UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-13315
--------
AVIS GROUP HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3347585
(State of Incorporation) (I.R.S. Employer Identification No.)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 496-3500
900 OLD COUNTRY ROAD
GARDEN CITY, NEW YORK 11530
(Former address)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section (g) of the Act:
11% SENIOR SUBORDINATED NOTES DUE 2009
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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AVIS GROUP HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
<Table>
<Caption>
PAGE
----
Consolidated Statements of:
Operations for the three months ended September 30, 2001
and 2000 ................................................................ 1
Operations for the period March 1, 2001 (Date of Acquisition) to
September 30, 2001, the two months ended February 28, 2001 and the
nine months ended September 30, 2000 .................................... 2
Financial Position as of September 30, 2001
and December 31, 2000 ................................................... 3
Cash Flows for the period March 1, 2001 (Date of Acquisition)
to September 30, 2001, the two months ended February 28, 2001
and the nine months ended September 30, 2000 ............................ 4
Notes to the Condensed Consolidated
Financial Statements .................................................... 5-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .............................................................. 22-29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS ...................................................... 30
PART II. OTHER INFORMATION
Signatures .............................................................. 31
ITEM 6(a). EXHIBITS ................................................................ 32
ITEM 6(b). REPORT ON FORM 8-K ...................................................... 35
</Table>
<Page>
PART 1 - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR COMPANIES
---------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ---------------------
Revenue ........................................................................ $ 650,368 $733,694
--------- --------
Cost and expenses:
Direct operating, net .......................................................... 238,657 259,573
Vehicle depreciation and lease charges, net .................................... 194,350 191,346
Selling, general and administrative ............................................ 122,094 121,101
Interest, net .................................................................. 70,440 86,992
Non-vehicle depreciation and amortization ...................................... 5,449 12,647
Amortization of cost in excess of net assets acquired and other intangibles .... 8,095 3,133
Unusual charges ................................................................ 60,062
--------- --------
699,147 674,792
--------- --------
Income (loss) before provision for income taxes ................................ (48,779) 58,902
Provision (benefit) for income taxes ........................................... (24,033) 30,573
--------- --------
Income (loss) from continuing operations ....................................... (24,746) 28,329
Income from discontinued operations, net of income taxes of $5,938 ............. 20,068
--------- --------
Net income (loss) .............................................................. $ (24,746) $ 48,397
========= ========
</Table>
See notes to the condensed consolidated financial statements.
1
<Page>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR COMPANIES
---------------------------------
MARCH 1, 2001 TWO MONTHS NINE MONTHS
(DATE OF ACQUISITION) ENDED ENDED
TO FEBRUARY 28, SEPTEMBER 30,
SEPTEMBER 30, 2001 2001 2000
--------------------- ------------ -------------
Revenue ..................................................... $ 1,497,258 $385,821 $1,989,167
----------- -------- ----------
Costs and expenses:
Direct operating, net ....................................... 549,021 173,830 715,581
Vehicle depreciation and lease charges, net ................. 423,110 111,966 510,674
Selling, general and administrative ......................... 276,213 83,229 355,240
Interest , net .............................................. 166,547 52,792 278,228
Non-vehicle depreciation and amortization ................... 12,235 4,154 22,260
Amortization of cost in excess of net assets acquired
and other intangibles ..................................... 18,604 2,087 9,414
Unusual charges ............................................. 60,062
----------- -------- ----------
1,505,792 428,058 1,891,397
----------- -------- ----------
Income (loss) before provision (benefit) for income taxes ... (8,534) (42,237) 97,770
Provision (benefit) for income taxes ........................ (2,381) (15,783) 47,976
----------- -------- ----------
Income (loss) from continuing operations .................... (6,153) (26,454) 49,794
Income from discontinued operation, net of
income taxes of $5,045 for the two months ended
February 28, 2001 and $35,186 for the nine months
ended September 30, 2000 .................................. 4,947 55,621
----------- -------- ----------
Income (loss) before cumulative effect of accounting
change .................................................... (6,153) (21,507) 105,415
Cumulative effect of accounting change, net of income
tax benefit of $3,331 ..................................... (7,612)
----------- -------- ----------
Net income (loss) ........................................... $ (6,153) $(29,119) $ 105,415
=========== ======== ==========
</Table>
See notes to the condensed consolidated financial statements.
2
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AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR
COMPANIES
------------
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Cash and cash equivalents .................................. $ 43,021 $ 80,368
Restricted cash ............................................ 43,953 41,280
Accounts receivable, net ................................... 206,176 189,662
Prepaid expenses ........................................... 57,896 47,924
Property and equipment, net ................................ 198,425 181,504
Other assets ............................................... 35,090 78,972
Net assets of discontinued operation ....................... 880,300
Deferred income tax assets, net ............................ 489,911 349,268
Customer lists ............................................. 18,392
Cost in excess of net assets acquired, net ................. 1,220,530 453,450
----------- -----------
Total assets exclusive of assets under programs ............ 2,313,394 2,302,728
----------- -----------
Assets under management programs:
Restricted cash ......................................... 151,046 126,202
Vehicles ................................................ 3,554,442 3,761,454
Due from vehicle manufacturers .......................... 590,551 318,666
----------- -----------
4,296,039 4,206,322
----------- -----------
Total assets ........................................... $ 6,609,433 $ 6,509,050
=========== ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Accounts payable ........................................... $ 262,096 $ 283,556
Accrued liabilities ........................................ 386,884 263,277
Due to Cendant Corporation and affiliates, net ............. 410,471 36,117
Public liability, property damage and other insurance
liabilities, net ........................................ 227,668 247,567
Non-vehicle debt ........................................... 594,594 730,333
----------- -----------
Total liabilities exclusive of liabilities under programs .. 1,881,713 1,560,850
----------- -----------
Liabilities under management programs:
Vehicle debt ............................................ 3,934,969 3,816,682
Deferred income taxes ................................... 370,765 376,404
Other ................................................... 67,933
----------- -----------
4,373,667 4,193,086
----------- -----------
Total liabilities ...................................... 6,255,380 5,753,936
----------- -----------
Commitments and contingencies:
Common stock ...............................................
Class A Common stock ....................................... 359
Additional paid-in-capital ................................. 156,065 593,829
Retained earnings .......................................... 242,207 277,460
Treasury stock ............................................. (96,538)
Accumulated comprehensive loss ............................. (44,219) (19,996)
----------- -----------
Total common stockholders' equity ...................... 354,053 755,114
----------- -----------
Total liabilities and common stockholders' equity ...... $ 6,609,433 $ 6,509,050
=========== ===========
</Table>
See notes to the condensed consolidated financial statements.
3
<Page>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
PREDECESSOR COMPANIES
-----------------------------
MARCH 1, 2001 TWO MONTHS NINE MONTHS
(DATE OF ACQUISITION) ENDED ENDED
TO FEBRUARY 28, SEPTEMBER 30,
SEPTEMBER 30, 2001 2001 2000
------------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (6,153) $ (29,119) $ 105,415
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Non-vehicle depreciation and amortization .............................. 30,839 6,241 31,674
Changes in operating assets and liabilities:
Accounts receivable ................................................. 6,887 10,108 (23,688)
Accounts payable .................................................... 124,495 (33,889) 46,573
Due to Cendant-trading accounts ..................................... (169,144) (45,096) 1,076,008
Accrued liabilities ................................................. 114,432 1,486 (36,342)
Other, net .......................................................... (71,064) (7,180) 33,955
----------- ----------- -----------
Net cash provided by (used in) operating activities exclusive of
management programs ................................................. 30,292 (97,449) 1,233,595
----------- ----------- -----------
Management programs:
Vehicle depreciation ................................................ 395,985 105,928 488,538
Deferred income taxes ............................................... (12,488) (17,744) (14,056)
----------- ----------- -----------
383,497 88,184 474,482
----------- ----------- -----------
Net cash provided by (used in) operating activities ................. 413,789 (9,265) 1,708,077
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Management programs:
Increase (decrease) in restricted cash ........................... (36,855) 10,978 (36,963)
Increase (decrease) in due (from) to vehicle manufacturers ....... (284,433) 16,368 (54,882)
Payments for vehicle additions ................................... (3,407,418) (943,102) (3,907,439)
Vehicle deletions ................................................ 3,057,001 813,460 2,794,366
----------- ----------- -----------
(671,705) (102,296) (1,204,918)
----------- ----------- -----------
Payments for additions to property and equipment ....................... (22,957) (3,278) (29,800)
Retirements of property and equipment .................................. 3,219 (380) 5,618
Payment for purchase of rental car franchise licensees ................. (28,261)
Decrease in net assets and preferred stock of discontinued operation ... (291) (41,566)
----------- ----------- -----------
Net cash used in investing activities, exclusive of management programs. (47,999) (3,949) (65,748)
----------- ----------- -----------
Net cash used in investing activities .................................. (719,704) (106,245) (1,270,666)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Management programs:
Changes in vehicle debt:
Proceeds ......................................................... 1,111,524 132,294 1,392,856
Repayments ....................................................... (1,025,222) (31,087) (865,804)
----------- ----------- -----------
Net increase in vehicle debt ..................................... 86,302 101,207 527,052
Changes in non-vehicle debt:
Proceeds ......................................................... 140,000 161,000
Repayments ....................................................... (457,928) (77) (1,118,328)
----------- ----------- -----------
Net decrease in non-vehicle debt ....................................... (317,928) (77) (957,328)
Increase in due to Cendant-intercompany financing, net ................. 394,950
Payments for debt issuance costs ....................................... (4,593) (12) (9,525)
Capital contribution from Cendant ...................................... 125,000
Other .................................................................. 140 271
Net cash provided by (used in) financing activities, exclusive of ----------- ----------- -----------
management programs ................................................. 197,429 51 (966,582)
----------- ----------- -----------
Net cash provided by (used in) financing activities .................... 283,731 101,258 (439,530)
----------- ----------- -----------
Effect of exchange rate changes on cash ................................ (900) (11) (390)
----------- ----------- -----------
Net decrease in cash and cash equivalents .............................. (23,084) (14,263) (2,509)
Cash and cash equivalents at beginning of period ....................... 66,105 80,368 31,901
----------- ----------- -----------
Cash and cash equivalents at end of period ............................. $ 43,021 $ 66,105 $ 29,392
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash interest paid ..................................................... $ 189,230 $ 44,315 $ 176,538
=========== =========== ===========
Cash income taxes paid ................................................. $ 11,690 $ 1,962 $ 10,625
=========== =========== ===========
Businesses acquired:
Fair value of assets acquired, net of cash acquired of $182 ............ $ 30,283
Liabilities assumed .................................................... 2,022
-----------
Net cash paid for rental car franchise licensees ....................... $ 28,261
===========
</Table>
See notes to the condensed consolidated financial statements
4
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION
GENERAL
Prior to March 1, 2001, the accompanying unaudited condensed consolidated
financial statements included Avis Group Holdings, Inc. and its subsidiaries
(the "Predecessor" or "Predecessor Companies"), Avis Rent A Car System, Inc.
("Vehicle Rental"), Avis Fleet Leasing and Management Corp. ("Vehicle Leasing")
and Reserve Claims Management Co. On November 11, 2000, Cendant Corporation
("Cendant") entered into an Agreement and Plan of Merger with the Predecessor
(the "Cendant Merger Agreement") whereby Cendant would acquire all of the
outstanding shares of the Predecessor's Class A Common stock that were not owned
by Cendant at the price of $33.00 per share, in cash and convert certain Avis
Group Holdings, Inc. stock options to Cendant stock options which were then
valued at approximately $17 million (the "Cendant Consideration"). Pursuant to
the Cendant Merger Agreement, all outstanding and unexercised options to
purchase Class A Common stock of the Predecessor were either cancelled upon the
merger in exchange for a cash payment equal to the excess of the merger
consideration over the per share exercise price of each option or converted into
options to purchase Cendant common stock. Approximately 24.9 million outstanding
shares of the Predecessor's Class A Common stock were not owned by Cendant and
approximately 6.7 million unexercised non-converted options were outstanding at
February 28, 2001. The merger was approved on February 28, 2001, by a majority
of the Predecessor's shareholders who were unaffiliated with Cendant and closed
on March 1, 2001 (the "Date of Acquisition") at a cost to Cendant of
approximately $994 million, including $40 million of transaction costs and
expenses (the "Acquisition"). Concurrent with the Acquisition, Avis Group
Holdings, Inc.'s common stock was recapitalized. As a result of the
recapitalization, 10,000 shares were authorized, of which 5,537 shares were
issued and outstanding at March 1, 2001 and September 30, 2001. These shares,
which have a par value of $0.01 per share, are 100% owned by a subsidiary of
Cendant. In addition, Avis Group Holdings, Inc. sold its investment in Vehicle
Leasing to PHH Corporation ("PHH Corp."), a wholly-owned subsidiary of Cendant,
for $800 million. The proceeds from the sale were used to retire acquisition
indebtedness (see Note 5). Accordingly, the unaudited condensed consolidated
financial statements for the period from the Date of Acquisition through
September 30, 2001 and the three months ended September 30, 2001 include the
consolidated accounts of Avis Group Holdings, Inc., Avis Rent A Car System, Inc.
and Reserve Claims Management Co., (collectively referred to as the "Company" or
"Successor Company"). As a result of the sale of Vehicle Leasing to PHH Corp.,
the Condensed Consolidated Statements of Operations for the two months ended
February 28, 2001 and the three and nine months ended September 30, 2000 of the
Predecessor present Vehicle Leasing as a discontinued operation, net of the
related provision for income taxes (see Note 3). The Series A, B, and C
Preferred stock, which was originally issued by Vehicle Leasing, is excluded
from the Successor Company's Condensed Statement of Financial Position at
September 30, 2001.
The Acquisition was accounted for under the purchase method. The purchase price
has been allocated among the Predecessor Companies based upon their estimated
fair values at the Date of Acquisition. Because of this purchase price
allocation, the condensed consolidated financial statements of the Predecessor
Companies are not comparable to the condensed consolidated financial statements
of the Successor Company.
The excess of the purchase price over the estimated fair value of the underlying
net assets acquired was allocated to goodwill, which is being amortized over 40
years on a straight-line basis until the adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (see below).
The allocation of the excess purchase price was based upon preliminary estimates
and assumptions and is subject to revision when appraisals and integration costs
have been finalized. Accordingly, revisions to the allocation will be recorded
by the Company as further adjustments to the purchase price allocation. The
preliminary allocation of the purchase price is summarized as follows (in
thousands):
<Table>
<Caption>
AMOUNT
-----------
Cash consideration ................................................................... $ 937,554
Fair value of converted options ...................................................... 17,000
Transaction costs and expenses ....................................................... 40,000
-----------
Total purchase price ................................................................. 994,554
Book value of Cendant's existing net investment in Avis Group ........................ 408,957
-----------
Cendant's basis in Predecessor Companies ............................................. 1,403,511
Portion of basis attributable to Vehicle Leasing ..................................... (1,000,000)
-----------
Cendant's basis in the Successor Company ............................................ 403,511
Intercompany loan assumed by Successor Company ....................................... (137,554)
-----------
Cendant's adjusted basis in Successor Company ........................................ 265,957
Fair value of liabilities assumed in excess of assets acquired of Successor Company .. 953,020
-----------
Excess purchase price over net assets acquired ....................................... $ 1,218,977
===========
</Table>
5
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AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-BASIS OF PRESENTATION (CONTINUED)
Certain reclassifications have been made to conform to the current period
presentation.
In management's opinion, the condensed consolidated financial statements contain
all normal recurring adjustments necessary for a fair presentation of interim
results reported. The results of operations reported for interim periods are not
necessarily indicative of the results of operations for the entire year or any
subsequent interim period. In addition, management is required to make estimates
and assumptions that affect the amounts reported and related disclosures.
Estimates, by their nature, are based on judgment and available information.
Accordingly, actual results could differ from those estimates. The condensed
consolidated financial statements should be read in conjunction with the
Predecessor's Annual Report on Form 10-K for the year ended December 31, 2000.
CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVE INSTRUMENTS
On January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133") as amended. SFAS No. 133, established accounting
and reporting standards for derivative instruments, including freestanding and
embedded derivatives, and hedging activities. The Company has recorded all such
derivatives at fair value at January 1, 2001.
The adoption of SFAS No. 133 resulted in the recognition of a non-cash charge of
$12.5 million ($7.6 million, after tax) in the Condensed Consolidated Statement
of Operations for the two months ended February 28, 2001 to account for the
cumulative effect of the accounting change relating to derivatives not
qualifying as hedges prior to that date. The Company also recognized a
cumulative-effect-type adjustment in the amount of $2.4 million in accumulated
comprehensive loss in the Condensed Consolidated Balance Sheet attributable to
derivatives designated as cash flow like hedges prior to the adoption of SFAS
No. 133.
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with interest rate
risks. As a matter of policy, the Company does not use derivatives for trading
or speculative purposes.
All derivatives are recorded at fair value either as assets or liabilities.
Gains or losses on derivatives designated in cash flow hedges, to the extent the
hedge is effective, are recorded in other comprehensive income (loss). Any
ineffectiveness resulting from these cash flow hedges is reported currently in
earnings. Amounts accumulated in other comprehensive income are reclassified
into earnings in the same period during which the hedged item affects earnings.
Gains and losses on derivatives not designated as hedging instruments are
recognized currently in earnings.
RECENT ACCOUNTING STANDARDS
Recent pronouncements of the Financial Accounting Standards Board which are not
required to be adopted at this date include Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" ("SFAS No. 141"), SFAS No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and SFAS No. 144
"Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No.
144").
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires additional
disclosures for material business combinations completed after such date. This
standard also addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination acquisition. On July
1, 2001, the Company adopted the provisions relating to acquisitions made
subsequent to June 30, 2001, as required. The provisions regarding the
classification of previously acquired intangible asset will be adopted
simultaneously with the provisions of SFAS No. 142 on January 1, 2002, as
required.
6
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
RECENT ACCOUNTING STANDARDS (CONTINUED)
SFAS No. 142 addresses financial accounting and reporting for intangible assets
acquired outside of a business combination. The standard also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. The Company will be required to assess goodwill
and other intangible assets for impairment annually, or more frequently if
circumstances indicate a potential impairment. On July 1, 2001, the Company
adopted the provisions requiring that goodwill and certain other intangible
assets acquired after June 30, 2001 not be amortized. The Company will adopt the
remaining provisions of this standard on January 1, 2002, as required.
Transition-related impairment losses, if any, resulting form the initial
assessment of goodwill and certain other intangible assets will be recognized by
the Company as a cumulative effect of accounting change as of January 1, 2002.
The Company is currently evaluating the impact of adopting the remaining
provisions on its financial position and results of operations.
Based upon a preliminary assessment of previously acquired goodwill and certain
other intangible assets that will no longer be amortized upon the adoption of
SFAS No. 142, the Company expects that the related reduction to amortization
expense during the seven months ended September 30, 2001, the two months ended
February 28, 2001 and the nine months ended September 30, 2000 would approximate
$18.6 million, $2 million, and $9.2 million, respectively.
SFAS No. 144 addresses financial accounting and reporting for the impairment of
disposal of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and replaces the accounting and reporting provisions of APB
Opinion No. 30, "Reporting Results of Operations - Reporting the Effect of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" as it relates to the disposal of a segment of
a business. SFAS No. 144 requires the use of a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations,
by requiring those long-lived assets to be measured at the lower of carrying
amount or fair value less cost to sell. The impairment recognition and
measurement provisions of SFAS No. 121 were retained for all long-lived assets
to be held and used with the exception of goodwill. The Company will adopt this
standard on January 1, 2002.
NOTE 2-UNUSUAL CHARGES
During the third quarter 2001, unusual charges of $60.1 million were recorded as
a result of the September 11, 2001 terrorist attacks on the World Trade Center
("Terrorist Attacks"). The unusual charges include 1) an asset impairment loss
arising from the return of Regular Program vehicles, $43.8 million, 2) a reserve
for anticipated decline in market value on the sale of Non-Program vehicles,
$5.8 million, 3) a reserve for the cancellation of marketing programs, $0.9
million, 4) a reserve for severance costs, $0.5 million and 5) other costs, $9.1
million, principally related to redundancies caused by the Terrorist Attacks.
The asset impairment loss of $43.8 million relates to the disposal of Program
Vehicles under repurchase programs. Prices under these repurchase programs are
based on either 1) a specified percentage of original vehicle costs, depending
on the month the vehicle is returned to the manufacturers or 2) the original
capitalized cost less a set depreciation amount. Unlike Program Vehicles, the
resale of Non-Program Vehicles is determined by current market conditions. Due
to the excessive number of vehicles being returned by Avis and other car rental
companies subsequent to the Terrorist Attacks, the Company has experienced a
sharp decline in the resale value of these Non-Program vehicles. A reserve in
the amount of $5.8 million was established anticipating losses on the disposal
of Non-Program vehicles. As of September 30, 2001, a reserve of $35 million
remains for those Program Vehicles which have not been disposed. The remaining
vehicles will be disposed of as soon as possible.
Also included in the unusual charge were costs of commissions payable to
agencies for advertising placement. Prior to the Terrorist Attacks, the Company
had committed to a level of advertising placement commissions based on
anticipated advertising spending. As a result of the Terrorist Attacks, the
Company has significantly curtailed its advertising spending, it remains,
however, obligated to pay commissions based on budgeted advertising spending. As
of September 30, 2001, the entire amount of advertising placement commission had
been paid. In addition, the Company has initiated a formal plan to terminate
certain employees at field locations and at corporate headquarters. As of
September 30, 2001, the Company had accrued $0.5 million for severance and other
related costs for employees so notified. The Company expects all affected
employees will be terminated prior to December 31, 2001. Other costs of $9.1
million associated with the Terrorist Attacks have been classified within the
Statement of Operations to the Unusual Charge. Amounts classified comprise $7.2
million of estimated payroll costs for underutilized employees (the majority of
which have been terminated) and $1.9 million of minimum airport commission
guarantees.
7
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3-DISCONTINUED OPERATION
In connection with the acquisition of the Company by Cendant on March 1, 2001,
the Company sold its investment in Vehicle Leasing for $800 million to PHH Corp.
(see Note 1). No gain or loss was recognized on the sale.
Summarized financial data of the discontinued operation of the Predecessor is as
follows (in thousands):
<Table>
<Caption>
VEHICLE LEASING
----------------------------------------------
TWO MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2000
------------ ------------- -------------
Revenue ..................................... $255,548 $1,250,609 $396,581
======== ========== ========
Income before provision for income taxes .... $ 9,992 $ 90,807 $ 26,006
Provision for income taxes .................. 5,045 35,186 5,938
-------- ---------- --------
Net income .................................. $ 4,947 $ 55,621 $ 20,068
======== ========== ========
</Table>
Income before provision for income taxes for the two months ended February 28,
2001 and the nine and three months ended September 30, 2000 include certain
intercompany charges from the Predecessor Companies. These charges seek to
reimburse the Predecessor Companies for the costs it had incurred on behalf of
Vehicle Leasing as follows (in thousands):
<Table>
<Caption>
TWO MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED
FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2000
------------ ------------- -------------
Interest on intercompany loans .... $ 342 $ 6,371 $ (16)
Employee benefits costs ........... 963 4,420 1,595
------- ------- -------
$ 1,305 $10,791 $ 1,579
======= ======= =======
</Table>
Net assets of the discontinued operation consist of the following (in
thousands):
<Table>
<Caption>
DECEMBER 31, 2000
-----------------
Cash ........................................ $ 122,509
Accounts receivable, net .................... 643,502
Vehicles, net ............................... 3,205,380
Cost in excess of net assets acquired ....... 873,286
Other assets ................................ 289,675
----------
Total assets ........................... 5,134,352
----------
Accounts payable and accrued liabilities .... 456,784
Deferred income taxes ....................... 432,357
Debt ........................................ 2,975,225
----------
Total liabilities ...................... 3,864,366
----------
Preferred stock classes A, B, and C ......... 389,686
----------
Net assets of discontinued operation ... $ 880,300
==========
</Table>
8
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4-COMPREHENSIVE INCOME (LOSS)
Comprehensive (loss) income is comprised of the following (in thousands):
<Table>
<Caption>
PREDECESSOR COMPANIES
-------------------------------
MARCH 1, 2001 TWO MONTHS NINE MONTHS
(DATE OF ACQUISITION) ENDED ENDED
TO FEBRUARY 28, SEPTEMBER 30,
SEPTEMBER 30, 2001 2001 2000
--------------------- ------------ -------------
Net (loss) income ....................................................... $ (6,153) $(29,119) $105,415
Foreign currency translation adjustment, net of income taxes ............ (3,371) (1,775) (10,275)
Cumulative effect of accounting change, net of income taxes ............. 1,229
(Losses) gains on derivative instruments, net of income taxes (Note 8) .. (40,848) 813
-------- -------- --------
Comprehensive (loss) income ............................................. $(50,372) $(28,852) $ 95,140
======== ======== ========
</Table>
NOTE 5-FINANCING AND DEBT
Debt outstanding consists of the following (in thousands):
<Table>
<Caption>
PREDECESSOR
COMPANIES
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
VEHICLE DEBT
Commercial Paper Notes .................................................... $ 149,682 $ 919,800
Short-term notes-foreign ................................................ 180,287 196,882
Series 1997-A-2 asset-backed Medium Term Notes due May through
October 2002 at 6.40% .................................................. 850,000 850,000
Series 1998-1 asset-backed Medium Term Notes due December 2004 through
May 2005 at 6.14% ...................................................... 600,000 600,000
Series 2000-1 floating rate Rental Car Asset-Backed Notes due
February 2003 through July 2003 ........................................ 250,000 250,000
Series 2000-2 floating rate Rental Car Asset-Backed Notes due
March 2007 through August 2007 ......................................... 300,000 300,000
Series 2000-3 floating rate Rental Car Asset-Backed Notes due
May 2003 through October 2003 .......................................... 200,000 200,000
Series 2000-4 floating rate Rental Car Asset-Backed Notes due
June 2005 through November 2005 ........................................ 500,000 500,000
Series 2001-1 floating rate Rental Car Asset-Backed Notes due
November 2003 through April 2004 ....................................... 750,000
Series 2001-2 auction rate Rental Car Asset-Backed Notes due May 2007 ..... 155,000
---------- ----------
TOTAL VEHICLE DEBT .................................................. 3,934,969 3,816,682
---------- ----------
NON-VEHICLE DEBT
Senior Subordinated Notes due May 2009 at 11.00% .......................... 589,615 500,000
Revolving Credit Facility due June 2005 ................................... 225,000
Other ..................................................................... 4,979 5,333
---------- ----------
TOTAL NON-VEHICLE DEBT .............................................. 594,594 730,333
---------- ----------
TOTAL DEBT .......................................................... $4,529,563 $4,547,015
========== ==========
</Table>
On March 2, 2001, one of the Company's vehicle rental financing subsidiaries
issued $750 million of Series 2001-1 Floating Rate Rental Car Asset Backed Notes
("Series 2001-1 Notes"), which are secured by the Company's vehicles.
Anticipated principal repayment on the Series 2001-1 Notes commence in November
2003 and continue through April 2004. The Series 2001-1 Notes bear interest at a
rate of LIBOR plus 20 basis points per annum. The Series 2001-1 Notes are
guaranteed under a Surety Bond issued by MBIA and are rated AAA by Standard and
Poor's rating services and Aaa by Moody's Investor Service, Inc. The Series
2001-1 Notes rank pari pasu with the Company's Variable Funding Notes and Medium
Term Notes.
9
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-FINANCING AND DEBT (CONTINUED)
On May 17, 2001, one of the Company's vehicle rental financing subsidiaries
issued $125 million of Series 2001-2 Auction Rate Notes (the "Series 2001-2
Notes"), which are secured by the Company's vehicles. The Series 2001-2 Notes
were issued in four classes, Class A-1, A-2, A-3 and A-4 with initial issuances
of $95 million, $10 million, $10 million and $10 million, respectively.
Subsequent to the initial issuance of $125 million of auction rate notes, the
Company issued $145 million of additional notes and repaid principal of $115
million, which brought the total outstanding Series 2001-2 Notes to $155 million
at September 30, 2001. The Company may issue up to $125 million of Auction Rate
Notes per class or $500 million in total. The interest rate on each class will
be a market derived rate determined by auction with auctions expected to occur
every 35 days. Anticipated principal repayment on the Series 2001-2 Notes is May
2007. The Series 2001-2 Notes are guaranteed under a Surety Bond issued by Ambac
and are rated AAA by Standard & Poor's Ratings Services and Aaa by Moody's
Investors Service, Inc. The Series 2001-2 Notes rank pari passu with the
Company's variable funding notes and medium term notes.
In connection with the acquisition by Cendant on March 1, 2001, a fair value of
$604.5 million was assigned to the Company's 11% Senior Subordinated Notes due
May 2009 ("Senior Subordinated Notes") of which $14.2 million has been accreted
to the Condensed Consolidated Statement of Operations since the date of
acquisition along with principal repayments of $650,000. The fair value of the
notes as of September 30, 2001 was $589.6 million and includes a call premium of
$27.5 million if the notes are redeemed during the twelve month period beginning
on May 1, 2004.
On September 5, 2001, the Company elected to terminate the Revolving Credit
Facility.
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS
In connection with the Vehicle Leasing acquisition on June 30, 1999 and as part
of the financing thereof, the Predecessor issued and sold the Senior
Subordinated Notes (see Note 5) in a transaction exempt from registration under
the Securities Act. The Senior Subordinated Notes are unsecured obligations of
Avis Group Holdings, Inc. The notes are subordinated in right of payment to all
existing and future senior indebtedness of the Company, and are guaranteed by
certain Avis Group Holdings, Inc. domestic subsidiaries. Vehicle Leasing and its
subsidiaries were released as guarantors under this financing agreement upon
Vehicle Leasing's sale to PHH Corp. on March 1, 2001 (see Notes 1 and 2).
Accordingly, the following condensed consolidating financial information
presents the results of operations for the three months ended September 30, 2001
and September 30, 2000, the results of operations and cash flows for the period
March 1, 2001 (Date of Acquisition) to September 30, 2001, the two months ended
February 28, 2001 and the nine months ended September 30, 2000 and the financial
position as of September 30, 2001 and December 31, 2000.
10
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The Unaudited Condensed Consolidating Statements of Operations for the two
months ended February 28, 2001 and the three and nine month periods ended
September 30, 2000 present the results of operations of Vehicle Leasing as
income from discontinued operations, net of the related income tax provision.
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------ --------------
Revenue .............................................. $ 575,914 $74,454 $ 650,368
--------- ------- ---------
Costs and expenses:
Direct operating, net ................................ 207,726 30,931 238,657
Vehicle depreciation and lease charges, net .......... 176,676 17,674 194,350
Selling, general and administrative .................. 113,750 8,344 122,094
Interest, net ........................................ $ 11,116 57,627 1,697 70,440
Non-vehicle depreciation and amortization ............ 4,763 686 5,449
Amortization of cost in excess of net
assets acquired and other intangibles ............. 5,037 3,014 44 8,095
Unusual charges ...................................... 60,062 60,062
--------- --------- ------- ---------
16,153 623,618 59,376 699,147
--------- --------- ------- ---------
(16,153) (47,704) 15,078 (48,779)
Equity (loss) in earnings of subsidiaries ............ (17,308) 9,493 $ 7,815
--------- --------- ------- -------- ---------
Income (loss) before provision (benefit) for income
taxes ............................................. (33,461) (38,211) 15,078 7,815 (48,779)
Provision (benefit) for income taxes ................. (8,715) (20,903) 5,585 (24,033)
--------- --------- ------- -------- ---------
Net income (loss) .................................... $ (24,746) $ (17,308) $ 9,493 $ 7,815 $ (24,746)
========= ========= ======= ======== =========
<Caption>
AVIS GROUP HOLDINGS, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(PREDECESSOR COMPANIES)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------ --------------
Revenue .............................................. $ 658,053 $75,641 $ 733,694
--------- ------- ---------
Costs and expenses:
Direct operating, net ................................ 229,975 29,598 259,573
Vehicle depreciation and lease charges, net .......... 173,196 18,150 191,346
Selling, general and administrative .................. 112,293 8,808 121,101
Interest, net ........................................ $ 25,250 60,067 1,675 86,992
Non-vehicle depreciation and amortization ............ 11,985 662 12,647
Amortization of cost in excess of net
Assets acquired and other intangibles ............. 3,090 43 3,133
--------- --------- ------- ---------
25,250 590,606 58,936 674,792
--------- --------- ------- ---------
(25,250) 67,447 16,705 58,902
Equity in earnings of subsidiaries ................... 64,268 19,983 $(84,251)
--------- --------- ------- -------- ---------
Income before provision (benefit) for income taxes ... 39,018 87,430 16,705 (84,251) 58,902
Provision (benefit) for income taxes ................. (9,379) 34,909 5,043 30,573
--------- --------- ------- -------- ---------
Income from continuing operations .................... 48,397 52,521 11,662 (84,251) 28,329
Income (loss) from discontinued operation, net of
income taxes ...................................... 11,747 8,321 20,068
--------- --------- ------- -------- ---------
Net income ........................................ $ 48,397 $ 64,268 $19,983 $(84,251) $ 48,397
========= ========= ======= ======== =========
</Table>
11
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 1, 2001 (DATE OF ACQUISITION) TO SEPTEMBER 30, 2001
(IN THOUSANDS)
-------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
Revenue .............................................. $ 1,343,901 $ 153,357 $ 1,497,258
----------- --------- -----------
Costs and expenses:
Direct operating, net ................................ 483,474 65,547 549,021
Vehicle depreciation and lease charges, net .......... 386,678 36,432 423,110
Selling, general and administrative .................. 257,307 18,906 276,213
Interest, net ........................................ $ 27,362 136,568 2,617 166,547
Non-vehicle depreciation and amortization ............ 10,651 1,584 12,235
Amortization of cost in excess of net
assets acquired and other intangibles ............. 11,611 6,891 102 18,604
Unusual charges ...................................... 60,062 60,062
----------- ----------- --------- -----------
38,973 1,341,631 125,188 1,505,792
----------- ----------- --------- -----------
(38,973) 2,270 28,169 (8,534)
Equity in earnings of subsidiaries ................... 21,914 20,232 $(42,146)
----------- ----------- --------- -------- -----------
Income (loss) before provision (benefit) for income
taxes ............................................. (17,059) 22,502 28,169 (42,146) (8,534)
Provision (benefit) for income taxes ................. (10,906) 588 7,937 (2,381)
----------- ----------- --------- -------- -----------
Net income (loss) .................................... $ (6,153) $ 21,914 $ 20,232 $(42,146) $ (6,153)
=========== =========== ========= ======== ===========
<Caption>
AVIS GROUP HOLDINGS, INC
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(PREDECESSOR COMPANIES)
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2001
(IN THOUSANDS)
-------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
Revenue .............................................. $ 344,496 $ 41,325 $ 385,821
----------- --------- -----------
Costs and expenses:
Direct operating, net ................................ 154,490 19,340 173,830
Vehicle depreciation and lease charges, net .......... 102,490 9,476 111,966
Selling, general and administrative .................. 77,866 5,363 83,229
Interest, net ........................................ $ 11,473 40,375 944 52,792
Non-vehicle depreciation and amortization ............ 3,707 447 4,154
Amortization of cost in excess of net
Assets acquired ................................... 2,060 27 2,087
----------- ----------- --------- -----------
11,473 380,988 35,597 428,058
----------- ----------- --------- -----------
(11,473) (36,492) 5,728 (42,237)
Equity (loss) in earnings of subsidiaries ............ (21,907) 10,898 $ 11,009
----------- ----------- --------- -------- -----------
Income (loss) before provision (benefit) for income
taxes ............................................. (33,380) (25,594) 5,728 11,009 (42,237)
----------- ----------- --------- -------- -----------
Provision (benefit) for income taxes ................ (4,261) (12,716) 1,194 (15,783)
----------- ----------- --------- -------- -----------
Income (loss) from continuing operations ............. (29,119) (12,878) 4,534 11,009 (26,454)
Income (loss) from discontinued operations, net of
income taxes ...................................... (6,358) 11,305 4,947
----------- ----------- --------- -------- -----------
Income (loss) before cumulative effect of accounting
change ............................................ (29,119) (19,236) 15,839 11,009 (21,507)
Cumulative effect of accounting change, net of income
tax benefit ....................................... (2,671) (4,941) (7,612)
----------- ----------- --------- -------- -----------
Net income (loss) .................................... $ (29,119) $ (21,907) $ 10,898 $ 11,009 $ (29,119)
=========== =========== ========= ======== ===========
</Table>
12
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(PREDECESSOR COMPANIES)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
Revenue .......................................... $ 1,792,413 $196,754 $1,989,167
----------- -------- ----------
Costs and expenses:
Direct operating, net ............................ 631,688 83,893 715,581
Vehicle depreciation and lease charges, net ...... 462,706 47,968 510,674
Selling, general and administrative .............. 329,985 25,255 355,240
Interest, net .................................... $ 105,500 169,787 2,941 278,228
Non-vehicle depreciation and amortization ........ 20,237 2,023 22,260
Amortization of cost in excess of net
assets acquired ............................... 9,282 132 9,414
---------- ----------- -------- ----------
105,500 1,623,685 162,212 1,891,397
---------- ----------- -------- ----------
(105,500) 168,728 34,542 97,770
Equity in earnings of subsidiaries ............... 171,727 82,010 $(253,737)
---------- ----------- -------- --------- ----------
Income before provision (benefit) for income taxes 66,227 250,738 34,542 (253,737) 97,770
---------- ----------- -------- --------- ----------
Provision (benefit) for income taxes ............. (39,188) 78,127 9,037 47,976
---------- ----------- -------- --------- ----------
Income from continuing operations ................ 105,415 172,611 25,505 (253,737) 49,794
Income (loss) from discontinued operation, net of
income taxes .................................. (885) 56,506 55,621
---------- ----------- -------- --------- ----------
Net income ....................................... $ 105,415 $ 171,726 $ 82,011 $(253,737) $ 105,415
========== =========== ======== ========= ==========
</Table>
13
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 2001
(IN THOUSANDS)
--------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
ASSETS
Cash and cash equivalents ......................... $ 200 $ 29,653 $ 13,168 $ 43,021
Restricted cash ................................... 621 43,332 43,953
Accounts receivable, net .......................... (12) 180,268 25,920 206,176
Prepaid expenses .................................. 50,416 7,480 57,896
Property and equipment, net ....................... 185,670 12,755 198,425
Investment in consolidated subsidiaries ........... 705,132 (448,517) 448,517 $(705,132)
Other assets ...................................... 14,134 20,956 35,090
Deferred income tax assets, net ................... 190,278 295,200 4,433 489,911
Customer lists .................................... 18,392 18,392
Cost in excess of net assets acquired, net ........ 756,511 461,411 2,608 1,220,530
----------- ----------- ----------- --------- ----------
Total assets exclusive of assets under management
programs ....................................... 1,671,122 768,235 579,169 (705,132) 2,313,394
----------- ----------- ----------- --------- ----------
Assets under management programs:
Restricted cash ................................ 151,046 151,046
Vehicles ....................................... (82,431) 3,636,873 3,554,442
Due from vehicle manufacturers ................. (693) 591,244 590,551
----------- ----------- ----------
(83,124) 4,379,163 4,296,039
----------- ----------- ----------- --------- ----------
Total assets ...................................... $ 1,671,122 $ 685,111 $ 4,958,332 $(705,132) $6,609,433
=========== =========== =========== ========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities .......... $ 22,877 $ 476,186 $ 149,917 $ 648,980
Due to Cendant Corporation and affiliates, net .... 704,576 (318) (293,787) 410,471
Public liability, property damage and other
insurance liabilities, net ..................... 171,118 56,550 227,668
Non-vehicle debt .................................. 589,616 4,978 594,594
----------- ----------- ----------- ----------
Total liabilities exclusive of liabilities under
management programs ............................ 1,317,069 651,964 (87,320) 1,881,713
----------- ----------- ----------- ----------
Liabilities under management programs:
Vehicle debt ................................... 3,934,969 3,934,969
Deferred income taxes .......................... 333,461 37,304 370,765
Other .......................................... 67,933 67,933
----------- ----------- ----------
401,394 3,972,273 4,373,667
----------- ----------- ----------- --------- ----------
Total liabilities ................................. 1,317,069 1,053,358 3,884,953 6,255,380
----------- ----------- ----------- --------- ----------
Common stockholder's equity ....................... 354,053 (368,247) 1,073,379 (705,132) 354,053
----------- ----------- ----------- --------- ----------
Total liabilities and common stockholder's equity . $ 1,671,122 $ 685,111 $ 4,958,332 $(705,132) $6,609,433
=========== =========== =========== ========= ==========
</Table>
14
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
(PREDECESSOR COMPANIES)
DECEMBER 31, 2000
(IN THOUSANDS)
--------------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
ASSETS
Cash and cash equivalents .......................... $ 73 $ 65,602 $ 14,693 $ 80,368
Restricted cash .................................... 41,280 41,280
Accounts receivable, net ........................... 156 162,589 26,917 189,662
Prepaid expenses ................................... 39,014 8,910 47,924
Property and equipment, net ........................ 167,256 14,248 181,504
Investment in consolidated subsidiaries ............ 2,276,599 (826) $(2,275,773)
Other assets ....................................... 1,064 55,304 22,604 78,972
Net assets of discontinued operation ............... (883,464) 2,086,932 (323,168) 880,300
Deferred income taxes .............................. 96,680 249,201 3,387 349,268
Cost in excess of net assets acquired, net ......... 450,922 2,528 453,450
----------- ----------- ----------- ----------- ----------
Total assets exclusive of assets under management
programs ........................................ 1,491,108 3,275,994 (188,601) (2,275,773) 2,302,728
----------- ----------- ----------- ----------- ----------
Assets under management programs:
Restricted cash ................................. 126,202 126,202
Vehicles ........................................ (50,804) 3,812,258 3,761,454
Due from vehicle manufacturers .................. 9,666 309,000 318,666
----------- ----------- ----------- ----------
(41,138) 4,247,460 4,206,322
----------- ----------- ----------- ----------- ----------
Total assets ....................................... $ 1,491,108 $ 3,234,856 $ 4,058,859 $(2,275,773) $6,509,050
=========== =========== =========== =========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ........... $ 10,994 $ 383,754 $ 152,085 $ 546,833
Due to Cendant Corporation and affiliates, net ..... 36,117 36,117
Public liability, property damage and other
insurance liabilities, net ...................... 194,373 53,194 247,567
Non-vehicle debt ................................... 725,000 5,333 730,333
----------- ----------- ----------- ----------
Total assets exclusive of assets under management
programs ........................................ 735,994 619,577 205,279 1,560,850
----------- ----------- ----------- ----------
Liabilities under management programs:
Vehicle debt .................................... 3,816,682 3,816,682
Deferred income taxes ........................... 338,680 37,724 376,404
----------- ----------- ----------
338,680 3,854,406 4,193,086
----------- ----------- ----------- ----------
Total liabilities .................................. 735,994 958,257 4,059,685 5,753,936
----------- ----------- ----------- ----------
Common stockholders' equity ........................ 755,114 2,276,599 (826) $(2,275,773) 755,114
----------- ----------- ----------- ----------- ----------
Total liabilities and common stockholders' equity .. $ 1,491,108 $ 3,234,856 $ 4,058,859 $(2,275,773) $6,509,050
=========== =========== =========== =========== ==========
</Table>
15
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 1, 2001 (DATE OF ACQUISITION) TO SEPTEMBER 30, 2001
(IN THOUSANDS)
------------------------------------------------------------------------
AVIS GROUP
NON- HOLDINGS, INC.
PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED
--------- --------- ----------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ (6,153) $ 21,914 $ 20,232 $(42,146) $ (6,153)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
exclusive of management programs ....................... (75,546) 13,884 98,107 36,445
--------- --------- ----------- -------- -----------
Net cash provided by (used in) operating activities
exclusive of management programs ....................... (81,699) 35,798 118,339 (42,146) 30,292
--------- --------- ----------- -------- -----------
Management programs:
Vehicle depreciation ................................. 366,231 29,754 395,985
Deferred income taxes ................................ (98,628) 86,855 (715) (12,488)
--------- --------- ----------- -----------
(98,628) 453,086 29,039 383,497
--------- --------- ----------- -------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . (180,327) 488,884 147,378 (42,146) 413,789
--------- --------- ----------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Management programs:
Decrease in restricted cash .......................... (36,855) (36,855)
Increase (decrease) in due (from) to vehicle
manufacturers ...................................... 6,485 (290,918) (284,433)
Payments for vehicle additions ....................... (87,510) (3,319,908) (3,407,418)
Vehicle deletions .................................... (331,887) 3,388,888 3,057,001
--------- ----------- -----------
(412,912) (258,793) (671,705)
--------- ----------- -----------
Payments for additions to property and equipment .......... (22,084) (873) (22,957)
Retirements of property and equipment ..................... 703 2,516 3,219
Payment for purchase of rental car franchise licensees .... (27,837) (424) (28,261)
Investment in subsidiaries ................................ (21,914) (20,232) 42,146
--------- --------- ----------- -------- -----------
Net cash provided by (used in) investing activities
exclusive of management programs ....................... (21,914) (69,450) 1,219 42,146 (47,999)
--------- --------- ----------- -------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............... (21,914) (482,362) (257,574) 42,146 (719,704)
--------- --------- ----------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Management programs:
Net (decrease) increase in vehicle debt ................ (8,743) 95,045 86,302
--------- --------- ----------- -----------
Net decrease in non-vehicle debt .......................... (317,650) (278) (317,928)
Increase in due to Cendant - intercompany financing,
net .................................................... 394,950 394,950
Payments for debt issuance costs .......................... (4,593) (4,593)
Capital contribution from Cendant ......................... 125,000 125,000
--------- --------- ----------- -----------
Net cash provided by (used in) financing activities
exclusive of management programs ....................... 202,300 (4,871) 197,429
--------- --------- ----------- -----------
NET CASH PROVIDED (USED IN) BY FINANCING
ACTIVITIES ......................................... 202,300 (13,614) 95,045 283,731
--------- --------- ----------- -----------
Effect of exchange rate changes on cash ................... (900) (900)
--------- --------- ----------- -------- -----------
Net increase (decrease) in cash and cash equivalents ...... 59 (7,092) (16,051) (23,084)
Cash and cash equivalents at beginning of period .......... 141 36,745 29,219 66,105
--------- --------- ----------- -------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 200 $ 29,653 $ 13,168 $ $ 43,021
========= ========= =========== ======== ===========
</Table>
16
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(PREDECESSOR COMPANIES)
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2001
(IN THOUSANDS)
----------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ (29,119) $ (21,907) $ 10,898 $11,009 $ (29,119)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
exclusive of management programs ...................... (84,192) (22,321) 38,183 (68,330)
--------- --------- --------- ------- ---------
Net cash provided by (used in) operating activities
exclusive of management programs ...................... (113,311) (44,228) 49,081 11,009 (97,449)
--------- --------- --------- ------- ---------
Management programs:
Vehicle depreciation .................................. 97,909 8,019 105,928
Deferred income taxes ................................. (668) 10,648 (27,724) (17,744)
--------- --------- --------- ------- ---------
(668) 108,557 (19,705) 88,184
--------- --------- --------- ------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ... (113,979) 64,329 29,376 11,009 (9,265)
--------- --------- --------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Management programs:
Increase in restricted cash ........................... 10,978 10,978
Increase in due from vehicle manufacturers ............ 16,368 16,368
Payments for vehicle additions ........................ (1,843) (941,259) (943,102)
Vehicle deletions ..................................... (82,138) 895,598 813,460
--------- --------- ---------
(83,981) (18,315) (102,296)
--------- --------- --------- ---------
Payments for additions to property and equipment .......... (2,948) (330) (3,278)
Retirements of property and equipment ..................... (400) 20 (380)
Increase (decrease) in net assets and preferred stock of
discontinued operation ................................. 5,132 (5,423) (291)
Investment in subsidiaries ................................ 21,907 (10,898) (11,009)
--------- --------- --------- ------- ---------
Net cash provided by (used in) investing activities
exclusive of management programs ...................... 21,907 (9,114) (5,733) (11,009) (3,949)
--------- --------- --------- ------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ... 21,907 (93,095) (24,048) (11,009) (106,245)
--------- --------- --------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Management programs:
Net increase (decrease) in vehicle debt ............... 92,000 (2) 9,209 101,207
--------- --------- --------- ---------
Net decrease in non-vehicle debt .......................... (77) (77)
Payments for debt issuance costs .......................... (12) (12)
Other ..................................................... 140 140
Net cash provided by (used in) financing activities --------- --------- --------- ---------
exclusive of management programs ...................... 140 (89) 51
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES .......................................... 92,140 (91) 9,209 101,258
--------- --------- --------- ---------
Effect of exchange rate changes on cash ................... (11) (11)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...... 68 (28,857) 14,526 (14,263)
Cash and cash equivalents at beginning of period .......... 73 65,602 14,693 80,368
--------- --------- --------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 141 $ 36,745 $ 29,219 $ -- $ 66,105
========= ========= ========= ======= =========
</Table>
17
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
AVIS GROUP HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(PREDECESSOR COMPANIES)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
-----------------------------------------------------------------------
NON- AVIS GROUP
GUARANTOR GUARANTOR HOLDINGS, INC.
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 105,415 $ 171,726 $ 82,011 $(253,737) $ 105,415
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
exclusive of management programs ..................... 1,067,357 981,983 (921,161) 1 1,128,180
----------- ----------- ----------- --------- -----------
Net cash provided by (used in) operating activities
exclusive of management programs ..................... 1,172,772 1,153,709 (839,150) (253,736) 1,233,595
----------- ----------- ----------- --------- -----------
Management programs:
Vehicle depreciation ................................. 454,721 33,817 488,538
Deferred income taxes ................................ (44,300) 33,934 (3,690) (14,056)
----------- ----------- ----------- -----------
(44,300) 488,655 30,127 474,482
----------- ----------- ----------- --------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .. 1,128,472 1,642,364 (809,023) (253,736) 1,708,077
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Management programs:
Decrease in restricted cash .......................... (36,963) (36,963)
Decrease in due from vehicle manufacturers ........... (8,608) (46,274) (54,882)
Payments for vehicle additions ....................... (51,696) (3,855,743) (3,907,439)
Vehicle deletions .................................... (437,550) 3,231,916 2,794,366
----------- ----------- -----------
(497,854) (707,064) (1,204,918)
----------- ----------- -----------
Payments for additions for property and equipment ........ (28,465) (1,335) (29,800)
Retirements of property and equipment .................... 5,420 198 5,618
Increase (decrease) in net assets and preferred stock of
discontinued operations .............................. (1,036,387) 994,821 (41,566)
Investment in subsidiaries ............................... (171,726) (82,010) 253,736
----------- ----------- ----------- --------- -----------
Net cash provided by (used in) investing activities
exclusive of management programs ..................... (171,726) (1,141,442) 993,684 253,736 (65,748)
----------- ----------- ----------- --------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . (171,726) (1,639,296) 286,620 253,736 (1,270,666)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Management programs:
Net increase in vehicle debt ......................... 527,052 527,052
----------- -----------
Net decrease in non-vehicle debt ......................... (957,000) (328) (957,328)
Payments for debt issuance costs ......................... (9,525) (9,525)
Purchase of treasury stock ............................... 271 271
----------- ----------- ----------- -----------
Net cash used in financing activities
exclusive of management programs ..................... (956,729) (9,853) (966,582)
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .. (956,729) (9,853) 527,052 (439,530)
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash .................. (390) (390)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ..... 17 (6,785) 4,259 (2,509)
Cash and cash equivalents at beginning of period ......... 54 24,797 7,050 31,901
----------- ----------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 71 $ 18,012 $ 11,309 $ $ 29,392
=========== =========== =========== ========= ===========
</Table>
18
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7-SEGMENT INFORMATION
Prior to the Acquisition, the Company operated in two segments, vehicle leasing
and vehicle rental. Subsequent to the sale of Vehicle Leasing on March 1, 2001,
the Company operates in one industry segment, the vehicle rental business.
EBITDA represents net income, plus non-vehicle related interest expense,
non-vehicle depreciation and amortization, unusual charges, corporate
allocations and income taxes from vehicle rental operations (in thousands).
Provided below is a reconciliation of EBIDTA to income (loss) before income
taxes.
<Table>
<Caption>
PREDECESSOR
COMPANIES
-------------
THREE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, 2001 2000
------------------ -------------
EBITDA ........................................... $ 38,381 $ 84,169
Non-fleet interest ............................... (7,758) (23,291)
Intercompany interest ............................ (4,735)
Non-vehicle depreciation and amortization ........ (13,544) (1,976)
Unusual charges .................................. (60,062)
Corporate allocations ............................ (1,061)
--------- --------
Income (loss) before provision for income taxes .. $ (48,779) $ 58,902
========= ========
<Caption>
PREDECESSOR COMPANIES
-------------------------------
MARCH 1, 2001 TWO MONTHS NINE MONTHS
(DATE OF ACQUISITION) ENDED ENDED
TO FEBRUARY 28, SEPTEMBER 30,
SEPTEMBER 30, 2001 2001 2000
--------------------- ------------ -------------
EBITDA ........................................... $ 116,304 $(23,715) $224,566
Interest, net .................................... (22,413) (12,281) (95,122)
Intercompany interest ............................ (9,742)
Non-vehicle depreciation and amortization ........ (30,839) (6,241) (31,674)
Unusual charges .................................. (60,062)
Corporate allocations ............................ (1,782)
--------- -------- --------
Income (loss) before provision for income taxes .. $ (8,534) $(42,237) $ 97,770
========= ======== ========
</Table>
NOTE 8-DERIVATIVES
The Company's operations are primarily funded through a combination of
asset-backed floating rate notes and commercial paper programs in the United
States and Canada. Consistent with its historical risk management policies, the
Company uses interest rate swaps and caps to hedge interest rate risks on its
debt and to create a mixed portfolio of fixed and floating rate debt.
Certain interest rate swaps have been designated as cash flow hedges of interest
rate risk on the Company's floating rate medium-term notes. Certain cash flow
hedge contracts extend into 2004. For the two months ended February 28, 2001 and
the seven months ended September 30, 2001, no material ineffectiveness was
recognized on these hedges. Amounts accumulated in other comprehensive income
(loss) are reclassified into earnings as interest is accrued on the hedged
transactions. For the two months ended February 28, 2001 and the seven months
ended September 30, 2001, approximately $0.4 million and $(7.7) million,
respectively, of net income (loss) has been reclassified from other
comprehensive loss into earnings. Over the next 12 months, net losses of
approximately $48.3 million are expected to be reclassified from other
comprehensive income (loss) into earnings. The impact of these charges will have
the desired effect of fixing the interest rate paid on certain debt instruments.
The amounts accumulated in other comprehensive income (loss) will fluctuate
based on changes in the fair value of the Company's derivatives at each
reporting period. For the two months ended February 28, 2001 and the seven
months ended September 30, 2001, there were no amounts reclassified into
earnings resulting from the discontinuation of any hedging relationships.
19
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-DERIVATIVES (CONTINUED)
The majority of the Company's interest rate swaps and caps have not been
designated as hedges for accounting purposes. However, these derivatives are
being used to economically hedge interest rate risk exposures on the Company's
floating rate notes and commercial paper programs. For the two months ended
February 28, 2001 and the seven months ended September 30, 2001, the net loss
recognized on these derivatives was $869,000 and $2.8 million, respectively.
These amounts have been recorded as a component of interest, net on the
Company's Condensed Consolidated Statements of Operations.
NOTE 9-RELATED PARTY TRANSACTIONS
Related party charges include allocations from Cendant for services provided to
the Company, which consist of (in thousands):
<Table>
<Caption>
PREDECESSOR
COMPANIES
-------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
Royalties .......... $ 27,495 $29,347
Reservations ....... 14,487 14,743
Data processing .... 15,433 12,009
Rent and other ..... 11,906 3,280
Interest ........... 4,129
-------- -------
Total .............. $ 73,450 $59,379
======== =======
<Caption>
PREDECESSOR COMPANIES
-------------------------------
MARCH 1, 2001 TWO MONTHS NINE MONTHS
(DATE OF ACQUISITION) ENDED ENDED
TO FEBRUARY 28, SEPTEMBER 30,
SEPTEMBER 30, 2001 2001 2000
-------------------- ------------ -------------
Royalties .......... $ 63,305 $16,205 $ 79,566
Reservations ....... 33,673 8,496 43,226
Data processing .... 35,574 11,395 33,021
Rent and other ..... 23,535 1,456 7,316
Interest ........... 11,139
-------- ------- --------
Total .............. $167,226 $37,552 $163,129
======== ======= ========
</Table>
20
<Page>
AVIS GROUP HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9-RELATED PARTY TRANSACTIONS (CONTINUED)
The amounts due to Cendant Corporation and affiliates, net at September 30, 2001
and December 31, 2000 consisted of the following balances (in thousands):
<Table>
<Caption>
PREDECESSOR
COMPANIES
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Due (from) to Cendant, short term funding and trading, net .. $(132,387) $36,117
Due to Cendant-working capital .............................. 181,904
Due to Cendant-long term .................................... 380,000
Due from other Cendant affiliates, net ...................... (19,046)
--------- -------
Total due to Cendant Corporation and affiliates, net ........ $ 410,471 $36,117
========= =======
</Table>
In connection with the Acquisition, Avis Acquisition Corp. ("Acquisition
Corp."), a wholly-owned subsidiary of PHH Corp., borrowed $937 million from PHH
Corp. Concurrent with the Acquisition, Acquisition Corp. was merged into Avis
Group Holdings, Inc. with Avis Group Holdings, Inc. becoming the surviving
entity. Immediately after the Acquisition, Avis Group Holdings, Inc. sold all of
the stock of Vehicle Leasing to PHH Corp. for $800 million. The proceeds of the
sale were used by Avis Group Holdings, Inc. to reduce its note payable to PHH
Corp. from $937 million to $137 million. Following such sale, the stock of Avis
Group Holdings, Inc. acquired in the Acquisition was dividended by PHH Corp. to
Cendant Finance Holding Corporation ("CFHC") and, through a series of internal
transfers, to Cendant Car Holdings, LLC. The note payable to PHH Corp. remaining
due from Avis Group Holdings, Inc. in the amount of $137 million was transferred
by PHH Corp. to CFHC, where it remains.
During the quarter ended June 30, 2001, the Company repaid its outstanding
borrowings under its then existing Revolving Credit Facility (see Note 5).
Subsequent to the repayment, Cendant provides the Company funding for certain of
its working capital needs. The intercompany borrowings bear interest at a market
rate based on LIBOR. On June 29, 2001, Cendant made a capital contribution to
the Company by forgiving $125 million of intercompany debt. As of September 30,
2001, $182 million of borrowings are related to working capital and $380 million
are long-term in nature and are related to the Acquisition. These borrowings are
not expected to be repaid before December 31, 2001.
On June 29, 2001, one of the Company's vehicle financing subsidiaries amended
its loan agreements to allow Cendant to borrow $155 million of its restricted
cash. In turn, Cendant provided a demand note to this subsidiary and secured the
demand note with letters of credit. The loan to Cendant is included in due
(from) to Cendant, short-term funding and trading, net.
NOTE 10-INCOME TAXES
Subsequent to the Date of Acquisition, the Company continues to file its own
consolidated federal income tax return. In addition, the Company files
consolidated and combined state income tax returns with Cendant in jurisdictions
where required. The provision for income taxes is computed as if the Company
filed its federal and state income tax returns on a stand-alone basis.
21
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2:
GENERAL OVERVIEW
On November 11, 2000, we entered into a merger agreement with Cendant
Corporation. The merger was approved on February 28, 2001 by a majority of our
shareholders who were unaffiliated with Cendant and closed on March 1, 2001. In
addition, we sold our investment in our Avis Fleet Leasing and Management Corp.,
subsidiaries to PHH Corporation, a wholly-owned subsidiary of Cendant, for $800
million. The proceeds from the sale were used to retire acquisition
indebtedness. As such, the following discussion and analysis of continuing
results of operations includes our Rent A Car System, Inc. and Reserve Claims
Management Co. subsidiaries.
We conduct vehicle rental operations through wholly-owned subsidiaries in the
United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina,
Australia and New Zealand. Vehicle rental revenue is derived principally from
time and mileage charges for vehicle rentals and, to a lesser extent, the sale
of loss damage waivers, liability insurance and other products and services.
We evaluate our performance based upon a modified earnings before non-vehicle
interest, income taxes, non-vehicle depreciation and amortization calculations.
For this purpose, Adjusted EBITDA is defined as earnings before non-vehicle
interest, income taxes and non-vehicle depreciation and amortization, adjusted
to exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific.
REVENUE
Revenue is recognized over the period the vehicle is rented.
COSTS AND EXPENSES
Vehicle rental expenses include:
o Direct operating expenses (primarily field operations' wages and
related benefits, concessions and commissions paid to airport
authorities, vehicle insurance premiums and other costs relating to
the operation of rental locations and the rental fleet).
o Vehicle depreciation and lease charges relating to the rental fleet.
o Selling, general and administrative (including wages and related
benefits, information processing and information services).
o Vehicle interest.
NET INCOME
Vehicle rental profitability is primarily a function of the number of rental
transactions, pricing of rental transactions and utilization of the rental
fleet.
CORPORATE
Expenses included are interest on non-vehicle debt and amortization of cost in
excess of net assets acquired and other intangible assets.
The following discussion and analysis provides information that management
believes to be relevant to understanding the our financial position and results
of operations:
22
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
PRO-FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO PRO-FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2000.
We believe that a more meaningful comparison is made when the vehicle rental
pro-forma results of operations for the nine months ended September 30, 2001 and
historical results for the three months ended September 30, 2001 are compared to
the pro-forma results of operations for the nine and three months ended
September 30, 2000. These pro-forma statements give effect to the acquisition of
us by Cendant, and the retirement of term loans in the amount of $991.5 million
from the proceeds of the sale of the vehicle leasing operations in Europe and
the repayment of intercompany indebtedness, including the related interest
expense, as if they had occurred on January 1, 2000.
<Table>
<Caption>
PRO-FORMA PRO-FORMA
NINE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------- ------------------------------------
VEHICLE VEHICLE
RENTAL CORPORATE TOTAL RENTAL CORPORATE TOTAL
----------- --------- ----------- ----------- --------- ----------
Revenue ............................ $ 1,883,079 $ 1,883,079 $ 1,989,167 $1,989,167
----------- ----------- ----------- ----------
Costs and expenses:
Direct operating ................. 722,855 722,855 715,581 715,581
Vehicle depreciation and
lease charges, net ............. 535,077 535,077 510,674 510,674
Selling, general and
administrative ................. 359,436 359,436 355,444 $ (1,294) 354,150
Vehicle interest, net ............ 173,882 173,882 175,534 175,534
Unusual charges .................. 60,062 60,062
----------- ----------- ----------- -------- ----------
1,851,312 1,851,312 1,757,233 (1,294) 1,755,939
----------- ----------- ----------- -------- ----------
Adjusted EBITDA .................... 31,767 31,767 231,934 1,294 233,228
Interest on non-vehicle debt ....... 7,813 $ 24,703 32,516 14,678 35,512 50,190
Interest on intercompany debt ...... 8,276 1,466 9,742
Amortization of cost in excess of
net assets acquired ............ 9,080 14,762 23,842 9,414 14,475 23,889
Non-vehicle depreciation and
amortization ................... 16,389 16,389 8,048 8,048
----------- -------- ----------- ----------- -------- ----------
Income (loss) before provision
(benefit) for income taxes ..... $ (9,791) $(40,931) (50,722) $ 199,794 $(48,693) 151,101
=========== ======== =========== ========
(Benefit) provision for income
taxes ......................... (14,151) 68,751
----------- ----------
Net (loss) income .................. $ (36,571) $ 82,350
=========== ==========
</Table>
VEHICLE RENTAL
REVENUE
Revenue decreased 5.3%, from $1,989.2 million to $1,883.1 million, compared to
the same period in 2000. The revenue decrease reflects a 5.5% decrease in the
number of rental transactions partially offset by a 0.2% increase in revenue per
rental transaction.
COSTS AND EXPENSES
Total costs and expenses (including interest on non-vehicle debt, interest on
intercompany debt, amortization of cost in excess of net assets acquired and
non-vehicle depreciation and amortization) increased 5.2%, from $1,838.1 million
to $1,933.8 million, compared to the same period in 2000.
23
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Direct operating expenses increased 1.0%, from $715.6 million to $722.9 million,
compared to the same period in 2000. As a percentage of revenue, direct
operating expenses were 38.4%, as compared to 36.0% for the corresponding period
in 2000. The increase was due primarily to higher salary & wages (0.6% of
revenue), higher maintenance and damage costs (0.5% of revenue) and higher
facilities costs (0.4% of revenue).
Vehicle depreciation and lease charges increased 4.8%, from $510.7 million to
$535.1 million, compared to the same period in 2000. As a percentage of revenue,
vehicle depreciation and lease charges were 28.4%, as compared to 25.7% for the
corresponding period in 2000. The change reflected a 6.3% increase in the
average cost per vehicle partially offset by a 1.1% decline in the average
rental fleet.
Selling, general and administrative expenses increased 1.5%, from $354.2 million
to $359.4 million, compared to the same period in 2000 due to a higher general
corporate overhead allocation ($16.5 million) and higher general and
administrative expenses ($9.6 million), partially offset by lower marketing and
advertising spending.
Vehicle related interest expense decreased 0.9%, from $175.5 million to $173.9
million, compared to the same period in 2000 due to lower borrowings required
for a smaller rental fleet coupled with lower average interest rates.
Unusual charges of $60.1 million ($39 million after tax) in September 2001
reflects the estimated impact toour results of operations associated with
reduced travel due to the aftermath of the September 11, 2001 terrorist attacks
at the World Trade Center (the "Terrorist Attacks").
With the completion of Cendant's acquisition of us on March 1, 2001, selected
debt previously funded by third party providers is now being funded by Cendant.
Accordingly, we now incur interest charges on intercompany debt.
Non-vehicle depreciation and amortization increased 103.6%, from $8.0 million to
$16.4 million, compared to the same period in 2000. The increase reflects higher
amortization of airport related leasehold improvements and equipment.
UNUSUAL CHARGES
The unusual charges of $60.1 million that were recorded during third quarter
2001 included 1) an asset impairment loss arising from the return of Regular
Program vehicles, $43.8 million, 2) a reserve for anticipated decline in market
value on the sale of Non-Program vehicles, $5.8 million, 3) a reserve for the
cancellation of marketing programs, $0.9 million, 4) a reserve for severance
costs, $0.5 million and 5) other costs, $9.1 million, principally related to the
redundancies caused by the Terrorist Attacks.
The asset impairment loss of $43.8 million relates to the disposal of Program
Vehicles under repurchase programs. Prices under these repurchase programs are
based on either 1) a specified percentage of original vehicle costs, depending
on the month the vehicle is returned to the manufacturers or 2) the original
capitalized cost less a set depreciation amount. Unlike Program Vehicles, the
resale of Non-Program Vehicles is determined by current market conditions. Due
to the excessive number of vehicles being returned by Avis and other car rental
companies subsequent to the Terrorist Attacks, we have experienced a sharp
decline in the resale value of these Non-Program vehicles. A reserve in the
amount of $5.8 million was established anticipating losses on the disposal of
Non-Program vehicles. As of September 30, 2001, a reserve of $35 million remains
for those Program Vehicles which we have yet to dispose of. The remaining
vehicles will be disposed of as soon as possible.
Also included in the unusual charge were costs of commissions payable to
agencies for advertising placement. Prior to the Terrorist Attacks, we had
committed to a level of advertising placement commissions based on anticipated
advertising spending. As a result of the Terrorist Attacks, we have
significantly curtailed our advertising spending, however, we remain obligated
to pay commissions based on budgeted advertising spending. As of September 30,
2001, the entire amount of advertising placement commission had been paid. In
addition, we have initiated a formal plan to terminate certain employees at
field locations and at corporate headquarters. As of September 30, 2001, we had
accrued $0.5 million for severance and related costs for employees so notified.
We expect all affected employees will be terminated prior to December 31, 2001.
Other costs of $9.1 million associated with the Terrorist Attacks have been
classified within the Statement of Operations to the Unusual Charge. Amounts
classified comprise $7.2 million of estimated payroll costs for underutilized
employees (the majority or which have been terminated) and $1.9 million of
minimum airport commission guarantees.
24
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROVISION FOR INCOME TAXES
Our consolidated provision for income taxes decreased from $68.8 million to a
benefit of $14.1 million, compared to the same period in 2000. The effective
income tax rate for the nine months ended September 30, 2001 was a benefit of
27.9%, down from a 45.5% provision for the corresponding period in 2000. The
27.9% tax benefit reflects a pre-tax loss of $50.7 million for the period and is
less than the statutory rate of 35% primarily due to the non-deductibility of
goodwill. The 45.5% tax provision reflects a pre-tax profit of $151.1 million
for the period in 2000 and is greater than the statutory rate of 35% due to the
non-deductibility of goodwill. The effective tax rate reflects differences
between foreign income tax rates and the U.S. federal statutory income tax rate,
taxes on the repatriation of foreign earnings, and foreign withholding taxes on
dividends that have been paid to us.
NET INCOME
Net income decreased from a profit of $82.4 million for the nine months ended
September 30, 2000 to a loss of $36.6 million for the nine months ended
September 30, 2001 as a result of the above-mentioned items.
HISTORICAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO PRO-FORMA RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 2000.
<Table>
<Caption>
HISTORICAL PRO-FORMA
THREE MONTHS ENDED SEPTEMBER 30, 2001 THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------- --------------------------------------
VEHICLE VEHICLE
RENTAL CORPORATE TOTAL RENTAL CORPORATE TOTAL
--------- --------- --------- --------- --------- --------
Revenue: ............................ $ 650,368 $ 650,368 $ 733,694 $733,694
--------- --------- --------- --------
Costs and expenses:
Direct operating .................. 238,657 238,657 259,573 259,573
Vehicle depreciation and
lease charges, net ............. 194,350 194,350 191,346 191,346
Selling, general and
administrative ................. 122,094 122,094 121,101 $ (1,294) 119,807
Vehicle interest, net ............. 57,947 57,947 68,364 68,364
Unusual charges ................... 60,062 60,062
--------- --------- --------- -------- --------
673,110 673,110 640,384 (1,294) 639,090
--------- --------- --------- -------- --------
Adjusted EBITDA ..................... (22,742) (22,742) 93,310 1,294 94,604
Interest on non-vehicle debt ........ 101 $ 7,657 7,758 7,485 14,570 22,055
Interest on intercompany debt ....... 4,735 4,735
Amortization of cost in excess of
net assets acquired ............ 3,057 5,038 8,095 3,133 5,042 8,175
Non-vehicle depreciation and
amortization ................... 5,449 5,449 217 217
--------- -------- --------- --------- -------- --------
Income (loss) before provision
for income taxes ............... $ (36,084) $(12,695) (48,779) $ 82,475 $(18,318) 64,157
========= ======== ========= ========
Provision (benefit) for income
taxes .......................... (24,033) 29,191
--------- --------
Net income (loss) ................... $ (24,746) $ 34,966
========= ========
</Table>
25
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
VEHICLE RENTAL
REVENUE
Revenue decreased 11.4%, from $733.7 million to $650.4 million, compared to the
same period in 2000. The revenue decrease reflects a 10.8% decrease in the
number of rental transactions.
COSTS AND EXPENSES
Total costs and expenses (including interest on non-vehicle debt, interest on
intercompany debt, amortization of cost in excess of net assets acquired and
non-vehicle depreciation and amortization) increased 4.4%, from $669.5 million
to $699.1 million, compared to the same period in 2000.
Direct operating expenses decreased 8.1%, from $259.6 million to $238.7 million,
compared to the same period in 2000. As a percentage of revenue, direct
operating expenses were 36.7%, as compared to 35.4% for the corresponding period
in 2000. The increase was due primarily to higher salary and wage expense (1.3%
of revenue) and higher maintenance and damage expenses (0.6% of revenue).
Vehicle depreciation and lease charges increased 1.6%, from $191.3 million to
$194.4 million, compared to the same period in 2000. As a percentage of revenue,
vehicle depreciation and lease charges were 29.9% of revenue, as compared to
26.1% of revenue for the corresponding period in 2000. The change reflects a
7.5% increase in the average cost per vehicle, partially offset by a 5.7%
decline in rental fleet.
Selling, general and administrative expenses increased 1.9%, from $119.8 million
to $122.1 million, compared to the same period in 2000 due primarily to a higher
general corporate overhead allocation ($8.3 million), partially offset by lower
marketing and advertising spending.
Vehicle related interest expense decreased 15.2%, from $68.4 million to $57.9
million, compared to the same period in 2000, due to lower borrowings resulting
from a 5.4% decline in the rental fleet and lower average interest rates.
Unusual charges of $60.1 million ($39 million after tax) in September 2001
reflects the estimated impact to our results of operations associated with
reduced travel due to the aftermath of the Terrorist Attacks.
With the completion of the Acquisition on March 1, 2001, selected debt
previously funded by third party providers is now being funded by Cendant.
Accordingly, we now incur interest charges on intercompany debt.
Non-vehicle depreciation and amortization increased from $217,000 to $5.4
million, compared to the same period in 2000. The increase reflects higher
amortization of airport related leasehold improvements and equipment.
PROVISION FOR INCOME TAXES
Our consolidated provision for income taxes decreased from $29.2 million to a
benefit of $24.0 million, compared to the same period in 2000. The effective
income tax rate for the three months ended September 30, 2001 was 49.3%, up from
45.5% for the corresponding period in 2000. The increase in the effective income
tax rate was due primarily to a decrease in income before provision for income
taxes in relation to non-deductible goodwill. The effective tax rate reflects
differences between foreign income tax rates and the U.S. federal statutory
income tax rate, taxes on the repatriation of foreign earnings, and foreign
withholding taxes on dividends that have been paid to us.
NET INCOME
Net income decreased from a profit of $35.0 million for the three months ended
September 30, 2000 to a loss of $24.7 million for the three months ended
September 30, 2001 as a result of the above-mentioned items.
26
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Our operations are expected to be funded by cash provided by operating
activities and by financing arrangements maintained by us in the markets in
which we operate. Our primary use of funds will be for the acquisition of new
vehicles and the repayment of indebtedness. For the nine months ended September
30, 2001, our expenditures for new vehicles were approximately $4.4 billion and
proceeds from the disposition of used vehicles were approximately $3.9 billion.
For 2001, we expect our expenditures for new vehicles (net of proceeds from the
disposition of used vehicles) to be higher than in 2000. Since the late 1980's,
we have acquired vehicles related to our vehicle rental operations primarily
pursuant to manufacturer repurchase programs. Repurchase prices under the
repurchase programs are based on either (1) a specified percentage of original
vehicle cost determined by the month the vehicle is returned to the manufacturer
or (2) the original capitalization cost less a set daily depreciation amount
(the "Repurchase Programs"). Repurchase Programs limit residual risk with
respect to vehicles purchased under the programs. This enables us to better
estimate depreciation expense in advance.
Historically, our financing requirements for rental vehicles have typically
reached an annual peak during the second and third calendar quarters, as fleet
levels build in response to increased rental demand during that period. The
typical low point for cash requirements occurs during the end of the fourth
quarter and the beginning of the first quarter, coinciding with lower levels of
vehicle and rental demand. We expect that this pattern will continue.
We expect that cash flows from operations and funds from available credit
facilities will be sufficient to meet our anticipated cash requirements for
operating purposes for the next twelve months. Trade receivables, from vehicle
rental operations, also provide liquidity with approximately 12.2 days of daily
sales outstanding.
Our vehicle rental operations made capital investments for property improvements
totaling $26.2 million and $29.8 million for the nine months ended September 30,
2001 and 2000, respectively.
We have an interest rate management policy, including a target mix for average
fixed rate and floating rate indebtedness on a consolidated basis. An increase
in interest rates would be unlikely to have a material adverse impact on our
profitability.
VEHICLE RENTAL ABS FACILITY
To support vehicle rental operations, we have a domestic integrated financing
program that as of September 30, 2001 provides for up to $4.45 billion in
financing for vehicles covered by Repurchase Programs, with up to 25% of the
asset-backed securities facility ("ABS Facility") available for vehicles not
covered by Repurchase Programs. The ABS Facility provides for the issuance of up
to $0.5 billion of asset-backed variable funding notes (the "Variable Funding
Notes") and $3.95 billion of asset-backed medium term notes under the ABS
Facility (the "Medium Term Notes"). The Variable Funding Notes and the Medium
Term Notes are indirectly secured by, among other things, a first priority
security interest in our rental fleet.
The Variable Funding Notes support the issuance by a special purpose company of
commercial paper notes that are rated A-1 by Standard & Poor's Ratings Services
("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's"). The Medium Term
Notes are guaranteed under a surety bond issued by either MBIA or AMBAC
Assurance and as a result are rated AAA by S&P and Aaa by Moody's.
On March 2, 2001, one of the vehicle rental financing subsidiaries issued $750
million of Series 2001-1 Floating Rate Rental Car Asset Backed Notes ("Series
2001-1 Notes"). The Series 2001-1 Notes are secured by our vehicles. Anticipated
principal repayment on the Series 2001-1 Notes commence on November 2003 through
April 2004. The interest rate with respect to the Series 2001-1 Notes is equal
to LIBOR plus 20 basis points per annum. The Series 2001-1 Notes are guaranteed
under a Surety Bond issued to MBIA and are rated AAA by Standard an Poors and
Aaa by Moody's. The Series 2001-1 Notes rank pari pasu with our Variable Funding
Notes and the Medium Term Notes.
27
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On May 17, 2001, one of the vehicle rental financing subsidiaries issued $125
million of Series 2001-2 Auction Rate Notes (the "Series 2001-2 Notes"). The
Series 2001-2 Notes are secured by our vehicles. The Series 2001-2 Notes were
issued in four classes, Class A-1, A-2, A-3, and A-4 with initial issuances of
$95 million, $10 million, $10 million and $10 million, respectively. Subsequent
to the initial issuance of $125 million auction rate notes, the Company issued
$145 million of additonal notes and repaid principal of $115 million, which
brought the total outstanding series 2001-2 notes to $155 million at September
30, 2001. We may issue up to $125 million of Auction Rate Notes per class or
$500 million in total. The interest rate on each class will be a market derived
rate determined by auction with auctions expected to occur every 35 days.
Anticipated principal repayment on the Series 2001-2 Notes is May 2007. The
2001-2 Notes are guaranteed under a Surety Bond issued by Ambac and are rated
AAA by Standard & Poor's Rating Services and Aaa by Moody' Investors Service,
Inc. The Series 2001-2 Notes rank pari passu with our Variable Funding Notes and
Medium Term Notes.
At September 30, 2001, we had approximately $3.75 billion of debt outstanding
under the ABS Facility and had approximately $700 million of additional credit
available for rental vehicle purchases. Based on current market conditions and
our current banking relationships, we expect to fund maturities of the Medium
Term Notes either by the issuance of new medium term notes or an increase in the
outstanding principal amount of the Variable Funding Notes depending on market
conditions at the time the Medium Term Notes mature. However, we cannot be sure
that this will occur.
REVOLVING CREDIT FACILITY/CENDANT INTERCOMPANY
We were party to a Revolving Credit Facility which provided borrowings up to
$450 million which were used for credit enhancement for our ABS commercial paper
program and for general corporate purposes. Although this facility did not
expire until June 30, 2005, we elected to terminate it on September 5, 2001.
We repaid our outstanding borrowings under the Revolving Credit Facility as of
June 30, 2001. We currently draw on a working capital line provided by Cendant
to fund its working capital needs. The borrowings bear interest at a market rate
based on LIBOR. On June 29, 2001, Cendant made a capital contribution to us by
forgiving $125 million of intercompany debt. As of September 30, 2001, $182
million of borrowings are related to working capital needs. Additionally, we
have long-term debt with Cendant of $380 million that is related to Cendant's
acquisition of us.
OTHER FACILITIES
Borrowings for our international operations consist mainly of loans obtained
from local and international banks. All borrowings for international operations
are in the local currencies of the countries in which those operations are
conducted. We guarantee only the borrowings of our car rental subsidiaries in
Argentina and Puerto Rico which had combined outstanding debt of $4.6 million at
September 30, 2001. At September 30, 2001, the total debt for our international
operations was approximately $175.7 million. The impact on our liquidity and
financial condition due to the exchange rate fluctuations of our foreign
operations is not expected to be material.
PARENT COMPANY TRANSACTION
On June 29, 2001, one of our vehicle financing subsidiaries amended its loan
agreements to allow Cendant to borrow $155 million of its restricted cash. In
turn, Cendant provided a demand note to the subsidiary and secured the demand
note with letters of credit.
RECENT ACCOUNTING STANDARDS
Recent pronouncements of the Financial Accounting Standards Board which are not
required to be adopted at this date include Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" ("SFAS No. 141"), SFAS No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and SFAS No. 144
"Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No.
144").
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and requires additional
disclosures for material business combinations completed after such date. This
standard also addresses financial accounting and reporting for goodwill and
other intangible assets acquired in a business combination at acquisition. On
July 1, 2001, we adopted the provisions relating to acquisitions made subsequent
to June 30, 2001, as required. The provisions regarding the classification of
previously acquired intangible asset will be adopted simultaneously with the
provisions of SFAS No. 142 on January 1, 2002, as required.
28
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SFAS No. 142 addresses financial accounting and reporting for intangible assets
acquired outside of a business combination. The standard also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. We will be required to assess goodwill and
other intangible assets for impairment annually, or more frequently if
circumstances indicate a potential impairment. On July 1, 2001, we adopted the
provisions requiring that goodwill and certain other intangible assets acquired
after June 30, 2001 not be amortized. We will adopt the remaining provisions of
this standard on January 1, 2002, as required. Transition-related impairment
losses, if any, resulting form the initial assessment of goodwill and certain
other intangible assets will be recognized by us as a cumulative effect of
accounting change as of January 1, 2002. We are currently evaluating the impact
of adopting the remaining provisions on its financial position and results of
operations. Based upon a preliminary assessment of previously acquired goodwill
and certain other intangible assets that will no longer be amortized upon the
adoption of SFAS No. 142, we expect that the related reduction to amortization
expense during the seven months ended September 30, 2001, the two months ended
February 28, 2001 and the nine months ended September 30, 2000 would approximate
$18.6 million, $2 million, and $92 million, respectively.
SFAS No. 144 addresses financial accounting and reporting for the impairment of
disposal of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of,", and replaces the accounting and reporting provisions of APB
Opinion No. 30, "Reporting Results of Operations - Reporting the Effect of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" as it relates to the disposal of a segment of
a business. SFAS No. 144 requires the use of a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations,
by requiring those long-lived assets to be measured at the lower of carrying
amount or fair value less cost to sell. The impairment recognition and
measurement provisions of SFAS No 121 were retained for all long-lived assets to
be held and used with the exception of goodwill. We will adopt this standard on
January 1, 2002.
SEASONALITY
Our vehicle rental business is seasonal, with decreased travel in winter months
and heightened activity in spring and summer. To accommodate increased demand,
we increased our available fleet during the second and third quarters. Certain
of our operating expenses are fixed and cannot be reduced during periods of
decreased rental demand. In certain geographic markets, the impact of
seasonality has been reduced by emphasizing leisure or business travel in the
off-peak season.
INFLATION
The increased acquisition cost of vehicles is the primary inflationary factor
affecting our operations. Many of our other operating expenses are inflation
sensitive, with increases in inflation generally resulting in increased costs of
operations. The effect of inflation-driven cost increases on the Company's
overall operating costs is not expected to be greater for us than for our
competitors.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks and uncertainties including the impact of competitive
products and pricing, changing market conditions; and other risks which were
detailed from time to time in our publicly-filed documents, including its Annual
Report on Form 10-K for the period ended December 31, 2000. Actual results may
differ materially from those projected. These forward-looking statements
represent our judgment as of the date of this report.
29
<Page>
AVIS GROUP HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has derivative financial instruments at September 30, 2001 that are
sensitive to interest rate changes on its debt obligations and on its interest
rate swap agreements. The following derivative instrument agreements have been
entered into by the Company:
(a) In order to reduce its risk from interest rate increases under its asset
backed debt, one of the Company's vehicle rental financing subsidiaries
has entered into six domestic interest rate cap agreements with durations
of up to 6 years. The agreements have a notional value of $2.5 billion,
and establishes the domestic interest rate ceiling on asset-backed vehicle
financing of either 7% or 7.5%. Offsetting interest rate cap agreements
with a notional value of $2.5 billion have been sold by us in order to
reduce the cost of acquiring the cap agreements.
(b) The Company has also entered into eight U.S. and foreign interest rate
swap agreements. Swap agreements which effectively convert floating rates
of interest to fixed rates of interest on the Company's debt have an
aggregate notional value of $2.25 billion and terminate through November
2004.
30
<Page>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Avis Group Holdings, Inc.
-------------------------
(Registrant)
Dated: November 14, 2001 By: /s/ Kevin M. Sheehan
------------------------------------
Executive Vice President
(Principal Financial Officer)
Dated: November 14, 2001 By: /s/ Kurt Freudenberg
------------------------------------
Senior Vice President and Controller
(Principal Accounting Officer)
31
<Page>
ITEM: 6 EXHIBITS AND REPORTS ON FORM 8-K
ITEM NO. 6 (A)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
2.0 PLAN OF ACQUISITION
2.02 Agreement and Plan of Merger dated November 11, 2000 by and among
Cendant Corporation, PHH Corporation, Avis Acquisition Corp., and
Avis Group Holdings, Inc. (9)
2.03 Establishment of Arval/PHH Holdings, a joint venture company in the
United Kingdom, by Avis Group Holdings, Inc. and BNP Paribas (10)
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.01 Certificate of Incorporation of Avis Rent A Car, Inc. (3)
3.01(a) Certificate of Ownership and Merger merging Avis Group Holdings,
Inc. into Avis Rent A Car, Inc. (8)
3.01(b) Certificate of Merger of Avis Acquisition. Into Avis Group Holdings,
Inc. (12)
3.02(a) Certificate of Incorporation of Avis Rent A Car System, Inc. (7)
3.02(b) Restated Certificate of Incorporation of Avis Rent A Car System,
Inc. (7)
3.02(c) Corrected Restated Certificate of Incorporation of Avis Rent A Car
System, Inc. (7)
3.02(d) Certificate of Ownership and Merger merging The First Gray Line
Corporation into Avis Rent A Car System, Inc. (7)
3.03(a) Certificate of Incorporation of Avis International, Ltd. (7)
3.03(b) Certificate of Change of Location of Registered Office and
Registered Agent of Avis International, Ltd. (7)
3.03(c) Certificate of Change of Registered Agent and Registered Office of
Avis International, Ltd. (7)
3.04(a) Certificate of Incorporation of Avis Management Services, Ltd. (7)
3.04(b) Certificate of Change of Location of Registered Office and
Registered Agent of Avis Management Services, Ltd. (7)
3.04(c) Certificate of Change of Registered Agent and Registered Office of
Avis Management Services, Ltd. (7)
3.05 Certificate of Incorporation of Avis Caribbean, Limited. (7)
3.06 Certificate of Incorporation of Avis Asia and Pacific, Limited. (7)
3.07(a) Certificate of Incorporation of Avis Enterprises, Inc. (7)
3.07(b) Certificate of Amendment of Certificate of Incorporation of Avis
Enterprises, Inc. (7)
3.07(c) Certificate of Amendment of Certificate of Incorporation of Avis
Enterprises, Inc. (7)
3.08 Certificate of Incorporation of Avis Service, Inc. (7)
3.09 Certificate of Incorporation of Avis Lube, Inc.(7)
3.10 Certificate of Incorporation of Avis Leasing Corporation. (7)
3.11(a) Certificate of Incorporation of Rent-A-Car Company, Incorporated.
(7)
3.11(b) Articles of Reduction of Rent-A-Car Company, Incorporated. (7)
3.11(c) Articles of Amendment to Articles of Incorporation of Rent-A-Car
Company, Incorporated. (7)
3.11(d) Articles of Amendment to Articles of Incorporation of Rent-A-Car
Company, Incorporated. (7)
3.11(e) Articles of Amendment to the Articles of Incorporation of Rent-A-Car
Company, Incorporated. (7)
3.11(f) Articles of Amendment of Rent-A-Car Company, Incorporated. (7)
3.12(a) Certificate of Incorporation of Reserve Claims Management Co. (7)
3.12(b) Certificate of Change of Registered Agent and Registered Office of
Reserve Claims Management Co. f/k/a Avis Leasing International, Ltd.
(7)
3.12(c) Restated Certificate of Incorporation of Reserve Claims Management
Co. (7)
3.50 By-Laws of Avis Group Holdings, Inc. (3)
3.51 By-Laws of Avis Rent A Car System, Inc. (7)
3.52 By-Laws of Avis International, Ltd. (7)
3.53 By-Laws of Avis Management Services, Ltd. (7)
3.54 By-Laws of Avis Caribbean, Limited. (7)
3.55 By-Laws of Avis Asia and Pacific, Limited. (7)
3.56 By-Laws of Avis Enterprises, Inc. (7)
3.57 By-Laws of Avis Service, Inc. (7)
3.58 By-Laws of Avis Lube, Inc. (7)
32
<Page>
ITEM NO. 6 (A)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
3.59 By-Laws of Avis Leasing Corporation. (7)
3.60 By-Laws of Rent-A-Car Company, Incorporated. (7)
3.61 By-Laws of Reserve Claims Management Co. (7)
4.0 INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.03 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP
Funding II L.L.C. and the Avis ABS Trustee, to the Amended and
Restated Base Indenture, dated as of July 30, 1997, between AESOP
Funding II and the Avis ABS Trustee. (2)
4.04 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP
Funding II L.L.C. and the Avis ABS Trustee, to the Amended and
Restated Base Indenture, dated as of July 30, 1997, between AESOP
Funding II and the Avis ABS Trustee. (2)
4.05 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing
L.P., as borrower, and AESOP Funding II L.L.C. as lender. (2)
4.06 Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P.,
as borrower, PV Holding Corp., as a permitted nominee of the
borrower, Quartz Fleet Management, Inc., as a permitted nominee of
the borrower, and AESOP Funding I L.L.C., as lender. (2)
4.07 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing
Corp II, as borrower, AESOP Leasing Corp., as permitted nominee of
the borrower, and AESOP Funding II L.L.C., as lender. (2)
4.08 Master Motor Vehicle Finance Lease Agreement, dated as of July 30,
1997, by and among AESOP Leasing L.P., as lessor, Avis Rent A Car
System, Inc., as lessee, individually and as the administrator and
Avis Rent A Car, Inc., as guarantor. (2)
4.09 Master Motor Vehicle Operating Lease Agreement, dated as of July 30,
1997, by and among AESOP Leasing L.P., as lessor, Avis Rent A Car
System, Inc., individually and as the administrator, certain
Eligible Rental Car Companies, as lessees, and Avis Rent A Car,
Inc., as guarantor. (2)
4.10 Master Motor Vehicle Operating Lease Agreement, dated as of July 30,
1997, by and among AESOP Leasing Corp. II, as lessor, Avis Rent A
Car System, Inc., individually and as the administrator, certain
Eligible Rental Car Companies, as lessees, and Avis Rent A Car,
Inc., as guarantor. (2)
4.15 Supplemental Indenture No. 1, dated as of July 31, 1998, to the
Amended and Restated Base Indenture, dated as of July 30, 1997,
between AESOP Funding I L.L.C. as issuer and the Avis ABS Trustee.
(4)
4.16 Amendment No. 1, dated as of July 31, 1998, to Loan Agreement, dated
as of July 30, 1997, between AESOP Leasing L.P., as borrower, and
AESOP Funding I L.L.C., as lender. (4)
4.17 Amendment No. 1, dated as of July 31, 1998, to Loan Agreement, dated
as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV
Holding Corp., as a permitted nominee of the borrower, Quartz Fleet
Management, Inc., as a permitted nominee of the borrower, and AESOP
Funding II L.L.C., as lender. (4)
4.18 Amendment No. 1, dated as of July 31, 1998, to Master Motor Vehicle
Finance Lease Agreement, dated as of July 30, 1997, among AESOP
Leasing L.P., as lessor, Avis Rent A Car Systems, Inc., as Lessee
individually and as Administrator, and Avis Rent A Car, Inc., as
guarantor. (4)
4.19 Amended and Restated Loan Agreement, dated as of September 15, 1998,
among AESOP Leasing L.P., as borrower, PV Holding Corp., as a
permitted nominee of the borrower, Quartz Fleet Management, Inc., as
a permitted nominee of the borrower, and AESOP Funding II L.L.C. (4)
4.20 Amended and Restated Master Motor Vehicle Operating Lease Agreement,
dated as of September 15, 1998, among AESOP Leasing L.P., as lessor,
Avis Rent Car System, Inc., individually and as Administrator,
certain Eligible Rental Car Companies, as lessees, and Avis Rent A
Car, Inc., as guarantor. (4)
4.21 Supplemental Indenture No. 2, dated as of September 15, 1998, to
Amended and Restated Base Indenture, dated as of July 30, 1997,
between AESOP Funding I L.L.C., as issuer and the Avis ABS Trustee.
(4)
4.22 Series 1998-1 Supplement, dated as of February 26, 1998 between
AESOP Funding II L.L.C., as issuer, and the Avis ABS Trustee, as
trustee and Series 1998-1 agent, to the Amended and Restated Base
Indenture, dated as of July 30, 1997, between AESOP Funding II
L.L.C., as issuer, and the Avis ABS Trustee. (4)
4.30 Indenture, dated as of June 30, 1999, among the Company, the
Subsidiary Guarantors and the Bank of New York (the "Notes
Trustee"). (7)
4.31 Exchange and Registration Rights Agreement, dated as of June 30,
1999, among the Company, the Subsidiary Guarantors, the Initial
Purchasers and the Notes Trustee. (7)
33
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ITEM NO. 6 (A)
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
4.19 Supplemental Indenture by and among Avis Group Holdings, Inc., the
Subsidiary Guarantors and the Notes Trustee. (13)
- -----------
(1) Filed herewith.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, 333-28609.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, 333-46737.
(4) Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1998.
(5) Incorporated by reference to the Registrant's Current Report on Form
8-K dated July 15, 1999.
(6) Incorporated by reference to Amendment No. 1 to the Registrant's
Current Report on Form 8-K/A dated July 15, 1999.
(7) Incorporated by reference to the Registrant's Registration Statement
on Form S-4, 333-86269.
(8) Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1999.
(9) Incorporated by reference to the Registrants Report on Form 8-K
dated November 14, 2000.
(10) Incorporated by reference to the Registrants Reports on Form 8-K
dated August 24, 2000.
(11) Incorporated by reference to the Registrants Report on Form 8-K
dated July 18, 2000.
(12) Incorporated by reference to Cendant Corporations Quarterly Report
on From 10-Q for the fiscal quarter ended September 30, 2000, dated
as of November 14, 2000.
(13) Incorporated by reference to the Registrants Report on Form 8-K
dated April 2, 2001.
34
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ITEM: 6(B) REPORTS ON FORM 8-K
None.
35