Form 10-Q
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 June 30, 2007

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

  Accelerated filer  ¨   Non-accelerated filer  ¨

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 103,769,313 shares as of July 31, 2007.

 



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 Six Months Ended June 30, 2007
and 2006
(restated)
   3
   Consolidated Condensed Balance Sheets as of June 30, 2007 and December 31, 2006    4
   Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2007
and 2006
(restated)
   5
   Notes to Consolidated Condensed Financial Statements    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    29
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    38
Item 4.    Controls and Procedures    38
PART II    Other Information   
Item 1.    Legal Proceedings    38
Item 4.    Submission of Matters to a Vote of Security Holders    38
Item 6.    Exhibits    39
   Signatures    40


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 the cost of new vehicles;

 

   

a decrease in our ability to acquire or dispose of cars generally through repurchase or guaranteed depreciation programs and/or dispose of vehicles through sales of vehicles in the used car market;

 

   

a decline in the results of operations or financial condition of the manufacturers of our cars;

 

   

a downturn in airline passenger traffic in the United States or in the other international locations in which we operate;

 

   

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

 

   

our dependence on third-party distribution channels;

 

   

a disruption or decline in rental activity, particularly during our peak season or in key market segments;

 

   

a disruption in our ability to obtain financing for our operations, including the funding of our vehicle fleet via the asset-backed securities and lending market;

 

   

a significant increase in interest rates or in borrowing costs;

 

   

our failure to increase or decrease appropriately the size of our fleet due to the seasonal nature of our business;

 

   

our ability to accurately estimate our future results;

 

   

our ability to implement our strategy for growth;

 

   

a major disruption in our communication or centralized information networks;

 

   

our failure or inability to comply with regulations or any changes in regulations;

 

   

our failure or inability to make the changes necessary to operate effectively now that we operate independently from 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;

 

   

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

 

   

risks inherent in the restructuring of the operations of Budget Truck Rental;

 

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risks inherent in the separation and related transactions, including risks related to our April 2006 borrowings, and costs of the separation; and

 

   

the terms of agreements among the separated companies, including the allocations of assets and liabilities, including contingent liabilities and guarantees, commercial arrangements and the performance of each of the separated companies’ obligations under these agreements.

Other factors and assumptions not identified above, including those described under “Risk Factors” set forth in Item 1A of our 2006 Annual Report on Form 10-K 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 “Risk Factors” set forth in Item 1A of our 2006 Annual Report on Form 10-K, 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
June 30,
   

Six Months Ended

June 30,

 
     2007    2006
Restated
        2007         2006
Restated
 

Revenues

         

Vehicle rental

   $ 1,175    $ 1,150     $ 2,252     $ 2,215  

Other

     341      304       629       576  
                               

Net revenues

     1,516      1,454       2,881       2,791  
                               

Expenses

         

Operating

     785      729       1,496       1,425  

Vehicle depreciation and lease charges, net

     402      364       764       694  

Selling, general and administrative

     168      240       327       446  

Vehicle interest, net

     71      75       142       166  

Non-vehicle related depreciation and amortization

     20      28       43       55  

Interest expense related to corporate debt, net

     32      97       65       157  

Separation costs, net

     3      31       (3 )     56  
                               

Total expenses

     1,481      1,564       2,834       2,999  
                               

Income (loss) before income taxes

     35      (110 )     47       (208 )

Provision (benefit) from income taxes

     12      (46 )     12       (78 )
                               

Income (loss) from continuing operations

     23      (64 )     35       (130 )

Income from discontinued operations, net of tax

     —        317       —         532  

Gain (loss) on disposal of discontinued operations, net of tax

     1      (1,307 )     1       (1,322 )
                               

Income (loss) before cumulative effect of accounting changes

     24      (1,054 )     36       (920 )

Cumulative effect of accounting changes, net of tax

     —        —         —         (64 )
                               

Net income (loss)

   $ 24    $ (1,054 )   $ 36     $ (984 )
                               

Earnings per share

         

Basic

         

Income (loss) from continuing operations

   $ 0.22    $ (0.64 )   $ 0.34     $ (1.30 )

Net income (loss)

     0.23      (10.52 )     0.35       (9.80 )

Diluted

         

Income (loss) from continuing operations

   $ 0.22    $ (0.64 )   $ 0.34     $ (1.30 )

Net income (loss)

     0.23      (10.52 )     0.35       (9.80 )

See Notes to Consolidated Condensed Financial Statements.

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

    

     June 30,     

2007

   

December 31,

2006

 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 227     $ 172  

Receivables, net

     436       363  

Deferred income taxes

     6       7  

Other current assets

     540       1,264  
                

Total current assets

     1,209       1,806  

Property and equipment, net

     497       486  

Deferred income taxes

     169       226  

Goodwill

     2,194       2,193  

Other intangibles, net

     745       739  

Other non-current assets

     728       121  
                

Total assets exclusive of assets under vehicle programs

     5,542       5,571  
                

Assets under vehicle programs:

    

Program cash

     18       14  

Vehicles, net

     9,299       7,049  

Receivables from vehicle manufacturers and other

     142       276  

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

     375       361  
                
     9,834       7,700  
                

Total assets

   $ 15,376     $ 13,271  
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable and other current liabilities

   $ 1,110     $ 1,855  

Current portion of long-term debt

     11       29  
                

Total current liabilities

     1,121       1,884  

Long-term debt

     1,792       1,813  

Other non-current liabilities

     959    

 

452

 

                

Total liabilities exclusive of liabilities under vehicle programs

     3,872       4,149  
                

Liabilities under vehicle programs:

    

Debt

     1,043       759  

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

     6,321       4,511  

Deferred income taxes

     1,311       1,206  

Other

     299    

 

203

 

                
     8,974       6,679  
                

Commitments and contingencies (Note 12)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value—authorized 1 million shares; none issued and outstanding

     —         —    

Common stock, $.01 par value—authorized 250 million shares; issued 136,810,549 and 135,498,121 shares

     1       1  

Additional paid-in capital

     9,327       9,664  

Retained earnings (accumulated deficit)

     (568 )     (586 )

Accumulated other comprehensive income

     117       68  

Treasury stock, at cost— 32,605,466 and 34,306,694 shares

     (6,347 )     (6,704 )
                

Total stockholders’ equity

     2,530       2,443  
                

Total liabilities and stockholders’ equity

   $ 15,376     $ 13,271  
                

See Notes to Consolidated Condensed Financial Statements.

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
         2007        

2006

Restated

 

Operating Activities

    

Net income (loss)

   $ 36     $ (984 )

Adjustments to arrive at income (loss) from continuing operations

     (1 )     854  
                

Income (loss) from continuing operations

     35       (130 )

Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities exclusive of vehicle programs:

    

Non-vehicle related depreciation and amortization

     43       55  

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

    

Receivables

     (14 )     —    

Income taxes and deferred income taxes

     12       (309 )

Accounts payable and other current liabilities

     (53 )     (37 )

Other, net

     (11 )     (92 )
                

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

     12       (513 )
                

Vehicle programs:

    

Vehicle depreciation

     759       663  
                
     759       663  
                

Net cash provided by continuing operating activities

     771       150  
                

Investing Activities

    

Property and equipment additions

     (51 )     (46 )

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

     (1 )     (113 )

Proceeds received on asset sales

     8       10  

Proceeds from sale of investment

     106       —    

Payments made to Realogy and Wyndham, net

     (88 )     —    

Proceeds from dispositions of businesses, net of transaction-related payments

     (1 )     (28 )

Other, net

     (8 )     6  
                

Net cash used in investing activities exclusive of vehicle programs

     (35 )     (171 )
                

Vehicle programs:

    

Increase in program cash

     (4 )     (49 )

Investment in vehicles

     (6,480 )     (6,936 )

Payments received on investment in vehicles

     3,752       5,404  

Other, net

     —         (6 )
                
     (2,732 )     (1,587 )
                

Net cash used in investing activities

     (2,767 )     (1,758 )
                

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

 

     Six Months Ended
June 30,
 
         2007         2006
Restated
 

Financing Activities

    

Proceeds from borrowings

     —         1,875  

Principal payments on borrowings

     (39 )     —    

Net short-term borrowings

     —         192  

Issuances of common stock

     39       36  

Repurchases of common stock

     —         (243 )

Payment of dividends

     —         (113 )

Other, net

     —         (25 )
                

Net cash provided by financing activities exclusive of vehicle programs

     —         1,722  
                

Vehicle programs:

    

Proceeds from borrowings

     6,287       6,441  

Principal payments on borrowings

     (4,362 )     (7,322 )

Net change in short-term borrowings

     129       104  

Other, net

     (6 )     (22 )
                
     2,048       (799 )
                

Net cash provided by financing activities

     2,048       923  
                

Effect of changes in exchange rates on cash and cash equivalents

     3       (1 )

Cash provided by (used in) discontinued operations

    

Operating activities

     —         1,059  

Investing activities

     —         (526 )

Financing activities

     —         (282 )

Effect of exchange rate changes

     —         10  
                

Cash provided by discontinued operations

     —         261  
                

Net increase (decrease) in cash and cash equivalents

     55       (425 )

Cash and cash equivalents, beginning of period

     172       546  
                

Cash and cash equivalents, end of period

   $ 227     $ 121  
                

See Notes to Consolidated Condensed Financial Statements.

 

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Avis Budget Group, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts 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 car rentals and ancillary products and services primarily in Canada, Argentina, Australia, 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 principals generally accepted in the United States (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 2006 Annual Report on Form 10-K filed on March 1, 2007.

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.

Discontinued Operations. In connection with the separation of Cendant into four independent companies, 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. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the account balances and activities of Realogy, Wyndham and Travelport have been segregated and reported as discontinued operations for the three and six months ended June 30, 2006. Summarized financial data for the aforementioned businesses are provided in Note 2—Discontinued Operations.

Separation. During the three and six months ended June 30, 2007, the Company incurred costs (credits) of $3 million and $(3) million, respectively, in connection with the separation of Cendant into four independent companies. Such costs consisted primarily of professional and consulting fees and the six months ended June 30, 2007 amount includes a $14 million credit for tax-related receivables from Realogy and Wyndham recognized in connection with the adoption of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), discussed below. For the three and six months ended June 30, 2006, the Company incurred costs of $31 million and $56 million, respectively, in connection with the separation. Such costs were primarily related to the accelerated vesting of stock-based compensation awards, severance and retention and professional and consulting fees.

Restatement. In 2006, the Company restated second quarter 2006 income (loss) from disposal of discontinued operations for an error in the determination of the impairment charge related to the sale of Travelport. The effect of this correction was to recognize an additional loss of $300 million on the sale of Travelport in the second quarter 2006. This restatement was disclosed in the Company’s September 30, 2006 Quarterly Report on Form 10-Q, filed on November 21, 2006.

 

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The following table presents certain of the Company’s previously reported income statement and cash flow data and revisions to such data resulting from the restatement and corresponding amounts currently reported.

 

     As Previously
Reported as
Cendant
    Effect of
Discontinued
Operations
    Effect of
Restatement
    As
Restated
 

For the three months ended June 30, 2006:

        

Consolidated condensed statement of operations

        

Gain (loss) on disposal of discontinued
operations, net of tax

   $ (981 )   (26 )   (300 )   $ (1,307 )

Net income (loss)

     (754 )   —       (300 )     (1,054 )

Per share information (*)
Basic:

        

Gain (loss) on disposal of discontinued operations

     (9.79 )   (0.26 )   (3.00 )     (13.05 )

Net income (loss)

     (7.52 )   —       (3.00 )     (10.52 )

For the six months ended June 30, 2006:

        

Consolidated condensed statement of operations

        

Gain (loss) on disposal of discontinued
operations, net of tax

   $ (981 )   (41 )   (300 )   $ (1,322 )

Income (loss) before cumulative effect of
accounting changes

     (620 )   —       (300 )     (920 )

Net income (loss)

     (684 )   —       (300 )     (984 )

Per share information (*)
Basic:

        

Gain (loss) on disposal of discontinued operations

     (9.78 )   (0.40 )   (2.99 )     (13.17 )

Net income (loss)

     (6.81 )   —       (2.99 )     (9.80 )

Consolidated condensed statement of cash flow

        

Adjustments to arrive at income (loss) from continuing operations

     939     (385 )   300       854  

 

 
 

(*)

Adjusted for the 1-for-10 reverse stock split which became effective September 5, 2006.

This restatement did not affect the Company’s income from continuing operations. There was a corresponding decrease of $300 million to the assets of discontinued operations on the Company’s balance sheet at June 30, 2006.

Changes in Accounting Policies during 2007

Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FIN 48, which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company adopted the provisions of FIN 48 effective January 1, 2007, as required, and recorded an after tax charge to stockholders’ equity of $18 million, which represents the recognition of $10 million of accrued interest and an increase of $8 million in the liability for unrecognized tax benefits. The Company has been indemnified by Realogy and Wyndham for additional tax related liabilities of $14 million recognized as a result of the adoption of FIN 48. Accordingly, the Company recorded a $14 million credit, within the separation costs, net line item on the accompanying Consolidated Condensed Statement of Operations for first quarter 2007, reflecting the recognition of receivables from Wyndham and Realogy for such tax related matters. At June 30, 2007, certain income tax payable balances have been classified as long term liabilities and certain receivables from Realogy and Wyndham have been classified as non-current assets (see Note 8 – Other Current Assets and Note 9 – Accounts Payable and Other Current Liabilities).

 

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Including the impact of the adoption of FIN 48 discussed above, the Company’s unrecognized tax benefits totaled $559 million and were reclassified to long-term income taxes payable as of January 1, 2007. If recognized, substantially all would affect the annual effective income tax rate. In connection with the Company’s adoption of FIN 48, the Company reduced alternative minimum tax credit and net operating loss carryforwards in the amount of $94 million and $60 million, respectively.

During the six months ended June 30, 2007, the Company’s unrecognized tax benefits did not significantly change. As of June 30, 2007, the unrecognized tax benefits in the long-term income taxes payable were $404 million. The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within twelve months.

Including the impact of the adoption of FIN 48 discussed above, the Company’s accrual for the payment of potential interest associated with uncertain tax positions was $26 million as of January 1, 2007. During the six months ended June 30, 2007, the Company recorded additional liabilities of $12 million for the payment of interest, which had minimal impact on the Company’s results of operations as the Company is substantially indemnified for such liabilities and recognized corresponding receivables from Realogy and Wyndham. The Company recognizes potential interest related to unrecognized tax benefits within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statements of Operations. Penalties incurred during the six months ended June 30, 2007, were not significant and recognized as a component of income taxes.

Recently Issued Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The Company will adopt SFAS No. 159 on January 1, 2008, as required, and is currently evaluating the impact of such adoption on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008, as required, and is currently evaluating the impact of such adoption on its financial statements.

 

2. Discontinued Operations

The $1 million gain on disposal of discontinued operations, net of tax in the three and six months ended June 30, 2007 represents reserve adjustments related to the disposition of certain discontinued operations.

 

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Summarized statement of operations data for discontinued operations for the three and six months ended June 30, 2006 is as follows:

Three Months Ended June 30, 2006

 

     Wright
Express(a)
  

Marketing
Services

Division(b)

    Realogy(c)     Wyndham(c)  

Net revenues

   $ —      $ —       $ 1,904     $ 899  
                               

Income before income taxes

   $ —      $ —       $ 277     $ 127  

Provision for income taxes

     —        —         108       44  
                               

Income from discontinued operations, net of tax

   $ —      $ —       $ 169     $ 83  
                               

Gain (loss) on disposal of discontinued operations

   $ 9    $ (8 )   $ (9 )   $ (8 )

Provision (benefit) from income taxes

     3      (2 )     (2 )     (2 )
                               

Gain (loss) on disposal of discontinued operations, net of tax

   $ 6    $ (6 )   $ (7 )   $ (6 )
                               
                Travelport(d)     Total  

Net revenues

        $ 687     $ 3,490  
                     

Income before income taxes

        $ 80     $ 484  

Provision for income taxes

          15       167  
                     

Income from discontinued operations, net of tax

        $ 65     $ 317  
                     

Gain (loss) on disposal of discontinued operations

        $ (1,321 )   $ (1,337 )

Provision (benefit) from income taxes

          (27 )     (30 )
                     

Gain (loss) on disposal of discontinued operations, net of tax

        $ (1,294 )   $ (1,307 )
                     
 
 

(a)

Represents payments received from Wright Express in connection with a tax receivable agreement pursuant to which Wright Express is obligated to make payments to the Company over a 15 year term. Pursuant to the Separation Agreement, the Company began to distribute all such payments received from Wright Express to Realogy and Wyndham following the separation.

 
 

(b)

Represents payments in connection with a guarantee obligation made to the Company’s former Marketing Services division.

 
 

(c)

Loss on disposal of discontinued operations represents costs incurred by Realogy and Wyndham in connection with their separation from Cendant, which was completed on July 31, 2006.

 
 

(d)

Loss on disposal of discontinued operations includes a $1.3 billion impairment charge reflecting the difference between Travelport’s carrying value and its estimated fair value.

 

Six Months Ended June 30, 2006

 

     Wright
Express(a)
  

Marketing
Services

Division(b)

    Realogy(c)     Wyndham(c)  

Net revenues

   $ —      $ —       $ 3,329     $ 1,714  
                               

Income before income taxes

   $ —      $ —       $ 368     $ 288  

Provision for income taxes

     —        —         140       106  
                               

Income from discontinued operations, net of tax

   $ —      $ —       $ 228     $ 182  
                               

Gain (loss) on disposal of discontinued operations

   $ 9    $ (10 )   $ (14 )   $ (15 )

Provision (benefit) from income taxes

     3      (4 )     (2 )     (3 )
                               

Gain (loss) on disposal of discontinued operations, net of tax

   $ 6    $ (6 )   $ (12 )   $ (12 )
                               
                Travelport(d)     Total  

Net revenues

        $ 1,327     $ 6,370  
                     

Income before income taxes

        $ 136     $ 792  

Provision for income taxes

          14       260  
                     

Income from discontinued operations, net of tax

        $ 122     $ 532  
                     

Gain (loss) on disposal of discontinued operations

        $ (1,327 )   $ (1,357 )

Provision (benefit) from income taxes

          (29 )     (35 )
                     

Gain (loss) on disposal of discontinued operations, net of tax

        $ (1,298 )   $ (1,322 )
                     
 
 

(a)

Represents payments received from Wright Express in connection with a tax receivable agreement pursuant to which Wright Express is obligated to make payments to the Company over a 15 year term. Pursuant to the Separation Agreement, the Company began to distribute all such payments received from Wright Express to Realogy and Wyndham following the separation.

 
 

(b)

Represents payments in connection with a guarantee obligation made to the Company’s former Marketing Services division.

 
 

(c)

Loss on disposal of discontinued operations represents costs incurred by Realogy and Wyndham in connection with their separation from Cendant, which was completed on July 31, 2006.

 
 

(d)

Loss on disposal of discontinued operations includes a $1.3 billion impairment charge reflecting the difference between Travelport’s carrying value and its estimated fair value.

 

 

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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
June 30,
      Six Months Ended  
June 30,
 
     2007    2006     2007    2006  

Income (loss) from continuing operations

   $ 23    $ (64 )   $ 35    $ (130 )

Income from discontinued operations, net of tax

     —        317       —        532  

Gain (loss) on disposal of discontinued operations, net of tax

     1      (1,307 )     1      (1,322 )

Cumulative effect of accounting changes, net of tax

     —        —         —        (64 )
                              

Net income (loss)

   $ 24    $ (1,054 )   $ 36    $ (984 )
                              

Basic weighted average shares outstanding (a)

     103.4      100.1       102.5      100.4  

Stock options, warrants and restricted stock units (b)

     1.4      —         1.2      —    
                              

Diluted weighted average shares outstanding (a)

     104.8      100.1       103.7      100.4  
                              

Earnings per share:

          

Basic

          

Income (loss) from continuing operations

   $ 0.22    $ (0.64 )   $ 0.34    $ (1.30 )

Income from discontinued operations

     —        3.17       —        5.30  

Gain (loss) on disposal of discontinued operations

     0.01      (13.05 )     0.01      (13.17 )

Cumulative effect of accounting changes

     —        —         —        (0.63 )
                              

Net income (loss)

   $ 0.23    $ (10.52 )   $ 0.35    $ (9.80 )
                              

Diluted

          

Income (loss) from continuing operations

   $ 0.22    $ (0.64 )   $ 0.34    $ (1.30 )

Income from discontinued operations

     —        3.17       —        5.30  

Gain (loss) on disposal of discontinued operations

     0.01      (13.05 )     0.01      (13.17 )

Cumulative effect of accounting changes

     —        —         —        (0.63 )
                              

Net income (loss)

   $ 0.23    $ (10.52 )   $ 0.35    $ (9.80 )
                              
 
 

(a)

Because the Company incurred a loss from continuing operations in 2006, all outstanding stock options, restricted stock units and warrants are anti-dilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such period.

 
 

(b)

Excludes restricted stock units for which performance-based vesting criteria have not been achieved.

 

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  
June 30,
     Six Months Ended  
June 30,
     2007    2006    2007    2006

Options (a)

   3.0    12.0    4.6    12.0

Warrants

   0.2    0.2    0.2    0.2
 
 

(a)

The weighted average exercise price for anti-dilutive options for the three and six months ended June 30, 2007 was $39.32 and $35.25, respectively. At June 30, 2006, all outstanding stock options were anti-dilutive, as the Company incurred a loss from continuing operations.

 

 

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4. Intangible Assets

As of June 30, 2007 and December 31, 2006, intangible assets consisted of:

 

     As of June 30, 2007    As of December 31, 2006
    

Gross

Carrying

Amount

   Accumulated
Amortization
  

Net

Carrying

Amount

  

Gross

Carrying

Amount

   Accumulated
Amortization
  

Net

Carrying

Amount

Amortized Intangible Assets

                 

Franchise agreements

   $ 75    $ 17    $ 58    $ 75    $ 16    $ 59

Customer lists

     19      6      13      19      6      13

Other

     2      1      1      2      1      1
                                         
   $ 96    $ 24    $ 72    $ 96    $ 23    $ 73
                                         

Unamortized Intangible Assets

                 

Goodwill

   $ 2,194          $ 2,193      
                         

Trademarks

   $ 673          $ 666      
                         

Amortization expense relating to all intangible assets was less than $1 million during both second quarter 2007 and 2006.

For the six month periods ended June 30, 2007 and 2006, amortization expense was less than $2 million.

Based on the Company’s amortizable intangible assets at June 30, 2007, the Company expects amortization expense of approximately $1 million for the remainder of 2007 and approximately $3 million for each of the five fiscal years thereafter.

 

5. Restructuring Charges

During fourth quarter 2006, the Company recorded $10 million of restructuring charges, of which $8 million was incurred in connection with current restructuring initiatives within the Company’s Truck Rental and Domestic Car Rental operations and $2 million represented a revision to an estimated charge recorded in connection with restructuring actions undertaken in first quarter 2005. The remaining liability relating to the 2005 actions was $3 million at June 30, 2007 and primarily relates to obligations under terminated leases.

2006 Restructuring

During fourth quarter 2006, the Company committed to various strategic initiatives targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities within its Budget Truck Rental and Domestic Car Rental operations. The more significant areas of cost reduction include the closure of the Budget Truck Rental headquarters and other facilities and reductions in staff.

The initial recognition of the restructuring charge and the corresponding utilization for the 2006 Truck Rental and Domestic Car Rental operations restructuring initiative are summarized by category from inception as follows:

 

    

Personnel

Related (a)

    Facility
Related (b)
        Total      

Initial charge

   $ 4     $ 4     $ 8  

Cash payments

     —         (1 )     (1 )
                        

Balance at December 31, 2006

     4       3       7  

Cash payments

     (4 )     (2 )     (6 )
                        

Balance at June 30, 2007

   $ —       $ 1     $ 1  
                        
 
 

(a)

The initial charge primarily represents severance benefits resulting from reductions in staff. Prior to December 31, 2006, the Company formally communicated the termination of employment to approximately 180 employees, representing a wide range of employee groups. As of June 30, 2007, the Company had terminated substantially all of these employees.

 

(b)

The initial charge principally represents costs incurred in connection with facility closures and lease obligations resulting from the closure of the Truck Rental headquarters, consolidation of Truck Rental operations and the closure of other facilities within the Company’s Domestic Car Rental operations.

 

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6. Vehicle Rental Activities

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

 

    

As of

June 30,

        2007        

   

As of

December 31,

2006

 

Rental vehicles

   $ 10,305     $ 7,738  

Less: Accumulated depreciation

     (1,124 )     (993 )
                
     9,181       6,745  

Vehicles held for sale

     118       304  
                
   $ 9,299     $ 7,049  
                

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007     2006    2007     2006

Depreciation expense

   $ 407     $ 346    $ 759     $ 663

Lease charges

     12       12      26       29

(Gain) loss on sales of vehicles, net

     (17 )     6      (21 )     2
                             
   $ 402     $ 364    $ 764     $ 694
                             

During the three and six months ended June 30, 2007, vehicle interest, net on the accompanying Consolidated Condensed Statements of Operations excludes $35 million and $71 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.

 

7. Income Taxes

The Company’s effective tax rate from continuing operations for the six months ended June 30, 2007 is a provision of 25.5%. Such rate differs from the Federal statutory rate of 35.0% primarily due to an increase in the receivables due from Realogy and Wyndham in connection with the adoption of FIN 48 with a corresponding credit to the separation costs which is not subject to income taxes; and a decrease for changes in New York State and Canadian tax law.

 

8. Other Current Assets

Other current assets consisted of:

 

    

As of

June 30,

        2007        

  

As of

December 31,

2006

Receivables from Realogy (a)

   $ 137    $ 572

Receivables from Wyndham (a)

     106      393

Prepaid expenses

     145      144

Other

     152      155
             
   $ 540    $ 1,264
             
 
 

(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.  These amounts are due from Realogy and Wyndham on demand upon the Company’s settlement of the related liability. At June 30, 2007 and December 31, 2006, there are corresponding liabilities recorded within accounts payable and other current liabilities. In connection with the Company’s adoption of FIN 48, receivables from Realogy and Wyndham related to income taxes were classified as non-current assets. At June 30, 2007, receivables related to tax items included in non-current assets were $623 million.

 

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9. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of:

 

    

As of

June 30,

        2007        

  

As of

December 31,

2006

Income taxes payable (a)

   $ —      $ 520

Accounts payable

     209      223

Accrued payroll and related

     180      244

Accrued disposition costs

     141      152

Public liability and property damage insurance liabilities (b)

     117      116

Accrued legal settlements

     36      71

Other

     427      529
             
   $ 1,110    $ 1,855
             
 
 

(a)

Income taxes payable have been classified as long-term liabilities as of January 1, 2007, in connection with the adoption of FIN 48. At June 30, 2007, the non-current liability related to long-term income taxes payable was $404 million. 

 

(b)

The non-current liability related to public liability and property damage insurance was $266 million and $260 million at June 30, 2007 and December 31, 2006, respectively.

 

10. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of:

 

    

Maturity

Date

  

As of

June 30,

        2007        

  

As of

December 31,

2006

Floating rate term loan

   April 2012    $ 800    $ 838

Floating rate notes

   May 2014      250      250

7 5/8% notes

   May 2014      375      375

7 3/4% notes

   May 2016      375      375
                
        1,800      1,838

Other

        3      4
                

Total long-term debt

        1,803      1,842

Less: Current portion (a)

        11      29
                

Long-term debt

      $ 1,792    $ 1,813
                
 
 

(a)

Primarily represents borrowings under the Company’s floating rate term loan as of June 30, 2007 and December 31, 2006.

Committed Credit Facilities and Available Funding Arrangements

At June 30, 2007, 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

$1.5 billion revolving credit facility (a)

   $ 1,500    $ —      $ 441    $ 1,059

Letter of credit facility (b)

     303      —        303      —  
 
 

(a)

This secured revolving credit facility was entered into by Avis Budget Car Rental in April 2006, has a five year term and currently bears interest at one month LIBOR plus 125 basis points.

 

(b)

Final maturity date is July 2010.

On February 9, 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 7.625% Senior Notes due 2014, 7.75% Senior Notes due 2016 and Floating Rate Senior Notes due 2014. The Company executed a Supplemental Indenture, dated February 9, 2007, to provide the Guarantee in accordance with the terms and limitations of the Notes and the indenture governing the Notes.

 

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In consideration for providing the Guarantee, the Company received $14 million, before fees and expenses, from certain institutional investors. The $14 million consideration has been deferred and is being amortized over the life of the debt.

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, mergers, liquidations, and sale and leaseback transactions. The credit facility also requires the maintenance of certain financial ratios. As of June 30, 2007, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

 

11. 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

June 30,

        2007        

  

As of

December 31,

2006

Debt due to Avis Budget Rental Car Funding (a)

   $ 6,321    $ 4,511

Budget Truck financing:

     

Budget Truck Funding program (b)

     247      135

Capital leases

     231      257

Other (c)

     565      367
             
   $ 7,364    $ 5,270
             
 
 

(a)

The change in the balance at June 30, 2007 principally reflects (i) increased borrowings under the Company’s extendible commercial paper program and conduit facility during the six months ended June 30, 2007 and (ii) the issuance of vehicle-backed floating rate notes at various interest rates during the second quarter 2007 to support the acquisition of rental vehicles within the Company’s domestic car rental operations.

 

(b)

The change in the balance at June 30, 2007 primarily reflects incremental borrowings during second quarter 2007 to support the acquisition of rental vehicles within the Budget Truck rental fleet.

 

(c)

The change in the balance at June 30, 2007 primarily reflects incremental borrowings under the Company’s bank loan and commercial paper conduit facilities to support the acquisition of vehicles in its international operations.

Avis Budget Rental Car Funding (AESOP), LLC. Avis Budget Rental Car Funding, an unconsolidated bankruptcy remote qualifying special purpose limited liability company, issues private placement notes that are typically “AAA” rated generally with principal and interest payments guaranteed by independent insurance companies. Avis Budget Rental Car Funding then uses the proceeds from such issuances to make loans to a wholly-owned subsidiary of the Company, AESOP Leasing LP (“AESOP Leasing”) on a continuing basis. By issuing debt through the AESOP program, Avis Budget pays a lower rate of interest than if the Company had issued debt directly to third parties. AESOP Leasing is then required to use these proceeds to acquire or finance the acquisition of vehicles used in the Company’s rental car operations. As a result, AESOP Leasing’s obligation to Avis Budget Rental Car Funding is reflected as related party debt on the Company’s Consolidated Condensed Balance Sheets as of June 30, 2007 and December 31, 2006. The Company also recorded an asset within assets under vehicle programs on its Consolidated Condensed Balance Sheets at June 30, 2007 and December 31, 2006, which represented the equity issued to the Company by Avis Budget Rental Car Funding. The vehicles purchased by AESOP Leasing remain on the Company’s Consolidated Condensed Balance Sheet as AESOP Leasing is consolidated by the Company. Such vehicles and related assets, which approximate $8.3 billion and the majority of which are subject to manufacturer repurchase and guaranteed depreciation agreements, collateralize the debt issued by Avis Budget Rental Car Funding and are not available to pay the obligations of the Company.

The business activities of Avis Budget Rental Car Funding are limited primarily to issuing indebtedness and using the proceeds thereof to make loans to AESOP Leasing for the purpose of acquiring or financing the acquisition of vehicles to be leased to the Company’s rental car subsidiaries and pledging its assets to secure the indebtedness. Because Avis Budget Rental Car Funding is not consolidated by the Company, its results of operations and cash flows are not reflected within the Company’s Consolidated Condensed Financial Statements. Borrowings under the Avis Budget Rental Car Funding program primarily represent floating rate term notes.

Truck financing. Budget Truck financing consists of debt outstanding under the Budget Truck Funding program and capital leases. The Budget Truck Funding program constitutes debt facilities established by the Company to finance the acquisition of the Budget truck rental fleet. The borrowings under the Budget Truck Funding program floating rate term loans are collateralized by $275 million of corresponding assets. The Company has also obtained a portion of its truck rental fleet under capital lease arrangements for which there are corresponding gross assets of $385 million and $381 million with accumulated amortization of $144 million and $129 million classified within vehicles, net on the Company’s Consolidated Condensed Balance Sheets as of June 30, 2007 and December 31, 2006, respectively.

 

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Other. Borrowings under the Company’s other vehicle rental programs represent amounts issued under financing facilities that provide for the issuance of notes to support the acquisition of vehicles used in the Company’s international vehicle rental operations. The debt issued is collateralized by $1.1 billion of vehicles and related assets and primarily represents floating rate bank loans and commercial paper.

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 June 30, 2007:

 

    

Vehicle-

Backed

Debt

   Capital
Leases
   Total

Within 1 year

   $ 2,469    $ 89    $ 2,558

Between 1 and 2 years

     1,422      116      1,538

Between 2 and 3 years

     400      26      426

Between 3 and 4 years

     1,468      —        1,468

Between 4 and 5 years

     250      —        250

Thereafter

     1,124      —        1,124
                    

Total

   $ 7,133    $ 231    $ 7,364
                    
As of June 30, 2007, 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

   $ 7,266    $ 6,321    $ 945

Budget Truck financing:

        

Budget Truck Funding program

     400      247      153

Capital leases

     231      231      —  

Other

     1,203      565      638
                    
   $ 9,100    $ 7,364    $ 1,736
                    
 
 

(a)

Capacity is subject to maintaining sufficient assets to collateralize debt.

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 indebtedness of material subsidiaries, mergers, liens, liquidations, and sale and leaseback transactions, and also require the maintenance of certain financial ratios. As of June 30, 2007, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

 

12. Commitments and Contingencies

Contingencies

The Company and the Internal Revenue Service (“IRS”) have settled the IRS examination for the federal consolidated income tax group’s taxable years 1998 through 2002. The Company was adequately reserved for this audit cycle and has reflected the results of that examination in the accompanying Consolidated Condensed Financial Statements. The IRS has begun to examine the Company’s taxable years 2003 through 2006. Although the Company believes there is appropriate support for the positions taken on its tax returns, the Company has recorded liabilities representing the best estimates of the probable loss on certain positions. The Company believes that the accruals for tax liabilities are adequate for all open years, based on assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Although the Company believes the recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore, the Company’s assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. While the Company believes that the estimates and assumptions supporting the assessments are reasonable, the final determination of tax audits and any other related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities.

The results of an audit or litigation related to these matters include a range of potential outcomes, which may involve material amounts. However, the Company is entitled to indemnification for pre-separation matters by Realogy and Wyndham and, therefore, does not expect such resolution to have a significant impact on its earnings, financial position or cash flows.

 

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On March 19, 2007, the IRS and the U.S. Department of the Treasury issued final regulations addressing the treatment of dual consolidated losses generated by entities that are tax residents in the United States and one or more foreign jurisdictions. Certain elements of these regulations can be applied retroactively and may affect the Company. The Company is currently evaluating what impact, if any, these regulations may have on its tax accounts.

The Company is involved in litigation asserting claims associated with accounting irregularities discovered in 1998 at former CUC business units outside of the principal common stockholder class action litigation. While the Company has an accrued liability of approximately $15 million recorded on its Consolidated Condensed Balance Sheet as of June 30, 2007 for these claims based upon its best estimates, it does not believe that it is feasible to predict or determine the final outcome or resolution of any unresolved proceedings. Pursuant to the Separation Agreement, Realogy and Wyndham have assumed all liabilities related to this litigation, as described below.

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 (or, in certain cases, a portion thereof) 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 Liability, 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. Realogy and Wyndham have also agreed to guarantee each other’s as well as the Company’s obligation under each entity’s deferred compensation plans for amounts deferred in respect of 2005 and earlier years.

The Company does not believe that the impact of any unresolved proceedings constituting an Assumed Liability related to the CUC accounting irregularities 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 as well as other liabilities related to the Company’s litigation that is not related to its vehicle rental operations. Such litigation assumed by Realogy and Wyndham includes litigation which was retained by the Company in connection with the sale of its former Marketing Services division.

On April 10, 2007, Realogy was acquired by an affiliate of Apollo Management VI, L.P. and no longer is listed as an independent public company. 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 for the benefit of the Company to cover its estimated share of the Assumed Liabilities discussed above although there can be no assurance that such letter of credit will be sufficient to cover Realogy’s actual obligations if and when they arise.

In addition to the matters discussed above, the Company is also involved in claims and legal proceedings related to its vehicle rental operations, including contract disputes, business practices, intellectual property, environmental issues and other commercial, employment and tax matters, including patent claims, wage and hour claims and breach of contract claims by licensees. 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 effect 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 have a material adverse effect on 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 $7.1 billion of vehicles from these manufacturers over the next year. These commitments are subject to the vehicle manufacturers’ satisfying their obligations to repurchase vehicles from the Company under the relevant repurchase and guaranteed depreciation agreements. The Company’s featured suppliers for the Avis and Budget brands are General Motors Corporation 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 under repurchase and guaranteed depreciation programs.

 

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Concentrations

Concentrations of credit risk at June 30, 2007 include (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with General Motors Corporation and Ford Motor Company with respect to receivables for program cars that have been returned to the car manufacturers and (ii) receivables from Realogy and Wyndham of $527 million and $339 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with the separation.

Activity with Realogy and Wyndham

During the six months ended June 30, 2007, the following transactions occurred between the Company and Realogy and Wyndham: (i) the Company realized a portion of a preferred stock investment in cash and transferred $106 million to Realogy and Wyndham representing the proceeds received; (ii) the Company transferred its remaining preferred stock investment of $26 million to Realogy and Wyndham through the assignment of such investment; (iii) the Company resolved a litigation matter for $32 million, which was paid by Realogy and Wyndham; and (iv) the Company, settled other reimbursable transactions between the Company and Realogy and Wyndham resulting in net cash inflows of $18 million.

 

13. Stockholders’ Equity

Dividends

During the six months ended June 30, 2006, the Company paid cash dividends of $113 million ($1.10 per share). For the six months ended June 30, 2007, the Company has not paid cash dividends.

Share Repurchases

During the six months ended June 30, 2007, the Company has not repurchased its common stock. During the six months ended June 30, 2006, the Company used $221 million of available cash and $22 million of proceeds primarily received in connection with option exercises to repurchase $243 million of its common stock.

Accumulated Other Comprehensive Income

The after-tax components of accumulated other comprehensive income are as follows:

 

     Currency
Translation
Adjustments
   Gains on Cash
Flow Hedges
  

Minimum

Pension

Liability

Adjustment

   

Accumulated
Other

Comprehensive

Income

Balance, January 1, 2007

   $ 67    $ 30    $ (29 )   $ 68

Current period change

     34      15      —         49
                            

Balance, June 30, 2007

   $ 101    $ 45    $ (29 )   $ 117
                            
 

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

Total Comprehensive Income

For the six months ended June 30, 2007, the Company’s total comprehensive income was $85 million, which includes net income of $36 million and other comprehensive income of $49 million.

 

14. Stock-Based Compensation

The Company recorded pretax stock-based compensation expense of $5 million and $3 million ($3 million and $2 million, after tax) during second quarter 2007 and 2006, respectively, and $9 million and $11 million ($5 million after tax and $7 million, after tax) during the six months ended June 30, 2007 and 2006, respectively, related to employee stock awards that were granted or modified by the Company. The expense recorded in the six months ended June 30, 2006 includes a pretax charge of $7 million relating to the extension of the exercisable life of certain stock options.

The Company also recorded pretax stock-based compensation expense of $11 million ($7 million, after tax) and $27 million ($17 million, after tax) during the three and six months ended June 30, 2006, respectively, within discontinued operations.

 

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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 2007 exercises of stock-based awards did not generate a cash benefit. Approximately $28 million of tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

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

 

     Six Months Ended June 30, 2007
     RSUs    Options
    

Number

of RSUs

    Weighted
Average
Grant Price
   Number
of Options (c)
   

Weighted

Average

Exercise

Price

Balance at January 1, 2007

   1,774     $ 24.33    11,037     $ 27.22

Granted at fair market value

   1,149       25.88    —         —  

Vested/exercised (a)

   (398 )     24.54    (2,368 )     19.85

Cancelled

   (71 )     24.53    (750 )     30.81
                 

Balance at June 30, 2007 (b)

   2,454       25.04    7,919       29.09
                 
 
 

(a)

Stock options exercised during the six months ended June 30, 2007 had an intrinsic value of $20 million.

 

(b)

As of June 30, 2007, the Company’s outstanding “in-the-money” stock options and RSUs had aggregate intrinsic value of $27 million and $70 million, respectively. Aggregate unrecognized compensation expense related to outstanding stock options and RSUs amounted to $56 million as of June 30, 2007.

 

(c)

All options outstanding as of June 30, 2007 are exercisable and have a weighted average remaining contractual life of 3 years.

The table below summarizes information regarding the Company’s outstanding and exercisable stock options as of June 30, 2007 (in thousands of shares):

 

Range of

Exercise Prices

  

Number of

Options (*)

Less than $20.00    1,576
$20.01 to $25.00    233
$25.01 to $30.00    3,240
$30.01 to $35.00    1,269
$35.01 and above    1,601
    
   7,919
    
 
 

(*)

All outstanding stock options vested in connection with the completion of the separation.

As of June 30, 2007, 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 6 years and unrecognized compensation expense of $3 million.

 

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15. 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, 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 June 30,  
     2007     2006  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 1,195    $ 59     $ 1,132    $ 74  

International Car Rental

     202      21       178      19  

Truck Rental

     114      10       129      18  

Corporate and Other (a)

     5      (3 )     15      (96 )
                              

Total Company

   $ 1,516      87     $ 1,454      15  
                  

Less: Non-vehicle related depreciation and amortization

        20          28  

Interest expense related to corporate debt, net

        32          97  
                      

Income (loss) before income taxes

      $ 35        $ (110 )
                      
     Six Months Ended June 30,  
     2007     2006  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 2,279    $ 110     $ 2,176    $ 105  

International Car Rental

     393      45       352      42  

Truck Rental

     197      (1 )     230      19  

Corporate and Other (a)

     12      1       33      (162 )
                              

Total Company

   $ 2,881      155     $ 2,791      4  
                  

Less: Non-vehicle related depreciation and amortization

        43          55  

Interest expense related to corporate debt, net

        65          157  
                      

Income (loss) before income taxes

      $ 47        $ (208 )
                      
 
 

(a)

Includes unallocated corporate overhead, the elimination of transactions between segments and the results of operations of certain non-strategic businesses.

Since December 31, 2006, there have been no significant changes in segment assets with the exception of the Company’s Domestic Car Rental segment, for which assets under vehicle programs amounted to approximately $8.2 billion and approximately $6.4 billion at June 30, 2007 and December 31, 2006, respectively.

 

16. Guarantor and Non-Guarantor Consolidating Financial Statements

The following consolidating financial information presents Consolidating Condensed Balance Sheets as of June 30, 2007 and December 31, 2006, Consolidating Condensed Statements of Operations for the three months and six months ended June 30, 2007 and 2006 and Consolidating Condensed Statements of Cash Flows for the six months ended June 30, 2007 and 2006 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.

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. The results of operations of discontinued operations are included in the non-guarantor subsidiaries column. Income from discontinued operations, net of tax within the parent column includes the equity in earnings from discontinued operations and gain (loss) on disposal of discontinued operations.

 

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Consolidating Condensed Statements of Operations

Three Months Ended June 30, 2007

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

  

Non-Guarantor

Subsidiaries

   Eliminations     Total

Revenues

              

Vehicle rental

   $ —       $ —       $ 1,033    $ 142    $ —       $ 1,175

Other

     3       —         257      566      (485 )     341
                                            

Net revenues

     3       —         1,290      708      (485 )     1,516
                                            

Expenses

              

Operating

     3       —         665      117      —         785

Vehicle depreciation and lease charges, net

     —         —         352      404      (354 )     402

Selling, general and administrative

     1       —         145      22      —         168

Vehicle interest, net

     —         —         67      85      (81 )     71

Non-vehicle related depreciation and amortization

     —         —         18      2      —         20

Interest expense related to corporate debt, net:

              

Interest expense

     (1 )     33       —        —        —         32

Intercompany interest expense (income)

     —         (33 )     33      —        —         —  

Separation costs, net

     1       2       —        —        —         3
                                            

Total expenses

     4       2       1,280      630      (435 )     1,481
                                            

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

     (1 )     (2 )     10      78      (50 )     35

Provision (benefit) for income taxes

     (1 )     (1 )     4      10      —         12

Equity in earnings of subsidiaries

     23       75       69      —        (167 )     —  
                                            

Income from continuing operations

     23       74       75      68      (217 )     23

Income from discontinued operations, net of tax

     1       —         —        —        —         1
                                            

Net income

   $ 24     $ 74     $ 75    $ 68    $ (217 )   $ 24
                                            

 

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Table of Contents

Six Months Ended June 30, 2007

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

   Eliminations     Total  

Revenues

             

Vehicle rental

   $ —       $ —       $ 1,970     $ 282    $ —       $ 2,252  

Other

     5       —         462       1,062      (900 )     629  
                                               

Net revenues

     5       —         2,432       1,344      (900 )     2,881  
                                               

Expenses

             

Operating

     2       —         1,263       231      —         1,496  

Vehicle depreciation and lease charges, net

     —         —         671       750      (657 )     764  

Selling, general and administrative

     7       —         277       43      —         327  

Vehicle interest, net

     —         —         134       154      (146 )     142  

Non-vehicle related depreciation and amortization

     1       —         39       3      —         43  

Interest expense related to corporate debt, net:

             

Interest expense

     (2 )     67       —         —        —         65  

Intercompany interest expense (income)

     —         (67 )     67       —        —         —    

Separation costs, net

     (6 )     3       —         —        —         (3 )
                                               

Total expenses

     2       3       2,451       1,181      (803 )     2,834  
                                               

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

     3       (3 )     (19 )     163      (97 )     47  

Provision (benefit) for income taxes

     (4 )     (2 )     (4 )     22      —         12  

Equity in earnings of subsidiaries

     28       127       142       —        (297 )     —    
                                               

Income from continuing operations

     35       126       127       141      (394 )     35  

Income from discontinued operations, net of tax

     1       —         —         —        —         1  
                                               

Net income

   $ 36     $ 126     $ 127     $ 141    $ (394 )   $ 36  
                                               

 

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Table of Contents

Three Months Ended June 30, 2006

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

   Eliminations     Total  

Revenues

             

Vehicle rental

   $ —       $ —       $ 1,024     $ 126    $ —       $ 1,150  

Other

     10       —         215       526      (447 )     304  
                                               

Net revenues

     10       —         1,239       652      (447 )     1,454  
                                               

Expenses

             

Operating

     2       —         632       95      —         729  

Vehicle depreciation and lease charges, net

     —         —         322       399      (357 )     364  

Selling, general and administrative

     77       —         148       21      (6 )     240  

Vehicle interest, net

     —         —         72       78      (75 )     75  

Non-vehicle related depreciation and amortization

     2       —         21       5      —         28  

Interest expense related to corporate debt, net:

             

Interest expense

     81       30       (9 )     —        (5 )     97  

Intercompany interest expense (income)

     —         (30 )     30       —        —         —    

Separation costs, net

     29       2       —         —        —         31  
                                               

Total expenses

     191       2       1,216       598      (443 )     1,564  
                                               

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

     (181 )     (2 )     23       54      (4 )     (110 )

Provision (benefit) for income taxes

     (73 )     —         10       13      4       (46 )

Equity in earnings of subsidiaries

     44       54       41       —        (139 )     —    
                                               

Income (loss) from continuing operations

     (64 )     52       54       41      (147 )     (64 )

Income (loss) from discontinued operations, net of tax

     (990 )     —         —         317      (317 )     (990 )
                                               

Net income (loss)

   $ (1,054 )   $ 52     $ 54     $ 358    $ (464 )   $ (1,054 )
                                               

 

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Table of Contents

Six Months Ended June 30, 2006

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Total  

Revenues

            

Vehicle rental

   $ —       $ —       $ 1,961     $ 254     $ —       $ 2,215  

Other

     24       —         398       1,021       (867 )     576  
                                                

Net revenues

     24       —         2,359       1,275       (867 )     2,791  
                                                

Expenses

            

Operating

     2       —         1,226       197       —         1,425  

Vehicle depreciation and lease charges, net

     —         —         608       769       (683 )     694  

Selling, general and administrative

     125       —         290       42       (11 )     446  

Vehicle interest, net

     —         —         160       160       (154 )     166  

Non-vehicle related depreciation and amortization

     5       —         37       13       —         55  

Interest expense related to corporate debt, net:

            

Interest expense

     160       30       (22 )     (1 )     (10 )     157  

Intercompany interest expense (income)

     —         (30 )     30       —         —         —    

Separation costs, net

     54       2       —         —         —         56  
                                                

Total expenses

     346       2       2,329       1,180       (858 )     2,999  
                                                

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

     (322 )     (2 )     30       95       (9 )     (208 )

Provision (benefit) for income taxes

     (122 )     —         13       23       8       (78 )

Equity in earnings of subsidiaries

     70       92       75       —         (237 )     —    
                                                

Income (loss) from continuing operations

     (130 )     90       92       72       (254 )     (130 )

Income (loss) from discontinued operations, net of tax

     (790 )     —         —         532       (532 )     (790 )
                                                

Income (loss) before cumulative effect of accounting changes

     (920 )     90       92       604       (786 )     (920 )

Cumulative effect of accounting changes, net of tax

     (64 )     —         —         (65 )     65       (64 )
                                                

Net income (loss)

   $ (984 )   $ 90     $ 92     $ 539     $ (721 )   $ (984 )
                                                

 

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Table of Contents

Consolidating Condensed Balance Sheets

As of June 30, 2007

 

    

Parent

  

Subsidiary

Issuers

  

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

  

Eliminations

   

Total

Assets

               

Current assets:

               

Cash and cash equivalents

   $ 88    $ 59    $ 18     $ 62    $ —       $ 227

Receivables, net

     2      110      230       94      —         436

Deferred income taxes

     4      —        10       7      (15 )     6

Other current assets

     304      107      69       66      (6 )     540
                                           

Total current assets

     398      276      327       229      (21 )     1,209

Property and equipment, net

     5      127      317       48      —         497

Deferred income taxes

     34      81      —         72      (18 )     169

Goodwill

     —        7      2,165       22      —         2,194

Other intangibles, net

     —        17      639       89      —         745

Other non-current assets

     656      50      17       5      —         728

Intercompany receivables (payables)

     377      675      (1,065 )     13      —         —  

Investment in subsidiaries

     1,931      3,184      2,685       —        (7,800 )     —  
                                           

Total assets exclusive of assets under vehicle programs

     3,401      4,417      5,085       478      (7,839 )     5,542
                                           
               

Assets under vehicle programs:

               

Program cash

     —        —        —         18      —         18

Vehicles, net

     —        —        241       9,058      —         9,299

Receivables from vehicle manufacturers and others

     —        —        3       139      —         142

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

     —        —        —         375      —      

 

375

                                           
     —        —        244       9,590      —         9,834
                                           

Total assets

   $ 3,401    $ 4,417    $ 5,329     $ 10,068    $ (7,839 )   $ 15,376
                                           

Liabilities and stockholders’ equity

               

Current liabilities:

               

Accounts payable and other current liabilities

  

$

326

  

$

190

  

$

508

 

 

$

107

  

$

(21

)

 

$

1,110

Current portion of long-term debt

     3      8      —         —        —         11
                                           

Total current liabilities

     329      198      508       107      (21 )     1,121

Long-term debt

     —        1,792      —         —        —         1,792

Other non-current liabilities

     542      41      205       189      (18 )     959
                                           

Total liabilities exclusive of liabilities under vehicle programs

     871      2,031      713       296      (39 )  

 

3,872

                                           

Liabilities under vehicle programs:

               

Debt

     —        —        247       796      —         1,043

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

     —        —        —         6,321      —      

 

6,321

Deferred income taxes

     —        —        1,180       131      —         1,311

Other

     —        —        5       294      —         299
                                           
     —        —        1,432       7,542      —         8,974
                                           

Total stockholders’ equity

     2,530      2,386      3,184       2,230      (7,800 )     2,530
                                           

Total liabilities and stockholders’ equity

   $ 3,401    $ 4,417    $ 5,329     $ 10,068    $ (7,839 )   $ 15,376
                                           

 

25


Table of Contents

As of December 31, 2006

 

     Parent   

Subsidiary

Issuers

  

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Total

Assets

              

Current assets:

              

Cash and cash equivalents

   $ 35    $ 75    $ 29     $ 33     $ —       $ 172

Receivables, net

     2      54      217       90       —         363

Deferred income taxes

     5      —        10       7       (15 )     7

Other current assets

     1,070      49      84       62       (1 )     1,264
                                            

Total current assets

     1,112      178      340       192       (16 )     1,806

Property and equipment, net

     —        115      326       45       —         486

Deferred income taxes

     41      153      —         68       (36 )     226

Goodwill

     —        7      2,165       21       —         2,193

Other intangibles, net

     1      17      639       82       —         739

Other non-current assets

     59      48      10       4       —         121

Intercompany receivables (payables)

     627      627      (1,209 )     (45 )     —         —  

Investment in subsidiaries

     1,854      3,109      2,603       —         (7,566 )     —  
                                            

Total assets exclusive of assets under vehicle programs

     3,694      4,254      4,874       367       (7,618 )     5,571
                                            

Assets under vehicle programs:

              

Program cash

     —        —        —         14       —         14

Vehicles, net

     —        —        299       6,750       —         7,049

Receivables from vehicle manufacturers and others

     —        —        13       263       —         276

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

     —        —        —         361       —         361
                                            
     —        —        312       7,388       —         7,700
                                            

Total assets

   $ 3,694    $ 4,254    $ 5,186     $ 7,755     $ (7,618 )   $ 13,271
                                            

Liabilities and stockholders’ equity

              

Current liabilities:

              

Accounts payable and other current liabilities

   $ 1,185    $ 81    $ 490     $ 115     $ (16 )   $ 1,855

Current portion of long-term debt

     4      25      —         —         —         29
                                            

Total current liabilities

     1,189      106      490       115       (16 )     1,884

Long-term debt

     —        1,813      —         —         —         1,813

Other non-current liabilities

     62      24      226       176       (36 )     452
                                            

Total liabilities exclusive of liabilities under vehicle programs

     1,251      1,943      716       291       (52 )     4,149
                                            

Liabilities under vehicle programs:

              

Debt

     —        —        271       488       —         759

Due to Avis Budget Rental Car

Funding (AESOP) LLC-related party

     —        —        —         4,511       —         4,511

Deferred income taxes

     —        —        1,077       129       —         1,206

Other

     —        —        13       190       —         203
                                            
     —        —        1,361       5,318       —         6,679
                                            

Total stockholders’ equity

     2,443      2,311      3,109       2,146       (7,566 )     2,443
                                            

Total liabilities and stockholders’ equity

   $ 3,694    $ 4,254    $ 5,186     $ 7,755     $ (7,618 )   $ 13,271
                                            

 

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Table of Contents

Consolidating Condensed Statements of Cash Flows

Six Months Ended June 30, 2007

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations    

Total

 

Net cash provided by operating activities

   $ 1     $ 14     $ 47     $ 799     $ (90 )   $ 771  
                                                

Investing activities

            

Property and equipment additions

     —         (25 )     (20 )     (6 )     —         (51 )

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

  

 

—  

 

 

 

—  

 

 

 

(1

)

 

 

—  

 

    —      

 

(1

)

Proceeds received on asset sales

     —         6       —         2       —         8  

Proceeds from sale of investment

     106       —         —         —         —         106  

Payments made to Realogy and Wyndham, net

     (88 )     —         —         —         —         (88 )

Proceeds from dispositions of businesses, net of transaction-related payments

  

 

(1

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

    —      

 

(1

)

Other, net

     —         (4 )     (4 )     —         —         (8 )
                                                

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

     17       (23 )     (25 )     (4 )     —         (35 )
                                                

Vehicle programs:

            

Increase in program cash

     —         —         —         (4 )     —         (4 )

Investment in vehicles

     —         (57 )     (58 )     (6,365 )     —         (6,480 )

Payments received on investment in vehicles

     —         128       46       3,578       —         3,752  
                                                
     —         71       (12 )     (2,791 )     —         (2,732 )
                                                

Net cash provided by (used in) investing activities

     17       48       (37 )     (2,795 )     —         (2,767 )
                                                

Financing activities

            

Principal payments on borrowings

     (1 )     (38 )     —         —         —         (39 )

Issuances of common stock

     39       —         —         —         —         39  

Net intercompany transactions

     (2 )     (36 )     6       (58 )     90       —    
                                                

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

     36       (74 )     6       (58 )     90       —    
                                                

Vehicle programs:

            

Proceeds from borrowings

     —         —         —         6,287       —         6,287  

Principal payments on borrowings

     —         —         (26 )     (4,336 )     —         (4,362 )

Net change in short-term borrowings

     —         —         —         129       —         129  

Other, net

     (1 )     (4 )     (1 )     —         —         (6 )
                                                
     (1 )     (4 )     (27 )     2,080       —         2,048  
                                                

Net cash provided by (used in) financing

activities

  

 

35

 

 

 

(78

)

    (21 )  

 

2,022

 

 

 

90

 

 

 

2,048

 

                                                

Effect of changes in exchange rates on cash and cash equivalents

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

3

 

    —      

 

3

 

Net increase (decrease) in cash and cash equivalents

  

 

53

 

    (16 )     (11 )  

 

29

 

    —      

 

55

 

Cash and cash equivalents, beginning of period

     35       75       29       33       —         172  
                                                

Cash and cash equivalents, end of period

   $ 88     $ 59     $ 18     $ 62     $ —       $ 227  
                                                

 

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Table of Contents

Six Months Ended June 30, 2006

 

     Parent    

Subsidiary

Issuers

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

    Eliminations     Total  

Net cash provided by (used in) operating activities

   $ (633 )   $ 188     $ (58 )   $ 653     $ —       $ 150  
                                                

Investing activities

            

Property and equipment additions

     (9 )     (5 )     (20 )     (12 )     —         (46 )

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

     —         (95 )     (7 )     (11 )     —         (113 )

Proceeds received on asset sales

     —         7       —         3       —         10  

Proceeds from dispositions of businesses, net of transaction-related payments

     (28 )     —         —         —         —         (28 )

Other, net

     6       —         1       (1 )     —         6  
                                                

Net cash used in investing activities exclusive of vehicle programs

     (31 )     (93 )     (26 )     (21 )     —         (171 )
                                                

Vehicle programs:

            

Decrease (increase) in program cash

     —         14       —         (63 )     —         (49 )

Investment in vehicles

     —         (84 )     (163 )     (6,689 )     —         (6,936 )

Payments received on investment in vehicles

     —         193       6       5,205       —         5,404  

Other, net

     —         —         —         (6 )     —         (6 )
                                                
     —         123       (157 )     (1,553 )     —         (1,587 )
                                                

Net cash provided by (used in) investing activities

     (31 )     30       (183 )     (1,574 )     —         (1,758 )
                                                

Financing activities

            

Proceeds from borrowings

     —         1,875       —         —         —         1,875  

Net short-term borrowings

     192       —         —         —         —         192  

Issuances of common stock

     36       —         —         —         —         36  

Repurchases of common stock

     (243 )     —         —         —         —         (243 )

Payment of dividends

     (113 )     —         —         —         —         (113 )

Net intercompany transactions

     (70 )     (1,939 )     295       1,693       21       —    

Other, net

     (4 )     (21 )     —         —         —         (25 )
                                                

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

     (202 )     (85 )     295       1,693       21       1,722  
                                                

Vehicle programs:

            

Proceeds from borrowings

     —         —         —         6,441       —         6,441  

Principal payments on borrowings

     —         —         (31 )     (7,291 )     —         (7,322 )

Net change in short-term borrowings

     —         —         —         104       —         104  

Other, net

     —         (22 )     —         —         —         (22 )
                                                
     —         (22 )     (31 )     (746 )     —         (799 )
                                                

Net cash provided by (used in) financing activities

     (202 )     (107 )     264       947       21       923  
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —         —         —         (1 )     —         (1 )

Cash provided by discontinued operations(a)

     261       —         —         —         —         261  
                                                

Net increase (decrease) in cash and cash equivalents

     (605 )     111       23       25       21       (425 )

Cash and cash equivalents, beginning of period

     638       1       13       46       (152 )     546  
                                                

Cash and cash equivalents, end of period

   $ 33     $ 112     $ 36     $ 71     $ (131 )   $ 121  
                                                

(a)

See Consolidated Condensed Statements of Cash Flows for cash provided by discontinued operations from operating, investing and financing activities and effect of exchange rates.

 

28


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007. Unless otherwise noted, all dollar amounts are in millions and those relating to our results of operations are presented before taxes. As discussed in Note 1 to the unaudited consolidated condensed financial statements, the Company’s financial statements for the three and six months ended June 30, 2006 have been restated. The accompanying management discussion and analysis gives effect to that restatement.

We operate two of the most recognized brands in the global vehicle rental industry through Avis Rent A Car System, LLC and Budget Rent A Car System, Inc. We provide car and truck rentals and ancillary services to businesses and consumers in the United States and internationally.

We operate in the following business segments:

 

   

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

 

   

International Car Rental— provides car rentals and ancillary products and services primarily in Canada, Argentina, Australia, 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.

Our revenues are derived principally from car and truck rentals in our Company-owned operations and include (i) time and mileage (“T&M”) fees charged to our customers for vehicle rentals, (ii) reimbursement from our customers for certain operating expenses we incur, including gasoline and vehicle licensing fees, as well as airport concession fees, which we pay in exchange for the right to operate at airports and other locations, and (iii) sales of loss damage waivers and insurance and rentals of GPS navigation units and other items in conjunction with vehicle rentals. We also earn royalty revenue from our franchisees in conjunction with their vehicle rental transactions.

Car rental volumes are closely associated with the travel industry, particularly airline passenger volumes, or enplanements. Because we operate primarily in the United States and generate a significant portion of our revenue from our on-airport operations, we expect that our ability to generate revenue growth will be somewhat dependent on increases in domestic enplanements. We have also experienced significant per-unit fleet cost increases on model-year 2006 and 2007 vehicles, which have negatively impacted our margins. Accordingly, our ability to achieve profit margins consistent with prior periods remains dependent on our ability to successfully reflect corresponding changes in our pricing programs.

Our vehicle rental operations are seasonal. Historically, the third quarter of the year has been our strongest quarter due to the increased level of leisure travel and household moving activity. Any occurrence that disrupts rental activity during the third quarter could have a disproportionately material adverse effect on our results of operations. We have a predominantly variable cost structure and routinely adjust the size and, therefore, the cost of our rental fleet in response to fluctuations in demand. However, certain expenses, such as rent, are fixed and cannot be reduced in response to seasonal fluctuations in our operations.

We believe that the following trends, among others, may affect and/or have impacted our financial condition and results of operations:

 

   

Domestic enplanements, which increased compared to second quarter 2006, and are expected to increase modestly throughout 2007, assuming there are no major disruptions in travel;

 

   

Rising per-unit car fleet costs, which we began to experience in 2005 and anticipate will continue with model-year 2008 vehicles;

 

   

Pricing increases, which we instituted throughout 2006 in response to rising fleet costs and intend to continue to pursue, where appropriate;

 

   

Our continued expansion in off-airport, or local market segments, including insurance replacement rentals;

 

   

Legislative changes in certain states that enable us to recover a greater percentage of airport concession and vehicle licensing fees, which will continue to favorably impact our year-over-year results throughout 2007; and

 

   

Demand for truck rentals, which can be impacted by household moving activity.

 

29


Table of Contents

RESULTS OF OPERATIONS

Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. In connection with the separation of Cendant into four independent companies, we completed the spin-offs of Realogy and Wyndham on July 31, 2006 and we completed the sale of Travelport on August 23, 2006. Generally accepted accounting principles require us to segregate and report as discontinued operations, for all periods presented, the account balances and activities of Realogy, Wyndham and Travelport.

We measure performance using the following key operating statistics: (i) rental days, which represents the total number of days (or portion thereof) a vehicle was rented, and (ii) T&M revenue per rental day, which represents the average daily revenue we earned from rental and mileage fees charged to our customers. Our car rental operating statistics (rental days and T&M revenue per rental day) are all calculated based on the actual usage of