10-Q 1 d01-35187.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 (MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER: 1-13315 -------- AVIS GROUP HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-3347585 (State of Incorporation) (I.R.S. Employer Identification No.) 6 SYLVAN WAY PARSIPPANY, NEW JERSEY 07054 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 496-3500 900 OLD COUNTRY ROAD GARDEN CITY, NEW YORK 11530 (Former address) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section (g) of the Act: 11% SENIOR SUBORDINATED NOTES DUE 2009 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| AVIS GROUP HOLDINGS, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
PAGE ---- Consolidated Statements of: Operations for the three months ended September 30, 2001 and 2000 ................................................................ 1 Operations for the period March 1, 2001 (Date of Acquisition) to September 30, 2001, the two months ended February 28, 2001 and the nine months ended September 30, 2000 .................................... 2 Financial Position as of September 30, 2001 and December 31, 2000 ................................................... 3 Cash Flows for the period March 1, 2001 (Date of Acquisition) to September 30, 2001, the two months ended February 28, 2001 and the nine months ended September 30, 2000 ............................ 4 Notes to the Condensed Consolidated Financial Statements .................................................... 5-21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................................................. 22-29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ...................................................... 30 PART II. OTHER INFORMATION Signatures .............................................................. 31 ITEM 6(a). EXHIBITS ................................................................ 32 ITEM 6(b). REPORT ON FORM 8-K ...................................................... 35
PART 1 - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR COMPANIES --------------------- THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ --------------------- Revenue ........................................................................ $ 650,368 $733,694 --------- -------- Cost and expenses: Direct operating, net .......................................................... 238,657 259,573 Vehicle depreciation and lease charges, net .................................... 194,350 191,346 Selling, general and administrative ............................................ 122,094 121,101 Interest, net .................................................................. 70,440 86,992 Non-vehicle depreciation and amortization ...................................... 5,449 12,647 Amortization of cost in excess of net assets acquired and other intangibles .... 8,095 3,133 Unusual charges ................................................................ 60,062 --------- -------- 699,147 674,792 --------- -------- Income (loss) before provision for income taxes ................................ (48,779) 58,902 Provision (benefit) for income taxes ........................................... (24,033) 30,573 --------- -------- Income (loss) from continuing operations ....................................... (24,746) 28,329 Income from discontinued operations, net of income taxes of $5,938 ............. 20,068 --------- -------- Net income (loss) .............................................................. $ (24,746) $ 48,397 ========= ========
See notes to the condensed consolidated financial statements. 1 AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR COMPANIES --------------------------------- MARCH 1, 2001 TWO MONTHS NINE MONTHS (DATE OF ACQUISITION) ENDED ENDED TO FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2001 2000 --------------------- ------------ ------------- Revenue ..................................................... $ 1,497,258 $385,821 $1,989,167 ----------- -------- ---------- Costs and expenses: Direct operating, net ....................................... 549,021 173,830 715,581 Vehicle depreciation and lease charges, net ................. 423,110 111,966 510,674 Selling, general and administrative ......................... 276,213 83,229 355,240 Interest , net .............................................. 166,547 52,792 278,228 Non-vehicle depreciation and amortization ................... 12,235 4,154 22,260 Amortization of cost in excess of net assets acquired and other intangibles ..................................... 18,604 2,087 9,414 Unusual charges ............................................. 60,062 ----------- -------- ---------- 1,505,792 428,058 1,891,397 ----------- -------- ---------- Income (loss) before provision (benefit) for income taxes ... (8,534) (42,237) 97,770 Provision (benefit) for income taxes ........................ (2,381) (15,783) 47,976 ----------- -------- ---------- Income (loss) from continuing operations .................... (6,153) (26,454) 49,794 Income from discontinued operation, net of income taxes of $5,045 for the two months ended February 28, 2001 and $35,186 for the nine months ended September 30, 2000 .................................. 4,947 55,621 ----------- -------- ---------- Income (loss) before cumulative effect of accounting change .................................................... (6,153) (21,507) 105,415 Cumulative effect of accounting change, net of income tax benefit of $3,331 ..................................... (7,612) ----------- -------- ---------- Net income (loss) ........................................... $ (6,153) $(29,119) $ 105,415 =========== ======== ==========
See notes to the condensed consolidated financial statements. 2 AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS)
PREDECESSOR COMPANIES ------------ SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS Cash and cash equivalents .................................. $ 43,021 $ 80,368 Restricted cash ............................................ 43,953 41,280 Accounts receivable, net ................................... 206,176 189,662 Prepaid expenses ........................................... 57,896 47,924 Property and equipment, net ................................ 198,425 181,504 Other assets ............................................... 35,090 78,972 Net assets of discontinued operation ....................... 880,300 Deferred income tax assets, net ............................ 489,911 349,268 Customer lists ............................................. 18,392 Cost in excess of net assets acquired, net ................. 1,220,530 453,450 ----------- ----------- Total assets exclusive of assets under programs ............ 2,313,394 2,302,728 ----------- ----------- Assets under management programs: Restricted cash ......................................... 151,046 126,202 Vehicles ................................................ 3,554,442 3,761,454 Due from vehicle manufacturers .......................... 590,551 318,666 ----------- ----------- 4,296,039 4,206,322 ----------- ----------- Total assets ........................................... $ 6,609,433 $ 6,509,050 =========== =========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Accounts payable ........................................... $ 262,096 $ 283,556 Accrued liabilities ........................................ 386,884 263,277 Due to Cendant Corporation and affiliates, net ............. 410,471 36,117 Public liability, property damage and other insurance liabilities, net ........................................ 227,668 247,567 Non-vehicle debt ........................................... 594,594 730,333 ----------- ----------- Total liabilities exclusive of liabilities under programs .. 1,881,713 1,560,850 ----------- ----------- Liabilities under management programs: Vehicle debt ............................................ 3,934,969 3,816,682 Deferred income taxes ................................... 370,765 376,404 Other ................................................... 67,933 ----------- ----------- 4,373,667 4,193,086 ----------- ----------- Total liabilities ...................................... 6,255,380 5,753,936 ----------- ----------- Commitments and contingencies: Common stock ............................................... Class A Common stock ....................................... 359 Additional paid-in-capital ................................. 156,065 593,829 Retained earnings .......................................... 242,207 277,460 Treasury stock ............................................. (96,538) Accumulated comprehensive loss ............................. (44,219) (19,996) ----------- ----------- Total common stockholders' equity ...................... 354,053 755,114 ----------- ----------- Total liabilities and common stockholders' equity ...... $ 6,609,433 $ 6,509,050 =========== ===========
See notes to the condensed consolidated financial statements. 3 AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR COMPANIES ----------------------------- MARCH 1, 2001 TWO MONTHS NINE MONTHS (DATE OF ACQUISITION) ENDED ENDED TO FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2001 2000 ------------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...................................................... $ (6,153) $ (29,119) $ 105,415 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Non-vehicle depreciation and amortization .............................. 30,839 6,241 31,674 Changes in operating assets and liabilities: Accounts receivable ................................................. 6,887 10,108 (23,688) Accounts payable .................................................... 124,495 (33,889) 46,573 Due to Cendant-trading accounts ..................................... (169,144) (45,096) 1,076,008 Accrued liabilities ................................................. 114,432 1,486 (36,342) Other, net .......................................................... (71,064) (7,180) 33,955 ----------- ----------- ----------- Net cash provided by (used in) operating activities exclusive of management programs ................................................. 30,292 (97,449) 1,233,595 ----------- ----------- ----------- Management programs: Vehicle depreciation ................................................ 395,985 105,928 488,538 Deferred income taxes ............................................... (12,488) (17,744) (14,056) ----------- ----------- ----------- 383,497 88,184 474,482 ----------- ----------- ----------- Net cash provided by (used in) operating activities ................. 413,789 (9,265) 1,708,077 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Management programs: Increase (decrease) in restricted cash ........................... (36,855) 10,978 (36,963) Increase (decrease) in due (from) to vehicle manufacturers ....... (284,433) 16,368 (54,882) Payments for vehicle additions ................................... (3,407,418) (943,102) (3,907,439) Vehicle deletions ................................................ 3,057,001 813,460 2,794,366 ----------- ----------- ----------- (671,705) (102,296) (1,204,918) ----------- ----------- ----------- Payments for additions to property and equipment ....................... (22,957) (3,278) (29,800) Retirements of property and equipment .................................. 3,219 (380) 5,618 Payment for purchase of rental car franchise licensees ................. (28,261) Decrease in net assets and preferred stock of discontinued operation ... (291) (41,566) ----------- ----------- ----------- Net cash used in investing activities, exclusive of management programs. (47,999) (3,949) (65,748) ----------- ----------- ----------- Net cash used in investing activities .................................. (719,704) (106,245) (1,270,666) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Management programs: Changes in vehicle debt: Proceeds ......................................................... 1,111,524 132,294 1,392,856 Repayments ....................................................... (1,025,222) (31,087) (865,804) ----------- ----------- ----------- Net increase in vehicle debt ..................................... 86,302 101,207 527,052 Changes in non-vehicle debt: Proceeds ......................................................... 140,000 161,000 Repayments ....................................................... (457,928) (77) (1,118,328) ----------- ----------- ----------- Net decrease in non-vehicle debt ....................................... (317,928) (77) (957,328) Increase in due to Cendant-intercompany financing, net ................. 394,950 Payments for debt issuance costs ....................................... (4,593) (12) (9,525) Capital contribution from Cendant ...................................... 125,000 Other .................................................................. 140 271 Net cash provided by (used in) financing activities, exclusive of ----------- ----------- ----------- management programs ................................................. 197,429 51 (966,582) ----------- ----------- ----------- Net cash provided by (used in) financing activities .................... 283,731 101,258 (439,530) ----------- ----------- ----------- Effect of exchange rate changes on cash ................................ (900) (11) (390) ----------- ----------- ----------- Net decrease in cash and cash equivalents .............................. (23,084) (14,263) (2,509) Cash and cash equivalents at beginning of period ....................... 66,105 80,368 31,901 ----------- ----------- ----------- Cash and cash equivalents at end of period ............................. $ 43,021 $ 66,105 $ 29,392 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash interest paid ..................................................... $ 189,230 $ 44,315 $ 176,538 =========== =========== =========== Cash income taxes paid ................................................. $ 11,690 $ 1,962 $ 10,625 =========== =========== =========== Businesses acquired: Fair value of assets acquired, net of cash acquired of $182 ............ $ 30,283 Liabilities assumed .................................................... 2,022 ----------- Net cash paid for rental car franchise licensees ....................... $ 28,261 ===========
See notes to the condensed consolidated financial statements 4 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-BASIS OF PRESENTATION GENERAL Prior to March 1, 2001, the accompanying unaudited condensed consolidated financial statements included Avis Group Holdings, Inc. and its subsidiaries (the "Predecessor" or "Predecessor Companies"), Avis Rent A Car System, Inc. ("Vehicle Rental"), Avis Fleet Leasing and Management Corp. ("Vehicle Leasing") and Reserve Claims Management Co. On November 11, 2000, Cendant Corporation ("Cendant") entered into an Agreement and Plan of Merger with the Predecessor (the "Cendant Merger Agreement") whereby Cendant would acquire all of the outstanding shares of the Predecessor's Class A Common stock that were not owned by Cendant at the price of $33.00 per share, in cash and convert certain Avis Group Holdings, Inc. stock options to Cendant stock options which were then valued at approximately $17 million (the "Cendant Consideration"). Pursuant to the Cendant Merger Agreement, all outstanding and unexercised options to purchase Class A Common stock of the Predecessor were either cancelled upon the merger in exchange for a cash payment equal to the excess of the merger consideration over the per share exercise price of each option or converted into options to purchase Cendant common stock. Approximately 24.9 million outstanding shares of the Predecessor's Class A Common stock were not owned by Cendant and approximately 6.7 million unexercised non-converted options were outstanding at February 28, 2001. The merger was approved on February 28, 2001, by a majority of the Predecessor's shareholders who were unaffiliated with Cendant and closed on March 1, 2001 (the "Date of Acquisition") at a cost to Cendant of approximately $994 million, including $40 million of transaction costs and expenses (the "Acquisition"). Concurrent with the Acquisition, Avis Group Holdings, Inc.'s common stock was recapitalized. As a result of the recapitalization, 10,000 shares were authorized, of which 5,537 shares were issued and outstanding at March 1, 2001 and September 30, 2001. These shares, which have a par value of $0.01 per share, are 100% owned by a subsidiary of Cendant. In addition, Avis Group Holdings, Inc. sold its investment in Vehicle Leasing to PHH Corporation ("PHH Corp."), a wholly-owned subsidiary of Cendant, for $800 million. The proceeds from the sale were used to retire acquisition indebtedness (see Note 5). Accordingly, the unaudited condensed consolidated financial statements for the period from the Date of Acquisition through September 30, 2001 and the three months ended September 30, 2001 include the consolidated accounts of Avis Group Holdings, Inc., Avis Rent A Car System, Inc. and Reserve Claims Management Co., (collectively referred to as the "Company" or "Successor Company"). As a result of the sale of Vehicle Leasing to PHH Corp., the Condensed Consolidated Statements of Operations for the two months ended February 28, 2001 and the three and nine months ended September 30, 2000 of the Predecessor present Vehicle Leasing as a discontinued operation, net of the related provision for income taxes (see Note 3). The Series A, B, and C Preferred stock, which was originally issued by Vehicle Leasing, is excluded from the Successor Company's Condensed Statement of Financial Position at September 30, 2001. The Acquisition was accounted for under the purchase method. The purchase price has been allocated among the Predecessor Companies based upon their estimated fair values at the Date of Acquisition. Because of this purchase price allocation, the condensed consolidated financial statements of the Predecessor Companies are not comparable to the condensed consolidated financial statements of the Successor Company. The excess of the purchase price over the estimated fair value of the underlying net assets acquired was allocated to goodwill, which is being amortized over 40 years on a straight-line basis until the adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (see below). The allocation of the excess purchase price was based upon preliminary estimates and assumptions and is subject to revision when appraisals and integration costs have been finalized. Accordingly, revisions to the allocation will be recorded by the Company as further adjustments to the purchase price allocation. The preliminary allocation of the purchase price is summarized as follows (in thousands):
AMOUNT ----------- Cash consideration ................................................................... $ 937,554 Fair value of converted options ...................................................... 17,000 Transaction costs and expenses ....................................................... 40,000 ----------- Total purchase price ................................................................. 994,554 Book value of Cendant's existing net investment in Avis Group ........................ 408,957 ----------- Cendant's basis in Predecessor Companies ............................................. 1,403,511 Portion of basis attributable to Vehicle Leasing ..................................... (1,000,000) ----------- Cendant's basis in the Successor Company ............................................ 403,511 Intercompany loan assumed by Successor Company ....................................... (137,554) ----------- Cendant's adjusted basis in Successor Company ........................................ 265,957 Fair value of liabilities assumed in excess of assets acquired of Successor Company .. 953,020 ----------- Excess purchase price over net assets acquired ....................................... $ 1,218,977 ===========
5 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1-BASIS OF PRESENTATION (CONTINUED) Certain reclassifications have been made to conform to the current period presentation. In management's opinion, the condensed consolidated financial statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. The condensed consolidated financial statements should be read in conjunction with the Predecessor's Annual Report on Form 10-K for the year ended December 31, 2000. CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVE INSTRUMENTS On January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") as amended. SFAS No. 133, established accounting and reporting standards for derivative instruments, including freestanding and embedded derivatives, and hedging activities. The Company has recorded all such derivatives at fair value at January 1, 2001. The adoption of SFAS No. 133 resulted in the recognition of a non-cash charge of $12.5 million ($7.6 million, after tax) in the Condensed Consolidated Statement of Operations for the two months ended February 28, 2001 to account for the cumulative effect of the accounting change relating to derivatives not qualifying as hedges prior to that date. The Company also recognized a cumulative-effect-type adjustment in the amount of $2.4 million in accumulated comprehensive loss in the Condensed Consolidated Balance Sheet attributable to derivatives designated as cash flow like hedges prior to the adoption of SFAS No. 133. The Company uses derivative financial instruments as part of its overall strategy to manage its exposure to market risks associated with interest rate risks. As a matter of policy, the Company does not use derivatives for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. Gains or losses on derivatives designated in cash flow hedges, to the extent the hedge is effective, are recorded in other comprehensive income (loss). Any ineffectiveness resulting from these cash flow hedges is reported currently in earnings. Amounts accumulated in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings. Gains and losses on derivatives not designated as hedging instruments are recognized currently in earnings. RECENT ACCOUNTING STANDARDS Recent pronouncements of the Financial Accounting Standards Board which are not required to be adopted at this date include Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" ("SFAS No. 141"), SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and SFAS No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"). SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and requires additional disclosures for material business combinations completed after such date. This standard also addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination acquisition. On July 1, 2001, the Company adopted the provisions relating to acquisitions made subsequent to June 30, 2001, as required. The provisions regarding the classification of previously acquired intangible asset will be adopted simultaneously with the provisions of SFAS No. 142 on January 1, 2002, as required. 6 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - BASIS OF PRESENTATION (CONTINUED) RECENT ACCOUNTING STANDARDS (CONTINUED) SFAS No. 142 addresses financial accounting and reporting for intangible assets acquired outside of a business combination. The standard also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. The Company will be required to assess goodwill and other intangible assets for impairment annually, or more frequently if circumstances indicate a potential impairment. On July 1, 2001, the Company adopted the provisions requiring that goodwill and certain other intangible assets acquired after June 30, 2001 not be amortized. The Company will adopt the remaining provisions of this standard on January 1, 2002, as required. Transition-related impairment losses, if any, resulting form the initial assessment of goodwill and certain other intangible assets will be recognized by the Company as a cumulative effect of accounting change as of January 1, 2002. The Company is currently evaluating the impact of adopting the remaining provisions on its financial position and results of operations. Based upon a preliminary assessment of previously acquired goodwill and certain other intangible assets that will no longer be amortized upon the adoption of SFAS No. 142, the Company expects that the related reduction to amortization expense during the seven months ended September 30, 2001, the two months ended February 28, 2001 and the nine months ended September 30, 2000 would approximate $18.6 million, $2 million, and $9.2 million, respectively. SFAS No. 144 addresses financial accounting and reporting for the impairment of disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and replaces the accounting and reporting provisions of APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effect of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" as it relates to the disposal of a segment of a business. SFAS No. 144 requires the use of a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations, by requiring those long-lived assets to be measured at the lower of carrying amount or fair value less cost to sell. The impairment recognition and measurement provisions of SFAS No. 121 were retained for all long-lived assets to be held and used with the exception of goodwill. The Company will adopt this standard on January 1, 2002. NOTE 2-UNUSUAL CHARGES During the third quarter 2001, unusual charges of $60.1 million were recorded as a result of the September 11, 2001 terrorist attacks on the World Trade Center ("Terrorist Attacks"). The unusual charges include 1) an asset impairment loss arising from the return of Regular Program vehicles, $43.8 million, 2) a reserve for anticipated decline in market value on the sale of Non-Program vehicles, $5.8 million, 3) a reserve for the cancellation of marketing programs, $0.9 million, 4) a reserve for severance costs, $0.5 million and 5) other costs, $9.1 million, principally related to redundancies caused by the Terrorist Attacks. The asset impairment loss of $43.8 million relates to the disposal of Program Vehicles under repurchase programs. Prices under these repurchase programs are based on either 1) a specified percentage of original vehicle costs, depending on the month the vehicle is returned to the manufacturers or 2) the original capitalized cost less a set depreciation amount. Unlike Program Vehicles, the resale of Non-Program Vehicles is determined by current market conditions. Due to the excessive number of vehicles being returned by Avis and other car rental companies subsequent to the Terrorist Attacks, the Company has experienced a sharp decline in the resale value of these Non-Program vehicles. A reserve in the amount of $5.8 million was established anticipating losses on the disposal of Non-Program vehicles. As of September 30, 2001, a reserve of $35 million remains for those Program Vehicles which have not been disposed. The remaining vehicles will be disposed of as soon as possible. Also included in the unusual charge were costs of commissions payable to agencies for advertising placement. Prior to the Terrorist Attacks, the Company had committed to a level of advertising placement commissions based on anticipated advertising spending. As a result of the Terrorist Attacks, the Company has significantly curtailed its advertising spending, it remains, however, obligated to pay commissions based on budgeted advertising spending. As of September 30, 2001, the entire amount of advertising placement commission had been paid. In addition, the Company has initiated a formal plan to terminate certain employees at field locations and at corporate headquarters. As of September 30, 2001, the Company had accrued $0.5 million for severance and other related costs for employees so notified. The Company expects all affected employees will be terminated prior to December 31, 2001. Other costs of $9.1 million associated with the Terrorist Attacks have been classified within the Statement of Operations to the Unusual Charge. Amounts classified comprise $7.2 million of estimated payroll costs for underutilized employees (the majority of which have been terminated) and $1.9 million of minimum airport commission guarantees. 7 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3-DISCONTINUED OPERATION In connection with the acquisition of the Company by Cendant on March 1, 2001, the Company sold its investment in Vehicle Leasing for $800 million to PHH Corp. (see Note 1). No gain or loss was recognized on the sale. Summarized financial data of the discontinued operation of the Predecessor is as follows (in thousands):
VEHICLE LEASING ---------------------------------------------- TWO MONTHS NINE MONTHS THREE MONTHS ENDED ENDED ENDED FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2000 ------------ ------------- ------------- Revenue ..................................... $255,548 $1,250,609 $396,581 ======== ========== ======== Income before provision for income taxes .... $ 9,992 $ 90,807 $ 26,006 Provision for income taxes .................. 5,045 35,186 5,938 -------- ---------- -------- Net income .................................. $ 4,947 $ 55,621 $ 20,068 ======== ========== ========
Income before provision for income taxes for the two months ended February 28, 2001 and the nine and three months ended September 30, 2000 include certain intercompany charges from the Predecessor Companies. These charges seek to reimburse the Predecessor Companies for the costs it had incurred on behalf of Vehicle Leasing as follows (in thousands):
TWO MONTHS NINE MONTHS THREE MONTHS ENDED ENDED ENDED FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2000 ------------ ------------- ------------- Interest on intercompany loans .... $ 342 $ 6,371 $ (16) Employee benefits costs ........... 963 4,420 1,595 ------- ------- ------- $ 1,305 $10,791 $ 1,579 ======= ======= =======
Net assets of the discontinued operation consist of the following (in thousands):
DECEMBER 31, 2000 ----------------- Cash ........................................ $ 122,509 Accounts receivable, net .................... 643,502 Vehicles, net ............................... 3,205,380 Cost in excess of net assets acquired ....... 873,286 Other assets ................................ 289,675 ---------- Total assets ........................... 5,134,352 ---------- Accounts payable and accrued liabilities .... 456,784 Deferred income taxes ....................... 432,357 Debt ........................................ 2,975,225 ---------- Total liabilities ...................... 3,864,366 ---------- Preferred stock classes A, B, and C ......... 389,686 ---------- Net assets of discontinued operation ... $ 880,300 ==========
8 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4-COMPREHENSIVE INCOME (LOSS) Comprehensive (loss) income is comprised of the following (in thousands):
PREDECESSOR COMPANIES ------------------------------- MARCH 1, 2001 TWO MONTHS NINE MONTHS (DATE OF ACQUISITION) ENDED ENDED TO FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2001 2000 --------------------- ------------ ------------- Net (loss) income ....................................................... $ (6,153) $(29,119) $105,415 Foreign currency translation adjustment, net of income taxes ............ (3,371) (1,775) (10,275) Cumulative effect of accounting change, net of income taxes ............. 1,229 (Losses) gains on derivative instruments, net of income taxes (Note 8) .. (40,848) 813 -------- -------- -------- Comprehensive (loss) income ............................................. $(50,372) $(28,852) $ 95,140 ======== ======== ========
NOTE 5-FINANCING AND DEBT Debt outstanding consists of the following (in thousands):
PREDECESSOR COMPANIES SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ VEHICLE DEBT Commercial Paper Notes .................................................... $ 149,682 $ 919,800 Short-term notes-foreign ................................................ 180,287 196,882 Series 1997-A-2 asset-backed Medium Term Notes due May through October 2002 at 6.40% .................................................. 850,000 850,000 Series 1998-1 asset-backed Medium Term Notes due December 2004 through May 2005 at 6.14% ...................................................... 600,000 600,000 Series 2000-1 floating rate Rental Car Asset-Backed Notes due February 2003 through July 2003 ........................................ 250,000 250,000 Series 2000-2 floating rate Rental Car Asset-Backed Notes due March 2007 through August 2007 ......................................... 300,000 300,000 Series 2000-3 floating rate Rental Car Asset-Backed Notes due May 2003 through October 2003 .......................................... 200,000 200,000 Series 2000-4 floating rate Rental Car Asset-Backed Notes due June 2005 through November 2005 ........................................ 500,000 500,000 Series 2001-1 floating rate Rental Car Asset-Backed Notes due November 2003 through April 2004 ....................................... 750,000 Series 2001-2 auction rate Rental Car Asset-Backed Notes due May 2007 ..... 155,000 ---------- ---------- TOTAL VEHICLE DEBT .................................................. 3,934,969 3,816,682 ---------- ---------- NON-VEHICLE DEBT Senior Subordinated Notes due May 2009 at 11.00% .......................... 589,615 500,000 Revolving Credit Facility due June 2005 ................................... 225,000 Other ..................................................................... 4,979 5,333 ---------- ---------- TOTAL NON-VEHICLE DEBT .............................................. 594,594 730,333 ---------- ---------- TOTAL DEBT .......................................................... $4,529,563 $4,547,015 ========== ==========
On March 2, 2001, one of the Company's vehicle rental financing subsidiaries issued $750 million of Series 2001-1 Floating Rate Rental Car Asset Backed Notes ("Series 2001-1 Notes"), which are secured by the Company's vehicles. Anticipated principal repayment on the Series 2001-1 Notes commence in November 2003 and continue through April 2004. The Series 2001-1 Notes bear interest at a rate of LIBOR plus 20 basis points per annum. The Series 2001-1 Notes are guaranteed under a Surety Bond issued by MBIA and are rated AAA by Standard and Poor's rating services and Aaa by Moody's Investor Service, Inc. The Series 2001-1 Notes rank pari pasu with the Company's Variable Funding Notes and Medium Term Notes. 9 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5-FINANCING AND DEBT (CONTINUED) On May 17, 2001, one of the Company's vehicle rental financing subsidiaries issued $125 million of Series 2001-2 Auction Rate Notes (the "Series 2001-2 Notes"), which are secured by the Company's vehicles. The Series 2001-2 Notes were issued in four classes, Class A-1, A-2, A-3 and A-4 with initial issuances of $95 million, $10 million, $10 million and $10 million, respectively. Subsequent to the initial issuance of $125 million of auction rate notes, the Company issued $145 million of additional notes and repaid principal of $115 million, which brought the total outstanding Series 2001-2 Notes to $155 million at September 30, 2001. The Company may issue up to $125 million of Auction Rate Notes per class or $500 million in total. The interest rate on each class will be a market derived rate determined by auction with auctions expected to occur every 35 days. Anticipated principal repayment on the Series 2001-2 Notes is May 2007. The Series 2001-2 Notes are guaranteed under a Surety Bond issued by Ambac and are rated AAA by Standard & Poor's Ratings Services and Aaa by Moody's Investors Service, Inc. The Series 2001-2 Notes rank pari passu with the Company's variable funding notes and medium term notes. In connection with the acquisition by Cendant on March 1, 2001, a fair value of $604.5 million was assigned to the Company's 11% Senior Subordinated Notes due May 2009 ("Senior Subordinated Notes") of which $14.2 million has been accreted to the Condensed Consolidated Statement of Operations since the date of acquisition along with principal repayments of $650,000. The fair value of the notes as of September 30, 2001 was $589.6 million and includes a call premium of $27.5 million if the notes are redeemed during the twelve month period beginning on May 1, 2004. On September 5, 2001, the Company elected to terminate the Revolving Credit Facility. NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS In connection with the Vehicle Leasing acquisition on June 30, 1999 and as part of the financing thereof, the Predecessor issued and sold the Senior Subordinated Notes (see Note 5) in a transaction exempt from registration under the Securities Act. The Senior Subordinated Notes are unsecured obligations of Avis Group Holdings, Inc. The notes are subordinated in right of payment to all existing and future senior indebtedness of the Company, and are guaranteed by certain Avis Group Holdings, Inc. domestic subsidiaries. Vehicle Leasing and its subsidiaries were released as guarantors under this financing agreement upon Vehicle Leasing's sale to PHH Corp. on March 1, 2001 (see Notes 1 and 2). Accordingly, the following condensed consolidating financial information presents the results of operations for the three months ended September 30, 2001 and September 30, 2000, the results of operations and cash flows for the period March 1, 2001 (Date of Acquisition) to September 30, 2001, the two months ended February 28, 2001 and the nine months ended September 30, 2000 and the financial position as of September 30, 2001 and December 31, 2000. 10 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) The Unaudited Condensed Consolidating Statements of Operations for the two months ended February 28, 2001 and the three and nine month periods ended September 30, 2000 present the results of operations of Vehicle Leasing as income from discontinued operations, net of the related income tax provision.
AVIS GROUP HOLDINGS, INC CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) ------------------------------------------------------------------------ NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ----------- ------------ ------------ -------------- Revenue .............................................. $ 575,914 $74,454 $ 650,368 --------- ------- --------- Costs and expenses: Direct operating, net ................................ 207,726 30,931 238,657 Vehicle depreciation and lease charges, net .......... 176,676 17,674 194,350 Selling, general and administrative .................. 113,750 8,344 122,094 Interest, net ........................................ $ 11,116 57,627 1,697 70,440 Non-vehicle depreciation and amortization ............ 4,763 686 5,449 Amortization of cost in excess of net assets acquired and other intangibles ............. 5,037 3,014 44 8,095 Unusual charges ...................................... 60,062 60,062 --------- --------- ------- --------- 16,153 623,618 59,376 699,147 --------- --------- ------- --------- (16,153) (47,704) 15,078 (48,779) Equity (loss) in earnings of subsidiaries ............ (17,308) 9,493 $ 7,815 --------- --------- ------- -------- --------- Income (loss) before provision (benefit) for income taxes ............................................. (33,461) (38,211) 15,078 7,815 (48,779) Provision (benefit) for income taxes ................. (8,715) (20,903) 5,585 (24,033) --------- --------- ------- -------- --------- Net income (loss) .................................... $ (24,746) $ (17,308) $ 9,493 $ 7,815 $ (24,746) ========= ========= ======= ======== ========= AVIS GROUP HOLDINGS, INC CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (PREDECESSOR COMPANIES) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS) ------------------------------------------------------------------------ NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ----------- ------------ ------------ -------------- Revenue .............................................. $ 658,053 $75,641 $ 733,694 --------- ------- --------- Costs and expenses: Direct operating, net ................................ 229,975 29,598 259,573 Vehicle depreciation and lease charges, net .......... 173,196 18,150 191,346 Selling, general and administrative .................. 112,293 8,808 121,101 Interest, net ........................................ $ 25,250 60,067 1,675 86,992 Non-vehicle depreciation and amortization ............ 11,985 662 12,647 Amortization of cost in excess of net Assets acquired and other intangibles ............. 3,090 43 3,133 --------- --------- ------- --------- 25,250 590,606 58,936 674,792 --------- --------- ------- --------- (25,250) 67,447 16,705 58,902 Equity in earnings of subsidiaries ................... 64,268 19,983 $(84,251) --------- --------- ------- -------- --------- Income before provision (benefit) for income taxes ... 39,018 87,430 16,705 (84,251) 58,902 Provision (benefit) for income taxes ................. (9,379) 34,909 5,043 30,573 --------- --------- ------- -------- --------- Income from continuing operations .................... 48,397 52,521 11,662 (84,251) 28,329 Income (loss) from discontinued operation, net of income taxes ...................................... 11,747 8,321 20,068 --------- --------- ------- -------- --------- Net income ........................................ $ 48,397 $ 64,268 $19,983 $(84,251) $ 48,397 ========= ========= ======= ======== =========
11 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 1, 2001 (DATE OF ACQUISITION) TO SEPTEMBER 30, 2001 (IN THOUSANDS) ------------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- Revenue .............................................. $ 1,343,901 $ 153,357 $ 1,497,258 ----------- --------- ----------- Costs and expenses: Direct operating, net ................................ 483,474 65,547 549,021 Vehicle depreciation and lease charges, net .......... 386,678 36,432 423,110 Selling, general and administrative .................. 257,307 18,906 276,213 Interest, net ........................................ $ 27,362 136,568 2,617 166,547 Non-vehicle depreciation and amortization ............ 10,651 1,584 12,235 Amortization of cost in excess of net assets acquired and other intangibles ............. 11,611 6,891 102 18,604 Unusual charges ...................................... 60,062 60,062 ----------- ----------- --------- ----------- 38,973 1,341,631 125,188 1,505,792 ----------- ----------- --------- ----------- (38,973) 2,270 28,169 (8,534) Equity in earnings of subsidiaries ................... 21,914 20,232 $(42,146) ----------- ----------- --------- -------- ----------- Income (loss) before provision (benefit) for income taxes ............................................. (17,059) 22,502 28,169 (42,146) (8,534) Provision (benefit) for income taxes ................. (10,906) 588 7,937 (2,381) ----------- ----------- --------- -------- ----------- Net income (loss) .................................... $ (6,153) $ 21,914 $ 20,232 $(42,146) $ (6,153) =========== =========== ========= ======== =========== AVIS GROUP HOLDINGS, INC CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (PREDECESSOR COMPANIES) FOR THE TWO MONTHS ENDED FEBRUARY 28, 2001 (IN THOUSANDS) ------------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- Revenue .............................................. $ 344,496 $ 41,325 $ 385,821 ----------- --------- ----------- Costs and expenses: Direct operating, net ................................ 154,490 19,340 173,830 Vehicle depreciation and lease charges, net .......... 102,490 9,476 111,966 Selling, general and administrative .................. 77,866 5,363 83,229 Interest, net ........................................ $ 11,473 40,375 944 52,792 Non-vehicle depreciation and amortization ............ 3,707 447 4,154 Amortization of cost in excess of net Assets acquired ................................... 2,060 27 2,087 ----------- ----------- --------- ----------- 11,473 380,988 35,597 428,058 ----------- ----------- --------- ----------- (11,473) (36,492) 5,728 (42,237) Equity (loss) in earnings of subsidiaries ............ (21,907) 10,898 $ 11,009 ----------- ----------- --------- -------- ----------- Income (loss) before provision (benefit) for income taxes ............................................. (33,380) (25,594) 5,728 11,009 (42,237) ----------- ----------- --------- -------- ----------- Provision (benefit) for income taxes ................ (4,261) (12,716) 1,194 (15,783) ----------- ----------- --------- -------- ----------- Income (loss) from continuing operations ............. (29,119) (12,878) 4,534 11,009 (26,454) Income (loss) from discontinued operations, net of income taxes ...................................... (6,358) 11,305 4,947 ----------- ----------- --------- -------- ----------- Income (loss) before cumulative effect of accounting change ............................................ (29,119) (19,236) 15,839 11,009 (21,507) Cumulative effect of accounting change, net of income tax benefit ....................................... (2,671) (4,941) (7,612) ----------- ----------- --------- -------- ----------- Net income (loss) .................................... $ (29,119) $ (21,907) $ 10,898 $ 11,009 $ (29,119) =========== =========== ========= ======== ===========
12 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (PREDECESSOR COMPANIES) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) -------------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- Revenue .......................................... $ 1,792,413 $196,754 $1,989,167 ----------- -------- ---------- Costs and expenses: Direct operating, net ............................ 631,688 83,893 715,581 Vehicle depreciation and lease charges, net ...... 462,706 47,968 510,674 Selling, general and administrative .............. 329,985 25,255 355,240 Interest, net .................................... $ 105,500 169,787 2,941 278,228 Non-vehicle depreciation and amortization ........ 20,237 2,023 22,260 Amortization of cost in excess of net assets acquired ............................... 9,282 132 9,414 ---------- ----------- -------- ---------- 105,500 1,623,685 162,212 1,891,397 ---------- ----------- -------- ---------- (105,500) 168,728 34,542 97,770 Equity in earnings of subsidiaries ............... 171,727 82,010 $(253,737) ---------- ----------- -------- --------- ---------- Income before provision (benefit) for income taxes 66,227 250,738 34,542 (253,737) 97,770 ---------- ----------- -------- --------- ---------- Provision (benefit) for income taxes ............. (39,188) 78,127 9,037 47,976 ---------- ----------- -------- --------- ---------- Income from continuing operations ................ 105,415 172,611 25,505 (253,737) 49,794 Income (loss) from discontinued operation, net of income taxes .................................. (885) 56,506 55,621 ---------- ----------- -------- --------- ---------- Net income ....................................... $ 105,415 $ 171,726 $ 82,011 $(253,737) $ 105,415 ========== =========== ======== ========= ==========
13 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION SEPTEMBER 30, 2001 (IN THOUSANDS) -------------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- ASSETS Cash and cash equivalents ......................... $ 200 $ 29,653 $ 13,168 $ 43,021 Restricted cash ................................... 621 43,332 43,953 Accounts receivable, net .......................... (12) 180,268 25,920 206,176 Prepaid expenses .................................. 50,416 7,480 57,896 Property and equipment, net ....................... 185,670 12,755 198,425 Investment in consolidated subsidiaries ........... 705,132 (448,517) 448,517 $(705,132) Other assets ...................................... 14,134 20,956 35,090 Deferred income tax assets, net ................... 190,278 295,200 4,433 489,911 Customer lists .................................... 18,392 18,392 Cost in excess of net assets acquired, net ........ 756,511 461,411 2,608 1,220,530 ----------- ----------- ----------- --------- ---------- Total assets exclusive of assets under management programs ....................................... 1,671,122 768,235 579,169 (705,132) 2,313,394 ----------- ----------- ----------- --------- ---------- Assets under management programs: Restricted cash ................................ 151,046 151,046 Vehicles ....................................... (82,431) 3,636,873 3,554,442 Due from vehicle manufacturers ................. (693) 591,244 590,551 ----------- ----------- ---------- (83,124) 4,379,163 4,296,039 ----------- ----------- ----------- --------- ---------- Total assets ...................................... $ 1,671,122 $ 685,111 $ 4,958,332 $(705,132) $6,609,433 =========== =========== =========== ========= ========== LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable and accrued liabilities .......... $ 22,877 $ 476,186 $ 149,917 $ 648,980 Due to Cendant Corporation and affiliates, net .... 704,576 (318) (293,787) 410,471 Public liability, property damage and other insurance liabilities, net ..................... 171,118 56,550 227,668 Non-vehicle debt .................................. 589,616 4,978 594,594 ----------- ----------- ----------- ---------- Total liabilities exclusive of liabilities under management programs ............................ 1,317,069 651,964 (87,320) 1,881,713 ----------- ----------- ----------- ---------- Liabilities under management programs: Vehicle debt ................................... 3,934,969 3,934,969 Deferred income taxes .......................... 333,461 37,304 370,765 Other .......................................... 67,933 67,933 ----------- ----------- ---------- 401,394 3,972,273 4,373,667 ----------- ----------- ----------- --------- ---------- Total liabilities ................................. 1,317,069 1,053,358 3,884,953 6,255,380 ----------- ----------- ----------- --------- ---------- Common stockholder's equity ....................... 354,053 (368,247) 1,073,379 (705,132) 354,053 ----------- ----------- ----------- --------- ---------- Total liabilities and common stockholder's equity . $ 1,671,122 $ 685,111 $ 4,958,332 $(705,132) $6,609,433 =========== =========== =========== ========= ==========
14 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION (PREDECESSOR COMPANIES) DECEMBER 31, 2000 (IN THOUSANDS) -------------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- ASSETS Cash and cash equivalents .......................... $ 73 $ 65,602 $ 14,693 $ 80,368 Restricted cash .................................... 41,280 41,280 Accounts receivable, net ........................... 156 162,589 26,917 189,662 Prepaid expenses ................................... 39,014 8,910 47,924 Property and equipment, net ........................ 167,256 14,248 181,504 Investment in consolidated subsidiaries ............ 2,276,599 (826) $(2,275,773) Other assets ....................................... 1,064 55,304 22,604 78,972 Net assets of discontinued operation ............... (883,464) 2,086,932 (323,168) 880,300 Deferred income taxes .............................. 96,680 249,201 3,387 349,268 Cost in excess of net assets acquired, net ......... 450,922 2,528 453,450 ----------- ----------- ----------- ----------- ---------- Total assets exclusive of assets under management programs ........................................ 1,491,108 3,275,994 (188,601) (2,275,773) 2,302,728 ----------- ----------- ----------- ----------- ---------- Assets under management programs: Restricted cash ................................. 126,202 126,202 Vehicles ........................................ (50,804) 3,812,258 3,761,454 Due from vehicle manufacturers .................. 9,666 309,000 318,666 ----------- ----------- ----------- ---------- (41,138) 4,247,460 4,206,322 ----------- ----------- ----------- ----------- ---------- Total assets ....................................... $ 1,491,108 $ 3,234,856 $ 4,058,859 $(2,275,773) $6,509,050 =========== =========== =========== =========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities ........... $ 10,994 $ 383,754 $ 152,085 $ 546,833 Due to Cendant Corporation and affiliates, net ..... 36,117 36,117 Public liability, property damage and other insurance liabilities, net ...................... 194,373 53,194 247,567 Non-vehicle debt ................................... 725,000 5,333 730,333 ----------- ----------- ----------- ---------- Total assets exclusive of assets under management programs ........................................ 735,994 619,577 205,279 1,560,850 ----------- ----------- ----------- ---------- Liabilities under management programs: Vehicle debt .................................... 3,816,682 3,816,682 Deferred income taxes ........................... 338,680 37,724 376,404 ----------- ----------- ---------- 338,680 3,854,406 4,193,086 ----------- ----------- ----------- ---------- Total liabilities .................................. 735,994 958,257 4,059,685 5,753,936 ----------- ----------- ----------- ---------- Common stockholders' equity ........................ 755,114 2,276,599 (826) $(2,275,773) 755,114 ----------- ----------- ----------- ----------- ---------- Total liabilities and common stockholders' equity .. $ 1,491,108 $ 3,234,856 $ 4,058,859 $(2,275,773) $6,509,050 =========== =========== =========== =========== ==========
15 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE PERIOD MARCH 1, 2001 (DATE OF ACQUISITION) TO SEPTEMBER 30, 2001 (IN THOUSANDS) ------------------------------------------------------------------------ AVIS GROUP NON- HOLDINGS, INC. PARENT GUARANTOR GUARANTOR ELIMINATIONS CONSOLIDATED --------- --------- ----------- ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ......................................... $ (6,153) $ 21,914 $ 20,232 $(42,146) $ (6,153) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities exclusive of management programs ....................... (75,546) 13,884 98,107 36,445 --------- --------- ----------- -------- ----------- Net cash provided by (used in) operating activities exclusive of management programs ....................... (81,699) 35,798 118,339 (42,146) 30,292 --------- --------- ----------- -------- ----------- Management programs: Vehicle depreciation ................................. 366,231 29,754 395,985 Deferred income taxes ................................ (98,628) 86,855 (715) (12,488) --------- --------- ----------- ----------- (98,628) 453,086 29,039 383,497 --------- --------- ----------- -------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . (180,327) 488,884 147,378 (42,146) 413,789 --------- --------- ----------- -------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Management programs: Decrease in restricted cash .......................... (36,855) (36,855) Increase (decrease) in due (from) to vehicle manufacturers ...................................... 6,485 (290,918) (284,433) Payments for vehicle additions ....................... (87,510) (3,319,908) (3,407,418) Vehicle deletions .................................... (331,887) 3,388,888 3,057,001 --------- ----------- ----------- (412,912) (258,793) (671,705) --------- ----------- ----------- Payments for additions to property and equipment .......... (22,084) (873) (22,957) Retirements of property and equipment ..................... 703 2,516 3,219 Payment for purchase of rental car franchise licensees .... (27,837) (424) (28,261) Investment in subsidiaries ................................ (21,914) (20,232) 42,146 --------- --------- ----------- -------- ----------- Net cash provided by (used in) investing activities exclusive of management programs ....................... (21,914) (69,450) 1,219 42,146 (47,999) --------- --------- ----------- -------- ----------- NET CASH USED IN INVESTING ACTIVITIES ............... (21,914) (482,362) (257,574) 42,146 (719,704) --------- --------- ----------- -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Management programs: Net (decrease) increase in vehicle debt ................ (8,743) 95,045 86,302 --------- --------- ----------- ----------- Net decrease in non-vehicle debt .......................... (317,650) (278) (317,928) Increase in due to Cendant - intercompany financing, net .................................................... 394,950 394,950 Payments for debt issuance costs .......................... (4,593) (4,593) Capital contribution from Cendant ......................... 125,000 125,000 --------- --------- ----------- ----------- Net cash provided by (used in) financing activities exclusive of management programs ....................... 202,300 (4,871) 197,429 --------- --------- ----------- ----------- NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES ......................................... 202,300 (13,614) 95,045 283,731 --------- --------- ----------- ----------- Effect of exchange rate changes on cash ................... (900) (900) --------- --------- ----------- -------- ----------- Net increase (decrease) in cash and cash equivalents ...... 59 (7,092) (16,051) (23,084) Cash and cash equivalents at beginning of period .......... 141 36,745 29,219 66,105 --------- --------- ----------- -------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 200 $ 29,653 $ 13,168 $ $ 43,021 ========= ========= =========== ======== ===========
16 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (PREDECESSOR COMPANIES) FOR THE TWO MONTHS ENDED FEBRUARY 28, 2001 (IN THOUSANDS) ---------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ------------ ------------ ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ......................................... $ (29,119) $ (21,907) $ 10,898 $11,009 $ (29,119) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities exclusive of management programs ...................... (84,192) (22,321) 38,183 (68,330) --------- --------- --------- ------- --------- Net cash provided by (used in) operating activities exclusive of management programs ...................... (113,311) (44,228) 49,081 11,009 (97,449) --------- --------- --------- ------- --------- Management programs: Vehicle depreciation .................................. 97,909 8,019 105,928 Deferred income taxes ................................. (668) 10,648 (27,724) (17,744) --------- --------- --------- ------- --------- (668) 108,557 (19,705) 88,184 --------- --------- --------- ------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ... (113,979) 64,329 29,376 11,009 (9,265) --------- --------- --------- ------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Management programs: Increase in restricted cash ........................... 10,978 10,978 Increase in due from vehicle manufacturers ............ 16,368 16,368 Payments for vehicle additions ........................ (1,843) (941,259) (943,102) Vehicle deletions ..................................... (82,138) 895,598 813,460 --------- --------- --------- (83,981) (18,315) (102,296) --------- --------- --------- --------- Payments for additions to property and equipment .......... (2,948) (330) (3,278) Retirements of property and equipment ..................... (400) 20 (380) Increase (decrease) in net assets and preferred stock of discontinued operation ................................. 5,132 (5,423) (291) Investment in subsidiaries ................................ 21,907 (10,898) (11,009) --------- --------- --------- ------- --------- Net cash provided by (used in) investing activities exclusive of management programs ...................... 21,907 (9,114) (5,733) (11,009) (3,949) --------- --------- --------- ------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ... 21,907 (93,095) (24,048) (11,009) (106,245) --------- --------- --------- ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Management programs: Net increase (decrease) in vehicle debt ............... 92,000 (2) 9,209 101,207 --------- --------- --------- --------- Net decrease in non-vehicle debt .......................... (77) (77) Payments for debt issuance costs .......................... (12) (12) Other ..................................................... 140 140 Net cash provided by (used in) financing activities --------- --------- --------- --------- exclusive of management programs ...................... 140 (89) 51 --------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .......................................... 92,140 (91) 9,209 101,258 --------- --------- --------- --------- Effect of exchange rate changes on cash ................... (11) (11) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents ...... 68 (28,857) 14,526 (14,263) Cash and cash equivalents at beginning of period .......... 73 65,602 14,693 80,368 --------- --------- --------- ------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 141 $ 36,745 $ 29,219 $ -- $ 66,105 ========= ========= ========= ======= =========
17 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6-GUARANTOR AND NON-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AVIS GROUP HOLDINGS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (PREDECESSOR COMPANIES) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS) ----------------------------------------------------------------------- NON- AVIS GROUP GUARANTOR GUARANTOR HOLDINGS, INC. PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................... $ 105,415 $ 171,726 $ 82,011 $(253,737) $ 105,415 Adjustments to reconcile net income to net cash provided by (used in) operating activities exclusive of management programs ..................... 1,067,357 981,983 (921,161) 1 1,128,180 ----------- ----------- ----------- --------- ----------- Net cash provided by (used in) operating activities exclusive of management programs ..................... 1,172,772 1,153,709 (839,150) (253,736) 1,233,595 ----------- ----------- ----------- --------- ----------- Management programs: Vehicle depreciation ................................. 454,721 33,817 488,538 Deferred income taxes ................................ (44,300) 33,934 (3,690) (14,056) ----------- ----------- ----------- ----------- (44,300) 488,655 30,127 474,482 ----------- ----------- ----------- --------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .. 1,128,472 1,642,364 (809,023) (253,736) 1,708,077 ----------- ----------- ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Management programs: Decrease in restricted cash .......................... (36,963) (36,963) Decrease in due from vehicle manufacturers ........... (8,608) (46,274) (54,882) Payments for vehicle additions ....................... (51,696) (3,855,743) (3,907,439) Vehicle deletions .................................... (437,550) 3,231,916 2,794,366 ----------- ----------- ----------- (497,854) (707,064) (1,204,918) ----------- ----------- ----------- Payments for additions for property and equipment ........ (28,465) (1,335) (29,800) Retirements of property and equipment .................... 5,420 198 5,618 Increase (decrease) in net assets and preferred stock of discontinued operations .............................. (1,036,387) 994,821 (41,566) Investment in subsidiaries ............................... (171,726) (82,010) 253,736 ----------- ----------- ----------- --------- ----------- Net cash provided by (used in) investing activities exclusive of management programs ..................... (171,726) (1,141,442) 993,684 253,736 (65,748) ----------- ----------- ----------- --------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . (171,726) (1,639,296) 286,620 253,736 (1,270,666) ----------- ----------- ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Management programs: Net increase in vehicle debt ......................... 527,052 527,052 ----------- ----------- Net decrease in non-vehicle debt ......................... (957,000) (328) (957,328) Payments for debt issuance costs ......................... (9,525) (9,525) Purchase of treasury stock ............................... 271 271 ----------- ----------- ----------- ----------- Net cash used in financing activities exclusive of management programs ..................... (956,729) (9,853) (966,582) ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .. (956,729) (9,853) 527,052 (439,530) ----------- ----------- ----------- ----------- Effect of exchange rate changes on cash .................. (390) (390) ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ..... 17 (6,785) 4,259 (2,509) Cash and cash equivalents at beginning of period ......... 54 24,797 7,050 31,901 ----------- ----------- ----------- --------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 71 $ 18,012 $ 11,309 $ $ 29,392 =========== =========== =========== ========= ===========
18 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7-SEGMENT INFORMATION Prior to the Acquisition, the Company operated in two segments, vehicle leasing and vehicle rental. Subsequent to the sale of Vehicle Leasing on March 1, 2001, the Company operates in one industry segment, the vehicle rental business. EBITDA represents net income, plus non-vehicle related interest expense, non-vehicle depreciation and amortization, unusual charges, corporate allocations and income taxes from vehicle rental operations (in thousands). Provided below is a reconciliation of EBIDTA to income (loss) before income taxes.
PREDECESSOR COMPANIES ------------- THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------------ ------------- EBITDA ........................................... $ 38,381 $ 84,169 Non-fleet interest ............................... (7,758) (23,291) Intercompany interest ............................ (4,735) Non-vehicle depreciation and amortization ........ (13,544) (1,976) Unusual charges .................................. (60,062) Corporate allocations ............................ (1,061) --------- -------- Income (loss) before provision for income taxes .. $ (48,779) $ 58,902 ========= ======== PREDECESSOR COMPANIES ------------------------------- MARCH 1, 2001 TWO MONTHS NINE MONTHS (DATE OF ACQUISITION) ENDED ENDED TO FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2001 2000 --------------------- ------------ ------------- EBITDA ........................................... $ 116,304 $(23,715) $224,566 Interest, net .................................... (22,413) (12,281) (95,122) Intercompany interest ............................ (9,742) Non-vehicle depreciation and amortization ........ (30,839) (6,241) (31,674) Unusual charges .................................. (60,062) Corporate allocations ............................ (1,782) --------- -------- -------- Income (loss) before provision for income taxes .. $ (8,534) $(42,237) $ 97,770 ========= ======== ========
NOTE 8-DERIVATIVES The Company's operations are primarily funded through a combination of asset-backed floating rate notes and commercial paper programs in the United States and Canada. Consistent with its historical risk management policies, the Company uses interest rate swaps and caps to hedge interest rate risks on its debt and to create a mixed portfolio of fixed and floating rate debt. Certain interest rate swaps have been designated as cash flow hedges of interest rate risk on the Company's floating rate medium-term notes. Certain cash flow hedge contracts extend into 2004. For the two months ended February 28, 2001 and the seven months ended September 30, 2001, no material ineffectiveness was recognized on these hedges. Amounts accumulated in other comprehensive income (loss) are reclassified into earnings as interest is accrued on the hedged transactions. For the two months ended February 28, 2001 and the seven months ended September 30, 2001, approximately $0.4 million and $(7.7) million, respectively, of net income (loss) has been reclassified from other comprehensive loss into earnings. Over the next 12 months, net losses of approximately $48.3 million are expected to be reclassified from other comprehensive income (loss) into earnings. The impact of these charges will have the desired effect of fixing the interest rate paid on certain debt instruments. The amounts accumulated in other comprehensive income (loss) will fluctuate based on changes in the fair value of the Company's derivatives at each reporting period. For the two months ended February 28, 2001 and the seven months ended September 30, 2001, there were no amounts reclassified into earnings resulting from the discontinuation of any hedging relationships. 19 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8-DERIVATIVES (CONTINUED) The majority of the Company's interest rate swaps and caps have not been designated as hedges for accounting purposes. However, these derivatives are being used to economically hedge interest rate risk exposures on the Company's floating rate notes and commercial paper programs. For the two months ended February 28, 2001 and the seven months ended September 30, 2001, the net loss recognized on these derivatives was $869,000 and $2.8 million, respectively. These amounts have been recorded as a component of interest, net on the Company's Condensed Consolidated Statements of Operations. NOTE 9-RELATED PARTY TRANSACTIONS Related party charges include allocations from Cendant for services provided to the Company, which consist of (in thousands):
PREDECESSOR COMPANIES ------------- THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------- ------------- Royalties .......... $ 27,495 $29,347 Reservations ....... 14,487 14,743 Data processing .... 15,433 12,009 Rent and other ..... 11,906 3,280 Interest ........... 4,129 -------- ------- Total .............. $ 73,450 $59,379 ======== ======= PREDECESSOR COMPANIES ------------------------------- MARCH 1, 2001 TWO MONTHS NINE MONTHS (DATE OF ACQUISITION) ENDED ENDED TO FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30, 2001 2001 2000 -------------------- ------------ ------------- Royalties .......... $ 63,305 $16,205 $ 79,566 Reservations ....... 33,673 8,496 43,226 Data processing .... 35,574 11,395 33,021 Rent and other ..... 23,535 1,456 7,316 Interest ........... 11,139 -------- ------- -------- Total .............. $167,226 $37,552 $163,129 ======== ======= ========
20 AVIS GROUP HOLDINGS, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9-RELATED PARTY TRANSACTIONS (CONTINUED) The amounts due to Cendant Corporation and affiliates, net at September 30, 2001 and December 31, 2000 consisted of the following balances (in thousands):
PREDECESSOR COMPANIES SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Due (from) to Cendant, short term funding and trading, net .. $(132,387) $36,117 Due to Cendant-working capital .............................. 181,904 Due to Cendant-long term .................................... 380,000 Due from other Cendant affiliates, net ...................... (19,046) --------- ------- Total due to Cendant Corporation and affiliates, net ........ $ 410,471 $36,117 ========= =======
In connection with the Acquisition, Avis Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of PHH Corp., borrowed $937 million from PHH Corp. Concurrent with the Acquisition, Acquisition Corp. was merged into Avis Group Holdings, Inc. with Avis Group Holdings, Inc. becoming the surviving entity. Immediately after the Acquisition, Avis Group Holdings, Inc. sold all of the stock of Vehicle Leasing to PHH Corp. for $800 million. The proceeds of the sale were used by Avis Group Holdings, Inc. to reduce its note payable to PHH Corp. from $937 million to $137 million. Following such sale, the stock of Avis Group Holdings, Inc. acquired in the Acquisition was dividended by PHH Corp. to Cendant Finance Holding Corporation ("CFHC") and, through a series of internal transfers, to Cendant Car Holdings, LLC. The note payable to PHH Corp. remaining due from Avis Group Holdings, Inc. in the amount of $137 million was transferred by PHH Corp. to CFHC, where it remains. During the quarter ended June 30, 2001, the Company repaid its outstanding borrowings under its then existing Revolving Credit Facility (see Note 5). Subsequent to the repayment, Cendant provides the Company funding for certain of its working capital needs. The intercompany borrowings bear interest at a market rate based on LIBOR. On June 29, 2001, Cendant made a capital contribution to the Company by forgiving $125 million of intercompany debt. As of September 30, 2001, $182 million of borrowings are related to working capital and $380 million are long-term in nature and are related to the Acquisition. These borrowings are not expected to be repaid before December 31, 2001. On June 29, 2001, one of the Company's vehicle financing subsidiaries amended its loan agreements to allow Cendant to borrow $155 million of its restricted cash. In turn, Cendant provided a demand note to this subsidiary and secured the demand note with letters of credit. The loan to Cendant is included in due (from) to Cendant, short-term funding and trading, net. NOTE 10-INCOME TAXES Subsequent to the Date of Acquisition, the Company continues to file its own consolidated federal income tax return. In addition, the Company files consolidated and combined state income tax returns with Cendant in jurisdictions where required. The provision for income taxes is computed as if the Company filed its federal and state income tax returns on a stand-alone basis. 21 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2: GENERAL OVERVIEW On November 11, 2000, we entered into a merger agreement with Cendant Corporation. The merger was approved on February 28, 2001 by a majority of our shareholders who were unaffiliated with Cendant and closed on March 1, 2001. In addition, we sold our investment in our Avis Fleet Leasing and Management Corp., subsidiaries to PHH Corporation, a wholly-owned subsidiary of Cendant, for $800 million. The proceeds from the sale were used to retire acquisition indebtedness. As such, the following discussion and analysis of continuing results of operations includes our Rent A Car System, Inc. and Reserve Claims Management Co. subsidiaries. We conduct vehicle rental operations through wholly-owned subsidiaries in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New Zealand. Vehicle rental revenue is derived principally from time and mileage charges for vehicle rentals and, to a lesser extent, the sale of loss damage waivers, liability insurance and other products and services. We evaluate our performance based upon a modified earnings before non-vehicle interest, income taxes, non-vehicle depreciation and amortization calculations. For this purpose, Adjusted EBITDA is defined as earnings before non-vehicle interest, income taxes and non-vehicle depreciation and amortization, adjusted to exclude certain items, which are of a non-recurring or unusual nature and are not measured in assessing segment performance or are not segment specific. REVENUE Revenue is recognized over the period the vehicle is rented. COSTS AND EXPENSES Vehicle rental expenses include: o Direct operating expenses (primarily field operations' wages and related benefits, concessions and commissions paid to airport authorities, vehicle insurance premiums and other costs relating to the operation of rental locations and the rental fleet). o Vehicle depreciation and lease charges relating to the rental fleet. o Selling, general and administrative (including wages and related benefits, information processing and information services). o Vehicle interest. NET INCOME Vehicle rental profitability is primarily a function of the number of rental transactions, pricing of rental transactions and utilization of the rental fleet. CORPORATE Expenses included are interest on non-vehicle debt and amortization of cost in excess of net assets acquired and other intangible assets. The following discussion and analysis provides information that management believes to be relevant to understanding the our financial position and results of operations: 22 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS PRO-FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO PRO-FORMA RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000. We believe that a more meaningful comparison is made when the vehicle rental pro-forma results of operations for the nine months ended September 30, 2001 and historical results for the three months ended September 30, 2001 are compared to the pro-forma results of operations for the nine and three months ended September 30, 2000. These pro-forma statements give effect to the acquisition of us by Cendant, and the retirement of term loans in the amount of $991.5 million from the proceeds of the sale of the vehicle leasing operations in Europe and the repayment of intercompany indebtedness, including the related interest expense, as if they had occurred on January 1, 2000.
PRO-FORMA PRO-FORMA NINE MONTHS ENDED SEPTEMBER 30, 2001 NINE MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------------- ------------------------------------ VEHICLE VEHICLE RENTAL CORPORATE TOTAL RENTAL CORPORATE TOTAL ----------- --------- ----------- ----------- --------- ---------- Revenue ............................ $ 1,883,079 $ 1,883,079 $ 1,989,167 $1,989,167 ----------- ----------- ----------- ---------- Costs and expenses: Direct operating ................. 722,855 722,855 715,581 715,581 Vehicle depreciation and lease charges, net ............. 535,077 535,077 510,674 510,674 Selling, general and administrative ................. 359,436 359,436 355,444 $ (1,294) 354,150 Vehicle interest, net ............ 173,882 173,882 175,534 175,534 Unusual charges .................. 60,062 60,062 ----------- ----------- ----------- -------- ---------- 1,851,312 1,851,312 1,757,233 (1,294) 1,755,939 ----------- ----------- ----------- -------- ---------- Adjusted EBITDA .................... 31,767 31,767 231,934 1,294 233,228 Interest on non-vehicle debt ....... 7,813 $ 24,703 32,516 14,678 35,512 50,190 Interest on intercompany debt ...... 8,276 1,466 9,742 Amortization of cost in excess of net assets acquired ............ 9,080 14,762 23,842 9,414 14,475 23,889 Non-vehicle depreciation and amortization ................... 16,389 16,389 8,048 8,048 ----------- -------- ----------- ----------- -------- ---------- Income (loss) before provision (benefit) for income taxes ..... $ (9,791) $(40,931) (50,722) $ 199,794 $(48,693) 151,101 =========== ======== =========== ======== (Benefit) provision for income taxes ......................... (14,151) 68,751 ----------- ---------- Net (loss) income .................. $ (36,571) $ 82,350 =========== ==========
VEHICLE RENTAL REVENUE Revenue decreased 5.3%, from $1,989.2 million to $1,883.1 million, compared to the same period in 2000. The revenue decrease reflects a 5.5% decrease in the number of rental transactions partially offset by a 0.2% increase in revenue per rental transaction. COSTS AND EXPENSES Total costs and expenses (including interest on non-vehicle debt, interest on intercompany debt, amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 5.2%, from $1,838.1 million to $1,933.8 million, compared to the same period in 2000. 23 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Direct operating expenses increased 1.0%, from $715.6 million to $722.9 million, compared to the same period in 2000. As a percentage of revenue, direct operating expenses were 38.4%, as compared to 36.0% for the corresponding period in 2000. The increase was due primarily to higher salary & wages (0.6% of revenue), higher maintenance and damage costs (0.5% of revenue) and higher facilities costs (0.4% of revenue). Vehicle depreciation and lease charges increased 4.8%, from $510.7 million to $535.1 million, compared to the same period in 2000. As a percentage of revenue, vehicle depreciation and lease charges were 28.4%, as compared to 25.7% for the corresponding period in 2000. The change reflected a 6.3% increase in the average cost per vehicle partially offset by a 1.1% decline in the average rental fleet. Selling, general and administrative expenses increased 1.5%, from $354.2 million to $359.4 million, compared to the same period in 2000 due to a higher general corporate overhead allocation ($16.5 million) and higher general and administrative expenses ($9.6 million), partially offset by lower marketing and advertising spending. Vehicle related interest expense decreased 0.9%, from $175.5 million to $173.9 million, compared to the same period in 2000 due to lower borrowings required for a smaller rental fleet coupled with lower average interest rates. Unusual charges of $60.1 million ($39 million after tax) in September 2001 reflects the estimated impact toour results of operations associated with reduced travel due to the aftermath of the September 11, 2001 terrorist attacks at the World Trade Center (the "Terrorist Attacks"). With the completion of Cendant's acquisition of us on March 1, 2001, selected debt previously funded by third party providers is now being funded by Cendant. Accordingly, we now incur interest charges on intercompany debt. Non-vehicle depreciation and amortization increased 103.6%, from $8.0 million to $16.4 million, compared to the same period in 2000. The increase reflects higher amortization of airport related leasehold improvements and equipment. UNUSUAL CHARGES The unusual charges of $60.1 million that were recorded during third quarter 2001 included 1) an asset impairment loss arising from the return of Regular Program vehicles, $43.8 million, 2) a reserve for anticipated decline in market value on the sale of Non-Program vehicles, $5.8 million, 3) a reserve for the cancellation of marketing programs, $0.9 million, 4) a reserve for severance costs, $0.5 million and 5) other costs, $9.1 million, principally related to the redundancies caused by the Terrorist Attacks. The asset impairment loss of $43.8 million relates to the disposal of Program Vehicles under repurchase programs. Prices under these repurchase programs are based on either 1) a specified percentage of original vehicle costs, depending on the month the vehicle is returned to the manufacturers or 2) the original capitalized cost less a set depreciation amount. Unlike Program Vehicles, the resale of Non-Program Vehicles is determined by current market conditions. Due to the excessive number of vehicles being returned by Avis and other car rental companies subsequent to the Terrorist Attacks, we have experienced a sharp decline in the resale value of these Non-Program vehicles. A reserve in the amount of $5.8 million was established anticipating losses on the disposal of Non-Program vehicles. As of September 30, 2001, a reserve of $35 million remains for those Program Vehicles which we have yet to dispose of. The remaining vehicles will be disposed of as soon as possible. Also included in the unusual charge were costs of commissions payable to agencies for advertising placement. Prior to the Terrorist Attacks, we had committed to a level of advertising placement commissions based on anticipated advertising spending. As a result of the Terrorist Attacks, we have significantly curtailed our advertising spending, however, we remain obligated to pay commissions based on budgeted advertising spending. As of September 30, 2001, the entire amount of advertising placement commission had been paid. In addition, we have initiated a formal plan to terminate certain employees at field locations and at corporate headquarters. As of September 30, 2001, we had accrued $0.5 million for severance and related costs for employees so notified. We expect all affected employees will be terminated prior to December 31, 2001. Other costs of $9.1 million associated with the Terrorist Attacks have been classified within the Statement of Operations to the Unusual Charge. Amounts classified comprise $7.2 million of estimated payroll costs for underutilized employees (the majority or which have been terminated) and $1.9 million of minimum airport commission guarantees. 24 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PROVISION FOR INCOME TAXES Our consolidated provision for income taxes decreased from $68.8 million to a benefit of $14.1 million, compared to the same period in 2000. The effective income tax rate for the nine months ended September 30, 2001 was a benefit of 27.9%, down from a 45.5% provision for the corresponding period in 2000. The 27.9% tax benefit reflects a pre-tax loss of $50.7 million for the period and is less than the statutory rate of 35% primarily due to the non-deductibility of goodwill. The 45.5% tax provision reflects a pre-tax profit of $151.1 million for the period in 2000 and is greater than the statutory rate of 35% due to the non-deductibility of goodwill. The effective tax rate reflects differences between foreign income tax rates and the U.S. federal statutory income tax rate, taxes on the repatriation of foreign earnings, and foreign withholding taxes on dividends that have been paid to us. NET INCOME Net income decreased from a profit of $82.4 million for the nine months ended September 30, 2000 to a loss of $36.6 million for the nine months ended September 30, 2001 as a result of the above-mentioned items. HISTORICAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO PRO-FORMA RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000.
HISTORICAL PRO-FORMA THREE MONTHS ENDED SEPTEMBER 30, 2001 THREE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------- -------------------------------------- VEHICLE VEHICLE RENTAL CORPORATE TOTAL RENTAL CORPORATE TOTAL --------- --------- --------- --------- --------- -------- Revenue: ............................ $ 650,368 $ 650,368 $ 733,694 $733,694 --------- --------- --------- -------- Costs and expenses: Direct operating .................. 238,657 238,657 259,573 259,573 Vehicle depreciation and lease charges, net ............. 194,350 194,350 191,346 191,346 Selling, general and administrative ................. 122,094 122,094 121,101 $ (1,294) 119,807 Vehicle interest, net ............. 57,947 57,947 68,364 68,364 Unusual charges ................... 60,062 60,062 --------- --------- --------- -------- -------- 673,110 673,110 640,384 (1,294) 639,090 --------- --------- --------- -------- -------- Adjusted EBITDA ..................... (22,742) (22,742) 93,310 1,294 94,604 Interest on non-vehicle debt ........ 101 $ 7,657 7,758 7,485 14,570 22,055 Interest on intercompany debt ....... 4,735 4,735 Amortization of cost in excess of net assets acquired ............ 3,057 5,038 8,095 3,133 5,042 8,175 Non-vehicle depreciation and amortization ................... 5,449 5,449 217 217 --------- -------- --------- --------- -------- -------- Income (loss) before provision for income taxes ............... $ (36,084) $(12,695) (48,779) $ 82,475 $(18,318) 64,157 ========= ======== ========= ======== Provision (benefit) for income taxes .......................... (24,033) 29,191 --------- -------- Net income (loss) ................... $ (24,746) $ 34,966 ========= ========
25 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) VEHICLE RENTAL REVENUE Revenue decreased 11.4%, from $733.7 million to $650.4 million, compared to the same period in 2000. The revenue decrease reflects a 10.8% decrease in the number of rental transactions. COSTS AND EXPENSES Total costs and expenses (including interest on non-vehicle debt, interest on intercompany debt, amortization of cost in excess of net assets acquired and non-vehicle depreciation and amortization) increased 4.4%, from $669.5 million to $699.1 million, compared to the same period in 2000. Direct operating expenses decreased 8.1%, from $259.6 million to $238.7 million, compared to the same period in 2000. As a percentage of revenue, direct operating expenses were 36.7%, as compared to 35.4% for the corresponding period in 2000. The increase was due primarily to higher salary and wage expense (1.3% of revenue) and higher maintenance and damage expenses (0.6% of revenue). Vehicle depreciation and lease charges increased 1.6%, from $191.3 million to $194.4 million, compared to the same period in 2000. As a percentage of revenue, vehicle depreciation and lease charges were 29.9% of revenue, as compared to 26.1% of revenue for the corresponding period in 2000. The change reflects a 7.5% increase in the average cost per vehicle, partially offset by a 5.7% decline in rental fleet. Selling, general and administrative expenses increased 1.9%, from $119.8 million to $122.1 million, compared to the same period in 2000 due primarily to a higher general corporate overhead allocation ($8.3 million), partially offset by lower marketing and advertising spending. Vehicle related interest expense decreased 15.2%, from $68.4 million to $57.9 million, compared to the same period in 2000, due to lower borrowings resulting from a 5.4% decline in the rental fleet and lower average interest rates. Unusual charges of $60.1 million ($39 million after tax) in September 2001 reflects the estimated impact to our results of operations associated with reduced travel due to the aftermath of the Terrorist Attacks. With the completion of the Acquisition on March 1, 2001, selected debt previously funded by third party providers is now being funded by Cendant. Accordingly, we now incur interest charges on intercompany debt. Non-vehicle depreciation and amortization increased from $217,000 to $5.4 million, compared to the same period in 2000. The increase reflects higher amortization of airport related leasehold improvements and equipment. PROVISION FOR INCOME TAXES Our consolidated provision for income taxes decreased from $29.2 million to a benefit of $24.0 million, compared to the same period in 2000. The effective income tax rate for the three months ended September 30, 2001 was 49.3%, up from 45.5% for the corresponding period in 2000. The increase in the effective income tax rate was due primarily to a decrease in income before provision for income taxes in relation to non-deductible goodwill. The effective tax rate reflects differences between foreign income tax rates and the U.S. federal statutory income tax rate, taxes on the repatriation of foreign earnings, and foreign withholding taxes on dividends that have been paid to us. NET INCOME Net income decreased from a profit of $35.0 million for the three months ended September 30, 2000 to a loss of $24.7 million for the three months ended September 30, 2001 as a result of the above-mentioned items. 26 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES Our operations are expected to be funded by cash provided by operating activities and by financing arrangements maintained by us in the markets in which we operate. Our primary use of funds will be for the acquisition of new vehicles and the repayment of indebtedness. For the nine months ended September 30, 2001, our expenditures for new vehicles were approximately $4.4 billion and proceeds from the disposition of used vehicles were approximately $3.9 billion. For 2001, we expect our expenditures for new vehicles (net of proceeds from the disposition of used vehicles) to be higher than in 2000. Since the late 1980's, we have acquired vehicles related to our vehicle rental operations primarily pursuant to manufacturer repurchase programs. Repurchase prices under the repurchase programs are based on either (1) a specified percentage of original vehicle cost determined by the month the vehicle is returned to the manufacturer or (2) the original capitalization cost less a set daily depreciation amount (the "Repurchase Programs"). Repurchase Programs limit residual risk with respect to vehicles purchased under the programs. This enables us to better estimate depreciation expense in advance. Historically, our financing requirements for rental vehicles have typically reached an annual peak during the second and third calendar quarters, as fleet levels build in response to increased rental demand during that period. The typical low point for cash requirements occurs during the end of the fourth quarter and the beginning of the first quarter, coinciding with lower levels of vehicle and rental demand. We expect that this pattern will continue. We expect that cash flows from operations and funds from available credit facilities will be sufficient to meet our anticipated cash requirements for operating purposes for the next twelve months. Trade receivables, from vehicle rental operations, also provide liquidity with approximately 12.2 days of daily sales outstanding. Our vehicle rental operations made capital investments for property improvements totaling $26.2 million and $29.8 million for the nine months ended September 30, 2001 and 2000, respectively. We have an interest rate management policy, including a target mix for average fixed rate and floating rate indebtedness on a consolidated basis. An increase in interest rates would be unlikely to have a material adverse impact on our profitability. VEHICLE RENTAL ABS FACILITY To support vehicle rental operations, we have a domestic integrated financing program that as of September 30, 2001 provides for up to $4.45 billion in financing for vehicles covered by Repurchase Programs, with up to 25% of the asset-backed securities facility ("ABS Facility") available for vehicles not covered by Repurchase Programs. The ABS Facility provides for the issuance of up to $0.5 billion of asset-backed variable funding notes (the "Variable Funding Notes") and $3.95 billion of asset-backed medium term notes under the ABS Facility (the "Medium Term Notes"). The Variable Funding Notes and the Medium Term Notes are indirectly secured by, among other things, a first priority security interest in our rental fleet. The Variable Funding Notes support the issuance by a special purpose company of commercial paper notes that are rated A-1 by Standard & Poor's Ratings Services ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's"). The Medium Term Notes are guaranteed under a surety bond issued by either MBIA or AMBAC Assurance and as a result are rated AAA by S&P and Aaa by Moody's. On March 2, 2001, one of the vehicle rental financing subsidiaries issued $750 million of Series 2001-1 Floating Rate Rental Car Asset Backed Notes ("Series 2001-1 Notes"). The Series 2001-1 Notes are secured by our vehicles. Anticipated principal repayment on the Series 2001-1 Notes commence on November 2003 through April 2004. The interest rate with respect to the Series 2001-1 Notes is equal to LIBOR plus 20 basis points per annum. The Series 2001-1 Notes are guaranteed under a Surety Bond issued to MBIA and are rated AAA by Standard an Poors and Aaa by Moody's. The Series 2001-1 Notes rank pari pasu with our Variable Funding Notes and the Medium Term Notes. 27 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On May 17, 2001, one of the vehicle rental financing subsidiaries issued $125 million of Series 2001-2 Auction Rate Notes (the "Series 2001-2 Notes"). The Series 2001-2 Notes are secured by our vehicles. The Series 2001-2 Notes were issued in four classes, Class A-1, A-2, A-3, and A-4 with initial issuances of $95 million, $10 million, $10 million and $10 million, respectively. Subsequent to the initial issuance of $125 million auction rate notes, the Company issued $145 million of additonal notes and repaid principal of $115 million, which brought the total outstanding series 2001-2 notes to $155 million at September 30, 2001. We may issue up to $125 million of Auction Rate Notes per class or $500 million in total. The interest rate on each class will be a market derived rate determined by auction with auctions expected to occur every 35 days. Anticipated principal repayment on the Series 2001-2 Notes is May 2007. The 2001-2 Notes are guaranteed under a Surety Bond issued by Ambac and are rated AAA by Standard & Poor's Rating Services and Aaa by Moody' Investors Service, Inc. The Series 2001-2 Notes rank pari passu with our Variable Funding Notes and Medium Term Notes. At September 30, 2001, we had approximately $3.75 billion of debt outstanding under the ABS Facility and had approximately $700 million of additional credit available for rental vehicle purchases. Based on current market conditions and our current banking relationships, we expect to fund maturities of the Medium Term Notes either by the issuance of new medium term notes or an increase in the outstanding principal amount of the Variable Funding Notes depending on market conditions at the time the Medium Term Notes mature. However, we cannot be sure that this will occur. REVOLVING CREDIT FACILITY/CENDANT INTERCOMPANY We were party to a Revolving Credit Facility which provided borrowings up to $450 million which were used for credit enhancement for our ABS commercial paper program and for general corporate purposes. Although this facility did not expire until June 30, 2005, we elected to terminate it on September 5, 2001. We repaid our outstanding borrowings under the Revolving Credit Facility as of June 30, 2001. We currently draw on a working capital line provided by Cendant to fund its working capital needs. The borrowings bear interest at a market rate based on LIBOR. On June 29, 2001, Cendant made a capital contribution to us by forgiving $125 million of intercompany debt. As of September 30, 2001, $182 million of borrowings are related to working capital needs. Additionally, we have long-term debt with Cendant of $380 million that is related to Cendant's acquisition of us. OTHER FACILITIES Borrowings for our international operations consist mainly of loans obtained from local and international banks. All borrowings for international operations are in the local currencies of the countries in which those operations are conducted. We guarantee only the borrowings of our car rental subsidiaries in Argentina and Puerto Rico which had combined outstanding debt of $4.6 million at September 30, 2001. At September 30, 2001, the total debt for our international operations was approximately $175.7 million. The impact on our liquidity and financial condition due to the exchange rate fluctuations of our foreign operations is not expected to be material. PARENT COMPANY TRANSACTION On June 29, 2001, one of our vehicle financing subsidiaries amended its loan agreements to allow Cendant to borrow $155 million of its restricted cash. In turn, Cendant provided a demand note to the subsidiary and secured the demand note with letters of credit. RECENT ACCOUNTING STANDARDS Recent pronouncements of the Financial Accounting Standards Board which are not required to be adopted at this date include Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" ("SFAS No. 141"), SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and SFAS No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"). SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and requires additional disclosures for material business combinations completed after such date. This standard also addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. On July 1, 2001, we adopted the provisions relating to acquisitions made subsequent to June 30, 2001, as required. The provisions regarding the classification of previously acquired intangible asset will be adopted simultaneously with the provisions of SFAS No. 142 on January 1, 2002, as required. 28 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SFAS No. 142 addresses financial accounting and reporting for intangible assets acquired outside of a business combination. The standard also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. We will be required to assess goodwill and other intangible assets for impairment annually, or more frequently if circumstances indicate a potential impairment. On July 1, 2001, we adopted the provisions requiring that goodwill and certain other intangible assets acquired after June 30, 2001 not be amortized. We will adopt the remaining provisions of this standard on January 1, 2002, as required. Transition-related impairment losses, if any, resulting form the initial assessment of goodwill and certain other intangible assets will be recognized by us as a cumulative effect of accounting change as of January 1, 2002. We are currently evaluating the impact of adopting the remaining provisions on its financial position and results of operations. Based upon a preliminary assessment of previously acquired goodwill and certain other intangible assets that will no longer be amortized upon the adoption of SFAS No. 142, we expect that the related reduction to amortization expense during the seven months ended September 30, 2001, the two months ended February 28, 2001 and the nine months ended September 30, 2000 would approximate $18.6 million, $2 million, and $92 million, respectively. SFAS No. 144 addresses financial accounting and reporting for the impairment of disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,", and replaces the accounting and reporting provisions of APB Opinion No. 30, "Reporting Results of Operations - Reporting the Effect of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" as it relates to the disposal of a segment of a business. SFAS No. 144 requires the use of a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations, by requiring those long-lived assets to be measured at the lower of carrying amount or fair value less cost to sell. The impairment recognition and measurement provisions of SFAS No 121 were retained for all long-lived assets to be held and used with the exception of goodwill. We will adopt this standard on January 1, 2002. SEASONALITY Our vehicle rental business is seasonal, with decreased travel in winter months and heightened activity in spring and summer. To accommodate increased demand, we increased our available fleet during the second and third quarters. Certain of our operating expenses are fixed and cannot be reduced during periods of decreased rental demand. In certain geographic markets, the impact of seasonality has been reduced by emphasizing leisure or business travel in the off-peak season. INFLATION The increased acquisition cost of vehicles is the primary inflationary factor affecting our operations. Many of our other operating expenses are inflation sensitive, with increases in inflation generally resulting in increased costs of operations. The effect of inflation-driven cost increases on the Company's overall operating costs is not expected to be greater for us than for our competitors. FORWARD LOOKING INFORMATION Certain matters discussed in this report that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties including the impact of competitive products and pricing, changing market conditions; and other risks which were detailed from time to time in our publicly-filed documents, including its Annual Report on Form 10-K for the period ended December 31, 2000. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of this report. 29 AVIS GROUP HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company has derivative financial instruments at September 30, 2001 that are sensitive to interest rate changes on its debt obligations and on its interest rate swap agreements. The following derivative instrument agreements have been entered into by the Company: (a) In order to reduce its risk from interest rate increases under its asset backed debt, one of the Company's vehicle rental financing subsidiaries has entered into six domestic interest rate cap agreements with durations of up to 6 years. The agreements have a notional value of $2.5 billion, and establishes the domestic interest rate ceiling on asset-backed vehicle financing of either 7% or 7.5%. Offsetting interest rate cap agreements with a notional value of $2.5 billion have been sold by us in order to reduce the cost of acquiring the cap agreements. (b) The Company has also entered into eight U.S. and foreign interest rate swap agreements. Swap agreements which effectively convert floating rates of interest to fixed rates of interest on the Company's debt have an aggregate notional value of $2.25 billion and terminate through November 2004. 30 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Avis Group Holdings, Inc. ------------------------- (Registrant) Dated: November 14, 2001 By: /s/ Kevin M. Sheehan ------------------------------------ Executive Vice President (Principal Financial Officer) Dated: November 14, 2001 By: /s/ Kurt Freudenberg ------------------------------------ Senior Vice President and Controller (Principal Accounting Officer) 31 ITEM: 6 EXHIBITS AND REPORTS ON FORM 8-K ITEM NO. 6 (A) EXHIBIT INDEX EXHIBIT DESCRIPTION ------- -------------------------------------------------------------------- 2.0 PLAN OF ACQUISITION 2.02 Agreement and Plan of Merger dated November 11, 2000 by and among Cendant Corporation, PHH Corporation, Avis Acquisition Corp., and Avis Group Holdings, Inc. (9) 2.03 Establishment of Arval/PHH Holdings, a joint venture company in the United Kingdom, by Avis Group Holdings, Inc. and BNP Paribas (10) 3. CERTIFICATE OF INCORPORATION AND BY-LAWS. 3.01 Certificate of Incorporation of Avis Rent A Car, Inc. (3) 3.01(a) Certificate of Ownership and Merger merging Avis Group Holdings, Inc. into Avis Rent A Car, Inc. (8) 3.01(b) Certificate of Merger of Avis Acquisition. Into Avis Group Holdings, Inc. (12) 3.02(a) Certificate of Incorporation of Avis Rent A Car System, Inc. (7) 3.02(b) Restated Certificate of Incorporation of Avis Rent A Car System, Inc. (7) 3.02(c) Corrected Restated Certificate of Incorporation of Avis Rent A Car System, Inc. (7) 3.02(d) Certificate of Ownership and Merger merging The First Gray Line Corporation into Avis Rent A Car System, Inc. (7) 3.03(a) Certificate of Incorporation of Avis International, Ltd. (7) 3.03(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis International, Ltd. (7) 3.03(c) Certificate of Change of Registered Agent and Registered Office of Avis International, Ltd. (7) 3.04(a) Certificate of Incorporation of Avis Management Services, Ltd. (7) 3.04(b) Certificate of Change of Location of Registered Office and Registered Agent of Avis Management Services, Ltd. (7) 3.04(c) Certificate of Change of Registered Agent and Registered Office of Avis Management Services, Ltd. (7) 3.05 Certificate of Incorporation of Avis Caribbean, Limited. (7) 3.06 Certificate of Incorporation of Avis Asia and Pacific, Limited. (7) 3.07(a) Certificate of Incorporation of Avis Enterprises, Inc. (7) 3.07(b) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc. (7) 3.07(c) Certificate of Amendment of Certificate of Incorporation of Avis Enterprises, Inc. (7) 3.08 Certificate of Incorporation of Avis Service, Inc. (7) 3.09 Certificate of Incorporation of Avis Lube, Inc.(7) 3.10 Certificate of Incorporation of Avis Leasing Corporation. (7) 3.11(a) Certificate of Incorporation of Rent-A-Car Company, Incorporated. (7) 3.11(b) Articles of Reduction of Rent-A-Car Company, Incorporated. (7) 3.11(c) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated. (7) 3.11(d) Articles of Amendment to Articles of Incorporation of Rent-A-Car Company, Incorporated. (7) 3.11(e) Articles of Amendment to the Articles of Incorporation of Rent-A-Car Company, Incorporated. (7) 3.11(f) Articles of Amendment of Rent-A-Car Company, Incorporated. (7) 3.12(a) Certificate of Incorporation of Reserve Claims Management Co. (7) 3.12(b) Certificate of Change of Registered Agent and Registered Office of Reserve Claims Management Co. f/k/a Avis Leasing International, Ltd. (7) 3.12(c) Restated Certificate of Incorporation of Reserve Claims Management Co. (7) 3.50 By-Laws of Avis Group Holdings, Inc. (3) 3.51 By-Laws of Avis Rent A Car System, Inc. (7) 3.52 By-Laws of Avis International, Ltd. (7) 3.53 By-Laws of Avis Management Services, Ltd. (7) 3.54 By-Laws of Avis Caribbean, Limited. (7) 3.55 By-Laws of Avis Asia and Pacific, Limited. (7) 3.56 By-Laws of Avis Enterprises, Inc. (7) 3.57 By-Laws of Avis Service, Inc. (7) 3.58 By-Laws of Avis Lube, Inc. (7) 32 ITEM NO. 6 (A) EXHIBIT INDEX EXHIBIT DESCRIPTION ------- -------------------------------------------------------------------- 3.59 By-Laws of Avis Leasing Corporation. (7) 3.60 By-Laws of Rent-A-Car Company, Incorporated. (7) 3.61 By-Laws of Reserve Claims Management Co. (7) 4.0 INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.03 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and the Avis ABS Trustee, to the Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II and the Avis ABS Trustee. (2) 4.04 Series 1997-1 Supplement, dated as of July 30, 1997 between AESOP Funding II L.L.C. and the Avis ABS Trustee, to the Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II and the Avis ABS Trustee. (2) 4.05 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing L.P., as borrower, and AESOP Funding II L.L.C. as lender. (2) 4.06 Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV Holding Corp., as a permitted nominee of the borrower, Quartz Fleet Management, Inc., as a permitted nominee of the borrower, and AESOP Funding I L.L.C., as lender. (2) 4.07 Loan Agreement, dated as of July 30, 1997, between AESOP Leasing Corp II, as borrower, AESOP Leasing Corp., as permitted nominee of the borrower, and AESOP Funding II L.L.C., as lender. (2) 4.08 Master Motor Vehicle Finance Lease Agreement, dated as of July 30, 1997, by and among AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., as lessee, individually and as the administrator and Avis Rent A Car, Inc., as guarantor. (2) 4.09 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among AESOP Leasing L.P., as lessor, Avis Rent A Car System, Inc., individually and as the administrator, certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car, Inc., as guarantor. (2) 4.10 Master Motor Vehicle Operating Lease Agreement, dated as of July 30, 1997, by and among AESOP Leasing Corp. II, as lessor, Avis Rent A Car System, Inc., individually and as the administrator, certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car, Inc., as guarantor. (2) 4.15 Supplemental Indenture No. 1, dated as of July 31, 1998, to the Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding I L.L.C. as issuer and the Avis ABS Trustee. (4) 4.16 Amendment No. 1, dated as of July 31, 1998, to Loan Agreement, dated as of July 30, 1997, between AESOP Leasing L.P., as borrower, and AESOP Funding I L.L.C., as lender. (4) 4.17 Amendment No. 1, dated as of July 31, 1998, to Loan Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as borrower, PV Holding Corp., as a permitted nominee of the borrower, Quartz Fleet Management, Inc., as a permitted nominee of the borrower, and AESOP Funding II L.L.C., as lender. (4) 4.18 Amendment No. 1, dated as of July 31, 1998, to Master Motor Vehicle Finance Lease Agreement, dated as of July 30, 1997, among AESOP Leasing L.P., as lessor, Avis Rent A Car Systems, Inc., as Lessee individually and as Administrator, and Avis Rent A Car, Inc., as guarantor. (4) 4.19 Amended and Restated Loan Agreement, dated as of September 15, 1998, among AESOP Leasing L.P., as borrower, PV Holding Corp., as a permitted nominee of the borrower, Quartz Fleet Management, Inc., as a permitted nominee of the borrower, and AESOP Funding II L.L.C. (4) 4.20 Amended and Restated Master Motor Vehicle Operating Lease Agreement, dated as of September 15, 1998, among AESOP Leasing L.P., as lessor, Avis Rent Car System, Inc., individually and as Administrator, certain Eligible Rental Car Companies, as lessees, and Avis Rent A Car, Inc., as guarantor. (4) 4.21 Supplemental Indenture No. 2, dated as of September 15, 1998, to Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding I L.L.C., as issuer and the Avis ABS Trustee. (4) 4.22 Series 1998-1 Supplement, dated as of February 26, 1998 between AESOP Funding II L.L.C., as issuer, and the Avis ABS Trustee, as trustee and Series 1998-1 agent, to the Amended and Restated Base Indenture, dated as of July 30, 1997, between AESOP Funding II L.L.C., as issuer, and the Avis ABS Trustee. (4) 4.30 Indenture, dated as of June 30, 1999, among the Company, the Subsidiary Guarantors and the Bank of New York (the "Notes Trustee"). (7) 4.31 Exchange and Registration Rights Agreement, dated as of June 30, 1999, among the Company, the Subsidiary Guarantors, the Initial Purchasers and the Notes Trustee. (7) 33 ITEM NO. 6 (A) EXHIBIT INDEX EXHIBIT DESCRIPTION ------- -------------------------------------------------------------------- 4.19 Supplemental Indenture by and among Avis Group Holdings, Inc., the Subsidiary Guarantors and the Notes Trustee. (13) ----------- (1) Filed herewith. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1, 333-28609. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, 333-46737. (4) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1998. (5) Incorporated by reference to the Registrant's Current Report on Form 8-K dated July 15, 1999. (6) Incorporated by reference to Amendment No. 1 to the Registrant's Current Report on Form 8-K/A dated July 15, 1999. (7) Incorporated by reference to the Registrant's Registration Statement on Form S-4, 333-86269. (8) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999. (9) Incorporated by reference to the Registrants Report on Form 8-K dated November 14, 2000. (10) Incorporated by reference to the Registrants Reports on Form 8-K dated August 24, 2000. (11) Incorporated by reference to the Registrants Report on Form 8-K dated July 18, 2000. (12) Incorporated by reference to Cendant Corporations Quarterly Report on From 10-Q for the fiscal quarter ended September 30, 2000, dated as of November 14, 2000. (13) Incorporated by reference to the Registrants Report on Form 8-K dated April 2, 2001. 34 ITEM: 6(B) REPORTS ON FORM 8-K None. 35