AVIS RENT A CAR, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) UNAUDITED Three months ended Nine months ended September 30, September 30, ------------------------ ------------------------- Predecessor Predecessor Companies Companies 1997 1996 1997 1996 ---------- ---------- ---------- ----------- Revenue $ 580,049 $531,478 $1,525,696 $1,419,044 ---------- --------- ---------- ---------- Costs and expenses: Direct operating 242,997 225,939 641,545 616,064 Vehicle depreciation, net 143,937 93,828 323,355 257,574 Vehicle lease charges 6,766 33,480 75,791 94,342 Selling, general and 110,256 96,290 313,639 264,332 administrative Interest, net 49,465 42,012 117,808 115,165 Amortization of cost in excess of net assets acquired 1,675 1,193 4,245 3,575 ---------- --------- ---------- ---------- 555,096 492,742 1,476,383 1,351,052 ---------- --------- ---------- ---------- Income before provision for income taxes 24,953 38,736 49,313 67,992 Provision for income taxes 11,085 17,315 22,339 30,392 ---------- --------- ---------- ---------- Net income $ 13,868 $ 21,421 $ 26,974 $ 37,600 ========== ========= ========== ========== Earnings per share $ 0.45 $ 0.69 $ 0.87 $ 1.22 ========== ========= ========== ========== See accompanying notes to the unaudited consolidated financial statements. 1 AVIS RENT A CAR, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS) September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) ASSETS Cash and cash equivalents $ 159,551 $ 50,886 Accounts receivable, net 400,653 311,179 Due from affiliates, net 61,807 Prepaid expenses 46,025 40,155 Vehicles, net 3,364,660 2,243,492 Property and equipment, net 117,290 98,887 Deferred income tax assets 106,500 113,660 Cost in excess of net assets acquired, 402,701 196,765 net Other assets 119,727 14,526 ---------- ---------- Total assets $4,717,107 $3,131,357 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 232,065 $ 175,535 Accrued liabilities 386,823 329,245 Due to affiliates, net 62,633 Current income tax liabilities 7,448 4,790 Deferred income tax liabilities 38,618 35,988 Public liability, property damage and other insurance liabilities 249,866 213,785 Debt 3,285,548 2,295,474 ---------- ---------- Total liabilities 4,263,001 3,054,817 ---------- ---------- Commitments and contingencies Stockholders' equity: Common Stock 309 85 Additional paid-in capital 430,507 74,915 Retained earnings 28,158 1,184 Foreign currency translation (4,868) 356 adjustment ---------- ---------- Total stockholders' equity 454,106 76,540 ---------- ---------- Total liabilities and stockholders' equity $4,717,107 $3,131,357 ========== ========== See accompanying notes to the unaudited consolidated financial statements. 2 AVIS RENT A CAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED For the Nine Months Ended September 30, Predecessor Companies 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,974 $ 37,600 Adjustments to reconcile net income to net cash provided by operating activities: Vehicle depreciation 332,183 287,836 Depreciation and amortization of property and equipment 8,382 11,634 Amortization of cost in excess of net assets acquired 4,245 3,575 Amortization of debt issuance costs 1,630 2,363 Deferred income tax provision 11,680 21,870 Undistributed (earings) losses of associated companies, net 130 (219) Provision for losses on accounts receivable 2,127 1,178 Provision for public liability, property damage and other insurance liabilities, net 19,315 16,659 Change in operating assets and liabilities: Accounts receivable (82,985) (32,168) Prepaid expenses 4,583 (7,361) Other assets (73,903) 1,909 Accounts payable 79,713 1,501 Accrued liabilities (39,680) 99,962 ---------- ---------- Net cash provided by operating activities 294,394 446,339 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for vehicle additions (3,169,229) (2,085,689) Vehicle deletions 1,987,853 1,414,507 Payments for additions to property and equipment (30,297) (23,998) Retirements of property and equipment 18,070 2,179 Payments for purchase of Licensees (199,381) (164) ---------- ---------- Net cash used in investing activities (1,392,984) (693,165) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in debt: Proceeds 3,195,292 594,029 Repayments (2,390,528) (271,705) ---------- ---------- Net increase in debt 804,764 322,324 Payments for debt issuance costs (28,202) (2,429) Proceeds from initial public offering 359,316 Proceeds (payments on) from intercompany loans 71,945 (22,142) ---------- ---------- Net cash used in financing activities 1,207,823 297,753 ---------- ---------- Effect of exchange rate changes on cash (568) 256 ---------- ---------- Net increase in cash and cash equivalents 108,665 51,183 Cash and cash equivalents at beginning of period 50,886 39,081 ---------- ---------- Cash and cash equivalents at end of period 159,551 90,264 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 129,802 $ 123,809 ========== ========== Income taxes $ 7,946 $ 6,179 ========== ========== See accompanying notes to the unaudited consolidated financial statements. 3 AVIS RENT A CAR, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include Avis Rent A Car, Inc. and subsidiaries which includes certain carved out corporate operations of HFS Car Rental, Inc., which was formerly known as, Avis, Inc. Avis, Inc. was acquired by HFS Incorporated ("HFS") on October 17, 1996. Prior to October 16, 1996, Avis Rent A Car, Inc. and subsidiaries and the carved out corporate operations of Avis , Inc. are referred to collectively as the "Predecessor Companies". Avis Rent A Car, Inc. and the Predecessor Companies are referred to throughout the notes as the "Company". These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position, the results of operations and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with the Company's audited annual consolidated financial statements and notes thereto. NOTE 2 - CHANGES IN STOCKHOLDERS' EQUITY On September 24, 1997, the Company effected an 85,000 to 1 common stock split and increased its authorized shares to 100 million shares. After giving effect to the stock split, the Company issued and sold 22,425,000 shares of its common stock, $.01 par value, in an initial public offering and received net proceeds of $359.3 million. NOTE 3 - EARNINGS PER SHARE Earnings per share is computed by dividing net income in each of the three-months and nine-months ended September 30, 1997 and 1996 by 30,925,000 shares outstanding after the initial public offering. NOTE 4 - ACQUISITIONS On August 20, 1997, the Company purchased The First Gray Line Corporation. On September 18, 1997, the Company purchased certain assets and repurchased the franchise rights of a franchise based in Albany, New York. These acquisitions had an aggregate purchase cost of $199.4 million. The excess purchase cost over net assets acquired was approximately $171.8 million. The following is the preliminary purchase cost allocation for the acquisitions mentioned above: Purchase cost $ 199,381 --------- Fair value of: Assets acquired 353,832 Liabilities assumed 326,251 --------- Net assets 27,581 --------- Cost in excess of net assets acquired $ 171,800 ========= The preliminary purchase cost allocations for these acquisitions are subject to adjustment when additional information concerning asset and liability valuations are obtained. The final asset and liability fair values may differ from those set forth in the accompanying unaudited statement of financial position at September 30, 1997. However, the changes are not expected to have a material effect on the financial position of the Company. These acquisitions have all been accounted for by the purchase method. The financial statements include the operating results of these acquisitions subsequent to their respective dates of acquisition. 4 The following unaudited pro forma information presents the results of operations of the Company as if the acquisition of The First Gray Line Corporation had taken place on January 1, of each period. These unaudited pro forma results are not necessarily indications of the actual results of operations that would have occurred had the acquisition of The First Gray Line Corporation actually been made at January 1, of each period. Pro forma Nine-months ended September 30, ------------------------ 1997 1996 --------- --------- Revenue $ 1,655,439 $1,563,017 =========== ========== Income before provision for income taxes $ 65,247 $ 83,705 =========== ========== Net income $ 36,147 $ 46,904 =========== ========== Earnings per share $ 1.17 $ 1.52 =========== ========== The above unaudited pro forma results of operations of the Company do not give effect, for the period ended September 30, 1996 to the acquisition of the Company by HFS and the establishment of a franchisor/franchisee relationship and do not give effect in each period presented to the repayment of debt with the net proceeds (after the purchase of The First Gray Line Corporation) from the initial public offering. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) NOTE 5 - FINANCING AND DEBT Debt outstanding at September 30, 1997 and December 31, 1996 consists of the following: September 30, December 31, 1997 1996 ------------- ------------ CURRENT DEBT Commercial paper (average rate 5.7%) $ 1,459,149 Short-term vehicle trust financing-revolving credit facilities $1,970,000 Short-term notes - foreign at 3.89% to 13.00% in 1997 133,774 65,516 Current portion of 7.5% capital lease 40,169 Other current debt 11,443 1,060 ----------- ---------- Total current debt 1,604,366 2,076,745 ----------- ---------- LONG TERM DEBT Term loan due December 2000 at 7.94%: 29,000 Medium term note due July 2000 at 6.22% 800,000 Medium term note due July 2002 at 6.40% 850,000 Vehicle manufacturer's floating rate notes due September 1998 ($50,719 senior at 8.50% and $16,281 subordinated at 10.00%) 67,000 Vehicle manufacturer's floating rate notes due October 2001 ($63,731 senior at 7.16% and $54,269 subordinated at 8.91%) 118,000 Other domestic debt 2,182 2,916 Debt of foreign subsidiaries: Floating rate notes due February 1998 at 4.75% in 1996 2,935 Floating rate notes due August 1998 at 6.94% to 8.65% 27,878 ----------- ---------- Total long-term debt 1,681,182 218,729 ----------- ---------- $ 3,285,548 $2,295,474 =========== ========== 5 NOTE 6 - SEGMENT INFORMATION Operations within major geographic areas for the three and nine-months ended September 30, 1997 and 1996 are summarized as follows: Three months ended Nine months September 30, ended September 30, --------------------- ----------------------- 1997 1996 1997 1996 ---------- ---------- ------------ ---------- Revenue: United States $ 510,406 $459,419 $1,340,674 $1,237,717 Australia/ New Zealand 30,036 33,219 98,322 99,906 Canada 32,818 33,019 67,452 66,114 Other foreign operations 6,789 5,821 19,248 15,307 ========= ======== ========== ========== $ 580,049 $531,478 $1,525,696 $1,419,044 ========= ======== ========== ========== Income (loss) before provision for income taxes: United States $ 12,112 $ 26,550 $ 24,803 $ 45,991 Australia/ New Zealand 5,076 5,499 17,309 13,916 Canada 6,964 6,848 7,190 7,411 Other foreign operations 801 (161) 11 674 ========= ======== ========== ========== $ 24,953 $ 38,736 $ 49,313 $ 67,992 ========= ======== ========== ========== NOTE 7- STOCK OPTIONS On September 23, 1997, the Avis Rent A Car, Inc. 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of Directors. Shares of common stock totaling 4,602,977 are reserved for issuance upon the exercise of options granted to officers, key employees, and directors of the Company pursuant to the Stock Option Plan. As of September 30, 1997, 3,963,900 options were granted at the fair market value of the Company's common stock on the date of grant. Options become exercisable as to 20% of the shares covered by such options on the first anniversary of the date of grant, with an additional 20% of the shares covered by such options on each of the four succeeding anniversaries of the date of grant. All options granted under the Stock Option Plan, to the extent not exercised, expire on the earliest of (i) the tenth anniversary of the date of grant, (ii) two years following the optionee's termination of employment on account of death, retirement or disability or (iii) one year following the optionee's termination of employment for any other reason. 6