Attached files

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EX-10.2 - THIRD AMENDMENT, DATED AS OF AUGUST 27, 2009, TO THE SERIES 2005-1 SUPPLEMENT - AVIS BUDGET GROUP, INC.dex102.htm
EX-10.1 - SECOND AMENDMENT, DATED AS OF AUGUST 27, 2009, TO THE SERIES 2006-1 SUPPLEMENT - AVIS BUDGET GROUP, INC.dex101.htm
EX-32 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - AVIS BUDGET GROUP, INC.dex32.htm
EX-10.4 - SUPPLY AND FEATURE AGREEMENT DATED OCTOBER 30, 2007 - AVIS BUDGET GROUP, INC.dex104.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULES 13(A)-14(A) AND 15(D)-14(A) - AVIS BUDGET GROUP, INC.dex312.htm
EX-10.3 - AMENDMENT NO. 5 TO THE SERIES 2006-1 SUPPLEMENT - AVIS BUDGET GROUP, INC.dex103.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULES 13(A)-14(A) AND 15(D)-14(A) - AVIS BUDGET GROUP, INC.dex311.htm
EX-12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - AVIS BUDGET GROUP, INC.dex12.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 1-10308

 

 

Avis Budget Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   06-0918165

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

6 Sylvan Way

Parsippany, NJ

  07054
(Address of principal executive offices)   (Zip Code)

(973) 496-4700

(Registrant’s telephone number, including area code)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s common stock was 101,988,727 shares as of October 31, 2009.

 

 

 


Table of Contents

Table of Contents

 

          Page
PART I    Financial Information (Unaudited)   
Item 1.    Financial Statements   
   Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)    3
   Consolidated Condensed Balance Sheets as of September 30, 2009 and December 31, 2008 (Unaudited)    4
   Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)    5
   Notes to Consolidated Condensed Financial Statements (Unaudited)    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    33
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    42
Item 4.    Controls and Procedures    43
PART II    Other Information   
Item 1.    Legal Proceedings    43
Item 1A.    Risk Factors    43
Item 6.    Exhibits    43
   Signatures    44


Table of Contents

FORWARD-LOOKING STATEMENTS

The forward-looking statements contained herein are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various facts and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may increase”, “may fluctuate” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

 

   

the high level of competition in the vehicle rental industry and the impact such competition may have on pricing and rental volume;

 

   

an increase in our fleet costs as a result of an increase in the cost of new vehicles and/or a decrease in the price at which we dispose of used vehicles either in the used vehicle market or under repurchase or guaranteed depreciation programs;

 

   

the results of operations or financial condition of the manufacturers of our cars, which could impact their ability to perform their payment obligations under repurchase and/or guaranteed depreciation arrangements they have with us, and/or their willingness or ability to make cars available to us or the rental car industry as a whole on commercially reasonable terms or at all;

 

   

risks associated with the impact of the Chapter 11 bankruptcy filings of General Motors and Chrysler;

 

   

weakness in travel demand, including the downturn in airline passenger traffic in the United States and in the international locations in which we operate;

 

   

the decline in general economic conditions and weakness in the housing market, which could lead to a disruption or decline in rental activity, and the impact such a disruption or decline may have on us, particularly during our peak season or in key market segments;

 

   

our ability to obtain financing for our operations, including the funding of our vehicle fleet via the asset-backed securities and lending market as outstanding indebtedness matures, as a result of the significant disruption in the credit market or other factors, and the financial condition of financial-guaranty firms that have insured a portion of our outstanding vehicle-backed debt;

 

   

an occurrence or threat of terrorism, pandemic disease, natural disasters or military conflict in the locations in which we operate;

 

   

our dependence on third-party distribution channels;

 

   

our ability to successfully implement our cost-savings and efficiency improvement initiatives and business strategy;

 

   

the impact of our derivative instruments, which can be affected by fluctuations in interest rates;

 

   

our ability to accurately estimate our future results;

 

   

a major disruption in our communication or centralized information networks;

 

   

our exposure to uninsured claims in excess of historic levels;

 

   

our failure or inability to comply with regulations or any changes in regulations, including with respect to personally identifiable information;

 

   

any impact on us from the actions of our licensees, dealers and independent contractors;

 

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substantial increases in the cost, or decreases in the supply, of fuel, vehicle parts, energy or other resources on which we depend to operate our business;

 

   

risks related to our indebtedness, including our substantial amount of debt and our ability to incur substantially more debt;

 

   

our ability to meet the financial and other covenants contained in our senior credit facilities, our outstanding unsecured senior notes and certain asset-backed funding arrangements;

 

   

the terms of agreements among us and the former real estate, hospitality and travel distribution businesses following the separation of those businesses from us during third quarter 2006, when we were known as Cendant Corporation (the “Separation”), particularly with respect to the allocation of assets and liabilities, including contingent liabilities and guarantees, commercial arrangements, the ability of each of the separated companies to perform its obligations, including its indemnification obligations, under these agreements, and the former real estate business’ right to control the process for resolving disputes related to contingent liabilities and assets;

 

   

the trading price of our stock, which could limit our access to capital;

 

   

risks associated with litigation involving the Company;

 

   

our exposure to fluctuations in foreign exchange rates; and

 

   

other business, economic, competitive, governmental, regulatory, political or technological factors affecting our operations, pricing or services.

Other factors and assumptions not identified above, including those described under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2008 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above, as well as those described under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2008 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q and those that may be disclosed from time to time in filings and furnishings with the Securities and Exchange Commission, in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  

Revenues

          

Vehicle rental

   $ 1,123    $ 1,298      $ 3,036    $ 3,611   

Other

     342      403        935      1,112   
                              

Net revenues

     1,465      1,701        3,971      4,723   
                              

Expenses

          

Operating

     731      847        2,020      2,435   

Vehicle depreciation and lease charges, net

     357      473        1,104      1,296   

Selling, general and administrative

     155      171        421      513   

Vehicle interest, net

     75      74        215      234   

Non-vehicle related depreciation and amortization

     26      23        71      62   

Interest expense related to corporate debt, net

     37      31        114      92   

Restructuring charges

     1      6        14      6   

Impairment

     —        1,262        1      1,262   

Separation costs

     —        —          —        2   
                              

Total expenses

     1,382      2,887        3,960      5,902   
                              

Income (loss) before income taxes

     83      (1,186     11      (1,179

Provision for (benefit from) income taxes

     26      (180     9      (176
                              

Net income (loss)

   $ 57    $ (1,006   $ 2    $ (1,003
                              

Earnings (loss) per share:

          

Basic

   $ 0.55    $ (9.91   $ 0.02    $ (9.84

Diluted

   $ 0.54    $ (9.91   $ 0.02    $ (9.84

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

     September 30,
2009
    December 31,
2008
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 470      $ 258   

Receivables, net

     307        360   

Deferred income taxes

     89        75   

Other current assets

     263        380   
                

Total current assets

     1,129        1,073   

Property and equipment, net

     439        485   

Deferred income taxes

     546        503   

Goodwill

     76        75   

Other intangibles, net

     477        467   

Other non-current assets

     839        889   
                

Total assets exclusive of assets under vehicle programs

     3,506        3,492   
                

Assets under vehicle programs:

    

Program cash

     7        12   

Vehicles, net

     6,135        7,164   

Receivables from vehicle manufacturers and other

     163        533   

Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party

     151        117   
                
     6,456        7,826   
                

Total assets

   $ 9,962      $ 11,318   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable and other current liabilities

   $ 846      $ 901   

Current portion of long-term debt

     12        10   
                

Total current liabilities

     858        911   

Long-term debt

     1,873        1,779   

Other non-current liabilities

     1,121        1,121   
                

Total liabilities exclusive of liabilities under vehicle programs

     3,852        3,811   
                

Liabilities under vehicle programs:

    

Debt

     887        892   

Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party

     3,629        5,142   

Deferred income taxes

     1,266        1,188   

Other

     99        192   
                
     5,881        7,414   
                

Commitments and contingencies (Note 14)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value—authorized 10 million shares; none issued and outstanding

     —          —     

Common stock, $.01 par value—authorized 250 million shares; issued 136,915,861 and 136,812,802 shares

     1        1   

Additional paid-in capital

     9,092        9,197   

Accumulated deficit

     (2,642     (2,644

Accumulated other comprehensive income (loss)

     (71     (194

Treasury stock, at cost— 34,617,266 and 35,030,086 shares

     (6,151     (6,267
                

Total stockholders’ equity

     229        93   
                

Total liabilities and stockholders’ equity

   $ 9,962      $ 11,318   
                

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Operating Activities

    

Net income (loss)

   $ 2      $ (1,003

Adjustments to reconcile net income (loss) to net cash provided by operating activities exclusive of vehicle programs:

    

Non-vehicle related depreciation and amortization

     71        62   

Goodwill, tradename and investment impairment

     1        1,262   

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:

    

Receivables

     25        24   

Income taxes and deferred income taxes

     (8     (193

Accounts payable and other current liabilities

     30        (13

Other, net

     33        12   
                

Net cash provided by operating activities exclusive of vehicle programs

     154        151   
                

Vehicle programs:

    

Vehicle depreciation

     1,096        1,267   
                
     1,096        1,267   
                

Net cash provided by operating activities

     1,250        1,418   
                

Investing Activities

    

Property and equipment additions

     (19     (65

Proceeds received on asset sales

     10        13   

Proceeds received from Realogy and Wyndham, net

     2        3   

Net assets acquired, net of cash acquired, and acquisition-related payments

     —          (88

Other, net

     (2     (14
                

Net cash used in investing activities exclusive of vehicle programs

     (9     (151
                

Vehicle programs:

    

Decrease in program cash

     5        1   

Investment in vehicles

     (5,019     (7,023

Proceeds received on disposition of vehicles

     5,424        5,021   

Distribution from (investment in) Avis Budget Rental Car Funding (AESOP) LLC—related party

     19        (343
                
     429        (2,344
                

Net cash provided by (used in) investing activities

     420        (2,495
                

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Financing Activities

    

Proceeds from borrowings

     100        —     

Principal payments on borrowings

     (8     (7

Repurchases of common stock

     —          (33

Other, net

     (2     —     
                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     90        (40
                

Vehicle programs:

    

Proceeds from borrowings

     5,728        6,836   

Principal payments on borrowings

     (7,335     (5,927

Net change in short-term borrowings

     36        388   

Other, net

     (6     (8
                
     (1,577     1,289   
                

Net cash (used in) provided by financing activities

     (1,487     1,249   
                

Effect of changes in exchange rates on cash and cash equivalents

     29        (12
                

Net increase in cash and cash equivalents

     212        160   

Cash and cash equivalents, beginning of period

     258        214   
                

Cash and cash equivalents, end of period

   $ 470      $ 374   
                

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Unless otherwise noted, all amounts in tables are in millions, except per share amounts)

 

1. Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

Avis Budget Group, Inc. provides car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries (“Avis Budget”), as well as entities in which Avis Budget directly or indirectly has a controlling financial interest (collectively, the “Company”), and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.

The Company operates in the following business segments:

 

   

Domestic Car Rental— provides car rentals and ancillary products and services in the United States.

 

   

International Car Rental— provides vehicle rentals and ancillary products and services primarily in Argentina, Australia, Canada, New Zealand, Puerto Rico and the U.S. Virgin Islands.

 

   

Truck Rental— provides truck rentals and related services to consumers and light commercial users in the United States.

In presenting the Consolidated Condensed Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed 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. These financial statements should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K filed on February 26, 2009.

Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Company’s other activities since the assets under vehicle programs are generally funded through the issuance of debt, asset-backed funding or other similar arrangements which are collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company’s vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets.

Separation. In connection with the separation of Cendant Corporation (as the Company was formerly known) into four independent companies (the “Separation”), the Company completed the spin-offs of Realogy Corporation (“Realogy”) and Wyndham Worldwide Corporation (“Wyndham”) on July 31, 2006 and completed the sale of Travelport, Inc. (“Travelport”) on August 23, 2006.

Compliance with Debt Covenants, Business Risks and Management’s Plans

Compliance with Debt Covenants. Many of the Company’s debt instruments, including its senior credit facilities, contain financial and other covenants that impose significant requirements on the Company and limit its ability to engage in certain transactions or activities. The Company’s financial covenants require it to maintain minimum trailing twelve month EBITDA (as defined in the Company’s senior credit facilities) amounts on a quarterly basis. Commencing with the Company’s fiscal quarter ending June 30, 2010, the requirement to maintain a quarterly minimum trailing twelve month EBITDA under the financial covenants of its amended senior credit facilities will be replaced by the maximum leverage ratio that was in place prior to the December 2008 amendment to the senior credit facilities.

The U.S. economy appears to have been in recession throughout 2008 and for at least a portion of 2009. Historically, the Company’s results of operations have declined during periods of general economic weakness. The effects of the recession contributed to the significant year-over-year decline in the results of the Company’s operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, excluding the 2008

 

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impairment charge. If economic conditions in the United States worsen, the Company’s results of operations could be materially and adversely impacted.

The Company relies upon financing for its operations, particularly asset-backed financing, through asset-backed securities and the lending market, for its vehicle fleet. In fourth quarter 2008, the Company amended and renewed its two asset-backed domestic rental car conduit facilities and as a result of these amendments and renewals, the Company’s borrowing costs and collateral requirements for 2009 have increased compared to 2008. In October 2009, the Company combined these facilities into one facility, renewed such facility for $1.9 billion and reduced the associated borrowing costs; such facility now matures in October 2010. During July and October 2009, the Company issued a total of $900 million in asset-backed notes for rental car financing. The existing availability under the asset-backed vehicle financing programs including the asset-backed conduit facility should be sufficient to fund the Company’s Domestic Car Rental fleet for 2010. Approximately $42 million and $1.1 billion of term asset-backed financings for the Company’s car rental operations will mature before the end of 2009 and in 2010, respectively. A default by, or insolvency of, any of the financial-guaranty firms that have insured a portion of the Company’s outstanding vehicle-backed debt could affect the timing for repayment of such debt.

Dependence on Vehicle Manufacturers. The Company is dependent on vehicle manufacturers for its fleet purchases and related incentive payments, and a substantial portion of the rental cars that comprise its domestic car fleet (“program cars”) are subject to manufacturer repurchase or guaranteed depreciation programs. A default on any repurchase or guaranteed depreciation agreement or incentive payment could leave the Company with a substantial unpaid claim against the manufacturer particularly with respect to program cars that were either (i) resold at an amount less than the amount guaranteed under the applicable agreement, and therefore subject to a “true-up” payment obligation from the manufacturer or (ii) returned to the manufacturer but for which the Company was not paid. In addition, the Company could incur additional expenses if, following a manufacturer default, the prices at which it were able to dispose of program cars were less than the specified prices under the repurchase or guaranteed depreciation program and/or if the prices at which the Company were able to dispose of non-program cars were less than previously assumed.

Cost Reduction Initiatives. In light of the challenging conditions facing its business as well as for competitive reasons, the Company has taken numerous actions to reduce expenses, including implementing a five-point plan designed to reduce costs and improve efficiency. This plan includes (i) significant reductions in operating costs, fleet costs, selling, general and administrative expenses, headcount, discretionary spending and other variable costs, (ii) improving station, channel and customer profitability, (iii) strengthening the Company’s pricing strategies and marketing, selling and affinity efforts, (iv) consolidation of both customer facing and non-customer facing activities and locations to reduce costs and provide synergies, and (v) consolidation of purchasing and procurement programs and practices. The Company closed and consolidated certain facilities and terminated employees in fourth quarter 2008 and the nine months ended September 30, 2009 in conjunction with this initiative (see Note 2—Restructuring Charges). The Company has also generated and expects to generate additional cost savings in 2009 through implementation of its Performance Excellence process improvement initiative, which began in late 2007. The Company has also identified a number of additional cost reduction measures that it could implement, if necessary, to offset additional costs.

Notwithstanding the December 2008 amendments to the Company’s senior credit facilities and its cost reduction initiatives, due to reduced demand for travel services, disruption in the credit markets, rising borrowing costs, the Company’s dependence on vehicle manufacturers, and other factors, there can be no assurance that the Company will be able to generate sufficient earnings to enable it to satisfy the minimum EBITDA requirement or other covenants included in its senior credit facilities, the asset-backed conduit facilities used to finance a portion of its domestic car rental operations or other borrowing agreements. The Company’s failure to comply with these covenants, if not waived, would cause a default under the senior credit facilities and could result in principal under the conduit facilities being required to be repaid from a portion of vehicle disposition proceeds and lease payments the Company makes to its vehicle program subsidiaries and adversely affect the Company’s liquidity position. If such a failure were to occur, there can be no assurance that the Company would be able to refinance or obtain a replacement for such facilities and in certain circumstances such failure could also give rise to a default under the instruments that govern its other indebtedness. As of September 30, 2009, the Company was in compliance with the financial covenants of its senior credit facilities.

Adoption of New Accounting Standards during 2009

In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), as codified in FASB Accounting Standards Codification (“ASC”) topic 805, Business Combinations. The Company adopted FSP FAS 141(R)-1 on January 1, 2009, as required, and it had no impact on its financial statements at the time of adoption.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), as codified in FASB ASC topic 320, Investments—Debt

 

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and Equity Securities. FSP FAS 115-2 and FAS 124-2 provides additional guidance on how to evaluate whether an impairment of a debt security is other than temporary and for recognition of any such impairment in the financial statements. The Company adopted FSP FAS 115-2 and FAS 124-2 on June 30, 2009, as required, and it had no impact on its financial statements.

In April 2009, FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), as codified in FASB ASC topic 820, Fair Value Measurements and Disclosures. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 applies prospectively for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS 157-4 on June 30, 2009, as required, and it had no impact on its financial statements.

In April 2009, FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), as codified in FASB ASC topic 825, Financial Instruments. FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments”, as codified in ASC topic 825, and requires a publicly traded entity to include disclosures about the fair value of its financial instruments for its interim reporting periods as well as its annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 on June 30, 2009, as required, and it did not have a significant impact on its financial statements; however, it did result in enhanced disclosure about the fair value of financial instruments in the Company’s interim financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”), as codified in FASB ASC topic 855, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted SFAS No. 165 on June 30, 2009, as required, and it did not have a significant impact on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS No. 168”), as codified in FASB ASC topic 105, Generally Accepted Accounting Principles. SFAS No. 168 replaces FASB Statement No. 162 to allow the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the SEC. The Company adopted SFAS No. 168 on July 1, 2009, as required, and it did not have a significant impact on its financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU No. 2009-05”). ASU No. 2009-5 clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. The Company adopted ASU No. 2009-05 on July 1, 2009, as required, and it had no impact on its financial statements.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS No. 166”), as codified in FASB ASC topic 860, Transfers and Servicing. SFAS No. 166 (i) removes the concept of a Qualifying Special Purpose Entity (“QSPE”) from FASB No. 140, as codified in FASB ASC topic 860, Transfers and Servicing, and eliminates the exception from applying FIN 46(R), as codified in FASB ASC topic 810, Consolidation, to variable interest entities that are QSPEs, (ii) amends the accounting for transfers of financial assets and (iii) increases the related disclosures about transfers of financial assets. SFAS No. 166 applies to fiscal years beginning on or after November 15, 2009 and transfers that occurred both before and after its effective date. The Company will adopt SFAS No. 166 on January 1, 2010, as required, and does not believe it will have a significant impact on its financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), as codified in FASB ASC topic 810, Consolidation. SFAS No. 167 changes the method for determining the primary beneficiary of a variable interest entity (“VIE”) from a quantitative-based risks and rewards calculation to a qualitative approach to identify which entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, subject to certain exceptions. SFAS No. 167 applies prospectively for fiscal years beginning on or after November 15, 2009. The Company will adopt SFAS No. 167 on January 1, 2010, as required, and does not believe it will have a significant impact on its financial statements.

 

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2. Restructuring Charges

During 2008 and 2009, the Company implemented various strategic initiatives within the Company’s Domestic Car Rental, International Car Rental and Truck Rental segments as part of its five-point plan announced in November 2008. These initiatives are targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities. During the nine months ended September 30, 2009, as part of the five-point plan, the Company eliminated approximately 1,700 positions, resulting in the termination of approximately 1,200 employees within its Domestic Car Rental, International Car Rental and Truck Rental segments and the closure and consolidation of certain facilities, including data center, back-office administrative locations and local market vehicle rental locations. As a result of these actions, the Company incurred $1 million and $14 million in restructuring-related charges for the three and nine months ended September 30, 2009, respectively.

At September 30, 2009, the remaining liability relating to restructuring actions amounted to $5 million, primarily for lease obligation costs. As part of the five-point plan, the Company continues to implement steps to reduce costs and consolidate certain customer facing and non-customer facing activities and locations. The Company expects further restructuring costs of approximately $3 million to be incurred through December 31, 2009 and is continuing to look at other initiatives expected to reduce costs and may incur further restructuring costs.

The restructuring charges and corresponding utilization are recorded within the Company’s segments as follows:

 

     Domestic
Car Rental
    International
Car Rental
    Truck
Rental
        Total      

Balance as of January 1, 2009 (a)

   $ 12      $ 2      $ 2      $ 16   

Incremental charges (b)

     12        1        1        14   

Cash payment/utilization

     (20     (3     (2     (25
                                

Balance at September 30, 2009

   $ 4      $ —        $ 1      $ 5   
                                

The initial recognition of the restructuring charges and the corresponding utilization from inception are summarized by category as follows:

 

     Personnel
Related
    Facility
Related(c)
    Asset
Impairments(d)
        Total      

Balance as of January 1, 2009 (a)

   $ 10      $ 5      $ 1      $ 16   

Incremental charges (b)

     10        3        1        14   

Cash payment/utilization

     (19     (5     (1     (25
                                

Balance September 30, 2009

   $ 1      $ 3      $ 1      $ 5   
                                
 
  (a)

The January 1, 2009 balance includes the 2008 initial charge that primarily represented severance benefits resulting from the reductions in staff. As of September 30, 2009, the Company had terminated all of these employees.

  (b)

During the nine months ended September 30, 2009, the Company incurred additional restructuring charges primarily for severance benefits resulting from the reductions in staff and the closure of certain facilities. The Company formally communicated the termination of employment to approximately 1,200 employees, representing a wide range of employee groups. As of September 30, 2009, the Company had terminated substantially all of these employees.

  (c)

At September 30, 2009, the remaining liability relates primarily to required minimum lease payments.

  (d)

At September 30, 2009, the remaining asset impairment liability relates primarily to shuttle buses held for sale.

 

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3. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  

Net income (loss)

   $ 57    $ (1,006   $ 2    $ (1,003
                              

Basic weighted average shares outstanding

     102.3      101.6        102.1      101.9   

Stock options and restricted stock units (a)

     2.2      —          1.3      —     
                              

Diluted weighted average shares outstanding

     104.5      101.6        103.4      101.9   
                              

Earnings per share:

          

Basic

   $ 0.55    $ (9.91   $ 0.02    $ (9.84

Diluted

   $ 0.54    $ (9.91   $ 0.02    $ (9.84
 
  (a)

As the Company incurred a net loss for the three and nine months ended September 30, 2008, all outstanding stock options and restricted stock units have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.

The following table summarizes the Company’s outstanding common stock equivalents that were anti-dilutive and therefore excluded from the computation of diluted EPS:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Options (a)

   3.4    5.3    3.4    5.3
 
  (a)

For the three and nine months ended September 30, 2008, all outstanding stock options were anti-dilutive, as the Company incurred a loss from continuing operations.

 

4. Acquisitions

Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Condensed Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Consolidated Condensed Statements of Operations since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired, including trademark assets related to franchisees, and liabilities assumed is allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values, within the allocation period, will be recorded by the Company as further adjustments to the purchase price allocations.

During the nine months ended September 30, 2009, the Company acquired the exclusive rights to certain Domestic Car Rental franchise territories, primarily due to a legal settlement, resulting in trademark intangible assets of $1 million. These acquisitions were not significant individually or in the aggregate to the Company’s results of operations, financial position or cash flows.

During the nine months ended September 30, 2008, the Company acquired the exclusive rights to certain vehicle rental franchise territories and related assets, which included $36 million of associated vehicles, for $87 million in cash, resulting in trademark intangible assets of $50 million. These acquisitions for 2008 relate primarily to the Company’s Domestic Car Rental segment and were not significant individually or in the aggregate to the Company’s results of operations, financial position or cash flows.

 

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5. Intangible Assets

Intangible assets consisted of:

 

     As of September 30, 2009    As of December 31, 2008
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Amortized Intangible Assets

                 

Franchise agreements

   $ 73    $ 21    $ 52    $ 73    $ 20    $ 53

Customer lists

     19      9      10      19      8      11

Other

     2      1      1      2      1      1
                                         
   $ 94    $ 31    $ 63    $ 94    $ 29    $ 65
                                         

Unamortized Intangible Assets

                 

Goodwill (a)

   $ 76          $ 75      
                         

Trademarks (b)

   $ 414          $ 402      
                         
 
  (a) The increase in goodwill is due to fluctuations in foreign currency.
  (b) The increase in trademarks is primarily due to fluctuations in foreign currency.

Amortization expense relating to all intangible assets was approximately $1 million during the third quarter of 2009 and 2008. For the nine months ended September 30, 2009 and 2008, amortization expense was approximately $2 million.

Based on the Company’s amortizable intangible assets at September 30, 2009, the Company expects amortization expense of approximately $1 million for the remainder of 2009 and approximately $3 million for each of the five fiscal years thereafter.

 

6. Financial Instruments

Debt Instruments

The fair value of the Company’s debt instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In some cases where quoted market prices are not available, prices are derived by considering the yield of the benchmark security that was issued to initially price the instruments and adjusting this rate by the estimated credit spread that market participants would demand for the instruments as of the measurement date. In situations where long-term borrowings are part of a conduit facility backed by short-term floating rate debt, the Company has determined that its carrying value approximates the fair value of this debt. The carrying amounts of cash and cash equivalents, accounts receivable, program cash and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

The carrying amounts and estimated fair values of debt instruments are as follows:

 

     September 30, 2009
     Carrying
Amount
   Estimated
Fair
Value

Corporate debt

     

Current portion of long-term debt

   $ 12    $ 12

Long-term debt

     1,873      1,684

Debt under vehicle programs

     

Vehicle-backed debt due to Avis Budget Rental Car Funding

     3,629      3,536

Vehicle-backed debt

     884      885

Derivative instruments and hedging activities

The Company uses foreign exchange forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions. The Company primarily hedges its foreign currency exposure to the Australian dollar, British pound, Canadian dollar and the New Zealand dollar. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the fair value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically

 

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hedge. Forward contracts used to hedge forecasted third party receipts and disbursements up to twelve months are designated and do qualify as cash flow hedges. The amount of gains or losses reclassified from other comprehensive income to earnings resulting from ineffectiveness during the three and nine months ended September 30, 2009 and 2008 was not material.

The Company uses various hedging strategies including interest rate swaps and interest rate caps to manage its exposure to changes in interest rates. The Company uses interest rate swaps, designated as cash flow hedges, to manage the risk related to its floating rate corporate debt. In connection with such cash flow hedges, the Company records net unrealized losses to other comprehensive income. To manage the risk associated with its floating rate vehicle-backed debt, the Company uses both interest rate swaps and caps. These derivatives include derivatives not designated as a hedge for accounting purposes and derivatives designated as cash flow hedges. In connection with such cash flow hedges, the Company records the effective portion of the change in fair value in other comprehensive income, net of tax. The Company records the change in fair value gains or losses related to derivatives not designated as a hedge in its consolidated results of operations.

The Company periodically enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. These instruments are not designated as hedges for accounting purposes and the changes in fair value are recorded in the Company’s consolidated results of operations.

Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post cash collateral to the extent that these derivatives are in a liability position. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position and the aggregate fair value of assets needed to settle these derivatives on September 30, 2009 was approximately $6 million, for which the Company has posted cash collateral of $7 million in the normal course of business.

As of September 30, 2009, the Company held derivative instruments with absolute notional values as follows: interest rate caps of $5.5 billion, interest rate swaps of $1.6 billion, foreign exchange forward contracts of $29 million and commodity contracts for the purchase of 3 million gallons of unleaded gasoline.

The Company used significant observable inputs (Level 2 inputs) to determine the fair value of its derivative assets and liabilities. Derivatives entered into by the Company are typically executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. The principal techniques used to value these instruments are discounted cash flows and Black-Scholes option valuation models. These models take into account a variety of factors including, where applicable, maturity, commodity prices, interest rate yield curves, credit curves of the Company and counterparties, counterparty creditworthiness and forward and spot currency exchange rates. These factors are applied on a consistent basis and are based upon observable inputs where available.

Fair values of derivative instruments as of September 30, 2009 were as follows:

 

     Derivative Assets    Derivative Liabilities
     Balance Sheet
Category
   Fair
Value
   Balance Sheet
Category
   Fair
Value

Derivatives designated as hedging instruments (a)

           

Interest rate swaps

      $ —      Other non-current
liabilities
   $ 44
                   

Total

      $ —         $ 44
                   

Derivatives not designated as hedging instruments (a)

           

Foreign exchange forward contracts

   Other current assets    $ 1    Other current liabilities    $ 3

Interest rate contracts

   Assets under vehicle
programs
     1    Liabilities under vehicle
programs
     3
                   

Total

      $ 2       $ 6
                   
 
  (a)

Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”), as it is not consolidated by the Company; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within other comprehensive income, as discussed in Note 15—Stockholders’ Equity.

The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three months ended September 30, 2009 was (i) a loss of $1 million recognized as a component of operating expenses related to foreign

 

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exchange forward contracts, (ii) an insignificant loss recognized as a component of operating expenses related to our commodity contracts and (iii) a $2 million loss recognized as a component of interest expense related to interest rate swaps not designated as hedging instruments. The loss on the interest rate swaps had no impact on net interest expense as it was offset by reduced interest expense on the underlying floating rate debt which it hedges.

The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the nine months ended September 30, 2009, was (i) a loss of $5 million recognized as a component of operating expenses related to foreign exchange forward contracts, (ii) a gain of $3 million recognized as a component of operating expenses related to our commodity contracts and (iii) a loss of $4 million recognized as a component of interest expense related to interest rate swaps not designated as hedging instruments. The loss on the interest rate swaps had no impact on net interest expense as it was offset by reduced interest expense on the underlying floating rate debt which it hedges.

The Company also recognized a gain of $2 million and $26 million, as a component of other comprehensive income, net of tax, for the three and nine months ended September 30, 2009, respectively, which relates to interest rate swaps designated as cash flow hedges.

 

7. Vehicle Rental Activities

The components of the Company’s vehicles, net within assets under vehicle programs are as follows:

 

     As of
September 30,
2009
    As of
December 31,
2008
 

Rental vehicles

   $ 7,005      $ 7,502   

Less: Accumulated depreciation

     (1,081     (1,219
                
     5,924        6,283   

Vehicles held for sale

     211        881   
                

Vehicles, net

   $ 6,135      $ 7,164   
                

The components of vehicle depreciation and lease charges, net are summarized below:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2009     2008    2009     2008  

Depreciation expense

   $ 363      $ 448    $ 1,096      $ 1,267   

Lease charges

     23        18      37        34   

(Gain) loss on sales of vehicles, net and cost of vehicle disposition

     (29     7      (29     (5
                               

Vehicle depreciation and lease charges, net

   $ 357      $ 473    $ 1,104      $ 1,296   
                               

For the three months ended September 30, 2009 and 2008, vehicle interest, net on the accompanying Consolidated Condensed Statements of Operations excludes $38 million and $33 million, respectively, and for the nine months ended September 30, 2009 and 2008, excludes $116 million and $99 million, respectively, of interest expense related to the fixed and floating rate borrowings of the Company’s Avis Budget Car Rental, LLC (“Avis Budget Car Rental”) subsidiary. Such interest is recorded within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statements of Operations.

 

8. Income Taxes

The Company’s effective tax rate from continuing operations for the nine months ended September 30, 2009 is a provision of 81.8%. Such rate differs from the Federal statutory rate of 35.0% primarily due to foreign withholding taxes and the differences in the amount of stock-based compensation recorded for book and tax purposes.

The Company’s effective tax rate from continuing operations for the nine months ended September 30, 2008 is a benefit of 14.9%. Such rate differs from the Federal statutory rate of 35.0% primarily due to the impact of the non-deductible portion of the impairment charges, state taxes and differences in the amount of stock-based compensation recorded for book and tax purposes.

 

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9. Equity Investment

At September 30, 2009, the Company’s equity-method investee and approximate ownership interest, based on outstanding shares, are as follows:

 

Company

   Percentage
Ownership
 

Carey Holdings, Inc.

   47.9

The Company’s investment in Carey Holdings, Inc. (“Carey”) is recorded within other non-current assets on the Consolidated Condensed Balance Sheets and the Company’s share of Carey’s operating results is reported within operating expenses on the Consolidated Condensed Statements of Operations. At September 30, 2009, the Company’s investment totaled $34 million, including a net loss of $9 million, representing the Company’s share of Carey’s operating results for the nine months ended September 30, 2009. As of September 30, 2009, Carey has not met the financial covenants in certain of its debt agreements and is currently in discussions with its lenders. At December 31, 2008, the Company’s investment totaled $43 million.

 

10. Other Current Assets

Other current assets consisted of:

 

     As of
September 30,
2009
   As of
December 31,
2008

Prepaid expenses

   $ 130    $ 127

Receivables from Realogy (a)

     52      112

Receivables from Wyndham (a)

     34      70

Other

     47      71
             
   $ 263    $ 380
             
 
  (a)

Represents amounts due for certain contingent and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation and services performed under the Transition Services Agreement entered into in connection with the Separation. These amounts are due from Realogy and Wyndham on demand upon the Company’s settlement of the related liability. At September 30, 2009 and December 31, 2008, there are corresponding liabilities recorded within accounts payable and other current liabilities.

 

11. Other Non-Current Liabilities

Other non-current liabilities consisted of:

 

     As of
September 30,
2009
   As of
December 31,
2008

Long-term income taxes payable

   $ 476    $ 480

Public liability and property damage insurance liability

     217      219

Accrued interest – tax contingencies

     126      111

Pension liability

     75      69

Other

     227      242
             
   $ 1,121    $ 1,121
             

 

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12. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of:

 

     Maturity
Date
   As of
September 30,
2009
   As of
December 31,
2008

Floating rate term loan (a)

   April 2012    $ 780    $ 787

Floating rate notes

   May 2014      250      250

7 5/8% notes

   May 2014      375      375

7 3/4% notes

   May 2016      375      375

Other (a)

        105      2
                

Total long-term debt

        1,885      1,789

Less: Current portion

        12      10
                

Long-term debt

      $ 1,873    $ 1,779
                
 
  (a)

The floating rate term loan and our revolving credit facility are secured by pledges of all of the capital stock of all of the Company’s direct or indirect domestic subsidiaries and up to 66% of the capital stock of each direct foreign subsidiary, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property and certain other real and personal property.

In February 2007, the Company agreed to guarantee (the “Guarantee”) the payment of principal, premium, if any, and interest on the $1.0 billion aggregate principal amount of senior notes issued by Avis Budget Car Rental in April 2006 (the “Notes”). The Notes consist of Avis Budget Car Rental’s 7 5/8% Senior Notes due 2014, 7 3/4% Senior Notes due 2016 and Floating Rate Senior Notes due 2014. In consideration for providing the Guarantee, the Company received $14 million, before fees and expenses, from certain institutional investors. The $14 million consideration is being treated as deferred income and being amortized over the life of the debt. As of September 30, 2009, the deferred consideration remaining to be amortized amounted to $9 million.

Committed Credit Facilities and Available Funding Arrangements

At September 30, 2009, the committed credit facilities available to the Company and/or its subsidiaries at the corporate or Avis Budget Car Rental level were as follows:

 

     Total
Capacity
   Outstanding
Borrowings
   Letters of
Credit
Issued
   Available
Capacity

Revolving credit facility (a)

   $ 1,150    $ 100    $ 730    $ 320

Letter of credit facility (b)

     100      —        100      —  
 
  (a)

This secured revolving credit facility was entered into by Avis Budget Car Rental in April 2006 and amended in December 2008, has a five year term and as of September 30, 2009 bears interest at one month LIBOR plus 400 basis points. The senior credit facilities, which encompass the floating rate term loan and the revolving credit facility, are secured by pledges of all of the capital stock of all of the Company’s direct or indirect domestic subsidiaries and up to 66% of the capital stock of each direct foreign subsidiary, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property and certain other real and personal property. There is $320 million available capacity for the issuance of letters of credit, while the remaining borrowing capacity is $175 million, as total outstanding borrowings are limited to $275 million under this secured revolving credit facility.

  (b)

Final maturity date is March 2010.

The Company’s debt agreements contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of indebtedness by the Company and certain of its subsidiaries, acquisitions, mergers, liquidations, and sale and leaseback transactions. The senior credit facilities also contain a minimum EBITDA requirement (as defined in the senior credit facilities). As of September 30, 2009, the Company was in compliance with the financial covenants in its senior credit facilities.

 

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13. Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”)) consisted of:

 

     As of
September 30,
2009
   As of
December 31,
2008

Debt due to Avis Budget Rental Car Funding (a)

   $ 3,629    $ 5,142

Budget Truck financing:

     

Budget Truck Funding program

     249      316

Capital leases

     76      126

Other

     562      450
             
   $ 4,516    $ 6,034
             
 
  (a)

The decrease reflects reduced borrowings within Domestic Car Rental operations principally due to a decrease in the size of the Company’s car rental fleet.

The following table provides the contractual maturities of the Company’s debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) at September 30, 2009:

 

     Vehicle-Backed
Debt
   Capital Leases        Total    

Within 1 year

   $ 1,600    $ 66    $ 1,666

Between 1 and 2 years

     1,036      10      1,046

Between 2 and 3 years

     1,525      —        1,525

Between 3 and 4 years

     75      —        75

Between 4 and 5 years

     —        —        —  

Thereafter

     204      —        204
                    
   $ 4,440    $ 76    $ 4,516
                    

As of September 30, 2009, available funding under the Company’s vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of:

 

     Total
Capacity (a)
   Outstanding
Borrowings
   Available
Capacity

Debt due to Avis Budget Rental Car Funding (b)

   $ 5,059    $ 3,629    $ 1,430

Budget Truck financing:

        

Budget Truck Funding program (c)

     249      249      —  

Capital leases (d)

     76      76      —  

Other (e)

     810      562      248
                    
   $ 6,194    $ 4,516    $ 1,678
                    
 
  (a)

Capacity is subject to maintaining sufficient assets to collateralize debt.

  (b)

The outstanding debt is collateralized by approximately $5.1 billion of underlying vehicles and related assets.

  (c)

The outstanding debt is collateralized by approximately $302 million of underlying vehicles and related assets.

  (d)

These capital leases are collateralized by approximately $91 million of underlying vehicles.

  (e)

The outstanding debt is collateralized by approximately $964 million of underlying vehicles and related assets.

Debt agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and restrictions on indebtedness, mergers, liens, liquidations, and sale and leaseback transactions. As of September 30, 2009, the Company was not aware of any instances of non-compliance with such covenants.

 

14. Commitments and Contingencies

Contingencies

The Internal Revenue Service (“IRS”) has commenced an audit of the Company’s taxable years 2003 through 2006, the year of the Separation. The Company has recorded a $476 million liability in respect of such taxable years, reflecting the Company’s current best estimates of the probable outcome with respect to certain tax positions. The Company believes that its accruals for tax liabilities, including the liabilities for which it is entitled to indemnification from Realogy and

 

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Wyndham, are adequate for all remaining open years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

The rules governing taxation are complex and subject to varying interpretations. Therefore, the Company’s tax accruals reflect a series of complex judgments about future events and rely heavily on estimates and assumptions. Although the Company believes the estimates and assumptions supporting its tax accruals are reasonable, the potential result of an audit or litigation related to tax could include a range of outcomes, and could result in tax liabilities for the Company that are materially different from those reflected in the Consolidated Condensed Financial Statements. Notwithstanding this, as discussed above, the Company is entitled to indemnification by Realogy and Wyndham for substantially all of its recorded liabilities for open tax matters and therefore does not expect such resolution to have a material impact on its earnings, financial position or cash flows. As further discussed below, Realogy posted a letter of credit in April 2007 for the benefit of the Company related to its indemnification obligations to the Company.

As a result of payments made by Realogy and Wyndham in July 2009, the judgment in respect of the litigation alleging breach of contract and fraud arising out of the acquisition of a business in 1998 which occurred just prior to Cendant’s announcement of the discovery of accounting irregularities at its former CUC business units was satisfied. Plaintiffs have petitioned the court for attorneys’ fees in the amount of $33 million and the Company has accrued liabilities of approximately $12 million in respect of this petition based on its assessment of amounts that plaintiffs are likely to recover. Regardless of the ultimate outcome of the petition for attorney’s fees, pursuant to the Separation Agreement (described below), Realogy and Wyndham have assumed all liabilities related to this litigation, as discussed below, and therefore a corresponding receivable has been established for such amount. Additionally, a letter of credit, as discussed below, has been posted by Realogy to cover its share of the estimated liabilities it has assumed related to this litigation. Changes in liabilities related to such legal matters for which the Company is entitled to indemnification, and corresponding changes in the Company’s indemnification assets, are shown net on the Consolidated Condensed Statements of Operations. There was no net impact to the Company’s financial statements or cash balances as a result of the satisfaction of this judgment or the petition for attorneys’ fees.

In connection with the spin-offs of Realogy and Wyndham, the Company entered into the Separation Agreement, pursuant to which Realogy assumed 62.5% and Wyndham assumed 37.5% of certain contingent and other corporate liabilities of the Company or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy, Wyndham, Travelport and/or the Company’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the separation of Travelport from the Company (“Assumed Liabilities”). Realogy is entitled to receive 62.5% and Wyndham is entitled to receive 37.5% of the proceeds from certain contingent corporate assets of the Company, which are not primarily related to any of the respective businesses of Realogy, Wyndham, Travelport and/or the Company’s vehicle rental operations, arising or accrued on or prior to the separation of Travelport from the Company (“Assumed Assets”). Additionally, if Realogy or Wyndham were to default on its payment of costs or expenses to the Company related to any Assumed Liabilities, the Company would be responsible for 50% of the defaulting party’s obligation. In such event, the Company would be allowed to use the defaulting party’s share of the proceeds of any Assumed Assets as a right of offset.

The Company does not believe that the impact of any unresolved proceedings constituting Assumed Liabilities related to the litigation described above or other pre-Separation activities should result in a material liability to the Company in relation to its consolidated financial position or liquidity, as Realogy and Wyndham each have agreed to assume responsibility for these liabilities, which include liabilities associated with litigation which was retained by the Company in connection with the sale of its former Marketing Services division.

In April 2007, Realogy was acquired by an affiliate of Apollo Management VI, L.P. The acquisition does not affect Realogy’s obligation to satisfy 62.5% of the contingent and other corporate liabilities of the Company or its subsidiaries pursuant to the terms of the Separation Agreement. As a result of the acquisition, Realogy has greater debt obligations and its ability to satisfy its portion of the contingent and other corporate liabilities may be adversely impacted. In accordance with the terms of the Separation Agreement, Realogy posted a letter of credit in April 2007 for the benefit of the Company to cover its estimated share of the Assumed Liabilities discussed above, subject to adjustment, although there can be no assurance that such letter of credit will be sufficient or effective to cover Realogy’s actual obligations if and when they arise.

In October 2009, a jury rendered a verdict against the Company regarding an action filed in 2003 by one of the Company’s licensees for breach of contract and other claims related to the Company’s acquisition of its Budget vehicle rental business in 2002. The Company plans to file a motion to set aside the jury’s decision or grant a new trial. The Company has accrued liabilities of $18 million related to this litigation.

 

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In addition to the matters discussed above, the Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices issues, insurance claims, intellectual property claims, environmental issues and other commercial, tax and employment matters, including wage and hour claims. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse impact on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could adversely impact the Company’s results of operations or cash flows in a particular reporting period.

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers which require the Company to purchase approximately $4.4 billion of vehicles from manufacturers over the next twelve months. The majority of these commitments are subject to the vehicle manufacturers’ satisfying their obligations under the repurchase and guaranteed depreciation agreements. The Company’s featured suppliers for the Avis and Budget brands are General Motors Company and Ford Motor Company, respectively, although the Company purchases vehicles produced by numerous other manufacturers. The purchase of such vehicles is financed primarily through the issuance of vehicle-backed debt in addition to cash received upon the sale of vehicles in the used car market and under repurchase or guaranteed depreciation programs.

Concentrations

Concentrations of credit risk at September 30, 2009 include (i) risks related to the Company’s repurchase or guaranteed depreciation agreements with domestic and foreign car manufacturers, including Chrysler Group LLC, General Motors Company, Hyundai Motor America, Kia Motors America and Ford Motor Company primarily with respect to receivables for program cars that have been returned to the car manufacturers and (ii) risks related to receivables from Realogy and Wyndham of $506 million and $310 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation.

Other Guarantees

The Company has provided certain guarantees to, or for the benefit of, subsidiaries of Realogy, Wyndham and Travelport which, as previously discussed, were disposed of during third quarter 2006. These guarantees relate to various real estate operating leases. The maximum potential amount of future payments that the Company may be required to make under the guarantees relating to the various real estate operating leases is estimated to be approximately $253 million. At September 30, 2009, the liability recorded by the Company in connection with these guarantees was approximately $5 million. To the extent that the Company would be required to perform under any of these guarantees, the Company is entitled to indemnification by Realogy, Wyndham and Travelport. The Company monitors the credit ratings and other relevant information for Realogy, Wyndham and Travelport’s parent company in order to assess the status of the payment/performance risk of these guarantees.

 

15. Stockholders’ Equity

Dividends

For the nine months ended September 30, 2009 and 2008, the Company did not pay cash dividends.

Share Repurchases

During the nine months ended September 30, 2009, the Company did not repurchase any of its common stock. The Company used approximately $33 million of available cash to repurchase approximately 2.9 million shares of Avis Budget Group, Inc. common stock under its common stock repurchase program during the nine months ended September 30, 2008.

 

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Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows:

 

     Currency
Translation
Adjustments
   Unrealized
Gains (Losses)
on Cash Flow
Hedges
    Minimum
Pension
Liability
Adjustment
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance, January 1, 2009

   $ 7    $ (149   $ (52   $ (194

Current period change

     97      26        —          123   
                               

Balance, September 30, 2009

   $ 104    $ (123   $ (52   $ (71
                               

 

All components of accumulated other comprehensive income (loss) are net of tax except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries.

   

Total Comprehensive Income

Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income.

The components of other comprehensive income (loss) were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  

Net income (loss)

   $ 57    $ (1,006   $ 2    $ (1,003

Other comprehensive income (loss):

          

Currency translation adjustments

     44      (74     97      (49

Gains (losses) on cash flow hedges, net of tax

     2      (3     26      (4
                              
     46      (77     123      (53
                              

Total comprehensive income (loss)

   $ 103    $ (1,083   $ 125    $ (1,056
                              

During the nine months ended September 30, 2009 and 2008, the Company recorded unrealized gains on cash flow hedges of $42 million ($26 million, net of tax) and unrealized losses on cash flow hedges of $4 million, net of tax, respectively, in accumulated other comprehensive income (loss), which primarily related to the derivatives used to manage the interest-rate risk associated with the Company’s vehicle-backed debt and the Company’s floating rate debt. Such amount in the nine months ended September 30, 2009 and 2008, included $54 million of unrealized gains and $11 million of unrealized losses, excluding tax, respectively, on cash flow hedges related to the Company’s vehicle-backed debt and is offset by a corresponding change in the Company’s Investment in Avis Budget Rental Car Funding on the Consolidated Condensed Balance Sheets.

 

16. Stock-Based Compensation

The Company records compensation expense for all outstanding employee stock awards based on the estimated fair value of the award at the grant date and is recognized as an expense in the Consolidated Condensed Statement of Operations over the requisite service period. The Company recorded stock-based compensation expense of $4 million and $4 million ($2 million and $2 million, after tax) during third quarter 2009 and 2008, respectively, and $10 million and $11 million ($6 million and $6 million, after tax) during the nine months ended September 30, 2009 and 2008, respectively, related to employee stock awards that were granted by the Company.

The Company applies the direct method and tax law ordering approach to calculate the tax effects of stock-based compensation. In jurisdictions with net operating loss carryforwards, tax deductions for 2009 and 2008 exercises of stock-based awards did not generate a cash benefit. Approximately $30 million of tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

In first quarter 2009, the Company granted approximately 4 million stock options to its employees under the Company’s 2007 Equity and Incentive Plan. The grant consisted of approximately 2.7 million time-vesting stock options, approximately 0.9 million performance-vesting stock options and approximately 0.4 million market-vesting stock options. The performance-vesting and market-vesting stock options also contain a time-vesting component.

 

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The time-based awards cliff vest on the two-year anniversary of the date of grant while the performance-based awards vest on the one-year anniversary of the date of grant provided certain minimum EBITDA levels are attained. The market-based awards were granted to the Company’s CEO and President and vest on the two-year anniversary of the date of grant. The vesting of the market-based awards is conditional on the average closing stock price of the Company’s common stock equaling or exceeding $5 for a 20 consecutive trading day period. This criterion has been met. The option exercise price was set at the closing price of the Company’s common stock on the date of the grant and the options expire 10 years from the date of the grant. The performance-vesting stock options expire immediately if vesting criteria are not met by the deadline of such criteria.

The Company used the Black-Scholes option pricing model to calculate the fair value of the time-vesting and performance-vesting stock option awards granted in first quarter 2009. The Company determined the fair value of its market-vesting awards using a Monte Carlo simulation model with assumptions including, but not limited to, the options’ expected life and the price volatility of the underlying stock. Based on facts and circumstances at the time of the grant, the Company used a blended volatility rate that combines market-based measures of implied volatility with historical volatility as the most appropriate indicator of the Company’s expected volatility. The Company considered several factors in estimating the life of the options granted, including the historical option exercise behavior of employees and the option vesting periods. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero. Based on these assumptions, the fair value of each of the Company’s time-vesting, performance-vesting and market-vesting stock options issued in first quarter 2009 was estimated to be approximately $0.64, $0.59 and $0.45, respectively.

The following table presents the assumptions used to estimate the fair value of stock options at the time of the grant using the Black-Scholes and Monte Carlo simulation option pricing models:

 

     Three Months Ended
March 31, 2009

Expected volatility of stock price

   130%

Risk-free interest rate

   1.22% - 1.46%

Expected life of options

   3-4 years

Dividend yield

   0.0%

The activity related to the Company’s restricted stock units (“RSUs”) and stock option plans consisted of (in thousands of shares):

 

     Nine Months Ended September 30, 2009
     RSUs    Options
     Number
of RSUs
    Weighted
Average
Grant Price
   Number
of Options
    Weighted
Average
Exercise
Price

Balance at January 1, 2009

   2,673      $ 20.18    5,003      $ 24.90

Granted at fair market value

   —          —      4,012        0.79

Vested/exercised

   (612     21.96    —          —  

Cancelled

   (192     22.90    (1,639     25.68
                 

Balance at September 30, 2009 (a)

   1,869        19.32    7,376        11.61
                 
 
  (a)

As of September 30, 2009, the Company’s outstanding RSUs and stock options had an aggregate intrinsic value of $25 million and $50 million, respectively. Aggregate unrecognized compensation expense related to RSUs and unvested stock options amounted to $28 million and $2 million, respectively, as of September 30, 2009. The balance of RSUs at September 30, 2009 consisted of 1,029,000 units related to time-based awards and 840,000 units related to performance-based awards.

 

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The table below summarizes information regarding the Company’s outstanding stock options as of September 30, 2009 (in thousands of shares):

 

Range of

Exercise Prices

   Weighted Average
Contractual Life (years)
   Number of
Options

Less than $5.00

   9.3    4,007

$5.01 to $10.00

   —      —  

$10.01 to $15.00

   1.2    738

$15.01 to $20.00

   2.0    314

$20.01 to $25.00

   0.8    178

$25.01 to $30.00

   1.9    1,167

$30.01 and above

   0.3    972
       
   5.6    7,376
       

As of September 30, 2009, the Company also had approximately 0.5 million outstanding stock appreciation rights with a weighted average exercise price of $24.40, a weighted average remaining contractual life of 3.8 years and unrecognized compensation expense of $1 million.

 

17. Segment Information

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and “EBITDA,” which is defined as income from continuing operations before non-vehicle related depreciation and amortization, any impairment of goodwill, other intangible asset or equity investment, non-vehicle related interest and income taxes. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 

     Three Months Ended September 30,  
     2009     2008  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 1,109    $ 102      $ 1,319    $ 67   

International Car Rental

     250      56        265      60   

Truck Rental

     106      13        116      6   

Corporate and Other (a)

     —        (25     1      (3
                              

Total Company

   $ 1,465      146      $ 1,701      130   
                  

Less: Non-vehicle related depreciation and amortization

        26           23   

Interest expense related to corporate debt, net

        37           31   

Impairment

        —             1,262   
                      

Income (loss) before income taxes

      $ 83         $ (1,186
                      
     Nine Months Ended September 30,  
     2009     2008  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 3,100    $ 128      $ 3,695    $ 128   

International Car Rental

     597      93        725      116   

Truck Rental

     273      12        300      4   

Corporate and Other (a)

     1      (36     3      (11
                              

Total Company

   $ 3,971      197      $ 4,723      237   
                  

Less: Non-vehicle related depreciation and amortization

        71           62   

Interest expense related to corporate debt, net

        114           92   

Impairment

        1           1,262   
                      

Income (loss) before income taxes

      $ 11         $ (1,179
                      
 
  (a)

Includes unallocated corporate overhead, the elimination of transactions between segments and an $18 million charge recorded in third quarter 2009 for an adverse litigation judgment against the Company for a breach-of-contract claim filed in 2003.

Since December 31, 2008, there have been no significant changes in segment assets with the exception of the Company’s Domestic Car Rental and International Car Rental segments’ assets under vehicle programs. At September 30, 2009,

 

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segment assets under vehicle programs amounted to approximately $5.0 billion and $956 million for Domestic Car Rental and International Car Rental, respectively, and at December 31, 2008, $6.5 billion and $780 million, for Domestic Car Rental and International Car Rental, respectively.

 

18. Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Operations for the three months and nine months ended September 30, 2009 and 2008, Consolidating Condensed Balance Sheets as of September 30, 2009 and December 31, 2008, and Consolidating Condensed Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) Avis Budget Car Rental and Avis Budget Finance, Inc. (the “Subsidiary Issuers”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary to consolidate the Parent with the Subsidiary Issuers, the guarantor and non-guarantor subsidiaries; and (vi) the Company on a consolidated basis. The Subsidiary Issuers and the guarantor and non-guarantor subsidiaries are 100% owned by the Parent, either directly or indirectly. All guarantees are full and unconditional and joint and several. This financial information is being presented in relation to the Company’s Guarantee of the Notes issued by Avis Budget Car Rental. See Note 12—Long-term Debt and Borrowing Arrangements for additional description of these Notes. The Notes have separate investors than the equity investors of the Company and the Notes are guaranteed by certain subsidiaries.

Investments in subsidiaries are accounted for using the equity method of accounting for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. For purposes of the accompanying Consolidating Condensed Statements of Operations, certain expenses incurred by the Subsidiary Issuers are allocated to the guarantor and non-guarantor subsidiaries.

In September 2007, Avis Budget Car Rental transferred certain assets and liabilities to Wizard Services, Inc. (“Wizard Services”, a newly created subsidiary. Wizard Services executed a Supplemental Indenture in January 2009 to become a subsidiary guarantor under the Indenture governing the Notes. Accordingly, financial information for Wizard Services for the three and nine months ended September 30, 2009 and as of September 30, 2009, is presented in the “Guarantor Subsidiaries” column. Previously, such information was included in the “Subsidiary Issuers” column. Financial information for the three and nine months ended September 30, 2008 and as of December 31, 2008 for Wizard Services has been recast to reflect Wizard Services as a Guarantor for comparability purposes.

 

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Consolidating Condensed Statements of Operations

Three Months Ended September 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Total

Revenues

             

Vehicle rental

   $ —        $ —        $ 948    $ 175      $ —        $ 1,123

Other

     —          —          246      494        (398     342
                                             

Net revenues

     —          —          1,194      669        (398     1,465
                                             

Expenses

             

Operating

     5        21        567      138        —          731

Vehicle depreciation and lease charges, net

     —          —          306      349        (298     357

Selling, general and administrative

     3        —          131      21        —          155

Vehicle interest, net

     —          —          69      24        (18     75

Non-vehicle related depreciation and amortization

     —          —          24      2        —          26

Interest expense related to corporate debt, net:

             

Interest expense

     —          38        —        (1     —          37

Intercompany interest expense (income)

     —          (38     38      —          —          —  

Restructuring charges

     —          —          1      —          —          1
                                             

Total expenses

     8        21        1,136      533        (316     1,382
                                             

Income (loss) before income taxes and equity in earnings of subsidiaries

     (8     (21     58      136        (82     83

Provision (benefit) for income taxes

     1        (7     17      15        —          26

Equity in earnings (loss) of subsidiaries

     66        80        39      —          (185     —  
                                             

Net income (loss)

   $ 57      $ 66      $ 80    $ 121      $ (267   $ 57
                                             

 

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Nine Months Ended September 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

Revenues

            

Vehicle rental

   $ —        $ —        $ 2,625      $ 411      $ —        $ 3,036

Other

     1        —          685        1,407        (1,158     935
                                              

Net revenues

     1        —          3,310        1,818        (1,158     3,971
                                              

Expenses

            

Operating

     12        25        1,644        339        —          2,020

Vehicle depreciation and lease charges, net

     —          —          964        957        (817     1,104

Selling, general and administrative

     8        —          359        54        —          421

Vehicle interest, net

     —          —          199        58        (42     215

Non-vehicle related depreciation and amortization

     —          —          66        5        —          71

Interest expense related to corporate debt, net:

            

Interest expense

     —          116        —          (2     —          114

Intercompany interest expense (income)

     —          (116     116        —          —          —  

Restructuring charges

     —          —          13        1        —          14

Impairment

     —          1        —          —          —          1
                                              

Total expenses

     20        26        3,361        1,412        (859     3,960
                                              

Income (loss) before income taxes and equity in earnings of subsidiaries

     (19     (26     (51     406        (299     11

Provision (benefit) for income taxes

     (5     (5     (15     34        —          9

Equity in earnings (loss) of subsidiaries

     16        37        73        —          (126     —  
                                              

Net income (loss)

   $ 2      $ 16      $ 37      $ 372      $ (425   $ 2
                                              

 

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Three Months Ended September 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

            

Vehicle rental

   $ —        $ —        $ 1,113      $ 185      $ —        $ 1,298   

Other

     —          —          294        552        (443     403   
                                                

Net revenues

     —          —          1,407        737        (443     1,701   
                                                

Expenses

            

Operating

     1        3        702        141        —          847   

Vehicle depreciation and lease charges, net

     —          —          415        359        (301     473   

Selling, general and administrative

     3        —          146        22        —          171   

Vehicle interest, net

     —          —          66        51        (43     74   

Non-vehicle related depreciation and amortization

     —          —          21        2        —          23   

Interest expense related to corporate debt, net:

            

Interest expense

     —          32        —          (1     —          31   

Intercompany interest expense (income)

     —          (32     32        —          —          —     

Restructuring charges

     —          —          5        1        —          6   

Impairment

     18        13        1,213        18        —          1,262   
                                                

Total expenses

     22        16        2,600        593        (344     2,887   
                                                

Income (loss) before income taxes and equity in earnings of subsidiaries

     (22     (16     (1,193     144        (99     (1,186

Provision (benefit) for income taxes

     (12     (4     (183     19        —          (180

Equity in earnings (loss) of subsidiaries

     (996     (984     26        —          1,954        —     
                                                

Net income (loss)

   $ (1,006   $ (996   $ (984   $ 125      $ 1,855      $ (1,006
                                                

 

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Table of Contents

Nine Months Ended September 30, 2008

 

      Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

            

Vehicle rental

   $ —        $ —        $ 3,106      $ 505      $ —        $ 3,611   

Other

     1          813        1,584        (1,286     1,112   
                                                

Net revenues

     1        —          3,919        2,089        (1,286     4,723   
                                                

Expenses

            

Operating

     3        10        2,021        401        —          2,435   

Vehicle depreciation and lease charges, net

     —          —          1,128        983        (815     1,296   

Selling, general and administrative

     8        —          441        64        —          513   

Vehicle interest, net

     —          —          214        161        (141     234   

Non-vehicle related depreciation and amortization

     —          —          56        6        —          62   

Interest expense related to corporate debt, net:

            

Interest expense

     (1     96        —          (3     —          92   

Intercompany interest expense (income)

     —          (96     96        —          —          —     

Restructuring charges

     —          —          5        1        —          6   

Impairment

     18        13        1,213        18        —          1,262   

Separation cost

     —          2        —          —          —          2   
                                                

Total expenses

     28        25        5,174        1,631        (956     5,902   
                                                

Income (loss) before income taxes and equity in earnings of subsidiaries

     (27     (25     (1,255     458        (330     (1,179

Provision (benefit) for income taxes

     (14     (1     (209     48        —          (176

Equity in earnings (loss) of subsidiaries

     (990     (966     80        —          1,876        —     
                                                

Net income (loss)

   $ (1,003   $ (990   $ (966   $ 410      $ 1,546      $ (1,003
                                                

 

27


Table of Contents

Consolidating Condensed Balance Sheets

As of September 30, 2009

 

     Parent     Subsidiary
Issuers
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations     Total

Assets

              

Current assets:

              

Cash and cash equivalents

   $ 7      $ 268    $ 6      $ 189    $ —        $ 470

Receivables, net

     —          64      155        88      —          307

Deferred income taxes

     1        —        106        4      (22     89

Other current assets

     87        65      69        72      (30     263
                                            

Total current assets

     95        397      336        353      (52     1,129

Property and equipment, net

     —          54      344        41      —          439

Deferred income taxes

     12        242      275        17      —          546

Goodwill

     —          —        74        2      —          76

Other intangibles, net

     —          7      386        84      —          477

Other non-current assets

     765        60      12        54      (52     839

Intercompany receivables (payables)

     (29     615      (849     263      —          —  

Investment in subsidiaries

     124        922      2,132        —        (3,178     —  
                                            

Total assets exclusive of assets under vehicle programs

     967        2,297      2,710        814      (3,282     3,506
                                            

Assets under vehicle programs:

              

Program cash

     —          —        —          7      —          7

Vehicles, net

     —          14      149        5,972      —          6,135

Receivables from vehicle manufacturers and other

     —          —        1        162      —          163

Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —        —          151      —          151
                                            
     —          14      150        6,292      —          6,456
                                            

Total assets

   $ 967      $ 2,311    $ 2,860      $ 7,106    $ (3,282   $ 9,962
                                            

Liabilities and stockholders’ equity

              

Current liabilities:

              

Accounts payable and other current liabilities

   $ 100      $ 200    $ 485      $ 111    $ (50   $ 846

Current portion of long-term debt

     —          10      2        —        —          12
                                            

Total current liabilities

     100        210      487        111      (50     858

Long-term debt

     —          1,872      1        —        —          1,873

Other non-current liabilities

     638        119      289        124      (49     1,121
                                            

Total liabilities exclusive of liabilities under vehicle programs

     738        2,201      777        235      (99     3,852
                                            

Liabilities under vehicle programs:

              

Debt

     —          6      76        805      —          887

Due to Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —        —          3,629      —          3,629

Deferred income taxes

     —          —        1,085        181      —          1,266

Other

     —          —        —          99      —          99
                                            
     —          6      1,161        4,714      —          5,881
                                            

Total stockholders’ equity

     229        104      922        2,157      (3,183     229
                                            

Total liabilities and stockholders’ equity

   $ 967      $ 2,311    $ 2,860      $ 7,106    $ (3,282   $ 9,962
                                            

 

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Table of Contents

As of December 31, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations     Total

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 11      $ 51      $ 15      $ 181    $ —        $ 258

Receivables, net

     —          108        179        73      —          360

Deferred income taxes

     1        —          95        3      (24     75

Other current assets

     189        66        88        41      (4     380
                                             

Total current assets

     201        225        377        298      (28     1,073

Property and equipment, net

     —          60        385        40      —          485

Deferred income taxes

     12        217        255        19      —          503

Goodwill

     —          —          74        1      —          75

Other intangibles, net

     —          7        387        73      —          467

Other non-current assets

     765        99        21        4      —          889

Intercompany receivables (payables)

     (29     794        (1,075     310      —          —  

Investment in subsidiaries

     (19     752        1,961        —        (2,694     —  
                                             

Total assets exclusive of assets under vehicle programs

     930        2,154        2,385        745      (2,722     3,492
                                             

Assets under vehicle programs:

             

Program cash

     —          —          —          12      —          12

Vehicles, net

     —          —          174        6,990      —          7,164

Receivables from vehicle manufacturers and other

     —          —          —          533      —          533

Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          117      —          117
                                             
     —          —          174        7,652      —          7,826
                                             

Total assets

   $ 930      $ 2,154      $ 2,559      $ 8,397    $ (2,722   $ 11,318
                                             

Liabilities and stockholders’ equity

             

Current liabilities:

             

Accounts payable and other current liabilities

   $ 205      $ 234      $ 410      $ 80    $ (28   $ 901

Current portion of long-term debt

     —          10        —          —        —          10
                                             

Total current liabilities

     205        244        410        80      (28     911

Long-term debt

     —          1,779        —          —        —          1,779

Other non-current liabilities

     632        125        251        113      —          1,121
                                             

Total liabilities exclusive of liabilities under vehicle programs

     837        2,148        661        193      (28     3,811
                                             

Liabilities under vehicle programs:

             

Debt

     —          50        126        716      —          892

Due to Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          5,142      —          5,142

Deferred income taxes

     —          —          1,020        168      —          1,188

Other

     —          —          —          192      —          192
                                             
     —          50        1,146        6,218      —          7,414
                                             

Total stockholders’ equity

     93        (44     752        1,986      (2,694     93
                                             

Total liabilities and stockholders’ equity

   $ 930      $ 2,154      $ 2,559      $ 8,397    $ (2,722   $ 11,318
                                             

 

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Table of Contents

Consolidating Condensed Statements of Cash Flows

Nine Months Ended September 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by (used in) operating activities

   $ (4   $ 105      $ (40   $ 1,073      $ 116      $ 1,250   
                                                

Investing activities

            

Property and equipment additions

     —          (9     (9     (1     —          (19

Proceeds received on asset sales

     —          9        —          1        —          10   

Proceeds received from Realogy and Wyndham, net

     2        —          —          —          —          2   

Other, net

     —          (2     —          —          —          (2
                                                

Net cash provided by (used in) investing activities exclusive of vehicle programs

     2        (2     (9     —          —          (9
                                                

Vehicle programs:

            

Decrease in program cash

     —          —          —          5        —          5   

Investment in vehicles

     —          (28     —          (4,991     —          (5,019

Proceeds received on disposition of vehicles

     —          63        6        5,355        —          5,424   

Distribution from Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          19        —          19   
                                                
     —          35        6        388        —          429   
                                                

Net cash provided by (used in) investing activities

     2        33        (3     388        —          420   
                                                

Financing activities

            

Proceeds from borrowings

     —          100        —          —          —          100   

Principal payments on borrowings

     —          (7     (1     —          —          (8

Net intercompany transactions

     —          34        85        (3     (116     —     

Other, net

     (2     —          —          —          —          (2
                                                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     (2     127        84        (3     (116     90   
                                                

Vehicle programs:

            

Proceeds from borrowings

     —          —          —          5,728        —          5,728   

Principal payments on borrowings

     —          (42     (50     (7,243     —          (7,335

Net change in short-term borrowing

     —          —          —          36        —          36   

Other, net

     —          (6     —          —          —          (6
                                                
     —          (48     (50     (1,479     —          (1,577
                                                

Net cash provided by (used in) financing activities

     (2     79        34        (1,482     (116     (1,487
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —          —          —          29        —          29   
                                                

Net increase (decrease) in cash and cash equivalents

     (4     217        (9     8        —          212   

Cash and cash equivalents, beginning of period

     11        51        15        181        —          258   
                                                

Cash and cash equivalents, end of period

   $ 7      $ 268      $ 6      $ 189      $ —        $ 470   
                                                

 

30


Table of Contents

Nine Months Ended September 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by (used in) operating activities

   $ (10   $ 119      $ 134      $ 1,505      $ (330   $ 1,418   
                                                

Investing activities

            

Property and equipment additions

     —          (14     (43     (8     —          (65

Net assets acquired, net of cash acquired, and acquisition-related payments

     —          —          (72     (16     —          (88

Proceeds received on asset sales

     —          8        3        2        —          13   

Payments received from Realogy and Wyndham, net

     3        —          —          —          —          3   

Other, net

     (1     (3     (9     (1     —          (14
                                                

Net cash provided by (used in) investing activities exclusive of vehicle programs

     2        (9     (121     (23     —          (151
                                                

Vehicle programs:

            

Decrease in program cash

     —          —          —          1        —          1   

Investment in vehicles

     —          (98     (9     (6,916     —          (7,023

Proceeds received on disposition of vehicles

     —          104        2        4,915        —          5,021   

Investment in Avis Budget Rental Car Funding (AESOP) LLC

     —          —          —          (343     —          (343
                                                
     —          6        (7     (2,343     —          (2,344
                                                

Net cash provided by (used in) investing activities

     2        (3     (128     (2,366     —          (2,495
                                                

Financing activities

            

Principal payments on borrowings

     (1     (6     —          —          —          (7

Repurchases of common stock

     (33     —          —          —          —          (33

Net intercompany transactions

     16        (21     36        (361     330        —     
                                                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     (18     (27     36        (361     330        (40
                                                

Vehicle programs:

            

Proceeds from borrowings

     —          30        —          6,806        —          6,836   

Principal payments on borrowings

     —          (24     (40     (5,863     —          (5,927

Net change in short-term borrowings

     —          —          —          388        —          388   

Other, net

     —          (6     (2     —          —          (8
                                                
     —          —          (42     1,331        —          1,289   
                                                

Net cash provided by (used in) financing activities

     (18     (27     (6     970        330        1,249   
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —          —          —          (12     —          (12
                                                

Net increase (decrease) in cash and cash equivalents

     (26     89        —          97        —          160   

Cash and cash equivalents, beginning of period

     37        99        12        66        —          214   
                                                

Cash and cash equivalents, end of period

   $ 11      $ 188      $ 12   </