AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
REGISTRATION NO. 333-86269
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4/A
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVIS RENT A CAR, INC.
And the subsidiaries listed on Table 1 hereto
(Exact name of Registrant as specified in its charter)
DELAWARE 7514 11-3347585
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation or organization) Classification Code Number)
------------------------
900 OLD COUNTRY ROAD
GARDEN CITY, NEW YORK 11530
(516) 222-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
KAREN C. SCLAFANI, ESQ., VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
AVIS RENT A CAR, INC.
900 OLD COUNTRY ROAD
GARDEN CITY, NY 11530
(516) 222-3000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
COPIES TO:
SEAN J. GEARY, ESQ.
TIMOTHY B. GOODELL, ESQ.
WHITE & CASE LLP
1155 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 819-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this form are to be offered in connection with
the formation of holding company and there is compliance with General
Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)
11% Senior Subordinated Exchange Notes due
2009........................................... $500,000,000 100% $500,000,000 $139,000
Guarantees of Senior Subordinated Exchange Notes
Due 2009(2).................................... -- -- -- --
Total............................................ $500,000,000 100% $500,000,000 $139,000
(1) Determined in accordance with Rule 457(f) promulgated under the Securities
Act of 1933, as amended.
(2) No separate consideration will be received for the Guarantees, and,
therefore, no additional registration fee is required.
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TABLE 1 TO REGISTRATION STATEMENT: CO-REGISTRANT SUBSIDIARY GUARANTORS
PRIMARY STANDARD IRS EMPLOYER
SUBSIDIARY GUARANTOR STATE OF ORGANIZATION INDUSTRIAL CODE NUMBER IDENTIFICATION NUMBER
- ------------------------------------------------------ --------------------- ------------------------- ---------------------
Avis Rent A Car System, Inc. ......................... Delaware 7510 11-1998661
Avis International, Ltd. ............................. Delaware 6700 11-2411667
Avis Management Services, Ltd. ....................... Delaware 7389 11-2160100
Avis Caribbean, Limited............................... Delaware 6700 11-2850374
Avis Asia and Pacific, Limited........................ Delaware 6700 11-2850373
Avis Enterprises, Inc. ............................... Delaware 6700 11-2631886
Avis Service, Inc. ................................... Delaware 7389 11-2811732
Avis Lube, Inc. ...................................... Delaware 7549 11-2811733
Avis Leasing Corporation.............................. Delaware 7350 11-3102377
Rent-A-Car Company, Incorporated...................... Virginia 7510 54-0601449
Reserve Claims Management Corp. ...................... Delaware 8741 11-2520537
Avis Fleet Leasing and Management Corp. .............. Texas 6700 11-3494799
PHH Vehicle Management Services LLC................... Delaware 8741 11-3494799*
Dealer Holdings, Inc. ................................ Maryland 6700 52-1286342
Williamsburg Motors, Inc. ............................ Maryland 5511 52-1286341
Edenton Motors, Inc. ................................. Maryland 5511 52-1386917
Wright Express LLC.................................... Delaware 7549 11-3494799*
PHH Canadian Holdings, Inc. .......................... Delaware 6700 52-2174391
PHH Deutschland, Inc. ................................ Maryland 6700 52-1392716
PHH/Paymentech LLC.................................... Delaware 8999 11-3494799*
FAH Company, Inc. .................................... Delaware 6700 04-3393483
*ID # IS SAME AS AVIS FLEET LEASING AND MANAGEMENT CORP. (THE PARENT COMPANY)
PROSPECTUS
OFFER TO EXCHANGE ALL 11% SENIOR SUBORDINATED NOTES DUE 2009
FOR 11% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2009
OF
AVIS RENT A CAR, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER 25, 1999, UNLESS EXTENDED
---------------------
Terms of the exchange offer
- We will issue up to $500,000,000 aggregate principal amount of new notes.
- We will exchange new notes for all outstanding old notes that are validly
tendered and not withdrawn prior to the expiration of the exchange offer.
- You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
- The exchange of old notes for new notes will not be a taxable transaction
for U.S. federal income tax purposes, but you should see the discussion
under the heading "Certain United States Federal Income Tax Consequences"
on page 187 for more information.
- We will not receive any cash proceeds from the exchange offer.
- The terms of the new notes are substantially identical to those of the
outstanding old notes, except that the transfer restrictions and
registration rights relating to the old notes do not apply to the new
notes.
- The old notes are, and the new notes will be, unconditionally guaranteed
by some of Avis Rent A Car, Inc.'s subsidiaries.
- The exchange offer is the initial public offering of the new notes.
- There is no established trading market for the new notes or the old notes.
- We do not intend to apply for listing of the new notes on any national
securities exchange or for quotation through the NASDAQ National Market.
------------------------
SEE RISK FACTORS BEGINNING ON PAGE 23 FOR A DISCUSSION OF RISKS YOU SHOULD
CONSIDER BEFORE TENDERING YOUR OLD NOTES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR HAS PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
EACH BROKER-DEALER THAT RECEIVES NEW NOTES FOR ITS OWN ACCOUNT PURSUANT TO THIS
EXCHANGE OFFER MUST ACKNOWLEDGE THAT IT WILL DELIVER A PROSPECTUS IN CONNECTION
WITH ANY RESALE OF NEW NOTES. THE LETTER OF TRANSMITTAL STATES THAT BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, A BROKER-DEALER WILL NOT BE DEEMED
TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT.
THIS PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME, MAY BE
USED BY A BROKER-DEALER IN CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN
EXCHANGE FOR OLD NOTES WHERE SUCH OLD NOTES WERE ACQUIRED BY SUCH BROKER-DEALER
AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES. WE HAVE
AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE, WE WILL MAKE THIS PROSPECTUS AVAILABLE TO ANY BROKER-DEALER FOR USE
IN CONNECTION WITH ANY SUCH RESALE. SEE "PLAN OF DISTRIBUTION".
------------------------
The date of this prospectus is September 24, 1999
TABLE OF CONTENTS
PAGE
-----
Summary........................................ 1
Risk Factors................................... 23
The VMS Acquisition............................ 39
Use of Proceeds................................ 42
The Exchange Offer............................. 43
Capitalization................................. 52
Unaudited Pro Forma Consolidated Financial
Data......................................... 54
Selected Historical Consolidated Financial Data
(Avis)....................................... 59
Selected Historical Combined Financial Data
(VMS)........................................ 62
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 65
Company Background............................. 83
PAGE
-----
Business....................................... 86
Management..................................... 112
Ownership of Capital Stock..................... 121
Certain Relationships and Related Party
Transactions................................. 123
Description of Avis Fleet Preferred Stock and
Class B Common Stock......................... 131
Description of Other Indebtedness.............. 135
Description of Notes........................... 139
Certain United States Federal Income Tax
Consequences................................. 187
Book-Entry; Delivery and Form.................. 187
Registration Rights............................ 190
Plan of Distribution........................... 193
Legal Matters.................................. 193
Experts........................................ 193
Available Information.......................... 194
Index to Consolidated and Combined Financial
Statements................................... F-1
ii
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including, in
particular, statements about our plans, strategies and prospects under the
captions "Summary", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (particularly under the subheading "Liquidity and
capital resources"), and "Business". Statements that are included in this
prospectus that are prefaced with the heading "may", "will", "anticipate",
"expect", "continue", "estimate", "project", "intend", "designed", and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect our future plans of
operations, business strategy, results of operations and financial condition. We
have based these forward-looking statements on our current assumptions,
expectations and projections about future events. Since it is not possible to
predict every factor that may emerge, forward-looking statements should not be
relied upon as a prediction of our actual future financial condition or
operating results. We caution you that a variety of factors could cause business
conditions and results to differ materially from these forward-looking
statements. The forward-looking statements are subject to risks, uncertainties
and assumptions about us, including, among other things:
- our substantial debt and significant debt service obligations;
- our ability to integrate VMS into our operations;
- developments in, or changes to, the laws and regulations governing our
business;
- our ability to finance vehicle purchases in the asset-backed market;
- the increasingly competitive nature of the industries in which we are
operating;
- changes in interest rates, foreign currency exchange rates and other
domestic and international market and industry conditions;
- the cyclicality and seasonality of the car rental industry;
- changes in our relationships with our major suppliers;
- changes in government policy;
- changes in technology;
- developments regarding environmental and tort liability;
- our ability to keep key personnel required to operate the business; and
- the potential effect of Year 2000 compliance issues.
iii
[THIS PAGE INTENTIONALLY LEFT BLANK]
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE PARTICIPATING IN THE EXCHANGE OFFER
OR INVESTING IN THE NOTES, AND YOU ARE ENCOURAGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY.
UNLESS THE CONTEXT OTHERWISE REQUIRES, EACH REFERENCE IN THIS PROSPECTUS TO
- "NEW AVIS", "WE", "OUR" OR "US" REFERS TO THE BUSINESS OF AVIS, AFTER
GIVING EFFECT TO THE ACQUISITION OF VMS (THE "VMS ACQUISITION"),
- "AVIS" REFERS TO AVIS RENT A CAR AND ITS OPERATING SUBSIDIARIES AND
PREDECESSORS OTHER THAN VMS,
- "VMS" REFERS TO THE VEHICLE MANAGEMENT AND FUEL CARD BUSINESSES WHICH,
PRIOR TO THE VMS ACQUISITION, WERE OPERATED BY CENDANT CORPORATION THROUGH
ITS PHH SUBSIDIARIES IN THE UNITED STATES AND CANADA ("PHH NORTH
AMERICA"), ITS PHH SUBSIDIARIES IN EUROPE ("PHH EUROPE") AND WRIGHT
EXPRESS CORPORATION ("WEX"),
- "AVIS RENT A CAR" REFERS TO AVIS RENT A CAR, INC.,
- "AVIS FLEET" REFERS TO AVIS FLEET LEASING AND MANAGEMENT CORPORATION, THE
WHOLLY-OWNED SUBSIDIARY OF AVIS RENT A CAR THAT ACQUIRED VMS,
- "CENDANT" REFERS TO CENDANT CORPORATION AND ITS SUBSIDIARIES,
- THE "AVIS SYSTEM" REFERS TO THE AVIS WORLDWIDE VEHICLE RENTAL SYSTEM
INCLUDING RELATED TRADEMARKS, TRADE NAMES AND COMPUTER SYSTEMS, INCLUDING
THE WIZARD-REGISTERED TRADEMARK- SYSTEM, ALL OF WHICH ARE OWNED BY
CENDANT,
- "NOTES" REFERS TO BOTH THE OLD NOTES THAT WERE ISSUED IN CONNECTION WITH
THE VMS ACQUISITION AND THE NEW NOTES THAT WE ARE OFFERING TO EXCHANGE FOR
THE OLD NOTES, AND
- "VEHICLES" INCLUDE CARS, LIGHT TRUCKS AND VANS.
UNLESS OTHERWISE SPECIFIED HEREIN,
- CONSOLIDATED REVENUES OF EACH OF NEW AVIS, AVIS AND VMS ARE PRESENTED
BEFORE DEDUCTING THE INTEREST AND DEPRECIATION ASSOCIATED WITH THE VEHICLE
FLEETS ("FLEET COSTS") OF EACH ENTITY AND
- CONSOLIDATED EBITDA AFTER FLEET COSTS (AS DEFINED ON PAGE 61) OF EACH OF
NEW AVIS, AVIS AND VMS ARE PRESENTED AFTER DEDUCTING THE FLEET COSTS OF
EACH ENTITY.
THE STATISTICAL INFORMATION IN THIS PROSPECTUS REGARDING THE DOMESTIC AND
INTERNATIONAL CAR RENTAL INDUSTRY, THE DOMESTIC OR INTERNATIONAL VEHICLE LEASING
MARKETS AND THE DOMESTIC OR INTERNATIONAL FUEL CARD MARKETS CONSISTS OF
MANAGEMENT ESTIMATES OR HAS BEEN DERIVED FROM PUBLICLY AVAILABLE SOURCES,
INCLUDING TRADE PUBLICATIONS, WHICH WE HAVE NOT INDEPENDENTLY VERIFIED BUT WE
BELIEVE TO BE RELIABLE.
THE EXCHANGE OFFER
Old notes....................... 11% Senior Subordinated Notes due 2009, which were issued
on June 30, 1999.
New notes....................... 11% Senior Subordinated Exchange Notes due 2009. The terms
of the new notes are substantially identical to those of
1
the outstanding old notes, except that the transfer
restrictions and registration rights relating to the old
notes do not apply to the new notes.
Exchange offer.................. We are offering to issue up to $500,000,000 aggregate
principal amount of the new notes in exchange for a like
principal amount of the old notes to satisfy our
obligations under the registration rights agreement that
we entered into when the old notes were sold in
transactions under Rule 144A and Regulation S under the
Securities Act of 1933, as amended (the "Securities Act").
Expiration date; Tenders........ The exchange offer will expire at 5:00 p.m., New York City
time, on October 25, 1999, unless extended. By tendering
your old notes, you represent to us:
- that you are not an "affiliate" of ours, as defined
in Rule 405 under the Securities Act;
- that any new notes you receive in the exchange offer
are being acquired by you in the ordinary course of
your business;
- that, at the time of commencement of the exchange
offer, neither you nor, to your knowledge, anyone
receiving new notes from you, has any arrangement or
understanding with any person to participate in the
"distribution" of the new notes, as defined in the
Securities Act, in violation of the Securities Act;
- if you are not a participating broker-dealer, that
you are not engaged in, and do not intend to engage
in, the "distribution" of the new notes, as defined
in the Securities Act; and
- if you are a broker-dealer, that you will receive
the new notes for your own account in exchange for old
notes that were acquired by you as a result of your
market-making or other trading activities and that
you will deliver a prospectus in connection with any
resale of the new notes you receive. For further
information regarding resales of the new notes by
participating broker-dealers, see the discussion
below under the caption "Plan of Distribution" on
page 193.
Withdrawal; Non-acceptance...... You may withdraw any old notes tendered in the exchange
offer at any time prior to 5:00 p.m., New York City time,
on October 25, 1999. If we decide for any reason not to
accept any old notes tendered for exchange, the old notes
will be returned to the registered holder at our expense
promptly after the expiration or termination of the
exchange offer. In the case of old notes tendered by
book-entry transfer into the exchange agent's account at
The Depository Trust Company, any withdrawn or unaccepted
old notes will be credited to the
2
tendering holder's account at The Depository Trust
Company. For further information regarding the withdrawal
of tendered old notes, see "The Exchange Offer--Terms of
the exchange offer; period for tendering old notes" on
pages 43 to 44 and "--Withdrawal rights" on page 48.
Conditions to the exchange
offer......................... The exchange offer is subject to customary conditions,
which we may waive. See the discussion below under the
caption "The Exchange Offer--Conditions to the exchange
offer" on pages 48 to 49 for more information regarding
the conditions to the exchange offer.
Procedures for tendering old
notes......................... Unless you comply with the procedure described below under
the caption "The Exchange Offer--Guaranteed delivery
procedures" on page 47, you must do one of the following
on or prior to the expiration of the exchange offer to
participate in the exchange offer:
- tender your old notes by sending the certificates
for your old notes, in proper form for transfer, a
properly completed and duly executed letter of
transmittal, with any required signature guarantees,
and all other documents required by the letter of
transmittal, to The Bank of New York, as exchange
agent, at one of the addresses listed below under
the caption "The Exchange Offer--Exchange agent" on
page 49; or
- tender your old notes by using the book-entry
transfer procedures described below and transmitting a
properly completed and duly executed letter of
transmittal, with any required signature guarantees,
or an agent's message instead of the letter of
transmittal, to the exchange agent. In order for a
book-entry transfer to constitute a valid tender of
your old notes in the exchange offer, The Bank of
New York, as exchange agent, must receive a
confirmation of book-entry transfer of your old
notes into the exchange agent's account at The
Depository Trust Company prior to the expiration of
the exchange offer. For more information regarding
the use of book-entry transfer procedures, including
a description of the required agent's message, see
the discussion below under the caption "The Exchange
Offer--Book-entry transfer" on page 47.
Guaranteed delivery procedures.. If you are a registered holder of the old notes and wish
to tender your old notes in the exchange offer, but
- the old notes are not immediately available,
- time will not permit your old notes or other
required documents to reach the exchange agent before
the expiration of the exchange offer, or
3
- the procedure for book-entry transfer cannot be
completed prior to the expiration of the exchange
offer,
you may tender old notes by following the procedures
described below under the caption "The Exchange Offer--
Guaranteed delivery procedures" on page 47.
Special procedures for
beneficial owners............. If you are a beneficial owner whose old notes are
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to
tender your old notes in the exchange offer, you should
promptly contact the person in whose name the old notes
are registered and instruct that person to tender on your
behalf.
If you wish to tender in the exchange offer on your own
behalf, prior to completing and executing the letter of
transmittal and delivering your old notes, you must either
make appropriate arrangements to register ownership of the
old notes in your name or obtain a properly completed bond
power from the person in whose name the old notes are
registered.
Certain federal tax
considerations................ The exchange of old notes for new notes in the exchange
offer will not be a taxable transaction for United States
federal income tax purposes. See the discussion below
under the caption "Certain United States Federal Income
Tax Consequences" on page 187 for more information
regarding the tax consequences to you of the exchange
offer.
Use of proceeds................. We will not receive any cash proceeds from the exchange
offer.
Exchange agent.................. The Bank of New York is the exchange agent for the
exchange offer. The addresses and telephone number of the
exchange agent can be found below under the caption "The
Exchange Offer--Exchange agent" on page 49.
Resales......................... Based on interpretations by the staff of the Securities
and Exchange Commission (the "Commission"), as set forth
in no-action letters issued to third parties, we believe
that the new notes you receive in the exchange offer may
be offered for resale, resold or otherwise transferred
without compliance with the registration and prospectus
delivery provisions of the Securities Act. However, you
will not be able to freely transfer the new notes if:
- you are an "affiliate" of ours, as defined in Rule
405 under the Securities Act;
- you are not acquiring the new notes in the exchange
offer in the ordinary course of your business;
- you have any arrangement or understanding with any
person to participate in the distribution of the new
notes, as defined in the Securities Act, you will
receive in the exchange offer; or
4
- you are a participating broker-dealer that receives
new notes for its own account in the exchange offer in
exchange for old notes that were acquired as a
result of market-making or other trading activities.
If you fall within one of the exceptions listed above, you
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
resale transaction involving the new notes.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes in the exchange offer, your old notes
will continue to be subject to the restrictions on transfer described in the
legend on the certificate for your old notes. In general, you may offer or sell
your old notes only:
- if they are registered under the Securities Act and applicable state
securities laws;
- if they are offered or sold under an exemption from registration under the
Securities Act and applicable state securities laws; or
- if they are offered or sold in a transaction not subject to the Securities
Act and applicable state securities laws.
We do not currently intend to register the old notes under the Securities
Act. Under some circumstances, however, holders of the old notes--including
holders who are not permitted to participate in the exchange offer or who may
not freely resell new notes received in the exchange offer--may require us to
file, and cause to become effective, a shelf registration statement which would
cover resales of old notes by these holders. For more information regarding the
consequences of not tendering your old notes and our obligation to file a shelf
registration statement, see "The Exchange Offer--Consequences of exchanging or
failing to exchange old notes" on page 50 and "Registration Rights" on pages 190
to 192.
5
OUR COMPANY
OVERVIEW
Avis operates the second largest general-use car rental business in the
world, based on total revenue. As the largest Avis System franchisee, Avis rents
vehicles and provides ancillary products and services to business and leisure
travelers through approximately 670 airport and non-airport (downtown or
suburban) locations in the United States, Canada, Puerto Rico, the U.S. Virgin
Islands, Argentina, Australia and New Zealand as of June 30, 1999. During 1998,
Avis completed over 15 million transactions for approximately 56 million rental
days with a fleet that averaged approximately 206,000 vehicles. Avis has
corporate operations at the 50 top domestic airports which accounted for
approximately 92% of all domestic rental transactions processed through the Avis
System based on 1998 revenue. Avis provides its services to a broad range of
retail and corporate customers including both domestic and multinational
corporations, among which Avis has many long-standing relationships. For model
year 1999, Avis purchased over 90% of its vehicles from the "Big 3" U.S. auto
makers, primarily General Motors. Through repurchase and other agreements with
these and other auto makers, Avis bears the residual risk with respect to less
than 2% of its fleet. For the six month period ended June 30, 1999, Avis
generated total revenues of approximately $1.2 billion.
On June 30, 1999, Avis acquired VMS from Cendant for approximately $1.8
billion, plus the refinancing of approximately $3.5 billion of indebtedness. A
subsidiary of Cendant Corporation received $362.0 million of the acquisition
consideration in the form of Avis Fleet Preferred Stock (as defined on page 12),
$2.0 million of which was transferred to a third party. The VMS Acquisition has
established us as a leading worldwide provider of comprehensive automotive
transportation and vehicle management solutions. We expect that the VMS
Acquisition will allow Avis to diversify its revenue base, create significant
revenue growth and cost savings opportunities, expand its car rental business,
and bring together a senior management team that has extensive knowledge of the
car rental and vehicle management and financing industries.
VMS provides integrated card payment, vehicle leasing and value-added
vehicle management services in North America and Europe, with leading market
shares across many of its product lines. VMS provides comprehensive vehicle
management solutions to its customers which include over 19,000 companies and
government agencies in North America and Europe, including nearly one-third of
the Fortune 500 and approximately one-half of the FTSE 100 companies. VMS'
services consist of vehicle leasing and related asset-based services and a broad
range of fee-based services which include fuel and maintenance cards, accident
management, and various other vehicle-related services, all of which are
designed to allow clients to effectively manage costs and enhance productivity.
In 1998, asset-based products and services accounted for 39% of VMS' total
revenues (after Fleet Costs), while fee-based products and services accounted
for the remaining 61%. At December 31, 1998, VMS had approximately 780,000
vehicles under management and over 3.6 million fuel and maintenance cards
outstanding (accounting for over $5.4 billion of fuel and maintenance purchases
in 1998). At December 31, 1998, VMS' automotive fleet consisted of approximately
354,000 leased vehicles worldwide, 85% of which were leased subject to
open-ended leases under which the customer bears substantially all of the
vehicle residual risk. VMS' lease and card portfolios have experienced low
historical default rates as a result of the strong credit quality of its
customer base and VMS' credit underwriting procedures. For the six month period
ended June 30, 1999, VMS generated total revenues of $808.1 million.
6
As a result of the VMS Acquisition, we are a leading worldwide provider of
automotive transportation and vehicle management solutions. After giving effect
to the VMS Acquisition, we believe that we hold the following market positions,
based on reported units:
GENERAL-USE CAR RENTALS
- #2 worldwide
- #2 in the United States
- #1 in Australia and New Zealand
VEHICLES UNDER MANAGEMENT(1)
- #2 in the United States
- #1 in the United Kingdom
FUEL AND MAINTENANCE CARDS(2)
- #1 in the United States
- #1 in the United Kingdom
- ------------------------
(1) Includes leased vehicles and vehicles for which third-party vehicle-related
services are provided, which are comparable to those provided by VMS.
(2) Includes cards for third parties for which VMS acts as processor.
For the six months ended June 30, 1999, pro forma for the Transactions (as
defined on page 11), we would have generated total revenues of $2.0 billion.
OUR INDUSTRY
U.S. CAR RENTAL INDUSTRY. The U.S. car rental industry, which includes
short-term car and truck rentals for business and retail customers at both
airport and non-airport locations, was a $17.2 billion industry in 1998 based on
revenues, and has grown at a compound annual growth rate, or CAGR, of 11.1% from
1985 to 1998. The U.S. airport market accounted for $6.3 billion of these
revenues. Ancillary products offered in addition to vehicle rentals include
refueling services, loss damage waivers and used vehicle sales. Industry sources
estimate that the U.S. car rental industry will continue to grow, principally
due to continued increases in airline passenger traffic, the trend toward
shorter, more frequent vacations resulting from the increased number of
households with two wage earners, the demographic trend toward older, more
affluent Americans who travel more frequently, and increased business travel.
VEHICLE LEASING INDUSTRY. We estimate that corporations in the United
States, Canada, the United Kingdom and Germany (the markets in which VMS
currently competes) made expenditures of over $125 billion in 1998 with respect
to their vehicle fleets for depreciation and interest, management and
operations. These expenditures are driven by growth in the number of vehicles
operated by these companies. The U.S., Canadian, U.K. and German vehicle leasing
markets are highly fragmented. We estimate that in 1998, approximately 61% of
the combined U.S. and Canadian and a significant portion of the U.K. and German
vehicle leasing markets were unserved by third-party fleet management companies,
which we believe indicates a significant market opportunity. We believe that
growth in the third-party vehicle leasing industry is principally driven by a
general trend toward outsourcing. As companies focus on their core competencies
and competition drives corporate cost reduction efforts, we believe that they
are more likely to rely on third-party fleet management companies.
FUEL CARD INDUSTRY. We estimate that corporate vehicle fleets in the United
States, Canada, the United Kingdom and Germany (the markets in which VMS
currently competes) made fuel
7
expenditures of over $85 billion in 1998. The growth of the fuel card industry
has been driven by corporations seeking to control costs and monitor corporate
credit card usage. Technological advances have enabled fuel card providers to
penetrate this market with point-of-sale networks, information management
products and enhanced customer services. With increased competition, major oil
companies are further driving growth in the industry by accepting independent
fuel cards in addition to their own private label cards. We believe that
significant expansion opportunities remain, as management estimates that
approximately 45% of both the U.S. and U.K. fueling markets remain unpenetrated
by fuel card providers. In addition, many major oil companies outsource their
private label fuel card processing services to third-party processors.
COMPETITIVE STRENGTHS
We believe our principal competitive strengths are:
- LEADING MARKET POSITIONS. We have leading market shares in each of our
principal markets. Avis operates the second largest general-use car rental
business in the world, based on total revenue. VMS is the largest vehicle
leasing company in the United Kingdom and the second largest in the United
States, and it maintains one of the largest fuel and maintenance
cardholder bases in the world with over 3.6 million cards in use
(including approximately 800,000 third-party cards for which VMS acts as
processor). These cards accounted for approximately $5.4 billion of fuel
and maintenance expenditures in 1998. With approximately 780,000 vehicles
under management at VMS and with Avis' car rental franchise, we are a
leading worldwide provider of integrated vehicle management solutions.
- DIVERSIFIED REVENUE STREAMS AND STRONG HISTORICAL GROWTH. We have several
sources of asset-based and fee-based revenues, each of which has
demonstrated strong historical growth. Avis' total revenues have grown
from $1.9 billion in 1996 to $2.3 billion in 1998, as a result of
acquisitions and internal growth. Moreover, Avis' revenues have increased
every year over the past 25 years. VMS' total revenues have grown from
$1.2 billion in 1994 to $1.6 billion in 1998. In addition, VMS' operations
have not been subject to the same seasonal fluctuations that have
historically affected the car rental industry. Accordingly, we expect that
the combination of New Avis' diversified revenue streams will reduce
fluctuations in our overall earnings and will provide us with a
competitive advantage over traditional car rental companies.
- LEADING TECHNOLOGY PLATFORMS. We believe that Avis has one of the most
sophisticated information management and data processing systems in the
car rental industry, including the Wizard System and certain other
management information systems. The addition of VMS' advanced
technological client server platform should further increase our strengths
in technology. VMS has invested heavily to become an industry leader in
technology-based services, having developed a technologically advanced
interactive Internet tool called "PHH Interactive(sm)" and a data
warehouse called Strategic PHH Information Network or
"SPIN-Registered Trademark-", in which transaction-level information is
collected in a central repository that permits detailed and customized
"real-time" deliveries of proprietary information to its U.S. customers.
Our ability to deliver such information across our various lines of
business in a variety of customized report formats to corporations of all
sizes on a worldwide basis should provide us with a significant
competitive advantage.
- ESTABLISHED CUSTOMER BASE WITH STRONG CREDIT QUALITY. Avis has succeeded
in cultivating relationships with over 100,000 small and medium-sized
corporate customers by focusing on airport locations and providing
high-quality customer service to business travelers. Similarly, as a
result of its own emphasis on customer service and enhanced product
offerings, VMS has developed and maintains relationships with over 19,000
corporate and governmental
8
customers in North America and Europe. Within North America, VMS' client
base is comprised of nearly 3,300 corporate customers spanning a variety
of industries, including nearly one-third of the Fortune 500 companies.
Over 550 of these corporations have been VMS customers for more than ten
years. Within Europe, VMS' client base is comprised of nearly 16,000
customers, including approximately one-half of the FTSE 100 companies. The
combination of Avis' and VMS' established relationships with many of the
world's leading corporations and the continuation of VMS' conservative
underwriting procedures is expected to result in low default rates across
both our lease and card portfolios, where default rates totalled
approximately 0.06% of total billings during 1998.
- STRONG MANAGEMENT TEAM. Avis' senior management team has successfully led
Avis through the recent consolidation of the car rental industry and
related changes in industry dynamics. This management team has focused on
solidifying Avis' position as a leading car rental franchise, and we
believe it is well positioned to work with VMS' senior management team in
the future. VMS' management team has extensive experience in, and
knowledge of, the vehicle leasing business including vehicle acquisition,
remarketing and financing, as well as vehicle management consulting. VMS'
23 senior managers have an average of 10 years of experience in the
vehicle management and card service industries.
BUSINESS STRATEGY
Our strategy is to be the world's leading provider of comprehensive
automotive transportation and vehicle management solutions by concentrating on
the following key elements:
- INTEGRATE VMS AND AVIS AND CAPITALIZE ON SYNERGIES AND CROSS-SELLING
OPPORTUNITIES. The combination of the strong rental car franchise of Avis,
with its strength in the corporate market, and the vehicle leasing and
management expertise of VMS should result in significant opportunities to
expand the complementary businesses of Avis and VMS across their
respective customer bases. Avis' and VMS' common strengths should provide
a significant opportunity to provide a one-stop shop of comprehensive
automotive transportation and vehicle management solutions that can be
cross-sold. As an example, the integration of Avis' Small Account
Telesales efforts with VMS' fuel card operations will permit New Avis to
more efficiently penetrate the highly profitable small-fleet fuel card
market. The combination of Avis' small and medium-sized company
relationships and VMS' technology platform should enable New Avis to
penetrate the profitable, yet largely unpenetrated, smaller-fleet leasing
market. We expect to develop additional synergies in the areas of
information technology, sales, insurance, fleet purchasing and
disposition, operations, human resources, marketing and administration.
- CAPITALIZE ON ADDITIONAL EXPANSION OPPORTUNITIES. Historically, Avis has
capitalized on its network of airport locations by focusing its sales and
marketing resources principally on business travelers. We believe that
Avis' established presence at the leading airports in the United States
provides us with an opportunity to capture a greater share of the leisure
market. Moreover, Avis is expanding its presence in the suburban market
and intends to enter the vehicle replacement market (which Avis will be
permitted to enter on a nationwide basis after expiration of a non-compete
agreement in June 2000). In addition, management estimates that in 1998,
approximately 61% of the combined U.S. and Canadian and a significant
portion of the U.K. and German vehicle leasing markets were unserved by
third-party vehicle management companies, providing a significant
opportunity to capture share in unpenetrated markets. In addition,
approximately 45% of the U.S. and U.K. fueling markets remain unpenetrated
by fuel card providers. Management believes that the foregoing will
provide New Avis with strong opportunities to capture additional share in
each of its target
9
markets as a leading provider of automotive transportation and vehicle
management solutions.
- LEVERAGE STRENGTHS IN TECHNOLOGY. We intend to apply our extensive
technology and information processing capabilities to take advantage of
current trends in the car rental and vehicle management industries. We
believe that customers in the domestic car rental industry are focusing
increasingly on brand loyalty, while at the same time our customer base
has become increasingly diverse. We plan to use the Avis System's
proprietary management information applications, enhanced by VMS'
capabilities in real-time data access, to provide customers with
customized information and services. We also plan to use our technology to
identify key operating characteristics among our customers in order to
optimize our business mix. Additionally, as corporations of all sizes in
North America and Europe continue to outsource vehicle management, we will
leverage our strong technological capabilities to increase our array of
services, improve customer service and develop products and services at
reduced costs to appeal to smaller fleet owners that previously could not
justify the cost of outsourcing their vehicle management needs. In
addition, we expect to increase customer loyalty as our technology-based
services become an integral part of our customers' operations.
- DEVELOP NEW PRODUCTS AND SERVICES FOR TARGET MARKETS. In addition to our
existing asset-based and fee-based products and services, we will seek to
develop a broad range of new products and services designed to further
penetrate our existing customer base, expand our presence in international
markets, and penetrate other, previously underserved, markets such as
smaller corporate fleets and leisure travelers. Among the new products and
services that we will consider offering are: (i) a customized leisure pass
which combines Avis' rental cars with VMS' value-added services marketed
to the leisure traveler; (ii) expanding VMS into Australia and New Zealand
by leveraging Avis' existing infrastructure; and (iii) offering prepaid
fuel cards to retail and corporate customers.
- CONTINUE TO DEVELOP CORE BUSINESS OPPORTUNITIES AT AVIS AND VMS. While
seeking to realize revenue enhancing and cost saving synergies between
Avis and VMS, management of New Avis intends to continue focusing on the
development of each business' core market opportunities.
- Within Avis, such opportunities include: (i) capitalizing on changing
rental car industry dynamics; (ii) improving business mix and fleet
utilization; (iii) increasing brand loyalty through target marketing;
and (iv) developing Avis' suburban program.
- Within VMS, such opportunities include: (i) cross-selling PHH North
America and PHH Europe non-card products to VMS' extensive base of fuel
and maintenance cardholders; (ii) further developing the "One Card"
co-branded corporate card program to capture a greater share of
corporate travel and entertainment expenditures; (iii) further
penetrating both the small and large vehicle leasing markets; (iv)
expanding into underserved markets in Europe; and (v) developing new
revenue opportunities based on enhancements to the services provided by
VMS' technology platform.
OUR RELATIONSHIP WITH CENDANT
Cendant is a major publicly-traded international provider of consumer and
business services. Prior to 1997, Avis was owned by Cendant Car Rental, Inc.
(the "Franchisor"), a wholly-owned indirect subsidiary of Cendant Corporation.
Until the completion of the VMS Acquisition, VMS was indirectly owned by Cendant
Corporation. The Franchisor owns the Avis System, of which Avis is a franchisee,
as well as the Avis trademarks, tradenames and the Wizard System. In connection
with Avis Rent A Car's 1997 initial public offering (the "IPO"), its operating
subsidiary, Avis Rent A Car
10
System, Inc. ("ARACS"), entered into a 50-year master license agreement with the
Franchisor to participate in the Avis System (the "Master License Agreement")
and a 50-year computer services agreement for use of the Wizard System. The
Master License Agreement provides for certain base and supplemental royalties to
be paid to Cendant based on ARACS's gross revenue, while Cendant provides
services under the computer services agreement at cost. These agreements are
unaffected by the VMS Acquisition. There are, however, certain transition and
computer-related agreements resulting from the VMS Acquisition. See "The VMS
Acquisition" and "Certain Relationships and Related Party Transactions".
Since the IPO, as a result of a secondary stock offering and a share
repurchase program instituted by Avis Rent A Car, Cendant's ownership of Avis
Rent A Car's common stock has been reduced to approximately 19% as of June 30,
1999. Assuming that, subject to certain conditions, Cendant converted all of the
Avis Fleet Preferred Stock that it received in the VMS Acquisition into Class B
common stock of Avis Rent A Car (the "Class B Common Stock") as of June 30,
1999, Cendant's ownership of Avis Rent A Car would have been approximately 34%.
Class B Common Stock is non-voting but is convertible into shares of Class A
common stock of Avis Rent A Car (the "Class A Common Stock") under certain
circumstances. The Class A Common Stock is voting stock. See "Description of
Avis Fleet Preferred Stock and Class B Common Stock" and "Certain Relationships
and Related Party Transactions".
New Avis has no additional obligations to Cendant as a result of the VMS
Acquisition, other than with regard to the Avis Fleet Preferred Stock, customary
indemnities and certain expenses arising from the computer-related and
transitional services to be provided to New Avis by Cendant as described under
"The VMS Acquisition". In connection with the VMS Acquisition, Avis Rent A Car's
Board of Directors, as well as a special committee of the Board of Directors
consisting of independent directors, each received fairness opinions from
nationally recognized investment banking firms.
THE TRANSACTIONS
On June 30, 1999, Avis acquired VMS from Cendant for $1.8 billion
(consisting of approximately $1.4 billion of cash and $362.0 million in Avis
Fleet Preferred Stock), plus the refinancing of approximately $3.5 billion of
debt. Avis financed the cash portion of the acquisition costs (including
repayment of the assumed debt) and refinanced the $3.5 billion of existing VMS
debt with $32.6 million of unrestricted cash as well as (i) borrowings under a
$1.35 billion senior secured credit facility consisting of three tranches of
term loans in an aggregate principal amount of $1.0 billion (the "Term Loans")
and $350.0 million of revolving credit commitments, which replaced Avis'
existing bank credit facility, (the "Revolving Credit Facility", together with
the Term Loans, the "New Credit Facility"), (ii) the issuance of $500.0 million
of old notes, and (iii) the issuance of $3.5 billion of asset-backed securities
under the $3.6 billion Interim VMS ABS Facility (as defined on page 12). The New
Credit Facility, the notes and the Interim VMS ABS Facility, together with the
Avis Fleet Preferred Stock, are collectively referred to as the "Financings".
The VMS Acquisition, the Financings and related refinancings of certain
indebtedness, including to Cendant, are collectively referred to as the
"Transactions". The existing $3.75 billion Avis ABS Facility (as defined on page
77) was unaffected by the VMS Acquisition.
In connection with the VMS Acquisition, Avis Rent A Car formed Avis Fleet to
acquire from PHH Holdings Corporation ("PHH Holdings"), an indirect subsidiary
of Cendant and a direct subsidiary of PHH Corporation ("PHH Corporation"), all
of the outstanding capital stock of the subsidiaries that comprise VMS (the "VMS
Subsidiaries"). The VMS Acquisition was effected by a merger under Texas law.
Upon consummation of the merger, (i) Avis Fleet owned, directly or indirectly,
all of the outstanding capital stock of the VMS Subsidiaries, (ii) PHH
Corporation owned $360.0 million of Series A Cumulative Participating Redeemable
Convertible Preferred Stock (the "Series A
11
Preferred") of Avis Fleet, (iii) an additional $2.0 million of Series C
Cumulative Redeemable Preferred Stock (the "Series C Preferred") of Avis Fleet
initially issued to PHH Corporation was transferred to a third party (the Series
A Preferred and the Series C Preferred are collectively referred to as the "Avis
Fleet Preferred Stock") and (iv) Avis Fleet assumed and repaid approximately
$1.4 billion of indebtedness of PHH Holdings.
The following chart illustrates part of our corporate structure after giving
effect to the Transactions:
[LOGO]
In connection with the VMS Acquisition, New Avis received a perpetual,
royalty-free license from PHH Corporation to use certain trademarks and
tradenames in connection with the VMS business, including the "PHH" name. In
addition, PHH Corporation and PHH Holdings entered into a five-year
non-competition agreement with Avis Rent A Car.
In order to refinance the $3.5 billion of existing VMS fleet debt and
achieve an efficient asset-backed financing in connection with the VMS
Acquisition, securitization or other vehicle financing subsidiaries of New Avis
issued $3.5 billion in asset-backed securities (the "Interim VMS ABS Offering")
under a facility (the "Interim VMS ABS Facility") that permits the issuance of
(i) up to $2.5 billion of variable funding asset-backed notes, supported by U.S.
leases and vehicles ("Domestic VFNs"), (ii) up to $236 million of asset-backed
preferred membership interests supported by U.S. leases and vehicles ("Preferred
Membership Interests", and together with the Domestic VFNs, the "Domestic
Asset-Backed Securities") and (iii) an advance of up to $829 million under an
asset-backed facility to PHH Europe, which advance is guaranteed by various PHH
Europe entities and is supported by substantially all of the assets of such
entities (the "U.K. Advances"). Each of the foregoing securities have been
placed with one or more multi-seller commercial paper conduits. See "Description
of Other Indebtedness".
12
The following table outlines the sources and uses of funds in connection
with the VMS Acquisition as of June 30, 1999:
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
SOURCES OF FUNDS:
Unrestricted Cash........................................................ $ 32.6
Revolving Credit Facility(1)(2).......................................... 73.0
Term Loan A.............................................................. 250.0
Term Loan B.............................................................. 375.0
Term Loan C.............................................................. 375.0
Senior Subordinated Notes................................................ 500.0
Avis Fleet Preferred Stock(3)............................................ 362.0
Interim VMS ABS Facility(4).............................................. 3,455.5
--------
Total Sources............................................................ $ 5,423.1
--------
--------
USES OF FUNDS:
VMS Acquisition consideration............................................ $ 1,800.0
Refinancing of VMS non-vehicle debt...................................... 14.9
Refinancing of VMS existing fleet debt(5)................................ 3,486.7
Fees and expenses(6)..................................................... 63.4
Escrow Deposits.......................................................... 58.1
--------
Total Uses............................................................... $ 5,423.1
--------
--------
- ------------------------
(1) The Revolving Credit Facility permits borrowings of up to an aggregate
principal amount of $350.0 million. Approximately $92.2 million was
available under the New Credit Facility on June 30, 1999 to fund our
liquidity requirements after giving effect to the Transactions. See
"Capitalization" for a description of anticipated unrestricted cash balances
as of June 30, 1999.
(2) Does not include $184.8 million in letters of credit that were outstanding
in connection with the Avis ABS Facility and support airport concession
agreements, insurance matters and foreign debt.
(3) Comprised of $360.0 million liquidation preference of Series A Preferred and
$2.0 million liquidation preference of Series C Preferred to be issued by
Avis Fleet. Until the fifth anniversary of the issue date of the Avis Fleet
Preferred Stock, dividends on the Series A Preferred may be paid in shares
of Series B Cumulative PIK Preferred of Avis Fleet which has terms
substantially similar to the terms of the Series A Preferred. Dividends on
the Series C Preferred are payable in cash. See "Description of Avis Fleet
Preferred Stock and Class B Common Stock".
(4) See "Description of Other Indebtedness-Interim VMS ABS Facility".
(5) Consists of the following: approximately (i) $283.0 million of intercompany
debt; (ii) $103.0 million of current taxes; (iii) $2,121.6 million of North
American Vehicle Related Debt; (iv) $53.3 million of Canadian Vehicle
Related Debt; and (v) $925.8 million of European Vehicle Related Debt.
(6) Consists of fees and expenses incurred in connection with the Transactions.
13
SUMMARY DESCRIPTION OF NOTES
THE FOLLOWING SUMMARY IS PROVIDED SOLELY FOR YOUR CONVENIENCE. THIS SUMMARY
IS NOT INTENDED TO BE COMPLETE AND CONTAINS ONLY BASIC INFORMATION ABOUT THE
NOTES. IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A
MORE DETAILED DESCRIPTION OF THE NOTES, YOU SHOULD REFER TO THE SECTION ENTITLED
"DESCRIPTION OF NOTES".
Issuer............................ Avis Rent A Car, Inc.
Notes offered..................... $500,000,000 aggregate principal amount of 11% Senior
Subordinated Exchange Notes due 2009 to be issued in
exchange for 11% Senior Subordinated Notes due 2009.
Maturity.......................... May 1, 2009.
Sinking fund...................... None.
Interest.......................... Annual rate: 11%. Payment frequency: every six months on
May 1 and November 1.
First payment: November 1, 1999.
Optional redemption............... On or after May 1, 2004, Avis Rent A Car may redeem some
or all of the notes at the redemption prices listed in
the section entitled "Description of Notes-Optional
redemption". Prior to May 1, 2002, Avis Rent A Car may
redeem up to 35% of the principal amount of the notes
with the proceeds of certain equity offerings at a
redemption price equal to 111.000% of the principal
amount of the notes so redeemed plus accrued and unpaid
interest to the date of redemption, but only so long as
at least 65% of the original principal amount of the
notes remains outstanding after any such redemption.
Except as set forth in the preceding sentences, Avis
Rent A Car may not redeem the notes.
Change of Control................. Upon the occurrence of a change of control, you will
have the right to require Avis Rent A Car to purchase
all or a portion of your notes at a price equal to 101%
of their principal amount together with accrued and
unpaid interest, if any, to the date of purchase. See
"Description of Notes-Change of Control".
Guarantees........................ The old notes are, and the new notes will be, guaranteed
by each of Avis Rent A Car's existing and future U.S.
restricted subsidiaries other than banking subsidiaries,
insurance company subsidiaries and securitization or
other vehicle financing subsidiaries which have not
guaranteed senior indebtedness of Avis Rent A Car. The
notes and the guarantees are unsecured senior
subordinated debts.
14
Ranking........................... The notes will be subordinated in right of payment to
all of Avis Rent A Car's existing and future senior
indebtedness. The guarantees of the notes will be
subordinated in right of payment to all existing and
future senior indebtedness of the guarantor
subsidiaries. The notes will rank equally in right of
payment with all of Avis Rent A Car's future senior
subordinated debt and senior to all of Avis Rent A Car's
future subordinated debt. The guarantees of the notes
will rank equally in right of payment with all senior
subordinated debt of the guarantor subsidiaries and will
rank senior to all subordinated debt of the guarantor
subsidiaries. See "Description of Notes--Ranking and
subordination".
As of June 30, 1999, after giving effect to the
Transactions, Avis Rent A Car:
- had $8.5 billion of debt to which the notes would be
contractually or structurally subordinated (which
amount does not include an additional $92.2 million
available under the New Credit Facility after giving
effect to $184.8 million of outstanding but undrawn
letters of credit);
- had no senior subordinated debt with which the notes
would rank equally; and
- had no subordinated debt to which the notes would be
senior.
As of June 30, 1999, after giving effect to the
Transactions, Avis Rent A Car's guarantor subsidiaries:
- had $63.2 million of senior debt to which their
respective guarantees would be subordinated (which
amount does not include their guarantees in respect
of the New Credit Facility);
- had no senior subordinated debt with which their
respective guarantees would rank equally; and
- had no subordinated debt to which their respective
guarantees would be senior.
The indenture relating to the notes (the "Indenture")
permits Avis Rent A Car and its subsidiaries to incur a
significant amount of additional senior debt. In
addition, Avis Rent A Car's securitization or other
vehicle financing subsidiaries are not guaranteeing the
notes and are permitted under the Indenture to incur an
unlimited amount of vehicle financing indebtedness to
the extent supported by requisite vehicle, lease and
fleet receivables collateral and under certain customer
programs.
15
Certain covenants................. The Indenture, among other things, restricts Avis Rent A
Car's ability and the ability of its subsidiaries to:
- borrow money (although Avis Rent A Car's ability to
do asset-backed vehicle financing will not be restricted
to the extent supported by requisite vehicle and
fleet receivables collateral);
- pay dividends on stock, redeem stock or redeem
subordinated debt;
- make certain investments;
- use assets as security in other transactions;
- incur debt that is senior to the notes but junior to
senior debt;
- sell assets;
- sell capital stock of subsidiaries;
- guarantee other indebtedness;
- enter into agreements that restrict dividends from
subsidiaries;
- merge or consolidate;
- enter into transactions with our affiliates; and
- enter into new lines of business.
For more details, see "Description of Notes--Certain
covenants".
RISK FACTORS
You should carefully consider the information set forth in the section
entitled "Risk Factors" beginning on page 23 as well as all other information in
this prospectus before investing in the notes.
------------------------
Our principal offices are located at 900 Old Country Road, Garden City, New
York 11530. Our telephone number is (516) 222-3000. Our common stock is listed
on the New York Stock Exchange under the symbol "AVI".
16
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (AVIS)
The summary historical consolidated financial data for Avis as of and for
each of the years ended December 31, 1997 and 1998 and the periods ended October
16, 1996 and December 31, 1996, have been derived from Avis' consolidated
financial statements which have been audited by Deloitte & Touche LLP included
elsewhere in this prospectus (the "Avis Audited Consolidated Financial
Statements"). The summary historical consolidated financial data for Avis as of
and for the six months ended June 30, 1998 and June 30, 1999 have been derived
from Avis' unaudited condensed consolidated financial statements included
elsewhere in this prospectus (the "Avis Unaudited Consolidated Financial
Statements" and together with the Avis Audited Consolidated Financial
Statements, the "Avis Consolidated Financial Statements") which were prepared on
the same basis as Avis' Audited Consolidated Financial Statements and include,
in the opinion of Avis' management, all adjustments necessary to present fairly
the information presented for such interim period. The interim results for the
six months ended June 30, 1999 are not necessarily indicative of results that
can be expected for the full fiscal year. This information should be read in
conjunction with the Avis Audited Consolidated Financial Statements and notes
thereto, the Unaudited Pro Forma Combined Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the other financial information included elsewhere in this prospectus.
PREDECESSOR OCTOBER 17, 1996 SIX MONTHS
COMPANIES(1) (DATE OF YEARS ENDED ENDED
JANUARY 1, 1996 TO ACQUISITION) COMBINED YEAR DECEMBER 31, JUNE 30,
OCTOBER 16, TO DECEMBER 31, ENDED DECEMBER 31, ------------------------ -----------
1996 1996 1996(2)(3) 1997 1998 1998
------------------ -------------------- -------------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
STATEMENTS OF OPERATIONS
DATA:
Revenue................ $ 1,504,673 $ 362,844 $ 1,867,517 $ 2,046,154 $ 2,297,582 $ 1,086,670
Costs and expenses:
Direct operating,
net(4)............. 650,750 167,682 818,432 863,839 939,986 440,684
Vehicle depreciation
and lease charges,
net................ 358,937 85,455 444,392 525,143 593,064 277,394
Selling, general and
administrative(5)... 283,180 68,215 351,395 415,728 438,724 213,114
Interest, net........ 138,225 38,205 176,430 184,261 201,726 96,818
Amortization of costs
in excess of net
assets acquired.... 3,782 1,026 4,808 6,860 11,854 5,521
------------------ -------------------- -------------------- ----------- ----------- -----------
Total operating
expenses......... 1,434,874 360,583 1,795,457 1,995,831 2,185,354 1,033,531
Income before provision
for income taxes..... 69,799 2,261 72,060 50,323 112,228 53,139
Provision for income
taxes.............. 31,198 1,040 32,238 22,850 48,707 23,381
------------------ -------------------- -------------------- ----------- ----------- -----------
Net income............. $ 38,601 $ 1,221 $ 39,822 $ 27,473 $ 63,521 $ 29,758
------------------ -------------------- -------------------- ----------- ----------- -----------
OTHER FINANCIAL DATA:
Vehicle depreciation
(Fleet Costs)........ $ 306,159 $ 71,343 $ 377,502 $ 466,799 $ 581,022 $ 268,944
Vehicle interest (Fleet
Costs)............... 135,577 38,087 173,664 178,213 187,773 92,628
Non-vehicle
depreciation and
amortization......... 18,538 3,238 21,776 23,022 36,750 16,646
Non-vehicle interest... 225 118 343 2,395 3,862 74
Ratio of earnings to
fixed charges(6)..... 1.4x 1.0x 1.3x 1.2x 1.4x 1.4x
1999
-----------
STATEMENTS OF OPERATIONS
DATA:
Revenue................ $ 1,204,374
Costs and expenses:
Direct operating,
net(4)............. 476,938
Vehicle depreciation
and lease charges,
net................ 311,167
Selling, general and
administrative(5)... 231,182
Interest, net........ 104,362
Amortization of costs
in excess of net
assets acquired.... 6,351
-----------
Total operating
expenses......... 1,130,000
Income before provision
for income taxes..... 74,374
Provision for income
taxes.............. 31,906
-----------
Net income............. $ 42,468
-----------
OTHER FINANCIAL DATA:
Vehicle depreciation
(Fleet Costs)........ $ 297,697
Vehicle interest (Fleet
Costs)............... 98,699
Non-vehicle
depreciation and
amortization......... 18,926
Non-vehicle interest... 1,227
Ratio of earnings to
fixed charges(6)..... 1.6x
17
PREDECESSOR OCTOBER 17, 1996 SIX MONTHS
COMPANIES(1) (DATE OF YEARS ENDED ENDED
JANUARY 1, 1996 TO ACQUISITION) COMBINED YEAR DECEMBER 31, JUNE 30,
OCTOBER 16, TO DECEMBER 31, ENDED DECEMBER 31, ------------------------ -----------
1996 1996 1996(2)(3) 1997 1998 1998
------------------ -------------------- -------------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
STATEMENTS OF FINANCIAL
POSITION DATA (END OF
PERIOD):
Accounts receivable,
net of allowance for
doubtful
accounts(7).......... $ 269,848 $ 311,179 $ 311,179 $ 359,463 $ 360,574 $ 211,861
Vehicles, net(8)....... 2,404,275 2,243,492 2,243,492 3,018,856 3,164,816 3,587,834
Total assets........... 3,186,503 3,131,232 3,131,232 4,282,657 4,505,062 4,809,697
Total debt, including
amounts due within
one year(9).......... 2,645,095 2,542,974 2,542,974 2,826,422 3,014,712 3,278,619
Total non-vehicle
debt................. 4,138 3,976 3,976 2,914 1,777 2,237
Common stockholders'
equity(10)........... 740,113 76,415 76,415 453,722 622,614 635,196
OPERATING DATA:
Car rental data:
Number of rental
locations (end of
period)............ 550 546 546 612 660 636
Number of rental
transactions during
period (in
thousands)......... 10,272 2,534 12,806 13,667 15,296 7,425
Peak number of
vehicles during
period............. 196,077 177,839 196,077 212,104 231,086 216,128
Average number of
vehicles during
period(11)......... 174,813 172,461 174,226 186,317 205,685 198,160
Average monthly
revenue per vehicle
during
period(12)......... $ 906 $ 842 $ 893 $ 915 $ 931 $ 914
Average revenue per
rental transaction
during period...... $ 146 $ 143 $ 146 $ 150 $ 150 $ 148
1999
-----------
STATEMENTS OF FINANCIAL
POSITION DATA (END OF
PERIOD):
Accounts receivable,
net of allowance for
doubtful
accounts(7).......... $ 910,311
Vehicles, net(8)....... 7,663,270
Total assets........... 11,588,627
Total debt, including
amounts due within
one year(9).......... 9,017,106
Total non-vehicle
debt................. 1,644,608
Common stockholders'
equity(10)........... 615,143
OPERATING DATA:
Car rental data:
Number of rental
locations (end of
period)............ 670
Number of rental
transactions during
period (in
thousands)......... 8,129
Peak number of
vehicles during
period............. 233,456
Average number of
vehicles during
period(11)......... 217,114
Average monthly
revenue per vehicle
during
period(12)......... $ 925
Average revenue per
rental transaction
during period...... $ 146
18
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (AVIS)
(1) On October 17, 1996, Cendant acquired the predecessors to Avis (such date,
the "Date of Acquisition"). See Note 1 to the Avis Audited Consolidated
Financial Statements.
(2) Excludes any purchase accounting adjustments for the period January 1, 1996
to October 16, 1996.
(3) Avis' results for 1996 are presented on a combined twelve month basis and
include the results of the predecessor companies of Avis ("Predecessor
Companies") for the period January 1, 1996 to October 16, 1996 and the
results of Avis Rent A Car for the period from the Date of Acquisition to
December 31, 1996. See Note 1 to the Avis Audited Consolidated Financial
Statements.
(4) Consist of expenses directly associated with Avis' rental vehicles,
including Fleet Costs, facility costs, salaries and benefits.
(5) Selling, general and administrative expenses includes a 4% royalty fee
payable to Cendant for the years ended December 31, 1997 and 1998 and
charges from Cendant for the period from the Date of Acquisition to December
31, 1996. See Note 5 to the Avis Audited Consolidated Financial Statements.
(6) Ratio of earnings to fixed charges consists of income from continuing
operations (before extraordinary items) before income taxes and fixed
charges (excluding capitalized interest), divided by fixed charges of
interest (including amounts capitalized and the interest factor in rental
expense) and amortization of deferred debt issuance costs.
(7) Includes manufacturers receivables (in thousands) of $134,315, $183,304,
$183,304, $219,391, $226,963, $53,517 and $116,975 at October 16, 1996;
December 31, 1996; December 31, 1996; December 31, 1997; December 31, 1998;
June 30, 1998 and June 30, 1999, respectively. Manufacturers receivables
arise from the sale of vehicles to manufacturers pursuant to guaranteed
Repurchase Programs and amounts due from incentives and allowances.
(8) Vehicles are presented net of accumulated vehicle depreciation.
(9) Includes vehicle financing notes-due to affiliates at October 16, 1996 and
December 31, 1996 of $1,289,500 and $247,500, respectively.
(10) Decrease in common stockholders' equity during the six months ended June
30, 1999, reflects a repurchase of Class A Common Stock by Avis.
(11) Average monthly revenue per vehicle for each period is calculated as
revenue divided by the average number of vehicles for the period divided by
the number of months in each period.
(12) Average rental revenue per rental transaction for each respective period is
calculated as revenue divided by the number of rental transactions during
the period.
19
SUMMARY HISTORICAL COMBINED FINANCIAL DATA (VMS)
The summary historical combined financial data for VMS as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 have been derived from VMS' audited combined financial statements included
elsewhere in this prospectus (the "VMS Audited Combined Financial Statements").
The summary historical combined financial data for VMS as of and for the three
months ended March 31, 1999 and for the three months ended March 31, 1998, have
been derived from VMS' unaudited condensed combined financial statements
included elsewhere in this prospectus (the "VMS Unaudited Combined Financial
Statements" and, together with the VMS Audited Combined Financial Statements,
the "VMS Combined Financial Statements") which were prepared on the same basis
as VMS' Audited Combined Financial Statements and include, in the opinion of
VMS' management, all adjustments necessary to present fairly the information
presented for such interim periods. The interim results for the three months
ended March 31, 1999 are not necessarily indicative of results that can be
expected for the full fiscal year. This information should be read in
conjunction with the VMS Combined Financial Statements and notes thereto, the
Unaudited Pro Forma Combined Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the other
financial information included elsewhere in this prospectus.
20
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------------
1996 1997 1998(1) 1998 1999
------------- ------------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Fleet leasing revenue................ $ 1,128,495 $ 1,187,193 $ 1,286,896 $ 312,126 $ 317,992
Fleet management services............ 167,512 184,047 182,356 49,689 50,694
Other................................ 61,032 81,455 135,811 29,490 31,567
------------- ------------- ------------- ----------- -------------
Total revenues....................... 1,357,039 1,452,695 1,605,063 391,305 400,253
Depreciation on vehicles............... 912,830 953,551 1,015,511 249,384 253,743
Interest expense....................... 167,687 177,149 183,560 43,183 46,457
Selling, general and administrative
expenses............................. 193,822 211,123 232,724 55,425 63,569
Depreciation and amortization on assets
other than vehicles.................. 16,585 14,943 25,680 6,341 7,332
Merger-related costs and other unusual
charges (credits)(2)................. -- 61,090 (1,280) -- --
------------- ------------- ------------- ----------- -------------
Total expenses....................... 1,290,924 1,417,856 1,456,195 354,333 371,101
------------- ------------- ------------- ----------- -------------
Income before provision for income
taxes................................ 66,115 34,839 148,868 36,972 29,152
Provision for income taxes............. 25,323 23,649 55,800 13,857 11,002
------------- ------------- ------------- ----------- -------------
Net income............................. $ 40,792 $ 11,190 $ 93,068 $ 23,115 $ 18,150
------------- ------------- ------------- ----------- -------------
------------- ------------- ------------- ----------- -------------
OTHER FINANCIAL DATA:
Vehicle depreciation (Fleet Costs)..... $ 912,830 $ 953,551 $ 1,015,511 $ 253,743
Vehicle interest (Fleet Costs)......... 165,466 173,891 179,729 45,706
Non-vehicle depreciation and
amortization......................... 16,585 14,943 25,680 7,332
Non-vehicle interest................... 2,221 3,258 3,831 751
STATEMENT OF FINANCIAL POSITION DATA
(END OF PERIOD):
Accounts and loans receivable, net of
allowance for doubtful accounts...... $ 383,830 $ 508,901 $ 506,325
Vehicles, net of accumulated
depreciation......................... 3,594,418 3,788,328 3,867,856
Total assets........................... 4,135,112 4,728,299 4,832,134
Total debt, including amounts due
within one year...................... 3,083,603 3,339,579 3,263,687
Total non-vehicle debt................. 46,123 62,489 56,070
Shareholders' equity................... 440,166 730,824 749,109
OPERATING DATA (END OF PERIOD):
Vehicle management data:
Vehicles under management(3)....... 642,000 664,000 779,000 761,000 767,000
Fuel and maintenance cards
outstanding(4)................... 2,314,000 2,726,000 3,629,000 3,688,000 4,390,000
21
NOTES TO SUMMARY HISTORICAL COMBINED FINANCIAL DATA (VMS)
(1) Includes the results of operations of the Harpur Group Limited from January
20, 1998, the date of acquisition. See Note 4 to the VMS Audited Combined
Financial Statements.
(2) For a discussion of merger-related costs and other unusual charges
(credits), see Note 3 to the VMS Audited Combined Financial Statements.
(3) Includes leased vehicles and vehicles for which third-party vehicle-related
services are provided.
(4) Includes fuel cards for third parties for which VMS acts as processor.
22
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO INVEST IN THE NOTES. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
THAT WE WILL FACE. ADDITIONAL RISKS THAT WE DO NOT KNOW ABOUT OR THAT WE VIEW AS
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS AND OUR ABILITY TO REPAY THE
NOTES.
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS
As of June 30, 1999, we had approximately $9.0 billion of indebtedness
outstanding, including approximately $7.2 billion under fleet financing
facilities (the "ABS Facilities"). In addition, we had approximately $145.5
million of additional credit availability under the ABS Facilities and
approximately $92.2 million available under the New Credit Facility (after
giving effect to $184.8 million of outstanding but undrawn letters of credit).
We had approximately $92.2 million available under the New Credit Facility on
June 30, 1999 to fund our liquidity requirements after giving effect to the
Transactions. See "Capitalization" for a description of anticipated unrestricted
cash balances as of June 30, 1999. Moreover, Avis Fleet had Avis Fleet Preferred
Stock outstanding with a $362.0 million aggregate liquidation preference. As a
result, we are highly leveraged. See "Capitalization" and "Unaudited Pro Forma
Combined Financial Data".
This high level of indebtedness could have important consequences to our
operations, including:
- we may have difficulty borrowing money in the future for working capital,
capital expenditures, acquisitions or other purposes;
- we will need to use a large portion of the money we earn to pay principal
and interest on the notes and our other debt, which will reduce the amount
of money available to finance our operations and other business
activities;
- some of our debt, including the New Credit Facility and the ABS
Facilities, has variable rates of interest, which exposes us to the risk
of increased interest rates;
- our debt under the New Credit Facility and the ABS Facilities will be
secured and will mature prior to the notes;
- we may have a much higher level of debt than certain of our competitors,
which may put us at a competitive disadvantage;
- our debt level will make us more vulnerable to economic downturns and
adverse developments in our businesses;
- our debt level will reduce our flexibility in responding to changing
business and economic conditions, including increased competition in our
industry; and
- our debt level will limit our ability to pursue other business
opportunities, borrow money for operations or capital in the future and
implement our business strategy.
In addition, under certain circumstances, we may not make payments on the
notes if certain senior indebtedness (including debt under the New Credit
Facility) is not paid when due or any other default on such senior indebtedness
exists.
We expect to obtain the money to pay our expenses and to pay principal and
interest on the notes, the New Credit Facility and other debt from our cash flow
and from additional loans under the New Credit Facility. Our ability to meet
these requirements will depend on our future financial performance, which will
be affected by financial, business, economic, competitive and other factors. We
will not be able to control many of these factors, such as economic conditions
in the markets in
23
which we operate and initiatives undertaken by competitors. We cannot be certain
that our cash flow will be sufficient to allow us to pay principal and interest
on our debt (including the notes) and meet our other obligations. If we do not
have enough money to do so, we may be required to refinance all or part of our
existing debt, including the notes, sell assets or borrow more money. We cannot
assure you that we will be able to do so on commercially reasonable terms, if at
all. In addition, the terms of our existing or future debt agreements, including
the New Credit Facility and the Indenture, may restrict us from adopting any of
these alternatives.
THE NOTES AND THE SUBSIDIARY GUARANTEES OF THE NOTES WILL BE SUBORDINATE TO ALL
SENIOR DEBT
The right to payment on the notes is subordinate to all of our existing
senior debt and will be subordinate to all of our future senior debt. Similarly,
the subsidiary guarantees of the notes are subordinate to all existing senior
debt of the applicable guarantor subsidiaries and will be subordinate to the
future senior debt of the applicable guarantor subsidiaries. As of June 30,
1999:
- we had $8.5 billion of debt outstanding (in addition to $92.2 million
available under the New Credit Facility after giving effect to $184.8
million of outstanding but undrawn letters of credit), and the notes would
have been contractually or structurally subordinate to all of this
outstanding debt; and
- the guarantor subsidiaries had $63.2 million of senior debt outstanding
(in addition to their guarantees of Avis Rent A Car's borrowings under the
New Credit Facility), and their subsidiary guarantees of the notes would
have been subordinate to all of their outstanding senior debt.
In the event of a bankruptcy or similar proceeding with respect to Avis Rent
A Car or any guarantor subsidiary of the notes, the assets of Avis Rent A Car or
such guarantor subsidiary will be available to pay obligations on the notes or
the applicable subsidiary guarantee only after all outstanding senior
indebtedness has been paid in full. There may not be sufficient assets remaining
to make payment of amounts due on any or all of the notes then outstanding or on
the subsidiary guarantees.
In addition, all payments on the notes and the subsidiary guarantees of the
notes will be blocked in the event of a payment default on, or the acceleration
of, certain senior indebtedness, including the New Credit Facility, and may be
blocked for up to 179 days out of 360 days in the event of a nonpayment default
on certain senior indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to Avis Rent A Car or our guarantor subsidiaries, holders of
the notes will participate on a PARI PASSU (equal) basis with certain trade
creditors, and all other holders of senior subordinated indebtedness of Avis
Rent A Car or our guarantor subsidiaries, as the case may be. However, because
the Indenture requires that amounts otherwise payable to holders of the notes in
a bankruptcy or similar proceeding be paid instead to holders of senior debt
until they are paid in full, holders of the notes may receive less, ratably,
than holders of such trade payables in any such proceeding. In addition, any
acceleration of the indebtedness under the New Credit Facility will, and
acceleration of our other indebtedness may, constitute an event of default under
the Indenture. If an event of default exists under the New Credit Facility or
certain other senior indebtedness, the Indenture may restrict payments on the
notes until holders of such other indebtedness are paid in full or such default
is cured or waived or has otherwise ceased to exist. In any of these cases, Avis
Rent A Car and our guarantor subsidiaries may not have sufficient funds to pay
all of our creditors and holders of the notes may receive less, ratably, than
the holders of trade payables.
24
WE MAY NOT BE ABLE TO SATISFY OUR OBLIGATIONS TO HOLDERS OF THE NOTES UPON A
CHANGE OF CONTROL
Upon the occurrence of a "change of control" (as defined in the Indenture),
each holder of the notes will have the right to require Avis Rent A Car to
purchase such holder's notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase; but,
- the New Credit Facility will effectively prevent the purchase of the notes
by Avis Rent A Car in the event of a change of control (absent the consent
of the required lenders), unless all amounts outstanding under the New
Credit Facility are repaid in full;
- failure to purchase, or give notice of purchase of, the notes would be a
default under the Indenture, which would in turn be a default under the
New Credit Facility; and
- failure to repay all amounts outstanding under the New Credit Facility
upon a default would (absent a waiver of such default by the required
lenders) be a default under the Indenture.
In addition, a change of control may constitute an event of default under
the New Credit Facility. A default under the New Credit Facility would result in
an event of default under the Indenture if the lenders were to accelerate the
debt thereunder, in which case the subordination provisions of the notes would
require payment in full of the New Credit Facility before purchase of the notes.
Any future credit agreements or other agreements to which we become a party may
contain similar restrictions and provisions.
In the event of a change of control, Avis Rent A Car may not have sufficient
assets to satisfy all obligations under the New Credit Facility and the
Indenture. The source of funds for any purchase of notes would be available cash
or cash generated from other sources. We cannot be sure that any such cash would
be available. Upon the occurrence of a change of control, we could seek to
refinance the indebtedness under the New Credit Facility and the notes or obtain
a waiver from the lenders, but it is possible that we would not be able to
obtain such a waiver or refinance such indebtedness on commercially reasonable
terms, if at all. Failure to purchase tendered notes at a time when such
purchase is required by the Indenture would constitute an event of default
which, in turn, would constitute a default under the New Credit Facility. In
such circumstances, the subordination provisions would restrict payment to you
until all senior debt has been repaid. Moreover, the provisions in the Indenture
regarding a change of control could increase the difficulty of a potential
acquiror obtaining control of us.
OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO TAKE SOME ACTIONS
The New Credit Facility and the Indenture as well as certain of our other
agreements with other lenders, include a number of significant covenants that,
among other things, will restrict our ability to:
- incur debt;
- pay dividends on stock or purchase stock;
- make certain types of investments;
- use the proceeds of the sale of certain assets or stock of certain
subsidiaries;
- engage in certain transactions with affiliates;
- engage in mergers, consolidations and certain sales of assets;
- engage in business activities unrelated to our current businesses; and
25
- permit restrictions on the ability of certain of our subsidiaries to pay
dividends and make other distributions.
Certain of these agreements also require us to maintain specified financial
ratios. A breach of any of these covenants or our inability to maintain the
required financial ratios could result in a default in respect of the related
indebtedness. In the event of a default, the relevant lenders could elect, among
other options, to declare the indebtedness, together with accrued interest and
other fees, to be immediately due and payable, and proceed against any
collateral securing that indebtedness. If, as a result of such a failure, a
default occurs with respect to senior debt, the subordination provisions in the
Indenture would likely restrict payments to the holders of the notes.
THE NOTES ARE UNSECURED
The notes are not secured by any of our assets. The ABS Facilities will be
secured by our vehicle fleet, related manufacturers' repurchase obligations,
leases and receivables arising under fleet service contracts (fleet maintenance
contracts, fuel card contracts, and any other service contracts, the fees for
which are billed together with leases) and restricted cash, and the New Credit
Facility will be secured by a pledge of the capital stock of a substantial
portion of our subsidiaries and certain other tangible and intangible assets
that do not secure the ABS Facilities. If we become insolvent or are liquidated,
or if payment under any of these facilities is accelerated, our lenders would be
entitled to exercise the remedies available to a secured lender under applicable
law and will have a claim on such assets before the holders of the notes. We
cannot be sure that the liquidation value of our assets would be sufficient to
repay in full the indebtedness under the ABS Facilities, the New Credit Facility
and our other indebtedness, including the notes.
WE WILL RELY ON ASSET-BACKED FINANCING TO PURCHASE VEHICLES
We will rely heavily on asset-backed financing to purchase vehicles. If our
access to asset-backed financing were reduced, we cannot be sure that we would
be able to obtain replacement financing on favorable terms. As a result, any
disruption in the market for asset-backed securities or in our ability to access
that market would have a material adverse effect on our financial condition and
results of operations. In addition, if defaults under leases increase or if
leases do not yield a return equivalent to the cost of the Interim VMS ABS
Facility, then receivables collections that would have been used for our working
capital requirements could instead be required to be used to pay amounts owing
in respect of the Interim VMS ABS Facility. If we are successful in our strategy
of penetrating the small fleet market, defaults are likely to increase. In
addition, we may elect to accept lower returns on leases in the future to
successfully sell additional fee services. Both events may increase the amounts
required to support the Interim VMS ABS Facility, through the contribution of
cash to the relevant financing subsidiaries. On the closing date of the Interim
VMS ABS Offering, approximately $205 million of receivables were used to support
the obligations under the Interim VMS ABS Facility, providing liquidity to make
related interest and dividend payments.
AVIS RENT A CAR IS A HOLDING COMPANY AND IT DEPENDS ON ITS SUBSIDIARIES FOR CASH
FLOW
Avis Rent A Car, the issuer of the notes, is a holding company and as such
conducts substantially all of its operations through its subsidiaries. As a
holding company, Avis Rent A Car depends on dividends or other intercompany
transfers of funds from its subsidiaries to meet its debt service and other
obligations. Although the notes are guaranteed by the guarantors, each guarantee
is subordinated to all senior debt of the relevant guarantor. Moreover, many of
Avis Rent A Car's subsidiaries are not guarantors. See "--Not all subsidiaries
are guarantors and assets of the non-guarantor subsidiaries may not be available
to make payments on the notes".
In addition, the ability of Avis Rent A Car's subsidiaries to pay dividends
and make other payments to it may be restricted by, among other things,
applicable corporate and other laws and
26
regulations and agreements of the subsidiaries. Although the Indenture will
limit the ability of such subsidiaries to enter into consensual restrictions on
their ability to pay dividends and make other payments, such limitations are
subject to a number of significant qualifications and exceptions.
NOT ALL SUBSIDIARIES ARE GUARANTORS AND ASSETS OF THE NON-GUARANTOR SUBSIDIARIES
MAY NOT BE AVAILABLE TO MAKE PAYMENTS ON THE NOTES
Our present and future foreign subsidiaries, banking subsidiaries and
insurance subsidiaries, as well as the financing subsidiaries under the ABS
Facilities or other vehicle financing structures, will not be guarantors of the
notes unless those entities guarantee our senior debt. Payments on the notes are
only required to be made by Avis Rent A Car and the subsidiary guarantors. As a
result, no payments are required to be made from assets of subsidiaries which do
not guarantee the notes unless those assets are transferred (by dividend or
otherwise) to Avis Rent A Car or a subsidiary guarantor.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness (including their trade
creditors) would generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us. As a result, the notes are effectively subordinated to the
indebtedness of the non-guarantor subsidiaries. As of June 30, 1999 such
indebtedness included $839.9 million of indebtedness of foreign subsidiaries,
$71.6 million of indebtedness of the banking subsidiary and $6.5 billion under
the domestic ABS Facilities.
Together, the non-guarantor subsidiaries accounted for 81% of total assets
at June 30, 1999. The Avis non-guarantor subsidiaries accounted for 10% of
Avis's revenue and 19% of Avis's pre-tax income for the six month period ending
June 30, 1999. The VMS non-guarantor subsidiaries accounted for 64% of VMS's
revenue and 61% of VMS's pre-tax income for the three months ended March 31,
1999.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE VMS' AND AVIS' OPERATIONS OR REALIZE
THE EXPECTED BENEFITS FROM THE VMS ACQUISITION OR FUTURE ACQUISITIONS
We cannot be sure that we will be able to successfully integrate VMS' and
Avis' operations without substantial costs, delays or other problems. In
addition, expected synergies may not materialize. Our success in integrating
VMS' and Avis' operations will depend upon our ability to:
- integrate VMS' information processing systems into Avis' systems;
- retain key personnel;
- integrate VMS' general and administrative services into Avis' own; and
- avoid diversion of management's attention from operational matters.
Prior to the VMS Acquisition, Cendant provided VMS with a number of
administrative services. We have entered into agreements with Cendant under
which Cendant has agreed to provide us with certain of these services on a
transitional basis.
Pursuant to a corporate services transition agreement, dated as of June 30,
1999, by and among Cendant and Avis Fleet Leasing and Management Corporation,
Cendant has agreed to provide us with certain administrative services relating
to the operation of the VMS entities. These services include: the provision and
administration of employee benefits; processing of corporate accounts payable,
payroll and tax filings; cash management reporting; risk management support
services for the invoicing and underwriting of insurance; fixed asset
administration; credit risk management and corporate financial systems services.
This agreement expires on December 31, 1999 with some services terminating prior
to that date, except that Cendant must continue to provide corporate financial
systems services until December 31, 2000. We cannot be certain that
27
after the corporate services transition agreement expires we will be able to
provide any of these services internally or obtain them from third-party
providers on a commercially reasonable basis. If we were unable to perform or
obtain these services on a commercially reasonable basis, it could have a
material adverse effect on our financial condition and results of operations.
Additionally, pursuant to an information technology services agreement,
dated as of June 30, 1999, by and among PHH Vehicle Management Services LLC and
Cendant, Cendant has agreed to continue allowing VMS access to Cendant's
mainframe and information technology resources. This information technology
services agreement expires in December 2001. We cannot be certain whether upon
the expiration of the information technology services agreement we would require
further access to Cendant's mainframe and information technology resources. If
we did and were unable to obtain them from Cendant on commercially reasonable
terms, it could have a material adverse effect on our financial condition and
results of operations.
Moreover, the consolidation and integration of VMS' and Avis' operations may
take longer, and be more disruptive to our business, than originally
anticipated. We may also encounter similar problems with future acquisitions.
ARACS IS A FRANCHISEE AND AVIS DEPENDS ON THE AVIS SYSTEM
As an Avis System franchisee, ARACS is required to pay royalties to the
Franchisor for use of the Avis trademarks and the Avis System. These royalties
are based upon ARACS' revenue, not its profits, which could result in increasing
royalty payments even during a period of declining profits. These royalties
resulted in a charge to Avis for the fiscal year ended December 31, 1998 of
$91.9 million and for the six months ended June 30, 1999 of $48.2 million.
The Franchisor has the right to terminate ARACS' franchise for certain
violations of the Master License Agreement, including, among others, if ARACS or
Avis Rent A Car purports to transfer any rights or obligations thereunder or in
the case of Avis Rent A Car, more than 10% of the equity interests in ARACS,
without compliance with its terms, or if ARACS fails, refuses or neglects to
promptly pay certain monies owing to the Franchisor or Cendant. The Franchisor
could also terminate the Master License Agreement upon the occurrence of various
bankruptcy or insolvency events. Any such termination would have a material
adverse effect on our business. Additionally, termination of the Master License
Agreement would result in a termination of the computer services agreement as
discussed below.
WE DEPEND ON COMPUTER SYSTEMS OWNED BY CENDANT
We are dependent on a number of computer systems owned and/or operated by
Cendant. For example, we utilize the Wizard System, a computer system which is
owned and operated by Cendant, pursuant to a 50-year computer services
agreement. We use the Wizard System for global reservation processing, rental
agreement generation and administration and fleet control and accounting. Our
data is also processed by the Wizard System to enable us to plan fleet
acquisitions, improve profits, monitor our competitors' rates and analyze our
business mix.
Cendant has the right to terminate this computer services agreement for
certain violations, including, among others, if we fail, refuse or neglect to
promptly pay monies owing to Cendant on two or more occasions within a six-month
period as well as for a change of control and various bankruptcy or insolvency
events. In addition, termination of the Master License Agreement would also
result in a termination of this computer services agreement. A loss of the
services provided by the Wizard System would have a material adverse effect on
our financial condition and results of operations.
28
Similarly, VMS' SPIN data warehouse and European data warehouse are
partially resident on a mainframe computer owned and operated by Cendant. As is
discussed above, VMS has entered into an information technology services
agreement with Cendant, whereby Cendant has agreed to continue allowing VMS
access to Cendant's mainframe and information technology resources. However,
this agreement expires in December 2001. We cannot be certain that upon the
expiration of this information technology services agreement whether we would
require further access to Cendant's mainframe and information technology
resources. If we did and were unable to obtain them from Cendant on commercially
reasonable terms, it could have a material adverse effect on our financial
condition and results of operations.
If we were prevented from having access to our data for any reason,
including a failure of the computer system or an inability to find a supplier of
these services, it could have a material adverse effect on our financial
condition and results of operations.
AN INCREASE IN INTEREST RATES COULD REDUCE OUR PROFITABILITY
A substantial portion of our debt, including our debt under the New Credit
Facility and the ABS Facilities to the extent costs cannot be passed through, is
interest rate sensitive. As a result, an increase in interest rates, whether
because of an increase in market interest rates or an increase in our own cost
of borrowing, may materially reduce our profitability. In addition, in the event
of an increase in prevailing interest rates, lessees with floating rate leases
may have greater difficulty in meeting their increased payment obligations,
which could result in an increase in default rates. Moreover, lessees generally
have the option to convert their floating rate leases to fixed rate leases which
could, if not properly hedged, expose us to additional risks resulting from
interest rate fluctuations.
CHANGES IN REPURCHASE PROGRAMS MAY AFFECT OUR BUSINESS
At June 30, 1999, substantially all of the vehicles in Avis' then existing
rental fleet were covered by vehicle manufacturers' repurchase programs
("Repurchase Programs"). The entities acquired pursuant to the VMS Acquisition
do not participate in Repurchase Programs. Under a Repurchase Program, we agree
to purchase a specified minimum number of vehicles directly from franchised
dealers of the manufacturer at a specified price, and the manufacturer agrees to
buy those vehicles back from us at a future date at a price that is based upon
the capitalized cost of the vehicles less an agreed-upon depreciation factor
and, in certain cases, an adjustment for damage and /or excess mileage. The
Repurchase Programs limit our risk of a decline in the residual value of our
fleet and enables us to fix depreciation expense in advance. We expect vehicle
depreciation to continue to be the largest cost factor in our car rental
operations. If automobile manufacturers reduced the availability of Repurchase
Programs or related incentives, it could have a material adverse effect on our
financial condition and results of operations.
In addition, we could be placed at a competitive disadvantage if U.S.
automobile manufacturers selectively restricted eligibility to participate in
their Repurchase Programs. For example, any effort by GM to reduce the scope of
our GM Repurchase Program could adversely affect our ability to compete with
those competitors whose access to similar programs is not reduced or that have
well established alternative vehicle disposition facilities.
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Furthermore, we currently obtain a substantial portion of our financing in
reliance on Repurchase Programs. A significant change in the financial condition
of the vehicle manufacturers, particularly General Motors Corporation ("GM" or
"General Motors") or Daimler Chrysler Corporation ("Chrysler"), would
significantly affect our ability to continue to obtain this financing on
favorable terms. In addition, under the terms of certain of our credit
facilities, including the Avis ABS Facility, various events over which we will
have no control, including:
- the bankruptcy of a repurchase party, and
- a material default of a repurchase party under a Repurchase Program
may result in:
- termination of our credit lines for the purchase of vehicles under a
Repurchase Program from such repurchase party, and
- a requirement to liquidate vehicles purchased from that repurchase
party.
WE BEAR THE RESIDUAL RISK ON THE VALUE OF A PORTION OF OUR LEASED VEHICLES
We lease vehicles on both closed-end and open-end bases. We generally bear
the residual value risk on the value of vehicles leased under closed-end leases.
Therefore, if the market for used vehicles declines, we may suffer losses in
remarketing vehicles upon the expiration of closed-end leases. While PHH North
America generally uses open-end leases, PHH Europe has traditionally relied on
closed end leases. In 1998, as a result of a decline in the used vehicle market,
VMS incurred a $4.4 million charge relating to remarketing losses. At June 30,
1999, approximately 15% of VMS' total lease portfolio consisted of closed-end
leases. In addition, if we are successful in our strategy of penetrating the
smaller-fleet leasing market, this percentage may increase.
WE ARE EXPOSED TO FOREIGN CURRENCY RISKS
For the twelve months ended December 31, 1998, pro forma for the VMS
Acquisition, a significant portion of our revenue and operating costs were
denominated in foreign currencies. We are therefore exposed to fluctuations in
the exchange rates between the U.S. dollar and the currencies in which our
foreign operations receive revenues and pay expenses, particularly, the British
pound sterling. Our consolidated financial results will be denominated in U.S.
dollars and therefore require translation adjustments for purposes of reporting
results from foreign operations. Such adjustments, which may arise, for example,
due to an appreciation of the U.S. dollar relative to the pound sterling, may be
significant. In addition, we expect to borrow amounts denominated in foreign
currencies. Although we intend to hedge our exposure under such borrowings to
exchange rate fluctuations, we cannot be sure that such hedges will be
successful or that the costs of such hedges will not be significant.
WE FACE RISKS IN INTERNATIONAL OPERATIONS
The international nature of our existing and planned operations, especially
our extensive presence in the United Kingdom, involves a number of risks,
including changes in U.S. and foreign government regulations, tariffs, taxes,
fuel duties, other trade barriers, the potential for nationalization of
enterprises, economic downturns, inflation, environmental regulations, political
and social instability, foreign exchange risk, difficulties in receivables
collections, and dependence on foreign personnel and foreign unions. Foreign
government regulations may also restrict our ability to own or operate
subsidiaries in those countries, acquire new businesses or repatriate dividends
from foreign subsidiaries back to the United States. We cannot be certain that
we will be able to enter and successfully compete in additional foreign markets
or that we will be able to continue to compete in the foreign markets in which
we currently operate.
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RISING CAR PRICES AND CHANGES IN INDUSTRY POLICIES MAY AFFECT OUR BUSINESS
In recent years the average price of new cars has increased. From time to
time, automobile manufacturers sponsor sales incentive programs that tend to
lower the average cost of vehicles for fleet purchasers like us. We anticipate
that new vehicle prices will continue to increase, and we cannot be sure that
sales incentive programs will remain available, that we will be able to
effectively control the average cost of our rental fleet by purchasing a mix of
less expensive vehicles or that, because of competitive pressures, we will be
able to pass on the increased cost of vehicles to rental customers.
In the United States VMS receives fees from its dealers, who, in turn,
receive fees from vehicle manufacturers for vehicles purchased directly from the
manufacturers. These fees totalled approximately $38.4 million in 1998. We
cannot be sure that manufacturers will continue to offer these fees at
historical levels.
In addition, if car prices were to decline, we expect that leasing revenues
would decline as well.
AVIS DEPENDS ON GM FOR ITS SUPPLY OF VEHICLES
Whereas VMS has historically purchased vehicles from a broad range of
manufacturers, Avis has historically purchased a substantial majority of its
vehicles from GM. In fact, from January 25, 1989 until October 16, 1996, GM was
a minority shareholder of Avis. The number of vehicles purchased by Avis has
varied from year to year. In model year 1998, approximately 80% of Avis' vehicle
fleet purchases in the United States consisted of GM vehicles. In model year
1999, approximately 87% of Avis' vehicle fleet purchases in the United States
are expected to consist of GM vehicles. During the term of Avis' current
agreement with GM, which expires in 2002, at least 51% of Avis' domestic fleet
must consist of GM vehicles acquired from local GM dealers. Shifting significant
portions of fleet purchases to other manufacturers would require significant
lead time. As a result, GM's inability to supply us with the planned number and
type of vehicles could have a material adverse effect on our financial condition
and results of operations. In addition, if GM is not able to offer competitive
terms and conditions and we are unable to purchase enough vehicles from other
manufacturers on competitive terms and conditions, then we may be forced to
purchase vehicles at higher prices or on otherwise less favorable terms. Such a
situation could adversely affect our financial condition and results of
operations through increased vehicle acquisition and depreciation costs if we
are unable to pass these costs on to our customers through increases in rental
rates.
FLUCTUATIONS IN FUEL COSTS OR REDUCED SUPPLIES COULD HARM OUR BUSINESS
We could be adversely affected by limitations on fuel supplies, the
imposition of mandatory allocations or rationing of fuel or significant
increases in fuel prices. A severe and protracted disruption of fuel supplies or
significant increases in fuel prices could have a material adverse effect on our
financial condition and results of operations. On the other hand, decreases in
fuel costs, including decreases in applicable taxes, could reduce fuel card
revenues, since fuel card fees are generally based on the gross amount of
purchases.
A DECREASE IN AIR TRAVEL COULD HARM OUR BUSINESS
For the twelve months ended December 31, 1998, approximately 85% of Avis'
revenue from U.S. rental operations was generated at airport rental locations. A
sustained decrease in airline passenger traffic in the United States or the loss
of a significant airport concession could have a material adverse effect on our
financial condition and results of operations. Events that could reduce airline
passenger traffic include, in addition to a general economic downturn (as
discussed
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below), labor unrest, airline bankruptcies and consolidations, substantially
higher air fares, the outbreak of war, high-profile crimes against tourists and
incidents of terrorism. In addition, our leases at several major airports are
renewed on a month-to-month basis.
OUR BUSINESS COULD BE HURT BY AN ECONOMIC DOWNTURN
Our business is affected by a number of economic factors, including the
level of economic activity in the markets in which we operate. A decline in
economic activity either in the United States or in international markets could
materially affect our financial condition and results of operations. In the
vehicle rental business, a decline in economic activity typically results in a
decline in both business and leisure travel, and, accordingly, a decline in the
volume of vehicle rental transactions. In the case of a decline in vehicle
rental activity, we may reduce rental rates to meet competitive pressures, which
could adversely affect our financial condition and results of operations. With
regard to vehicle leasing and other vehicle management services, economic
downturns may result in a decrease in sales volume and fee revenues, as well as
reduced margins.
A decline in economic activity may also adversely affect residual values
realized on the disposition of vehicles that are not covered by Repurchase
Programs. At June 30, 1999, we were subject to residual risk with respect to 15%
of the VMS vehicles. In addition, an economic decline is likely to result in an
increase in default rates, particularly if we are successful in penetrating the
smaller fleet leasing market. Any of the above factors could contribute to a
downgrading of our credit ratings. Any such downgrading could increase our
funding costs and decrease the spread between our cost of borrowing and our
lending rates. We cannot be sure that a decline in economic activity would not
have a material adverse effect on our financial condition and results of
operations.
OUR VEHICLE RENTAL BUSINESS IS HIGHLY SEASONAL
Avis' third quarter, which covers the peak summer travel months, has
historically been its strongest, accounting in 1998 for approximately 28% and
47% of its rental revenue and pre-tax income from rental operations,
respectively. Any occurrence that disrupts travel patterns during the summer
period could have a material adverse effect on our annual operating results.
Avis' fourth quarter has generally been its weakest with respect to pre-tax
income because of reduced leisure travel and the greater potential for adverse
weather conditions. Many operating expenses, such as rent, insurance and
personnel, are fixed and cannot be reduced during periods of decreased rental
demand. As a result, we cannot be sure that we will have sufficient liquidity
under all conditions.
OUR BUSINESS IS HIGHLY COMPETITIVE
The vehicle rental industry is highly competitive, particularly with respect
to price and service. In addition, recent changes in ownership of a number of
the major domestic vehicle rental companies could further intensify competition.
In any given location, franchisees may encounter competition from national,
regional and local companies, many of which, particularly those owned by the
major automobile manufacturers, have greater financial resources than we do.
Principal competitors for commercial accounts, unaffiliated business and leisure
travelers in the United States are Hertz Corporation ("Hertz"), National Car
Rental System, Inc. ("National"), Budget Rent A Car Corporation ("Budget") and,
particularly, with regard to leisure travelers, Alamo Rent-A-Car Inc. ("Alamo").
Similarly, the vehicle leasing and vehicle management services industries in
which VMS operates are also highly competitive. There are four other major
providers of fleet management services in the United States, hundreds of local
and regional competitors and numerous niche competitors who focus on only one or
two products. We cannot be sure that we will be able to compete successfully
with either existing or new competitors.
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From time to time, either because of overcapacity or reduced demand, the
major vehicle rental companies have been subject to industry-wide price
pressures, and Avis has, on such occasions, adjusted its rental rates in
response to such pressures. A recurrence of oversupply or a marked reduction in
overall demand could adversely affect our ability to maintain or increase our
rental rates.
TECHNOLOGICAL ADVANCES COULD REDUCE OUR COMPETITIVE ADVANTAGE IN INFORMATION
TECHNOLOGY
We believe that customers, especially in the United States, are demanding
broader and faster access to information in the manner that we will provide
through our SPIN system and other technology platforms. Technological advances
could enable our competitors to develop the ability to deliver information in a
similar manner more quickly than we currently anticipate. If our competitors
developed this ability, it would reduce our competitive advantage in information
technology.
GOVERNMENT ACTION MAY AFFECT SOURCES OF OUR REVENUES
Governmental action could affect several sources of our revenues. For
example, a significant source of profits for the vehicle rental industry has
been the sale of loss damage waivers, by which rental companies agree to relieve
a customer from financial responsibility arising from vehicle damage sustained
during the rental period. Approximately 3.3% of Avis' total revenue during 1998
was generated by the sale of loss damage waivers. The U.S. Congress has from
time to time considered legislation that would regulate the conditions under
which loss damage waivers may be sold by vehicle rental companies. At present,
no legislation is pending. In addition, approximately 40 states have considered
legislation affecting loss damage waivers. To date, 24 states have enacted
legislation regulating the sale of loss damage waivers, most of which requires
disclosure to each customer at the time of rental that damage to the rented
vehicle may be covered by the customer's personal automobile insurance and that
loss damage waivers may not be necessary. In addition, in 1988 New York enacted
legislation which eliminated Avis' right to offer loss damage waivers for sale
and limited potential customer liability to $100. California and Nevada have
capped rates that may be charged for loss damage waivers at $9.00 and $10.00 per
day, respectively. Texas requires that the rate charged for loss damage waivers
be reasonably related to the direct cost of the repairs. In Illinois, Avis is
currently permitted to sell loss damage waivers at fixed rates. If, however, the
customer elects not to purchase the loss damage waiver, the customer's liability
is limited to $9,000 unless the customer violates the prohibited use terms of
the rental agreement, in which case the customer is liable for the fair market
value of the vehicle or the cost of the repairs, whichever is less. Adoption of
national or additional state legislation affecting or limiting the sale of loss
damage waivers could result in the loss of this revenue source and additional
limitations on potential customers' liability could increase our costs. In
addition, any decrease in fuel taxes could reduce fuel card revenues.
In addition several state legislatures and insurance regulators have
recently begun to require vehicle rental companies or their personnel to obtain
limited licenses in order to sell optional insurance products at the rental
counter. In New York, legislation requires a single corporate license for the
vehicle rental company in order to permit the sale of additional liability
insurance, personal accident insurance and personal effects protection. In Ohio,
regulations now require that one person be licensed at each rental station in
order to sell these insurance products. In 1998, the Texas Insurance
Commissioner reversed earlier policy and imposed a limited licensing plan upon
the entire vehicle rental industry. Further, each company was required to refund
to customers proportions of sales revenues in compensation for operating without
a limited license. Avis' share of this refund program was approximately $2
million. However, we do not believe that fines have been
33
proposed by other state regulators or that any licensing requirements would have
a material adverse effect on us.
WE MAY HAVE CLEAN-UP COSTS RELATING TO PETROLEUM STORAGE
Approximately 245 of Avis' domestic and international facilities contain
tanks for the storage of petroleum products, such as gasoline, diesel fuel and
waste oils. At approximately 208 of Avis' locations, one or more of these tanks
are located underground. We cannot be sure that these tank systems will at all
times remain free from leaks or that the use of these tanks will not result in
spills. In addition, historical operations at certain of Avis' properties,
including activities relating to automobile and bus maintenance, may have
resulted in leaks or spills into soil or groundwater. Any such leak or spill,
depending on such factors as the material involved, quantity and environmental
setting, could result in interruptions to our operations and expenditures that
could have a material adverse effect on our financial condition and results of
operations. At certain facilities, we are presently remediating soil and
groundwater contamination. Based on currently available information, we estimate
that future expenditures for remediation of known contamination will be
approximately $5.54 million (which has been fully reserved). Such amount does
not take into account possible recoveries under any insurance that may be
available or reimbursement that may be available from certain state
reimbursement programs applicable to leaking underground storage tanks. In the
United States, Canada and Puerto Rico, we carry environmental impairment
liability coverage with annual limits of $4.0 million per incident and $4.0
million in the aggregate per site and a deductible generally of $250,000 against
liability to third parties and clean-up costs, but this insurance does not cover
internal business interruptions. In addition, we cannot be sure that our
liabilities will not exceed our insurance coverage.
WE MAY BE SUED AS A RESULT OF ACCIDENTS INVOLVING OUR CARS
Our business exposes us to claims for personal injury, death and property
damage resulting from the use of the vehicles rented or leased by us. Avis
currently either self-insures or maintains coverage from a wholly-owned
insurance subsidiary for such risk up to $1.0 million per occurrence and
maintains insurance with unaffiliated carriers in excess of such level up to
$200.0 million per occurrence. VMS also currently maintains liability insurance
with unaffiliated insurance carriers to a limit of $26 million per occurrence.
We intend to keep these insurance programs in place. We cannot, however, be sure
that we will not be exposed to uninsured liability at levels above historical
levels resulting from multiple payouts or otherwise, that liabilities in respect
of existing or future claims will not exceed the level of our insurance, that we
will have sufficient capital available to pay any uninsured claims or that
insurance with unaffiliated carriers will continue to be available to us on
economically reasonable terms. In addition, we cannot be certain that we will be
able to obtain the insurance for VMS on economically reasonable terms.
YEAR 2000 RISK
As has been widely reported, many computer systems process dates based on
two digits for the year of a transaction and may be unable to process dates in
the Year 2000 and beyond. There are many risks associated with the Year 2000
compliance issue, including but not limited to the possible failure of our
systems and hardware with embedded applications. Any such failure could result
in:
- the malfunctioning of the Wizard System, PHH Interactive or the SPIN data
warehouse and other technology platforms;
- an inability to track our vehicles and provide the fleet maintenance
services that account for a majority of the revenue of VMS;
34
- the malfunctioning of our other service processes;
- an inability to properly bill and collect payments from our customers;
and/or
- errors or omissions in accounting and financial data, any of which could
have a material adverse effect on our results of operations and financial
condition.
In addition, we cannot be sure that the systems of other companies,
including our vendors, utilities and customers, will be compliant in a timely
manner, or that a failure to be compliant by another company, or a conversion
that is incompatible with our systems, would not have a material adverse effect
on our financial condition and results of operations.
Avis has conducted a review of its computer systems including those owned by
Cendant to identify the systems that could be affected by the Year 2000 problem
and believes its mission critical systems will be Year 2000 compliant in the
summer of 1999. VMS has conducted a review of its computer systems including
those owned by Cendant to identify the systems that could be affected by the
Year 2000 problem and believes its mission critical systems are Year 2000 ready.
We are developing contingency plans with respect to certain key technology
used in our mission critical systems. The contingency planning process is
ongoing and will require modification as we obtain further information regarding
the results of testing our systems for Year 2000 compliance and the results of
tests performed on our vendors' systems. We cannot be sure that any contingency
plan will effectively mitigate problems caused by the failure of computer
systems to be Year 2000 compliant.
Our inability to remedy any mission critical systems or the failure of third
parties to do so may cause business interruptions or shutdowns, financial loss,
regulatory actions, reputational harm or legal liability. We cannot be sure that
our Year 2000 program will be effective or that our estimates about the timing
and cost of completing our program will be proven accurate.
WE MAY HAVE DIFFICULTY MANAGING FUTURE GROWTH
We expect to continue to experience rapid growth and development as a result
of the implementation of our operating strategy and industry changes. We cannot
be sure that such growth will continue to occur or that our operating strategy
will be successful. If we experience rapid growth, such growth would require the
hiring, retention and training of new personnel, the development and
introduction of new products, the expansion of our management information
systems, the control of expenses related to the expansion of our information
network and customer base, and the management of additional demands on our
customer support, sales and marketing, administrative resources and network
infrastructure. If we are unable to satisfy these requirements, or if we are
otherwise unable to manage growth effectively, our operations and financial
condition could be materially adversely affected.
WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL
Our success will depend in large part upon the ability and experience of
certain key management employees, particularly Robert Salerno, Kevin Sheehan and
Mark Miller. In addition, our performance will be highly dependent on our
ability to identify, hire, train, motivate and retain highly qualified
management, technical, sales and marketing personnel. Our need for new personnel
will be heightened as a result of the VMS Acquisition and other attempts to
expand operations. Competition for such personnel is intense, and we cannot be
certain that we will be able to attract, assimilate or retain highly qualified
technical, sales, marketing and managerial personnel. The inability to attract
and retain the necessary management, technical and sales and marketing
personnel, including without limitation, senior management personnel, could have
a material adverse effect on our business, results of operations and financial
condition.
35
YOU MAY FIND IT DIFFICULT TO SELL YOUR NOTES
There is no established trading market for the new notes or the old notes.
Although Chase Securities Inc. and Lehman Brothers Inc., the initial purchasers
of the old notes, have informed us that they currently intend to make a market
in the new notes, they have no obligation to do so and may discontinue making a
market at any time without notice.
We do not intend to apply for listing of the new notes on any national
securities exchange or for quotation through The Nasdaq National Market.
The liquidity of any market for the new notes will depend upon many factors,
including:
- our operating performance and financial condition;
- our ability to complete the offer to exchange the old notes for the new
notes;
- the interest of securities dealers in making a market; and
- the market for similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused volatility in prices. It is possible that the
market for the notes will be subject to disruptions. Any such disruptions may
have a negative effect on you (as a holder of the notes) regardless of our
prospects and financial performance. In addition, to the extent old notes are
tendered and accepted in the exchange offer, the trading market, if any, for the
old notes would be adversely affected.
HOLDERS WHO FAIL TO EXCHANGE THEIR OLD NOTES WILL CONTINUE TO BE SUBJECT TO
RESTRICTIONS ON TRANSFERS
If you do not exchange your old notes for new notes in the exchange offer,
you will continue to be subject to the restrictions on transfer of your old
notes described in the legend on the certificates for your old notes. The
restrictions on transfer of your old notes arise because we issued the old notes
under exemption from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old notes if they are registered under
the Securities Act and applicable state securities laws, or offered and sold
under an exemption from these requirements. We do not plan to register the old
notes under the Securities Act. For further information regarding the
consequences of tendering your old notes in the exchange offer, see the
discussions below under the captions "The Exchange Offer--Consequences of
exchanging or failing to exchange old notes" and "Certain United States Federal
Income Tax Consequences."
SOME HOLDERS WHO EXCHANGE THEIR OLD NOTES MAY BE DEEMED TO BE UNDERWRITERS
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
CONFLICTS OF INTEREST WITH CENDANT MAY ARISE
Cendant's ownership of approximately 19% (which may increase to up to
approximately 34% upon the conversion of the preferred stock of Avis Fleet
received by Cendant in connection with the VMS Acquisition (based on Cendant's
ownership as of the date hereof)) of our common stock, as well as the service of
certain persons as directors of both Avis Rent A Car and Cendant, could
36
create conflicts of interest when those directors and officers are faced with
decisions that could have different implications for Cendant and us, including:
- potential acquisitions of businesses;
- the issuance of additional securities;
- the election of new or additional directors; and
- the payment of dividends and other matters.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise among us, Cendant and Cendant's affiliates.
Avis is party to various agreements with Cendant and its affiliates that were
entered into when Cendant beneficially owned all of Avis Rent A Car's
outstanding common stock. In addition, we will be relying on Cendant to provide
transitional services with regard to VMS and to continue to provide access to
its mainframe computers on which the SPIN data warehouse and other data is
stored. See "--We depend on computer systems owned by Cendant" and "Certain
Relationships and Related Party Transactions".
On April 15, 1998, Cendant publicly announced that it discovered accounting
irregularities in the former business units of CUC International, Inc. As a
result, Cendant restated its previously reported financial results for 1997,
1996 and 1995 and is currently party to more than 70 lawsuits regarding the
same. We are currently not a party to such litigation, and we do not currently
believe that there is any basis for asserting a claim thereunder against us. In
addition, Avis was spun off from Cendant before CUC International, Inc. merged
into Cendant. However, we cannot be certain that claims will not be asserted
against us in the future or that we will not have any liability in respect of
such litigation. In the event that we were subject to any such liability, we
cannot be certain that we would be able to recover any amounts in respect of
such liability from Cendant. See "The VMS Acquisition" and Note 15 to the VMS
Audited Combined Financial Statements.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
THE GUARANTEES OF THE NOTES
The issuance of the guarantees of the notes may be subject to review under
U.S. federal bankruptcy law and comparable provisions of state fraudulent
conveyance laws if a bankruptcy or reorganization case or lawsuit is commenced
by or on behalf of a guarantor subsidiary's unpaid creditors. Under these laws,
if a court were to find in such a bankruptcy or reorganization case or lawsuit
that, at the time such guarantor subsidiary issued the guarantee of the notes:
- it issued the guarantee to delay, hinder or defraud present or future
creditors; or
- it received less than reasonably equivalent value or fair consideration
for issuing the guarantee; and
at the time it issued the guarantee:
- it was insolvent or rendered insolvent by reason of issuing the
guarantee (and the application of the proceeds thereof); or
- it was engaged, or about to engage, in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small
capital to carry on its business; or
- it intended to incur, or believed that it would incur, debts beyond its
ability to pay as they mature; or
- it was a defendant in an action for money damages, or had a judgment for
money damages docketed against it (if, in either case, after final
judgment, the judgment is unsatisfied).
37
then the court could void the obligations under the guarantees of the notes or
subordinate the guarantees of the Notes to such guarantor subsidiary's other
debt or take other action detrimental to holder of the guarantees of the notes.
The measures of insolvency for purposes of fraudulent transfer laws vary
depending upon the law of the jurisdiction that is being applied in any
proceeding to determine whether a fraudulent transfer has occurred. Generally,
however, a person would be considered insolvent if, at the time it incurred the
debt:
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
We cannot be sure as to the standard that a court would use to determine
whether or not the guarantor subsidiary was solvent at the relevant time, or,
regardless of the standard that the court uses, that the issuance of the
guarantee of the notes would not be voided or the guarantee of the notes would
not be subordinated to such guarantor subsidiary's other debt.
If such a case were to occur any guarantee of the notes incurred by one of
the guarantor subsidiaries could also be subject to the claim that, since the
guarantee was incurred for Avis Rent A Car's benefit, and only indirectly for
the benefit of the guarantor subsidiary, the obligations of the applicable
guarantor were incurred for less than fair consideration.
A court could thus void the obligations under the guarantee or subordinate
the guarantee to the applicable guarantor's other debt or take other action
detrimental to holders of the notes.
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THE VMS ACQUISITION
On June 30, 1999, pursuant to an Agreement and Plan of Merger and
Reorganization, dated as of May 22, 1999 (the "Merger Agreement"), by and among
PHH Corporation, a Maryland corporation and wholly-owned subsidiary of Cendant
Corporation, PHH Holdings, a Texas corporation and wholly-owned subsidiary of
PHH Corporation, Avis Rent A Car, and Avis Fleet, a Texas corporation and
wholly-owned subsidiary of Avis Rent A Car, Avis Fleet and PHH Holdings merged,
and Avis Fleet acquired VMS, which is comprised of PHH North America, PHH Europe
and WEX. Under Texas law, which governs the Merger Agreement, both PHH Holdings
and Avis Fleet continued to exist as separate entities following the VMS
Acquisition.
As consideration for the VMS Acquisition, PHH Corporation received $360.0
million aggregate liquidation preference of Series A Preferred of Avis Fleet and
$2.0 million aggregate liquidation preference of Series C Preferred of Avis
Fleet. PHH Corporation transferred the Series C Preferred to a third party. In
addition, Avis Fleet assumed liabilities of PHH Holdings to PHH Corporation (the
"PHH Holdings Indebtedness") in an amount equal to $1,438.0 million. In
addition, indebtedness (the "Net Intercompany Indebtedness") in an amount equal
to $386 million (including $103.0 million of current taxes) owing to PHH
Corporation or other Cendant entities by the subsidiaries of PHH Holdings
acquired pursuant to the VMS Acquisition became due upon consummation of the VMS
Acquisition. At the closing of the VMS Acquisition, New Avis (1) paid the Net
Intercompany Indebtedness in an estimated amount of $386 million (including
$103.0 million of current taxes), and (2) placed an amount equal to the PHH
Holdings Indebtedness into escrow (the "Escrow Funds"). All but $15.5 million of
the Escrow Funds were transferred to Cendant on July 1, 1999, with the remaining
$15.5 million transferred on July 13, 1999 upon transfer of the stock of WEX
Financial to us once the requisite FDIC approval was obtained. The total
consideration for the VMS Acquisition was approximately $1.8 billion, plus the
refinancing of approximately $3.5 billion of existing VMS indebtedness.
In connection with the VMS Acquisition, New Avis also received a perpetual,
royalty-free license to use a number of VMS trademarks, including the "PHH" name
and logo, and PHH Corporation and PHH Holdings entered into a 5-year
non-competition agreement with Avis Fleet. New Avis also received a limited
license to use the Cendant name in Europe for a period of up to one year. In
addition, the parties entered into agreements under which Cendant will provide
New Avis with computer services and with transitional services with respect to
various administrative services, including payroll and benefits, which had
previously been provided to VMS by Cendant. In addition, we have agreed to
provide Cendant with certain transitional administrative services which had
previously been provided by VMS. See "Certain Relationships and Related Party
Transactions" for a description of these agreements.
Under the Merger Agreement, PHH Corporation and PHH Holdings and Avis Rent A
Car and Avis Fleet have agreed to indemnify each other from and against certain
liabilities and expenses outlined in the Merger Agreement which are incurred by
an indemnified party as a result of, among other things, any breach of a
representation, warranty or covenant made by an indemnifying party. Such
indemnification obligations will survive for a period of one year following the
closing of the VMS Acquisition other than (A) with respect to either PHH
Corporation or PHH Holdings, any representation or warranty made relating to
their authorization to consummate the VMS Acquisition, the subsidiaries being
transferred, ownership of the capital stock being sold, taxes and employee
benefit matters and, (B) with respect to either Avis Rent A Car or Avis Fleet,
any representation or warranty made relating to their authorization to
consummate the VMS Acquisition or to its capitalization, which shall each
survive any applicable statute of limitations. The Merger Agreement provides
that the indemnifying parties are not obligated to indemnify the indemnified
parties until the aggregate damages suffered by such indemnified parties exceed
$30.0 million. Such indemnifying parties will thereafter be required to pay all
damages in excess of $18.0 million. Any
39
single claim which is equal to or less than $250,000 will not count against the
$30.0 million and $18.0 million thresholds. The indemnification obligations of
the respective indemnifying parties is limited to $500.0 million in the
aggregate. PHH Corporation and PHH Holdings are also obligated to indemnify Avis
Rent A Car and Avis Fleet and Avis Rent A Car and Avis Fleet are obligated to
indemnify PHH Corporation and PHH Holdings, without regard to the above
limitations, from any liabilities suffered for pre-closing taxes and
post-closing taxes. The indemnification obligations of PHH Corporation and PHH
Holdings and of Avis Rent a Car and Avis Fleet under the Merger Agreement are
all subject to, and limited by, any insurance proceeds received, and any tax
benefits actually realized, by the indemnified parties. PHH Corporation and PHH
Holdings are also obligated to continue the defense of and indemnify Avis Rent A
Car and Avis Fleet from and against all liabilities suffered by them in excess
of $500,000 in connection with the current litigation filed against The Harpur
Group Limited ("Harpur") by Richbell Information Services Inc., The Richbell
Group Limited and David Elias claiming damages in the amount of $240 million for
allegedly conspiring to defraud Mr. Elias of his interest in H-G Holdings, Inc.,
the former parent company of Harpur.
In connection with the VMS Acquisition, New Avis refinanced certain existing
debt through, among other things, borrowings under the New Credit Facility and
the Interim VMS ABS Offering. The sources and uses of funds in connection with
the VMS Acquisition and this refinancing as of June 30, 1999 are set forth
below:
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
SOURCES OF FUNDS:
Unrestricted Cash............................................................................ $ 32.6
Revolving Credit Facility(1)(2).............................................................. 73.0
Term Loan A.................................................................................. 250.0
Term Loan B.................................................................................. 375.0
Term Loan C.................................................................................. 375.0
Senior Subordinated Notes.................................................................... 500.0
Avis Fleet Preferred Stock(3)................................................................ 362.0
Interim VMS ABS Facility(4).................................................................. 3,455.5
-------------------
Total Sources................................................................................ $ 5,423.1
-------------------
USES OF FUNDS:
VMS Acquisition consideration................................................................ $ 1,800.0
Refinancing of VMS non-vehicle debt.......................................................... 14.9
Refinancing of VMS existing fleet debt(5).................................................... 3,486.7
Fees and expenses(6)......................................................................... 63.4
Escrow Deposits.............................................................................. 58.1
-------------------
Total Uses................................................................................... $ 5,423.1
-------------------
- ------------------------
(1) The Revolving Credit Facility permits borrowings of up to an aggregate
principal amount of $350.0 million. Approximately $92.2 million was
available under the New Credit Facility on June 30, 1999 to fund our
liquidity requirements after giving effect to the Transactions. See
"Capitalization" for a description of anticipated unrestricted cash balances
as of June 30, 1999.
(2) Does not include $184.8 million in letters of credit that were outstanding
in connection with the Avis ABS Facility and to support airport concession
agreements, insurance matters and foreign debt.
40
(3) Comprised of $360.0 million liquidation preference of Series A Preferred and
$2.0 million liquidation preference of Series C Preferred to be issued by
Avis Fleet. Until the fifth anniversary of the issue date of the Avis Fleet
Preferred Stock, dividends on the Series A Preferred may be paid in shares
of Series B Cumulative PIK Preferred of Avis Fleet which has terms
substantially similar to the terms of the Series A Preferred. Dividends on
the Series C Preferred are payable in cash. See "Description of Avis Fleet
Preferred Stock and Class B Common Stock".
(4) See "Description of Other Indebtedness-Interim VMS ABS Facility".
(5) Consists of the following, approximately: (i) $283.0 million of intercompany
debt; (ii) $103.0 million of current taxes; (iii) $2,121.6 million of North
American Vehicle Related Debt; (iv) $53.3 million of Canadian Vehicle
Related Debt; and (v) $925.8 million of European Vehicle Related Debt.
(6) Consists of fees and expenses incurred in connection with the Transactions.
41
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes in
the exchange offer. We will receive old notes in like principal amount in
exchange for the issuance of the new notes in the exchange offer. We will cancel
all old notes surrendered in exchange for new notes in the exchange offer.
The proceeds from the issuance and sale of the old notes was approximately
$479 million after deducting the initial purchasers' discount and other expenses
related to the offering. The net proceeds from the offering were applied,
together with unrestricted cash, the Avis Fleet Preferred Stock and proceeds
from borrowings under the New Credit Facility and the Interim VMS ABS Facility
to fund the VMS Acquisition, the refinancing of existing VMS fleet debt, the
refinancing of existing VMS non-vehicle debt, and the payment of fees and
expenses in connection with the Transactions. For a further discussion of the
sources and uses of funds relating to the Transactions, see "The VMS
Acquisition".
42
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
On June 30, 1999, we issued an aggregate principal amount of $500,000,000 of
our 11% Senior Subordinated Notes due 2009 in offerings under Rule 144A and
Regulation S of the Securities Act that were not registered under the Securities
Act. The old notes were issued, and the new notes will be issued, under an
indenture, dated as of June 30, 1999, by and among Avis Rent A Car, the
Subsidiary Guarantors and The Bank of New York, as trustee. We sold the old
notes to Chase Securities Inc. and Lehman Brothers Inc., as initial purchasers,
under a Purchase Agreement, dated June 25, 1999, among Avis Rent A Car, the
Subsidiary Guarantors, Chase Securities Inc. and Lehman Brothers Inc. When we
sold the old notes to Chase Securities Inc. and Lehman Brothers Inc., we also
signed a Registration Rights Agreement in which we agreed to exchange all the
issued and outstanding old notes for a like principal amount of our 11% Senior
Subordinated Exchange Notes due 2009. The terms of the new notes are
substantially identical to those of the outstanding old notes, except that the
transfer restrictions and registration rights relating to the old notes do not
apply to the new notes.
This prospectus and the enclosed letter of transmittal constitute an offer
to exchange new notes for all of the issued and outstanding old notes. This
exchange offer is being extended to all holders of the old notes. As of the date
of this prospectus, $500,000,000 aggregate principal amount of the old notes are
outstanding. This prospectus and the enclosed letter of transmittal are first
being sent on or about September 24, 1999, to all holders of old notes known to
us. Subject to the conditions listed below, we will accept for exchange all old
notes which are properly tendered on or prior to the expiration of the exchange
offer and not withdrawn as permitted below. The exchange offer will expire at
5:00 p.m., New York City time, on October 25, 1999. However, if we, in our sole
discretion, extend the period of time during which the exchange offer is open,
the exchange offer will expire at the latest time and date to which we extend
the exchange offer. Our obligation to accept old notes for exchange in the
exchange offer is subject to the conditions listed below under the caption
"--Conditions to the exchange offer."
We expressly reserve the right, at any time and from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any old notes. If we elect to extend the period of
time during which the exchange offer is open, we will give you oral or written
notice of the extension and delay, as described below. During any extension of
the exchange offer, all old notes previously tendered and not withdrawn will
remain subject to the exchange offer and may be accepted for exchange by us. We
will return to the registered holder, at our expense, any old notes not accepted
for exchange as promptly as practicable after the expiration or termination of
the exchange offer. In the case of an extension, we will issue a press release
or other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer, and
not to accept for exchange any old notes not previously accepted for exchange if
any of the events described below under the caption "--Conditions to the
exchange offer" should occur. We will give you oral or written notice of any
amendment, termination or non-acceptance as promptly as practicable.
Following completion of the exchange offer, we may, in our sole discretion,
commence one or more additional exchange offers to those old note holders who
did not exchange their old notes for new notes. The terms of these additional
exchange offers may differ from those applicable to this exchange offer, as
provided in the Registration Rights Agreement. We may use this prospectus, as
amended or supplemented from time to time, in connection with any additional
exchange offers. These additional exchange offers will take place from time to
time until all outstanding old notes have been exchanged for new notes, subject
to the terms and conditions contained in the
43
prospectus and letter of transmittal we will distribute in connection with the
additional exchange offers.
PROCEDURES FOR TENDERING OLD NOTES
Old notes tendered in the exchange offer must be in denominations of $1,000
principal amount and any integral multiple thereof.
When you tender your old notes, and we accept the old notes, this will
constitute a binding agreement between you and Avis Rent A Car, subject to the
terms and conditions set forth in this prospectus and the enclosed letter of
transmittal. Unless you comply with the procedures described below under the
caption "--Guaranteed delivery procedures," you must do one of the following on
or prior to the expiration of the exchange offer to participate in the exchange
offer:
- tender your old notes by sending the certificates for your old notes, in
proper form for transfer, a properly completed and duly executed letter of
transmittal, with any required signature guarantees, and all other
documents required by the letter of transmittal, to The Bank of New York,
as exchange agent, at one of the addresses listed below under the caption
"--Exchange agent"; or
- tender your old notes by using the book-entry procedures described below
under the caption "--Book-entry transfer" and transmitting a properly
completed and duly executed letter of transmittal, with any required
signature guarantees, or an agent's message instead of the letter of
transmittal, to The Bank of New York, as exchange agent, at one of the
addresses listed below under the caption "--Exchange agent."
In order for a book-entry transfer to constitute a valid tender of your old
notes in the exchange offer, the exchange agent must receive a confirmation of
book-entry transfer of your old notes into the exchange agent's account at The
Depository Trust Company prior to the expiration of the exchange offer. The term
"agent's message" means a message, transmitted by The Depository Trust Company
and received by the exchange agent and forming a part of the book-entry
confirmation, which states that The Depository Trust Company has received an
express acknowledgment from you that you have received and have agreed to be
bound by the letter of transmittal. If you use this procedure, we may enforce
the letter of transmittal against you.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such new
notes. See "Plan of Distribution."
THE METHOD OF DELIVERY OF CERTIFICATES FOR OLD NOTES, LETTERS OF
TRANSMITTAL, AGENT'S MESSAGES AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR
ELECTION. IF YOU DELIVER YOUR OLD NOTES BY MAIL, WE RECOMMEND REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. DO NOT SEND CERTIFICATES FOR OLD
NOTES, LETTERS OF TRANSMITTAL OR AGENT'S MESSAGES TO US.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless you are either (1) a registered old note
holder and have not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the letter of transmittal or (2) you are
exchanging old notes for the account of an eligible guarantor institution. An
eligible guarantor institution means:
- Banks (as defined in Section 3(a) of the Federal Deposit Insurance Act);
44
- Brokers, dealers, municipal securities dealers, municipal securities
brokers, government securities dealers and government securities brokers
(as defined in the Securities Exchange Act of 1934, as amended);
- Credit unions (as defined in Section 19B(l)(A) of the Federal Reserve
Act);
- National securities exchanges, registered securities associations and
clearing agencies (as these terms are defined in the Exchange Act); and
- Savings associations (as defined in Section 3(b) of the Federal Deposit
Insurance Act).
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantor must be an eligible guarantor
institution. If you plan to sign the letter of transmittal but you are not the
registered holder of the old notes--which term, for this purpose, includes any
participant in The Depository Trust Company's system whose name appears on a
security position listing as the owner of the old notes--you must have the old
notes signed by the registered holder of the old notes and that signature must
be guaranteed by an eligible guarantor institution. You may also send a separate
instrument of transfer or exchange signed by the registered holder and
guaranteed by an eligible guarantor institution, but that instrument must be in
a form satisfactory to us in our sole discretion. In addition, if a person or
persons other than the registered holder or holders of old notes signs the
letter of transmittal, certificates for the old notes must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the registered holder or holders that appear on the
certificates for old notes.
All questions as to the validity, form, eligibility--including time of
receipt--and acceptance of old notes tendered for exchange will be determined by
us in our sole discretion. Our determination will be final and binding. We
reserve the absolute right to reject any and all tenders of old notes improperly
tendered or to not accept any old notes, the acceptance of which might be
unlawful as determined by us or our counsel. We also reserve the absolute right
to waive any defects or irregularities or conditions of the exchange offer as to
any old notes either before or after the expiration of the exchange
offer--including the right to waive the ineligibility of any holder who seeks to
tender old notes in the exchange offer. Our interpretation of the terms and
conditions of the exchange offer as to any particular old notes either before or
after the expiration of the exchange offer--including the terms and conditions
of the letter of transmittal and the accompanying instructions--will be final
and binding. Unless waived, any defects or irregularities in connection with
tenders of old notes for exchange must be cured within a reasonable period of
time, as determined by us. Neither we, The Bank of New York, as exchange agent,
nor any other person has any duty to give notification of any defect or
irregularity with respect to any tender of old notes for exchange, nor will we
have any liability for failure to give this notification.
If you are a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or act in a similar fiduciary or representative
capacity, and wish to sign the letter of transmittal or any certificates for old
notes or bond powers, you must indicate your status when signing. If you are
acting in any of these capacities, you must submit proper evidence satisfactory
to us of your authority to so act unless we waive this requirement.
By tendering your old notes, you represent to us:
- that you are not an "affiliate" of New Avis, as defined in Rule 405 under
the Securities Act;
- that any new notes you receive in the exchange offer are being acquired by
you in the ordinary course of your business;
- that at the time of the commencement of the exchange offer, you do not
have any arrangement or understanding with any person to participate in
the distribution of the new notes, as defined in the Securities Act, in
violation of the Securities Act;
45
- if you are not a participating broker-dealer, that you are not engaged in,
and do not intend to engage in, the distribution of the new notes, as
defined in the Securities Act; and
- if you are a participating broker-dealer, that you will receive the new
notes for your own account in exchange for old notes that were acquired by
you as a result of your market-making or other trading activities and that
you will deliver a prospectus in connection with any resale of the new
notes you receive. As used in this prospectus, a "participating broker-
dealer" is a broker-dealer that receives new notes for its own account in
exchange for old notes that it acquired as a result of market-making or
other trading activities. The Commission has taken the position that
participating broker-dealers may fulfill their prospectus delivery
requirements with respect to resales of the new notes--other than a resale
of an unsold allotment from the original sale of the old notes--by
delivering this prospectus to prospective purchasers. For further
information regarding participating broker-dealers and the prospectus
delivery requirement, see "Plan of Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration of the exchange offer, all old
notes properly tendered and will issue the new notes promptly after acceptance
of the old notes. For purposes of the exchange offer, we will be deemed to have
accepted properly tendered old notes for exchange when, as and if we have given
oral or written notice of acceptance to The Bank of New York, as exchange agent,
with written confirmation of any oral notice to be given promptly after any oral
notice.
For each old note accepted for exchange in the exchange offer, the holder of
the old note will receive a new note having a principal amount at maturity equal
to that of the surrendered old note. Interest on the new note will accrue:
(1) from the later of (a) the last date to which interest was paid on
the old note surrendered in exchange for the new note or (b) if the old note
is surrendered for exchange on a date in a period which includes the record
date for an interest payment date to occur on or after the date of the
exchange and as to which interest will be paid, the date to which interest
will be paid on such interest payment date; or
(2) if no interest has been paid on the old note, from and including
June 30, 1999.
If the exchange offer is not completed by December 27, 1999, we will be
obligated to pay liquidated damages of $.0192 per week per $1,000 principal
amount of old notes that are subject to transfer restrictions until the exchange
offer is completed. Payments of interest, if any, on old notes that were
exchanged for new notes will be made on each May 1 and November 1 during which
the new notes are outstanding to the person who, at the close of business on the
April 15th or October 15th next preceding the interest payment date, is the
registered holder of the old notes if the record date occurs prior to the
exchange, or is the registered holder of the new notes it the record date occurs
on or after the date of the exchange, even if the notes are canceled after the
record date and on or before the interest payment date.
In all cases, the issuance of new notes in exchange for old notes will be
made only after The Bank of New York, as exchange agent, timely receives either
certificates for all physically tendered old notes, in proper form for transfer,
or a book-entry confirmation of transfer of the old notes into the exchange
agent's account at The Depository Trust Company, as the case may be, a properly
completed and duly executed letter of transmittal, with any required signature
guarantees, and all other required documents or, in the case of a book-entry
confirmation, a properly completed and duly executed letter of transmittal, with
any required signature guarantees, or an agent's message instead of the letter
of transmittal. If for any reason we do not accept any tendered old notes or if
46
old notes are submitted for a greater principal amount than the holder desires
to exchange, we will return the unaccepted or non-exchanged old notes without
expense to the registered tendering holder. In the case of old notes tendered by
book-entry transfer into the exchange agent's account at The Depository Trust
Company by using the book-entry procedures described below, the unaccepted or
non-exchanged old notes will be credited to an account maintained with The
Depository Trust Company. Any old notes to be returned to the holder will be
returned as promptly as practicable after the expiration or termination of the
exchange offer.
BOOK-ENTRY TRANSFER
Within two business days after the date of this prospectus, The Bank of New
York, as exchange agent, will establish an account at The Depository Trust
Company for the old notes tendered in the exchange offer. Once established, any
financial institution that is a participant in The Depository Trust Company's
systems may make book-entry delivery of old notes by causing The Depository
Trust Company to transfer the old notes into the exchange agent's account at The
Depository Trust Company in accordance with The Depository Trust Company's
procedures for transfer. Although delivery of the old notes may be effected
through book-entry transfer at The Depository Trust Company, the letter of
transmittal or facsimile of the letter of transmittal, with any required
signature guarantees, or an agent's message instead of a letter of transmittal,
and any other required documents, must be transmitted to and received by the
exchange agent on or prior to the expiration of the exchange offer at one of the
addresses listed below under the caption "--Exchange agent." In addition, the
exchange agent must receive book-entry confirmation of transfer of the old notes
into the exchange agent's account at The Depository Trust Company prior to the
expiration of the exchange offer. If you cannot comply with these procedures,
you may be able to use the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of the old notes and wish to tender your old
notes, but
- the certificates for the old notes are not immediately available,
- time will not permit your certificates for the old notes or other required
documents to reach The Bank of New York, as exchange agent, before the
expiration of the exchange offer, or
- the procedure for book-entry transfer cannot be completed before the
expiration of the exchange offer, you may effect a tender of your old
notes if:
- the tender is made through an eligible guarantor institution;
- prior to the expiration of the exchange offer, the exchange agent
receives from an eligible guarantor institution a properly completed and
duly executed notice of guaranteed delivery, substantially in the form we
have provided, setting forth your name and address, and the amount of old
notes you are tendering and stating that the tender is being made by
notice of guaranteed delivery. These documents may be sent by overnight
courier, registered or certified mail or facsimile transmission. If you
elect to use this procedure, you must also guarantee that within three
NYSE trading days after the date of execution of the notice of guaranteed
delivery, the certificates for all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation of transfer of the
old notes into the exchange agent's account at The Depository Trust
Company, as the case may be, a properly completed and duly executed
letter of transmittal, with any required signature guarantees, and all
other required or, in the case of a book-entry confirmation, a properly
completed and duly executed letter of transmittal, with any required
signature guarantees, or an agent's
47
message instead of the letter of transmittal, will be deposited by the
eligible guarantor institution with the exchange agent; and
- the exchange agent receives the certificates for all physically tendered
old notes, in proper form for transfer, or a book-entry confirmation of
transfer of the old notes into the exchange agent's account at The
Depository Trust Company, as the case may be, a properly completed and
duly executed letter of transmittal, with any required signature
guarantees, and all other required documents or, in the case of a book
entry confirmation, a properly completed and duly executed letter of
transmittal, with any required signature guarantees, or an agent's
message instead of the letter of transmittal, in each case, within three
NYSE trading days after the date of execution of the notice of guaranteed
delivery.
WITHDRAWAL RIGHTS
YOU MAY WITHDRAW TENDERS OF OLD NOTES AT ANY TIME PRIOR TO THE EXPIRATION OF
THE EXCHANGE OFFER.
For a withdrawal to be effective, a written notice of withdrawal must be
received by The Bank of New York, as exchange agent, prior to the expiration of
the exchange offer at one of the addresses listed below under the caption
"--Exchange agent". Any notice of withdrawal must specify the name of the person
who tendered the old notes to be withdrawn, identify the old notes to be
withdrawn, including the principal amount of the old notes, and, where
certificates for old notes have been transmitted, specify the name in which the
old notes are registered, if different from that of the withdrawing holder. If
certificates for old notes have been delivered or otherwise identified to the
exchange agent, then, prior to the release of the certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
eligible guarantor institution unless the holder is an eligible guarantor
institution. If old notes have been tendered using the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at The Depository Trust Company to be credited with the
withdrawn old notes and otherwise comply with the procedures of the book-entry
transfer facility. All questions as to the validity, form and
eligibility--including time of receipt--of these notices will be determined by
us, and our determination will be final and binding. Any old notes so withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the exchange offer. Any old notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the registered holder
without cost to that holder as soon as practicable after withdrawal,
non-acceptance of tender or termination of the exchange offer. In the case of
old notes tendered by book-entry transfer into the exchange agent's account at
The Depository Trust Company by using the book-entry transfer procedures
described above, any withdrawn or unaccepted old notes will be credited to the
tendering holder's account at The Depository Trust Company. Properly withdrawn
old notes may be retendered at any time on or prior to the expiration of the
exchange offer by following one of the procedures described above under
"--Procedures for tendering old notes."
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept any old notes for exchange or to issue any new notes in
exchange for old notes, and we may terminate or amend the exchange offer if, at
any time before the acceptance of the old notes for exchange or the exchange of
new notes for old notes, any of the following events occurs:
- the exchange offer is determined to violate any applicable law or any
applicable interpretation of the staff of the Commission;
48
- an action or proceeding is pending or threatened in any court or by any
governmental agency that might materially impair our ability to proceed
with the exchange offer;
- any material adverse development occurs in any existing legal action or
proceeding involving New Avis;
- we do not receive any governmental approval we deem necessary for the
completion of the exchange offer; or
- any of the conditions precedent to our obligations under the Registration
Rights Agreement are not fulfilled.
These conditions are for our benefit only and we may assert them regardless
of the circumstances giving rise to any condition. We may also waive any
condition in whole or in part at any time in our sole discretion. Our failure at
any time to exercise any of the foregoing rights will not constitute a waiver of
that right and each right is an ongoing right that we may assert at any time.
In addition, we will not accept any old notes for exchange or issue any new
notes in exchange for old notes, if at the time a stop order is threatened or in
effect which relates to:
- the registration statement of which this prospectus forms a part; or
- the qualification under the Trust Indenture Act of 1939 of the indenture
under which the old notes were issued and the new notes will be issued.
EXCHANGE AGENT
We have appointed The Bank of New York as the exchange agent for the
exchange offer. All completed letters of transmittal and agent's messages should
be directed to the exchange agent at one of the addresses listed below.
Questions and requests for assistance, requests for additional copies of this
prospectus or the letter of transmittal, agent's messages and requests for
notices of guaranteed delivery should be directed to the exchange agent at one
of the following addresses:
DELIVERY TO: THE BANK OF NEW YORK, EXCHANGE AGENT
BY REGULAR OR CERTIFIED MAIL: BY FACSIMILE: BY OVERNIGHT COURIER OR HAND:
The Bank of New York (Eligible Guarantor The Bank of New York
101 Barclay Street, 7E Institutions Only) 101 Barclay Street
New York, NY 10286 (212) 815-4699 Corporate Trust Services
Attention: To Confirm by Telephone Window
Reorganization Section, for Information Call: Ground Level
Marcia Brown (212) 815-2742 New York, NY 10286
Attention:
Reorganization Section,
Marcia Brown
DELIVERY OF A LETTER OF TRANSMITTAL OR AGENT'S MESSAGE TO AN ADDRESS OTHER
THAN THE ADDRESS LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER
THAN AS SET FORTH ABOVE IS NOT VALID DELIVERY OF THE LETTER OF TRANSMITTAL OR
AGENT'S MESSAGE.
49
FEES AND EXPENSES
The principal solicitation is being made by mail by The Bank of New York, as
exchange agent. We will pay the exchange agent customary fees for its services,
reimburse the exchange agent for its reasonable out-of-pocket expenses incurred
in connection with the provision of these services and pay other registration
expenses, including fees and expenses of the trustee under the indenture
relating to the notes, filing fees, blue sky fees and printing and distribution
expenses. We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in person by
officers and regular employees of New Avis and its affiliates and by persons so
engaged by the exchange agent.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with the
tender of old notes in the exchange offer unless you instruct us to register new
notes in the name of, or request that old notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder. In those cases, you will be responsible for the payment of any
applicable transfer tax.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will continue to be subject to the provisions of the indenture
relating to the notes regarding transfer and exchange of the old notes and the
restrictions on transfer of the old notes described in the legend on your
certificates. These transfer restrictions are required because the old notes
were issued under an exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the old notes may not be offered or sold, unless registered
under the Securities Act, except under an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not plan to register the old notes under the Securities Act. Based on
interpretations by the staff of the Commission, as set forth in no-action
letters issued to third parties, we believe that the new notes you receive in
the exchange offer may be offered for resale, resold or otherwise transferred
without compliance with the registration and prospectus delivery provisions of
the Securities Act. However, you will not be able to freely transfer the new
notes if:
- you are an "affiliate" of New Avis, as defined in Rule 405 under the
Securities Act;
- you are not acquiring the new notes in the exchange offer in the ordinary
course of your business;
- you have an arrangement or understanding with any person to participate in
the distribution of the new notes, as defined in the Securities Act, you
will receive in the exchange offer, or
- you are a participating broker-dealer.
We do not intend to request the Commission to consider, and the Commission
has not considered, the exchange offer in the context of a similar no-action
letter. As a result, we cannot guarantee that the staff of the Commission would
make a similar determination with respect to the exchange offer as in the
circumstances described in the no-action letters discussed above. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of new notes and has no arrangement or
understanding to participate in a distribution of new notes. If you are an
affiliate of New Avis, are engaged in or intend to engage in a distribution of
the new notes or have any arrangement or understanding with respect to the
distribution of the new notes you will receive in the exchange offer, you
50
- may not rely on the applicable interpretations of the staff of the
Commission, and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction involving the
new notes. If you are a participating broker-dealer, you must acknowledge
that you will deliver a prospectus in connection with any resale of the
new notes. In addition, to comply with state securities laws, you may not
offer or sell the new notes in any state unless they have been registered
or qualified for sale in that state or an exemption from registration or
qualification is available and is complied with. The offer and sale of the
new notes to "qualified institutional buyers"--as defined in Rule 144A of
the Securities Act--is generally exempt from registration or qualification
under state securities laws. We do not plan to register or qualify the
sale of the new notes in any state where an exemption from registration or
qualification is required and not available.
51
CAPITALIZATION
The following table sets forth the unaudited capitalization of New Avis as
of June 30, 1999. The information set forth below should be read in conjunction
with the Summary Historical Financial Data of Avis and VMS, the Selected
Historical Financial Data of Avis and VMS, the Unaudited Pro Forma Consolidated
Financial Information of New Avis, Management's Discussion and Analysis of
Financial Conditions and Results of Operations, and the audited financial
statements of Avis and VMS, in each case, with the notes thereto, included
elsewhere in this prospectus.
AS OF
JUNE 30, 1999
-------------
NEW AVIS
CONSOLIDATED
-------------
(DOLLARS IN
THOUSANDS)
Restricted cash(1)................................................................................. $ 189,680
Unrestricted cash(2)............................................................................... 280,370
-------------
Total cash......................................................................................... $ 470,050
-------------
-------------
Avis vehicle debt:
Asset-backed MTNs(3)............................................................................. $ 2,250,000
Commercial paper(4).............................................................................. 1,463,996
Other vehicle debt(5)............................................................................ 176,141
VMS vehicle debt:
Interim VMS ABS Facility(6)...................................................................... 3,455,508
Self Funded Notes................................................................................ 26,853
-------------
Total vehicle debt............................................................................. 7,372,498
-------------
Non-vehicle debt:
Revolving Credit Facility(7)..................................................................... 73,000
Term Loans(8).................................................................................... 1,000,000
Senior Subordinated Notes due 2009............................................................... 500,000
Other non-vehicle debt(9)........................................................................ 71,608
-------------
Total non-vehicle debt......................................................................... 1,644,608
-------------
Total debt................................................................................... 9,017,106
Avis Fleet Preferred Stock(10)..................................................................... 362,000
Common stockholders' equity........................................................................ 615,143
-------------
Total capitalization......................................................................... $ 9,994,249
-------------
-------------
- ------------------------
Footnotes:
(1) Restricted cash consists primarily of escrow funds related to Avis'
Asset-Backed MTNs and the Avis ABS Facility. See "Description of Other
Indebtedness-Vehicle Related Indebtedness-Avis ABS Facility" and Note 1 to
the Avis Audited Financial Statements.
(2) Cash balances fluctuate significantly throughout each year.
(3) Asset-Backed MTNs consist of medium-term notes with maturity dates of July
2000, July 2002, and February 2005, with interest rates of 6.22%, 6.40% and
6.14%, respectively. See "Description of Other Indebtedness-Vehicle Related
Indebtedness-Avis ABS Facility" and Note 9 to the Avis Audited Financial
Statements.
52
(4) Represents commercial paper with an average rate for the six months ended
June 30, 1999 of 5.0%. See "Description of Other Indebtedness-Vehicle
Related Indebtedness-Avis ABS Facility" and Note 9 to the Avis Audited
Financial Statements.
(5) Consists primarily of Canadian and Australian debt to finance vehicles.
(6) The Interim VMS ABS Offering consists of (i) variable funding asset-backed
notes, supported by U.S. leases and vehicles, (ii) asset-based preferred
membership interests supported by U.S. leases and vehicles, and (iii) an
advance under an asset-backed facility to PHH Europe guaranteed by various
PHH Europe entities and supported by all of the assets of such entities.
Each of these securities will be placed with one or more multi-seller
commercial paper conduits. See "Description of Other Indebtedness-Vehicle
Related Indebtedness-Interim VMS ABS Facilities". We expect to refinance a
portion of the Interim VMS ABS Facility with asset-backed medium-term notes,
subject to market conditions.
(7) The Revolving Credit Facility permits borrowings of up to an aggregate
principal amount of $350.0 million.
(8) Reflects the following: (i) a $250.0 million Term Loan A with a term of six
years; (ii) a $375.0 million Term Loan B with a term of seven years; and
(iii) a $375.0 million Term Loan C with a term of eight years. Each of the
Term Loans are senior secured obligations of Avis Rent A Car.
(9) Consists primarily of WEX non-vehicle debt.
(10) Avis Fleet Preferred Stock consists of (1) Series A Cumulative
Participating Redeemable Convertible Preferred Stock, 7,200,000 shares
outstanding, liquidation preference $50 per share, issued as part of the
consideration for the VMS Acquisition; (2) Series B Cumulative PIK Preferred
Stock, no shares outstanding, liquidation preference $50 per share, issued
as dividends on the Series A Cumulative Participating Redeemable Convertible
Preferred Stock; and (3) Series C Cumulative Redeemable Preferred Stock,
liquidation preference $50 per share, 40,000 shares authorized, issued as
part of the consideration for the VMS Acquisition.
53
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial statements (the
"Unaudited Pro Forma Consolidated Financial Statements") have been derived by
the application of pro forma adjustments to the historical financial statements
of Avis and VMS included elsewhere in this prospectus. The unaudited pro forma
consolidated statements of operations for the year ended December 31, 1998 and
for the six month period ended June 30, 1999, give effect to the Transactions as
if they had occurred on January 1 of the earliest period presented. The pro
forma adjustments are described in the accompanying notes. See "Description of
Avis Fleet Preferred Stock and Class B Common Stock", "Description of Other
Indebtedness" and "Description of Notes".
The VMS Acquisition was accounted for using the purchase method of
accounting for financial accounting purposes. The purchase price was allocated
to the assets acquired and the liabilities assumed, based on their respective
fair values. The allocation of the purchase price reflected in the Unaudited Pro
Forma Consolidated Financial Statements is preliminary. The adjustments that
have been included in the Unaudited Pro Forma Consolidated Financial Statements
will change based upon the final allocation of the purchase price when
additional information concerning asset and liability valuation is obtained. The
actual allocation of the purchase price and the resulting effect on operating
income may differ from the unaudited pro forma amounts included herein. However,
the changes are not expected to have a material effect on the consolidated
financial statements of Avis Rent A Car.
Avis Rent A Car believes that the accounting used to reflect the above
transactions provides a reasonable basis on which to present this unaudited pro
forma consolidated financial data. The pro forma consolidated statements of
operations are unaudited and were derived by adjusting the historical financial
statements of Avis and VMS. The Unaudited Pro Forma Consolidated Financial
Statements are provided for informational purposes only and should not be
construed to be indicative of Avis Rent A Car's consolidated results of
operations had the Transactions been consummated on the dates assumed and do not
project Avis Rent A Car's consolidated results of operations for any future date
or period. The Unaudited Pro Forma Consolidated Financial Statements and
accompanying notes should be read in conjunction with the Avis Consolidated
Financial Statements, the VMS Combined Financial Statements, as well as the
other financial information pertaining to Avis Rent A Car, in each case included
elsewhere in this prospectus.
54
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
AVIS VMS ADJUSTMENTS(1) CONSOLIDATED
------------- ------------- --------------- -------------
Revenue............................................ $ 2,297,582 $ 1,605,063 $ -- $ 3,902,645
Costs and expenses:
Direct operating, net............................ 925,181 -- -- 925,181
Vehicle interest................................. 187,773 179,729 841(2) 357,362
(10,981)(6)
Vehicle depreciation............................. 581,022 1,015,511 -- 1,596,533
Property and equipment depreciation.............. 13,191 18,144 -- 31,335
Goodwill amortization............................ 11,854 7,536 23,999(3) 43,389
Non-vehicle interest............................. 3,862 3,831 145,528(5) 146,074
(1,307)(7)
(5,840)(6)
Amortization of debt issuance costs and other.... 11,705 -- 9,900(4) 21,605
Lease charges.................................... 12,042 -- -- 12,042
Selling, general and administrative.............. 438,724 231,444 -- 670,168
------------- ------------- --------------- -------------
Income before provision for income taxes........... 112,228 148,868 (162,140) 98,956
Provision for income taxes....................... 48,707 55,800 (53,947)(8) 50,560
------------- ------------- --------------- -------------
Net income....................................... $ 63,521 $ 93,068 $ (108,193) 48,396
------------- ------------- ---------------
------------- ------------- ---------------
Avis Fleet Preferred Stock dividends............... 18,220(10)
-------------
Earnings applicable to common stockholders......... $ 63,521 $ 30,176
------------- -------------
------------- -------------
Earnings per share(10):
Basic............................................ $ 1.86 $ 0.88
------------- -------------
------------- -------------
Diluted.......................................... $ 1.82 $ 0.86
------------- -------------
------------- -------------
55
AVIS RENT A CAR, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
AVIS VMS ADJUSTMENTS(1) CONSOLIDATED
------------- ----------- --------------- -------------
Revenue.............................................. $ 1,204,374 $ 808,095 $ -- $ 2,012,469
Costs and expenses:
Direct operating, net.............................. 470,032 -- -- 470,032
Vehicle interest................................... 97,466 92,159 (1,875)(2) 184,862
(2,888)(6)
Vehicle depreciation............................... 298,490 510,989 -- 809,479
Property and equipment depreciation................ 6,906 10,310 -- 17,216
Goodwill amortization.............................. 6,351 4,054 11,714(3) 22,119
Non-vehicle interest............................... 1,227 1,439 72,764(5) 72,333
(2,920)(6)
(177)(7)
Amortization of debt issuance costs and other...... 5,669 4,950(4) 10,619
Lease charges...................................... 12,677 -- -- 12,677
Selling, general and administrative................ 231,182 128,517 -- 359,699
------------- ----------- --------------- -------------
Income before provision for income taxes............. 74,374 60,627 (81,568) 53,433
Provision for income taxes......................... 31,906 22,943 (27,343)(8) 27,506
------------- ----------- --------------- -------------
Net income........................................... $ 42,468 $ 37,684 $ (54,225) $ 25,927
------------- ----------- --------------- -------------
------------- ----------- --------------- -------------
Avis Fleet Preferred Stock dividends................. 9,110(10)
-------------
Earnings applicable to common stockholders........... $ 42,468 $ 16,817
------------- -------------
------------- -------------
Earnings per share(9):
Basic.............................................. $ 1.35 $ 0.53
------------- -------------
------------- -------------
Diluted............................................ $ 1.31 $ 0.52
------------- -------------
------------- -------------
56
AVIS RENT A CAR, INC
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) The Unaudited Pro Forma Consolidated Financial Statements assume that the
amounts borrowed (approximately $5.0 billion) at the closing date, June 30,
1999, would be outstanding for all pro forma periods presented. If such
borrowings were in excess of the historical amounts borrowed, the excess
would be first applied as a reduction of the revolving line of credit
borrowings and the remainder as a reduction of VMS fleet debt.
(2) Represents the adjustment to reflect the pro forma fleet interest expense,
based on pro forma VMS average debt and an assumed interest rate of 5.35%
net of the elimination of historical interest expense and interest income:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------- --------------
Pro forma interest expense at 5.35%.......................................... $ 184,870 $ 92,434
Historical interest expense.................................................. (179,729) (92,159)
Historical interest income................................................... (4,300) (2,150)
---------- --------------
Pro forma adjustment......................................................... $ 841 $ (1,875)
---------- --------------
---------- --------------
(3) Represents the amortization of cost in excess of net assets acquired over 40
years, net of the amortization recorded in the historical combined financial
statements of VMS.
(4) Represents the amortization of deferred debt issuance cost over the period
in which the debt will be outstanding.
(5) Represents the adjustment to reflect the pro forma interest expense on the
acquisition debt.
Total amount borrowed at June 30, 1999......................................... $5,028,508
Amounts borrowed under vehicle financing agreements............................ 3,455,508
----------
Non-vehicle debt............................................................... $1,573,000
----------
----------
Composition of net acquisition debt:
Term Loan A.................................................................... $ 250,000
Term Loan B.................................................................... 375,000
Term Loan C.................................................................... 375,000
Senior Subordinated Notes...................................................... 500,000
Revolving credit facility...................................................... 73,000
----------
Total...................................................................... $1,573,000
----------
----------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------- ---------------
Interest expense:
Term Loan A--interest at 8.00%.............................................. $ 20,000 $ 10,000
Term Loan B--interest at 8.50%.............................................. 31,875 15,938
Term Loan C--interest at 8.75%.............................................. 32,813 16,406
Senior Subordinated Notes interest at 11.00%................................ 55,000 27,500
Revolving credit facility interest at 8.00%................................. 5,840 2,920
---------- ---------------
Total................................................................... $ 145,528 $ 72,764
---------- ---------------
---------- ---------------
57
(6) Represents a reduction in interest expense as a result of the application of
the excess of the amounts borrowed at June 30, 1999 over the average debt
outstanding during the period.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------- -------------------
Total amount borrowed at June 30, 1999.................................. $ 5,028,508 $ 5,028,508
------------------- -------------------
Less:
Acquisition purchase price including expenses......................... 1,900,000 1,900,000
Less issuance of Avis Fleet Preferred Stock........................... 362,000 362,000
Less cash on hand utilized to pay a portion of the purchase price..... 32,600 32,600
------------------- -------------------
Acquisition purchase price to be financed............................. 1,505,400 1,505,400
------------------- -------------------
Amount available to refinance existing debt............................. 3,523,108 3,523,108
Average debt outstanding during the period.............................. 3,244,851 3,342,163
------------------- -------------------
Excess borrowings....................................................... $ 278,257 $ 180,945
------------------- -------------------
------------------- -------------------
Revolving debt at 8.00% interest rate................................. $ 73,000 $ 73,000
Vehicle financing at 5.35% interest rate.............................. 205,257 107,945
------------------- -------------------
Total reductions...................................................... $ 278,257 $ 180,945
------------------- -------------------
------------------- -------------------
Reductions in interest expense relating to:
Revolving debt........................................................ $ 5,840 $ 2,920
------------------- -------------------
------------------- -------------------
Vehicle financing..................................................... $ 10,981 $ 2,888
------------------- -------------------
------------------- -------------------
(7) Represents a reduction in interest expense because the obligation was
refinanced and the related interest expense is included in acquisition
interest.
(8) Represents the estimated income tax effect of the above adjustments. The
effective rate differs from the statutory rate due to the non-deductibility
of goodwill.
(9) Basic and diluted earnings per share for the year ended December 31, 1998,
were computed based on 34,172,249 and 34,952,557 shares of common stock,
respectively. Basic and diluted earnings per share for the six months ended
June 30, 1999, were computed based on 31,529,114 and 32,380,499 shares of
common stock, respectively.
(10) Represents the Avis Fleet Preferred Stock dividend as follows:
($000'S)
($000'S) DIVIDEND
($000'S) DIVIDEND SIX MONTHS
LIQUIDATION DIVIDEND YEAR ENDED ENDED
PREFERENCE RATE DECEMBER 31, 1998 JUNE 30, 1999
----------- ----------- ------------------- --------------
Series A............................................ 360,000 5.0% $ 18,000 $ 9,000
Series C............................................ 2,000 11.0% 220 110
-------- -------
$ 18,220 $ 9,110
-------- -------
-------- -------
58
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (AVIS)
The following selected historical consolidated financial data for each of
the years ended December 31, 1997 and 1998 and the periods ended October 16,
1996 and December 31, 1996, have been derived from the Avis Audited Consolidated
Financial Statements. The selected historical consolidated financial data for
each of the years in the two year period ended December 31, 1995, have been
derived from Avis' audited consolidated financial statements. The selected
historical consolidated unaudited financial data set forth below for the six
month periods ended June 30, 1998 and 1999 have been derived from the Avis
unaudited condensed consolidated financial statements and include all
adjustments, consisting of normal recurring adjustments, which management
considers necessary for a fair presentation of Avis' results for such periods.
Results for the interim periods are not indicative of results for the full year.
The selected historical consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, Unaudited Pro Forma
Consolidated Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Avis Consolidated Financial Statements
and accompanying notes thereto and the other financial information included
elsewhere in this prospectus.
59
OCTOBER 17,
PREDECESSOR COMPANIES(1) 1996
JANUARY 1, (DATE OF COMBINED
YEARS ENDED 1996 TO ACQUISITION) YEAR ENDED YEARS ENDED DECEMBER
DECEMBER 31, OCTOBER TO DECEMBER DECEMBER 31,
---------------------- 16, 31, 31, ----------------------
1994 1995 1996 1996 1996(2)(3) 1997 1998
---------- ---------- ----------- ------------ ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OPERATING DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $1,412,400 $1,615,951 $1,504,673 $ 362,844 $1,867,517 $2,046,154 $2,297,582
---------- ---------- ----------- ------------ ----------- ---------- ----------
Costs and expenses:
Direct operating, net(4).......... 664,993 724,759 650,750 167,682 818,432 863,839 939,986
Vehicle depreciation and lease
charges, net.................... 301,805 394,057 358,937 85,455 444,392 525,143 593,064
Selling, general and
administrative(5)............... 252,024 269,434 283,180 68,215 351,395 415,728 438,724
Interest, net..................... 136,508 162,244 138,225 38,205 176,430 184,261 201,726
Amortization of costs in excess of
net assets acquired............. 4,754 4,757 3,782 1,026 4,808 6,860 11,854
---------- ---------- ----------- ------------ ----------- ---------- ----------
Total operating expenses...... 1,360,084 1,555,251 1,434,874 360,583 1,795,457 1,995,831 2,185,354
---------- ---------- ----------- ------------ ----------- ---------- ----------
Income before provision for income
taxes........................... 52,316 60,700 69,799 2,261 72,060 50,323 112,228
Provision for income taxes........ 30,213 34,635 31,198 1,040 32,238 22,850 48,707
---------- ---------- ----------- ------------ ----------- ---------- ----------
Net income........................ $ 22,103 $ 26,065 $ 38,601 $ 1,221 $ 39,822 $ 27,473 $ 63,521
---------- ---------- ----------- ------------ ----------- ---------- ----------
---------- ---------- ----------- ------------ ----------- ---------- ----------
Earnings per share:
Basic............................. $ 0.72 $ 0.84 $ 1.25 $ 0.04 $ 0.89 $ 1.86
Diluted........................... $ 0.72 $ 0.84 $ 1.25 $ 0.04 $ 0.88 $ 1.82
Weighted average shares outstanding:
Basic............................. 30,925,000 30,925,000 30,925,000 30,925,000 30,925,000 34,172,249
Diluted........................... 30,925,000 30,925,000 30,925,000 30,925,000 31,181,134 34,952,557
OTHER FINANCIAL DATA:
Vehicle depreciation (Fleet
Cost)........................... $ 291,360 $ 342,048 $ 306,159 $ 71,343 $ 377,502 $ 466,799 $ 581,022
Vehicle interest (Fleet Cost)..... 132,867 159,212 135,577 38,087 173,664 178,213 187,773
Non-vehicle depreciation and
amortization.................... 20,990 20,804 18,538 3,238 21,776 23,022 36,750
Non-vehicle interest.............. 187 372 225 118 343 2,395 3,862
EBITDA after Fleet Costs(6)....... 73,493 81,876 88,562 5,617 94,179 75,740 152,840
Ratio of earnings to fixed
charges(7)...................... 1.3x 1.3x 1.4x 1.0x 1.3x 1.2x 1.4x
Cash flows from operating
activities...................... $ 312,934 $ 544,119 $ 246,212 $ 35,809 $ 282,021 $ 580,973 $ 652,889
Cash flows from investing
activities...................... (559,767) (558,074) (557,136) 1,656 (555,480) (1,244,149) (967,140)
Cash flows from financing
activities...................... 248,764 19,408 357,348 (72,419) 284,929 679,302 299,437
STATEMENTS OF FINANCIAL POSITION
DATA (END OF PERIOD):
Accounts receivable, net of
allowance for doubtful
accounts(8)..................... $ 287,376 $ 194,971 $ 269,848 $ 311,179 $ 311,179 $ 359,463 $ 360,574
Vehicles, net(9).................. 1,873,158 2,167,167 2,404,275 2,243,492 2,243,492 3,018,856 3,164,816
Total assets...................... 2,602,744 2,824,798 3,186,503 3,131,232 3,131,232 4,282,657 4,505,062
Total debt, including amounts due
within one year(10)............. 2,110,123 2,289,747 2,645,095 2,542,974 2,542,974 2,826,422 3,014,712
Total non-vehicle debt............ 7,207 5,911 4,138 3,976 3,976 2,914 1,777
Common stockholders' equity(11)... 658,012 688,260 740,113 76,415 76,415 453,722 622,614
OPERATING DATA:
Car rental data:
Number of rental locations (end of
period)......................... 576 541 550 546 546 612 660
Number of rental transactions
during period (in thousands).... 10,577 11,544 10,272 2,534 12,806 13,667 15,296
Peak number of vehicles during
period.......................... 150,966 167,511 196,077 177,839 196,077 212,104 231,086
Average number of vehicles........ 137,715 150,853 174,813 172,461 174,226 186,317 205,685
Average monthly revenue per
vehicle(12)..................... $ 855 $ 893 $ 906 $ 842 $ 893 $ 915 $ 931
Average revenue per rental
transaction during period(13)... $ 134 $ 140 $ 146 $ 143 $ 146 $ 150 $ 150
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1999
---------- ----------
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $1,086,670 $1,204,374
---------- ----------
Costs and expenses:
Direct operating, net(4).......... 440,684 476,938
Vehicle depreciation and lease
charges, net.................... 277,394 311,167
Selling, general and
administrative(5)............... 213,114 231,182
Interest, net..................... 96,818 104,362
Amortization of costs in excess of
net assets acquired............. 5,521 6,351
---------- ----------
Total operating expenses...... 1,033,531 1,130,000
---------- ----------
Income before provision for income
taxes........................... 53,139 74,374
Provision for income taxes........ 23,381 31,906
---------- ----------
Net income........................ $ 29,758 $ 42,468
---------- ----------
---------- ----------
Earnings per share:
Basic............................. $ 0.88 $ 1.35
Diluted........................... $ 0.86 $ 1.31
Weighted average shares outstanding:
Basic............................. 33,687,431 31,529,114
Diluted........................... 34,680,670 32,380,499
OTHER FINANCIAL DATA:
Vehicle depreciation (Fleet
Cost)........................... $ 268,944 $ 297,697
Vehicle interest (Fleet Cost)..... 92,628 98,699
Non-vehicle depreciation and
amortization.................... 16,646 18,926
Non-vehicle interest.............. 74 1,227
EBITDA after Fleet Costs(6)....... 69,859 94,527
Ratio of earnings to fixed
charges(7)...................... 1.4x 1.6x
Cash flows from operating
activities...................... $ 158,659 $ 299,169
Cash flows from investing
activities...................... (788,076) (2,365,088)
Cash flows from financing
activities...................... 613,428 2,316,451
STATEMENTS OF FINANCIAL POSITION
DATA (END OF PERIOD):
Accounts receivable, net of
allowance for doubtful
accounts(8)..................... $ 211,861 $ 910,311
Vehicles, net(9).................. 3,587,834 7,663,270
Total assets...................... 4,809,697 11,588,627
Total debt, including amounts due
within one year(10)............. 3,278,619 9,017,106
Total non-vehicle debt............ 2,237 1,644,608
Common stockholders' equity(11)... 635,196 615,143
OPERATING DATA:
Car rental data:
Number of rental locations (end of
period)......................... 636 670
Number of rental transactions
during period (in thousands).... 7,425 8,129
Peak number of vehicles during
period.......................... 216,128 233,456
Average number of vehicles........ 198,160 217,114
Average monthly revenue per
vehicle(12)..................... $ 914 $ 925
Average revenue per rental
transaction during period(13)... $ 148 $ 146
60
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (AVIS)
(1) On the Acquisition Date, Cendant acquired the predecessors to Avis. See Note
1 to the Avis Audited Consolidated Financial Statements.
(2) Excludes any purchase accounting adjustments for the period January 1, 1996
to October 16, 1996.
(3) Presented on a combined twelve-month basis and includes the results of the
Predecessor Companies for the period January 1, 1996 to October 16, 1996 and
the results of Avis Rent A Car for the period October 17, 1996 (Date of
Acquisition) to December 31, 1996. See Note 1 to the Avis Audited
Consolidated Financial Data.
(4) Consist of expenses directly associated with Avis' rental of vehicles,
including fleet costs, facility costs, salaries and benefits.
(5) Selling, general and administrative expenses includes a 4% royalty fee
payable to Cendant for the years ended December 31, 1997 and 1998 and
charges from Cendant for the period October 17, 1996, (Date of Acquisition)
to December 31, 1996. See Note 5 to the Avis Audited Consolidated Financial
Statements.
(6) "EBITDA after Fleet Costs" represents net income plus non-vehicle interest
expense, non-vehicle depreciation and amortization and income taxes. We
believe that EBITDA after Fleet Costs provides useful information regarding
this ability to service debt, and we understand that such information is
considered by certain investors to be an additional basis for evaluating our
ability to pay interest and repay debt. EBITDA after Fleet Costs does not,
however, represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute
for net income on as an indicator of our operating performance or cash flow
as a measure of liquidity. Because EBITDA after Fleet Costs is not
calculated identically by all companies, the presentation herein may not be
directly comparable to other similarly titled measures of other companies.
See the Avis Consolidated Financial Statements, and related notes thereto,
included elsewhere in this prospectus. EBITDA is presented after Fleet costs
because management believes this is a more meaningful representation of cash
flows available to service non-fleet debt.
(7) Ratio of earnings to fixed charges consists of income from continuing
operations (before extraordinary items) before income taxes and fixed
charges, divided by fixed charges of interest (included amounts capitalized
and the interest factor in rental expense), amortization of deferred debt
issuance costs.
(8) Includes manufacturers receivables, net (in thousands) of $192,811, $80,812,
$134,315, $183,304, $183,304, $219,391, $226,963, $53,517 and $116,975 at
December 31, 1994; December 31, 1995; October 16, 1996; December 31, 1996;
December 31, 1996; December 31, 1997; December 31, 1998; June 30, 1998; and
June 30, 1999, respectively. Manufacturers receivables arise from the sale
of vehicles to manufacturers pursuant to guaranteed Repurchase Programs and
amounts due from incentives and allowances.
(9) Vehicles, are presented net of accumulated vehicle depreciation.
(10) Includes vehicle financing notes-due to affiliates at December 31, 1994,
December 31, 1995, October 16, 1996 and December 31, 1996 (in thousands) of
$1,050,000, $1,180,000, $1,289,500 and $247,500, respectively.
(11) Decrease in common stockholders' equity during the three months ended June
30, 1999 reflects a repurchase of Class A Common Stock by Avis.
(12) Average monthly revenue per vehicle for each period is calculated as
revenue divided by the average number of vehicles for the period, divided by
the number of months in each period.
(13) Average rental revenue per rental transaction for each respective period is
calculated as revenue divided by the number of rental transactions during
the period.
61
SELECTED HISTORICAL COMBINED FINANCIAL DATA (VMS)
The selected historical combined financial data for VMS as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 have been derived from the VMS Audited Combined Financial Statements. The
selected historical combined financial data for VMS as of and for the three
months ended March 31, 1999 and for the three months ended March 31, 1998 have
been derived from the VMS Unaudited Combined Financial Statements which were
prepared on the same basis as the VMS Audited Combined Financial Statements and
include, in the opinion of VMS' management, all adjustments necessary to present
fairly the information presented for such interim periods. The interim results
for the three months ended March 31, 1999 are not necessarily indicative of
results that can be expected for the full fiscal year. This information should
be read in conjunction with the VMS Combined Financial Statements and notes
thereto, the Unaudited Pro Forma Combined Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the other financial information included elsewhere in this prospectus.
62
SELECTED HISTORICAL COMBINED FINANCIAL DATA (VMS)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------------
1996 1997 1998(1) 1998 1999
------------- -------------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Fleet leasing revenue............... $ 1,128,495 $ 1,187,193 $ 1,286,896 $ 312,126 $ 317,992
Fleet management services........... 167,512 184,047 182,356 49,689 50,694
Other............................... 61,032 81,455 135,811 29,490 31,567
------------- -------------- ------------- ----------- -------------
Total revenues...................... 1,357,039 1,452,695 1,605,063 391,305 400,253
Depreciation on vehicles.............. 912,830 953,551 1,015,511 249,384 253,743
Interest expense...................... 167,687 177,149 183,560 43,183 46,457
Selling, general and administrative
expenses............................ 193,822 211,123 232,724 55,425 63,569
Depreciation and amortization on
assets other than vehicles.......... 16,585 14,943 25,680 6,341 7,332
Merger-related costs and other unusual
charges (credits)(2)................ -- 61,090 (1,280) -- --
------------- -------------- ------------- ----------- -------------
Total expenses...................... 1,290,924 1,417,856 1,456,195 354,333 371,101
------------- -------------- ------------- ----------- -------------
Income before provision for income
taxes............................... 66,515 34,839 148,868 36,972 29,152
Provision for income taxes............ 25,323 23,649 55,800 13,857 11,002
------------- -------------- ------------- ----------- -------------
Net income.......................... $ 40,792 $ 11,190 $ 93,068 $ 23,115 $ 18,150
------------- -------------- ------------- ----------- -------------
------------- -------------- ------------- ----------- -------------
OTHER FINANCIAL DATA:
Vehicle depreciation (Fleet Costs).... $ 912,830 $ 953,551 $ 1,015,511 $ 249,384 $ 253,743
Vehicle interest (Fleet Costs)........ 165,466 173,891 179,729 42,265 45,706
Non-vehicle depreciation and
amortization........................ 16,585 14,943 25,680 6,341 7,332
Non-vehicle interest.................. 2,221 3,258 3,831 918 751
EBITDA after Fleet Costs(3)........... 85,321 53,040 178,379 44,231 37,235
STATEMENT OF FINANCIAL POSITION DATA
(END OF PERIOD):
Accounts and loans receivable, net
of allowance for doubtful
accounts.......................... $ 383,830 $ 508,901 $ 506,325
Vehicles, net of accumulated
depreciation........................ 3,594,418 3,788,328 3,867,856
Total assets.......................... 4,135,112 4,728,299 4,832,134
Total debt, including amounts due
within one year..................... 3,083,603 3,339,579 3,263,687
Total non-vehicle debt................ 46,123 62,489 56,070
Shareholders' equity.................. 440,166 730,824 749,109
OPERATING DATA (END OF PERIOD):
Vehicle management data:
Vehicles under management(4)...... 642,000 664,000 779,000 761,000 767,000
Fuel and maintenance cards
outstanding(5).................. 2,314,000 2,726,000 3,629,000 3,688,000 4,390,000
63
- ------------------------
(1) Includes the results of operations of the Harpur Group Limited from January
20, 1998, the date of acquisition. See Note 4 to the VMS Audited Combined
Financial Statements.
(2) For a discussion of merger-related costs and other unusual charges
(credits), see Note 3 to the VMS Audited Combined Financial Statements.
(3) "EBITDA after Fleet Costs" represents net income plus non-vehicle interest
expense, non-vehicle depreciation and amortization and income taxes. We
believe that EBITDA after Fleet Costs provides useful information regarding
our ability to service debt, and we understand that such information is
considered by certain investors to be an additional basis for evaluating our
ability to pay interest and repay debt. EBITDA after Fleet Costs does not,
however, represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute
for net income as an indicator of our operating performance or cash flow as
a measure of liquidity. Because EBITDA after Fleet Costs is not calculated
identically by all companies, the presentation herein may not be exactly
comparable to other similarly titled measures of other companies. See the
VMS Combined Financial Statements, and related notes thereto, included
elsewhere in this prospectus. EBITDA is presented after Fleet Costs because
management believes this is a more meaningful representation of cash flows
available to service non-fleet debt.
(4) Includes leased vehicles for which third-party vehicle-related services are
provided.
(5) Includes fuel cards for third parties for which VMS acts as processor.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of results of operations of Avis and
VMS includes periods before completion of the VMS Acquisition. Accordingly, the
discussion and analysis of such periods do not reflect the impact the VMS
Acquisition will have on Avis. See "Risk Factors", "Unaudited Pro Forma
Consolidated Financial Data" and the discussion under "--Liquidity and capital
resources" for further discussions relating to the impact that the VMS
Acquisition may have on Avis.
GENERAL
NEW AVIS
REVENUE. New Avis is a leading provider of comprehensive automotive
transportation and vehicle management solutions, with strengths in car rental,
vehicle leasing and vehicle management services. Avis conducts vehicle rental
operations through 670 airport and non-airport (downtown or suburban) locations
in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina,
Australia and New Zealand as of June 30, 1999. During 1998, Avis completed over
15 million transactions for approximately 56 million rental days with a fleet
that averaged approximately 206,000 vehicles. Revenue is derived principally
from time and mileage charges for vehicle rentals and, to a lesser extent, fees
for personal effects protection and additional liability insurance. For fiscal
1998, approximately 64% of Avis' revenues were derived from commercial use and
small business accounts and 36% from leisure travelers and other products and
services.
VMS' revenues are reported in accordance with generally accepted accounting
principles ("GAAP") which require lease revenues for operating leases to be
reported on a basis which includes the portion of the lease payment relating to
depreciation and interest as leasing revenues. For internal management
presentation and certain analytical presentation in this prospectus, revenues
are reported after Fleet Costs, which nets the depreciation and interest costs
relating to the operating leases against the gross leasing revenues, resulting
in net leasing revenue. Since VMS holds no inventory of vehicles, and therefore
takes no inventory risk, and the depreciation and interest expense on leased
vehicles is directly linked to the underlying lease payment, management believes
that revenue after Fleet Costs is a more appropriate methodology to analyze the
business. By evaluating the business on this basis, charges such as lease
depreciation and interest, which can be impacted by changes in the underlying
lease depreciation period and absolute level of interest rates, are offset
resulting in a net leasing figure. Additionally, management believes that
revenue after Fleet Costs more accurately reflects the true revenues available
to VMS to cover selling, general and administrative expenses and more accurately
reflects the magnitude of fee-based revenues as a percentage of revenues.
VMS' fleet management services are divided into two principal product
categories: (1) asset-based products and services and (2) fee-based products and
services. Asset-based products include leases and the services clients require
to lease a vehicle, such as vehicle acquisition, title and registration, vehicle
remarketing and fleet management consultation, (including fleet, policy and
vehicle recommendation). VMS' principal fee-based products are fuel card
services, maintenance card services and accident management services. VMS has
three primary asset-based revenue streams: (1) depreciation and interest
revenues which are passed through to the leasing clients as part of the lease
billing (Fleet Costs); (2) incentive and allowances paid by auto manufacturers;
and (3) management fees paid by clients for services required in conjunction
with the leased vehicle. VMS' fee-based revenues are derived primarily from: (1)
fees for services rendered in vehicle maintenance assistance; (2) accident and
risk management; (3) billing consolidation; and
65
(4) information management. In 1998, VMS' total revenues after Fleet Costs were
39% asset-based and 61% fee-based.
VMS operates through three business units: PHH North America, PHH Europe and
WEX. PHH North America's largest portion of revenue (68% of PHH North America's
1998 revenue (after Fleet Costs)) is generated by providing open-end and
closed-end leases and related asset-based services to corporate fleets.
Approximately 96% of the lease portfolio of PHH North America consists of
open-end leases, which means that PHH North America bears only minor residual
risk with respect to a decline in the resale value of its vehicle portfolio. PHH
Europe provides fuel and maintenance cards, as well as vehicle and general
management services to over 16,000 companies, primarily in the United Kingdom.
WEX distributes its fuel cards and related offerings through three primary
channels: (i) the WEX-branded Universal Card, which is issued directly to fleets
by WEX, (ii) the Private Label Card, under which WEX provides private label fuel
cards and related services to commercial fleet customers of major oil companies
and (iii) the Co-Branded Card, under which WEX fuel cards are co-branded and
issued in conjunction with products and services of partners such as commercial
vehicle leasing companies.
EXPENSES. Avis' expenses consist primarily of:
- direct operating expenses (primarily wages and related benefits,
concessions and commissions paid to airport authorities, vehicle insurance
premiums and other costs relating to the operation of the rental fleet);
- depreciation and lease charges relating to the rental fleet (including net
gains or losses upon disposition of vehicles);
- selling, general and administrative expenses (including payments to
Cendant under the Master License Agreement, the computer services
agreement and several other agreements), reservation costs and other
advertising and marketing costs, and commissions paid to airlines and
travel agencies; and
- interest expense, including those relating to the financing of its rental
fleet.
VMS' expenses consist primarily of:
- depreciation and lease charges relating to the fleet (including net gains
or losses upon the disposition of vehicles);
- selling, general and administrative expenses (including charges from
Cendant of $7.0 million in 1998 for administrative services); and
- interest expense relating primarily to VMS' leased fleet.
NET INCOME. Avis' profitability is primarily a function of the volume
(i.e., number of rental transactions) and pricing of Avis' rental transactions
and the utilization of Avis' rental fleet. Significant changes in Avis' net cost
of vehicles or in interest rates may have a material effect on Avis'
profitability and cash flows. Since Avis has entered into repurchase agreements
or other arrangements with respect to the bulk of its fleet, Avis does not bear
a significant risk from declines in the value of its fleet upon disposal. Avis
is required to pay royalties to Cendant based on ARACS' revenue (4.0% in 1998
and increasing periodically to a maximum of 4.5% in 2003), and such royalties
could increase during a period of declining profits. This royalty fee and Avis'
expenditures for vehicles and facilities impose a significant need for
liquidity.
VMS' profitability and cash flows are primarily a function of the volume of
fee-based transactions, leased vehicle volume and average unit pricing. VMS'
results of operations are susceptible to competitive pricing pressures,
particularly in the large corporate market, despite possible increases in the
volume of leasing and fee-based transactions. To address this competition, VMS
has focused on accelerating the development of new fee-based products to
66
strengthen customer loyalty and increase customer penetration. Since VMS bears
residual risk with respect to the portion of its fleet that is subject to
closed-end leases, VMS' results are impacted by the strength or weakness of the
used car market. VMS utilizes market estimates of residual projections from the
Automotive Lease Guide ("ALG") in the United States and David Henley Systems in
the United Kingdom along with its internal expertise to formulate residual price
projections. As of December 31, 1998, 74% of the U.K. units and 4% of the North
American vehicles are leased under closed-end leases and subject to residual
risk. In 1998 and 1999, VMS will suffer losses on the closed end residual
realizations in both the United Kingdom and North America. Approximately 66% of
VMS' leasing portfolio is priced on the basis of floating rates, therefore any
increase in the underlying cost which VMS is unable to pass through will have a
negative impact on VMS' profitability. Additionally, if either the fixed rate or
floating rate portfolio is not effectively matched (as VMS' strategy is to
match-fund its portfolio to the duration of the underlying debt), a movement in
interest rates would have an impact on the VMS' profitability. In addition, VMS'
profitability is positively impacted by the significant fuel taxes imposed in
the United Kingdom as VMS' fees are a function of the gross amount of each sale.
The following discussion and analysis provides information that management
believes to be relevant to understanding Avis' and VMS' respective financial
positions and results of operations. For Avis, management believes that a more
meaningful comparison of the results of operations for the years ended December
31, 1997 and 1996 is obtained by presenting results on a pro forma basis to give
effect to the following transactions as if they had occurred on January 1 of
1996 and 1997: Avis' acquisition by Cendant in October 1996 and the
establishment of a franchisor/franchisee relationship; the acquisition of The
First Gray Line Corporation ("First Gray Line") in August 1997 and the repayment
of debt with the net proceeds of the IPO. See "Company Background" for more
details on these transactions. Moreover, Avis' results for 1996 are presented on
a combined twelve-month basis and include the results of the predecessor
companies of Avis for the period January 1, 1996 to October 16, 1996 and Avis'
results for the period October 17, 1996 (the date of the 1996 acquisition by
Cendant) to December 31, 1996. As a result of the 1996 acquisition by Cendant,
Avis' consolidated financial statements for the periods subsequent to such date
are presented on a different basis of accounting than those for the periods
prior to the 1996 acquisition and, therefore, are not directly comparable.
This management's discussion and analysis of financial condition and results
of operations should be read in conjunction with the financial statements of
Avis and VMS included elsewhere in this prospectus.
67
COMPARISON OF THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998
The following table sets forth for the periods indicated, certain items in
the Company's consolidated statement of operations (dollars in thousands):
HISTORICAL
----------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999
---------------------------- ----------------------------
PERCENTAGE PERCENTAGE
OF REVENUE OF REVENUE
------------- -------------
Revenue................................................. $ 1,086,670 100.0% $ 1,204,374 100.0%
Costs and expenses:
Direct operating...................................... 440,684 40.6 476,938 39.6
Vehicle depreciation and lease charges, net........... 277,394 25.5 311,167 25.8
Selling, general and administrative................... 213,114 19.6 231,182 19.2
Interest, net......................................... 96,818 8.9 104,362 8.7
Amortization of cost in excess of net assets
acquired............................................ 5,521 0.5 6,351 0.5
------------- ----- ------------- -----
1,033,531 95.1 1,130,000 93.8
------------- ----- ------------- -----
Income before provision for income taxes................ 53,139 4.9 74,374 6.2
Provision for income taxes.............................. 23,381 2.2 31,906 2.7
------------- ----- ------------- -----
Net income.............................................. $ 29,758 2.7% $ 42,468 3.5%
------------- ----- ------------- -----
------------- ----- ------------- -----
REVENUE. Revenue increased 10.8%, from $1,086.7 million to $1,204.4
million, compared to the same period in 1998. The increase in revenue is due
primarily to overall market demand (8.1%) and the acquisition of the Hayes
Leasing Company, Inc. on May 1, 1998 (2.7%). The revenue increase reflected a
9.5% increase in the number of rental transactions and a 1.2% increase in
revenue per rental transactions.
COSTS AND EXPENSES. Total costs and expenses increased 9.3%, from $1,033.5
million to $1,130.0 million, compared to the same period in 1998. Direct
operating expenses increased 8.2%, from $440.7 million to $476.9 million,
compared to the same period in 1998. As a percentage of revenue, direct
operating expenses declined to 39.6%, from 40.6% for the corresponding period in
1998. Direct operating expense included a one-time $7.5 million credit (0.6% of
revenue), resulting from the curtailment of the Company's Deferred Benefit Plan.
Operating efficiencies were derived primarily from lower vehicle insurance costs
(0.4% of revenue), and lower airport commissions (0.9% of revenue) and were
partially offset by higher compensation costs (0.5% of revenue), and higher
computer services costs (0.4% of revenues).
VEHICLE DEPRECIATION AND LEASE CHARGES. Vehicle depreciation and lease
charges increased 12.1%, from $277.4 million to $311.2 million, compared to the
same period in 1998. As a percentage of revenue, vehicle depreciation and lease
charges were 25.8% of revenue, as compared to 25.5% of revenue for the
corresponding period in 1998. The change reflected a 9.6% increase in the
average rental fleet combined with a higher monthly cost per vehicle.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 8.5%, from $213.1 million to $231.2 million,
compared to the same period in 1998. The increase was due to higher reservation
costs, higher general and administrative expenses, and higher royalty fees.
68
INTEREST EXPENSE. Interest expense increased 7.8%, from $96.8 million to
$104.4 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.
INCOME TAXES. The provision for income taxes for the six months ended June
30, 1999, increased to $31.9 million, from $23.4 million for the same period in
1998. The effective income tax rate was 42.9%, 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. Net income increased 42.7%, from $29.8 million to $42.5
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.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND PRO FORMA YEAR ENDED 1997
The following table sets forth, for the periods indicated, certain items in
Avis' consolidated statements of operations (dollars in thousands):
UNAUDITED PRO FORMA(1) HISTORICAL
----------------------------- -----------------------------
YEAR YEAR
ENDED ENDED
DECEMBER 31, PERCENTAGE DECEMBER 31, PERCENTAGE
1997 OF REVENUE 1998 OF REVENUE
-------------- ------------- -------------- -------------
Revenue............................................... $ 2,175,897 100.0% $ 2,297,582 100.0%
Costs and Expenses:
Direct operating, net................................. 920,283 42.3 939,986 40.9
Vehicle depreciation and lease charges, net........... 559,433 25.7 593,064 25.8
Selling, general and administrative................... 422,053 19.4 438,724 19.1
Interest, net......................................... 192,598 8.9 201,726 8.8
Amortization of cost in excess of net assets
acquired............................................ 9,743 0.4 11,854 0.5
-------------- ----- -------------- -----
2,104,110 96.7 2,185,354 95.1
-------------- ----- -------------- -----
Income before provision for income taxes.............. 71,787 3.3 112,228 4.9
Provision for income taxes............................ 32,355 1.5 48,707 2.1
-------------- ----- -------------- -----
Net income............................................ $ 39,432 1.8% $ 63,521 2.8%
-------------- ----- -------------- -----
-------------- ----- -------------- -----
- ------------------------
(1) Includes the effects of the following transactions as if they had occurred
on January 1 of each period presented: (i) Avis' acquisition by Cendant and
the establishment of a franchisor/ franchisee relationship, (ii) the
acquisition of First Gray Line and (iii) the repayment of debt with the net
proceeds (after the acquisition of First Gray Line) from the IPO.
REVENUE. Avis' revenue for 1998 increased 5.6% from $2,175.9 million to
$2,297.6 million, over 1997. The increase in revenue is due primarily to the
acquisition of the assets of Hayes Leasing Company, Inc. ("Hayes Leasing")
(2.7%) and overall market demand (2.9%). The revenue increase reflected a 5.3%
increase in the number of rental transactions and a 0.3% increase in revenue per
rental transaction.
COSTS AND EXPENSES. Avis' total costs and expenses for 1998 increased 3.9%,
from $2,104.1 million to $2,185.4 million, over 1997. Avis' direct operating
expenses increased 2.1%, from $920.3 million to $940.0 million, over 1997. As a
percentage of revenue, Avis' direct operating expenses for 1998 declined to
40.9%, from 42.3% for 1997. Avis' operating efficiencies were derived primarily
from lower vehicle insurance costs (0.3% of revenue), lower airport commissions
(1.5% of
69
revenue), and lower computer services costs (0.4% of revenue). These
efficiencies were partially offset by higher vehicle damage costs (0.2% of
revenue) and higher compensation costs (0.5% of revenue).
VEHICLE DEPRECIATION AND LEASE CHARGES. Vehicle depreciation and lease
charges for 1998 increased 6.0%, from $559.4 million to $593.1 million, over
1997. As a percentage of revenue, Avis' vehicle depreciation and lease charges
were 25.8% of revenue in 1998, as compared to 25.7% of revenue in 1997. The
change reflected a 3.4% increase in the average rental fleet combined with a
higher monthly cost per vehicle. In addition, the net proceeds received by Avis
in excess of book value for the disposition of used vehicles was $2.3 million
lower (0.1% of revenue) in 1998 compared to 1997. This was primarily due to
favorable market conditions for the sale of certain model vehicles during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Avis' selling, general and
administrative expenses for 1998 increased 3.9%, from $422.1 million to $438.7
million, over 1997. The increase was due to $6.6 million higher reservation
costs, $5.2 million higher marketing expenses, and $4.9 million higher royalty
fees.
INTEREST EXPENSE. Avis' interest expense for 1998 increased 4.7%, from
$192.6 million to $201.7 million, over 1997, due to higher borrowings required
to finance the growth of the rental fleet.
INCOME TAXES. Avis' provision for income taxes for 1998 increased 50.5%,
from $32.4 million to $48.7 million, over 1997. The effective income tax rate
was 43.4%, down from 45.1% 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 us.
NET INCOME. Avis' net income for 1998 increased 61.1%, from $39.4 million
to $63.5 million, over 1997. The increase reflected higher revenue, decreased
costs and expenses as a percentage of revenue and a lower effective income tax
rate in 1998.
70
COMPARISON OF PRO FORMA YEARS ENDED DECEMBER 31, 1997 AND 1996
The following table sets forth, for the periods indicated, certain items in
Avis's consolidated statements of operations (dollars in thousands):
UNAUDITED PRO FORMA(1)
---------------------------------------------
YEAR YEAR
ENDED ENDED
DECEMBER 31, PERCENTAGE DECEMBER 31, PERCENTAGE
1996 OF REVENUE 1997 OF REVENUE
-------------- ------------- -------------- -------------
Revenue............................................... $ 2,055,519 100.0% $ 2,175,897 100.0%
Costs and Expenses:
Direct operating, net................................. 905,534 44.0 920,283 42.3
Vehicle depreciation and lease charges, net........... 493,306 24.0 559,433 25.7
Selling, general and administrative................... 439,674 21.4 422,053 19.4
Interest, net......................................... 183,115 8.9 192,598 8.9
Amortization of cost in excess of net assets
acquired............................................ 9,295 0.5 9,743 0.4
-------------- ------ -------------- ------
2,030,924 98.8 2,104,110 96.7
-------------- ------ -------------- ------
Income before provision for income taxes.............. 24,595 1.2 71,787 3.3
Provision for income taxes............................ 16,028 0.8 32,355 1.5
-------------- ------ -------------- ------
Net income............................................ $ 8,567 0.4% $ 39,432 1.8%
-------------- ------ -------------- ------
-------------- ------ -------------- ------
- --------------------------
(1) Includes the effects of the following transactions as if they had occurred
on January 1 of each period presented: (i) Avis' acquisition by Cendant and
the establishment of a franchisor/franchisee relationship, (ii) the
acquisition of First Gray Line and (iii) the repayment of debt with the net
proceeds (after the acquisition of First Gray Line) from the IPO.
REVENUE. Avis' revenue for 1997 increased 5.9%, from $2,055.5 million to
$2,175.9 million, over 1996. The revenue increase reflected a 3.5% increase in
the number of rental transactions and a 2.3% increase in revenue per rental
transaction, resulting from greater overall market demand.
COSTS AND EXPENSES. Avis' total costs and expenses for 1997 increased 3.6%,
from $2,030.9 million to $2,104.1 million, over 1996. Avis' direct operating
expenses for 1997 increased 1.6%, from $905.5 million to $920.3 million, over
1996. As a percentage of revenue, Avis' direct operating expenses for 1997
declined to 42.3% from 44.0% for 1996. Avis' operating efficiencies were derived
primarily from lower vehicle damage costs (0.3% of revenue), lower facility
costs (0.3% of revenue), lower vehicle insurance costs (0.2% of revenue), lower
vehicle registration costs (0.6% of revenue) and a decline in wages and benefits
as a percentage of revenue (0.2% of revenue).
VEHICLE DEPRECIATION AND LEASE CHARGES. Vehicle depreciation and lease
charges for 1997 increased 13.4%, from $493.3 million to $559.4 million, over
1996. As a percentage of revenue, vehicle depreciation and lease charges for
1997 was 25.7% of revenue, as compared to 24.0% of revenue for 1996. The change
reflected a 3.2% increase in the average rental fleet required to service higher
rental day activity. In addition, due to favorable market conditions for the
sale of certain model vehicles, the net proceeds received in excess of book
value upon the disposition of used vehicles was $30.0 million higher in 1996 as
compared to 1997. This resulted in a 1.7% reduction in vehicle depreciation and
lease charges as a percentage of revenue in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Avis' selling, general and
administrative expenses for 1997 decreased 4.0%, from $439.7 million to $422.1
million, over 1996. As a percentage of revenue, selling, general and
administrative expenses for 1997 decreased to 19.4% from 21.4% for 1996. This
decrease was the result of lower reservation costs due to operating efficiencies
and reduced marketing costs as a result of the elimination of certain marketing
programs in place during the first half of 1996, partially offset by higher
royalty fees due to increased revenue.
71
INTEREST EXPENSE. Avis' interest expense for 1997 increased 5.2%, from
$183.1 million to $192.6 million, over 1996, due primarily to higher borrowings
required to finance the growth of the rental fleet, which was partially offset
by lower average interest rates.
INCOME TAXES. The provision for income taxes for 1997 increased 101.9%,
from $16.0 million to $32.4 million, over 1996. The effective tax rate for 1997
was 45.1% as compared to 65.2% for 1996. The increase in the tax provision and
the decrease in the effective tax rate were primarily due to higher domestic
income before provision for income taxes. The effective tax rate reflects
differences between the 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 us.
NET INCOME. Avis' net income for 1997 increased 360.3%, from $8.6 million
to $39.4 million, over 1996. The increase reflected higher revenue, decreased
costs and expenses as a percentage of revenue and a higher effective income tax
rate in 1997.
RESULTS OF OPERATIONS (VMS)
HARPUR ACQUISITION. In January 1998, Cendant completed the acquisition of
Harpur, a leading vehicle management company in the United Kingdom. When
acquired, Harpur had outstanding over 390,000 fuel cards which were used to
purchase over 185,000 gallons of fuel during 1997. Harpur's processing and
support services have been fully integrated into the VMS platform. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of Harpur have been included in the combined financial statements since
the date of acquisition.
VMS-PAYMENTECH TRANSACTION. In January 1997, VMS sold one-half of its
interest in PHH Paymentech LLC ("Paymentech") to Paymentech Inc. resulting in a
gain of $17.5 million included in other revenues. Paymentech included all of the
card businesses of PHH Vehicle Management Services Corporation. The entity was
operated as a joint venture with each party maintaining a 50% interest and was
reflected in the 1997 combined financial results under the equity method of
accounting. In December 1997, Cendant purchased the 50% interest from Paymentech
Inc. in order to allow Cendant to evaluate other structuring possibilities with
its portfolio of card businesses. The 1998 financial results include 100% of the
operations of Paymentech.
MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES. In connection with the
merger of PHH Corporation and HFS Incorporated in the second quarter of 1997 and
the merger of HFS Incorporated with CUC International, Inc. in the fourth
quarter of 1997 (the "Mergers"), VMS incurred $61.1 million of merger-related
costs and other unusual charges. Management initiated a plan to continue the
downsizing of fleet operations by providing for job reductions and eliminating
unprofitable products.
Personnel-related charges included termination benefits such as severance,
medical and other benefits as well as retirement benefits (pursuant to
pre-existing contracts) resulting from a change in control. Business termination
charges of $55 million represented costs to exit certain activities including:
(i) a $30 million payment to terminate a relationship with a third-party
associated with certain credit card operations and (ii) a $25 million goodwill
impairment loss recorded as a result of abandoning certain unprofitable
closed-end leasing activities. The plan was substantially completed by December
31, 1997. At December 31, 1997, the remaining liability of approximately $2.1
million represented severance payments, which were paid in 1998 with the excess
liability of approximately $1.3 million reversed in the second quarter of 1998
as the plan was completed. See Note 3 to the VMS Audited Combined Financial
Statements.
CENDANT SERVICES. Prior to the VMS Acquisition, VMS was wholly owned by
Cendant. During this period, Cendant provided VMS with certain administrative
functions, such as risk management, treasury, legal, payroll, human resources,
certain information technology and taxes. Cendant has agreed to continue
providing certain of these services to us for a limited period of time.
Thereafter, we will either perform these services internally or obtain them from
one or more third-party providers. See "Risk Factors--We may be unable to
successfully integrate VMS into our operations or realize the expected benefits
from the VMS Acquisition or future acquisitions".
72
The following table sets forth, for the periods indicated, certain items in
VMS' statements of operations (dollars in thousands):
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------- ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
1996 OF REVENUE 1997 OF REVENUE 1998 OF REVENUE 1998 OF REVENUE
---------- ------------- ---------- ------------- ---------- ------------- --------- -------------
Revenue
Fleet leasing
revenue........ $1,128,495 $1,187,193 $1,286,896 $ 312,126
Fleet management
services....... 167,512 184,047 182,356 49,689
Other............ 61,032 81,455 135,811 29,490
---------- ---------- ---------- ---------
Total
revenue...... 1,357,039 100.0% 1,452,695 100.0% 1,605,063 100.0% 391,305 100.0%
Expenses
Depreciation on
leased
vehicles....... 912,830 67.3 953,551 65.6 1,015,511 63.3 249,384 63.7
Interest
expense........ 167,687 12.4 177,149 12.2 183,560 11.4 43,183 11.1
Selling, general
and
administrative
expenses....... 193,822 14.3 211,123 14.6 232,724 14.5 55,425 14.2
Depreciation and
amortization on
assets other
than leased
vehicles....... 16,585 1.2 14,943 1.0 25,680 1.6 6,341 1.6
Merger-related
costs
(credits)...... 61,090 4.2 (1,280) (0.1)
---------- ----- ---------- ----- ---------- ----- --------- -----
Total
expenses..... 1,290,924 95.2 1,417,856 97.6 1,456,195 90.7 354,333 90.6
---------- ----- ---------- ----- ---------- ----- --------- -----
Income before
income taxes..... 66,115 4.9 34,839 2.4 148,868 9.3 36,972 9.4
Provision for
income taxes..... 25,323 1.9 23,649 1.6 55,800 3.5 13,857 3.5
---------- ----- ---------- ----- ---------- ----- --------- -----
Net income......... $ 40,792 3.0% $ 11,190 0.8% $ 93,068 5.8% $ 23,115 5.9%
---------- ----- ---------- ----- ---------- ----- --------- -----
---------- ----- ---------- ----- ---------- ----- --------- -----
PERCENTAGE
1999 OF REVENUE
--------- -------------
Revenue
Fleet leasing
revenue........ $ 317,992
Fleet management
services....... 50,694
Other............ 31,567
---------
Total
revenue...... 400,253 100.0%
Expenses
Depreciation on
leased
vehicles....... 253,743 63.4
Interest
expense........ 46,457 11.6
Selling, general
and
administrative
expenses....... 63,569 15.9
Depreciation and
amortization on
assets other
than leased
vehicles....... 7,332 1.8
Merger-related
costs
(credits)......
--------- -----
Total
expenses..... 371,101 92.7
--------- -----
Income before
income taxes..... 29,152 7.3
Provision for
income taxes..... 11,002 2.8
--------- -----
Net income......... $ 18,150 4.5%
--------- -----
--------- -----
COMPARISON OF THREE MONTH PERIOD ENDED MARCH 31, 1999 AND 1998
REVENUES. VMS's revenues for the three month period ended March 31, 1999
increased 2.3% from $391.3 million in the three month period ended March 31,
1998 to $400.3 million. Vehicles under management remained stable, growing 1%
from 761,000 in the 1998 period to 767,000 in the 1999 period; while fuel and
maintenance cards outstanding grew 19% from 3.7 million to 4.4 million,
primarily in the United Kingdom and at WEX.
Fleet leasing revenues increased 1.9% in the three month period ended March
31, 1999 from $312.1 million in the comparable period in 1998 to $318.0 million.
The largest portion of the increase was due to higher depreciation and interest
pass-through costs on operating leases, which increased 2.7% to $299.4 million.
VMS' leased vehicles increased 5.1% to 356,467 units.
Fleet management services revenues increased 2.0% in the three month period
ended March 31, 1999 from $49.7 million in the comparable period in 1998 to
$50.7 million. Volume increases led to a 21% increase in vehicle maintenance
assistance revenue and a 31% increase in accident and risk management revenue.
The increase was offset in part by a $2.2 million decrease in revenues from
closed-end used car dispositions in the United Kingdom as a loss of $1.8 million
was realized in the first quarter of 1999 versus a $0.4 million gain in the
first quarter of 1998.
Other revenue increased 7.0% to $31.6 million due to unit increases in the
fuel card product line. WEX's fuel cards increased 26% while the PHH proprietary
fuel card increased 12%. This
73
increase was partially offset by lower revenue per card due to lower fuel
prices. In the United States, the average price of a gallon of fuel dropped from
$1.11 in the first three months of 1998 to $1.01 in the first three months of
1999.
EXPENSES. Total expenses (including interest) for the three-month period
ended March 31, 1999, increased 4.7% from $354.3 million to $371.1 million.
Expenses generally increased due to higher volumes.
Selling, general and administrative expenses increased $8.1 million to $63.6
million. This increase is due to higher transaction volumes across all product
lines.
Vehicle depreciation on leased assets for the three month period ended March
31, 1999, increased 1.8% from $249.4 million to $253.7 million. The increase
reflects higher lease billings resulting in part from higher volumes.
Total interest cost for the three month period ended March 31, 1999,
increased 7.6% from $43.2 million to $46.5 million. Despite relatively flat
interest rates, total interest costs increased due to PHH Corporation's
commercial paper rating downgrade to A2/P2 as of October 1998. Most of this
increased cost could not be passed through to customers.
NET INCOME. Net income for the three month period ended March 31, 1999
decreased 21.5% from $23.1 million to $18.2 million. The decrease was primarily
driven by two factors: (i) interest expense grew at a faster rate than interest
income due to VMS' inability to pass-through the higher interest costs resulting
from PHH Corporation's debt rating downgrade and (ii) the pretax loss of $1.8
million generated by the United Kingdom on its residual realization on contract
hire units (closed-end leases in the United Kingdom).
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND 1997
REVENUES. VMS' revenues increased 10.5% from $1.5 billion in 1997 to $1.6
billion in 1998. The increase is due primarily to the continued growth in all
major product lines and the inclusion of the Harpur revenues. Vehicles under
management increased from 664,000 units in 1997 to 779,000 units in 1998.
Additionally, total cards increased from 2.7 million to 3.6 million in 1998 due
to increased growth in both the United Kingdom and at WEX and from the addition
of approximately 400,000 Harpur cards.
Fleet leasing revenues increased 8.4% from $1.2 billion in 1997 to $1.3
billion in 1998. The largest portion of the increase was due to higher
depreciation and interest pass-through costs on open-end leases due to higher
volumes, which increased 6.0%, to $1.2 billion. Additionally, contract hire
revenues in the United Kingdom increased 111% to $18.3 million due to volume
increases.
Fleet management services revenues decreased 0.9% from $184.0 million in
1997 to $182.4 million in 1998. Excluding the effects of a $17.5 million gain
from the sale of 50% of Paymentech recorded in 1997 and a $10.3 million
deterioration in closed-end used car results as a loss of $4.4 million was
realized in 1998 versus a gain of $5.9 million in 1997, fleet management
services revenues increased due to accounting for Paymentech as a consolidated
subsidiary in 1998 (versus the equity method in 1997) and growth in fee based
revenues.
Other revenues increased 66.7% from $81.5 million in 1997 to $135.8 million
in 1998. The principal factors driving the increase were the inclusion of $31.7
million of revenues from the Harpur acquisition, the increase in WEX revenues of
$8.6 million and increases in the U.K. fuel card business.
EXPENSES. Total expenses increased 2.7% from $1.4 billion in 1997 to $1.5
billion in 1998.
74
Total pass-through costs of depreciation on leased vehicles and interest
expense increased $67.8 million from $1.1 billion in 1997 to $1.2 billion in
1998. The increases were related to higher volumes as leased units in the United
Kingdom increased 37% to approximately 51,000 units and leased units in North
America increased 4.4% to approximately 303,000 units. These pass-through costs
decreased as a percentage of fleet leasing revenues from 95.0% of revenues in
1997 to 92.9% of revenues in 1998.
Selling, general and administrative expenses increased 10.2% from $211.0
million in 1997 to $232.7 million in 1998. The increase resulted from three
major factors: (i) the inclusion of $10.9 million of Harpur expenses in 1998,
(ii) the consolidation of PHH Paymentech LLC in 1998 versus the accounting under
the equity method in 1997 resulting in a $20.9 million increase, and (iii) a
decrease in the corporate overhead allocated from PHH Corporation and Cendant
from $18.9 million in 1997 to $7.0 million in 1998.
Depreciation and amortization on assets other than leased vehicles increased
71.9% from $14.9 million in 1997 to $25.7 million in 1998. Increased capital
expenditures in certain key operating systems centered in the United Kingdom and
WEX were the principal factors contributing to the increase.
Merger-related expenses decreased in 1998 as charges related to the Mergers
were recorded in 1997. The credit reflected in 1998 resulted from changes in
estimates.
NET INCOME. VMS' net income for the year ended December 31, 1998 increased
732% from $11.2 million to $93.1 million, compared to the same period in 1997.
The increase reflects higher revenues due to volume increases and the impact of
the merger-related expenses recognized in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 AND 1996
REVENUES. VMS' revenues increased 7.0% from $1.4 billion in 1996 to $1.5
billion in 1997. The increase is due to growth in all major product lines.
Strong card growth in both the United Kingdom and WEX resulted in total cards
increasing from 2.3 million to 2.7 million in 1997.
Fleet leasing revenues increased 5.2% from $1.1 billion in 1996 to $1.2
billion in 1997. The largest increase was due to higher depreciation and
interest pass-through costs on the open-end leases in North America. Total
leased vehicles increased from 316,000 units in 1996 to 327,000 units in 1997.
Fleet management services revenues increased 9.9% from $167.5 million in
1996 to $184.0 million in 1997. The increase was due to the gain from the sale
of 50% of Paymentech recorded in January, 1997 of $17.5 million which was offset
by the decrease in revenues of approximately $21 million resulting from
Paymentech being accounted for under the equity method by VMS in 1997. Excluding
these offsetting effects, the growth resulted from increases in the major fee
based service offerings including accident management and maintenance in both
North America and Europe.
Other revenues increased 33.5% from $61.0 million in 1996 to $81.5 million
in 1997. Strong growth in both the European and WEX fuel card businesses were
the primary factors in the increase as each generated in excess of 30% growth in
revenues for the product.
EXPENSES. Total expenses increased 9.8% from $1.3 billion in 1996 to $1.4
billion in 1997. The increase was due to merger-related expenses of $61.1
million in 1997 from the merger of PHH Corporation and HFS Incorporated was the
principal increase.
Total pass-through costs of depreciation on leased vehicles and interest
expense increased 4.6% from $1.08 million to $1.13 million. The increase was due
principally to the 3.5% increase in
75
the number of leased units. These pass-through costs decreased as a percentage
of fleet leasing revenues from 95.7% of revenues in 1996 to 95.0% of revenues in
1997.
Selling, general and administrative expenses increased 8.9% from $193.8
million in 1996 to $211.1 million in 1997. The increases were related to two
factors: (1) an $11.9 million increase in corporate overhead allocated from PHH
Corporation and Cendant from $7.0 million in 1996 to $18.9 million in 1997, and
(2) increases in volume-related expenses.
Depreciation and amortization on assets other than leased vehicles decreased
9.9% from $16.6 million in 1996 to $14.9 million in 1997. The decrease resulted
principally from lower amortization of goodwill due to the merger write-off of
$25 million of goodwill in 1997 and lower depreciation on capitalized systems.
Merger-related expenses totaled $61.1 million in 1997. The principal
components of the charge were a $30 million payment to terminate a relationship
with a third-party associated with certain credit card operations and a $25
million goodwill impairment loss recorded as a result of abandoning certain
unprofitable closed-end leasing activities. There were no merger-related
expenses in 1996.
NET INCOME. VMS' net income for the year ended December 31, 1997 decreased
72.6% from $40.8 million to $11.2 million, compared to the same period in 1996.
The merger-related expenses of $61.1 million pre-tax were the singular cause of
the decrease.
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 acquisition indebitness. For the six months ended
June 30 1999, pro forma for the VMS Acquisition, our expenditures for new
vehicles would have been approximately $4.9 billion and proceeds from the
disposition of used vehicles would have been approximately $3.2 billion. For
1999, we expect our expenditures for new vehicles (net of proceeds from the
disposition of used vehicles) to be higher than in 1998. Since the late 1980's,
Avis has acquired vehicles related to its car rental operations primarily
pursuant to 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. These
Repurchase Programs limit residual risk with respect to vehicles purchased under
the programs. This enables management to better estimate depreciation expense in
advance. VMS has historically not participated in Repurchase Programs and
management does not expect to do so in the future. Generally, customers with
open-end leases, which make up approximately 85% of VMS' lease portfolio, bear
the residual risk with respect to their vehicles, whereas with respect to
closed-end leases, which made up approximately 15% of VMS' lease portfolio, VMS
bears such residual risk. Avis and VMS have established methods for disposition
of used vehicles that are not covered by Repurchase Programs.
Historically, Avis' financing requirements for 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. Management expects that this pattern will continue
with the addition of VMS, whose cash requirements have historically been
relatively consistent over the course of a given year.
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
76
months. Customer receivables also provide liquidity with approximately 10 days
of daily sales outstanding.
Pro forma for the VMS Acquisition, we would have made capital investments
for property improvements totaling $49.4 million for the six months ended June
30 1999, and $60.8 million for the six months ended June 30, 1998.
Management has an interest rate management policy, including a target mix
for average fixed rate and floating rate indebtedness on a consolidated basis.
However, an increase in interest rates may have a material adverse impact on our
profitability.
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 will guarantee only the borrowings of our subsidiary in Argentina.
At June 30, 1999, the total debt for our international operations was
approximately $900 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.
Avis Rent A Car is party to a credit agreement (the "New Credit Facility")
which provides for up to $1.35 billion of borrowings in the form of (1) A
Revolving Credit Facility in the amount of up to $350.0 million, (2) a $250.0
million Term A Loan, (3) a $375.0 million Term B Loan and (4) a $375.0 million
Term C Loan. Upon consummation of the VMS Acquisition, Avis borrowed as of June
30, 1999, the full $1.0 billion under the Term A Loan, Term B Loan and Term C
Loan and $73.0 million under the Revolving Credit Facility. The loans under the
New Credit Facility bear interest at variable rates at fixed margin, above
either The Chase Manhattan Bank's alternative base rate or the Eurodollar rate.
The New Credit Facility is guaranteed by each U.S subsidiary of Avis Rent A Car
but excluding any insurance subsidiaries, banking subsidiaries, and
securitization or other vehicle financing subsidiaries. All borrowings by us
under the New Credit Facility are secured by a first-priority perfected lien on
substantially all of the tangible and intangible assets of New Avis and each
guarantor under the New Credit Facility excluding assets that secure the ABS
Facilities, and by a pledge of all the capital stock of each of Avis Rent A Car,
Inc.'s U.S. subsidiaries and 65% of the capital stock of its first tier non-U.S.
subsidiaries.
The old notes and the new notes will mature in 2009. Avis Rent A Car's
obligations under these notes are subordinate and junior in right of payment in
all existing and future senior indebtedness of New Avis, including all
indebtedness under the New Credit Facility. The obligations of New Avis under
these notes and the Indenture have been guaranteed on a senior subordinated
basis by each of our U.S. subsidiaries, other than our banking subsidiaries,
insurance subsidiaries and securitization and other vehicle financing
subsidiaries which have not guaranteed senior indebtedness of New Avis. The New
Credit Facility and the Indenture contain numerous financing and operating
covenants that limit the discretion of our management with respect to certain
business matters. These covenants place significant restrictions on, among other
things, the ability of Avis Rent A Car and some subsidiaries to incur additional
indebtedness, pay dividends and other distributions, prepay subordinated
indebtedness, create liens or other encumbrances, make capital expenditures,
make certain investments or acquisitions, engage in certain transactions with
affiliates, sell or otherwise dispose of assets and merge with other entities
and otherwise restrict corporate activities. The New Credit Facility and the
Indenture contain customary events of default.
THE AVIS ABS FACILITY
Avis has a domestic integrated financing program (the "Avis ABS Facility")
that as of June 30, 1999 provide for up to $3.75 billion in financing for
vehicles covered by Repurchase Programs, with up to 25% of the Avis ABS Facility
available for vehicles not covered by Repurchase Programs. The Avis ABS Facility
provides for the issuance of up to $1.5 billion of asset backed variable funding
77
notes (the "Variable Funding Notes") and $2.25 billion of asset-backed medium
term notes are outstanding under the Avis 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 Avis's
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 MBIA and as a
result are rated AAA by S&P and Aaa by Moody's. At June 30, 1999, Avis had
approximately $3.7 billion of debt outstanding under the Avis ABS Facility. At
June 30, 1999, Avis had approximately $34 million of additional credit available
for vehicle purchases.
Based on current market conditions and Avis' 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.
THE INTERIM VMS ABS FACILITY
VMS currently has an interim $3.6 billion vehicle financing program (the
"Interim VMS ABS Facility" and, together with the Avis ABS Facility, the "ABS
Facilities") supported by leases and vehicles owned by VMS and to initially
consist of (1) up to $2.5 billion of variable funding asset-backed notes
supported by U.S. leases and vehicles, (2) up to $236 million of asset-backed
preferred membership interests supported by U.S. leases and vehicles and (3) an
advance of up to $829 million under an asset-backed facility to PHH United
Kingdom guaranteed by various PHH United Kingdom entities and supported by all
of the assets of such entities, each of which will be placed with one or more
multi-seller commercial paper conduits. We intend to refinance the Interim VMS
ABS Facility through the issuance of medium-term notes and bank conduits.
SEASONALITY
Avis' third quarter, which covers the peak summer travel months, has
historically been its strongest quarter, accounting for approximately 28% and
47% of Avis' rental revenue and pre-tax income from rental operations,
respectively, in 1998. Any occurrence that disrupts travel patterns during the
summer period could have a material adverse effect on New Avis' financial
condition and results of operations. Avis' fourth quarter is generally its
weakest, when there is limited leisure travel and a greater potential for
adverse weather conditions. Many of Avis' operating expenses, such as rent,
insurance and personnel, are fixed and cannot be reduced during periods of
decreased rental demand. As a result, there can be no assurance that Avis would
have sufficient liquidity under all conditions. Since VMS' business is generally
not seasonal, management expects these patterns to continue.
INFLATION
The increased acquisition cost of vehicles is expected to be the primary
inflationary factor affecting New Avis' operations. Many of New Avis' 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 New Avis' overall operating costs is not expected to be
greater for New Avis than for its competitors.
78
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
A recent pronouncement of the Financial Accounting Standards Board which are
not required to be adopted at this date, is Statement of Financial Accounting
Standards No. 133--"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES", ("SFAS 133") which is effective for our consolidated financial
statements for the year ending December 31, 2001. 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 is not expected to have a material effect on the Company's
consolidated financial statements.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued a Statement of Position No. 98-5,
"ACCOUNTING FOR START-UP COSTS" ("SOP No. 98-5"). 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. SOP No. 98-5 is effective for fiscal years beginning after December 15,
1998.
The adoption of SOP No. 98-5 is not expected to have a material effect on
our consolidated financial statements. Avis Rent A Car has not completed its
assessment of the effect on New Avis' consolidated financial statements that
will result from the adoption of SFAS No. 133.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
Our agreements with various lenders, including the New Credit Facility, the
Indenture and the ABS Facilities include a number of significant covenants that,
among other things, will restrict our ability to dispose of non-fleet assets,
incur additional indebtedness, create liens, pay dividends, enter into certain
investments or acquisitions, repurchase or redeem capital stock, engage in
mergers or consolidations or engage in certain transactions with affiliates, and
otherwise restrict corporate activities. Certain of these agreements will also
require us to maintain specified financial ratios. A breach of any of these
covenants or our inability to maintain the required financial ratios could
result in a default in respect of the related indebtedness. In the event of a
default, the lenders could declare, among other options, the indebtedness,
together with accrued interest and other fees, to be immediately due and
payable, failing which the lenders could proceed against the collateral securing
such indebtedness.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Avis has derivative financial instruments at December 31, 1998 that are
sensitive to changes in interest rates on Avis' debt obligations and on Avis'
interest rate swap agreements. See Note 9 to the Avis Audited Consolidated
Financial Statements. For long-term obligations, the following table presents
cash flows and weighted average interest rates by expected maturity dates.
Avis has entered into four interest rate swap agreements to reduce the
impact of changes in interest rates on certain outstanding current domestic and
Canadian debt obligations. Avis' swap agreements have the effect of changing the
interest rate on certain of Avis' current debt from a variable to a fixed rate
of interest. The variable interest rates for certain of these interest rate swap
agreements are either reset quarterly or daily based upon the average 30-day
commercial paper rate for the quarter. Interest is cash settled on a net basis
for each agreement quarterly. The U.S. interest rate swap agreement will
terminate in October 2001 and the three Canadian swap agreements in August 2003.
Under the Canadian swap agreements terminating in August 2003, the counter-party
has the right to terminate one of the agreements in August 2000 and one
agreement in August 2001.
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The notional amounts used to calculate the contractual payments to be
exchanged under these swap agreements consist of $250 million and $38.6 million
for the U.S. and Canada swap agreements, respectively. The weighted average
variable payment and receipt rates are based on implied forward rates in the
yield curve at December 31, 1998. The weighted average expected payment rates
are 4.8%, 4.8%, 4.8%, 5.6% and 5.6% for the years ended December 31, 1999, 2000,
2001, 2002 and 2003, respectively. The weighted average expected receipt rates
are 4.9%, 5.0%, 5.1%, 5.2% and 5.4% for the years ended December 31, 1999, 2000,
2001, 2002 and 2003, respectively. The fair value of the interest rate swap
agreements at December 31, 1998 is approximately $885,000.
EXPECTED MATURITY DATES AS OF DECEMBER 31, 1998
------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
--------- --------- ----- --------- ----- ----------- ----------
(DOLLARS IN THOUSANDS)
Long-term debt:
Fixed rate
Medium Term Notes........................ $ 800,000 $ 850,000 $ 600,000 $2,250,000
Other domestic debt...................... $ 1,085 $ 209 $ 227 $ 256 $ 1,777
Annualized weighted average interest rate
Variable Rate............................ 8.0% 6.2% 9.3% 6.4% 6.1%
Floating rate notes...................... $ 9,677 $ 9,677
Average interest rate.................... 6.0%
FAIR VALUE
----------
Long-term debt:
Fixed rate
Medium Term Notes........................ $2,294,541
Other domestic debt...................... $ 1,777
Annualized weighted average interest rate
Variable Rate............................
Floating rate notes...................... $ 9,677
Average interest rate....................
There have been no material changes to the Company's derivative financial
instruments for the six months ended June 30, 1999. However, in connection with
the VMS Acquisition and in order to reduce its risks from interest rate
fluctuations, the Company has entered into a domestic 10 year interest rate cap
agreement and a foreign five year agreement on notional amounts of US
$526,361,951 and LBS Sterling of 436,134,125. The agreements limit the domestic
and foreign interest rate exposures to 5.675% and 6.50%, respectively.
YEAR 2000 READINESS DISCLOSURE
GENERAL
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish
21(st) century dates from 20(th) 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.
Our state of readiness, contingency plans, Year 2000 costs and possible
consequences from Year 2000 problems are as follows:
(I) STATE OF READINESS
We have 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 our ability to provide
vehicle reservations, rental services and vehicle management services. Our
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. We are using both internal and external sources to
implement its plan. We have completed the remediation of our mission
critical systems including the modification, upgrading and replacement of
the affected systems. We
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have completed the testing of substantially all of these mission critical
systems. We currently believe our mission critical systems are Year 2000
ready.
Much of our technology, including technology associated with its mission
critical systems, is purchased from third parties. We are 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. We are 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 our comprehensive plan, we expect that we
will not experience a disruption of our 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 our mission critical systems will be
successful in taking corrective action in a timely manner. We are developing
contingency plans with respect to certain key technology used in our mission
critical systems, which are intended to enable us 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. We believe, that due
to the widespread nature of potential Year 2000 issues, the contingency
planning process is ongoing, which will require further modifications as we
obtain additional information regarding (1) our internal systems and
equipment during the remediation and testing phases of our 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
$26.2 million including $2.7 million related to VMS. Costs of hardware and
software remediation were approximately $3.0 million in 1997, $8.4 million
in 1998 and are estimated to be approximately $12.8 million in 1999 and $2.0
million in 2000. Costs of hardware and software remediation were
approximately $5.2 million for the six months ended June 30, 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. We expect to finance these costs through
internally generated cash flow and existing credit facilities.
(IV) POSSIBLE CONSEQUENCES FROM YEAR 2000 PROBLEMS
We believe that completed and planned modifications and conversions of
our internal systems and equipment will allow us to be Year 2000 compliant
in a timely manner. There can be no assurance, however, that our internal
systems or equipment or those of third parties on which we rely will be Year
2000 compliant in a timely manner or that our or third parties' contingency
plans will mitigate the effects of any non-compliance. The failure of the
systems or equipment of our or third parties (which we believe is the most
reasonably likely worst case scenario) could effect vehicle reservation and
rental operations and could have a material adverse effect on our business
or consolidated financial statements.
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FORWARD LOOKING INFORMATION
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations section 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, our ability and
our vendors' ability to complete the necessary actions to achieve a Year 2000
conversion for our computer systems and applications, and other risks which were
detailed from time to time in Avis' or VMS' publicly-filed documents, including
Avis' Annual Report on Form 10-K for the period ended December 31, 1998 and
Avis' Quarterly Report on Form 10-Q for the period ended June 30, 1999. Actual
results may differ materially from those projected. These forward-looking
statements represent management's judgment as of the date of this prospectus.
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COMPANY BACKGROUND
AVIS
On October 17, 1996 the Franchisor (formerly Avis, Inc.) and its
subsidiaries were purchased by Cendant for approximately $806.5 million (such
acquisition, the "1996 Acquisition"). The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4
million of common stock. Avis is the successor to the car rental operations
previously owned by the Franchisor and its subsidiaries (collectively referred
to as the "Predecessor Companies"). Prior to the 1996 Acquisition, the principal
shareholder of the Franchisor and the Predecessor Companies was an Employee
Stock Ownership Plan, and the minority shareholder was GM.
On September 24, 1997, Avis Rent A Car completed the IPO of its Class A
Common Stock at a price of $17 per share and received net proceeds of
approximately $359.3 million. Immediately after the IPO, Cendant continued to
own a significant portion of the Class A Common Stock. On March 23, 1998, Avis
Rent A Car sold an additional 5,000,000 shares of Class A Common Stock through a
secondary public offering (the "1998 Offering") and received net proceeds of
approximately $161.0 million from such offering. In addition, in the 1998
Offering, Cendant reduced its ownership in Avis by selling 1,000,000 shares of
Class A Common Stock. Following the 1998 Offering, Cendant beneficially owned
7,500,000 shares of Class A Common Stock, representing approximately 20.9% of
the then outstanding shares. Pursuant to a stock repurchase program approved by
Avis Rent A Car's Board of Directors on September 1, 1998 and amended on
September 23, 1998 authorizing the repurchase of up to 5,000,000 shares of Class
A Common Stock, Avis Rent A Car has purchased 5,000,000 shares through April 26,
1999, including 1,614,200 shares repurchased from Cendant in 1999. As a result
of these repurchases, Cendant's beneficial ownership of Class A Common Stock has
been reduced to 5,885,800 shares or approximately 19% as of June 30, 1999.
Assuming that Cendant had converted all of the Avis Fleet Preferred Stock that
it received in the VMS Acquisition into Class B Common Stock as of such date
(such conversion being subject to certain conditions), Cendant's ownership of
Avis Rent A Car would have been approximately 34%. Class B Common Stock is
non-voting. Upon transfer of shares of Class B Common Stock to transferees other
than Cendant or any affiliates of Cendant such shares will automatically convert
into shares of Class A Common Stock. Also, Cendant and its affiliates can cause
the Class B Common Stock to be converted into Class A Common Stock while owned
by Cendant and its affiliates to the extent that Cendant's voting interests in
Avis Rent A Car's common stock would not exceed 20%. Cendant and its affiliates
may also convert Class B Common Stock into Class A Common Stock in the event of
a Change of Control as defined in the Master License Agreement or the bankruptcy
of New Avis. See "Description of Avis Fleet Preferred Stock and Class B Common
Stock" and "Certain Relationships and Related Party Transactions".
The Franchisor, which is owned by Cendant, owns the Avis System, and ARACS
is currently the largest Avis System franchisee in the world. Avis System
franchisees operate approximately 4,200 rental locations, including locations at
the largest airports and cities in the United States and approximately 160 other
countries and territories, and a fleet of approximately 404,000 vehicles during
the peak season. Avis is the sole franchisee of the Avis System in the
international markets in which it operates. The Avis System in Europe, Africa,
part of Asia and the Middle East is operated under franchise by Avis Europe plc,
which is not affiliated with Avis. Management believes that the strong
recognition of the Avis brand name, the breadth of the Avis System and the
sophistication of the Wizard System enable Avis and other Avis System
franchisees to provide consistent quality, pricing and service to business and
leisure customers worldwide.
As an Avis System franchisee, ARACS has entered into certain arrangements
with the Franchisor and its affiliates that require ARACS to make various
payments, including monthly
83
payments under the Master License Agreement consisting of a monthly base royalty
of 3.0% of ARACS' gross revenue and a supplemental royalty of 1.0% of ARACS'
gross revenue payable quarterly in arrears (which supplemental royalty will
increase periodically to a maximum of 1.5% in 2003). Until July 30, 2002, the
supplemental royalty or a portion thereof may be deferred if ARACS does not
attain certain financial targets.
Since 1997, ARACS has made the following significant acquisitions:
FIRST GRAY LINE. On August 20, 1997, ARACS purchased all of the outstanding
capital stock of First Gray Line, then the largest Avis System franchisee in
North America (excluding Avis Rent A Car) with 70 locations in Southern
California, Nevada and Arizona, including Los Angeles International Airport,
McCarran International Airport (Las Vegas) and San Diego International Airport.
On September 18, 1997 ARACS purchased certain assets and repurchased the
franchise rights of another Avis System franchisee. The total consideration for
these acquisitions was approximately $199 million. On July 31, 1998, First Gray
Line was merged into ARACS.
HAYES LEASING. On May 1, 1998, ARACS acquired the assets of the car rental
business of Hayes Leasing, 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 $86 million in cash, plus the refinancing of
vehicle-related indebtedness which totalled approximately $136 million for a
total purchase price of approximately $222 million. At that time, Hayes Leasing
was the largest Avis System franchisee in North America (excluding Avis Rent A
Car), serving six locations in Texas, including the Dallas/Fort Worth Airport,
San Antonio Airport and Austin Municipal Airport.
RENT-A-CAR COMPANY, INCORPORATED. On March 19, 1999, ARACS purchased all of
the outstanding capital stock of Rent-A-Car Company, Incorporated ("Car Co.")
for approximately $10 million. Car Co. was then the third largest Avis System
franchisee in North America (excluding Avis Rent A Car) with locations in
Delaware, Maryland and Virginia, including Richmond International Airport.
MOTORENT, INC. On June 30, 1999, Avis purchased all of the outstanding
capital stock of Motorent, Inc. ("Motorent") for approximately $43.7 million.
Motorent operated at the airports in Knoxville, Memphis, Nashville and
Chattanooga, Tennessee, and was then the largest Avis System franchisee in North
America (excluding Avis Rent A Car).
OTHER ASSET ACQUISITIONS. During 1998, ARACS purchased the assets of
various former Avis System licensees for aggregate consideration of
approximately $15 million as outlined in the following table:
DATE FORMER LICENSEE LOCATION
- ------------------------------------ ------------------------------------ ------------------------------------
April 3, 1998 Amelco Leasing Ltd. Halifax, Nova Scotia and the
Provinces of New Brunswick and
Prince Edward Island
May 12, 1998 Hazqu Car Inc. and Hamilton, Ontario
The Champ Car, Inc.
August 31, 1998 Rent-All-Mart, Inc. Lima, Ohio
September 14, 1998 Economy Leasing Corp. White Plains, New York
October 30, 1998 One Bar, Inc. Butte, Great Falls, Helena, and
Glacier Park, Montana
November 18, 1998 Northern Rent A Car, Inc. Burlington, South Burlington, and
Montpelier, Vermont
84
AVIS TODAY. Avis operates the second largest general-use car rental
business in the world, based on total revenue. As the largest Avis System
franchisee, Avis rents vehicles and provides ancillary products and services to
business and leisure travelers through approximately 670 airport and non-airport
(downtown or suburban) locations in the United States, Canada, Puerto Rico, the
U.S. Virgin Islands, Argentina, Australia and New Zealand as of June 30, 1999.
During 1998, Avis completed over 15 million transactions for approximately 56
million rental days with a fleet that averaged approximately 206,000 vehicles.
Avis has corporate operations at the 50 top domestic airports which account for
approximately 92% of all domestic rental transactions processed through the Avis
System based on 1998 revenue. Avis provides its services to a broad range of
retail and corporate customers including both domestic and multinational
corporations, among which Avis has many long-standing relationships. For model
year 1999, Avis purchased over 90% of its vehicles from the "Big 3" U.S. auto
makers, primarily General Motors. Through repurchase and other agreements with
these and other auto makers, Avis bears the residual risk with respect to less
than 2% of its fleet. For the six month period ended June 30, 1999, Avis
generated total revenues of approximately $1.2 billion.
VMS
VMS is comprised of PHH North America, PHH Europe and WEX. Prior to the VMS
Acquisition, VMS was owned by Cendant. Cendant was formed in December 1997
through the merger of CUC International, Inc. ("CUC") and HFS Incorporated
("HFS"). In April 1997, HFS acquired PHH Corporation which at the time owned PHH
North America and PHH Europe. In August 1996, CUC acquired WEX, which had
earlier been a part of A.R. Wright Co.
PHH NORTH AMERICA
Established in 1946 and headquartered in Hunt Valley, Maryland, PHH North
America is one of the oldest brands in the vehicle management industry. It
provides vehicle leasing and related asset-based services, as well as a
comprehensive range of fee-based, value-added vehicle management products and
services including accident and risk management, fleet administration and fuel
and maintenance cards, to over 3,300 corporate customers, including
approximately one-third of the Fortune 500 companies, as well as various
government agencies. Concurrently with the closing of the VMS Acquisition, PHH
Vehicle Management Services LLC ("VMS LLC"), the principal component of PHH
North America, moved its chief executive office to Garden City, New York. VMS
LLC maintains a regional/processing office in Hunt Valley, Maryland. PHH North
America manages over 434,000 vehicles in the United States and Canada, making it
the number two ranked participant on the basis of vehicles under management in
North America. For the three months ended March 31, 1999, PHH North America
generated total revenues of $324.0 million.
PHH EUROPE
Headquartered in Swindon, England, PHH Europe has been in the European
vehicle management business for over 25 years. PHH Europe provides fuel and
fleet financing products and services as well as general vehicle management
solutions to over 16,000 companies. PHH Europe primarily operates in the United
Kingdom (which accounted for approximately 98% of 1998 revenue), but also
provides services in Ireland and Germany and is expanding its operations into
Austria and Switzerland. Through a strategic alliance with a major international
financial institution, PHH Europe covers the remaining key markets in Europe,
satisfying customers looking for pan-European vehicle management solutions. In
contrast to PHH North America, most of PHH Europe's net revenue (approximately
84% in 1998) stems from fee-based services. With the acquisition of Harpur in
January 1998, PHH Europe had over 1.2 million fuel cards outstanding in the
United Kingdom, accounting for over 613 million gallons of fuel purchased (equal
to a value of
85
approximately $3.0 billion) in 1998. The acquisition of Harpur, which was the
number two ranked provider of fuel management services in the United Kingdom
behind PHH Europe, enhanced PHH Europe's leadership position in United Kingdom
fuel and maintenance management. PHH Europe is also the top ranked fleet manager
in the United Kingdom, with over 345,000 vehicles under management. For the
three months ended March 31, 1999, PHH Europe generated total revenues of $61.2
million.
WEX
Headquartered in South Portland, Maine, WEX was incorporated in 1983 and is
currently the top ranked issuer of third-party fuel cards in North America based
on dollar volume and the top ranked provider of related information management,
payment processing and financial services to car, van and light truck fleets.
WEX differentiates itself from traditional open network credit card companies
like Visa and MasterCard and other competitors by providing an array of
information processing services in addition to its core charge card service.
Fuel card-related services include the industry's largest electronic acceptance
point of sale network, a proprietary payment system platform, comprehensive
information management services and responsive, reliable customer service. WEX
provides its end-user customer base of more than 87,000 commercial fleets with
charge card access to approximately 126,000 of the 160,000 retail fuel
facilities in the United States. For the three months ended March 31, 1999, WEX
generated total revenues of $15.1 million.
BUSINESS
NEW AVIS
Avis operates the second largest general-use car rental business in the
world, based on total revenue. As the largest Avis System franchisee, Avis rents
vehicles and provides ancillary products and services to business and leisure
travelers through approximately 670 airport and non-airport (downtown or
suburban) locations in the United States, Canada, Puerto Rico, the U.S. Virgin
Islands, Argentina, Australia and New Zealand as of June 30, 1999. During 1998,
Avis completed over 15 million transactions for approximately 56 million rental
days with a fleet that averaged approximately 206,000 vehicles. Avis has
corporate operations at the 50 top domestic airports which accounted for
approximately 92% of all domestic rental transactions processed through the Avis
System based on 1998 revenue. Avis provides its services to a broad range of
retail and corporate customers including both domestic and multinational
corporations, among which Avis has many long-standing relationships. For model
year 1999, Avis purchased over 90% of its vehicles from the "Big 3" U.S. auto
makers, primarily General Motors. Through repurchase and other agreements with
these and other auto makers, Avis bears the residual risk with respect to less
than 2% of its fleet. For the six month period ended June 30, 1999, Avis
generated total revenues of approximately $1.2 billion.
On June 30, 1999, Avis acquired VMS from Cendant for approximately $1.8
billion, plus the refinancing of approximately $3.5 billion of indebtedness. A
subsidiary of Cendant Corporation received $362.0 million of the acquisition
consideration in the form of Avis Fleet Preferred Stock, $2.0 million of which
was transferred to a third party. The VMS Acquisition has established New Avis
as a leading worldwide provider of comprehensive automotive transportation and
vehicle management solutions. We expect that the VMS Acquisition will allow Avis
to diversify its revenue base, create significant revenue growth and cost
savings opportunities, expand its car rental business, and bring together a
senior management team that has extensive knowledge of the car rental and
vehicle management and financing industries.
VMS provides integrated card payment, vehicle leasing and value-added
vehicle management services in North America and Europe, with leading market
shares across many of its product lines.
86
VMS provides comprehensive vehicle management solutions to its customers which
include over 19,000 companies and government agencies in North America and
Europe, including nearly one-third of the Fortune 500 and approximately one-half
of the FTSE 100 companies. VMS' services consist of vehicle leasing and related
asset-based services and a broad range of fee-based services which include fuel
and maintenance cards, accident management, and various other vehicle-related
services, all of which are designed to allow clients to effectively manage costs
and enhance productivity. In 1998, asset-based products and services accounted
for 39% of VMS' total revenues (after Fleet Costs), while fee-based products and
services accounted for the remaining 61%. At December 31, 1998, VMS had
approximately 780,000 vehicles under management and over 3.6 million fuel and
maintenance cards outstanding (accounting for over $5.4 billion of fuel and
maintenance purchases in 1998). At December 31, 1998, VMS' automotive fleet
consisted of approximately 354,000 leased vehicles worldwide, 85% of which were
leased subject to open-ended leases under which the customer bears substantially
all of the vehicle residual risk. VMS' lease and card portfolios have
experienced low historical default rates as a result of the strong credit
quality of its customer base and VMS' credit underwriting procedures. For the
three months ended March 31, 1999, VMS generated total revenues of $400.3
million.
As a result of the VMS Acquisition, we are a leading worldwide provider of
automotive transportation and vehicle management solutions. Pro forma for the
VMS Acquisition, we believe that we hold the following market positions, based
on reported units:
GENERAL-USE CAR RENTALS
- #2 worldwide
- #2 in the United States
- #1 in Australia and New Zealand
VEHICLES UNDER MANAGEMENT(1)
- #2 in the United States
- #1 in the United Kingdom
FUEL AND MAINTENANCE CARDS(2)
- #1 in the United States
- #1 in the United Kingdom
- ------------------------
(1) Includes leased vehicles and vehicles for which third-party vehicle-related
services are provided, which are comparable to those provided by VMS.
(2) Includes cards for third parties in which VMS acts as processor.
For the six months ended June 30, 1999, pro forma for the Transactions (as
defined), we would have generated total revenues of $2.0 billion.
BUSINESS STRATEGY
Our strategy is to be the world's leading provider of comprehensive
automotive transportation and vehicle management solutions by concentrating on
the following key elements:
- INTEGRATE VMS AND AVIS AND CAPITALIZE ON SYNERGIES AND CROSS-SELLING
OPPORTUNITIES. The combination of the strong rental car franchise of Avis,
with its strength in the corporate market, and the vehicle leasing and
management expertise of VMS should result in significant opportunities to
expand the complementary businesses of Avis and VMS across their
respective customer bases. Avis' and VMS' common strengths should provide
a significant opportunity to provide a one-stop shop of comprehensive
automotive transportation and vehicle management solutions that can be
cross-sold. As an example, the
87
integration of Avis' Small Account Telesales efforts with VMS' fuel card
operations will permit New Avis to more efficiently penetrate the highly
profitable small-fleet fuel card market. The combination of Avis' small
and medium-sized company relationships and VMS' technology platform should
enable New Avis to penetrate the profitable, yet largely unpenetrated,
smaller-fleet leasing market. We expect to develop additional synergies in
the areas of information technology, sales, insurance, fleet purchasing
and disposition, operations, human resources, marketing and
administration.
- CAPITALIZE ON ADDITIONAL EXPANSION OPPORTUNITIES.Historically, Avis has
capitalized on its network of airport locations by focusing its sales and
marketing resources principally on business travelers. We believe that
Avis' established presence at the leading airports in the United States
provides us with an opportunity to capture a greater share of the leisure
market. Moreover, Avis is expanding its presence in the suburban market
and intends to enter the vehicle replacement market (which Avis will be
permitted to enter on a nationwide basis after expiration of a non-compete
agreement in June 2000). In addition, management estimates that in 1998,
approximately 61% of the combined U.S. and Canadian and a significant
portion of the U.K. and German vehicle leasing markets were unserved by
third party vehicle management companies, providing a significant
opportunity to capture share in unpenetrated markets. In addition,
approximately 45% of the U.S. and U.K. fueling markets remain unpenetrated
by fuel card providers. Management believes that the foregoing will
provide New Avis with strong opportunities to capture additional share in
each of its target markets as a leading provider of automotive
transportation and vehicle management solutions.
- LEVERAGE STRENGTHS IN TECHNOLOGY. We intend to apply our extensive
technology and information processing capabilities to take advantage of
current trends in the car rental and vehicle management industries. We
believe that customers in the domestic car rental industry are focusing
increasingly on brand loyalty, while at the same time our customer base
has become increasingly diverse. We plan to use the Avis System's
proprietary management information applications, enhanced by VMS'
capabilities in real-time data access, to provide customers with
customized information and services. We also plan to use our technology to
identify key operating characteristics among our customers in order to
optimize our business mix. Additionally, as corporations of all sizes in
North America and Europe continue to outsource vehicle management, we will
leverage our strong technological capabilities to increase our array of
services, improve customer service and develop products and services at
reduced costs to appeal to smaller fleet owners that previously could not
justify the cost of outsourcing their vehicle management needs. In
addition, we expect to increase customer loyalty as our technology-based
services become an integral part of our customers' operations.
- DEVELOP NEW PRODUCTS AND SERVICES FOR TARGET MARKETS. In addition to our
existing asset-based and fee-based products and services, we will seek to
develop a broad range of new products and services designed to further
penetrate our existing customer base, expand our presence in international
markets, and penetrate other, previously underserved, markets such as
smaller corporate fleets and leisure travelers. Among the new products and
services that we will consider offering are: (i) a customized leisure pass
which combines Avis' rental cars with VMS' value-added services marketed
to the leisure traveler; (ii) expanding VMS into Australia and New Zealand
by leveraging Avis' existing infrastructure; and (iii) offering prepaid
fuel cards to retail and corporate customers.
88
- CONTINUE TO DEVELOP CORE BUSINESS OPPORTUNITIES AT AVIS AND VMS. While
seeking to realize revenue enhancing and cost saving synergies between
Avis and VMS, management of New Avis intends to continue focusing on the
development of each business' core market opportunities.
- Within Avis, such opportunities include: (i) capitalizing on changing
rental car industry dynamics; (ii) improving business mix and fleet
utilization; (iii) increasing brand loyalty through target marketing; and
(iv) developing Avis' suburban program.
- Within VMS, such opportunities include: (i) cross-selling PHH North
America and PHH Europe non-card products to VMS' extensive base of fuel
and maintenance cardholders; (ii) further developing the "One Card"
co-branded corporate card program to capture a greater share of corporate
travel and entertainment expenditures; (iii) further penetrating both the
small and large vehicle leasing markets; (iv) expanding into underserved
markets in Europe; and (v) developing new revenue opportunities based on
enhancements to the services provided by VMS' technology platform.
AVIS
INDUSTRY OVERVIEW
U.S. CAR RENTAL INDUSTRY. The U.S. car rental industry, which includes
short-term car and truck rentals for business and retail customers at both
airport and non-airport locations, was a $17.2 billion industry in 1998 based
on revenues, and has grown at a compound annual growth rate, or CAGR, of 11.1%
from 1985 to 1998. The U.S. airport market accounted for $6.3 billion of these
revenues. Ancillary products offered in addition to vehicle rentals include
refueling services, loss damage waivers and used vehicle sales. Industry
sources estimate that the U.S. car rental industry will continue to grow,
principally due to continued increases in airline passenger traffic, the trend
toward shorter, more frequent vacations resulting from the increased number of
households with two wage earners, the demographic trend toward older, more
affluent Americans who travel more frequently, and increased business travel.
Prior to 1996, the major car rental companies were each affiliated with
automobile manufacturers and served as outlets through which the manufacturers
disposed of their excess vehicles. This resulted in an oversupply of cars in
the rental industry, a lack of infrastructure development and poor financial
performance among car rental companies. In the 1996 Acquisition, Avis Inc.,
the predecessor to the Franchisor, was acquired by Cendant. The 1996
Acquisition was followed by AutoNation, Inc.'s purchase of both Alamo and
National and the purchase of Brac-Opco Inc. by Budget. In 1997, Hertz and
Dollar Thrifty Automotive Group, Inc. both completed initial public offerings.
Also in 1997, Avis Rent A Car issued shares to the public in the IPO, with
Cendant retaining approximately 21%. Significant changes have occurred in the
car rental industry as a result of these shifts in ownership, with the
industry now characterized by more rational pricing, better vehicle management
and improved service and facilities. For example, while industry revenue grew
10.3% in 1998, total fleet size increased only 2%, a reflection of improved
vehicle management practices by industry participants. Management believes
that these changes resulted in improved profitability for the car rental
industry in 1998.
RENTAL OPERATIONS
GENERAL. Avis' fleet includes various categories of automobiles, most of
which are of the current and immediately preceding model years. Rentals are
generally made on a daily, weekend, weekly or monthly basis. Rental charges in
the United States usually are computed on the basis of the duration of the
rental and may include a mileage charge and vary based upon vehicle category,
the day on which the rental begins and local competition and cost factors.
Additional
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charges are made for optional refueling services, loss damage waivers (a
waiver of Avis' right to make a renter pay for damage to the vehicle),
concession fee recovery, personal accident insurance, personal effects
protection, optional products such as cellular phones, child seats and ski
racks and, in some instances, additional liability insurance. Most rentals are
made utilizing rate plans under which the customer is responsible for gasoline
used during the rental. Avis also generally offers customers the convenience
of leaving a rented vehicle at an Avis location in a city other than the one
in which it was rented under Avis' "Rent it Here-Leave it There" program,
although, consistent with industry practices, a drop-off charge or special
intercity rate may be imposed.
UNITED STATES OPERATIONS. At June 30, 1999, Avis operated 539 vehicle
rental facilities at airport, near-airport and downtown locations throughout
the United States. During 1998, approximately 85% of Avis' U.S. revenue was
generated at 208 airports in the United States with the balance generated at
Avis' 331 non-airport locations. Avis' emphasis on airport traffic has
resulted in a particularly strong rental revenue market position at the major
U.S. airports.
At most airports, Avis is one of five to seven vehicle rental
concessionaires. In general, concession fees for airport locations are based
on a percentage of total concessionable revenues (as determined by each
airport location), subject to a minimum guaranteed amount. Concessions are
typically awarded by airport authorities every three to five years based upon
competitive bids. As a result of airport authority requirements as to the size
of the minimum guaranteed fee, smaller vehicle rental companies generally are
not located at airports. Avis' concession arrangements with the various
airport authorities generally include minimum requirements for vehicle age,
operating hours and employee conduct, and provide for relocation in the event
of future construction and abatement of fees in the event of extended low
passenger volume.
INTERNATIONAL OPERATIONS. Avis operates in Canada, Puerto Rico, the U.S.
Virgin Islands, Argentina, Australia and New Zealand. Avis' operations in
Canada, Australia and New Zealand were the principal contributors of revenue,
accounting for 88% of international revenue in 1998. Revenue from
international operations in 1998 was approximately $235.6 million. Avis holds
a solid market position in each of the countries in which it operates. In
terms of revenue, the operations in Australia and New Zealand are the largest
in their respective markets.
AVIS SYSTEM AND WIZARD SYSTEM SERVICES
As a participant in the Avis System, Avis has the benefits of a variety of
services, including:
- comprehensive safety initiatives, including the "Avis Cares" Safe Driving
Program, which offers vehicle safety information, directional assistance
such as satellite guidance, regional maps, weather reports and
specialized equipment for travelers with disabilities;
- standardized system-identity for rental location presentation and
uniforms;
- training programs and business policies, quality of service standards and
data designed to monitor service commitment levels;
- marketing/advertising/public relations support for national consumer
promotions including Frequent Flyer/Frequent Stay programs and the Avis
on-line Internet website; and
- brand awareness of the Avis System through the familiar "We try harder"
service announcements.
Under a long-term computer services agreement, ARACS, like other Avis
System franchisees, is provided with access to the Wizard System, a
reservations, data processing and information management system for the
vehicle rental business. The Wizard System is linked to all major travel
networks on six continents through telephone lines and satellite
communications. Direct
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access with other computerized reservations systems allows real-time
processing for travel agents and corporate travel departments. Among the
principal features of the Wizard System are:
- an advanced graphical interface reservation system;
- "Roving Rapid Return", which permits customers who are returning vehicles
to obtain completed charge records from radio-connected "Roving Rapid
Return" agents who complete and deliver the charge record at the vehicle
as it is being returned;
- "Preferred Service", an expedited rental service that provides customers
with a Preferred Service rental record printed in their pre-assigned
vehicle and a fast convenient check-out;
- "Wizard on Wheels", which enables the Avis System locations to assign
vehicles and complete rental agreements while customers are being
transported to the vehicle;
- "Flight Arrival Notification", a flight arrival notification system that
alerts Avis' rental location when flights have arrived so that vehicles
can be assigned and paperwork prepared automatically;
- "Avis Link", which automatically identifies the fact that a user of a
major credit card is entitled to special rental rates and conditions, and
therefore sharply reduces the number of instances in which Avis
inadvertently fails to give renters the benefits of negotiated rate
arrangements to which they are entitled;
- interactive interfaces through third-party computerized reservation
systems described under "--Marketing"; and
- sophisticated automated ready-line programs that, among other things,
enable rental agents to ensure that a customer who rents a particular
type of vehicle will receive the available vehicle of that type which has
the lowest mileage.
In 1998, the Wizard System enabled Avis to process approximately 30
million incoming customer calls, during which customers inquired about
locations, rates and availability and placed or modified reservations. In
addition, millions of inquiries and reservations come to Avis through travel
agents and travel industry partners, such as airlines. The Wizard System is
designed to provide information as to vehicle availability and rates as well
as personal profile information in an accurate and timely manner.
MANAGEMENT INFORMATION SYSTEMS
Avis also uses data supplied from the Wizard System and airline
reservation systems in certain proprietary management information systems to
maintain centralized control of major business processes such as fleet
acquisition and logistics, sales to corporate accounts and determination of
rental rates. The principal components of the systems Avis employs include:
- FLEET PLANNING MODEL. Avis has created a comprehensive decision tool to
develop fleet plans and schedules for the acquisition and disposition of
Avis' fleet, along with fleet age, mix, mileage and cost reports based
upon these plans and schedules. This tool allows management to monitor
and change fleet volume and composition on a daily basis and to develop
the lowest cost fleet alternative based on business levels and available
Repurchase Programs.
- YIELD MANAGEMENT. Avis has also created a yield management system which
is designed to maximize profits by providing greater control of vehicle
availability and rate availability changes at its rental locations. The
system monitors and forecasts supply and demand to result in a
combination of rentals that will improve the return over time at each
location. Integrated into this yield management system is a fleet
distribution module that takes into
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consideration the costs as well as the potential benefits associated with
distributing vehicles to various rental locations within a geographic
area to accommodate rental demand at these locations. The fleet
distribution module makes specific recommendations for movement of
vehicles between locations.
- PRICING DECISION SUPPORT SYSTEM. Pricing in the vehicle rental industry
is highly competitive and complex. To improve Avis' ability to respond to
rental rate changes in the marketplace, Avis has developed sophisticated
systems to gather and report competitive industry rental rate changes
every day. The system, using data from third-party reservation systems as
its source of information, automatically scans rate movements and reports
significant changes to a staff of pricing analysts for evaluation. The
system greatly enhances Avis' ability to gather and respond to rate
changes in Avis' markets.
- BUSINESS MIX MODEL. Avis has also developed a strategic planning model to
evaluate the discrete segments of its business relative to each other.
The model considers revenues and costs to determine the potential margin
contribution of each discrete segment. The model develops business mix
and fleet optimization recommendations by using data from Avis' financial
systems, the Wizard System and the fleet and revenue management systems
along with management's objectives and targets.
- PROFITABILITY MODEL. Avis has developed a sophisticated model which
blends a corporate customer's rentals into a pattern that determines
fleet costs by developing a profile of the corporate customer's
utilization. The model also combines local operations costs with division
overhead expenses with a resulting benchmark profitability which is used
to determine the financial merit of individual corporate accounts.
- SALES AND MARKETING SYSTEM. Avis has also developed a sophisticated
system of on-line data screens which enables Avis' sales force to analyze
key account information of Avis' corporate customers including historical
and current rental activity, revenue and booking sources, top renting
locations, rate usage categories and customer satisfaction data. Avis
uses this information, which is updated weekly and captured on a
country-by-country basis, to determine opportunities for revenue growth,
profitability and improvement.
FLEET ACQUISITION AND MANAGEMENT
FLEET PURCHASING. Avis participates in a variety of vehicle purchase
programs with major domestic and foreign manufacturers, principally GM,
although actual purchases are made directly through franchised dealers. The
average price for automobiles Avis purchased in 1998 for Avis' U.S. rental
fleet was approximately $17,895. For the 1998 model year, approximately 80% of
new vehicle purchases were GM vehicles, 9% were Chrysler vehicles and the
remaining 11% were a combination of Toyota, Nissan, Subaru, Ford, Mazda and
Suzuki vehicles. In model year 1999, approximately 87% of Avis' fleet in the
United States will consist of GM vehicles, approximately 6% will be Chrysler
vehicles and the balance will be provided by other manufacturers.
Manufacturers' vehicle purchase programs sometimes provide Avis with sales
incentives for the purchase of certain models, and most of these programs
allow Avis to serve as a drop-ship location for vehicles, thus enabling Avis
to receive a fee from the manufacturers for preparing newly purchased vehicles
for use. With regard to, Avis' international operations, vehicles are acquired
through negotiated arrangements with local manufacturers and dealers using
operating leases or Repurchase Programs.
Under the terms of Avis' agreement with GM, which expires at the end of
GM's model year 2002, Avis is required to purchase at least 188,000 GM
vehicles for model year 1999 and maintain at least 51% GM vehicles in Avis'
U.S. fleet at all times. The GM Repurchase Program is available for all
vehicles purchased pursuant to this agreement.
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IMPACT OF SEASONALITY. Avis' business is subject to seasonal variations
in customer demand, with the summer vacation period representing the peak
season for vehicle rentals. This general seasonal variation in demand, along
with more localized changes in demand at each of Avis' operations, causes Avis
to vary its fleet size over the course of the year. In 1998, Avis' average
monthly fleet size ranged from a low of 187,000 vehicles in January to a high
of 231,000 vehicles in July. Fleet utilization, which is based on the number
of hours vehicles are rented compared to the total number of hours vehicles
are available for rental, ranged from 66% in December 1998 to 83% in August
1998 and averaged 75% for all of 1998.
VEHICLE DISPOSITION. Avis' current operating strategy is to hold vehicles
for less than 12 months with the average fleet age being less than six months.
Approximately 99% of the vehicles purchased for Avis' domestic fleet during
the 1998 model year, including most GM vehicles, were eligible for Repurchase
Programs. These programs impose certain return conditions, including those
related to mileage and repair condition over specified allowances. Less than
3.5% of the Repurchase Program vehicles purchased by Avis and returned in 1998
were ineligible for return. Upon return of a Repurchase Program vehicle, Avis
receives a price based on the capitalized cost of the vehicle less an agreed
upon depreciation factor and in certain cases, an adjustment for damage and/or
excess mileage and is thereby protected from a decrease in prevailing used car
prices in the wholesale market. Avis also disposes of used vehicles that are
not covered by Repurchase Programs to dealers in the United States through
informal arrangements or at auctions. The future percentage of Repurchase
Program vehicles in Avis' fleet will depend on the availability of Repurchase
Programs, over which Avis has no control.
MAINTENANCE. Avis places a strong emphasis on vehicle maintenance since
quick and proper repairs are critical to fleet utilization. To accomplish this
task Avis employs two full-time National Institute for Automotive Service
Excellence ("ASE") fully certified technician instructors at Avis'
headquarters. These instructors have developed a specialized training program
for Avis' 350 technicians who operate 87 repair centers. The technicians also
maintain a strong relationship with General Motors Service Technology Group.
Avis uses advanced diagnostic equipment including GM's "Techline" and "Tech 2"
diagnostic computers. Avis' technician training department also prepares its
own technical service bulletins that can be retrieved electronically at all of
Avis' repair locations. Approximately 80% of Avis' technicians are ASE
certified.
MARKETING
UNITED STATES. In the United States, approximately 77% of Avis' 1998
rental transactions were generated by travelers who used the Avis System under
contracts between Avis and their employers or organizations of which they were
members. Avis' corporate sales organization is the principal source of
contracts with corporate accounts. Unaffiliated business travelers are
solicited by direct mail, telesales and advertising campaigns. Avis' telesales
department consists of a centralized staff that handles small corporate
accounts, travel agencies, meetings, conventions, tour operators and
associations. Working with an advanced system in Tulsa, Oklahoma, the
telesales operation produced revenue for the Avis System that exceeded $325
million in 1998.
Avis solicits contractual arrangements with corporate accounts by
emphasizing the advantages of the Wizard System. The Wizard System plays a
significant part in securing business of this type because it enables Avis to
offer a wide variety of rental rate combinations, special reports and tracking
techniques tailored to the particular needs of each account, access to a
worldwide rental network and assurance of adherence to agreed-upon rates.
Avis' presence in the leisure market is substantially less than Avis'
presence in the business market. Leisure rental activity is important in
enabling Avis to balance the use of Avis' fleet. Typically, business renters
use vehicles from Monday through Thursday, while in most areas of
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the United States leisure renters use vehicles primarily over weekends. Avis'
concentration on serving business travelers has led to excess capacity from
Friday through Sunday of most weeks. Avis intends to increase Avis' leisure
market penetration by capitalizing on Avis' strength at airports and by
increased focusing of Avis' marketing efforts toward leisure travelers. An
important part of Avis' leisure marketing strategy is to develop and maintain
contractual arrangements with associations that provide member benefits to
their constituents. In addition to developing arrangements with traditional
organizations, Avis has created innovative programs such as the Affinity Link
Program which cross-references credit card numbers with Avis Worldwide
identification numbers and provides discounts to the cardholders for
participating credit card programs. Avis also uses coupons in dine-out books
and provides discounts to members of shopping and travel clubs. These programs
generated approximately $61 million of leisure business revenue for Avis in
1998. Preferred supplier agreements with select travel agencies and contracts
with tour operators have also succeeded in generating leisure business for
Avis.
Travel agents can make Avis System reservations through all four major
U.S. based global distribution systems and several international based
systems. Users of the U.S. based global distribution systems can obtain access
through these systems to Avis' rental locations, vehicle availability and
applicable rate structures. An automated link between these systems and the
Wizard System gives travel agents the ability to reserve and confirm rentals
directly through these systems. Avis also maintains strong links to the travel
industry. Avis has arrangements with frequent traveler programs of airlines
such as Delta Air Lines Inc., American Airlines Inc., Continental Airlines
Inc., United Air Lines Inc. and Trans World Airlines Inc., and with hotels
including the Hilton Hotels Corporation, Hyatt Hotels Corporation, Best
Western International Inc., and Starwood Hotels and Resorts. These
arrangements provide various incentives to all program participants and
cooperative marketing opportunities for Avis and the partner. Avis also has an
arrangement with Cendant whereby lodging customers who are making reservations
by telephone will be transferred to Avis if they desire to rent a vehicle.
INTERNATIONAL. Avis utilizes a multi-faceted approach to sales and
marketing throughout Avis' global network. In Avis' principal international
operations, Avis employs teams of trained and qualified account executives to
negotiate contracts with major corporate accounts and leisure and travel
industry partners. In addition, Avis utilizes centralized telemarketing and
direct mail initiatives to broaden Avis' customer base. Avis' sales efforts
are designed to secure customer commitment and support customer requirements
for both domestic and international car rental needs.
Avis' international sales and marketing activities promote Avis'
reputation for delivering a high quality of service, contract rates,
competitive pricing and customer benefits from special services such as
Preferred Service, Roving Rapid Return and other benefits of the Wizard
System.
Avis' international operations maintain close relationships with the
travel industry including participation in several airline frequent flyer
programs, such as those operated by Air Canada Inc., British Airways Plc,
Deutsche Lufthansa AG, Ansett Airlines (Australia), and Varig Brazilian
Airlines.
COMPETITION
The vehicle rental industry is characterized by intense price and service
competition. In any given location, Avis may encounter competition from
national, regional and local companies, many of which, particularly those
owned by the major automobile manufacturers, have greater financial resources
than New Avis will. Avis' principal competitors for commercial accounts in the
United States are Hertz and National. Avis' principal competitors for
unaffiliated business and
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leisure travelers in the United States are Budget, Hertz and National, and,
particularly with regard to leisure travelers, Alamo and Dollar. In addition,
Avis competes with a variety of smaller vehicle rental companies throughout
the country.
Competition in the U.S. vehicle rental business is based primarily upon
price, reliability, ease of rental and return and other elements of customer
service. In addition, competition is influenced strongly by advertising and
marketing. New Avis believes that it will be capable of competing for
virtually all aspects of the vehicle rental business, except the insurance
replacement vehicle business (in which Avis has agreed not to engage in
certain markets until June 13, 2000 pursuant to an agreement relating to the
sale of Avis' replacement vehicle rental business). In part because of the
Wizard System, Avis has been particularly successful in competing for
commercial accounts.
There have been many occasions during the history of the vehicle rental
industry in which all of the major vehicle rental companies have been
adversely affected by severe industry-wide rental rate cutting, and Avis has,
on such occasions, lowered its rates in response to such rate cutting.
However, during the past two years, industry-wide rates have increased,
reflecting, in part, both increased costs of owning and maintaining vehicles
and the need to generate returns on invested capital. Management believes that
the effects of any similar fluctuations will be mitigated as a result of the
VMS Acquisition since VMS' business is not subject to such industry dynamics.
INSURANCE
Avis generally assumes the risk of liability to third parties arising from
vehicle rental services in the United States, Canada, Puerto Rico and the U.S.
Virgin Islands, for up to $1.0 million per occurrence, through a combination
of certificates of self-insurance, insurance coverage provided by a
wholly-owned insurance subsidiary, Pathfinder Insurance Company
("Pathfinder"), and insurance coverage secured from unaffiliated domestic
insurance carriers. Avis maintains additional insurance with unaffiliated
carriers in excess of $1.0 million up to $200.0 million per occurrence. In
addition, Avis provides claims management services from its headquarters in
New York to all of its locations in the United States, Canada, Puerto Rico and
the U.S. Virgin Islands.
Avis insures the risk of liability to third parties in Argentina,
Australia and New Zealand through a combination of unaffiliated carriers and
Global Excess & Reinsurance, Ltd., a wholly-owned subsidiary established under
the laws of Bermuda ("Global Excess"). These carriers provide coverage
supplemental to minimum local requirements.
Under Avis' standard rental contract in most states, Avis provides renters
primary automobile liability coverage up to the minimum financial
responsibility limits required by applicable law. In many states, the renters'
insurance is primary and in the States of California and Texas, Avis does not
provide automobile liability coverage for the renter. Higher limits are
provided to some United States national corporate accounts and, for an
additional daily charge, renters may participate in a group policy of
"Additional Liability Insurance" underwritten by Continental Casualty Co. (CNA
Group), which increases renters' liability coverage up to $1.0 million. Avis
also offer renters, for additional daily charges, "Personal Accident
Insurance", which pays medical expenses and accidental death benefits for
accidents during the rental period, and "Personal Effects Protection", which
insures against loss or damage to the renters' personal belongings during the
rental period. Coverages are underwritten by Gulf Insurance Company. In order
to capture a portion of the premiums in respect of these coverages, Avis Rent
A Car's wholly-owned subsidiary, Constellation Reinsurance Company Limited
("Constellation"), an insurance company established under the laws of
Barbados, reinsures such coverages.
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REGULATORY MATTERS
Avis is subject to federal, state and local laws and regulations including
those relating to taxing and licensing of vehicles, franchising, consumer
credit, environmental protection, retail vehicle sales and labor matters. The
principal environmental regulatory requirements applicable to Avis' operations
relate to the ownership or use of tanks for the storage of petroleum products,
such as gasoline, diesel fuel and waste oils; the treatment or discharge of
waste waters; and the generation, storage, transportation and off-site
treatment or disposal of solid or liquid wastes. Avis operates 245 locations
at which petroleum products are stored in underground or above-ground tanks.
Avis has instituted an environmental compliance program designed to maintain
compliance with applicable technical and operational requirements, including
the replacement of underground steel tanks and periodic testing of underground
storage tanks. Avis believes that the locations where it currently operates
are in compliance, in all material respects, with such regulatory
requirements.
New Avis may also be subject to requirements related to the remediation
of, or the liability for remediation of, substances that have been released to
the environment at properties owned or operated by New Avis or at properties
to which New Avis sends substances for treatment or disposal. Such remediation
requirements may be imposed without regard to fault, and liability for
environmental remediation can be substantial.
New Avis may be eligible for reimbursement or payment of remediation costs
associated with future releases from its regulated underground storage tanks.
Certain of the states in which Avis maintains underground storage tanks have
established funds to assist in the payment of remediation costs for releases
from certain registered underground tanks. Subject to certain deductibles, the
availability of funds, compliance status of the tanks and the nature of the
release, these tank funds may be available to New Avis for use in remediating
future releases from tank systems.
A traditional revenue source for the vehicle rental industry has been the
sale of loss damage waivers, by which rental companies agree to relieve a
customer from financial responsibility arising from vehicle damage incurred
during the rental period. Approximately 3.3% of Avis' revenue during 1998 was
generated by the sale of loss damage waivers. The U.S. Congress has from time
to time considered legislation that would regulate the conditions under which
loss damage waivers may be sold by vehicle rental companies. Approximately 40
states have considered legislation affecting the loss damage waivers. To date,
24 states have enacted legislation which requires disclosure to each customer
at the time of rental that damage to the rented vehicle may be covered by the
customer's personal automobile insurance and that loss damage waivers may not
be necessary. In addition, in the late 1980's, New York enacted legislation
which eliminated Avis' right to offer loss damage waivers for sale and limited
potential customer liability to $100. California and Nevada have capped rates
that may be charged for loss damage waivers at $9.00 and $10.00 per day,
respectively. Texas requires that the rate charged for loss damage waivers be
reasonably related to the direct cost of the repairs. In Illinois, Avis is
permitted to sell loss damage waivers at fixed rates. If, however, the
customer elects not to purchase the loss damage waiver, the customer's
liability is limited to $9,000 unless the customer violates the prohibited use
terms of the rental agreement, in which case the customer is liable for the
fair market value of the vehicle or the cost of the repairs, whichever is
less. Adoption of national or additional state legislation affecting or
limiting the sale of loss damage waivers could result in the loss of this
revenue source and additional limitations on customers' liability could
increase Avis' costs.
Avis is also subject to regulation under the insurance statutes, including
insurance holding company statutes, of the jurisdictions in which Avis'
insurance company subsidiaries are
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domiciled. These regulations vary from state to state, but generally require
insurance holding companies and insurers that are subsidiaries of insurance
holding companies to register and file certain reports including information
concerning their capital structure, ownership, financial condition and general
business operations with the state regulatory authority, and require prior
regulatory agency approval of changes in control of an insurer and
intercorporate transfers of assets within the holding company structure.
Pathfinder, as a licensed stock insurance company in the State of
Colorado, is subject to the applicable rules and regulations of the Colorado
Insurance Department. The Colorado Insurance Law provides that no person may
acquire control of Avis Rent A Car, and thus indirect control of Pathfinder,
unless it has obtained prior approval of the Colorado Insurance Commissioner
for such acquisition. "Control" is generally presumed to exist through the
ownership of 10% or more of the voting securities of a Colorado domestic
insurance company or of any company which controls a Colorado domestic
insurance company. Any purchaser of 10% or more of Avis Rent A Car's
outstanding voting equity would be presumed to have acquired control of it,
unless such presumption is rebutted by a showing that such control does not in
fact exist. Accordingly, any purchase of voting equity representing 10% or
more of Avis Rent A Car's voting power would require prior approval by the
Colorado Insurance Department.
Global Excess is subject to Bermuda Insurance Laws, which require Global
Excess to file a Bermuda statutory financial return in the form prescribed by
Bermuda Insurance Laws. Any transfer of shares of Global Excess by Avis will
require the approval of the Bermuda Monetary Authority, Foreign Exchange
Control. In addition, Constellation is required to file an annual financial
return in accordance with Barbados Insurance Regulations.
The payment of dividends to Avis by Avis' insurance company subsidiaries,
Pathfinder, Global Excess and Constellation, are restricted by government
regulations in Colorado, Bermuda and Barbados affecting insurance companies
domiciled in those jurisdictions.
EMPLOYEES
Avis has approximately 19,000 employees worldwide, of whom approximately
18,000 serve in various capacities at its rental locations, with the balance
engaged in executive, financial, sales and marketing, and administrative
capacities. Approximately one-third of Avis' employees are represented by
various unions under contracts expiring at various dates. No local union
represents more than 3.5% of Avis' employees. Avis believes its relationships
with its employees are good.
PROPERTIES
Avis leases or has concessions relating to space at 507 locations in the
United States and 161 locations outside the United States. Of those locations,
208 in the United States and 67 outside the United States are at airports.
Typically, an airport receives a percentage of vehicle rental revenues, with a
guaranteed minimum. Because there is a limit to the number of vehicle rental
locations in an airport, vehicle rental companies frequently bid for the
available locations, usually on the basis of the size of the guaranteed
minimums. Avis and other vehicle lease firms also lease parking space at or
near airports and at their other vehicle rental locations.
Avis leases almost all of its vehicle rental facilities. The airport
facilities are located on airport property owned by airport authorities or
located near the airport in locations convenient for bus transport of
customers to and from the airport. Avis' airport locations serve as the
administrative headquarters for Avis' non-airport locations nearest to those
airport locations and, as a general rule, each airport location includes
vehicle storage areas, a vehicle maintenance facility, a car wash, a refueling
station and rental and return facilities. Avis' non-airport facilities
generally consist of a limited parking facility as well as a rental and return
counter and are often subject to long-term leases with renewal options.
Certain of these leases also have purchase options at the end of their terms.
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Avis' principal offices are in Garden City, New York where it leases
approximately 250,000 square feet under a sublease agreement with Cendant
through the year 2015. The Avis reservation system is operated by Cendant from
leased space in Tulsa, Oklahoma, where we sublease for certain marketing
activities. Avis maintains terminal network facilities which Avis uses in
connection with the Wizard System in Garden City and Tulsa. Avis also leases
approximately 58,000 square feet in a building owned by Cendant in Virginia
Beach, Virginia that serves as a satellite administrative and reservation
facility.
LEGAL MATTERS
From time to time, Avis is subject to routine litigation incidental to its
business. Avis maintains insurance policies that cover most of the actions
brought against it. Avis is not currently involved in any legal proceeding which
Avis believes would have a material adverse effect upon its financial condition
or results of operations.
VMS
INDUSTRY OVERVIEW
VEHICLE LEASING INDUSTRY. Management estimates that corporations in the
United States, Canada, the United Kingdom and Germany (the markets in which VMS
currently competes) made expenditures of over $125 billion in 1998 with respect
to their vehicle fleets for depreciation and interest, management and
operations. These expenditures are driven by growth in the number of vehicles
operated by these companies. The U.S., Canadian, U.K. and German vehicle leasing
markets are highly fragmented. Management estimates that in 1998, approximately
61% of the combined U.S. and Canadian and a significant portion of the U.K. and
German vehicle leasing markets were unserved by third-party fleet management
companies, which we believe indicates a significant market opportunity.
Management believes that growth in the third-party vehicle leasing industry is
principally driven by a general trend toward outsourcing. As companies focus on
their core competencies and competition drives corporate cost reduction efforts,
we believe that they are more likely to rely on third-party fleet management
companies.
FUEL CARD INDUSTRY. Management estimates that corporate vehicle fleets in
the United States, Canada, the United Kingdom and Germany (the markets in which
VMS currently competes) made fuel expenditures of over $85 billion in 1998. The
growth of the fuel card industry has been driven by corporations seeking to
control costs and monitor corporate credit card usage. Technological advances
have enabled fuel card providers to penetrate this market with point-of-sale
networks, information management products and enhanced customer services. With
increased competition, major oil companies are further driving growth in the
industry by accepting independent fuel cards in addition to their own private
label cards. We believe that significant expansion opportunities remain, as
management estimates that approximately 45% of both the U.S. and U.K. fueling
markets remain unpenetrated by fuel card providers. In addition, many major oil
companies outsource their private label fuel card processing services to
third-party processors.
PRODUCTS AND SERVICES
VMS' vehicle management services are divided into two principal categories:
(1) asset-based products and services and (2) fee-based products and services.
Asset-based products are the services clients require to acquire, lease and
dispose of a vehicle. VMS leases more than 350,000 units on a worldwide basis
through both open-end and closed-end lease structures. As is market convention,
financing of the vehicle leases is directly linked to several other asset-based
products and services, such as vehicle acquisition, title and registration,
vehicle remarketing, and vehicle management consultation, including fleet policy
and vehicle recommendation.
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Fee-based products are designed to allow clients to effectively manage costs
and enhance driver productivity. VMS' main fee-based products are fuel services,
maintenance services and accident management. VMS also offers a variety of other
fee-based vehicle management products and services, including
acquisition/remarketing of non-leased vehicles under management, vehicle
management outsourcing, and miscellaneous fee-based services. In 1998, VMS bore
the credit risk with respect to 95% of its total fuel card charge volume and
100% of its maintenance card charge volume. Customer defaults in 1998 as a
percentage of total VMS billings were approximately 0.06%. Payments in respect
of fuel cards and maintenance cards are generally due within 15 to 30 days of
billing.
Leasing and directly-related products and services are frequently combined
with other related fee-based products and services such as accident management,
vehicle maintenance cards and fuel cards. Through use of these related services,
customers (1) receive access to VMS' broad network of vehicle-related suppliers
and (2) are able to access comprehensive information on total fleet operating
costs and characteristics, enabling better management of total fleet operations.
VMS frequently cross-sells its asset-based and fee-based products and services.
Management estimates that approximately 65% of North American and 100% of U.K.
leasing customers use at least one fee-based product or service.
The following chart sets forth the products and services provided by VMS
through PHH North America, PHH Europe and WEX:
PHH
NORTH AMERICA PHH EUROPE WEX
--------------------- ------------------- -----
ASSET-BASED
Vehicle Leasing.......................................................... X X
Vehicle Acquisition...................................................... X X
Vehicle Remarketing...................................................... X X
Fleet Management Consultation............................................ X X
Title and Registration Services.......................................... X X
FEE-BASED
Fuel Cards and Related Services.......................................... X X X
Maintenance Cards and Related Services................................... X X X
Accident Management Services............................................. X X X
Vehicle Acquisition/Disposition.......................................... X X
Data Polling/Loyalty..................................................... X
Directed Vehicle Rental.................................................. X X
Fleet Administration..................................................... X X
Customized Expense Reporting............................................. X X
Re-titling and Re-registration........................................... X X
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The following charts set forth, for each of PHH North America, PHH Europe
and WEX, the percentage of 1998 net revenues (after Fleet Costs with respect to
PHH North America and PHH Europe) attributable to asset-based and fee-based
services:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PHH NORTH AMERICA PHH EUROPE WRIGHT EXPRESS
Fee-Based 31% 16% 0%
Asset-Based 69% 84% 100%
ASSET-BASED PRODUCTS AND SERVICES
VEHICLE LEASING
Vehicle leases can be either open-end or closed-end. Open-end leases can be
structured on either a fixed rate or floating rate basis (where the interest
component of the lease payment changes month to month based upon an index)
depending upon client preference. Open-end leases are typically structured with
a 12 month minimum lease term, with month to month renewals thereafter. Open-end
leases are typically pursuant to a contract whereby VMS agrees to lease vehicles
to a customer in exchange for an interest markup and a separate monthly
management fee that covers a variety of related services (e.g., vehicle
remarketing, title and registration, etc.). The residual risk on the value of
the vehicle at the end of the lease term remains with the lessee under an
open-end lease, except for a small amount which is retained by VMS. The average
open-end leased vehicle remains in service for approximately 36 months.
Closed-end leases are structured with a fixed term with the lessor retaining the
vehicle residual risk. The most prevalent closed-end lease terms are 24 months,
36 months, and 48 months.
In North America, VMS offers customers a range of open-end vehicle leasing
products, representing 96% of the vehicles financed by VMX in North America.
VMS' total North American vehicle leasing revenues were approximately $95.6
million after fleet costs in 1998, consisting of $59.5 million of net interest
income and $36.1 million of leasing management fees. VMS' North American vehicle
lease portfolio has grown from $2.85 billion, representing 272,000 vehicles, in
1996 to $2.96 billion, representing 283,000, vehicles in 1998.
In North America, VMS generally structures open-end leases on a floating
rate basis (approximately 82% of total current North American portfolio), but
occasionally structures them under fixed rate terms. Interest payments under
floating rate leases vary month to month in accordance with changes in rates of
typically one-month commercial paper plus the agreed upon spread. Interest
payments under fixed rate leases are typically priced as a spread to two-year
treasury bills and remain constant for the life of the lease. The lessee under a
floating rate lease generally has the option to convert it to a fixed-rate lease
on 30 days notice to VMS.
In Europe, VMS offers customers traditional closed-end leases, representing
89% of the book value of total vehicles financed by VMS in Europe, and, to a
lesser extent, open-end vehicle leasing
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products. The closed-end lease structure is preferred in Europe due to certain
accounting regulations which permit off-balance sheet treatment only for
closed-end leases. VMS utilizes independent third party valuations and internal
projections to set the residuals utilized for its closed-end leases. Closed-end
lease revenues consist of the net interest spread over VMS' cost of funds
implicit in the lease and any gain generated on VMS' residual position. VMS'
total European vehicle leasing revenues (excluding sales of residual positions
on closed-end leases) were approximately $26.0 million in 1998.
VMS' European vehicle lease portfolio has grown from $505 million,
representing approximately 31,000 vehicles, in 1996 to $824 million,
representing approximately 53,000 vehicles, in 1998. The market in the United
Kingdom has seen a considerable shift towards closed-end leases in recent years
driven by clients' desire for off-balance sheet financing.
In order to maintain a strong overall credit risk portfolio and minimize bad
debt write-offs, VMS conducts extensive credit and financial analyses prior to
underwriting a lease or granting an extension, and monitors each customer's
credit and collection performance.
VEHICLE ACQUISITION
VMS uses its relationships with major vehicle manufacturers, including the
"Big 3" (General Motors, Ford and Chrysler) in North America and General Motors,
Ford and Rover Group Limited in Europe, to facilitate the efficient purchase and
convenient delivery of leased vehicles.
In North America, VMS assisted customers with the purchase of approximately
95,500 vehicles in 1998. In the United States, VMS typically orders vehicles to
be custom built by the manufacturer through dealers (principally its two owned
dealerships). In 1998, approximately 29%, 39%, and 30% of vehicles were
purchased through Chrysler, Ford and General Motors, respectively. VMS received
net fees from manufacturers as well as other fees approximating $40.3 million in
1998 in exchange for facilitating vehicle purchases. The vehicle acquisition
process through the manufacturers generally takes 4 to 6 weeks and is utilized
on approximately 81% of the vehicles purchased by VMS in the united states. VMS
purchases the remaining 19% of U.S. Vehicles "off-the-lot" generally in order to
satisfy customers' turnaround time requirements. VMS generally charges customers
a "network" fee for these purchases in order to offset the loss of
manufacturers' revenues.
In Canada, which accounts for approximately 11% of VMS' North American
vehicle orders, VMS primarily orders vehicles through negotiated contracts with
third-party dealerships. On Canadian orders, VMS receives (1) a network fee from
the customer, and (2) in certain cases a discount from the individual
third-party dealership. In all cases, VMS arranges to have vehicles delivered to
dealerships located near customers' fleet drivers.
In the United Kingdom, VMS typically orders vehicles to be built to its
customers' specifications through its preferred network of selected dealers
(unlike the situation in the United States, VMS does not own any vehicle
dealerships in Europe). In 1998, approximately 25%, 15%, and 12% of vehicles
were purchased from General Motors, Ford and Rover, respectively. VMS receives
fees from customers and, in certain cases, receives revenue directly from the
vehicle manufacturers in the form of rebates linked to purchased volumes. In
1998, almost 25,000 new vehicles were purchased for customers in the United
Kingdom.
VEHICLE REMARKETING
In North America, VMS sells used vehicles for vehicle leasing customers
across the United States and Canada (where it owns two vehicle remarketing
centers located near Toronto and Montreal) through a wide range of remarketing
channels, such as independent and franchised dealers, dealer auctions, public
auctions, and salvage dealers, as well as to dealers themselves.
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Approximately 95,000 used vehicles under VMS leases were re-sold by it in 1998.
In Europe, VMS sells used vehicles (both open-end leased and company-owned),
primarily through auctions as well as dealer groups. VMS vehicles often command
a premium when resold because of, among other things, VMS' reputation for
maintaining its vehicles. In both North America and Europe, VMS handles the
complete administrative and documentation aspects of used vehicle sales, and it
also organizes programs whereby used vehicles are sold to customers' employees.
For leased vehicles under management, vehicle remarketing services are provided
as part of the lease contract and thus do not generally generate additional
fees.
FLEET MANAGEMENT CONSULTATION
In North America, VMS provides customers with comprehensive fleet consulting
services, including fleet policy analysis and recommendations, tax and
regulatory analysis, benchmarking analysis, and vehicle recommendations and
specifications. VMS provides consulting services based mainly on (1) the
extensive knowledge and experience of its North American sales, marketing and
customer relations employees, and (2) its comprehensive vehicle management
database which evaluates vehicles and driver productivity based on performance,
cost and other criteria.
TITLE AND REGISTRATION SERVICES
In North America, VMS provides vehicle title administration services for
customers when they initially lease vehicles in the U.S. and Canada. VMS relies
upon the extensive knowledge of its experienced employees regarding
administrative vehicle requirements and its established widespread network of
contacts to successfully deliver such services.
FEE-BASED PRODUCTS AND SERVICES
FUEL CARDS AND RELATED SERVICES
VMS provides customers with fuel card programs which facilitate the payment,
monitoring, and control of fuel purchases. Fuel is typically the single largest
fleet-related operating expense, generally accounting for over 70% of total
operating expenses. By using fuel cards, VMS' customers receive the following
benefits from the fuel card: (1) access to more fuel brands and outlets than
other private label corporate fuel cards, (2) point-of-sale processing
technology for fuel card transactions that enhances customers' monitoring of
purchases, and (3) consolidated billing and access to other information on fuel
card transactions, which assists customers with evaluation of overall fleet
performance and costs.
In North America, VMS provides fuel services through both WEX and PHH North
America. WEX is a leading provider of fuel cards and related services such as
information management and payment processing to car, van and truck fleets
throughout North America. WEX provides fuel cards and related value-added
services primarily through three distribution channels: (1) its proprietary
"universal card", (2) private label cards, and (3) co-branded cards marketing.
Total cards outstanding have increased from 519,000 in 1994 to approximately 1.6
million in 1998 due to the success of the co-brand and private label partners'
marketing programs, as well as successful targeted marketing of large fleets
with WEX's universal card.
WEX's proprietary universal card is sold directly to fleet customers and is
accepted by all of the major petroleum marketers, representing approximately
130,000 of the 160,000 fueling sites throughout the united states. Approximately
579,000 universal cards were outstanding at December 31, 1998. The universal
card provides fleet operators with access to the gas station of their choice and
also provides them with a consolidated statement that reports detailed
purchasing activity, including the items purchased, date and time of purchase,
odometer reading, cost and vehicle performance information.
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WEX has developed approximately 20 private label fuel card relationships
with regional and national fuel oil marketers, including Mobil, Circle K, Gulf,
Crown, Fina and Imperial Oil Ltd. (Esso Canada) as a value-added service for the
marketers' fleet customers. The fuel oil marketers outsource all or part of
their fleet fuel card programs to WEX. Management believes that WEX's private
label cards and services enhance an individual oil company's gallon sales volume
and brand awareness, while also providing a full range of financial and
information processing services to the fleet fuel card customer. Approximately
474,000 private label cards were outstanding at December 31, 1998.
Under the co-branded marketing approach, WEX fuel cards are issued in
conjunction with commercial vehicle leasing companies, vehicle manufacturers,
associations and other sponsoring entities. These cards allow WEX's partners and
customers to add fuel cards and related services to their product lines and
thereby offer more integrated vehicle management solutions to customers. WEX has
approximately 20 co-brand partners, including over half of the national
commercial leasing concerns such as GE Capital Fleet Services, Enterprise Fleet
Services, Wheels Inc. and Automotive Rentals Inc. Approximately 530,000 WEX fuel
cards were outstanding under co-branded marketing programs at December 31, 1998.
WEX's fuel cards generate revenue from four primary sources: discount fees,
processing fees, card fees and other fees. WEX generates revenue through driver
purchases of fuel or maintenance services under universal, co-branded or private
label-funded fuel cards at merchant sites. A funded card is one in which WEX
pays the fuel merchant and holds the accounts receivable on its balance sheet
until collecting from its customers. WEX has generally negotiated three-year to
five-year contracts with merchant oil companies and service providers that sell
fuel and services to fleet customers. These contracts include a discount fee
percentage (payable to WEX) that is applied to dollar purchase volume.
Processing fees are primarily generated when a private label-unfunded charge
card (i.e. accounts receivable are held on the balance sheet of the private
label partner instead of WEX) is used at a merchant location. In lieu of the
discount fee payable by the fueling merchant which is typically earned by WEX on
a funded charge card, on unfunded cards, a fee is charged per transaction
processed, payable to WEX by the private label customer. In addition, certain
co-brand relationships include a transaction-based fee which is reflected in
this revenue category. WEX's revenue also includes monthly and transaction-based
card fees billed to both universal card customers and private label and co-brand
partners. Other revenue earned by WEX includes fees related to additional
processing services which leverage WEX's sophisticated electronic network system
to provide customized information to customers (e.g., fuel use, costs,
regulatory standards, and fuel trends, etc.). Other fees also include
miscellaneous finance charges and marketing services provided to private label
customers.
PHH North America also provides fuel cards, principally to existing
leasing-related customers. At December 31, 1998, there were approximately
290,000 cards outstanding (plus an additional 17,000 "one cards", which are
discussed below) in North America, including 72,000 in Canada. With respect to
approximately 63% of PHH North America's fuel card volume, a percentage of the
amount charged on such cards is deducted from amounts remitted to the fuel
company and kept as revenue by PHH North America.
In 1997, PHH North America (in partnership with MasterCard) initiated a
trial issuance of a co-branded, multi-purpose (e.g., fuel, maintenance, travel
and entertainment, etc.) corporate card for its customers. The card targets the
22% of corporate fleet managers that are also responsible for management of
travel and entertainment expenses. The "one card" product combines travel and
entertainment and corporate purchasing capability of the MasterCard platform
with PHH North America's fuel and maintenance card functionality. The response
to the "one card" has been
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favorable, and management expects to significantly increase the volume of "one
cards" outstanding by the end of 1999. The product's competitive advantage is
based on linking a corporate customers three major business spending categories
through the card to PHH North America's Spin data warehouse, thereby giving
customers the ability to access detailed integrated information on a "real-time"
basis.
PHH Europe manages over 1.2 million fuel cards. Its own brands include All
Star-TM- (approximately 600,000 cards outstanding) and Dial
Card-TM-(approximately 450,000 cards outstanding), which are accepted at over
12,000 fueling sites in the United Kingdom. In return for a fee, PHH Europe also
provides processing support for approximately 100,000 fuel cards on behalf of
third parties on a private label basis and approximately 45,000 local account
cards on behalf of oil companies (the latter's usage being restricted to use at
the particular oil company's branded sites only).
A percentage of the amount charged on each fuel card is deducted from
amounts remitted to retail fueling merchants and kept as revenue by PHH Europe.
Total fuel purchased on PHH Europe's fuel cards in 1998 equaled approximately $3
billion, representing approximately 610 million gallons of fuel. In addition,
PHH Europe receives an annual per card fee negotiated on a per customer basis.
MAINTENANCE CARDS AND RELATED SERVICES
VMS offers customers vehicle maintenance charge cards that are used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provide customers with benefits such as (1) negotiated discounts of up to 40%
off full retail prices through VMS' supplier network, (2) access to VMS'
in-house team of over 124 certified maintenance experts that monitor each card
transaction for policy compliance, reasonableness, and cost effectiveness and
(3) inclusion of vehicle maintenance card transactions in a consolidated
information and billing database that helps evaluate overall fleet performance
and costs. VMS maintains an extensive network of service providers in the United
States, Canada and the United Kingdom to improve ease of use by the client's
drivers.
In North America, the number of VMS vehicle maintenance charge cards issued
and outstanding has grown from 247,000 in 1996 to 282,000 at December 31, 1998,
with approximately 210,000 cards issued and outstanding in the U.S. and an
additional 72,000 cards in Canada. Cards are used at VMS' North American network
of over 72,000 preferred vehicle-related suppliers. The network includes over
34,000 "national account" suppliers, including Goodyear Tire & Rubber,
Firestone, Jiffy Lube and Safelite Glass. Total 1998 North American maintenance
card charge volume for VMS was $160.7 million in 1998, representing an increase
of 7.8% over 1997. In exchange for channeling significant business to key
suppliers and facilitating purchases and prompt payments by its customers, VMS
receives a percentage discount on each maintenance card transaction from the
participating preferred supplier. North American customers also pay VMS a
monthly fee.
In conjunction with its maintenance cards, VMS serves its North American
customers through utilization of a market-leading maintenance management system.
Each time a VMS maintenance card is used for a purchase exceeding an agreed-upon
dollar limit at an authorized vehicle-related supplier location, the supplier's
maintenance personnel are required to review the order by phone with one of VMS'
ASE certified mechanics. Prior to authorizing each maintenance purchase, the
maintenance specialist considers the particular vehicle's maintenance history
and warranty status and the customer's particular maintenance spending policy.
This process improves compliance with the customer's maintenance policies while
reducing operating costs and enhancing overall fleet maintenance levels.
Subsequent to each transaction, maintenance card activity is stored in the Spin
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data warehouse, thereby assisting in the comprehensive long-term tracking of
each vehicle and driver.
In Europe, VMS offers "FleetCards-TM-" that are used to facilitate repair
and maintenance payments. At December 31, 1998, VMS had over 137,000 cards
outstanding in Europe, and total charge volume in 1998 was $156 million. In
exchange for facilitating purchase and prompt payments by its European
customers, VMS receives a fee on each maintenance transaction from its network
of maintenance providers. Revenues also include a monthly per card fee.
With the FleetCard, clients are able to control maintenance costs by having
one of VMS' qualified technicians (who access the full service history of the
vehicle in VMS' computerized database) intervene to monitor the transactions and
significantly increase the likelihood that only necessary maintenance
transactions occur, taking into consideration factors such as the particular
vehicle's maintenance history and the customer's specific maintenance policies.
In addition to this assistance, clients receive benefits such as (1) substantial
discounts through the unit's network of 12,500 suppliers (one of the largest
networks in the industry), and (2) additional cost savings through an overall
evaluation of fleet performance.
In Europe, VMS also provides a specialized truck fleet maintenance program
that has approximately 16,500 units under management, as well as commercial
closed-end leases and rental services.
ACCIDENT MANAGEMENT SERVICES
VMS provides clients with comprehensive accident management services such as
(1) providing prompt assistance after receiving the initial accident report from
the driver (i.e. facilitating emergency towing services and car rental
assistance, etc.), (2) organizing the entire vehicle appraisal and repair
process through a network of preferred repair and body shops, (3) coordinating
and negotiating potential accident claims and (4) entering accident and repair
information into the data warehouse for future management use. Customers receive
benefits from these accident management services such as (1) convenient,
coordinated 24-hour assistance from VMS' call centers, (2) access to VMS'
leverage with the repair and body shops included in their preferred supplier
network (one of the largest in the industry), which typically provides customers
with favorable repair terms, (3) expertise of VMS' damage specialists, who
monitor vehicle appraisals and repairs for cost-efficiency and compliance with
each customer's specific repair policy, (4) services of VMS' claims experts, who
assess subrogation potential and, if necessary, attempt to negotiate maximum
recovery, and (5) significant additional information on vehicle and driver
performance (i.e., accident and claims history, etc.) that is consolidated into
the SPIN data warehouse or the European data warehouse, as applicable, and can
be used to help manage customers' overall vehicle management costs.
In North America, VMS provides customers with comprehensive accident
management services. The number of units served has grown from 101,000 in 1996
to 140,000 at December 31, 1998. In North America, customers generally pay VMS a
fee for accident management services on a per-incident basis. VMS also retains a
percentage of any subrogation recovery. In exchange for facilitating repair
purchases and prompt payments by its customers, VMS typically also receives a
negotiated discount on repair expenditures directly from the preferred repair
and body shops. Approximately 25,000 incidents are serviced by VMS in North
America per annum.
VMS also provides comprehensive accident management services in Europe. The
number of cards issued by VMS in Europe has grown from 98,500 in 1996 to 187,800
at December 31, 1998. In Europe, customers generally pay VMS a fee either on a
per-incident or per-unit-per-month basis for accident management services. In
addition, in exchange for facilitating repair purchases and prompt payments by
its customer, VMS also typically receives a discount on repair expenditures from
the preferred repair and body shops. Approximately 96,000 incidents are serviced
by VMS in Europe per annum.
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VEHICLE ACQUISITION/DISPOSITION
In North America, VMS acquires and disposes of vehicles for fleet customers
which it does not finance. Revenues are generated from associated manufacturers'
fees, and, in certain cases, from a separate fee for acquisition and disposal
paid by the customer. Approximately 10,000 units were acquired or disposed of in
1998.
In Canada, VMS also sells vehicles for its Canadian fleet and certain third
parties, such as insurance companies that do not have fleets, through its two
owned remarketing centers in Canada. Approximately 21,000 third party vehicles
and approximately 4,500 VMS vehicles were sold under this program in 1998.
At December 31, 1998, VMS also managed nearly 91,000 units through its total
outsourcing service called fleet administrative services ("FAS"). Through FAS,
VMS provides full service fleet administration functions, including policy
management, vehicle selection and responding to driver inquiries. VMS is
currently developing technology to allow FAS personnel to interact more directly
with drivers of fleet vehicles.
DATA POLLING/LOYALTY
In Europe VMS owns a system with data polling capability (i.e. the
electronic capture of card transaction data from point-of-sale-terminals) and
accordingly, VMS supplies its own polling data for certain of its cards, thus
limiting the need to purchase such data from banks or other third parties. In
addition to using such data internally, VMS also sells it directly to customers,
building on the advantage of a more customized, independent and generally
lower-cost service than is available from bank-owned competitors. VMS polls
approximately $2.35 billion of card transactions each year from sites across the
United Kingdom, making it the United Kingdom's largest independent data polling
bureau and electronic payment processor. VMS is able to provide point-of-sale
terminal supply, rental, and management and expert processing advice and
support, and it receives weekly fees per terminal polled, rental fees for the
terminals provided, and fees for management information reports provided to its
customers.
VMS has also developed its polling capability to capture information other
than card charge data. It has leveraged this capability to help corporations
manage loyalty programs (i.e. corporate incentive programs). For example, VMS
tracks telephone user talk time (capturing data on over 2 million calls daily)
for a wireless telecommunications company in the United Kingdom. The
telecommunications company awards heavy users with loyalty points that entitle
them to receive certain benefits.
DIRECTED VEHICLE RENTAL
In Europe, VMS sells car hire services as an adjunct to its vehicle
management and leasing services. The business handled over 97,000 rentals
(average duration 6 days) in 1998, an increase of 13.0% over 1997. It utilizes a
network of car hire suppliers including Avis, National, Hertz and Kennings and
does not take the risks of ownership of a car hire fleet itself. Revenues are
earned by negotiating volume discounts with the car hire suppliers and then
keeping a "mark-up" for VMS, while still providing an all-in price savings to
customers. PHH North America provides similar services.
OTHER SERVICES
In North America, VMS also offers customers a variety of other fee-based
services that are not directly related to vehicle leases including: (1)
customized vehicle expense reporting, (2) re-titling and re-registration
services, and (3) other miscellaneous vehicle management services.
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SALES AND MARKETING
GENERAL. VMS has over 560 professionals dedicated exclusively to its sales,
marketing and customer relations efforts. Management believes that this team of
experienced professionals, together with VMS' complementary information
technology have helped create both strong long-term customer relationships as
well as opportunities for new account penetration.
PHH NORTH AMERICA. PHH North America has over 270 professionals dedicated
exclusively to sales, marketing and customer relations. Approximately 40
professionals are directly responsible for prospective sales and marketing,
organized geographically and by targeted fleet sizes and in some cases by
industry/target market. The sales force compensation structure is approximately
60% salary and 40% commission, with overall compensation levels being
competitive with industry standards. Each salesperson is responsible for
marketing prospective customers with the entire range of PHH North America
products and services. Salesperson performance is measured on number of new unit
orders, fee-based revenues, and new account profitability.
Approximately 230 employees are dedicated to managing existing customer
accounts. In order to best service different customer groups, account executives
and their teams are organized primarily by geography and customers' fleet size.
On average, each tenured account executive is responsible for customers that
generate an aggregate of approximately $3.5 million in annual revenues. Account
executive performance is measured based on customer satisfaction and growth in
revenues and profitability. Working in teams with the account executives,
support professionals manage day-to-day administrative and related needs for
existing customers.
Increased technological capabilities and expectations have dramatically
changed the ways that vehicle management companies can interact with both
prospective and existing customers. Management believes that PHH North America's
technology gives its sales, marketing and customer relations professionals a
competitive advantage in providing quality products and services to both
prospective and existing accounts. PHH North America's technology enables its
sales, marketing and customer relations professionals to: (1) sell an integrated
set of products and services that are billed and analyzed from the same
consolidated information database, (2) respond quickly and efficiently to
customers' information requests through use of the SPIN data warehouse, (3)
dedicate additional time to new product and account development, as customers
learn to access and manipulate information on their own through PHH Interactive
on the internet, and (4) structure competitive bid pricing and other customer
initiatives to manage risk-adjusted profitability, through use of a proprietary
activity-based costing model.
PHH EUROPE. PHH Europe has over 150 professionals dedicated exclusively to
sales, marketing and customer relations. Approximately 50 professionals are
directly responsible for prospective sales and marketing, organized
geographically and by product segment. The sales force compensation structure is
approximately 50% salary and 50% commission, with overall compensation levels
being competitive with industry standards. Each salesperson is responsible for
marketing prospective customers with the entire range of vehicle management
products and services, but dedicated sales forces are focused on particular
customer segments, like trucks, fuel, etc. Salesperson performance is measured
based on new revenue generation.
Approximately 91 employees are dedicated to managing existing customer
accounts. In order to best service different customer groups, account executives
and their teams are organized primarily by size and geography. Top U.K.
customers, typically generating revenues in excess of $1 million, are managed by
group account directors, with intermediate size clients supported by account
managers, and small fleet size clients serviced by both office-based (by
telephone) and field-based representatives. Account executive performance is
measured based on customer satisfaction and penetration and growth in revenues
and profitability.
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WEX. The WEX sales and marketing effort is organized by distribution
channel, with the majority of resources focused on development of the Universal
Card channel. Within this channel, teams are organized by fleet size to improve
coverage of each customer segment. In particular, broad-based coverage is
afforded to developing the small fleet segment (i.e. fleets of 10 to 30
vehicles), while dedicated sales effort is focused on large, more easily
identified fleets.
With respect to the co-brand and private label channels, increasing cards
outstanding is more the result of sales efforts by the co-brand or private label
partner, rather than direct marketing efforts by WEX. In some cases, private
label partners pay WEX to help market the cards.
As the discount percentage received from fuel merchants is the same
irrespective of the applicable distribution channel, the primary pricing
decision to be made by WEX relative to each bid situation concerns the amount of
the card fee to be charged. Sales representatives utilize a model that evaluates
the overall economics associated with each customer to determine the appropriate
card fee.
LEGAL MATTERS
VMS currently is a defendant in several lawsuits, none of which is expected
to have a material adverse effect on its financial condition or results of
operations.
PHH North America is regularly named as a defendant in lawsuits arising from
accidents involving leased vehicles. In accordance with the terms of PHH North
America's standard lease agreements, lessees are required to provide physical
damage and liability insurance and to defend and hold harmless PHH North America
entities in the event of any such litigation. Although PHH Europe also has this
contractual protection, it is rarely named as a defendant in this type of
litigation. We intend to obtain insurance coverage for VMS similar to that which
Avis currently has.
In addition, Harpur is the defendant in a lawsuit filed by Richbell
Information Services Inc., The Richbell Group Limited and David Elias, claiming
damages in the amount of $240 million for allegedly conspiring to defraud Mr.
Elias of his interest in H-G Holdings, Inc., the former parent of Harpur.
Pursuant to the Merger Agreement, PHH Corporation and PHH Holdings have agreed
to provide the defense of this claim, and to indemnify Avis Rent A Car and Avis
Fleet for any damages they may suffer in connection with such claim, to the
extent such damages exceed $500,000.
TECHNOLOGY
PHH NORTH AMERICA. With the introduction of the SPIN data warehouse and PHH
Interactive, an Internet-based vehicle management program, PHH North America
became the first company in its industry to offer full capabilities in fleet
data warehousing, reporting and retrieval via the Internet. Recently, PHH North
America was nominated for a Computer World Smithsonian Award for its innovative
creation of a data warehouse with Internet access.
PHH North America initiated the development of SPIN in 1996 and has since
gathered and consolidated a large amount of historical fleet data, which used to
be clustered in various vehicle management departments and mainframe computers.
Management believes that SPIN is the largest data warehouse in the industry with
750 gigabytes of allocated space and contains years of essential data, including
vehicle acquisition costs, maintenance/repair history, accident information,
expense reports, driver history, safety records and used vehicle sales reports.
The SPIN data warehouse resides partially on a mainframe computer owned by
Cendant and partially on a local area network at PHH North America's
headquarters in Hunt Valley, MD.
The value of SPIN to customers and PHH North America was further enhanced by
the recent introduction of PHH Interactive, which provides customers "real-time"
access to the essential data of their own fleet contained in SPIN, down to the
vehicle unit level. Through PHH Interactive, vital
108
statistics can be easily generated directly by customers in customized reports
to accommodate the particular business needs of each customer. Fleet managers
can also gauge the performance of their fleets by benchmarking their own
statistics against industry composites available from the SPIN database. As a
result, PHH Interactive creates value for customers by transforming raw data
into usable information. PHH Interactive was internally developed by
VMS-affiliated web designers and developers, operations experts and customer
service professionals, and tested extensively with customers before being
officially introduced. The system registers an average of 70,000 hits per day.
PHH EUROPE. PHH Europe's operations utilize Cendant's Garden City, New York
data center, which utilizes the latest IBM mainframes and EMC storage devices.
This infrastructure is connected across the Atlantic by multiple leased
circuits. Within Europe, PHH Europe has a network of terminals which forms one
of the largest independent credit card data collection operations in the United
Kingdom and extends through Ireland and Germany.
PHH Europe has developed significant databases which aggregate years of
essential data including vehicle acquisition costs, maintenance/repair history,
accident information, expense reports, driver history, safety records, and used
vehicle sales reports. Most customer transactions are fed into these reporting
databases for analysis and reporting to PHH Europe customers. The system allows
for the production of special output (magnetic tape and disk files with
transaction data) for clients who wish to do their own analysis. Extracts are
also produced to update Fleetcom, an on-line system for clients who require an
interactive screen-based reporting capability. Updates to Fleetcom are provided
weekly or monthly, depending on client needs.
PHH Europe has also incorporated additional forms of technology into its
operations in order to streamline processes and reduce customer costs. For
example, in providing accident management services, PHH Europe eliminates, in
many cases, the need for an insurance adjuster to visit the vehicle prior to
authorizing repairs. This is accomplished by incorporating digital camera
technology at various preferred repair sites which provide electronic images
directly to VMS-affiliated repair professionals via their computers. Such
accident management professionals can then examine the damage on-line and make a
better determination as to the required action. Additionally, these images are
saved in PHH Europe's database for future use.
WEX. WEX's processing platform interfaces with a merchant card network to
provide transaction authorization, and prompts for data capture (e.g., mileage,
type of fuel, etc.) at the point-of-sale. This merchant network then provides
WEX with the relevant transactional information, which is stored in WEX's
systems, and processed to produce management information reporting for
customers.
COMPETITION
PHH NORTH AMERICA. PHH North America primarily competes for vehicle leasing
customers throughout North America with several large players, including GE
Capital Fleet Services, Automotive Rentals Inc., U.S. Fleet Leasing, Wheels
Inc., and Lease Plan USA. Like PHH North America, each of these competitors
packages certain related services (vehicle acquisition, vehicle remarketing,
title registration, etc.) with each lease. The top five participants focus on
larger corporate customers and management estimates that they account for almost
40% of all U.S. managed vehicles. A large group of additional competitors also
competes in the vehicle leasing market including BankAmerica Corporation,
through NationsBanc Leasing, but typically services the smaller, regional fleet
market segments.
As a result of the moderate overall growth in vehicle leasing, many players
focus on growing primarily through increasing share of the large corporate
fleets that already have established vehicle leasing or vehicle management
partners. Participants that rely solely on traditional vehicle financing
109
as a means of winning and/or maintaining accounts are facing intense competition
for their vehicles under management. Competitors are consequently expected to
focus on development of more value-added vehicle management products and
services as a means of increasing share of large corporate fleets and driving
customer retention.
With regard to fee-based services, PHH North America competes with different
companies with respect to various services. For example, consolidated service
corporation and Salex Holding Corporation participate in the vehicle maintenance
card sector and collision experts international competes in accident management.
In addition, WEX is the top ranked niche provider of proprietary fuel cards to
North American corporations, followed by Comcheck and Voyager Fleet Systems (PHH
North America would rank fourth in this sector based upon number of issued
cards). Many leasing-focused competitors provide fee-based fleet management
products and services through third-party arrangements with selected niche
suppliers. For example, many of PHH North America's competitors provide
customers with fuel cards through WEX or other suppliers. In addition, certain
vehicle fleets use lessors such as GE Capital Fleet Services for vehicle
financing while utilizing PHH North America and others for value-added services
such as accident management.
PHH EUROPE. With regard to fuel management, PHH Europe's main competitors
are fuel companies. PHH Europe manages over 1.2 million of the United Kingdom's
approximately 1.5 million fuel cards outstanding. PHH Europe has the only
multi-franchised fuel card available in the market in the United Kingdom. Fuel
companies are PHH Europe's primary competitors in fuel management.
With regard to other fleet management services, including leasing, PHH
Europe primarily competes throughout Europe and the United Kingdom with several
large players, including GE Capital Fleet Services, Lease Plan International,
Lex Service, Arriva, Dial and Swan International. While management believes that
these competitors focus more on providing closed-end leases, each is capable of
providing a full range of vehicle management services to customers. Various
other competitors also compete in the vehicle leasing market, focusing on
smaller, regional markets or specializing in providing particular services, like
maintenance management.
Competition is intense for the accounts of large corporations that already
have vehicle leasing or management partners. As a result, vehicle management
firms that rely solely on traditional vehicle financing as a means of winning
and/or maintaining accounts are facing intense competition for their vehicles
under management. Competitors are consequently expected to focus on the
development of more value-added vehicle management products and services as a
means of driving customer marketing and retention.
WEX. WEX competes primarily with other vehicle-based fuel cards (Voyager,
Comchek Fleet, Ceridian, etc.) and driver-based cards (Visa and MasterCard bank
cards, American Express, etc.). WEX also competes in serving small fleets with
vehicle-based cards issued by oil companies and niche players such as
FuelMan/GasCard.
EMPLOYEES
As of December 31, 1998 VMS had a total of approximately 3,125 employees, of
which 1,200 were employees of PHH North America (including 177 in Canada), 1,400
were employees of PHH Europe and 525 were employees of WEX. Management believes
that VMS' relations with its employees is good and does not anticipate any
disruptions in labor relations as a result of the VMS Acquisition. None of VMS'
employees are unionized.
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PROPERTIES
Each of PHH North America, PHH Europe and WEX has one primary
facility/headquarters and selected other satellite offices. All facilities are
leased with the exception of PHH Europe's headquarters in Swindon, United
Kingdom. The location and size of each of VMS' facilities is presented below.
VMS FACILITIES
LOCATION SQUARE FOOTAGE
- --------------------------------------------------------------------------------------------- -------------------
PHH North America(1)
Hunt Valley, Maryland........................................................................ 199,563
New York, New York........................................................................... 4,621
Oak Brook, Illinois.......................................................................... 4,977
Irvine, California........................................................................... 3,414
New York, New York........................................................................... 1,334
Mississauga, Canada.......................................................................... 31,532
Lachine, Canada.............................................................................. 13,135
Mississauga, Canada.......................................................................... 11,446
Calgary, Canada.............................................................................. 8,446
St. Laurent, Canada.......................................................................... 3,752
Vancouver, Canada............................................................................ 3,526
PHH EUROPE
Swindon, United Kingdom(2)................................................................... 148,352
Trowbridge, United Kingdom................................................................... 26,130
Birmingham, United Kingdom................................................................... 15,000
Manchester, United Kingdom................................................................... 11,500
Munich, Germany.............................................................................. 11,233
Dublin, Ireland.............................................................................. 4,000
WEX
South Portland, Maine........................................................................ 86,000
Murray, Utah................................................................................. 5,230
Scarborough, Maine........................................................................... 5,000
- ------------------------
(1) Does not include two vehicle dealerships located in North Carolina and
Virginia.
(2) Swindon, United Kingdom includes 19,352 square feet of leased offices.
Concurrently with the closing of the VMS Acquisition, VMS LLC moved its
chief executive office to Garden City, New York. VMS LLC maintains a
regional/processing office in Hunt Valley, Maryland.
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MANAGEMENT
The following table sets forth information regarding current executive
officers and directors of Avis Rent A Car as well as selected officers of VMS:
NAME POSITION(S)
- -------------------------------------------------------- --------------------------------------------------------
EXECUTIVE OFFICERS OF AVIS RENT A CAR
F. Robert Salerno....................................... President and Chief Operating Officer--Rental Car Group
and Director
Kevin M. Sheehan........................................ President--Corporate and Business Affairs, Chief
Financial Officer and Director
Mark E. Miller.......................................... President and Chief Operating Officer--Vehicle
Management Services Group
Thomas J. Byrnes........................................ Senior Vice President--Sales of Avis
Maria M. Miller......................................... Senior Vice President--Marketing of Avis
Michael P. Collins...................................... Vice President--International of Avis
Richard S. Jacobson..................................... Vice President--Tax of Avis
Gerard J. Kennell....................................... Vice President and Treasurer of Avis
James A. Keyes.......................................... Vice President--HR, Staffing and Diversity of Avis
Karen C. Sclafani....................................... Vice President, General Counsel and Secretary of Avis
Timothy M. Shanley...................................... Vice President and Controller of Avis
OTHER EXECUTIVE OFFICERS
John Cullum............................................. President of PHH Europe
Michael E. Dubyak....................................... President and Chief Executive Officer of WEX
Neil J. Cashen.......................................... Senior Vice President, PHH North America Finance and
Planning
David Bird.............................................. Managing Director of PHH Europe
NON-EXECUTIVE DIRECTORS OF AVIS RENT A CAR
W. Alun Cathcart........................................ Director
Leonard S. Coleman, Jr. ................................ Director
Alfonse M. D'Amato...................................... Director
Martin L. Edelman....................................... Director
Deborah L. Harmon....................................... Director
Stephen P. Holmes....................................... Director
Michael J. Kennedy...................................... Director
Michael P. Monaco....................................... Director
EXECUTIVE OFFICERS OF AVIS RENT A CAR
MR. SALERNO, age 48, was appointed President and Chief Operating
Officer--Rental Car Group in August 1999. Mr. Salerno continues to be President
of ARACS, a position he has held since November 1996. Additionally, Mr. Salerno
has been a director of Avis Rent A Car since May 29, 1997. From September 1995
to November 1996, Mr. Salerno was Executive Vice President of Operations of
Avis, Inc., the predecessor of Avis Rent A Car, and ARACS. From July 1990 to
September 1995, Mr. Salerno was Senior Vice President and General Manager of
Avis, Inc. and ARACS.
MR. SHEEHAN, age 46, was made President--Corporate and Business Affairs in
August 1999. Mr. Sheehan continues as the Chief Financial Officer of Avis Rent A
Car and ARACS, a position he has held since December 1996. Mr. Sheehan has also
been a director of Avis Rent A Car since
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June 1999. Mr. Sheehan had been Executive Vice President of Avis Rent A Car
since December 1996. From September 1996 to September 1997, Mr. Sheehan was a
Senior Vice President of HFS. From December 1994 to September 1996, Mr. Sheehan
was Chief Financial Officer for STT Video Partners, a joint venture between Time
Warner, Telecommunications, Inc., Sega of America and HBO. Prior thereto, he was
with Reliance Group Holdings, Inc., an insurance holding company, and some of
its affiliated companies for ten years and was involved with the formation of
the Spanish language television network, Telemundo Group, Inc. and from 1991
through 1994 was Senior Vice President--Finance and Controller.
MR. MILLER, age 40, was appointed President and Chief Operating
Officer--Vehicle Management Services Group in August 1999. Mr. Miller joined PHH
North America in 1997 as President. His previous experience includes positions
as President of GE Capital Financial, a unit of GE specializing in the issuance
of commercial payment systems, Senior Vice President of World Travel Partners
(the world's third largest travel management company), and Vice President of
Strategic Sales for Corporate Services at American Express.
MR. BYRNES, age 54, has been Senior Vice President--Sales of Avis Rent A Car
and ARACS since February 1998 and Vice President--Sales North America for Avis
Rent A Car or its predecessor and ARACS since 1987.
MS. MILLER, age 43, has been Senior Vice President--Marketing of Avis Rent A
Car since February 1998. From January 1997 to February 1998, Ms. Miller was the
principal in her own consulting firm, which provided marketing consulting
services to small and mid-sized businesses and nonprofit organizations. From
1987 to 1995, Ms. Miller held various positions with American Express Company
including Vice President, Platinum Card Operations from September 1993 to
October 1995 and Vice President, Small Business Services Marketing from December
1990 to August 1993.
MR. COLLINS, age 52, has been Vice President--International of Avis Rent A
Car or its predecessor and ARACS and General Manager of their international
operations since 1987.
MR. JACOBSON, age 55, has been Vice President--Tax of Avis Rent A Car and
ARACS since September 1998. From November 1997 until August 1998, Mr. Jacobson
was Staff Vice President of ARACS and for more than five years prior thereto he
was employed by ARACS as Director of Corporate Tax.
MR. KENNELL, age 54, has been Vice President and Treasurer of Avis Rent A
Car or its predecessor and ARACS since February 1987.
MR. KEYES, age 53, has been Vice President--HR, Staffing and Diversity of
Avis Rent A Car since March 1999 and of ARACS since January 1999. From July 1997
until December 1998, Mr. Keyes was Vice President--Staffing, Diversity &
Management Development of ARACS. From June 1993 until December 1996, Mr. Keyes
was Corporate Director of Human Relations at The Dun and Bradstreet Corporation.
MS. SCLAFANI, age 47, has been Vice President, General Counsel and Secretary
of Avis Rent A Car and ARACS since August 1998. From April 1990 until March
1997, Ms. Sclafani was Vice President, Deputy General Counsel and Assistant
Secretary of Avis, Inc. and ARACS. In March 1997, Ms. Sclafani was elected Vice
President and Secretary of Avis Rent A Car.
MR. SHANLEY, age 50, has been Vice President and Controller of Avis Rent A
Car and ARACS since November 1996. From November 1989 to November 1996, Mr.
Shanley was Vice President-- Planning and Analysis of Avis, Inc. and ARACS.
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OTHER EXECUTIVE OFFICERS
MR. CULLUM, age 54, has been President of PHH Europe since 1982 and has full
operating responsibility for all PHH Europe operations in Europe. He joined PHH
Europe in 1982 from Ford Motor Company where he held the position of Finance
Director of its European Credit subsidiaries.
MR. DUBYAK, age 48, has been with WEX since 1986 and was appointed President
and Chief Executive Officer in September, 1998. Prior to assuming this role, he
served as Executive Vice President responsible for sales, marketing, and the
development and management of private label and co-brand relationships in the
United States. Mr. Dubyak initially brought to WEX over a decade of experience
in the petroleum industry. He held a variety of management positions with
Pennzoil Company and Reserve Petroleum Company where, immediately prior to
joining WEX, he served as a Senior Vice President.
MR. CASHEN, age 44, has been Senior Vice President of PHH North America
Finance and Planning since July 1997 and is responsible for the direction of all
financial management and business planning activities related to PHH North
America's domestic fleet operations. Mr. Cashen joined PHH North America in 1979
as a Credit Manager. He has held positions as Vice President and Controller,
Vice President of Business Planning and Analysis and Director of Corporate
Planning and Business Development.
MR. BIRD, age 40, has been Managing Director of PHH Europe since 1994 and is
responsible for both the financial and network function of the European group
and operations of the ClaimsPlus, Cendant Business Partners and Overdrive
business units. He joined PHH Europe originally in 1986, worked for Lease Plan
in finance for 4 years and returned to PHH Europe in 1994.
NON-EXECUTIVE DIRECTORS OF AVIS RENT A CAR
Each director of Avis Rent A Car holds office until the next annual meeting
of stockholders or until his or her respective successor has been duly elected
and qualified or until his or her earlier death, resignation or removal.
MR. CATHCART, age 55, has been a Director of Avis Rent A Car since September
1997. Mr. Cathcart has been non-Executive Chairman of Avis Europe plc since
April 1, 1999. From January 1, 1999 until April 1, 1999 Mr. Cathcart served as
Executive Chairman of Avis Europe plc and for more than five years prior thereto
Mr. Cathcart was Chairman and Chief Executive of Avis Europe plc.
MR. COLEMAN, age 50, has been a Director of Avis Rent A Car since September
1997. Mr. Coleman has been President of the National League of Professional
Baseball Clubs since March 1994. From 1992 to March 1994, Mr. Coleman served as
Executive Director--Market Development of Major League Baseball. Mr. Coleman
also is a director of the following corporations which file reports pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"): Cendant,
H.J. Heinz Company, New Jersey Resources, The Omnicom Group and Owens Corning.
SEN. D'AMATO, age 61, has been a Director of Avis Rent A Car since June 1999
and has been Managing Director of Park Strategies, a business consulting firm in
New York City, since its formation in January 1999. From January 1981 until
January 4, 1999, Sen. D'Amato served in the United States Senate representing
the State of New York where he was Chairman of the Committee on Banking, Housing
and Urban Affairs from 1995 until he left office.
MR. EDELMAN, age 58, has been Interim Chairman of the Board since December
1998 and a Director of Avis Rent A Car since September 1997. From January 1996
to March 1998, Mr. Edelman
114
served as President and a director of Chartwell Leisure, Inc. He was a partner
with Battle Fowler, a New York City law firm, from 1972 through 1993 and since
January 1, 1994 has been Of Counsel to that firm. Mr. Edelman is also a partner
of Chartwell Hotels Associates, Chartwell Leisure Associates L.P., Chartwell
Leisure Associates L.P. II and of certain of their respective affiliates. Mr.
Edelman also serves as a director of the following corporations which file
reports pursuant to the Exchange Act: Arcadia Realty and Capital Trust, each a
real estate investment trust, and Cendant.
MS. HARMON, age 40, has been a Director of Avis Rent A Car since September
1997. Ms. Harmon has been a Principal in the Office of the President at JER Real
Estate Partners, L.P., an institutional, private equity fund for investment in
real estate assets, since 1991. Prior to joining JER, Ms. Harmon served as
Managing Director of the Real Estate Finance Group at Bankers Trust Company.
MR. HOLMES, age 42, has been a Director of Avis Rent A Car since October
1996. Mr. Holmes was appointed as Vice Chairman of Cendant in December 1997 and
from September 1996 through December 1997 Mr. Holmes served as Vice Chairman of
HFS, the predecessor company of Cendant. From July 1990 through September 1996,
Mr. Holmes served as Executive Vice President, Treasurer and Chief Financial
Officer of HFS. Mr. Holmes also serves as a director of Avis Europe plc and as a
director of the following corporations which file reports pursuant to the
Exchange Act: Cendant and PHH Corporation.
MR. KENNEDY, age 62, has been a Director of Avis Rent A Car since September
1997. Mr. Kennedy has been an attorney with his own law firm since 1976.
MR. MONACO, age 51, has been a Director of Avis Rent A Car since May 1997.
Mr. Monaco has been a Vice Chairman of Cendant since December 1997 and Chief
Executive Officer of the Alliance Marketing Division of Cendant since November
1998. From December 1997 until November 1998, Mr. Monaco was Chief Financial
Officer of Cendant and from October 1996 to December 1997, Mr. Monaco served as
Vice Chairman and Chief Financial Officer of HFS. Mr. Monaco served as Executive
Vice President and Chief Financial Officer of the American Express Company from
September 1990 to June 1996. Mr. Monaco is a director of Cendant, which files
reports pursuant to the Exchange Act.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $30,000, plus $4,000
for chairing a committee and $2,000 for serving as a member of a committee other
than Chair. Non-employee directors also are paid $1,000 for each Board meeting
attended and $500 ($1,000 for committee chair) for each Board committee meeting
if held on the same day as a Board meeting and $1,000 ($2,000 for committee
chair) for each Board committee meeting attended on a day on which there is no
Board meeting. Non-employee directors are reimbursed for expenses incurred in
attending meetings of the Board of Directors and committees.
Under Avis' 1997 Stock Option Plan (the "Plan"), each non-employee director
is granted options to purchase 50,000 shares of Class A Common Stock on the date
of his or her initial election to the Board of Directors. Such options have an
exercise price of the fair market value on the date of grant, vest over a
five-year period from the date of grant at the rate of 20% per year, and have
other terms which are the same as all other options granted under the Plan.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the 1996, 1997 and 1998 cash and non-cash
compensation awarded to or earned by Avis' Chief Executive Officer and Avis'
four other most highly compensated executive officers:
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) ($)(2)
- ---------------------------------- ----------------------- --------- --------- -------------- ---------------
F. Robert Salerno................. 1996 244,288 103,825 -- 13,947
President & Chief Operating 1997 336,346 351,752 533,200 6,197
Officer--Rental 1998 356,730 420,000 392,500 11,844
Car Group
Kevin M. Sheehan.................. 1997 264,413 289,330 355,500 4,155
President--Corporate and 1998 279,950 302,501 265,000 12,011
Business Affairs and Chief
Financial Officer
Thomas J. Byrnes.................. 1996 145,509 37,665 -- 7,041
Senior Vice President-- Sales 1997 162,692 108,331 71,100 7,738
1998 196,769 170,176 10,000 10,917
R. Craig Hoenshell(3) 1997 468,462 568,800 639,840 18,536
Chairman & Chief Executive 1998 623,845 812,501 74,000 37,090
Officer
Kevin P. Carey(3)................. 1997 169,711 132,000 106,620 9,151
Senior Vice President-- Human 1998 212,786 210,000 12,000 13,829
Resources
- ------------------------
(1) Amounts listed represent options to acquire Class A Common Stock.
(2) Includes the value of group term life insurance and Avis' matching
contribution to 401(k) or deferred compensation plans.
(3) Mr. Hoenshell resigned from his office as Chairman and Chief Executive
Officer of Avis Rent A Car effective December 31, 1998, but remains a Senior
Advisor to Avis Rent A Car until October 6, 2000. Mr. Carey ceased to be
employed by Avis Rent A Car on December 31, 1998. Securities shown are net
of options forfeited upon such resignation and cessation of employment.
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OPTION GRANTS TABLE
The following table describes the options to acquire shares of Class A
Common Stock granted to Avis' Chief Executive Officer and certain other
executive officers in the last fiscal year:
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE GRANT DATE
OPTIONS EMPLOYEES PRICE PER EXPIRATION PRESENT
NAME GRANTED IN FISCAL YEAR SHARES($)(1) DATE VALUE($)(2)
- ------------------------------------------ ------------ ----------------- ------------- ---------- -----------
F. Robert Salerno......................... 300,000 24.2% 21.38 12/16/08 3,268,530
92,500 7.5% 24.00 6/4/08 1,131,562
Kevin M. Sheehan.......................... 200,000 16.1% 21.38 12/16/08 2,179,020
65,000 5.2% 24.00 6/4/08 795,152
Thomas J. Byrnes.......................... 10,000 0.8% 24.00 6/4/08 122,331
R. Craig Hoenshell(3)..................... 74,000 6.0% 24.00 6/4/08 905,249
Kevin P. Carey(3)......................... 12,000 1.0% 24.00 6/4/08 146,797
- ------------------------
(1) Options granted at $24.00 per share vest 20% per year beginning June 4,
1999. Options granted at $21.38 per share vest 50% on June 30, 2000 and 50%
on December 31, 2001.
(2) The amount shown in this column represents the Grant Date Present Value
using the "Black-Scholes" valuation method.
(3) Securities shown are net of options forfeited upon resignation from office
or cessation of employment with Avis Rent A Car.
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YEAR END OPTION VALUE TABLES
The following table describes the value of unexercised in-the-money options
to acquire Class A Common Stock held by Avis' Chief Executive Officer and
certain other executive officers at December 31, 1998:
FY-END OPTION VALUES(1)
----------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FY-END(#) AT FY-END($)
- ----------------------------------------------------------------- ----------------------- ---------------------
F. Robert Salerno................................................ 925,700 4,694,283
Kevin M. Sheehan................................................. 620,500 3,130,395
Thomas J. Byrnes................................................. 81,100 513,109
R. Craig Hoenshell............................................... 713,840 4,614,510
Kevin P. Carey................................................... 118,620 768,878
- ------------------------
(1) None of the options shown in the table were exercised during 1998.
DEFINED BENEFIT PLAN
Avis maintains a defined benefit pension plan for employees who met the
eligibility requirements as of December 31, 1983. The eligibility requirements
are non-union, full time employees hired prior to December 31, 1983 who were age
25 or above on January 1, 1985. The plan was amended to curtail all benefit
accruals and to add two years of credited service to the accrued benefit of each
participant employed by Avis on December 31, 1998. Avis recognized a gain of
$7.5 million as a result of this curtailment during the first quarter of Avis'
fiscal year ending December 31, 1999.
The plan provides that the benefit for each participant, payable monthly, be
equal to 1 1/2% of his or her final average compensation (average compensation
being the average of the highest five consecutive years of compensation in the
last ten years of employment) for each year of service, not to exceed 35, minus
1 3/7% of the estimated Social Security benefit for each year of service. In
general, the effect is to provide a participant who has worked for Avis for 35
years prior to retirement, with a pension, including Social Security, equal to
at least 52% of the average compensation (including bonus, overtime and
commissions) earned during the highest five consecutive years of his or her
employment.
To the extent that applicable federal laws limit a participant's pension
plan benefit to an amount less than the amount otherwise provided by the plan's
formula, Avis has adopted a retirement equalization benefit plan to compensate
the participant for the reductions in the retirement benefit. In light of the
curtailment of benefit accruals under Avis' defined benefit plan, no additional
employees will be designated as participants in this retirement equalization
benefit plan.
The following table shows the estimated annual pension benefit payable under
the plans under normal retirement in 1999 after selected periods of service
(assuming such employees and their spouses elect a straight life annuity rather
than a form of joint and survivor or other form of annuity, in which case the
benefits would generally be lower than shown in the following table). The
estimated maximum benefits for employees who retire in years other than 1999
will be different from the amount shown in the table because pension benefits
will be offset by different Social Security benefits; however, the benefit shown
in the table will not be reduced by the amount of Social Security benefits
actually paid.
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PENSION PLAN TABLE
ESTIMATED ANNUAL PENSION BENEFIT(1)
YEARS OF SERVICE
-----------------------------------------------------
ANNUAL PAY 15 20 25 30 35
- ----------- --------- --------- --------- --------- ---------
2$00,000... $ 39,194 $ 52,258 $ 65,323 $ 78,387 $ 91,452
250,000... 49,881 66,508 83,135 99,762 116,390
300,000... 60,569 80,758 100,948 121,137 141,327
350,000... 71,256 95,008 118,760 142,512 166,265
400,000... 81,944 109,258 136,573 163,887 191,202
450,000... 92,631 123,508 154,385 185,262 216,140
500,000... 103,919 137,758 172,198 206,637 241,077
- ------------------------
(1) A portion of the benefit will be paid by Avis under Avis' retirement
equalization benefit plan, if the benefit exceeds the maximum pension
payable from the tax qualified retirement plan under federal law.
As of December 31, 1998, the specified named executives had the following
years of service under the defined benefit plan: Mr. Salerno, eighteen years,
seven months; Mr. Byrnes, thirty-two years, eleven months.
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF CONTROL
ARRANGEMENTS
AVIS
Three named executive officers of Avis Rent A Car have written employment
agreements.
Mr. Hoenshell resigned from his office as Chairman and Chief Executive
Officer of Avis Rent A Car effective December 31, 1998. However, he remains
employed by Avis Rent A Car as a Senior Advisor under an employment agreement
which expires on October 6, 2000 and entitles him to a salary of $625,000 during
his period of employment and lump sum payments of $325,000 each on January 1,
1999 and October 6, 2000 as a retention incentive. If Mr. Hoenshell's employment
is terminated by Avis Rent A Car other than as a result of death, disability or
cause, or by the executive due to Avis' material breach, he is entitled to
receive in a lump sum the remainder of his salary and the remaining $325,000
incentive payment within 30 days following his termination.
Mr. Salerno and Mr. Byrnes have employment agreements with a predecessor
company which terminate on February 8, 2001 and September 20, 1999,
respectively. Under the terms of their agreements, Mr. Salerno and Mr. Byrnes
are entitled to receive an annual base salary of not less than $356,730 and
$196,769, respectively, which salary may be increased by Avis Rent A Car's Board
of Directors during the term of their agreements. If the employment of Mr.
Salerno is terminated by Avis for reasons other than "just cause" or if Mr.
Salerno terminates his employment for "good reason" (as each term is defined in
the agreement), he is entitled to receive his remaining salary and full bonus
and certain perquisites through the term of his agreement. However, if the
employment of Mr. Salerno is terminated by Avis on or after a change-in-control,
he is entitled to receive his remaining salary, full bonus and certain
perquisites under the agreement in a single lump sum within 30 days following
his termination. If the employment of Mr. Byrnes is terminated by Avis Rent A
Car as a result of his death, his estate is entitled to receive his salary for a
period of one year as a death benefit. If the employment of Mr. Byrnes is
terminated without "just
119
cause" (as defined in the agreement), he is entitled to receive his salary for a
period of one year and a pro rated share of his bonus for the year in which his
termination occurred.
VMS
Mr. Miller does not have a written employment agreement. However, Avis Rent
A Car will be obligated to pay him two times his annual base salary, currently
$420,000, in the event he is terminated without good reason or resigns for cause
within one year of the closing of the VMS Acquisition.
Mr. Dubyak has an "at will" employment agreement with WEX. Under the terms
of the agreement, if his employment is terminated by WEX for reasons other than
"cause" or if Mr. Dubyak terminates his employment due to an "adverse change"
(as each term is defined in the agreement), he is entitled to receive a one time
severance payment equal to one year of his then effective base salary, and a pro
rata payment of any bonus amount due for the year in which such termination
occurs to the extent such bonus was not already paid as well as certain
perquisites.
Mr. Cullum has an employment agreement with Cendant Business Answers
(Europe) PLC ("CBA") which may be terminated by either CBA or Mr. Cullum by
giving 6 months prior written notice to the other party, or by CBA without
notice if Mr. Cullum is found to have committed a gross default, misconduct or
breach materially detrimental to CBA or its subsidiaries. Under the terms of
this agreement, Mr. Cullum's annual base salary is reviewed annually on May 1st
at the discretion of CBA, and is currently L160,000. However, Avis Rent A Car
will be obligated to pay him two times his annual base salary in the event he is
terminated without good reason or resigns for cause within one year of the
closing of the VMS Acquisition.
Mr. Cashen does not have a written employment agreement. However, Avis Rent
A Car will be obligated to pay him two times his annual base salary, currently
$175,000, in the event he is terminated without good reason or resigns for cause
within one year of the closing of the VMS Acquisition.
Mr. Bird does not have a written employment agreement. However, Avis Rent A
Car will be obligated to pay him two times his annual base salary, currently
L100,000, in the event he is terminated without good reason or resigns for cause
within one year of the closing of the VMS Acquisition.
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OWNERSHIP OF CAPITAL STOCK
The information set forth on the following table is furnished as of August
1, 1999 (except as otherwise noted) with respect to any person (including any
"group" as that term is used in Section 13(d)(3) of the Exchange Act) who is
known to New Avis to be the beneficial owner of more than 5% of any class of
Avis Rent A Car's voting securities, and as to those shares of Avis Rent A Car's
equity securities beneficially owned by each of its directors and nominees for
director, its current named executive officers, and all of its executive
officers and directors as a group.
AMOUNT
AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS
- -------------------------------------------------------------------------------- ------------- -----------------
PRINCIPAL STOCKHOLDERS
Cendant Corporation(1).......................................................... 5,885,800 18.9%(2)
6 Sylvan Way
Parsippany, NJ 07054
T. Rowe Price Associates, Inc.(3)............................................... 2,993,000 9.6%
100 E. Pratt Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS(4)(5)
Thomas J. Byrnes................................................................ 16,220 *
W. Alun Cathcart................................................................ 20,000 *
Leonard S. Coleman, Jr.......................................................... 20,000 *
Alfonse M. D'Amato.............................................................. 0 *
Martin L. Edelman............................................................... 20,000 *
Deborah L. Harmon............................................................... 20,000 *
Stephen P. Holmes............................................................... 21,000 *
Michael J. Kennedy.............................................................. 20,000 *
Michael P. Monaco............................................................... 21,000 *
F. Robert Salerno............................................................... 238,780 *
Kevin M. Sheehan................................................................ 159,200 *
DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP(5) (19 persons)......................................................... 649,073 2.0%
- ------------------------
* Less than 1%
(1) Cendant Corporation beneficially owns 5,885,800 shares of Class A Common
Stock after giving effect to Avis' repurchase of 1,614,200 shares of Class A
Common Stock in 1999, which shares are held of record by its indirect
wholly-owned subsidiary, Cendant Car Rental Holdings, Inc.
(2) Cendant Corporation beneficially owns 7,200,000 shares of Series A
Preferred, each of which is convertible, under certain circumstances into
Class B Common Stock. The Class B Common Stock is non-voting, but is
convertible into Class A Common Stock by Cendant Corporation or its
affiliates to the extent that the ownership by Cendant Corporation and its
affiliates of Class A Common Stock would not exceed 20% of the total
outstanding. In addition, upon transfer to anyone other than Cendant
Corporation or one of its affiliates, the Class B Common Stock automatically
converts into Class A Common Stock. Furthermore, under certain
circumstances, all of the Class B Common Stock held by Cendant Corporation
or its affiliates may be converted into Class A Common Stock. If this had
happened on June 30, 1999, Cendant Corporation's beneficial ownership of
Class A Common Stock would have been approximately 34% of the total then
outstanding. Additionally, as a holder of Series A Preferred, Cendant
Corporation will receive shares of Series B Preferred issued as dividends on
the Series A
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Preferred. Until the fifth anniversary of the date of issuance, dividends on
the Series B Preferred may be paid in kind, thereafter, dividends must be
paid in cash. Holders of Series B Preferred may convert their Series B
Preferred into Class B Common Stock if Avis Fleet defaults in certain of its
obligations under the Series A Preferred or the Series B Preferred. Series B
Preferred shares automatically convert into Class B Common Stock upon the
bankruptcy or insolvency of Avis Fleet or any of its Significant
Subsidiaries. As of the Closing Date, no shares of Series B Preferred had
been issued. See "Description of Avis Fleet Preferred Stock and Class B
Common Stock."
(3) Based upon the information contained in a Schedule 13G dated February 12,
1999 by T. Rowe Price Associates, Inc. ("T. Rowe"). T. Rowe beneficially
owns 2,993,000 shares of Avis' Class A Common Stock with sole voting or
investment power with respect to only 400 shares of Class A Common Stock.
These securities are owned by various individuals and institutional
investors for which T. Rowe serves as investment adviser with power to
direct investments and/or sole power to vote the securities. For purposes of
the reporting requirements of the Exchange Act, T. Rowe is deemed to be a
beneficial owner of such securities; however, T. Rowe expressly disclaims
that it is, in fact, the beneficial owner of such securities.
(4) Includes shares which could be acquired within 60 days of August 1, 1999
through the exercise of options to purchase Class A Common Stock under Avis'
1997 Stock Option Plan as follows: Mr. Byrnes-16,220; Messrs. Cathcart,
Coleman, Edelman, Holmes, Kennedy, and Monaco and Ms. Harmon-20,000 each;
Mr. Salerno-231,780; Mr. Sheehan-155,200 and all directors and executive
officers as a group-634,273. In addition, within 60 days of August 1, 1999,
under the 1997 Stock Option Plan Mr. Hoenshell could acquire 256,162 shares
of Avis' Class A Common Stock and Mr. Carey could acquire 11,882 shares of
Avis' Class A Common Stock.
(5) Excludes shares owned by Mr. Hoenshell and Mr. Carey. As of March 20, 1999,
Mr. Hoenshell owned 20,100 shares of Avis' Class A Common Stock and Mr.
Carey owned 3,000 shares of Avis' Class A Common Stock.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH CENDANT
Cendant, which beneficially owns approximately 19% of Avis' outstanding
Class A Common Stock and would own, if it had converted all the Avis Fleet
Preferred Stock as of June 30, 1999, approximately 34% of the common equity of
New Avis (although its voting interest would be limited, in most instances, to
20%), was formed through the merger of HFS and CUC International Inc. in
December 1997. Cendant is a major international provider of consumer and
business services. Cendant operates in four principal divisions: Travel
Services, Real Estate Services, Alliance Marketing and Other Consumer and
Business Services. In Travel Services, Cendant is the leading franchisor of
hotels and rental car agencies worldwide; the largest provider of vacation
exchange services; a leading vehicle management company; the United Kingdom's
largest private car park operator; and a leading motorist assistance group in
the United Kingdom. In Real Estate Services, Cendant is the world's largest
franchisor of residential real estate brokerage offices, a major provider of
mortgage services to consumers and a global leader in corporate employee
relocation. Through Alliance Marketing, Cendant provides access to insurance,
travel, shopping, auto, and other services, primarily through direct marketing
to customers of its affinity partners. Cendant's Other Consumer and Business
Services include the tax preparation services franchise, information technology
services, car park and vehicle emergency support and rescue services in the
United Kingdom, Cendant information services, financial products and other
consumer related services.
In connection with Avis Rent A Car's stock repurchase program, on January
15, 1999 Avis Rent A Car repurchased 1.3 million shares of Class A Common Stock
from Cendant at a cost of $31.5 million, and on April 26, 1999 purchased an
additional 314,200 shares at a cost of $9.3 million.
We are party to various agreements with Cendant that were entered into when
Cendant beneficially owned all of Avis Rent A Car's outstanding Class A Common
Stock. The agreements summarized below set forth our ongoing responsibilities to
Cendant.
SEPARATION AGREEMENT
In connection with Avis Rent A Car's IPO on September 24, 1997, Avis Rent A
Car and the Franchisor, a wholly-owned subsidiary of Cendant, entered into a
Separation Agreement which provides for, among other things, the assumption by
Avis Rent A Car of all liabilities relating to the vehicle rental business,
other than liabilities related to alleged acts of illegal discrimination against
customers in the rental of vehicles which are alleged to have occurred prior to
the IPO, and the allocation between Avis Rent A Car and the Franchisor of
certain other liabilities and certain indemnification obligations of Avis Rent A
Car and the Franchisor.
CROSS-INDEMNIFICATION. Subject to certain exceptions, Avis Rent A Car has
agreed to indemnify the Franchisor and its subsidiaries against any loss,
liability or expense incurred or suffered by the Franchisor or its subsidiaries
arising out of or related to the failure by Avis Rent A Car to perform or
otherwise discharge liabilities allocated to and assumed by Avis Rent A Car
under the Separation Agreement, and the Franchisor has agreed to indemnify Avis
Rent A Car and its subsidiaries against any loss, liability or expense incurred
or suffered by Avis Rent A Car or its subsidiaries arising out of or related to
the failure by the Franchisor to perform or otherwise discharge the liabilities
retained by the Franchisor under the Separation Agreement, including any
liabilities arising out of alleged acts of illegal discrimination against
customers in the rental of vehicles which are alleged to have occurred prior to
the IPO. The Separation Agreement also includes procedures for notice and
payment of indemnification claims and provides that the indemnifying party may
assume the defense of a claim or suit brought by a third party.
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MASTER LICENSE AGREEMENT
Avis' status as an Avis System franchisee is governed by the Master License
Agreement. Pursuant to the Master License Agreement, ARACS has agreed to pay the
Franchisor a monthly base royalty of 3.0% of ARACS' gross revenue. In addition,
ARACS has agreed to pay a supplemental royalty of 1.0% of gross revenue payable
quarterly in arrears which will increase periodically to a maximum of 1.5% in
2003 (the "Supplemental Fee"). These fees have been paid by ARACS since January
1, 1997. Until July 30, 2002, the Supplemental Fee, or a portion thereof, may be
deferred if ARACS does not attain certain financial targets. Any Supplemental
Fees that are deferred will bear interest at a market rate until paid and will
be expressly subordinated to indebtedness of ARACS. The royalties charged to
ARACS for the twelve months ended December 31, 1998 amounted to $91.9 million.
Additionally, ARACS is required to spend at least 1.2% of its gross revenues on
advertising.
ARACS has the exclusive right to open Avis franchises in 28 selected
standard metropolitan statistical areas in the United States, in territories
outside the United States that are not currently licensed to other Avis System
franchisees and in territories that ARACS purchases from existing franchisees
that have exclusivity. ARACS has the non-exclusive right to open new franchises
in any other market not currently served by another Avis System franchisee. In
the markets where ARACS has a non-exclusive right to open new franchises, ARACS
will have a right of first refusal to develop such area prior to the
Franchisor's granting a license to a third party. In the event Cendant acquires
another car rental company, ARACS has a right of first refusal to negotiate a
grant of a license to operate the rental locations for such car rental company
within any territory in which ARACS operates.
The Master License Agreement provides the Franchisor with significant rights
regarding the business and operations of ARACS. ARACS is required to operate
each of its Avis franchises in accordance with certain standards contained in
the Avis operating manual (the "Operating Manual"). Pursuant to the Master
License Agreement, the Franchisor may impose certain guidelines relating to the
Avis System, the vehicle rental operations and the amount of advertising and
promotional expenditures. In general, the Master License Agreement provides that
ARACS may not (1) engage in any other vehicle rental business or (2) disclose
the terms of the Operating Manual or any other confidential information relating
to the Avis System to any third party. In addition, ARACS agreed not to use any
of the licensed trademarks other than in its vehicle rental business without the
Franchisor's consent.
The Master License Agreement will terminate without offering ARACS an
opportunity to cure its default, if (A) certain bankruptcy and insolvency events
occur, (B) ARACS or Avis Rent A Car purports to transfer any of its rights and
obligations under the Master License Agreement or in the case of Avis Rent A
Car, more than 10% of the equity interests in ARACS, without compliance with the
terms of the Master License Agreement, (C) ARACS competes with the Franchisor in
violation of the Master License Agreement, (D) ARACS discloses the confidential
information of the Franchisor in violation of the Master License Agreement, (E)
ARACS challenges Wizard Co.'s rights to the licensed proprietary marks or (F)
ARACS receives three or more notices of termination for Curable Defaults (as
defined) which are cured or not cured (A through F are collectively, the
"Non-Curable Defaults"); provided that, except for (A) above, the Franchisor
must give ARACS 30 days notice of such Non-Curable Default. The Franchisor may
also terminate the Master License Agreement if ARACS (1) fails, refuses or
neglects to promptly pay monies owing to the Franchisor or Cendant under certain
specified agreements, (2) misuses or makes any unauthorized use of the licensed
proprietary marks or otherwise materially impairs the goodwill associated with
such marks, (3) engages in any business or markets any service or product under
a name or mark which, in the Franchisor's opinion, is similar to the licensed
proprietary marks, (4) fails to maintain material compliance with the standards
prescribed by the Franchisor in the Master License Agreement, in
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the Operating Manual or otherwise in writing or (5) with respect to any
facility, fails to maintain compliance with the standards or procedures
prescribed by the Franchisor at such facility (collectively, the "Curable
Defaults"); PROVIDED, HOWEVER, that ARACS will have 30 days (10 days in the case
of (1) above) after its receipt from the Franchisor of written notice of such
default to remedy such default and, PROVIDED, FURTHER, that other than with
respect to (1) above, in the event such default is not cured within 30 days but
ARACS has commenced to cure such default within 30 days and is diligently
prosecuting such cure to completion, ARACS will have up to an additional 60 days
to cure such default. In the event of a termination of the agreement, the
Franchisor has the option to acquire ARACS's rental locations, leases and fleet
for fair value.
REGISTRATION RIGHTS AGREEMENT
In connection with the IPO, Avis Rent A Car entered into a registration
rights agreement, pursuant to which Cendant and certain transferees of Class A
Common Stock held by the Franchisor (the "Holders") have the right to require
Avis Rent A Car to register all or part of the Class A Common Stock owned by
such Holders under the Securities Act (a "Demand Registration"); provided that
Avis Rent A Car must postpone giving effect to a Demand Registration up to a
period of 30 days if Avis Rent A Car believes such registration might have a
material adverse effect on any plan or proposal by Avis with respect to any
financing, acquisition, recapitalization, reorganization or other material
transaction, or Avis Rent A Car is in possession of material non-public
information that, if publicly disclosed, could result in a material disruption
of a major corporate development or transaction then pending or in progress or
in other material adverse consequences to Avis Rent A Car. Cendant has advised
Avis Rent A Car that it does not have any present intention to request any such
registration. In addition, the Holders have the right to participate in
registrations by Avis Rent A Car of Class A Common Stock (a "Piggyback
Registration"). The Holders will pay all out-of-pocket expenses incurred in
connection with any Demand Registration. Avis Rent A Car will pay any expenses
incurred in connection with a Piggyback Registration, except for underwriting
discounts, commissions and expenses attributable to the shares of Class A Common
Stock sold by such Holders. Cendant has exercised its rights under this
agreement. Accordingly, Avis Rent A Car has filed a registration statement with
respect to the Class A Common Stock owned by Cendant.
COMPUTER SERVICES AGREEMENT
The Wizard System, together with the associated back office and accounting
systems, is owned and operated by Cendant at a computer center in Garden City,
New York. ARACS purchases use of the Wizard System for the purpose of processing
reservation and rental transactions, and for accounting purposes, under the
terms of a computer services agreement entered into with Cendant in connection
with the IPO. The computer services agreement provides ARACS with access to all
functions of the Wizard System. ARACS participates in the funding of the
development costs for any new features which it agrees with other relevant users
to be desirable. Once developed, any such additional features also become
available to ARACS. Cendant charges ARACS the full cost of providing computer
services each month. The method of calculating costs chargeable to ARACS varies
depending on the service being provided. In 1998, ARACS paid a total of $35.8
million under the computer services agreement to Cendant. The computer services
agreement is coterminous with the Master License Agreement. Cendant may
terminate the agreement if, among other things, ARACS fails to pay any amount
due within 10 days of notice from Cendant and there has been a similar default
within the past six months. However, Cendant has agreed to provide services to
ARACS for a period of up to twelve months in the event the computer services
agreement is terminated in accordance with certain provisions thereof.
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RESERVATION SERVICES AGREEMENT
In connection with the IPO, ARACS entered into a reservation services
agreement with Cendant, pursuant to which Cendant agreed to operate and maintain
(directly or by subcontracting with affiliates or one or more third parties)
reservation center services consistent with the services historically provided
to ARACS. ARACS is obligated to obtain and maintain at its vehicle rental
locations the computer equipment and communication equipment and service
required to participate in the reservation system. ARACS agreed to pay Cendant
(A) a per call charge for each call received in the call centers operated by
Cendant for the Avis System, (B) for manually entered transactions, a per
booking charge for every booking made through direct electronic interface with
the global distribution systems utilized by the airlines and (C) a per booking
charge for every booking made through an internet connection for the Avis
System. Such fees are subject to adjustment annually to reflect the cost of
providing such service. In 1998, ARACS paid a total of $49.9 million under the
reservation services agreement to Cendant. The reservation services agreement
will terminate upon the termination of the Master License Agreement, unless
earlier terminated in accordance with the terms thereof.
PURCHASING SERVICES AGREEMENT
In connection with the IPO, Cendant and ARACS entered into a purchasing
services agreement pursuant to which Cendant agreed, with the assistance of
ARACS, to identify vendors and programs which would benefit ARACS and pursue
establishing a preferred alliance program with such vendors for the benefit of
ARACS. Any commissions, related access fees or other amounts paid by preferred
alliance partners in connection with an agreement relating to sales to ARACS
will be shared by the parties.
CALL TRANSFER AGREEMENT
ARACS and Cendant are parties to a call transfer agreement pursuant to which
Cendant agreed to transfer telephone calls from its lodging customers if such
customers wish to rent vehicles. Pursuant to the call transfer agreement, ARACS
has agreed to pay to Cendant a fee of $1.75 per call transferred to ARACS by
Cendant. Further, ARACS has agreed to pay to Cendant a fee of $8.00 for each car
rental that results from a call transferred by Cendant. ARACS has guaranteed
that it will pay Cendant no less than $2.25 million in recurring fees during
each of the five years of the contract term which expires on March 4, 2002.
ARACS recorded $2.6 million in fees payable to Cendant for the fiscal year ended
December 31, 1998.
TAX DISAFFILIATION AGREEMENT
In connection with the IPO, Avis Rent A Car and Cendant entered into a tax
disaffiliation agreement that sets forth each party's rights and obligations
with respect to payments and refunds, if any, for taxes relating to taxable
periods before and after the IPO and related matters such as the filing of tax
returns and the conduct of audits and other proceedings involving claims made by
taxing authorities.
On or prior to October 17, 1996, the Franchisor was the common parent of an
affiliated group of corporations within the meaning of Section 1504(a) of the
Internal Revenue Code of 1986, as amended, whose members included the
Franchisor, Avis Rent A Car and certain of their respective subsidiaries (the
"Old Avis Group"). Generally, under the tax disaffiliation agreement, Avis Rent
A Car agreed to indemnify Cendant for (i) taxes of or attributable to the Old
Avis Group, any member of the Old Avis Group and any nonconsolidated subsidiary
of the Franchisor for any period or portion thereof ending on or before October
17, 1996, (ii) taxes incurred pursuant to Section 1.1502-6 of the U.S. Treasury
regulations (or similar provisions under state, local or foreign
126
law imposing several liability upon members of a consolidated, combined,
affiliated or unitary group) as a result of any member of the Old Avis Group
having been a member of another affiliated group, (iii) taxes of or attributable
to Avis Rent A Car and its subsidiaries for periods or portions thereof
beginning the day after October 17, 1996 and (iv) transfer taxes incurred as a
result of the transactions contemplated by the IPO.
LEASE AGREEMENTS
Avis and Cendant currently share three facilities which are located in (i)
Virginia Beach, Virginia, (ii) Tulsa, Oklahoma and (iii) Garden City, New York.
The Virginia Beach property is owned by Cendant. The Garden City property (which
houses Avis' principal executive offices) and the Tulsa property are each owned
by third parties unrelated to Avis or Cendant and are leased by Cendant.
In connection with the IPO, ARACS and Cendant entered into a lease or a
sublease agreement with respect to each property, as applicable. Cendant leases
space at its Virginia Beach property to ARACS pursuant to a lease agreement. The
lease agreement has a term of 18 years and requires ARACS to pay Cendant its
proportionate share, based on allocated space, of the cost of operating such
facility which in 1998, totalled $1.2 million. In addition, Cendant subleases
space at its Tulsa and Garden City properties to ARACS pursuant to sublease
agreements for each respective property. The sublease agreement for the Garden
City property terminates in 2015, or upon the earlier termination of the Master
License Agreement. The sublease agreement for the Tulsa property terminates in
2001, or upon the earlier termination of the Master License Agreement. Both
sublease agreements require ARACS to reimburse Cendant for its proportionate
share, based on allocated space, of the rent and other charges required under
Cendant's existing leases relating to such properties, together with its
proportionate share, based on allocated space, of the cost of operating such
facilities which, in 1998, totalled $3.3 million and $1.2 million for the Garden
City and Tulsa properties, respectively.
INFORMATION TECHNOLOGY SERVICES AGREEMENT
In connection with the VMS Acquisition, PHH Vehicle Management Services, LLC
and Cendant entered into an information technology services agreement whereby
Cendant agreed to provide VMS with certain information technology services.
These services include: management and operation of the data center facility;
file service activities to allow Cendant to maintain, retrieve and back-up VMS
data; performing tape library management; ensuring information security;
capacity planning and management; physical security at the data center; change
management and control; service request management; business resumption and
disaster recovery; systems operations; technical support; and wide area network
services, including design, access, engineering and management; reports,
capacity planning and management and operations.
This agreement has an initial term of 30 months and will then be
automatically extended unless terminated by either party at any time after the
18th month by providing one year's written notice. Cendant has the right to
terminate the agreement on twelve month's notice if Cendant determines to cease
providing these services to all of its customers. During the first 18 months,
VMS will be charged Cendant's actual cost for the provision of the services.
After that time, VMS will be charged actual cost plus 25%. Cendant retains
exclusive property rights in all Cendant software used in the fulfillment of its
obligations under this agreement.
AVIS CORPORATE SERVICES TRANSITION AGREEMENT
In connection with the VMS Acquisition, Avis Fleet and Cendant entered into
the Avis corporate services transition agreement whereby Cendant agreed to
provide Avis Fleet with certain services. These services include: the provision
and administration of employee benefits; processing of
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corporate accounts payable, payroll and tax filings; cash management reporting;
risk management support services for the invoicing and underwriting of
insurance; fixed asset administration; credit risk management and corporate
financial systems. This agreement expires on December 31, 1999 with most
services terminating prior to that date, except that Cendant must continue to
provide corporate financial systems services until December 31, 2000. The
initial terms of service for corporate payroll, accounts payable and fixed asset
administration, however, expire on September 30, 1999. Upon mutual written
agreement, the parties may extend the term of any or all of the services for
additional, successive six month terms.
CENDANT CORPORATE SERVICES TRANSITION AGREEMENT
Avis Fleet and PHH Corporation entered into a corporate services transition
agreement dated as of June 30, 1999 whereby Avis Fleet agreed to provide PHH
Corporation with certain services. These services include: operating the general
ledger, accounts payable and receivable operations for PHH Corporation on the
Avis Fleet mainframe; continuing technical support; facilities management;
provision of certain health and fringe benefits; the billing, processing and
funding arrangements for relocation transactions provided by PHH Corporation to
clients in the Republic of Ireland; location and retrieval of archived files;
and the servicing of equipment leases. The agreement expires on December 31,
1999 unless earlier terminated by the parties, except that Avis Fleet must
continue to service the equipment leases until such leases have terminated and
Avis Fleet must locate and make available archived files until June 30, 2005.
The parties may, upon mutual written agreement, extend the term of any or all of
the services for additional, successive six month terms.
VMS ACQUISITION REGISTRATION RIGHTS AGREEMENT
In connection with the VMS Acquisition, Avis Rent A Car, Avis Fleet, PHH
Corporation and PHH Holdings entered into a registration rights agreement dated
as of June 30, 1999 pursuant to which PHH Corporation and its transferees (the
"Holders") will have the right to require Avis Rent A Car to register under the
Securities Act all or part of any of the following Class A Common Stock
beneficially owned by any such Holder: (x) Class A Common Stock issued to PHH
Corporation upon exchange of Class B Common Stock and (y) Class A Common Stock
acquired by PHH Corporation, Cendant, PHH Holdings or any other affiliate of PHH
Corporation in the open market at a time when any of the aforementioned entities
was deemed to be an affiliate of Avis Rent A Car and then transferred to a
Holder (a "Demand Registration"). Avis Rent A Car may postpone giving effect to
a Demand Registration for a period of up to 30 days if Avis Rent A Car believes
such registration might have a material adverse effect on any plan or proposal
by Avis Rent A Car with respect to any financing, acquisition, recapitalization,
reorganization, or other material transaction, or Avis Rent A Car is in
possession of material non-public information that, if publicly disclosed, could
result in a material disruption of a major corporate development or transaction
then pending or in progress or in other material adverse consequences to Avis
Rent A Car. If any Holder of securities to be covered by a Demand Registration
desires to sell the securities in an underwritten offering, such Holder has the
right to select an investment banking firm and Avis Rent A Car must enter into
underwriting agreements with the selected firm. In addition, the Holders will
have the right, subject to certain limitations, to participate in underwritten
registrations by Avis Rent A Car of Class A Common Stock.
TRADEMARK LICENSE AGREEMENT
In connection with the VMS Acquisition, PHH Holdings and Avis Fleet entered
into a trademark license agreement dated as of June 30, 1999 whereby Avis Fleet
obtained a perpetual, worldwide, royalty-free, exclusive right and license to
use certain licensed marks owned by PHH Holdings,
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including the PHH name and logo, in connection with the operation of its
business. Avis Fleet may also sublicense the marks. PHH Holdings, however,
retains the right to use and permit others to use the marks in connection with
any and all products and services other than vehicle management and fuel card
products and services. PHH Holdings has the right to inspect and monitor the use
of the marks by Avis Fleet.
TRANSITIONAL LICENSE AGREEMENT
In connection with the VMS Acquisition, Cendant and Avis Fleet entered into
a transitional license agreement dated as of June 30, 1999 whereby Avis Fleet
obtained a license to use certain licensed marks owned by Cendant, including the
Cendant name and logo, to sell off, deplete or dispose of, existing inventory of
products and business materials used by Cendant in connection with the vehicle
management and fuel card businesses. The agreement terminates upon the earlier
of (i) the depletion or disposal of all existing inventory or products and
business materials using the licensed marks or (ii) the first anniversary of the
agreement.
STOCKHOLDERS' AGREEMENT
In connection with the VMS Acquisition, Avis Rent A Car, Avis Fleet and PHH
Corporation entered into a stockholders' agreement dated as of June 30, 1999
whereby PHH Corporation agreed to cause Cendant Car Rental, Inc. to vote all
shares of Avis Rent A Car owned by it in favor of amending the Certificate of
Incorporation of Avis Rent A Car to permit the issuance of the Class B Common
Stock and the Class A Common Stock into which it may be converted. In return,
Avis Rent A Car covenanted to maintain specified levels of paid-in capital and
common equity and to take all actions necessary to effectuate the conversion of
Series A Preferred Stock into Class B Common Stock and the exchange of Class B
Common Stock for Class A Common Stock. Additionally, Avis Fleet covenanted to
deliver certain financial information to PHH Corporation. This agreement
terminates on the earliest of (a) the redemption of the Series A Preferred Stock
acquired by PHH Corporation by Avis Fleet and (b) the tenth anniversary of the
agreement.
INSTRUMENT OF ASSUMPTION
In connection with the VMS Acquisition, Avis Fleet executed an instrument of
assumption dated as of June 30, 1999 whereby Avis Fleet assumed and agreed to
perform, pay or discharge in accordance with their terms, to the extent not
previously performed, paid or discharged, all liabilities and obligations of PHH
Holdings arising out of or related to the indebtedness of PHH Holdings to PHH
Corporation, which may not exceed an aggregate principal amount of
$1,438,000,000, pursuant to a loan agreement dated January 13, 1999 between PHH
Holdings and PHH Corporation.
UNDERTAKING
In connection with the VMS Acquisition, Avis Fleet executed an undertaking
dated as of June 30, 1999 whereby Avis Fleet undertook, assumed and agreed to
perform, pay or discharge in accordance with their terms, to the extent not
previously performed, paid or discharged, all liabilities and obligations of VMS
as of the effective time of the VMS Acquisition and all debts, liabilities and
obligations of VMS after the closing of the VMS Acquisition.
NON-COMPETITION AGREEMENT
In connection with the VMS Acquisition, Avis Rent A Car, Avis Fleet, PHH
Holdings and PHH Corporation entered into a non-competition agreement dated as
of June 30, 1999 whereby PHH Holdings and PHH Corporation agreed that for a five
year period, they would not, and would cause
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each of their respective affiliates not to, directly or indirectly, engage in or
own any interest in any business that engages in the vehicle fleet management or
fuel card businesses or markets any product or services that directly compete
with the businesses of VMS. This restriction contains exceptions for:
investments in under five percent of a publicly traded company; existing
products and services; acquisitions of a business which derives under 15% of its
revenue from businesses which compete with VMS; and business of an entity that
acquires control of Cendant. Additionally, for a two year period from the
closing of the VMS Acquisition, PHH Holdings and PHH Corporation are also barred
from soliciting for employment any person who is at such time a VMS employee.
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DESCRIPTION OF AVIS FLEET PREFERRED STOCK AND CLASS B COMMON STOCK
SERIES A PREFERRED STOCK
A total of 7,200,000 shares of Series A Preferred were issued upon
consummation of the VMS Acquisition and are currently outstanding. Holders of
Series A Preferred are not entitled to preemptive rights. The Series A Preferred
has an aggregate liquidation preference of $360 million or $50 per share (the
"Series A Liquidation Preference"). Each share of Series A Preferred shall
accrue dividends at a rate per annum of 5% of the Series A Liquidation
Preference, payable semi-annually in arrears. In addition, if Avis Rent A Car is
unable to obtain the consent of its Shareholders to amend its charter by June
2000 to issue Class B Common Stock and Class A Common Stock issuable in exchange
for the Class B Common Stock, the dividend rate on the Series A Preferred will
increase to 12%, with retroactive effect to the date of issuance. Until the
fifth anniversary of the issuance of the Series A Preferred, these dividends may
be paid in Series B Preferred Stock at the discretion of Avis Fleet. The Series
A Preferred is also entitled to special annual dividends at a rate of 2% of the
Series A Liquidation Preference per annum, payable in cash annually on February
15(th) of each year, in the event that Avis Fleet achieves targeted consolidated
EBITDA levels. Upon liquidation, and after payment of all amounts owed to all
classes of capital stock ranked senior to the Series A Preferred, holders of
shares of Series A Preferred will receive the Series A Liquidation Preference of
such shares plus accrued and unpaid dividends.
The Series A Preferred ranks (1) junior to the Series C Preferred, PARI
PASSU to the Series B Preferred (as defined), and senior to Avis Fleet's common
stock in right of payment of the Series A Preferred dividends and special
dividends; and (2) junior to the Series C Preferred, PARI PASSU to the Series B
Preferred, and senior to Avis Fleet's common stock in right of payment of the
Series A Liquidation Preference. The Series A Preferred may be redeemed at any
time in whole or in part on or after the fifth anniversary of its date of
issuance and is mandatorily redeemable by Avis Fleet on the eleventh anniversary
of its date of issuance for an amount per share equal to the Series A
Liquidation Preference plus accrued and unpaid dividends (the "Series A
Redemption Price").
Holders of the Series A Preferred may cause Avis Fleet to redeem their
shares for cash, upon the bankruptcy or insolvency of Avis Rent A Car or a
change in control with respect to Avis Rent A Car or ARACS (a "Preferred Stock
Change of Control"), in an amount equal to either (1) the Series A Redemption
Price per share redeemed or (2) the kind and amount of securities, cash or other
assets which the holder of such Series A Preferred would have owned immediately
after the consolidation, merger, transfer or lease constituting a Preferred
Stock Change in Control if the holder had exercised its conversion option
immediately before the effective date (or, if applicable, record date) of such
transaction.
The holders of the Series A Preferred may convert shares of Series A
Preferred into shares of Class B Common Stock once specified levels of 12-month
consolidated EBITDA of Avis Rent A Car have been reached and the average closing
price of Class A Common Stock for a specified period shall have exceeded the
Performance Conversion Price. Such conversion shall be at a rate (the
"Performance Conversion Rate") obtained by dividing the per share Series A
Liquidation Preference by $50 (as adjusted for antidilution protection, the
"Performance Conversion Price").
On or after the fifth anniversary of the closing date of the VMS
Acquisition, if the share price of the Class A Common Stock has exceeded an
amount equal to 110% of the Performance Conversion Price for 20 trading days
within a period of 30 consecutive days ending within five trading days of notice
of conversion given by Avis Fleet, then the Series A Preferred will be converted
into Class B Common Stock at the Performance Conversion Rate. Upon the
bankruptcy or insolvency of Avis Fleet or any of its Significant Subsidiaries,
as defined in Rule 1-02(w) of Regulation S-X, the Series A Preferred shall
automatically convert into Class B Common Stock at the Series A Market
Conversion Rate.
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Additionally, holders of Series A Preferred may convert their Series A
Preferred into Class B Common Stock at the Series A Market Conversion Rate if
Avis Fleet: (1) fails to make a redemption payment on the Series A Preferred or
the Series B Preferred, (2) fails to pay dividends when due on either the Series
A Preferred or the Series B Preferred, (3) takes actions requiring consents of
holders of the Series A Preferred or the Series B Preferred without obtaining
such consents or (4) issues additional shares of the Series A Preferred or
Series B Preferred, or reissues shares of either, in violation of their terms.
The Series A Market Conversion Rate equals the quotient obtained by
dividing: (1) the per share Series A Liquidation Preference by (2) the average
closing price per share of Class A Common Stock for the 30 trading days
immediately preceding the date of the holder's conversion notice or the date on
which the bankruptcy case commences, as applicable. The Market Conversion Rate
is subject to customary adjustment under certain circumstances.
Upon any merger, consolidation, combination or reclassification of Avis
Fleet, (1) before the second anniversary of the date of issuance, Avis Fleet
must survive such transaction and remain a Texas corporation, and, following
such transaction, the Series A Preferred must remain outstanding, unaffected by
such transaction and (2) after the second anniversary of the Closing Date, each
holder of the Series A Preferred may, at its option, receive, other than in
connection with any such merger, consolidation or reclassification after which
100% of the common stock of Avis Fleet remains directly or indirectly owned by
Avis Rent A Car, (a) cash in an amount no less than the Series A Redemption
Price per share, or (b) the kind and amount of securities, cash or other assets
which the holder of such Series A Preferred would have owned immediately after
the consolidation, merger, transfer or lease constituting a Preferred Stock
Change in Control if the holder had exercised its conversion option immediately
before the effective date (or, if applicable, record date) of such transaction.
Without the affirmative vote of the holders of a majority of the outstanding
shares of Series A Preferred, Avis Fleet shall not (1) authorize or issue any
security ranking senior to the Series A Preferred as to dividends or on
liquidation (other than the Series C Preferred); (2) amend the articles of
incorporation or certificate of designations in a manner adverse to the holders
of the Series A Preferred; (3) authorize the issuance of additional shares of
Series A Preferred; or (4) reincorporate Avis Fleet in a jurisdiction other than
Texas prior to the second anniversary of the date of issuance. Holders of Series
A Preferred are not entitled to voting rights, except under certain
circumstances. In those circumstances where the holders of Series A Preferred
have a right to vote, each holder of a share of Series A Preferred shall be
entitled to one vote per share.
Shares of Series A Preferred shall be freely transferable. Shares of Series
A Preferred reacquired in any manner shall be retired and may not be reissued as
shares of Series A Preferred.
SERIES B PREFERRED STOCK
Series B Cumulative PIK Preferred Stock (the "Series B Preferred") will be
issued as dividends to the Series A Preferred holders by Avis Fleet. No shares
of Series B Preferred are currently outstanding. Holders of the Series B
Preferred are not entitled to preemptive rights. The Series B Preferred has a
liquidation preference of $50 per share (the "Series B Liquidation Preference").
Each share of Series B Preferred Stock shall accrue dividends at a rate per
annum of 5% of the Series B Liquidation Preference, payable in cash
semi-annually in arrears. In addition, if Avis Rent A Car is unable to obtain
the consent of its shareholders to amend its charter by June 2000 to issue Class
B Common Stock and Class A Common Stock issuable in exchange for the Class B
Common Stock, the dividend rate on the Series B Preferred will increase to 12%,
with retroactive effect to the date of issuance. Until the fifth anniversary of
the date of issuance, dividends may, at the discretion of Avis Fleet be paid in
kind; thereafter, dividends must be paid in cash. Upon
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liquidation, and after payment of all amounts owed to all classes of capital
stock ranked senior to the Series B Preferred, holders of shares of Series B
Preferred will receive the Series B Liquidation Preference of such shares plus
accrued and unpaid dividends.
The Series B Preferred has the same ranking as the Series A Preferred. The
Series B Preferred may be redeemed by Avis Fleet, in whole or in part, on or
after the fifth anniversary of the date of issuance, and must be redeemed in
whole upon the eleventh anniversary of the date of issuance for an amount per
share equal to the Series B Liquidation Preference plus accrued and unpaid
dividends (the "Series B Redemption Price").
Holders of the Series B Preferred may cause Avis Fleet to redeem their
shares for cash, upon the bankruptcy or insolvency of Avis Fleet or Avis Rent A
Car or a Preferred Stock Change in Control, at the Series B Redemption Price.
Upon any merger, consolidation, combination or reclassification of Avis Fleet,
other than in connection with any such merger, consolidation or reclassification
after which 100% of the common stock of Avis Fleet remains directly or
indirectly owned by Avis Rent A Car, each holder of the Series B Preferred will
receive on account of such holder's shares cash in an amount no less then the
Series B Redemption Price per share.
Upon the bankruptcy or insolvency of Avis Fleet or any of its Significant
Subsidiaries, the Series B Preferred shall automatically convert into Class B
Common Stock at the Series B Market Conversion Rate.
Additionally, holders of Series B Preferred Stock may convert their Series B
Preferred Stock into Class B Common Stock at the Series B Market Conversion Rate
if Avis Fleet: (1) fails to make a redemption payment on the Series A Preferred
or the Series B Preferred, (2) fails to pay dividends when due on either the
Series A Preferred or the Series B Preferred, (3) takes actions requiring
consents of holders of the Series A Preferred or the Series B Preferred without
obtaining such consents or (4) issues additional shares of the Series A
Preferred or Series B Preferred, or reissues shares of either, in violation of
their terms.
The Series B Market Conversion Rate equals the quotient obtained by
dividing: (1) the per share Series B Liquidation Preference by (2) the average
closing price per share of Avis Rent A Car Common Stock for the 30 trading days
immediately preceding the date of the holder's conversion notice or the date on
which the bankruptcy case commences, as applicable. The Market Conversion Rate
is subject to customary adjustment under certain circumstances.
Holders of Series B Preferred will have voting rights analogous to those of
the holders of the Series A Preferred. Shares of Series B Preferred shall be
freely transferable. Shares of Series B Preferred reacquired in any manner shall
be retired and may not be reissued as shares of Series B Preferred.
SERIES C PREFERRED STOCK
A total of 40,000 shares of Series C Preferred were issued upon consummation
of the VMS Acquisition and are currently outstanding. Holders of the Series C
Preferred are not entitled to preemptive rights. The Series C Preferred has an
aggregate liquidation preference of $2,000,000 or $50 per share (the "Series C
Liquidation Preference"). Each share of Series C Preferred Stock shall accrue
dividends at a rate per annum to be agreed upon, payable in cash semi-annually
in arrears. Upon liquidation, and after payment of amounts, if any, owed to all
classes of capital stock ranked senior to the Series C Preferred, holders of
shares of Series C Preferred will receive the Series C Liquidation Preference of
such shares plus accrued and unpaid dividends. The Series C Preferred ranks (1)
senior to the Series A Preferred and senior to the Class A Common Stock in right
of payment of the Series C Preferred dividends; and (2) senior to the Series A
Preferred and senior to Avis Fleet's common stock in right of payment of the
Series C Liquidation Preference. The Series C
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Preferred may be redeemed by Avis Fleet, in whole or in part, on or after the
fifth anniversary of the date of issuance, and must be redeemed in whole upon
the seventh anniversary of the date of issuance, in each case for an amount per
share equal to the Series C Liquidation Preference plus accrued and unpaid
dividends (the "Series C Redemption Price").
Holders of the Series C Preferred may cause Avis Fleet to redeem their
shares for cash, upon (i) the bankruptcy or insolvency of Avis Rent A Car, (ii)
a Preferred Stock Change in Control or (iii) notice given by a holder after the
second anniversary of the issuance of the Series C Preferred, in each case in an
amount equal to the Series C Redemption Price.
Upon any merger, consolidation, combination or reclassification of Avis
Fleet, other than in connection with any such merger, consolidation or
reclassification after which 100% of the common stock of Avis Fleet remains
directly or indirectly owned by Avis Rent A Car, (1) before the second
anniversary of the issuance of the Series C Preferred, Avis Fleet must survive
such transaction and remain a Texas corporation, and, following such
transaction, the Series C Preferred must remain outstanding, unaffected by such
transaction, or (2) after the second anniversary of the issuance of the Series C
Preferred, holders of the Series C Preferred may receive only cash consideration
in an amount not less than the Series C Redemption Price.
Holders of Series C Preferred are not entitled to voting rights, except
under certain circumstances. Without the affirmative vote of the holders of a
majority of the outstanding shares of Series C Preferred, Avis Fleet may not
take certain specified actions that would adversely affect the rights of the
holders of the Series C Preferred. Shares of Series C Preferred reacquired in
any manner will be retired and may not be reissued as shares of Series C
Preferred.
CLASS B COMMON STOCK
In the event that Avis Rent A Car obtains the consent of its Shareholders to
amend its charter by June 2000 to issue Class B Common Stock, Avis Rent A Car
will authorize and reserve for issuance shares of Class B Common Stock to be
issued upon the conversion of the Series A Preferred or the Series B Preferred.
The Class B Common Stock will rank (1) junior to any class or series of
preferred stock of Avis Rent A Car and (2) pari passu with the Class A Common
Stock in right of payment of dividends and on liquidation. The Class B Common
Stock is nonvoting.
At any time that the beneficial ownership by Cendant, together with any
affiliate of Cendant (Cendant and such affiliates, the "Cendant Affiliates"), of
the Class A Common Stock is less than 20% of the voting power of the outstanding
shares of Class A Common Stock, the Cendant Affiliates shall have the right to
convert shares of Class B Common Stock into Class A Common Stock on a
share-for-share basis in an amount such that the ownership by the Cendant
Affiliates of the Class A Common Stock does not exceed 20% of the voting power
of the outstanding shares of Class A Common Stock after giving effect to such
conversion.
The Cendant Affiliates shall have the right to convert the Class B Common
Stock into shares of Class A Common Stock on a share-for-share basis upon the
occurrence of (1) a bankruptcy or insolvency of Avis Rent A Car and (2) a
Preferred Stock Change of Control, other than any Preferred Stock Change of
Control that is caused solely by the sale by the Cendant Affiliates of its
shares of Class A Common Stock or Class B Common Stock.
Upon the transfer, sale or disposition for value to any person other than
the Cendant Affiliates, each share of Class B Common Stock shall be
automatically exchanged for the Class A Common Stock on a share-for-share basis.
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Holders of Class B Common Stock will not be entitled to any voting rights,
except under certain circumstances. In those circumstances where the holders of
Class B Common Stock have a right to vote, each holder of a share of Class B
Common Stock shall be entitled to one vote per share.
Other than upon conversion of the Series A Preferred or the Series B
Preferred Stock, no additional shares of Class B Common Stock may be issued.
Shares of Class B Common Stock shall be freely transferable. Shares of Class B
Common Stock reacquired in any manner shall be retired and may not be reissued
as shares of Class B Common Stock.
In connection with the VMS Acquisition, Avis Rent A Car entered into a
registration rights agreement, pursuant to which Cendant and certain transferees
of Class B Common Stock and Class A Common Stock converted from the Class B
Common Stock held by Cendant (the "Holders") will have the right to require Avis
Rent A Car to register all or part of the Class A Common Stock owned by such
Holders under the Securities Act (an "Acquisition Demand Registration");
provided that Avis Rent A Car may postpone giving effect to an Acquisition
Demand Registration for a period of up to 30 days if Avis Rent A Car believes
such registration might have a material adverse effect on any plan or proposal
by Avis with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or Avis Rent A Car is in
possession of material non-public information that, if publicly disclosed, could
result in a material disruption of a major corporate development or transaction
then pending or in progress or in other material adverse consequences to Avis
Rent A Car. In addition, the Holders will have the right to participate in
registrations by Avis Rent A Car of Class A Common Stock (an "Acquisition
Piggyback Registration"). The Holders will pay all out-of-pocket expenses
incurred in connection with any Acquisition Piggyback Registration, except for
underwriting discounts, commissions and expenses attributable to the shares of
Class A Common Stock sold by such Holders.
DESCRIPTION OF OTHER INDEBTEDNESS
THE NEW CREDIT FACILITY
In connection with the VMS Acquisition, Avis Rent A Car entered into the New
Credit Facility. The following summary of the material provisions of the New
Credit Facility does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the terms of the New Credit Facility.
Under the New Credit Facility, a syndicate of lenders led by The Chase
Manhattan Bank have made a total of $1.35 billion available to us in the form of
a $250.0 million Term A Loan, a $375.0 million Term B Loan, a $375.0 million
Term C Loan, and a Revolving Credit Facility of up to $350.0 million. On the
date of the consummation of the VMS Acquisition (the "Acquisition Closing
Date"), Avis Rent A Car borrowed the full $1.0 billion under the Term A Loan,
Term B Loan and Term C Loan and $73.0 million under the Revolving Credit
Facility and used those borrowings to finance a portion of the VMS Acquisition
and to repay and terminate ARACS' existing bank credit facilities. The loans
under the New Credit Facility bear interest at variable rates at a fixed margin
above either The Chase Manhattan Bank's alternative base rate or the Eurodollar
rate.
All borrowings by Avis Rent A Car under the New Credit Facility are
guaranteed by each U.S. subsidiary of Avis Rent A Car, including Avis Fleet, but
excluding its banking, insurance and special purpose financing subsidiaries.
The New Credit Facility is secured by a first-priority perfected lien on
substantially all of the tangible and intangible assets of Avis Rent A Car and
each guarantor under the New Credit Facility except to the extent that such
assets secure either of the ABS Facilities, and by a pledge of all of
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the capital stock of each of Avis Rent A Car's U.S. subsidiaries and 65% of the
capital stock of all first-tier non-U.S. subsidiaries.
Avis Rent A Car may voluntarily prepay some or all of obligations under the
New Credit Facility, but in some cases such voluntary prepayment will require
the payment of a premium. In addition, the loans under the New Credit Facility
are subject to mandatory prepayment under certain circumstances, including if
Avis Rent A Car generates excess cash flow. Avis Rent A Car must apply 50% of
excess cash flow to repay outstanding term loans for each fiscal year commencing
with the 2000 fiscal year.
REVOLVING CREDIT FACILITY. Pursuant to the Revolving Credit Facility, up to
$350.0 million may be borrowed, repaid and reborrowed by us from time to time.
Credit enhancement letters of credit of up to $225,000,000 in the aggregate and
other standby letters of credit of up to $75,000,000 in the aggregate are
available under the Revolving Credit Facility. At Avis' option, loans under the
Revolving Credit Facility bear interest at either The Chase Manhattan Bank's
alternate base rate or the Eurodollar rate, plus, in each case, the applicable
margin. The initial applicable margin will be 2.75% in the case of Eurodollar
loans and 1.75% in the case of alternate base rate loans. The Revolving Credit
Facility terminates six years after the closing date of the New Credit Facility.
TERM A LOAN. The $250.0 million Term A Loan was made available in a single
borrowing that occurred on the Acquisition Closing Date, and once repaid, cannot
be reborrowed. The Term A Loan bears interest at the same optional rates as the
Revolving Credit Facility and matures on the sixth anniversary of the closing of
the New Credit Facility. Avis Rent A Car must make mandatory repayments of
principal on the Term A Loan in quarterly installments.
TERM B LOAN. The $375.0 million Term B Loan was made available in a single
borrowing that occurred on the Acquisition Closing Date, and once repaid, cannot
be reborrowed. At Avis Rent A Car's option, the Term B Loan bears interest at
either The Chase Manhattan Bank's alternative base rate plus 2.25% or its
Eurodollar rate plus 3.25%. The Term B Loan matures on the seventh anniversary
of the closing of the New Credit Facility. Avis Rent A Car must make nominal
repayments of principal on the Term B Loan on a quarterly basis through the
maturity date of the Term A Loan and quarterly payments of the balance during
the last year that the Term B Loan is outstanding.
TERM C LOAN. The $375.0 million Term C Loan was made available in a single
borrowing that occurred on the Acquisition Closing Date, and once repaid, cannot
be reborrowed. At Avis Rent A Car's option, the Term C Loan bears interest at
either The Chase Manhattan Bank's alternative base rate plus 2.50% or its
Eurodollar rate plus 3.50%. The Term C Loan matures on the eighth anniversary of
the closing of the New Credit Facility. Avis Rent A Car must make nominal
repayments of principal on the Term C Loan on a quarterly basis through the
maturity date of the Term B Loan and quarterly payments of the balance during
the last year that the Term C Loan is outstanding.
In addition to paying interest on the outstanding principal under the New
Credit Facility, Avis Rent A Car will be required to pay a commitment fee to the
lenders under the Revolving Credit Facility-in respect of unutilized commitments
thereunder at a rate equal to 0.5% per annum on the average daily unused portion
of the Revolving Credit Facility, payable quarterly in arrears.
The New Credit Facility contains negative covenants limiting our ability to,
among other things, incur debt, create liens, guarantee obligations, pay
dividends, make distributions or stock repurchases, make loans and advances,
modify the Avis franchise agreements, engage in sales and lease backs, change
Avis' fiscal year, agree to negative pledge clauses, change our lines of
business, make investments or capital expenditures, engage in transactions with
affiliates, sell assets, and engage in mergers or acquisitions. Except on terms
satisfactory to the required lenders,
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we will also be restricted from refinancing, defeasing, repurchasing or repaying
its subordinated debt.
The New Credit Facility requires us to maintain certain financial ratios,
including maximum leverage ratios (decreasing from 5.75 to 1.00 in the third
quarter of fiscal 1999 to 3.00 to 1.00 commencing with the fourth quarter of
fiscal 2004 for the remainder of the term of the loans) and minimum interest
coverage ratios (increasing from 2.00 to 1.00 in the third quarter of fiscal
1999 to 3.25 to 1.00 commencing with the fourth quarter of fiscal 2004 for the
remainder of the term of the loans) and minimum Adjusted EDITDA coverage ratios
(increasing from 1.10 to 1.00 in the fourth quarter of fiscal 1999 to 1.25 to
1.00 commencing with the fourth quarter of fiscal 2003 for the remainder of the
term of the loans). Failure to satisfy any of these financial covenants
constitutes an event of default under the New Credit Facility. The New Credit
Facility also includes other customary events of default, including, without
limitation, a cross-default to New Avis' other material indebtedness or certain
changes in control.
VEHICLE-RELATED INDEBTEDNESS
AVIS ABS FACILITY. The Avis ABS Facility is a domestic integrated financing
program that provides for up to $3.75 billion in financing for vehicles covered
by Repurchase Programs, with up to 25% of the Avis ABS Facility available for
vehicles not covered by Repurchase Programs. The Avis ABS Facility consists of
Variable Funding Notes and Medium Term Notes that were issued by AESOP Funding
II, L.L.C. ("AFC-II"), an indirect subsidiary of ARACS, pursuant to an Amended
and Restated Base Indenture dated July 30, 1997 between AFC-II and Harris Trust
and Savings Bank, as trustee.
On July 30, 1997 AFC-II issued $800,000,000 of 6.22% Medium Term Notes due
July 2000, $850,000,000 of 6.40% Medium Term Notes due July 2002 and
$990,699,000 of Variable Funding Notes with an average rate of 5.9% in 1997 and
5.6% in 1998. On February 26, 1998 AFC-II issued additional $600,000,000 of
6.14% Medium Term Notes due February 2005, the proceeds of which were used to
repay borrowings under the Variable Funding Notes.
The Variable Funding Notes and the Medium Term Notes are indirectly secured
by, among other things, a first priority security interest in Avis' fleet. The
Variable Funding Notes support the issuance by a special purpose company of
commercial paper notes that are rated A-1 by S&P and P-1 by Moody's. The Medium
Term Notes are guaranteed under a surety bond issued by MBIA and as a result are
rated AAA by S&P and Aaa by Moody's. All series of Medium Term Notes rank
equally in right of payment among themselves and with the Variable Funding
Notes.
AFC-II uses the proceeds from the sale of the Variable Funding Notes and the
Medium Term Notes to provide loans to AESOP Leasing L.P. and AESOP Leasing Corp.
II for their purchase of vehicles that are then leased to ARACS. In connection
with the Avis ABS Facility, ARACS has entered into operating lease and finance
lease agreements with AESOP Leasing L.P. and AESOP Leasing Corp. II for the
leasing of vehicles for the conduct of Avis' rental car business.
At June 30, 1999, Avis had approximately $3.71 billion of debt outstanding
under the Avis ABS Facility. In addition, at June 30, 1999, it had approximately
$34 million of additional credit available for vehicle purchases.
INTERIM VMS ABS FACILITY. We refinanced VMS' fleet debt using the proceeds
of approximately $3.5 billion of asset-backed securities issued pursuant to the
Interim VMS ABS Offering. The Interim VMS ABS Facility currently consists of (i)
up to $2.5 billion of Domestic VFNs, (ii) up to $236 million of Domestic
Preferred Membership Interests and (iii) up to $829 million of U.K. Advances.
The domestic securities comprising the Interim VMS ABS Offering (the "Domestic
Asset-Backed Securities") were issued by a bankruptcy remote special purpose
entity (the "Domestic ABS
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Issuer") and placed initially with a single multi-seller commercial paper
conduit, and thereafter may be syndicated to one or more other bank sponsored
conduits (collectively the "CP Conduits").
The Domestic Asset-Backed Securities are backed by, among other things, the
following assets of the D.L. Peterson Trust, a bankruptcy-remote special purpose
Delaware business trust: VMS' domestic vehicle fleet, VMS' domestic vehicle
lease portfolio and a portion of the receivables generated from VMS' domestic
fee-based products and services (the "Domestic ABS Assets"). U.K. Advances are
backed by, among other things, a first priority security interest in VMS'
European vehicle fleet, vehicle lease portfolio and fee-based receivables.
The CP Conduits acquire Domestic VFNs, Domestic Preferred Membership
Interests and U.K. Advances using the proceeds of commercial paper issuances. In
addition, from time to time, the Domestic ABS Issuer may issue medium-term notes
secured by the Domestic ABS Assets, using the proceeds of any such offerings to
reduce the amount of Domestic VFNs then outstanding.
The Domestic ABS Issuer is required to maintain certain amounts on deposit
in an account with the indenture trustee for the Domestic Asset-Backed
Securities. These amounts will increase if the performance of the lease
portfolio deteriorates or lease rates decline in relation to the cost of funds
increase in certain events.
OTHER INTERNATIONAL INDEBTEDNESS. At December 31, 1998, Avis had available
letters of credit/ overdraft agreements for its international operations
totaling $29.8 million. The collateral for certain of these agreements consists
of a pledge of cash balances in the amount of $25 million. At December 31, 1998,
Avis had outstanding letters of credit under these facilities totaling $26.7
million. In addition, for certain of its international operations, Avis had
available unused lines of credit aggregating $227.1 million at December 31,
1998.
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DESCRIPTION OF NOTES
Avis Rent A Car, Inc. will issue the notes under the Indenture (the
"Indenture") among itself, the Subsidiary Guarantors and The Bank of New York,
as trustee (the "Trustee"). The terms of the notes include those expressly set
forth in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
This description of notes is intended to be a useful overview of the
material provisions of the notes and the Indenture. Since this description of
notes is only a summary, you should refer to the Indenture for a complete
description of the obligations of Avis Rent A Car, Inc. and your rights.
The section entitled "Certain Definitions" includes the definitions of the
capitalized terms used in this description.
GENERAL
THE NOTES. The notes:
- are general unsecured, senior subordinated obligations of Avis Rent A Car;
- are limited to an aggregate principal amount of $500.0 million;
- mature on May 1, 2009;
- will be issued in denominations of $1,000 and integral multiples of
$1,000;
- will be represented by one or more registered notes in global form, but in
certain circumstances may be represented by notes in definitive form. See
"Book-Entry; Delivery and Form";
- are subordinated in right of payment to all existing and future Senior
Indebtedness of Avis Rent A Car;
- rank equally in right of payment to any future Senior Subordinated
Indebtedness of Avis Rent A Car;
- are unconditionally guaranteed on a senior subordinated basis by Avis Rent
A Car System, Inc. and each other Domestic Subsidiary of Avis Rent A Car
that guarantees the Senior Credit Facilities. See "Subsidiary Guarantees";
and
- are eligible for trading in the PORTAL market.
INTEREST. Interest on the notes will compound semi-annually and:
- accrue at the rate of 11% per annum;
- accrue from the date of issuance or the most recent interest payment date;
- be payable in cash semi-annually in arrears on May 1 and November 1 and
commencing on November 1, 1999;
- be payable to the holders of record on the April 15 and October 15
immediately preceding the related interest payment dates; and
- be computed on the basis of a 360-day year comprised of twelve 30-day
months.
PAYMENTS ON THE NOTES
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of Avis
Rent A Car in the Borough of Manhattan, The City of New York (which initially
will be the corporate trust office of the Trustee in New York,
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New York), except that, at the option of Avis Rent A Car, payment of interest
may be made by check mailed to the address of the holders as such address
appears in the Note Register. Payment of principal of, premium, if any, and
interest on, notes in global form registered in the name of or held by the
Depositary or its nominee will be made in immediately available funds to the
Depositary or its nominee, as the case may be, as the registered holder of such
global note. No service charge will be made for any registration of transfer or
exchange of notes, but Avis Rent A Car may require payment of a sum sufficient
to cover any transfer tax or other similar governmental charge payable in
connection therewith.
PAYING AGENT AND REGISTRAR
The Trustee will initially act as Paying Agent and Registrar. Avis Rent A
Car may change the Paying Agent or Registrar without prior notice to the Holder
of the notes, and Avis Rent A Car or any of its Restricted Subsidiaries may act
as Paying Agent or Registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and Avis Rent A Car may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. Avis Rent A Car is not required to transfer or exchange any note
selected for redemption. Also, Avis Rent A Car is not required to transfer or
exchange any note for a period of 15 days before a selection of notes to be
redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
OPTIONAL REDEMPTION
Except as described below, the notes are not redeemable until May 1, 2004.
On and after May 1, 2004, Avis Rent A Car may redeem all or a part of the notes
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as a percentage of principal amount) plus accrued and unpaid
interest thereon, if any, to the applicable redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the twelve-month
period beginning on May 1 of the years indicated below:
YEAR PERCENTAGE
- ------------------------------------------------------------------------------------- -----------
2004................................................................................. 105.500%
2005................................................................................. 103.667%
2006................................................................................. 101.833%
2007 and thereafter.................................................................. 100.000%
Prior to May 1, 2002, Avis Rent A Car may on one or more occasions redeem up
to 35% of the original principal amount of the notes with the Net Cash Proceeds
of one or more Public Equity Offerings at a redemption price of 111.000% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided that:
(1) there is a Public Market at the time of such redemption;
(2) at least 65% of the original aggregate principal amount of the notes
remains outstanding after each such redemption; and
(3) the redemption occurs within 60 days after the closing of such Public
Equity Offering (together, the "Equity Clawback").
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In the case of any partial redemption, selection of the notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion will deem to be fair and appropriate,
although no note of $1,000 in original principal amount or less will be redeemed
in part. If any note is to be redeemed in part only, the notice of redemption
relating to such note will state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original note.
RANKING AND SUBORDINATION
The payment of the principal of, premium, if any, and interest on the notes
and any other payment obligations in respect of the notes (including any
obligation to repurchase the notes) will be subordinated to the prior payment in
full in cash or Cash Equivalents when due of all Senior Indebtedness of Avis
Rent A Car. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust (as described under "--Defeasance"
below) is not subordinate to any Senior Indebtedness or subject to these
restrictions.
As a result of the subordination provisions described below, holders of the
notes may recover less than creditors of Avis Rent A Car who are holders of
Senior Indebtedness in the event of an insolvency, bankruptcy, reorganization,
receivership or similar proceedings relating to Avis Rent A Car. Moreover, the
notes will be structurally subordinated to the liabilities of non-guarantor
Subsidiaries of Avis Rent A Car.
At June 30, 1999, after giving effect to the Transactions:
- outstanding Indebtedness to which the notes were contractually or
structurally subordinated (which amount does not include an additional
$92.2 million available under the New Credit Facility after giving effect
to $184.8 million of issued but outstanding letters of credit) was $8.5
billion, all of which was secured;
- Avis Rent A Car had no Senior Subordinated Indebtedness other than the
notes; and
- Restricted Subsidiaries, including Securitization Entities, had $10.6
billion of total liabilities (including $7.4 billion of Permitted Vehicle
Indebtedness).
Although the Indenture will limit the amount of indebtedness that Avis Rent
A Car and its Restricted Subsidiaries may incur, such indebtedness may be
substantial and all of it may be Senior Indebtedness or Guarantor Senior
Indebtedness or Indebtedness of Subsidiaries that do not issue a Subsidiary
Guarantee in favor of the Holders of the notes, as the case may be.
Only Indebtedness of Avis Rent A Car that is Senior Indebtedness will rank
senior to the notes in accordance with the provisions of the Indenture. The
notes will in all respects rank equally with all other Senior Subordinated
Indebtedness of Avis Rent A Car. Unsecured Indebtedness is not deemed to be
subordinate or junior to Secured Indebtedness merely because it is unsecured. As
described in "--Limitation on layering," Avis Rent A Car may not incur any
indebtedness that is senior in right of payment to the notes, but junior in
right of payment to Senior Indebtedness.
Avis Rent A Car may not pay principal of, premium, if any, or interest on,
or other payment obligations in respect of, the notes or make any deposit
pursuant to the provisions described under "--Defeasance" below and may not
otherwise purchase, redeem or retire any notes (collectively, "pay the notes")
if:
(1) any Senior Indebtedness is not paid when due in cash or Cash
Equivalents; or
(2) any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless,
in either case, the default
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has been cured or waived and any such acceleration has been rescinded or
such Senior Indebtedness has been paid in full in cash or Cash
Equivalents.
However, Avis Rent A Car may pay the notes if Avis Rent A Car and the
Trustee receive written notice approving such payment from the Representative of
the Senior Indebtedness with respect to which either of the events set forth in
clause (1) or (2) of the immediately preceding sentence has occurred and is
continuing.
Avis Rent A Car also will not be permitted to pay the notes for a Payment
Blockage Period (as defined below) during the continuance of any default, other
than a default described in clause (1) or (2) of the preceding paragraph, on any
Designated Senior Indebtedness that permits the holders of the Designated Senior
Indebtedness to accelerate its maturity immediately without either further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods.
A "Payment Blockage Period" commences on the receipt by the Trustee (with a
copy to Avis Rent A Car) of written notice (a "Blockage Notice") of a default of
the kind described in the immediately preceding paragraph from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ends 179 days thereafter.
The Payment Blockage Period will end earlier if such Payment Blockage Period is
terminated:
(1) by written notice to the Trustee and Avis Rent A Car from the Person or
Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is no longer
continuing; or
(3) because such Designated Senior Indebtedness has been repaid in full.
Avis Rent A Car may resume payments on the notes after the end of the
Payment Blockage Period, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness. Not more than one Blockage Notice may be
given in any consecutive 360-day period, irrespective of the number of defaults
with respect to Designated Senior Indebtedness during such period.
In the event of:
(1) a total or partial liquidation or a dissolution of Avis Rent A Car;
(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to Avis Rent A Car or its property; or
(3) an assignment for the benefit of creditors or marshaling of Avis Rent A
Car's assets and liabilities, then
the holders of Senior Indebtedness will be entitled to receive payment in full
in cash or Cash Equivalents in respect of Senior Indebtedness (including
interest accruing after, or which would accrue but for, the commencement of any
proceeding at the rate specified in the applicable Senior Indebtedness, whether
or not a claim for such interest would be allowed) before the holders of the
notes will be entitled to receive any payment or distribution, in the event of
any payment or distribution of the assets or securities of Avis Rent A Car. In
addition, until the Senior Indebtedness is paid in full in cash or Cash
Equivalents, any payment or distribution to which holders of the notes would be
entitled but for the subordination provisions of the Indenture will be made to
holders of the Senior Indebtedness as their interests may appear. If a payment
or distribution is made to holders of the notes that, due to the subordination
provisions, should not have been made to them, such holders are required to hold
it in trust for the holders of Senior Indebtedness and pay it over to them as
their interests may appear.
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If payment of the notes is accelerated because of an Event of Default, Avis
Rent A Car or the Trustee will promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
Avis Rent A Car may not pay the notes until five Business Days after such
holders or the Representative of the Designated Senior Indebtedness receives
notice of such acceleration and, thereafter, may pay the notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors will, jointly and severally, unconditionally
guarantee Avis Rent A Car's obligations under the notes and all obligations
under the Indenture. Each Subsidiary Guarantee will be subordinated to the prior
payment in full of all Guarantor Senior Indebtedness in the same manner and to
the same extent that the notes are subordinated to Senior Indebtedness. Each
Subsidiary Guarantee will rank equally with all other Guarantor Senior
Subordinated Indebtedness of that Subsidiary Guarantor. The Subsidiary
Guarantors will not be permitted to incur indebtedness that is junior in right
of payment to Guarantor Senior Indebtedness but senior in right of payment to
the Subsidiary Guarantee.
At June 30, 1999, after giving effect to the Transactions:
- outstanding Guarantor Senior Indebtedness was $63.2 million, all of which
was secured; and
- the Subsidiary Guarantors had no Guarantor Senior Subordinated
Indebtedness other than the Subsidiary Guarantees.
Although the Indenture will limit the amount of indebtedness that Avis Rent
A Car and its Restricted Subsidiaries may incur, such indebtedness may be
substantial and all of it may be Guarantor Senior Indebtedness.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
In the event a Subsidiary Guarantor is sold or disposed of (whether by
merger, consolidation, the sale of its Capital Stock or the sale of all or
substantially all of its assets (other than by lease)) and whether or not the
Subsidiary Guarantor is the surviving corporation in such transaction to a
Person which is not Avis Rent A Car or a Restricted Subsidiary of Avis Rent A
Car (other than a Securitization Entity), such Subsidiary Guarantor will be
released from its obligations under its Subsidiary Guarantee if:
(1) the sale or other disposition is in compliance with the Indenture,
including the covenants "--Limitation on Sales of Assets and Subsidiary
Stock" and "--Limitation on Sales of Capital Stock of Restricted
Subsidiaries"; and
(2) all the obligations of such Subsidiary Guarantor under the Senior Credit
Agreement and related documentation and any other agreements relating to
any other indebtedness of Avis Rent A Car or its remaining Restricted
Subsidiaries terminate upon consummation of such transaction.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, and the Subsidiary Guarantee if Avis Rent A Car designates
such Subsidiary as an Unrestricted Subsidiary and such designation complies with
the other applicable provisions of the Indenture.
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CHANGE OF CONTROL
If a Change of Control occurs, each Holder will have the right to require
Avis Rent A Car to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's notes at a purchase price in cash equal to
101% of the principal amount of the notes plus accrued and unpaid interest, if
any, to the date of purchase (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
Within 30 days following any Change of Control, Avis Rent A Car will mail a
notice (the "Change of Control Offer") to each holder with a copy to the Trustee
stating:
(1) that a Change of Control has occurred and that such holder has the right
to require Avis Rent A Car to purchase such holder's notes at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on a record date to receive interest on the
relevant interest payment date) (the "Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); and
(3) the procedures determined by Avis Rent A Car, consistent with the
Indenture, that a holder must follow in order to have its notes
repurchased.
On the Change of Control Payment Date, Avis Rent A Car will, to the extent
lawful:
(1) accept for payment all notes or portions thereof (equal to $1,000 or an
integral multiple thereof) properly tendered pursuant to the Change of
Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions thereof being purchased by Avis Rent A Car.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; PROVIDED that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof.
If the Change of Control Payment Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest, if any, will be paid to the Person in whose name a note is registered
at the close of business on such record date, and no additional interest will be
payable to holders who tender pursuant to the Change of Control Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders to require that Avis Rent A Car repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.
Prior to mailing a Change of Control Offer, and as a condition to such
mailing (i) all Senior Indebtedness must be repaid in full, or Avis Rent A Car
must offer to repay all Senior Indebtedness whose holders accept such offer or
(ii) the requisite holders of each issue of Senior Indebtedness shall have
consented to such Change of Control Offer being made. Avis Rent A Car covenants
to effect such repayment or obtain such consent within 30 days following any
Change of Control, it
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being a default of the Change of Control provision if Avis Rent A Car fails to
comply with such covenant. A default under the Indenture may result in a
cross-default under the Senior Credit Facilities. In the event of a default
under the Senior Credit Facilities, the subordination provisions of the
Indenture would likely restrict payments to the holders of the notes.
Avis Rent A Car will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by Avis Rent A Car
and purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
Avis Rent A Car will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Indenture, Avis Rent A Car will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations described in the Indenture by virtue
thereof.
Avis Rent A Car's ability to repurchase notes pursuant to a Change of
Control Offer may be limited by a number of factors. The occurrence of certain
of the events that constitute a Change of Control would constitute a default
under the Senior Credit Agreement. In addition, certain events that may
constitute a change of control under the Senior Credit Agreement and cause a
default may not constitute a Change of Control under the Indenture. Future
Indebtedness of Avis Rent A Car and its Subsidiaries may also contain
prohibitions of certain events that would constitute a Change of Control or
require such Indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require Avis Rent A Car to
repurchase the notes could cause a default under such Indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on Avis Rent A Car. Finally, Avis Rent A Car's ability to pay cash to
the holders upon a repurchase may be limited by Avis Rent A Car's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving Avis Rent A Car by
increasing the capital required to effectuate such transactions. The definition
of "Change of Control" includes a disposition of all or substantially all of the
property and assets of Avis Rent A Car and its Restricted Subsidiaries taken as
a whole to any Person. Although there is a limited body of case law interpreting
the phrase "substantially all", there is no precise established definition of
the phrase under applicable law. Accordingly, in certain circumstances there may
be a degree of uncertainty as to whether a particular transaction would involve
a disposition of "all or substantially all" of the property or assets of a
Person. As a result, it may be unclear as to whether a Change of Control has
occurred and whether a Holder of notes may require Avis Rent A Car to make an
offer to repurchase the notes as described above.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
Avis Rent A Car will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; PROVIDED, HOWEVER, that Avis Rent A Car
may Incur Indebtedness if on the date thereof:
(1) the Consolidated Coverage Ratio for Avis Rent A Car and its Restricted
Subsidiaries is at least 2.25 to 1.00; and
145
(2) no Default or Event of Default will have occurred or be continuing or
would occur as a consequence thereof.
The first paragraph of this covenant will not prohibit the incurrence of the
following Indebtedness:
(1) Indebtedness Incurred by Avis Rent A Car pursuant to the Senior Credit
Facilities in an aggregate principal amount up to $1,500,000,000 less the
aggregate principal amount of all scheduled principal repayments when
made unless refinanced on or prior to the date of such repayment under
this clause (1) and all mandatory prepayments of principal thereof
permanently reducing the commitments thereunder;
(2) the Subsidiary Guarantees and other Guarantees by the Subsidiary
Guarantors of Indebtedness Incurred in accordance with the provisions of
the Indenture; PROVIDED that in the event such Indebtedness that is being
Guaranteed is (a) Senior Subordinated Indebtedness or Guarantor Senior
Subordinated Indebtedness, then the related Guarantee shall rank equally
in right of payment to the Subsidiary Guarantee or (b) a Subordinated
Obligation or a Guarantor Subordinated Obligation, then the related
Guarantee shall be subordinated in right of payment to the Subsidiary
Guarantee;
(3) Indebtedness of Avis Rent A Car owing to and held by any Wholly-Owned
Subsidiary (other than a Securitization Entity) or Indebtedness of a
Restricted Subsidiary owing to and held by Avis Rent A Car or any
Wholly-Owned Subsidiary (other than a Securitization Entity); PROVIDED,
HOWEVER,
(a) if Avis Rent A Car is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full
in cash of all obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Capital Stock or any other
event which results in any such Indebtedness being beneficially
held by a Person other than Avis Rent A Car or a Wholly-Owned
Subsidiary (other than a Securitization Entity) of Avis Rent A
Car; and
(ii) any sale or other transfer of any such Indebtedness to a Person
other than Avis Rent A Car or a Wholly-Owned Subsidiary (other
than a Securitization Entity) of Avis Rent A Car,
shall be deemed in each case, to constitute an Incurrence of such
Indebtedness by Avis Rent A Car or such Subsidiary, as the case may be;
(4) Indebtedness of Foreign Subsidiaries in an aggregate principal amount
that, when taken together with the principal amount of all other
Indebtedness Incurred pursuant to this clause (4) (and any Indebtedness
Incurred by Foreign Subsidiaries prior to the Issue Date to finance
working capital) and then outstanding, does not exceed $125.0 million;
(5) Indebtedness represented by (a) the notes and the Exchange notes, (b)
any Indebtedness (other than the Indebtedness described in clauses (1),
(2), (3), (4), (7), (8), (9), (10), (11), (12) and (13)) outstanding on
the Issue Date and (c) any Refinancing Indebtedness Incurred in respect
of any Indebtedness described in this clause (5) or clause (6) or
Incurred pursuant to the first paragraph of this covenant;
(6) Indebtedness of a Restricted Subsidiary Incurred and outstanding on the
date on which such Restricted Subsidiary was acquired by Avis Rent A Car
(other than Indebtedness Incurred (a) to provide all or any portion of
the funds utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary
146
became a Restricted Subsidiary or was otherwise acquired by Avis Rent A
Car or (b) otherwise in connection with, or in contemplation of, such
acquisition); PROVIDED, HOWEVER, that at the time such Restricted
Subsidiary (other than WEX Financial) is acquired by Avis Rent A Car,
Avis Rent A Car would have been able to Incur $1.00 of additional
Indebtedness pursuant to the first paragraph of this covenant after
giving effect to the Incurrence of such Indebtedness pursuant to this
clause (6);
(7) Indebtedness under Currency Agreements and Interest Rate Agreements;
PROVIDED, that in the case of Currency Agreements, such Currency
Agreements are related to business transactions of Avis Rent A Car or its
Restricted Subsidiaries entered into in the ordinary course of business
(including in connection with the incurrence of Permitted Vehicle
Indebtedness) or in the case of Currency Agreements and Interest Rate
Agreements, such Currency Agreements and Interest Rate Agreements are
entered into for bona fide hedging purposes of Avis Rent A Car or its
Restricted Subsidiaries (as determined in good faith by the Board of
Directors or senior management of Avis Rent A Car) and corresponding to
such Indebtedness of Avis Rent A Car or its Restricted Subsidiaries or in
the case of Permitted Vehicle Indebtedness, corresponding to Indebtedness
of Restricted Subsidiaries (but not exceeding the notional amount
thereof) Incurred without violation of the Indenture;
(8) Permitted Vehicle Indebtedness and Customer Lease Financing Loans;
(9) Indebtedness represented by Guarantees issued to airports and airport
and other governmental authorities for the construction of airport rental
or related facilities to be used by Avis Rent A Car or any Restricted
Subsidiary in the ordinary course of business that do not exceed for Avis
Rent A Car and all Restricted Subsidiaries in the aggregate $75.0 million
at any time outstanding;
(10) the incurrence by Avis Rent A Car or any of its Restricted Subsidiaries
of Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations with respect to assets other
than Capital Stock or other Investments, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvements of property used in the business of Avis
Rent A Car or such Restricted Subsidiary, in an aggregate principal
amount not to exceed $25.0 million at any time outstanding;
(11) Indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by Avis Rent A Car or a Restricted
Subsidiary in the ordinary course of business;
(12) Indebtedness arising from agreements of Avis Rent A Car or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary or incurred in connection with a sale of Capital Stock of Avis
Rent A Car, PROVIDED that the maximum aggregate liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by Avis Rent A Car and its Restricted Subsidiaries in connection
with such disposition or sale;
(13) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the case
of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business, PROVIDED, HOWEVER, that such Indebtedness is
extinguished within five business days of Incurrence;
(14) PHH Sub Preferred Stock with an aggregate liquidation preference not to
exceed $362.0 million;
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(15) Indebtedness Incurred by WEX Financial to fund WEX Financial's credit
card payables in the ordinary course of business, in an aggregate
principal amount not to exceed $20.0 million; provided that the total
capital ratio determined in accordance with regulations promulgated by
the Board of Governors of the Federal Reserve System (the "Total Capital
Ratio") of WEX Financial on the date of any such Incurrence shall equal
or exceed the Total Capital Ratio of WEX Financial on June 30, 1999
determined on the equivalent basis; and
(16) in addition to the items referred to in clauses (1) through (15) above,
Indebtedness of Avis Rent A Car and its Subsidiary Guarantors in an
aggregate outstanding principal amount which, when taken together with
the principal amount of all other Indebtedness Incurred pursuant to this
clause (16) and then outstanding, will not exceed $50.0 million.
Avis Rent A Car will not Incur any Indebtedness under the preceding
paragraph if the proceeds thereof are used, directly or indirectly, to refinance
any Subordinated Obligations of Avis Rent A Car unless such Indebtedness will be
subordinated to the notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor will incur any indebtedness if the proceeds
thereof are used, directly or indirectly, to refinance any Guarantor
Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness
will be subordinated to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee to at least the same extent as such refinanced Guarantor
Subordinated Obligations. No Subsidiary Guarantor will incur any Indebtedness if
the proceeds thereof are used, directly or indirectly, to refinance any
Guarantor Senior Subordinated Indebtedness unless such refinancing Indebtedness
is either Guarantor Senior Subordinated Indebtedness or Guarantor Subordinated
Obligations. No Restricted Subsidiary may directly Incur any Indebtedness if the
proceeds are used to refinance Indebtedness of Avis Rent A Car.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the first and second paragraphs of
this covenant, Avis Rent A Car, in its sole discretion, will classify
such item of Indebtedness on the date of Incurrence and only be required
to include the amount and type of such Indebtedness in one of such
clauses; and
(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant. The
amount of any Indebtedness outstanding as of any date shall be the accreted
value thereof in the case of any Indebtedness issued with original issue
discount.
In addition, Avis Rent A Car will not permit any of its Unrestricted
Subsidiaries to incur any Indebtedness or issue any shares of Disqualified
Stock, other than Non-Recourse Indebtedness. If at any time an Unrestricted
Subsidiary becomes a Restricted Subsidiary, any Indebtedness of such Subsidiary
shall be deemed to be Incurred by a Restricted Subsidiary of Avis Rent A Car as
of such date (and, if such Indebtedness is not permitted to be Incurred as of
such date under this "Limitation on Indebtedness" covenant, Avis Rent A Car
shall be in Default of this covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange
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rate in effect on the date such Indebtedness was Incurred, in the case of term
Indebtedness, or first committed, in the case of revolving credit Indebtedness;
PROVIDED that if such Indebtedness is Incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable U.S. dollar-dominated restriction to be exceeded if calculated at the
relevant currency exchange rate in effect on the date of such refinancing, such
U.S. dollar-dominated restriction shall be deemed not to have been exceeded so
long as the principal amount of such refinancing Indebtedness does not exceed
the principal amount of such Indebtedness being refinanced. The principal amount
of any Indebtedness incurred to refinance other Indebtedness, if Incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
Refinancing Indebtedness is denominated that is in effect on the date of such
refinancing.
LIMITATION ON PERMITTED VEHICLE INDEBTEDNESS
The aggregate principal amount of outstanding Permitted Vehicle Indebtedness
held by Persons other than Avis Rent A Car and its Restricted Subsidiaries as of
the last calendar day of each month (the "Determination Date") shall not exceed
the net book value of the Permitted Vehicle Collateral securing Permitted
Vehicle Indebtedness held by Persons other than Avis Rent A Car and its
Restricted Subsidiaries on such Determination Date. Notwithstanding the
foregoing, if Avis Rent A Car is not in compliance with the preceding sentence
on any Determination Date, Avis Rent A Car will not be in breach thereof so long
as:
(1) within 25 days from the Determination Date (or if such day is not a
Business Day, on the next succeeding Business Day) Avis Rent A Car or its
Restricted Subsidiaries repay sufficient Permitted Vehicle Indebtedness
or deposits as collateral additional Permitted Vehicle Collateral so that
Avis Rent A Car would have been in compliance as of the Determination
Date assuming such repayment or deposit had been made on such date; or
(2) Avis Rent A Car delivers to the Trustee an Officers' Certificate setting
forth the amount of the shortfall within 25 days of such Determination
Date (or if such day is not a Business Day, on the next succeeding
Business Day) and within 50 days from the Determination Date (or if such
day is not a Business Day, on the next succeeding Business Day) Avis Rent
A Car (A) repays sufficient Permitted Vehicle Indebtedness, (B) deposits
as collateral additional Permitted Vehicle Collateral or (C) redesignates
sufficient Permitted Vehicle Indebtedness that is not secured by an
actual Lien on Permitted Vehicle Collateral to no longer constitute
Permitted Vehicle Indebtedness, in each case so that Avis Rent A Car
would have been in compliance as of the Determination Date assuming such
repayment, deposit or redesignation had been made on such date; provided,
however, that, in the case of a redesignation pursuant to clause (C)
above, on the date of such redesignation and after giving effect thereto
as if such redesignated Indebtedness were Incurred by Avis Rent A Car on
such date, Avis Rent A Car would have been able to Incur at least $1.00
of additional Indebtedness pursuant to the first paragraph under the
"Limitation on Indebtedness" covenant; provided further, however, that in
determining whether Avis Rent A Car would have been able to Incur such
$1.00 of additional Indebtedness, Avis Rent A Car shall be entitled to
exclude an amount of such redesignated Indebtedness equal to the amount
of Indebtedness Avis Rent A Car could have Incurred on such date pursuant
to clause (16) of the second paragraph of the "--Limitation on
Indebtedness" covenant, and such excluded amount shall be deemed to have
been Incurred pursuant to such clause (16) of the second paragraph.
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LIMITATION ON LAYERING
Avis Rent A Car will not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is contractually
subordinated in right of payment to Senior Subordinated Indebtedness. No
Subsidiary Guarantor will Incur any Indebtedness if such Indebtedness is
contractually subordinate or junior in ranking in any respect to any Guarantor
Senior Indebtedness of such Subsidiary Guarantor unless such Indebtedness is
Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor or is
contractually subordinated in right of payment to Guarantor Senior Subordinated
Indebtedness of such Subsidiary Guarantor.
LIMITATION ON RESTRICTED PAYMENTS
Avis Rent A Car will not, and will not permit any of its Restricted
Subsidiaries, directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving Avis Rent A Car or any of its Restricted
Subsidiaries) except:
(a) dividends or distributions payable in Capital Stock of Avis Rent A Car
(other than Disqualified Stock) or in options, warrants or other rights
to purchase such Capital Stock of Avis Rent A Car; and
(b) dividends or distributions payable to Avis Rent A Car or a Restricted
Subsidiary of Avis Rent A Car (and if such Restricted Subsidiary is not a
Wholly-Owned Subsidiary, to its other holders of common Capital Stock on
a pro rata basis);
(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of Avis Rent A Car or any direct or indirect parent of Avis Rent A
Car held by Persons other than Avis Rent A Car or a Restricted Subsidiary
of Avis Rent A Car (other than in exchange for Capital Stock of Avis Rent
A Car (other than Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations or Guarantor
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations or Guarantor Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of purchase, repurchase or acquisition); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Restricted Investment
referred to in clauses (1) through (4) shall be referred to herein as a
"Restricted Payment"), if at the time Avis Rent A Car or such Restricted
Subsidiary makes such Restricted Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom); or
(b) Avis Rent A Car is not able to incur an additional $1.00 of
Indebtedness pursuant to the first paragraph under the "Limitation on
Indebtedness" covenant after giving effect to such Restricted
Payment; or
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(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date
would exceed the sum of:
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) commencing on January 1, 2000 to the end of
the most recent fiscal quarter ending prior to the date of such
Restricted Payment for which financial statements are in
existence (or, in case such Consolidated Net Income is a deficit,
minus 100% of such deficit);
(ii) 75% of the aggregate Net Cash Proceeds received by Avis Rent A
Car from the issue or sale of its Capital Stock (other than
Disqualified Stock) or other capital contributions subsequent to
the Issue Date (other than Net Cash Proceeds received from an
issuance or sale of such Capital Stock to a Subsidiary of Avis
Rent A Car or an employee stock ownership plan or similar trust
to the extent such sale to an employee stock ownership plan or
similar trust is financed by loans from or guaranteed by Avis
Rent A Car or any Restricted Subsidiary unless such loans have
been repaid with cash on or prior to the date of determination);
PROVIDED that 100% of such Net Cash Proceeds shall be included in
the calculation of this clause (c)(ii) to the extent applied to
repurchase notes pursuant to the Equity Clawback;
(iii) the amount by which Indebtedness of Avis Rent A Car is reduced
on Avis Rent A Car's balance sheet upon the conversion or
exchange (other than by a Subsidiary of Avis Rent A Car)
subsequent to the Issue Date of any Indebtedness of Avis Rent A
Car (other than PHH Sub Preferred Stock) convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of
Avis Rent A Car (less the amount of any cash, or other property,
distributed by Avis Rent A Car upon such conversion or exchange);
and
(iv) the amount equal to the net reduction in Restricted Investments
made by Avis Rent A Car or any of its Restricted Subsidiaries in
any Person resulting from:
(A) repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such
Restricted Investment to an unaffiliated purchaser,
repayments of loans or advances or other transfers of assets
(including by way of dividend or distribution) by such Person
to Avis Rent A Car or any Restricted Subsidiary of Avis Rent
A Car; or
(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made by Avis Rent A Car or any Restricted Subsidiary in such
Unrestricted Subsidiary,
which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; PROVIDED, HOWEVER,
that no amount will be included under this clause (iv) to the extent
it is already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase or redemption of Capital Stock or Subordinated Obligations
of Avis Rent A Car made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of Avis Rent A Car (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust
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to the extent such sale to an employee stock ownership plan or similar
trust is financed by loans from or guaranteed by Avis Rent A Car or any
Restricted Subsidiary unless such loans have been repaid with cash on or
prior to the date of determination); PROVIDED, HOWEVER, that (a) such
purchase or redemption will be excluded in subsequent calculations of the
amount of Restricted Payments and (b) the Net Cash Proceeds from such
sale will be excluded from clause (c)(ii) of the preceding paragraph;
(2) any purchase or redemption of Subordinated Obligations of Avis Rent A
Car made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of Avis Rent A Car that
qualifies as Refinancing Indebtedness; PROVIDED, HOWEVER, that such
purchase or redemption will be excluded in subsequent calculations of the
amount of Restricted Payments;
(3) so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations from
Net Available Cash to the extent permitted under "--Limitation on Sales
of Assets and Subsidiary Stock" below; PROVIDED, HOWEVER, that such
purchase or redemption will be excluded in subsequent calculations of the
amount of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration if at such
date of declaration such dividend would have complied with this
provision; PROVIDED, HOWEVER, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
(5) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of Avis Rent A Car issued in
accordance with the terms of the Indenture to the extent such dividends
are included in the definition of "Consolidated Interest Expense";
PROVIDED that the payment of such dividends will be excluded from the
calculation of the amount of Restricted Payments;
(6) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of the
PHH Sub Preferred Stock issued in accordance with the terms of the
Indenture to the extent such dividends are included in the definition of
"Consolidated Interest Expense"; PROVIDED that the payment of such
dividends will be excluded from the calculation of the amount of
Restricted Payments;
(7) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof; PROVIDED, HOWEVER, that such repurchases will be excluded from
subsequent calculations of the amount of Restricted Payments;
(8) Restricted Payments in an amount not to exceed $35.0 million; PROVIDED
that the amount of such Restricted Payments will be included in the
calculation of the amount of Restricted Payments;
(9) the redemption of Series C Preferred Stock issued on the Issue Date in
accordance with its terms but not to exceed $2.0 million; PROVIDED that
the amount of such Restricted Payment will be included in the calculation
of the amount of Restricted Payments; and
(10) any Restricted Payments made by a Securitization Entity to holders of
its Capital Stock.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by Avis Rent A Car or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The fair market value of any cash Restricted Payment shall be its face amount
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and any non-cash Restricted Payment shall be determined conclusively by the
Board of Directors acting in good faith whose resolution with respect thereto
shall be delivered to the Trustee, such determination to be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value is estimated to exceed $10.0
million. Not later than the date of making any Restricted Payment, Avis Rent A
Car shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
LIMITATION ON LIENS
Avis Rent A Car will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur or suffer to exist any
Lien (other than Permitted Liens) upon any of its property or assets (including
Capital Stock), whether owned on the date of the Indenture or thereafter
acquired, securing any Senior Subordinated Indebtedness, Subordinated
Obligations, Guarantor Senior Subordinated Indebtedness or Guarantor
Subordinated Obligations, unless contemporaneously therewith effective provision
is made to secure the Indebtedness due under the Indenture and the notes or, in
respect of Liens on any Restricted Subsidiary's property or assets, any
Subsidiary Guarantee of such Restricted Subsidiary, equally and ratably with (or
prior to in the case of Liens with respect to Subordinated Obligations or
Guarantor Subordinated Obligations, as the case may be) the Indebtedness secured
by such Lien for so long as such Indebtedness is so secured.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Avis Rent A Car will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to Avis Rent A Car or any
Restricted Subsidiary;
(2) make any loans or advances to Avis Rent A Car or any Restricted
Subsidiary; or
(3) transfer any of its property or assets to Avis Rent A Car or any
Restricted Subsidiary.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement or certificates
of designation in effect at or entered into on the date of the
Indenture (including, without limitation, the Indenture, the Senior
Credit Facilities, and the PHH Sub Preferred Stock as in effect on such
date);
(ii) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by a
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by Avis Rent A Car (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the
funds utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Avis Rent A Car or in
contemplation thereof) and outstanding on such date;
(iii) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement effecting a refinancing of Indebtedness
Incurred pursuant to an agreement referred to in clause (i) or (ii) of
this paragraph or this clause (iii) or contained in any amendment to
an agreement referred to in clause (i) or (ii) of this paragraph or
this
153
clause (iii); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
any such agreement or amendment are no less favorable in any material
respect to the Holders of the notes than the encumbrances and
restrictions contained in such agreements referred to in clauses (i)
and (ii) of this paragraph;
(iv) in the case of clause (3) of the first paragraph of this covenant, any
encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment or
transfer of any property or asset that is subject to a lease, license
or similar contract, or the assignment or transfer of any such lease,
license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of Avis Rent A
Car or a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of the property subject to such
mortgages, pledges or other security agreements; or
(c) pursuant to customary provisions restricting dispositions of real
property interests set forth in any reciprocal easement agreements of
Avis Rent A Car or any Restricted Subsidiary;
(v) purchase money obligations for property acquired in the ordinary course
of business that impose encumbrances or restrictions of the nature
described in clause (3) of the first paragraph of this covenant on the
property so acquired;
(vi) any Purchase Money Note or other Indebtedness or contractual
requirements incurred with respect to a Qualified Securitization
Transaction relating exclusively to a Securitization Entity that, in
the good faith determination of the Board of Directors, are necessary
to effect such Qualified Securitization Transaction;
(vii) any restriction with respect to a Restricted Subsidiary (or any of its
property or assets) imposed pursuant to an agreement entered into for
the direct or indirect sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary (or the
property or assets that are subject to such restriction) pending the
closing of such sale or disposition;
(viii) restrictions on Foreign Subsidiaries pursuant to arrangements
governing Indebtedness of such Foreign Subsidiaries permitted pursuant
to clause (4) of the second paragraph of the covenant "Limitation on
Indebtedness";
(ix) restrictions on any Specified Financing Subsidiary pursuant to the
terms of the Customer Lease Financing Loans under which it is
obligated; and
(x) encumbrances or restrictions arising or existing by reason of applicable
law or any applicable rule, regulation or order, including, without
limitation, restrictions on the payment of dividends on Avis Rent A
Car's insurance company and/or banking Subsidiaries imposed by Federal
or state government regulations.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
Avis Rent A Car will not, and will not permit any of its Restricted
Subsidiaries to, make any Asset Disposition UNLESS:
(1) Avis Rent A Car or such Restricted Subsidiary receives consideration at
the time of such Asset Disposition at least equal to the fair market
value, as determined in good faith by the
154
Board of Directors (including as to the value of all non-cash
consideration), of the shares and assets subject to such Asset
Disposition;
(2) at least 75% of the consideration thereof received by Avis Rent A Car or
such Restricted Subsidiary, as the case may be, is in the form of cash or
Cash Equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by Avis Rent A Car or such Restricted Subsidiary,
as the case may be:
(a) FIRST, to the extent Avis Rent A Car or any Restricted Subsidiary, as
the case may be, elects (or is required by the terms of any Senior
Indebtedness), to prepay, repay or purchase Senior Indebtedness or
Indebtedness (other than any Preferred Stock or Guarantor
Subordinated Obligation) of a Restricted Subsidiary that is a
Subsidiary Guarantor (in each case other than Indebtedness owed to
Avis Rent A Car or an Affiliate of Avis Rent A Car) within 360 days
from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash; PROVIDED, HOWEVER, that, in connection
with any prepayment, repayment or purchase of Indebtedness pursuant
to this clause (a), Avis Rent A Car or such Restricted Subsidiary
will retire such Indebtedness and will cause the related commitment
(if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased; and
(b) SECOND, to the extent of the balance of such Net Available Cash after
application in accordance with clause (a), to the extent Avis Rent A
Car or such Restricted Subsidiary elects, to invest in Additional
Assets within 360 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash.
Any Net Available Cash from Asset Sales that are not applied or invested as
provided in the preceding paragraph will be deemed to constitute "Excess
Proceeds." On the 361st day after an Asset Disposition, if the aggregate amount
of Excess Proceeds exceeds $10.0 million, Avis Rent A Car will be required to
make an offer ("Asset Sale Offer") to all holders of notes and to the extent
required by the terms thereof, to all holders of other Senior Subordinated
Indebtedness outstanding with similar provisions requiring Avis Rent A Car to
make an offer to purchase such Senior Subordinated Indebtedness with the
proceeds from any Asset Disposition ("Pari Passu Notes"), to purchase the
maximum principal amount of notes and any such Pari Passu Notes to which the
Asset Sale Offer applies that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest to the date of purchase, in accordance with the
procedures set forth in the Indenture or the agreements governing the Pari Passu
Notes, as applicable. To the extent that the aggregate amount of notes and Pari
Passu Notes so validly tendered and not properly withdrawn pursuant to an Asset
Sale Offer is less than the Excess Proceeds, Avis Rent A Car may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of notes surrendered by Holders thereof and other Pari Passu
Notes surrendered by holders or lenders thereof, collectively, exceeds the
amount of Excess Proceeds, the Trustee shall select the notes and Pari Passu
Notes to be purchased on a pro rata basis on the basis of the aggregate
principal amount of tendered notes and Pari Passu Notes. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Sale Offer Period"). No later than five
Business Days after the termination of the Asset Sale Offer Period (the "Asset
Sale Purchase Date"), Avis Rent A Car will purchase the principal amount of
notes and Pari Passu Notes required to be purchased pursuant to this covenant
(the "Asset Sale
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Offer Amount") or, if less than the Asset Sale Offer Amount has been so validly
tendered, all notes and Pari Passu Notes validly tendered in response to the
Asset Sale Offer.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a note is registered at the close of
business on such record date, and no additional interest will be payable to
Holders who tender notes pursuant to the Asset Sale Offer.
On or before the Asset Sale Purchase Date, Avis Rent A Car will, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Sale Offer Amount of notes and Pari Passu Notes or portions thereof so
validly tendered and not properly withdrawn pursuant to the Asset Sale Offer, or
if less than the Asset Sale Offer Amount has been validly tendered and not
properly withdrawn, all notes and Pari Passu Notes so validly tendered and not
properly withdrawn. Avis Rent A Car will deliver to the Trustee an Officers'
Certificate stating that such notes or portions thereof were accepted for
payment by Avis Rent A Car in accordance with the terms of this covenant and, in
addition, Avis Rent A Car will deliver all certificates and notes required, if
any, by the agreements governing the Pari Passu Notes. Avis Rent A Car or the
Paying Agent, as the case may be, will promptly (but in any case not later than
five Business Days after the Asset Sale Purchase Date) mail or deliver to each
tendering Holder of notes or holder or lender of Pari Passu Notes, as the case
may be, an amount equal to the purchase price of the notes or Pari Passu Notes
so validly tendered and not properly withdrawn by such Holder or lender, as the
case may be, and accepted by Avis Rent A Car for purchase, and Avis Rent A Car
will promptly issue a replacement note, and the Trustee, upon delivery of an
Officers' Certificate from Avis Rent A Car will authenticate and mail or deliver
such replacement note to such Holder, in a principal amount equal to any
unpurchased portion of the note surrendered. In addition, Avis Rent A Car will
take any and all other actions required by the agreements governing the Pari
Passu Notes. Any note not so accepted will be promptly mailed or delivered by
Avis Rent A Car to the Holder thereof. Avis Rent A Car will publicly announce
the results of the Asset Sale Offer on the Asset Sale Purchase Date.
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness (other than
Subordinated Obligations or Disqualified Stock) of Avis Rent A Car or
Indebtedness (other than Guarantor Subordinated Obligations or Preferred
Stock) of any Restricted Subsidiary of Avis Rent A Car and the release of
Avis Rent A Car or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition (in which case
Avis Rent A Car will, without further action, be deemed to have applied
such deemed cash to Indebtedness in accordance with clause (a) above);
and
(2) securities, notes or other obligations received by Avis Rent A Car or
any Restricted Subsidiary of Avis Rent A Car from the transferee that are
promptly converted by Avis Rent A Car or such Restricted Subsidiary into
cash.
Avis Rent A Car will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, Avis Rent A Car will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Indenture by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
Avis Rent A Car will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any transaction
(including the purchase, sale, lease or exchange of
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any property or the rendering of any service) with any Affiliate of Avis Rent A
Car (an "Affiliate Transaction") UNLESS:
(1) the terms of such Affiliate Transaction are no less favorable to Avis
Rent A Car or such Restricted Subsidiary, as the case may be, than those
that could be obtained in a comparable transaction at the time of such
transaction in arm's- length dealings with a Person who is not such an
Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate amount in
excess of $5 million, the terms of such transaction have been approved by
a majority of the members of the Board of Directors of Avis Rent A Car
having no personal stake in such transaction, if any (and such majority
determines that such Affiliate Transaction satisfies the criteria in
clause (1) above); and
(3) in the event such Affiliate Transaction involves an aggregate amount in
excess of $10 million, Avis Rent A Car has received a written opinion
from an independent investment banking firm of nationally recognized
standing stating that such Affiliate Transaction is not materially less
favorable to Avis Rent A Car or such Restricted Subsidiary, as the case
may be, than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis with a
Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) any Restricted Payment (other than a Restricted Investment) permitted to
be made pursuant to the covenant described under "Limitation on
Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans and other
reasonable fees, compensation, benefits and indemnities paid or entered
into by Avis Rent A Car or its Restricted Subsidiaries in the ordinary
course of business to or with officers, directors or employees of Avis
Rent A Car and its Restricted Subsidiaries;
(3) loans or advances to employees in the ordinary course of business of
Avis Rent A Car or any of its Restricted Subsidiaries;
(4) any transaction between Avis Rent A Car and a Restricted Subsidiary
(other than a Securitization Entity) or between Restricted Subsidiaries
(other than a Securitization Entity);
(5) sales or other transfers or dispositions of Permitted Vehicle Collateral
customarily transferred in an asset securitization transaction to a
Securitization Entity in a Qualified Securitization Transaction,
acquisitions of Permitted Investments in connection with a Qualified
Securitization Transaction and performance of services in respect of
Permitted Vehicle Collateral in connection with a Qualified
Securitization Transaction;
(6) transactions under the Separation Agreement, Master License Agreement,
Registration Rights Agreement, Computer Services Agreement, Reservation
Services Agreement, Purchasing Services Agreement, Tax Disaffiliation
Agreement, lease agreements relating to facilities in Virginia Beach,
Virginia, Tulsa, Oklahoma and Garden City, New York and the VMS
Agreements, all as in effect on the Issue Date (including pursuant to any
amendment thereto or any replacement agreement thereof so long as any
such amendment or replacement agreement is not more disadvantageous to
the holders of the notes in any material respect than the original
agreement as in effect on the Issue Date); or
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(7) the payment of dividends on the PHH Sub Preferred Stock and the
conversion of the PHH Sub Preferred Stock in accordance with its terms as
in existence on the Issue Date.
LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
Avis Rent A Car will not, and will not permit any Restricted Subsidiary of
Avis Rent A Car to, transfer, convey, sell, lease or otherwise dispose of any
Voting Stock of any Restricted Subsidiary or to issue any Voting Stock of any
Restricted Subsidiary (other than, if necessary, shares of its Voting Stock
constituting directors' qualifying shares) to any Person except:
(1) to Avis Rent A Car or a Wholly-Owned Subsidiary (other than a
Securitization Entity); or
(2) in compliance with the covenant described under "--Limitation on Sales
of Assets and Subsidiary Stock" and immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would continue to be a
Restricted Subsidiary.
Notwithstanding the preceding paragraph, Avis Rent A Car may sell all the
Voting Stock of a Restricted Subsidiary as long as Avis Rent A Car complies with
the terms of the covenant described under "--Limitation on Sales of Assets and
Subsidiary Stock".
COMMISSION REPORTS
Notwithstanding that Avis Rent A Car may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted
by the Exchange Act, Avis Rent A Car will file with the Commission, and provide
the Trustee and the Holders of the notes with, the annual reports and the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) that are
specified in Sections 13 and 15(d) of the Exchange Act within the time periods
specified therein. In the event that Avis Rent A Car is not permitted to file
such reports, documents and information with the Commission pursuant to the
Exchange Act, Avis Rent A Car will nevertheless provide such Exchange Act
information to the Trustee and the holders of the notes as if Avis Rent A Car
were subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act within the time periods specified therein.
MERGER AND CONSOLIDATION
Avis Rent A Car will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, UNLESS:
(1) the resulting, surviving or transferee Person (the "Successor Company")
will be a corporation, partnership, trust or limited liability company
organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company
(if not Avis Rent A Car) will expressly assume, by supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to
the Trustee, all the obligations of Avis Rent A Car under the notes and
the Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the
time of such transaction), no Default or Event of Default shall have
occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to the first paragraph of the "Limitation on
Indebtedness" covenant;
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(4) each Subsidiary Guarantor (unless it is the other party to the
transactions above, in which case clause (1) shall apply) shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall
apply to such Person's obligations in respect of the Indenture and the
notes and its obligations under the Registration Rights Agreement shall
continue to be in effect; and
(5) Avis Rent A Car shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of Avis Rent A Car, which properties and
assets, if held by Avis Rent A Car instead of such Subsidiaries, would
constitute all or substantially all of the properties and assets of Avis Rent A
Car on a consolidated basis, shall be deemed to be the transfer of all or
substantially all of the properties and assets of Avis Rent A Car.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Avis Rent A Car under the Indenture, but, in
the case of a lease of all or substantially all its assets, Avis Rent A Car will
not be released from the obligation to pay the principal of and interest on the
notes.
Although there is a limited body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary of
Avis Rent A Car may consolidate with, merge into or transfer all or part of its
properties and assets to Avis Rent A Car and (y) Avis Rent A Car may merge with
an Affiliate incorporated solely for the purpose of reincorporating Avis Rent A
Car in another jurisdiction to realize tax or other benefits.
FUTURE SUBSIDIARY GUARANTORS
After the Issue Date, Avis Rent A Car will cause (i) each Restricted
Subsidiary, other than an Excluded Subsidiary, created or acquired by Avis Rent
A Car or one or more of its Restricted Subsidiaries and (ii) each Restricted
Subsidiary, at any time such Restricted Subsidiary ceases to be an Excluded
Subsidiary, to execute and deliver to the Trustee a Subsidiary Guarantee
pursuant to which such Restricted Subsidiary will unconditionally Guarantee, on
a joint and several basis, the full and prompt payment of the principal of,
premium, if any and interest on the notes on a senior subordinated basis.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture and the Subsidiary Guarantee if Avis Rent A Car designates
such Subsidiary as an Unrestricted Subsidiary in accordance with the Indenture.
LIMITATION ON LINES OF BUSINESS
Avis Rent A Car will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Related Business.
PAYMENTS FOR CONSENT
Neither Avis Rent A Car nor any of its Restricted Subsidiaries will,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fees or otherwise, to any Holder of
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any notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the notes unless such consideration
is offered to be paid or is paid to all Holders of the notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) default in any payment of interest or liquidated damages (as required by
the Registration Rights Agreement) on any note when due, continued for 30
days, whether or not such payment is prohibited by the provisions
described under "--Ranking and subordination";
(2) default in the payment of principal of or premium, if any, on any note
when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise, whether or not such payment is
prohibited by the provisions described under "Ranking and subordination";
(3) failure by Avis Rent A Car or any Subsidiary Guarantor to comply with
its obligations under "Certain covenants--Merger and Consolidation";
(4) failure by Avis Rent A Car to comply for 30 days after notice with any
of its obligations under the covenants described under "Change of
Control" above or under the covenants described under "Certain covenants"
above (in each case, other than a failure to purchase notes which will
constitute an Event of Default under clause (2) above and other than a
failure to comply with "Certain covenants--Merger and Consolidation"
which is covered by clause (3));
(5) failure by Avis Rent A Car to comply for 60 days after notice with its
other agreements contained in the Indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Avis Rent A Car or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by Avis
Rent A Car or any of its Restricted Subsidiaries), other than
Indebtedness owed to Avis Rent A Car or a Restricted Subsidiary, whether
such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default:
(a) is caused by a failure to pay principal on such Indebtedness at final
maturity (after giving effect to any applicable grace periods) ("payment
default"); or
(b) results in the acceleration of such Indebtedness prior to its maturity
(the "cross acceleration provision");
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a payment default or the maturity of which has been
so accelerated, aggregates $25.0 million or more;
(7) certain events of bankruptcy, insolvency or reorganization of Avis Rent
A Car or a Significant Subsidiary or group of Restricted Subsidiaries
that, taken together (as of the latest audited consolidated financial
statements for Avis Rent A Car and its Restricted Subsidiaries), would
constitute a Significant Subsidiary (the "bankruptcy provisions");
(8) failure by Avis Rent A Car or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for Avis Rent
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A Car and its Restricted Subsidiaries), would constitute a Significant
Subsidiary to pay final judgments aggregating in excess of $25.0 million
(net of any amounts that a reputable and creditworthy insurance company
has acknowledged liability for in writing), which judgments are not paid,
discharged or stayed for a period of 60 days (the "judgment default
provision"); or
(9) any Subsidiary Guarantee of a Significant Subsidiary or of a group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for Avis Rent A Car and its Restricted
Subsidiaries), would constitute a Significant Subsidiary ceases to be in
full force and effect (except as contemplated by the terms of the
Indenture) or is declared null and void in a judicial proceeding or any
Subsidiary Guarantor denies or disaffirms its obligations under the
Indenture or its Subsidiary Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding notes notify Avis Rent A Car of the default
and Avis Rent A Car does not cure such default within the time specified in
clauses (4) and (5) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(7) above) occurs and is continuing, the Trustee by notice to Avis Rent A Car,
or the holders of at least 25% in principal amount of the outstanding notes by
notice to Avis Rent A Car and the Trustee, may, and the Trustee at the request
of such holders shall, declare the principal of, premium, if any, and accrued
and unpaid interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid interest will be due
and payable immediately; PROVIDED, HOWEVER, that so long as any Indebtedness
permitted to be incurred under the Indenture as part of the Senior Credit
Agreement shall be outstanding, no such acceleration shall be effective until
the earlier of (x) acceleration of any such Indebtedness under the Senior Credit
Agreement or (y) five
business days after the giving of the acceleration notice to Avis Rent A Car and
the administrative agent under the Senior Credit Agreement of such acceleration.
In the event of a declaration of acceleration of the notes because an Event of
Default described in clause (6) under "Events of Default" has occurred and is
continuing, the declaration of acceleration of the notes shall be automatically
annulled if the Event of Default or payment default triggering such Event of
Default pursuant to clause (6) shall be remedied or cured by Avis Rent A Car or
a Restricted Subsidiary of Avis Rent A Car or waived by the holders of the
relevant Indebtedness within 20 days after the declaration of acceleration with
respect thereto and if (1) the annulment of the acceleration of the notes would
not conflict with any judgment or decree of a court of competent jurisdiction
and (2) all existing Events of Default, except nonpayment of principal, premium
or interest on the notes that became due solely because of the acceleration of
the notes, have been cured or waived. If an Event of Default described in clause
(7) above occurs and is continuing, the principal of, premium, if any, and
accrued and unpaid interest on all the notes will become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any holders. The holders of a majority in principal amount of the outstanding
notes may waive all past defaults (except with respect to nonpayment of
principal, premium or interest) and rescind any such acceleration with respect
to the notes and its consequences if (1) rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and (2) all existing
Events of Default, other than the nonpayment of the principal of, premium, if
any, and interest on the notes that have become due solely by such declaration
of acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or
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expense. Except to enforce the right to receive payment of principal, premium,
if any, or interest when due, no holder may pursue any remedy with respect to
the Indenture or the notes UNLESS:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding notes
have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium, if any, or interest on any note, the Trustee may
withhold notice if and so long as a committee of trust officers of the Trustee
in good faith determines that withholding notice is in the interests of the
holders. In addition, Avis Rent A Car is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. Avis Rent A Car also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any events which
would constitute certain Defaults, their status and what action Avis Rent A Car
is taking or proposes to take in respect thereof.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of Avis Rent A Car
with the intention of avoiding payment of the premium that Avis Rent A Car would
have had to pay if Avis Rent A Car then had elected to redeem the notes pursuant
to the optional redemption provisions of the Indenture or was required to
repurchase the notes, an equivalent premium shall also become and be immediately
due and payable to the extent permitted by law upon the acceleration of the
notes. If an Event of Default occurs prior to May 1, 2004 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of Avis Rent A
Car with the intention of avoiding the prohibition on redemption of the notes
prior to May 1, 2004, the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the notes.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the notes then outstanding
(including without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes) and, subject to certain
exceptions, any past default or compliance with any provisions may be
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waived with the consent of the holders of a majority in principal amount of the
notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
However, without the consent of each holder of an outstanding note affected, no
amendment may, among other things:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any note;
(3) reduce the principal of or extend the Stated Maturity of any note;
(4) reduce the premium payable upon the redemption or repurchase of any note
or change the time at which any note may be redeemed or repurchased as
described above under "Optional redemption," "Change of Control,"
"Certain covenants--Limitation on Sales of Assets and Subsidiary Stock"
or any similar provision;
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's notes; or
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, Avis Rent A Car and the Trustee may amend
the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of Avis Rent A Car
under the Indenture;
(3) provide for uncertificated notes in addition to or in place of
certificated notes (PROVIDED that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated notes are described in Section 163(f)
(2) (B) of the Code);
(4) add Guarantees with respect to the notes;
(5) secure the notes;
(6) add to the covenants of Avis Rent A Car for the benefit of the holders
or surrender any right or power conferred upon Avis Rent A Car;
(7) make any change that does not adversely affect the rights of any holder;
or
(8) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, Avis Rent A Car is required to mail to the holders
a notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect therein, will not impair or affect the
validity of the amendment.
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DEFEASANCE
Avis Rent A Car at any time may terminate all its obligations under the
notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes and to maintain a registrar and paying agent in respect of the
notes. If Avis Rent A Car exercises its legal defeasance option, the Subsidiary
Guarantees in effect at such time will terminate.
Avis Rent A Car at any time may terminate its obligations under covenants
described under "--Certain covenants" (other than "Merger and Consolidation"),
the operation of the cross-default upon a payment default, cross acceleration
provisions, the bankruptcy provisions with respect to Significant Subsidiaries,
the judgment default provision and the Subsidiary Guarantee provision described
under "Events of Default" above and the limitations contained in clause (3)
under "Certain covenants--Merger and Consolidation" above ("covenant
defeasance").
Avis Rent A Car may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Avis Rent A Car exercises
its legal defeasance option, payment of the notes may not be accelerated because
of an Event of Default with respect thereto. If Avis Rent A Car exercises its
covenant defeasance option, payment of the notes may not be accelerated because
of an Event of Default specified in clause (4), (5), (6), (7) (with respect only
to Significant Subsidiaries), (8) or (9) under "--Events of Default" above or
because of the failure of Avis Rent A Car to comply with clause (3) under
"Certain covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, Avis Rent A Car must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal, premium, if any, and
interest on the notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the
effect that holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred. In the case of legal defeasance only, such Opinion of Counsel must
be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Avis Rent A
Car, as such, shall have any liability for any obligations of Avis Rent A Car
under the notes, the Indenture or the Subsidiary Guarantees or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder by accepting a note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by Avis Rent A Car as Registrar and Paying Agent with regard to the
notes.
GOVERNING LAW
The Indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York.
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CERTAIN DEFINITIONS
"Avis Fleet" means Avis Fleet Leasing and Management Corporation and any
successor thereto.
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to be
used by Avis Rent A Car or a Restricted Subsidiary in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by Avis Rent A Car or a
Restricted Subsidiary of Avis Rent A Car; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of Avis Rent A Car;
PROVIDED, HOWEVER, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
PROVIDED that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease entered into in the ordinary course of business), transfer,
issuance or other disposition, or a series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan, of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by Avis Rent A Car or any of its Restricted Subsidiaries,
including any disposition by means of a merger, consolidation or similar
transaction.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to Avis Rent A Car or by Avis
Rent A Car or a Restricted Subsidiary to a Wholly-Owned Subsidiary (other
than a Securitization Entity);
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory or Eligible Vehicles in the ordinary course
of business;
(4) a disposition of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of Avis Rent A Car and its
Restricted Subsidiaries (other than Eligible Vehicles) and that is
disposed of in each case in the ordinary course of business;
(5) transactions permitted under "Certain covenants--Merger and
Consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary of Avis Rent A
Car to Avis Rent A Car or to a Wholly-Owned Subsidiary (other than a
Securitization Entity) or in the case of a Securitization Entity to any
Person;
(7) for purposes of "Certain covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, the making of a Permitted Investment or a
disposition subject to "Certain covenants--Limitation on Restricted
Payments";
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(8) sales of Permitted Vehicle Collateral or an interest therein of the type
specified in the definition of "Qualified Securitization Transaction" to
a Securitization Entity;
(9) dispositions of assets with an aggregate fair market value in any fiscal
year of less than $2.5 million; and
(10) dispositions in connection with Permitted Liens.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter Incurred, payable by Avis Rent A Car under or in
respect of the Senior Credit Agreement and any related notes, collateral
documents, letters of credit and guarantees and any Interest Rate Agreement
entered into in connection with the Senior Credit Agreement, including
principal, premium, if any, interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to Avis
Rent A Car at the rate specified therein whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Call Transfer Agreement" means the Call Transfer Agreement made and entered
into March 4, 1997 between Avis Rent A Car System, Inc. and HFS Incorporated.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease prior to the first date such lease may be
terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States or the United Kingdom Government or any agency or
instrumentality thereof, having maturities of not more than one year from
the date of acquisition;
(2) marketable general obligations issued by the United Kingdom or any state
of the United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and, at
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the time of acquisition thereof, having a credit rating of "A" or better
from either Standard & Poor's Ratings Services or Moody's Investors
Service, Inc.;
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank the long-term debt of which is rated at the time of
acquisition thereof at least "A" or the equivalent thereof by Standard &
Poor's Ratings Services, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having combined capital and surplus in
excess of $500 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and (3)
entered into with any bank meeting the qualifications specified in clause
(3) above;
(5) commercial paper rated at the time of acquisition thereof at least "A-2"
or the equivalent thereof by Standard & Poor's Ratings Services or "P-2"
or the equivalent thereof by Moody's Investors Service, Inc., or carrying
an equivalent rating by a nationally recognized rating agency, if both of
the two named rating agencies cease publishing ratings of investments,
and in either case maturing within one year after the date of acquisition
thereof; and
(6) interests in any investment company or money market fund which invests
solely in instruments of the type specified in clauses (1) through (5)
above.
"Change of Control" means:
(1) any "person" or "group" of related persons (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that such person or group shall be deemed to have "beneficial
ownership" of all shares that any such person or group has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the total
voting power of the Voting Stock of Avis Rent A Car (or its successor by
merger, consolidation or purchase of all or substantially all of its
assets) (for the purposes of this clause, such person or group shall be
deemed to beneficially own any Voting Stock of Avis Rent A Car held by an
entity, if such person or group "beneficially owns" (as defined above),
directly or indirectly, more than 35% of the voting power of the Voting
Stock of such entity); or
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Avis Rent
A Car, together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of Avis
Rent A Car, as the case may be, was approved by a vote of at least a
majority of the directors of Avis Rent A Car then still in office who
were either directors at the beginning of such period or whose election
or nomination for election was previously so approved cease for any
reason to constitute a majority of the Board of Directors of Avis Rent A
Car then in office;
(3) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Avis Rent A
Car and its Restricted Subsidiaries taken as a whole to any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act);
(4) the adoption by the stockholders of Avis Rent A Car of a plan or
proposal for the liquidation or dissolution of Avis Rent A Car; or
(5) a Change of Control Event as defined under the Master License Agreement.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Computer Services Agreement" means the Computer Service Agreement,
effective as of July 30, 1997 between Avis Rent A Car System, Inc. and WizCom
International, Ltd.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence to (y) Consolidated Interest Expense for such four
fiscal quarters, PROVIDED, HOWEVER, that:
(1) if Avis Rent A Car or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period that
remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness
under any revolving credit facility outstanding on the date of such
calculation will be computed based on (i) the average daily balance
of such Indebtedness during such four fiscal quarters or such shorter
period for which such facility was outstanding or (ii) if such
facility was created after the end of such four fiscal quarters, the
average daily balance of such Indebtedness during the period from the
date of creation of such facility to the date of such calculation)
and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of
such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio
involves a discharge of Indebtedness (in each case other than
Indebtedness incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and the related commitment
terminated), Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving effect on a pro forma
basis to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred
on the first day of such period;
(2) if since the beginning of such period Avis Rent A Car or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is
an Asset Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an amount
equal to the Consolidated EBITDA (if positive) directly attributable
to the assets which are the subject of such Asset Disposition for
such period or increased by an amount equal to the Consolidated
EBITDA (if negative) directly attributable thereto for such period;
and
(b) Consolidated Interest Expense for such period will be reduced by an
amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of Avis Rent A Car or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to Avis Rent A Car and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if the
Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period
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directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent Avis Rent A Car and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale);
(3) if since the beginning of such period Avis Rent A Car or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary or is merged with or into Avis Rent A Car) or an acquisition
of assets, including any acquisition of assets occurring in connection
with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit, division or
line of business, Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Avis Rent A Car
or any Restricted Subsidiary since the beginning of such period) will
have made any Asset Disposition or any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (2) or
(3) above if made by Avis Rent A Car or a Restricted Subsidiary during
such period, Consolidated EBITDA and Consolidated Interest Expense for
such period will be calculated after giving pro forma effect thereto as
if such Asset Disposition or Investment or acquisition of assets occurred
on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given under
any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of
Avis Rent A Car (including pro forma expense and cost reductions calculated on a
basis consistent with Regulation S-X under the Securities Act). If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness will be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated non-vehicle related depreciation expense;
(4) consolidated non-vehicle related amortization of intangibles; and
(5) other non-vehicle related non-cash charges reducing Consolidated Net
Income (excluding any such non-cash charge to the extent it represents an
accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period
not included in the calculation).
Notwithstanding the preceding sentence, clauses (2) through (5) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated Net
Income to compute Consolidated EBITDA of such Person only to the extent (and in
the same proportion) that the net income (loss) of such Restricted Subsidiary
was included in calculating the Consolidated Net Income of such Person and, to
the extent the amounts set forth in clauses (2) through (5) are in excess of
those necessary to offset a net loss of such Restricted Subsidiary or if such
Restricted Subsidiary has net income for such period included in Consolidated
Net Income, only if a corresponding amount would be
169
permitted at the date of determination to be dividended to Avis Rent A Car by
such Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Avis Rent A Car and its consolidated Restricted Subsidiaries, whether
paid or accrued, excluding interest on Permitted Vehicle Indebtedness, plus, to
the extent not included in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations and the
interest portion of rent expense associated with Attributable
Indebtedness in respect of the relevant lease giving rise thereto,
determined as if such lease were a capitalized lease in accordance with
GAAP and the interest component of any deferred payment obligations;
(2) amortization of debt discount and debt issuance cost;
(3) non-cash interest expense (except with respect to Permitted Vehicle
Indebtedness);
(4) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(5) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, to the extent such Guarantee or Lien is called upon;
(6) net costs (if positive) associated with Hedging Obligations (including
amortization of fees);
(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period (except with respect
to Permitted Vehicle Indebtedness);
(8) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series
of Disqualified Stock of such Person or on Preferred Stock of its
Restricted Subsidiaries payable to a party other than Avis Rent A Car or
a Wholly-Owned Subsidiary, times (b) a fraction, the numerator of which
is one and the denominator of which is one minus the then current
effective combined federal, state, provincial and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP; and
(9) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any Person (other than Avis Rent A Car) in
connection with Indebtedness Incurred by such plan or trust; PROVIDED,
HOWEVER, that there will be excluded therefrom any such interest expense
of any Unrestricted Subsidiary to the extent the related Indebtedness is
not Guaranteed or paid by Avis Rent A Car or any Restricted Subsidiary.
For purposes of the foregoing, total interest expense will be determined after
giving effect to any net payments made or received by Avis Rent A Car and its
Subsidiaries with respect to Interest Rate Agreements.
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"Consolidated Net Income" means, for any period, the net income (loss) of
Avis Rent A Car and its consolidated Restricted Subsidiaries determined in
accordance with GAAP; PROVIDED, HOWEVER, that there will not be included in such
Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not a Restricted
Subsidiary, except that:
(a) subject to the limitations contained in clauses (4), (5) and (6) below,
Avis Rent A Car's equity in the net income of any such Person for such
period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to Avis Rent A Car or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (3) below); and
(b) Avis Rent A Car's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in determining
such Consolidated Net Income to the extent such loss has been funded with
cash from Avis Rent A Car or a Restricted Subsidiary;
(2) any net income (loss) of any Person acquired by Avis Rent A Car or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Avis Rent A Car, except that:
(a) subject to the limitations contained in clauses (4), (5) and (6) below,
Avis Rent A Car's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
distributed by either such Restricted Subsidiary or the entity to which
the receivables or cash generated by such Consolidated Net Income has
been transferred for purposes of a Qualified Securitization Transaction
during such period to Avis Rent A Car or another Restricted Subsidiary as
a dividend (subject, in the case of a dividend to another Restricted
Subsidiary, to the limitation contained in this clause); and
(b) Avis Rent A Car's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated Net
Income;
(4) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of Avis Rent A Car or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) any extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Customer Lease Financing Loans" has the meaning set forth in the definition
of Specified Financing Subsidiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Designated Senior Indebtedness" means (1) the Bank Indebtedness (to the
extent such Bank Indebtedness constitutes Senior Indebtedness) and (2) any other
Senior Indebtedness which, at the date of determination, has an aggregate
principal amount outstanding of, or under which, at the date of determination,
the holders thereof are committed to lend up to, at least $50 million and is
specifically designated in the instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture.
"Determination Date" means the last calendar day of each month.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely at
the option of Avis Rent A Car or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to the date that is 91 days after the date (a)
on which the notes mature or (b) on which there are no notes outstanding,
PROVIDED that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so
redeemable at the option of the holder thereof prior to such date will be
deemed to be Disqualified Stock; PROVIDED, FURTHER that any Capital Stock
that would constitute Disqualified Stock solely because the holders
thereof have the right to require Avis Rent A Car to repurchase such
Capital Stock upon the occurrence of a change of control or asset sale
(each defined in a substantially identical manner to the corresponding
definitions in the Indenture) shall not constitute Disqualified Stock if
the terms of such Capital Stock (and all such securities into which it is
convertible or for which it is ratable or exchangeable) provide that Avis
Rent A Car may not repurchase or redeem any such Capital Stock (and all
such securities into which it is convertible or for which it is ratable
or exchangeable) pursuant to such provision prior to compliance by Avis
Rent A Car with the provisions of the Indenture described under the
captions "Change of Control" and "Limitation on Sales of Assets and
Subsidiary Stock" and such repurchase or redemption complies with
"Certain covenants--Limitation on Restricted Payments".
"Domestic Subsidiary" means any Restricted Subsidiary that is organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"Eligible Leases" means open-end and closed-end automobile fleet leases
originated by or on behalf of Avis Rent A Car and its Restricted Subsidiaries
which are of a type customarily eligible for inclusion in a Qualified
Securitization Transaction.
"Eligible Vehicles" shall mean the motor vehicle inventory of Avis Rent A
Car and its Restricted Subsidiaries, in each case, whether held for sale, lease
or rental purposes which are of a type customarily eligible for inclusion in a
Qualified Securitization Transaction.
"Excluded Subsidiary" is a reference to a Foreign Subsidiary, Securitization
Entity, Specified Financing Subsidiary or any regulated bank subsidiary or
insurance subsidiary that has not issued a Guarantee of any Senior Indebtedness.
"Fleet Receivables" means all receivables generated by Avis Rent A Car and
its Restricted Subsidiaries from obligors under fleet maintenance contracts,
fleet management contracts and fuel card contracts and any other service
contracts billed together with Eligible Leases, which are of a type customarily
eligible for inclusion in a Qualified Securitization Transaction.
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"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); PROVIDED, HOWEVER,
that the term "Guarantee" will not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as
a verb has a corresponding meaning.
"Guarantor Senior Indebtedness" means, with respect to a Subsidiary
Guarantor, the following obligations, whether outstanding on the date of the
Indenture or thereafter issued, without duplication:
(1) any Guarantee of the Bank Indebtedness by such Subsidiary Guarantor and
all other Guarantees by such Subsidiary Guarantor of Senior Indebtedness
of Avis Rent A Car or Guarantor Senior Indebtedness of any other
Subsidiary Guarantor; and
(2) all obligations consisting of principal of and premium, if any, accrued
and unpaid interest on, and fees and other amounts relating to, all other
Indebtedness of the Subsidiary Guarantor. Guarantor Senior Indebtedness
includes interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Subsidiary Guarantor
regardless of whether postfiling interest is allowed in such proceeding.
Notwithstanding anything to the contrary in the preceding paragraph,
Guarantor Senior Indebtedness will not include:
(1) any Indebtedness which, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Indebtedness are not superior in right
of, or are subordinate to, payment of the notes and the Subsidiary
Guarantee;
(2) any obligations of such Subsidiary Guarantor to another Subsidiary or
Avis Rent A Car;
(3) any liability for Federal, state, local, foreign or other taxes owed or
owing by such Subsidiary Guarantor;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor
that is expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or
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obligation of such Subsidiary Guarantor, including, without limitation,
any Guarantor Senior Subordinated Indebtedness and Guarantor Subordinated
Obligations of such Guarantor; or
(6) any Capital Stock.
"Guarantor Senior Subordinated Indebtedness" means, with respect to a
Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor
(whether outstanding on the Issue Date or thereafter Incurred) that specifically
provides that such Indebtedness is to rank equally in right of payment with the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee and is
not expressly subordinated by its terms in right of payment to any Indebtedness
of such Subsidiary Guarantor which is not Guarantor Senior Indebtedness of such
Subsidiary Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is expressly subordinate in right
of payment to the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a
Person existing at the time such person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) will be deemed to be
incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings correlative
to the foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of such
Person for borrowed money (including in respect of Qualified
Securitization Transactions);
(2) the principal of and premium (if any) in respect of obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) the principal component of all obligations of such Person in respect of
letters of credit, bankers' acceptances or other similar instruments
(including reimbursement obligations with respect thereto except to the
extent such reimbursement obligation relates to a trade payable and such
obligation is satisfied within 30 days of Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property (except trade payables),
which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto;
(5) Capitalized Lease Obligations and all Attributable Indebtedness of such
Person;
(6) the principal component of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary, any Preferred Stock;
(7) the principal component of all Indebtedness of other Persons secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; PROVIDED, HOWEVER, that the amount of such
Indebtedness will be the lesser of (a) the fair market value of such
asset at such date of determination and (b) the amount of such
Indebtedness of such other Persons;
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(8) the principal component of Indebtedness of other Persons to the extent
Guaranteed by such Person; and
(9) to the extent not otherwise included in this definition, net obligations
of such Person under Currency Agreements and Interest Rate Agreements
(the amount of any such obligations to be equal at any time to the
termination value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time).
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness
described in the preceding paragraph that would not appear as a liability on the
balance sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect to the
payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person; and then such Indebtedness shall be
included in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and (ii) the
amount of such obligations to the extent that there is recourse, by
contract or operation of law, to the property or assets of such Person or
a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a) immediately
above, the actual amount of such Indebtedness that is recourse to such
Person or a Restricted Subsidiary of such Person, if the Indebtedness is
evidenced by a writing and is for a determinable amount and the related
interest expense shall be included in Consolidated Interest Expense to
the extent actually paid by Avis Rent A Car or its Restricted
Subsidiaries.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of Guarantee or
similar arrangement, but excluding any debt or extension of credit represented
by a bank deposit other than a time deposit) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; PROVIDED that:
(1) Hedging Obligations entered into in the ordinary course of business and
in compliance with the Indenture;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
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(3) an acquisition of assets, Capital Stock or other securities by Avis Rent
A Car or a Restricted Subsidiary for consideration consisting exclusively
of common equity securities of Avis Rent A Car, shall in each case not be
deemed to be an Investment.
For purposes of "--Certain covenants--Limitation on Restricted Payments",
(1) "Investment" will include the portion (proportionate to Avis Rent A
Car's equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of Avis Rent A Car at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, Avis Rent A Car will be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (a) Avis Rent A Car's "Investment" in such Subsidiary
at the time of such redesignation less (b) the portion (proportionate to
Avis Rent A Car's equity interest in such Subsidiary) of the fair market
value of the net assets (as conclusively determined by the Board of
Directors of Avis Rent A Car in good faith) of such Subsidiary at the
time that such Subsidiary is so re-designated a Restricted Subsidiary;
and
(2) any property transferred to or from an Unrestricted Subsidiary will be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of Avis Rent A
Car. If Avis Rent A Car or any Restricted Subsidiary of Avis Rent A Car
sells or otherwise disposes of any Voting Stock of any Restricted
Subsidiary of Avis Rent A Car such that, after giving effect to any such
sale or disposition, such entity is no longer a Subsidiary of Avis Rent A
Car, Avis Rent A Car shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value (as
conclusively determined by the Board of Directors of Avis Rent A Car in
good faith) of the Capital Stock of such Subsidiary not sold or disposed
of.
"Issue Date" means the date on which the notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Master License Agreement" means the Master License Agreement, dated July
30, 1997, among HFS Car Rental, Inc., Avis Rent A Car System, Inc. and Wizard
Co., Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other nonfat form) therefrom, in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP (after taking into account any
available tax credits or deductions and any tax sharing agreements), as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain
a necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from such Asset Disposition;
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(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition and retained by Avis
Rent A Car or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result of such issuance or sale (after taking into account any
available tax credit or deductions and any tax sharing arrangements).
"Non-Recourse Indebtedness" means Indebtedness:
(1) as to which neither Avis Rent A Car nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder
of any other Indebtedness of Avis Rent A Car or any Restricted Subsidiary
to declare a default under such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and
(3) the explicit terms of which provide there is no recourse against any of
the assets of Avis Rent A Car or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of Avis Rent A Car.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of Avis Rent
A Car.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to Avis
Rent A Car or the Trustee.
"Permitted Investment" means an Investment by Avis Rent A Car or any
Restricted Subsidiary in:
(1) a Restricted Subsidiary (other than a Securitization Entity) or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary (other than a Securitization Entity); PROVIDED, HOWEVER, that
the primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Avis Rent A Car or a Restricted
Subsidiary (other than a Securitization Entity); PROVIDED, HOWEVER, that
such Person's primary business is a Related Business;
(3) cash and Cash Equivalents;
(4) receivables owing to Avis Rent A Car or any Restricted Subsidiary
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such
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concessionary trade terms as Avis Rent A Car or any such Restricted
Subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of Avis Rent A Car or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to Avis Rent A Car or any
Restricted Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(8) Investments made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with
"--Certain covenants--Limitation on Sales of Assets and Subsidiary
Stock";
(9) Investments in existence on the Issue Date;
(10) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in compliance
with "Certain covenants--Limitation on Indebtedness";
(11) Investments by Avis Rent A Car or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (11), in an
aggregate amount at the time of such Investment not to exceed $40.0
million outstanding at any one time;
(12) Guarantees issued in accordance with "--Certain covenants--Limitations
on Indebtedness"; and
(13) Investments by Avis Rent A Car or a Restricted Subsidiary in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person, in each case, in connection with a Qualified Securitization
Transaction, PROVIDED, HOWEVER, that any Investment in any such Person is
in the form of a Purchase Money Note, or any equity interest or interests
in Permitted Vehicle Collateral generated by Avis Rent A Car or a
Restricted Subsidiary and transferred to any Person in connection with a
Qualified Securitization Transaction.
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations under the Senior
Credit Facilities and related Interest Rate Agreements and other Senior
Indebtedness and liens on assets of Restricted Subsidiaries securing
Guarantees of Indebtedness and other obligations under a Senior Credit
Facilities and other Guarantor Senior Indebtedness permitted to be
incurred under the Indenture;
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import or customs duties or for the payment of rent,
in each case Incurred in the ordinary course of business;
(3) Liens imposed by law, including carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good faith
by appropriate proceedings if a
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reserve or other appropriate provisions, if any, as shall be required by
GAAP shall have been made in respect thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings provided appropriate reserves required
pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or letters of
credit or bankers' acceptances issued pursuant to the request of and for
the account of such Person in the ordinary course of its business;
PROVIDED, HOWEVER, that such letters of credit do not constitute
Indebtedness;
(6) Liens on any airport concession agreements or permits to secure loans
extended to finance tenant improvements used in connection with the
concession agreement or permit subject to such Lien;
(7) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other restrictions as to
the use of real properties or liens incidental to the conduct of the
business of such Person or to the ownership of its properties which do
not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the
business of such Person;
(8) Liens securing Hedging Obligations so long as the related Indebtedness
is, and is permitted to be under the Indenture, secured by a Lien on the
same property securing such Hedging Obligation;
(9) leases and subleases of real property which do not materially interfere
with the ordinary conduct of the business of Avis Rent A Car or any of
its Restricted Subsidiaries;
(10) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment have not been
finally terminated or the period within which such proceedings may be
initiated has not expired;
(11) Liens for the purpose of securing the payment of all or a part of the
purchase price of, or Capitalized Lease Obligations with respect to,
assets or property acquired or constructed in the ordinary course of
business; PROVIDED that:
(a) the aggregate principal amount of Indebtedness secured by such Liens is
otherwise permitted to be Incurred under the Indenture and does not
exceed the cost of the assets or property so acquired or constructed; and
(b) such Liens are created within 180 days of construction or acquisition of
such assets or property and do not encumber any other assets or property
of Avis Rent A Car or any Restricted Subsidiary other than such assets or
property and assets affixed or appurtenant thereto;
(12) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with
a depositary institution; PROVIDED that:
(a) such deposit account is not a dedicated cash collateral account and is
not subject to restrictions against access by Avis Rent A Car in excess
of those set forth by regulations promulgated by the Federal Reserve
Board; and
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(b) such deposit account is not intended by Avis Rent A Car or any
Restricted Subsidiary to provide collateral to the depository
institution;
(13) Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by Avis Rent A Car and its
Restricted Subsidiaries in the ordinary course of business;
(14) Liens existing on the Issue Date;
(15) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; PROVIDED, HOWEVER, that such
Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming a Restricted Subsidiary;
PROVIDED FURTHER, HOWEVER, that any such Lien may not extend to any other
property owned by Avis Rent A Car or any Restricted Subsidiary;
(16) Liens on property at the time Avis Rent A Car or a Restricted
Subsidiary acquired the property, including any acquisition by means of a
merger or consolidation with or into Avis Rent A Car or any Restricted
Subsidiary; PROVIDED, HOWEVER, that such Liens are not created, incurred
or assumed in connection with, or in contemplation of, such acquisition;
PROVIDED FURTHER, HOWEVER, that such Liens may not extend to any other
property owned by Avis Rent A Car or any Restricted Subsidiary;
(17) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to Avis Rent A Car or a Wholly Owned Subsidiary (other
than a Securitization Entity);
(18) Liens securing the notes and Subsidiary Guarantees;
(19) Liens securing Refinancing Indebtedness incurred to refinance
Indebtedness that was previously so secured, PROVIDED that any such Lien
is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or, under the written arrangements under
which the original Lien arose, could secure) the Indebtedness being
refinanced or is in respect of property that is the security for a
Permitted Lien hereunder;
(20) Liens on assets transferred to a Securitization Entity or on assets of
a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction; and
(21) Liens securing Customer Lease Financing Loans incurred without
violation of the Indenture.
"Permitted Vehicle Collateral" means, as of any Determination Date:
(1) the collateral securing Permitted Vehicle Indebtedness and consisting of
Eligible Vehicles and receivables, or a beneficial interest therein,
arising from the disposition of Eligible Vehicles and the proceeds
thereof;
(2) Eligible Leases and Fleet Receivables, or a beneficial interest therein,
transferred to a Securitization Entity in connection with a Qualified
Securitization Transaction and the proceeds thereof;
(3) any related assets which are customarily transferred, or in respect of
which security interests are customarily granted, in connection with
asset securitizations involving Eligible Vehicles or Eligible Leases; and
(4) any proceeds of any of the foregoing.
"Permitted Vehicle Indebtedness" means (1) Indebtedness Incurred to finance
or refinance Eligible Vehicles (but only to the extent actually used to finance
or refinance Eligible Vehicles) and (2) Indebtedness secured by Permitted
Vehicle Collateral; provided, however, that any Indebtedness
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redesignated pursuant to paragraph (2)(C) of the covenant described under
"--Certain covenants-- Limitation on Permitted Vehicle Indebtedness" shall not
constitute Permitted Vehicle Indebtedness; and provided, further, that the notes
shall be deemed not to constitute Permitted Vehicle Indebtedness when issued.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"PHH Sub Preferred Stock" is a collective reference to the Series A
Cumulative Participating Redeemable Convertible Preferred Stock, Series B
Cumulative PIK Preferred Stock and Series C Cumulative Redeemable Preferred
Stock of Avis Fleet and the related Certificates of Designations in effect on
the Issue Date, as each of the same may be amended, supplemented or otherwise
modified from time to time; PROVIDED that any such amendment, supplement or
modification is not disadvantageous to the Holders in any material respect.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means an offering for cash by Avis Rent A Car of
its common stock, or options, warrants or rights with respect to its common
stock.
A "Public Market" exists at any time with respect to the common stock of
Avis Rent A Car, if:
(1) the common stock of Avis Rent A Car is then registered with the
Securities Exchange Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and traded either on a national securities exchange or in
the National Association of Securities Dealers Automated Quotation
System; and
(2) at least 15% of the total issued and outstanding common stock of Avis
Rent A Car has been and remains distributed prior to such time by means
of an effective registration statement under the Securities Act of 1933,
as amended.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from Avis Rent A Car or
any Restricted Subsidiary of Avis Rent A Car to a Securitization Entity or
representing the deferred purchase price for the purchase of assets by such
Securitization Entity from Avis Rent A Car or a Restricted Subsidiary, in each
case in connection with a Qualified Securitization Transaction, to a
Securitization Entity, which note is repayable from cash available to the
Securitization Entity, other than amounts required to be established as reserves
pursuant to agreements, amounts paid to investors in respect of interest,
principal and other amounts owing to such investors and amounts paid in
connection with the purchase of Eligible Vehicles, Eligible Leases, Fleet
Receivables or a beneficial interest therein.
"Purchasing Services Agreement" means the purchasing services agreement
dated as of August 1, 1997, between ARACS and Cendant Corporation.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by Avis Rent A Car or any of its
Restricted Subsidiaries pursuant to which Avis Rent A Car or any of its
Restricted Subsidiaries may sell, convey or otherwise transfer to (1) a
Securitization Entity (in the case of a transfer by Avis Rent A Car or any of
its Restricted Subsidiaries) and (2) any other Person (in the case of a transfer
by a Securitization Entity), or may grant a security interest in, any Permitted
Vehicle Collateral (whether now existing or arising in the future) of Avis Rent
A Car or any of its Restricted Subsidiaries, and any assets related thereto
including, without limitation, the proceeds of such Permitted Vehicle
Collateral.
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"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinance", "refinances," and
"refinanced" shall have a correlative meaning) any Indebtedness existing on the
date of the Indenture or Incurred in compliance with the Indenture (including
Indebtedness of Avis Rent A Car that refinances Indebtedness of any Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness, PROVIDED, HOWEVER, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the notes, the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of
the Indebtedness being refinanced or (b) if the Stated Maturity of the
Indebtedness being refinanced is later than the Stated Maturity of the
notes, the Refinancing Indebtedness has a Stated Maturity at least 91
days later than the Stated Maturity of the notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted
value) then outstanding (plus, without duplication, accrued interest,
fees and expenses, including any premium and defeasance costs) of the
Indebtedness being refinanced; and
(4) if the Indebtedness being refinanced is subordinated in right of payment
to the notes or the Subsidiary Guarantee, such Refinancing Indebtedness
is subordinated in right of payment to the notes or the Subsidiary
Guarantee on terms at least as favorable to the Holders as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Registration Rights Agreement" means the registration rights agreement
between Avis Rent A Car and the Franchisor entered into in connection with the
IPO.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of Avis Rent A Car and its
Restricted Subsidiaries on the date of the Indenture after giving effect to the
acquisition of VMS on such date (including WEX Financial).
"Related Business Assets" means assets used or useful in a Related Business.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Reservation Services Agreement" means the reservation service agreement
between Cendant Corporation and ARACS entered into in connection with the IPO.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means (i) any Subsidiary of Avis Rent A Car other
than an Unrestricted Subsidiary and (ii) any Securitization Entity.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Avis Rent A Car or a Restricted Subsidiary
transfers such property to a Person and Avis Rent A Car or a Restricted
Subsidiary leases it from such Person.
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"Securitization Entity" means a Restricted Subsidiary of Avis Rent A Car (or
another Person in which Avis Rent A Car or any Restricted Subsidiary of Avis
Rent A Car makes an Investment and to which Avis Rent A Car or any Restricted
Subsidiary of Avis Rent A Car transfers Permitted Vehicle Collateral or an
interest in Permitted Vehicle Collateral) which engages in no activities other
than in connection with the ownership, leasing, operation and financing of
Eligible Vehicles and other Permitted Vehicle Collateral and which is designated
by the Board of Directors of Avis Rent A Car (as provided below) as a
Securitization Entity and as to which:
(1) no portion of the Indebtedness or any other obligations (contingent or
otherwise) of which:
(a) is guaranteed by Avis Rent A Car or any Restricted Subsidiary of Avis
Rent A Car (excluding guarantees of Obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings);
(b) is recourse to or obligates Avis Rent A Car or any Restricted
Subsidiary of Avis Rent A Car in any way other than pursuant to
Standard Securitization Undertakings; or
(c) subjects any property or asset of Avis Rent A Car or any Restricted
Subsidiary of Avis Rent A Car, directly or indirectly, contingently
or otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(2) neither Avis Rent A Car nor any Restricted Subsidiary of Avis Rent A Car
has any material contract, agreement, arrangement or understanding
(except in connection with a Purchase Money Note or Qualified
Securitization Transaction) other than on terms no less favorable to Avis
Rent A Car or such Restricted Subsidiary than those that might be
obtained at the time from Persons that are not Affiliates of Avis Rent A
Car, other than fees payable in the ordinary course of business in
connection with servicing Permitted Vehicle Collateral; and
(3) neither Avis Rent A Car nor any Restricted Subsidiary of Avis Rent A Car
has any obligation to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating
results.
Any such designation by the Board of Directors of Avis Rent A Car shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors of Avis Rent A Car giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"Senior Credit Agreement" means the Credit Agreement, dated as of the Issue
Date among Avis Rent A Car, Inc., the several banks and other financial
institutions and entities from time to time parties thereto, The Chase Manhattan
Bank, as administrative agent for the lenders and Lehman Commercial Paper Inc.,
as syndication agent, including any amendments, supplements, modifications,
extensions, renewals, restatements or refundings thereof and any credit
facilities or agreements that replace, refund or refinance any part of the loans
with other Senior Indebtedness of Avis Rent A Car, Inc.
"Senior Credit Facilities" means, with respect to Avis Rent A Car, one or
more debt facilities (including, with limitation, the Revolving Credit Facility
and the Term Loan Facilities to be entered into among Avis Rent A Car, The Chase
Manhattan Bank, as Administrative Agent, and the lenders parties thereto from
time to time) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans or letters of credit,
in each case, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time (and whether or not with the
original administrative agent and lenders or another administrative agent or
agents or other lenders and whether provided under the original Revolving Credit
Facility and the Term Loan Facilities or any other credit or other agreement or
indenture).
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"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, created, Incurred or assumed, the Bank Indebtedness and all
other Indebtedness of Avis Rent A Car, including accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Avis Rent A Car at the rate
specified in the documentation with respect thereto whether or not a claim for
post filing interest is allowed in such proceeding) and fees relating thereto;
PROVIDED, HOWEVER, that Senior Indebtedness will not include:
(1) any Indebtedness which, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Indebtedness are not superior in right
of, or are subordinate to, payment of the notes and the Subsidiary
Guarantees;
(2) any obligation of Avis Rent A Car to any Subsidiary;
(3) any liability for Federal, state, foreign, local or other taxes owed or
owing by Avis Rent A Car;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of Avis Rent A Car that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of Avis Rent A Car, including,
without limitation, any Senior Subordinated Indebtedness and any
Subordinated Obligations; or
(6) any Capital Stock.
"Senior Subordinated Indebtedness" means the notes and any other
Indebtedness of Avis Rent A Car that specifically provides that such
Indebtedness is to rank equally with the notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of Avis Rent A Car which is not Senior Indebtedness.
"Separation Agreement" means the Separation Agreement dated as of June 30,
1997 between HFS Car Rental, Inc. and Avis Rent A Car, Inc.
"Series C Preferred Stock" means the Series C Cumulative Redeemable
Preferred Stock of Avis Fleet and the related Certificate of Designation in
effect on the Issue Date.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Avis Rent A Car within the meaning of Rule 1-02
under Regulation S-X promulgated by the Commission.
"Specified Financing Subsidiary" means a direct wholly-owned subsidiary of
Avis Fleet (into which Avis Fleet has contributed only nominal equity) that is
solely engaged in the business of acquiring vehicles for and then leasing such
vehicles to, a specified customer (the "Customer"); provided that (i) such
vehicles are purchased solely with the proceeds of loans made by the Customer to
such Specified Financing Subsidiary (the "Customer Lease Financing Loans"), (ii)
neither Avis Rent A Car nor any Restricted Subsidiary provides the Specified
Financing Subsidiary any guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would constitute
Indebtedness) or is directly or indirectly liable (as a guarantor or otherwise)
for such Customer Lease Financing Loans and (iii) the explicit terms of such
Customer Lease Financing Loans provide that there shall be no recourse against
any of the assets of Avis Rent A Car or its Restricted Subsidiaries.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Avis Rent A Car or any Restricted
Subsidiary of Avis Rent A Car which are reasonably customary in securitizations
of vehicles and vehicle leases.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem or
repurchase any such principal prior to the date originally scheduled for the
payment thereof.
"Subordinated Obligation" means any Indebtedness of Avis Rent A Car (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, trust, association,
partnership, joint venture, limited liability company or other business entity
of which more than 50% of the total voting power of shares of Capital Stock or
other interests (including partnership and joint venture interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (1) such Person, (2) such Person and one or more
Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
Unless otherwise specified herein, each reference to a Subsidiary will refer to
a Subsidiary of Avis Rent A Car.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
notes by a Subsidiary Guarantor pursuant to the terms of the Indenture and any
supplemental indenture thereto, and, collectively, all such Guarantees. Each
such Subsidiary Guarantee will be in the form prescribed by the Indenture.
"Subsidiary Guarantor" means each Restricted Subsidiary of Avis Rent A Car
in existence on the Issue Date and any Restricted Subsidiary created or acquired
by Avis Rent A Car after the Issue Date other than in each case an Excluded
Subsidiary.
"Tax Disaffiliation Agreement" means the Tax Disaffiliation Agreement by and
among Cendant Corporation and Avis Rent A Car entered into in connection with
the IPO.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of Avis Rent A Car that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors
of Avis Rent A Car in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of Avis Rent A Car may designate any Subsidiary of
Avis Rent A Car (including any newly acquired or newly formed Subsidiary or a
Person becoming a Subsidiary through merger or consolidation or Investment
therein) to be an Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any
Lien on any property of, any other Subsidiary of Avis Rent A Car which is
not a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall, at
the date of designation, and will at all times thereafter, consist of
Non-Recourse Indebtedness;
(3) such designation and the Investment of Avis Rent A Car in such
Subsidiary complies with "Certain covenants--Limitation on Restricted
Payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all
or substantially all of the business of Avis Rent A Car and its
Subsidiaries;
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(5) such Subsidiary is a Person with respect to which neither Avis Rent A
Car nor any of its Restricted Subsidiaries has any direct or indirect
obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement or
understanding with Avis Rent A Car or any Restricted Subsidiary with
terms substantially less favorable to Avis Rent A Car than those that
might have been obtained from Persons who are not Affiliates of Avis Rent
A Car.
Any such designation by the Board of Directors of Avis Rent A Car shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board of
Directors of Avis Rent A Car giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred as of such date.
The Board of Directors of Avis Rent A Car may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately after giving
effect to such designation, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof and Avis Rent A Car
could incur at least $1.00 of additional Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant on a pro forma basis taking into
account such designation.
"VMS Agreements" means the IT Agreement and any transition service agreement
entered into by Cendant or its affiliates in connection with the VMS
Acquisition.
"Voting Stock" of a Person means all classes of Capital Stock of such Person
then outstanding and normally entitled to vote in the election of directors or
Persons discharging comparable functions.
"WEX Financial" means Wright Express Financial Services Corporation, a
licensed industrial loan corporation and any successor thereto.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Avis Rent A Car,
all of the Capital Stock of which (other than directors' qualifying shares and
PHH Sub Preferred Stock) is owned by Avis Rent A Car or another Wholly-Owned
Subsidiary.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the principal U.S. federal income tax
consequences of the exchange offer. This description is based on (1) the
Internal Revenue Code of 1986, as amended (the "Code"), (2) income tax
regulations (proposed and final) issued under the Code, and (3) administrative
and judicial interpretations of the Code and regulations, each as in effect and
available as of the date of this offering memorandum. These income tax laws,
regulations, and interpretations, however, may change at any time, and any
change could be retroactive to the issuance date of the old notes.
Except where we state otherwise, this summary deals only with old notes held
as capital assets (as defined in the Code) by an initial purchaser who purchased
the old notes at their original offering price.
We do not address all of the tax consequences that may be relevant to a
holder. We also do not address, except as stated below, any of the tax
consequences to (1) holders that may be subject to special tax treatment, such
as financial institutions, real estate investment trusts, tax-exempt
organizations, regulated investment companies, insurance companies and brokers
and dealers or traders in securities or currencies, (2) persons whose functional
currency is not the United States dollar, and (3) persons that will hold notes
as part of a position in a straddle or as part of a "hedging," "conversion" or
other integrated investment transaction. Further, we do not address any state,
local or foreign tax consequences of the exchange offer.
The exchange of old notes for new notes pursuant to the exchange offer will
not constitute a material modification of the terms of the old notes and,
therefore, such exchange will not constitute an exchange for U.S. federal income
tax purposes. Accordingly, you will have no U.S. federal income tax consequences
from such exchange and, further, you will be required to continue to include
interest on the new notes in gross income in the same manner and to the same
extent, if any, as such interest was included in gross income under the old
notes. Your holding period with respect to the new notes will include the
holding period of the old notes and your tax basis in the new notes will be the
same as your tax basis in the old notes immediately before the exchange.
THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSEQUENCES RELATING TO THE EXCHANGE OFFER. ACCORDINGLY, INVESTORS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES RELATING TO THE EXCHANGE OFFER IN LIGHT OF
THEIR PARTICULAR SITUATIONS.
BOOK-ENTRY; DELIVERY AND FORM
Except as described below, the new notes will initially be issued in the
form of one or more registered new notes in global form without coupons. Each
global note will be deposited with, or on behalf of, The Depository Trust
Company and registered in the name of Cede & Co., as nominee of The Depository
Trust Company, or will remain in the custody of the Trustee pursuant to the FAST
Balance Certificate Agreement between The Depository Trust Company and the
trustee.
The Depository Trust Company has advised New Avis that it is (1) a limited
purpose trust company organized under the laws of the State of New York, (2) a
member of the Federal Reserve System, (3) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (4) a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. The Depository Trust
Company was created to hold securities for its participating organizations
(collectively, the "DTC Participants") and facilitates the clearance and
settlement of securities transactions between DTC Participants through
electronic book-entry changes to the accounts of the DTC Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC
Participants include securities brokers and dealers, including the placement
agents from the
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original offering of the old notes, banks and trust companies, clearing
corporations and other organizations. Access to The Depository Trust Company's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect DTC Participants") that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly. Holders who are not DTC Participants may beneficially
own securities held by or on behalf of The Depository Trust Company only through
DTC Participants or Indirect DTC Participants.
The Depository Trust Company management is aware that some computer
applications, systems, and the like for processing data ("Systems") that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems." The Depository Trust Company has
informed its Participants and other members of the financial community (the
"Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and interest payments) to securityholders, book-entry deliveries, and
settlement of trades within The Depository Trust Company, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, The Depository Trust Company's
plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, The Depository Trust Company's ability to perform properly its
services is also dependent upon other parties, including but not limited to
issuers and their agents, as well as third party vendors from whom The
Depository Trust Company licenses software and hardware, and third party vendors
on whom The Depository Trust Company relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. The Depository Trust Company has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom The
Depository Trust Company acquires services to: (i) impress upon them the
importance of such services being Year 2000 compliant; and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, The Depository Trust Company is in the process
of developing such contingency plans as it deems appropriate.
New Avis expects, as provided in the procedures established by The
Depository Trust Company, that (1) upon deposit of the global notes, The
Depository Trust Company will credit the accounts of DTC Participants with an
interest in the global notes and (2) ownership of the new notes will be shown
on, and the transfer of ownership of the new notes will be effected only
through, records maintained by The Depository Trust Company with respect to the
interest of DTC Participants, the DTC Participants and the Indirect DTC
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that a security
interest in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to transfer
the new notes or to pledge the new notes as collateral will be limited to this
extent.
So long as The Depository Trust Company or its nominee is the registered
owner of a global note, The Depository Trust Company or the nominee, as the case
may be, will be considered the sole owner or holder of the new notes represented
by the global note for all purposes under the indenture. Except as provided
below, owners of beneficial interests in a global note will not be entitled to
have the new notes represented by the global note registered in their names,
will not receive or be entitled to receive physical delivery of certificated
securities, and will not be considered the owners or holders of the new notes
under the indenture for any purpose, including with respect to the giving of any
directions, instruction or approval to the trustee under the indenture. As a
result, the ability of a person having a beneficial interest in new notes
represented by a global note to pledge or transfer that interest to persons or
entities that do not participate in The Depository Trust Company's system or to
otherwise take action with respect to that interest, may be affected by the lack
of a physical certificate evidencing the interest.
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Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of The Depository Trust Company and, if the holder is not
a DTC Participant or an Indirect DTC Participant, on the procedures of the DTC
Participant through which the holder owns its interest, to exercise any rights
of a holder of new notes under the indenture or the global note. New Avis
understands that under existing industry practice, in the event New Avis
requests any action of holders of new notes or a holder that is an owner of a
beneficial interest in a global note desires to take any action that The
Depository Trust Company, as the holder of the global note, is entitled to take,
The Depository Trust Company would authorize the DTC Participants to take the
action and the DTC Participants would authorize holders owning through the DTC
Participants to take the action or would otherwise act upon the instruction of
such holders. Neither New Avis nor the trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of the new notes by The Depository Trust Company, or for maintaining,
supervising or reviewing any records of The Depository Trust Company relating to
the new notes.
Payments with respect to the principal of, premium on, if any, and interest
on, any new notes represented by a global note registered in the name of The
Depository Trust Company or its nominee on the applicable record date will be
payable by the trustee to or at the direction of The Depository Trust Company or
its nominee in its capacity as the registered holder of the global note
representing the new notes under the indenture. Under the terms of the
indenture, New Avis and the trustee may treat the persons in whose names the new
notes, including the global notes, are registered as the owners for the purpose
of receiving payment and for any and all other purposes whatsoever. As a result,
neither New Avis nor the trustee has or will have any responsibility or
liability for the payment of amounts due to beneficial owners of interest in the
global note, including principal, premium, if any, and interest, or to
immediately credit the accounts of the relevant DTC Participants with such
payment, in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the global note as shown on the records of The
Depository Trust Company. Payments by the DTC Participants and the Indirect DTC
Participants to the beneficial owners of interests in the global note will be
governed by standing instructions and customary practice and will be the
responsibility of the DTC Participants or the Indirect DTC Participants and The
Depository Trust Company.
CERTIFICATED SECURITIES
If (1) The Depository Trust Company notifies New Avis in writing that it is
no longer willing or able to act as a depository or The Depository Trust Company
ceases to be registered as a clearing agency under the Exchange Act and New Avis
is unable to locate a qualified successor within 90 days, (2) New Avis, at its
option, notifies the trustee in writing that it elects to cause the issuance of
new notes in definitive form under the indenture or (3) upon the occurrence of
other specified events, then, upon surrender by The Depository Trust Company of
its global notes, certificated securities will be issued to each person that The
Depository Trust Company identifies as the beneficial owner of the new notes
represented by the global notes. Upon any such issuance, the trustee is required
to register the certificated securities in the name of the persons identified as
beneficial owners--or the nominee of any thereof--and cause the same to be
delivered to these persons.
NO LIABILITY FOR DELAY IN IDENTIFYING BENEFICIAL OWNERS.
Neither New Avis nor the trustee will be liable for any delay by The
Depository Trust Company or any DTC Participant or Indirect DTC Participant in
identifying the beneficial owners of the related new notes and each beneficial
owner may conclusively rely on, and will be protected in relying on,
instructions from The Depository Trust Company for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the new notes to be issued.
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REGISTRATION RIGHTS
Holders of the new notes are not entitled to any registration rights with
respect to the new notes. On June 30, 1999, Avis Rent A Car, the subsidiary
guarantors, Chase Securities Inc. and Lehman Brothers Inc. entered into a
Registration Rights Agreement. The Registration Rights Agreement requires Avis
Rent A Car and the subsidiary guarantors to use their reasonable best efforts to
cause a registration statement relating to the exchange of old notes for
registered new notes to be declared effective under the Securities Act by
November 29, 1999. We have also agreed to bear the cost of preparing, filing and
having the registration statement declared effective. The registration statement
of which this prospectus forms a part is the registration statement required by
the Registration Rights Agreement. Upon the registration statement being
declared effective, Avis Rent A Car and the subsidiary guarantors will offer to
all holders of the old notes an opportunity to exchange their securities for a
like principal amount of the new notes and the related guarantees. Avis Rent A
Car and the subsidiary guarantors will keep the exchange offer open for
acceptance for not less than 20 business days--or longer if required by
applicable law--after the date notice of the exchange offer is mailed to the
holders of the old notes, subject to certain customary exceptions. For each old
note accepted for exchange in the exchange offer, the holder of the old note
will receive a new note having a principal amount at maturity equal to that of
the surrendered old note. Interest on the new note will accrue (1) from the
later of (a) the last date to which interest was paid on the old note
surrendered in exchange for the new note or (b) if the old note is surrendered
for exchange on a date in a period which includes the record date for an
interest payment date to occur on or after the date of such exchange and as to
which interest will be paid, the date to which interest will be paid on such
interest payment or (2) if no interest has been paid on such old note, from June
30, 1999.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, we believe that the new notes and the
related guarantees you receive in the exchange offer may be offered for resale,
resold or otherwise transferred without compliance with the registration and
prospectus delivery provisions of the Securities Act. By tendering your old
notes, you represent to us:
- that any new notes you receive in the exchange offer are being acquired by
you in the ordinary course of your business;
- that at the time of the commencement of the exchange offer, you do not
have any arrangement or understanding with any person to participate in
the distribution of the new notes in violation of the Securities Act, as
defined in the Securities Act;
- that you are not an "affiliate" of New Avis, as defined in Rule 405 under
the Securities Act;
- if you are not a broker-dealer, that you are not engaged in, and do not
intend to engage in, the distribution of the new notes; and
- if you are a participating broker-dealer, that you will receive the new
notes for your own account in exchange for old notes that were acquired by
you as a result of your market-making or other trading activities and that
you will deliver a prospectus in connection with any resale of the new
notes you receive.
The Commission has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements with respect to resales of the
new notes--other than a resale of an unsold allotment from the original sale of
the old notes--by delivering this prospectus to prospective purchasers. Avis
Rent A Car and the subsidiary guarantors have agreed that for a period of not
more than 180 days after the consummation of the exchange offer, they will make
this prospectus, as amended or supplemented, available to any participating
broker-dealer for use in connection with any resale of the new notes. For
further information regarding the obligations of
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participating broker-dealers, including the prospectus delivery requirement, see
"Plan of Distribution."
Under some circumstances, we may be required to file a shelf registration
statement covering resales of the old notes. This requirement will be triggered
if:
- because of any change in law or interpretations thereof by the staff of
the Commission, we are not permitted to effect the exchange offer;
- any old notes validly tendered pursuant to the exchange offer are not
exchanged for new notes by December 27, 1999;
- either Chase Securities Inc. or Lehman Brothers Inc. so requests with
respect to old notes that are not eligible to be exchanged in the exchange
offer;
- any applicable law or interpretations do not permit any holder of old
notes to participate in the exchange offer; or
- any holder of old notes that participates in the exchange offer does not
receive freely transferable new notes in exchange for its old notes.
We must file the shelf registration statement within 90 days of receiving
written notice that one of the foregoing has occurred. If we are required to
file the shelf registration statement, then we will:
- at our expense, file the shelf registration statement with the Commission;
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act; and
- subject to certain customary exceptions, use our reasonable best efforts
to keep the shelf registration statement effective until the earlier of:
- such time as all of the old notes have been exchanged for new notes
that are not subject to transfer restrictions;
- the date on which, in the written opinion of our counsel, all
outstanding old notes held by persons that are not affiliates of New
Avis may be resold without registration under the Securities Act
pursuant to Rule 144(k) under the Securities Act or any successor
provision; and
- such time as all of the old notes have been sold under the shelf
registration statement.
In the event that a shelf registration statement is filed, we will:
- provide a copy of the prospectus that forms a part of the shelf
registration statement to each holder of old notes;
- notify each holder of old notes when the shelf registration statement has
been declared effective; and
- and take other actions as are required to permit unrestricted resales of
the old notes.
If you sell old notes under the shelf registration statement:
- you must be named as a selling security holder in the prospectus that
forms a part of the shelf registration statement;
- you must deliver a prospectus to any purchasers of your old notes;
191
- you will be subject to the civil liability provisions of the Securities
Act in connection with such sales; and
- you will be bound by the provisions of the Registration Rights Agreement
that are applicable to holders who sell their old notes under the shelf
registration statement, including certain indemnification rights and
obligations.
If by December 27, 1999, the exchange offer has not been completed and a
shelf registration statement has not been declared effective, we will be
obligated to pay liquidated damages on all outstanding old notes that are
subject to transfer restrictions at a rate of $0.192 per week per $1,000
principal amount until the earlier of (1) the completion of the exchange offer
and (2) the effective date of the shelf registration statement.
This summary of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the full text of the Registration Rights Agreement, a copy of which is filed as
an exhibit to the registration statement of which this prospectus forms a part
and is incorporated by reference in this prospectus.
192
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired as a result of market-making activities or other trading
activities. New Avis has agreed that for a period of not more than 180 days
after the effectiveness of the registration statement of which this prospectus
forms a part, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with resales of the new
notes.
New Avis will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account in
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any resale of the new notes may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account in the
exchange offer and any broker or dealer that participates in a distribution of
the new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act. Any profit on any resale of new notes and any commissions or
concessions received by any persons deemed to be underwriters may be deemed to
be underwriting compensation under the Securities Act. The enclosed letter of
transmittal states that by acknowledging that it will deliver and be delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of not more than 180 days after the effectiveness of the
registration statement of which this prospectus forms a part, New Avis will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
from the Exchange Agent. New Avis has agreed to pay all expenses incident to the
exchange offer--other than commissions or concessions of any brokers or
dealers-- and will indemnify the holders of the new notes, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
Following completion of the exchange offer, New Avis may, in its sole
discretion, commence one or more additional exchange offers to holders of old
notes who did not exchange their old notes for new notes in the exchange offer
on terms which may differ from those contained in the prospectus and the
enclosed letter of transmittal, as provided in the Registration Rights
Agreement. This prospectus, as it may be amended or supplemented from time to
time, may be used by New Avis in connection with any additional exchange offers.
These additional exchange offers may take place from time to time until all
outstanding old notes have been exchanged for new notes, subject to the terms
and conditions contained in the prospectus and letter of transmittal distributed
by New Avis in connection with these additional exchange offers.
LEGAL MATTERS
Certain matters with respect to the notes will be passed upon for Avis Rent
A Car by White & Case LLP, New York, New York.
EXPERTS
The consolidated financial statements of Avis Rent A Car, Inc. and its
subsidiaries as of December 31, 1998 and 1997 and for the years ended December
31, 1998 and 1997 and the
193
period October 17, 1996 (Date of Acquisition) to December 31, 1996 and as to the
Predecessor Companies for the period January 1, 1996 to October 16, 1996
included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the Registration Statement, and are included in reliance upon the reports of
such firm given their authority as experts in accounting and auditing.
The combined financial statements of PHH Vehicle Management Services as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the Registration Statement and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
Avis Rent A Car and the subsidiary guarantors have filed with the Commission
a registration statement on Form S-4, of which this prospectus forms a part,
under the Securities Act, in connection with our offering of the new notes. As
permitted by the rules and regulations of the Commission, this prospectus does
not contain all of the information in the registration statement. You will find
additional information about Avis Rent A Car, the subsidiary guarantors and the
new notes in the registration statement. Any statements made in this prospectus
concerning the provisions of legal documents are not necessarily complete and
you should read the documents that are filed as exhibits to the registration
statement.
As a result of the exchange offer, Avis Rent A Car will become subject to
the informational requirements of the Exchange Act and will file periodic
reports, statements and other information with the Commission. We do not expect
that the subsidiary guarantors will be individually subject to the information
reporting requirements of the Exchange Act. Financial information with respect
to the subsidiary guarantors and non-guarantor subsidiaries will be included in
the footnotes to Avis Rent A Car's quarterly and annual financial statements.
You may inspect and copy the registration statement, including exhibits, and,
when filed, our periodic reports, statements and other information filed with
the Commission at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices located at 7 World Trade Center, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains a Web site at http://www.sec.gov
which will contain, when filed, our reports, statements and other information
filed with the Commission.
If we are not required to be subject to the reporting requirements of the
Exchange Act in the future, we will be required under the indenture for the new
notes and the old notes to continue to file with the Commission and to furnish
to holders of the new notes and the old notes the reports, statements and other
information specified in Sections 13 and 15(d) of the Exchange Act, including
annual reports containing audited consolidated financial statements of New Avis
and quarterly reports containing unaudited condensed consolidated financial data
for the first three quarters of each fiscal year.
194
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PAGE #
-----------
AVIS RENT A CAR, INC.
Audited Consolidated Financial Statements:
Independent Auditors' Report........................................................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 and the period
October 17, 1996 (Date of Acquisition) to December 31, 1996 and as to the Predecessor Companies for
the period January 1, 1996 to October 16, 1996....................................................... F-3
Consolidated Statements of Financial Position at December 31, 1998 and 1997............................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997 and the
period October 17, 1996 (Date of Acquisition) to December 31, 1996 and as to the Predecessor
Companies for the period January 1, 1996 to October 16, 1996......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 and the period
October 17, 1996 (Date of Acquisition) to December 31, 1996 and as to the Predecessor Companies for
the period January 1, 1996 to October 16, 1996....................................................... F-6
Notes to the Consolidated Financial Statements......................................................... F-7
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998........ F-42
Condensed Consolidated Statement of Financial Position as of June 30, 1999............................. F-43
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998........ F-44
Notes to the Condensed Consolidated Financial Statements............................................... F-45
PHH VEHICLE MANAGEMENT SERVICES
Audited Combined Financial Statements:
Independent Auditors' Report........................................................................... F-61
Combined Balance Sheets at December 31, 1998 and 1997.................................................. F-62
Combined Statements of Income for the years ended December 31, 1998, 1997 and 1996..................... F-63
Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-64
Combined Statements of Shareholders' Equity for the years ended December 31, 1998, 1997, and 1996...... F-65
Notes to the Combined Financial Statements............................................................. F-66
Unaudited Condensed Combined Financial Statements:
Condensed Combined Balance Sheet at March 31, 1999..................................................... F-94
Condensed Combined Statements of Income for the three months ended March 31, 1999 and 1998............. F-95
Condensed Combined Statements of Cash Flows for the three months ended March 31, 1999 and 1998......... F-96
Notes to the Condensed Combined Financial Statements................................................... F-97
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Avis Rent A Car, Inc.
Garden City, New York
We have audited the accompanying consolidated statements of financial
position of Avis Rent A Car, Inc. and subsidiaries (successor to Rental Car
System Holdings, Inc. and subsidiaries, Avis International, Ltd. and
subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder Insurance
Company and Global Excess & Reinsurance, Ltd., all previously wholly-owned by
Avis, Inc., collectively the "Predecessor Companies") (collectively referred to
as "Avis Rent A Car, Inc." or the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1998 and 1997 and for the period
October 17, 1996 (Date of Acquisition) to December 31, 1996 and as to the
Predecessor Companies the related consolidated statements of operations,
stockholders' equity and cash flows for the period January 1, 1996 to October
16, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997 and for the period October 17,
1996 to December 31, 1996 (period after the change in control referred to in
Note 1 to the consolidated financial statements), and with respect to the
Predecessor Companies for the period January 1, 1996 to October 16, 1996 (period
up to the change in control referred to in Note 1 to the consolidated financial
statements) in conformity with generally accepted accounting principles.
As more fully discussed in Note 1 to the consolidated financial statements,
the Predecessor Companies were acquired in a business combination accounted for
as a purchase. As a result of the acquisition, the consolidated financial
statements for the period subsequent to the acquisition are presented on a
different basis of accounting than those for the periods prior to the
acquisition and, therefore, are not directly comparable.
[LOGO]
New York, New York
January 25, 1999
(March 19, 1999 as to Note 21 and August 23, 1999 as to Note 22)
F-2
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR OCTOBER 17, 1996
COMPANIES (DATE OF
------------------- ACQUISITION) YEARS ENDED DECEMBER
JANUARY 1, 1996 TO 31,
TO DECEMBER 31, ----------------------
OCTOBER 16, 1996 1996 1997 1998
------------------- ---------------- ---------- ----------
Revenue.................... $ 1,504,673 $ 362,844 $2,046,154 $2,297,582
------------------- ---------------- ---------- ----------
Costs and expenses:
Direct operating, net.... 650,750 167,682 863,839 939,986
Vehicle depreciation and
lease charges, net..... 358,937 85,455 525,143 593,064
Selling, general and
administrative......... 283,180 68,215 415,728 438,724
Interest, net............ 138,225 38,205 184,261 201,726
Amortization of cost in
excess of net assets
acquired............... 3,782 1,026 6,860 11,854
------------------- ---------------- ---------- ----------
1,434,874 360,583 1,995,831 2,185,354
------------------- ---------------- ---------- ----------
Income before provision for
income taxes............. 69,799 2,261 50,323 112,228
Provision for income
taxes.................... 31,198 1,040 22,850 48,707
------------------- ---------------- ---------- ----------
Net income................. $ 38,601 $ 1,221 $ 27,473 $ 63,521
------------------- ---------------- ---------- ----------
------------------- ---------------- ---------- ----------
Earnings per share:
Basic...................... $ 1.25 $ .04 $ .89 $ 1.86
------------------- ---------------- ---------- ----------
Diluted.................... $ 1.25 $ .04 $ .88 $ 1.82
------------------- ---------------- ---------- ----------
------------------- ---------------- ---------- ----------
See accompanying notes to the consolidated financial statements.
F-3
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1997 1998
-------------- --------------
ASSETS
Cash and cash equivalents......................................................... $ 44,899 $ 29,751
Restricted cash................................................................... 106,984 133,284
Accounts receivable, net.......................................................... 359,463 360,574
Prepaid expenses.................................................................. 47,360 42,083
Vehicles, net..................................................................... 3,018,856 3,164,816
Property and equipment, net....................................................... 122,860 145,045
Other assets...................................................................... 40,469 40,590
Deferred income tax assets........................................................ 145,726 120,779
Cost in excess of net assets acquired, net........................................ 396,040 468,140
-------------- --------------
Total assets...................................................................... $ 4,282,657 $ 4,505,062
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................................................. $ 329,706 $ 198,481
Accrued liabilities............................................................... 315,287 326,204
Due to affiliates, net............................................................ 44,512 22,293
Current income tax liabilities.................................................... 22,873 23,045
Deferred income tax liabilities................................................... 34,106 28,504
Public liability, property damage and other insurance liabilities, net............ 256,029 269,209
Debt.............................................................................. 2,826,422 3,014,712
-------------- --------------
Total liabilities............................................................. 3,828,935 3,882,448
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value 20,000,000 shares authorized; none issued)........
Class A Common stock ($.01 par value, 100,000,000 shares authorized; 35,925,000
issued at December 31, 1998; 30,925,000 shares issued and outstanding at
December 31, 1997).............................................................. 309 359
Additional paid-in capital........................................................ 430,507 591,651
Retained earnings................................................................. 28,694 92,215
Accumulated other comprehensive loss.............................................. (5,788) (10,651)
Treasury stock 2,672,700 shares, at cost.......................................... (50,960)
-------------- --------------
Total stockholders' equity.................................................... 453,722 622,614
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 4,282,657 $ 4,505,062
-------------- --------------
-------------- --------------
See accompanying notes to the consolidated financial statements.
F-4
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME/(LOSS) STOCK TOTAL
--------------- ----------- ----------- ----------- --------------- ----------- ---------
Balance, January 1, 1996..... $ 2,977 $ 344,531 $ 340,596 $ 156 $ 688,260
Net income................... $ 38,601 38,601 38,601
Tax benefit of ESOP income
tax deduction.............. 12,939 12,939
Foreign currency translation
adjustment................. 1,711 1,711 1,711
Cash dividends............... (1,398) (1,398)
--------------- ----------- ----------- ----------- --------------- ---------
Comprehensive income......... $ 40,312
---------------
---------------
Balance, October 16, 1996.... $ 2,977 $ 357,470 $ 377,799 $ 1,867 $ 740,113
----------- ----------- ----------- --------------- ---------
----------- ----------- ----------- --------------- ---------
Avis Rent A Car, Inc. ($.01
par value 100,000,000
shares of Class A Common
Stock authorized; 8,500,000
shares of Common Stock
outstanding at October 17,
1996 (Date of Acquisition)
after restatement for a
85,000 to 1 stock split on
September 24,1997.......... $ 85 $ 74,915 $ 75,000
Net income................... $ 1,221 $ 1,221 1,221
Foreign currency translation
adjustment................. 217 $ 217 217
Additional minimum pension
charge..................... (23) (23) (23)
--------------- ----------- ----------- ----------- --------------- ---------
Comprehensive income......... $ 1,415
---------------
---------------
Balance, December 31, 1996... 85 74,915 1,221 194 76,415
Net income................... $ 27,473 27,473 27,473
Sale of Class A Common Stock
($.01 par value) through an
initial public offering of
22,425,000 shares of Common
Stock on September 24,
1997....................... 224 355,592 355,816
Foreign currency translation
adjustment................. (5,761) (5,761) (5,761)
Additional minimum pension
charge..................... (221) (221) (221)
--------------- ----------- ----------- ----------- --------------- ---------
Comprehensive income......... $ 21,491
---------------
---------------
Balance, December 31, 1997... 309 430,507 28,694 (5,788) 453,722
Net income................... $ 63,521 63,521 63,521
Sale of Class A Common Stock
($.01 par value) through a
public offering of
5,000,000 shares of Common
Stock on March 23, 1998.... 50 161,144 161,194
Purchases of Treasury stock,
2,672,700 shares, at
cost....................... $ (50,960) (50,960)
Foreign currency translation
adjustment................. (3,374) (3,374) (3,374)
Additional minimum pension
charge..................... (1,489) (1,489) (1,489)
--------------- ----------- ----------- ----------- --------------- ----------- ---------
Comprehensive income......... $ 58,658
---------------
---------------
Balance, December 31, 1998... $ 359 $ 591,651 $ 92,215 $ (10,651) $ (50,960) $ 622,614
----------- ----------- ----------- --------------- ----------- ---------
----------- ----------- ----------- --------------- ----------- ---------
See accompanying notes to the consolidated financial statements.
F-5
AVIS RENT A CAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR COMPANIES
--------------------------- OCTOBER 17, 1996 YEARS ENDED
JANUARY 1, 1996 (DATE OF ACQUISITION) DECEMBER 31,
TO TO ------------
OCTOBER 16, 1996 DECEMBER 31, 1996 1997
--------------------------- ----------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 38,601 $ 1,221 $ 27,473
Adjustments to reconcile net income to net cash
provided by operating activities:
Vehicle depreciation............................. 306,159 71,343 466,799
Depreciation and amortization of property and
equipment........................................ 12,333 2,212 11,791
Amortization of other non-revenue producing
assets........................................... 6,205 1,026 11,231
Deferred income tax provision.................... 22,342 33 9,161
Undistributed (earnings) losses of associated
companies........................................ (232) 146
Provision for doubtful accounts receivable....... 1,238 227 3,208
Provision for public liability, property damage
and other insurance liabilities, net............. 17,745 1,340 25,574
Changes in operating assets and liabilities:
Restricted cash.................................. (535) 724 (76,596)
Accounts receivable.............................. (204,137) 10,327 (15,201)
Prepaid expenses................................. (2,125) (2,664) 3,914
Other assets..................................... 2,391 (2,754) (8,915)
Accounts payable................................. 82,354 (18,712) 152,777
Accrued liabilities.............................. 101,069 (24,718) (84,150)
Due to (from) affiliates......................... (137,196) (3,796) 53,761
------------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 246,212 35,809 580,973
------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions................... (2,325,460) (561,117) (4,406,183)
Vehicle deletions................................ 1,795,562 565,896 3,382,177
Payments for additions to property and
equipment........................................ (25,953) (3,484) (24,733)
Retirements of property and equipment............ 1,849 361 3,971
Payments for purchase of licensees............... (3,134) (199,381)
------------- ----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES....................................... (557,136) 1,656 (1,244,149)
------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offerings, net................ 359,316
Purchases of treasury stock........................
Changes in debt:
Proceeds......................................... 519,167 63,903 3,381,173
Repayments....................................... (267,317) (133,457) (3,031,885)
------------- ----------- ------------
Net increase (decrease) in debt.................. 251,850 (69,554) 349,288
Intercompany debt.................................. 109,500 (2,865)
Payments for debt issuance costs................... (2,604) (29,302)
Cash dividends..................................... (1,398)
------------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 357,348 (72,419) 679,302
------------- ----------- ------------
Effect of exchange rate changes on cash............ 260 94 (945)
------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 46,684 (34,860) 15,181
Cash and cash equivalents at beginning of period... 17,894 64,578 29,718
------------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 64,578 $ 29,718 $ 44,899
------------- ----------- ------------
------------- ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................... $ 135,733 $ 28,170 $ 189,086
------------- ----------- ------------
------------- ----------- ------------
Income taxes..................................... $ 6,220 $ 827 $ 8,899
------------- ----------- ------------
------------- ----------- ------------
1998
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 63,521
Adjustments to reconcile net income to net cash
provided by operating activities:
Vehicle depreciation............................. 581,022
Depreciation and amortization of property and
equipment........................................ 13,191
Amortization of other non-revenue producing
assets........................................... 23,559
Deferred income tax provision.................... 38,457
Undistributed (earnings) losses of associated
companies........................................
Provision for doubtful accounts receivable....... 2,961
Provision for public liability, property damage
and other insurance liabilities, net............. 13,687
Changes in operating assets and liabilities:
Restricted cash.................................. (26,300)
Accounts receivable.............................. (14,045)
Prepaid expenses................................. 6,848
Other assets..................................... (6,069)
Accounts payable................................. (23,148)
Accrued liabilities.............................. (2,475)
Due to (from) affiliates......................... (18,320)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 652,889
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions................... (4,303,048)
Vehicle deletions................................ 3,610,721
Payments for additions to property and
equipment........................................ (42,933)
Retirements of property and equipment............ 5,302
Payments for purchase of licensees............... (237,182)
------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES....................................... (967,140)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offerings, net................ 161,194
Purchases of treasury stock........................ (50,960)
Changes in debt:
Proceeds......................................... 1,217,289
Repayments....................................... (1,023,432)
------------
Net increase (decrease) in debt.................. 193,857
Intercompany debt..................................
Payments for debt issuance costs................... (4,654)
Cash dividends.....................................
------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 299,437
------------
Effect of exchange rate changes on cash............ (334)
------------
Net increase (decrease) in cash and cash
equivalents...................................... (15,148)
Cash and cash equivalents at beginning of period... 44,899
------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 29,751
------------
------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................... $ 209,977
------------
------------
Income taxes..................................... $ 13,338
------------
------------
See accompanying notes to the consolidated financial statements.
F-6
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include Avis Rent A Car,
Inc. (name changed from and formerly known as Rental Car System Holdings, Inc.
which was incorporated on October 17, 1996) and subsidiaries (including the
carved out corporate operations of HFS Car Rental, Inc. (name changed from and
formerly known as, and hereinafter referred to as, Avis, Inc.), which is the
holding company of Rental Car System Holdings, Inc., and Prime Vehicles Trust
(the "Vehicle Trust")), Avis International, Ltd. and subsidiaries, Avis
Enterprises, Inc. and subsidiaries, Pathfinder Insurance Company and Global
Excess & Reinsurance, Ltd. (collectively referred to as "Avis Rent A Car,
Inc."). All of the foregoing companies were ultimately wholly-owned subsidiaries
of Avis, Inc., which was acquired by Cendant Corporation (formerly HFS
Incorporated ("Cendant")) on October 17, 1996 (the "Date of Acquisition") for
approximately $806.5 million (the "Acquisition"). The purchase price was
comprised of approximately $367.2 million in cash, $100.9 million of
indebtedness and $338.4 million of common stock. Prior to October 17, 1996, the
above-named entities were wholly-owned by Avis, Inc. and are referred to
collectively as the "Predecessor Companies". Avis Rent A Car, Inc. and the
Predecessor Companies are referred to throughout the notes to the consolidated
financial statements as the "Company". Prior to the Acquisition, the major
shareholder of Avis, Inc. was an Employee Stock Ownership Plan ("ESOP") and the
minority shareholder was General Motors Corporation ("General Motors"). The
Company purchases a significant portion of its vehicles, and receives certain
financial incentives and allowances from General Motors (see Notes 4, 6, and
19). As a result of the Acquisition, the consolidated financial statements for
the period subsequent to the Acquisition are presented on a different basis of
accounting than those for the periods prior to the Acquisition and, therefore,
are not directly comparable. On January 1, 1997, Avis, Inc. contributed the net
assets of its corporate operations and all of its common stock ownership in Avis
International, Ltd. and subsidiaries, Avis Enterprises, Inc. and subsidiaries,
Pathfinder Insurance Company and Global Excess & Reinsurance, Ltd. to the
Company. After the transfer, the remaining operations of Avis, Inc. consist of
an investment in a wholly-owned subsidiary which owns the Avis trade names and
trademarks. Pursuant to a plan developed by Cendant prior to the Date of
Acquisition, Cendant caused the Company to undertake an initial public offering
("IPO"). On September 24, 1997, the Company issued and sold 22,425,000 shares of
its common stock through such IPO and received net proceeds of $359.3 million.
On March 23, 1998, the Company sold 5,000,000 shares of its common stock through
a public offering (the "Offering") and received net proceeds of approximately
$161 million. In addition, in the Offering on March 23, 1998, Cendant reduced
its ownership of the Company by selling 1,000,000 shares of the Company's common
stock and retained the net proceeds. As a result of the IPO, the Offering on
March 23, 1998 and the repurchase of 2,672,700 shares of treasury stock by the
Company during 1998, Cendant's equity interest in the Company at January 23,
1999 is approximately 20% (see Notes 12 and 21). The Company has used the net
proceeds from these offerings to (i) acquire certain Avis System franchises (see
Note 2) and (ii) for working capital and general corporate purposes, including
the repayment of certain indebtedness. A Cendant subsidiary owns and operates
the reservation system as well as the telecommunications and computer processing
systems which service the rental car operations for reservations, rental
agreement processing, accounting and vehicle control. Cendant is reimbursed for
such services at cost (see Note 5). In addition, a Cendant subsidiary charges
the Company a royalty fee for the use of the Avis trade name (see Note 5).
F-7
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The acquisition of the Company by Cendant was accounted for under the
purchase method and includes the operations of the Company subsequent to the
Date of Acquisition. A portion of the purchase price has been allocated to the
fair value of the Company. This fair value was calculated on the basis that the
Company is an independent franchisee of Avis, Inc. and is required to pay
certain fees for use of the Avis trade name, reservation services and other
franchise related services. The fair value of the Company has been allocated to
individual assets and liabilities based on their fair value at the Date of
Acquisition.
The purchase cost allocation at the Date of Acquisition has been allocated
to the Company as follows (in thousands):
Allocated purchase cost........................................ $ 75,000
----------
Fair value of:
Liabilities assumed.......................................... 3,215,677
Assets acquired.............................................. 3,059,186
----------
Net liabilities................................................ 156,491
----------
Cost in excess of net assets acquired.......................... $ 231,491
----------
----------
Certain prior year amounts have been reclassified so that the consolidated
financial statements are comparable with the current year.
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
Generally accepted accounting principles require the use of estimates, which
are subject to change, in the preparation of financial statements. Significant
accounting estimates used include estimates for determining public liability,
property damage and other insurance liabilities, and the realization of deferred
income tax assets. However, actual results may differ.
REVENUE RECOGNITION
Revenue is recognized over the period the vehicle is rented.
CASH AND CASH EQUIVALENTS
The Company considers unrestricted deposits and short-term investments with
an original maturity date of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash includes cash and short-term investments that are not
readily available for normal company disbursements. Certain amounts have been
set aside as required under the Company's debt covenants and to satisfy
insurance related and other commitments of the Company.
F-8
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VEHICLES, NET
Vehicles are stated at cost, net of accumulated depreciation, incentives and
allowances. In accordance with industry practice, when vehicles are sold, gains
or losses are reflected as an adjustment to depreciation. Vehicles are generally
depreciated at rates ranging from 10% to 25% per annum. Manufacturers provide
the Company with incentives and allowances (such as rebates and volume
discounts) which are amortized to income over the holding periods of the
vehicles.
PROPERTY AND EQUIPMENT, NET
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful life of the assets. Estimated useful lives range from five
to ten years for furniture, fixtures and equipment, to thirty years for
buildings. Leasehold improvements are amortized over the shorter of twenty years
or the remaining life of the lease. Maintenance and repairs are expensed;
renewals and improvements are capitalized. When depreciable assets are retired
or sold, the cost and related accumulated depreciation are removed from the
accounts with any resulting gain or loss reflected in the consolidated statement
of operations.
COST IN EXCESS OF NET ASSETS ACQUIRED, NET
Cost in excess of net assets acquired is amortized over a 40 year period and
is shown net of accumulated amortization of $7.9 million and $19.7 million at
December 31, 1997 and 1998, respectively.
IMPAIRMENT ACCOUNTING
The Company reviews the recoverability of its long-lived assets, including
cost in excess of net assets acquired, when events or changes in circumstances
occur that indicate that the carrying value of the assets may not be
recoverable. The measurement of possible impairment is based on the Company's
ability to recover the carrying value of the asset from the expected future
pre-tax undiscounted cash flows generated. The measurement of impairment
requires management to use estimates of expected future cash flows. If an
impairment loss existed, the amount of the loss would be recorded under the
caption costs and expenses in the consolidated statements of operations. It is
at least reasonably possible that future events or circumstances could cause
these estimates to change.
PUBLIC LIABILITY, PROPERTY DAMAGE AND OTHER INSURANCE LIABILITIES, NET
Insurance liabilities on the accompanying consolidated statements of
financial position include additional liability insurance, personal effects
protection insurance, public liability and property damage ("PLPD") and personal
accident insurance claims for which the Company is self-insured. The Company is
self-insured up to $1 million per claim under its automobile liability insurance
program for PLPD and additional liability insurance. Costs in excess of $1
million per claim are insured under various contracts with commercial insurance
carriers. The liability for claims up to $1 million is estimated based on the
Company's historical loss and loss adjustment expense experience, which is
adjusted for current trends.
F-9
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The insurance liabilities include a provision for both claims reported to
the Company as well as claims incurred but not yet reported to the Company. This
method is an actuarially accepted loss reserve method. Adjustments to this
estimate and differences between estimates and the amounts subsequently paid are
reflected in the Consolidated Statements of Operations as they occur.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign companies are translated at year-end
exchange rates. Results of operations are translated at the average rates of
exchange in effect during the year. The resultant translation adjustment is
included as a component of comprehensive income within consolidated
stockholders' equity.
INCOME TAXES
Effective September 30, 1997, the Company files a U.S. consolidated federal
income tax return. The Company has adopted the calendar year as its fiscal year.
The Company files separate income tax returns in states where a consolidated
return is not permitted. The Company was included in the consolidated federal
income tax return of Cendant through September 29, 1997. Pursuant to the
regulations under the Internal Revenue Code, the Company's pro rata share of the
consolidated federal income tax liability of Cendant was allocated to the
Company on a separate return basis. The Predecessor Companies were included in
the consolidated federal income tax return of Avis, Inc. In accordance with
Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME
TAXES" ("SFAS 109"), deferred income tax assets and liabilities are measured
based upon the difference between the financial accounting and tax basis of
assets and liabilities.
PENSIONS
Costs of the defined benefit plans are actuarially determined under the
projected unit credit cost method and include amounts for current service and
interest on projected benefit obligations and plan assets. The Company's policy
is to fund at least the minimum contribution amount required by the Employee
Retirement Income Security Act of 1974.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were $66.1
million, $10.3 million, $65.6 million and $77.7 million for the periods ended
October 16, 1996, December 31, 1996, 1997, and 1998, respectively.
ENVIRONMENTAL COSTS
The Company's operations include the storage and dispensing of gasoline. The
Company accrues losses associated with the remediation of accidental fuel
discharges when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries from insurance companies and other
reimbursements are generally not significant.
F-10
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
were adopted for the year ended December 31, 1998 are Financial Accounting
Standards No. 130, "REPORTING COMPREHENSIVE INCOME" (see Note 11), and No. 132
"EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" (see
Note 13). The adoption of these accounting standards has not had a material
effect on the results of operations or the financial position of the Company.
A recent pronouncement of the Financial Accounting Standards Board which is
not required to be adopted at this date, is Statement of Financial Accounting
Standards 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 any entity recognize all derivatives as either assets or
liabilities in the statement of financial position at fair value.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position No. 98-5, "ACCOUNTING
FOR START-UP COSTS" ("SOP 98-5"). SOP 98-5 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 133 and SOP 98-5 is not expected to have a material
effect on the results of the Company's consolidated financial statements.
NOTE 2--ACQUISITIONS
On May 1, 1998, the Company acquired the assets of the car rental business
of Hayes Leasing Company, Inc., 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 $86 million in cash plus the refinancing of
fleet-related indebtedness, which totaled approximately $136 million for a total
purchase price of approximately $222 million. In addition, during the year ended
December 31, 1998, the Company purchased the assets of several other Avis System
franchises for approximately $15 million in cash. If these Acquisitions had
occurred on January 1, 1998 or 1997, they would not have had a material impact
on the Company's results of operations. The excess purchase price over the net
assets acquired for these acquisitions was approximately $90 million.
F-11
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
The following is the preliminary purchase cost allocation for the
acquisition of the assets of Hayes Leasing Company, Inc. and other Avis System
franchises during the year ended December 31, 1998 mentioned above (in
thousands):
Purchase cost.................................................... $ 237,182
---------
Fair value of:
Assets acquired................................................ 153,828
Liabilities assumed............................................ (6,967)
---------
Net assets....................................................... 146,861
---------
Cost in excess of net assets acquired............................ $ 90,321
---------
---------
On August 20, 1997, the Company purchased The First Gray Line Corporation.
On September 18, 1997, the Company purchased certain assets and repurchased the
franchise rights of another Avis System franchisee. These acquisitions had an
aggregate purchase cost of approximately $199 million. The excess purchase cost
over net assets acquired was approximately $173 million.
The following is the purchase cost allocation for these 1997 acquisitions
mentioned above (in thousands):
Purchase cost.................................................... $ 199,381
---------
Fair value of:
Assets acquired................................................ 354,637
Liabilities assumed............................................ 328,269
---------
Net assets....................................................... 26,368
---------
Cost in excess of net assets acquired............................ $ 173,013
---------
---------
The preliminary purchase cost allocations for certain acquisitions are
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
December 31, 1998. However, the changes are not expected to have a material
effect on the financial position of the Company. These acquisitions have been
accounted for by the purchase method. The financial statements include the
operating results of these acquisitions subsequent to their respective dates of
acquisition.
The acquisition of the franchise rights of the additional Avis System
franchisee, if it had occurred on January 1, 1997, would not have had a material
impact on the results of operations of the Company.
The following unaudited pro forma information presents the results of
operations of the Company, which assumes that the following transactions had
occurred on January 1 of each period presented: (i) the acquisition of the
Company by Cendant and the establishment of a franchisor/ franchisee
relationship, (ii) the acquisition of First Gray Line and (iii) the repayment of
debt with the
F-12
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
net proceeds (after the purchase of First Gray Line) from the IPO (in thousands,
except earnings per share amounts):
1996 1997
------------- -------------
Revenue......................................................... $ 2,055,519 $ 2,175,897
------------- -------------
------------- -------------
Net income...................................................... $ 8,567 $ 39,432
------------- -------------
------------- -------------
Basic earnings per share........................................ $ .28 $ 1.28
------------- -------------
------------- -------------
Diluted earnings per share...................................... $ .28 $ 1.26
------------- -------------
------------- -------------
NOTE 3--RESTRICTED CASH
At December 31, 1997 and 1998, restricted cash includes an escrow amount of
$66,000,000 and $90,000,000, respectively, as required under the Company's debt
agreements, to provide additional credit enhancement on the Company's Medium
Term Notes (the "Medium Term Notes") (see Note 9). In addition, restricted cash
includes amounts relating to lease obligations of the Company's Canadian vehicle
financing arrangements, amounts set aside to satisfy certain claims under the
Company's self-insurance programs and other obligations of the Company.
NOTE 4--ACCOUNTS RECEIVABLE, NET
Accounts receivable, net at December 31, 1997 and 1998 consist of the
following (in thousands):
1997 1998
----------- -----------
Vehicle rentals..................................................... $ 102,697 $ 104,032
Due from General Motors............................................. 166,941 161,377
Vehicle related..................................................... 52,450 65,586
Damage claims....................................................... 11,938 14,710
Due from licensees.................................................. 4,361 1,571
Other............................................................... 23,362 16,648
----------- -----------
361,749 363,924
Less allowance for doubtful accounts................................ (2,286) (3,350)
----------- -----------
$ 359,463 $ 360,574
----------- -----------
----------- -----------
Vehicle related amounts include receivables for vehicles sold under
guaranteed repurchase contracts ("Repurchase Programs") and amounts due for
incentives and allowances. Incentives and allowances are based on all of the
following: the volume of vehicles to be purchased for a model year, the
manufacturers' willingness to encourage the Company to retain vehicles rather
than return the vehicles back to the manufacturer and the purchase of particular
models not subject to repurchase under "buyback" arrangements. Incentives and
allowances are amortized to income over the average holding period of the
vehicles (see Notes 6 and 19).
F-13
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DUE TO AFFILIATES, NET
Due to affiliates, net at December 31, 1997 and 1998 consist of non-interest
bearing advances due Cendant or its consolidated subsidiaries of $44.5 million
and $22.3 million, respectively. Non-interest bearing advances represents
intercompany transactions relating primarily to royalty fees, reservation
processing, data processing and management, service and administrative fees.
Expense and (income) items of the Company include the following charges from
(to) Avis, Inc. and subsidiaries prior to the Date of Acquisition for the period
ended October 16, 1996 (in thousands):
JANUARY 1, 1996
TO
OCTOBER 16, 1996
-----------------
Vehicle related costs.......................................................................... $ (25,134)
Data processing................................................................................ 30,209
Employee benefits allocation................................................................... (2,776)
Rent........................................................................................... (2,459)
--------
$ (160)
--------
--------
Expense items of the Company include the following charges from Cendant and
affiliates of Cendant for the period October 17, 1996 (Date of Acquisition) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 (in
thousands):
OCTOBER 17, 1996
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
----------------- -------------- --------------
Royalty fee................................ $ -- $ 81,846 $ 91,904
Reservations............................... 10,900 43,240 49,872
Data processing............................ 8,772 41,896 35,844
Management, service and administrative fees
and other................................ 12,079 4,927 4,648
-------- -------------- --------------
$ 31,751 $ 171,909 $ 182,268
-------- -------------- --------------
-------- -------------- --------------
These charges seek to reimburse the affiliated company for the actual costs
incurred. They are determined in accordance with various intercompany agreements
and include certain allocations which are based upon such factors as square
footage, employee salaries, computer usage time, etc. Effective January 1, 1997,
Cendant charged the Company a royalty fee of 4.0% of revenue for the use of the
Avis trade name. The royalty fee of 4.0% consists of a base royalty of 3.0% of
the Company's gross revenue and a supplemental royalty of 1.0% of gross revenue
payable quarterly in arrears (which will increase 0.1% per year commencing July
30, 1999 and each of the following four years thereafter to a maximum of 1.5%
until July 30, 2003). The supplemental royalty or a portion thereof may be
deferred if the Company does not meet certain financial targets.
In addition, for the year ended December 31, 1998, the Company was charged
by Cendant approximately $3.8 million for certain software developed for
internal use, which have been capitalized on the accompanying Consolidated
Statements of Financial Position. Under the
F-14
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DUE TO AFFILIATES, NET (CONTINUED)
Computer Services Agreement with Cendant dated July 30, 1997, software developed
for the Company's internal use is charged to the Company at Cendant's cost.
NOTE 6--VEHICLES, NET
Vehicles at December 31, 1997 and 1998 consist of the following (in
thousands):
1997 1998
------------- -------------
Rental vehicles..................................................................... $ 3,173,526 $ 3,443,385
Buses and support vehicles.......................................................... 55,761 67,786
Vehicles held for sale.............................................................. 51,645 21,871
------------- -------------
3,280,932 3,533,042
Less accumulated depreciation....................................................... (262,076) (368,226)
------------- -------------
$ 3,018,856 $ 3,164,816
------------- -------------
------------- -------------
Depreciation expense recorded for vehicles was $275.9 million, $66.8
million, $460.6 million and $576.2 million for the periods ended October 16,
1996, December 31, 1996, 1997, and 1998, respectively. Depreciation expense is
stated net of amortization of certain incentives and allowances from various
vehicle manufacturers of approximately $67.6 million, $15.6 million, $121
million and $119 million for the periods ended October 16, 1996, December 31,
1996, 1997 and 1998, respectively. Depreciation expense also reflects a net gain
(loss) on the disposal of vehicles of $23.7 million, $2.9 million, $7.0 million
and $(6.8) million for the periods ended October 16, 1996, December 31, 1996,
1997, and 1998, respectively.
In April 1990 and December 1994, the Company entered into seven year
operating leases. Rental expense for those vehicles under the Company's
operating lease agreements was $93.0 million, $16.1 million, and $58.4 million
for the periods ended October 16, 1996, December 31, 1996 and 1997,
respectively. These leases were terminated on July 31, 1997 and refinanced under
a domestic integrated fleet financing program (see Note 9).
NOTE 7--PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1997 and 1998 consist of the
following (in thousands):
1997 1998
----------- -----------
Land................................................................ $ 25,269 $ 23,726
Buildings........................................................... 12,775 8,655
Leasehold improvements.............................................. 64,779 87,830
Furniture, fixtures and equipment................................... 13,456 16,869
Construction-in-progress............................................ 18,714 32,236
----------- -----------
134,993 169,316
Less accumulated depreciation and amortization...................... (12,133) (24,271)
----------- -----------
$ 122,860 $ 145,045
----------- -----------
----------- -----------
F-15
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1998 consist of the following
(in thousands):
1997 1998
----------- -----------
Payroll and related costs........................................... $ 101,962 $ 103,043
Taxes, other than income taxes...................................... 9,229 9,349
Rents and property related.......................................... 35,644 22,241
Interest............................................................ 7,294 6,140
Sales and marketing................................................. 24,672 43,704
Vehicle related..................................................... 25,475 27,102
Other............................................................... 111,011 114,625
----------- -----------
$ 315,287 $ 326,204
----------- -----------
----------- -----------
NOTE 9--FINANCING AND DEBT
Debt outstanding at December 31, 1997 and 1998 consist of the following (in
thousands):
1997 1998
------------- -------------
Commercial Paper Notes (at an average rate of 5.9% in 1997 and
5.6% in 1998)................................................. $ 1,091,800 $ 678,377
Short-term notes-foreign at 5.77% to 13.5% in 1997 and 5.0% to
12.0% in 1998................................................. 17,996 17,904
Floating rate notes at rates from 5.42% to 5.63%................ 56,977
Current portion of long-term debt............................... 49,644 1,085
------------- -------------
Total current debt............................................ 1,159,440 754,343
Medium Term Notes due July 2000 at 6.22%........................ 800,000 800,000
Medium Term Notes due July 2002 at 6.40%........................ 850,000 850,000
Medium Term Notes due February 2005 at 6.14%.................... 600,000
Foreign floating rate notes due July 2000 at rates from 5.81% to
7.02% in 1997 and 5.69% to 6.21% in 1998...................... 15,205 9,677
Other debt...................................................... 1,777 692
------------- -------------
$ 2,826,422 $ 3,014,712
------------- -------------
------------- -------------
On July 31, 1997, the Company through Avis Rent A Car System, Inc. ("ARACS")
entered into a domestic integrated fleet financing program that provided for up
to $3.65 billion in financing for vehicles covered by Repurchase Programs, with
up to 25% of the facility available for vehicles not covered by Repurchase
Programs. As of December 31, 1998, the availability of the domestic integrated
fleet financing program is $3.75 billion. The domestic integrated fleet
financing program provides for the issuance of up to $1.5 billion of
asset-backed variable funding notes (the "Commercial Paper Notes") and $2.25
billion of asset backed medium term notes (The "Medium Term Notes"). The
Commercial Paper Notes and the Medium Term Notes are backed by a first priority
security interest in the Company's fleet. Additional credit enhancement was
provided for the Medium Term Notes by establishing an escrow account in the
amounts of $66 million and $90 million, which is included in "Restricted Cash"
(see Note 3) on the accompanying Consolidated
F-16
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--FINANCING AND DEBT (CONTINUED)
Statements of Financial Position at December 31, 1997 and 1998, respectively.
The weighted average interest rate on commercial paper was 5.5% for the year
ended December 31, 1998. Average commercial paper borrowings during 1998
amounted to $809.7 million.
As part of the acquisition of The First Gray Line Corporation (see Notes 1
and 2), the Company assumed a $200 million vehicle financing facility between
Grand Rent A Car, Inc. (a subsidiary of The First Gray Line Corporation) and
Atlantic Asset Securitization Corporation, under a credit agreement originally
dated as of September 15, 1995. This agreement provided for the financing of
vehicles used in The First Gray Line Corporation's rental business, and expired
on August 15, 1998. At December 31, 1997 under this credit agreement, there was
$115 million outstanding and included in Commercial Paper Notes. The weighted
average interest rate and average borrowing under this credit agreement was 5.7%
and $171.1 million respectively for the period August 20, 1997 to December 31,
1997. The credit facility was maintained until July 31, 1998, when it was
terminated. For the period January 1, 1998, to July 31, 1998, the weighted
average interest rate and average borrowing under this credit facility was 5.6%
and $58.1 million, respectively.
On July 31, 1997, ARACS entered into a $470 million secured credit facility
(the "Credit Facility") which is guaranteed by the Company and certain of ARACS'
subsidiaries. The Credit Facility was reduced to $350 million with the repayment
of a $120 million term loan on December 1, 1997. The following is a summary of
the material terms and conditions of the Credit Facility:
The Credit Facility consists of (i) a revolving credit facility in the
amount of up to $125 million and is available on a revolving basis until
December 31, 2001 in order to finance the working capital 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 worker's
compensation and other insurance and bonding requirements of ARACS, the
Company and its subsidiaries in the ordinary course of business), (ii) a 364
day standby letter of credit facility of $225 million available on a
revolving basis until April 29, 1999 to fund (a) any shortfall in certain
payments owing to 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. In addition, up to $75 million of the $225 million is available on a
revolving basis to finance the working capital needs of ARACS in the
ordinary course of business. For the period July 31, 1997 through December
1, 1997, the average outstanding borrowings on this facility were $74.6
million with a weighted average interest rate of 8%. At December 31, 1998,
the Company had issued letters of credit of $31.9 million under the $125
million revolving credit facility and $150 million under the $225 million
standby letter of credit facility. At December 31, 1998 there were no loans
outstanding under either facility.
Interest accrues on borrowings outstanding under the Credit Facility at a
rate equal to at the option of ARACS, (A) the sum of (i) the highest of (a)
the rate of interest publicly announced by Chase Securities Inc. as its
prime rate in effect at its principal office in New York City, or (b) the
secondary market rate for three-month certificates of deposit (adjusted for
statutory reserve requirements) plus 1% or (c) the federal funds effective
rate from time to time plus 0.5% and (ii) an applicable margin; or (B) the
sum of (i) the rate (adjusted for statutory reserve requirements) at which
eurodollar deposits for one, two, three or six months (as selected by ARACS)
are offered in the interbank eurodollar market and (ii) an applicable
margin.
F-17
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--FINANCING AND DEBT (CONTINUED)
The Credit Facility is secured by the tangible and intangible assets of
ARACS and the Company (including, without limitation, its intellectual
property, its rights under the Master License Agreement and related
agreements, real property and all of the capital stock or equivalent equity
ownership interests of ARACS and each of its direct and indirect domestic
subsidiaries and 65% of ARACS first-tier foreign subsidiaries), except for
those assets which are subject to a negative pledge or as to which the
agents for the Credit Facility shall determine in their sole discretion that
the costs of obtaining such a security interest are excessive in relation to
the value of the security to be afforded thereby.
The weighted-average interest rates of the short-term notes-foreign as of
December 31, 1997 and 1998 were 8.7% and 6.0%, respectively.
Prior to July 31, 1997, the primary source of funding the Company's domestic
vehicles was provided by a Vehicle Trust. The annualized weighted average
interest rates for Vehicle Trust financing for the periods ended October 16,
1996, December 31, 1996 and 1997 were 6.6%, 6.5% and 6.6%, respectively.
The agreements with the Company's lenders include a number of significant
covenants that, among other things, restrict its ability to dispose of non-fleet
assets, incur additional indebtedness, create liens, prohibit the payment of
dividends, enter into certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations or engage in certain
transactions with affiliates and otherwise restrict corporate activities.
Certain of these agreements also require the Company to maintain specified
financial ratios. As of December 31, 1998, the Company was in compliance with
all such covenants related to these agreements.
Mandatory maturities of long-term obligations, including current maturities,
for each of the next five years ending December 31, and thereafter, are as
follows (in thousands):
1999............................................. $ 1,085
2000............................................. 809,886
2001............................................. 227
2002............................................. 850,220
2003............................................. 36
Thereafter....................................... 600,000
OTHER CREDIT FACILITIES
At December 31, 1998, in addition to the Credit Facility previously
described, the Company has available letters of credit/overdraft agreements for
its international operations totaling $29.8 million, which may be renewed
annually at the Company's option and the banks' discretion. The collateral for
certain of these agreements consists of a pledge of certain cash balances in the
amount of $25 million, which are included in "Restricted Cash" on the
accompanying Consolidated Statements of Financial Position at December 31, 1998.
At December 31, 1998, the Company has outstanding letters of credit under these
facilities totaling $26.7 million.
In addition, for certain of its international operations, the Company has
available unused lines of credit totaling $227.1 million. At December 31, 1998,
the unused lines of credit agreements require an annual fee of 0.2% to 0.5% of
the unused line.
F-18
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--FINANCING AND DEBT (CONTINUED)
INTEREST RATE SWAP AGREEMENTS
The Company has entered into four interest rate swap agreements to reduce
the impact of changes in interest rates on certain outstanding current debt
obligations. These agreements effectively change the Company's interest rate
exposure on $24.6 million and $288.6 million of its outstanding debt from a
weighted average variable interest rate to a fixed rate of 6.3% and 4.8% at
December 31, 1997 and 1998, respectively. The variable interest rates for
certain of these interest rate swap agreements are either reset quarterly or
daily based upon the average 30-day commercial paper rate for the quarter.
Interest is cash settled on a net basis for each agreement quarterly. The
interest rate swap agreements will terminate in October 2001 and August 2003.
Under certain of the swap agreements terminating in August 2003, the
counter-party has the right to terminate one of the agreements in August 2000
and one agreement in August 2001. The differential to be paid or received is
recognized ratably as interest rates change over the life of the agreements as
an adjustment to interest expense.
The net interest differential charged to interest expense for the periods
ended October 16, 1996, December 31, 1996, 1997 and 1998 was $582,000, $285,000,
$909,000 and $53,000, respectively. The Company is exposed to credit risk in the
event of nonperformance by counterparties to its interest rate swap agreements.
Credit risk is limited by entering into such agreements with primary dealers
only. Therefore, the Company does not anticipate that non-performance by
counterparties will occur. Notwithstanding this, the Company monitors
counterparty credit ratings at least quarterly through reviewing independent
credit agency reports.
Both current and potential exposure are evaluated, as necessary, by
obtaining replacement cost information from alternative dealers. Potential loss
to the Company from credit risk on these agreements is limited to amounts
receivable, if any.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
The net interest payable and the estimated fair value of the Company's
interest rate swap agreements represent liabilities of approximately $193,000
and $366,000, respectively, at December 1997. At December 31, 1998, the net
interest receivable and estimated fair value of the Company's interest rate swap
agreements represent assets of approximately $268,000 and $885,000,
respectively.
For instruments including cash and cash equivalents, restricted cash,
accounts receivable, and accounts payable, the carrying amount approximates fair
value because of the short maturity of these instruments. The fair value of
floating-rate debt approximates carrying value because these instruments
re-price frequently at current market prices. At December 31, 1998, the fair
value of the Medium Term Notes exceeds the carrying value by approximately $44.5
million.
The Company believes that it is not practicable to estimate the current fair
value of the amounts due from (to) affiliates because of the related party
nature of the instruments.
F-19
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES
The provision for income taxes consists of the following (in thousands):
OCTOBER 17, 1996
JANUARY 1, 1996 (DATE OF ACQUISITION)
TO TO YEAR ENDED YEAR ENDED
OCTOBER 16, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- --------------------- ------------------- -------------------
Current:
Federal.................... $ 800
State...................... $ 2,176 $ 719 $ 1,013 980
Foreign.................... 6,680 288 12,676 8,470
-------- ------- -------- --------
8,856 1,007 13,689 10,250
-------- ------- -------- --------
Deferred:
Federal.................... 19,614 (85) 12,463 33,200
State...................... 410 3,520
Foreign.................... 2,728 118 (3,712) 1,737
-------- ------- -------- --------
22,342 33 9,161 38,457
-------- ------- -------- --------
Provision for income taxes... $ 31,198 $ 1,040 $ 22,850 $ 48,707
-------- ------- -------- --------
-------- ------- -------- --------
F-20
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
The effective income tax rates for the periods ended October 16, 1996,
December 31, 1996, 1997 and 1998 vary from the statutory U.S. federal income tax
rate due to the following (dollar amounts in thousands):
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996
-------------------- --------------------
Statutory U.S. federal income tax provision/tax rate................ $ 24,429 35.0% $ 791 35.0%
Tax effect of foreign operations and dividends...................... 5,134 7.4 (1,073) (47.5)
Amortization of cost in excess of net assets acquired and other
intangibles....................................................... 1,045 1.5 359 15.9
State income taxes, net of federal tax benefit...................... 1,413 2.0 469 20.8
Other non-deductible business expenses.............................. 462 .6 494 21.8
Other............................................................... (1,285) (1.8)
--------- --- --------- ---------
Effective income tax provision/tax rate............................. $ 31,198 44.7% $ 1,040 46.0%
--------- --- --------- ---------
--------- --- --------- ---------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
Statutory U.S. federal income tax provision/tax rate................ $ 17,613 35.0% $ 39,280 35.0%
Tax effect of foreign operations and dividends...................... 1,436 2.9 2,677 2.4
Amortization of cost in excess of net assets acquired and other
intangibles....................................................... 2,369 4.7 3,351 3.0
State income taxes, net of federal tax benefit...................... 924 1.8 2,925 2.6
Other non-deductible business expenses.............................. 508 1.0 474 0.4
--------- --- --------- ---
Effective income tax provision/tax rate............................. $ 22,850 45.4% $ 48,707 43.4%
--------- --- --------- ---
--------- --- --------- ---
In accordance with SFAS 109, the net deferred income tax assets at December
31, 1997 and 1998, include the following (in thousands):
1997 1998
----------- -----------
GROSS DEFERRED INCOME TAX ASSETS:
Accrued liabilities..................................................................... $ 223,881 $ 233,695
Net operating loss carryforwards........................................................ 96,253 118,437
Alternative minimum income tax credit carryforwards..................................... 3,025 3,825
----------- -----------
323,159 355,957
----------- -----------
GROSS DEFERRED INCOME TAX LIABILITIES:
Tax depreciation in excess of book depreciation......................................... (197,082) (247,090)
Prepaids and other...................................................................... (14,457) (16,592)
----------- -----------
(211,539) (263,682)
----------- -----------
Net deferred income tax assets.......................................................... $ 111,620 $ 92,275
----------- -----------
----------- -----------
In connection with the adoption of Statement of Financial Accounting
Standards No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"), the Company
has included in net deferred
F-21
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
income tax assets and Stockholders' Equity, a decrease of $1.2 million, a
decrease of $0.1 million, an increase of $3.8 million, and an increase of $3.1
million related to the income tax effects of the Foreign Currency Translation
Adjustment and Minimum Pension Liability for the periods ended October 16, 1996,
December 31, 1996, 1997, and 1998, respectively.
The Company has alternative minimum tax net operating loss carryforwards of
$191.4 million. The federal net operating loss carryforward is $318.5 million;
the net operating loss carryforward expires as follows: 2000, $7.5 million;
2001, $7.1 million; 2004, $93.1 million; 2007, $67.7 million; 2008, $41.1
million; 2009, $18.3 million; and 2012, $83.7 million.
NOTE 12--TREASURY STOCK
On September 1, 1998, the Board of Directors authorized the Company to
repurchase up to 1,500,000 shares of the outstanding common stock at market
prices. On September 23, 1998, the Board of Directors authorized the Company to
purchase up to 3,500,000 additional shares of outstanding common stock. For the
year ended December 31, 1998, the Company repurchased 2,672,700 shares of common
stock at an aggregate cost of $50,960,000. On January 23, 1999, the Company
repurchased an additional 1,300,000 common shares from Cendant at a cost of
$31,500,000, which reduced Cendant's ownership in the Company's common stock to
approximately 20% (see Note 21).
NOTE 13--RETIREMENT BENEFITS
The Company, through its subsidiary ARACS, sponsors non-contributory defined
benefit plans covering employees who are members of certain collective
bargaining units and non-union full-time employees hired prior to December 31,
1983 who were age 25 or above on January 1, 1985. ARACS also contributes to
union sponsored pension plans.
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 will
recognize a gain as a result of the curtailment during the first quarter of
fiscal year ending December 31, 1999.
Through ARACS, the Company sponsors two Voluntary Investment Savings Plans
under a "qualified cash or deferred arrangement" under Section 401(k) of the
Internal Revenue Code covering its union and non-union employees. For the
periods ended October 16, 1996, December 31, 1996, 1997 and 1998, the Company's
cost of these plans was $1.4 million, $0.4 million, $1.8 million and $1.6
million, respectively.
Included in the non-union Investment Savings Plan, ARACS makes a defined
contribution for full-time employees. The contributions are determined at 2% of
each covered employee's compensation. Employer contributions for the periods
ended October 16, 1996, December 31, 1996, 1997 and 1998 amounted to $1.5
million, $0.4 million, $2.1 million and $2.3 million, respectively.
The defined benefit plans provide benefits based upon years of credited
service, highest average compensation and social security benefits. Annual
retirement benefits, at age 65, are equal to 1 1/2% of the participating
employee's final average compensation (average compensation during the highest
five consecutive years of employment in the ten years prior to retirement) less
1 3/7% of
F-22
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--RETIREMENT BENEFITS (CONTINUED)
the Social Security benefits for each year of service up to a maximum of 35
years. In addition, the plan provides for reduced benefits before age 65 and for
a joint and survivor annuity option.
The Company also sponsors several foreign pension plans. The most
significant of these is the Canadian pension plan.
The status of the Company's defined benefit plans at December 31, 1997 and
1998, including the plans to its Salaried and Hourly Employees as of June 1985,
the Bargaining Plan, the Non Qualified Defined Benefit Plan and the Canadian
Plan is as follows (in thousands):
1997 1998
---------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............................. $ 89,325 $ 106,887
Service cost...................................................... 3,446 2,809
Interest cost..................................................... 6,956 6,922
Plan participants' contributions.................................. 193 182
Amendments........................................................ 631 635
Actuarial gain.................................................... 9,266 11,014
Benefits paid..................................................... (2,752) (2,798)
Foreign currency translation loss................................. (178) (400)
---------- -----------
Benefit obligation at end of year................................... 106,887 125,251
---------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year...................... 77,747 89,816
Actual return on plan assets...................................... 9,707 8,969
Plan participants' contributions.................................. 192 182
Employer contributions............................................ 5,160 5,908
Benefits paid..................................................... (2,628) (2,798)
Foreign currency translation loss................................. (362) (715)
---------- -----------
Fair value of plan assets at end of year............................ 89,816 101,362
---------- -----------
Funded status....................................................... (17,071) (23,889)
Unrecognized net accrual gain....................................... 7,629 16,394
Unrecognized prior service cost..................................... 1,228 1,703
Unrecognized transition asset....................................... (2,587) (2,251)
---------- -----------
Accrued benefit cost................................................ $ (10,801) $ (8,043)
---------- -----------
---------- -----------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION:
Prepaid benefit cost................................................ $ 1,704 $ 1,752
Accrued benefit liability........................................... (4,351) (14,340)
Intangible asset.................................................... (8,554) 1,704
Accumulated other comprehensive income.............................. 400 2,841
---------- -----------
Net amount recognized............................................... $ (10,801) $ (8,043)
---------- -----------
---------- -----------
F-23
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--RETIREMENT BENEFITS (CONTINUED)
Net pension costs of the non-qualified defined benefit plan for the periods
ended October 16, 1996, December 31, 1996, 1997 and 1998, include the following
components (in thousands):
JANUARY 1, 1996 OCTOBER 17, 1996 JANUARY 1, 1997 JANUARY 1, 1998
TO TO TO TO
OCTOBER 16, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- --------------------- --------------------- ---------------------
Service cost-benefits earned during the
period................................ $ 2,558 $ 359 $ 3,446 $ 2,809
Interest cost on projected benefit
obligation............................ 4,224 517 6,956 6,922
Return on assets-expected gain on plan
assets................................ (5,380) (1,558) (6,804) (7,786)
Net amortization of prior service cost.. 765 1,257 35 70
Contributions to union plans and
other................................. 2,029 733 3,021 3,894
Amortization of unrecognized net assets
at transition......................... (106) (28) (132) (123)
------- ------- ------- -------
Net pension cost........................ $ 4,090 $ 1,280 $ 6,522 $ 5,786
------- ------- ------- -------
------- ------- ------- -------
At December 31, 1997 and 1998, the measurement of the projected benefit
obligation was based upon the following assumptions weighted average interest
rates:
1997 1998
--------- ---------
Discount rate................................................................ 7.24% 6.00%
Compensation increase........................................................ 4.72% 4.72%
Long-term return on plan assets.............................................. 8.81% 8.77%
The U.S. plans' assets are invested in corporate bonds, U.S. government
securities and common stock mutual funds. The Canadian plan's assets are
invested in Canadian stocks, bonds, mutual funds, real estate and money market
funds.
NOTE 14--EARNINGS PER SHARE ("EPS")
In calculating basic earnings per share, the shares issued in the initial
public offering of 22,425,000 shares together with 8,500,000 shares owned by
Cendant, resulting from the 85,000 to 1 stock split on September 24, 1997 (Date
of IPO), were used for all periods presented through December 31, 1997. Basic
EPS for 1998 was calculated using 34,172,249 weighted-average shares
F-24
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--EARNINGS PER SHARE ("EPS") (CONTINUED)
outstanding for the year ended December 31, 1998. Diluted EPS for the year ended
December 31, 1997 and 1998 was calculated as follows (in thousands, except share
amounts):
1997 1998
-------------- --------------
DILUTED EPS
Income available to common stockholders...................... $ 27,473 $ 63,521
-------------- --------------
-------------- --------------
Weighted average common shares outstanding................... 30,925,000 34,172,249
Plus: Dilutive effect of the assumed exercise of stock
options (i)................................................ 256,134 780,308
-------------- --------------
Adjusted weighted average shares outstanding................. 31,181,134 34,952,557
-------------- --------------
-------------- --------------
Diluted EPS (i).............................................. $ 0.88 $ 1.82
-------------- --------------
-------------- --------------
- ------------------------
(i) Prior to September 23, 1997, there were no stock options outstanding.
NOTE 15--STOCK OPTION PLAN
On September 23, 1997, the Avis Rent A Car, Inc. 1997 Stock Option Plan (the
"Stock Option Plan") was adopted by the Board of Directors under which 4,620,977
shares of Common Stock were reserved for issuance upon the exercise of options
granted to officers, key employees, independent contractors and non-employee
Directors of the Company and its designated subsidiaries. On September 23, 1997,
3,953,900 options were granted at $17.00 per share, the fair market value of the
Company's common stock on the date of grant. On May 21, 1998, at the Annual
Meeting of Stockholders, the shareholders approved an amendment to the Company's
Stock Option Plan, increasing the maximum number of shares authorized for
issuance under the Stock Option Plan to 6,000,000. At December 31, 1998,
approximately 4,443,100 options are outstanding under the Stock Option Plan. The
primary purpose of the Stock Option Plan is to provide additional incentive to
officers, key employees, independent contractors and non-employee Directors of
the Company and to strengthen their commitment to the Company and its
subsidiaries.
Subsequently elected non-employee Directors will receive a like grant under
the Stock Option Plan upon election or appointment to the Board of Directors.
The exercise price of each option under the Stock Option Plan may not be
less than the fair market value of a share of Common Stock on the date the
option is granted. Options held by an optionee will generally become exercisable
as to 20% of the shares covered by such options on the first anniversary of the
date of grant and with respect to an additional 20% of the shares covered by
such options on each of the four succeeding anniversaries of the date of grant
if the optionee continues to be employed or retained as an independent
contractor by the Company, on each such date. All options held by an optionee
will become fully exercisable (to the extent not already exercisable) if a
"change of control transaction" (as defined in the Stock Option Plan) occurs.
Shares of Common Stock acquired upon the exercise of the options may be subject
to restrictions on transfer which will be set forth in the agreement evidencing
the grant of the option. All options granted under the Stock Option Plan, to the
extent not exercised, expire on the earliest of (i) the tenth anniversary of the
date of grant, (ii) two years following the optionee's termination of employment
on account of death, retirement, disability or (iii) one year following the
termination of optionee's employment for any other reason.
F-25
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--STOCK OPTION PLAN (CONTINUED)
Generally, the Board of Directors of the Company may amend or terminate the
Stock Option Plan, provided that (i) no such amendment or termination may
adversely affect the rights of any participant without the consent of such
participant and (ii) to the extent required by any law, regulation or stock
exchange rule, no amendment shall be effective without the approval of the
Company's stockholders.
The Company makes no recognition of the options in the financial statements
until they are exercised. The Company applies Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
Interpretations in accounting for its plans and does not recognize compensation
expense for its stock-based compensation plans. The Company has adopted only the
disclosure provisions of Statement of Financial Accounting Standard No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123").
The following is a summary of stock option activity for the period September
23, 1997 through December 31, 1997 and the year ended December 31, 1998:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- ---------------
Granted September 23, 1997 (inception of the stock option
plan)......................................................... 3,953,900 $ 17.00
Forfeited....................................................... (78,200) $ 17.00
----------- -------
Outstanding at December 31, 1997................................ 3,875,700 $ 17.00
Granted......................................................... 1,437,000 $ 23.49
Forfeited....................................................... (869,600) $ 19.32
----------- -------
Outstanding at December 31, 1998................................ 4,443,100 $ 18.65
----------- -------
----------- -------
Exercisable Options
December 31, 1998............................................... 759,140 $ 17.00
----------- -------
----------- -------
No options were exercisable at December 31, 1997.
Pro forma disclosures are provided for the years ended December 31, 1997 and
1998 as if the Company adopted the cost recognition requirements under SFAS 123.
The weighted average fair value of each option granted is (estimated on the date
of grant using the Black-Scholes option-pricing model) is $9.80 and $11.73 for
1997 and 1998, respectively, using the following assumptions:
1997 1998
--------- ---------
Expected volatility.......................................................... 45.0% 40.0%
Risk-free interest rate...................................................... 5.7 6.0
Expected option life in years................................................ 7.5 6.5
The weighted-average remaining contractual life of the stock options is 9.6
years and 7.3 years at December 31, 1997 and 1998, respectively. Had
compensation expense been recognized for the years ended December 31, 1997 and
1998, grants for stock-based compensation plans in
F-26
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--STOCK OPTION PLAN (CONTINUED)
accordance with provisions of SFAS 123, the Company would have recorded net
income and earnings per share as follows (in thousands, except per share data):
1997 1998
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ----------- ------------ -----------
Net income................................................... $ 27,473 $ 26,436 $ 63,521 $ 58,656
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Basic earnings per share..................................... $ .89 $ .85 $ 1.86 $ 1.72
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Diluted earnings per share................................... $ .88 $ .85 $ 1.82 $ 1.68
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
NOTE 16--LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS
The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees, which are generally based on a percentage of revenues.
Operating lease payments and net airport concession fees charged to expense
for the periods ended October 16, 1996, December 31, 1996, 1997 and 1998 are as
follows (in thousands):
OCTOBER 17, 1996
(DATE OF
JANUARY 1, 1996 ACQUISITION)
TO TO YEAR ENDED YEAR ENDED
OCTOBER 16, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -------------------- ------------------- -------------------
Minimum fees................. $ 88,787 $ 23,576 $ 122,015 $ 147,034
Contingent fees.............. 61,290 13,220 72,954 34,944
----------------- -------- ---------- ----------
150,077 36,796 194,969 181,978
Less sublease rentals........ (3,843) (1,000) (4,741) (4,701)
----------------- -------- ---------- ----------
$ 146,234 $ 35,796 $ 190,228 $ 177,277
----------------- -------- ---------- ----------
----------------- -------- ---------- ----------
Future minimum rental commitments under noncancelable operating leases
amounted to approximately $467.8 million at December 31, 1998. The minimum
rental payments due in each of the next five years ending December 31, and
thereafter, are as follows (in thousands):
1999.............................................................. $ 89,185
2000.............................................................. 73,512
2001.............................................................. 58,671
2002.............................................................. 43,841
2003.............................................................. 26,195
Thereafter........................................................ 176,430
At December 31, 1998, future minimum rental commitments include $75.0
million due to a subsidiary of Cendant, related to the Company's corporate
headquarters and Virginia Beach processing facility.
F-27
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS (CONTINUED)
In addition to the Company's lease commitments, the Company has outstanding
purchase commitments of approximately $2.1 billion at December 31, 1998, which
relate principally to vehicle purchases.
NOTE 17--SEGMENT INFORMATION
The Company operates in one industry segment, the rental car business. The
Company's rental car business rents vehicles to business and leisure travelers,
and is divided into four main geographic areas; the United States, Australia/New
Zealand, Canada, and other Foreign Operations. Revenue generated from the car
rental business is recorded in the country in which the vehicle is rented. The
accounting policies of each geographic area are the same as those described in
the summary of significant accounting policies (see Note 1). The operations
within major geographic areas for the periods ended October 16, 1996, December
31, 1996, 1997 and 1998 are summarized as follows (in thousands):
PERIOD ENDED OCTOBER 16, 1996
---------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------- ------------- ----------- ----------- -------------
Revenue.................................. $ 1,313,619 $ 105,401 $ 69,814 $ 15,839 $ 1,504,673
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
Total assets............................. $ 2,858,008 $ 115,082 $ 147,617 $ 65,796 $ 3,186,503
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
PERIOD ENDED DECEMBER 31, 1996
---------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------- ------------- ----------- ----------- -------------
Revenue.................................. $ 312,194 $ 31,107 $ 13,467 $ 6,076 $ 362,844
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
Total assets............................. $ 2,839,188 $ 120,216 $ 122,657 $ 49,171 $ 3,131,232
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------- ------------- ----------- ----------- -------------
Revenue.................................. $ 1,804,478 $ 131,228 $ 85,021 $ 25,427 $ 2,046,154
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
Total assets............................. $ 4,001,186 $ 98,145 $ 131,987 $ 51,339 $ 4,282,657
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
OTHER
UNITED AUSTRALIA/ FOREIGN
STATES NEW ZEALAND CANADA OPERATIONS CONSOLIDATED
------------- ------------- ----------- ----------- -------------
Revenue.................................. $ 2,061,967 $ 115,790 $ 92,402 $ 27,423 $ 2,297,582
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
Total assets............................. $ 4,209,835 $ 98,361 $ 148,230 $ 48,636 $ 4,505,062
------------- ------------- ----------- ----------- -------------
------------- ------------- ----------- ----------- -------------
F-28
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--SELECTED QUARTERLY FINANCIAL DATA
QUARTERS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------- ------------- -------------- --------------
Revenue............................................ $ 456,014 $ 489,633 $ 580,049 $ 520,458
Costs and expenses................................. 449,031 472,256 555,096 519,448
------------- ------------- -------------- --------------
Income before provision for income taxes........... 6,983 17,377 24,953 1,010
Provision for income taxes......................... 2,778 8,476 11,085 511
------------- ------------- -------------- --------------
Net income......................................... $ 4,205 $ 8,901 $ 13,868 $ 499
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Earnings per share:
Basic.............................................. $ .14 $ .29 $ .45 $ .02
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Diluted............................................ $ .14 $ .29 $ .45 $ .02
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Shares of Common Stock outstanding:
Basic.............................................. 30,925,000 30,925,000 30,925,000 30,925,000
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Diluted............................................ 30,925,000 30,925,000 30,925,000 31,949,535
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
QUARTERS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
------------- ------------- -------------- --------------
Revenue............................................ $ 511,390 $ 575,280 $ 652,385 $ 558,527
Costs and expenses................................. 498,161 535,370 599,679 552,144
------------- ------------- -------------- --------------
Income before provision for income taxes........... 13,229 39,910 52,706 6,383
Provision for income taxes......................... 5,821 17,560 22,568 2,758
------------- ------------- -------------- --------------
Net income......................................... $ 7,408 $ 22,350 $ 30,138 $ 3,625
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Earnings per share:
Basic............................................ $ .24 $ .62 $ .85 $ .11
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Diluted.......................................... $ .23 $ .61 $ .83 $ .11
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Shares of Common Stock outstanding:
Basic............................................ 31,425,000 35,925,000 35,608,000 33,690,798
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Diluted.......................................... 32,561,483 36,730,233 36,180,000 34,068,603
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
NOTE 19--RELATED PARTY TRANSACTIONS
The Company and Avis Europe, plc cooperate jointly in marketing and
promotional activities, the exchange of reservations, the honoring of charge
cards and vouchers, and the transfer of the related billings. Two members of the
Company's board of directors are executive officers of Cendant and also serve on
the board of Avis Europe Limited, the parent company of Avis Europe, plc.
During the period ended October 16, 1996, the Company purchased from General
Motors approximately $1.8 billion of vehicles net of incentives and allowances
(see Notes 1 and 4).
F-29
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--RELATED PARTY TRANSACTIONS (CONTINUED)
Vehicle manufacturers offer vehicle repurchase programs on an ongoing basis
to assist in the acquisition and disposition of vehicles. These programs
generally allow the Company, at its option, subject to certain provisions, to
sell the vehicles back to the manufacturers at pre-determined prices. Amounts
included under these programs are reflected in "Accounts receivable, net" on the
accompanying consolidated statement of financial position at December 31, 1998
(see Note 4). Under the terms of certain financing agreements with General
Motors, the Company is required to purchase a significant percentage of its
fleet from local dealers of General Motors subject to market conditions. In
addition, the Company participates in an arrangement whereby General Motors
provides payments for purchasing and promoting a specified number and mix of
vehicles (see Note 6).
At December 31, 1998, the Company is affiliated with Cendant, which owns
approximately 20% of the Company as of January 23, 1999. For the years ended
December 31, 1997 and 1998, the Company earned revenues of approximately $2.2
million and $62.1 million, respectively, from Cendant and its subsidiary
companies, of which approximately $76 thousand and $745 thousand was outstanding
and is included in accounts receivable on the accompanying Consolidated
Statements of Financial Position at December 31, 1997 and 1998. The Company
purchased approximately $90.6 million and $91.0 million in 1997 and 1998,
respectively, of goods and services from these affiliated companies.
NOTE 20--LITIGATION
From time to time, the Company is subject to routine litigation incidental
to its business. The Company maintains insurance policies that cover most of the
actions brought against the Company. The Company is not currently involved in
any legal proceeding which it believes would have a material adverse effect upon
its financial condition or results of operations.
NOTE 21--SUBSEQUENT EVENTS
On March 19, 1999, the Company purchased the common stock and franchise
rights of Rent A Car Company, Incorporated, of Richmond, Virginia for $10.2
million. Cost in excess of the fair value of net assets acquired at March 19,
1999, is approximately $7.6 million. The Company financed this transaction
through internally generated funds.
From January 1, 1999 through March 10, 1999, the Company under its Common
Stock Repurchase Program, purchased 2,013,100 shares of common stock at an
aggregate cost of $48.0 million including 1.3 million shares, which were
repurchased from Cendant at a cost of $31.5 million. As of March 10, 1999, under
the Company's Common Stock Repurchase Program, the Company has cumulatively
repurchased 4,685,800 common shares at an average cost of approximately $21 per
share.
NOTE 22--VMS ACQUISITION AND GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL
STATEMENTS
On June 30, 1999, the Company completed the transaction contemplated by the
agreement and plan of merger and reorganization dated as of May 22, 1999 (the
"Merger "), with PHH Corporation, a Maryland corporation and wholly-owned
subsidiary of Cendant, PHH Holdings Corporation ("PHH Holdings"), a Texas
corporation and wholly-owned subsidiary of PHH
F-30
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--VMS ACQUISITION AND GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL
STATEMENTS (CONTINUED)
Corporation, and Avis Fleet Leasing and Management Corporation, a Texas
corporation and a wholly-owned subsidiary of the Company (the "Acquisition
Subsidiary").
Pursuant to the merger agreement, the Acquisition Subsidiary and PHH
Holdings merged on June 30, 1999 and the Acquisition Subsidiary acquired VMS for
$1.8 billion and refinanced VMS indebtedness of approximately $3.5 billion (the
"VMS Acquisition"). The acquisition financing included borrowings by the Company
of $1.0 billion of term loans, the issuance by the Company of $500 million of
senior subordinated notes, and the issuance by the acquisition subsidiary of
$362 million of preferred stock.
In connection with the VMS Acquisition and as part of the financing thereof,
Avis Rent A Car. Inc. (the "Parent") issued and sold the senior subordinated
notes. The senior subordinated notes are general unsecured obligations of the
Parent, subordinated in right of payment to all existing and future senior
indebtedness of the Company, and guaranteed by certain of the Parent's domestic
subsidiaries. Accordingly, the following condensed consolidating financial
information presents the condensed consolidating financial statements as of
December 31, 1998 and 1997 and for the years ended December 31, 1998 and 1997
and for the period from October 17, 1996 (Date of Acquisition) to December 31,
1996 and as to the Predecessor Companies for the period from January 1, 1996 to
October 16, 1996, respectively, of: (a) the Parent; (b) the guarantor
subsidiaries; (c) the non-guarantor subsidiaries; (d) elimination entries
necessary to consolidate Parent with guarantor and non-guarantor subsidiaries;
and (e) the Company on a consolidated basis.
Separate financial statements and other disclosures with respect to the
subsidiary guarantors have not been made because management has determined that
such information is not material to holders of the senior subordinated notes.
F-31
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--VMS ACQUISITION AND GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL
STATEMENTS (CONTINUED)
Investments in subsidiaries are accounted using the equity method for
purposes of the consolidating presentation. The principle elimination entries
eliminate investments in subsidiaries and intercompany balances and transactions
(in thousands):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
---------- --------------- ------------------- -------------- -------------
Revenue.......................... $ 2,061,967 $ 235,615 $ 2,297,582
--------------- ---------- -------------
Direct operating, net.......... 836,124 103,862 939,986
Vehicle depreciation and lease
charges, net................. 531,828 61,236 593,064
Selling, general and
administrative............... 405,366 33,358 438,724
Interest, net.................. $ 13,836 183,663 4,227 201,726
Amortization of cost in excess
of net assets acquired....... 11,702 152 11,854
---------- --------------- ---------- -------------
13,836 1,968,683 202,835 2,185,354
---------- --------------- ---------- -------------
(13,836) 93,284 32,780 112,228
Equity in net earnings of
subsidiaries................. 72,514 $ (72,514)
---------- --------------- ---------- -------------- -------------
Income before provision for
income taxes................... 58,678 93,284 32,780 (72,514) 112,228
Provision for/(benefit from)
income taxes................... (4,843) 44,470 9,080 48,707
---------- --------------- ---------- -------------- -------------
Net income....................... $ 63,521 $ 48,814 $ 23,700 $ (72,514) $ 63,521
---------- --------------- ---------- -------------- -------------
---------- --------------- ---------- -------------- -------------
F-32
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
----------- --------------- ------------------- -------------- -------------
(IN THOUSANDS)
Revenue........................ $ 1,804,477 $ 241,677 $ 2,046,154
--------------- ---------- -------------
Direct operating, net........ 752,084 111,755 863,839
Vehicle depreciation and
lease charges, net......... 459,963 65,180 525,143
Selling, general and
administrative............. $ 8,073 373,071 34,584 415,728
Interest, net................ 5,765 173,636 4,860 184,261
Amortization of cost in
excess of net assets
acquired................... 6,728 132 6,860
----------- --------------- ---------- -------------
13,838 1,765,482 216,511 1,995,831
----------- --------------- ---------- -------------
(13,838) 38,995 25,166 50,323
Equity in net earnings of
subsidiaries............... 36,468 $ (36,468)
----------- --------------- ---------- -------------- -------------
Income before provision for
income taxes................. 22,630 38,995 25,166 (36,468) 50,323
Provision for/(benefit from)
income taxes................. (4,843) 18,730 8,963 -- 22,850
----------- --------------- ---------- -------------- -------------
Net Income................... $ 27,473 $ 20,265 $ 16,203 $ (36,468) $ 27,473
----------- --------------- ---------- -------------- -------------
----------- --------------- ---------- -------------- -------------
F-33
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 17, 1996 (DATE OF ACQUISITION)
TO DECEMBER 31, 1996
----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
--------- --------------- ------------------- -------------- -----------
(IN THOUSANDS)
Revenue............................ $ 313,395 $ 49,449 $ 362,844
--------------- -------- -----------
Direct operating, net............ 144,915 22,767 167,682
Vehicle depreciation and lease
charges, net................... 70,324 15,131 85,455
Selling, general and
administrative................. 60,222 7,993 68,215
Interest, net.................... 36,756 1,449 38,205
Amortization of cost in excess of
net assets acquired............ 999 27 1,026
--------------- -------- -----------
313,216 47,367 360,583
--------------- -------- -----------
179 2,082 2,261
Equity in net earnings of
subsidiaries................... $ 1,221 1,977 $ (3,198)
--------- --------------- -------- -------------- -----------
Income before provision for income
taxes............................ 1,221 2,156 2,082 (3,198) 2,261
Provision for income taxes......... 935 105 1,040
--------- --------------- -------- -------------- -----------
Net Income......................... $ 1,221 $ 1,221 $ 1,977 $ (3,198) $ 1,221
--------- --------------- -------- -------------- -----------
--------- --------------- -------- -------------- -----------
F-34
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1996 TO OCTOBER 16, 1996
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
--------------- ------------------- -------------- -------------
(IN THOUSANDS)
Revenue...................................... $ 1,310,695 $ 193,978 $ 1,504,673
--------------- ---------- -------------
Direct operating, net...................... 563,292 87,458 650,750
Vehicle depreciation and lease charges,
net...................................... 310,115 48,822 358,937
Selling, general and administrative........ 253,391 29,789 283,180
Interest, net.............................. 130,726 7,499 138,225
Amortization of cost in excess of net
assets acquired.......................... 3,699 83 3,782
--------------- ---------- -------------
1,261,223 173,651 1,434,874
--------------- ---------- -------------
49,472 20,327 69,799
Equity in net earnings of subsidiaries..... 11,991 $ (11,991)
--------------- ---------- -------------- -------------
Income before provision for income taxes..... 61,463 20,327 (11,991) 69,799
Provision for income taxes................... 22,862 8,336 31,198
--------------- ---------- -------------- -------------
Net Income................................... $ 38,601 $ 11,991 $ (11,991) $ 38,601
--------------- ---------- -------------- -------------
--------------- ---------- -------------- -------------
F-35
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998
----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
------------ --------------- ------------------- -------------- --------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents.... $ 11 $ 9,776 $ 19,964 $ 29,751
Restricted cash.............. 2,000 131,284 133,284
Accounts receivable, net..... 136,112 224,462 360,574
Prepaid expenses............. 34,666 7,417 42,083
Vehicles, net................ (73,213) 3,238,029 3,164,816
Property and equipment,
net........................ 129,090 15,955 145,045
Investment in subsidiaries... 533,274 422,146 $ (955,420)
Other Assets................. 38,127 2,463 40,590
Deferred Income tax assets... 9,686 111,093 120,779
Cost in excess of net assets
acquired, net.............. 465,321 2,819 468,140
------------ --------------- ------------------- -------------- --------------
Total Assets............. $ 542,971 $ 1,275,118 $ 3,642,393 $ (955,420) $ 4,505,062
------------ --------------- ------------------- -------------- --------------
------------ --------------- ------------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable............. $ 112,220 $ 86,261 $ 198,481
Accrued liabiities........... $ 969 277,018 48,217 326,204
Due to affiliates, net....... (80,612) 112,605 (9,700) 22,293
Current income tax
liabilities................ 19,413 3,632 23,045
Deferred income tax
liabilities................ 28,504 28,504
Public liability, property
damage and other insurance
liabilities, net........... 218,811 50,398 269,209
Debt......................... 1,777 3,012,935 3,014,712
------------ --------------- ------------------- --------------
Total Liabilities........ (79,643) 741,844 3,220,247 3,882,448
Commitments and contingencies
Stockholders' equity......... 622,614 533,274 422,146 $ (955,420) 622,614
------------ --------------- ------------------- -------------- --------------
Total Liabilities and
Stockholders' Equity... $ 542,971 $ 1,275,118 $ 3,642,393 $ (955,420) $ 4,505,062
------------ --------------- ------------------- -------------- --------------
------------ --------------- ------------------- -------------- --------------
F-36
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1997
--------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL
----------- --------------- ------------------- -------------- -------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............. $ 11 $ 27,199 $ 17,689 $ 44,899
Restricted cash....................... 106,984 106,984
Accounts receivable, net.............. 153,268 206,195 359,463
Prepaid expenses...................... 38,492 8,868 47,360
Vehicles, net......................... 115,125 2,903,731 3,018,856
Property and equipment, net........... 106,257 16,603 122,860
Investment in subsidiaries............ 465,631 293,231 $ (758,862)
Other assets.......................... 37,416 3,053 40,469
Deferred income tax assets............ 4,843 140,883 145,726
Cost in excess of net assets acquired,
net................................. 393,981 2,059 396,040
----------- --------------- ------------------- -------------- -------------
Total Assets...................... $ 470,485 $ 1,305,852 $ 3,265,182 $ (758,862) $ 4,282,657
----------- --------------- ------------------- -------------- -------------
----------- --------------- ------------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................... $ 161,045 $ 168,661 $ 329,706
Accrued liabiities.................... $ 1,151 288,768 25,368 315,287
Due to affiliates, net................ 15,612 41,180 (12,280) 44,512
Current income tax liabilities........ 15,938 6,935 22,873
Deferred income tax liabilities....... 5,483 28,623 34,106
Public liabiity, property damage and
other insurance liabilities, net.... 209,893 46,136 256,029
Debt.................................. 117,914 2,708,508 2,826,422
----------- --------------- ------------------- -------------
Total Liabilities................. 16,763 840,221 2,971,951 3,828,935
Commitments and contingencies
Stockholders' equity.................. 453,722 465,631 293,231 $ (758,862) 453,722
----------- --------------- ------------------- -------------- -------------
Total Liabilities and
Stockholders' Equity............ $ 470,485 $ 1,305,852 $ 3,265,182 $ (758,862) $ 4,282,657
----------- --------------- ------------------- -------------- -------------
----------- --------------- ------------------- -------------- -------------
F-37
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATION TOTAL
--------- ------------- ------------------- -------------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.......................... $ 63,521 $ 48,814 $ 23,700 $ (72,514) $ 63,521
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:............. (101,241) 593,636 96,973 589,368
--------- ------------- ------------------- -------------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES.......... (37,720) $ 642,450 120,673 (72,514) 652,889
--------- ------------- ------------------- -------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for vehicle additions...... 49,363 (4,352,411) (4,303,048)
Vehicle deletions................... (218,228) 3,828,949 3,610,721
Payments for additions to property
and equipment..................... (39,691) (3,242) (42,933)
Retirements of property and
equipment......................... 4,664 638 5,302
Investment in subsidiaries.......... (72,514) (107,977) 180,491
Payment for purchase of licensees... (227,213) (9,969) (237,182)
--------- ------------- ------------------- -------------- -----------
NET CASH USED IN INVESTING
ACTIVITIES.................... (72,514) (539,082) (536,035) 180,491 (967,140)
--------- ------------- ------------------- -------------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from public offerings,
net............................... 161,194 161,194
Purchases of treasury stock......... (50,960) (50,960)
Net (decrease) increase in debt..... (116,137) 309,994 193,857
Payments for debt issuance costs.... (4,654) (4,654)
Capital contribution in Argentina... 1,000 (1,000)
Investment in AESOP Leasing LP...... 110,000 (110,000)
Cash dividends...................... (3,023) 3,023
--------- ------------- ------------------- -------------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.......... 110,234 (120,791) 417,971 (107,977) 299,437
--------- ------------- ------------------- -------------- -----------
Effect of exchange rate changes on
cash.............................. (334) (334)
--------- ------------- ------------------- -------------- -----------
Net (decrease) increase in cash and
cash equivalents.................. (17,423) 2,275 (15,148)
Cash and cash equivalents at
beginning of the year............. 11 27,199 17,689 44,899
--------- ------------- ------------------- -------------- -----------
CASH AND CASH EQUIVALENTS AT END OF
THE YEAR.......................... $ 11 $ 9,776 $ 19,964 $ $ 29,751
--------- ------------- ------------------- -------------- -----------
--------- ------------- ------------------- -------------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.......................... $ 209,977
-----------
-----------
Income taxes...................... $ 13,338
-----------
-----------
F-38
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATION TOTAL
--------- ------------- ------------------- -------------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.......................... $ 27,473 $ 20,265 $ 16,203 $ (36,468) $ 27,473
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:............. (350,310) 909,073 (5,263) 553,500
--------- ------------- ------------------- -------------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES.......... (322,837) 929,338 10,940 (36,468) 580,973
--------- ------------- ------------------- -------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for vehicle additions...... (73,731) (4,332,452) (4,406,183)
Vehicle deletions................... (287,267) 3,669,444 3,382,177
Payments for additions to property
and equipment..................... (19,588) (5,145) (24,733)
Retirements of property and
equipment......................... 3,814 157 3,971
Investment in subsidiaries.......... (36,468) (191,400) 227,868
Payment for purchase of licensees... (199,381) (199,381)
--------- ------------- ------------------- -------------- -----------
NET CASH USED IN INVESTING
ACTIVITIES.................... (36,468) (767,553) (667,996) 227,868 (1,244,149)
--------- ------------- ------------------- -------------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from public offerings,
net............................... 359,316 359,316
Net (decrease) increase in debt..... (116,231) 465,519 349,288
Payments for debt issuance costs.... (29,302) (29,302)
Investment in AESOP Leasing LP...... 191,400 (191,400)
--------- ------------- ------------------- -------------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.......... 359,316 (145,533) 656,919 (191,400) 679,302
--------- ------------- ------------------- -------------- -----------
Effect of exchange rate changes on
cash.............................. (945) (945)
--------- ------------- ------------------- -------------- -----------
Net increase (decrease) in cash and
cash equivalents.................. 11 16,252 (1,082) 15,181
Cash and cash equivalents at
beginning of the year............. 10,947 18,771 29,718
--------- ------------- ------------------- -------------- -----------
CASH AND CASH EQUIVALENTS AT END OF
THE YEAR.......................... $ 11 $ 27,199 $ 17,689 $ $ 44,899
--------- ------------- ------------------- -------------- -----------
--------- ------------- ------------------- -------------- -----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.......................... $ 189,086
-----------
-----------
Income taxes...................... $ 8,899
-----------
-----------
F-39
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION)
TO DECEMBER 31, 1996
---------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATION TOTAL
----------- ------------- ------------------- -------------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,221 $ 1,221 $ 1,977 $ (3,198) $ 1,221
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:............... 45,190 (10,602) 34,588
----------- ------------- ---------- -------------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............ 1,221 46,411 (8,625) (3,198) 35,809
----------- ------------- ---------- -------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions........ 540 (561,657) (561,117)
Vehicle deletions..................... (74,970) 640,866 565,896
Payments for additions to property and
equipment........................... (2,938) (546) (3,484)
Retirements of property and
equipment........................... (383) 744 361
Investment in subsidiaries............ (1,221) (3,892) 5,113
----------- ------------- ---------- -------------- ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES............ (1,221) (81,643) 79,407 5,113 1,656
----------- ------------- ---------- -------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in debt....... 376 (69,930) (69,554)
Intercompany debt..................... (2,865) (2,865)
Investment in Constellation
Reinsurance Company Ltd............. 1,915 (1,915)
----------- ------------- ---------- -------------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............ 376 (70,880) (1,915) (72,419)
----------- ------------- ---------- -------------- ----------
Effect of exchange rate changes on
cash................................ 94 94
----------- ------------- ---------- -------------- ----------
Net decrease in cash and cash
equivalents......................... (34,856) (4) (34,860)
Cash and cash equivalents at beginning
of period........................... 45,803 18,775 64,578
----------- ------------- ---------- -------------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.............................. $ $ 10,947 $ 18,771 $ $ 29,718
----------- ------------- ---------- -------------- ----------
----------- ------------- ---------- -------------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................ $ 28,170
----------
----------
Income taxes........................ $ 827
----------
----------
F-40
AVIS RENT A CAR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO OCTOBER 16, 1996
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATION TOTAL
-------------- ------------------- -------------- --------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 38,601 $ 11,991 $ (11,991) $ 38,601
Adjustments to reconcile net income to net
cash provided by operating activities:..... 143,043 64,568 207,611
-------------- ------------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 181,644 76,559 (11,991) 246,212
-------------- ------------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions............... (122,013) (2,203,447) (2,325,460)
Vehicle deletions............................ 32,708 1,762,854 1,795,562
Payments for additions to property and
equipment.................................. (23,150) (2,803) (25,953)
Retirements of property and equipment........ 3,021 (1,172) 1,849
Investment in subsidiaries................... (11,991) 11,991
Payment for purchase of licensee,
net........................................ (3,134) (3,134)
-------------- ------------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES.... (121,425) (447,702) 11,991 (557,136)
-------------- ------------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in debt.............. (23,474) 275,324 251,850
Intercompany debt............................ 109,500 109,500
Payments for debt issuance costs............. (2,604) (2,604)
Cash dividends............................... (1,398) (1,398)
-------------- ------------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES............................. (26,078) 383,426 357,348
-------------- ------------------- --------------
Effect of exchange rate changes on cash...... 260 260
-------------- ------------------- --------------
Net increase in cash and cash equivalents.... 34,141 12,543 46,684
Cash and cash equivalents at beginning of
period..................................... 11,662 6,232 17,894
-------------- ------------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 45,803 $ 18,775 $ $ 64,578
-------------- ------------------- -------------- --------------
-------------- ------------------- -------------- --------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................... $ 135,733
--------------
--------------
Income taxes............................... $ 6,220
--------------
--------------
F-41
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1999
------------- -------------
Revenue............................................................................. $ 1,086,670 $ 1,204,374
------------- -------------
Costs and Expenses:
Direct operating, net............................................................... 440,684 476,938
Vehicle depreciation and lease charges, net......................................... 277,394 311,167
Selling, general and administrative................................................. 213,114 231,182
Interest, net....................................................................... 96,818 104,362
Amortization of cost in excess of net assets acquired............................... 5,521 6,351
------------- -------------
1,033,531 1,130,000
------------- -------------
Income before provision for income taxes............................................ 53,139 74,374
Provision for income taxes.......................................................... 23,381 31,906
------------- -------------
Net income.......................................................................... $ 29,758 $ 42,468
------------- -------------
------------- -------------
Earnings per share:
Basic............................................................................... $ 0.88 $ 1.35
------------- -------------
------------- -------------
Diluted............................................................................. $ 0.86 $ 1.31
------------- -------------
------------- -------------
See accompanying notes to the condensed consolidated financial statements.
F-42
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS)
(UNAUDITED)
JUNE 30,
1999
--------------
ASSETS
Cash and cash equivalents......................................................................... $ 280,370
Restricted cash................................................................................... 189,680
Accounts receivable, net.......................................................................... 910,311
Finance lease receivables......................................................................... 340,868
Prepaid expenses.................................................................................. 62,212
Vehicles, net..................................................................................... 7,663,270
Property and equipment, net....................................................................... 257,114
Cost in excess of net assets acquired, net........................................................ 1,796,203
Other assets...................................................................................... 88,599
--------------
Total assets...................................................................................... $ 11,588,627
--------------
--------------
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Accounts payable.................................................................................. $ 624,278
Accrued liabilities............................................................................... 352,744
Deferred income................................................................................... 65,375
Due to affiliates, net............................................................................ 79,677
Current income tax liabilities.................................................................... 50,400
Deferred income tax liabilities................................................................... 142,580
Public liability, property damage and other insurance liabilities, net............................ 279,324
Debt.............................................................................................. 9,017,106
--------------
Total liabilities............................................................................. 10,611,484
--------------
Commitments and contingencies
Class A Preferred stock........................................................................... 360,000
Class C Preferred stock........................................................................... 2,000
--------------
Total Preferred stock......................................................................... 362,000
--------------
Common stockholders' equity:
Class A Common stock.............................................................................. 359
Additional paid-in capital........................................................................ 591,959
Retained earnings................................................................................. 134,683
Accumulated other comprehensive loss.............................................................. (7,971)
Treasury stock.................................................................................... (103,887)
--------------
Total common stockholders' equity............................................................. 615,143
--------------
Total liabilities, preferred stock and common stockholders' equity............................ $ 11,588,627
--------------
--------------
See accompanying notes to the condensed consolidated financial statements.
F-43
AVIS RENT A CAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 29,758 $ 42,468
Adjustments to reconcile net income to net cash provided by operating activities..... 128,901 256,701
----------- -----------
Net cash provided by operating activities............................................ 158,659 299,169
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions....................................................... (1,919,655) (2,494,247)
Vehicle deletions.................................................................... 1,382,588 1,519,474
Payments for property and equipment.................................................. (21,088) (17,953)
Retirements of property and equipment................................................ 2,554 1,073
Payments for purchase of rental car franchise licensees, net of cash acquired of
$11,065 in 1999.................................................................... (232,475) (42,503)
Payment for purchase of PHH Holdings, net of cash acquired of $170,568............... (1,330,932)
----------- -----------
Net cash used in investing activities................................................ (788,076) (2,365,088)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in debt:
Proceeds........................................................................... 1,233,774 5,882,621
Repayments......................................................................... (777,708) (3,510,624)
----------- -----------
Net increase in debt............................................................... 456,066 2,371,997
Payments for debt issuance costs..................................................... (3,832) (1,635)
Proceeds from public offering........................................................ 161,194
Purchases of treasury stock.......................................................... (57,237)
Other................................................................................ 3,326
----------- -----------
Net cash provided by financing activities............................................ 613,428 2,316,451
----------- -----------
Effect of exchange rate changes on cash................................................ (428) 87
----------- -----------
Net increase (decrease) in cash and cash equivalents................................... (16,417) 250,619
Cash and cash equivalents at beginning of period....................................... 44,899 29,751
----------- -----------
Cash and cash equivalents at end of period............................................. $ 28,482 $ 280,370
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash interest paid..................................................................... $ 98,390 $ 107,466
----------- -----------
----------- -----------
Cash income taxes paid................................................................. $ 7,938 $ 5,329
----------- -----------
----------- -----------
Businesses acquired:
Fair value of assets acquired, net of cash of $181,633............................... $ 232,765 $ 6,218,950
Liabilities assumed.................................................................. 290 4,483,515
----------- -----------
Net assets acquired.................................................................. 232,475 1,735,435
Less issuance of Series A and Series C Preferred Stocks.............................. (362,000)
----------- -----------
Net cash paid for acquisitions....................................................... $ 232,475 $ 1,373,435
----------- -----------
----------- -----------
See accompanying notes to the condensed consolidated financial statements.
F-44
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" or "Avis Rent
A Car"). 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. The condensed consolidated
statement of financial position include all of the assets and liabilities of the
Company including the Company's recently acquired vehicle management business in
the United States and Canada ("PHH North America"), and in Europe ("PHH
Europe"), and of Wright Express LLC (collectively "VMS") and Motorent, Inc.
These condensed consolidated statements of operations do not include the results
of operations of VMS and of Motorent, Inc., which were purchased on June 30,
1999 (see Note 4). 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 and Forms 8-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 June 30, 1998 and 1999 by 35,925,000 and 31,188,977 weighted
average shares outstanding, respectively, and for the six months ended June 30,
1998 and 1999 by 33,687,431 and 31,529,114 weighted average shares outstanding,
respectively. Diluted earnings per share is computed by dividing net income for
the six months ended June 30, 1998 and 1999 by 34,680,670 and 32,380,499
weighted average shares outstanding, respectively. Shares used in calculating
diluted earnings per share include the effects of the assumed exercise of stock
options.
NOTE 3--TREASURY STOCK
At June 30, 1999 treasury stock is comprised of the following:
TREASURY
STOCK, NET TREASURY
(IN THOUSANDS) SHARES
-------------- -------------
Balance, January 1, 1999...................................... $ 50,960 2,672,700
Treasury stock repurchased from January 1, to June 30, 1999... 57,037 2,318,775
Treasury stock issued under the Company's stock option plan... (4,110) (195,627)
-------------- -------------
Balance, June 30, 1999........................................ $ 103,887 4,795,848
-------------- -------------
-------------- -------------
Included in treasury stock repurchased from January 1, 1999 to June 30, 1999
are 1.6 million shares repurchased from Cendant Corporation ("Cendant") at a
cost of $40.8 million.
F-45
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACQUISITIONS
On March 19, 1999, and June 30, 1999, the Company purchased the common stock
and franchise rights of Rent A Car Company, Incorporated, of Richmond Virginia
("Rent-A-Car, Inc.") and Motorent, Inc. of Nashville Tennessee ("Motorent") for
approximately $10.1 million and $43.7 million, respectively. These acquisitions
were financed through internally generated funds.
On June 30, 1999, the Company completed the transaction contemplated by the
agreement and plan of merger and reorganization dated as of May 22, 1999 (the
"Merger "), with PHH Corporation, a Maryland corporation and wholly-owned
subsidiary of Cendant, PHH Holdings Corporation ("PHH Holdings"), a Texas
corporation and wholly-owned subsidiary of PHH Corporation, and Avis Fleet
Leasing and Management Corporation, a Texas corporation and a wholly-owned
subsidiary of the Company (the "Acquisition Subsidiary").
Pursuant to the merger agreement, the Acquisition Subsidiary and PHH
Holdings merged on June 30, 1999 and the Acquisition Subsidiary acquired VMS for
$1.8 billion and refinanced VMS indebtedness of approximately $3.5 billion (the
"VMS Acquisition"). The acquisition financing included borrowings by the Company
of $1.0 billion of term loans, the issuance by the Company of $500 million of
senior subordinated notes, and the issuance by the acquisition subsidiary of
$362 million of preferred stock (see Note 5).
In connection with the VMS Acquisition, the Company received a perpetual,
royalty-free license to use a number of VMS trademarks, including the "PHH" name
and logo. PHH Corporation and PHH Holdings entered into a 5-year non-compete
agreement with Avis Rent A Car, Inc. and the Acquisition Subsidiary. The
Acquisition Subsidiary also received a limited license to use the Cendant name
in Europe and the United States for a period of up to one year. In addition, the
parties have entered into agreements under which Cendant agreed to provide the
Company with computer services and with transitional services with respect to
various administrative services, including payroll and benefits, which had
previously been provided to VMS by Cendant. In addition, the Acquisition
Subsidiary has entered into an agreement under which it will provide Cendant
with certain transitional administrative services which had previously been
provided by VMS.
The preliminary purchase cost allocation for the Company's acquisitions of
Rent-A-Car Inc., Motorent and VMS, are subject to adjustment, when additional
information concerning asset and liability valuations are obtained. The final
asset and liability fair values will differ from those set forth in the
accompanying statement of financial position at June 30, 1999. However, the
changes are not expected to have a material effect on the financial position of
the Company. The above mentioned acquisitions have been accounted for by the
purchase method. The financial statements include the operating results of
acquisitions subsequent to their dates of acquisition.
F-46
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACQUISITIONS (CONTINUED)
The following is the preliminary purchase cost allocation of the
acquisitions described above (in thousands):
Purchase cost.................................................. $1,853,767
----------
Fair value of:
Assets acquired.............................................. 4,986,842
Liabilities assumed.......................................... 4,483,315
----------
Net assets..................................................... 503,527
----------
Cost in excess of net assets acquired.......................... $1,350,240
----------
----------
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition of VMS for $1.8 billion
(including the issuance of Series A and Series C Preferred) and the refinancing
of VMS indebtedness and related adjustments had taken place on January 1, 1998
(in thousands, except share data):
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
-------------- --------------
Revenue........................................................................... $ 1,880,744 $ 2,012,469
-------------- --------------
-------------- --------------
Income before provision for income taxes.......................................... $ 51,752 $ 53,433
-------------- --------------
-------------- --------------
Net income........................................................................ $ 26,640 $ 25,927
-------------- --------------
-------------- --------------
Earnings applicable to common stockholders........................................ $ 17,530 $ 16,817
-------------- --------------
-------------- --------------
Earnings per share:
Basic............................................................................. $ .52 $ .53
-------------- --------------
-------------- --------------
Diluted........................................................................... $ .51 $ .52
-------------- --------------
-------------- --------------
If the acquisition of Rent-A-Car, Inc. and Motorent had occurred on January
1, 1998, they would not have had a material impact on the results of operations
for the three and six month periods ended June 30, 1998 and 1999.
NOTE 5--SERIES A, B AND C PREFERRED STOCK
SERIES A PREFERRED STOCK
In connection with the VMS Acquisition, a total of 7,200,000 shares of
Series A Preferred have been issued and were outstanding at June 30, 1999.
Holders of Series A Preferred Stock are not entitled to preemptive rights. The
Series A Preferred Stock has an aggregate liquidation preference of $360 million
or $50 per share (the "Series A Liquidation Preference"). Each share of Series A
Preferred accrues dividends at a rate per annum of 5% of the Series A
Liquidation Preference, payable in cash semi-annually in arrears. Dividends are
payable in shares of Series B Cumulative PIK Preferred Stock (see Series B
Preferred Stock below). In addition, if the Company is unable to obtain the
consent of its Shareholders to amend its charter by June 30, 2000 to Issue Class
B
F-47
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SERIES A, B AND C PREFERRED STOCK (CONTINUED)
Common Stock (see Note 6) and Class A Common Stock issuable in exchange for the
Class B Common Stock, the dividend rate on the Series A Preferred will increase
to 12%, with retroactive effect to the date of issuance. Until the fifth
anniversary of the issuance of the Series A Preferred, these dividends may be
paid in Series B Preferred Stock at the discretion of the Company. The Series A
Preferred is also entitled to special annual dividends at a rate of 2% of the
Series A Liquidation Preference per annum, payable in cash annually on March
15(th), in the event that the Acquisition Subsidiary achieves targeted
consolidated Earnings Before Income Taxes, Depreciation and Amortization
("EBITDA") levels. Upon liquidation, and after payment of all amounts owed to
all classes of capital stock ranked senior to the Series A Preferred, holders of
shares of Series A Preferred will receive the Series A Liquidation Preference of
such shares plus accrued and unpaid dividends. The Series A Preferred may be
redeemed by the Acquisition Subsidiary, in whole or in part, on or after the
fifth anniversary of the date of issuance, and must be redeemed in whole upon
the eleventh anniversary of the date of issuance for an amount per share equal
to the Series A Liquidation Preference plus accrued and unpaid dividends. In
addition, holders of the Series A Preferred may cause the Acquisition Subsidiary
to redeem their shares for cash, upon the bankruptcy or insolvency of the
Company or a change in control with respect to Avis Rent A Car, Inc. or Avis
Rent A Car System, Inc.
The holders of the Series A Preferred may convert shares of Series A
Preferred into shares of Class B Common Stock once specified levels of 12-month
consolidated EBITDA of the Acquisition Subsidiary have been reached and the
average closing price of Class A Common Stock for a specified period shall have
exceeded a performance conversion price. Such conversion shall be at a rate (the
"Performance Conversion Rate") obtained by dividing the per share Series A
Liquidation Preference by $50 (as adjusted for antidilution protection, the
"Performance Conversion Price").
On or after the fifth anniversary of the closing date of the VMS
Acquisition, if the share price of the Class A Common Stock has exceeded an
amount equal to 110% of the Performance Conversion Price for 20 trading days
within a period of 30 consecutive trading days ending within five trading days
of notice of conversion given by the Acquisition Subsidiary, then the Series A
Preferred will be converted into Class B Common Stock at the Performance
Conversion Rate. Upon the bankruptcy or insolvency of the Acquisition Subsidiary
or any of its subsidiaries that constitute a Significant Subsidiary of Avis Rent
A Car, Inc., as defined in Rule 1-02(w) of Regulation S-X (a "Significant
Subsidiary"), the Series A Preferred automatically converts into Class B Common
Stock at a rate equal to the quotient obtained by dividing: (1) the per share
Series A Liquidation Preference by (2) the average trading price per share of
Class A Common Stock for the 30 trading days immediately preceding the date of
the holder's conversion notice or the date on which the bankruptcy case
commences, as applicable (the "Series A Market Conversion Rate"). The Series A
Market Conversion Rate is subject to adjustment for antidilution protection.
Additionally, holders of Series A Preferred may convert their Series A
Preferred into Class B Common Stock at the Series A Market Conversion Rate if
the Acquisition Subsidiary: (1) fails to make a redemption payment on the Series
A Preferred or the Series B Preferred, (2) fails to pay dividends when due on
either the Series A Preferred or the Series B Preferred, (3) takes actions
requiring consents of its holders of the Series A Preferred or the Series B
Preferred without
F-48
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SERIES A, B AND C PREFERRED STOCK (CONTINUED)
obtaining such consents or (4) issues additional shares of the Series A
Preferred or Series B Preferred, or reissues shares of either, in violation of
their terms.
Without the affirmative vote of the holders of a majority of the outstanding
shares of Series A Preferred, the Acquisition Subsidiary shall not (1)
authorize, create or issue any security ranking senior to the Series A Preferred
as to dividends or on liquidation (other than the Series C Preferred); (2) amend
its articles of incorporation or the certificate of designations for the Series
A Preferred in a manner adverse to the holders of the Series A Preferred; (3)
authorize the issuance of additional shares of Series A Preferred; or (4)
reincorporate the Acquisition Subsidiary in a jurisdiction other than Texas
prior to the second anniversary of the date of issuance of the Series A
Preferred. Holders of Series A Preferred are not entitled to voting rights,
except as required by Texas law. In those circumstances where the holders of
Series A Preferred have a right to vote, each holder of a share of Series A
Preferred shall be entitled to one vote per share.
Shares of Series A Preferred are freely transferable. Shares of Series A
Preferred reacquired in any manner will be retired and may not be reissued as
shares of Series A Preferred.
SERIES B PREFERRED STOCK
Series B Cumulative PIK Preferred Stock (the "Series B Preferred") will be
issued as dividends to the Series A Preferred holders by the Acquisition
Subsidiary. No shares of Series B Preferred were outstanding as of June 30,
1999. Holders of the Series B Preferred are not entitled to preemptive rights.
The Series B Preferred has a liquidation preference of $50 per share (the
"Series B Liquidation Preference"). Each share of Series B Preferred accrues
dividends at a rate per annum of 5% of the Series B Liquidation Preference,
payable in cash semi-annually in arrears. In addition, if the Company is unable
to obtain the consent of its shareholders to amend its charter by June 30, 2000
to issue Class B Common Stock and Class A Common Stock issuable in exchange for
the Class B Common Stock, the dividend rate on the Series B Preferred will
increase to 12%, with retroactive effect to the date of issuance. Until the
fifth anniversary of the date of issuance of the Series B Preferred, dividends
may, at the discretion of the Acquisition Subsidiary be paid in kind;
thereafter, dividends must be paid in cash. Upon liquidation, and after payment
of all amounts owed to all classes of capital stock ranked senior to the Series
B Preferred, holders of shares of Series B Preferred will receive the Series B
Liquidation Preference of such shares plus accrued and unpaid dividends.
The Series B Preferred has the same ranking as the Series A Preferred. The
Series B Preferred may be redeemed by the Acquisition Subsidiary, in whole or in
part, on or after the fifth anniversary of the date of issuance, and must be
redeemed in whole upon the eleventh anniversary of the date of issuance for an
amount per share equal to the Series B Liquidation Preference plus accrued and
unpaid dividends.
Additionally, holders of Series B Preferred may convert their Series B
Preferred into Class B Common Stock at the Series B Market Conversion Rate
(defined below) if the Acquisition Subsidiary: (1) fails to make a redemption
payment on the Series A Preferred or the Series B Preferred, (2) fails to pay
dividends when due on either the Series A Preferred or the Series B Preferred,
(3) takes actions requiring the consents of the holders of the Series A
Preferred or the
F-49
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SERIES A, B AND C PREFERRED STOCK (CONTINUED)
Series B Preferred without obtaining such consents or (4) issues additional
shares of the Series A Preferred or Series B Preferred, or reissues shares of
either, in violation of their terms. The Series B Preferred also automatically
converts into Class B Common Stock at the Series B Market Conversion Rate upon
the bankruptcy or insolvency of the Acquisition Subsidiary or any of its
Significant Subsidiaries.
The Series B Market Conversion Rate ("Series B Market Conversion Rate")
equals the quotient obtained by dividing: (1) the per share Series B Liquidation
Preference by (2) the average trading price per share of the Company's Common
Stock for the 30 trading days immediately preceding the date of the holder's
conversion notice or the date on which the bankruptcy case commences, as
applicable. The Market Conversion Rate is subject to customary adjustment under
certain circumstances.
Holders of Series B Preferred will have voting rights analogous to those of
the holders of the Series A Preferred. Shares of Series B Preferred are freely
transferable. Shares of Series B Preferred reacquired in any manner will be
retired and may not be reissued as shares of Series B Preferred.
SERIES C PREFERRED STOCK
A total of 40,000 shares of Series C Preferred were outstanding at June 30,
1999, in connection with the VMS Acquisition. Holders of the Series C Preferred
are not entitled to preemptive rights. The Series C Preferred has an aggregate
liquidation preference of $2,000,000 or $50 per share (the "Series C Liquidation
Preference"). Each share of Series C Preferred accrues dividends at 11% per
annum, payable in cash semi-annually in arrears. An escrow account in the amount
of $1,000,000 has been established to cover future dividend payments. Upon
liquidation, and after payment of amounts, if any, owed to all classes of
capital stock ranked senior to the Series C Preferred, holders of shares of
Series C Preferred will receive the Series C Liquidation Preference of such
shares plus accrued and unpaid dividends. The Series C Preferred ranks senior to
the Series A Preferred, the Series B Preferred and the Class A Common Stock in
right of payment of the dividends. The Series C Preferred may be redeemed by the
Acquisition Subsidiary, in whole or in part, on or after the fifth anniversary
of the date of issuance, and must be redeemed in whole upon the seventh
anniversary of the date of issuance, in each case for an amount per share equal
to the Series C Liquidation Preference plus accrued and unpaid dividends.
Holders of Series C Preferred are not entitled to voting rights, except
under certain circumstances. Without the affirmative vote of the holders of a
majority of the outstanding shares of Series C Preferred, the Acquisition
Subsidiary may not take certain specified actions that would adversely affect
the rights of the holders of the Series C Preferred. Shares of Series C
Preferred reacquired in any manner will be retired and may not be reissued as
shares of Series C Preferred.
NOTE 6--CLASS B COMMON STOCK
In the event that Avis Rent A Car obtains the consent of its shareholders to
amend its charter by June 30, 2000 to issue Class B Common Stock, Avis Rent A
Car will authorize and reserve for issuance shares of Class B Common Stock to be
issued upon the conversion of the Series A Preferred or the Series B Preferred.
F-50
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--CLASS B COMMON STOCK (CONTINUED)
The Class B Common Stock will rank (1) junior to any class or series of
preferred stock of the Company and (2) PARI PASSU with the Class A Common Stock
in right of payment of dividends and on liquidation. The Class B Common Stock
will be nonvoting.
At any time that the beneficial ownership by Cendant, together with any
affiliate of Cendant (Cendant and such affiliates, the "Cendant Affiliates"), of
the Class A Common stock is less than 20% of the voting power of the outstanding
shares of Class A Common Stock, the Cendant Affiliates shall have the right to
convert shares of Class B Common Stock into Class A Common Stock on a
share-for-share basis in an amount such that the ownership by the Cendant
Affiliates of the Class A Common Stock does not exceed 20% of the voting power
of the outstanding shares of Class A Common Stock after giving effect to such
conversion.
The Cendant Affiliates shall have the right to convert the Class B Common
Stock into shares of Class A Common Stock on a share-for-share basis upon the
occurrence of (1) a bankruptcy or insolvency of the Company and (2) a Preferred
Stock Change of Control, other than any Preferred Stock Change of Control that
is caused solely by the sale by the Cendant Affiliates of its shares of Class A
Common Stock or Class B Common Stock.
Upon the transfer, sale or disposition for value to any person other than
the Cendant Affiliates, each share of Class B Common Stock shall be
automatically exchanged for the Class A Common Stock on a share-for-share basis.
Other than upon conversion of the Series A Preferred or the Series B
Preferred, no additional shares of Class B Common Stock may be issued. Shares of
Class B Common Stock shall be freely transferable. Shares of Class B Common
Stock reacquired in any manner shall be retired and may not be reissued as
shares of Class B Common Stock.
In connection with the VMS Acquisition, the Company entered into a
registration rights agreement pursuant to which Cendant and certain transferees
of Class B Common Stock and Class A Common Stock converted from the Class B
Common stock held by Cendant (the "Holders") will have the right to require the
Company to register all or part of the Class A Common Stock owned by such
Holders under the Securities Act of 1933 as amended (the "Securities Act") (an
"Acquisition Demand Registration"). However, the Company may postpone giving
effect to an Acquisition Demand Registration for a period of up to 30 days if
the Company believes such registration might have a material adverse effect on
any plan or proposal by the Company with respect to any financing, acquisition,
recapitalizaiton, reorganization or other material transaction or the Company is
in possession of material non-public information that, if publicly disclosed,
could result in a material disruption of a major corporate development or
transaction then pending or in progress or in other material adverse
consequences to the Company. In addition, the Holders have the right to
participate in any registrations by the Company of Class A Common Stock (an
"Acquisition Piggyback Registration"). The Holders will pay all out-of-pocket
expenses incurred in connection with any Acquisition Registration, and the
Company will pay all out-of-pocket expenses incurred in connection with any
Acquisition Demand Piggyback Registration, except for underwriting discounts,
commissions and expenses attributable to the shares of Class A Common Stock sold
by such holders.
F-51
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--COMPREHENSIVE INCOME
Comprehensive income is comprised of the following (in thousands):
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1999
--------- ---------
Net income............................................................. $ 29,758 $ 42,468
Foreign currency translation adjustment................................ (3,524) 2,680
--------- ---------
Comprehensive income................................................... $ 26,234 $ 45,148
--------- ---------
--------- ---------
NOTE 8--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 for the six months
ended June 30, 1999.
F-52
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--FINANCING AND DEBT
Debt outstanding at June 30, 1999 consists of the following (in thousands):
JUNE 30,
1999
-------------
Commercial Paper Notes......................................................... $ 1,463,996
Short-term notes-foreign....................................................... 169,940
Wright Express Federal Funds................................................... 21,957
Wright Express Certificates of Deposit......................................... 49,651
Current portion of long-term debt -other....................................... 512
Current portion of long-term debt--acquisition financing....................... 8,500
-------------
TOTAL CURRENT DEBT........................................................... 1,714,556
-------------
FLEET FINANCING
Interim Domestic Asset Backed Securities -Variable Funding Notes............... 2,735,508
Interim Foreign Asset Backed Securities -UK Advances........................... 720,000
Series 1997-1A asset backed notes due July 2000 at 6.22%....................... 800,000
Series 1997-1B asset backed notes due July 2002 at 6.40%....................... 850,000
Series 1998-1 asset backed notes due February 2005 at 6.14%.................... 600,000
Self funded notes.............................................................. 26,853
Other.......................................................................... 5,689
-------------
TOTAL FLEET DEBT............................................................. 5,738,050
-------------
ACQUISITION FINANCING
Senior Subordinated Notes due May 2009 at 11.00%............................... 500,000
Term A Loan Notes due June 2005................................................ 242,500
Term B Loan Notes due June 2006................................................ 374,500
Term C Loan Notes due June 2007................................................ 374,500
Revolving Credit Facility due June 2005........................................ 73,000
-------------
TOTAL ACQUISITION FINANCING.................................................. 1,564,500
-------------
TOTAL DEBT................................................................... $ 9,017,106
-------------
-------------
COMMERCIAL PAPER NOTES, SERIES 1997-1A, 1997-1B AND 1998-1 ASSET BACKED NOTES
On July 31, 1997, the Company through Avis Rent A Car System, Inc. ("ARACS")
entered into a domestic integrated fleet financing program (the "Avis ABS
Facility") that provides for up to $3.65 billion in financing for vehicles
covered by Repurchase Programs, with up to 25% of the facility available for
vehicles not covered by Repurchase Programs. As of June 30, 1999, the domestic
integrated fleet financing program is $3.75 billion. The domestic integrated
fleet financing program provides for the issuance of up to $1.5 billion of
asset-backed variable funding notes (the "Commercial Paper Notes") and $2.25
billion of asset-backed medium term notes (The "Medium Term Notes"). The
Commercial Paper Notes and the Medium Term Notes are backed by a first priority
security interest in the Company's fleet. Additional credit enhancement was
provided for the
F-53
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--FINANCING AND DEBT (CONTINUED)
Medium Term Notes by establishing an escrow account in the amount of $90
million, which is included in "Restricted Cash".
The weighted average interest rate on commercial paper borrowings was 5.7%
and 5.0% for the six months ended June 30, 1998 and 1999, respectively.
Average commercial paper borrowings was $737 million and $1,001 million for
the six months ended June 30, 1998 and 1999, respectively.
SHORT-TERM NOTES FOREIGN
The weighted average interest rates of the short-term notes-foreign as of
June 30, 1998 and 1999 was 5.5% and 5.2%, respectively.
CERTIFICATES OF DEPOSIT
At June 30, 1999, scheduled maturities of certificates of deposit of $49,651
are all less than one year. The interest rates range from 5.09% to 5.5%.
FEDERAL FUNDS PAYABLE
Federal Funds Payable consists of federal funds purchased and is generally
repaid within one to ten business days from the transaction date. At June 30,
1999, federal funds payable consist of three separate agreements totaling
$21,957, bearing interest at rates of 5.875% and 6.375%.
ASSET BACKED SECURITIES, SENIOR SUBORDINATED NOTES AND TERM NOTES
In connection with the VMS Acquisition (see Note 4), Avis Rent A Car, Inc.:
(A) Refinanced the VMS existing fleet debt with the proceeds of $2,735,507
domestic and $720,000 foreign asset-backed securities issued pursuant to
an offering of asset-backed securities (the "Interim VMS ABS Offering"),
under certain fleet financing facilities and together with the Avis ABS
facilities.
The domestic securities comprising the Interim VMS ABS Offering are
issued by a bankruptcy remote special purpose entity (the "Domestic ABS
Issuer") and placed initially with a single multi-seller commercial paper
conduit, and thereafter may be syndicated to one or more other bank
sponsored conduits (collectively the "CP Conduits").
The CP Conduits will acquire Domestic Variable funding notes ("VFNs"),
Domestic Preferred Membership Interests and U.K. Advances using the
proceeds of commercial paper issuances. In addition, from time to time,
the Domestic ABS Issuer may issue medium-term notes secured by the
Domestic ABS Assets, using the proceeds of any such offerings to reduce
the amount of Domestic VFNs then outstanding.
The interest rate is variable and is based on commercial paper notes plus
a weighted average margin of approximately 45 basis points.
F-54
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--FINANCING AND DEBT (CONTINUED)
The rate in effect at June 30, 1999 for the domestic and foreign
asset-backed securities were 5.39% and 5.43%, respectively.
(B) Issued $500,000 of Senior Subordinated Notes due May 1, 2009 with an
interest rate of 11% (the "Senior Subordinated Notes"). The Senior
Subordinated Notes are subordinated in the right of payment to all
existing and future senior indebtedness of the Company and are
unconditionally guaranteed on a senior subordinated basis by ARACS and
other domestic subsidiary of the Company that guarantees the Senior
Credit Facility (as defined). Interest is payable semi-annually
commencing November 1, 1999.
(C) At June 30, 1999, the Company had outstanding the following term loans:
Term Loans A, B, and C bear interest at either Chase Manhattan Bank's
("Chase") alternate base rate or the Eurodollar rate (at the Company's
option) plus the applicable margin. The applicable margin for each type
of loan is as follows:
ABR LOANS EURODOLLAR LOANS
----------- -----------------
Revolving Loans.............................................. 1.75% 2.75%
Term A Loan.................................................. 1.75% 2.75%
Term B Loan.................................................. 2.25% 3.25%
Term C Loan.................................................. 2.50% 3.50%
The Term A, B, and C Loans mature on June 30, 2005, 2006 and 2007,
respectively, and require repayments of principal in quarterly
installments.
REVOLVING CREDIT FACILITY
Under the terms of the Revolving Credit Facility, the Company had
outstanding $73,000 as of June 30, 1999 at a variable interest rate with terms
identical to the Term A Loan.
SELF-FUND NOTES
Self-fund notes represent loans made by customers to purchase leased
vehicles. Repayment of these notes is matched to payments on the underlying
lease including the disposal of the vehicles at maturity. Interest can be fixed
or floating, depending on the underlying leases. The average interest rate at
June 30, 1999, was 5.5%.
The agreements with the Company's lenders include a number of significant
covenants that, among other things, restrict its ability to dispose of non-fleet
assets, incur additional indebtedness, create liens, prohibit the payment of
dividends, enter into certain investments or acquisitions, repurchase or redeem
capital stock, engage in mergers or consolidations or engage in certain
transactions with affiliates and otherwise restrict corporate activities.
Certain of these agreements also require the Company to maintain specific
financial ratios. At June 30, 1999, the Company was in compliance with all such
covenants related to these agreements.
F-55
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS
In connection with the VMS Acquisition and as part of the financing thereof,
Avis Rent A Car, Inc. (the "Parent") issued and sold the Senior Subordinated
Notes (see Note 9). The Senior Subordinated Notes are general unsecured
obligations of the Parent, subordinated in right of payment to all existing and
future senior indebtedness of the Company, and guaranteed by certain of the
Parent's domestic subsidiaries. Accordingly, the following condensed
consolidating financial information presents the condensed consolidating
financial statement as of June 30, 1999 and for the six months ended June 30,
1998 and 1999, respectively, of: (a) Parent; (b) the guarantor subsidiaries; (c)
the non-guarantor subsidiaries; (d) elimination entries necessary to consolidate
Parent with guarantor and non-guarantor subsidiaries; and (e) the Company on a
consolidated basis.
Separate financial statements and other disclosures with respect to the
subsidiary guarantors have not been made because management has determined that
such information is not material to holders of the Senior Subordinated Notes.
Investments in subsidiaries are accounted using the equity method for
purposes of the consolidating presentation. The principle elimination entries
eliminate investments in subsidiaries and intercompany balances and transactions
(in thousands):
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ --------------
Revenue................................. $ 975,294 $ 111,376 $ 1,086,670
------------ ------------ --------------
Direct operating, net................... 389,323 51,361 440,684
Vehicle depreciation and lease charges,
net................................... 248,580 28,814 277,394
Selling, general and administrative..... 196,641 16,473 213,114
Interest, net........................... $ 6,916 88,234 1,668 96,818
Amortization of cost in excess of net
assets acquired....................... 5,449 72 5,521
----------- ------------ ------------ --------------
$ 6,916 928,227 98,388 1,033,531
----------- ------------ ------------ --------------
(6,916) 47,067 12,988 53,139
Equity in earnings of subsidiaries...... 34,253 8,473 $ (42,726)
----------- ------------ ------------ ------------ --------------
Income before provision for income
taxes................................. 27,337 55,540 12,988 (42,726) 53,139
Provision for income taxes.............. (2,421) 21,287 4,515 23,381
----------- ------------ ------------ ------------ --------------
Net income.......................... $ 29,758 $ 34,253 $ 8,473 $ (42,726) $ 29,758
----------- ------------ ------------ ------------ --------------
----------- ------------ ------------ ------------ --------------
F-56
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- ------------ ------------ -------------
Revenue.................................. $ 1,086,437 $ 117,937 $ 1,204,374
------------- ------------ -------------
Direct operating, net.................... 421,062 55,876 476,938
Vehicle depreciation and lease charges,
net.................................... 281,621 29,546 311,167
Selling, general and administrative...... 214,450 16,732 231,182
Interest, net............................ $ 6,918 95,556 1,888 104,362
Amortization of cost in excess of net
assets acquired........................ 6,255 96 6,351
----------- ------------- ------------ -------------
6,918 1,018,944 104,138 1,130,000
----------- ------------- ------------ -------------
(6,918) 67,493 13,799 74,374
Equity in earnings of subsidiaries....... 46,965 9,374 $ (56,339)
----------- ------------- ------------ ------------ -------------
Income before provision for income
taxes.................................. 40,047 76,867 13,799 (56,339) 74,374
Provision for income taxes............... (2,421) 29,902 4,425 31,906
----------- ------------- ------------ ------------ -------------
Net income............................... $ 42,468 $ 46,965 $ 9,374 $ (56,339) $ 42,468
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
F-57
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION
JUNE 30, 1999
----------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- -------------- -------------- --------------
ASSETS
Cash and cash equivalents.......... $ 15,359 $ 67,177 $ 197,834 $ 280,370
Restricted cash.................... 189,680 189,680
Accounts receivable, net........... 3,952 221,870 684,489 910,311
Finance lease receivables.......... 43,123 297,745 340,868
Due from affiliates, net........... 1,404,419 (1,319,212) (85,207)
Prepaid expenses................... 49,108 13,104 62,212
Vehicles, net...................... (44,079) 7,707,349 7,663,270
Property and equipment, net........ 174,367 82,747 257,114
Investment in subsidiaries......... 982,919 1,460,246 134,020 $ (2,577,185)
Other assets....................... 1,001 82,266 5,332 88,599
Cost in excess of net assets
acquired, net.................... 1,597,484 198,719 1,796,203
------------- ------------- -------------- -------------- --------------
Total assets....................... $ 2,407,650 $ 2,332,350 $ 9,425,812 $ (2,577,185) $ 11,588,627
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
LIABILITIES, PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Accounts payable................... $ 233,282 $ 390,996 $ 624,278
Accrued liabilities, net........... $ 1,063 327,806 23,875 352,744
Deferred income.................... 24,445 40,930 65,375
Due to affiliates.................. 231,550 (380,179) 228,306 79,677
Current income tax liabilities..... (9,172) 59,572 50,400
Deferred income tax liabilities.... (13,106) 114,911 40,775 142,580
Public liability, property damage
and other insurance liabilities,
net.............................. 223,674 55,650 279,324
Debt............................... 1,573,000 63,164 7,380,942 9,017,106
------------- ------------- -------------- --------------
Total liabilities.................. 1,792,507 597,931 8,221,046 10,611,484
Commitments and contingencies
Preferred stock.................... 362,000 362,000
Common stockholders' equity........ 615,143 1,372,419 1,204,766 $ (2,577,185) 615,143
------------- ------------- -------------- -------------- --------------
Total liabilities, preferred stock
and common stockholders'
equity........................... $ 2,407,650 $ 2,332,350 $ 9,425,812 $ (2,577,185) $ 11,588,627
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
F-58
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 29,758 $ 34,253 $ 8,473 $ (42,726) $ 29,758
Adjustments to reconcile net income to
net cash provided by operating
activities:........................... (156,701) 276,735 8,867 128,901
------------ ------------- ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............. (126,943) 310,988 17,340 (42,726) 158,659
------------ ------------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions.......... 70,072 (1,989,727) (1,919,655)
Vehicle deletions....................... (84,739) 1,467,327 1,382,588
Payments for additions to property and
equipment............................. (19,874) (1,214) (21,088)
Retirements of property and equipment... 2,365 189 2,554
Investment in subsidiaries.............. (31,126) (8,475) 39,601
Payment for purchase of licensees....... (222,506) (9,969) (232,475)
------------ ------------- ------------ ------------ -------------
NET CASH USED IN INVESTING
ACTIVITIES........................ (31,126) (263,157) (533,394) 39,601 (788,076)
------------ ------------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) increase in debt..... (54,507) 510,573 456,066
Payments for debt issuance costs........ (3,832) (3,832)
Proceeds from public offering........... 161,194 161,194
------------ ------------- ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.............. 161,194 (58,339) 510,573 613,428
------------ ------------- ------------ ------------ -------------
Effect of exchange rate changes on
cash.................................. (3,125) (428) 3,125 (428)
------------ ------------- ------------ ------------ -------------
Net decrease in cash and cash
equivalents........................... (10,508) (5,909) (16,417)
Cash and cash equivalents at beginning
of period............................. 11 27,199 17,689 44,899
------------ ------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 11 $ 16,691 $ 11,780 $ $ 28,482
------------ ------------- ------------ ------------ -------------
------------ ------------- ------------ ------------ -------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
Interest.............................. $ 98,390
-------------
-------------
Income taxes.......................... $ 7,938
-------------
-------------
Businesses acquired:
Fair value of assets acquired......... $ 232,765
Liabilities assumed................... 290
-------------
Net assets acquired................... 232,475
-------------
Net cash paid for acquisitions........ $ 232,475
-------------
-------------
F-59
AVIS RENT A CAR, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 42,468 $ 46,965 $ 9,374 $ (56,339) $ 42,468
Adjustments to reconcile net income to net cash
provided by operating activities:............. (166,712) 311,296 112,117 256,701
----------- ------------ ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ (124,244) 358,261 121,491 (56,339) 299,169
----------- ------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for vehicle additions.................. 89,213 (2,583,460) (2,494,247)
Vehicle deletions............................... (259,369) 1,778,843 1,519,474
Payments for additions to property and
equipment..................................... (16,761) (1,192) (17,953)
Retirements of property and equipment........... 1,056 17 1,073
Investment in subsidiaries...................... (49,645) (9,374) 59,019
Payment for purchase of licensees, net of cash
acquired of $11,065........................... (42,503) (42,503)
Payment for purchase of PHH Holdings, net of
cash acquired of $170,568..................... (1,330,932) (1,330,932)
----------- ------------ ------------ ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES....... (1,380,577) (237,738) (805,792) 59,019 (2,365,088)
----------- ------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in (repayment of) debt............. 1,573,000 (67,953) 866,950 2,371,997
Payments for debt issuance costs................ (1,600) (35) (1,635)
Purchase of treasury stock...................... (57,237) (57,237)
Other........................................... 3,326 3,326
Cash dividends.................................. 4,866 (4,866)
----------- ------------ ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ 1,517,489 (63,122) 862,084 2,316,451
----------- ------------ ------------ ------------ -------------
Effect of exchange rate changes on cash......... 2,680 87 (2,680) 87
----------- ------------ ------------ ------------ -------------
Net increase in cash and cash equivalents....... 15,348 57,401 177,870 250,619
Cash and cash equivalents at beginning of
period........................................ 11 9,776 19,964 29,751
----------- ------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 15,359 $ 67,177 $ 197,834 $ $ 280,370
----------- ------------ ------------ ------------ -------------
----------- ------------ ------------ ------------ -------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest...................................... $ 107,466
-------------
-------------
Income taxes.................................. $ 5,329
-------------
-------------
Business acquired:
Fair value of assets acquired................. 6,218,950
Liabilities................................... 4,483,515
-------------
Net assets acquired........................... 1,735,435
Less issuance of Series A and Series C
preferred stock............................. (362,000)
-------------
Net cash paid for acquisitions................ $ 1,373,435
-------------
-------------
F-60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PHH Corporation
We have audited the accompanying combined balance sheets of PHH Vehicle
Management Services (the "Group") as of December 31, 1998 and 1997, and the
related combined statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. All entities in
the Group are directly or indirectly wholly-owned subsidiaries of Cendant
Corporation. These combined financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of PHH Vehicle Management Services as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
[LOGO]
Parsippany, New Jersey
June 18, 1999, except Note 18,
which is dated June 30, 1999
F-61
PHH VEHICLE MANAGEMENT SERVICES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
ASSETS
Cash and cash equivalents......................................................... $ 21,059 $ 11,938
Accounts and loans receivable--net of allowance of $11,272 and $8,702............. 508,901 383,830
Property and equipment--net....................................................... 93,529 39,066
Goodwill--net of accumulated amortization of $22,849 and $17,108.................. 219,192 31,439
Other intangibles--net............................................................ 17,246 1,179
Deferred income taxes............................................................. 39,945 39,696
Other assets...................................................................... 40,099 33,546
------------- -------------
Total assets exclusive of assets under management programs.................... 939,971 540,694
------------- -------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles
Operating leases................................................................ 2,956,676 3,030,187
Direct financing leases......................................................... 830,753 563,290
Accrued interest................................................................ 899 941
------------- -------------
3,788,328 3,594,418
------------- -------------
TOTAL ASSETS........................................................................ $ 4,728,299 $ 4,135,112
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.................................................................. $ 181,718 $ 219,229
Accrued liabilities............................................................... 113,499 56,598
Income taxes payable.............................................................. 108,089 44,828
Deferred revenue.................................................................. 41,146 46,447
Due to affiliates................................................................. 182,061 242,850
Certificate of deposit............................................................ 25,000 --
Borrowed funds.................................................................... 22,207 39,677
------------- -------------
Total liabilities exclusive of liabilities under management programs.......... 673,720 649,629
------------- -------------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt:
Affiliates...................................................................... 1,859,683 2,531,863
Third party..................................................................... 1,250,628 269,213
Deferred income taxes............................................................. 213,444 244,241
------------- -------------
3,323,755 3,045,317
------------- -------------
TOTAL LIABILITIES................................................................... 3,997,475 3,694,946
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 15).............................................
SHAREHOLDERS' EQUITY................................................................ 730,824 440,166
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 4,728,299 $ 4,135,112
------------- -------------
------------- -------------
See notes to combined financial statements.
F-62
PHH VEHICLE MANAGEMENT SERVICES
COMBINED INCOME STATEMENTS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
REVENUE
Fleet leasing revenue............................................. $ 1,286,896 $ 1,187,193 $ 1,128,495
Fleet management services......................................... 182,356 184,047 167,512
Other revenue..................................................... 135,811 81,455 61,032
------------- ------------- -------------
Total revenues.................................................. 1,605,063 1,452,695 1,357,039
------------- ------------- -------------
EXPENSES
Depreciation on leased vehicles................................... 1,015,511 953,551 912,830
Interest expense.................................................. 183,560 177,149 167,687
Selling, general and administrative expenses...................... 232,724 211,123 193,822
Depreciation and amortization on assets other than leased
vehicles........................................................ 25,680 14,943 16,585
Merger-related costs and other unusual (credits) charges.......... (1,280) 61,090 --
------------- ------------- -------------
Total expenses.................................................. 1,456,195 1,417,856 1,290,924
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES............................ 148,868 34,839 66,115
PROVISION FOR INCOME TAXES.......................................... 55,800 23,649 25,323
------------- ------------- -------------
NET INCOME.......................................................... $ 93,068 $ 11,190 $ 40,792
------------- ------------- -------------
------------- ------------- -------------
See notes to combined financial statements.
F-63
PHH VEHICLE MANAGEMENT SERVICES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income.............................................................. $ 93,068 $ 11,190 $ 40,792
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation on leased vehicles....................................... 1,015,511 953,551 912,830
Depreciation and amortization on assets other than leased vehicles.... 25,680 14,943 16,585
Merger-related costs and other unusual (credits) charges.............. (1,280) 61,090 --
Other non-cash charges................................................ 5,140 2,961 2,047
Changes in other assets and liabilities:
Accounts and loans receivable....................................... (134,007) (25,022) (2,990)
Income taxes payable................................................ 101,511 35,732 (20,419)
Accounts payable and other accrued liabilities...................... 50,620 (28,957) 67,995
Due to affiliates................................................... (24,642) (89,600) (96,299)
Deferred income taxes............................................... (64,743) 44,784 55,432
Other assets, net................................................... (2,017) 602 (8,556)
----------- ----------- -----------
Net cash provided by operating activities......................... 1,064,841 981,274 967,417
----------- ----------- -----------
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles.............................. (2,516,895) (2,185,270) (1,918,531)
Repayments of investment in leases and leased vehicles................ 1,088,036 756,939 726,246
Proceeds from sales and transfers of leases and leased vehicles....... 224,597 229,303 117,753
Net purchases of property and equipment................................. (59,823) (13,171) (13,750)
Cash acquired in acquisition of business, net of contribution from
affiliates............................................................ 2,341 -- --
----------- ----------- -----------
Net cash used in investing activities............................. (1,261,744) (1,212,199) (1,088,282)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from certificate of deposit.................................... 25,000 -- --
Net change in line of credit............................................ (18,360) 5,552 6,170
Payment of dividends to PHH Corporation................................. -- -- (19,302)
Capital contribution.................................................... -- -- 4,985
Liabilities under management programs
Proceeds from third party debt issuance............................... 4,431,004 1,596,668 1,669,418
Principal payments on third party debt issuance....................... (3,005,694) (1,611,431) (1,558,814)
Proceeds from debt from affiliates.................................... 1,401,573 2,078,077 1,026,697
Principal payments on debt from affiliates............................ (2,607,726) (1,843,035) (1,002,354)
----------- ----------- -----------
Net cash provided by financing activities......................... 225,797 225,831 126,800
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS..................... (19,773) (2,806) 3,496
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 9,121 (7,900) 9,431
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............................. 11,938 19,838 10,407
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................... $ 21,059 $ 11,938 $ 19,838
----------- ----------- -----------
Interest paid............................................................. $ 184,285 $ 160,421 $ 148,320
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid......................................................... $ 23,804 $ 22,422 $ 22,444
----------- ----------- -----------
----------- ----------- -----------
Non-cash investing and financing information:
Business acquired:
Fair value of assets acquired, excluding cash........................... $ 294,287
Liabilities assumed..................................................... (86,006)
Capital contribution from affiliate for acquisition..................... (190,597)
Additional purchase consideration payable............................... (20,025)
-----------
Net cash acquired....................................................... $ (2,341)
-----------
-----------
See notes to combined financial statements.
F-64
PHH VEHICLE MANAGEMENT SERVICES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
Balance, January 1, 1996......................................................... $ 352,353
Comprehensive income, net of tax:
Net income..................................................................... 40,792
Currency translation........................................................... 12,173
---------
Total comprehensive income....................................................... 52,965
---------
Capital contribution............................................................. 4,985
Dividends paid to PHH Corporation................................................ (19,302)
---------
Balance, December 31, 1996....................................................... 391,001
---------
Comprehensive loss, net of tax income:
Net income..................................................................... 11,190
Currency translation........................................................... (8,852)
---------
Total comprehensive income....................................................... 2,338
---------
Capital contribution............................................................. 46,827
---------
Balance, December 31, 1997....................................................... 440,166
---------
Comprehensive income (loss), net of tax:
Net income..................................................................... 93,068
Currency translation........................................................... 3,018
Pension plan additional minimum liability, net................................. (1,306)
---------
Total comprehensive income....................................................... 94,780
---------
Capital contribution............................................................. 190,597
Benefit of tax losses received from outside the Group............................ 5,281
---------
Balance, December 31, 1998....................................................... $ 730,824
---------
---------
See notes to combined financial statements.
F-65
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
PHH Vehicle Management Services (the "Group") is a combined reporting entity
engaged in the business of providing fleet and fuel management services
primarily consisting of the management, purchase, leasing and resale of vehicles
for corporate and government agencies. All entities within the Group are
directly or indirectly wholly-owned subsidiaries of PHH Corporation ("PHH") and
PHH is a wholly-owned subsidiary of Cendant Corporation ("Cendant" or the
"Parent Company"). Services provided by the Group include fuel, maintenance,
safety, and accident management programs and other fee-based services for
vehicle fleets. The Group leases vehicles under operating and direct financing
lease arrangements. The Group operates in the United States, Canada, United
Kingdom, Ireland and Germany. The combined and consolidated financial statements
represent the aggregation of the accounts and transactions of the following
legal entities and their subsidiaries:
PHH Vehicle Management Services Corporation and its wholly-owned
subsidiaries ("PHH VMS Corporation"), excluding Trac Funding III, Inc.
PHH Vehicle Management Services Inc. and its subsidiaries ("PHH VMS Canada")
PHH Personalease Corporation
Dealers Holding, Inc. and its wholly-owned subsidiaries
PHH Commercial Leasing, Inc.
PHH Corner Leasing, Inc.
PHH Page Leasing, Inc.
PHH St. Paul Leasing, Inc.
PHH Continental Leasing, Inc.
PHH Caribbean Leasing, Inc.
PHH Market Leasing, Inc.
PHH Milford Leasing, Inc.
PHH National Leasing, Inc.
PHH Power Leasing, Inc.
PHH Vehicle Management Services Plc
PHH Investment Services Ltd.
PHH Financial Services Ltd.
PHH Leasing (No. 9) Ltd.
PHH Card Services Ltd.
Allstar Petrol Card Limited
PHH Truck Management Services Ltd.
Pointeuro Limited and its wholly-owned subsidiaries
Wright Express Corporation and its wholly-owned subsidiaries ("Wright
Express")
PHH Deutschland Inc.
PHH Charitable Trust
Wright Express Financial Services Corporation (the "Bank"), a subsidiary of
Wright Express, is licensed as an industrial loan corporation pursuant to the
laws of the State of Utah and its deposits
F-66
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
subject to competition from other financial institutions and to the regulations
of certain federal and state agencies and undergoes examination by those
agencies.
The combined financial statements include the accounts and transactions of
all of the above-mentioned legal entities. All significant balances and
transactions between the combined entities have been eliminated. Remaining
balances with affiliates relate to PHH and Cendant or their subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Group considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS AND LOANS RECEIVABLE
Accounts and loans receivable at December 31, 1998 includes $122 million of
credit card receivables of the Bank.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed by the straight-line method over the estimated useful
lives of the related assets or the lease term, if shorter.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired, is amortized on a straight-line basis over the estimated useful lives,
which range from 25 to 40 years.
INTANGIBLE ASSETS
Intangible assets represent the value placed on customer lists. Intangible
assets are amortized on a straight-line basis over their estimated useful lives
of 7 to 14 years.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, comparing the respective carrying
values to the current and expected future cash
F-67
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
flows, on an undiscounted basis, to be generated from such assets. Property and
equipment is evaluated separately within each business. The recoverability of
goodwill is evaluated on a separate basis for each acquisition.
RECOGNITION OF REVENUES AND EXPENSES
FLEET LEASING SERVICES--The Group primarily leases vehicles under three
standard arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). These leases are accounted
for in accordance with Statement of Financial Accounting Standards ("SFAS") No.
13, "Accounting for Leases." Each lease is either classified as an operating
lease or direct financing lease, as defined.
The Group records the cost of the leased vehicle as an "investment in leases
and leased vehicles." Vehicles are depreciated using the straight-line method
over the expected lease term. The lease terms range from 12 months to 144
months. Amounts charged to the lessees for interest on the unrecovered
investment are credited to income on a level yield method, which approximates
the contractual terms. Amounts received from the motor companies are partially
recognized at the time of acquisition of the leased vehicle, a portion is
deferred and recognized straight line over the lease term of the vehicle, and a
portion is deferred and recognized at the time the vehicle is disposed of.
FLEET MANAGEMENT SERVICES--Revenues from fleet management services other
than leasing are recognized over the period in which services are provided and
the related expenses are incurred.
SERVICE, MAINTENANCE AND REPAIRS PROVISION--Service, maintenance and repairs
("SMR") are provided for vehicles under certain leases. These leases include a
revenue component for SMR costs. The Group accrues estimated losses on those
leases where estimated SMR costs exceed revenues.
INCOME TAXES
The U.S. entities are included in the consolidated income tax return of
Cendant. In the United Kingdom, the Group files combined income tax returns with
other members of Cendant. The Group's share of the consolidated federal income
tax liability is allocated to each company on a separate return basis. Separate
income tax returns are filed in states or countries where consolidated returns
are not permitted. In 1998 the income taxes payable for the Group has been
reduced by approximately $5,281 for tax benefits received from other members of
Cendant. The benefit has been accounted for as a capital contribution. For the
other European companies, separate income tax returns are filed in countries
where consolidated returns are not permitted. The provision for income taxes
includes deferred income taxes resulting from items reported in different
periods for income tax and financial statement purposes. Deferred tax assets and
liabilities represent the expected future tax consequences of the differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The effects of changes in tax rates
on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
F-68
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERCOMPANY TRANSACTIONS
The Group borrows principally from PHH Corporation and PHH Dublin Unlimited
to fund its leasing operations, except for PHH VMS Canada which raises its own
funds through its commercial paper program. The costs of these funds are passed
on to the leasing customers. In addition, PHH Corporation has guaranteed certain
transactions entered into by the Group. Cendant provides certain administrative
services to the Group. The Group records the cost of these services as expenses
when incurred. These services are discussed in Note 12.
TRANSLATION OF FOREIGN CURRENCIES
The combined financial statements are expressed in U.S. dollars solely for
the purpose of presenting the Group's financial position and results of
operations. Assets and liabilities of foreign entities are translated at the
exchange rates as of the balance sheet dates, equity accounts are translated at
historical exchange rates and revenues, expenses and cash flows are translated
at the average exchange rates for the periods presented. Translation gains and
losses are included as a component of other comprehensive income in the
statement of shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-The Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in June 1998. This Standard establishes
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires a company to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
This standard is expected to be effective for fiscal years beginning after June
15, 2000. The Group has not completed its assessment of the effect on the
combined financial statements that will result from the adoption of SFAS No.
133.
3. MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES
In connection with the merger of PHH with HFS Incorporated in the second
quarter of 1997 and the merger of HFS Incorporated with CUC International, Inc.
in the fourth quarter of 1997 (the "Mergers"), the Group recorded $62,662 of
merger-related costs and other unusual charges. The Mergers afforded the Parent
Company, at such time, an opportunity to rationalize its businesses, gain
organizational efficiencies and maximize profits. Parent Company management
initiated a plan to continue the downsizing of fleet operations by providing for
143 job reductions and eliminating unprofitable products. In conjunction with
these charges during 1997, the Parent Company made a non-cash capital
contribution of $46,827.
Personnel related charges of $7,662 included termination benefits such as
severance, medical and other benefits as well as retirement benefits pursuant to
pre-existing contracts resulting from a change in control. Business termination
charges of $55,000 represented costs to exit certain activities including: (i)
$30,000 payment to terminate a relationship with a third-party associated with
certain credit card operations and (ii) $25,000 goodwill impairment loss
recorded as a result of
F-69
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
3. MERGER RELATED COSTS AND OTHER UNUSUAL CHARGES (CONTINUED)
abandoning certain unprofitable closed-end leasing activities. The Group
determined that servicing certain small closed-end lease customers was not
profitable. The decision to discontinue service of such customers resulted in
reduced revenues and cash flows associated with operations previously acquired.
Undiscounted future expected cash flows were not sufficient to support the
carrying value of the related goodwill and accordingly, an impairment loss was
recorded based on the discounted cash flows. The plan was substantially
completed by December 31, 1997 and the Group recorded a credit to merger related
costs and other unusual charges in 1997 due to a change in estimate. The
remaining liability at December 31, 1997 represented severance payments, which
were paid in 1998 with any excess liability reversed as a credit to merger
related costs and other unusual charges as the plan was completed in 1998. The
following table summarizes the activity by category of expenditure:
PERSONNEL BUSINESS
TOTAL RELATED TERMINATIONS
---------- ----------- -------------
1997 ACTIVITY:
Original Charge........................................................... $ 62,662 $ 7,662 $ 55,000
Cash Payments............................................................. (34,028) (4,028) (30,000)
Non-cash reductions....................................................... (25,000) -- (25,000)
Adjustments............................................................... (1,572) (1,572) --
---------- ----------- -------------
Balance December 31, 1997................................................. $ 2,062 $ 2,062 $ --
---------- ----------- -------------
---------- ----------- -------------
1998 ACTIVITY:
Cash Payments............................................................. $ (782) $ (782)
Adjustments............................................................... (1,280) (1,280)
---------- -----------
Balance December 31, 1998................................................. $ -- $ --
---------- -----------
---------- -----------
4. ACQUISITIONS AND DIVESTITURES
a) On January 20, 1998, Cendant acquired The Harpur Group Ltd ("Harpur") for
an initial purchase price of approximately $194 million, including acquisition
costs. Additional purchase consideration of approximately $20 million was
accrued as of December 31, 1998, upon the attainment of certain revenue
thresholds as specified in the purchase agreement. The excess of the aggregate
purchase price over the fair value of net assets acquired of approximately $189
million has been allocated to goodwill. Harpur was subsequently contributed by
Cendant to PHH and is included within the Pointeuro Limited legal entity. The
operating results of Harpur are included in the combined income statement of the
Group since the Cendant acquisition date. Harpur provides fuel card and fleet
management services to corporate clients in the United Kingdom.
Pro forma Information (unaudited)
The underlying unaudited pro forma information includes the amortization
expense associated with the assets acquired, the Group's financing arrangements
and related income tax effects. The pro forma results are not necessarily
indicative of the operating results that would have occurred
F-70
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
4. ACQUISITIONS AND DIVESTITURES (CONTINUED)
had the Harpur acquisition been consummated on January 1, 1997, nor are they
intended to be indicative of results that may occur in the future. The
underlying pro forma information includes the amortization expense associated
with assets acquired, the Group's financing arrangements and related income tax
effects. Pro forma results of operations for the year ended December 31, 1998,
assuming the acquisition of Harpur had occurred on January 1, 1998, have not
been presented as the effect is not material. The following table reflects the
operating results of the Group for the year ended December 31, 1997 on a pro
forma basis, which gives effect to the acquisition of Harpur as if such
acquisition occurred on January 1, 1997.
YEAR ENDED
DECEMBER 31, 1997
-------------------
Net revenues............................................................. $ 1,475,034
-------------------
-------------------
Pre-tax.................................................................. $ 27,379
-------------------
-------------------
Net income............................................................... $ 7,179
-------------------
-------------------
b) In January 1997, PHH VMS Corporation sold 50 percent of its interest in a
subsidiary, which contained certain credit card operations to a third party,
resulting in a gain of $17.5 million included in other revenue in the combined
statement of income.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
DECEMBER 31,
USEFUL LIVES -----------------------
IN YEARS 1998 1997
------------ ---------- -----------
Building.................................................................. 50 $ 22,106 $ 8,977
Leasehold improvements.................................................... 2-10 9,646 7,880
Software.................................................................. 3-5 7,033 4,187
Furniture, fixtures and equipment......................................... 3-8 146,047 88,034
Construction in progress.................................................. 7,879 1,521
---------- -----------
192,711 110,599
Accumulated depreciation and amortization................................. (99,182) (71,533)
---------- -----------
Property and equipment, net............................................... $ 93,529 $ 39,066
---------- -----------
---------- -----------
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES
The Group offers primarily three leasing arrangements to its customers.
These arrangements are:
OPEN-END OPERATING LEASES--Under these leases, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of the
vehicles upon termination of the lease is generally for the account of the
lessee except for a minimum residual value, which the Group has guaranteed. The
Group guarantees 16% of the original cost of the unit for the first 24 months of
the
F-71
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES (CONTINUED)
lease, and then 16% of the fair market value of the unit at inception of the
month to month renewals thereafter. The original cost and accumulated
depreciation of vehicles under these leases was $5.1 billion and $2.5 billion,
respectively at December 31, 1998 and $4.9 billion and $2.4 billion,
respectively at December 31, 1997.
CLOSED-END OPERATING LEASES--Under these leases, the minimum lease term is
for 12 months or longer. However, 24 and 36 month lease terms are the most
prevalent. These leases are cancelable under certain conditions. Resale of the
vehicles upon termination is for the account of the lessor. The original cost
and accumulated depreciation of vehicles under these leases was $430 million and
$108 million, respectively at December 31, 1998. The original cost and
accumulated depreciation of vehicles under these leases were $328 million and
$75 million, respectively at December 31, 1997.
DIRECT FINANCING LEASES--Under these leases, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of the
vehicles upon termination of the lease is for either the account of the lessor
(Europe) or the lessee (both North America and Europe). The net investment in
leases and leased vehicles consisted of the following:
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
Vehicles under open-end operating leases........................ $ 2,634,000 $ 2,552,000
Vehicles under closed-end operating leases...................... 322,676 478,187
Direct financing leases......................................... 830,753 563,290
Accrued interest on leases...................................... 899 941
------------- -------------
Net investment in leases and leased vehicles.................... $ 3,788,328 $ 3,594,418
------------- -------------
------------- -------------
At December 31, 1998, future minimum lease payments are as follows:
DIRECT
OPERATING FINANCING
YEAR LEASES LEASES TOTAL
- ----------------------------------------------------- ----------- ----------- -------------
1999................................................. $ 267,094 $ 280,317 $ 547,411
2000................................................. 37,289 218,825 256,114
2001................................................. 17,779 134,781 152,560
2002................................................. 3,013 42,223 45,236
2003................................................. 1,068 4,867 5,935
Thereafter........................................... 946 -- 946
----------- ----------- -------------
Total................................................ $ 327,189 $ 681,013 $ 1,008,202
----------- ----------- -------------
----------- ----------- -------------
F-72
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES (CONTINUED)
Fleet leasing revenue consisted of:
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
Operating leases................................ $ 1,197,616 $ 1,121,722 $ 1,071,129
Direct financing leases......................... 89,280 65,471 57,366
------------- ------------- -------------
$ 1,286,896 $ 1,187,193 $ 1,128,495
------------- ------------- -------------
------------- ------------- -------------
Other managed vehicles with net carrying amounts of $222 million and $158
million at December 31, 1998 and 1997, respectively, are included in special
purpose entities which are not owned by the Group. These entities do not require
consolidation as they are not controlled by the Group and all risks and rewards
rest with the owners. Additionally, managed vehicles totaling approximately $82
and $70 million at December 31, 1998 and 1997, respectively, are owned by
special purpose entities, which are owned by the Group. However, such assets and
related liabilities have been netted in the combined balance sheets since there
is a two-party agreement with determinable accounts, a legal right of offset
exists and the Group exercises its right of offset in settlement with client
corporations.
F-73
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
7. DEBT UNDER MANAGEMENT PROGRAMS
The components of the Group's debt under management programs are as follows:
DECEMBER 31,
-----------------------
1998 1997
---------- -----------
INSTALLMENT NOTES PAYABLE ON LEASED VEHICLES--Represents loans
under a loan agreement with PHH Corporation to fund specific
leases. Repayment of these notes is matched to payments on the
underlying leases including the disposal of the vehicles at
maturity. The interest rate can be either a fixed rate or
floating rate as it is matched to the underlying lease and is
based upon PHH Corporation's cost of funds. The average interest
rates were 5.92% and 5.93% for 1998 and 1997, respectively...... $1,012,712 $2,133,613
SECURED LOANS--Represents two five year secured transactions
completed in December 1998 through two wholly-owned
subsidiaries, PHH Trac Funding and PHH Trac Funding II, with
banks. Specified beneficial interests in leases totaling
$600,008 and $725,296, respectively, were contributed into the
subsidiaries by PHH VMS Corporation. The loans are secured by
the specified beneficial interests.............................. 1,104,300 --
COMMERCIAL PAPER--Borrowing outstanding which is used to fund the
leased inventory in Canada. At December 31, 1998, all
outstanding debt matured on February 1999. The average interest
rates were 5.41% and 3.37% for 1998 and 1997, respectively...... 89,042 117,178
SELF-FUND NOTES--Represents loans made by customers to purchase
leased vehicles. Repayment of these notes is matched to payments
on the underlying leases including the disposal of the vehicles
at maturity. Interest rate characteristics can be fixed or
floating, depending on the underlying leases. Notes in the
amount of $15,039 include full recourse provisions to the Group
during 1998. The average interest rates were 5.88% and 5.85% for
1998 and 1997, respectively..................................... 24,096 27,583
INTERCOMPANY POSITION--Short-term financing needs are met under
revolving loan agreements with PHH Corporation and PHH Dublin
Unlimited. Interest is based upon their average commercial paper
cost for the month the loan is outstanding. These loans fund
working capital needs and there is no stated maturity. Interest
is paid monthly with respect to PHH Corporation and twice yearly
for PHH Dublin Unlimited........................................ 846,971 421,474
OVERNIGHT LOAN--Short-term financing needs are met by overnight
loans from a bank. This loan funded working capital needs. The
rates of interest were 6% for 1998 and 1997..................... 33,190 101,228
---------- -----------
Total debt under management programs.............................. $3,110,311 $2,801,076
---------- -----------
---------- -----------
F-74
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
7. DEBT UNDER MANAGEMENT PROGRAMS (CONTINUED)
PHH VMS Canada has an unsecured line of credit with a bank. The Group
carries the line as a backup for outstanding commercial paper. At December 31,
1998, the Group had no borrowings outstanding under this line of credit. The
total amount available under this line of credit is $3.3 million. The line of
credit does not have a stated maturity date.
Cendant Business Answers (Europe) Plc and its subsidiaries has an unsecured
line of credit providing for borrowing of up to $33.2 million with a bank
expiring in January 2000. At December 31, 1998 Cendant Business Answers (Europe)
Plc had no borrowings outstanding under this line.
Cendant Business Answers (Europe) Plc maintains Bills of Exchange available
to meet short-term financing needs. At December 31, 1998, Cendant Business
Answers (Europe) Plc had no borrowings outstanding under this arrangement.
Projections of estimated repayments of debt under management programs as of
December 31, 1998 are set forth as follows:
YEAR
- -------------------------------------------------------------------------------
1999........................................................................... $ 1,798,118
2000........................................................................... 774,753
2001........................................................................... 355,669
2002........................................................................... 115,720
2003........................................................................... 39,402
Thereafter..................................................................... 26,649
-------------
$ 3,110,311
-------------
-------------
8. SALE-LEASEBACK TRANSACTIONS
The Group entered into several sale-leaseback transactions as described
below:
During 1998, the Group entered into an agreement with an independent third
party to sell and leaseback vehicles subject to operating leases. Accordingly,
vehicles with a net carrying amount of $100,600 were removed from the Group's
books. Since the net carrying value of these vehicles was equal to their sales
value, there was no gain or loss recognized on the sale. The lease agreement
entered into between the Group and the counterparty was for a minimum lease term
of 12 months with three one-year renewal options. This lease qualified as an
operating lease. For the year ended December 31, 1998, the total rental expense
incurred by the Group under this lease was $17,700.
The Group entered into two sale-leaseback transactions with an independent
third party ("Counterparty") in Canada. Under these arrangements, the Group
sells its net investment in operating leases and leased vehicles to the
Counterparty. Then, it repurchases the leased vehicles (the Counterparty retains
the lease rights). Subsequently, the Group leases the vehicles under a direct
financing lease to the Counterparty. The Counterparty prepays all lease payments
except for an agreed-upon residual amount. These residual amounts are typically
3% to 4.5% of the total lease payments. These residual amounts represent the
Group's total exposure from these transactions. The total amounts of net
investment in operating leases and leased vehicles sold under these
F-75
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
8. SALE-LEASEBACK TRANSACTIONS (CONTINUED)
agreements were $185,900 and $162,000 during 1998 and 1997, respectively. The
total outstanding prepaid rent under such agreements were $240,100 and $225,000
at December 31, 1998 and 1997, respectively. The residual amounts outstanding
were $9,400 and $8,000 at December 31, 1998 and 1997, respectively. The total
revenues recognized under these agreements were $90,600, $88,000 and $84,000 for
1998, 1997 and 1996, respectively.
During 1998, the Group purchased and leased back to a provincial government
unit a fleet of vehicles with a carrying value of $24,800. The lease under this
transaction qualified as an operating lease. Subsequent to this transaction, the
Group entered into a sale-leaseback transaction with a financial institution
similar to the arrangement with the Counterparty described above, except that
the financial institution prepaid all the rent. At December 31, 1998, the total
prepaid rent outstanding under this agreement was $19,000. For the year ended
December 31, 1998, the total rental revenue recognized from the provincial
government and rental expense incurred to the financial institution under these
agreements was $7,400.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used to manage exposure to market risks
associated with fluctuations in interest rates. Analyses are performed on an
on-going basis to determine that a high correlation exists between the
characteristics of derivative instruments and the assets or transactions being
hedged. As a matter of policy, derivatives activities are not engaged for
trading or speculative purposes. Exposure to credit-related losses exist in the
event of non-performance by counterparties to certain derivative financial
instruments. Such risk is managed by periodically evaluating the financial
position of counterparties and spreading the positions among multiple
counterparties. Non-performance is presently not expected by any of the
counterparties.
INTEREST RATE SWAPS--If the interest rate characteristics of the funding
mechanism that the Group uses does not match the interest rate characteristics
of the assets being funded, interest rate swap agreements are entered into to
offset the interest rate risk associated with such funding. The swap agreements
correlate the terms of the assets to the maturity and rollover of the debt by
effectively matching a fixed or floating interest rate with the stipulated
revenue stream generated from the portfolio of assets being funded. Amounts to
be paid or received under interest rate swap agreements are accrued as interest
rates change and are recognized over the life of the swap agreements as an
adjustment to interest expense. For the years ended December 31, 1998, 1997 and
1996, hedging activities increased interest expense $3,600, $7,800 and $7,060,
respectively, and had no effect on the weighted average borrowing rate. The fair
value of the swap agreements is not recognized in the combined financial
statements since they are accounted for as matched swaps.
F-76
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The following table summarizes the maturity and weighted average rates of
interest rate swaps at December 31, 1998.
MATURITIES
-----------------------------------------------------
TOTAL 1999 2000 2001 2002
--------- --------- --------- --------- ---------
NORTH AMERICA
Pay fixed/receive floating:
Notional value........................................... $ 42,061 $ 35,690 $ 5,526 $ 845
Weighted average receive rate............................ 5.07% 5.07% 5.07%
Weighted average pay rate................................ 5.10% 4.89% 4.93%
Pay floating/receive floating:
Notional value........................................... $ 47,852 $ 29,055 $ 13,208 $ 4,486 $ 1,103
Weighted average receive rate............................ 5.45% 5.30% 5.24% 5.23%
Weighted average pay rate................................ 5.46% 5.45% 5.45% 5.45%
UNITED KINGDOM
Pay fixed/receive floating
Notional value........................................... $ 663,800 $ 256,392 $ 207,438 $ 145,206 $ 54,764
Weighted average receive rate............................ 6.26% 6.26% 6.26% 6.26%
Weighted average pay rate................................ 6.81% 6.71% 6.30% 6.30%
DEUTSCHLAND
Pay fixed/receive floating
Notional value........................................... $ 31,897 $ 21,165 $ 9,242 $ 1,490
Weighted average receive rate............................ 3.24% 3.24% 3.24%
Weighted average pay rate................................ 4.28% 4.29% 4.29%
Additionally, depending on market fundamentals of the price of gasoline and
other conditions, Wright Express may purchase put options to reduce or eliminate
the risk of gasoline price declines. Put options purchased by Wright Express
effectively establish a minimum sales transaction fee for the volume of gasoline
purchased on Wright Express's programs. An increase in the value of the options
is highly correlated to a decrease in the average price of gasoline purchased by
Wright Express's cardholders. Put options permit Wright Express to participate
in price increases above the option price. The cost of an option is amortized in
the month the option expires. Gains from the sale or exercise of options are
recognized when the underlying option is sold.
At December 31, 1998, the total contract amount of such options was 32.4
million gallons of gasoline and the unamortized cost of options was $499 and is
included in other assets in the accompanying combined balance sheet. There were
no gasoline option contracts during 1997.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Group in estimating
fair value disclosures for material financial instruments. The fair values of
the financial instruments presented may not be indicative of their future
values.
CASH AND CASH EQUIVALENTS -The carrying amounts for cash and cash
equivalents approximate fair value.
LOANS RECEIVABLE -The carrying amounts for loans receivable approximate fair
value.
F-77
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DIRECT FINANCING LEASES--The contractual minimum lease terms on these
contracts is 12 months. The estimated fair value of these short-term instruments
approximates the carrying amounts.
BORROWED FUNDS--The carrying amount of borrowed funds approximates fair
value.
DEBT UNDER MANAGEMENT PROGRAMS--The fair value was determined based on
quoted market prices for similar issues or on current rates available to the
Group for debt on similar terms.
INTEREST RATE SWAPS--The fair value of interest rate swaps are estimated,
using dealer quotes, as the amount that the Group would receive or pay to
execute a new agreement with terms identical to those remaining on the current
agreement, considering interest rates at the reporting date.
The carrying amounts and fair values of the Group's financial instruments at
December 31, 1998 and 1997 were as follows:
1998 1997
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
--------- --------- ----------- --------- --------- -----------
Cash and cash equivalent.................. $ 21,059 $ 21,059 $ 11,938 $ 11,938
Loans receivable.......................... 121,705 121,705 -- --
Options................................... 499 1,233 -- --
Direct financing leases................... 830,753 830,753 563,290 563,290
Borrowed funds............................ 22,207 22,207 39,677 39,677
Liabilities under management programs:
Debt
Affiliates............................ 1,859,683 1,859,683 2,531,863 2,531,863
Third party........................... 1,250,628 1,250,628 269,213 269,213
Off balance sheet derivatives:
Interest rate swaps..................... $ 785,611 $ 634,332
In a gain position.................... 828 2,823
In a loss position.................... (13,470) (1,370)
F-78
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
11. INCOME TAXES
The income tax provision consisted of the following:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
Current:
U.S. federal.......................................... $ 91,096 $ 24,518 $ (23,483)
State and local....................................... 13,621 2,734 (1,918)
Foreign............................................... 14,523 17,429 648
---------- ---------- ----------
119,240 44,681 (24,753)
---------- ---------- ----------
Deferred:
U.S. federal.......................................... (65,476) (13,308) 38,186
State and local....................................... (10,205) (791) 4,251
Foreign............................................... 12,241 (6,933) 7,639
---------- ---------- ----------
(63,440) (21,032) 50,076
---------- ---------- ----------
Provision for income taxes.............................. $ 55,800 $ 23,649 $ 25,323
---------- ---------- ----------
---------- ---------- ----------
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Net deferred income taxes:
Provision for doubtful accounts.................... $ 3,721 $ 2,382
Net operating losses............................... 510 941
Accrued liabilities and deferred income............ 11,344 16,358
Alternative minimum tax credit carry forward....... 19,800 19,800
Other.............................................. 4,570 215
--------- ---------
Net deferred tax asset............................... $ 39,945 $ 39,696
--------- ---------
--------- ---------
Management program net deferred income taxes:........
Depreciation....................................... $(214,898) $(243,938)
Other.............................................. 1,454 (303)
--------- ---------
Net deferred tax liability........................... $(213,444) $(244,241)
--------- ---------
--------- ---------
At December 31, 1998, Wright Express had net operating losses of
approximately $1,300 available for tax purposes which expire through 2001.
Deferred taxes have not been provided on approximately $169,000 of
cumulative undistributed earnings of foreign subsidiaries at December 31, 1998,
as those earnings are considered to be permanently reinvested. The determination
of unrecognized deferred US tax liability for unremitted
F-79
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
11. INCOME TAXES (CONTINUED)
earnings is not practicable. The Group's effective income tax rate differs from
the statutory federal rate as follows:
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
Federal statutory rate........................................... 35.0% 35.0% 35.0%
State income taxes net of federal benefit........................ 1.5% 3.5% 2.3%
Foreign taxes differential....................................... (0.9%) 0.8% (0.5%)
Non-deductible goodwill.......................................... 1.2% 1.7% 1.2%
Merger-related costs............................................. -- 24.3% --
Other............................................................ 0.7% 2.6% 0.3%
--- --- ---
37.5% 67.9% 38.3%
--- --- ---
--- --- ---
12. RELATED PARTY TRANSACTIONS
The Group receives the benefit of certain administrative services from
Cendant and subsidiaries. For these administrative services, the Group was
charged $6,970, $18,892 and $4,379 for the years ended December 31, 1998, 1997
and 1996, respectively. The Group also purchases data processing services from
Cendant, which amounted to $4,947, $5,094 and $5,509 for the years ended
December 31, 1998, 1997 and 1996, respectively. Such expenses are included in
selling, general and administrative expenses in the combined income statement.
These charges represent allocations from the parent companies who owned the
Group during each of the three years and are not indicative of amounts which
would have been incurred had the Group been under common ownership for all years
or if the Group had operated independently.
PHH Financial Services Limited makes loans from time to time to Cendant
Relocation Plc. The balance of such loans receivable were $55,500 and $18,200 at
December 31, 1998 and 1997, respectively. Associated interest charges were
$1,940, $1,276 and $1,476 for 1998, 1997 and 1996, respectively. Overhead
expenses of $1,720, $453 and $628 were also allocated to this subsidiary by
Cendant Business Answers (Europe) Plc during 1998, 1997 and 1996 respectively.
During 1998, PHH Deutschland, Inc. charged Cendant $703 in respect to office
expenses for shared facilities.
The Group established a $7,000 revolving loan agreement with Cendant
effective December 23, 1998. At December 31, 1998, the Group had $5,847
outstanding under this revolving loan with an interest rate of approximately 6%.
This liability is included in Due to Affiliates in the combined balance sheet.
During February 1999, such revolving loan availability was increased to $40,000.
During 1996, Deutschland, Inc. received a cash capital contribution from PHH
of approximately $4,985 to meet minimum capital requirements.
See Note 7 for a description of related party financing activities.
F-80
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
13. BENEFIT PLANS
The majority of domestic employees of the Group are participants in the
defined benefit and defined contribution plans of Cendant. Effective May 1,
1998, former defined contribution plans of PHH Corporation were merged into
Cendant's plans. Substantially all domestic employees are covered. Accumulated
plan benefit data is not available for the individual companies participating in
the defined benefit plan. Employees of Wright Express are also participants in
the defined contribution plan. Benefit plan expenses were $2,583, $2,300 and
$2,006 for the years ended December 31, 1998, 1997 and 1996, respectively.
Foreign employees can participate in a contributory defined benefit pension
plan, at the employee's option. Benefits are based on an employee's years of
credited service and a percentage of final average compensation.
Net costs for the foreign plan included the following:
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
Service cost..................................... $ 1,147 $ 1,343 $ 853
Interest cost.................................... 1,123 1,074 714
Actual return on assets.......................... (1,330) (1,091) (664)
Net amortization and deferral.................... 55 53 56
--------- --------- ---------
Net periodic pension cost........................ $ 995 $ 1,379 $ 959
--------- --------- ---------
--------- --------- ---------
F-81
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
13. BENEFIT PLANS (CONTINUED)
The changes in benefit obligations and plan assets, as well as the funded
status of the foreign pension plan are as follows:
1998 1997
--------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1,....................................... $ 16,097 $ 12,718
Service cost........................................................... 1,147 1,343
Interest cost.......................................................... 1,123 1,074
Benefit payments....................................................... (209) (198)
Net loss/gain.......................................................... 7,391 (29)
Contributions.......................................................... 737 371
Translation............................................................ -- 818
--------- ---------
Benefit obligation at December 31,..................................... $ 26,286 $ 16,097
--------- ---------
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1,................................ $ 15,491 $ 10,857
Actual return of plan assets........................................... 1,332 2,317
Benefit payments....................................................... (378) (361)
Contributions.......................................................... 2,515 1,891
Other.................................................................. 696 --
Translation............................................................ 88 787
--------- ---------
Fair value of plan assets at December 31,.............................. $ 19,744 $ 15,491
--------- ---------
--------- ---------
Funded status.......................................................... $ (6,542) $ (606)
Unrecognized net gain/loss from past experience different from that 6,514 (248)
assumed and effects of change in assumptions.........................
Unrecognized prior service cost........................................ 237 260
Unrecognized net obligation............................................ 91 132
--------- ---------
Prepaid/(accrued) benefit cost......................................... $ 300 $ (462)
--------- ---------
--------- ---------
The plan resulted in a net prepaid pension asset of $300 at December 31,
1998 and a liability of $462 at 1997. This amount is classified as other assets
and accrued liabilities in the Group's combined balance sheet at December 31,
1998 and 1997, respectively.
The Group recorded an additional minimum liability of $2,222 at December 31,
1998. This liability represents the amount by which the accumulated benefit
obligation exceeds the sum of the fair market value of plan assets and accrued
amounts previously recorded. The additional liability may be offset by an asset
to the extent of previously unrecognized prior service cost. The asset amount of
$328 is included in other assets in the Group's combined balance sheet at
December 31, 1998. The remaining amount of $1,976 is recorded as a reduction to
other comprehensive income, net of related tax benefits of $670.
F-82
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
13. BENEFIT PLANS (CONTINUED)
The following weighted-average assumptions were used to determine the
obligations under the foreign plan:
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Discount rate......................................... 5.25% 7.00% 8.50%
Expected rate of return on plan assets................ 6.25% 8.00% 9.50%
Rate of compensation increase......................... 3.25% 3.25% 5.50%
14. PROFIT INCENTIVE PLANS
The Group has established Incentive Plans for both Sales/Client Relations
personnel and managerial positions. Sales/Client Relations personnel's
incentives are based upon revenues, profitability, individual objectives and the
department's and Cendant's earnings before interest, taxes, depreciation and
amortization adjusted to exclude nonrecurring or unusual items ("Adjusted
EBITDA"). The incentive plan for managers is based upon individual objectives
and the department's and Cendant's Adjusted EBITDA targets. The total expense
was $5,111, $7,394 and $5,631 for 1998, 1997 and 1996, respectively.
15. COMMITMENTS AND CONTINGENCIES
LINES OF CREDIT--Wright Express has entered into commitments to extend
credit in the normal course of business in order to meet the financing needs of
its customers. Wright Express's exposure to loss in the event of nonperformance
by the other party for commitments to extend credit is represented by the
contractual notional amount of those instruments. Wright Express uses the same
credit policies in making commitments as it does for on-balance sheet
instruments. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Since many of the commitments significantly exceed the normal draw upon the
line, the total commitment amounts do not necessarily represent future cash
requirements. Wright Express evaluates each customer's creditworthiness on a
case-by-case basis. At December 31, 1998, Wright Express had $361,000 of
commitments to extend additional credit.
LEASES--Certain facilities and equipment are leased under short-term lease
agreements expiring at various dates through 2002 and beyond. All such leases
are accounted for as operating leases. Total rental expense for premises and
equipment amounted to $11,841, $6,135 and $5,308 for the years ended December
31, 1998, 1997 and 1996, respectively.
F-83
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases which
have an initial term of more than twelve months are as follows:
YEAR
- -----------------------------------------------------------------------------------
1999............................................................................... $ 7,238
2000............................................................................... 6,854
2001............................................................................... 6,297
2002............................................................................... 5,606
2003............................................................................... 2,453
Thereafter......................................................................... 21,031
---------
Total minimum lease payments....................................................... $ 49,479
---------
---------
GROUP GUARANTEES--A composite cross guarantee exists between companies
included within the Cendant Business Answers (Europe) Plc group and The Harpur
Group Limited group, with National Westminster Bank Plc. This guarantee includes
Cendant Relocation Plc.
A cross guarantee exists between Cendant Business Answers (Europe) Plc and
PHH Allstar Limited, with Bank of Ireland.
LITIGATION--In April 1998, Cendant publicly announced that it discovered
accounting irregularities in the former business units of CUC International Inc.
Such discovery prompted investigations into such matters by Cendant and the
Audit Committee of Cendant's Board of Directors. As a result of the findings
from the investigations, Cendant restated its previously reported financial
results for 1997, 1996 and 1995. Since such announcement, more than 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought derivatively
on Cendant's behalf and several individual lawsuits have been filed in various
courts against Cendant and other defendants. The Court has ordered consolidation
of many of the actions. The SEC and the United States Attorney for the district
of New Jersey are conducting investigations relating to the matters referenced
above. The SEC advised Cendant that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. As
a result of the findings from the investigations, Cendant made all adjustments
considered necessary which are reflected in its financial statements. However,
Cendant can provide no assurances that additional adjustments will not be
necessary as a result of these government investigations.
Cendant does not believe that it is feasible to predict or determine the
final outcome of these proceedings or investigations or to estimate the amount
or potential range of loss with respect to these proceedings or investigations.
The possible outcome or resolutions of the proceedings could include judgments
against Cendant or settlements and could require substantial payments by
Cendant. In addition, the timing of the final resolution of the proceedings or
investigations is uncertain. The Group is currently not a party to such
litigation and management does not currently believe that there is any basis for
asserting a claim thereunder against the Group.
In the ordinary course of business, the Group has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying combined financial statements. In addition, the Group is a
defendant in several claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters is not expected to have a material adverse effect on the financial
condition of the Group.
F-84
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
16. SEGMENT INFORMATION
Effective December 31, 1998, the Group adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The provisions of SFAS
No. 131 established revised standards for public companies relating to reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports. It
also established standards for related disclosures about products and services,
and geographic areas. The Group operates in a single segment, fleet and fuel
card management.
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
------------- ------------- ----------- -----------
1998
Total revenues............................... $ 1,605,063 $ 1,286,368 $ 231,363 $ 87,332
Assets....................................... 4,728,299 3,199,614 1,326,890(1) 201,795
Long-lived assets............................ 93,529 27,095 61,734 4,700
1997
Total revenues............................... $ 1,452,695 $ 1,218,104 $ 153,556 $ 81,035
Assets....................................... 4,135,112 3,165,686 788,859 180,567
Long-lived assets............................ 39,066 16,009 22,065 992
1996
Total revenues............................... $ 1,357,039 $ 1,151,353 $ 125,312 $ 80,374
Assets....................................... 3,852,827 2,934,683 639,843 278,301
Long-lived assets............................ 39,364 14,435 23,346 1,583
- ------------------------
(1) Includes $294.3 million of assets acquired in connection with the Harpur
acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property and
equipment.
17. SUBSEQUENT EVENT
On May 24, 1999, PHH executed an agreement with Avis Rent A Car, Inc.
("Avis"), pursuant to which Avis will acquire the net assets of the Group from
PHH for $1.44 billion in assumed intercompany debt of PHH Holdings, a
wholly-owned subsidiary of PHH, and the issuance of $360 million in convertible
preferred stock of Avis Fleet Leasing and Management Corporation, a wholly-owned
subsidiary of Avis. The transaction is subject to customary regulatory approvals
and closed on June 30, 1999.
18. COMBINING FINANCIAL INFORMATION
In conjunction with the June 30, 1999 closing of the transaction detailed in
Note 17, Avis has issued $500,000 in Senior Subordinated Notes due 2009 (the
"Note"). Certain companies included in the Group ("Guarantor Companies")
unconditionally guaranteed the Notes on a joint and several basis. The following
tables summarize the financial position, results of operations, and cash flows
for the Group, the Guarantor Companies and the companies in the Group that did
not guarantee the Notes (the "Non-Guarantor Companies").
F-85
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31, 1998
--------------------------------------------------------
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- -------------------------- -------------
ASSETS
Cash and cash equivalents............................ $ 15,039 $ 6,020 $ 21,059
Accounts and loans receivable........................ 82,293 426,608 508,901
Property and equipment............................... 29,831 63,698 93,529
Goodwill............................................. 29,783 189,409 219,192
Other intangibles.................................... -- 17,246 17,246
Deferred income taxes................................ 39,421 524 39,945
Other assets......................................... 245,651 (205,552) 40,099
------------- ----------- -------------
Total assets exclusive of assets under management
programs......................................... 442,018 497,953 939,971
------------- ----------- -------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles
Operating leases................................... 1,227,132 1,729,544 2,956,676
Direct financing leases............................ 103,061 727,692 830,753
Accrued interest................................... 776 123 899
------------- ----------- -------------
1,330,969 2,457,359 3,788,328
------------- ----------- -------------
TOTAL ASSETS........................................... $ 1,772,987 $ 2,955,312 $ 4,728,299
------------- ----------- -------------
------------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable..................................... $ 88,560 $ 93,158 $ 181,718
Accrued liabilities.................................. 29,460 84,039 113,499
Income taxes payable................................. 91,208 16,881 108,089
Deferred revenue..................................... 26,115 15,031 41,146
Due to affiliates.................................... (48,580) 230,641 182,061
Certificate of deposit............................... (7,000) 32,000 25,000
Borrowed funds....................................... 22,207 -- 22,207
------------- ----------- -------------
Total liabilities exclusive of liabilities under
management programs.............................. 201,970 471,750 673,720
------------- ----------- -------------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt
Affiliates......................................... 1,059,999 799,684 1,859,683
Third party........................................ -- 1,250,628 1,250,628
Deferred income taxes................................ 198,816 14,628 213,444
------------- ----------- -------------
1,258,815 2,064,940 3,323,755
------------- ----------- -------------
TOTAL LIABILITIES...................................... 1,460,785 2,536,690 3,997,475
COMMITMENTS AND CONTINGENCIES..........................
SHAREHOLDERS' EQUITY................................... 312,202 418,622 730,824
------------- ----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 1,772,987 $ 2,955,312 $ 4,728,299
------------- ----------- -------------
------------- ----------- -------------
F-86
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31, 1997
---------------------------------------------
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
ASSETS
Cash and cash equivalents........................................ $ 17,976 $ (6,038) $ 11,938
Accounts and loans receivable.................................... 171,636 212,194 383,830
Property and equipment........................................... 16,311 22,755 39,066
Goodwill......................................................... 31,307 132 31,439
Other intangibles................................................ -- 1,179 1,179
Deferred income taxes............................................ 39,696 -- 39,696
Other assets..................................................... 19,051 14,495 33,546
------------- --------------- -------------
Total assets exclusive of assets under management programs..... 295,977 244,717 540,694
------------- --------------- -------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles
Operating leases............................................... 2,395,995 634,192 3,030,187
Direct financing leases........................................ 147,156 416,134 563,290
Accrued interest............................................... 798 143 941
------------- --------------- -------------
2,543,949 1,050,469 3,594,418
------------- --------------- -------------
TOTAL ASSETS....................................................... $ 2,839,926 $ 1,295,186 $ 4,135,112
------------- --------------- -------------
------------- --------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................. $ 113,597 $ 105,632 $ 219,229
Accrued liabilities.............................................. 30,296 26,302 56,598
Income taxes payable............................................. 9,497 35,331 44,828
Deferred revenue................................................. 25,230 21,217 46,447
Due to affiliates................................................ (34,296) 277,146 242,850
Borrowed funds................................................... 39,677 -- 39,677
------------- --------------- -------------
Total liabilities exclusive of liabilities under management
programs..................................................... 184,001 465,628 649,629
------------- --------------- -------------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt
Affiliates..................................................... 2,156,696 375,167 2,531,863
Third party.................................................... -- 269,213 269,213
Deferred income taxes............................................ 218,774 25,467 244,241
------------- --------------- -------------
2,375,470 669,847 3,045,317
------------- --------------- -------------
TOTAL LIABILITIES.................................................. 2,559,471 1,135,475 3,694,946
COMMITMENTS AND CONTINGENCIES......................................
SHAREHOLDERS' EQUITY............................................... 280,455 159,711 440,166
------------- --------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 2,839,926 $ 1,295,186 $ 4,135,112
------------- --------------- -------------
------------- --------------- -------------
F-87
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
REVENUE
Fleet leasing revenue............................................ $ 943,501 $ 343,395 $ 1,286,896
Fleet management services........................................ 124,041 58,315 182,356
Other revenue.................................................... 38,628 97,183 135,811
------------- --------------- -------------
Total revenues................................................. 1,106,170 498,893 1,605,063
------------- --------------- -------------
EXPENSES
Depreciation on leased vehicles.................................. 804,598 210,913 1,015,511
Interest expense................................................. 89,942 93,618 183,560
Selling, general and administrative expenses..................... 126,729 105,995 232,724
Depreciation and amortization on assets other than leased
vehicles....................................................... 10,146 15,534 25,680
Merger-related costs and other unusual charges (credits)......... -- (1,280) (1,280)
------------- --------------- -------------
Total expenses................................................. 1,031,415 424,780 1,456,195
------------- --------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................... 74,755 74,113 148,868
PROVISION FOR INCOME TAXES......................................... 27,528 28,272 55,800
------------- --------------- -------------
NET INCOME......................................................... $ 47,227 $ 45,841 $ 93,068
------------- --------------- -------------
------------- --------------- -------------
F-88
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
REVENUE
Fleet leasing revenue............................................ $ 940,815 $ 246,378 $ 1,187,193
Fleet management services........................................ 114,348 69,699 184,047
Other revenue.................................................... 52,203 29,252 81,455
------------- --------------- -------------
Total revenues................................................. 1,107,366 345,329 1,452,695
------------- --------------- -------------
EXPENSES
Depreciation on leased vehicles.................................. 783,920 169,631 953,551
Interest expense................................................. 114,776 62,373 177,149
Selling, general and administrative expenses..................... 135,534 75,589 211,123
Depreciation and amortization on assets other than leased
vehicles....................................................... 10,575 4,368 14,943
Merger-related costs and other unusual charges (credits)......... 56,572 4,518 61,090
------------- --------------- -------------
Total expenses................................................. 1,101,377 316,479 1,417,856
------------- --------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................... 5,989 28,850 34,839
PROVISION FOR INCOME TAXES......................................... 12,752 10,897 23,649
------------- --------------- -------------
NET (LOSS) INCOME.................................................. $ (6,763) $ 17,953 $ 11,190
------------- --------------- -------------
------------- --------------- -------------
F-89
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
REVENUE
Fleet leasing revenue............................................ $ 930,672 $ 197,823 $ 1,128,495
Fleet management services........................................ 109,707 57,805 167,512
Other revenue.................................................... 37,698 23,334 61,032
------------- --------------- -------------
Total revenues................................................. 1,078,077 278,962 1,357,039
------------- --------------- -------------
EXPENSES
Depreciation on leased vehicles.................................. 779,993 132,837 912,830
Interest expense................................................. 130,632 37,055 167,687
Selling, general and administrative expenses..................... 125,899 67,923 193,822
Depreciation and amortization on assets other than leased
vehicles....................................................... 12,360 4,225 16,585
------------- --------------- -------------
Total expenses..................................................... 1,048,884 242,040 1,290,924
------------- --------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................... 29,193 36,922 66,115
PROVISION FOR INCOME TAXES......................................... 11,623 13,700 25,323
------------- --------------- -------------
NET INCOME......................................................... $ 17,570 $ 23,222 $ 40,792
------------- --------------- -------------
------------- --------------- -------------
F-90
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
OPERATING ACTIVITIES
Net income...................................................... $ 47,227 $ 45,841 $ 93,068
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation on leased vehicles............................. 804,598 210,913 1,015,511
Depreciation and amortization on assets other than leased
vehicles.................................................. 10,146 15,534 25,680
Merger-related costs and other unusual charges (credits).... -- (1,280) (1,280)
Other non-cash charges...................................... 1,502 3,638 5,140
Changes in other assets and liabilities:
Accounts and loans receivable............................. (3,572) (130,435) (134,007)
Income taxes payable...................................... 139,293 (37,782) 101,511
Accounts payable and other accrued liabilities............ 29,684 20,936 50,620
Due to affiliates......................................... (39,351) 14,709 (24,642)
Deferred income taxes..................................... (58,032) (6,711) (64,743)
Other assets, net......................................... (336,775) 334,758 (2,017)
------------- --------------- -------------
Net cash provided by operating activities..................... 594,720 470,121 1,064,841
------------- --------------- -------------
INVESTING ACTIVITIES
Assets under management programs
Investment in leases and leased vehicles...................... (1,298,916) (1,217,979) (2,516,895)
Repayments of investment in leases and leased vehicles........ 1,708,235 (620,199) 1,088,036
Proceeds from sales and transfers of leases and leased
vehicles.................................................... -- 224,597 224,597
Net purchases of property and equipment....................... (16,471) (43,352) (59,823)
Cash acquired in acquisition of business, net of contribution
from affiliates............................................. -- 2,341 2,341
------------- --------------- -------------
Net cash provided by (used in) investing activities........... 392,848 (1,654,592) (1,261,744)
------------- --------------- -------------
FINANCING ACTIVITIES:
Proceeds from certificate of deposit............................ (7,000) 32,000 25,000
Net change in line of credit.................................... 13,020 (31,380) (18,360)
Investment in subsidiary........................................ (10,500) 10,500 --
Liabilities under management programs
Proceeds from third party debt issuance....................... 1,108,300 3,322,704 4,431,004
Principal payments on third party debt issuance............... (1,108,120) (1,897,574) (3,005,694)
Proceeds from debt from affiliates............................ 1,013,606 387,967 1,401,573
Principal payments on debt from affiliates.................... (2,000,103) (607,623) (2,607,726)
------------- --------------- -------------
Net cash (used in) provided by financing activities........... (990,797) 1,216,594 225,797
------------- --------------- -------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............. 292 (20,065) (19,773)
------------- --------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (2,937) 12,058 9,121
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................... 17,976 (6,038) 11,938
------------- --------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................ $ 15,039 $ 6,020 $ 21,059
------------- --------------- -------------
------------- --------------- -------------
F-91
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
-------------- --------------- --------------
OPERATING ACTIVITIES:
Net (loss) income.............................................. $ (6,763) $ 17,953 $ 11,190
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation on leased vehicles............................ 783,920 169,631 953,551
Depreciation and amortization on assets other than leased
vehicles................................................. 10,575 4,368 14,943
Merger-related costs and other unusual charges............. 56,572 4,518 61,090
Other non-cash charges..................................... 26,150 (23,189) 2,961
Changes in other assets and liabilities:
Accounts and loans receivable............................ 38,396 (63,418) (25,022)
Income taxes payable..................................... 15,435 20,297 35,732
Accounts payable and other accrued liabilities........... (7,623) (21,334) (28,957)
Due to affiliates........................................ 28,067 (117,667) (89,600)
Deferred income taxes.................................... 41,538 3,246 44,784
Other assets, net........................................ (12,860) 13,462 602
-------------- --------------- --------------
Net cash provided by operating activities.................... 973,407 7,867 981,274
-------------- --------------- --------------
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles..................... (1,179,099) (1,006,171) (2,185,270)
Repayments of investment in leases and leased vehicles....... 292,438 464,501 756,939
Proceeds from sales and transfers of leases and leased
vehicles................................................... -- 229,303 229,303
Net purchases of property and equipment...................... (9,713) (3,458) (13,171)
-------------- --------------- --------------
Net cash used in investing activities........................ (896,374) (315,825) (1,212,199)
-------------- --------------- --------------
FINANCING ACTIVITIES:
Net change in line of credit................................... 5,552 -- 5,552
Liabilities under management programs
Proceeds from third party debt issuance...................... 5,768 1,590,900 1,596,668
Principal payments on third party debt issuance.............. (1,278) (1,610,153) (1,611,431)
Proceeds from debt from affiliates........................... 1,038,541 1,039,536 2,078,077
Principal payments on debt from affiliates................... (1,115,409) (727,626) (1,843,035)
-------------- --------------- --------------
Net cash (used in) provided by financing activities.......... (66,826) 292,657 225,831
-------------- --------------- --------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............ 130 (2,936) (2,806)
-------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 10,337 (18,237) (7,900)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 7,639 12,199 19,838
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR........................... $ 17,976 $ (6,038) $ 11,938
-------------- --------------- --------------
-------------- --------------- --------------
F-92
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS UNLESS IDENTIFIED DIFFERENTLY)
18. COMBINING FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
-------------- --------------- --------------
OPERATING ACTIVITIES:
Net income..................................................... $ 17,570 $ 23,222 $ 40,792
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation on leased vehicles............................ 779,993 132,837 912,830
Depreciation and amortization on assets other than leased
vehicles................................................. 12,360 4,225 16,585
Other non-cash charges..................................... 319 1,728 2,047
Changes in other assets and liabilities:
Accounts and loans receivable............................ (25,540) 22,550 (2,990)
Income taxes payable..................................... (15,960) (4,459) (20,419)
Accounts payable and other accrued liabilities........... 49,158 18,837 67,995
Due to affiliates........................................ (375,062) 278,763 (96,299)
Deferred income taxes.................................... 42,144 13,288 55,432
Other assets, net........................................ 2,557 (11,113) (8,556)
-------------- --------------- --------------
Net cash provided by operating activities.................... 487,539 479,878 967,417
-------------- --------------- --------------
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles..................... (1,222,726) (695,805) (1,918,531)
Repayments of investment in leases and leased vehicles....... 427,236 299,010 726,246
Proceeds from sales and transfers of leases and leased
vehicles................................................... -- 117,753 117,753
Net purchases of property and equipment...................... (8,805) (4,945) (13,750)
-------------- --------------- --------------
Net cash used in investing activities........................ (804,295) (283,987) (1,088,282)
-------------- --------------- --------------
FINANCING ACTIVITIES:
Net change in line of credit................................... 6,170 -- 6,170
Payment of dividends to PHH.................................... (18,106) (1,196) (19,302)
Capital contribution........................................... 4,985 -- 4,985
Liabilities under management programs
Proceeds from third party debt issuance...................... 3,461 1,665,957 1,669,418
Principal payments on third party debt issuance.............. (278) (1,558,536) (1,558,814)
Proceeds from debt from affiliates........................... 1,241,754 (215,057) 1,026,697
Principal payments on debt from affiliates................... (914,304) (88,050) (1,002,354)
-------------- --------------- --------------
Net cash provided by financing activities.................... 323,682 (196,882) 126,800
-------------- --------------- --------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............ (7,354) 10,850 3,496
-------------- --------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............. (428) 9,859 9,431
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 8,067 2,340 10,407
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR........................... $ 7,639 $ 12,199 $ 19,838
-------------- --------------- --------------
-------------- --------------- --------------
F-93
PHH VEHICLE MANAGEMENT SERVICES
CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
UNAUDITED
MARCH 31,
1999
-------------
ASSETS
Cash and cash equivalents........................................................................ $ 74,211
Accounts and loans receivable, net............................................................... 506,325
Property and equipment, net...................................................................... 96,919
Goodwill and other intangibles, net.............................................................. 227,351
Deferred income taxes............................................................................ 39,200
Other assets..................................................................................... 20,272
-------------
Total assets exclusive of assets under management programs................................. 964,278
-------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles..................................................... 3,867,856
-------------
TOTAL ASSETS....................................................................................... $ 4,832,134
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities......................................................... $ 443,596
Income taxes payable............................................................................. 119,093
Deferred revenue................................................................................. 43,590
Due to affiliates................................................................................ 228,160
Borrowed funds................................................................................... 20,769
-------------
Total liabilities exclusive of liabilities under management programs....................... 855,208
-------------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt............................................................................................. 3,014,758
Deferred income taxes............................................................................ 213,059
-------------
3,227,817
TOTAL LIABILITIES.................................................................................. 4,083,025
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY............................................................................... 749,109
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................................... $ 4,832,134
-------------
-------------
See notes to condensed combined financial statements.
F-94
PHH VEHICLE MANAGEMENT SERVICES
CONDENSED COMBINED INCOME STATEMENTS
(IN THOUSANDS)
UNAUDITED
THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------- ---------------
REVENUE........................................................................ $ 400,253 $ 391,305
EXPENSES
Depreciation on leased vehicles.............................................. 253,743 249,384
Interest expense............................................................. 46,457 43,183
Selling, general and administrative expenses................................. 63,569 55,425
Depreciation and amortization on assets other than leased vehicles........... 7,332 6,341
--------------- ---------------
Total expenses............................................................. 371,101 354,333
--------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES....................................... 29,152 36,972
PROVISION FOR INCOME TAXES..................................................... 11,002 13,857
--------------- ---------------
NET INCOME..................................................................... $ 18,150 $ 23,115
--------------- ---------------
--------------- ---------------
See notes to condensed combined financial statements.
F-95
PHH VEHICLE MANAGEMENT SERVICES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES.................................................... $ 509,890 $ 284,470
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles............................................ (560,758) (626,170)
Repayments of investment in leases and leased vehicles.............................. 133,455 222,021
Proceeds from sales and transfers of leases and leased vehicles..................... 44,640 27,284
Net purchases of property and equipment............................................... (8,586) (14,852)
Cash acquired in acquisition of business, net of contribution from affiliates......... -- 2,341
----------- -----------
Net cash used in investing activities............................................... (391,249) (389,376)
----------- -----------
FINANCING ACTIVITIES:
Other, net............................................................................ (26,438) 23,023
Liabilities under management programs
Proceeds from debt issuance......................................................... 112,061 162,789
Principal payments on debt issuance................................................. (162,574) (103,292)
----------- -----------
Net cash (used in) provided by financing activities................................. (76,951) 82,520
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS................................... 11,462 10,448
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 53,152 (11,938)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 21,059 11,938
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 74,211 $ --
----------- -----------
----------- -----------
Non-cash investing and financing information:
Business acquired:
Fair value of assets acquired, excluding cash......................................... $ 294,287
Liabilities assumed................................................................... (86,006)
Capital contribution from affiliate for acquisition................................... (190,597)
Additional purchase consideration payable............................................. (20,025)
-----------
Net cash acquired..................................................................... $ (2,341)
-----------
-----------
See notes to condensed combined financial statements
F-96
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed combined balance sheet of PHH Vehicle Management Services (the
"Group") as of March 31, 1999 and the condensed combined statements of income
and cash flows for the three months ended March 31, 1999 and 1998 are unaudited.
In the opinion of management, all adjustments consisting of normal recurring
accruals considered necessary for a fair presentation of such financial
statements are included. The accompanying unaudited combined financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. The December 31, 1998 condensed
combined balance sheet was derived from the Group's audited financial statements
for the year ended December 31, 1998, and should be read in conjunction with
such combined financial statements and notes thereto.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
2. ACQUISITIONS
On January 20, 1998, Pointeuro Limited acquired the Harpur Group Limited
("Harpur") for an initial purchase price of approximately $194 million,
including acquisition costs. Additional purchase consideration of approximately
$20 million was accrued as of December 31, 1998, upon the attainment of certain
revenue thresholds as specified in the purchase agreement. Harpur provides fuel
card and fleet management services to corporate clients in the United Kingdom.
The transaction was accounted for as a purchase and, accordingly, the operating
results of Harpur have been included in the Group's combined financial
statements since the date of acquisition.
The excess of the aggregate purchase price over the fair value of net assets
acquired of approximately $189 million has been allocated to goodwill. Pro forma
results of operations for the three months ended March 31, 1998, assuming the
acquisition of Harpur had occurred on January 1, 1998, have not been presented
as the effect is not material.
3. SEGMENT INFORMATION
The Group operates in a single segment, fleet and fuel card management.
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
------------- ------------- ------------- -----------
1999
Revenue................................................ $ 400,253 $ 333,464 $ 59,316 $ 7,473
Assets................................................. 4,832,134 3,216,939 1,386,131 229,064
Long-lived assets...................................... 96,919 27,396 64,653 4,870
1998
Revenue................................................ $ 391,305 $ 330,306 $ 54,195 $ 6,804
Assets................................................. 4,483,710 3,184,333 1,072,076 227,301
Long-lived assets...................................... 50,373 16,664 32,718 991
F-97
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. COMPREHENSIVE INCOME
Components of comprehensive income are summarized as follows:
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
Net income............................................................. $ 18,150 $ 23,115
Other comprehensive income (loss), net of tax:
Currency translation................................................. 201 (1,630)
--------- ---------
Comprehensive income................................................... $ 18,351 $ 21,485
--------- ---------
--------- ---------
5. SUBSEQUENT EVENT
On May 22, 1999, PHH executed an agreement with Avis Rent A Car, Inc.
("Avis") pursuant to which Avis will acquire the net assets of the Group from
PHH for $1.44 billion in assumed intercompany debt of PHH Holdings, a
wholly-owned subsidiary of PHH and the issuance of $360 million in convertible
preferred stock of Avis Fleet Leasing and Management Corporation, a wholly-owned
subsidiary of Avis. The transaction is subject to customary regulatory approvals
and closed on June 30, 1999.
6. CONDENSED COMBINING FINANCIAL INFORMATION
In conjunction with the June 30, 1999 closing of the transaction detailed in
Note 5, Avis has issued $500,000 in Senior Subordinated Notes due 2009 (the
"Notes"). Certain companies included in the Group ("Guarantor Companies")
unconditionally guaranteed the Notes on a joint and several basis. The following
condensed tables summarize the financial position, results of operations, and
F-98
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. CONDENSED COMBINING FINANCIAL INFORMATION (CONTINUED)
cash flows for the Group, the Guarantor Companies and the companies in the Group
that did not guarantee the Notes (the "Non-Guarantor Companies").
MARCH 31, 1999
---------------------------------------------
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
------------- --------------- -------------
ASSETS
Cash and cash equivalents........................................ $ 15,332 $ 58,879 $ 74,211
Accounts and loans receivable, net............................... 39,169 467,156 506,325
Property and equipment, net...................................... 30,299 66,620 96,919
Goodwill and other intangibles, net.............................. 29,403 197,948 227,351
Deferred income taxes............................................ 20,879 18,321 39,200
Other assets..................................................... 248,186 (227,914) 20,272
------------- --------------- -------------
Total assets exclusive of assets under management programs..... 383,268 581,010 964,278
------------- --------------- -------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles..................... 1,534,894 2,332,962 3,867,856
------------- --------------- -------------
TOTAL ASSETS....................................................... $ 1,918,162 $ 2,913,972 $ 4,832,134
------------- --------------- -------------
------------- --------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities......................... $ 129,390 $ 314,206 $ 443,596
Income taxes payable............................................. (19,101) 138,194 119,093
Deferred revenue................................................. 25,840 17,750 43,590
Due to affiliates................................................ 110,583 117,577 228,160
Borrowed funds................................................... 574 20,195 20,769
------------- --------------- -------------
Total liabilities exclusive of liabilities under management
programs..................................................... 247,286 607,922 855,208
------------- --------------- -------------
LIABILITIES UNDER MANAGEMENT PROGRAMS:
Debt............................................................. 1,113,957 1,900,801 3,014,758
Deferred income taxes............................................ 238,505 (25,446) 213,059
------------- --------------- -------------
1,352,462 1,875,355 3,227,817
------------- --------------- -------------
TOTAL LIABILITIES.................................................. 1,599,748 2,483,277 4,083,025
------------- --------------- -------------
COMMITMENTS AND CONTINGENCIES......................................
SHAREHOLDERS' EQUITY............................................... 318,414 430,695 749,109
------------- --------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 1,918,162 $ 2,913,972 $ 4,832,134
------------- --------------- -------------
------------- --------------- -------------
F-99
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
6. CONDENSED COMBINING FINANCIAL INFORMATION (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
----------- --------------- -----------
REVENUE.............................................................. $ 143,673 $ 256,580 $ 400,253
EXPENSES
Depreciation on leased vehicles.................................... 79,903 173,840 253,743
Interest expense................................................... 14,662 31,795 46,457
Selling, general and administrative expenses....................... 36,395 27,174 63,569
Depreciation and amortization on assets other than
leased vehicles................................................ 1,300 6,032 7,332
----------- --------------- -----------
Total expenses................................................. 132,260 238,841 371,101
----------- --------------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............................. 11,413 17,739 29,152
PROVISION FOR INCOME TAXES........................................... 5,287 5,715 11,002
----------- --------------- -----------
NET INCOME........................................................... $ 6,126 $ 12,024 $ 18,150
----------- --------------- -----------
----------- --------------- -----------
THREE MONTHS ENDED MARCH 31, 1998
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
----------- --------------- -----------
REVENUE.............................................................. $ 296,997 $ 94,308 $ 391,305
EXPENSES
Depreciation on leased vehicles.................................... 211,193 38,191 249,384
Interest expense................................................... 27,677 15,506 43,183
Selling, general and administrative expenses....................... 34,451 20,974 55,425
Depreciation and amortization on assets other than leased
vehicles......................................................... 1,245 5,096 6,341
----------- --------------- -----------
Total expenses................................................... 274,566 79,767 354,333
----------- --------------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............................. 22,431 14,541 36,972
PROVISION FOR INCOME TAXES........................................... 7,484 6,373 13,857
----------- --------------- -----------
NET INCOME........................................................... $ 14,947 $ 8,168 $ 23,115
----------- --------------- -----------
----------- --------------- -----------
F-100
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
6. CONDENSED COMBINING FINANCIAL INFORMATION (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
----------- --------------- -----------
CASH FLOW FROM OPERATING ACTIVITIES............................. $ 198,521 $ 311,369 $ 509,890
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles...................... (348,914) (211,844) (560,758)
Repayments of investment in leases and leased vehicles........ 65,086 68,369 133,455
Proceeds from sales and transfers of leases and leased
vehicles.................................................... -- 44,640 44,640
Net purchases of property and equipment....................... (1,388) (7,198) (8,586)
Cash acquired in acquisition of business, net of contribution
from affiliates............................................. -- -- --
----------- --------------- -----------
Net cash used in investing activities......................... (285,216) (106,033) (391,249)
----------- --------------- -----------
FINANCING ACTIVITIES:
Other, net.................................................... 33,467 (59,905) (26,438)
Liabilities under management programs
Proceeds from debt issuance................................. 55,780 56,281 112,061
Principal payments on debt issuance......................... (1,822) (160,752) (162,574)
----------- --------------- -----------
Net cash provided (used in) by financing activities......... 87,425 (164,376) (76,951)
----------- --------------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS.............................................. (437) 11,899 11,462
----------- --------------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS.............................................. 293 52,859 53,152
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 15,039 6,020 21,059
----------- --------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 15,332 $ 58,879 $ 74,211
----------- --------------- -----------
----------- --------------- -----------
F-101
PHH VEHICLE MANAGEMENT SERVICES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. CONDENSED COMBINING FINANCIAL INFORMATION (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998
GUARANTOR NON-GUARANTOR PHH VMS
COMPANIES COMPANIES COMBINED
----------- --------------- -----------
CASH FLOW FROM OPERATING ACTIVITIES.............................. $ 206,683 $ 77,787 $ 284,470
INVESTING ACTIVITIES:
Assets under management programs
Investment in leases and leased vehicles....................... (351,708) (274,462) (626,170)
Repayments of investment in leases and leased vehicles......... 116,336 105,685 222,021
Proceeds from sales and transfers of leases and leased
vehicles..................................................... -- 27,284 27,284
Net purchases of property and equipment........................ (2,925) (11,927) (14,852)
Cash acquired in acquisition of business, net of contribution
from affiliates.............................................. -- 2,341 2,341
----------- --------------- -----------
Net cash used in investing activities.......................... (238,297) (151,079) (389,376)
----------- --------------- -----------
FINANCING ACTIVITIES:
Other, net..................................................... (105) 23,128 23,023
Liabilities under management programs
Proceeds from debt issuance.................................. 104,455 58,334 162,789
Principal payments on debt issuance.......................... (66,461) (36,831) (103,292)
----------- --------------- -----------
Net cash provided by financing activities.................... 37,889 44,631 82,520
----------- --------------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS............................................... 341 10,107 10,448
----------- --------------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................... 6,616 (18,554) (11,938)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 18,004 (6,066) 11,938
----------- --------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 24,620 $ (24,620) $ --
----------- --------------- -----------
----------- --------------- -----------
F-102
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
1. DELAWARE (Avis Rent A Car, Inc., Avis Rent A Car System, Inc., Avis
International, Ltd., Avis Management Services, Ltd., Avis Caribbean, Limited,
Avis Asia and Pacific Limited, Avis Enterprises, Inc., Avis Service, Inc., Avis
Lube, Inc., Avis Leasing Corporation, Reserve Claims Management Co., PHH Vehicle
Management Services, LLC, Wright Express LLC, PHH Canadian Holdings, Inc.,
PHH/Paymentech LLC and FAH Company, Inc.)
Section 145 of the Delaware General Corporation Law (the "DGCL") permits a
Delaware corporation to indemnify any person who was or is a party or witness or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reasons of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorneys' fees) judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery of the State of Delaware, or the court in
which such action or suit was brought, shall determine that, despite the
adjudication of liability, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
provides that, to the extent a director, officer, employee or agent of a
corporation has been successful in the defense of any claim, issue or manner
therein, he or she shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
The Amended and Restated Certificate of Incorporation and Amended and
Restated By-Laws of Avis Rent A Car, Inc. (the "Company") and the Certificates
of Incorporation or By-Laws, each if amended and restated then as amended and
restated, of each of Avis Rent A Car System, Inc., Avis International, Ltd.,
Avis Management Services, Ltd., Avis Caribbean, Limited, Avis Asia and Pacific
Limited, Avis Enterprises, Inc., Avis Service, Inc., Avis Lube, Inc., Avis
Leasing Corporation, Reserve Claims Management Co., PHH Canadian Holdings, Inc.,
and FAH Company, Inc., provide for indemnification by such entity of its
respective directors and officers to the fullest extent permitted by the DGCL
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of his or her heirs,
executors and administrators. The Certificate of Incorporation or By-Laws, each
if amended and restated then as amended and restated, of the Company and each of
the aforementioned subsidiaries provide that every person will be indemnified
against any and all judgments, fines, amounts paid in settling or otherwise
disposing of threatened, pending or complete actions, suits or proceedings
(including an action by or in the right of the Company or the respective
subsidiary, subject to certain conditions), whether by fact that he is or was a
director or officer of the Company or the respective subsidiary
II-1
or is or was serving at the request of the Company or the respective subsidiary
as a director or officer of another corporation, subject in all instances to the
requirements that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Company
or the respective subsidiary, and with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. While these provisions provide directors with protection from awards
for monetary damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, these provisions will have no effect on the availability
of equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
Section 18-108 of the Delaware Limited Liability Company Act (the "LLC Act")
empowers a Delaware limited liability company to indemnify and hold harmless any
member, manager or other person from and against any and all claims and demands
whatsoever. In accordance with such section, the Limited Liability Company
Agreement of PHH Vehicle Management Services LLC, dated as of April 5, 1999 (the
"PHH Agreement"), the Limited Liability Company Agreement of PHH/ Paymentech
LLC, dated as of January 31, 1997 (the "Paymentech Agreement"), and the Limited
Liability Company Agreement of Wright Express LLC, dated as May 24, 1999 (the
"WEX Agreement" and, together with the Paymentech Agreement and the PHH
Agreement, the "LLC Agreements"), each provide that the Company shall, to the
fullest extent authorized by the LLC Act, as in effect from time to time,
indemnify and hold harmless any member, manager, officer, employee or agent of
PHH Vehicle Management Services LLC, PHH/Paymentech LLC and Wright Express LLC,
as the case may be, from and against any and all claims and demands arising by
reason of the fact that such person is, or was, a member, manager, officer,
employee or agent of the respective LLC. The LLC Agreements further provide that
expenses incurred by any member, manager, officer, employee or agent of PHH
Vehicle Management Services LLC, PHH/Paymentech LLC and Wright Express LLC, as
the case may be, in defending a proceeding shall be paid by the respective LLC
in advance of such proceeding's final disposition unless otherwise determined by
the manager or the president of such LLC in the specific case upon receipt of an
undertaking by or on behalf of the member, manager or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the respective LLC. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions if any, as the manager or
the president of PHH Vehicle Management Services LLC, PHH/Paymentech LLC and
Wright Express LLC, as the case may be, deems appropriate.
2. MARYLAND (PHH Deutschland, Inc., Williamsburg Motors, Inc., Edenton Motors,
Inc., and Dealers Holdings, Inc.)
Section 2-418 of the Annotated Code of Maryland requires indemnification
against expenses incurred in successful defense, unless limited by charter, of a
director who has been successful, on the merits or otherwise, in the defense of
any proceeding, judgment, penalty, fine or settlement. A corporation may
indemnify any director made a party to any proceeding by reason of service in
that capacity unless it is established that the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith; or was the result of active and deliberate dishonesty; or the
director actually received an improper personal benefit in money, property, or
services, or in the case of any criminal proceeding, the director had reasonable
cause to believe that the act was unlawful. Additionally, a court may order
indemnification if it finds that the director is entitled to reimbursement under
Section 2-418 or if it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances. Section 6
of the By-Laws of PHH Deutschland, Inc. provides that it shall indemnify its
directors and officers and such indemnification shall apply to all proceedings.
II-2
3. VIRGINIA (Rent-A-Car Company, Incorporated)
The Virginia Stock Corporations Act permits, and the By-Laws of Rent-A-Car
Company, Inc. require, indemnification of the officers and directors of
Rent-A-Car Company, Inc. against all liabilities imposed or asserted against
them by reason of having been an officer or director of Rent-A-Car Company, Inc.
(including derivative actions), except in the case of willful misconduct or a
knowing violation of criminal law.
4. TEXAS (Avis Fleet Leasing and Management Corporation)
Under the Texas Business Corporations Act, a corporation has the power to
indemnify directors, officers, employees and agents of the corporation against
certain liabilities and to purchase and maintain liability insurance for those
persons. The By-Laws of Avis Fleet Leasing and Management Corporation provide
that Avis Fleet Leasing and Management Corporation will indemnify any person who
was or is a named defendant or respondent or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative, or investigative, or any appeal of such
action, suit or proceeding and any inquiry or investigation that could lead to
such an action, suit or proceeding, by reason of the fact that he is or was a
director, officer or employee of Avis Fleet Leasing and Management Corporation,
or is or was serving at the request of Avis Fleet Leasing and Management
Corporation as a director, officer or employee of another foreign or domestic
corporation, against judgments, penalties, fines, amounts paid in settlement and
reasonable expenses actually incurred by him in connection with such action,
suit or proceeding, if he acted in good faith and in a manner he reasonably
believed, (i) in the case of conduct in his or her official capacity as a
director of Avis Fleet Leasing and Management Corporation, to be in the best
interests of Avis Fleet Leasing and Management Corporation, and (ii) in all
other cases, to be not opposed to the best interests of Avis Fleet Leasing and
Management Corporation, except that no indemnification shall be made available
where such person is found liable for willful or intentional misconduct in the
performance of his or her duty to Avis Fleet Leasing and Management Corporation.
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
1.01 Purchase Agreement, dated as of June 25, 1999, among Avis Rent A Car, Inc. (the "Company"), the
Subsidiary Guarantors (as defined therein) and Chase Securities Inc. and Lehman Brothers Inc. (the
"Initial Purchasers").*
2.01 Agreement and Plan of Merger and Reorganization by and among PHH Corporation, PHH Holdings
Corporation, the Company and Avis Fleet Leasing and Management Corporation, dated as of May 22,
1999.*
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.01 Certificate of Incorporation of Avis Rent A Car, Inc.***
3.02(a) Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(b) Restated Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(c) Corrected Restated Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(d) Certificate of Ownership and Merger merging The First Gray Line Corporation into Avis Rent A Car
System, Inc.*
3.03(a) Certificate of Incorporation of Avis International, Ltd.*
3.03(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis International,
Ltd.*
3.03(c) Certificate of Change of Registered Agent and Registered Office of Avis International, Ltd.*
3.04(a) Certificate of Incorporation of Avis Management Services, Ltd.*
3.04(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis Management
Services, Ltd.*
3.04(c) Certificate of Change of Registered Agent and Registered Office of Avis Management Services, Ltd.*
3.05 Certificate of Incorporation of Avis Caribbean, Limited.*
3.06 Certificate of Incorporation of Avis Asia and Pacific, Limited.*
3.07(a) Certificate of Incorporation of Avis Enterprises, Inc.*
3.07(b) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc.*
3.07(c) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc.*
3.08 Certificate of Incorporation of Avis Service, Inc.*
3.09 Certificate of Incorporation of Avis Lube, Inc.*
3.10 Certificate of Incorporation of Avis Leasing Corporation.*
3.11(a) Certificate of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(b) Articles of Reduction of Rent-A-Car Company, Incorporated.*
II-4
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.11(c) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(d) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(e) Articles of Amendment to the Articles of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(f) Articles of Amendment of Rent-A-Car Company, Incorporated.*
3.12(a) Certificate of Incorporation of Reserve Claims Management Co.*
3.12(b) Certificate of Change of Registered Agent and Registered Office of Reserve Claims Management Co.
f/k/a Avis Leasing International, Ltd.*
3.12(c) Restated Certificate of Incorporation of Avis Leasing International, Ltd.*
3.13(a) Certificate of Incorporation of Avis Fleet Leasing and Management Corporation.*
3.13(b) Articles of Correction of Avis Fleet Leasing and Management Corporation.*
3.13(c) Certificate of Designation of Powers, Preferences and Special Rights of Series A Cumulative
Participating Redeemable Convertible Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Avis Fleet Leasing and Management Corporation.******
3.13(d) Certificate of Designation of Powers, Preferences and Special Rights of Series B Cumulative PIK
Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Avis Fleet Leasing and
Management Corporation.*****
3.13(e) Certificate of Designation of Powers, Preferences and Special Rights of Series C Cumulative
Redeemable Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Avis Fleet
Leasing and Management Corporation.*****
3.14(a) Certificate of Incorporation of Dealers Holding, Inc.*
3.14(b) Notice of Change of Resident Agent of Dealers Holding, Inc.*
3.14(c) Notice of Change of Resident Agent of Dealers Holding, Inc.*
3.14(d) Change of Address of Resident Agent of Dealers Holding, Inc.*
3.14(e) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of Dealers Holdings, Inc.*
3.15(a) Articles of Incorporation of Williamsburg Motors, Inc.*
3.15(b) Notice of Change of Resident Agent of Williamsburg Motors, Inc.*
3.15(c) Change of Resident Agent of Williamsburg Motors, Inc.*
3.15(d) Change of Address of Resident Agent of Williamsburg Motors, Inc.*
3.15(e) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office.*
3.15(f) Articles of Amendment of Articles of Incorporation of Williamsburg Motors, Inc.*
3.16(a) Articles of Incorporation of Edenton Motors, Inc.*
3.16(b) Notice of Change of Resident Agent of Edenton Motors, Inc.*
II-5
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.16(c) Articles of Amendment of Edenton Motors, Inc.*
3.16(d) Articles of Amendment of Edenton Motors, Inc.*
3.16(e) Change of Resident Agent of Edenton Motors, Inc.*
3.16(f) Change of Address of Resident Agent of Edenton Motors, Inc.*
3.16(g) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of Edenton Motors, Inc.*
3.17 Certificate of Incorporation of PHH Canadian Holdings, Inc.*
3.18(a) Articles of Incorporation of PHH Deutschland, Inc.*
3.18(b) Articles of Amendment of PHH Deutschland, Inc.*
3.18(c) Articles of Amendment of PHH Deutschland, Inc.*
3.18(d) Articles of Amendment of PHH Deutschland, Inc.*
3.18(e) Change of Resident Agent of PHH Deutschland, Inc.*
3.18(f) Articles of Amendment of PHH Deutschland, Inc.*
3.18(g) Articles of Amendment of PHH Deutschland, Inc.*
3.18(h) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of PHH Deutschland, Inc.*
3.18(i) Change of Address of Resident Agent of PHH Deutschland, Inc.*
3.19(a) Certificate of Incorporation of FAH Company, Inc.*
3.19(b) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.19(c) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.19(d) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.20 Limited Liability Company Agreement of PHH Vehicle Management Services LLC.*
3.21 Limited Liability Company Agreement of Wright Express LLC.*
3.22 Operating Agreement of PHH/Paymentech LLC.*
3.50 By-Laws of Avis Rent A Car, Inc.***
3.51 By-Laws of Avis Rent A Car System, Inc.*
3.52 By-Laws of Avis International, Ltd.*
3.53 By-Laws of Avis Management Services, Ltd.*
3.54 By-Laws of Avis Caribbean, Limited.*
3.55 By-Laws of Avis Asia and Pacific, Limited.*
3.56 By-Laws of Avis Enterprises, Inc.*
3.57 By-Laws of Avis Service, Inc.*
3.58 By-Laws of Avis Lube, Inc.*
3.59 By-Laws of Avis Leasing Corporation.*
II-6
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.60 By-Laws of Rent-A-Car Company, Incorporated.*
3.61 By-Laws of Reserve Claims Management Co.*
3.62 By-Laws of Avis Fleet Leasing and Management Corporation.*
3.63 By-Laws of Dealers Holdings, Inc.*
3.64 By-Laws of Williamsburg Motors, Inc.*
3.65 By-Laws of Edenton Motors, Inc.*
3.66 By-Laws of PHH Canadian Holdings, Inc.*
3.67 By-Laws of PHH Deutschland, Inc.*
3.68 By-Laws of FAH Company, Inc.*
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.**
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.**
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.**
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.**
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.**
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.**
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.**
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.**
4.11 Credit Agreement, dated as of July 30, 1997, among Avis Rent A Car, Inc., Avis Rent A Car System,
Inc., The Chase Manhattan Bank, as administrative agent, Lehman Commercial Paper, Inc., as
syndication agent and the other lenders party thereto (the "Credit Agreement").**
4.12 Guarantee, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as administrative agent
for the lenders from time to time parties to the Credit Agreement.**
II-7
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
4.13 Security Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as
administrative agent for the lenders from time to time parties to the Credit Agreement.**
4.14 Pledge Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as administrative
agent for the lenders from time to time parties to the Credit Agreement.**
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.****
4.16 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.****
4.17 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.****
4.18 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.****
4.19 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.****
4.20 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.****
4.21 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.****
4.22 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.****
4.30 Indenture, dated as of June 30, 1999, among the Company, the Subsidiary Guarantors and the Bank of
New York (the "Notes Trustee").*
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.*
4.32 Credit Agreement, dated as of June 30, 1999, among the Company, as borrower, the financial
institutions party thereto, the Chase Manhattan Bank (the "Administrative Agent"), and Lehman
Commercial Paper Inc.*
II-8
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
4.33 Guarantee and Collateral Agreement, dated as of June 30, 1999, among the Company, the Subsidiary
Guarantors and the Administrative Agent.*
4.40 Origination Trust Agreement, dated as of June 30, 1999 (the "Origination Trust Agreement"), among
Raven Funding LLC (the "SPV"), PHH Vehicle Management Services LLC ("VMS LLC") and Wilmington Trust
Company (the "VMS ABS Trustee").*
4.41 Sold SUBI Supplement 1999-1A to the Origination Trust Agreement, dated as of June 30, 1999 (the
"1999-1A SUBI Supplement"), among the SPV, VMS LLC and the VMS ABS Trustee.*
4.42 Sold SUBI Supplement 1999-1B to the Origination Trust Agreement, dated as of June 30, 1999 (the
"1999-1B SUBI Supplement"), among the SPV, VMS LLC and the VMS ABS Trustee.*
4.43 Servicing Agreement, dated as of June 30, 1999 (the "Servicing Agreement"), between D.L. Peterson
Trust (the "Origination Trust") and VM LLC.*
4.44 Sold SUBI Supplement 1999-1 to the Servicing Agreement, dated as of June 30, 1999 (the "Sold SUBI
Servicing Supplement"), among the Origination Trust, the VMS ABS Trustee and VMS LLC.*
4.45 Asset Sale Agreement, dated as of June 30, 1999, between VMS LLC and the SPV.*
4.46 Receivables Purchase Agreement, dated as of June 30, 1999, by and between VMS LLC and the SPV.*
4.47 Contribution Agreement, dated as of June 30, 1999 between the SPV and the VMS ABS Trustee as trustee
for the Organization Trust and by VMS LLC for the Origination Trust.*
4.48 Transfer Agreement, dated as of June 30, 1999, between the SPV and Greyhound Funding LLC
("Greyhound"), together with the Origination Trust, VM LLC and the SPV.*
4.49 Base Indenture, dated as of June 30, 1999, between Greyhound and The Chase Manhattan Bank (the "VMS
ABS Indenture Trustee").*
4.50 Series 1999-1 Supplement, dated as of June 30, 1999, among Greyhound, VMS LLC, Park Avenue
Receivables Corporation and the VMS ABS Indenture Trustee.*
4.51 Custodian Agreement dated as of June 30, 1999, among the Origination Trust, Wilmington Trust Company
as Trustee, VMS LLC, as Servicer and All First Financial Center, as Custodian.*
4.52 Lockbox Services Agreement, dated as of June 30, 1999 among the Origination Trust, VMS LLC, in its
capacity as servicer of the Trust, and Bank of America National Trust and Savings Association.*
4.53 Preferred Membership Interest Purchase Agreement, dated as of June 0, 1999, among Greyhound Funding
LLC, Park Avenue Receivables Corporation, The Chase Manhattan Bank, individually as the APA Bank and
as Funding Agent, PHH Vehicle Management Services LLC, as Administrator.*
4.54 Administration Agreement, dated as of June 30, 1999, among Greyhound Funding LLC, Raven Funding LLC,
The Chase Manhattan Bank, as Indenture Trustee, PHH Vehicle Management Services LLC, as
Administrator.*
5.0 OPINIONS
II-9
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
5.1 Opinion of White & Case LLP regarding the legality of the securities being registered hereby.*
10. MATERIAL CONTRACTS.
10.01 Form of Registration Rights Agreement**
10.02 Separation Agreement, dated as of July 30, 1997, between Cendant Car Rental, Inc. and Avis Rent A
Car, Inc.**
10.03 Master License Agreement, dated as of July 30, 1997, among Cendant Car Rental, Inc., Avis Rent A Car
System, Inc. and Wizard Co., Inc.**
10.04 Computer Services Agreement, dated as of July 30, 1997, between Avis Rent A Car System, Inc. and
WizCom International, Ltd.**
10.05 Reservation Services Agreement, dated as of July 30, 1997, between Cendant Incorporated and Avis Rent
A Car System, Inc.**
10.06 Form of Tax Disaffiliation Agreement among Cendant Incorporated, Cendant Car Rental, Inc. and Avis
Rent A Car, Inc.**
10.07 Form of Lease Agreement by and between WizCom International, Ltd., as lessor, and Avis Rent A Car
System, Inc., as lessee (Virginia Beach, Virginia).**
10.08 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis Rent A
Car System, Inc., as sublessee (Tulsa, Oklahoma).**
10.09 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis Rent A
Car System, Inc., as sublessee (Garden City, New York).**
10.10 Wizard Note Assignment, Assumption and Release Agreement, dated as of July 30, 1997, by and between
Wizard Co., Inc., Avis Rent A Car System, Inc. and Reserve Claims Management Co.**
10.11 Termination Services Agreement, dated as of July 30, 1997, among Harris Trust and Savings Bank, AESOP
Funding II L.L.C., Avis Rent A Car System, Inc., and WizCom International, Ltd.**
10.13 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A Car System,
Inc.**
10.15 Retention Agreement, dated as of January 1, 1999, between Avis Rent A Car System, Inc. and F. Robert
Salerno.****
10.16 Retention Agreement, dated as of January 1, 1999, between Avis Rent A Car System, Inc. and Kevin M.
Sheehan.****
10.17 Avis Rent A Car, Inc. 1997 Stock Option Plan.**
10.18 Avis Rent A Car System, Inc. Nonqualified Deferred Compensation Plan.****
10.20 Information Technology Services Agreement, dated as of June 29, 1999, between PHH Vehicle Management
Services, LLC and Cendant Corporation.*
10.21 Corporate Services Transition Agreement, dated as of June 30, 1999 between Cendant Operations, Inc.
and Avis Fleet Leasing and Management Corporation.*
10.22 Corporate Services Transition Agreement, dated as of June 30, 1999 between PHH Corporation and Avis
Fleet Leasing and Management Corporation.*
II-10
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.23 VMS Acquisition Registration Rights Agreement, dated as of June 30, 1999, among Avis Rent A Car,
Inc., Avis Fleet Leasing and Management Corporation, PHH Corporation and PHH Holdings Corporation.*
10.24 Non-Competition Agreement, dated as of June 30, 1999, among Avis Rent Car, Inc., Avis Fleet Leasing
and Management Corporation, PHH Corporation and PHH Holdings Corporation.*
10.25 Stockholders' Agreement, dated as of June 30, 1999, among Avis Rent A Car, Inc., Avis Fleet Leasing
and Management Corporation, and PHH Corporation.*
10.26 Trademark License Agreement, dated as of June 30, 1999, between Avis Fleet Leasing and Management
Corporation and PHH Holdings Corporation.*
10.27 Transitional License Agreement, dated as of June 30, 1999, between Cendant Corporation and Avis Fleet
Leasing and Management Corporation.*
10.28 Undertaking, dated as of June 30, 1999 by Avis Fleet Leasing and Management Corporation.*
10.29 Instrument of Assumption, dated as of June 30, 1999 by Avis Fleet Leasing and Management
Corporation.*
12.1 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges.
21 Subsidiaries of the Registrants.*
23.01 Consent of Deloitte & Touche LLP relating to Avis Financial Statements.
23.02 Consent of Deloitte & Touche LLP relating to VMS Financial Statements.
23.03 Consent of White & Case LLP (included in opinion).*
24.1 Powers of Attorney.*
25.1 Form T-1 Statement of Eligibility of The Bank of New York, as trustee.*
99.1 Form of Letter of Transmittal.
99.2 Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees.
99.4 Form of Letter from Registered Holders to clients.
99.5 Form of Instruction to Registered Holder from Beneficial Owner.
- ------------------------
* Previously filed.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, 333-28609.
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, 333-46737.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1998.
II-11
***** Incorporated by reference to the Registrant's Current Report on Form 8-K
dated July 15, 1999.
****** Incorporated by reference to Amendment No. 1 to the Registrant's Current
Report on Form 8-K/A dated July 15, 1999.
(b) Financial Statement Schedule
- Schedule II--Valuation and Qualifying Accounts of Avis Rent A Car, Inc.
and subsidiaries.
- Report of Deloitte & Touche LLP, independent auditors on Financial
Statement Schedule of Avis Rent A Car, Inc. and subsidiaries for the years
ended December 31, 1996, 1997 and 1998.
All other schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the consolidated or combined
financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by any of the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Garden City, state of New York, on September 23, 1999.
AVIS RENT A CAR, INC.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT--RENTAL CAR GROUP
AVIS RENT A CAR SYSTEM, INC.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS INTERNATIONAL, LTD.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS MANAGEMENT SERVICES, LTD.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS CARIBBEAN, LIMITED
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS ASIA AND PACIFIC, LIMITED
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
II-13
AVIS ENTERPRISES, INC.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS SERVICE, INC.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS LUBE, INC.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS LEASING CORPORATION
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
RENT-A-CAR COMPANY, INCORPORATED
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
RESERVE CLAIMS MANAGEMENT CO.
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
AVIS FLEET LEASING AND MANAGEMENT CORPORATION
By: /s/ F. ROBERT SALERNO*
-----------------------------------------
Name: F. Robert Salerno
TITLE: PRESIDENT
II-14
PHH VEHICLE MANAGEMENT SERVICES LLC
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
DEALERS HOLDINGS, INC.
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
WILLIAMSBURG MOTORS, INC.
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
EDENTON MOTORS, INC.
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
WRIGHT EXPRESS LLC
By: /s/ MICHAEL E. DUBYAK*
-----------------------------------------
Name: Michael E. Dubyak
TITLE: PRESIDENT
PHH CANADIAN HOLDINGS, INC.
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
PHH DEUTSCHLAND, INC.
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
II-15
PHH/PAYMENTECH LLC
By: /s/ MARK E. MILLER*
-----------------------------------------
Name: Mark E. Miller
TITLE: PRESIDENT
FAH COMPANY, INC.
By: /s/ KEVIN M. SHEEHAN*
-----------------------------------------
Name: Kevin M. Sheehan
TITLE: PRESIDENT
* The undersigned, by signing
their name hereto, does sign
and execute this Amendment
No. 1 to Registration
Statement on Form S-4 on
September 23, 1999, pursuant
to powers of attorney
executed on behalf of the
above-named officers and
directors and previously
filed with the Securities
and Exchange Commission.
By: /s/ KAREN C. SCLAFANI Attorney-in-Fact September 23, 1999
Name: Karen C. Sclafani
Title: Vice President, General
Counsel and Secretary
II-16
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
AVIS RENT A CAR, INC.
/s/ F. ROBERT SALERNO* President and Chief
- ------------------------------ Operating Officer-Rental September 23, 1999
F. Robert Salerno Car Group and Director
President-Corporate and
/s/ KEVIN M. SHEEHAN* Business Affairs, Chief
- ------------------------------ Financial Officer and September 23, 1999
Kevin M. Sheehan Director
President and Chief
/s/ MARK E. MILLER* Operating
- ------------------------------ Officer-Vehicle September 23, 1999
Mark E. Miller Management Services
Group
/s/ TIMOTHY M. SHANLEY* Vice President and
- ------------------------------ Controller (Chief September 23, 1999
Timothy M. Shanley Accounting Officer)
/s/ MARTIN L. EDELMAN*
- ------------------------------ Chairman of the Board and September 23, 1999
Martin L. Edelman Director
- ------------------------------ Director
W. Alun Cathcart
/s/ LEONARD S. COLEMAN*
- ------------------------------ Director September 23, 1999
Leonard S. Coleman, Jr.
/s/ ALFONSE M. D'AMATO*
- ------------------------------ Director September 23, 1999
Alfonse M. D'Amato
- ------------------------------ Director
Deborah L. Harmon
- ------------------------------ Director
Stephen P. Holmes
II-17
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL J. KENNEDY*
- ------------------------------ Director September 23, 1999
Michael J. Kennedy
- ------------------------------ Director
Michael P. Monaco
AVIS RENT A CAR SYSTEM, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ GERARD J. KENNELL*
- ------------------------------ Director September 23, 1999
Gerard J. Kennell
AVIS INTERNATIONAL, LTD.
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
AVIS MANAGEMENT SERVICES, LTD.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
II-18
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
AVIS CARIBBEAN, LIMITED
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
AVIS ASIA AND PACIFIC, LIMITED
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
AVIS ENTERPRISES, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
AVIS SERVICE, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
II-19
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
AVIS LUBE, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL P. COLLINS*
- ------------------------------ Director September 23, 1999
Michael P. Collins
AVIS LEASING CORPORATION
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVEIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ GERARD J. KENNELL*
- ------------------------------ Director September 23, 1999
Gerard J. Kennell
RENT-A-CAR COMPANY,
INCORPORATED
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ GERARD J. KENNELL*
- ------------------------------ Director September 23, 1999
Gerard J. Kennell
II-20
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
RESERVE CLAIMS MANAGEMENT CO.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ GERARD J. KENNELL*
- ------------------------------ Director September 23, 1999
Gerard J. Kennell
AVIS FLEET LEASING AND
MANAGEMENT CORPORATION
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ RICHARD S. JACOBSON*
- ------------------------------ Director September 23, 1999
Richard S. Jacobson
PHH VEHICLE MANAGEMENT
SERVICES, LLC
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
II-21
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
DEALERS HOLDINGS, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
WILLIAMSBURG MOTORS, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
EDENTON MOTORS, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
II-22
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
WRIGHT EXPRESS LLC
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MICHAEL E. DUBYAK*
- ------------------------------ Director September 23, 1999
Michael E. Dubyak
PHH CANADIAN HOLDINGS, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
II-23
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
PHH DEUTSCHLAND, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
PHH/PAYMENTECH LLC
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
FAH COMPANY, INC.
/s/ F. ROBERT SALERNO*
- ------------------------------ Director September 23, 1999
F. Robert Salerno
/s/ KEVIN M. SHEEHAN*
- ------------------------------ Director September 23, 1999
Kevin M. Sheehan
/s/ MARK E. MILLER*
- ------------------------------ Director September 23, 1999
Mark E. Miller
* The undersigned, by signing
their name hereto, does sign
and execute this Amendment
No. 1 to Registration
Statement on Form S-4 on
September 23, 1999, pursuant
to powers of attorney
executed on behalf of the
above-named officers and
directors and previously
filed with the Securities
and Exchange Commission.
By: /s/ KAREN C. SCLAFANI Attorney-in-Fact September 23, 1999
-------------------------
Name: Karen C. Sclafani
Title: Vice President,
General Counsel
and Secretary
II-24
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Avis Rent A Car, Inc.
Garden City, NY
We have audited the consolidated statements of financial position of Avis
Rent A Car, Inc. and subsidiaries (successors to Rental Car System Holdings,
Inc. and subsidiaries, Avis International, Ltd. and subsidiaries, Avis
Enterprises, Inc. and subsidiaries, Pathfinder Insurance Company and Global
Excess & Reinsurance, Ltd., all previously wholly-owned by Avis, Inc.,
collectively the "Predecessor Companies") (collectively referred to as "Avis
Rent A Car, Inc." or the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and for the period October
17, 1996 (Date of Acquisition) to December 31, 1996 and as to the Predecessor
Companies the related consolidated statements of operations, stockholders'
equity and cash flows for the period January 1, 1996 to October 16, 1996, and
have issued our report thereon dated January 25, 1999 (March 19, 1999 as to Note
21 and August 23, 1999 as to Note 22) (included elsewhere in this Registration
Statement). Our audits also included the consolidated financial statement
schedule of the Company and the Predecessor Companies, listed in Item 21. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Deloitte & Touche LLP
New York, New York
January 25, 1999
(March 19,1999 as to Note 21 and
August 23, 1999 as to Note 22)
AVIS RENT A CAR, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ADDITIONS, END OF
DESCRIPTION OF PERIOD EXPENSES NET(A) DEDUCTIONS PERIOD
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
January 1, 1996 to October 16, 1996:
Allowance for doubtful accounts-- accounts
receivable.................................... $ 2,746 $ 1,238 $ 794 $ 3,190
Accumulated amortization--goodwill.............. $ 37,471 $ 3,782 $ 41,253
Public liability and property damage and other
insurance liabilities......................... $ 194,677 $ 74,109 $ 56,315 $ 212,471
October 17, 1996 (Date of Acquisition) to
December 31, 1996:
Allowance for doubtful accounts-- accounts
receivable.................................... $ 227 $ 227
Accumulated amortization--goodwill.............. $ 1,026 $ 1,026
Public liability and property damage and other
insurance liabilities......................... $ 212,471 $ 17,355 $ 16,041 $ 213,785
Year ended December 31, 1997:
Allowance for doubtful accounts-- accounts
receivable.................................... $ 227 $ 3,208 $ 1,149 $ 2,286
Accumulated amortization--goodwill.............. $ 1,026 $ 6,860 $ 7,886
Public liability and property damage and other
insurance liabilities......................... $ 213,785 $ 96,663 $ 16,670 $ 71,089 $ 256,029
Year ended December 31, 1998:
Allowance for doubtful accounts-- accounts
receivable.................................... $ 2,286 $ 2,961 $ 1,897 $ 3,350
Accumulated amortization--goodwill.............. $ 7,886 $ 11,854 $ 19,740
Public liability and property damage and other
insurance liabilities......................... $ 256,029 $ 93,038 $ 79,858 $ 269,209
- ------------------------
a) Includes additions of $16,838 relating to the acquisition of The First Gray
Line Corporation on August 20, 1997.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
1.01 Purchase Agreement, dated as of June 25, 1999, among Avis Rent A Car, Inc. (the "Company"), the
Subsidiary Guarantors (as defined therein) and Chase Securities Inc. and Lehman Brothers Inc. (the
"Initial Purchasers").*
2.01 Agreement and Plan of Merger and Reorganization by and among PHH Corporation, PHH Holdings
Corporation, the Company and Avis Fleet Leasing and Management Corporation, dated as of May 22,
1999.*
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.01 Certificate of Incorporation of Avis Rent A Car, Inc.***
3.02(a) Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(b) Restated Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(c) Corrected Restated Certificate of Incorporation of Avis Rent A Car System, Inc.*
3.02(d) Certificate of Ownership and Merger merging The First Gray Line Corporation into Avis Rent A Car
System, Inc.*
3.03(a) Certificate of Incorporation of Avis International, Ltd.*
3.03(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis International,
Ltd.*
3.03(c) Certificate of Change of Registered Agent and Registered Office of Avis International, Ltd.*
3.04(a) Certificate of Incorporation of Avis Management Services, Ltd.*
3.04(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis Management
Services, Ltd.*
3.04(c) Certificate of Change of Registered Agent and Registered Office of Avis Management Services, Ltd.*
3.05 Certificate of Incorporation of Avis Caribbean, Limited.*
3.06 Certificate of Incorporation of Avis Asia and Pacific, Limited.*
3.07(a) Certificate of Incorporation of Avis Enterprises, Inc.*
3.07(b) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc.*
3.07(c) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc.*
3.08 Certificate of Incorporation of Avis Service, Inc.*
3.09 Certificate of Incorporation of Avis Lube, Inc.*
3.10 Certificate of Incorporation of Avis Leasing Corporation.*
3.11(a) Certificate of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(b) Articles of Reduction of Rent-A-Car Company, Incorporated.*
3.11(c) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(d) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated.*
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.11(e) Articles of Amendment to the Articles of Incorporation of Rent-A-Car Company, Incorporated.*
3.11(f) Articles of Amendment of Rent-A-Car Company, Incorporated.*
3.12(a) Certificate of Incorporation of Reserve Claims Management Co.*
3.12(b) Certificate of Change of Registered Agent and Registered Office of Reserve Claims Management Co.
f/k/a Avis Leasing International, Ltd.*
3.12(c) Restated Certificate of Incorporation of Avis Leasing International, Ltd.*
3.13(a) Certificate of Incorporation of Avis Fleet Leasing and Management Corporation.*
3.13(b) Articles of Correction of Avis Fleet Leasing and Management Corporation.*
3.13(c) Certificate of Designation of Powers, Preferences and Special Rights of Series A Cumulative
Participating Redeemable Convertible Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Avis Fleet Leasing and Management Corporation.******
3.13(d) Certificate of Designation of Powers, Preferences and Special Rights of Series B Cumulative PIK
Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Avis Fleet Leasing and
Management Corporation.*****
3.13(e) Certificate of Designation of Powers, Preferences and Special Rights of Series C Cumulative
Redeemable Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Avis Fleet
Leasing and Management Corporation.*****
3.14(a) Certificate of Incorporation of Dealers Holding, Inc.*
3.14(b) Notice of Change of Resident Agent of Dealers Holding, Inc.*
3.14(c) Notice of Change of Resident Agent of Dealers Holding, Inc.*
3.14(d) Change of Address of Resident Agent of Dealers Holding, Inc.*
3.14(e) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of Dealers Holdings, Inc.*
3.15(a) Articles of Incorporation of Williamsburg Motors, Inc.*
3.15(b) Notice of Change of Resident Agent of Williamsburg Motors, Inc.*
3.15(c) Change of Resident Agent of Williamsburg Motors, Inc.*
3.15(d) Change of Address of Resident Agent of Williamsburg Motors, Inc.*
3.15(e) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office.*
3.15(f) Articles of Amendment of Articles of Incorporation of Williamsburg Motors, Inc.*
3.16(a) Articles of Incorporation of Edenton Motors, Inc.*
3.16(b) Notice of Change of Resident Agent of Edenton Motors, Inc.*
3.16(c) Articles of Amendment of Edenton Motors, Inc.*
3.16(d) Articles of Amendment of Edenton Motors, Inc.*
3.16(e) Change of Resident Agent of Edenton Motors, Inc.*
3.16(f) Change of Address of Resident Agent of Edenton Motors, Inc.*
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.16(g) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of Edenton Motors, Inc.*
3.17 Certificate of Incorporation of PHH Canadian Holdings, Inc.*
3.18(a) Articles of Incorporation of PHH Deutschland, Inc.*
3.18(b) Articles of Amendment of PHH Deutschland, Inc.*
3.18(c) Articles of Amendment of PHH Deutschland, Inc.*
3.18(d) Articles of Amendment of PHH Deutschland, Inc.*
3.18(e) Change of Resident Agent of PHH Deutschland, Inc.*
3.18(f) Articles of Amendment of PHH Deutschland, Inc.*
3.18(g) Articles of Amendment of PHH Deutschland, Inc.*
3.18(h) Certified Copy of Resolution of Board of Directors for Designation or Change of Resident Agent and/or
Principal Office of PHH Deutschland, Inc.*
3.18(i) Change of Address of Resident Agent of PHH Deutschland, Inc.*
3.19(a) Certificate of Incorporation of FAH Company, Inc.*
3.19(b) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.19(c) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.19(d) Certificate of Amendment to Certificate of Incorporation of FAH Company, Inc.*
3.20 Limited Liability Company Agreement of PHH Vehicle Management Services LLC.*
3.21 Limited Liability Company Agreement of Wright Express LLC.*
3.22 Operating Agreement of PHH/Paymentech LLC.*
3.50 By-Laws of Avis Rent A Car, Inc.***
3.51 By-Laws of Avis Rent A Car System, Inc.*
3.52 By-Laws of Avis International, Ltd.*
3.53 By-Laws of Avis Management Services, Ltd.*
3.54 By-Laws of Avis Caribbean, Limited.*
3.55 By-Laws of Avis Asia and Pacific, Limited.*
3.56 By-Laws of Avis Enterprises, Inc.*
3.57 By-Laws of Avis Service, Inc.*
3.58 By-Laws of Avis Lube, Inc.*
3.59 By-Laws of Avis Leasing Corporation.*
3.60 By-Laws of Rent-A-Car Company, Incorporated.*
3.61 By-Laws of Reserve Claims Management Co.*
3.62 By-Laws of Avis Fleet Leasing and Management Corporation.*
3.63 By-Laws of Dealers Holdings, Inc.*
3.64 By-Laws of Williamsburg Motors, Inc.*
3.65 By-Laws of Edenton Motors, Inc.*
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.66 By-Laws of PHH Canadian Holdings, Inc.*
3.67 By-Laws of PHH Deutschland, Inc.*
3.68 By-Laws of FAH Company, Inc.*
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.**
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.**
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.**
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.**
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.**
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.**
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.**
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.**
4.11 Credit Agreement, dated as of July 30, 1997, among Avis Rent A Car, Inc., Avis Rent A Car System,
Inc., The Chase Manhattan Bank, as administrative agent, Lehman Commercial Paper, Inc., as
syndication agent and the other lenders party thereto (the "Credit Agreement").**
4.12 Guarantee, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as administrative agent
for the lenders from time to time parties to the Credit Agreement.**
4.13 Security Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as
administrative agent for the lenders from time to time parties to the Credit Agreement.**
4.14 Pledge Agreement, dated as of July 30, 1997, in favor of The Chase Manhattan Bank, as administrative
agent for the lenders from time to time parties to the Credit Agreement.**
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.****
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
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.****
4.17 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.****
4.18 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.****
4.19 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.****
4.20 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.****
4.21 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.****
4.22 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.****
4.30 Indenture, dated as of June 30, 1999, among the Company, the Subsidiary Guarantors and the Bank of
New York (the "Notes Trustee").*
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.*
4.32 Credit Agreement, dated as of June 30, 1999, among the Company, as borrower, the financial
institutions party thereto, the Chase Manhattan Bank (the "Administrative Agent"), and Lehman
Commercial Paper Inc.*
4.33 Guarantee and Collateral Agreement, dated as of June 30, 1999, among the Company, the Subsidiary
Guarantors and the Administrative Agent.*
4.40 Origination Trust Agreement, dated as of June 30, 1999 (the "Origination Trust Agreement"), among
Raven Funding LLC (the "SPV"), PHH Vehicle Management Services LLC ("VMS LLC") and Wilmington Trust
Company (the "VMS ABS Trustee").*
4.41 Sold SUBI Supplement 1999-1A to the Origination Trust Agreement, dated as of June 30, 1999 (the
"1999-1A SUBI Supplement"), among the SPV, VMS LLC and the VMS ABS Trustee.*
4.42 Sold SUBI Supplement 1999-1B to the Origination Trust Agreement, dated as of June 30, 1999 (the
"1999-1B SUBI Supplement"), among the SPV, VMS LLC and the VMS ABS Trustee.*
4.43 Servicing Agreement, dated as of June 30, 1999 (the "Servicing Agreement"), between D.L. Peterson
Trust (the "Origination Trust") and VM LLC.*
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
4.44 Sold SUBI Supplement 1999-1 to the Servicing Agreement, dated as of June 30, 1999 (the "Sold SUBI
Servicing Supplement"), among the Origination Trust, the VMS ABS Trustee and VMS LLC.*
4.45 Asset Sale Agreement, dated as of June 30, 1999, between VMS LLC and the SPV.*
4.46 Receivables Purchase Agreement, dated as of June 30, 1999, by and between VMS LLC and the SPV.*
4.47 Contribution Agreement, dated as of June 30, 1999 between the SPV and the VMS ABS Trustee as trustee
for the Organization Trust and by VMS LLC for the Origination Trust.*
4.48 Transfer Agreement, dated as of June 30, 1999, between the SPV and Greyhound Funding LLC
("Greyhound"), together with the Origination Trust, VM LLC and the SPV.*
4.49 Base Indenture, dated as of June 30, 1999, between Greyhound and The Chase Manhattan Bank (the "VMS
ABS Indenture Trustee").*
4.50 Series 1999-1 Supplement, dated as of June 30, 1999, among Greyhound, VMS LLC, Park Avenue
Receivables Corporation and the VMS ABS Indenture Trustee.*
4.51 Custodian Agreement dated as of June 30, 1999, among the Origination Trust, Wilmington Trust Company
as Trustee, VMS LLC, as Servicer and All First Financial Center, as Custodian.*
4.52 Lockbox Services Agreement, dated as of June 30, 1999 among the Origination Trust, VMS LLC, in its
capacity as servicer of the Trust, and Bank of America National Trust and Savings Association.*
4.53 Preferred Membership Interest Purchase Agreement, dated as of June 0, 1999, among Greyhound Funding
LLC, Park Avenue Receivables Corporation, The Chase Manhattan Bank, individually as the APA Bank and
as Funding Agent, PHH Vehicle Management Services LLC, as Administrator.*
4.54 Administration Agreement, dated as of June 30, 1999, among Greyhound Funding LLC, Raven Funding LLC,
The Chase Manhattan Bank, as Indenture Trustee, PHH Vehicle Management Services LLC, as
Administrator.*
5.0 OPINIONS
5.1 Opinion of White & Case LLP regarding the legality of the securities being registered hereby.*
10. MATERIAL CONTRACTS.
10.01 Form of Registration Rights Agreement**
10.02 Separation Agreement, dated as of July 30, 1997, between Cendant Car Rental, Inc. and Avis Rent A
Car, Inc.**
10.03 Master License Agreement, dated as of July 30, 1997, among Cendant Car Rental, Inc., Avis Rent A Car
System, Inc. and Wizard Co., Inc.**
10.04 Computer Services Agreement, dated as of July 30, 1997, between Avis Rent A Car System, Inc. and
WizCom International, Ltd.**
10.05 Reservation Services Agreement, dated as of July 30, 1997, between Cendant Incorporated and Avis Rent
A Car System, Inc.**
10.06 Form of Tax Disaffiliation Agreement among Cendant Incorporated, Cendant Car Rental, Inc. and Avis
Rent A Car, Inc.**
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.07 Form of Lease Agreement by and between WizCom International, Ltd., as lessor, and Avis Rent A Car
System, Inc., as lessee (Virginia Beach, Virginia).**
10.08 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis Rent A
Car System, Inc., as sublessee (Tulsa, Oklahoma).**
10.09 Form of Sublease Agreement by and between WizCom International, Ltd., as sublessor, and Avis Rent A
Car System, Inc., as sublessee (Garden City, New York).**
10.10 Wizard Note Assignment, Assumption and Release Agreement, dated as of July 30, 1997, by and between
Wizard Co., Inc., Avis Rent A Car System, Inc. and Reserve Claims Management Co.**
10.11 Termination Services Agreement, dated as of July 30, 1997, among Harris Trust and Savings Bank, AESOP
Funding II L.L.C., Avis Rent A Car System, Inc., and WizCom International, Ltd.**
10.13 Call Transfer Agreement, dated March 4, 1997, between HFS Incorporated and Avis Rent A Car System,
Inc.**
10.15 Retention Agreement, dated as of January 1, 1999, between Avis Rent A Car System, Inc. and F. Robert
Salerno.****
10.16 Retention Agreement, dated as of January 1, 1999, between Avis Rent A Car System, Inc. and Kevin M.
Sheehan.****
10.17 Avis Rent A Car, Inc. 1997 Stock Option Plan.**
10.18 Avis Rent A Car System, Inc. Nonqualified Deferred Compensation Plan.****
10.20 Information Technology Services Agreement, dated as of June 29, 1999, between PHH Vehicle Management
Services, LLC and Cendant Corporation.*
10.21 Corporate Services Transition Agreement, dated as of June 30, 1999 between Cendant Operations, Inc.
and Avis Fleet Leasing and Management Corporation.*
10.22 Corporate Services Transition Agreement, dated as of June 30, 1999 between PHH Corporation and Avis
Fleet Leasing and Management Corporation.*
10.23 VMS Acquisition Registration Rights Agreement, dated as of June 30, 1999, among Avis Rent A Car,
Inc., Avis Fleet Leasing and Management Corporation, PHH Corporation and PHH Holdings Corporation.*
10.24 Non-Competition Agreement, dated as of June 30, 1999, among Avis Rent Car, Inc., Avis Fleet Leasing
and Management Corporation, PHH Corporation and PHH Holdings Corporation.*
10.25 Stockholders' Agreement, dated as of June 30, 1999, among Avis Rent A Car, Inc., Avis Fleet Leasing
and Management Corporation, and PHH Corporation.*
10.26 Trademark License Agreement, dated as of June 30, 1999, between Avis Fleet Leasing and Management
Corporation and PHH Holdings Corporation.*
10.27 Transitional License Agreement, dated as of June 30, 1999, between Cendant Corporation and Avis Fleet
Leasing and Management Corporation.*
10.28 Undertaking, dated as of June 30, 1999 by Avis Fleet Leasing and Management Corporation.*
10.29 Instrument of Assumption, dated as of June 30, 1999 by Avis Fleet Leasing and Management
Corporation.*
12.1 Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges.
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
21 Subsidiaries of the Registrants.*
23.01 Consent of Deloitte & Touche LLP relating to Avis Financial Statements.
23.02 Consent of Deloitte & Touche LLP relating to VMS Financial Statements.
23.03 Consent of White & Case LLP (included in opinion).*
24.1 Powers of Attorney.*
25.1 Form T-1 Statement of Eligibility of The Bank of New York, as trustee.*
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees.
99.4 Form of Letter from Registered Holders to clients.
99.5 Form of Instruction to Registered Holder from Beneficial Owner.
- ------------------------
* Previously filed.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, 333-28609.
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-1, 333-46737.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1998.
***** Incorporated by reference to the Registrant's Current Report on Form 8-K
dated July 15, 1999.
****** Incorporated by reference to Amendment No. 1 to the Registrant's Current
Report on Form 8-K/A dated July 15, 1999.