SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For the quarterly period ended March 31, 1999 [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 May 5, 1999: Common Stock, $.01 par value - Class A 31,127,892 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, 1999 and 1998....................................2 Condensed Consolidated Statements of Financial Position as of March 31, 1999 and December 31, 1998......................................3 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 1999 and 1998....................................4 Notes to the Condensed Consolidated Financial State........................................5 - 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................7 - 10 1 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three months ended March 31, 1999 1998 -------------- ---------- Revenue...................................... $ 566,917 $ 511,390 -------------- ---------- Costs and Expenses: Direct operating............................. 226,165 210,431 Vehicle depreciation and lease charges, net....................................... 149,402 133,362 Selling, general and administrative.......... 110,801 104,148 Interest, net................................ 50,545 47,668 Amortization of cost in excess of net assets acquired ...................... 3,174 2,552 -------------- ------- 540,087 $498,161 -------------- -------- Income before provision for income taxes .... 26,830 13,229 Provision for income taxes................... 11,644 5,821 -------------- -------- Net income .................................. $ 15,186 $ 7,408 ============== ======== Earnings per share: Basic ..................................... $ 0.48 0.24 ============== ========= Diluted ..................................... $ 0.47 $ 0.23 ============== ========= See accompanying notes to the condensed consolidated financial statements. 2 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands) March 31, December 31, 1999 1998 -------------- -------------- (Unaudited) ASSETS Cash and cash equivalents.................... $ 41,071 $ 29,751 Restricted cash.............................. 137,414 133,284 Accounts receivable, net..................... 271,372 360,574 Prepaid expenses............................. 43,828 42,083 Vehicles, net ............................... 3,558,957 3,164,816 Property and equipment, net.................. 147,707 145,045 Deferred income tax assets................... 105,633 120,779 Cost in excess of net assets acquired,net.... 465,565 468,140 Other assets ................................ 49,189 40,590 -------------- -------------- Total assets................................. $ 4,820,736 $ 4,505,062 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................ $ 193,234 $ 198,481 Accrued liabilities ......................... 308,360 326,204 Due to affiliates, net....................... 27,496 22,293 Current income tax liabilities............... 25,660 23,045 Deferred income tax liabilities.............. 29,479 28,504 Public liability, property damage and other insurance liabilities............... 274,243 269,209 Debt ........................................ 3,369,713 3,014,712 -------------- -------------- Total liabilities ........................ 4,228,185 3,882,448 -------------- -------------- Commitments and contingencies Stockholders' equity: Class A Common stock ........................ 359 359 Additional paid-in capital................... 591,723 591,651 Retained earnings............................ 107,401 92,215 Accumulated other comprehensive loss......... (10,251) (10,651) Treasury stock .............................. (96,681) (50,960) -------------- -------------- Total stockholders' equity................ 592,551 622,614 -------------- -------------- Total liabilities and stockholders' equity .. $ 4,820,736 $ 4,505,062 ============== ============== See accompanying notes to the condensed consolidated financial statements. 3 AVIS RENT A CAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three months ended March 31, 1999 1998 ---------- ---------- Cash flows from operating activities: Net income ........................................... $ 15,186 $ 7,408 Adjustments to reconcile net income to cash provided by (used in) operating activities ............... 155,264 (63,334) ---------- ---------- Net cash provided by (used in) operating activities ....................................... 170,450 (55,926) ---------- ---------- Cash flows from investing activities: Vehicle additions .................................... (1,227,481) (749,583) Vehicle deletions .................................... 789,697 684,449 Additions to property and equipment................... (5,630) (8,956) Retirements of property and equipment ................ 241 366 Payment for purchase of licensee, net of cash acquired of $8,011 .......................... (1,879) ---------- ---------- Net cash used in investing activities ............ (445,052) (73,724) ---------- ---------- Cash flows from financing activities: Changes in debt: Issuance of medium term notes..................... 600,000 Net increase (decrease) in commercial paper....... 320,829 (607,200) Other increases (decreases) in debt, net ......... 11,163 (39,459) ---------- ---------- Net increase (decrease) in debt .................. 331,992 (46,659) Payments for debt issuance costs ................... (3,301) Proceeds from public offering ...................... 161,194 Purchases of treasury stock.......................... (47,768) Other................................................ 1,679 ---------- ---------- Net cash provided by financing activities........ 285,903 111,234 ---------- ---------- Effect of exchange rate changes on cash ................ 19 8 ---------- --------- Net increase (decrease) in cash and cash equivalents.... 11,320 (18,408) Cash and cash equivalents at beginning of period ....... 29,751 44,899 ---------- ---------- Cash and cash equivalents at end of period ............. $ 41,071 $ 26,491 ========== ========== Supplemental disclosure of cash flow information Cash paid during the period for: Interest.............................................. $ 51,728 $ 46,714 ========== ========== Income taxes ........................................... $ 2,238 $ 3,935 ========== ========== See accompanying notes to the condensed consolidated financial statements. 4 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 include Avis Rent A Car, Inc. and its subsidiaries (the "Company"). These consolidated financial statements reflect, in the opinion of management, all material adjustments (which include normal recurring adjustments only) necessary to fairly state the financial position, the results of operations and cash flows for the periods presented. Operating results for interim periods are not indicative of the results that can be expected for a full year. These consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements and notes thereto, included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. Certain amounts in the prior period have been reclassified to conform to current period presentation. Note 2- Earnings Per Share Basic earnings per share is computed by dividing net income for the three month periods ended March 31, 1999 and 1998 by 31,873,031 and 31,425,000 weighted average shares outstanding, respectively. Diluted earnings per share is computed by dividing net income for the three month periods ended March 31, 1999 and 1998 by 32,517,570 and 32,561,483 weighted average shares outstanding, respectively. Shares used in calculating diluted earnings per share include the effects of the assumed exercise of dilutive stock options. Note 3 - Treasury Stock At March 31, 1999 treasury stock is comprised of the following: Treasury Stock, Treasury (in thousands) Shares Balance, December 31, 1998.......................... $ 50,960 2,672,700 Treasury stock repurchased from January 1, 1999 to March 31, 1999.............. 47,768 2,004,575 Treasury stock issued under the Company's stock option plan................... (2,047) (98,767) ---------- ------------ $ 96,681 4,578,508 ========== ============ Included in treasury stock repurchased from January 1, 1999 to March 31, 1999 are 1.3 million shares, repurchased from Cendant Corporation at a cost of $31.5 million. Note 4 - Acquisition On March 19, 1999, the Company purchased the common stock and franchise rights of Rent A Car Company, Incorporated, of Richmond, Virginia. The following is the preliminary purchase cost allocation for this acquisition (in thousands): Purchase cost....................................... $10,090 Fair value of: Assets acquired................................ 30,424 Liabilities assumed............................ 28,017 -------- Net assets.......................................... 2,407 -------- Cost in excess of net assets acquired............... $ 7,683 ======== 5 The preliminary purchase cost allocation for this acquisition is subject to adjustment when additional information concerning asset and liability valuations are obtained. The final asset and liability fair values may differ from those set forth in the accompanying statement of financial position at March 31, 1999. However, the changes are not expected to have a material effect on the financial position of the Company. This acquisition has been accounted for by the purchase method. These consolidated financial statements include the operating results of this acquisition subsequent to the date of acquisition. If the foregoing acquisition had occurred on January 1, 1998, it would not have had a material impact on the results of operations for the three-month periods ended March 31, 1999 and 1998. During 1999, adjustments were made to asset and liability valuations relating to former acquisitions resulting in a reduction of the excess purchase price over net assets acquired. Note 5 - Comprehensive Income Comprehensive income is comprised of the following (in thousands): Three months ended March 31, 1999 1998 Net income............................................. $15,186 $7,408 Foreign currency translation adjustment.............. 400 388 -------- ------- Comprehensive income.................................. $15,586 $7,796 ======= ======= Note 6- Retirement Benefits Effective January 1, 1999 the Company curtailed its defined benefit plans to its eligible salaried and hourly employees as of June 30, 1985. The Company recognized a non-recurring $7.5 million pre-tax gain as a result of the curtailment which was recorded in January 1999 and is included in Direct Operating expense on the accompanying Statement of Operations. 6 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 charges for vehicle rentals and, to a lesser extent, the sale of loss damage waivers, liability insurance and other products and services. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 The following table sets forth for the periods indicated, certain items in the Company's unaudited condensed consolidated statements of operations (dollars in thousands): Three Months ended Three Months ended March 31, 1999 March 31, 1998 ---------------------- --------------------- Percentage Percentage of Revenue of Revenue --------- ----------- --------- ---------- Revenue.......................... $566,917 100.0% $511,390 100.0% --------- ----------- --------- ---------- Costs and expenses: Direct operating ............. 226,165 39.9 210,431 41.1 Vehicle depreciation and lease charges, net........... 149,402 26.4 133,362 26.1 Selling, general and administrative............... 110,801 19.5 104,148 20.4 Interest, net................. 50,545 8.9 47,668 9.3 Amortization of cost in excess of net assets acquired....... 3,174 0.6 2,552 0.5 --------- ----------- --------- --------- 540,087 95.3 498,161 97.4 --------- ----------- --------- - ------- Income before provision for income taxes ................. 26,830 4.7 13,229 2.6 Provision for income taxes....... 11,644 2.0 5,821 1.1 ========= =========== ========= ========== Net income....................... $ 15,186 2.7% $7,408 1.5% ========= =========== ========= ========== Revenue Revenue for the current quarter increased 10.9%, from $511.4 million to $566.9 million, compared to the same period in 1998, due primarily to overall market demand (6.7%) and the acquisition of certain car rental assets of the Hayes Leasing Company, Inc. on May 1, 1998, (4.2%). The revenue increase reflected an 11 % increase in the number of rental transactions and a 0.1% decrease in revenue per rental transaction. Costs and Expenses Total costs and expenses for the current quarter increased 8.4%, from $498.2 million to $540.1 million, compared to the same period in 1998. Direct operating expenses increased 7.5%, from $210.4 million to $226.2 million, compared to the same period in 1998. As a percentage of revenue, direct operating expenses declined to 39.9%, from 41.1% for the corresponding period in 1998. Direct Operating expenses included a non-recurring $7.5 million gain (1.3% of revenue), resulting from the curtailment of the Company's defined benefit plans. Operating efficiencies were derived primarily from lower vehicle damage expense (0.4% of revenue) and lower airport commissions (1.0% of revenue). These efficiencies were offset by higher compensation costs (0.8% of revenue) and higher facility costs (0.5% of revenue). 7 Vehicle depreciation and lease charges for the current quarter increased 12.0%, from $133.4 million to $149.4 million, compared to the same period in 1998. As a percentage of revenue, vehicle depreciation and lease charges were 26.4% of revenue, as compared to 26.1% of revenue for the corresponding period in 1998. The change reflected a 9.8% increase in the average rental fleet combined with a higher monthly cost per vehicle. Selling, general and administrative expenses for the current quarter increased 6.4%, from $104.1 million to $110.8 million, compared to the same period in 1998. The increase was due to higher reservation costs, higher royalty fees, and higher general and administrative expenses. Interest expense for the current quarter increased 6.0%, from $47.7 million to $50.5 million, compared to the same period in 1998, due to higher borrowings required to finance the growth of the rental fleet, partially offset by lower average interest rates. The provision for income taxes for the current quarter increased to $11.6 million, from $5.8 million for the same period in 1998. The effective income tax rate was 43.4%, down from 44.0% for the corresponding period in 1998. 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 for the current quarter increased 105%, from $7.4 million to $15.2 million, compared to the same period in 1998. 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 current quarter, the Company's expenditures for new vehicles were approximately $1.2 billion and proceeds from the disposition of used vehicles were approximately $790 million. In 1999, the Company expects its expenditures for new vehicles (net of proceeds from the disposition of used vehicles) to be higher than in 1998. 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's customer receivables also provide liquidity with approximately 11 days of daily sales outstanding. The Company made capital investments for property improvements totaling $5.6 million for the current quarter, compared to $9.0 million for the same period in 1998. 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 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 of up to $125 million which is available until December 31, 2001 to finance the general corporate needs of ARACS in the ordinary course of business with up to $75 million of such amount available for the issuance of standby letters of credit to support workers' compensation and other insurance and bond requirements of ARACS, the Company and their subsidiaries, in the ordinary course of business and (ii) a $225 million standby letter of credit facility available on a revolving basis until April 15, 2000 to fund (a) any shortfall in certain payments owing AESOP Leasing L.P., 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, 1999, the Company had approximately $168 million of additional credit available under the secured credit agreement. 8 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. Based on current market conditions and the Company's current banking relationships, the Company expects to fund maturities of the Medium Term Notes by the issuance of either new medium term notes or commercial paper depending on market conditions at the time the Medium Term Notes mature. However, the Company can give no assurance that will occur. 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, 1999, the total debt for the Company's international operations was $119.1 million, of which $112.2 million is due in less than 12 months. At March 31, 1999, 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 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. 133 - "Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"), which is effective for the Company's consolidated financial statements for the year ending December 31, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position at fair value. The adoption of SFAS 133 will not have a material effect on the Company's consolidated financial statements. Quantitative and Qualitative Disclosures About Market Risk The Company has derivative financial instruments at March 31, 1999 that are sensitive to changes in interest rates on its debt obligations and on its interest rate swap agreements. There have been no material changes to the Company's derivative financial instruments for the quarter ended March 31, 1999. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. Consequently, these software and computer systems need to be either reprogrammed, upgraded or replaced in order to properly function when Year 2000 arrives. The Company's state of readiness, contingency plans, Year 2000 costs and possible consequences from Year 2000 problems are as follows: (i) State of Readiness The Company has implemented a comprehensive plan to address the Year 2000 requirements in its mission critical systems. Mission critical systems are those whose failure poses a risk of disruption to the Company's ability to provide vehicle reservation and rental services. The Company's comprehensive plan includes (i) the identification of all mission critical systems and the inventory of all hardware and software affected by the Year 2000; (ii) assessment of these systems including prioritization; (iii) modification, upgrading and replacement of the affected systems; and (iv) testing of the systems. The Company is using both internal and external sources to implement its plan. The Company has completed the remediation of its mission critical systems including the modification, 9 upgrading and replacement of the affected systems. The Company has completed the testing of approximately 70% of these mission critical systems. The Company currently believes its mission critical systems will be Year 2000 compliant in the summer of 1999. Much of the Company's technology, including technology associated with its mission critical systems, is purchased from third parties. The Company is dependent on those third parties to assess the impact of Year 2000 on the technology they have supplied and to take any necessary corrective action. The Company is monitoring the progress of these third parties and conducting tests to determine whether they have accurately assessed the problem and taken corrective action. (ii) Contingency Plans Based upon the progress of its comprehensive plan, the Company expects that it will not experience a disruption of its operations as a result of the change to the Year 2000. However, there can be no assurance that the third parties who have supplied technology used in the Company's mission critical systems will be successful in taking corrective action in a timely manner. The Company is developing contingency plans with respect to certain key technology used in its mission critical systems, which are intended to enable the Company to continue to operate. The contingency plans include performing certain processes manually; repairing systems and changing suppliers if necessary, although there can be no assurance that these contingency plans will successfully avoid service disruption in the reservation and rental of vehicles. The Company believes, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is ongoing, which will require further modifications as the Company obtains additional information regarding (1) the Company's internal systems and equipment during the remediation and testing phases of its Year 2000 comprehensive plan; and (2) the status of third parties Year 2000 readiness. (iii) Year 2000 Costs Total costs of hardware and software remediation are expected to be $22.3 million. Costs of hardware and software remediation were approximately $3.0 million in 1997, $8.4 million in 1998 and are estimated to be approximately $10.5 million in 1999 and $400,000 in 2000. Costs of hardware and software remediation were approximately $2.5 million for the three months ended March 31, 1999. These estimates include the costs of certain equipment and software for which planned replacement was accelerated due to Year 2000 requirements. In addition, they reflected the cost of redeploying certain internal resources to address the Year 2000 requirements. This estimate assumes that third party suppliers have accurately assessed the compliance of their products and that they will successfully correct the issue in non-compliant products. Because of the complexity of correcting the Year 2000 issue, actual costs may vary from these estimates. The Company expects to finance these costs through internally generated cash flow and existing credit facilities. (iv) Possible Consequences from Year 2000 Problems The Company believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that the Company's internal systems or equipment or those of third parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or third parties' contingency plans will mitigate the effects of any non-compliance. The failure of the systems or equipment of the Company or third parties (which the Company believes is the most reasonably likely worst case scenario) could effect vehicle reservation and rental operations and could have a material adverse effect on the Company's business or consolidated financial statements. Forward Looking Information Certain matters discussed in this report that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties including the impact of competitive products and pricing, changing market conditions, the ability of the Company and its vendors to complete the necessary actions to achieve a Year 2000 conversion for its computer systems and applications, and other risks which were detailed from time to time in the Company's publicly-filed documents, including its Annual Report on Form 10-K for the period ended December 31, 1998. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgement as of the date of this report. 10 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, 1999 By: /s/ Kevin M. Sheehan -------------------------- Name: Kevin M. Sheehan Title: Executive Vice President and Chief Financial Officer (principal financial officer) Dated: May 12, 1999 By: /s/ Timothy M. Shanley ---------------------------- Name: Timothy M. Shanley Title:Vice President and Controller (principal accounting officer) 11 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Exhibits filed with Form 10-Q for the quarter ended March 31, 1999 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 13 the Three months ended March 31, 1999 12