<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------
DECEMBER 4, 1996 (NOVEMBER 10, 1996)
(Date of Report (date of earliest event reported))
HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 1-11402 22-3059335
(State or other jurisdiction (Commission File No. (I.R.S. Employer
of incorporation or organization) Identification No.)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
<PAGE>
This Current Report on Form 8-K/A amends the Current Report on Form 8-K of HFS
Incorporated (the "Company" or "Registrant") dated November 15, 1996.
ITEM 7. EXHIBITS
Exhibit
No. Description
- ------- -----------
23.1 Consent of KPMG Peat Marwick LLP relating to the financial
statements of PHH Corporation.
99.1 The audited consolidated balance sheets of PHH Corporation and
subsidiaries as of April 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended
April 30, 1996.
99.2 The unaudited consolidated balance sheet of PHH Corporation and
subsidiaries as of October 31, 1996 and the related unaudited
consolidated statements of income for the three and six months
ended October 31, 1996 and 1995 and cash flows for the six
months ended October 31, 1996 and 1995.
99.3 Pro forma financial information of the Company
- - Section I
Pro forma consolidated combining financial statements of the
Company for the PHH Merger, including the following:
The pro forma consolidated combining balance sheet of the
Company, which combines the pro forma consolidated balance
sheet of the Company with the consolidated balance
sheet of PHH Corporation as of September 30, 1996 and the
related pro forma consolidated combining statements of income
for the year ended December 31, 1995, and each of the nine
month periods ended September 30, 1995 and 1996.
- - Section II
Pro forma consolidated financial information of the Company
excluding the PHH Merger. Such financial information includes
the following:
The pro forma consolidated balance sheet of the Company as of
September 30, 1996 and the pro forma consolidated statements of
operations of the Company for the year ended December 31, 1995
and each of the nine month periods ended September 30, 1995 and
1996.
Section III
Combining historical consolidated financial statements of the
Company for the PHH Merger, including the following:
The combining historical consolidated balance sheet of the
Company, which combines the consolidated balance sheet of the
Company with and into the historical consolidated balance sheet
of PHH Corporation as of September 30, 1996 and the related
combining historical consolidated statements of income for each
of the years ended December 31, 1993, 1994 and 1995 and each of
the nine month periods ended September 30, 1995 and 1996.
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HFS INCORPORATED
BY: /s/ Michael P. Monaco
-----------------------------------
Michael P. Monaco
Vice Chairman
and Chief Financial Officer
Date: December 4, 1996
2
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K
REPORT DATED DECEMBER 4, 1996 (NOVEMBER 10, 1996)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
23.1 Consent of KPMG Peat Marwick LLP relating to the financial
statements of PHH Corporation.
99.1 The audited consolidated balance sheets of PHH Corporation and
subsidiaries as of April 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended
April 30, 1996.
99.2 The unaudited consolidated balance sheet of PHH Corporation and
subsidiaries as of October 31, 1996 and the related unaudited
consolidated statements of income for the three and six months
ended October 31, 1996 and 1995 and cash flows for the six
months ended October 31, 1996 and 1995.
99.3 Pro forma financial information of the Company
- - Section I
Pro forma consolidated combining financial statements of the
Company for the PHH Merger, including the following:
The pro forma consolidated combining balance sheet of the
Company, which combines the pro forma consolidated balance
sheet of the Company with the consolidated balance sheet of PHH
Corporation as of September 30, 1996 and the related pro forma
consolidated combining statements of income for the year ended
December 31, 1995, and each of the nine month periods ended
September 30, 1995 and 1996.
- - Section II
Pro forma consolidated financial information of the Company
excluding the PHH Merger. Such financial information includes
the following:
The pro forma consolidated balance sheet of the Company as of
September 30, 1996 and the pro forma consolidated statements of
operations of the Company for the year ended December 31, 1995
and each of the nine month periods ended September 30, 1995 and
1996.
Section III
Combining historical consolidated financial statements of the
Company for the PHH Merger, including the following:
The combining historical consolidated balance sheet of the
Company, which combines the consolidated balance sheet of the
Company with the historical consolidated balance sheet of PHH
Corporation as of September 30, 1996 and the related combining
historical consolidated statements of income for each of the
years ended December 31, 1993, 1994 and 1995 and each of the
nine month periods ended September 30, 1995 and 1996.
3
<PAGE>
Exhibit 23.1
KPMG Peat Marwick LLP
111 South Calvert Street Telephone 410 783 8300 Telefax 410 625 9231
Baltimore, MD 21202
The Board of Directors
PHH Corporation:
We consent to the incorporation by reference in the registration statements
(No. 33-56354), (No. 33-70632), (No. 33-72752), (No. 33-83956), (No. 33-94756),
(No. 333-06733) and (No. 333-06939) on Form S-8 and (No. 333-11029) and
(No. 333-11031) on Form S-3 of HFS Incorporated of our report dated
May 17, 1996, except for the note on capital stock as to which the date is
June 24, 1996 with respect to the consolidated balance sheets of PHH
Corporation and subsidiaries as of April 30, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended April 30, 1996, which report
appears in the Form 8-K/A of HFS Incorporated dated December 4, 1996.
Our report contains an explanatory paragraph that states that the company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," in 1996.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
December 4, 1996
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation:
We have audited the consolidated financial statements of PHH Corporation and
subsidiaries as of April 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of
the years in the three-year period ended April 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PHH
Corporation and subsidiaries as of April 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the
Company adopted the provisions of statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights," in 1996.
KPMG Peat Marwick LLP
Baltimore, Maryland May 17, 1996, except for the note on capital stock as to
which the date is June 24, 1996
<PAGE>
PHH Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
(In thousands except per share data)
Years ended April 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483
Real estate services 812,851 686,836 816,261
Mortgage banking services 195,599 126,094 155,935
- ---------------------------------------------------------------------------------------------------------------------------
2,379,600 2,070,626 2,134,679
Expenses:
Depreciation on vehicles under operating leases 944,187 872,495 808,894
Costs, including interest, of carrying and reselling homes 681,589 576,385 717,793
Direct costs of mortgage banking services 68,985 40,924 57,091
Interest 223,847 173,094 138,617
Selling, general and administrative 321,844 286,410 302,488
- ---------------------------------------------------------------------------------------------------------------------------
2,240,452 1,949,308 2,024,883
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 139,148 121,318 109,796
Income taxes 57,528 49,656 45,238
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 81,620 $ 71,662 $ 64,558
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ 2.33 $ 2.08 $ 1.82
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
<PAGE>
PHH Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In thousands)
As of April 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 9,288 $ 3,412
Accounts receivable, less allowance for doubtful
accounts of $5,478 in 1996 and $6,689 in 1995 468,938 484,230
Carrying costs on homes under management 46,560 45,260
Mortgage loans held for sale 874,794 712,247
Mortgage servicing rights and fees 230,209 98,003
Property and equipment, net 93,089 102,399
Goodwill, net 49,081 51,164
Other assets 117,999 77,929
- ---------------------------------------------------------------------------------------------------------------------------
1,889,958 1,574,644
- ---------------------------------------------------------------------------------------------------------------------------
Assets Under Management Programs:
Net investment in leases and leased vehicles 3,216,224 3,017,231
Equity advances on homes 566,808 447,658
- ---------------------------------------------------------------------------------------------------------------------------
3,783,032 3,464,889
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,672,990 $ 5,039,533
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 434,109 $ 424,438
Advances from clients and deferred revenue 96,439 101,229
Other debt 903,442 735,886
Deferred income taxes 191,700 158,400
- ---------------------------------------------------------------------------------------------------------------------------
1,625,690 1,419,953
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities Under Management Programs 3,438,804 3,079,629
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares -- --
Common stock, no par value, authorized
50,000,000 shares; issued and outstanding
34,661,524* shares in 1996 and 16,890,212
shares in 1995 96,081 79,210
Cumulative foreign currency translation adjustment (23,483) (16,913)
Retained earnings 535,898 477,654
- ---------------------------------------------------------------------------------------------------------------------------
608,496 539,951
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,672,990 $ 5,039,533
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
<PAGE>
PHH Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands)
Years ended April 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 81,620 $ 71,662 $ 64,558
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation on vehicles under operating leases 944,187 872,495 808,894
Other depreciation and amortization 30,020 32,095 29,000
Amortization and write-down of
servicing rights and fees 37,640 20,089 29,132
Additions to originated mortgage servicing rights (91,134) -- --
Additions to excess mortgage servicing fees (66,432) (27,869) (39,042)
Deferred income taxes 33,585 41,530 25,694
Gain on sale of subsidiary (11,688) -- --
Changes in:
Accounts receivable (31,211) (5,913) (72,536)
Carrying costs on homes under management (1,507) (9,011) 15,544
Mortgage loans held for sale (162,547) (6,359) (227,230)
Accounts payable and accrued expenses 32,951 (93,033) (28,835)
Advances from clients and deferred revenue (4,208) 21,790 (27,146)
All other operating activity (18,592) 12,983 (5,368)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 772,684 930,459 572,665
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Investment in leases and leased vehicles (1,909,805) (1,785,923) (1,578,721)
Repayment of investment in leases and leased vehicles 582,487 579,835 549,262
Proceeds from sales and transfers of leases and
leased vehicles to third parties 163,172 109,859 105,087
Value of homes acquired (4,649,297) (6,603,355) (4,101,894)
Value of homes sold 4,530,106 6,631,414 4,301,529
Purchases of mortgage servicing rights (13,316) (13,826) (14,223)
Additions to property and equipment, net of dispositions (17,650) (16,429) (32,719)
Acquisitions accounted for as a purchase -- -- (2,594)
Proceeds from sale of subsidiary 33,618 -- --
All other investing activities (34,583) (21,114) 1,348
- ---------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (1,315,268) (1,119,539) (772,925)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in borrowings with terms of less than 90 days (150,349) 114,462 172,255
Proceeds from issuance of other borrowings 1,914,461 1,195,147 1,040,092
Principal payment on other borrowings (1,223,110) (1,074,230) (1,011,673)
Stock option plan transactions 16,871 4,090 9,554
Repurchases of common shares -- (17,019) (8,721)
Payment of dividends (23,376) (21,809) (20,850)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 534,497 200,641 180,657
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 13,963 (8,174) 19,106
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 5,876 3,387 (497)
Cash at beginning of period 3,412 25 522
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 9,288 $ 3,412 $ 25
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PHH Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency
(Dollars in thousands except per share data) Common Stock Translation Retained
Years Ended April 30, 1996, 1995 and 1994 Shares Amount Adjustment Earnings
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance April 30, 1993 17,197,785 $ 91,306 $ (17,916) $ 384,093
Net income 64,558
Cash dividends declared ($.60 per share)* (20,850)
Foreign currency translation adjustment (3,711)
Stock option plan transactions,
net of related income tax benefits 305,062 9,554
Repurchases of common shares (257,174) (8,721)
- ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1994 17,245,673 92,139 (21,627) 427,801
Net income 71,662
Cash dividends declared ($.64 per share)* (21,809)
Foreign currency translation adjustment 4,714
Stock option plan transactions,
net of related income tax benefits 129,660 4,090
Repurchases of common shares (485,121) (17,019)
- ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1995 16,890,212 79,210 (16,913) 477,654
Net income 81,620
Cash dividends declared ($.68 per share)* (23,376)
Foreign currency translation adjustment (6,570)
Stock option plan transactions,
net of related income tax benefits 440,550 16,871
Two-for-one common stock split* 17,330,762
- ---------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1996 34,661,524 $ 96,081 $ (23,483) $ 535,898
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects two-for-one common stock split declared June 24, 1996, described in
the capital stock note.
See Notes to Consolidated Financial Statements.
<PAGE>
PHH Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands except per share data)
Accounting Policies
The accounting policies of PHH Corporation conform to generally accepted
accounting principles. The consolidated financial statements include the
accounts of PHH Corporation and its wholly owned domestic and foreign
subsidiaries (the Company). Policies outlined below include all policies
considered significant. All significant intercompany balances and transactions
have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosures of
contingencies at the date of the financial statements, and revenues and
expenses recognized during the reporting period. Actual results could differ
from those estimates.
Vehicle Management Services
Vehicle management services primarily consist of the management, purchase,
leasing, and resale of vehicles for corporate clients and government agencies.
These services also include fuel, maintenance, safety and accident management
programs and other fee-based services for clients' vehicle fleets. Revenues
from these services other than leasing are taken into income over the periods
in which the services are provided and the related expenses are incurred.
The Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements. The initial lease term typically
covers a period of twelve months or more and thereafter may be extended at the
option of the lessee. The Company records the cost of leased vehicles as an
"investment in leases and leased vehicles." Amounts charged to lessees for
interest on the unrecovered investment are credited to income on a level yield
method which approximates the contractual terms.
Real Estate Services
Real estate services primarily consist of the purchase, management and resale
of homes for transferred employees of corporations and government agencies.
The Company pays transferring employees their equity based on an appraised
value of their homes, determined by independent appraisers, after deducting
any outstanding mortgages. The Company normally retires the mortgage
concurrently with the purchase of the equity; but, in certain circumstances,
the Company accepts administrative responsibility for making payments on the
mortgages. These mortgages are retired at settlement when the homes are
resold, which generally is within six months.
The client normally pays an advance billing for a portion of the costs to be
incurred during the period the home is held for resale. These advances are
included in "advances from clients." These costs are paid by the Company and
are identified as "carrying costs on homes under management" until resale.
After resale, a settlement of actual costs and the advance billing is made
with the client.
Revenues and the related "costs, including interest, of carrying and reselling
homes" are recognized at closing on the resale of a home. Under the terms of
contracts with clients, the Company is generally protected against losses from
changes in real estate market conditions.
The Company also offers fee-based programs such as home marketing assistance,
household goods moves, destination services, property dispositions for
financial institutions and government agencies and strategic management
consulting. Revenues from these fee-based services are taken into income over
the periods in which the services are provided and the related expenses are
incurred.
Mortgage Banking Services
Mortgage banking services primarily include the origination, sale and
servicing of residential first mortgage loans. The Company markets a variety
of first mortgage products to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and other mortgage banks. Loan origination fees, commitment fees paid in
connection with the sale of loans, and direct loan origination costs
associated with loans held for resale, are deferred until the loan is sold.
Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages and
the amount paid to the investor, or on a stipulated percentage of the
outstanding monthly principal balance on such loans. Servicing fees are
credited to income when received. Costs associated with loan servicing are
charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is delivered
to an investor. Sales of mortgage securities are recorded on the settlement
date. Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold. Beginning in 1996, the carrying value of the loans
excludes the cost assigned to originated servicing rights. (See note for
mortgage servicing rights and fees). Such gains and losses are also increased
or decreased by the amount of deferred mortgage servicing fees recorded.
The Company acquires mortgage servicing rights and excess servicing fees by
originating or purchasing mortgage loans and selling those loans with
servicing retained, or it may purchase mortgage servicing rights separately.
The carrying value of mortgage servicing rights and excess servicing fees is
amortized over the estimated life of the related loan portfolio.
Gains or losses on the sale of mortgage servicing rights are recognized when
title and all risks and rewards have irrevocably passed to the buyer and there
are no significant unresolved contingencies.
The Company reviews the recoverability of excess servicing fees by discounting
anticipated future excess servicing cash flows at original discount rates
utilizing externally published prepayment rates. If the discounted value is
less than the recorded balance due to higher than expected prepayments, the
difference is recognized as a write-down in the consolidated statement of
income.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is provided by charges to
income over the estimated useful lives of such assets. Buildings are
depreciated using the straight-line method (25 to 50 years); building
improvements, using the straight-line method (10 to 20 years); equipment and
leasehold improvements, using either the double-declining balance or
straight-line method (3 to 10 years); and externally developed software is
capitalized and amortized using the straight-line method (5 years).
Expenditures for improvements that increase
<PAGE>
PHH Corporation and Subsidiaries
value or that extend the life of the assets are capitalized; maintenance and
repairs are charged to operations. Gains or losses from retirements and
disposals of property and equipment are included in selling, general and
administrative expense.
Goodwill, Net
Goodwill, net represents the excess of cost over the net tangible and
intangible assets of businesses acquired net of accumulated amortization. It
is being amortized by the straight-line method over various periods up to 40
years and such amortization is included in selling, general and administrative
expense.
Assets Under Management Programs
Assets under management programs are held subject to leases or other client
contracts. The effective interest rates and maturity characteristics of the
leases and other contracts are generally matched with the characteristics of
the overall funding program.
Translation of Foreign Currencies
Assets and liabilities of the foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates; equity accounts are translated
at historical exchange rates. Revenues, expenses and cash flows are translated
at the average exchange rates for the periods presented. Translation gains and
losses are included in stockholders' equity including, for years prior to
1991, transaction gains and losses resulting from forward exchange contracts
on foreign equity amounts net of income tax effects. Gains and losses
resulting from the change in exchange rates realized upon settlement of
foreign currency transactions are substantially offset by gains and losses
realized upon settlement of forward exchange contracts. Therefore, the
resulting net income effect of transaction gains and losses in fiscal years
1994 through 1996 was not significant.
Interest
Interest expense consists of interest on debt incurred to fund working capital
requirements and to finance vehicle leasing activities, real estate services
and mortgage banking operations. Interest on borrowings used to finance equity
advances on homes is included in "costs, including interest, of carrying and
reselling homes" and was $29,119 in 1996, $21,102 in 1995, and $23,491 in
1994. Total interest paid, including amounts within "costs, including
interest, of carrying and reselling homes," was $273,198 in 1996, $211,206 in
1995, and $165,406 in 1994.
Income Taxes
The provision for income taxes includes deferred income taxes resulting from
items reported in different periods for income tax and financial statement
purposes. Deferred tax assets and liabilities represent the expected future
tax consequences of the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. The
effects of changes in tax rates on deferred tax assets and liabilities are
recognized in the period that includes the enactment date. No provision has
been made for US income taxes on cumulative undistributed earnings of foreign
subsidiaries since it is the present intention of management to reinvest the
undistributed earnings indefinitely in foreign operations. Undistributed
earnings of the foreign subsidiaries at April 30, 1996, were approximately
$105,000. The determination of unrecognized deferred US tax liability for
unremitted earnings is not practicable. However, it is estimated that foreign
withholding taxes of approximately $5,500 may be payable if such earnings were
remitted.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock outstanding during the year and common stock equivalents arising
from the assumed exercise of outstanding stock options under the treasury
stock method. The number of shares used in the calculations, adjusted to
reflect the two-for-one common stock split, (see note for capital stock), were
35,074,920 for 1996, 34,505,686 for 1995, and 35,482,068 for 1994.
Derivative Financial Instruments
As a matter of policy, the Company does not engage in derivatives trading or
market-making activities. Rather, derivative financial instruments such as
interest rate swaps are used by the Company principally in the management of
its interest rate exposures and foreign currency exposures on intercompany
borrowings. Additionally, the Company enters into forward delivery contracts,
financial futures programs and options to reduce the risks of adverse price
fluctuation with respect to both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued.
Amounts to be paid or received under interest rate swap agreements are accrued
as interest rates change and are recognized over the life of the swap
agreements as an adjustment to interest expense. The fair value of the swap
agreements is not recognized in the consolidated financial statements since
they are accounted for as hedges. Market value gains and losses on the
Company's foreign currency transaction hedges are recognized in income and
substantially offset the foreign exchange gains and losses on the underlying
transactions. Market value gains and losses on positions used as hedges in the
mortgage banking services operations are deferred and considered in the
valuation of the lower of cost or market value of mortgage loans held for
sale.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements for comparative purposes.
New Accounting Pronouncements
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective in
1997. Application of this statement will require the Company to review
long-lived assets and certain intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This statement is not expected to significantly affect the
consolidated financial statements of the Company.
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for awards of shares of common stock to employees under
compensatory plans only if the quoted market price of the stock at the grant
date (or other measurement date, if later) is greater than the amount the
employee must pay to acquire the stock. In October 1995, the FASB issued SFAS
No. 123, "Accounting for Stock-Based Compensation." This statement permits
companies to adopt a new fair value-based method to account for stock-based
employee compensation plans or to continue using the intrinsic value method.
If the intrinsic value method is used, information concerning the pro forma
effects on net income and net income per share of adopting the fair
value-based method is required to be
<PAGE>
PHH Corporation and Subsidiaries
presented in the notes to the financial statements. The Company intends to
continue using the intrinsic value method and will provide disclosures about
its stock-based employee compensation plans in its 1997 financial statements,
as required by Statement No. 123.
Divestiture
In February 1996 the Company sold its North American truck fuel and management
operations resulting in a net gain of $11,688, which is reflected in vehicle
management services revenues.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. Such mortgage loans are
recorded at the lower of cost or market value as determined by outstanding
commitments from investors or current investor yield requirements calculated
on the aggregate loan basis.
The Company issues mortgage-backed certificates insured or guaranteed by the
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Government National Mortgage Association (GNMA) and other
private insurance agencies. The insurance provided by FNMA and FHLMC and other
private insurance agencies are on a non-recourse basis to the Company.
However, the guarantee provided by GNMA is only to the extent recoverable from
insurance programs of the Federal Housing Administration and the Veterans
Administration. The outstanding principal balance of mortgages backing GNMA
certificates issued by the Company aggregated approximately $2,483,000 and
$1,699,000 at April 30, 1996 and 1995, respectively. Additionally, the Company
sells mortgage loans as part of various mortgage-backed security programs
sponsored by FNMA, FHLMC and GNMA. Certain of these sales are subject to
recourse or indemnification provisions in the event of default by the
borrower. As of April 30, 1996, mortgage loans sold with recourse amounted to
$113,000. The Company believes adequate reserves are maintained to cover all
potential losses.
Mortgage Servicing Rights and Fees
Mortgage servicing rights and fees at April 30 consisted of the following:
1996 1995
- --------------------------------------------------------------------------------
Excess servicing fees $122,045 $ 78,848
Purchased mortgage servicing rights 25,977 19,155
Originated mortgage servicing rights 83,500 --
Valuation allowance (1,313) --
- --------------------------------------------------------------------------------
$230,209 $ 98,003
- --------------------------------------------------------------------------------
Excess servicing fees represent the present value of the differential between
the actual servicing fees and normal servicing fees which are capitalized at
the time loans are sold with servicing rights retained. Purchased servicing
rights represent the cost of acquiring the rights to service mortgage loans
for others.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights" (SFAS No. 122). This Statement
requires that mortgage servicing rights be recognized when a mortgage loan is
sold and servicing rights are retained. The Company adopted SFAS No. 122
effective May 1, 1995, and, accordingly, capitalized originated servicing
rights, net of amortization and valuation allowances, of $82,187 in 1996.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on the servicing
rights' fair value relative to the loan as a whole. To determine the fair
value of mortgage servicing rights, the Company uses market prices for
comparable mortgage servicing, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income using assumptions that market participants would use in estimating
future net servicing income.
SFAS No. 122 also requires the impairment of originated and purchased
servicing rights to be measured based on the difference between the carrying
amount and current fair value of the servicing rights. In determining
impairment, the Company aggregates all mortgage servicing rights, excluding
those capitalized prior to the adoption of SFAS No. 122, and stratifies them
based on the predominant risk characteristic of interest rate band. For each
risk stratification, a valuation allowance is maintained for any excess of
amortized book value over the current fair value by a charge or credit to
income.
Property and Equipment
Property and equipment at April 30 consisted of the following:
1996 1995
- --------------------------------------------------------------------------------
Land $ 9,082 $ 9,584
Buildings and leasehold improvements 55,215 58,305
Equipment 102,353 111,909
Accumulated depreciation
and amortization (81,607) (87,342)
- --------------------------------------------------------------------------------
85,043 92,456
Capitalized software costs, net 8,046 9,943
- --------------------------------------------------------------------------------
$ 93,089 $102,399
- --------------------------------------------------------------------------------
Other Assets
Other assets at April 30 consisted of the following:
1996 1995
- --------------------------------------------------------------------------------
Mortgage-related notes receivable $ 62,242 $ 27,659
Residential properties held for resale 11,048 14,596
Other 44,709 35,674
- --------------------------------------------------------------------------------
$117,999 $ 77,929
- --------------------------------------------------------------------------------
Mortgage-related notes receivable are loans secured by residential real
estate. Residential properties held for resale are located primarily in the US
and are carried at the lower of cost or net realizable value.
Assets Under Management Programs
Net Investment in Leases and Leased Vehicles
The net investment in leases and leased vehicles at April 30 consisted of the
following:
1996 1995
- --------------------------------------------------------------------------------
Vehicles under open-end
operating leases $2,519,731 $2,357,425
Vehicles under closed-end
operating leases 347,645 288,582
Direct financing leases 348,043 370,234
Accrued interest on leases 805 990
- --------------------------------------------------------------------------------
$3,216,224 $3,017,231
- --------------------------------------------------------------------------------
The Company leases vehicles for initial periods of twelve months or more under
either operating or direct financing lease agreements. The Company's
experience indicates that the full term of the leases may vary considerably
due to extensions beyond the minimum lease term. Lessee repayments of
investments in leases and leased vehicles for 1996 and 1995 were $1,527,000
and $1,452,000, respectively; and the ratio of such repayments to the average
net investment in leases and leased vehicles was 49% in 1996 and 50% in 1995.
<PAGE>
PHH Corporation and Subsidiaries
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost of vehicles under this type of operating lease at April 30, 1996
and 1995, was $4,387,000 and $3,898,000, respectively.
Under the other type of operating lease, closed-end operating leases, resale
of the vehicles on termination of the lease is for the account of the Company.
The lessee generally pays for or provides maintenance, vehicle licenses and
servicing. The original cost of vehicles under these agreements at April 30,
1996 and 1995, was $483,000 and $391,000, respectively. The Company believes
adequate reserves are maintained in the event of loss on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Leasing revenues are included in revenues from vehicle management services.
Following is a summary of leasing revenues for years ended April 30:
1996 1995 1994
- --------------------------------------------------------------------------------
Operating leases $1,111,812 $1,017,521 $939,297
Direct financing leases,
primarily interest 42,460 40,937 28,852
- --------------------------------------------------------------------------------
$1,154,272 $1,058,458 $968,149
- --------------------------------------------------------------------------------
The Company has transferred existing managed vehicles and related leases to
unrelated investors and has retained servicing responsibility. Credit risk for
such agreements is retained by the Company to a maximum extent in one of two
forms: excess assets transferred, which were $10,088 and $8,389 at April 30,
1996 and 1995, respectively; or guarantees to a maximum extent of $21 and $907
at April 30, 1996 and 1995, respectively. All such credit risk has been
included in the Company's consideration of related reserves. The outstanding
balances under such agreements aggregated $237,104 and $166,379 at April 30,
1996 and 1995, respectively.
Other managed vehicles with balances aggregating $155,723 and $175,111 at
April 30, 1996 and 1995, respectively, are included in special purpose
entities whose ownership is deemed unrelated to the Company and whose credit
and residual value risk characteristics are ultimately not the Company's
responsibility.
Equity Advances on Homes
Equity advances on homes represent advances paid to transferring employees of
clients for their equity based on appraised values of their homes.
Other Debt
Other debt at April 30 consisted of the following:
1996 1995
- --------------------------------------------------------------------------------
Commercial paper $803,442 $635,886
Medium-term note 100,000 100,000
- --------------------------------------------------------------------------------
$903,442 $735,886
- --------------------------------------------------------------------------------
Commercial paper programs are more fully described in the note for Liabilities
Under Management Programs. The medium-term note represents an unsecured
obligation having a fixed interest rate of 6.5% with interest payable
semi-annually and a term of seven years payable in full in fiscal 2000.
Income Taxes
Provisions (credits) for income taxes for the years ended April 30 were
comprised as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Current income taxes:
Federal $ 12,305 $ (2,958) $ 7,550
State and local 3,783 3,464 9,938
Foreign 8,140 6,979 2,739
- --------------------------------------------------------------------------------
24,228 7,485 20,227
- --------------------------------------------------------------------------------
Deferred income taxes:
Federal 27,700 39,600 24,452
State and local 5,400 4,500 (1,033)
Foreign 200 (1,929) 1,592
- --------------------------------------------------------------------------------
33,300 42,171 25,011
- --------------------------------------------------------------------------------
$ 57,528 $ 49,656 $ 45,238
- --------------------------------------------------------------------------------
Deferred income taxes are recorded based upon differences between the
financial statement and the tax bases of assets and liabilities and available
tax credit carryforwards. There was no valuation allowance relating to
deferred tax assets. Net deferred tax liabilities as of April 30 were
comprised as follows:
1996 1995
- --------------------------------------------------------------------------------
Depreciation $(208,100) $(197,800)
Accrued liabilities and deferred income 47,500 41,900
Unamortized mortgage servicing rights (31,100) (2,500)
- --------------------------------------------------------------------------------
$(191,700) $(158,400)
- --------------------------------------------------------------------------------
The portions of the 1996 income tax liability and provision classified as
current and deferred are subject to final determination based on the actual
1996 income tax returns. The liability and provision amounts for 1995 have
been reclassified to reflect the final determination made in filing the 1995
income tax returns.
The Company received net income tax refunds of $1,330 in 1996 and paid income
taxes of $26,049 in 1995 and $35,739 in 1994.
A summary of the differences between the statutory federal income tax rate and
the Company's effective income tax rate follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Federal income tax
statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.3 4.5 5.3
Amortization of goodwill .6 1.0 0.7
Rate increase
on deferred taxes -- -- 3.0
Adjustments of tax
accruals -- -- (3.0)
Foreign tax in excess of
(less than) domestic rate 1.1 (0.1) --
Other .3 0.5 0.2
- --------------------------------------------------------------------------------
Effective tax rate 41.3% 40.9% 41.2%
- --------------------------------------------------------------------------------
The Company's US federal income tax returns have been examined by the Internal
Revenue Service through April 30, 1993.
<PAGE>
PHH Corporation and Subsidiaries
Liabilities Under Management Programs
Borrowings to fund assets under management programs are classified as
"liabilities under management programs" and, at April 30, consisted of the
following:
1996 1995
- --------------------------------------------------------------------------------
Commercial paper $ 1,404,094 $1,665,193
Medium-term notes 1,981,200 1,261,000
Limited recourse debt 8,595 8,357
Secured notes payable on
vehicles under lease 11,570 39,446
Other unsecured debt 33,345 105,633
- --------------------------------------------------------------------------------
$ 3,438,804 $3,079,629
- --------------------------------------------------------------------------------
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term lines of
credit. The weighted average interest rates on the Company's outstanding
commercial paper were 5.5% and 6.3% at April 30, 1996 and 1995, respectively.
Medium-term notes represent unsecured loans which mature in 1997. The weighted
average interest rates on medium-term notes were 5.5% and 6.4% at April 30,
1996 and 1995, respectively.
Limited recourse debt and secured notes payable on vehicles under lease
primarily consist of secured loans arranged for certain clients for their
convenience. The lenders hold a security interest in the lease payments and
the clients' leased vehicles. The debt and notes payable mature concurrently
with the related lease payments. The aggregate lease payments due from the
lessees exceed the loan repayment requirements. The weighted average interest
rates on secured debt were 5.2% and 6.4% at April 30, 1996 and 1995,
respectively.
The Company has unsecured committed credit agreements with various banks
totaling $2,377,000. These agreements have both fixed and evergreen maturities
ranging from June 13, 1996, to April 30, 1999. The evergreen revolving credit
agreements require a notice of termination of one to three years. Interest
rates under all revolvers are either at fixed rates or vary with the prime
rate or the London Interbank Offered Rate. Under these agreements, the Company
is obligated to pay annual commitment fees which were $2,471 and $2,904 in
1996 and 1995, respectively. The Company has other unused lines of credit of
$341,000 and $262,000 at April 30, 1996 and 1995, respectively, with various
banks.
Other unsecured debt, all of which matures in 1997, includes other borrowings
under short-term lines of credit and other bank facilities. The weighted
average interest rates on unsecured debt was 6.2% at both April 30, 1996 and
1995.
Although the period of service for a vehicle is at the lessee's option, and
the period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the
rate at which homes will be resold. These projections of estimated
liquidations of assets under management programs and the related estimated
repayment of liabilities under management programs as of April 30, 1996, as
set forth in the table below, indicate that the actual repayments of
liabilities under management programs will be different than required by
contractual maturities.
Assets Under Liabilities Under
Management Programs Management Programs
- --------------------------------------------------------------------------------
1997 $ 1,999,332 $ 1,754,684
1998 1,062,884 990,171
1999 480,217 455,905
2000 154,399 153,038
2001 51,583 51,497
2002-2006 34,617 33,509
- --------------------------------------------------------------------------------
$ 3,783,032 $ 3,438,804
- --------------------------------------------------------------------------------
Stock Option Plans
The Company's employee stock option plan allows for options to be granted to
key employees for the purchase of common stock at prices not less than fair
market value on the date of grant. Either incentive stock options or
non-statutory stock options may be granted under the plans. The Company's
Directors' stock option plan allows for options to be granted to outside
Directors of the Company for the purchase of common stock at prices not less
than fair market value on the date of grant. Options become exercisable after
one year from date of grant on a vesting schedule provided by the plans, and
expire ten years after the date of the grant. Option transactions during 1996,
1995, and 1994 were as follows:
Number of Option Price
Shares per Share
- --------------------------------------------------------------------------------
Outstanding April 30, 1993 1,971,570 $18.13 to $39.63
Granted 199,450 $39.00 to $42.00
Exercised (305,062) $18.13 to $37.75
Canceled (97,785) $27.00 to $39.63
- --------------------------------------------------------------------------------
Outstanding April 30, 1994 1,768,173 $19.88 to $42.00
Granted 234,700 $35.50 to $37.00
Exercised (129,660) $19.88 to $37.75
Canceled (200,245) $24.50 to $41.13
- --------------------------------------------------------------------------------
Outstanding April 30, 1995 1,672,968 $19.88 to $42.00
Granted 190,750 $39.88 to $53.12
Exercised (443,083) $27.00 to $40.62
Canceled (112,650) $27.00 to $39.88
Two-for-one common
stock split 1,307,985
- --------------------------------------------------------------------------------
Outstanding April 30, 1996* 2,615,970 $9.94 to $26.56
- --------------------------------------------------------------------------------
Exercisable April 30, 1996* 2,256,070 $9.94 to $21.00
- --------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared on June 24, 1996, described
in the capital stock note.
In addition to outstanding options, at April 30, 1996, there were 2,543,402
shares of common stock reserved (adjusted for the two-for-one common stock
split), including 1,571,544 shares for issuance under future employee stock
option plan awards, 863,858 shares for future issuance under the employee
investment plan and 108,000 shares for future issuance under the Director's
stock option plan.
Capital Stock
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split, distributable July 31, 1996, to stockholders of record on July 5, 1996.
All per share amounts herein and data as to outstanding and exercisable common
stock options at April 30, 1996, have been adjusted for the common stock
split.
On April 10, 1996, the Company declared a dividend of one preferred share
purchase right for each share of common stock outstanding on April 10, 1996.
This dividend is a continuation of the dividend which expired on April 10,
1996. Each right entitles the
<PAGE>
PHH Corporation and Subsidiaries
holder to purchase 1/100th of a share of series A Junior Participating
Preferred Stock at an exercise price of $88 (adjusted for the two-for-one
common stock split), subject to future adjustment. The rights become
exercisable in the event any party acquires or announces an offer to acquire
20% or more of the Company's common stock. The rights expire April 10, 2006,
and are redeemable at $.025 (adjusted for the two-for-one common stock split)
per right prior to the time any party owns 20% or more of the Company's
outstanding common stock. In the event the Company enters into a consolidation
or merger after the time rights are exercisable, the rights provide that the
holder will receive, upon exercise of the right, shares of common stock of the
surviving company having a market value of twice the exercise price of the
right. Until the earlier of the time the rights become exercisable, are
redeemed or expire, the Company will issue one right with each new share of
common stock issued. The Company has designated 400,000 (adjusted for the
two-for-one common stock split) shares of the authorized preferred shares as
series A Junior Participating Preferred Stock for issuance upon exercise of
the rights.
Pension and Other Employee Benefit Plans
Pension and Supplemental Retirement Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all US employees of the Company and its subsidiaries. The
Company's subsidiary located in the UK has a contributory defined benefit
pension plan, with participation at the employee's option. Under both the US
and UK plans, benefits are based on an employee's years of credited service
and a percentage of final average compensation. The Company's policy for both
plans is to contribute amounts sufficient to meet the minimum requirements
plus other amounts as the Company deems appropriate from time to time. The
Company also sponsors two unfunded supplemental retirement plans to provide
certain key executives with benefits in excess of limits under the federal tax
law and to include annual incentive payments in benefit calculations.
Net costs included the following components for the years ended April 30:
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 5,038 $ 4,597 $ 4,604
Interest cost 7,607 6,742 6,181
Actual return on assets (10,977) (3,144) (2,049)
Net amortization and deferral 5,515 (1,698) (2,050)
- --------------------------------------------------------------------------------
Net cost $ 7,183 $ 6,497 $ 6,686
- --------------------------------------------------------------------------------
A summary of the plans' status and the Company's recorded liability recognized
in the Consolidated Balance Sheets at April 30 follows:
Funded Plans
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 61,766 $ 49,799
Unvested 6,447 6,428
- --------------------------------------------------------------------------------
$ 68,213 $ 56,227
- --------------------------------------------------------------------------------
Projected benefit obligation $ 88,892 $ 75,537
Funded assets, at fair value (78,851) (60,558)
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (6,409) (8,906)
Unrecognized prior service cost (62) (94)
Unrecognized net obligation (137) (93)
- --------------------------------------------------------------------------------
Recorded liability $ 3,433 $ 5,886
- --------------------------------------------------------------------------------
Unfunded Plans
1996 1995
- --------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested $ 12,196 $ 8,591
Unvested 786 965
- --------------------------------------------------------------------------------
$ 12,982 $ 9,556
- --------------------------------------------------------------------------------
Projected benefit obligation $ 16,167 $ 13,433
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions (1,885) (849)
Unrecognized prior service cost (3,049) (2,598)
Unrecognized net obligation (1,392) (1,624)
Minimum liability adjustment 3,141 1,194
- --------------------------------------------------------------------------------
Recorded liability $ 12,982 $ 9,556
- --------------------------------------------------------------------------------
Significant percentage assumptions used in determining the cost and
obligations under the US pension and unfunded supplemental retirement plans
are as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate 8.00% 8.50% 8.25%
Rate of increase in
compensation 5.00 5.00 5.00
Long-term rate of
return on assets 9.50 9.50 10.00
- --------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions
The Company provides healthcare and life insurance benefits for certain
retired employees up to the age of 65. Such postretirement benefits costs for
1996, 1995 and 1994 were $1,523, $1,474 and $1,551, respectively. A summary of
the plan's status and the Company's recorded liability recognized in the
consolidated balance sheets at April 30 follows:
1996 1995
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Active employees $ 5,732 $ 5,574
Current retirees 1,743 1,785
- --------------------------------------------------------------------------------
7,475 7,359
Unrecognized transition obligation (4,995) (5,289)
Unrecognized net gain 1,081 248
- --------------------------------------------------------------------------------
Recorded liability $ 3,561 $ 2,318
- --------------------------------------------------------------------------------
Investment Plan
Under provisions of the Company's employee investment plan, a qualified
retirement plan, eligible employees may generally have up to 10% of their base
salaries withheld and placed with an independent custodian and elect to invest
in common stock of the Company, an index equity fund, a growth equity fund, an
international equity fund, a fixed income fund, an asset allocation fund
and/or a money market fund. The Company's contributions vest proportionately
in accordance with an employee's years of vesting service, with an employee
being 100% vested after three years of vesting service. The Company matches,
in common stock of the Company, employee contributions to 3% of their base
salaries, with an additional 3% match available at the end of the year based
on the Company's operating results. The Company's additional matches of
employee contributions greater than 3% up to 6%, were 75% in 1996 and 50% in
1995 and 1994. The additional match, initially invested in a money market
fund, can be redirected by the employee into any of the investment elections
noted above. The Company's expenses for contributions were $4,810, $4,483, and
$4,020 for the years ended April 30, 1996, 1995 and 1994, respectively.
<PAGE>
PHH Corporation and Subsidiaries
Lease Commitments
Total rental expenses relating to office facilities and equipment were
$23,519, $24,195, and $27,264 for 1996, 1995 and 1994, respectively. Minimum
rental commitments under non-cancelable leases with remaining terms in excess
of one year are as follows:
- --------------------------------------------------------------------------------
1997 $ 14,980 2001 $ 6,406
1998 $ 13,619 2001-2006 $ 13,071
1999 $ 10,395 2007 and thereafter $ 4,158
2000 $ 7,294
- --------------------------------------------------------------------------------
These leases provide for additional rentals based on the lessors' increased
property taxes, maintenance and operating expenses.
Contingent Liabilities
The Company and its subsidiaries are involved in pending litigation of the
usual character incidental to the business transacted by them. In the opinion
of management, such litigation will not have a material effect on the
Company's consolidated financial statements.
The Company is contingently liable under the terms of an agreement involving
its discontinued aviation services segment for payment of Industrial Revenue
Bonds issued by local governmental authorities operating at two airports. The
Company believes its allowance for disposition loss is sufficient to cover all
potential liability.
Fair Value of Financial Instruments
and Servicing Rights
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
(bullet) Cash, accounts receivable, certain other assets and commercial paper
borrowings. Due to the short-term nature of these financial instruments, the
carrying value equals or approximates fair value.
(bullet) Mortgage loans held for sale. Fair value is estimated using the
quoted market prices for securities backed by similar types of loans and
current dealer commitments to purchase loans. These loans are priced to be
sold with servicing rights retained. Gains (losses) on mortgage-related
positions, used to reduce the risk of adverse price fluctuations, for both
mortgage loans held for sale and anticipated mortgage loan closings arising
from commitments issued, are included in the carrying amount of mortgage loans
held for sale.
(bullet) Mortgage servicing rights and fees. Fair value is estimated by
discounting the expected net cash flow of servicing rights and deferred
mortgage servicing fees using discount rates that approximate market rates and
externally published prepayment rates, adjusted, if appropriate, for
individual portfolio characteristics.
(bullet) Borrowings. Fair value of borrowings, other than commercial paper, is
estimated based on quoted market prices or market comparables.
(bullet) Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options. The fair value of interest rate
swaps, foreign exchange contracts, forward delivery commitments, futures
contracts and options is estimated, using dealer quotes, as the amount that
the Company would receive or pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering interest
rates at the reporting date.
The following table sets forth information about financial instruments, except
for those noted above for which the carrying value approximates fair value, at
April 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage loans held for sale $ -- $ 874,794 $ 874,794 $ -- $ 712,247 $ 712,247
Excess mortgage servicing fees -- 122,045 132,586 -- 78,848 86,982
Originated mortgage servicing rights -- 82,187 88,516 -- -- --
Purchased mortgage servicing rights -- 25,977 34,241 -- 19,155 20,333
Liabilities--Medium-term notes -- 2,081,200 2,080,827 -- 1,361,000 1,361,198
Off balance sheet:
Interest rate swaps 1,858,597 1,740,964
In a gain position -- 3,164 -- 8,350
In a loss position -- (11,192) -- (4,693)
Foreign exchange forwards 125,031 -- (12) 80,600 -- (54)
Mortgage-related positions:*
Forward delivery commitments 1,630,000 (1,156) 11,402 1,089,500 12,951 (3,441)
Option contracts to sell 345,000 1,786 518 143,500 729 (318)
Option contracts to buy 800,000 4,280 148 110,000 483 488
</TABLE>
* Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
<PAGE>
PHH Corporation and Subsidiaries
Derivative Financial Instruments
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. A key
assumption in the following information is that rates remain constant at April
30, 1996 levels. To the extent that rates change, both the maturity and
variable interest rate information will change. However, the net rate the
Company pays remains matched with the assets funded.
The following table summarizes the maturity and weighted average rates of the
Company's interest rate swaps employed at April 30, 1996. These
characteristics are effectively offset within the portfolio of assets funded
by the Company.
<TABLE>
<CAPTION>
Maturities
Total 1997 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------
US
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 467,301 $ 189,564 $ 152,628 $ 75,786 $ 31,423 $ 11,250 $ 6,650
Weighted average receive rate 5.43% 5.43% 5.43% 5.43% 5.43% 5.43%
Weighted average pay rate 6.22% 6.26% 6.48% 6.56% 6.34% 6.50%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 150,000 150,000
Weighted average receive rate 6.98%
Weighted average pay rate 5.39%
Pay floating/receive floating:
Notional value 806,200 806,200
Weighted average receive rate 5.49%
Weighted average pay rate 5.37%
Canada
- -----------------------------------------------------------------------------------------------------------------------
Commercial Paper:
Pay fixed/receive floating:
Notional value 63,504 33,296 20,212 8,085 1,911
Weighted average receive rate 4.85% 4.85% 4.85% 4.85%
Weighted average pay rate 6.97% 6.85% 6.49% 7.29%
Pay floating/receive floating:
Notional value 76,488 39,078 24,439 10,321 2,261 389
Weighted average receive rate 6.92% 7.24% 7.41% 7.40% 7.70%
Weighted average pay rate 5.22% 5.22% 5.22% 5.22% 5.22%
UK
- -----------------------------------------------------------------------------------------------------------------------
Commercial Paper:
Pay fixed/receive floating:
Notional value 295,104 87,521 90,083 67,788 33,141 16,571
Weighted average receive rate 6.07% 6.07% 6.07% 6.07% 6.07%
Weighted average pay rate 7.46% 6.05% 8.11% 6.93% 7.18%
- -----------------------------------------------------------------------------------------------------------------------
Total $1,858,597 $1,305,659 $ 287,362 $ 161,980 $ 68,736 $ 28,210 $ 6,650
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended April 30, 1996 and 1995, the Company's hedging activities
increased interest expense $1,510 and $1,496, respectively, and had no effect
on its weighted average borrowing rate. For the same period in 1994, hedging
activities increased interest expense $12,632 and increased the weighted
average borrowing rate 0.3%.
The Company enters into foreign exchange contracts as hedges against currency
fluctuation on certain intercompany loans. Such contracts effectively offset
the currency risk applicable to approximately $125,031 and $80,600 of
obligations at April 30, 1996 and 1995, respectively.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to certain derivative financial instruments.
The Company manages such risk by periodically evaluating the financial
condition of counterparties and spreading its positions among multiple
counterparties. The Company presently does not expect non-performance by any
of the counterparties.
<PAGE>
PHH Corporation and Subsidiaries
Business Segments
The Company's operations are classified into three business segments: vehicle
management services, real estate services and mortgage banking services.
Vehicle management services and real estate services are provided in North
America and Europe. Mortgage banking services are provided in the US. Selected
information by business segment and geographic area follows:
Business Segments
<TABLE>
<CAPTION>
(In thousands)
Years Ended April 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483
Real estate services 812,851 686,836 816,261
Mortgage banking services 195,599 126,094 155,935
- --------------------------------------------------------------------------------------------------
Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679
- --------------------------------------------------------------------------------------------------
Income before income taxes:
Vehicle management services $ 64,536 $ 55,668 $ 46,230
Real estate services 31,841 35,219 21,500
Mortgage banking services 42,771 30,431 42,066
- --------------------------------------------------------------------------------------------------
Consolidated $ 139,148 $ 121,318 $ 109,796
- --------------------------------------------------------------------------------------------------
Identifiable assets:
Vehicle management services $ 3,562,737 $ 3,413,080 $ 3,120,154
Real estate services 841,881 723,698 807,119
Mortgage banking services 1,268,372 902,755 839,510
- --------------------------------------------------------------------------------------------------
Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783
- --------------------------------------------------------------------------------------------------
Capital expenditures:
Vehicle management services $ 10,663 $ 8,536 $ 10,250
Real estate services 9,775 9,103 8,839
Mortgage banking services 3,090 1,668 17,023
- --------------------------------------------------------------------------------------------------
Consolidated $ 23,528 $ 19,307 $ 36,112
- --------------------------------------------------------------------------------------------------
Depreciation and amortization:
Vehicle management services $ 960,584 $ 891,361 $ 825,609
Real estate services 10,290 10,054 8,921
Mortgage banking services 40,973 23,264 32,496
- --------------------------------------------------------------------------------------------------
Consolidated $ 1,011,847 $ 924,679 $ 867,026
- --------------------------------------------------------------------------------------------------
</TABLE>
Geographic Areas
<TABLE>
<CAPTION>
(In thousands)
Years Ended April 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
North America $ 2,181,805 $ 1,894,050 $ 1,954,106
Europe 197,795 176,576 180,573
- --------------------------------------------------------------------------------------------------
Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679
- --------------------------------------------------------------------------------------------------
Income before income taxes:
North America $ 123,957 $ 113,942 $ 106,895
Europe 15,191 7,376 2,901
- --------------------------------------------------------------------------------------------------
Consolidated $ 139,148 $ 121,318 $ 109,796
- --------------------------------------------------------------------------------------------------
Identifiable assets:
North America $ 5,086,009 $ 4,492,213 $ 4,211,169
Europe 586,981 547,320 555,614
- --------------------------------------------------------------------------------------------------
Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PHH Corporation and Subsidiaries
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data) Year ended April 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Revenues $ 581,857 $ 589,770 $ 586,717 $ 621,256 $ 2,379,600
Income before income taxes $ 31,663 $ 33,217 $ 33,080 $ 41,188 $ 139,148
Net income $ 18,301 $ 19,564 $ 19,482 $ 24,273 $ 81,620
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ .52 $ .57 $ .54 $ .70 $ 2.33
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share* $ .17 $ .17 $ .17 $ .17 $ .68
- ---------------------------------------------------------------------------------------------------------------------------
Closing price range of stock:*
High $ 23 3/4 $ 23 3/8 $ 25 3/4 $ 28 3/8 $ 28 3/8
Low $ 19 5/8 $ 21 $ 21 7/8 $ 24 1/2 $ 19 5/8
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended April 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
Revenues $ 520,308 $ 510,137 $ 494,141 $ 546,040 $ 2,070,626
Income before income taxes $ 28,035 $ 29,874 $ 28,254 $ 35,155 $ 121,318
Net income $ 16,515 $ 17,612 $ 16,762 $ 20,773 $ 71,662
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share* $ .47 $ .51 $ .49 $ .61 $ 2.08
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share* $ .16 $ .16 $ .16 $ .16 $ .64
- ---------------------------------------------------------------------------------------------------------------------------
Closing price range of stock:*
High $ 19 3/8 $ 19 $ 19 $ 20 1/4 $ 20 1/4
Low $ 17 1/2 $ 17 3/8 $ 16 3/4 $ 17 5/8 $ 16 3/4
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects two-for-one common stock split declared June 24, 1996. See capital
stock note in Notes to Consolidated Financial Statements.
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Vehicle management services $ 345,166 $ 334,291 $ 684,402 $ 668,053
Real estate services 193,626 207,064 410,655 411,516
Mortgage banking services 65,346 48,415 134,738 92,058
-------- -------- ---------- ----------
604,138 589,770 1,229,795 1,171,627
------- ------- --------- ---------
Expenses:
Depreciation on vehicles under
operating leases 243,734 230,908 482,219 462,396
Costs, including interest, of
carrying and reselling homes 154,140 171,489 334,512 347,032
Direct costs of mortgage banking
services 27,457 15,851 57,269 28,131
Interest 55,966 55,932 113,197 109,384
Selling, general and administrative 82,878 82,373 165,522 159,804
-------- -------- ---------- ----------
564,175 556,553 1,152,719 1,106,747
------- ------- --------- ---------
Income before income taxes 39,963 33,217 77,076 64,880
Income taxes 15,997 13,653 31,338 27,015
-------- --------- ----------- ---------
Net income $ 23,966 $ 19,564 $ 45,738 $ 37,865
======== ========= =========== =========
Net income per share $ .68 $ .57 $ 1.29 $ 1.09
========== =========== ============ ==========
</TABLE>
See accompanying notes.
-3-
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31, 1996 April 30, 1996
(in thousands) (Unaudited)
<S> <C> <C>
ASSETS:
Cash $ 11,450 $ 9,288
Accounts receivable, less allowance for
doubtful accounts of $6,232 at October 31,
1996 and $5,478 at April 30, 1996 442,951 468,938
Carrying costs on homes under management 58,916 46,560
Mortgage loans held for sale 872,404 874,794
Mortgage servicing rights and fees 280,344 230,209
Property and equipment, net 92,846 93,089
Goodwill, net 47,656 49,081
Other assets 125,384 117,999
---------- ----------
1,931,951 1,889,958
--------- ---------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles 3,285,721 3,216,224
Equity advances on homes 666,905 566,808
---------- ----------
3,952,626 3,783,032
--------- ---------
$ 5,884,577 $ 5,672,990
========= =========
LIABILITIES:
Accounts payable and accrued expenses $ 418,143 $ 434,109
Advances from clients and deferred revenue 114,021 96,439
Other debt 814,560 903,442
Deferred income taxes 221,700 191,700
---------- ----------
1,568,424 1,625,690
--------- ---------
LIABILITIES UNDER MANAGEMENT PROGRAMS 3,662,245 3,438,804
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 3,000,000 shares -- --
Common stock, no par value, authorized
75,000,000 shares; issued and outstanding
34,885,942 shares at October 31, 1996
and 34,661,524 shares at April 30, 1996 99,820 96,081
Cumulative foreign currency translation
adjustment (14,312) (23,483)
Retained earnings 568,400 535,898
--------- ---------
653,908 608,496
--------- ---------
$ 5,884,577 $ 5,672,990
========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended October 31,
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 45,738 $ 37,865
Adjustments to reconcile income to cash provided by operating activities:
Depreciation on vehicles under operating leases 482,219 462,396
Other depreciation and amortization 16,359 15,933
Amortization of capitalized servicing rights and fees 27,620 15,016
Additions to originated mortgage servicing rights (29,841) (40,613)
Additions to excess mortgage servicing fees (48,768) (30,263)
Deferred income taxes 29,167 20,095
Gain on sale of assets (2,944) -
Changes in:
Accounts receivable 33,960 2,112
Carrying costs on homes under management (11,717) (5,888)
Mortgage loans held for sale 2,390 (69,622)
Accounts payable and accrued expenses (22,797) (13,907)
Advances from clients and deferred revenue 16,367 10,205
All other operating activity 13,238 (17,505)
------------- -------------
Cash provided by operating activities 550,991 385,824
------------- -------------
Investing Activities:
Investment in leases and leased vehicles (805,638) (761,320)
Repayment of investment in leases and leased vehicles 290,395 271,379
Value of homes acquired (1,776,201) (2,695,199)
Value of homes sold 1,682,051 2,427,642
Purchases of mortgage servicing rights - (7,718)
Additions to property and equipment, net of dispositions (12,615) (8,913)
Proceeds from sale of assets 4,400 -
All other investing activities (7,887) (28,128)
------------- -------------
Cash used in investing activities (625,495) (802,257)
------------- -------------
Financing Activities:
Net change in borrowings with terms of less than 90 days (156,217) 431,999
Proceeds from issuance of other borrowings 1,024,486 748,915
Principal payment on other borrowings (751,365) (765,534)
Stock option plan transactions 3,739 9,250
Payment of dividends (13,236) (11,628)
------------- -------------
Cash provided by financing activities 107,407 413,002
------------- -------------
Effect of exchange rate changes on cash (27,041) 1,339
------------- -------------
Increase (decrease) in cash 5,862 (2,092)
Cash at beginning of period 9,288 3,412
-------------- -------------
Cash at end of period $ 15,150 $ 1,320
-------------- =============
Supplemental disclosures of cash flow information:
Cash payments for interest $ 135,501 $ 135,516
============== =============
Cash payments for income taxes $ 672 $ 4,667
============== =============
</TABLE>
See accompanying notes.
-5-
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements included in this Form 10-Q reflect all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report included as part of Form
10-K for the year ended April 30, 1996.
Capital Stock and Net Income Per Share
On June 24, 1996, the Board of Directors authorized a two-for-one common stock
split which was distributed on July 31, 1996, to stockholders of record on
July 5, 1996. All per share amounts herein and data as to outstanding common
stock at have been adjusted for the common stock split.
Net income per share is computed on the basis of the weighted average number
of shares of common stock outstanding during each period and common stock
equivalents arising from the assumed exercise of outstanding stock options
under the treasury stock method. See Exhibit 11 to this Form 10-Q which
details the computation of net income per share.
Reclassifications
Certain reclassifications have been made to the prior years' condensed
consolidated financial statements for comparative purposes.
CONTINGENT LIABILITIES
The Company and its subsidiaries are involved in pending litigation of the
usual character incidental to the business transacted by them. In the opinion
of management, such litigation will not have a material effect on the
Company's consolidated financial statements.
SUBSEQUENT EVENT
On November 10, 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with HFS Incorporated ("HFS"), and Mercury Acq.
Corp., a wholly-owned subsidiary of HFS. Pursuant to the Merger Agreement,
shares of the Company's common stock will be converted into a right to receive
shares of HFS's common stock as determined in the Merger Agreement. The Merger
is conditioned, among other things, upon the approval of the Company's and
HFS's shareholders and upon certain regulatory approvals. The merger will be
accounted for as a pooling of interests, and is expected to close in the first
quarter of calendar year 1997.
In connection with the Merger Agreement, on November 13, 1996, the Company and
First Chicago Trust company of New York, as Rights Agent, entered into an
amendment to the Rights Agreement, dated as of March 15, 1996, by and between
the Company and the Rights Agent (the "Rights Agreement"), having the effect
of exempting the events and transactions contemplated by the Merger Agreement
from the Rights Agreement.
-6-
<PAGE>
EXHIBIT 99.3
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
Index
Section I - Pro forma consolidated combining financial statements of
the Company for the PHH Merger, including the following:
The pro forma consolidated combining balance sheet of the
Company, which combines the pro forma consolidated balance
sheet of the Company with the consolidated balance sheet of
PHH Corporation as of September 30, 1996 and the related
pro forma consolidated combining statements of income for
the year ended December 31, 1995, and each of the nine
month periods ended September 30, 1995 and 1996.
Section II - Pro forma consolidated financial information of the
Company excluding the PHH Merger. Such pro forma
consolidated financial information includes the following:
The pro forma consolidated balance sheet of the Company as
of September 30, 1996 and the pro forma consolidated
statements of operations of the Company for the year ended
December 31, 1995 and each of the nine month periods ended
September 30, 1995 and 1996.
Section III - Combining historical consolidated financial statements
of the Company for the PHH Merger, including the following:
The combining historical consolidated balance sheet of the
Company, which combines the consolidated balance sheet of
the Company with the historical consolidated balance sheet
of PHH Corporation as of September 30, 1996 and the related
combining historical consolidated statements of income for
each of the years ended December 31, 1993, 1994 and 1995
and each of the nine month periods ended September 30, 1995
and 1996.
4
<PAGE>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING FINANCIAL STATEMENTS
FOR THE PHH MERGER
On November 10, 1996, the Company entered into a definitive merger agreement
(the "PHH Merger") pursuant to which the Company will issue approximately $1.7
billion of Company common stock in exchange for all of the outstanding common
stock of PHH Corporation ("PHH"). The accompanying pro forma consolidated
combining financial statements give effect to the business combination of the
Company and PHH which will be accounted for as a pooling of interests.
Accordingly, the underlying pro forma consolidated combining balance sheet as
of September 30, 1996 and the pro forma consolidated combining statements of
income for the year ended December 31, 1995 and the nine month periods ended
September 30, 1995 and 1996 reflects the combining of the historical financial
results of PHH Corporation with the pro forma financial results of the Company
prior to the Company entering into the PHH Merger. The pro forma financial
results of the Company include all of the Company's acquisitions prior to the
PHH Merger, including the recent acquisitions of Avis, Inc. and Resort
Condominiums International, Inc. See Section II of Exhibit 99.3 herein for the
Pro Forma Consolidated Financial Statements of the Company prior to the PHH
Merger related to the aforementioned periods.
Additionally, the pro forma consolidated combining financial statements
reflect adjustments for the pooling of the Company and PHH including
reclassifications to conform accounting policies and shares issued as
consideration in connection with the PHH Merger. The Company expects to
recognize a one-time charge related to transaction and business combination
costs in connection with the PHH Merger, which is not reflected in the pro
forma consolidated combining statements of income.
The pro forma consolidated combining financial statements do not purport to
present the financial position or results of operations of the Company had the
PHH Merger occurred on the dates specified, nor are they necessarily
indicative of the operating results that may be achieved in the future.
The pro forma consolidated combining financial statements are based on certain
assumptions and adjustments described in the Pro Forma consolidated financial
information of the Company as set forth in Section II, herein and should be
read in conjunction therewith and with (i) the consolidated financial
statements and related notes of the Company included in its 1995 Annual Report
on Form 10-K (ii) the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (iii) the consolidated financial statements of PHH
Corporation included elsewhere in this report; and (iv) the financial
statements and related notes of certain of the acquired companies previously
filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3.05,
"Financial Statements of Business Acquired or to be Acquired".
5
<PAGE>
<TABLE>
<CAPTION>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING BALANCE SHEET PAGE 1 OF 2
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 150,900 $ 11,450 $ - $ 162,350
Relocation receivables 136,052 666,905 - 802,957
Other accounts and notes receivable, net 148,082 442,951 - 591,033
Other current assets 83,798 58,916 - 142,714
-------------- ------------- ------------ -------------
TOTAL CURRENT ASSETS 518,832 1,180,222 - 1,699,054
-------------- ------------- ------------ -------------
Property and equipment-net 241,018 92,846 - 333,864
Franchise agreements-net 594,415 - - 594,415
Excess of cost over fair value of
net assets acquired-net 1,339,836 47,656 - 1,387,442
Intangible assets 1,168,400 - - 1,168,400
Investment in car rental operating
company-net 75,000 - - 75,000
Deferred income taxes-net 61,200 - - 61,200
Other assets 137,816 125,384 - 263,200
-------------- ------------- ---------- -------------
TOTAL 4,136,517 1,446,108 - 5,582,625
-------------- ------------- ------------ -------------
ASSETS UNDER VEHICLE MANAGEMENT
AND MORTGAGE PROGRAMS
Net investment in leases and leased vehicles - 3,285,721 - 3,285,721
Mortgage loans held for sale - 872,404 - 872,404
Mortgage servicing rights & fees - 280,344 - 280,344
-------------- ------------- ------------ -------------
TOTAL - 4,438,469 - 4,438,469
-------------- ------------- ------------ -------------
TOTAL ASSETS $ 4,136,517 $ 5,884,577 $ - $ 10,021,094
============== ============= ============ =============
</TABLE>
- -------------
(1) Pro forma for all material transactions, excluding the PHH Merger (See
Section II).
(2) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the merged
companies.
See Notes to pro forma consolidated combining financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING BALANCE SHEET PAGE 2 OF 2
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and other
accrued liabilities $ 243,307 $ 418,143 $ 76,651 (A) $ 738,101
Deferred revenue - net 143,873 - - 143,873
Income taxes payable 81,633 - - 81,633
Accrued acquisition obligations 84,287 - - 84,287
Current portion of long-term debt 130,837 - - 130,837
-------------- ------------ ---------- -----------
TOTAL CURRENT LIABILITIES 683,937 418,143 76,651 1,178,731
-------------- ------------ ---------- -----------
Long-term debt 822,800 - 584,796 (B) 1,407,596
Deferred revenue 193,002 114,021 (76,651) (A) 230,372
Other non-current liabilities 32,970 - - 32,970
Deferred income taxes 85,400 - - 85,400
-------------- ------------ ---------- -----------
TOTAL 1,818,109 532,164 508,145 2,935,069
-------------- ------------ ---------- -----------
LIABILITIES UNDER VEHICLE MANAGEMENT
AND MORTGAGE PROGRAMS
Debt - 4,476,805 (584,796) (B) 3,892,009
Deferred income taxes - 221,700 - 221,700
-------------- ------------ ---------- -----------
TOTAL - 4,698,505 (584,796) 4,113,709
-------------- ------------ ---------- -----------
STOCKHOLDERS' EQUITY:
Common stock 1,293 99,820 (99,563) (C) 1,550
Additional paid-in capital 2,110,879 - 99,563 (C) 2,210,442
Retained earnings 206,236 568,400 - 774,636
Foreign currency equity adjustment - (14,312) - (14,312)
-------------- ------------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,318,408 653,908 - 2,972,316
-------------- ------------ ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,136,517 $ 5,884,577 $ - $10,021,094
============== ============ =========== ===========
</TABLE>
- -------------
(1) Pro forma for all material transactions, excluding the PHH Merger (See
Section II).
(2) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the merged
companies.
See notes to pro forma consolidated combining financial statements.
7
<PAGE>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS,
HFS (1) PHH (2) ADJUSTMENTS AS RESTATED
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 834,038 $ - $ 203,390 (E) $ 1,037,428
Real estate services - 782,727 (532,573) (D) 250,154
Mortgage services - 173,787 - 173,787
------------ ------------ ------------ ---------------
Service fees, net 834,038 956,514 (329,183) 1,461,369
Fleet management - 1,347,870 (203,390) (E) 1,144,480
Depreciation on vehicles
under operating leases - (929,341) - (929,341)
Interest - - (159,652) (F) (159,652)
------------ ------------ ------------- ---------------
Fleet management, net - 418,529 (363,042) 55,487
------------ ------------ ------------- ---------------
Other 169,510 - - 169,510
------------ ------------ ------------ ---------------
Net revenues 1,003,548 1,375,043 (692,225) 1,686,366
------------ ------------ ------------- ---------------
EXPENSES
Selling, general and administrative 452,491 310,567 (29,692) (G) 733,366
Costs, including interest,of carrying
and reselling homes - 658,498 (532,573) (D) 97,324
(25,972) (H)
(2,629) (G)
Direct costs of mortgage services - 60,498 (30,667) (G) 29,831
------------ ------------ ------------- ---------------
Total selling, general
and administrative 452,491 1,029,563 (621,533) 860,521
Depreciation and amortization 136,319 - 62,988 (G) 199,307
Interest 53,534 212,365 (159,652) (F) 132,219
25,972 (H)
Other 33,527 - - 33,527
------------ ------------ ------------ ---------------
Total expenses 675,871 1,241,928 (692,225) 1,225,574
------------ ------------ ------------- ---------------
Income before income taxes 327,677 133,115 - 460,792
Provision for income taxes 135,243 54,995 - 190,238
------------ ------------ ------------ ---------------
Net income $ 192,434 $ 78,120 $ - $ 270,554
============ ============ ============ ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 1.38 $ 1.63
============ ===============
Weighted average common and
common equivalent shares
outstanding 143,110 25,700 (I) 168,810
============ ============ ===============
</TABLE>
- ----------------
(1) Pro forma for all material transactions, excluding the PHH Merger (See
Section II).
0
(2) The historical statement of operations of PHH is for the twelve months
ended January 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform ato the presentation expected to be used by the
merged companies.
See notes to pro forma consolidated combining financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS,
HFS (1) PHH (2) ADJUSTMENTS AS RESTATED
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 616,268 $ - $ 150,028 (E) $ 766,296
Real estate services - 590,168 (399,717) (D) 190,451
Mortgage services - 124,144 - 124,144
------------ ------------ ------------ ---------------
Service fees, net 616,268 714,312 (249,689) 1,080,891
------------ ------------ ------------ ---------------
Fleet management - 1,003,355 (150,028) (E) 853,327
Depreciation on vehicles
under operating leases - (692,788) - (692,788)
Interest - - (117,373) (F) (117,373)
------------ ------------ ------------ ----------------
Fleet management, net - 310,567 (267,401) 43,166
------------ ------------ ------------ ---------------
Other 115,985 - - 115,985
------------ ------------ ------------ ---------------
Net revenues 732,253 1,024,879 (517,090) 1,240,042
------------ ------------ ------------ ---------------
EXPENSES
Selling, general and administrative 335,403 232,698 (22,452) (G) 545,649
Costs, including interest, of carrying
and reselling homes - 497,415 (399,717) (D) 76,266
(19,344) (H)
(2,088) (G)
Direct costs of mortgage services - 40,093 (18,981) (G) 21,112
------------ ------------ ------------ ---------------
Total selling, general and
administrative 335,403 770,206 (462,582) 643,027
------------ ------------ ------------ ---------------
Depreciation and amortization 100,632 - 43,521 (G) 144,153
Interest 41,063 154,638 (117,373) (F) 97,672
19,344 (H)
Other 22,328 - - 22,328
------------ ------------ ---------- ---------------
Total expenses 499,426 924,844 (517,090) 907,180
------------ ------------ ---------- ---------------
Income before income taxes 232,827 100,035 - 332,862
Provision for income taxes 96,094 41,397 - 137,491
------------ ------------ ---------- ---------------
Net Income $ 136,733 $ 58,638 $ - $ 195,371
============ ============ ========== ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 1.00 $ 1.19
============ ===============
Weighted average common and
common equivalent shares
outstanding 140,582 25,700 (I) 166,282
============ ============ ===============
</TABLE>
- -----------------
(1) Pro forma for all material transactions, excluding the PHH Merger (See
Section II).
(2) The historical statement of operations of PHH is for the nine months
ended October 31, 1995.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the merged
companies.
See notes to pro forma consolidated combining financial statements.
9
<PAGE>
SECTION I
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS,
HFS (1) PHH (2) ADJUSTMENTS AS RESTATED
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 691,711 $ - $ 152,602 (E) $ 844,313
Real estate services - 619,431 (420,805) (D) 198,626
Mortgage services - 188,636 - 188,636
-------------- ------------ ------------- ---------------
Service fees, net 691,711 808,067 (268,203) 1,231,575
-------------- ------------ ------------- ---------------
Fleet Management - 1,042,984 (152,602) (E) 890,382
Depreciation on vehicles
under operating leases - (727,457) - (727,457)
Interest (120,404) (F) (120,404)
-------------- ------------- ------------- ----------------
Fleet management, net - 315,527 (273,006) 42,521
-------------- ------------ ------------- ---------------
Other 186,004 - - 186,004
-------------- ------------ ------------ ---------------
Net revenues 877,715 1,123,594 (541,209) 1,460,100
-------------- ------------ ------------- ---------------
EXPENSES
Selling, general and administrative 390,168 249,693 (19,808) (G) 620,053
Costs, including interest, of carrying
and reselling homes - 507,986 (420,805) (D) 62,841
(22,970) (H)
(1,370) (G)
Direct costs of mortgage services - 77,718 (38,720) (G) 38,998
-------------- ------------ ------------- ---------------
Total selling, general and
administrative 390,168 835,397 (503,673) 721,892
-------------- ------------ ------------- ---------------
Depreciation and amortization 102,208 - 59,898 (G) 162,106
Interest 36,930 169,933 (120,404) (F) 109,429
22,970 (H)
Other 16,259 - - 16,259
-------------- ------------ ------------ ---------------
Total expenses 545,565 1,005,330 (541,209) 1,009,686
-------------- ------------ ------------- ---------------
Income before income taxes 332,150 118,264 - 450,414
Provision for income taxes 137,087 48,253 - 185,340
-------------- ------------ ------------ ---------------
Net Income $ 195,063 $ 70,011 $ - $ 265,074
============== ============ ============ ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 1.35 $ 1.55
============== ===============
Weighted average common and
common equivalent shares
outstanding 147,513 25,700 (I) 173,213
============== ============ ===============
</TABLE>
- -----------------
(1) Pro forma for all material transactions, excluding the PHH Merger (See
Section II).
(2) The historical statement of operations of PHH is for the nine months
ended October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to pro forma consolidated combining financial statements.
10
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED COMBINING
FINANCIAL STATEMENTS
A. OTHER CURRENT ASSETS:
The pro forma adjustment reclassifies advances from clients to accounts
payable and other accrued liabilities. This adjustment is made to conform
to the presentation expected to be used by the merged companies. This
adjustment was made to conform to the presentation expected to be used
by the merged companies.
B. Long-Term Debt:
This pro forma adjustment reclassifies the portion of long-term debt
associated with real estate services activities from Liabilities under
Vehicle Management and Mortgage Programs to Long-Term Debt. This
adjustment is made to conform to the presentation expected to be used
by the merged companies.
C. EQUITY:
The pro forma adjustment reflects a reclassification of equity in
connection with issuance of Company common stock to the PHH shareholders.
D. SERVICES FEES:
The pro forma adjustment offsets amounts billed (PHH revenue) to
client corporations with expenses incurred (PHH expense) on behalf of
client corporations. This adjustment is made to conform to the
presentation expected to be used by the merged companies.
E. FLEET MANAGEMENT:
The pro forma adjustment reclassifies service fees generated from
fee-based services provided to clients' vehicle fleets. This adjustment
is made to conform to the presentation expected to be used by the merged
companies.
F. INTEREST EXPENSE--FLEET MANAGEMENT:
The pro forma adjustment reclassifies interest expense on debt incurred
to finance vehicle leasing activities. This adjustment is made to conform
to the presentation expected to be used by the merged companies.
G. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment reclassifies depreciation and amortization,
other than depreciation on vehicles under operating leases, to a separate
financial line to conform to the presentation expected to be used by the
merged companies.
H. INTEREST EXPENSE--REAL ESTATE SERVICES:
The pro forma adjustment reclassifies the interest portion of the cost of
carrying and reselling homes from selling general and administrative
expense to interest expense. This adjustment is made to conform to the
presentation expected to be used by the merged companies.
I. WEIGHTED AVERAGE SHARES:
The pro forma adjustment reflects the number of shares of Company common
stock estimated to be issued by the Company in connection with the PHH
Merger at an assumed $67.00 per share price.
11
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
EXCLUDING THE PHH MERGER
The pro forma consolidated balance sheet as of September 30, 1996 is presented
as if the following had occurred on September 30, 1996:(i) the acquisition of
Avis, Inc. ("Avis") and issuance of Company common stock (the "Avis Offering")
as partial consideration for Avis and; (ii) the acquisition of Resort
Condominiums International, Inc. and its affiliates ("RCI") and the issuance
of Company common stock as partial consideration for RCI. The Company
currently intends to undertake an initial public offering of a majority
interest in the corporation which owns all company-owned Avis car rental
locations (the "Operating Company") in 1997 and to enter into franchise,
information technology and other agreements to provide services to the
Operating Company based on terms to be determined. Accordingly, the pro forma
financial statements reflect the acquired net assets and results of operations
of the Avis rental car operating subsidiary intended to be sold as "Investment
in car rental operating company-net" and "Other revenue", respectively.
The pro forma statements of operations for the year ended December 31, 1995
and the nine months ended September 30, 1995 and 1996 are presented as if the
acquisitions of Avis and RCI and the following transactions had occurred on
January 1, 1995: (i) the May 31, 1996 acquisition of the common stock of
Coldwell Banker Corporation ("Coldwell Banker") and the related contribution
of Coldwell Banker's owned real estate brokerage offices (the "Owned Brokerage
Business") to an independent trust (the "Trust") (the "Coldwell Banker
Transaction"); (ii) the receipt of proceeds from an offering of the Company's
common stock (the "CB Offering") to the extent necessary to fund the
acquisition of Coldwell Banker and the related repayment of indebtedness and
acquisition expenses; (iii) the acquisitions of: the six non-owned Century 21
regions ("Century 21 NORS") during the second quarter of 1996, the Travelodge
franchise system ("Travelodge") on January 23, 1996 and the Electronic Realty
Associates franchise system ("ERA") on February 12, 1996 (collectively, the
"Other 1996 Acquisitions"); and (iv) the February 22, 1996 issuance of $240
million of 4 3/4% convertible senior notes due 2003 to the extent such
proceeds were used to finance the Other 1996 Acquisitions. The pro forma
statements of operations for the year ended December 31, 1995 and the nine
months ended September 30, 1995 are also presented as if the August 1, 1995
acquisition of Century 21 and the acquisition by merger (the "CCI Merger") in
May 1995 of Central Credit Inc. ("CCI") had occurred on January 1, 1995.
All of the aforementioned acquisitions have been accounted for using the
purchase method of accounting. Accordingly, assets acquired and liabilities
assumed have been recorded at their estimated fair values which are subject to
further refinement, including appraisals and other analyses, with appropriate
recognition given to the effect of current interest rates and income taxes.
Management does not expect that the final allocation of the purchase price for
the above acquisitions will differ materially from the preliminary
allocations. The Company has entered into certain immaterial transactions
which are not reflected in the pro forma statements of operations.
The pro forma consolidated financial statements do not purport to present the
financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. In addition to the cost savings reflected in the pro
forma consolidated statements of operations, the pro forma consolidated
statements of operations do not reflect certain additional cost savings and
revenue enhancements that management believes may be realized following the
acquisitions. These savings are expected to be realized primarily through the
restructuring of franchise services of the acquired companies as well as
revenue enhancements expected through leveraging of the Company's preferred
vendor programs. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that actually will be realized.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and should be read in conjunction
therewith and with (i) the consolidated financial statements and related notes
of the Company included in its 1995 Annual Report on Form 10-K; (ii) the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996
12
<PAGE>
as amended by the Form 10-Q/A and September 30, 1996; and (iii) the financial
statements and related notes of the acquired companies previously filed in
Current Reports on Form 8-K pursuant to Regulation S-X Rule 3-05, "Financial
Statements of Businesses Acquired or to be Acquired."
13
<PAGE>
<TABLE>
<CAPTION>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
HISTORICAL
-------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------
HFS AVIS (1) RCI AVIS (A) RCI (B) PRO FORMA
----------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 471,194 $ - $ 89,070 $ (367,166) $ (42,198) $ 150,900
Marketable securities - - 184,599 - (184,599) -
Relocation receivables 136,052 - - - - 136,052
Other accounts and notes
receivable, net 113,175 1,800 33,107 - - 148,082
Other current assets 59,081 1,881 22,836 - - 83,798
----------- --------- --------- ---------- ----------- -----------
TOTAL CURRENT ASSETS 779,502 3,681 329,612 (367,166) (226,797) 518,832
----------- --------- --------- ----------- ------------ -----------
Property and equipment-net 106,233 33,828 87,785 58,172 (45,000) 241,018
Franchise agreements-net 594,415 - - - - 594,415
Excess of cost over fair value of
net assets acquired-net 1,339,836 - - - - 1,339,836
Intangible assets - 499,143 - 127,426 541,831 1,168,400
Investment in car rental
operating company-net - (127,384) - 202,384 - 75,000
Deferred income taxes-net - - - 5,200 56,000 61,200
Other assets 80,064 59,633 40,936 (9,614) (33,203) 137,816
----------- --------- --------- ----------- ------------ -----------
TOTAL ASSETS $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517
=========== ========= ========= =========== =========== ===========
</TABLE>
Note: Certain reclassifications have been made to the historical results of HFS
to conform with the Company's pro forma classification.
(1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of
August 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
14
<PAGE>
<TABLE>
<CAPTION>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
HISTORICAL
-------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------
HFS AVIS (1) RCI AVIS (A) RCI (B) PRO FORMA
----------- --------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other
accrued liabilities $ 160,357 $ 1,954 $ 80,996 $ - $ - $ 243,307
Deferred revenue 24,655 - 119,218 - - 143,873
Income taxes payable 81,633 182 - (182) - 81,633
Accrued acquisition obligations 40,287 - - 44,000 - 84,287
Current portion of long-term debt 29,907 - - 100,930 - 130,837
----------- --------- --------- --------- --------- -------------
TOTAL CURRENT LIABILITIES 336,839 2,136 200,214 144,748 - 683,937
----------- --------- --------- --------- --------- -------------
Long-term debt 534,264 - 3,536 - 285,000 822,800
Deferred revenue 7,299 - 185,703 - - 193,002
Other non-current liabilities 31,259 - 1,711 - - 32,970
Deferred income taxes 85,400 - - - - 85,400
Preferred stock - Avis, Inc. - 72,416 - (72,416) - -
Redeemable portion of
common stock-ESOP - 295,465 - (295,465) - -
Unearned compensation-ESOP - (257,751) - 257,751 - -
STOCKHOLDERS' EQUITY
Participating convertible
preferred stock - 132,000 - (132,000) - -
Common stock 1,237 290 - (244) 10 1,293
Additional paid-in capital 1,705,541 220,401 16,189 117,972 50,776 2,110,879
Retained earnings 206,236 103,339 37,459 (103,339) (37,459) 206,236
Treasury stock (8,025) (102,269) - 102,269 8,025 -
Net unrealized gain on available
for sale of securities - - 13,521 - (13,521) -
Foreign currency equity adjustment - 2,874 - (2,874) - -
----------- --------- --------- ---------- --------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,904,989 356,635 67,169 (18,216) 7,831 2,318,408
----------- --------- --------- ---------- --------- -------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517
=========== ========= ========= ========== ========= =============
</TABLE>
- --------------
Note: Certain reclassifications have been made to the historical results of
HFS to conform with the Company's pro forma classification.
(1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of
August 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
15
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED HISTORICAL BALANCE SHEET
AS OF AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL RECLASSIFICATION AVIS,
AVIS ADJUSTMENT AS ADJUSTED
--------------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 75,683 $ (75,683) $ -
Accounts and notes
receivable, net 174,047 (172,247) 1,800
Vehicles, net 2,567,517 (2,567,517) -
Due from affiliated company 114,976 (114,976) -
Other current assets 45,296 (43,415) 1,881
Deferred income taxes 68,667 (68,667) -
-------------- -------------- -------------
Total current assets 3,046,186 (3,042,505) 3,681
-------------- --------------- -------------
Property and equipment-net 151,854 (118,026) 33,828
Intangible assets-Avis 499,143 - 499,143
Investment in car rental
operating company-net - (127,384) (127,384)
Other assets 85,368 (25,735) 59,633
-------------- --------------- -------------
Total $ 3,782,551 $ (3,313,650) $ 468,901
============== =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other $ 444,867 $ (442,731) $ 2,136
-------------- --------------- -------------
Long-term debt 2,488,651 (2,488,651) -
Public liability and property damage 215,135 (215,135) -
Due to affiliated company 132,563 (132,563) -
Other non-current liabilities
Deferred income taxes 34,570 (34,570) -
Preferred stock-Avis, Inc. 72,416 - 72,416
Redeemable portion of common
stock - ESOP 295,465 - 295,465
Unearned compensation - ESOP (257,751) - (257,751)
Stockholders' Equity
Participating convertible
preferred stock 132,000 - 132,000
Common stock 290 - 290
Additional paid-in capital 220,401 - 220,401
Retained earnings 103,339 - 103,339
Treasury stock (102,269) - (102,269)
Foreign currency equity adjustment 2,874 - 2,874
-------------- --------------- -------------
Total stockholders' equity 356,635 - 356,635
-------------- --------------- -------------
Total $ 3,782,551 $ (3,313,650) $ 468,901
============== =============== =============
</TABLE>
- --------------
Note: The reclassification adjustment made to the historical balance sheet of
Avis, Inc. is to present the historical net assets of car rental
operations as "investment in car rental subsidiary-net".
See notes to pro forma consolidated balance sheet and statements of operations.
16
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
ACQUIRED PRO FORMA
HFS (1) COMPANIES ADJUSTMENTS PRO FORMA
------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 229,671 $ 1,130,675 $ 25,950 (C) $ 834,038
(535,207) (D)
(17,051) (E)
Other 43,541 91,312 (4,421) 169,510
- - 39,078 (F)
------------ ------------- ------------ ---------------
Net revenues 273,212 1,221,987 (491,651) 1,003,548
------------ ------------- ------------- ---------------
EXPENSES
Selling, general and
administrative 82,426 957,758 (66,317) (G) 452,491
(521,376) (H)
Depreciation and amortization 30,857 66,522 38,940 (I) 136,319
Interest 21,789 12,553 19,192 (J) 53,534
Other 3,235 31,891 (1,599) 33,527
------------ ------------- ------------- ---------------
Total expenses 138,307 1,068,724 (531,160) 675,871
------------ ------------- ------------- ---------------
Income before income taxes
and extraordinary loss 134,905 153,263 39,509 327,677
Provision for income taxes 55,175 56,368 23,700 (K) 135,243
------------ ------------- ------------ ---------------
Income before extraordinary loss 79,730 96,895 15,809 192,434
Extraordinary loss - 2,027 (2,027) -
------------ ------------- ------------- ---------------
Net income $ 79,730 $ 94,868 $ 17,836 $ 192,434
============ ============= ============ ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .73 $ 1.38
============ ===============
Weighted average common and
common equivalent shares
outstanding 115,654 27,456 (L) 143,110
============ ============ ===============
</TABLE>
- -----------------
Note: Certain reclassifications have been made to the historical results of
HFS and acquired companies to conform with the Company's pro forma
classification.
The historical statement of income has been adjusted to reclassify $139,771
of marketing and reservations expenses against related service fees.
See notes to pro forma consolidated balance sheet and statements of
operations.
17
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------
AVIS (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 21,608 $ 295,183 $ 679,137 $ 134,747 $ 1,130,675
Other 41,200 - 20,264 29,848 91,312
----------- ---------- ---------- ----------- -----------
Net revenues 62,808 295,183 699,401 164,595 1,221,987
----------- ---------- ---------- ----------- -----------
EXPENSES
Selling, general
and administrative 7,205 205,637 616,182 128,734 957,758
Depreciation and
amortization 19,683 15,931 22,425 8,483 66,522
Interest 461 536 5,329 6,227 12,553
Other 410 16,724 - 14,757 31,891
----------- ---------- ---------- ----------- -----------
Total expenses 27,759 238,828 643,936 158,201 1,068,724
----------- ---------- ---------- ----------- -----------
Income before
income taxes and
extraordinary loss 35,049 56,355 55,465 6,394 153,263
Provision for
income taxes 23,977 4,464 24,385 3,542 56,368
----------- ---------- ---------- ----------- -----------
Income before
extraordinary loss 11,072 51,891 31,080 2,852 96,895
Extraordinary loss - - 2,027 - 2,027
----------- ---------- ---------- ----------- -----------
Net income $ 11,072 $ 51,891 $ 29,053 $ 2,852 $ 94,868
=========== ========== ========== =========== ===========
</TABLE>
- --------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's pro forma
classification.
(1) The historical financial statement of operations of Avis, as adjusted,
has been adjusted to present only the historical results of operations
intended to be retained by the Company. See Historical Consolidated
Statement of Operations of Avis, Inc., as Adjusted, for the year ended
February 29, 1996.
See notes to pro forma consolidated balance sheet and statements of
operations.
18
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC., AS ADJUSTED
FOR THE YEAR ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------------------
RENTAL CAR AVIS,
HISTORICAL RECLASSIFICATION SUBSIDIARY AS ADJUSTED
-------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $ 1,716,677 $ -- $ (1,653,869) $ 62,808
EXPENSES
Selling, general and
administrative 1,119,888 (16,865) (1,095,818) 7,205
Depreciation and
amortization 411,796 16,404 (408,517) 19,683
Interest 149,534 461 (149,534) 461
Other 410 -- -- 410
------------- ------------- ------------ -------------
Total expenses 1,681,628 -- (1,653,869) 27,759
------------- ------------- ------------- -------------
Income before income taxes 35,049 -- -- 35,049
Provision for income taxes 23,977 -- -- 23,977
------------- ------------- ------------ -------------
Net income $ 11,072 $ -- $ -- $ 11,072
============= ============= ============ =============
</TABLE>
- ---------------
See notes to pro forma consolidated balance sheet and statements of operations.
19
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY CENTURY 21
CCI (1) 21 (1) NORS TRAVELODGE ERA TOTAL
--------- --------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ - $ 60,506 $ 29,021 $ 18,361 $ 26,859 $ 134,747
Other 3,326 10,164 403 79 15,876 29,848
--------- --------- ----------- ----------- --------- ---------
Net revenues 3,326 70,670 29,424 18,440 42,735 164,595
--------- --------- ----------- ----------- --------- ---------
EXPENSES
Selling, general
and administrative - 57,241 25,763 15,604 30,126 128,734
Depreciation and
amortization 529 5,217 578 8 2,151 8,483
Interest - 2,904 54 - 3,269 6,227
Other 1,917 2,751 - - 10,089 14,757
--------- --------- ----------- ----------- --------- ---------
Total expenses 2,446 68,113 26,395 15,612 45,635 158,201
--------- --------- ----------- ----------- --------- ---------
Income (loss) before
income taxes 880 2,557 3,029 2,828 (2,900) 6,394
Provision for income taxes 313 2,097 - 1,132 - 3,542
--------- --------- ----------- ----------- --------- ---------
Net income (loss) $ 567 $ 460 $ 3,029 $ 1,696 $ (2,900) $ 2,852
========= ========= =========== =========== =========== =========
</TABLE>
- ---------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's pro forma
classification.
(1) Reflects results of operations for the period from January 1, 1995 to
the respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statement of operations.
20
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
NET REVENUES
Service fees, net $ 616,268 $ 691,711
Other 115,985 186,004
------------- -------------
Net revenues 732,253 877,715
------------- -------------
EXPENSES
Selling, general and administrative 335,403 390,168
Depreciation and amortization 100,632 102,208
Interest 41,063 36,930
Other 22,328 16,259
------------- -------------
Total expenses 499,426 545,565
------------- -------------
Income before income taxes 232,827 332,150
Provision for income taxes 96,094 137,087
------------- -------------
Net income $ 136,733 $ 195,063
============= =============
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 1.00 $ 1.35
============= ============
Weighted average common and common
equivalent shares outstanding 140,582 147,513
============== =============
</TABLE>
See notes to pro forma consolidated balance sheet and statements of operations.
21
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
ACQUIRED PRO FORMA
HFS (1) COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 159,792 $ 862,148 $ 19,508 (C) $ 616,268
(411,795) (D)
(13,385) (E)
Other 30,869 53,318 31,798 (F) 115,985
---------- ----------- ------------ ----------
Net revenues 190,661 915,466 (373,874) 732,253
---------- ----------- ------------- ----------
EXPENSES
Selling, general
and administrative 49,472 730,298 (50,773) (G) 335,403
(393,594) (H)
Depreciation and amortization 21,721 52,566 26,345 (I) 100,632
Interest 16,272 8,135 16,656 (J) 41,063
Other 2,012 21,018 (702) 22,328
---------- ----------- ------------- ----------
Total expenses 89,477 812,017 (402,068) 499,426
---------- ----------- ------------- ----------
Income before income taxes
and extraordinary loss 101,184 103,449 28,194 232,827
Provision for income taxes 41,820 43,250 11,024 (K) 96,094
---------- ----------- ------------ ----------
Income before extraordinary loss 59,364 60,199 17,170 136,733
Extraordinary loss - 2,027 (2,027) -
---------- ----------- ------------- ----------
Net income $ 59,364 $ 58,172 $ 19,197 $ 136,733
========== =========== ============ ==========
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .56 $ 1.00
========== ==========
Weighted average common and
common equivalent shares
outstanding 112,056 28,526 (L) 140,582
========== ============ ==========
</TABLE>
- -----------------
(1) The historical statement of income has been adjusted to reclassify
$109,070 of marketing and reservation expenses against related service
fees.
Note: Certain reclassifications have been made to the historical results of
HFS and acquired companies to conform with the Company's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of operations.
22
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------
AVIS (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 13,358 $ 222,627 $ 513,483 $ 112,680 $ 862,148
Other 21,652 - 3,972 27,694 53,318
---------- ---------- ---------- ----------- -----------
Net revenues 35,010 222,627 517,455 140,374 915,466
---------- ---------- ---------- ----------- -----------
EXPENSES
Selling, general
and administrative 7,106 154,227 458,785 110,180 730,298
Depreciation and
amortization 14,253 12,698 17,272 8,343 52,566
Interest - 402 2,958 4,775 8,135
Other - 6,570 1,944 12,504 21,018
---------- ---------- ---------- ----------- -----------
Total expenses 21,359 173,897 480,959 135,802 812,017
---------- ---------- ---------- ----------- -----------
Income before
income taxes and
extraordinary loss 13,651 48,730 36,496 4,572 103,449
Provision for
income taxes 21,644 1,940 16,422 3,244 43,250
---------- ---------- ---------- ----------- -----------
Income (loss) before
extraordinary loss (7,993) 46,790 20,074 1,328 60,199
Extraordinary loss - - 2,027 - 2,027
---------- ---------- ---------- ----------- -----------
Net income (loss) $ (7,993) $ 46,790 $ 18,047 $ 1,328 $ 58,172
=========== ========== ========== =========== ===========
</TABLE>
- --------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's pro forma
classification.
(1) The historical financial statement of operations of Avis, as adjusted,
has been adjusted to present only the historical results of operations
intended to be retained by the Company. See Historical Consolidated
Statement of Operations of Avis, Inc., as Adjusted, for the nine months
ended August 31, 1995.
See notes to pro forma consolidated balance sheet and statements of operations.
23
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC. AS ADJUSTED
FOR THE NINE MONTHS ENDED AUGUST 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RENTAL CAR
SUBSIDIARY AVIS
HISTORICAL ADJUSTMENT AS ADJUSTED
------------ ------------- ------------
<S> <C> <C> <C>
REVENUES $ 1,190,189 $ (1,155,179) $ 35,010
------------ ------------- -----------
EXPENSES
Selling, general and administrative 766,509 (759,403) 7,106
Depreciation and amortization 304,339 (290,086) 14,253
Interest 105,379 (105,379) -
Other 311 (311) -
------------ ------------- -----------
Total expenses 1,176,538 (1,155,179) 21,359
------------ ------------- -----------
Income before income taxes 13,651 - 13,651
Provision for income taxes 21,644 - 21,644
------------ ------------ -----------
Net loss $ (7,993) $ - $ (7,993)
============= ============ ============
</TABLE>
- ---------------
See notes to pro forma consolidated balance sheet and statements of operations.
24
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER ACQUISITIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY CENTURY 21
CCI (1) 21 (1) NORS TRAVELODGE ERA TOTAL
--------- --------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ - $ 60,506 $ 20,750 $ 13,476 $ 17,948 $ 112,680
Other 3,326 10,164 288 59 13,857 27,694
--------- --------- ----------- ----------- --------- ---------
Net revenues 3,326 70,670 21,038 13,535 31,805 140,374
--------- --------- ----------- ----------- --------- ---------
EXPENSES
Selling, general
and administrative - 57,241 18,421 11,503 23,015 110,180
Depreciation and
amortization 529 5,217 413 6 2,178 8,343
Interest - 2,904 38 - 1,833 4,775
Other 1,917 2,751 - - 7,836 12,504
--------- --------- ----------- ----------- --------- ---------
Total expenses 2,446 68,113 18,872 11,509 34,862 135,802
--------- --------- ----------- ----------- --------- ---------
Income (loss) before
income taxes 880 2,557 2,166 2,026 (3,057) 4,572
Provision for income taxes 313 2,097 - 834 - 3,244
--------- --------- ----------- ----------- --------- ---------
Net income (loss) $ 567 $ 460 $ 2,166 $ 1,192 $ (3,057) $ 1,328
========= ========= =========== =========== =========== =========
</TABLE>
- ---------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's pro forma
classification.
(1) Reflects results of operations for the period from January 1, 1995 to
the respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statement of operations.
25
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
ACQUIRED PRO FORMA
HFS (1) COMPANIES ADJUSTMENTS PRO FORMA
---------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 346,127 $ 584,215 $ 11,835 (C) $ 691,711
(235,625) (D)
(14,841) (E)
Other 81,733 78,084 26,187 (F) 186,004
---------- ----------- ------------ ----------
Net revenues 427,860 662,299 (212,444) 877,715
---------- ----------- ------------- ----------
EXPENSES
Selling, general
and administrative 148,287 525,245 (56,001) (G) 390,168
(227,363) (H)
Depreciation and amortization 41,129 37,041 24,038 (I) 102,208
Interest 22,194 4,993 9,743 (J) 36,930
Other 10,988 5,616 (345) 16,259
---------- ----------- ------------- ----------
Total expenses 222,598 572,895 (249,928) 545,565
---------- ----------- ------------- ----------
Income before income taxes 205,262 89,404 37,484 332,150
Provision for income taxes 82,630 21,904 32,553 (K) 137,087
---------- ----------- ------------ ----------
Net income $ 122,632 $ 67,500 $ 4,931 $ 195,063
========== =========== ============ =========
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .96 - - $ 1.35
========== ==========
Weighted average common and
common equivalent shares
outstanding 131,684 - 15,829 (L) 147,513
========== ============ ==========
</TABLE>
- ---------------
(1) The historical statement of income has been adjusted to reclassify
$122,150 of marketing and reservation expenses against related service
fees.
Note: Certain reclassifications have been made to the historical results of
HFS and acquired companies to conform with the Company's pro forma
classification.
See notes to pro forma consolidated balance sheet and statement of operations.
26
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------
OTHER
AVIS (1) COLDWELL 1996 (2) TOTAL
AS ADJUSTED RCI BANKER (2) ACQUISITIONS HISTORICAL
-------------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 26,871 $ 251,516 $ 295,478 $ 10,350 $ 584,215
Other 72,366 - 4,067 1,651 78,084
---------- ---------- ----------- ----------- -----------
Net revenues 99,237 251,516 299,545 12,001 662,299
---------- ---------- ----------- ----------- -----------
EXPENSES
Selling, general and
administrative 20,173 181,489 312,348 11,235 525,245
Depreciation and
amortization 14,247 13,352 9,021 421 37,041
Interest - 345 3,155 1,493 4,993
Other - 4,340 512 764 5,616
---------- ---------- ----------- ----------- -----------
Total expenses 34,420 199,526 325,036 13,913 572,895
---------- ---------- ----------- ----------- -----------
Income (loss) before
income taxes 64,817 51,990 (25,491) (1,912) 89,404
Provision (benefit) for
income taxes 29,966 2,370 (10,432) - 21,904
---------- ---------- ------------ ----------- -----------
Net income (loss) $ 34,851 $ 49,620 $ (15,059) $ (1,912) $ 67,500
========== ========== ============ ============ ===========
</TABLE>
- ---------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) The historical financial statements of operations of Avis, as adjusted,
has been adjusted to include the historical results of Avis operations
intended to be retained by the Company and the operating results of the
Avis Car rental subsidiary, included in Other Revenue. See Historical
Consolidated Statement of Operations of Avis, Inc., as Adjusted for the
nine months ended August 31, 1996.
(2) Reflects results of operations for the period from January 1, 1996 to
the respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statement of operations.
27
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC., AS ADJUSTED
FOR THE NINE MONTHS ENDED AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RENTAL CAR
SUBSIDIARY AVIS
HISTORICAL ADJUSTMENT AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 1,490,709 $ (1,391,472) $ 99,237
------------- ------------- ------------
EXPENSES
Selling, general and administrative 975,769 (955,596) 20,173
Depreciation and amortization 333,147 (318,900) 14,247
Interest 116,958 (116,958) -
Other 18 (18) -
------------- -------------- -------------
Total expenses 1,425,892 (1,391,472) 34,420
------------- -------------- -------------
Income before income taxes 64,817 - 64,817
Provision for income taxes 29,966 - 29,966
------------- ------------- -------------
Net income $ 34,851 $ - $ 34,851
============= ============= =============
</TABLE>
- ---------------
See notes to pro forma consolidated balance sheet and statements of operations.
28
<PAGE>
SECTION II
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF OTHER 1996 ACQUISITIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
NORS (1) TRAVELODGE (1) ERA (1) TOTAL
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 6,668 $ 688 $ 2,994 $ 10,350
Other 449 - 1,202 1,651
---------- -------------- ---------- ------------
Net revenues 7,117 688 4,196 12,001
---------- -------------- ---------- ------------
EXPENSES
Selling, general
and administrative 7,566 552 3,117 11,235
Depreciation
and amortization 285 - 136 421
Interest 2 - 1,491 1,493
Other - - 764 764
---------- -------------- ---------- ------------
Total expenses 7,853 552 5,508 13,913
---------- -------------- ---------- ------------
Income (loss) before
income taxes (736) 136 (1,312) (1,912)
Provision for
income taxes - - - -
---------- -------------- ---------- ------------
Net income (loss) $ (736) $ 136 $ (1,312) $ (1,912)
=========== ============== =========== =============
</TABLE>
- ---------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1996 to
the respective date of acquisition.
See notes to pro forma consolidated balance sheet and statements of operations.
29
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. ACQUISITION OF AVIS:
The purchase price for Avis has been allocated to assets acquired and
liabilities assumed at their estimated fair values. Pro forma adjustments
consist of the elimination of certain acquired assets and assumed
liabilities, net of the fair value ascribed to such assets and
liabilities.
The Company acquired Avis for the following consideration ($000's):
<TABLE>
<CAPTION>
<S> <C>
Cash consideration (i) $ 367,166
Issuance of approximately 4.6 million shares of Company
common stock 338,419
Issuance of note to ESOP 100,930
-------------
TOTAL PRO FORMA ACQUISITION COST 806,515
-------------
Fair value of net assets acquired:
Historical book value of acquired company 356,635
Elimination of net assets (liabilities) not acquired or assumed:
Other assets (9,614)
Preferred stock - Avis 72,416
Intangible assets - Avis (499,143)
Redeemable portion of common stock - ESOP 295,465
Unearned compensation - ESOP (257,751)
Fair value adjustments to assets acquired and liabilities assumed:
Deferred income tax asset, net (ii) 5,200
Property and equipment 58,172
Investment in car rental operating company 202,384
Accrued acquisition obligations (44,000)
Other 182
-------------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED 179,946
-------------
Intangible assets-Avis (iii) $ 626,569
=============
</TABLE>
(i) The cash consideration of the pro forma acquisition cost was financed
by the Second Quarter 1996 Offering.
(ii) The pro forma adjustment to deferred income taxes recorded in
connection with the acquisition results from differences in the fair
values of assets acquired and liabilities assumed and their respective
income tax bases.
(iii) The Company has not completed the valuation of identifiable intangible
assets.
30
<PAGE>
A. ACQUISITION OF AVIS (CONTINUED)
The pro forma adjustments include the elimination of Avis stockholders'
equity and the issuance of approximately 4.6 million shares of the
Company's common stock to finance the acquisition.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------------------------------
ISSUANCE OF ELIMINATION OF ADJUSTMENT TO
COMPANY STOCKHOLDERS' STOCKHOLDERS'
COMMON STK. EQUITY EQUITY
-------------- -------------- --------------
<S> <C> <C> <C>
Participating convertible preferred stock $ - $ 132,000 $ (132,000)
Common stock 46 290 (244)
Additional paid-in capital 338,373 220,401 117,972
Retained earnings - 103,339 (103,339)
Treasury stock - (102,269) 102,269
Foreign currency equity adjustment - 2,874 (2,874)
---------- ------------ ------------
$ 338,419 $ 356,635 $ (18,216)
========== ============ =============
</TABLE>
B. ACQUISITION OF RCI:
The purchase price for RCI has been allocated to assets acquired and
liabilities assumed at their estimated fair values. Pro forma adjustments
consist of the elimination of certain acquired assets and assumed
liabilities, net of the fair value ascribed to such assets and
liabilities.
The Company acquired RCI for the following consideration ($000's):
<TABLE>
<CAPTION>
<S> <C> <C>
Cash (i) $ 265,000
Borrowings under the Company's Revolving Credit Facilities 285,000
Issuance of approximately one million shares of Company
common stock (ii) 75,000
-------------------------------
Total pro forma acquisition cost $ 625,000
Fair value of net assets acquired is as follows:
Historical book value of RCI $ 67,169
Fair value adjustments to assets acquired and liabilities assumed:
Property and equipment (45,000)
Other non-current assets 5,000
Deferred income taxes - non -current (iii) 56,000
------------------------------
Fair value of net assets acquired 83,169
-------------
Intangible assets - RCI (iv) $ 541,831
=============
</TABLE>
(i) Cash consideration is comprised of $185 million in marketable
securities, $38 million in notes not acquired and $42 million of
acquired RCI cash.
(ii) The number of shares of Company common stock issued in
connection with the acquisition was calculated using a $75.0375
per share stock price.
(iii) The pro forma adjustment to deferred income taxes recorded is
the fair value of unearned income liabilities assumed and the
respective income tax basis.
(iv) The Company has not completed the valuation of identifiable
intangible assets.
31
<PAGE>
B. ACQUISITION OF RCI (continued)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
------------------------------------------------
ISSUANCE OF ELIMINATION OF ADJUSTMENT TO
COMPANY STOCKHOLDERS' STOCKHOLDERS'
COMMON STK. EQUITY EQUITY
------------- -------------- -------------
<S> <C> <C> <C>
Common stock $ 10 $ - $ 10
Additional paid-in capital 66,965 (16,189) 50,776
Retained earnings - (37,459) (37,459)
Treasury stock 8,025 - 8,025
Net unrealized gain on available for
sale of securities - (13,521) (13,521)
---------- ------------- -------------
$ 75,000 $ (67,169) $ 7,831
========== ============= ============
</TABLE>
The pro forma adjustments include the elimination of RCI stockholders'
equity and the issuance of approximately one million shares of the
Company's common stock as partial consideration for RCI.
C. SERVICE FEE REVENUE:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations,
the elimination of franchise revenue paid by the Century 21 NORS to
Century 21 under sub-franchise agreements and the addition of franchise
fees to be received under franchise contracts with owned brokerage
offices upon contribution of the Owned Brokerage Business to the Trust.
Pro forma adjustments to franchise revenue consists of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
Eliminate:
Discontinued operations $ (57) $ (34) $ -
Century 21 revenue included as
Century 21 NORS SG&A (4,500) (3,375) (1,003)
Add:
Franchise fees from Owned Brokerage Business 30,507 22,917 12,838
---------- ---------- ----------
Total $ 25,950 $ 19,508 $ 11,835
========== ========== ==========
</TABLE>
D. SERVICE FEE REVENUE:
The pro forma adjustment reflect the elimination of revenue generated
from Coldwell Banker's 318 formerly owned brokerage offices. The Company
contributed the net assets of the Owned Brokerage Business to the Trust
upon consummation of the Coldwell Banker acquisition. The free cash flow
of the Trust will be expended at the discretion of the trustees to
enhance the growth of funds available for advertising and promotion.
E. SERVICE FEE REVENUE:
The pro forma adjustment reflects the elimination of revenue
associated with investment income generated from RCI cash and marketable
securities which were used by the Company as partial consideration for
the RCI acquisition.
32
<PAGE>
F. OTHER REVENUE:
The pro forma adjustment is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
ADJUSTMENTS TO RENTAL CAR OPERATIONS: 1995 1995 1996
------------------- ----------- ------------
<S> <C> <C> <C>
Elimination of historical expense associated with:
Long-term incentive compensation plans $ 4,700 $ - $ 9,302
Unfavorable vehicle leases 33,411 30,478 15,488
Depreciation and amortization 31,869 23,208 26,120
Addition of pro forma expenses associated with:
Depreciation and amortization of property,
equipment and other intangibles (22,898) (17,174) (17,174)
Increased financing costs (8,004) (4,714) (1,549)
------------- ---------- -----------
Total adjustments to rental car operations 39,078 31,798 32,187
OTHER ADJUSTMENT:
Elimination of historical interest income
related to cash consideration portion
of Avis Acquisition (i) - - (6,000)
------------ ---------- ------------
Total $ 39,078 $ 31,798 $ 26,187
============ ========== ===========
</TABLE>
(i) The pro forma adjustment eliminates historical interest income on the
portion of cash generated from the Second Quarter 1996 Offering which
was used as consideration in the Avis Acquisition.
G. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
The pro forma adjustments eliminate redundant costs associated with the
restructuring of franchise services and other businesses and the
resulting termination of certain functions and positions in connection
with company acquisitions. Adjustments are comprised of the following
($000's):
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL CENTURY 21
21 RCI BANKER NORS TRAVELODGE ERA TOTAL
--------- -------- ------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Payroll and related $ 10,885 $ 1,198 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 38,817
Professional 2,693 1,000 1,500 1,486 154 387 7,220
Occupancy 3,628 - - 2,754 186 1,172 7,740
Franchise fees (Note B) - - - 4,500 - - 4,500
Other 3,128 2,900 (1,517) 2,326 167 1,036 8,040
-------- -------- -------- ----------- --------- --------- --------
Total $ 20,334 $ 5,098 $10,665 $ 18,772 $ 1,617 $ 9,831 $ 66,317
======== ======== ======= =========== ========= ========= ========
</TABLE>
33
<PAGE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL CENTURY 21
21 RCI BANKER NORS TRAVELODGE ERA TOTAL
--------- -------- ------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Payroll and related $ 10,885 $ 914 $ 9,830 $ 5,354 $ 502 $ 1,526 $ 29,011
Professional 2,693 750 1,573 1,063 70 - 6,149
Occupancy 3,628 - - 1,944 84 666 6,322
Franchise fees (Note B) - - - 3,375 - - 3,375
Other 3,128 1,275 (1,072) 1,528 74 983 5,916
-------- -------- -------- ----------- --------- --------- --------
Total $ 20,334 $ 2,939 $10,331 $ 13,264 $ 730 $ 3,175 $ 50,773
======== ======== ======= =========== ========= ========= ========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL CENTURY 21
RCI BANKER NORS TRAVELODGE ERA TOTAL
-------- -------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Payroll and related $ 880 $ 5,462 $ 2,425 $ 25 $ 222 $ 9,014
Stock option expense - 40,801 - - - 40,801
Professional 750 1,055 705 4 - 2,514
Occupancy - - 604 4 102 710
Franchise fees (Note B) - - 1,003 - - 1,003
Other 1,333 (604) 1,069 4 157 1,959
------- -------- --------- ----------- ---------- ---------
Total $ 2,963 $46,714 $ 5,806 $ 37 $ 481 $ 56,001
======= ======= ========= =========== ========== =========
</TABLE>
H. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
The pro forma adjustment reflects the elimination of expenses associated
with Coldwell Banker's formerly owned brokerage offices (See Note D).
I. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised
of ($000's):
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CCI CENTURY COLDWELL OTHER 1996
MERGER 21 RCI AVIS BANKER ACQUISITIONS TOTAL
-------- --------- ------ -------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Elimination of historical
expense $ (529) $ (5,217) $(14,193) $(19,683) $(22,425) $ (2,737) $(64,784)
Property, equipment and
furniture and fixtures 100 534 4,623 12,400 1,295 - 18,952
Information data base 375 - - - - - 375
Intangible assets 289 3,669 27,211 20,327 25,877 7,024 84,397
------- -------- -------- ------- ------- --------- --------
Total $ 235 $ (1,014) $ 17,641 $13,044 $ 4,747 $ 4,287 $ 38,940
======= ========= ======== ======= ======= ========= ========
</TABLE>
34
<PAGE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CCI CENTURY COLDWELL OTHER 1996
MERGER 21 RCI AVIS BANKER ACQUISITIONS TOTAL
-------- --------- ------ -------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Elimination of historical
expense $ (529) $ (5,217) $(12,698) $(14,253) $(17,272) $ (2,597) $(52,566)
Property, equipment and
furniture and fixtures 100 534 3,467 9,300 972 - 14,373
Information data base 375 - - - - - 375
Intangible assets 289 3,669 20,285 15,246 19,408 5,266 64,163
------- -------- -------- ------- ------- --------- --------
Total $ 235 $ (1,014) $ 11,054 $10,293 $ 3,108 $ 2,669 $ 26,345
======= ========= ======== ======= ======= ========= ========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
RCI AVIS BANKER ACQUISITIONS TOTAL
--------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Elimination of historical
expense $(13,352) $(14,247) $ (9,021) $ (421) $ (37,041)
Property, equipment and
furniture and fixtures 3,467 9,300 540 - 13,307
Intangible assets 20,285 15,246 10,775 1,466 47,772
------- ------- ---------- ----------- ----------
Total $10,400 $10,299 $ 2,294 $ 1,045 $ 24,038
======= ======= ========== =========== ==========
</TABLE>
CCI Merger
The estimated fair values of CCI's information data base, property and
equipment and excess of cost over fair value of net assets acquired are
$7.5 million, $1.0 million and $33.8 million, respectively, and are
amortized on a straight-line basis over the periods to be benefited which
are ten , five and forty years, respectively. The benefit periods
associated with the excess cost over fair value of net assets acquired
were determined based on CCI's position as the dominant provider of
gambling patron credit information services since 1956, its ability to
generate operating profits and expansion of its customer base and the
longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are
$5.5 million, $33.5 million and $140.0 million, respectively, and are
amortized on a straight-line basis over the periods to be benefited which
are seven, twelve and forty years, respectively. The benefit periods
associated with the excess cost over fair value of net assets acquired
were determined based on Century 21's position as the world's largest
franchisor of residential real estate brokerage offices, the most
recognized brand name in the residential real estate brokerage industry
and the longevity of the residential real estate brokerage business.
RCI
The fair value of RCI's property and equipment is estimated at
approximately $37 million and is amortized on a straight line basis over
the estimated useful lives, ranging from seven to thirty years.
RCI's intangible assets consist of customer lists and excess of cost over
fair value of net assets acquired. The estimated fair value of such
intangible assets is approximately $542 million and is amortized on a
straight-line basis over the periods to be benefited. The excess of cost
over fair value of net assets acquired was determined to have a benefit
period of forty years, which was based on RCI being a leading provider of
services to the timeshare industry, which includes being the world's
largest provider of timeshare exchange programs.
35
<PAGE>
Avis
The estimated fair value of Avis' property and equipment intended to be
retained by the Company, is $92 million, comprised primarily of a
reservation system and related assets. Such property and equipment is
amortized on a straight-line basis over the estimated benefit periods
ranging from five to eight years. The estimated fair values of Avis'
intangible assets, comprised principally of excess of cost over fair
value of net assets acquired, are $627 million and are amortized on a
straight-line basis over the respective assets benefit periods which
range between ten to forty years.
The excess of cost over fair value of net assets acquired was determined
to have a benefit period of forty years, which was based on Avis'
position as the second largest car rental system in the world, the
recognition of its brand name in the car rental industry and the
longevity of the car rental business.
Coldwell Banker
The estimated fair value of Coldwell Banker's property and equipment
(excluding land) of $16.7 million, is amortized on a straight-line basis
over the estimated benefit periods ranging from five to twenty-five
years. The estimated fair value of Coldwell Banker's intangible assets,
comprised of franchise agreements and excess of cost over fair value of
net assets acquired, is $768.4 million and is amortized on a
straight-line basis over the periods to be benefited. The excess of cost
over fair value of net assets acquired was determined to have a benefit
period of forty years, which was based on Coldwell Banker's position as
the largest gross revenue producing real estate company in North
American, the recognition of its brand name in the real estate brokerage
industry and the longevity of the real estate brokerage business.
Other 1996 Acquisitions
The estimated fair values of Other 1996 Acquisitions franchise agreements
aggregate $61.0 million and are being amortized on a straight line basis
over the periods to be benefited, which range from twelve to thirty
years. The estimated fair values of Other Acquisitions excess of cost
over fair value of net assets acquired aggregate $164.2 million and are
each being amortized on a straight line basis over the periods to
benefited which are forty years.
J. INTEREST EXPENSE:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, September 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
Elimination of historical interest expense of:
Century 21 $ (2,904) $ (2,904) $ -
Other 1996 Acquisitions (3,323) (1,871) (1,493)
RCI (536) (402) (345)
Reversal of Coldwell Banker (5,329) (2,958) (3,155)
Century 21 2,835 2,835 -
RCI 17,955 13,466 13,466
Minority interest - preferred dividends 1,796 1,796 -
4 3/4% Notes to finance Other 1996 Acquisitions 8,698 6,694 1,270
---------- ---------- ----------
Total $ 19,192 $ 16,656 $ 9,743
========== ========== ==========
</TABLE>
36
<PAGE>
Century 21
The pro forma adjustment reflects the recording of interest expense on $60
million of borrowings under the Company's revolving credit facility at
an interest rate 6.3%. Borrowings represent the amount necessary to
finance the initial cash purchase price net of $10.2 million of acquired
cash.
Coldwell Banker
The pro forma adjustment reflects the reversal of interest expense
relating to the following ($000's):
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, September 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
Expense associated with the Owned
Brokerage Business $ 138 $ 72 $ (179)
Expense associated with revolving credit
facility borrowings which will be repaid
with proceeds from offering 5,191 2,886 3,334
----------- ----------- -----------
Total $ 5,329 $ 2,958 $ 3,155
=========== =========== ===========
</TABLE>
RCI
The pro forma adjustment reflects the recording of interest expense on
$285 million of borrowings under the Company's revolving credit
facilities at an interest rate of 6.3%. Borrowings represent the amount
used as partial consideration in the RCI acquisition.
Minority interest - preferred dividends:
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21.
4-3/4% Notes
The pro forma adjustment reflects interest expense and amortization of
deferred financing costs related to the February 22, 1996 issuance of the
4-3/4% Notes to the extent that such proceeds were used to finance the
Other 1996 Acquisitions.
K. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, September 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
Reversal of historical (provision) benefit of:
Company $ (55,175) $ (41,820) $ (82,630)
CCI (313) (313) -
Century 21 (2,097) (2,097) -
RCI (4,464) (1,940) (2,370)
Avis (23,977) (21,644) (29,966)
Coldwell Banker (24,385) (16,422) 10,432
Travelodge (1,132) (834) -
Pro forma provision 135,243 96,094 137,087
---------- ---------- ----------
Total $ 23,700 $ 11,024 $ 32,553
========== ========== ==========
</TABLE>
37
<PAGE>
The pro forma effective tax rates are approximately 1% higher than the
Company's historical effective tax rates due to non-deductible excess of cost
over fair value of net assets acquired to be recorded in connection with the
acquisitions of Avis and RCI.
L. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
<TABLE>
<CAPTION>
For The Year Ended For the Nine Months Ended
December 31, September 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
CCI 896 1,180 -
Century 21 2,334 3,120 -
Avis Offering 4,569 4,569 4,569
RCI 1,000 1,000 1,000
Second Quarter 1996 Offering - Coldwell Banker 12,838 12,838 7,122
Second Quarter 1996 Offering - Avis 4,896 4,896 2,720
Century 21 NORS 923 923 418
----------- ----------- -----------
Total 27,456 28,526 15,829
=========== =========== ===========
</TABLE>
The unaudited Pro Forma Consolidated Statements of Operations are
presented as if the acquisitions took place at the beginning of the
periods presented; thus, the stock issuances referred to above are
considered outstanding as of the beginning of the period for purposes of
per share calculations.
38
<PAGE>
SECTION III
HFS Incorporated and Subsidiaries
COMBINING HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PHH MERGER
On November 10, 1996, the Company entered into a definitive merger agreement
(the "PHH Merger") pursuant to which the Company will issue approximately $1.7
billion of Company common stock in exchange for all of the outstanding common
stock of PHH Corporation ("PHH"). The accompanying combining consolidated
financial statements give effect to the business combination of the Company
and PHH which will be accounted for as a pooling of interests. Accordingly,
the underlying consolidated combining balance sheet as of September 30, 1996
and the consolidated combining statements of income for each of the years
ended December 31, 1993, 1994 and 1995, and each of the nine month periods
ended September 30, 1995 and 1996, reflects the combining of the historical
financial results of PHH Corporation with and into the historical consolidated
financial results of the Company. The Company expects to recognize a one-time
charge related to transaction and business combination costs in connection with
the PHH Merger, which is not reflected in the combining statements of income.
Additionally, the combining historical consolidated financial statements
reflect adjustments for the pooling of the Company and PHH including
reclassifications to conform accounting policies and shares issued as
consideration in connection with the PHH merger.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and should be read in conjunction
therewith and with (i) the consolidated financial statements and related
notes of the Company included in its 1995 Annual Report on Form 10-K (ii) the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996; and (iii) the consolidated financial statements of PHH Corporation
included elsewhere in this report.
39
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED
BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PAGE 1 OF 2
HISTORICAL
------------------------------- PRO FORMA COMBINED
HFS PHH (1) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 471,194 $ 11,450 $ - $ 482,644
Relocation receivables 136,052 666,905 - 802,957
Other accounts and notes receivable, net 113,175 442,951 - 556,126
Other current assets 59,081 58,916 - 117,997
-------------- ------------- ------------- -------------
TOTAL CURRENT ASSETS 779,502 1,180,222 - 1,959,724
-------------- ------------- ------------- -------------
Property and equipment-net 106,233 92,846 - 199,079
Franchise agreements-net 594,415 - - 594,415
Excess of cost over fair value of
net assets acquired-net 1,339,836 47,656 - 1,387,492
Other assets 80,064 125,384 - 205,448
-------------- ------------- ------------- -------------
TOTAL 2,900,050 1,446,108 - 4,346,158
-------------- ------------- ------------- -------------
ASSETS UNDER VEHICLE MANAGEMENT AND
MORTGAGE PROGRAMS
Net investment in leases and leased vehicles - 3,285,721 - 3,285,721
Mortgage loans held for sale - 872,404 - 872,404
Mortgage servicing rights & fees - 280,344 - 280,344
-------------- ------------- ------------- -------------
TOTAL - 4,438,469 - 4,438,469
-------------- ------------- ------------- -------------
TOTAL ASSETS $ 2,900,050 $ 5,884,577 $ - $ 8,784,627
============== ============= ============= =============
</TABLE>
- -------------
(1) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by
the merged companies.
See notes to combining consolidated financial statements.
40
<PAGE>
PAGE 2 OF 2
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED
BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------- PRO FORMA COMBINED
HFS PHH (1) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and other
accrued liabilities $ 160,357 $ 418,143 $ 76,651 (A) $ 655,151
Deferred revenue - net 24,655 - - 24,655
Income taxes payable 81,633 - - 81,633
Accrued acquisition obligations 40,287 - - 40,287
Current portion of long-term debt 29,907 - - 29,907
-------------- ------------- ------------- -------------
TOTAL CURRENT LIABILITIES 336,839 418,143 76,651 831,633
-------------- ------------- ------------- -------------
Long-term debt 534,264 - 584,796 (B) 1,119,060
Deferred revenue 7,299 114,021 (76,651) (A) 44,669
Other non-current liabilities 31,259 - - 31,259
Deferred income taxes 85,400 - - 85,400
-------------- ------------- ------------- -------------
TOTAL 995,061 532,164 584,796 2,112,021
-------------- ------------- ------------- -------------
LIABILITIES UNDER VEHICLE MANAGEMENT AND MORTGAGE PROGRAMS
Debt - 4,476,805 (584,796) 3,892,009
Deferred income taxes - 221,700 - 221,700
-------------- ------------- ------------- -------------
Total - 4,698,505 (584,796) 4,113,709
-------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock 1,237 99,820 (99,563) (C) 1,494
Additional paid-in capital 1,705,541 - 99,563 (C) 1,805,104
Retained earnings 206,236 568,400 - 774,636
Treasury stock (8,025) - - (8,025)
Foreign currency equity adjustment - (14,312) - (14,312)
-------------- -------------- ------------- --------------
TOTAL STOCKHOLDERS' EQUITY 1,904,989 653,908 - 2,558,897
-------------- ------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 5,884,577 $ - $ 8,784,627
============== ============= ============= =============
</TABLE>
- -------------
(1) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statements.
41
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------- PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 128,489 $ - $ 188,060 (E) $ 316,549
Real estate services - 824,872 (602,965) (D) 221,907
Mortgage services - 150,414 - 150,414
------------ ------------ ------------- ---------------
Service fees, net 128,489 975,286 (414,905) 688,870
------------ ------------ ------------- ---------------
Fleet management - 1,140,557 (188,060) (E) 952,497
Depreciation on vehicles
under operating leases - (790,864) - (790,864)
Interest - - (111,939) (F) (111,939)
------------ ------------ ------------- ----------------
Fleet management, net - 349,693 (299,999) 49,694
------------ ------------ ------------- ---------------
Other 11,881 - - 11,881
------------ ------------ ------------ ---------------
Net revenues 140,370 1,324,979 (714,904) 750,445
------------ ------------ ------------ ---------------
EXPENSES
Selling, general and administrative 40,315 293,161 (20,147) (G) 313,329
Costs, including interest, of carrying
and reselling homes - 728,634 (602,965) (D) 84,981
(36,113) (H)
(4,575) (G)
Direct costs of mortgage services - 56,557 (30,080) (G) 26,477
------------ ------------ ------------- ---------------
Total selling, general and
administrative 40,315 1,078,352 (693,880) 424,787
Depreciation and amortization 19,153 - 54,802 (G) 73,955
Interest 20,234 139,684 (111,939) (F) 84,092
36,113 (H)
------------ ------------ ------------- ---------------
Total expenses 79,702 1,218,036 (714,904) 582,834
------------ ------------ ------------- ---------------
Income before income taxes and
extraordinary loss 60,668 106,943 - 167,611
Provision for income taxes 26,345 43,917 - 70,262
------------ ------------ ------------- ---------------
Income before extraordinary loss 34,323 63,026 - 97,349
Extraordinary loss 12,845 - - 12,845
------------ ------------ ------------- ---------------
Net income $ 21,478 $ 63,026 $ - $ 84,504
============ ============ ============= ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .21 $ .67
============ ===============
Weighted average common and
common equivalent shares
outstanding 100,228 25,700 (I) 125,928
============ ============= ===============
</TABLE>
- ----------------
(1) The historical statement of income has been adjusted to reclassify
$116,700 of marketing and reservation expenses against related service
fees.
(2) The historical statement of operations of PHH is for the twelve months
ended January 31, 1994.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statements.
42
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------- PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 152,976 $ - $ 202,031 (E) $ 355,007
Real estate services - 705,146 (478,726) (D) 226,420
Mortgage services - 127,551 - 127,551
------------ ------------ ------------ ---------------
Service fees, net 152,976 832,697 (276,695) 708,978
------------ ------------ ------------ ---------------
Fleet management - 1,225,815 (202,031) (E) 1,023,784
Depreciation on vehicles
under operating leases - (849,523) - (849,523)
Interest (126,721) (F) (126,721)
------------ ------------- ------------ ----------------
Fleet management, net - 376,292 (328,752) 47,540
------------ ------------ ------------- ---------------
Other 29,303 - - 29,303
------------ ------------ ------------ ---------------
Net revenues 182,279 1,208,989 (605,447) 785,821
------------ ------------ ------------ ---------------
EXPENSES
Selling, general and administrative 46,018 295,345 (26,230) (G) 315,133
Costs, including interest, of carrying
and reselling homes - 595,900 (478,726) (D) 93,422
(19,993) (H)
(3,759) (G)
Direct costs of mortgage services - 41,221 (20,284) (G) 20,937
------------ ------------ ------------- ---------------
Total selling, general and
administrative 46,018 932,466 (548,992) 429,492
Depreciation and amortization 23,723 - 50,273 (G) 73,996
Interest 18,685 159,765 (126,721) (F) 71,722
19,993 (H)
Other 3,210 - - 3,210
------------ ------------ ------------ ---------------
Total expenses 91,636 1,092,231 (605,447) 578,420
------------ ------------ ------------- ---------------
Income before income taxes 90,643 116,758 - 207,401
Provision for income taxes 37,154 47,714 - 84,868
------------ ------------ ------------ ---------------
Net income $ 53,489 $ 69,044 $ - $ 122,533
============ ============ ============ ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .53 $ .97
============ ===============
Weighted average common and
common equivalent shares
outstanding 100,874 25,700 (I) 126,574
============ ============= ===============
</TABLE>
- -----------------
(1) The historical statement of income has been adjusted to reclassify
$130,268 of marketing and reservation expenses against related service
fees.
(2) The historical statement of operations of PHH is for the twelve months
ended January 31, 1995.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statement.
43
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------- PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 229,671 $ - $ 203,390 (E) $ 433,061
Real estate services - 782,727 (532,573) (D) 250,154
Mortgage services - 173,787 - 173,787
------------ ------------ ------------- ---------------
Service fees, net 229,671 956,514 (329,183) 857,002
------------ ------------ ------------- ---------------
Fleet management - 1,347,870 (203,390) (E) 1,144,480
Depreciation on vehicles
under operating leases - (929,341) - (929,341)
Interest (159,652) (F) (159,652)
------------ ------------- ------------- ----------------
Fleet management, net - 418,529 (363,042) 55,487
------------ ------------ ------------- ---------------
Other 43,541 - - 43,541
------------ ------------ ------------ ---------------
Net revenues 273,212 1,375,043 (692,225) 956,030
------------ ------------ ------------ ---------------
EXPENSES
Selling, general and administrative 82,426 310,567 (29,692) (G) 363,301
Costs, including interest, of carrying
and reselling homes - 658,498 (532,573) (D) 97,324
(25,972) (H)
(2,629) (G)
Direct costs of mortgage services - 60,498 (30,667) (G) 29,831
------------ ------------ ------------ ---------------
Total selling, general and
administrative 82,426 1,029,563 (621,533) 490,456
Depreciation and amortization 30,857 - 62,988 (G) 93,845
Interest 21,789 212,365 (159,652) (F) 100,474
25,972 (H)
Other 3,235 - - 3,235
------------ ------------ ------------ ---------------
Total expenses 138,307 1,241,928 (692,225) 688,010
------------ ------------ ------------- ---------------
Income before income taxes 134,905 133,115 - 268,020
Provision for income taxes 55,175 54,995 - 110,170
------------ ------------ ------------ ---------------
Net income $ 79,730 $ 78,120 $ - $ 157,850
============ ============ ============ ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .73 $ 1.15
============ ===============
Weighted average common and
common equivalent shares
outstanding 115,654 25,700 (I) 141,354
============ ============= ===============
</TABLE>
- -----------------
(1) The historical statement of income has been adjusted to reclassify
$139,771 of marketing and reservation expenses against related service
fees.
(2) The historical statement of operations of PHH is for the twelve months
ended January 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statements.
44
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- PRO FORMA HISTORICAL HFS,
HFS (1) PHH (2) ADJUSTMENTS AS RESTATED
-------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 159,792 $ - $ 150,028 (E) $ 309,820
Real estate services - 590,168 (399,717) (D) 190,451
Mortgage services - 124,144 - 124,144
------------ ------------- ------------ ---------------
Service fees, net 159,792 714,312 (249,689) 624,415
------------ ------------- ------------ ---------------
Fleet management - 1,003,355 (150,028) (E) 853,327
Depreciation on vehicles
under operating leases - (692,788) - (692,788)
Interest (117,373) (F) (117,373)
------------ ------------ ------------ ----------------
Fleet management, net - 310,567 (267,401) 43,166
------------ ------------ ------------ ----------------
Other 30,869 - - 30,869
------------ ------------ ------------ ----------------
Net revenues 190,661 1,024,879 (517,090) 698,450
------------ ------------ ------------ ----------------
EXPENSES
Selling, general and administrative 49,472 232,698 (22,452) (G) 259,718
Costs, including interest, of carrying
and reselling homes - 497,415 (399,717) (D) 76,266
(19,344) (H)
(2,088) (G)
Direct costs of mortgage services - 40,093 (18,981) (G) 21,112
------------ ------------ ------------ ---------------
Total selling, general and
administrative 49,472 770,206 (462,582) 357,096
Depreciation and amortization 21,721 - 43,521 (G) 65,242
Interest 16,272 154,638 (117,373) (F) 72,881
19,344 (H)
Other 2,012 - - 2,012
------------ ------------ ------------ ---------------
Total expenses 89,477 924,844 (517,090) 497,231
------------ ------------ ------------ ---------------
Income before income taxes 101,184 100,035 - 201,219
Provision for income taxes 41,820 41,397 - 83,217
------------ ------------ ------------ ---------------
Net income $ 59,364 $ 58,638 $ - $ 118,002
============ ============ ============ ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .56 $ .88
============ ===============
Weighted average common and
common equivalent shares
outstanding 112,056 25,700 (I) 137,756
============ ============ ===============
</TABLE>
- -----------------
(1) The historical statement of income has been adjusted to reclassify
$109,070 of marketing and reservation expenses against related service
fees.
(2) The historical statement of operations of PHH is for the nine months
ended October 31, 1995.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statements.
45
<PAGE>
SECTION III
HFS INCORPORATED AND SUBSIDIARIES
COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- PRO FORMA HISTORICAL HFS,
HFS (1) PHH (2) ADJUSTMENTS AS RESTATED
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net $ 346,127 $ - $ 152,602 (E) $ 498,729
Real estate services - 619,431 (420,805) (D) 198,626
Mortgage services - 188,636 - 188,636
------------ ------------ ------------ ---------------
Service fees, net 346,127 808,067 (268,203) 885,991
------------ ------------ ------------- ---------------
Fleet management - 1,042,984 (152,602) (E) 890,382
Depreciation on vehicles
under operating leases - (727,457) - (727,457)
Interest (120,404) (F) (120,404)
------------ ------------- ------------- ----------------
Fleet management, net - 315,527 (273,006) 42,521
------------ ------------ ------------- ---------------
Other 81,733 - - 81,733
------------ ------------ ------------ ---------------
Net revenues 427,860 1,123,594 (541,209) 1,010,245
------------ ------------ ------------- ---------------
EXPENSES
Selling, general and administrative 148,287 249,693 (19,808) (G) 378,172
Costs, including interest, of carrying
and reselling homes - 507,986 (420,805) (D) 62,841
(22,970) (H)
(1,370) (G)
Direct costs of mortgage services - 77,718 (38,720) (G) 38,998
------------ ------------ ------------- ---------------
Total selling, general and
administrative 148,287 835,397 (503,673) 480,011
Depreciation and amortization 41,129 - 59,898 (G) 101,027
Interest 22,194 169,933 (120,404) (F) 94,693
22,970 (H)
Other 10,988 - - 10,988
------------ ------------ ------------ ---------------
Total expenses 222,598 1,005,330 (541,209) 686,719
------------ ------------ ------------- ---------------
Income before income taxes 205,262 118,264 - 323,526
Provision for income taxes 82,630 48,253 - 130,883
------------ ------------ ------------- ---------------
Net income $ 122,632 $ 70,011 $ - $ 192,643
============ ============ ============= ===============
PER SHARE INFORMATION
(FULLY DILUTED)
Net income $ .96 $ 1.25
============ ===============
Weighted average common and
common equivalent shares
outstanding 131,684 25,700 (I) 157,384
============ ============= ===============
</TABLE>
- -----------------
(1) The historical statement of income has been adjusted to reclassify
$122,150 of marketing and reservation expenses against related service
fees.
(2) The historical statement of operations of PHH is for the nine months
ended October 31, 1996.
Note: Certain reclassifications have been made to the historical results of
HFS and PHH to conform to the presentation expected to be used by the
merged companies.
See notes to combining consolidated financial statements.
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HFS Incorporated and Subsidiaries
NOTES TO PRO FORMA CONSOLIDATING COMBINING
FINANCIAL STATEMENTS
A. OTHER CURRENT ASSETS:
The pro forma adjustment reclassifies advances from clients to accounts
payable and other accrued liabilities. This adjustment is made to conform
to the presentation expected to be used by the merged companies.
B. LONG-TERM DEBT:
This pro forma adjustment reclassifies the portion of long-term debt
associated with real estate services activities from Liabilities under
vehicle management and mortgage programs to Long-term debt. This
adjustment was made to conform to the presentation expected to be used
by the merged companies.
C. EQUITY:
The pro forma adjustment reflects a reclassification of equity in
connection with issuance of Company common stock to the PHH shareholders.
D. SERVICES FEES:
The pro forma adjustment offsets amounts billed (PHH revenue) to client
corporations with expenses incurred (PHH expense) on behalf of client
corporations. This adjustment is made to conform to the presentation
expected to be used by the merged companies.
E. FLEET MANAGEMENT:
The pro forma adjustment reclassifies service fees generated from
fee-based services provided to clients' vehicle fleets. This adjustment
is made to conform to the presentation expected to be used by the
merged companies.
F. INTEREST EXPENSE - FLEET MANAGEMENT:
The pro forma adjustment reclassifies interest expense on debt incurred
to finance vehicle leasing activities. This adjustment is made to
conform to the presentation expected to be used by the merged companies.
G. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment reclassifies depreciation and amortization,
other than depreciation on vehicles under operating leases, to a separate
financial line to conform to the presentation expected to be used by the
merged companies.
H. INTEREST EXPENSE - REAL ESTATE SERVICES:
The pro forma adjustment reclassifies the interest portion of the cost of
carrying and reselling homes from selling general and administrative
expense to interest expense. This adjustment is made to conform to the
presentation expected to be used by the merged companies.
I. WEIGHTED AVERAGE SHARES:
The pro forma adjustment reflects the number of shares of Company common
stock estimated to be issued by the Company in connection with the PHH
Merger at an assumed $67.00 per share price.
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