SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 1998
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-13315
AVIS RENT A CAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3347585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Old Country Road, Garden City, New York 11530
(Address of principal executive offices)
(Zip Code)
(516)222-3000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of April 22, 1998: Common Stock, $.01 par value - Class A,
35,925,000 shares.
AVIS RENT A CAR, INC
INDEX
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Page
Condensed Consolidated Statements of
Operations for the Three months ended
March 31, 1998 and 1997..............................1
Condensed Consolidated Statements of Financial
Position as of March 31, 1998
and December 31, 1997 ...............................2
Condensed Consolidated Statements of Cash
Flows for the Three months ended
March 31, 1998 and 1997..............................3
Notes to the Condensed Consolidated
Financial Statements ................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................6
PART II. Other Information
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............11
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
Three months ended
March 31,
------------------------
1998 1997
-------- --------
Revenue ........................................... $511,390 $456,014
-------- --------
Costs and expenses:
Direct operating .................................. 209,815 198,286
Vehicle depreciation and lease
charges, net ................................... 133,362 120,609
Selling, general and
administrative ................................. 104,764 94,913
Interest, net ..................................... 47,668 34,247
Amortization of cost in excess
of net assets acquired ......................... 2,552 976
-------- --------
498,161 449,031
-------- --------
Income before provision for
income taxes ................................... 13,229 6,983
Provision for income taxes ........................ 5,821 2,778
-------- --------
Net income ........................................ $ 7,408 $ 4,205
======== ========
Earnings per share:
Basic ............................................. $ 0.24 $ 0.14
======== ========
Diluted ........................................... $ 0.23 $ 0.14
======== ========
See accompanying notes to the condensed consolidated financial statements.
1
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
March 31, December 31,
1998 1997
---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents .................. $ 42,286 $ 44,899
Accounts receivable, net ................... 248,656 359,463
Prepaid expenses ........................... 40,330 47,360
Vehicles, net .............................. 3,071,625 3,018,856
Property and equipment, net ................ 125,639 122,860
Deferred income tax assets ................. 140,595 142,025
Cost in excess of net assets acquired, net . 395,014 396,040
Other assets ............................... 174,008 147,453
---------- ----------
Total assets .......................... $4,238,153 $4,278,956
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ........................... $ 209,592 $ 329,706
Accrued liabilities ........................ 314,272 328,411
Due to affiliates, net ..................... 14,454 44,512
Current income tax liabilities ............. 7,831 9,749
Deferred income tax liabilities ............ 35,230 34,106
Public liability, property damage
and other insurance liabilities ......... 257,508 256,029
Debt ....................................... 2,780,007 2,826,422
---------- ----------
Total liabilities ...................... 3,618,894 3,828,935
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common Stock ............................ 359 309
Additional paid-in capital .............. 591,651 430,507
Retained earnings ....................... 35,702 28,294
Foreign currency translation adjustment . (8,453) (9,089)
---------- ----------
Total stockholders' equity ............ 619,259 450,021
---------- ----------
Total liabilities and stockholders'
equity ............................... $4,238,153 $4,278,956
========== ==========
See accompanying notes to the condensed consolidated financial statements.
2
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
----------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income .......................................... $ 7,408 $ 4,205
Adjustments to reconcile net income to
cash (used in) provided by operating activities .... (17,481) 61,824
--------- ---------
Net cash (used in) provided by operating activities (10,073) 66,029
--------- ---------
Cash flows from investing activities:
Vehicle additions ................................... (749,583) (570,281)
Vehicle deletions ................................... 684,449 635,020
Additions to property and equipment ................. (8,956) (4,833)
Retirements of property and equipment ............... 366 1,082
--------- ---------
Net cash (used in) provided by investing activities. (73,724) 60,988
--------- ---------
Cash flows from financing activities:
Changes in debt:
Proceeds ........................................... 724,234 73,143
Repayments ......................................... (770,893) (192,983)
--------- ---------
Net decrease in debt ............................... (46,659) (119,840)
Payment for debt issuance costs ..................... (3,301)
Proceeds from public offering ....................... 161,194
(Payments) proceeds from intercompany loans ......... (30,058) 16,953
--------- ---------
Net cash provided by (used in) financing activities. 81,176 (102,887)
--------- ---------
Effect of exchange rate changes on cash .............. 8 (74)
--------- ---------
Net (decrease) increase in cash and cash equivalents . (2,613) 24,056
Cash and cash equivalents at beginning of period ..... 44,899 29,718
--------- ---------
Cash and cash equivalents at end of period ........... $ 42,286 $ 53,774
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................... $ 46,714 $ 41,237
========= =========
Income taxes ....................................... $ 3,935 $ 1,838
========= =========
See accompanying notes to the condensed consolidated financial statements.
3
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements includes
Avis Rent A Car, Inc. and subsidiaries (the "Company"). These unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position, the results of
operations and cash flows for the periods presented. Operating results for
interim periods are not indicative of the results that can be expected for a
full year. These interim financial statements should be read in conjunction with
the Company's audited annual consolidated financial statements and notes
thereto, included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission. Certain amounts in the prior period have
been reclassified to conform to current period presentation.
Note 2 - Changes in Stockholders' Equity
On March 23, 1998, the Company sold 5,000,000 shares of its common stock through
a public offering and received proceeds of approximately $162 million. The
Company utilized the proceeds of the common stock issuance to finance the Hayes
Leasing Company, Inc. ("Hayes") transaction, discussed below in "Note 4 -
Acquisitions", and for working capital and general corporate purposes, including
the repayment of certain indebtedness.
Note 3 - Earnings Per Share
Basic earnings per share is computed by dividing net income for the three month
periods ended March 31, 1998 and 1997 by 31,425,000 and 30,925,000 weighted
average shares outstanding, respectively; which give effect to the initial and
subsequent public offerings on September 24, 1997 and March 23, 1998,
respectively. Diluted earnings per share is computed by dividing net income for
the three month periods ended March 31, 1998 and 1997 by 32,561,000 and
30,925,000 weighted average shares outstanding, respectively. Shares used in
calculating diluted earnings per share, include the effects of the assumed
exercise of stock options.
Note 4 - Acquisitions
On August 20, 1997, the Company purchased The First Gray Line Corporation. The
following unaudited pro forma information presents the results of operations of
the Company as if the acquisition of The First Gray Line Corporation, the
repayment of debt with the net proceeds (after the purchase of The First Gray
Line Corporation) from the Initial Public Offering (the "IPO") on September 24,
1997 and related adjustments had taken place on January 1, 1997. These unaudited
pro forma results are not necessarily an indication of the actual results of
operations that would have occurred had the acquisition of The First Gray Line
Corporation and the IPO actually occurred on January 1, 1997.
Pro forma
Three months ended
March 31, 1997
--------------
(In thousands, except share data)
Revenue ..................................... $506,417
========
Income before provision for income taxes .... $ 10,342
========
Net income .................................. $ 5,681
========
Earnings per share:
Basic ....................................... $ .18
========
Diluted ..................................... $ .18
========
4
Note 4 - Acquisitions (Continued)
On May 1, 1998, the Company completed its agreement to acquire the assets of the
car rental business of Hayes, including the Avis System franchises for the
cities of Austin, Fort Worth and San Antonio, and the counties of Dallas and
Tarrant, Texas for approximately $85 million in cash plus the refinancing of
fleet-related indebtedness which totaled approximately $136 million.
Note 5 - Comprehensive Income
Comprehensive income is comprised of the following (in thousands):
Three months ended
March 31,
----------------------
1998 1997
------- -------
Net income ........................................ $ 7,408 $ 4,205
Foreign currency translation adjustment ........... 636 (647)
------- -------
Comprehensive income .............................. $ 8,044 $ 3,558
======= =======
Note 6 - Financing and Debt
On January 7, 1998, the Company refinanced the fleet debt of its Canadian car
rental operation which provided for borrowings up to $211.7 million. The
vehicles were transferred to a partnership in which Aviscar, Inc., a
wholly-owned subsidiary of the Company, is the general partner and a financing
source is the limited partner. Aviscar, Inc. continues to operate and service
the vehicles in the fleet. The partnership structure allows Aviscar, Inc. to
finance vehicles at more advantageous interest rates.
On February 26, 1998, the Company issued $600 million of asset-backed medium
term notes (the "New MTN's"), the proceeds of which were used to repay
borrowings under its commercial paper program. The New MTN's rank equal in right
of payment with the Company's other existing asset-backed notes. The New MTN's
are supported by a surety bond issued by MBIA and are rated AAA by Standard and
Poor's and Aaa by Moody's.
5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
General Overview
The Company conducts vehicle rental operations through wholly-owned subsidiaries
in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina,
Australia and New Zealand. Revenue is derived principally from time and mileage
charges for vehicle rentals and, to a lesser extent, the sale of loss damage
waivers, liability insurance and other products and services.
On October 17, 1996, Cendant Corporation, Inc. ("Cendant"), formerly HFS
Incorporated, acquired the Company and its subsidiaries (the "Acquisition"). The
Acquisition was accounted for as a purchase.
On September 24, 1997, the Company issued and sold 22,425,000 shares of its
common stock in an IPO and received net proceeds of $359.3 million. The net
proceeds were used to repay amounts outstanding under the acquisition credit
facility utilized to complete the acquisition of the First Gray Line
Corporation, pay certain acquisition expenses incurred to complete The First
Gray Line acquisition and to prepay outstanding indebtedness.
Management believes that a more meaningful comparison of the results of
operations for the three month periods ended March 31, 1998 and 1997 is obtained
by presenting the results for the three months ended March 31, 1997 on a pro
forma basis to give effect to the following transactions as if they had occurred
on January 1, 1997: the acquisition of The First Gray Line Corporation; and the
repayment of debt with the net proceeds (after the purchase of The First Gray
Line Corporation) from the IPO and related adjustments.
On March 23, 1998, the Company sold 5,000,000 shares of its common stock through
a public offering and received proceeds of approximately $162 million. The
Company utilized the proceeds of the common stock issuance to finance the Hayes
transaction (see Note 4, to the unaudited condensed consolidated financial
statements), and for working capital and general corporate purposes, including
the repayment of certain indebtedness. In the same offering, Cendant reduced its
ownership in the Company by selling 1,000,000 shares of the Company's common
stock and retained the net proceeds.
6
Three Months Ended March 31, 1998 Compared to Pro Forma Three Months Ended March
31, 1997
The following table sets forth for the periods indicated, certain items in the
Company's condensed consolidated statements of operations (dollars in
thousands):
Actual Pro forma
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
-------------------- --------------------
Percentage Percentage
of Revenue of Revenue
-------- ---------- -------- ----------
Revenue ................................ $511,390 100.0% $506,417 100.0%
-------- ----- -------- -----
Costs and expenses:
Direct operating .................. 209,815 41.0 220,499 43.5
Vehicle depreciation, and
lease charges, net .............. 133,362 26.1 128,040 25.3
Selling, general and
administrative .................. 104,764 20.5 100,488 19.9
Interest, net ..................... 47,668 9.3 44,984 8.9
Amortization of cost in
excess of net assets acquired .. 2,552 0.5 2,064 0.4
-------- ----- -------- -----
498,161 97.4 496,075 98.0
-------- ----- -------- -----
Income before provision for
income taxes ........................ 13,229 2.6 10,342 2.0
Provision for income taxes ............. 5,821 1.2 4,661 0.9
-------- ----- -------- -----
Net income ............................. $ 7,408 1.4% $ 5,681 1.1%
======== ===== ======== =====
Revenue
Revenue increased 1.0%, from $506.4 million to $511.4 million, compared to the
same period in 1997. The revenue increase reflected a 0.6% increase in the
number of rental transactions and a 0.3% increase in revenue per rental
transaction. The revenue increase resulted from greater overall market demand.
Costs and Expenses
Total costs and expenses increased 0.4%, from $496.1 million to $498.2 million,
compared to the same period in 1997. Direct operating expenses decreased 4.9%,
from $220.5 million to $209.8 million, compared to the same period in 1997. As a
percentage of revenue, direct operating expenses declined to 41.0%, from 43.5 %
for the corresponding period in 1997. Operating efficiencies were derived
primarily from lower vehicle insurance costs (0.6% of revenue), lower airport
commissions (1.2% of revenue), lower vehicle registration costs (0.3% of
revenue) and lower vehicle maintenance and damage costs (0.3% of revenue).
7
Vehicle depreciation and lease charges increased 4.2%, from $128.0 million to
$133.4 million, compared to the same period in 1997. As a percentage of revenue,
vehicle depreciation and lease charges were 26.1% of revenue, as compared to
25.3% of revenue for the corresponding period in 1997. The change reflected a
0.1% increase in the average rental fleet combined with a higher monthly cost
per vehicle. In addition, the net proceeds received in excess of book value from
the disposition of used vehicles was $3.2 million lower (0.6% of revenue) in the
1998 first quarter compared to the same period in 1997. This was primarily due
to favorable market conditions for the sale of certain model vehicles during
1997.
Selling, general and administrative expenses increased 4.3%, from $ 100.5
million to $ 104.8 million, compared to the same period in 1997. The increase
was due to the cost of additional marketing programs and higher general and
administrative expenses.
Interest expense increased 6.0%, from $ 45.0 million to $ 47.7 million, compared
to the same period in 1997, due to higher borrowings required to finance the
growth of the rental fleet plus higher average interest rates resulting from a
higher percentage of fixed rate debt.
The provision for income taxes for the three months ended March 31, 1998
increased 24.9%, from $4.7 million to $5.8 million, compared to the same period
in 1997. The effective income tax rate was 44 %, down from 45.1% for the
corresponding period in 1997. The effective tax rate reflects differences
between foreign income tax rates and the U.S. federal statutory income tax rate,
taxes on the repatriation of foreign earnings, and foreign withholding taxes on
dividends paid to the Company.
Net income increased 30.4%, from $5.7 million to $7.4 million, compared to the
same period in 1997. The increase reflects higher revenue, decreased costs and
expenses as a percentage of revenue and a lower effective income tax rate.
Liquidity and Capital Resources
The Company's operations are funded by cash provided by operating activities and
by financing arrangements maintained by the Company in the markets in which it
operates. The Company's primary use of funds is for the acquisition of new
vehicles. For the three months ended March 31, 1998, the Company's expenditures
for new vehicles were approximately $750 million and proceeds from the
disposition of used vehicles were approximately $684 million. In 1998, the
Company expects its expenditures for new vehicles (net of proceeds from the
disposition of used vehicles) to be higher than in 1997. The financing
requirements for vehicles typically reaches an annual peak in the third calendar
quarter, as fleet levels build up in response to increased rental demand during
that period. The typical low point for cash requirements occurs during the end
of the fourth quarter and the beginning of the first quarter, coinciding with
lower levels of fleet and rental demand. The Company has established methods for
disposition of its used vehicles.
The Company expects that cash flows from operations and funds from available
credit facilities will be sufficient to enable the Company to meet its
anticipated operating cash requirements for the next twelve months.
The Company also makes capital investments for property improvements and
non-revenue earning equipment. Capital investments for property improvements and
non-revenue earning equipment were $9.0 million for the three months ended March
31, 1998, compared to $4.8 million for the same period in 1997. The Company's
customer receivables also provide liquidity with approximately 12 days of daily
sales outstanding.
8
The Company's fleet financing program provides for borrowings up to $ 3.75
billion, comprised of $2.25 billion of asset-backed medium term notes (the
"Medium Term Notes") and the issuance of up to $1.5 billion of asset-backed
variable funding notes (the "Commercial Paper Notes"). The Medium Term Notes and
the Commercial Paper Notes are backed by, among other things, a first priority
security interest in the Company's vehicles.
Avis Rent A Car System, Inc. ("ARACS"), a wholly-owned subsidiary of the
Company, is party to a $350 million secured credit agreement that provides for
(i) a revolving credit facility which is available until December 31, 2001 to
finance the general corporate needs of ARACS and (ii) a standby letter of credit
facility available on a revolving basis until April 20, 1999 to fund (a) any
shortfall in certain payments owing AESOP Leasing, a subsidiary of ARACS,
pursuant to fleet agreements and (b) maturing Commercial Paper Notes if such
Commercial Paper Notes cannot be repaid through the issuance of additional
Commercial Paper Notes or draws under the liquidity facility supporting the
Commercial Paper Notes. At March 31, 1998, the Company had approximately $1.65
billion of additional credit available.
Borrowings for the Company's international operations consist mainly of loans
obtained from local and international banks. All borrowings for international
operations are in the local currencies of the countries in which those
operations are conducted. At March 31, 1998, the total debt for the Company's
international operations was $92.7 million, of which $88.7 million was due in
less than 12 months. At March 31, 1998, the impact on the Company's liquidity
and financial condition due to exchange rate fluctuations of its foreign
operations is not material.
Seasonality
Car rental is a seasonal business, with decreased travel in winter months and
heightened activity in spring and summer. To accommodate increased demand, the
Company increases its available fleet during the second and third quarters.
Certain of the Company's operating expenses are fixed and cannot be reduced
during periods of decreased rental demand. In certain geographic markets, the
impact of seasonality has been reduced by emphasizing leisure or business travel
in the off-peak season.
Recent Accounting Standards
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 132 - "Employer's Disclosures about
Pensions and Other Post Retirement Benefits," ("SFAS No. 132") which is
effective for the Company's consolidated financial statements for the year
ending December 31, 1998. This Statement revises employers' disclosures about
pension and other post retirement benefit plans and does not change the
measurement or recognition of pension or other post retirement benefit plans.
This Statement standardizes the disclosure requirements for pension and other
post retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued a Statement of Position ("SOP") No. 98-5,
"Accounting for Start-Up Costs". The SOP requires that all start-up costs should
be expensed as incurred, unless the costs incurred were to acquire or develop
tangible assets or to acquire intangible assets from a third party. The SOP is
effective for fiscal years beginning after December 15, 1998.
The adoption of SFAS No. 132 and the SOP will not have a material effect on the
Company's consolidated financial statements.
9
Year 2000
The Company has evaluated the effect on its information systems, primarily
computer software programs, to properly recognize and process date-sensitive
information related to the Year 2000. A preliminary assessment indicates that
ensuring the Company is Year 2000 compliant will involve a mix of purchasing new
systems, modifying existing systems and confirming vendor compliance. The
Company currently anticipates that incremental capital expenditures associated
with the Year 2000 will not have a material impact on the Company's operations.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issue. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be converted timely and would
not have an adverse effect on the Company's systems.
The Company will utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications. The Company
currently believes that its information systems will be Year 2000 compliant by
the end of the first quarter in 1999.
Forward Looking Information
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. These statements are
based upon a number of assumptions and estimates which are inherently subject to
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. Some
of the assumptions may not materialize and unanticipated events may occur which
can affect the Company's results.
10
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 2, 1998, the Company filed a Registration Statement (File No.
333-46737) on Form S-1 which became effective on March 17, 1998.
The managing underwriters of this offering were: Bear, Stearns & Co., Inc,
Lehman Brothers, Merrill Lynch & Co., and NationsBanc Montgomery Securities LLC.
The total price to the public, underwriting discounts and commissions and
proceeds to the Company were $170.0 million, $8.1 million and $161.9 million ,
respectively. The Company estimates that an additional $375,000 of other
expenses has been incurred in connection with the offering.
The net proceeds received from this offering were utilized to purchase the
assets of the Hayes Leasing Company, Inc. (see Note 4 to the unaudited condensed
consolidated financial statements), and for working capital and general
corporate purposes, including the repayment of certain indebtedness.
11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Avis Rent A Car, Inc.
---------------------
(Registrant)
Dated: May 12, 1998 By: /s/ Kevin M. Sheehan
--------------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Dated: May 12, 1998 By: /s/ Timothy M. Shanley
--------------------------------
Vice President and Controller
(principal accounting officer)
12
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
filed with
Form 10 - Q
for the quarter ended
March 31, 1998
under
THE SECURITIES EXCHANGE ACT OF 1934
AVIS RENT A CAR, INC.
Commission file number 1-13315
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ------------------------------------- --------
27 Financial Data Schedule for 14
the Three months ended March 31, 1998
13