EXHIBIT 2 AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION MAY 31, 1996 AND FEBRUARY 29, 1996 (In thousands) (Unaudited) May 31, February 29, 1996 1996 --------------------------- ASSETS Cash and cash equivalents ........................ $ 75,122 $ 49,326 Accounts receivable, net ......................... 152,224 144,842 Due from affiliated company ...................... 44,098 75,635 Prepaid expenses ................................. 45,755 40,227 Vehicles, net .................................... 2,330,630 2,064,943 Property and equipment, net ...................... 150,538 146,429 Other assets ..................................... 165,881 176,368 Cost in excess of fair value of net assets acquired .............. 503,037 506,883 ----------- ----------- Total assets ................................ $ 3,467,285 $ 3,204,453 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................. $ 205,443 $ 181,920 Accrued liabilities .............................. 195,371 200,870 Current and deferred income taxes ................ 36,959 36,339 Public liability and property damage ............. 208,692 205,698 Debt ............................................. 2,262,223 2,043,143 Due to affiliated company ........................ 122,002 122,111 Redeemable preferred stock ....................... 72,412 72,409 Redeemable portion of common stock ............... 295,465 295,482 Unearned compensation ............................ (261,702) (263,024) Participating convertible preferred stock ........ 132,000 132,000 Common stock ..................................... 290 290 Additional paid in capital ....................... 217,445 215,644 Treasury stock ................................... (102,269) (102,252) Retained earnings ................................ 79,120 62,095 Foreign currency equity adjustment ............... 3,834 1,728 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity .. $ 3,467,285 $ 3,204,453 =========== =========== See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995 (In thousands) (Unaudited) Three Months Ended ------------------------- May 31, May 31, 1996 1995 --------- ---------- Revenues ......................................... $ 496,994 $ 394,258 --------- --------- Cost and expenses: Direct operating ............................... 210,611 167,225 Vehicle depreciation ........................... 90,746 84,208 Vehicle lease charges .......................... 36,924 34,446 Selling, general and administrative ............ 79,288 49,393 Interest ....................................... 37,971 34,456 Unrealized foreign exchange loss ................. 62 Amortization of unearned compensation - Employee Stock Ownership Plan .................. 3,951 3,951 Amortization of cost in excess of fair value of net assets acquired and other intangibles ............ 4,178 4,056 --------- --------- Income before income taxes and preferred stock dividends ................................ 33,325 16,461 Provision for income taxes ....................... 14,280 10,706 --------- --------- Net income ....................................... 19,045 5,755 Preferred stock dividends ........................ (2,017) (2,192) --------- --------- Income available for common shares ............... $ 17,028 $ 3,563 ========= ========= See accompanying notes to the consolidated financial statements. AVIS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MAY 31, 1996 (In thousands) (Unaudited) Participating Convertible Common Stock Preferred Stock ----------------- ----------------- Foreign Additional Additional Treasury currency Par paid-in Par paid-in stock Retained equity value capital value capital (at cost) earnings adjustment ----- --------- ----- ---------- ---------- --------- ---------- Balance March 1, 1996 ......................... $ 290 $ 215,644 $ 98 $ 131,902 $(102,252) $ 62,095 $ 1,728 Net income for the three months ended May 31, 1996 ............................... 19,045 Tax benefit of ESOP income tax deductions for the three months ended May 31, 1996 ..... 1,784 Foreign currency equity adjustment for the three months ended May 31, 1996 ............. 2,106 Payment of common and preferred stock dividends (2,017) Change in redeemable portion of common stock .. 17 Purchase of treasury stock (1,381 shares) ..... (17) Appropriation for amortization of discount from redemption value of preferred stock .... (3) ------ --------- ------ --------- --------- --------- --------- Balance May 31, 1996 .......................... $ 290 $ 217,445 $ 98 $ 131,902 $(102,269) $ 79,120 $ 3,834 ====== ========= ====== ========= ========= ========= ========= See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995 (In thousands) Increase (decrease) in cash and cash equivalents (Unaudited) Three Months Ended ---------------------- May 31, May 31, 1996 1995 ---------- --------- Net cash provided by operating activities ............... $ 149,485 $ 104,437 Cash flows from investing activities: Payments for vehicle additions ...................... (734,439) (454,963) Proceeds received from vehicle sales ............... 408,981 351,445 Payments for additions to property and equipment, net (8,276) (8,749) --------- --------- Net cash used in investing activities ................... (333,734) (112,267) Cash flows from financing activities: Increase in debt and due to affiliated company ...... 214,518 25,281 Increase in deferred debt issuance costs ............ (56) (391) Payment of preferred stock dividends ................ (2,017) (2,192) Purchase of treasury stock .......................... (17) (977) Increase in unearned compensation ................... (2,629) --------- --------- Net cash provided by financing activities ............... 209,799 21,721 Effect of exchange rate changes on cash ................. 246 (72) --------- --------- Net increase in cash and cash equivalents ............... 25,796 13,819 Cash and cash equivalents at beginning of period ........ 49,326 36,643 --------- --------- Cash and cash equivalents at end of period .............. $ 75,122 $ 50,462 ========= ========= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest .......................................... $ 29,997 $ 26,224 Income taxes ...................................... 3,539 2,157 Disclosure of accounting policy: For purposes of reporting cash flows, the Company considers deposits and short-term investments with an initial maturity of three months or less to be cash equivalents. The effect of unrealized foreign currency revaluations on the assets and liabilities of foreign foreign subsidiaries has been eliminated. Changes in vehicles and vehicle related accounts are included in the cash flows from investing activities. See accompanying notes to the consolidated financial statements. AVIS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND MAY 31, 1995 (Unaudited) Note 1 - Organization and Significant Accounting Policies In 1987, the trust for the Employee Stock Ownership Plan (ESOP) of Avis, Inc. (the Company) acquired all the outstanding common stock of Avis, Inc. This transaction has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Accordingly, the purchase price has been allocated based on the estimated fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the Company's net assets is included in "Cost in excess of fair value of net assets acquired" on the consolidated balance sheet. The Company's primary business is the rental of automobiles. The consolidated financial statements include the accounts of all majority-owned subsidiaries of Avis, Inc. combined with related accounts of the ESOP and Prime Vehicles Trust. Intercompany accounts and transactions among Avis, Inc., its subsidiaries, the ESOP and Prime Vehicles Trust (Vehicle Trust) have been eliminated. During the year ended February 29, 1996, the Company acquired the rights to the name and certain assets of Agency Rent A Car, Inc., a company primarily engaged in the insurance replacement car rental business. Investments in associated companies in which the Company has a 20 percent or greater interest are accounted for under the equity method of accounting. Generally accepted accounting principles require the use of estimates, which are subject to change, in the preparation of financial statements. Certain amounts of the prior period have been reclassified for comparability. The unaudited interim financial statements at May 31, 1996 and for the three months ended May 31, 1996 and 1995 have been prepared in accordance with generally accepted accounting principles, and in the opinion of the Company include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim period. Note 2 - Gain on Sale of Leasehold Right In April, 1996 the Company sold a leasehold right and recognized a pre-tax gain of approximately $4.4 million. Note 3 - Vehicles Vehicles are stated at cost, net of accumulated depreciation as follows (in thousands): May May 31, 1996 31, 1995 ---------- ----------- Vehicles ............................... $ 2,663,301 $ 2,056,855 Accumulated depreciation ............... (332,671) (214,332) ----------- ----------- $ 2,330,630 $ 1,842,523 =========== =========== Included in vehicles are vehicles acquired under long-term capital leases of $25,795,000 and $42,992,000 (net of accumulated depreciation of $59,138,000 and $41,941,000) at May 31, 1996 and May 31, 1995, respectively. Vehicles also include vehicles held for sale as follows (in thousands): May May 31, 1996 31, 1995 -------- --------- Vehicles held for sale ..................... $ 31,423 $ 17,884 Accumulated depreciation ................... (4,827) (2,219) -------- -------- $ 26,596 $ 15,665 ======== ======== Depreciation expense recorded for vehicles was $104,986,000 and $89,384,000, net of a gain on disposal of vehicles of $14,240,000 and $5,176,000 for the three months ended May 31, 1996 and May 31, 1995, respectively. Note 4 - Income Taxes The provision (benefit) for income taxes is comprised of the following (in thousands): Three Months Ended ------------------------ May 31, May 31, 1996 1995 --------- --------- Current: State ......................................... $ 546 $ 252 Foreign ....................................... 1,568 2,112 -------- -------- 2,114 2,364 -------- -------- Deferred: Federal ....................................... 11,282 6,956 Foreign ....................................... 884 1,386 -------- -------- 12,166 8,342 -------- -------- Provision for income taxes ....................... 14,280 10,706 Less: Federal tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 .............. (1,784) (1,912) -------- -------- $ 12,496 $ 8,794 ======== ======== The Company derives an income tax deduction for dividend distributions to the ESOP. The ESOP repays the same amount to the Company to reduce the ESOP debt due to the Company. The effective income tax rate varies from the federal statutory income tax rate due to the following: Three Months Ended ------------------------ May 31, May 31, 1996 1995 --------- -------- Statutory U.S. federal income tax rate ............... 35.0% 35.0% Tax effect of foreign operations .................... 1.9 1.5 Amortization of cost in excess of net assets acquired and other intangibles .............. 3.5 5.9 Foreign dividends and withholding tax ................ 0.6 21.3 State income taxes, net of federal tax benefit ........................................ 0.9 0.9 Other ................................................ 1.0 0.4 ----- ------ Provision for income taxes ....................... 42.9 65.0 ----- ------ Tax benefit of ESOP income tax deductions credited to stockholders' equity under SFAS No. 109 (5.4) (11.6) ------ ------- Effective income tax rate ....... .................... 37.5% 53.4% ====== ======= Note 5 - Subsequent Event On October 17, 1996, HFS Incorporated ("HFS") completed the acquisition of all of the outstanding capital stock of the Company, including payments under certain employee stock plans of the Company and the redemption of certain series of preferred stock of the Company for an aggregate $806.5 million. The purchase price was comprised of approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4 million (approximately 4.6 million shares) in HFS common stock. Note 6 - Litigation On May 22, 1996 a complaint was filed in the United States District Court for Eastern District of North Carolina against Avis Rent A Car System, Inc. (ARACS) and one of its licensees, New Hanover Rent-A-Car, Inc. (New Hanover) alleging discrimination by New Hanover in the rental of automobiles based on race. Plaintiff seeks an unspecified amount of compensatory and punitive damages and a permanent injunction barring ARACS and New Hanover from continuing to engage in illegally discriminatory conduct. ARACS has asserted claims for indemnification against New Hanover and intends to vigorously defend the complaint. ARACS believes that it has meritorious defenses against the complaint. In the opinion of management, the ultimate liability, if any, resulting from this matter will not have a material adverse effect on the Company's consolidated financial position.