-----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, TuFeaEAtXdwxFiDMAk0ar539e8EssBrL988lowvx6CuLfIhW3gvNenWmCMXu4sFt 907G12TIxMnBPEtC5LfhKQ== 0000891104-97-000002.txt : 19970328 0000891104-97-000002.hdr.sgml : 19970328 ACCESSION NUMBER: 0000891104-97-000002 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960829 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970327 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: 97564280 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 FOR AUGUST 29, 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 ____________ March 27, 1997 (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 Number) 339 Jefferson Road Parsippany, New Jersey 07054 (Address of principal executive (Zip Code) office) (201) 428-9700 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if applicable) Item 5. Other Events This Current Report on Form 8-K/A amends the Current Report on Form 8-K of HFS Incorporated (the "Registrant") dated August 29, 1996 for purposes of amending and restating certain historical financial statements of an acquired company and pro forma financial information of the Registrant previously filed. Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits Exhibit No. Description - ------- --------------------------------------------------------------------- 23.1 Consent of Price Waterhouse LLP 99.1 Pro forma financial statements of the Registrant as of and for the six months ended June 30, 1996 and for the year ended December 31, 1995, including the proposed acquisition of Avis, Inc. 99.2 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. 99.3 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. 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: March 27, 1997 HFS INCORPORATED CURRENT REPORT ON FORM 8-K Report Dated March 27, 1997 (August 29, 1996) EXHIBIT INDEX Exhibit No. Description Page No. - ------- ------------------------------------------------- -------- 23.1 Consent of Price Waterhouse LLP 99.1 Pro forma financial statements of the Registrant as of and for the six months ended June 30, 1996 and for the year ended December 31, 1995, including the proposed acquisition of Avis, Inc. 99.2 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. 99.3 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. EX-23 2 EX. 23.1 - CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 Consent of Indenpendent Accountants We hereby consent to the incorporation by reference in the Prospectuses consituting part of the Registration Statements on Form S-3 (Nos. 333-11029, 333-11031 and 333-17453), and Form S-8 (Nos. 33-56354, 33-70632, 33-72752, 33-83956, 333-06733, 33-94756, 333-03532, 333-06939) of HFS Incorporated 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, as amended, of HFS Incorporated dated August 29, 1996. Price Waterhouse LLP New York, New York March 21, 1997 EX-99.1 3 EX. 99.1 - AVIS STATEMENTS EXHIBIT 99.1 INDEX TO PRO FORMA FINANCIAL STATEMENTS Page Pro Forma Financial Statements Section A: Pro forma consolidated financial statements of HFS for the Acquisition of Avis as of and for the six months ended June 30, 1996 and for the year ended December 31, 1995. Section B: Pro forma consolidated financial information of HFS excluding the Acquisition of Avis as of and for the six months ended June 30, 1996 and for the year ended December 31, 1995. SECTION A HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED FINANCIAL INFORMATION FOR THE ACQUISITION OF AVIS The pro forma consolidated balance sheet as of June 30, 1996 is presented as if the acquisition of Avis, Inc. ("Avis") and issuance of Company common stock (the "Avis Offering") as partial consideration for Avis occurred on June 30, 1996. The Company intends to undertake an initial public offering of a majority interest in the corporation which owns all company-owned Avis car rental locations (the "Operating Company") in 1997 and to enter into franchise, information technology and other agreements to provide services to the Operating Company based on terms to be determined. Accordingly, the pro forma financial statements reflect the acquired net assets and results of operations of the Avis rental car operating subsidiary intended to be sold as "Investment in car rental operating company" and "other revenue", respectively. The pro forma statements of operations for the year ended December 31, 1995 and the six months ended June 30, 1996 are presented as if the acquisition of Avis had occurred on January 1, 1995 and reflects the consolidation of such transactions and the pro forma financial results of HFS prior to the Avis acquisition. The acquisitions have been or will be accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been or will be recorded at their estimated fair values which are subject to further refinement, including appraisals and other analyses, with appropriate recognition given to the effect of current interest rates and income taxes. Management does not expect that the final allocation of the purchase price for the above acquisitions will differ materially from the preliminary allocations. The pro forma consolidated financial statements do not purport to present the financial position or results of operations of the Company had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The pro forma consolidated statements of operations do not reflect cost savings and revenue enhancements that management believes may be realized following the acquisitions. These savings are expected to be realized primarily through the restructuring of franchise services of the acquired companies as well as revenue enhancements expected through leveraging of the Company's preferred vendor programs. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that actually will be realized. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with the consolidated financial statements and related notes of the Company included in its 1995 Annual Report on Form 10-K and in its June 30, 1996 Quarterly Report on Form 10-Q, as amended and the financial statements and related notes of the acquired or to be acquired companies included elsewhere herein or previously filed in Current Reports on Form 8-K. SECTION A HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED BALANCE SHEET As of June 30, 1996 (In thousands)
Historical ---------------------------- Avis (1) Pro Forma Pro Forma for HFS As Adjusted Adjustment (A) Avis Acquisition ---------------------------------------------------------------- Assets Current assets Cash and cash equivalents ........ $ 387,837 $ -- $ (367,200) $ 20,637 Royalty accounts and notes receivable, net ................ 82,765 636 -- 83,401 Relocation receivables ........... 113,075 -- -- 113,075 Marketing and reservation receivables, net ............... 43,351 -- -- 43,351 Other current assets ............. 32,337 779 -- 33,116 Deferred income taxes ............ 36,456 -- -- 36,456 ----------- --------- ---------- ----------- Total current assets ................ 695,821 1,415 (367,200) 330,036 Property and equipment-net .......... 99,411 34,024 57,976 191,411 Franchise agreements-net ............ 599,631 -- -- 599,631 Excess of cost over fair value of net assets acquired-net .......... 1,316,146 -- -- 1,316,146 Intangible assets-Avis .............. -- 503,037 299,633 802,670 Investment in car rental operating company, net............ -- 12,257 62,743 75,000 Deferred income taxes-net ........... -- 28,033 (28,033) -- 5,200 5,200 Other assets ........................ 78,609 59,614 (9,614) 128,609 ----------- ---------- ---------- ----------- Total ............................... $ 2,789,618 $ 638,380 $ 20,705 $ 3,448,703 =========== ========== ========== =========== Liabilities and Stockholders' Equity Current Liabilities Accounts payable and other accrued liabilities ............ $ 172,064 $ 201,785 $ -- $ 373,849 Income taxes payable ............. 62,421 -- -- 62,421 Accrued acquisition obligations .. 32,002 -- 18,000 50,002 Current portion of long-term debt 29,562 -- 100,900 130,462 ----------- ----------- ------------ ----------- Total current liabilities ........... 296,049 201,785 118,900 616,734 Long-term debt ...................... 540,530 -- -- 540,530 Other non-current liabilities ....... 30,894 -- -- 30,894 Deferred income taxes ............... 85,400 -- -- 85,400 Preferred Stock - Avis .............. -- 72,412 (72,412) -- Redeemable portion of common stock - ESOP .................... -- 295,465 (295,465) -- Unearned compensation-ESOP .......... -- (261,702) 261,702 -- Stockholders' Equity Participating convertible preferred stock ................ -- 132,000 (132,000) -- Common stock ..................... 1,232 290 (244) 1,278 Additional paid-in capital ....... 1,690,347 217,445 120,909 2,028,701 Retained earnings ................ 145,166 79,120 (79,120) 145,166 Treasury stock ................... -- (102,269) 102,269 -- Foreign currency equity adjustment -- 3,834 (3,834) -- ----------- ----------- ----------- ----------- Total stockholders' equity .......... 1,836,745 330,420 7,980 2,175,145 ----------- ----------- ----------- ----------- Total ............................... $ 2,789,618 $ 638,380 $ 20,705 $ 3,448,703 =========== =========== =========== =========== - ------------ (1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of May 31, 1996. See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A HFS Incorporated and Subsidiaries CONSOLIDATED HISTORICAL BALANCE SHEET OF AVIS, INC. AS ADJUSTED As of May 31, 1996 (In thousands)
Historical Reclassification Avis, Avis Adjustment As Adjusted ----------------------------------------------------- Assets Current Assets Cash and cash equivalents ........ $ 75,122 $ (75,122) $ -- Royalty accounts and notes receivable, net ................ 152,224 (151,588) 636 Vehicles, net .................... 2,330,630 (2,330,630) -- Due from affiliated company ...... 44,098 (44,098) -- Other current assets ............. 45,755 (44,976) 779 Deferred income taxes ............ -- -- -- ----------- ----------- --------- Total current assets ................ 2,647,829 (2,646,414) 1,415 Property and equipment-net .......... 150,538 (116,514) 34,024 Franchise agreements-net ............ -- Excess of cost over fair value of net assets acquired-net .......... -- Intangible assets-Avis .............. 503,037 -- 503,037 Investment in car rental operating company, net........... -- 12,257 12,257 Deferred income taxes ............... -- 28,033 28,033 Other assets ........................ 165,881 (106,267) 59,614 ----------- ----------- ----------- Total ............................... $ 3,467,285 $(2,828,905) $ 638,380 =========== =========== =========== Liabilities and Stockholders' Equity Accounts Payable and other ....... $ 400,814 $ (199,029) $ 201,785 ----------- ----------- ----------- Long-term debt ...................... 2,262,223 (2,262,223) -- Public liability and property damage 208,692 (208,692) -- Due to affiliated company ........... 122,002 (122,002) -- Other non-current liabilities Deferred income taxes ............ 36,959 (36,959) -- Preferred stock - Avis ....... 72,412 -- 72,412 Redeemable portion of common stock - ESOP ................... 295,465 -- 295,465 Unearned compenstion-ESOP ........ (261,702) -- (261,702) Stockholders' Equity Participating convertible preferred stock ................ 132,000 -- 132,000 Common stock ..................... 290 -- 290 Additional paid-in capital ....... 217,445 -- 217,445 Retained earnings ................ 79,120 -- 79,120 Treasury stock ................... (102,269) -- (102,269) Foreign currency equity adjustment 3,834 -- 3,834 ----------- ----------- ----------- Total stockholders' Equity .......... 330,420 -- 330,420 ----------- ----------- ----------- Total ............................... $ 3,467,285 $(2,828,905) $ 638,380 =========== =========== =========== ____________ Note: The reclassification adjustment made to the historical balance sheet of Avis, Inc. is to present the historical net assets of the car rental operations as "investment in car rental operating company - net". See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 (In thousands, except per share amounts)
Historical Pro Forma Avis, (1) Pro Forma Pro Forma for HFS As Adjusted Adjustments Avis Acquisition --------------------------------------------------------------- Revenue Franchise .......... $ 583,485 $ -- $ 87,393 (B) $ 670,878 Relocation services 90,584 -- -- 90,584 Other .............. 89,232 21,608 -- 110,840 Equity in loss of car rental operating company -- -- (5,272) (B) (5,272) -------- -------- -------- -------- Total revenue .... 763,301 21,608 82,121 867,030 ======== ======== ======== ======== Expenses Marketing and reservation ...... 164,961 -- -- 164,961 Selling, general and administrative ... 186,262 7,205 -- 193,467 Ramada license fee . 18,911 -- -- 18,911 Depreciation and amortization ..... 65,919 19,683 15,820 (C) 101,422 Interest ........... 34,315 461 -- 34,776 Relocation ......... 71,103 -- -- 71,103 Other .............. 17,593 410 -- 18,003 -------- ------- -------- -------- Total expenses ... 559,064 27,759 15,820 602,643 -------- ------- -------- -------- Income (loss) before income taxes ....... 204,237 (6,151) 66,301 264,387 Provision for income taxes ....... 83,910 4,100 25,676 (D) 113,686 --------- --------- --------- --------- Net income (loss)...... $ 120,327 $ (10,251) $ 40,625 $ 150,701 ========= ========= ========= ========= Per Share Information (primary) Net income ......... $ 0.96 -- $ 1.10 ========= ========== Weighted average common and common equivalent shares outstanding 130,476 10,690 (E) 141,166 ======= ======== ======= Per Share Information (fully diluted) Net income ......... $ 0.94 -- $ 1.09 ========= ========= Weighted average common and common equivalent shares outstanding 132,313 10,690 (E) 143,003 ======= ======== ======= _______________ Note:Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) The historical financial statements of operations of Avis, as adjusted, has been adjusted to include the historical results of Avis operations intended to be retained by the Company and the operating results of the car rental operating company, which are included in "Other Revenue". See Historical Consolidated Statement of Operations, as adjusted of Avis, Inc. for the year ended February 29, 1996. See notes to pro forma consolidated balance sheet and statement of operations.
SECTION A HFS Incorporated and Subsidiaries HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC. AS ADJUSTED For the Year Ended February 29, 1996 (In thousands)
Adjustments --------------------------------- Rental Car Avis Historical Reclassifications Subsidiary As Adjusted -------------------------------------------------------------------- Revenue .............................................. $ 1,716,677 $ (21,608) $(1,695,069) $ -- Service fees.......................................... -- 21,608 -- 21,608 ----------- ----------- ----------- ---------- Net revenues.......................................... $ 1,716,677 $ -- $(1,695,069) $ 21,608 ----------- ----------- ----------- ---------- Expenses: Selling, general & administrative ................. 1,119,888 (16,865) (1,095,818) 7,205 Depreciation & amortization ....................... 411,796 16,404 (408,517) 19,683 Interest .......................................... 149,534 461 (149,534) 461 Other ............................................. 410 -- -- 410 ----------- ----------- ----------- ---------- Total expenses .................................. 1,681,628 -- (1,653,869) 27,759 ----------- ----------- ----------- ---------- Income (loss) before income taxes .................... 35,049 -- (41,200) (6,151) Provision for income taxes ........................... 23,977 -- (19,877) 4,100 ----------- ----------- ----------- ---------- Net income (loss)..................................... $ 11,072 $ -- $ (21,323) $ (10,251) =========== =========== =========== ========== _______________
NOTE: The reclassification adjustment made to the historical consolidated statement of income of Avis, Inc. is to present information technology services as "Service fees". The elimination of the car rental operating company is presented as a result of HFS' plan to undertake an initial public offering of a majority interest of 75 percent in the corporation which owns all company-owned Avis car rental operations (the "IPO Company"). HFS intends to substantially replace results of car rental operations with license fees from the IPO Company. See notes to pro forma consolidated balance sheet and statements of operations. SECTION A HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1996 (In thousands, except per share amounts)
Historical Pro forma Avis, (1) Pro Forma Pro Forma for HFS As Adjusted Adjustments Avis Acquisition --------------------------------------- ---------------- Revenue Franchise .......... $ 287,295 $ -- $ 47,644 (B) $ 334,939 Owned brokerage .... -- -- -- -- Relocation ......... 50,057 -- -- 50,057 Other .............. 54,614 15,682 (1,500) (B) 68,796 Equity in loss on car rental operating company........... (3,680) (B) (3,680) -------- -------- --------- --------- Total revenue .... 391,966 15,682 42,464 450,112 -------- -------- --------- --------- Expenses Marketing and reservation ...... 76,625 -- -- 76,625 Selling, general & administrative . 85,422 3,703 -- 89,125 Ramada license fee . 10,045 -- -- 10,045 Owned brokerage .... -- -- -- -- Depreciation and amortization ..... 37,977 9,905 7,846 (C) 55,728 Interest ........... 15,935 251 -- 16,186 Relocation ......... 38,355 -- -- 38,355 Other .............. 8,168 18 -- 8,186 -------- ------- -------- -------- Total expenses ... 272,527 13,877 7,846 294,250 -------- ------- -------- -------- Income before income taxes ....... 119,439 1,805 34,618 155,862 Provision for income taxes ....... 48,253 53 18,715 (D) 67,021 --------- --------- --------- --------- Net income ............ $ 71,186 $ 1,752 $ 15,903 $ 88,841 ========= ========= ========= ========= Per Share Information (primary) Net income ......... $ 0.54 $ 0.62 ========= ========= Weighted average common and common equivalent shares outstanding 136,165 9,677 (E) 145,842 ======= ======= ========= Per Share Information (fully diluted) Net income ......... $ 0.54 $ 0.62 ========= ========= Weighted average common and common equivalent shares outstanding 137,211 9,677 (E) 146,888 ======= ====== ======= _______________ Note:Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) The historical financial statement of operations of Avis, as adjusted, has been adjusted to include the historical results of operations intended to be retained by the Company and the operating results of the car rental operating company, which are included in "Other Revenue". See Historical Consolidated Statement of Operations of Avis, Inc. as adjusted, for the six months ended May 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations. SECTION A HFS Incorporated and Subsidiaries HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC. AS ADJUSTED For the Six Months Ended May 31, 1996 (In thousands)
Adjustments ---------------------------------- Rental Car Avis Historical (1) Reclassifications Subsidiary As Adjusted -------------------------------------------------------------------- Revenue ............................ $ 918,698 $(15,682) $(903,016) $ -- Service fees........................ -- 15,682 -- 15,682 --------- -------- --------- --------- Net Revenues 918,698 -- (903,016) 15,682 --------- -------- --------- --------- Expenses: Selling, general & administrative 624,543 (9,168) (611,672) 3,703 Depreciation & amortization ..... 199,924 8,917 (198,936) 9,905 Interest ........................ 76,013 251 (76,013) 251 Other ........................... 18 -- -- 18 --------- ------- --------- -------- Total expenses ................ 900,498 -- (886,621) 13,877 --------- ------- --------- -------- Income before income taxes ......... 18,200 -- (16,395) 1,805 Provision for income taxes ......... 8,883 -- (8,830) 53 --------- -------- --------- -------- Net income ......................... $ 9,317 $ -- $ (7,565) $ 1,752 ========= ======== ========= ========= _______________ (1) The historical financial statements of Avis, Inc. are for the six months ended May 31, 1996. The three months ended February 29, 1996 are included in the six months ended May 31, 1996 and the year ended February 29, 1996. Revenue and net loss for the three months ended February 29, 1996 are $421.7 million and $9.7 million, respectively.
See notes to pro forma consolidated balance sheet and statements of operations. SECTION A HFS Incorporated and Subsidiaries NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS A. Acquisition of Avis: At the time HFS announced its acquisition of Avis, it developed and announced a plan (the "Plan") as follows: 1. Retain certain assets acquired, including the reservation system, franchise agreements, trademarks and tradenames and certain liabilities. 2. Segregate the assets used in the car rental operations in a separate subsidiary ("Car Rental Operating Company") and to dispose of approximately 75% interest in Car Rental Operating Company within one year through an initial public offering (IPO) of Car Rental Operating Company. 3. Enter into a license agreement with Car Rental Operating company for use of the trademarks and tradename and other franchise services. Based on the Plan, the purchase price for Avis has been allocated to the assets and liabilities acquired by HFS, including its investment in Car Rental Operating Company based on their estimated fair values. The amount allocated to Car Rental Operating company was based on the estimated valuation of the Car Rental Operating Company including the effect of royalty, reservation and information technology agreements with HFS. Under the plan, Car Rental Operating Company will sell approximately 75% interest at an assumed price of $225 million, thereby diluting HFS' interest to 25%. All of the proceeds from the IPO will be retained by Car Rental Operating Company. Pro forma adjustments consist of the elimination of certain acquired assets and assumed liabilities, net of the fair value ascribed to such assets and liabilities.
The Company acquired Avis for the following consideration ($000's): Cash consideration (i) $ 367,200 Issuance of approximately 4.6 million shares of Company common stock 338,400 ESOP liability (ii) 100,900 --------- Total pro forma acquisition cost 806,500 --------- Fair value of net assets acquired: Historical book value of acquired company 330,420 Elimination of net assets (liabilities) not acquired or assumed: Deferred income taxes (28,033) Other assets (9,614) Preferred stock - Avis 72,412 Intangible assets - Avis (503,037) Redeemable portion of common stock - ESOP 295,465 Unearned compensation - ESOP (261,702) Fair value adjustments to assets acquired and liabilities assumed: Deferred income tax asset, net (iii) 5,200 Property and equipment (iv) 57,976 Investment in car rental operating company (v) 62,743 Accrued acquisition obligations (vi) (18,000) ---------- Fair value of identifiable net assets acquired 3,830 ---------- Intangible assets-Avis (vii) $ 802,670 ==========
SECTION A HFS Incorporated and Subsidiaries NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS (Continued) A. Acquisition of Avis: (continued) In connection with the Company's fair value allocation of net assets to the Car Rental Operating Company, the estimated net worth of the Car Rental Operating Company was valued at $75 million. Such net worth and corresponding company investment in the Car Rental Operating Company was allocated as follows: Historical net book value of car rental operating company $ 72,616 Fair value adjustments to car rental operating company 2,384 ---------- $ 75,000 ========== The condensed balance sheet of the Car Rental Operating Company including fair value adjustments at June 30, 1996 is as follows: Vehicles $2,567,517 Property and equipment 101,000 Deferred tax asset 102,000 Excess of cost over fair value of net assets acquired 154,000 Debt (2,488,651) Property liability and property damage (215,135) Other, net (145,731) ---------- Stockholders' Equity $ 75,000 ========== HFS' investment in Car Rental Operating Company of $75 million represents the estimated value of its 100% interest in the Car Rental Operating Company at the date of acquisition and is accounted for under the equity method since HFS' control is temporary based on the planned IPO of Car Rental Operating Company. Upon completion of the IPO, the value of Car Rental Operating Company is expected to increase to $300 million (with the $225 million of IPO proceeds retained by the Car Rental Operating Company) with HFS' interest at 25% equal to $75 million, its current investment balance. If the results of the IPO do not confirm the preliminary purchase price allocation for the investment in Car Rental Operating Company, then such investment will be adjusted with a corresponding adjustment to goodwill. (i) Cash consideration of $336.6 million was financed by the Second Quarter 1996 Offering. (ii) The ESOP liability bears interest at LIBOR plus 20 basis points for a period commencing on the acquisition date to maturity which is primarily the earlier of three days after the sale of Company shares issued to the ESOP or the first anniversary of the acquisition. (iii)The pro forma adjustment to deferred income taxes recorded in connection with the acquisition results from differences in the fair values of assets acquired and liabilities assumed and their respective income tax bases. (iv) The adjustment to property and equipment is primarily attributable to the values ascribed to reservation equipment and related assets and to the Avis headquarters office in excess of historical cost. (v) The adjustment to investment in car rental operating company reflects the net effect of push-down accounting adjustments which result in a $75 million fair value of the car rental operating company. (vi) Accrued acquisition obligations consist of professional fees ($3.7 million), investment banker fees ($8.0 million) and filing fees and other ($6.3 million). (vii) Intangible assets retained by HFS consisting of the following: (In Millions) ------------- Avis trademark $ 400.0 Reservation system and customer database 109.0 Excess of cost over fair value of net assets acquired 293.7 ---------- $ 802.7 ========== Excess of cost over fair value of net assets acquired is as of June 30, 1996 and differs from the actual purchase price allocation at date of acquisition. That amount, which was valued at $317.6 million, was used as a basis for assumptions made in the pro forma statements of operations. A. Acquisition of Avis (continued) The pro forma adjustments include the elimination of Avis stockholders' equity and the issuance of approximately 5.6 million shares of the Company's common stock to finance the acquisition.
Stockholders' Equity --------------------------------------------- Issuance of Eimination of Adjustment to Company Stockholders' Stockholders' Common Stk. Equity Equity ---------------------------------------------- Participating convertible preferred stock $ -- $ 132,000 $(132,000) Common stock ............................ 46 290 (244) Additional paid-in capital .............. 338,354 217,445 120,909 Retained earnings ....................... -- 79,120 (79,120) Treasury stock .......................... -- (102,269) 102,269 Foreign currency equity adjustment ...... -- 3,834 (3,834) Redeemable portion of common stock ...... -- -- -- Unearned compensation ................... -- -- -- --------- --------- --------- $ 338,400 $ 330,420 $ 7,980 ========= ========= =========
B. Car Rental Operating Company Operations: The pro forma adjustments are comprised of the following:
For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ------------------------------------------------ Historical income before taxes from Car Rental Operating Company........................ $ 41,200 $ 16,395 Adjustments to Car Rental Operating Company: Elimination of historical expense associated with: Long-term incentive compensation plans eliminated in connection with the Avis Acquisition............................. $ 4,700 $ 3,549 Depreciation and amortization........... 31,869 15,337 Addition of pro forma expenses associated with: Depreciation and amortization (i)...... (18,279) ( 9,140) Increased financing costs.(ii).... .... (8,004) 10,286 (3,556) 6,190 HFS Service Fee Adjustment: Service fees from franchised locations.. (18,366) (9,419) Reservation and information technology services................................ (9,700) (6,619) Gross royalty payment to HFS from Avis (iii)............................. (59,327) (87,393) (31,606) (47,644) Adjsuted income (loss) before taxes from car rental operating company.......... (35,907) (25,059) Provision (benefit) for income taxes...... (14,819) (10,339) Adjusted net income (loss) from car rental operating company..................... (21,088) (14,720) HFS ownership percentage 25% 25% HFS: equity in earnings (loss) in car rental operating company..................... $ (5,272) $ (3,680) ======== ======== (Other Revenue Adjustment): Elimination of historical interest income related to cash consideration portion of Avis Acquisition (iv)................ $ -- $ 1,500 ======== =========
(i) The estimated fair value of Avis property and equipment intended to be retained by the car rental company is $101.0 million, comprised primarily of furniture, fixtures, and leasehold improvements, which is amortized on a straight-line basis over the estimated useful lives, which average seven years. Excess of cost over fair value of net assets acquired by the Car Rental Operating Company is valued at $154 million and is amortized on a straight- line basis over a benefit period of 40 years. (ii) As a result of the merger between the Company and Avis, approximately $1 billion of tax-advantaged debt was repaid and replaced by a similar amount of non tax-advantaged debt. This resulted in an increase in interest rates, due to the loss of tax benefits from ESOP financing which were passed through from various lenders to Avis ($000's): For the Year Ended For the Six Months December 31, Ended June 30, 1995 1996 ------------------ ------------------ Add current facilities........... $ 129,472 $ 76,054 Reverse former facilities....... (121,468) (72,498) --------- -------- Increased financing cost $ 8,004 $ 3,556 ========= ======== (iii) In connection with the Company's plan to dispose of approximately 75% of the Car Rental Operating Company, the Company will enter into franchise, information technology and other agreements to provide services to the Car Rental Operating Company based on terms to be determined. The royalty payment to be made to HFS from the Car Rental Operating Company for use of the Avis trademarks and tradename is calculated at 3.5% of the revenues generated by the Car Rental Operating Company which is the net royalty percentage the Company expects to receive as a result of a planned contractual arrangement with the Avis Car Rental Operating Company subsequent to the IPO. Such payment for the year ended December 31, 1995 and the six months ended June 30, 1996 is calculated as follows($000's): For the Year Ended For the Six Months December 31, Ended June 30, 1995 1996 ------------------ ------------------ Revenues generated by Car Rental Operating Company............... $1,695,069 $ 903,016 Royalty percentage................... 3.5% 3.5% --------- -------- Royalty payment to HFS............... $ 59,327 $ 31,606 ========= ======== (iv) The pro forma adjustment eliminates historical interest income on the portion of cash generated from the Second Quarter 1996 Offering which was used as consideration in the Avis Acquisition. C. Depreciation and amortization: The pro forma adjustment for depreciation and amortization is comprised of ($000's): For The Year For the Six Months Ended Ended December 31, June 30, 1995 1996 ----------------------------- Elimination of historical expense ............. $ (19,683) $ (9,905) Property, equipment & furniture & fixtures 5,909 2,954 Intangible assets ....... 29,594 14,797 -------- -------- Total ................... $ 15,820 $ 7,846 ======== ======== The estimated fair value of Avis' property and equipment intended to be retained by HFS is $96.0 million, comprised primarily of reservation equipment and related assets and to the Avis Headquarters office in excess of historical cost. Such property and equipment is amortized on a straight-line basis over the estimated benefit periods ranging from five to thirty years. Avis' intangible assets recorded by HFS (not applicable to car rental operating subsidiary) are comprised of the Avis trademark, a reservation system and customer database, and excess of cost over fair value of net assets acquired. The estimated fair value of Avis trademark is approximately $400 million and is amortized on a straight-line basis over a benefit period of 40 years. The estimated fair value of the reservation system and customer database are approximately 95.0 million and 14.0 million, respectively and are amortized on a straight-line basis over the periods to be benefit which are 10 years and 6.5 years, respectively. The excess of cost over fair value of net assets acquired applicable to the allocated porition of the business to be retained by HFS is estimated at approximately $317.6 million and is determined to have a benefit period of 40 years which is based on Avis' position as the second larges car rental system in the world, the recognition of its brand name in the car rental industry and the longevity of the car rental business. D. Income Taxes The pro forma adjustment to income taxes is comprised of ($000's): For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 -------------------------------------------- Reversal of historical (provision) benefit of: Pro forma provision prior to acquisition of Avis....... $ (83,910) $ (48,253) Avis ....................... (4,100) (53) Pro forma provision ............ 113,686 67,021 --------- --------- Total .......................... $ 25,676 $ 18,715 ========= ========= The pro forma effective tax rates are approximately 1% higher than the Company's historical effective tax rates due to non-deductible excess of cost over fair vaue of net assets acquired to be recorded in connection with the acquisition of Avis. The pro forma provisions for taxes were computed using pro forma pre-tax amounts and the provisions of Financial Accounting Standards No. 109. E. Weighted average common and common equivalent shares outstanding The pro forma adjustment to weighted average shares reflects the Avis acquisition, which occurred on October 17, 1996 at an issuance price per share of $74.06, as if it took place at the beginning of the period presented; thus, the stock issuance is considered outstanding as of the beginning of the period for purposes of per share calculations. F. Estimated selling, general and administrative cost savings: In connection with HFS's acquisitions, HFS developed related business plans to restructure each of the respective acquired companies which will result in future cost savings subsequent to the acquisitions. HFS's restructuring plans in each case were developed prior to the consummation of the respective acquisitions and were implemented concurrent with the consummation of the acquisitions. Restructuring plans included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Pursuant to HFS's specific restructuring plans, certain selling, general and administrative expenses may not be incurred subsequent to each acquisition that existed pror to consummation. In addition, there are incremental costs in the conduct of activities of the acquired companies prior to the acquisitions that may not be incurred subsequent to consummation and have no future economic benefit to HFS. The estimated cost savings that HFS believes would have been attained had its acquisitions occurred on January 1, 1995 and the related impact of such cost savings on pro forma net income and net income per share are not reflected in the pro forma consolidated statements of income, but are presented below ($000's):
For the year ended December 31, 1995: Century Coldwell Century 21 21 Banker NORS Travelodge ERA Total ------- ------ ------------ ---------- ---------- -------- Payroll and related... $10,885 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 37,619 Professional......... 2,693 1,500 1,486 154 387 6,220 Occupancy............ 3,629 -- 2,754 186 1,172 7,740 Other 3,128 (1,517) 2,326 167 1,036 5,140 ------- ------- ------- ------- ------- -------- Total........... $20,334 $10,665 $14,272 $ 1,617 $ 9,831 $ 56,719 ======= ======= ======= ======= ======= ========
For the six months ended June 30, 1996: Coldwell Century 21 Banker NORS Travelodge ERA Total -------- ---------- ---------- ------- --------- Payroll and related... $ 4,451 $ 2,424 $ 25 $ 222 $ 7,122 Professional......... 1,055 705 4 -- 1,764 Occupancy............ -- 603 4 102 709 Other (604) 1,069 4 157 626 ------- ------- ----- ------ ------- Total........... $ 4,902 $ 4,801 $ 37 $ 481 $10,221 ======= ======= ===== ====== =======
The impact on pro forma net income and net income per share of the estimated SG&A cost savings are as follows: For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 -------------------------------------------- Income before taxes, as reported... $266,369 $ 155,862 SG&A adjustments.................. 56,719 10,221 Income before taxes, as adjusted.. 323,088 166,083 Income taxes...................... 138,928 71,416 -------- --------- Net income, as adjusted $184,160 $ 94,667 ======== ========= Net income per share (primary): Ad adjusted................. $ 1.34 $ 0.66 ======== ========= As reported................. $ 1.10 $ 0.62 ======== ========= Net income per share (fully diluted): Ad adjusted................. $ 1.32 $ 0.66 ======== ========= As reported................. $ 1.09 $ 0.62 ======== ========= SECTION B HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED FINANCIAL INFORMATION EXCLUDING THE AVIS ACQUISITION The pro forma statements of operations for the year ended December 31, 1995 and the six months ended June 30, 1996 are presented as if the following transactions had occurred on January 1, 1995: (i) the May 31, 1996 acquisition of the common stock of Coldwell Banker Corporation ("Coldwell Banker") and the related contribution of Coldwell Banker's owned real estate brokerage offices (the "Owned Brokerage Business") to an independent trust (the "Trust") the ("Coldwell Banker Transaction"); (ii) the receipt of the proceeds from an offering of the Company's common stock (the CB Offering") to the extent necessary to fund the acquiition of Coldwell Banker and the related repayment of indebtedness and acquisition expenses: (iii) the acquisitions of: the six non-owned Century 21 regions ("Century 21 NORS") during the second quarter of 1996, the Travelodge franchise system, ("Travelodge") on January 23, 1996 and the Electronic Realty Associates franchise system ("ERA") on February 12, 1996 (collectively, the "Other Acquisitions"); and (iv) the February 22, 1996 issuance of $240 million of 4-3/4% convertible senior notes due 2003 to the extend such proceeds were used to finance the Other Acquisitions. The pro forma statement of operations for the year ended December 31, 1995 is also presented as if the August 1, 1995 acquisition of Century 21 Real Estate Corporation ("Century 21") and the acquisition by merger (the "CCI Merger") in May 1995 of Casino & Credit Services, Inc's. gambling patron credit information business, Central Credit Inc. ("CCI") had occurred on January 1, 1995. The acquisitions have been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been or will be recorded at their estimated fair values which are subject to further refinement, including appraisals and other analyses, with appropriate recognition given to the effect of current interest rates and income taxes. Management does not expect that the final allocation of the purchase price for the above acquisitions will differ materially from the preliminary allocations. The Company has entered into certain immaterial transactions which are not relfected in the pro forma statements of operations. The pro forma consolidated financial statements do not purport to present the financial position or results of operations of the Company had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The pro forma consolidated statements of operations do not reflect cost savings and revenue enhancements that management believes may be realized following the acquisitions. These savings are expected to be realized primarily through the restructuring of franchise services of the acquired companies as well as revenue enhancements expected through leveraging of the Company's preferred alliance programs. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that actually will be realized. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with the consolidated financial statements and related notes of the Company included in its 1995 Annual Report on Form 10-K and in its June 30, 1996 Quarterly Report on Form 10-Q, as amended and the financial statements and related notes of the acquired or to be acquired companies included elsewhere herein or previously filed in Current Reports on Form 8-K. SECTION B HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 (In thousands, except per share amounts)
Historical ----------------------------------------- Coldwell Other Acquired Pro Forma HFS Banker Companies Adjustments Pro Forma --------------------------------------------------------------------------- Revenue Franchise .......... $ 361,238 $ 68,064 $ 128,233 $ 25,950 (A) $ 583,485 Owned brokerage business -- 535,207 -- (535,207) (B) -- Relocation services 8,204 75,866 6,514 -- 90,584 Other .............. 43,541 20,264 29,848 (4,421) (B) 89,232 -------- -------- -------- -------- --------- Total revenue .... 412,983 699,401 164,595 (513,678) 763,301 ======== ======== ======== ======== ========= Expenses Marketing and reservation ...... 143,965 -- 20,996 -- 164,961 Selling, general and administrative ... 55,538 32,367 102,857 (4,500) (C) 186,262 Ramada license fee . 18,911 -- -- -- 18,911 Owned brokerage..... -- 521,376 -- (521,376) (B) -- Depreciation and amortization ..... 30,857 22,425 8,483 4,154 (D) 65,919 Interest ........... 21,789 5,329 6,227 970 (E) 34,315 Relocation ......... 3,783 62,439 4,881 -- 71,103 Other .............. 3,235 -- 14,757 (399) (F) 17,593 -------- ------- -------- -------- --------- Total expenses ... 278,078 643,936 158,201 (521,151) 559,064 -------- ------- -------- -------- --------- Income before income taxes ....... 134,905 55,465 6,394 7,473 204,237 Provision for income taxes ....... 55,175 24,385 3,542 808 (G) 83,910 --------- --------- --------- --------- --------- Net income ............ $ 79,730 $ 31,080 $ 2,852 6,665 $ 120,327 ========= ========= ========= ========= ========= Per Share Information (primary) Net income ......... $ .74 $ 0.96 ========= ========= Weighted average common and common equivalent shares outstanding 113,817 16,659 (H) 130,476 ======= ======== ======= Per Share Information (fully diluted) Net income ......... $ .73 $ 0.94 ========= ========= Weighted average common and common equivalent shares outstanding 115,654 16,659 (H) 132,313 ======= ======= ========
_______________ Note:Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. See notes to pro forma consolidated balance sheet and statement of operations. SECTION B HFS Incorporated and Subsidiaries HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 (In thousands, except per share amounts)
Other Acquired Companies -------------------------------------------------------------------- Century 21 CCI (l) Century 21 (1) NORS Travelodge ERA Total ------------------------------------------------------------------------------- Revenue Franchise .......... $ -- $ 53,992 $ 29,021 $ 18,361 $26,859 $128,233 Relocation ......... -- 6,514 -- -- -- 6,514 Other .............. 3,326 10,164 403 79 15,876 29,848 -------- -------- -------- -------- ------- -------- Total revenue .... 3,326 70,670 29,424 18,440 42,735 164,595 ======== ======== ======== ======== ======= ======== Expenses Marketing and reservation ...... -- 5,128 2,912 12,956 -- 20,996 Selling, general and administrative ... -- 47,232 22,851 2,648 30,126 102,857 Depreciation and amortization ..... 529 5,217 578 8 2,151 8,483 Interest ........... -- 2,904 54 -- 3,269 6,227 Relocation ......... -- 4,881 -- -- -- 4,881 Other .............. 1,917 2,751 -- -- 10,089 14,757 -------- ------- -------- -------- ------- -------- Total expenses ... 2,446 68,113 26,395 15,612 45,635 158,201 -------- ------- -------- -------- ------- -------- Income (loss) before income taxes ....... 880 2,557 3,029 2,828 (2,900) 6,394 Provision for income taxes ....... 313 2,097 -- 1,132 -- 3,542 --------- --------- --------- --------- ------- -------- Net income ............ $ 567 $ 460 $ 3,029 $ 1,696 $(2,900) $ 2,852 ========= ========= ========= ========= ======= ========
NOTE: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) Reflects results of operations for the period from January 1, 1995 to the respective date of acquisition. See notes to pro forma consolidated balance sheet and statements of operations. SECTION B HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1996 (In thousands, except per share amounts)
Historical ----------------------------------------- Coldwell Other (2) Pro Forma HFS Banker(2) Acquisitions Adjustments Pro Forma --------------------------------------------------------------------------- Revenue Franchise .......... $ 240,135 $ 25,694 $ 9,631 $ 11,835 (A) $ 287,295 Owned brokerage business -- 235,625 -- (235,625) (B) -- Relocation ............. 15,179 34,159 719 -- 50,057 Other .............. 48,896 4,067 1,651 -- 54,614 -------- -------- -------- -------- --------- Total revenue .... 304,210 299,545 12,001 (223,790) 391,966 ======== ======== ======== ======== ========= Expenses Marketing and reservation ...... 75,491 -- 1,134 -- 76,625 Selling, general administrative ... 60,311 57,455 9,460 (41,804) (C) 85,422 Ramada license fee . 10,045 -- -- -- 10,045 Owned brokerage..... -- 227,363 -- (227,363) (B) -- Depreciation and amortization ..... 23,405 9,021 421 5,130 (D) 37,977 Interest ........... 14,574 3,155 1,493 (3,287) (E) 15,935 Relocation ......... 10,184 27,530 641 -- 38,355 Other .............. 6,892 512 764 -- 8,168 -------- -------- -------- -------- --------- Total expenses ... 200,902 325,036 13,913 (267,324) 272,527 -------- -------- -------- -------- --------- Income (loss) before income taxes ....... 103,308 (25,491) (1,912) 43,534 119,439 Provision for income taxes ....... 41,746 (10,432) -- 16,939 (G) 48,253 --------- --------- --------- --------- --------- Net income ............ $ 61,562 $ (15,059) $ (1,912) $ 26,595 $ 71,186 ========= ========= ========= ========= ========= Per Share Information (primary) Net income ......... $ 0.51 -- -- $ 0.54 ========= ========= Weighted average common and common equivalent shares outstanding 125,229 10,936 (H) 136,165 ======= ======== ========= Per Share Information (fully diluted) Net income ......... $ 0.51 $ 0.54 ========= ========= Weighted average common and common equivalent shares outstanding 126,275 10,936 (H) 137,211 ======= ======= ========
_______________ Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) Reflects results of operations for the period from January 1, 1996 to the respective dates of acquisition. See notes to pro forma consolidated balance sheet and statements of operations. SECTION B HFS Incorporated and Subsidiaries PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1996 (In thousands, except per share amounts)
Century 21 NORS (1 Travelodge (1) ERA (1) Total --------------------------------------------------------- Revenue Franchise .......... $ 6,668 $ 688 $ 2,275 $ 9,631 Relocation ............. -- -- 719 719 Other .............. 449 -- 1,202 1,651 ------- ------- ------- ------- Total revenue .... 7,117 688 4,196 12,001 ======= ======= ======= ======= Expenses Marketing and reservation ...... 681 453 -- 1,134 Selling, general administrative ... 6,885 99 2,476 9,460 Depreciation and amortization ..... 285 -- 136 421 Interest ........... 2 -- 1,491 1,493 Relocation ......... -- -- 641 641 Other .............. -- -- 764 764 -------- -------- -------- -------- Total expenses ... 7,853 552 5,508 13,913 -------- -------- -------- -------- Income (loss) before income taxes ....... (736) 136 (1,312) (1,912) Provision for income taxes ....... -- -- -- -- --------- --------- --------- --------- Net income (loss)...... $ (736) $ 136 $ (1,312) $ (1,912) ========= ========= ========= =========
NOTE: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) Reflects results of operations for the period from January 1, 1996 to the respective dates of acquisition. See note to pro form consolidated balance sheet and statements of operations. A. Franchise revenue: The pro forma adjustment reflects the elimination of franchise revenue associated with discontinued Century 21 international based operations, the elimination of franchise revenue paid by the Century 21 NORS to Century 21 under sub-franchise agreements and the addition of franchise fees to be received under franchise contracts with owned brokerage offices upon contribution of the Owned Brokerage Business to the Trust. Pro forma adjustments to franchise revenue consists of the following: For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ----------------- ------------------ Eliminate: Discontinued operations....... $ (57) $ - Century 21 revenue included as Century 21 NORS SG&A....... (4,500) (1,003) Add: Franchise fees from Owned Brokerage Busines......... 30,507 12,838 -------- -------- Total...................... $ 25,950 $ 11,835 ======== ======= The franchise fees from the Owned Brokerage Business, which is based on the franchise contracts with the Trust, is calculated at approximately 5.7% of gross commissions earned by the Owned Brokerage Business on sales of real estate properties. Gross commissions earned by the Owned Brokerage Business were $535.2 million, $225.2 million for the year ended December 31, 1995 and for the six months ended June 30, 1996. B. Owned brokerage revenue and expenses: The pro forma adjustments reflect the elimination of revenue and expenses for Coldwell Banker's 318 formerly owned brokerage offices. The Company contributed the net assets of the Owned Brokerage Business to the Trust upon consummation of the Coldwell Banker acquisition. The free cash flow of the Trust will be expended at the discretion of the trustees to enhance the growth of funds available for advertising and promotion. The majority of Owned Brokerage Business expenses are directly attributable to the business. Based on the Company's due diligence of Coldwell Banker Corporation and subsidiaries ("CB Consolidated"), the Company determined that common expenses were allocated to the owned brokerage business based on a reasonable allocation method. Such allocations were based on the ratio of number of employees, the amount of space occupied and revenue generated relative to CB Consolidated in the aggregate and multiplied by corresponding common costs as appropriate to determine allocable expenses. C. Selling, general and administrative expense: The pro forma adjustments reflect the elimination of royalty payments made by the Century 21 NORS to Century 21 under sub-franchise agreements (offset against service fee revenue - See Note A) and the payment of Coldwell Banker stock options as a result of change in control provisions in connection with the acquisition of Coldwell Banker by HFS. For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ----------------- ------------------ Franchise fees................ $ 4,500 $ 1,003 Stock option expense.......... -- 40,801 -------- ------- Total...................... $ 4,500 $41,804 ======== ======= D. Depreciation and amortization: The pro forma adjustment for depreciation and amortization is comprised of ($000's):
For the year ended December 31, 1995: CCI Coldwell Other Merger Century 21 Banker Acquisitions Total ------------------------------------------------------------- Elimination of historical expense................ $ (529) $ (5,217) $(22,425) $(2,737) $(30,908) Property, equipment & furniture & fixtures... 100 425 1,156 189 1,870 Information database......... 375 -- -- -- 375 Intangible assets........... 289 -- -- -- 289 Franchise agreements....... -- 1,628 11,712 2,917 16,257 Excess of cost over fair value of net assets acquired -- 2,912 8,675 4,684 16,271 ------ -------- -------- ------- ------- Total $ 235 $ (252) $ (882) $ 5,053 $ 4,154 ====== ======== ======== ======= =======
For the six months ended June 30, 1996 Coldwell Other Banker Acquisitions Total -------------------------------------- Elimination of historical expense................ $(9,021) $ (421) $(9,442) Property, equipment & furniture & fixtures... 578 -- 578 Franchise agreements....... 5,856 1,458 7,314 Excess of cost over fair value of net assets acquired 4,338 2,342 6,680 ------- ------- ------- Total $ 1,751 $ 3,379 $ 5,130 ======= ======= ======= CCI Merger The estimated fair values of CCI's information data base, property and equipment and excess of cost over fair value of net assets acquired are $7.5 million, $1.0 million and $33.8 million, respectively, and are amortized on a straight-line basis over the periods to be benefited which are ten, five and forty years, respectively. The benefit periods associated with the excess cost over fair value of ent assets acquired were determined based on CCI's position as the dominant provider of gambling patron credit information services since 1956, its ability to generate oprating profits and expansion of its customer base and the longevity of the casino gaming industry. Century 21 The estimated fair values of Century 21 property and equipment, franchise agreements and excess cost over fair value of net assets acquired are $5.5 million, $33.5 million and $199.7 million, respectively and are amortized on a straight-line basis over the periods to be benefited which are seven, twelve and forty years, respectively. The benefit periods associted with the excess cost over fair value of net assets acquired were determined based on Century 21's position as the world's largest franchisor of residential real estate brokerage offices, the most recognized brnad name in the residentialr real estate brokerage industry and the longevity of the residential real estate brokerage business. Coldwell Banker The estimated fair values of Coldwell Banker's property and equipment, (excluding land) of $16.7 million is amortized on a straight-line basis over the estimated beneit periods ranging from five to twenty-five years. Coldwell Banker's intangible assets are comprised of franchise agreements and excess of cost over fair value of net assets acquired. The franchise agreements with the brokerage offices comprising the Trust are valued independently of all other franchise agreements with Coldwell Banker affiliates. Franchise agreements within the Trust and independent of the Trust are valued at $218.5 million and $218.7 million, respectively and are amortized on a straight-line basis over the respective benefit periods of forty and thirty-five years, respectively. The benefit period associated with Trust franchise agreements was based upon a long history of gross commissions sustained by the Trust. The benefit period associated with Coldwell Banker affiliates franchise agreements was based upon the historical profitability of such agreements and historical renewal rates. The excess of cost over fair value of net assets acquired is estimated at approximately $347.0 million and is determined to have a benefit period of forty years, which is based on Coldwell Banker's position as the largest gross revenue producing real estate company in North America, the recognition of its brand name in the real estate brokerage industry and the longevity of the real estate brokerage business. Other Acquisitions The estimated fair value of Other 1996 Acquisitions property and equipment aggregate $1.3 million and are being amortized on a straight-line basis over the estimate benefit periods ranging from five to twenty-five years. The estimated fair values of Other Acquisitions franchise agreements aggregate $61.0 million and are being amortized on a straight-line basis over the periods to be benefited, which range from twelve to thrity years. The estimated fair values of Other Acquisitions excess of cost over fair value of net assets acquired aggregate $187.4 million and are each being amortized on a straight-line basis over the periods to be benefited, which are forty years. E. Interest Expense For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ----------------- ------------------ Elimination of historical interest expense of Other Acquisitions and Century 21................. $ (6,227) $ (1,493) Reversal of Coldwell Banker..... (5,329) (3,155) Century 21...................... 2,135 -- Minority interest - preferred dividends..................... 1,796 -- 4-3/4% Notes................... 8,595 1,361 -------- ------- Total $ 970 $(3,287) ======== ======= Century 21 The pro forma adjustment reflects the recording of interest expense on $70 million of borrowings under the Company's revolving credit facility at an interest rate of approximately 6.0%, which is the variable rate in effect on the date of brorrowing. Borrowings represent the amount necessary to finance the initial cash of purchase price. Coldwell Banker The pro forma adjustment reflects the reversal of interest expense relating to the following ($000's): For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ----------------- ------------------ Expense associated with the Owned Brokerage Business (i)........... $ 138 $ (179) Expense associated with revolving credit facility borrowings which will be repaid with proceeds from offering (ii)................... 5,191 3,334 ------ ------- Total.............................. $5,329 $ 3,155 ====== ======= (i) HFS paid substantially all outstanding debt of Coldwell Banker Corporation and subsidiaries ("CB Consolidated") at the consummation date of the acquisition. Therefore, a determination as to the reasonableness of allocated CB Consolidated interest to the Owned Brokerage Business is unnecessary. (ii) At the date of acquisition, HFS repaid $105 million of Coldwell Banker indebtedness, which represented borrowings under a revolving credit facility at a variable rate of interest (LIBOR plus a margin ranging from .5% to 1.25%). Minority interest - preferred dividends The pro forma adjustment represents dividends on the redeemable Series A Adjustable Rate Preferred Stock of Century 21. Preferred dividends are calculated based on an $80 million face value and a 4.9% dividend rate. 4-3/4% Notes The pro forma adjustment reflects interest and amortization of deferred financing costs related to the February 22, 1996 issuance of the 4-3/4% Notes (5.0% effective interest rate) to the extent that such proceeds were used to finance the acquisitions of ERA ($32.8 million), Travelodge ($39.3 million) and Century 21 NORS ($96.4 million). Effect of a 1/8% variance in variable interest rates As mentioned above, interest expense was incurred on borrowings under the Company's revolving credit facility which partially funded the acquisition of Century 21. The Company recorded interest expense using the variable interest rate in effect on the borrowing date. The effect on pro forma net income assuming a 1/8% variance in the variable interest rate used to calculate interest expense is $26,000 for both the year ended December 31, 1995 and the six months ended June 30, 1996. The pro forma net income efffects of a 1/8% variance in the interest rate has no impact on earnigns per share for all periods presented. F. Other expenses The pro forma adjustment eliminates $399,000 of accounting, legal and other administrative expenses allocated to CCI which would not have been incurred by the Company. G. Income taxes The pro forma adjustment to income taxes is comprised of ($000's): For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 ----------------- ------------------ Reversal of historical (provision) benefit of: Company..................... $(55,175) $(41,746) CCI......................... (313) -- Century 21.................. (2,097) -- Coldwell Banker............ (24,385) 10,432 Travelodge................. (1,132) -- Pro forma provision............. 83,910 48,253 -------- -------- Total...................... $ 808 $ 16,939 ======== ======== The pro forma effective tax rate approximates the Company's historical effective tax rate. The pro forma provision for taxes was computed using pro forma pre-tax amounts and the provisions of Statement of Financial Accounting Standards No. 109. H. Weighted average common and common equivalent share outstanding. The pro forma adjustment to weighted average shares consists of the following ($000's):
Issuance For the Year For the Six Months Price Per Ended Ended Share December 31, 1995 June 30, 1996 --------- ----------------- ------------------ CCI (including dilutive impact of warrants) (1)............ $15.30 896 -- Century 21 (2)............... $49.88 2,334 -- Coldwell Banker Offering (3).. $59.99 12,506 10,307 Century 21 NORS (4)........... $49.83 923 629 ------ ------ Total........................ 16,659 10,936 ====== ======
(1) Date of Acquisition, May 11, 1995 (2) Date of Acquisition, August 1, 1995 (3) Date of Acquisition, May 31, 1996 (4) Date of Acquisition, April 3, 1996 The unaudited Pro Forma Consolidated Statement of Operations is presented as if the acquisitions took place at the beginning of the period presented; thus, the stock issuances referred to above are considered outstanding as of the beginning of the period for purposes of per share calculations. I. Estimated selling, general and administrative cost savings: In connection with HFS' acquisitions, HFS developed related business plans to restructure each of the respective acquired companies which will result in future cost savings subsequent to the acquisitions. HFS' restructuring plans in each case were developed prior to the consummation of the respective acquisitions and were implemented concurrent with the consummation of the acquisitions. Restructuring plans included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Pursuant to HFS' specific restructuring plans, certain selling, general and administrative expenses may not be incurred subsequent to each acquisition that existed pror to consummation. In addition, there are incremental costs in the conduct of activities of the acquired companies prior to the acquisitions that may not be incurred subsequent to consummation and have no future economic benefit to HFS. The estimated cost savings that HFS believes would have been attained had its acquisitions occurred on January 1, 1995 and the related impact of such cost savings on pro forma net income and net income per share are not reflected in the pro forma consolidated statements of income, but are presented below ($000's):
For the year ended December 31, 1995: Century Coldwell Century 21 21 Banker NORS Travelodge ERA Total ------- -------- ---------- ---------- ------- --------- Payroll and related... $10,885 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 37,619 Professional......... 2,693 1,500 1,486 154 387 6,220 Occupancy............ 3,628 -- 2,754 186 1,172 7,740 Other 3,128 (1,517) 2,326 167 1,036 5,140 ------- ------- ------- ------- ------- -------- Total........... $20,334 $10,665 $14,272 $ 1,617 $ 9,831 $ 56,719 ======= ======= ======= ======= ======= ========
For the six months ended June 30, 1996: Coldwell Century 21 Banker NORS Travelodge ERA Total -------- ---------- ---------- ------- --------- Payroll and related... $ 4,451 $ 2,424 $ 25 $ 222 $ 7,122 Professional......... 1,055 705 4 -- 1,764 Occupancy............ -- 603 4 102 709 Other (604) 1,069 4 157 626 ------- ------- ----- ------ ------- Total........... $ 4,902 $ 4,801 $ 37 $ 481 $10,221 ======= ======= ===== ====== =======
The impact on pro forma net income and net income per share of the estimated SG&A cost savings are as follows: For the Year For the Six Months Ended Ended December 31, 1995 June 30, 1996 -------------------------------------------- Income before taxes, as reported... $204,237 $ 119,439 SG&A adjustments.................. 56,719 10,221 -------- --------- Income before taxes, as adjusted.. 260,956 129,660 Income taxes...................... 105,426 52,383 -------- --------- Net income, as adjusted $155,530 $ 77,277 ======== ========= Net income per share (primary): Ad adjusted................. $ 1.23 $ 0.58 ======== ========= As reported................. $ 0.96 $ 0.54 ======== ========= Net income per share (fully diluted): Ad adjusted................. $ 1.21 $ 0.58 ======== ========= As reported................. $ 0.94 $ 0.54 ======== ========= J. Accrued acquisition liability: The Company has recorded liabilities for charges to be incurred in connection with the restructuring of acquired Century 21, Century 21 NORS, ERA and Coldwell Banker operations. These acquisitions were consummated in 1995 and 1996 and resulted in the consolidation of facilities, involuntary termination and relocation of employees, and elimination of duplicative operating and overhead activities. The following table provides details of these charges by type.
Century 21 Coldwell Century 21 NORS ERA Banker ---------- ---------- ------- -------- Personnel related..... $ 12,647 $ 1,720 $ 8,000 $ 4,237 Facility related...... 16,511 2,293 1,558 5,491 Other costs 990 711 501 211 -------- ------- ------- ------- Total ............ $ 30,148 $ 4,724 $10,059 $ 9,939 ======== ======= ======= ======= Terminated employees.... 325
Personnel related charges include termination benefits such as severance, wage continuation, medical and other benefits. Facility related costs include contract and lease terminations, temporary storage and relocation costs associated with assets to be disposed of, and other charges incurred in the consolidation of excess office space. As of June 30, 1996, approximately $23.7 million, $1.6 million, $3.3 million and $1.6 million were paid by Century 21, Century 21 NORS, ERA and Coldwell Banker, respectively and charged against the restructuring liability. K. Trust contribution: Included in HFS' historical SG&A for the six months ended June 30, 1996, is a $5 million charge associated with the Company's contribution of the Owned Brokerage Business to the Trust. The charge represents the fair value of the Owned Brokerage Business based upon a valuation which considered earnings, cash flow, assets and business prospects of the contributed business. EX-99.2 4 EX. 99.2 - AVIS STATEMENTS EXHIBIT 99. 2 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 opertaions 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 Income tax benefit relating to ESOP 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 ----------------- ------------------ Foregin 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) Income tax benefit relating to ESOP 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 Inocme tax benefit relating to ESOP tax deductions for the year ended February 28, 1993 ............. 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 affiliate company: Proceeds 977,958 745,213 435,241 Repayments (661,656) (846,124) (455,725) 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 to 50 percent 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. Advertising expense was $57,478,000, $59,236,000 and $47,232,000 for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, respectively. Evironmental 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 amounts due from vehicle manufacturers include $75,635,000 and $71,570,000 of amounts due from affiliated company at February 29, 1996 and February 28, 1995, respectively. Amounts due from vehicle manufactuers include receivables for vehicles sold under guaranteed repurchase contracts and amounts due for incentives and allowances. Incentives and allowances are derived based on the overall volume of vehicles to be purchased for a model year or from the manufactuers' eagerness to encourage the Company to surrender its option to sell vehicles back to the manufacturer or arise from the purchase of particular models not subject to repurchase under "buyback" arrangements. Incentives and allowances are generally amortized to income over the life of the vehicle. 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 and Due to Affiliated Company outstanding is comprised of the following (in thousands): February February 29, 1996 28, 1995 --------- ---------- VEHICLE TRUST FINANCING Commercial paper - vehicle trust financing ....... $ 29,550 $ 1,000 Current portion of long-term debt - vehicle trust financing ....................... 46,000 10,000 --------- ---------- Total current debt .......................... 75,550 11,000 --------- ---------- Guaranteed ESOP notes ......................... 1,000,000 1,000,000 Revolving credit facilities..................... 412,500 195,700 Manufacturer's financing due June 1996 (interest rate 1995: 8.7%)............................ 132,000 Floating rate notes due September 1998 ......... 115,000 Insurance company notes due from June 1996 to June 2003 (interest rate 1996: 7.3% 1995: 7.3%)............................ 262,500 308,500 --------- --------- Vehicle trust financing - long term ...... 1,790,000 1,636,200 OTHER FINANCING Short-term capital lease obligation .............. 142 Short-term notes - foreign ....................... 46,635 38,356 Current portion of long-term debt - other ........ 32,337 21,742 --------- --------- Total current debt - other 79,114 60,098 --------- --------- 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 ......................... 220,590 136,482 ---------- ---------- $2,165,254 $1,843,780 ========== ========== 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. 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 $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, $95,601,000 and $110,615,000 of vehicle manufacturer finance companies subordinated debt is included in the $1 bllion ESOP related tax advantage vehicle financing. At February 29, 1996, the Company has a $450 million line of credit from a finance subsidiary of 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% of the unused portion. (See note 17 for other related party transactions). 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. As of February 29, 1996, February 28, 1995 and February 28, 1994, the weighted average interest rate of the $1 billion ESOP loans was 6.1%, 6.3% and 5.0%, respectively. The $850 million revolving credit facility expires on September 30, 1997. The interest rate on these loans is based on the London Interbank rate plus a spread negotiated at the time of the borrowing. 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. The floating rate notes were issued pursuant to a loan agreement dated September 1, 1995 for a period of three years. The interest rate on these notes is based on the London Interbank rate, plus a spread of 0.45%. The interest rate on these notes as of February 28, 1996 was 6.2%. 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 ======= 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 with an interest rate of 7.75%. 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. 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. 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 as follows: Amount Expiration (in thousands) Date -------------- ----------------- $ 27,300 February 28, 2003 96,692 February 29, 2004 100,631 February 28, 2007 69,387 February 28, 2010 60,779 February 28, 2011 -------- $354,789 ======== The Company also has available unused investment tax credits of approximately $5,834,000 which expire on February 28, 2002. The valuation allowance represents an amount of the deferred tax assets that more likely than not will not be realized. The portion of tne NOL carryforwards that are not considered more likely than not realizable is due to the Company being a leveraged ESOP with fluctuating interest rates on its ESOP and non-ESOP debt. At February 29, 1996 and February 28, 1995, management of the Company reviewed recent operating results and projected future operating results. At the end of each of the respective years, management determined that a portion of the net deferred income tax assets would likely be realized as a result of projected future operating income. 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. 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. The carrying and redemption amounts for each redeemable preferred stock issue is as follows (in thousands, except per share amounts): February 29, February 28, 1996 1995 ------------ ------------ Series A: Carrying amount $ 9,323 $11,653 Redemption amount ($50 per share at February 29, 1996 and February 28, 1995) 9,349 11,687 Series B: Carrying amount 9,323 11,653 Redemption amount ($50 per share at February 29, 1996 and February 28, 1995) 9,349 11,687 Series C: Carrying amount 53,763 53,968 Redemption amount ($18.68 per share at February 29, 1996 and February 28, 1995) 53,763 53,968 Total carrying amount $72,409 $77,274 Total redemption amount $72,461 $77,342 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. 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 Events - (unaudited) A. 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. 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 illegal discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to virgorously 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, results of operations and liquidity. EX-99.3 5 EX. 99.3 AVIS FIN'L. STMTS. EXHIBIT 99.3 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 .............. 503,037 506,683 ----------- ----------- 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 (decrease) in debt and due to affiliated company: Proceeds........................................... 377,035 97,828 Repayments......................................... (162,517) (72,547) 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 illegal discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to virgorously 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, results of operations or liquidity. -----END PRIVACY-ENHANCED MESSAGE-----