<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HFS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 6794 22-3059335
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(201) 428-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES E. BUCKMAN, ESQ.
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(201) 428-9700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
DAVID FOX, ESQ. LAWRENCE LEDERMAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP MILBANK, TWEED, HADLEY & MCCLOY
919 THIRD AVENUE 1 CHASE MANHATTAN PLAZA
NEW YORK, NY 10022 NEW YORK, NY 10005
(212) 735-3000 (212) 530-5000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE
WITH GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT
PROPOSED MAXIMUM PROPOSED MAXIMUM OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE(2)
- --------------------------------- -------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 31,400,000 (1) (1) $532,137.00
- --------------------------------- -------------- ------------------ ---------------- -----------------
</TABLE>
<PAGE>
(1) Pursuant to Rule 457(f) promulgated under the Securities Act of 1933,
as amended and estimated solely for the purpose of calculating the
registration fee, the proposed maximum aggregate offering price is
$1,756,052,398, which equals the sum of (A) the product of (a)
$47.5625, the average of the high and low prices of the common stock,
without par value, of PHH Corporation ("PHH") as reported on the New
York Stock Exchange Composite Tape on March 21, 1997 (the "PHH Average
Price") and (b) 35,169,098, the total number of shares of PHH Common
Stock expected to be exchanged (assuming no options to purchase PHH
Common Stock are exercised prior to such exchange) in the merger of a
subsidiary of HFS Incorporated with and into PHH (the "Merger") and (B)
(i) the product of (a) the PHH Average Price and (b) 3,164,490, the
number of outstanding options to purchase PHH Common Stock minus (ii)
$67,188,881, the aggregate exercise price of the outstanding options to
purchase PHH Common Stock.
(2) $322,526.78 of which was previously paid in connection with the filing
by HFS and PHH on December 19, 1996 of preliminary proxy materials on
Schedule 14A in connection with the Merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
[HFS LOGO]
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
MARCH 27, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"HFS Special Meeting") of HFS Incorporated ("HFS") to be held at 10:00 a.m.,
local time, on April 30, 1997, at the offices of HFS, 6 Sylvan Way,
Parsippany, New Jersey. At the HFS Special Meeting, you will be asked to
consider and vote upon (i) a proposal (the "Share Issuance") to approve the
issuance by HFS of up to 31.4 million shares of HFS common stock, par value
$.01 per share ("HFS Common Stock"), pursuant to the Agreement and Plan of
Merger dated as of November 10, 1996 (the "Merger Agreement") by and among
HFS, Mercury Acq. Corp., a wholly owned subsidiary of HFS ("Merger Sub"), and
PHH Corporation ("PHH"), which provides for the merger of Merger Sub with and
into PHH (the "Merger"); (ii) a proposal to amend HFS's Certificate of
Incorporation to increase the maximum number of authorized directors of HFS
from twelve (12) to twenty (20) (the "Directors Amendment"); (iii) a proposal
to amend HFS's Certificate of Incorporation to increase the number of
authorized shares of HFS Common Stock from 300,000,000 shares to 600,000,000
shares (the "Shares Amendment" and together with the Directors Amendment, the
"Certificate of Incorporation Amendments"); and (iv) a proposal to amend
HFS's Amended and Restated 1993 Stock Option Plan (the "1993 Plan") to
provide for an increase of 10,000,000 shares in the total number of shares of
HFS Common Stock currently authorized for issuance under the 1993 Plan (which
would increase the total number of shares authorized for issuance under the
1993 Plan from 24,541,600 to 34,541,600) (the "1993 Plan Amendment").
In the Merger, each outstanding share of common stock of PHH ("PHH Common
Stock"), other than PHH Common Stock held by PHH or held by HFS, Merger Sub
or any other wholly owned subsidiary of HFS, will be converted into the right
to receive that fraction of a share of HFS Common Stock represented by the
number (rounded upward, if necessary, to the nearest one-thousandth)
determined by dividing $49.50 by the average price of HFS Common Stock over a
period of twenty (20) trading days preceding the fifth trading day prior to
the date of the special meeting of stockholders of PHH; provided, however,
that in no event will such number be greater than 0.8250 or less than 0.6111.
In addition, in the Merger, shares of HFS Common Stock will be issued in
exchange for the currently outstanding options to purchase shares of PHH
Common Stock. Approval of the Share Issuance by HFS stockholders is a
condition to consummation of the Merger. Upon consummation of the Merger, PHH
will become a wholly owned subsidiary of HFS.
The Board of Directors of HFS has carefully reviewed and considered the
terms and conditions of the proposed Merger, as well as a number of other
factors, including the opinion of Lehman Brothers Inc. ("Lehman Brothers") to
the effect that, from a financial point of view, the consideration to be paid
by HFS in the Merger is fair to HFS. The full text of the written opinion of
Lehman Brothers, which sets forth a description of the matters considered,
assumptions made and limits on review undertaken by Lehman Brothers is
attached to the accompanying Joint Proxy Statement/Prospectus as Annex II.
THE HFS BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE SHARE ISSUANCE, AND
RECOMMENDS THAT HFS STOCKHOLDERS VOTE FOR APPROVAL OF THE SHARE ISSUANCE. IN
ADDITION, THE HFS BOARD OF DIRECTORS HAS APPROVED, AND RECOMMENDS THAT HFS
STOCKHOLDERS VOTE FOR APPROVAL OF, THE CERTIFICATE OF INCORPORATION
AMENDMENTS AND THE 1993 PLAN AMENDMENT.
<PAGE>
The accompanying Notice of Special Meeting and Joint Proxy
Statement/Prospectus more fully describe the matters to be acted on at the
HFS Special Meeting and include other information about HFS and PHH. Please
give this information your careful attention.
Whether or not you plan to attend the HFS Special Meeting in person, it is
important that your shares be represented at the HFS Special Meeting. Please
date and sign your proxy card and return it in the enclosed envelope as soon
as possible. This will not prevent you from attending the HFS Special Meeting
in person.
Very truly yours,
HFS INCORPORATED
/s/ Henry R. Silverman
----------------------------
Henry R. Silverman
Chairman of the Board
and Chief Executive Officer
<PAGE>
[HFS LOGO]
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF HFS INCORPORATED:
A Special Meeting of Stockholders (the "HFS Special Meeting") of HFS
Incorporated ("HFS") will be held at 10:00 a.m., local time, on April 30,
1997, at the offices of HFS, 6 Sylvan Way, Parsippany, New Jersey, for the
following purposes:
(1) To consider and vote upon a proposal (the "Share Issuance") to
approve the issuance of up to 31.4 million shares of HFS common
stock, par value $.01 per share ("HFS Common Stock"), pursuant to
the Agreement and Plan of Merger dated as of November 10, 1996 (the
"Merger Agreement"), by and among HFS, Mercury Acq. Corp., a wholly
owned subsidiary of HFS ("Merger Sub"), and PHH Corporation ("PHH")
pursuant to which Merger Sub will be merged with and into PHH and
PHH will become a wholly owned subsidiary of HFS (the "Merger").
Approval of the Share Issuance by HFS stockholders is a condition
to consummation of the Merger. The Share Issuance, the Merger and
the Merger Agreement are more fully described in the accompanying
Joint Proxy Statement/Prospectus and a copy of the Merger Agreement
is attached as Annex I thereto.
(2) To consider and vote upon a proposal to amend HFS's Certificate of
Incorporation to increase the maximum number of authorized
directors of HFS from twelve (12) to twenty (20) (the "Directors
Amendment"). The Directors Amendment is more fully described in the
accompanying Joint Proxy Statement/Prospectus and the form of the
Directors Amendment is attached as Annex V thereto.
(3) To consider and vote upon a proposal to amend HFS's Certificate of
Incorporation to increase the number of authorized shares of HFS
Common Stock from 300,000,000 shares to 600,000,000 shares (the
"Shares Amendment"). The Shares Amendment is more fully described
in the accompanying Joint Proxy Statement/Prospectus and the form
of the Shares Amendment is attached as Annex VI thereto.
(4) To consider and vote upon a proposal to amend HFS's Amended and
Restated 1993 Stock Option Plan (the "1993 Plan") to provide for an
increase of 10,000,000 shares in the total number of shares of HFS
Common Stock currently authorized for issuance under the 1993 Plan
(which would increase the total number of shares authorized for
issuance pursuant to the 1993 Plan from 24,541,600 to 34,541,600)
(the "1993 Plan Amendment"); the 1993 Plan Amendment is more fully
described in the accompanying Joint Proxy Statement/Prospectus and
the form of the 1993 Plan Amendment is attached as Annex VII
thereto.
(5) To transact such other business as may properly come before the HFS
Special Meeting or any adjournment or postponement thereof.
<PAGE>
Only stockholders of record at the close of business on March 3, 1997, the
record date set for the HFS Special Meeting, are entitled to notice of, and
to vote at, the HFS Special Meeting or any adjournment or postponement
thereof. HFS stockholders will not be entitled to dissenters' appraisal
rights in connection with the Share Issuance or the other matters to be
considered at the HFS Special Meeting.
By Order of the Board of Directors,
Jeanne M. Murphy
Secretary
Parsippany, New Jersey
March 27, 1997
YOU ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN
THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE YOUR PROXY IN
THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT
ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT THE HFS SPECIAL MEETING.
<PAGE>
[PHH LOGO]
March 27, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"PHH Special Meeting") of PHH Corporation ("PHH") to be held at 10:00 a.m.,
local time, on April 30, 1997, at The Carlton Hotel, 923 16th and K Streets,
N.W., Washington, DC. At the PHH Special Meeting, you will be asked to consider
and vote upon a proposal (the "Merger Proposal") to approve the merger of
Mercury Acq. Corp. ("Merger Sub"), a wholly owned subsidiary of HFS
Incorporated ("HFS"), with and into PHH (the "Merger") pursuant to the
Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS,
Merger Sub and PHH (the "Merger Agreement").
In the Merger, each outstanding share of common stock of PHH ("PHH Common
Stock"), other than PHH Common Stock held by PHH or held by HFS, Merger Sub
or any other wholly owned subsidiary of HFS, will be converted into the right
to receive that fraction of a share of common stock of HFS ("HFS Common
Stock") represented by the number (rounded upward, if necessary, to the
nearest one-thousandth) determined by dividing $49.50 by the average price of
HFS Common Stock over a period of twenty (20) trading days preceding the
fifth trading day prior to the date of the PHH Special Meeting (the "Conversion
Number"); provided, however, that in no event will such number be greater than
0.8250 or less than 0.6111. In addition, in the Merger, shares of HFS Common
Stock will be issued in exchange for the currently outstanding options to
purchase shares of PHH Common Stock. Approval of the Merger Proposal by PHH
stockholders is a condition to consummation of the Merger. Upon consummation of
the Merger, PHH will become a wholly owned subsidiary of HFS.
The PHH Board of Directors has received written opinions of Goldman, Sachs
& Co. ("Goldman Sachs") and The Beacon Group Capital Services, LLC ("Beacon")
to the effect that, as of the date hereof, the Conversion Number pursuant to
the Merger Agreement is fair to stockholders of PHH other than HFS, Merger Sub
or any other wholly owned subsidiary of HFS. The full text of the written
opinions of Goldman Sachs and Beacon, which set forth a description of the
matters considered, assumptions made and limits on review undertaken by
Goldman Sachs and Beacon, respectively, are attached to the accompanying Joint
Proxy Statement/Prospectus as Annex III and Annex IV, respectively. The Board
of Directors of PHH has carefully reviewed and considered the terms and
conditions of the proposed Merger, the Merger Agreement and the other
transactions contemplated thereby. THE PHH BOARD OF DIRECTORS HAS APPROVED THE
MERGER PURSUANT TO THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, AND RECOMMENDS THAT PHH STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
PROPOSAL.
The accompanying Notice of Special Meeting and Joint Proxy
Statement/Prospectus more fully describe the matters to be acted on at the
PHH Special Meeting and include other information about HFS and PHH. Please
give this information your careful attention.
<PAGE>
Whether or not you plan to attend the PHH Special Meeting in person, it is
important that your shares be represented at the PHH Special Meeting. Please
date and sign your proxy card and return it in the enclosed envelope as soon
as possible. This will not prevent you from attending the PHH Special Meeting
in person.
Very truly yours,
PHH CORPORATION
/s/ Robert D. Kunisch
-----------------------------------
Robert D. Kunisch
Chairman of the Board
Chief Executive Officer and
President
<PAGE>
[PHH LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF PHH CORPORATION:
A Special Meeting of Stockholders (the "PHH Special Meeting") of PHH
Corporation ("PHH") will be held at 10:00 a.m., local time, on April 30,
1997, at The Carlton Hotel, 923 16th and K Streets, N.W., Washington, DC,
for the following purposes:
(1) To consider and vote upon a proposal (the "Merger Proposal") to
approve the merger of Mercury Acq. Corp. ("Merger Sub"), a wholly
owned subsidiary of HFS Incorporated ("HFS"), with and into PHH
(the "Merger") pursuant to the Agreement and Plan of Merger dated
as of November 10, 1996, by and among HFS, Merger Sub and PHH (the
"Merger Agreement") and the transactions contemplated thereby. The
Merger Proposal, the Merger and the Merger Agreement are more
fully described in the accompanying Joint Proxy
Statement/Prospectus and a copy of the Merger Agreement is
attached as Annex I thereto.
(2) To transact such other business as may properly come before the
PHH Special Meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on January 31, 1997,
the record date set for the PHH Special Meeting, are entitled to notice of,
and to vote at, the PHH Special Meeting or any adjournment or postponement
thereof. PHH stockholders will not be entitled to objecting stockholders'
appraisal rights in connection with the Merger Proposal or the other matters
to be considered at the PHH Special Meeting.
By Order of the Board of Directors,
Samuel H. Wright
Secretary
March 27, 1997
YOU ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
IN THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE YOUR PROXY
IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS
AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT THE PHH SPECIAL MEETING.
<PAGE>
HFS INCORPORATED
PHH CORPORATION
JOINT PROXY STATEMENT
HFS INCORPORATED
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to stockholders
of HFS Incorporated ("HFS") in connection with the solicitation of proxies by
the Board of Directors of HFS (the "HFS Board") from holders of shares of
common stock, par value $.01 per share ("HFS Common Stock"), for use at a
special meeting of HFS stockholders (the "HFS Special Meeting") to be held to
consider and vote upon: (i) a proposal to approve the issuance by HFS of up
to 31.4 million shares of HFS Common Stock (the "Share Issuance"), pursuant
to the Agreement and Plan of Merger dated as of November 10, 1996 (the
"Merger Agreement") by and among HFS, Mercury Acq. Corp., a wholly owned
subsidiary of HFS ("Merger Sub"), and PHH Corporation ("PHH"), which provides
for the merger of Merger Sub with and into PHH (the "Merger"); (ii) a
proposal to amend HFS's Certificate of Incorporation to increase the maximum
number of authorized directors of HFS from twelve (12) to twenty (20) (the
"Directors Amendment"); (iii) a proposal to amend HFS's Certificate of
Incorporation to increase the number of authorized shares of HFS Common Stock
from 300,000,000 shares to 600,000,000 shares (the "Shares Amendment" and
together with the Directors Amendment, the "Certificate of Incorporation
Amendments"); and (iv) a proposal to amend HFS's Amended and Restated 1993
Stock Option Plan (the "1993 Plan") to provide for an increase of 10,000,000
shares in the total number of shares of HFS Common Stock currently authorized
for issuance under the 1993 Plan (which would increase the total number of
shares authorized for issuance pursuant to the 1993 Plan from 24,541,600 to
34,541,600) (the "1993 Plan Amendment" and together with the Share Issuance
and the Certificate of Incorporation Amendments, the "HFS Proposals").
Approval of the Share Issuance by HFS stockholders is a condition to
consummation of the Merger. See "THE MERGER AGREEMENT--Conditions Precedent
to the Merger." Only holders of record of HFS Common Stock at the close of
business on March 3, 1997 (the "HFS Record Date") are entitled to notice of,
and to vote at, the HFS Special Meeting. At the close of business on the HFS
Record Date, 127,529,530 shares of HFS Common Stock were outstanding, which
constituted the only outstanding voting securities of HFS. See "INFORMATION
CONCERNING THE HFS SPECIAL MEETING."
This Joint Proxy Statement/Prospectus also is being furnished to the
stockholders of PHH in connection with the solicitation of proxies by the
Board of Directors of PHH (the "PHH Board") from holders of shares of common
stock, without par value, including the attached preferred stock purchase
rights ("PHH Common Stock"), for use at a special meeting of stockholders of
PHH (the "PHH Special Meeting," and together with the HFS Special Meeting,
the "Special Meetings") to be held to consider and vote upon a proposal (the
"Merger Proposal") to approve the Merger, pursuant to the Merger Agreement
and the transactions contemplated thereby. Upon consummation of the Merger,
PHH will become a wholly owned subsidiary of HFS. Approval of the Merger
Proposal by PHH stockholders is a condition to consummation of the Merger.
See "THE MERGER AGREEMENT--Conditions Precedent to the Merger." Only holders
of record of PHH Common Stock at the close of business on January 31, 1997
(the "PHH Record Date"), are entitled to notice of, and to vote at, the PHH
Special Meeting. At the close of business on the PHH Record Date, 34,984,265
shares of PHH Common Stock were outstanding, which constituted the only
outstanding voting securities of PHH. See "INFORMATION CONCERNING THE PHH
SPECIAL MEETING."
<PAGE>
In the Merger, among other things, each outstanding share of PHH Common
Stock, other than PHH Common Stock held by PHH or held by HFS, Merger Sub or
any other wholly owned subsidiary of HFS, will be converted into the right to
receive that fraction of a share of HFS Common Stock (the "Conversion
Number") represented by the number (rounded upward, if necessary, to the
nearest one-thousandth) determined by dividing $49.50 by the average price of
HFS Common Stock over a period of twenty (20) trading days preceding the
fifth trading day prior to the date of the PHH Special Meeting (the "Pricing
Period"); provided, however, that in no event will such number be greater
than 0.8250 or less than 0.6111. Promptly following the Pricing Period, HFS
and PHH will issue a joint press release announcing the Conversion Number. As
a result of the conversion formula described above, if the average price of
HFS Common Stock during the Pricing Period is within the range of $60.00 to
$81.00, holders of PHH Common Stock will receive that fraction of a share of
HFS Common Stock having a value (based on the average price of such shares
during the Pricing Period) of $49.50 for each share of PHH Common Stock (and
the Conversion Number will fluctuate accordingly), but if the average price
of HFS Common Stock during the Pricing Period is less than $60.00 or greater
than $81.00, the Conversion Number will be fixed at 0.8250 or 0.6111,
respectively, resulting in the issuance of a number of shares of HFS Common
Stock for each share of PHH Common Stock having a value (based on the average
price of such shares during the Pricing Period) less than or more than
$49.50, as the case may be. In addition, in the Merger, shares of HFS Common
Stock will be issued in exchange for the currently outstanding options to
purchase shares of PHH Common Stock. A copy of the Merger Agreement is
attached to this Joint Proxy Statement/ Prospectus as Annex I and is
incorporated by reference herein. Stockholders may call telephone number
1-888-224-2745, between the hours of 8:00 a.m. and 8:00 p.m., New York time,
after 5:00 p.m., New York time, on April 22, 1997 to be advised of the
Conversion Number. See "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF
CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF HFS AND PHH.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
HFS with respect to the shares of HFS Common Stock to be issued in exchange
for all of the outstanding shares of PHH Common Stock and in exchange for all
of the outstanding options to purchase PHH Common Stock in connection with
the Merger, as described herein. HFS Common Stock is listed and traded on the
New York Stock Exchange, Inc. (the "NYSE") under the symbol "HFS". PHH Common
Stock is listed and traded on the NYSE under the symbol "PHH".
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being sent to holders of HFS Common Stock and PHH Common Stock on
or about March 27, 1997.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is March 27, 1997.
ii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HFS
OR PHH. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO OR FROM ANY
PERSON TO WHOM OR FROM WHOM, SUCH OFFER, SOLICITATION OF AN OFFER OR
SOLICITATION OF A PROXY IS NOT AUTHORIZED OR IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT
BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR IN THE AFFAIRS OF HFS OR PHH SINCE THE DATE HEREOF.
THE INFORMATION CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH
RESPECT TO HFS AND ITS SUBSIDIARIES HAS BEEN PROVIDED BY HFS. THE INFORMATION
CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH RESPECT TO PHH AND ITS
SUBSIDIARIES HAS BEEN PROVIDED BY PHH.
AVAILABLE INFORMATION
HFS and PHH are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations promulgated thereunder, and, in accordance therewith,
file reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "Commission"). These reports, proxy
and information statements and other information concerning HFS and PHH can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
should be available at the Commission's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7
World Trade Center, 13th Floor, New York, New York 10048, and copies of such
material can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
site on the World Wide Web (at http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. In addition, information filed
by each of HFS and PHH with the NYSE may be inspected at the offices of the
NYSE at 20 Broad Street, New York, New York 10005.
HFS has filed with the Commission a Registration Statement on Form S-4
(including all amendments and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations promulgated thereunder, with respect to
the shares of HFS Common Stock to be issued pursuant to the Merger Agreement.
This Joint Proxy Statement/ Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which
have been omitted in accordance with the rules and regulations of the
Commission. Such additional information may be obtained from the Commission's
principal office in Washington, D.C. Statements contained herein, or in any
document incorporated herein by reference, concerning the provisions of
certain documents are not necessarily complete and, in each instance,
reference is made to the copies of such documents filed as exhibits to the
Registration Statement or otherwise filed with the Commission, each such
statement being qualified in its entirety by such reference.
iii
<PAGE>
INCORPORATION BY REFERENCE
HFS incorporates by reference herein the following documents filed
pursuant to the Exchange Act:
1. Annual Report on Form 10-K for the year ended December 31, 1995 (as
amended by the Form 10-K/A filed on March 27, 1997);
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996,
June 30, 1996 (as amended by the Form 10-Q/A filed on August 19, 1996
and the 10-Q/A filed on March 27, 1997), and September 30, 1996 (as
amended by the Form 10-Q/A filed on March 27, 1997);
3. The description of HFS's capital stock which is contained in its
Registration Statement on Form 8-A, dated September 16, 1992 (including
the amendment on Form 8-A/A, dated September 1, 1995), including any
amendment or report filed for the purpose of updating such description;
and
4. Current Reports on Form 8-K dated August 16, 1995 (as amended by the
Form 8-K/A dated August 18, 1995), February 16, 1996 (as amended by the
Form 8-K/A dated March 27, 1997), March 8, 1996, April 5, 1996 (as
amended by the Form 8-K/A dated March 27, 1997), May 8, 1996 (as amended
by the Form 8-K/A dated March 27, 1997), May 21, 1996, August 29, 1996
(as amended by the Form 8-K/A dated December 5, 1996 and as further
amended by the Form 8-K/A dated March 27, 1997), October 15, 1996 (as
amended by the Form 8-K/A dated March 27, 1997), November 15, 1996 (as
amended by the Form 8-K/A dated December 4, 1996 and as further amended
by the Form 8-K/A dated March 27, 1997) and December 24, 1996.
PHH incorporates by reference herein the following documents filed
pursuant to the Exchange Act:
1. Annual Report on Form 10-K for the year ended April 30, 1996 (as
amended by the Form 10-K/A filed on March 27, 1997);
2. Quarterly Reports on Form 10-Q for the quarters ended July 31, 1996,
(as amended by the Form 10-Q/A filed on March 27, 1997), October 31, 1996
(as amended by the Form 10-Q/A filed on March 27, 1997), and January
31, 1997 (as amended by the Form 10-Q/A filed on March 27, 1997).
3. The description of PHH's capital stock which is contained in its
Registration Statements on Form 8-A, dated April 1, 1986 and March 25,
1996 (including the amendment on Form 8-A/A, dated November 15, 1996),
including any amendment or report filed for the purpose of updating
such description; and
4. Current Report on Form 8-K dated November 10, 1996 and filed on
November 15, 1996.
All documents and reports filed by HFS or PHH pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the Special Meetings shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be
a part hereof from the date of such filing. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
IS DELIVERED, ON WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING
TO HFS, TO JAMES E. BUCKMAN, ESQ., EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL, HFS INCORPORATED, 6 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054, (201)
428-9700, OR IN THE CASE OF DOCUMENTS RELATING TO PHH, TO SAMUEL H. WRIGHT,
ESQ., VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, PHH CORPORATION, 11333
MCCORMICK ROAD, HUNT VALLEY, MARYLAND 21031, (410) 771-3600. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETINGS,
REQUESTS SHOULD BE MADE BY APRIL 23, 1997.
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FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under the captions "RISK FACTORS,"
"THE MERGER -- Reasons of HFS for the Merger; Recommendations of the HFS
Board," in the Pro Forma Financial Statements and elsewhere in this Joint
Proxy Statement/Prospectus, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or
achievements of HFS to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. These forward-looking statements were based on various factors
and were derived utilizing numerous important assumptions and other important
factors that could cause actual results to differ materially from those in
the forward-looking statements. Important assumptions and other important
factors that could cause actual results to differ materially from those in
the forward-looking statements, include, but are not limited to: uncertainty
as to HFS's future profitability and PHH's future profitability; HFS's
ability to develop and implement operational and financial systems to manage
rapidly growing operations; competition in HFS's and PHH's existing and
potential future lines of business; HFS's ability to integrate and
successfully operate acquired businesses and the risks associated with such
businesses; HFS's ability to obtain financing on acceptable terms to finance
HFS's growth strategy and for HFS to operate within the limitations imposed
by financing arrangements; uncertainty as to the future profitability of
acquired businesses; and other factors. Other factors and assumptions not
identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized as well as other factors may also cause actual results to differ
materially from those projected. HFS assumes no obligation to update these
forward-looking statements to reflect actual results, changes in assumptions
or changes in other factors affecting such forward-looking statements.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY..................................................................... 1
The Companies.............................................................. 1
HFS Incorporated........................................................... 1
PHH Corporation............................................................ 2
The Special Meetings....................................................... 3
The HFS Special Meeting.................................................... 3
The PHH Special Meeting.................................................... 4
Risk Factors............................................................... 5
Summary Consolidated Financial Data........................................ 5
The Merger................................................................. 6
General.................................................................... 6
Toll-Free Number........................................................... 8
Background of the Merger................................................... 8
Recommendation of the HFS Board............................................ 8
Financial Advisor to HFS................................................... 8
Recommendation of the PHH Board............................................ 8
Financial Advisors to PHH.................................................. 8
Conditions to the Merger................................................... 8
Termination of the Merger Agreement........................................ 9
Regulatory Matters......................................................... 9
Certain Federal Income Tax Consequences.................................... 9
Accounting Treatment....................................................... 10
Appraisal Rights........................................................... 10
Interests of Certain Persons in the Merger................................. 10
Comparative Rights of Stockholders of HFS and PHH.......................... 10
Certificate of Incorporation Amendments.................................... 10
1993 Plan Amendment........................................................ 10
RECENT EVENTS............................................................... 11
HFS Fourth Quarter and Fiscal Year 1996 Financial Results.................. 11
HFS Share Repurchase Authorization......................................... 11
HFS's Preliminary Understanding with Hilton Hotels Corporation ............ 11
Amre, Inc. ................................................................ 11
Value Rent-A-Car, Inc. .................................................... 12
HFS First Quarter 1997 Results............................................. 12
HISTORICAL AND PRO FORMA SELECTED FINANCIAL INFORMATION..................... 13
Historical Financial Information........................................... 13
Unaudited Pro Forma Financial Information ................................. 14
Unaudited Combined Historical Financial Information........................ 14
Comparative Per Share Information.......................................... 16
COMPARATIVE STOCK PRICES AND DIVIDENDS...................................... 19
RISK FACTORS................................................................ 20
Fluctuation in Value of Merger Consideration............................... 20
Uncertainties in Integrating Business Operations and Achieving Cost Savings 20
Risks Related to HFS's Operations.......................................... 20
No Dividends............................................................... 21
Risks Related to Avis's Operations......................................... 21
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Risks Related to PHH's Operations ......................................... 24
INFORMATION CONCERNING THE HFS SPECIAL MEETING.............................. 25
Purpose, Time and Place.................................................... 25
Record Date; Quorum; Vote Required......................................... 25
Proxies.................................................................... 26
Appraisal Rights........................................................... 27
INFORMATION CONCERNING THE PHH SPECIAL MEETING.............................. 28
Purpose, Time and Place.................................................... 28
Record Date; Quorum; Vote Required......................................... 28
Proxies.................................................................... 28
Appraisal Rights........................................................... 29
THE MERGER.................................................................. 30
Background of the Merger................................................... 30
Reasons of HFS for the Merger; Recommendation of the HFS Board ............ 32
HFS Financial Advisor...................................................... 33
Reasons of PHH for the Merger; Recommendation of the PHH Board ............ 37
PHH Financial Advisors..................................................... 39
Certain Federal Income Tax Consequences.................................... 41
Accounting Treatment....................................................... 42
Appraisal Rights........................................................... 42
Interests of Certain Persons in the Merger................................. 43
Regulatory Matters......................................................... 47
NYSE Listing............................................................... 47
Delisting and Deregistration of PHH Common Shares.......................... 47
PHH Rights Plan Amendment.................................................. 47
Certain Federal Securities Laws Consequences............................... 48
THE MERGER AGREEMENT........................................................ 49
General; Conversion of Shares.............................................. 49
Exchange Procedures........................................................ 50
Effective Time............................................................. 51
Representations and Warranties............................................. 51
Conduct of Business of PHH Pending the Merger.............................. 51
Conduct of Business of HFS Pending the Merger.............................. 52
Employee Benefit Plans..................................................... 53
Directors' and Officers' Indemnification and Insurance..................... 53
Appointment of Director.................................................... 53
No Solicitation............................................................ 53
PHH Rights Agreement....................................................... 54
Conditions Precedent to the Merger......................................... 54
Termination................................................................ 54
Termination Fee............................................................ 55
Amendment; Waiver.......................................................... 55
Expenses................................................................... 55
DESCRIPTION OF HFS CAPITAL STOCK............................................ 56
General.................................................................... 56
Common Stock............................................................... 56
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Preferred Stock ........................................................... 56
Section 203 of the Delaware General Corporation Law........................ 56
Limitations on Change of Control........................................... 57
Disqualified Stockholders.................................................. 57
Transfer Agent............................................................. 57
COMPARATIVE RIGHTS OF STOCKHOLDERS OF HFS AND PHH........................... 58
Action by Written Consent of Stockholders.................................. 58
Amendment of Charter Documents and By-Laws................................. 58
Business Combinations...................................................... 58
Appraisal Rights........................................................... 60
Preemptive Rights.......................................................... 60
Indemnification............................................................ 60
Limitation of Personal Liability of Directors.............................. 61
Classified Board of Directors.............................................. 61
Cumulative Voting for Directors............................................ 62
Removal of Directors....................................................... 62
Newly Created Directorships and Vacancies.................................. 62
Special Meetings........................................................... 62
Inspection Rights.......................................................... 63
Dividends and Distributions................................................ 63
Rights Agreement........................................................... 63
PROPOSALS FOR CERTIFICATE OF INCORPORATION AMENDMENTS....................... 64
Directors Amendment........................................................ 64
Shares Amendment........................................................... 64
PROPOSAL FOR 1993 PLAN AMENDMENT............................................ 65
Interests of Certain Persons in the 1993 Plan Amendment.................... 67
Plan Benefits.............................................................. 67
LEGAL MATTERS AND EXPERTS................................................... 68
STOCKHOLDER PROPOSALS....................................................... 69
HFS........................................................................ 69
PHH........................................................................ 69
INDEX TO FINANCIAL STATEMENTS............................................... F-1
ANNEXES
ANNEX I: Agreement and Plan of Merger dated November 10, 1996 by and
among HFS Incorporated, Mercury Acq. Corp. and PHH
Corporation................................................. I-1
ANNEX II: Opinion of Lehman Brothers Inc., dated March 27, 1997....... II-1
ANNEX III: Opinion of Goldman, Sachs & Co., dated March 27, 1997....... III-1
ANNEX IV: Opinion of The Beacon Group Capital Services, LLC, dated
March 27, 1997.............................................. IV-1
ANNEX V: Form of Directors Amendment................................. V-1
ANNEX VI: Form of Shares Amendment.................................... VI-1
ANNEX VII: Form of 1993 Plan Amendment................................. VII-1
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. This summary is not intended to be
complete and reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Joint Proxy
Statement/Prospectus, the Annexes hereto and the documents incorporated
herein by reference. Stockholders of both HFS and PHH are encouraged to
review carefully this Joint Proxy Statement/Prospectus and the Annexes
hereto, and the documents incorporated herein by reference, in their
entirety. On June 24, 1996, the PHH Board declared a two-for-one stock split
in the form of a 100% stock dividend to stockholders of record on July 5,
1996, which was distributed on July 31, 1996 (the "PHH Stock Split"). On
November 3, 1995, the HFS Board declared a two-for-one stock split in the
form of a 100% stock dividend to stockholders of record on January 30, 1996,
which was distributed on February 14, 1996 (the "HFS Stock Split," and
together with the PHH Stock Split, the "Stock Splits"). All references in
this Joint Proxy Statement/ Prospectus to historical share and per share data
for PHH and HFS have been retroactively adjusted to reflect the Stock Splits.
Capitalized terms used in this Summary and not defined shall have the
meanings ascribed to them elsewhere in this Joint Proxy Statement/Prospectus.
THE COMPANIES
HFS INCORPORATED
HFS Incorporated ("HFS"), formerly named Hospitality Franchise Systems,
Inc., is the world's largest franchisor of hotels and residential real estate
brokerage offices. HFS operates eight national hotel franchise systems: Days
Inn(Registered Trademark), Ramada(Registered Trademark) (in the United
States), Howard Johnson(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn (Service Mark). In aggregate, these franchise systems consist of
approximately 5,400 properties and 495,000 hotel rooms worldwide. HFS also
operates the CENTURY 21(Registered Trademark), Coldwell Banker(Registered
Trademark) and Electronic Realty Associates or ERA(Registered Trademark)
(collectively "ERA") real estate brokerage franchise systems which represent
three of the four largest franchisors of residential real estate brokerage
services worldwide. HFS, a Delaware corporation, was incorporated on May 15,
1990.
As a franchisor of hotels and residential real estate brokerage offices,
HFS licenses the owners and operators of independent businesses, principally
hotels and real estate brokerage offices to use HFS's brand names. HFS does
not own or operate hotels or real estate brokerage offices. Instead, HFS
provides its customers with services designed to increase their revenue and
profitability. These services allow customers to retain independence and
local control while benefiting from the economies of scale of widely promoted
brand names and standards of service, national and regional direct marketing
and co-marketing arrangements and global procurement. The most important of
these services for hotel owners are access to a national reservation system,
national advertising and promotional campaigns, co-marketing programs and
volume purchasing discounts. The most significant services to real estate
brokerages are national advertising and promotion, referrals and training.
HFS also operates the Coldwell Banker corporate employee relocation
business, which HFS estimates is one of the largest providers of corporate
relocation services in the United States based on the number of transferred
employees assisted. This Coldwell Banker business offers corporate clients a
variety of services in connection with the transfer of their employees,
including the selling of a transferee's home, appraisals, inspections,
assistance in finding a new home, property marketing advice, rental
assistance, equity advances, purchasing a transferee's home at the appraised
value when no higher bid is obtained, educational and school placement
counseling, career counseling, spouse/partner employment assistance and group
move services.
HFS has recently completed two significant acquisitions. On October 17,
1996, HFS acquired all the outstanding capital stock of Avis, Inc. ("Avis")
for approximately $800 million in cash and HFS Common Stock. Avis, together
with its subsidiaries, affiliates and licensees, operates the Avis System,
which HFS
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believes to be the second largest car rental system in the world, with
approximately 4,139 locations in approximately 149 countries and territories.
On November 12, 1996, HFS completed the acquisition of all the outstanding
capital stock of Resort Condominiums International, Inc. ("RCI"), the world's
largest provider of timeshare exchange programs, for approximately $550
million in cash, $75 million in HFS Common Stock and up to $200 million in
contingent cash payments. The "RCI Network" enables a member who owns a
timeshare interest in a resort property that is affiliated with the RCI
Network to exchange such timeshare interest for one of equivalent value in
another affiliated resort. HFS expects that the recent acquisitions of Avis
and RCI, as well as PHH in the Merger, will provide increased cross-marketing
opportunities and economies of scale among HFS's lodging, car rental and real
estate brokerage franchisor operations.
HFS continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its industries and
in other franchise, franchisable and service businesses. Historically, HFS
has been involved in numerous transactions of various magnitudes for
consideration which included cash or securities (including HFS Common Stock)
or combinations thereof. HFS is continuing to evaluate and to pursue
appropriate acquisition and combination opportunities as they arise in the
expansion of its operations. No assurance can be given with respect to the
timing, likelihood or financial or business effect of any possible
transaction. In the past, acquisitions by HFS have involved both relatively
small acquisitions and acquisitions which have been significant.
As part of its regular on-going evaluation of acquisition opportunities,
HFS is currently engaged in a number of separate and unrelated preliminary
discussions concerning possible acquisitions, principally focused on
acquisition opportunities in the rental car and direct marketing industries.
HFS is in the early stages of such discussions and has not entered into any
agreement in principle with respect to any of these possible acquisitions.
The purchase price for the possible acquisitions may be paid in cash, through
the issuance of HFS Common Stock (which would increase the number of shares
of HFS Common Stock outstanding) or other securities of HFS, borrowings, or a
combination thereof. Prior to consummating any such possible acquisitions,
HFS, among other things, will have to initiate and satisfactorily complete
its due diligence investigation; negotiate the financial and other terms
(including price) and conditions of such acquisitions; obtain appropriate
Board of Directors, regulatory and other necessary consents and approvals;
and secure financing. HFS cannot predict whether any such acquisitions will
be consummated or, if consummated, will result in a financial or other
benefit to HFS.
HFS's principal executive offices are located at 6 Sylvan Way, Parsippany,
New Jersey 07054, and its telephone number is (201) 428-9700.
PHH CORPORATION
PHH Corporation ("PHH") was incorporated under Maryland law in 1953 as the
successor to a partnership, organized in Baltimore in 1946, which pioneered
the vehicle fleet management industry. In 1971, it entered the employee
relocation management business through the acquisition of Homequity, Inc.
from the founder of that company. In 1984, it launched its third principal
business segment, residential mortgage banking, through the acquisition of a
regional mortgage lender, US Mortgage Corporation, and subsequent expansion
of its services nationwide.
PHH provides a broad range of integrated management services, expense
management programs and mortgage banking services to more than 3,000 major
clients, including many of the world's largest corporations, as well as
government agencies and affinity groups. Its primary business service
segments consist of vehicle management, real estate and mortgage banking.
Fleet management services consist primarily of the management, purchase,
leasing and resale of vehicles for corporate clients and government agencies,
including fuel and expense management programs and other fee-based services
for clients' vehicle fleets. These programs were developed to meet the
specific needs of organizations using large and small numbers of cars and
trucks and are designed particularly to enable clients to reduce and control
the cost of operating corporate fleets.
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PHH provides real estate services principally to large international
corporations, government agencies and financial institutions, as well as to
members of affinity groups in the United States, Canada, the United Kingdom
and the Republic of Ireland. PHH also has capabilities in this industry
segment throughout Europe. PHH estimates that it is the largest provider of
corporate relocation services in the United States based on the number of
transferred employees assisted. Intended to help clients reduce employee
relocation costs, PHH's real estate subsidiaries' services include counseling
transferred employees of clients and the purchase, management and resale of
their homes, planning and implementing corporate group moves, home marketing
assistance and the movement of household goods, as well as destination
services and asset management for financial institutions.
In addition, PHH provides U.S. residential mortgage banking services in
all 50 states, including the origination, sale and servicing of residential
first mortgage loans. In 1995, PHH ranked 15th among loan originators. While
generally retaining mortgage servicing rights, PHH customarily sells all
mortgages it originates to investors as individual loans, or pooled with
other loans, from which pool are issued either participation interests or
mortgage-backed securities certificates issued, insured or guaranteed by the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) or the Government National Mortgage Association (GNMA).
Mortgage servicing consists of collecting loan payments, remitting principal
and interest payments to investors, holding escrow funds for payment of
mortgage-related expenses (e.g., taxes and insurance), and otherwise
administering PHH's mortgage loan servicing portfolio.
PHH's principal executive offices are located at 11333 McCormick Road,
Hunt Valley, Maryland 21031, and its telephone number is (410) 771-3600.
THE SPECIAL MEETINGS
THE HFS SPECIAL MEETING
Purpose, Time and Place. The HFS Special Meeting will be held on April 30,
1997 at 10:00 a.m., local time, at the offices of HFS, 6 Sylvan Way,
Parsippany, New Jersey. At the HFS Special Meeting, the stockholders of HFS
will be asked:
1. To consider and vote upon a proposal (the "Share Issuance") to approve
the issuance by HFS of up to 31.4 million shares of HFS common stock, par
value $.01 per share ("HFS Common Stock"), pursuant to the Agreement and Plan
of Merger dated as of November 10, 1996 (the "Merger Agreement") by and among
HFS, Mercury Acq. Corp., a wholly owned subsidiary of HFS ("Merger Sub"), and
PHH Corporation ("PHH"), which provides for the merger of Merger Sub with and
into PHH (the "Merger").
2. To consider and vote upon a proposal to amend HFS's Certificate of
Incorporation to increase the maximum number of authorized directors of HFS
from twelve (12) to twenty (20) (the "Directors Amendment").
3. To consider and vote upon a proposal to amend HFS's Certificate of
Incorporation to increase the number of authorized shares of HFS Common Stock
from 300,000,000 shares to 600,000,000 shares (the "Shares Amendment" and
together with the Directors Amendment, the "Certificate of Incorporation
Amendments").
4. To consider and vote upon a proposal to amend HFS's Amended and
Restated 1993 Stock Option Plan (the "1993 Plan") to provide for an increase
of 10,000,000 shares in the total number of shares of HFS Common Stock
currently authorized for issuance under the 1993 Plan (which would increase
the total number of shares authorized for issuance under the 1993 Plan from
24,541,600 to 34,541,600) (the "1993 Plan Amendment" and together with the
Share Issuance and the Certificate of Incorporation Amendments, the "HFS
Proposals").
5. To transact such other business as may properly come before the HFS
Special Meeting or any adjournment or postponement thereof.
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See "INFORMATION CONCERNING THE HFS SPECIAL MEETING--Purpose, Time and
Place."
Record Date; Quorum; Required Vote. The record date for the HFS Special
Meeting is the close of business on March 3, 1997 (the "HFS Record Date").
Only holders of record of HFS Common Stock at the close of business on the
HFS Record Date are entitled to notice of, and to vote at, the HFS Special
Meeting. As of the HFS Record Date, there were 127,529,530 outstanding shares
of HFS Common Stock, held by 504 holders of record. Each share of HFS Common
Stock is entitled to one vote on each of the HFS Proposals. The presence at
the HFS Special Meeting, either in person or by proxy, of a majority of the
issued and outstanding shares of HFS Common Stock entitled to vote will
constitute a quorum at the HFS Special Meeting. The affirmative vote of the
holders of a majority of the shares of HFS Common Stock voting on each of the
Share Issuance and 1993 Plan Amendment (where the total number of votes cast
on the respective proposal represents over 50% of all outstanding shares of
HFS Common Stock outstanding on the HFS Record Date and entitled to vote) is
required to approve the Share Issuance and the 1993 Plan Amendment,
respectively. The affirmative vote of the holders of at least a majority of
the total outstanding shares of HFS Common Stock is required to approve the
Certificate of Incorporation Amendments.
It is expected that all of the 1,197,628 outstanding shares of HFS Common
Stock beneficially owned by directors and executive officers of HFS at the
close of business on the HFS Record Date (0.94% of the total number of
outstanding shares of HFS Common Stock at such date) will be voted for
approval of each of the HFS Proposals. See "INFORMATION CONCERNING THE HFS
SPECIAL MEETING--Record Date; Quorum; Required Vote."
Proxies. The enclosed proxy card provides that each HFS stockholder may
specify that such stockholder's shares of HFS Common Stock be voted "for" or
"against" approval of each of the HFS Proposals or that the designated proxy
holders be directed to "abstain" from voting with respect thereto. If
properly executed and returned in time for the HFS Special Meeting, the
enclosed proxy will be voted in accordance with the choice specified. If a
properly executed proxy is returned, but no choice is specified, the
corresponding shares of HFS Common Stock will be voted FOR approval of the
Share Issuance, FOR approval of the Certificate of Incorporation Amendments
and FOR approval of the 1993 Plan Amendment. It is not expected that any
matter other than those contemplated by the HFS Proposals will be brought
before the HFS Special Meeting; however, if other matters are properly
presented, the persons named in such proxy will have authority to vote in
accordance with their judgment on any other such matter, including without
limitation, any proposal to adjourn or postpone the HFS Special Meeting. If a
proxy is returned which specifies a vote against the Share Issuance, such
discretionary authority will not be used to adjourn the HFS Special Meeting
in order to solicit additional votes in favor of the Share Issuance.
Any stockholder who executes and returns a proxy may revoke it at any time
before it is voted at the HFS Special Meeting by (i) delivering to the
Secretary of HFS at HFS's principal offices (before the HFS Special Meeting)
an instrument of revocation bearing a later date or time than the date or
time of the proxy being revoked; (ii) submitting a duly executed proxy
bearing a later date or time than the date or time of the proxy being
revoked; or (iii) voting in person at the HFS Special Meeting. A
stockholder's attendance at the HFS Special Meeting will not by itself revoke
a proxy given by such stockholder. See "INFORMATION CONCERNING THE HFS
SPECIAL MEETING--Proxies."
THE PHH SPECIAL MEETING
Purpose, Time and Place. The PHH Special Meeting will be held on April 30,
1997 at 10:00 a.m., local time at The Carlton Hotel, 923 16th and K Streets,
N.W., Washington, DC. At the PHH Special Meeting, the stockholders of PHH will
be asked:
1. To consider and vote upon a proposal to approve the Merger and to adopt
the Merger Agreement (the "Merger Proposal").
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2. To transact such other business as may properly come before the PHH
Special Meeting or any adjournment or postponement thereof.
See "INFORMATION CONCERNING THE PHH SPECIAL MEETING--Purpose, Time and
Place."
Record Date; Quorum; Required Vote. The record date for the PHH Special
Meeting is the close of business on January 31, 1997 (the "PHH Record Date").
Only holders of record of PHH Common Stock at the close of business on the
PHH Record Date are entitled to notice of, and to vote at, the PHH Special
Meeting. As of the PHH Record Date, there were 34,984,265 outstanding shares
of PHH Common Stock, held by 1,610 holders of record. Each share of PHH
Common Stock is entitled to one vote on the Merger Proposal. The presence at
the PHH Special Meeting, either in person or by proxy, of PHH stockholders
entitled to cast a majority of all the votes entitled to be cast will
constitute a quorum at the PHH Special Meeting. The affirmative vote of the
holders of at least two-thirds of the total outstanding shares of PHH Common
Stock is required to approve and adopt the Merger Proposal.
It is expected that all of the 537,563 outstanding shares of PHH Common
Stock beneficially owned by directors and executive officers of PHH at the
close of business on the PHH Record Date (1.5% of the total number of
outstanding shares of PHH Common Stock at such date) will be voted for
approval of the Merger Proposal. See "INFORMATION CONCERNING THE PHH SPECIAL
MEETING--Record Date; Quorum; Required Vote."
Proxies. The enclosed proxy card provides that each stockholder of PHH may
specify that such stockholder's shares of PHH Common Stock be voted "for" or
"against" approval of the Merger Proposal or that the designated proxy
holders be directed to "abstain" from voting with respect thereto. If
properly executed and returned in time for the PHH Special Meeting, the
enclosed proxy will be voted in accordance with the choice specified. If a
properly executed proxy is returned, but no choice is specified, the
corresponding shares of PHH Common Stock will be voted FOR approval of the
Merger Proposal. It is not expected that any matter other than that
contemplated by the Merger Proposal will be brought before the PHH Special
Meeting; however, if other matters are properly presented, the persons named
in such proxy will have authority to vote in accordance with their judgment
on any other such matter, including without limitation, any proposal to
adjourn or postpone the PHH Special Meeting. If a proxy is returned which
specifies a vote against the Merger Proposal, such discretionary authority
will not be used to adjourn the PHH Special Meeting in order to solicit
additional votes in favor of the Merger Proposal.
Any stockholder who executes and returns a proxy may revoke it at any time
before it is voted at the PHH Special Meeting by (i) delivering to the
Secretary of PHH at PHH's principal offices (before the PHH Special Meeting)
an instrument of revocation bearing a later date or time than the date or
time of the proxy being revoked; (ii) submitting a duly executed proxy
bearing a later date or time than the date or time of the proxy being
revoked; or (iii) voting in person at the PHH Special Meeting. A
stockholder's attendance at the PHH Special Meeting will not by itself revoke
a proxy given by such stockholder. See "INFORMATION CONCERNING THE PHH
SPECIAL MEETING--Proxies."
RISK FACTORS
Stockholders of HFS and of PHH should carefully evaluate the matters set
forth under "RISK FACTORS." Factors to be considered, among other things,
include the potential for fluctuation in the number of shares of, and value
of, HFS Common Stock to be issued in the Merger as well as certain risks
associated with the business and operations of HFS and its subsidiaries. See
"RISK FACTORS."
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents summary historical and pro forma consolidated
financial information of HFS for the year ended December 31, 1995 and as of
and for the nine months ended September 30, 1996. "Pro forma HFS excluding
the Merger" gives effect to all material transactions of HFS prior to the
Merger. "Pro Forma Combined Companies" reflects the combining of "Pro Forma
HFS excluding the
5
<PAGE>
Merger" with the historical financial statements of PHH, accounted for as a
"pooling of interests." The historical financial statements of PHH have been
adjusted for reclassifications to conform to the presentation expected to be
used by the merged companies.
The following summary historical and pro forma consolidated financial data
should be read in conjunction with the (i) Pro Forma Financial Statements;
(ii) Historical Consolidated financial statements and related notes thereto
of HFS; and (iii) Historical Consolidated financial statements and related
notes thereto of PHH included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------
(PRO FORMA (PRO FORMA
(HFS HFS EXCLUDING COMBINED
HISTORICAL) THE MERGER) COMPANIES)(1)
-------------- --------------- ------------
<S> <C> <C> <C>
Statements of Income Data:
Net Revenues ............... $412,983 $1,172,876 $1,775,158
Net Income.................. 79,730 159,925 235,065
Per share information
(fully diluted):
Net Income per share........ 0.73 1.14
Net Income per share
assuming the following
average per share prices
of HFS common stock: (3)
$60....................... 1.38
$67....................... 1.41
$81....................... 1.45
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------
(PRO FORMA (PRO FORMA
(HFS HFS EXCLUDING COMBINED
HISTORICAL) THE MERGER) COMPANIES)(2)
-------------- --------------- ------------
<S> <C> <C> <C>
Statements of Income Data:
Net Revenues ............... $550,010 $1,001,383 $1,496,711
Net Income.................. 122,632 171,220 238,996
Per share information
(fully diluted):
Net Income per share........ 0.96 1.18
Net Income per share
assuming the following
average per share prices
of HFS common stock: (3)
$60....................... 1.37
$67....................... 1.39
$81....................... 1.43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------------------------
(PRO FORMA (PRO FORMA
(HFS HFS EXCLUDING COMBINED
HISTORICAL) THE MERGER) COMPANIES)(2)
-------------- --------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets............................................... $2,900,050 $4,275,830 $10,263,156
Assets under fleet management and mortgage programs ...... -- -- 4,438,469
Long-term debt and debt under fleet management and
mortgage programs......................................... 541,563 830,099 5,396,753
Total equity............................................... 1,904,989 2,300,832 2,755,740
</TABLE>
- ------------
(1) The Pro Forma Combined Companies statement of income data for the year
ended December 31, 1995 includes the historical financial results of
PHH for the twelve months ended January 31, 1996.
(2) The Pro Forma Combined Companies financial information as of and for
the nine months ended September 30, 1996 includes the historical
results of PHH as of and for the nine months ended October 31, 1996.
(3) Net Income per common share for the Pro Forma Combined Companies is
presented using an average per share price of HFS Common Stock of $60,
$67 (estimated average) and $81. Pursuant to the Merger Agreement, the
number of shares of HFS Common Stock to be issued is based on a
conversion formula which calculates a conversion of PHH shares into HFS
shares. Such conversion is variable based on a twenty day average price
of the HFS Common Stock preceding the fifth trading day prior to the
date of the PHH meeting within a range of $60 per share up to $81 per
share.
THE MERGER
GENERAL
If the HFS stockholders approve the Share Issuance and the PHH
stockholders approve the Merger Proposal and all other conditions to the
Merger are satisfied or waived, Merger Sub will be merged with and into PHH,
with PHH being the surviving corporation after the Merger (the "Surviving
Corporation") and becoming a wholly owned subsidiary of HFS, effective at the
time the parties file articles of merger with the Department of Assessments
and Taxation of the State of Maryland (the "Effective Time").
6
<PAGE>
Upon consummation of the Merger pursuant to the Merger Agreement, each
outstanding share of PHH Common Stock, other than PHH Common Stock held by
PHH or held by HFS, Merger Sub or any other wholly owned subsidiary of HFS,
will be converted into the right to receive that fraction of a share of HFS
Common Stock (the "Conversion Number") represented by the number (rounded
upward, if necessary, to the nearest one-thousandth) determined by dividing
$49.50 by the average price of HFS Common Stock over a period of twenty (20)
trading days preceding the fifth trading day prior to the date of the PHH
Special Meeting (the "Pricing Period"); provided, however, that in no event
will such number be greater than 0.8250 or less than 0.6111. Promptly
following the Pricing Period, HFS and PHH will issue a joint press release
announcing the Conversion Number. As a result of the conversion formula
described above, if the average price of HFS Common Stock during the Pricing
Period is within the range of $60.00 to $81.00, holders of PHH Common Stock
will receive that fraction of a share of HFS Common Stock having a value
(based on the average price of such shares during the Pricing Period) of
$49.50 for each share of PHH Common Stock (and the Conversion Number will
fluctuate accordingly), but if the average price of HFS Common Stock during
the Pricing Period is less than $60.00 or greater than $81.00, the Conversion
Number will be fixed at 0.8250 or 0.6111, respectively, resulting in the
issuance of a number of shares of HFS Common Stock for each share of PHH
Common Stock having a value (based on the average price of such shares during
the Pricing Period) less than or more than $49.50, as the case may be. Based
on the number of shares of PHH Common Stock outstanding on March 20, 1997,
the number of shares of HFS Common Stock to be issued upon conversion of
outstanding shares of PHH Common Stock will be not less than approximately
21.5 million shares and not more than approximately 29.0 million shares. In
addition, in the Merger, up to approximately 1.9 million shares of HFS Common
Stock will be issued in exchange for the currently outstanding options to
purchase shares of PHH Common Stock, assuming no tax withholding with respect
thereto. However, to the extent all of the approximately 2.1 million
currently outstanding and exercisable options to purchase PHH Common Stock
are exercised prior to the Effective Time, the number of shares of HFS Common
Stock to be issued upon conversion of outstanding shares of PHH Common Stock
will be increased by not less than approximately 1.3 million shares and not
more than approximately 1.7 million shares and up to approximately 659,000
(rather than 1.9 million) shares of HFS Common Stock will be issued in
exchange for then-outstanding options. See "THE MERGER--General; Conversion
of Shares."
ALTHOUGH THE CONVERSION NUMBER WILL BE BASED ON THE AVERAGE PRICE OF HFS
COMMON STOCK OVER THE PRICING PERIOD, THE MARKET PRICE OF HFS COMMON STOCK
MAY FLUCTUATE AND, ON THE DATE OF THE EFFECTIVE TIME, THE DATE OF RECEIPT OF
SHARES OF HFS COMMON STOCK BY HOLDERS OF PHH COMMON STOCK, OR THE DATE ON
WHICH SUCH SHARES OF HFS COMMON STOCK ARE EVENTUALLY SOLD, MAY BE MORE OR
LESS THAN THE AVERAGE PRICE OF HFS COMMON STOCK OVER THE PRICING PERIOD.
In lieu of any fractional shares of HFS Common Stock, each holder of PHH
Common Stock who otherwise would be entitled to receive a fractional share of
HFS Common Stock will be paid an amount in cash equal to the average price of
HFS Common Stock during the Pricing Period multiplied by the fractional share
interest to which such PHH stockholder is entitled. See "THE MERGER
AGREEMENT--Exchange Procedures."
At the Effective Time, each holder of outstanding options to purchase
shares of PHH Common Stock (a "PHH Stock Option") under the PHH option plans,
whether vested or unvested, shall be entitled to receive in exchange for all
of such holder's PHH Stock Options a number of shares of HFS Common Stock
equal to the number obtained by dividing (a) the excess, if any, of (i) the
product of (A) the average price of HFS Common Stock during the Pricing
Period, (B) the Conversion Number and (C) the number of shares of PHH Common
Stock subject to such PHH Stock Options, over (ii) the aggregate exercise
price of such PHH Stock Options by (b) the average price of HFS Common Stock
during the Pricing Period (the "First Quotient") reduced by the number
obtained by dividing (c) the aggregate amount of withholding taxes required
by any governmental or regulatory authority in connection with the transfer
of a number of shares of HFS Common Stock to such holder equal to the First
Quotient by (d) the average price of HFS Common Stock during the Pricing
Period. See "THE MERGER--General; Conversion of Shares."
7
<PAGE>
TOLL-FREE NUMBER
Stockholders may call telephone number 1-888-224-2745, between the hours
of 8:00 a.m. and 8:00 p.m., New York time, after 5:00 p.m., New York time, on
April 22, 1997 to be advised of the Conversion Number.
BACKGROUND OF THE MERGER
For information concerning the background of the Merger, see "THE
MERGER--Background of the Merger."
RECOMMENDATION OF THE HFS BOARD
The HFS Board has unanimously concluded that the Merger is fair to, and in
the best interests of, HFS and its stockholders and unanimously recommends
that HFS stockholders vote FOR approval of the Share Issuance. For a
discussion of the factors considered by the HFS Board in reaching its
decision to approve and recommend to stockholders the Share Issuance, see
"THE MERGER--Reasons of HFS for the Merger; Recommendation of the HFS Board."
FINANCIAL ADVISOR TO HFS
Lehman Brothers Inc. ("Lehman Brothers") acted as financial advisor to HFS
in connection with the Merger. On November 10, 1996, Lehman Brothers
delivered its oral opinion to the HFS Board, to the effect that, as of the
date of such opinion, from a financial point of view, the consideration to be
paid by HFS in the Merger is fair to HFS. Lehman Brothers subsequently
confirmed its earlier opinion by delivery of its written opinion dated as of
the date hereof. A copy of the written opinion of Lehman Brothers, which sets
forth a discussion of the assumptions made, matters considered and
limitations on the review undertaken by Lehman Brothers, is attached hereto
as Annex II. See "THE MERGER--HFS Financial Advisor."
RECOMMENDATION OF THE PHH BOARD
The PHH Board has unanimously concluded that the Merger is advisable and
in the best interests of PHH and its stockholders and unanimously recommends
that PHH stockholders vote for approval of the Merger Proposal. See "THE
MERGER--Reasons of PHH for the Merger; Recommendation of the PHH Board."
FINANCIAL ADVISORS TO PHH
Goldman, Sachs & Co. ("Goldman Sachs") and The Beacon Group Capital
Services, LLC ("Beacon") acted as financial advisors to PHH in connection
with its consideration of the Merger, the Merger Agreement and the other
transactions contemplated thereby. On November 9, 1996, Goldman Sachs and
Beacon delivered their respective oral opinions to the PHH Board that as of
the date of such opinions, the Conversion Number pursuant to the Merger
Agreement was fair to the holders of PHH Stock other than HFS, Merger Sub or
any other wholly owned subsidiary of HFS. Goldman Sachs and Beacon each
subsequently confirmed their respective earlier opinions by delivery of their
written opinions dated as of the date hereof.
The full text of the written opinions of Goldman Sachs and Beacon, which
set forth assumptions made, matters considered and limitations on the review
undertaken in connection with the opinions, are attached hereto as Annexes
III and IV, respectively, and are incorporated herein by reference. HOLDERS
OF PHH COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINIONS IN THEIR
ENTIRETY. See "THE MERGER--PHH Financial Advisors."
CONDITIONS TO THE MERGER
The obligations of HFS and PHH to consummate the Merger are subject to the
satisfaction or waiver (where permissible) of various conditions, including,
among others, (i) approval of the Share Issuance by
8
<PAGE>
the holders of the outstanding shares of HFS Common Stock by the requisite
vote under applicable law and under applicable regulations and approval of
the Merger Proposal by the holders of the outstanding shares of PHH Common
Stock, (ii) receipt by HFS and PHH of letters of their respective independent
auditors that the Merger will qualify as a "pooling of interests" transaction
under Accounting Principles Board Opinion No. 16, (iii) receipt by HFS and
PHH of opinions of their respective counsel to the effect that, inter alia,
on the basis of representations made by HFS and PHH and referred to therein,
for U.S. federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and that HFS, Merger Sub and PHH will
each be a party to the reorganization, (iv) the average price of HFS Common
Stock over a period of twenty (20) trading days preceding the fifth trading
day prior to the Closing Date being no less than $50.00 per share (the
"Minimum Average Price"), subject to certain adjustments, and (v) certain
other conditions. See "THE MERGER AGREEMENT--Conditions Precedent to the
Merger."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated by HFS or PHH under certain
circumstances. Under certain of these circumstances, PHH or HFS, as the case
may be, may be required to reimburse to the other expenses incurred in
connection with the Merger, not in excess of $2,500,000. Under certain other
circumstances, PHH may be required to pay HFS a termination fee of
$50,000,000. See "THE MERGER AGREEMENT--Termination" and "--Termination Fee."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, (the "HSR Act"), and the rules that have been promulgated thereunder
by the Federal Trade Commission ("FTC"), the Merger may not be consummated
unless certain filings have been submitted to the Antitrust Division of the
United States Department of Justice (the "Antitrust Division") and the FTC
and certain waiting period requirements have been satisfied. On November 27,
1996, HFS and PHH submitted the required filings to the FTC and the Antitrust
Division. On December 27, 1996, the waiting period under the HSR Act expired.
As a result of the Merger, among other things: (i) PHH or HFS, as the case
may be, may be required to either notify or obtain the consent of (x) certain
state regulatory authorities in connection with various licenses held by PHH
Mortgage Services Corporation ("PHH Mortgage") to act as a mortgage lender
and servicer in those states, (y) federal secondary market agencies, and (z)
with respect to a portion of PHH Mortgage's servicing portfolio, certain
private investors for whom PHH Mortgage services loans; (ii) HFS will be
required to notify and receive approval from the New York State Department of
Insurance and the Bermuda Monetary Authority for the acquisition of control
of two insurance company subsidiaries of PHH; and (iii) HFS will be required
to either notify or obtain the consent of certain regulatory authorities in
other countries where HFS and/or PHH conduct business pursuant to certain
antitrust and foreign investment laws and regulations governing the conduct
of business in such countries.
Under the Merger Agreement, HFS and PHH have agreed to use all reasonable
efforts to obtain all necessary material permits, licenses, franchises and
other governmental authorizations necessary or advisable to complete or
effect the Merger. While HFS and PHH believe that they will receive the
requisite regulatory approvals for the Merger, there can be no assurance as
to the timing of such approvals or the ability of the companies to obtain
such approvals on satisfactory terms or otherwise. It is a condition to the
parties' respective obligations to consummate the Merger that all necessary
material consents, approvals, actions of, filings with and notice to any
governmental authority or public or private third parties be obtained. See
"THE MERGER--Regulatory Matters."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Each of HFS and PHH has received an opinion from their respective tax
counsel to the effect that, among other things, the Merger will constitute a
"reorganization" within the meaning of Section 368(a)
9
<PAGE>
of the Code and no gain or loss will be recognized by the stockholders of PHH
upon the exchange of their shares of PHH Common Stock solely for shares of
HFS Common Stock pursuant to the Merger, except with respect to cash, if any,
received in lieu of fractional shares of HFS Common Stock. It is a condition
to the consummation of the Merger that each such opinion of counsel be
confirmed on and as of the Closing Date. See "THE MERGER--Certain Federal
Income Tax Consequences" and "THE MERGER AGREEMENT--Conditions Precedent to
the Merger."
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "pooling of
interests" under generally accepted accounting principles. Consummation of
the Merger is conditioned upon receipt by HFS and PHH of letters of their
respective independent auditors that the Merger will qualify as a "pooling of
interests" transaction under Accounting Principles Board Opinion No. 16. See
"THE MERGER -- Accounting Treatment."
APPRAISAL RIGHTS
Under the Delaware General Corporation Law ("DGCL"), the holders of HFS
Common Stock will not have dissenters' appraisal rights in connection with
the Share Issuance, the Merger Agreement and the consummation of the Merger.
Under the Maryland General Corporation Law ("MGCL"), the holders of PHH
Common Stock will not have objecting stockholders' appraisal rights in
connection with the Merger Agreement and the consummation of the Merger. See
"THE MERGER--Appraisal Rights" and "COMPARATIVE RIGHTS OF STOCKHOLDERS OF HFS
AND PHH--Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Stockholders of PHH should be aware that certain directors and officers of
PHH have interests in the Merger that may be deemed to be in addition to
their interests solely as stockholders of PHH. See "THE MERGER--Interests of
Certain Persons in the Merger."
COMPARATIVE RIGHTS OF STOCKHOLDERS OF HFS AND PHH
As a result of the Merger, shares of PHH Common Stock, which are issued by
a Maryland corporation, will be converted into the right to receive shares of
HFS Common Stock, which are issued by a Delaware corporation. There are
differences between the rights of PHH stockholders and the rights of HFS
stockholders. These differences result from (i) differences between the MGCL
and the DGCL, and (ii) differences between the governing instruments of PHH
and HFS. For a discussion of certain differences between the rights of PHH
stockholders and the rights of HFS stockholders, see "COMPARATIVE RIGHTS OF
STOCKHOLDERS OF HFS AND PHH."
CERTIFICATE OF INCORPORATION AMENDMENTS
At the HFS Special Meeting, HFS stockholders will be asked to consider and
vote upon two proposals to (i) amend HFS's Certificate of Incorporation to
increase the maximum number of authorized directors of HFS from twelve (12)
to twenty (20) (the "Directors Amendment") and (ii) amend HFS's Certificate
of Incorporation to increase the number of authorized shares of HFS Common
Stock from 300,000,000 shares to 600,000,000 shares (the "Shares Amendment"
and together with the Directors Amendment, the "Certificate of Incorporation
Amendments"). Stockholders of HFS should carefully evaluate the matters set
forth under "PROPOSALS FOR CERTIFICATE OF INCORPORATION AMENDMENTS." The
forms of the proposed Certificate of Incorporation Amendments are attached
hereto as Annexes V and VI.
1993 PLAN AMENDMENT
At the HFS Special Meeting, HFS stockholders will be asked to consider and
vote upon a proposal to amend the 1993 Plan to provide for an increase of
10,000,000 shares in the total number of shares of
10
<PAGE>
HFS Common Stock currently authorized for issuance under the 1993 Plan, which
would increase the total number of shares authorized for issuance under the
1993 Plan from 24,541,600 to 34,541,600. As of December 10, 1996, 2,362,906
shares remained available for grant pursuant to the 1993 Plan. Stockholders
of HFS should carefully evaluate the matters set forth under "PROPOSAL FOR
1993 PLAN AMENDMENT." The form of the proposed 1993 Plan Amendment is
attached hereto as Annex VII.
RECENT EVENTS
HFS FOURTH QUARTER AND FISCAL YEAR 1996 FINANCIAL RESULTS
On January 27, 1997, HFS announced earnings for the fourth quarter and
year ended December 31, 1996. For the quarter ended December 31, 1996, HFS
reported earnings per share of $.33, an increase of 83% compared to $.18 per
share reported in the fourth quarter of 1995. During the fourth quarter of
1996, HFS wrote off its investment in and receivable from Amre, Inc. as well
as recorded a gain related to the prepayment of a contractual arrangement
with Chartwell Leisure Inc. Excluding these two transactions, HFS's earnings
per share for the fourth quarter of 1996 would have been $0.35, representing
a 94% increase over the prior year. Revenue increased 120% to $249.0 million
from $113.3 million in the fourth quarter of 1995. Net income increased 131%
to $47.0 million from $20.4 million in the fourth quarter of 1995.
For the year 1996, HFS reported record earnings per share of $1.29, an
increase of 77% compared to $0.73 per share reported for 1995. Excluding the
second quarter 1996 $0.03 per share restructuring charge, related primarily
to the creation of National Realty Trust, as well as the aforementioned
transactions recognized during the 1996 fourth quarter, full year 1996
earnings per share would have been $1.34, representing an 84% increase over
the prior year. For 1996, revenue increased 93% to $799.0 million from $413.0
million in 1995 and net income increased 113% to $169.6 million from $79.7
million in 1995.
HFS SHARE REPURCHASE AUTHORIZATION
On January 7, 1997, HFS announced that the executive committee of the HFS
Board authorized a share repurchase program of up to 2.6 million common
shares, which supersedes all previous repurchase authorizations. From January
7, 1997 through February 3, 1997 HFS acquired approximately 2 million shares.
HFS made such share repurchases to have available, at what it believes were
attractive prices, HFS Common Stock to satisfy stock option exercises and
conversions of convertible debts securities and to fund future acquisitions.
It is expected that any future purchases would be made from time to time in
the open market or in privately negotiated transactions, at the discretion of
management, subject to prevailing market conditions, and applicable
disclosure requirements.
HFS'S PRELIMINARY UNDERSTANDING WITH HILTON HOTELS CORPORATION
On January 27, 1997, Hilton Hotels Corporation announced, in connection
with its pending tender offer for the outstanding common stock of ITT
Corporation, that it had reached a preliminary understanding with HFS under
which, subject to Hilton's acquisition of ITT Corporation, HFS would license,
on a long-term, worldwide basis, the Sheraton trademark, franchise system and
management agreements. Any such transaction is subject to Hilton's
acquisition of ITT Corporation, as well as to the negotiation of definitive
agreements relating to such license. There can be no assurance that Hilton's
attempt to acquire ITT Corporation will be successful or that any transaction
between Hilton Hotels Corporation and HFS will be consummated.
AMRE, INC.
HFS has granted Amre, Inc. ("Amre"), a 20 year license to sell home
improvement services and products under the Century 21 Home Improvements
name, has a $3 million preferred stock investment in Amre and a $4 million
revolving credit facility with Amre. Due to Amre's poor business performance,
11
<PAGE>
in the fourth quarter of 1996 HFS wrote-off an $11 million accrued license
fee representing fees recognized as earned through the third quarter of 1996,
a $3 million investment in preferred stock and related accrued professional
fees. In addition, HFS and Amre agreed to terminate the revolving credit
facility, under which there were no borrowings. On January 21, 1997, Amre
sought protection under Chapter 11 of the United States Bankruptcy Code. The
Amre license was terminated by order of the Bankruptcy Court effective
February 28, 1997 and HFS expects to relicense the Century 21 Home
Improvements name to a number of independent parties. HFS does not expect its
relationship with Amre or the bankruptcy filing of Amre to have a material
adverse effect on HFS.
VALUE RENT-A-CAR, INC.
On March 3, 1997, HFS announced that it has reached an agreement in
principle to acquire Value Rent-A-Car, Inc. ("Value") from Mitsubishi Motor
Sales of America, Inc. ("Mitsubishi") for $175 million in cash. In connection
therewith, HFS and Mitsubishi intend to enter into a vehicle supply agreement
and related marketing agreements in connection with Value's continuing fleet
purchases from Mitsubishi. Any transaction with Mitsubishi is subject to
customary conditions, including antitrust clearance, negotiation of
definitive documentation and approval of the Boards of Directors of HFS and
Mitsubishi. There can be no assurance that any such transaction between
Mitsubishi and HFS will be consummated.
HFS FIRST QUARTER 1997 RESULTS
On March 18, 1997, HFS announced that it will report first quarter 1997
results with and without PHH, and that it expects its results on each basis
will exceed analyst expectations.
12
<PAGE>
HISTORICAL AND PRO FORMA SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The information below sets forth selected historical, pro forma combined
and combined historical financial data. The results of operations for interim
periods are not necessarily indicative of the results for a full year. The
financial data should be read in conjunction with the (i) Pro Forma Financial
Statements; (ii) Historical Consolidated financial statements and related
notes thereto of HFS; and (iii) Historical Consolidated financial statements
and related notes thereto of PHH included elsewhere in this Joint Proxy
Statement/Prospectus (see F pages).
HISTORICAL FINANCIAL INFORMATION
The historical selected financial data of HFS and PHH for each of the
years in the five year periods ended December 31, 1995 and April 30, 1996,
respectively, set forth below, have been derived from audited financial
statements. The historical selected financial data of HFS and PHH as of and
for the nine-month periods ended September 30, 1996 and 1995 and nine-month
periods ended January 31, 1997 and 1996, respectively, set forth below, have
been derived from unaudited financial statements.
HFS INCORPORATED -- HISTORICAL SELECTED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS
AT OR FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net Revenues ............... $102,218 $202,954 $257,070 $312,547 $ 412,983 $ 299,731 $ 550,010
Income (loss) before
extraordinary loss (3) .... (5,438) 19,857 34,323 53,489 79,730 59,364 122,632
Per Share Information
(fully diluted):
Income (loss) before
extraordinary loss per
common share(2)(3) ........ (0.12) 0.23 0.34 0.53 0.73 0.56 0.96(4)
Cash dividends declared per
common share ............... -- -- -- -- -- -- --
BALANCE SHEET DATA:
Total assets ............... 209,968 545,330 735,821 774,097 1,165,808 1,153,286 2,900,050
Long-term debt ............. 77,000 236,088 347,712 347,416 300,778 301,184 541,563
</TABLE>
- ------------
(1) On January 31, 1992, HFS purchased substantially all of the assets
comprising the franchise system of Days Inns of America, Inc., and
certain of its subsidiaries (Days Inn). On April 29, 1993, HFS
purchased the outstanding stock of the company which owns the Super 8
Motel franchise system (Super 8). On May 11, 1995, HFS acquired by
merger Central Credit Inc. (CCI) a gambling patron credit information
business. On August 1, 1995, a majority owned subsidiary of HFS
acquired the Century 21 real estate brokerage franchise system (Century
21). On January 23, 1996, HFS purchased the assets comprising the
Travelodge hotel franchise system in North America (Travelodge). On
February 12, 1996 HFS purchased substantially all the assets comprising
the Electronic Realty Associates real estate brokerage franchise system
("ERA"). During the second quarter of 1996, HFS purchased the six U.S.
previously non-owned Century 21 regions (the "Century 21 NORS"). On May
31, 1996, HFS acquired by merger Coldwell Banker Corporation (Coldwell
Banker). Consolidated results of the Company include the operating
results of the aforementioned acquisitions since the respective dates
of acquisition.
(2) Reflects two-for one stock splits declared February 1994 and November
17, 1995, respectively.
(3) Excludes extraordinary losses, net of tax of $1.6 million or $.02 per
share and $12.8 million or $.13 per share for the years ended December
31, 1992 and 1993, respectively, related to the early extinguishment of
debt.
(4) Includes a pre-tax restructuring charge of $7.0 million (approximately
$4.3 million, net of tax or $0.03 per share) related primarily to the
contribution of owned Coldwell Banker brokerage offices to an
independent trust.
<PAGE>
PHH CORPORATION -- HISTORICAL SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
AT OR FOR THE YEAR ENDED APRIL 30, ENDED JANUARY 31,
----------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net Revenues ............... $1,315,773 $1,415,250 $1,546,704 $1,605,646 $1,825,136 $1,343,653 $1,444,715
Net Income ................. 49,979 56,417 64,558 71,662 81,620 57,347 75,313
Per Share Information
(fully diluted):
Net Income per common
share(1) .................. 1.46 1.63 1.82 2.08 2.33 1.63 2.08
Cash dividends declared per
common share(1) ........... 0.60 0.60 0.60 0.64 0.68 .51 .57
BALANCE SHEET DATA:
Total assets ............... 4,365,031 4,613,028 4,766,783 5,039,533 5,672,990 5,741,963 6,068,232
Debt under fleet management
and mortgage programs and
other debt ................ 3,176,267 3,412,062 3,561,727 3,815,515 4,342,246 4,427,872 4,669,833
</TABLE>
- ------------
(1) Reflects two-for-one common stock split declared June 24, 1996.
13
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following presents unaudited pro forma financial information as of
September 30, 1996, and for the year ended December 31, 1995 and nine month
periods ended September 30, 1995 and 1996, respectively. "Pro Forma HFS
excluding the Merger" gives effect to all material transactions of HFS prior
to the Merger. "Pro Forma Combined Companies" reflect the combining of "Pro
Forma HFS excluding the Merger" with the historical financial statements of
PHH accounted for as a "pooling of interests". The historical financial
statements of PHH have been adjusted for reclassifications to conform to the
presentation expected to be used by the merged companies. The unaudited "Pro
Forma Combined Companies" balance sheet data at September 30, 1996 gives
effect to the Merger as if it had occurred at such balance sheet date. The
unaudited "Pro Forma Combined Companies" statements of income data for the
year ended December 31, 1995, and for the nine-month periods ended September
30, 1995 and 1996, give effect to the Merger as if it had occurred on January
1, 1995. The following information is not necessarily indicative of the
financial position or operating results that would have occurred had the
Merger been completed on the date as of which, or at the beginning of the
periods for which, the Merger is being given effect nor is it necessarily
indicative of future operating results or financial position.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30,
------------------------------------------------------------
1995 1996
----------------------------- ----------------------------- ------------------------------
PRO FORMA HFS PRO FORMA PRO FORMA HFS PRO FORMA PRO FORMA HFS PRO FORMA
EXCLUDING THE COMBINED EXCLUDING THE COMBINED EXCLUDING THE COMBINED
MERGER COMPANIES(1) MERGER COMPANIES(2) MERGER COMPANIES(2)
--------------- ------------ --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net Revenues .............. $1,172,876 $1,775,158 $862,989 $1,316,455 $1,001,383 $ 1,496,711
Net Income ............... 159,925 235,065 112,318 168,721 171,220 238,996
PER SHARE INFORMATION
(FULLY DILUTED):
Net Income per common
share .................... 1.14 .82 1.18
Net Income per common
share assuming the
following average per
share prices of HFS
common stock:(3)
$60 .................... 1.38 1.01 1.37
$67 .................... 1.41 1.03 1.39
$81 .................... 1.45 1.06 1.43
Cash dividends declared
per common share(4) .....
BALANCE SHEET DATA: AT SEPTEMBER30, 1996
------------------------------
Total assets ............. $4,275,830 $10,263,156
--------------- -------------
Long-term debt and debt
under fleet management
and mortgage programs ... 830,099 5,396,753
--------------- -------------
</TABLE>
<PAGE>
- ------------
(1) The Pro Forma Combined Companies statement of income data for the year
ended December 31, 1995 includes the historical financial results of
PHH for the twelve months ended January 31, 1996.
(2) The Pro Forma Combined Companies financial information at September 30,
1996 and for the nine months ended September 30, 1995 and 1996 includes
the historical results of PHH as of October 31, 1996 and for the nine
months ended October 31, 1995 and 1996, respectively.
(3) Net Income per common share for the Pro Forma Combined Companies is
presented using an average per share price of HFS Common Stock of $60,
$67 (estimated average) and $81. Pursuant to the Merger Agreement, the
number of shares of HFS Common Stock to be issued is based on a
conversion formula which calculates a conversion of PHH shares into HFS
shares. Such conversion is variable based on a twenty day average price
of the HFS Common Stock preceding the fifth trading day prior to the
date of the PHH Meeting within a range of $60 per share up to $81 per
share.
(4) Since its inception, HFS has not declared or paid any cash dividends on
HFS Common Stock. HFS currently intends to retain its earnings for its
business and, therefore, does not anticipate paying cash dividends in
the foreseeable future.
UNAUDITED COMBINED HISTORICAL FINANCIAL INFORMATION
The following presents combined historical financial information as of
December 31, 1995, and September 30, 1996, respectively, and for the years
ended December 31, 1993, 1994 and 1995, respectively and each of the nine
month periods ended September 30, 1995 and 1996, respectively. The combined
historical financial information gives effect to the business combination of
HFS and PHH, which will be accounted for as a pooling of interests. Such
financial information reflects the combining of the historical consolidated
financial results of PHH with the historical consolidated financial results
of HFS.
14
<PAGE>
UNAUDITED COMBINED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ ------------------------
1993(1) 1994(1) 1995(1) 1995(2) 1996(2)
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net Revenues ............................... $810,496 $863,032 $1,015,265 $753,197 $1,045,338
Income before extraordinary loss............ 97,349 122,533 157,850 118,002 192,643
PER SHARE INFORMATION (FULLY DILUTED):
Net Income per common share assuming the
following average per share prices of HFS
Common Stock:(3)
$60 ...................................... 0.75 0.95 1.12 0.86 1.22
$67 ...................................... 0.77 0.97 1.15 0.88 1.24
$81 ...................................... 0.80 1.00 1.18 0.91 1.28
Cash dividends declared per common
share(4)...................................
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT SEPTEMBER 30, 1996
-------------------- ---------------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................... $8,887,376
Long-term debt and debt under fleet management and
mortgage programs......................................... 5,108,217
Book value per common share assuming the following average
per share prices of HFS Common Stock:
$60 ..................................................... 8.75 15.47
$67 ..................................................... 8.95 15.79
$81 ..................................................... 9.27 16.27
Tangible book value per common share assuming the
following average per share prices of HFS Common Stock:
$60 ..................................................... 1.70 2.66
$67 ..................................................... 1.74 2.68
$81 ..................................................... 1.80 2.76
</TABLE>
- ------------
(1) The Combined Historical financial information as of December 31, 1995
and for the years ended December 31, 1993, 1994 and 1995 includes the
historical financial results of PHH as of January 31, 1996 and each of
the twelve month periods ended January 31, 1994, 1995 and 1996,
respectively.
(2) The Combined Historical financial information as of September 30, 1996
and for each of the nine month periods ended September 30, 1995 and
1996 includes the historical results of PHH as of October 31, 1996 and
each of the nine month periods ended October 31, 1995 and 1996,
respectively.
(3) Net Income per common share for the Pro Forma Combined Companies is
presented using an average per share price of HFS Common Stock of $60,
$67 (estimated average) and $81. Pursuant to the Merger Agreement, the
shares of HFS Common Stock to be issued is based on a conversion
formula which calculates a conversion of PHH shares into HFS shares.
Such conversion is variable based on a twenty day average price of the
HFS Common Stock preceding the fifth trading day prior to the date of
the PHH Meeting within a range of $60 per share up to $81 per share.
(4) Since its inception, HFS has not declared or paid any cash dividends on
HFS Common Stock. HFS currently intends to retain its earnings for its
business and, therefore, does not anticipate paying cash dividends in
the foreseeable future.
15
<PAGE>
COMPARATIVE PER SHARE INFORMATION (FULLY DILUTED)
The following table sets forth certain fully diluted per share information
for HFS and PHH on a historical, pro forma combined, combined historical and
equivalent basis. The PHH Pro Forma equivalent Information represents the
corresponding Combined per share Information multiplied by 0.8250, 0.7388 and
0.6111, the Conversion Numbers assuming an average price of HFS Common Stock
over the Pricing Period of $60 (low end of the range) per share, $67 per
share (estimated average price) and $81 per share (high end of the range),
respectively.
The unaudited pro forma combined financial data is derived from the "Pro
Forma Combining Consolidated Financial Statements" included elsewhere in the
Joint Proxy Statement/Prospectus and gives effect to the business combination
of PHH with pro forma HFS (which gives effect to certain completed
acquisitions by HFS), accounted for as a "pooling of interests."
The unaudited combined historical data is derived from the "Combined
Historical Consolidated Financial Statements" included elsewhere in this
Joint Proxy Statement/Prospectus and gives effect to the business combination
of historical PHH with historical HFS (excluding any pro forma effects of
completed acquisitions by HFS), accounted for as a "pooling of interests."
The pro forma comparative per share data does not purport to represent
what the financial position or results of operations of HFS would actually
have been had the transactions identified above occurred at the beginning of
the relevant periods or to project HFS's financial position or results of
operations for any future date or period. This data should be read in
conjunction with the unaudited Pro Forma Financial Statements and the
separate financial statements and notes thereto of HFS and PHH, appearing
elsewhere in this Joint Proxy Statement/Prospectus.
HFS INCORPORATED
<TABLE>
<CAPTION>
AT OR FOR THE NINE
AT OR FOR THE YEARS ENDED MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
HISTORICAL:
Income before extraordinary loss per common
share ......................................... $0.34(2) $0.53 $0.73 $0.56 $0.96(3)
Cash dividends declared per
common share(1) ............................... -- -- -- -- --
Book value per common share .................... -- -- 5.46 -- 15.40
Tangible book value per common share ........... -- -- 1.98 -- 8.07
UNAUDITED PRO FORMA COMBINED:
Income from continuing operations per common
share assuming the following average per share
prices of HFS Common Stock:
$60 .......................................... -- -- 1.38 1.01 1.37
$67 .......................................... -- -- 1.41 1.03 1.39
$81 .......................................... -- -- 1.45 1.06 1.43
Cash dividends declared per
common share(1)................................ -- -- -- -- --
Book value per common share assuming the
following average per share prices of HFS
Common Stock:
$60........................................... -- -- -- -- 17.43
$67........................................... -- -- -- -- 17.77
$81........................................... -- -- -- -- 18.30
Tangible book value per common share assuming
the following average per share prices of HFS
Common Stock:
$60........................................... -- -- -- -- (3.63)
$67........................................... -- -- -- -- (3.70)
$81........................................... -- -- -- -- (3.81)
16
<PAGE>
AT OR FOR THE NINE
AT OR FOR THE YEARS ENDED MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
---------- ------- ------- ------- ----------
UNAUDITED COMBINED HISTORICAL:
Income before extraordinary loss per common
share assuming the following average per share
prices of HFS Common Stock:
$60 .......................................... 0.75 0.95 1.12 0.86 1.22
$67 .......................................... 0.77 0.97 1.15 0.88 1.24
$81 .......................................... 0.80 1.00 1.18 0.91 1.28
Cash dividends declared per common share(1) ... -- -- -- -- --
Book value per common share assuming the
following average per share stock prices of
HFS Common Stock:
$60........................................... -- -- 8.75 -- 15.47
$67........................................... -- -- 8.95 -- 15.79
$81........................................... -- -- 9.27 -- 16.27
Tangible book value per common share assuming
the following average per share prices of HFS
Common Stock:
$60........................................... -- -- 1.70 -- 2.66
$67........................................... -- -- 1.74 -- 2.68
$81........................................... -- -- 1.80 -- 2.76
</TABLE>
- ------------
(1) Since its inception, HFS has not declared or paid any cash dividends on
HFS Common Stock. HFS currently intends to retain its earnings for its
business and, therefore, does not anticipate paying cash dividends in
the foreseeable future.
(2) Excludes an extraordinary loss, net of tax of $12.8 million or $.13 per
share.
(3) Includes a pre-tax restructuring charge of $7.0 million (approximately
$4.3 million, net of tax or $0.03 per share) related primarily to the
contribution of owned Coldwell Banker offices to an independent trust.
17
<PAGE>
PHH CORPORATION
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEARS ENDED NINE MONTHS
APRIL 30, ENDED JANUARY 31,
------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL:
Income from continuing operations per common
share ......................................... $1.82 $2.08 $ 2.33 $1.63 2.08
Cash dividends declared per
common share .................................. 0.60 0.64 0.68 0.51 0.57
Book value per common share .................... -- -- 17.56 -- 19.37
Tangible book value per common share ........... -- -- 16.14 -- 18.02
PRO FORMA EQUIVALENTS (CALCULATED ON UNAUDITED
PRO FORMA COMBINED AMOUNTS):(1)
Income from continuing operations per common
share assuming the following average per share
prices of HFS Common Stock:
$60 .......................................... -- -- 1.13 0.83 1.12
$67 .......................................... -- -- 1.01 0.75 1.02
$81 .......................................... -- -- 0.87 0.64 0.87
Cash dividends declared per
common share .................................. -- -- -- -- --
Book value per common share assuming the
following average per share prices of HFS
Common Stock:
$60 .......................................... -- -- -- -- 14.38
$67 .......................................... -- -- -- -- 13.13
$81 .......................................... -- -- -- -- 11.18
Tangible book value per common share assuming
the following average per share prices of HFS
Common Stock:
$60 .......................................... -- -- -- -- (2.99)
$67 .......................................... -- -- -- -- (2.73)
$81 .......................................... -- -- -- -- (2.33)
PRO FORMA EQUIVALENTS (CALCULATED ON UNAUDITED
COMBINED HISTORICAL AMOUNTS):(1)
Income from continuing operations per common
share assuming the following average per share
prices of HFS Common Stock:
$60 .......................................... 0.62 0.78 0.92 0.71 1.01
$67 .......................................... 0.57 0.72 0.85 0.65 0.92
$81 .......................................... 0.49 0.61 0.72 0.56 0.78
Cash dividends declared per
common share .................................. -- -- -- -- --
Book value per common share assuming the
following average per share prices of HFS
Common Stock:
$60 .......................................... -- -- 7.22 -- 12.76
$67 .......................................... -- -- 6.61 -- 11.67
$81 .......................................... -- -- 5.66 -- 9.94
Tangible book value per common share assuming
the following average per share prices of HFS
Common Stock:
$60 .......................................... -- -- 1.40 -- 2.19
$67 .......................................... -- -- 1.29 -- 1.98
$81 .......................................... -- -- 1.10 -- 1.69
</TABLE>
- ------------
(1) Pro Forma Equivalent income from continuing operations per common share
and book value per common share, is calculated by multiplying pro forma
income from continuing operations per common share and pro forma book
value per common share by the exchange ratio.
18
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
HFS Common Stock is listed and traded on the NYSE under the symbol "HFS."
PHH Common Stock is listed and traded on the NYSE under the symbol "PHH." The
following table sets forth, for the periods indicated, the high and low
reported sales prices per share of HFS Common Stock and PHH Common Stock, as
reported on the NYSE Composite Tape and dividends declared on PHH Common
Stock for the same periods. Dividends have not been declared during the
indicated periods on HFS Common Stock.
<TABLE>
<CAPTION>
HFS PHH
COMMON STOCK(A) COMMON STOCK(A)
---------------------------- -----------------------------
CALENDAR QUARTERS HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ------------------ -------- ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter ... $16 11/16 $12 1/2 -- $ 19 3/8 17 1/16 $.16
Second Quarter .. 17 9/16 13 13/16 -- 22 5/16 18 11/16 .17
Third Quarter ... 27 17 -- 24 20 13/16 .17
Fourth Quarter .. 41 1/8 25 5/16 -- 23 3/4 21 .17
1996
First Quarter ... 51 1/2 36 1/2 -- 27 13/16 22 5/8 .17
Second Quarter .. 72 1/2 45 1/2 -- 29 3/8 25 15/16 .19
Third Quarter ... 72 49 1/8 -- 30 7/8 25 9/16 .19
Fourth Quarter .. 79 7/8 55 3/4 -- 48 1/2 28 3/4 .19
1997
First Quarter(b).. 73 3/8 57 3/4 -- 48 5/8 41 3/4 .19
</TABLE>
- ------------
(a) Prices and dividend information on HFS Common Stock and PHH Common
Stock reflect the impact of the Stock Splits.
(b) Prices and dividend information are through March 26, 1997.
Set forth below is a table containing, for each of November 8, 1996 (the
last trading day before the announcement of the Merger Agreement) and March
26, 1997 (the last trading day before the printing of this Joint Proxy
Statement/Prospectus), the last reported sale price per share of each of HFS
Common Stock and PHH Common Stock, as reported on the NYSE Composite Tape, as
well as the equivalent market value per share of PHH Common Stock, assuming
that the PHH Special Meeting and the Merger had occurred on such day:
<TABLE>
<CAPTION>
NOVEMBER 8, 1996 MARCH 26, 1997
---------------- --------------
<S> <C> <C>
HFS.................. $74.13 $64.63
PHH.................. $30.75 $48
PHH (HFS
equivalent)......... $49.50 $49.50
</TABLE>
The market prices of shares of HFS Common Stock and PHH Common Stock are
subject to fluctuation. As a result, HFS stockholders and PHH stockholders
are encouraged to obtain current market quotations.
Since its inception, HFS has not declared or paid any cash dividends on
HFS Common Stock. HFS currently intends to retain its earnings for future
growth and, therefore, does not anticipate paying cash dividends in the
foreseeable future.
19
<PAGE>
RISK FACTORS
FLUCTUATION IN VALUE OF MERGER CONSIDERATION
The number and market price of shares of HFS Common Stock to be issued in
the Merger is subject to fluctuation. The number of shares of HFS Common
Stock that holders of PHH Common Stock will receive in the Merger depends
upon the average price of HFS Common Stock during the Pricing Period. If the
average price of HFS Common Stock during the Pricing Period is within the
range of $60.00 to $81.00 per share, holders of PHH Common Stock will receive
that fraction of a share of HFS Common Stock having a value (based on the
average price of such shares during the Pricing Period) of $49.50 for each
share of PHH Common Stock (and the Conversion Number will fluctuate
accordingly), but if the average price of HFS Common Stock during the Pricing
Period is less than $60.00 or greater than $81.00, the Conversion Number will
be fixed at 0.8250 or 0.6111, respectively, resulting in the issuance of a
number of shares of HFS Common Stock for each share of PHH Common Stock
having a value (based on the average price of such shares during the Pricing
Period) less than or more than $49.50, as the case may be. The Merger
Agreement provides that either HFS or PHH may terminate the Merger Agreement
if at any time after the PHH Special Meeting, the average price of HFS Common
Stock over a period of 20 trading days preceding the fifth trading day prior
to such date is less than $50.00 per share.
ALTHOUGH THE CONVERSION NUMBER WILL BE BASED ON THE AVERAGE PRICE OF HFS
COMMON STOCK OVER THE PRICING PERIOD, THE MARKET PRICE OF HFS COMMON STOCK
MAY FLUCTUATE AND, ON THE DATE OF THE EFFECTIVE TIME, THE DATE OF RECEIPT OF
SHARES OF HFS COMMON STOCK BY HOLDERS OF PHH COMMON STOCK, OR THE DATE ON
WHICH SUCH SHARES OF HFS COMMON STOCK ARE EVENTUALLY SOLD, MAY BE MORE OR
LESS THAN THE AVERAGE PRICE OF HFS COMMON STOCK OVER THE PRICING PERIOD.
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS AND ACHIEVING COST SAVINGS
In determining that the Merger is in the best interests of its
stockholders, each of the HFS Board and the PHH Board considered potential
efficiencies and cost savings as a result of the combination of HFS's and
PHH's operations. The integration of operations presents significant
management challenges. There can be no assurance that such actions will be
successfully accomplished, and if accomplished, when they will be
accomplished.
RISKS RELATED TO HFS'S OPERATIONS
COMPETITION FOR NEW FRANCHISE PROPERTIES AND GENERAL RISKS OF THE LODGING
AND RESIDENTIAL REAL ESTATE BROKERAGE INDUSTRIES
As a franchisor, HFS's products are its brand names and the support
services it provides to its franchisees. Competition among national brand
franchisors in the lodging and residential real estate brokerage industries
to grow their franchise systems is intense. In addition, smaller chains pose
some degree of competitive pressure in selected markets. HFS believes that
competition for the sale of franchises in such industries is based
principally upon the perceived value and quality of the brand and services as
well as the nature of those services offered to franchisees. HFS believes
that prospective franchisees value a franchise based upon their view of the
relationship of conversion costs and future charges to the potential for
increased revenue and profitability.
HFS's revenue varies directly with franchisees' gross revenue, but is not
directly dependent upon franchisees' profitability. However, HFS believes
that the perceived value of its brand names to prospective franchisees is, in
part, a function of the success of its existing franchisees. The ability of
HFS's franchisees to compete in the lodging and residential real estate
brokerage industries is important to HFS's prospects because franchise fees
are based on franchisees' gross revenue. HFS's franchisees are generally in
intense competition with franchisees of other systems, independent properties
and realtors, and owner-operated chains. Competition in the lodging business
for hotel guests and in the residential real estate brokerage business for
house sales is based upon many factors, each of which may be more or less
important in a given market and location. A franchisee's success may also be
affected by general, regional and local economic conditions.
20
<PAGE>
Regulation. The sale of franchises is regulated by various state laws as
well as by the FTC. The FTC requires that franchisors make extensive
disclosure to prospective franchisees but does not require registration. A
number of states require registration or disclosure in connection with
franchise offers and sales. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of
franchisors to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While HFS's franchising operations
are not materially adversely affected by such existing regulations, HFS
cannot predict the effect any future legislation or regulation may have on
its business operations or financial condition. HFS's casino marketing
business is also subject to extensive government regulation and licensing
requirements. The Federal Real Estate Settlement Procedures Act and state
real estate brokerage laws restrict payments which real estate brokers may
receive in connection with the sale of residences. Such laws may to some
extent restrict preferred vendor arrangements involving HFS's real estate
brokerage franchisees.
Certain Anti-takeover Effects; Divestiture and Loss of Voting
Rights. Certain provisions of HFS's Amended and Restated Certificate of
Incorporation may have the effect of requiring a stockholder of HFS to divest
its shares of HFS Common Stock or forfeit its voting rights in certain
circumstances where such stockholder's ownership of HFS Common Stock would
adversely affect HFS's ability to secure requisite gaming related approvals
or comply with certain governmental requirements (the "Gaming Provisions").
The Gaming Provisions may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that a stockholder might consider
in its best interest.
In addition, the HFS Board has the ability to establish by resolution one
or more series of preferred stock having such number of shares, designation,
relative voting rights, dividend rate, liquidation and other rights,
preferences and limitations as may be fixed by the HFS Board, without any
further stockholder approval. The issuance of a new series of preferred stock
could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, a majority of the
outstanding voting stock of HFS. See "DESCRIPTION OF CAPITAL
STOCK--Disqualified Stockholders."
Entry into New Industries. By acquiring Avis, RCI and PHH, HFS is entering
new industries in which it has not previously participated. While HFS
believes that its experience as a franchisor and service provider in the
hotel and residential real estate brokerage industries will enable it to
succeed in such industries, there can be no assurance that HFS will be able
to compete successfully as a car rental business operator and franchisor, as
a timeshare exchange operator or as a management services provider.
NO DIVIDENDS
HFS has never declared or paid cash dividends. HFS currently expects to
retain its earnings for its business and does not anticipate paying dividends
in the foreseeable future. See "Comparative Stock Prices and Dividends".
RISKS RELATED TO AVIS'S OPERATIONS
Leverage; Availability of Financing; Requirements for Capital. Avis
maintains a substantial amount of secured indebtedness to finance its fleet
purchases. At December 31, 1996, Avis and its subsidiaries had approximately
$2.445 billion of indebtedness outstanding, approximately $2.195 billion of
which represented secured indebtedness for the purchase of vehicles. Of the
remaining indebtedness, approximately $96.3 million represents debt of Avis's
foreign subsidiaries and is unsecured. At December 31, 1996, Avis had
subordinated indebtedness of approximately $220.5 million, of which
approximately $70.5 million is secured but subordinated to the fleet debt and
approximately $150 million is unsecured and structurally subordinated to the
fleet debt. At December 31, 1996, Avis had approximately $649 million of
additional availability under these vehicle financing facilities to finance
the purchase of additional fleet vehicles.
The level of Avis's indebtedness could have important consequences to
Avis's operation, including: (i) the potential limitation of Avis's ability
to obtain additional financing for certain purposes; (ii) the commitment of a
substantial portion of Avis's cash flow from operations for debt service; and
(iii) the limitation of Avis's ability to react to changes in the car rental
industry and general economic conditions.
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Avis depends upon third-party financing to purchase its fleet vehicles.
Continued availability of such financing upon favorable terms is critical to
Avis's operations. Since a substantial portion of such indebtedness is
incurred in connection with major vehicle manufacturers' repurchase programs
("Repurchase Programs"), a significant change in the financial condition of
the vehicle manufacturers, particularly General Motors Corporation ("GM"),
would significantly affect Avis's ability to obtain such financing on
favorable terms. In addition, under the terms of certain of Avis's credit
facilities, including the Prime Vehicles Trust, if the senior indebtedness of
a repurchase party (such as GM) fails to maintain certain rating standards or
upon the bankruptcy of a repurchase party or upon the occurrence of certain
other events, certain adverse consequences may result. These adverse
consequences include a prohibition on borrowing additional amounts under such
facilities for the purchase of vehicles from such repurchase party, a
requirement to repay a lender, and a requirement to increase the overall
level of subordinated debt as additional asset support for such facilities.
The inability of Avis to obtain vehicle financing on favorable terms could
have a material adverse effect on Avis's financial condition and results of
operations.
Potential Changes in Manufacturers' Repurchase Programs. At December 31,
1996, approximately 89% of the vehicles in Avis's rental car fleet were
subject to the terms of manufacturers' Repurchase Programs ("Program
Vehicles"). Repurchase Programs are methods of purchasing vehicles whereby a
buyer, such as Avis, purchases vehicles from the manufacturer at a specified
and stipulated price and, under the program, the manufacturer agrees to buy
the same vehicles back from the purchaser at a future date at a price based
on a pre-determined formula. The formula typically consists of the
capitalized cost less a depreciation factor minus damage and excess mileage.
The availability of Program Vehicles limits Avis's risk of a decline in
residual value at the time of disposition of the vehicles and enables Avis to
fix its depreciation expense in advance. Vehicle depreciation is the largest
cost factor in Avis's car rental operations. Avis could be adversely affected
if automobile manufacturers reduce the availability of Repurchase Programs or
related incentives.
Avis could be at a competitive disadvantage if U.S. automobile
manufacturers selectively restrict eligibility to participate in their
Repurchase Programs. Over the past decade, U.S. automobile manufacturers have
acquired direct or indirect equity stakes in most of the major car rental
systems. Prior to the Avis Acquisition, GM had an equity interest in Avis
which was sold to HFS pursuant to a certain Stock Purchase Agreement, dated
August 28, 1996, by and between HFS and GM; Ford Motor Company owned The
Hertz Corporation ("Hertz") and had an equity interest in Budget Rent a Car
Corporation ("Budget"); and Chrysler Corporation had equity interests in
Dollar Rent a Car Systems, Inc. ("Dollar") and Thrifty Rent-A-Car Systems,
Inc. ("Thrifty"). For the 1996 model year, Avis purchased a significant
number of its vehicles pursuant to Repurchase Programs sponsored by GM. Any
effort by GM to restrict eligibility to participate in Repurchase Programs to
car rental systems could adversely affect Avis's ability to compete with
those of its competitors that have continued access to such programs.
Competition. The car rental industry is characterized by intense
competition, particularly with respect to price and service. In any
geographic market, Avis may encounter competition from national, regional and
local car rental companies. Avis's largest competitors for car rentals
include Alamo Rent-A-Car, Inc., Budget, Dollar, Enterprise Rent a Car, Hertz,
National Car Rental System, Inc. and Thrifty.
There have been occasions during the history of the car rental industry in
which the major car rental companies have been adversely affected by
industry-wide price pressures, and Avis has, on such occasions, priced its
product in response to such pressures. Moreover, at times when the car rental
industry has experienced vehicle oversupply, there has been intensified
competitive pressure. This oversupply has had a negative impact on the
industry's ability to raise rental rates. Avis has taken steps to address its
fixed cost structure to improve its overall competitive position; however,
future oversupply or other factors affecting competition could still
adversely affect Avis's financial condition and results of operations.
Seasonality. Avis experiences seasonal revenue patterns similar to the
travel industry wherein the summer months, due to the increase in leisure
travel, produce higher revenue than other periods during the year.
Historically, Avis's fiscal quarter ended August 31, accounted for over 26%
and 71% of Avis's
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combined total revenue and pre-tax profit, respectively, in fiscal years 1995
and 1996. As a result, any occurrence that disrupts travel patterns during
the summer period could have a material adverse effect on Avis's annual
performance. Avis's fourth quarter is generally its weakest, when there is
limited leisure travel and a greater potential for adverse weather
conditions. Many of Avis's operating expenses such as rent, general insurance
and administrative personnel are fixed and cannot be reduced during periods
of decreased rental demand.
Regulation of Loss Damage Waivers. A traditional revenue source for the
car rental industry has been the sale of loss damage waivers, by which rental
companies agree to relieve a customer from financial responsibility arising
from vehicle damage to a rented vehicle incurred during the rental period.
Approximately 3% of Avis's rental revenue during fiscal 1996 was generated by
the sale of loss damage waivers. The U.S. House of Representatives has from
time to time considered legislation that would regulate the conditions under
which loss damage waivers may be sold by car rental companies. House Bill
H.R. 175, introduced in January 1995, seeks to prohibit the imposition of
liability on renters for loss of, or damage to, rented vehicles, except in
certain circumstances, and to prohibit the sale of loss damage waivers. To
date, no action has been taken on this bill. In addition, approximately 40
states have considered legislation affecting the sale of loss damage waivers.
To date, 24 states have enacted legislation regulating the sale of loss
damage waivers, most of which require disclosure to each customer at the time
of rental that damage to the rented vehicle may be covered by the customer's
personal automobile insurance and that loss damage waivers may not be
necessary. In addition, in the late 1980's, New York and Illinois enacted
legislation which eliminated Avis's right to offer loss damage waivers for
sale and limited potential customer liability to $100 and $200, respectively.
Moreover, California, Nevada and Indiana have capped rates that may be
charged for collision damage waivers to $9.00, $10.00 and $5.00 per day,
respectively. Texas requires that the rate charged for loss damage waivers be
reasonably related to the direct cost of repairs. Adoption of national or
additional state legislation eliminating or limiting the sale of loss damage
waivers could result in the loss or reduction of this revenue source and
additional limitations on potential customers liability could increase Avis's
costs.
Environmental Risks Inherent in On-Site Petroleum Storage. 250 of Avis's
domestic and international facilities contain tanks for the storage of
petroleum products, such as gasoline, diesel fuel and waste oils. At 219 of
Avis's operating locations, one or more of these tanks are located
underground. Avis maintains an environmental compliance program that includes
the replacement of steel tanks and the implementation of required technical
and operational procedures designed to minimize the potential for leaks and
spills, maintenance of records and the regular testing of tank systems for
tightness. However, there can be no assurance that these tank systems will at
all times remain free from leaks or that the use of these tanks will not
result in spills. Any leak or spill, depending on such factors as the
material involved, quantity and environmental setting, could result in
interruptions to Avis's operations and expenditures that could have a
material adverse effect on Avis's results of operations and financial
condition. Avis carries environmental impairment liability coverage with
limits of $4 million per site and $4 million in the aggregate and a
deductible generally of $250,000. This policy covers against liability to
third parties and clean-up costs, but not business interruption in Avis's own
operations.
Risk of Non-Renewal of Airport Concessions. Avis conducts rental
operations at 233 airports domestically and internationally, with each of
these operations conducted pursuant to a concession agreement granted by the
local airport authority. In general, these concession agreements are subject
to competitive bidding at the time of renewal. The terms of Avis's airport
concession agreements are varied and include month-to-month terms at certain
locations and fixed terms of various durations at other locations. Avis is at
risk of losing its ability to operate at an airport if it is not a successful
bidder at the time its concession agreement is subject to renewal. The loss
of one or more airport operations may have an adverse effect on Avis.
Dependence on Air Travel Industry and Fuel Supply. A significant amount of
Avis's North American revenue is generated at its on-airport or near-airport
facilities. A decrease in air travel or any event that disrupts air travel
patterns at such facilities for a continued period of time could have a
material adverse effect on Avis's financial condition and results of
operations. Such events could include labor unrest, airline bankruptcies or
consolidations, substantially higher air fares, a downturn in the economy,
the outbreak of war, high-profile crimes against tourists, terrorist
incidents and natural occurrences, such as earthquakes, floods and
hurricanes.
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Avis's operations, as well as those of its competitors, could be affected
by any limitations in fuel supplies or by any imposition of mandatory
allocations or rationing regulations or significant increases in fuel prices.
In the event of a severe disruption of fuel supplies or significant increases
in fuel prices, the operations of Avis and other car rental companies would
be adversely affected.
Dependence on Principal Supplier. Since approximately 1978, GM has been
Avis's principal supplier of vehicles. The number of vehicles purchased from
GM varies from year to year. In model year 1995, Avis made approximately 82%
of its vehicle purchases in North America from GM. In model year 1996, Avis
made approximately 81% of its vehicle fleet purchases in North America from
GM. Under the terms of the GM Repurchase Program, Avis must purchase at least
100,000 vehicles and maintain a minimum of 51% GM share penetration of its
domestic vehicles during model years 1996 through 2000. Given the volume of
vehicles purchased from GM by Avis, shifting significant portions of the
fleet purchases to other manufacturers would require lead time. As a result,
if GM were unable to supply Avis with the planned number and types of
vehicles, it could have a material adverse effect on Avis's financial
condition and results of operations.
RISKS RELATED TO PHH'S OPERATIONS
Strength of the Economy. PHH's financial results are dependent on the
strength of the economy. A downturn in the economy may cause corporate
clients to exercise a higher degree of fiscal caution by decreasing the size
of their vehicle fleets or extending the service period of existing fleet
vehicles which could negatively affect PHH's vehicle management services. In
addition, while PHH is generally not at risk for the carrying value of homes
in its relocation services segment, a downturn in the economy could cause
clients to reassess their relocation plans as part of cost control measures
and authorize fewer home purchase transactions. PHH's mortgage banking
services may also be affected by the strength of the economy, the level of
interest rates and the related condition of residential real estate markets.
Funding Requirements and Interest Rate Risk. The continuous necessity of
funding very large portfolios of vehicles and homes on behalf of clients
subjects PHH to pressures to limit leverage. In addition, although PHH is
generally able to match floating and fixed interest rate and maturity
characteristics of funding liabilities to their related assets, either by a
matched funding mechanism or through the use of interest rate swap
agreements, there remains some element of rate and liquidity exposure. With
respect to its mortgage banking operations, PHH 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 and as
a hedge against earnings volatility of its mortgage servicing rights. Risk
remains to the extent such exposures are either under-or over-hedged.
Additionally, PHH hedges its risk on foreign currency transactions through
the use of foreign currency forward commitments. The combined entity will
continue the above risk mitigating strategy and plans to use foreign currency
forward commitments to hedge against commitments made in foreign currency by
HFS' international timeshare business.
Competitive Contract Terms. Vehicle management services and real estate
services client contracts generally have no fixed term and are subject to
competitive pricing pressures. Mortgage banking services depend on large
segments of origination derived from affinity groups and real estate brokers,
which could decline in times of rising interest rates. PHH's financial
results could be negatively impacted to the extent that PHH can not replace
these volumes with other sources. Due to the potential for combining PHH's
real estate services with those of HFS, there is a risk of loss of volume
from some relocation management clients who prefer to maintain dual supplier
relationships. In addition, real estate services government contracts are
subject to end-period adjustments, and to the extent amounts are payable to
the government, PHH's profitability may be negatively impacted. The service
fee portion of real estate services corporate client contracts is at risk for
direct cost overruns against fixed performance targets.
Regulation. The leasing business is dependent on current tax and
accounting regulations which continue to create economic advantages for
companies to lease, rather than own, vehicles. PHH cannot predict the effect
any future legislation or regulation may have on its business operations or
financial conditions. Efforts to achieve cross-marketing and operational
synergies among real estate and mortgage banking services, and between such
services and their customer bases within the combined HFS/PHH
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organization, may be impeded by the restrictions of the Real Estate
Settlement Procedures Act. This Act and analagous laws in various states
restrict the value which real estate brokers, mortgage bankers and others may
pay or receive in connection with residential real estate transactions and
services ancillary thereto.
The Clean Air Act Amendments of 1990 impose obligations on certain motor
vehicle fleet operators in specified ambient air quality non-attainment areas
to acquire vehicles that meet lower emissions standards than vehicles sold to
and used by the general public. Several states have also adopted air quality
laws that impose similar restrictions on certain fleet operators. The Energy
Policy Act of 1992 imposes obligations on certain utility and fuel provider
fleets to acquire vehicles that use non-petroleum based fuels, and delegates
to the Secretary of the Department of Energy authority to impose similar
alternative fuel vehicle acquisition obligations on other fleets. PHH is
dependent upon motor vehicle manufacturers to build and service vehicles at a
reasonable price, and in such quantities and models that meet these potential
fleet requirements, and is dependent upon fuel providers to establish
adequate distribution networks to meet this demand. In addition, as such
requirements proliferate, and the business justification for the operation of
the fleet is weighed against the administrative and cost burden of complying
with these obligations, some fleet operators may elect to reduce or eliminate
company-provided vehicles and replace them with driver reimbursement
programs.
Limited Supplier Network. Vehicle sources are limited to a small number of
manufacturers who tightly control their dealer networks. The manufacturers
control the production, allocation and delivery of vehicles produced based on
their overall goals and objectives. As PHH orders vehicles for its clients
from these controlled sources, this may effect the ability of PHH to serve
the needs of its clients.
INFORMATION CONCERNING THE HFS SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to stockholders
of HFS in connection with the solicitation of proxies by the HFS Board from
holders of HFS Common Stock for use at the HFS Special Meeting to be held on
April 30, 1997, at 10:00 a.m., local time, at the offices of HFS, 6 Sylvan
Way, Parsippany, New Jersey, and at any adjournments or postponements
thereof. At the HFS Special Meeting, holders of HFS Common Stock will be
asked to consider and vote upon (i) a proposal (the "Share Issuance") to
approve the issuance by HFS of up to 31.4 million shares of HFS common stock,
par value $.01 per share ("HFS Common Stock"), pursuant to the Agreement and
Plan of Merger dated as of November 10, 1996 (the "Merger Agreement") by and
among HFS, Mercury Acq. Corp., a wholly owned subsidiary of HFS ("Merger
Sub"), and PHH Corporation ("PHH"), which provides for the merger of Merger
Sub with and into PHH (the "Merger"); (ii) a proposal to amend HFS's
Certificate of Incorporation to increase the maximum number of authorized
directors of HFS from twelve (12) to twenty (20) (the "Directors Amendment");
(iii) a proposal to amend HFS's Certificate of Incorporation to increase the
number of authorized shares of HFS Common Stock from 300,000,000 shares to
600,000,000 shares (the "Shares Amendment" and together with the Directors
Amendment, the "Certificate of Incorporation Amendments"); (iv) a proposal to
amend HFS's Amended and Restated 1993 Stock Option Plan (the "1993 Plan") to
provide for an increase of 10,000,000 shares in the total number of shares of
HFS Common Stock currently authorized for issuance under the 1993 Plan (which
would increase the total number of shares authorized for issuance pursuant to
the 1993 Plan from 24,541,600 to 34,541,600) (the "1993 Plan Amendment"); and
(v) to transact such other business as may properly come before the HFS
Special Meeting.
RECORD DATE; QUORUM; VOTE REQUIRED
The HFS Board has fixed the close of business on March 3, 1997, as the
record date for determining the holders of HFS Common Stock entitled to
notice of, and to vote at, the HFS Special Meeting (the "HFS Record Date").
Only holders of record of HFS Common Stock at the close of business on the
HFS Record Date will be entitled to notice of, and to vote at, the HFS
Special Meeting. At the close of business on the HFS Record Date, 127,529,530
shares of HFS Common Stock were issued and outstanding and
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were held by approximately 504 holders of record. The HFS Common Stock
constitutes the only outstanding class of voting securities of HFS, and each
share of HFS Common Stock is entitled to one vote on each matter to be acted
upon or which may come before the HFS Special Meeting. Votes may be cast at
the HFS Special Meeting in person or by proxy. See "--Proxies."
The presence at the HFS Special Meeting, either in person or by proxy, of
the holders of a majority of the issued and outstanding shares of HFS Common
Stock entitled to vote is necessary to constitute a quorum to transact
business at the HFS Special Meeting. If a quorum is not present at the HFS
Special Meeting, the stockholders who are present and entitled to vote at the
HFS Special Meeting may, by a majority vote, adjourn the HFS Special Meeting
from time to time without notice or other announcement until a quorum is
present.
The affirmative vote of the holders of a majority of the shares of HFS
Common Stock voting on each of the Share Issuance and the 1993 Plan Amendment
(where the total number of votes cast on the respective proposal represents
over 50% of all shares of HFS Common Stock outstanding on the HFS Record Date
and entitled to vote) is required to approve the Share Issuance and the 1993
Plan Amendment, respectively. Abstentions will have the same effect as votes
cast against the Share Issuance and the 1993 Plan Amendment, as the case may
be. However, broker non-votes (i.e., shares held by brokers in street name
that are not entitled to vote at the HFS Special Meeting due to the absence
of specific instructions from the beneficial owners of such shares) will be
disregarded and will have no effect on the votes on the Share Issuance and
the 1993 Plan Amendment.
The affirmative vote of the holders of at least a majority of the total
outstanding shares of HFS Common Stock is required to approve the Certificate
of Incorporation Amendments. Under applicable Delaware law, in determining
whether the proposals to approve the Certificate of Incorporation Amendments
have received the requisite number of affirmative votes, abstentions and
broker non-votes will be counted and will have the same effect as a vote
against the proposals.
As of the close of business on the HFS Record Date, HFS's directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of 1,197,628 outstanding shares (excluding shares underlying stock
options) of HFS Common Stock, or approximately 0.94% of the then outstanding
shares of HFS Common Stock. It is expected that such executive officers and
directors of HFS will vote for approval of the HFS Proposals. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--HFS."
THE HFS BOARD UNANIMOUSLY RECOMMENDS THAT HFS STOCKHOLDERS
VOTE FOR APPROVAL OF EACH OF THE HFS PROPOSALS.
PROXIES
Shares of HFS Common Stock represented by properly executed proxies
received in time for the HFS Special Meeting will be voted at the HFS Special
Meeting in the manner specified on such proxies. Proxies which are properly
executed but which do not contain voting instructions will be voted FOR
approval of each of the HFS Proposals. It is not expected that any matter
other than those contemplated by the HFS Proposals will be brought before the
HFS Special Meeting; however, if other matters are properly presented, the
persons named in such proxy will have authority to vote in accordance with
their judgment on any other such matter, including without limitation, any
proposal to adjourn or postpone the meeting or otherwise concerning the
conduct of the meeting. If a proxy is returned which specifies a vote against
the Share Issuance, such discretionary authority will not be used to adjourn
the HFS Special Meeting in order to solicit additional votes in favor of the
Share Issuance.
The grant of a proxy on the enclosed HFS proxy card does not preclude a
stockholder from voting in person at the HFS Special Meeting. A stockholder
may revoke a proxy at any time prior to its exercise by (i) delivering, prior
to the HFS Special Meeting, to Jeanne M. Murphy, Secretary, HFS Incorporated,
6 Sylvan Way, Parsippany, New Jersey 07054, a written notice of revocation
bearing a later date or time than the proxy; (ii) delivering to the Secretary
of HFS a duly executed proxy bearing a later date or time than the revoked
proxy; or (iii) attending the HFS Special Meeting and voting in person.
Attendance at the HFS Special Meeting will not by itself constitute
revocation of a proxy.
For participants in the HFS Incorporated Employee Savings Plan (the
"Savings Plan") with shares of HFS Common Stock credited to their accounts,
voting instructions for the trustee of the Savings Plan
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are also being solicited through this Joint Proxy Statement/Prospectus. In
accordance with the provisions of the Savings Plan, the trustee will vote
shares of HFS Common Stock in accordance with instructions received from the
participants to whose accounts such shares are credited, provided that, to
the extent such instructions are not received prior to twelve o'clock noon,
Eastern Standard Time on April 23, 1997, the trustee will vote the shares
with respect to which it has not received instructions proportionately in
accordance with the shares for which it has received instructions.
Instructions given with respect to shares in Savings Plan accounts may be
changed or revoked only in writing, and no such instructions may be revoked
after twelve o'clock noon, Eastern Standard Time on April 23, 1997.
Participants in the Savings Plan are not entitled to vote in person at the
Special Meeting.
If a participant in the Savings Plan has shares of HFS Common Stock
credited to his or her account in the Savings Plan and also owns other shares
of HFS Common Stock, he or she should receive separate proxy cards for shares
credited to his or her account in the Savings Plan and any other shares that
he or she owns. All such proxy cards should be completed, signed and returned
to register voting instructions for all shares owned by him or her or held
for his or her benefit in the Savings Plan's HFS Stock Fund.
HFS will bear the cost of solicitation of proxies from its stockholders,
except that HFS and PHH intend to share equally the cost of preparing and
printing this Joint Proxy Statement/Prospectus relating to the Share Issuance
and the Merger, including related filing fees. In addition to solicitation by
mail, the directors, officers and employees of HFS and its subsidiaries may
solicit proxies from stockholders of HFS by telephone, telegram or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and HFS will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
In addition, HFS has retained ChaseMellon Shareholder Services
("ChaseMellon") to assist HFS in the solicitation of proxies from
stockholders in connection with the HFS Special Meeting. ChaseMellon will
receive a fee of $8,500 as compensation for its services and reimbursement of
its out-of-pocket expenses in connection therewith. HFS has agreed to
indemnify ChaseMellon against certain liabilities arising out of or in
connection with its engagement.
Representatives of Deloitte & Touche LLP are expected to be present at the
HFS Special Meeting, where they will have the opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
APPRAISAL RIGHTS
Stockholders of HFS will have no dissenters' appraisal rights under the
DGCL in connection with the Share Issuance, the Merger Agreement and the
consummation of the Merger. See "THE MERGER--Appraisal Rights" and
"COMPARATIVE RIGHTS OF STOCKHOLDERS OF HFS AND PHH--Appraisal Rights."
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INFORMATION CONCERNING THE PHH SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to stockholders
of PHH in connection with the solicitation of proxies by the PHH Board from
holders of PHH Common Stock for use at the PHH Special Meeting to be held on
April 30, 1997, at 10:00 a.m., local time, at The Carlton Hotel, 923 16th and
K Streets, N.W., Washington, DC, and at any adjournments or postponements
thereof. At the PHH Special Meeting, holders of PHH Common Stock will be asked
to consider and vote upon a proposal (the "Merger Proposal") to approve the
Merger pursuant to the Merger Agreement and the transactions contemplated
thereby and to transact such other business as may properly come before the
PHH Special Meeting.
RECORD DATE; QUORUM; VOTE REQUIRED
The PHH Board has fixed the close of business on January 31, 1997, as the
record date for determining the holders of PHH Common Stock entitled to
notice of, and to vote at, the PHH Special Meeting (the "PHH Record Date").
Only holders of record of PHH Common Stock at the close of business on the
PHH Record Date will be entitled to notice of, and to vote at, the PHH
Special Meeting. At the close of business on the PHH Record Date, 34,984,265
shares of PHH Common Stock were issued and outstanding and were held by
approximately 1,610 holders of record. The PHH Common Stock constitutes the
only outstanding class of voting securities of PHH, and each share of PHH
Common Stock is entitled to one vote on each matter to be acted upon or which
may come before the PHH Special Meeting. Votes may be cast at the PHH Special
Meeting in person or by proxy. See "--Proxies."
The presence at the PHH Special Meeting, either in person or by proxy, of
PHH stockholders entitled to cast a majority of all the votes entitled to be
cast will constitute a quorum to transact business at the PHH Special
Meeting. Whether or not a quorum is present at the PHH Special Meeting, the
stockholders who are present and entitled to vote at the PHH Special Meeting
may, by a majority vote, adjourn the PHH Special Meeting to a date not more
than 120 days after the original record date without notice or other
announcement.
The affirmative vote of at least two-thirds of the total outstanding
shares of PHH Common Stock is required to approve the Merger Proposal. Under
applicable Maryland law, in determining whether the Merger Proposal has
received the requisite number of affirmative votes, abstentions and broker
non-votes will be counted and will have the same effect as a vote against the
Merger Proposal.
As of the close of business on the PHH Record Date, PHH's directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of 537,563 outstanding shares (excluding shares underlying stock
options) of PHH Common Stock, or approximately 1.5% of the then outstanding
shares of PHH Common Stock. It is expected that such executive officers and
directors of PHH will vote for approval of the Merger Proposal. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--PHH."
THE PHH BOARD UNANIMOUSLY RECOMMENDS THAT PHH STOCKHOLDERS
VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
PROXIES
Shares of PHH Common Stock represented by properly executed proxies
received in time for the PHH Special Meeting will be voted at the PHH Special
Meeting in the manner specified by the holder thereof. Proxies which are
properly executed but which do not contain voting instructions will be voted
FOR approval of the Merger Proposal. It is not expected that any matter other
than that contemplated by the Merger Proposal will be brought before the PHH
Special Meeting; however, if other matters are properly presented, the
persons named in such proxy will have authority to vote in accordance with
their judgment on any other such matter, including without limitation, any
proposal to adjourn or postpone the
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meeting or otherwise concerning the conduct of the meeting. If a proxy is
returned which specifies a vote against the Merger Proposal, such
discretionary authority will not be used to adjourn the PHH Special Meeting
in order to solicit additional votes in favor of the Merger Proposal.
The grant of a proxy on the enclosed PHH proxy card does not preclude a
stockholder from voting in person at the PHH Special Meeting. A stockholder
may revoke a proxy at any time prior to its exercise by (i) delivering, prior
to the PHH Special Meeting, to Samuel H. Wright, Secretary, PHH Corporation,
11333 McCormick Road, Hunt Valley, Maryland 21031, a written notice of
revocation bearing a later date or time than the proxy; (ii) delivering to
the Secretary of PHH a duly executed proxy bearing a later date or time than
the revoked proxy; or (iii) attending the PHH Special Meeting and voting in
person. Attendance at the PHH Special Meeting will not by itself constitute
revocation of a proxy.
PHH will bear the cost of solicitation of proxies from its stockholders,
except that HFS and PHH intend to share equally the cost of preparing and
printing this Joint Proxy Statement/Prospectus relating to the Share Issuance
and the Merger, including related filing fees. In addition to solicitation by
mail, the directors, officers and employees of PHH and its subsidiaries may
solicit proxies from stockholders of PHH by telephone, telegram or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and PHH will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
It is the policy of PHH that all stockholder votes, whether by proxy or in
person, will be handled in a manner that protects individual stockholder
voting privacy. Only the proxy solicitor, independent tabulator and the few
other persons engaged in the receipt and tabulation of proxies and ballots
have access to them and such persons are required to keep all voting
information confidential. Under the policy, no vote of any individual
stockholder will be disclosed except when required by law, when disclosure is
voluntarily made or requested by a stockholder, in certain circumstances in a
proxy contest, or when there is a bona fide dispute as to the authenticity or
tabulation of votes.
In addition, PHH has retained Georgeson & Company, Inc. ("Georgeson") to
assist PHH in the solicitation of proxies from stockholders in connection
with the PHH Special Meeting. Georgeson will receive a fee of $15,000 as
compensation for its services and reimbursement of its out-of-pocket expenses
in connection therewith. PHH has agreed to indemnify Georgeson against
certain liabilities arising out of or in connection with its engagement.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
PHH Special Meeting, where they will have the opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
APPRAISAL RIGHTS
Stockholders of PHH will have no objecting stockholders' appraisal rights
in connection with the Merger Agreement and the consummation of the Merger.
See "THE MERGER--Appraisal Rights" and "COMPARATIVE RIGHTS OF STOCKHOLDERS OF
HFS AND PHH--Appraisal Rights."
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THE MERGER
The discussion in this Joint Proxy Statement/Prospectus of the Merger and
the description of the principal terms of the Merger Agreement are subject to
and qualified in their entirety by reference to the Merger Agreement, a copy
of which is attached to this Joint Proxy Statement/Prospectus as Annex I and
is incorporated herein by reference.
BACKGROUND OF THE MERGER
During the past several years, PHH with the assistance of Goldman Sachs
and, more recently with the additional assistance of Beacon, has engaged in a
continued review of various strategic alternatives in each of its three major
business segments. The review centered on growth opportunities, potential
joint venture partners, acquisitions and start-up opportunities. From time to
time during this period, representatives of various companies approached PHH
on an informal basis to express interest in exploring various strategic
alternatives with PHH or one of the various business units of PHH.
During the fall of 1995, Mr. Terry E. Kridler, Vice President, Corporate
Planning and Business Development of PHH, had several discussions with
representatives of HFS regarding a possible acquisition by PHH of Worldwide
Relocation Management Company (formerly known as Western Relocation
Management Company) ("Worldwide") from HFS. HFS had acquired Worldwide as
part of its acquisition of Century 21 Real Estate Corporation in August 1995.
Thereafter, on November 29, 1995, Mr. Roy A. Meierhenry, Senior Vice
President and Chief Financial Officer of PHH, and Mr. Kridler had a telephone
conversation with Mr. Henry R. Silverman, Chairman of the Board and Chief
Executive Officer of HFS, regarding Worldwide. The following day, HFS
provided to PHH certain Worldwide financial statements. Discussions were
terminated prior to calendar year end.
To further evaluate the alternatives available to PHH, the management of
PHH made various contacts with third parties to test the level of market
interest in a strategic transaction involving PHH, as well as an ongoing
review of strategic alternatives. PHH management and its financial advisors
solicited indications of interest for a strategic alliance with PHH to
compare the value indicated by this market test against PHH's ability to
realize value for its stockholders by pursuing other alternatives. PHH's
financial advisors and management identified companies that they believed
would be possible strategic partners, and prepared an analysis of PHH and the
market for its securities to provide a basis for evaluating any indications
of interest that might be received by PHH.
On June 17, 1996, following the May 31, 1996 acquisition of Coldwell
Banker Corporation by HFS, Messrs. Meierhenry and Kridler, along with PHH's
financial advisors, met with Mr. Silverman and other representatives, in
order to discuss a possible acquisition by one of the companies of the
relocation business of the other.
During the spring and summer of 1996, the PHH financial advisors and
management considered contacting a number of companies in order to determine
whether any of those entities would be interested in considering a strategic
transaction with PHH. The PHH financial advisors and management initially
reviewed approximately twenty-six United States and foreign companies. From
this group, certain companies were selected to be contacted based on several
factors, including perceived interest in the lines of business in which PHH
is engaged, their financial and business resources and their perceived
ability to consummate a strategic transaction with PHH. Confidentiality
agreements were signed by ten parties, which provided for, among other
things, the parties' exchange of certain non-public information regarding
their businesses on a confidential basis, and certain standstill provisions.
In order for HFS to pursue its interest in the relocation business of PHH,
PHH and HFS entered into such a confidentiality agreement on July 9, 1996.
During this period, Goldman Sachs and Beacon assisted management of PHH in
developing a potential auction process in the event the PHH Board ultimately
decided that a merger or disposition of PHH, or any of its business units,
was in the best interests of PHH and its stockholders. The auction process
would involve several steps, including the identification of potential
acquirors, an informal approach to the potential acquirors to determine their
interest in participating in the process, the entering into of mutual
confidentiality agreements, the receipt of preliminary indications of
interest from the
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potential acquirors, detailed on-site due diligence by potential acquirors
with indications of interests of a magnitude deemed acceptable to the PHH
Board and the receipt of preliminary bid proposals.
During the spring and summer of 1996, PHH provided certain confidential
information to potential strategic partners which had signed confidentiality
agreements. Meetings were also held between senior management of PHH and
senior management of several of the potential strategic partners. In early
August 1996, HFS indicated for the first time its interest in possibly
acquiring the entire business of PHH. On August 12, 1996, Mr. Robert D.
Kunisch, Chairman of the Board and Chief Executive Officer of PHH, Mr.
Meierhenry and Mr. Silverman, and other representatives of PHH and HFS, along
with their financial advisors, met to exchange information and discuss the
potential advantages and benefits of a possible transaction involving the
entire business of PHH.
On August 16, 1996, HFS submitted a written non-binding indication of
interest to enter into a tax-free merger with PHH.
On August 19, 1996, the PHH Board was informed of the results of several
exploratory meetings and discussions regarding the possibility of certain
strategic transactions involving PHH or business units of PHH with various
parties. The PHH Board directed management of PHH to pursue these
discussions, gather additional data, research several specific points and
provide an update to the PHH Board no later than its regularly scheduled
meeting in October.
HFS suspended its August 19, 1996 indication of interest in early
September 1996, indicating that it desired at that time to focus on other
potential acquisitions. At a special meeting of the PHH Board held on
September 17, 1996, Mr. Kunisch provided an update of discussions since the
August meeting of the PHH Board between management of PHH and interested
parties, including HFS, concerning potential strategic alliances with PHH or
specific operations of PHH. At that meeting, the PHH directors expressed
approval and support of management's analysis of potential strategic
alliances. The PHH Board also instructed management to continue to
investigate several pending initiatives.
During the second week of October 1996, Messrs. Kunisch and Silverman held
a telephone conference in which HFS expressed a renewed interest in a
strategic transaction with PHH. HFS then commenced additional due diligence.
On October 18, 1996, PHH and its financial advisors met with senior
management of HFS and its financial advisors for a due diligence session
relating to HFS to enable PHH to evaluate more thoroughly a potential
strategic alliance with HFS. Also on October 18, 1996, HFS submitted a
renewed and revised indication of interest to acquire PHH in a merger
transaction that would involve an exchange of shares in a tax-free
transaction designed to be accounted for as a pooling of interests.
On October 21, 1996, the PHH Board convened a meeting with PHH's
management and financial and legal advisors regarding the preliminary
non-binding indications of interest that PHH had recently received. PHH's
legal advisors reviewed the possible different structures inherent in
existing expressions of interest and PHH's financial advisors provided a
review of potential strategic partners, including company backgrounds,
financial structures, stock performance and analysts' reports and future
growth potential. The PHH Board authorized PHH's management, with the
assistance of the advisors, to continue to explore strategic alternatives
available to PHH. Following the meeting, PHH's representatives informed HFS's
representatives that PHH was interested in studying further the transaction
proposed by HFS in its October 18, 1996 revised indication of interest. The
PHH representatives similarly contacted the other potential strategic
partners.
On October 22, 1996, PHH's legal advisors delivered prototype draft merger
agreements (for both stock and cash transactions) to the parties interested
in pursuing a transaction. PHH arranged due diligence sessions with potential
strategic partners, including HFS, over the next few weeks. These sessions
involved representatives of the potential strategic partners, outside
counsel, financial advisors and interviews with PHH's management teams.
Potential strategic partners were informed that final indications of
interest would be due on November 5, 1996. During the week of November 4,
1996, PHH and its advisors continued discussions and negotiations with
potential strategic partners. With respect to HFS there were extensive
arm's-length
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negotiations regarding, among other things, the Conversion Number, the
minimum and maximum exchange ratios, the circumstances under which a
termination fee would be payable and the price of HFS Common Stock at which
either party could terminate the Merger Agreement.
At a PHH Board meeting held on November 9, 1996, PHH's management reported
on the status of discussions with potential strategic partners. While
interested potential strategic partners had submitted indications of
interest, the PHH Board determined, after consultation with Goldman Sachs and
Beacon, that the indication of interest submitted by HFS was superior in
value to indications of interest received from other potential strategic
partners.
At the same PHH Board Meeting, PHH's financial advisors discussed their
views on the business and operations of HFS, discussed various analyses
relating to the Merger and answered questions regarding such analyses and
prior analyses that had been discussed with the PHH Board. Additionally,
PHH's legal advisors reported to the PHH Board that PHH and HFS had
negotiated a nearly final draft of the Merger Agreement and reviewed the
terms of the Merger Agreement with the PHH Board. At the same November 9
meeting, the PHH Board received the oral opinion of Goldman Sachs and Beacon
that, as of such date and subject to review of the definitive Merger
Agreement, the Conversion Number pursuant to the draft Merger Agreement was
fair to the holders of shares of PHH Common Stock, other than HFS, Merger Sub
or any other wholly owned subsidiary of HFS. The PHH Board approved the
Merger and the draft of the Merger Agreement subject to finalization by PHH's
management and advisors.
The management of each of PHH and HFS, along with their respective legal
and financial advisors, continued negotiations through the weekend of
November 9 and 10, 1996, culminating in the execution of the definitive
Merger Agreement on the evening of November 10, 1996.
REASONS OF HFS FOR THE MERGER; RECOMMENDATION OF THE HFS BOARD
The HFS Board has unanimously concluded that the Merger is fair to and in
the best interests of HFS and its stockholders and recommends that HFS's
stockholders vote to approve the Share Issuance. As discussed below, HFS
believes that the strategic fit and strengths of HFS and PHH will enhance
HFS's competitive position, offer potential cost savings and opportunities
for other synergies, and provide a platform for continued growth, both
internally and through acquisitions. In reaching its determination, the HFS
Board consulted with management, as well as its advisors, and considered
various factors, including:
(1) the business, assets, management, competitive position and prospects
of HFS and PHH, including the analysis, judgment and advice of HFS management
with respect thereto, the synergistic businesses of HFS and PHH, the quality
of PHH's assets, the complementary management teams, and the strong
competitive position of the combined entity;
(2) the financial condition, cash flows and results of operations of HFS
and PHH, both on a historical and a prospective basis, including the strong
balance sheet of the combined entity, strong results of operations and cash
flows of the combined entity and the accretive nature of the Merger;
(3) PHH's strong positions in the corporate relocation and mortgage
origination and servicing businesses and the potential synergies between
PHH's mortgage services and real estate services subsidiaries and Coldwell
Banker, Century 21 and ERA, between PHH's vehicle management services
business and Avis and between Coldwell Banker and PHH's relocation business;
(4) potential efficiencies and cost-savings as a result of the combination
of HFS's and PHH's operations, including the elimination of redundant costs
at the corporate level;
(5) the significant potential enhancement of the strategic and market
position of the combined entity beyond that achievable by HFS alone,
particularly in the real estate services and mortgage services businesses,
both of which offer significant new growth opportunities for the combined
company, and the increase in international business opportunities expected to
result from the combination of the two companies;
(6) historical market prices and trading information with respect to HFS
Common Stock and PHH Common Stock and the Conversion Number to be used as a
basis for converting PHH Common Stock into HFS Common Stock;
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(7) the terms and conditions of the Merger Agreement, including the form
and amount of consideration, that the consideration was fair to HFS, that the
issuance of HFS Common Stock was subject to a collar, that the transaction
was structured as a stock-for-stock merger and that the representations and
warranties given by PHH were reasonable (See "THE MERGER AGREEMENT");
(8) detailed financial analyses and presentations of Lehman Brothers,
HFS's financial advisor in connection with the Merger, and its opinion that
the consideration to be paid by HFS in the Merger is fair, from a financial
point of view, to HFS (See "--HFS Financial Advisor");
(9) the intended treatment of the Merger as a tax-free reorganization
under the Code and the condition to HFS's obligation under the Merger
Agreement that HFS receive a legal opinion as to the tax-free nature of the
Merger (See "THE MERGER--Certain Federal Income Tax Consequences" and "THE
MERGER AGREEMENT--Conditions Precedent to the Merger");
(10) the intended treatment of the Merger as a "pooling of interests" for
financial reporting and accounting purposes and the condition to HFS's
obligation under the Merger Agreement that HFS and PHH receive letters from
their respective independent auditors stating that the Merger will qualify as
a "pooling of interests" transaction under Accounting Principles Board
Opinion No. 16. (See "THE MERGER AGREEMENT--Conditions Precedent to the
Merger");
(11) the increased asset and earnings base and diversification of
businesses of the combined companies, which should help increase earnings
stability; and
(12) the opportunity to achieve a larger and more stable platform to
continue to make strategic acquisitions.
The foregoing discussion of the factors considered by the HFS Board is not
intended to be exhaustive. In view of the wide variety of factors considered
in connection with its evaluation of the Merger, the HFS Board did not
quantify or assign any relative weights to the factors considered in reaching
its determination, although its individual members may have given different
weights to different factors.
THE HFS BOARD HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS
FAIR TO, AND IN THE BEST INTERESTS OF, HFS AND ITS STOCKHOLDERS
AND UNANIMOUSLY RECOMMENDS THAT HFS STOCKHOLDERS
VOTE FOR APPROVAL OF THE SHARE ISSUANCE.
HFS FINANCIAL ADVISOR
Lehman Brothers delivered an oral opinion to the HFS Board on November 10,
1996 (the "Lehman Opinion"), to the effect that on the date of the Lehman
Opinion, and based upon assumptions made, matters considered, and limitations
on its review as set forth in the Lehman Opinion, from a financial point of
view, the consideration to be paid by HFS in the Merger is fair to HFS.
Lehman Brothers subsequently confirmed its earlier opinion by delivery of its
written opinion dated as of the date hereof.
THE FULL TEXT OF THE LEHMAN OPINION IS ATTACHED AS ANNEX II TO THIS JOINT
PROXY STATEMENT/ PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
SHAREHOLDERS MAY READ THE LEHMAN OPINION FOR A DISCUSSION OF ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY LEHMAN
BROTHERS IN RENDERING ITS OPINION. THE SUMMARY OF THE LEHMAN OPINION SET
FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE LEHMAN OPINION.
No limitations were imposed by HFS on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion. Lehman Brothers was not requested to and did not make
any recommendation to the HFS Board as to the form or amount of the
consideration to be paid by HFS in the Merger, which was determined through
arm's-length negotiations between the parties. In arriving at its opinion,
Lehman Brothers did not ascribe a specific range of value to PHH, but rather
made its determination as to the fairness, from the financial point of view
to HFS, of the consideration to be paid by HFS in the Merger on the basis of
the financial and comparative analyses
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described below. Lehman Brothers' opinion is for the use and benefit of the
HFS Board and was rendered to the HFS Board in connection with the HFS
Board's consideration of the Merger. Lehman Brothers' opinion is not intended
to be and does not constitute a recommendation to any stockholder of HFS or
PHH as to how such stockholder should vote with respect to the Share Issuance
or the Merger Proposal. Lehman Brothers was not requested to opine as to, and
its opinion does not address, HFS's underlying business decision to proceed
with or effect the Merger.
In connection with its opinion, Lehman Brothers reviewed and analyzed: (i)
the Merger Agreement and specific terms of the Merger, (ii) publicly
available information concerning PHH and HFS that Lehman Brothers believed to
be relevant to its analysis, (iii) financial and operating information with
respect to the business, operations and prospects of PHH furnished to Lehman
Brothers by PHH or HFS, including presentations made by PHH management to HFS
and projections of future financial performance of PHH prepared by PHH
management, (iv) financial and operating information with respect to the
business, operations and prospects of HFS furnished to Lehman Brothers by
HFS, (v) a comparison of historical financial results and the present
financial condition of PHH with those of other companies that Lehman Brothers
deemed relevant, (vi) a comparison of historical financial results and the
present financial condition of HFS with those of other companies that Lehman
Brothers deemed relevant, (vii) the strategic benefits, operating synergies
and cost savings estimated by the management of HFS in connection with the
combination of the businesses of PHH and HFS, (viii) the potential pro forma
impact on HFS of the Merger, and (ix) a comparison of the financial terms of
the Merger with the financial terms of certain other recent transactions that
Lehman Brothers deemed relevant. In addition, Lehman Brothers had discussions
with the management of PHH and HFS concerning their respective businesses,
operations, assets, financial conditions and prospects and the strategic
benefits, operating synergies and cost savings expected to result from a
combination of their businesses and undertook such other studies, analyses
and investigations as Lehman Brothers deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by
Lehman Brothers without assuming any responsibility for the independent
verification of such information and further relied upon the assurances of
the managements of PHH and HFS that they are not aware of any facts that
would make such information inaccurate or misleading. With respect to the
financial projections of PHH, upon advice of HFS, Lehman Brothers assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of PHH as to
the future financial performance of PHH and that PHH will perform
substantially in accordance with such projections. With respect to the
financial projections for HFS, upon advice of HFS, Lehman Brothers assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of HFS as to
the future financial performance of HFS and that HFS will perform
substantially in accordance with such projections. In arriving at its
opinion, Lehman Brothers did not conduct a physical inspection of the
properties or facilities of PHH or HFS and did not make or obtain any
evaluations or appraisals of the assets or liabilities of PHH or HFS, except
for an evaluation of PHH's mortgage servicing portfolio based upon data
supplied and representations made to Lehman Brothers by PHH. Upon the advice
of HFS and its legal and accounting advisors, Lehman Brothers assumed that
the Merger would qualify (i) for pooling-of-interests accounting treatment
and (ii) as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and therefore as a tax-free
transaction to the stockholders of PHH. Lehman Brothers' opinion necessarily
is based upon market, economic and other conditions as they existed on, and
could be evaluated as of, the date of its opinion.
In connection with the preparation and delivery of its opinion to the HFS
Board, Lehman Brothers performed a variety of financial and comparative
analyses as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each
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analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portion of such
analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion.
In its analyses, Lehman Brothers made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of HFS. Any estimates contained
in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than as set forth therein. In addition, analyses relating to
the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
Analysis of Selected Comparable Transactions. Selected from the Lehman
Brothers database of leasing and financial services company transactions,
Lehman Brothers compared a consideration of $49.50 per share of PHH Common
Stock to be paid by HFS to the consideration paid in the following
transactions: the acquisition of AT&T Capital by GRS Holdings, Babcock &
Brown and management, the acquisition of USL Capital Fleet Services by
Associates First Capital Corp., and the acquisition of Fleetwood Credit by
Associates First Capital Corp. (the "Comparable Transactions"). The
Comparable Transactions had a ratio of transaction price to leveraged
adjusted equity ranging from 3.00x to 1.87x, and a ratio of transaction price
to the trailing twelve months net income ranging from 19.1x to 15.8x. In
comparison, a valuation of $49.50 per share of PHH Common Stock represents a
transaction price to leveraged adjusted equity of 2.50x, and a ratio of
transaction price to the trailing twelve months net income, and net income
based on estimates of PHH for the year ending January 31, 1997 and the year
ending January 31, 1998 of 21.4x, 20.2x and 18.5x, respectively.
However, because the reasons for and the circumstances surrounding each of
the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
HFS and PHH and to the businesses, operations and prospects of the acquired
companies included in the Comparable Transactions, Lehman Brothers believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly also made qualitative
judgments concerning differences between the characteristics of these
transactions and the Merger that would affect the acquisition values of PHH
and such acquired companies. In particular, Lehman Brothers considered the
form of consideration, whether the transactions involved the purchase of
assets or stock, the cross-selling opportunities that the transactions
offered to the acquirors and potential cost savings. Further, with regard to
the acquisition of PHH by HFS, Lehman Brothers considered that PHH's mortgage
origination and servicing business is predominantly non-branch and affinity
oriented in comparison to traditional mortgage banks, that PHH's Mortgage
Banking Services and Relocation Services businesses offer the opportunity to
capture mortgage origination at point-of-sale, and the potential
complementary nature of, and cost savings between, HFS's existing businesses
and PHH's Relocation Services and Vehicle Management Services businesses.
Pro Forma Dilution Analysis. Using estimates of calendar year net income
for HFS for the year ending December 31, 1997, and for PHH for the twelve
months ended January 31, 1998, and employing estimates as to potential
strategic benefits, operating synergies and cost savings anticipated to
result from the Merger prepared by HFS' management, and making certain
assumptions as to the exercise of options presently held by PHH employees and
directors utilizing the treasury method, Lehman Brothers compared HFS'
estimated earnings per share ("EPS") for fiscal year 1997 both on a
stand-alone basis and on a pro forma basis following consummation of the
Merger. These estimates assumed that each share of PHH Common Stock would be
exchanged for shares of HFS Common Stock consistent with the Conversion
Number described in the Merger Agreement. Based upon the assumptions and
estimates relied upon, Lehman Brothers noted that the Merger is estimated to
result in EPS accretion for HFS between 8% and 13% in 1997, exclusive of
one-time transaction costs, revenue enhancements and cost savings.
Component Valuation. Lehman Brothers computed a valuation of each of PHH's
vehicle management services, mortgage banking services and real estate
services segments. Lehman Brothers valued PHH's vehicle management services
business segment by assessing the following comparable transactions: the
acquisition of USL Capital Fleet Services by Associates First Capital Corp.,
the acquisition of
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Fleetwood Credit by Associates First Capital Corp., and the acquisition of
AGC Financial by AT&T Capital (the "Valuation Comparables"). The Valuation
Comparables had a median premium to finance receivables of 15.20%, a median
price-earnings ratio for the trailing twelve months of 17.2x, and a median
valuation price to leveraged adjusted book value multiple of 1.96x. Lehman
Brothers then derived a valuation range for PHH's vehicle management services
segment by applying these median ratios to the comparable financial data for
PHH's vehicle management services segment. Lehman Brothers valued PHH's
mortgage banking services business segment based on an aggregation of a range
of servicing value as a percentage of PHH's mortgage servicing portfolio, and
a range of origination values as a percentage of mortgage origination volume.
Lehman Brothers valued PHH's real estate services business segment based on
estimates of future financial performance prepared by PHH's management and on
discussions with HFS' management. The results of the component valuation,
combined with the estimated benefit of a range of cost savings, and assuming
no strategic benefits and operating synergies, implied a range of value of
PHH Common Stock from $36.75 to $52.21. Lehman Brothers noted that if
assumptions concerning strategic benefits and operating synergies were
included, the range of value of PHH Common Stock would shift upwards to
produce an increased minimum and maximum value of PHH Common Stock.
Contribution Analysis. Lehman Brothers analyzed the contribution to
combined historical net income for HFS and PHH for calendar year 1995, and
the combined estimated net income for HFS and PHH for calendar years 1996 and
1997, assessing HFS' net income for the years ending December 31st of each
year and PHH's net income for the twelve months ending January 31st of each
year. This analysis indicated that in 1995 HFS and PHH would have contributed
50.2% and 49.8%, respectively, of combined net income, and that in 1996 and
1997 HFS is projected to contribute 67.0% and 77.1%, respectively, and PHH is
projected to contribute 33.0% and 22.9%, respectively, of estimated net
income.
Pro Forma Ownership Analysis. Lehman Brothers analyzed the relative
ownership of HFS after the Merger on a fully diluted basis by present HFS and
PHH stockholders, employing certain assumptions as to the exercise of options
presently held by PHH stockholders and future share repurchases by HFS, and
further assuming that each share of PHH Common Stock would be exchanged for
shares of HFS Common Stock consistent with the Conversion Number as described
in the Merger Agreement. This analysis indicated that: if the average price
of HFS Common Stock during the Pricing Period (the "HFS Average Stock Price")
were $50.00, present HFS and PHH stockholders would own 83.50% and 16.50%,
respectively, of HFS after the Merger; if the HFS Average Stock Price were
$60.00, present HFS and PHH stockholders would own 83.39% and 16.61%,
respectively, of HFS after the Merger; if the HFS Average Stock Price were
$73.625, present HFS and PHH stockholders would own 86.04% and 13.96%,
respectively, of HFS after the Merger; if the HFS Average Stock Price were
$81.00, present HFS and PHH stockholders would own 87.15% and 12.85%,
respectively, of HFS after the Merger; and if the HFS Average Stock Price
were $90.00, present HFS and PHH stockholders would own 87.10% and 12.90%,
respectively, of HFS after the Merger.
HFS Financial Condition. Lehman Brothers compared selected financial
information of HFS to that of Doubletree Corp., Hilton Hotels Corp., ITT
Corp., La Quinta Inns Inc., Marriott International Inc., Promus Hotels Inc.
and Red Lion Hotels, Inc. (the "Reference Companies"). The Reference
Companies had a median multiple of 1996 estimated enterprise value to EBITDA
of 12.4x, median multiples of estimated 1996 and 1997 price earnings ratios
of 21.3x and 18.9x, respectively, and a median projected five year growth
rate of 22%. In comparison, the ratio of HFS' 1996 estimated enterprise value
to EBITDA was 27.9x, its 1996 and 1997 price earnings ratios were 45.9x and
34.5x, and its projected five year growth rate was 30%.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in
the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The HFS Board selected Lehman
Brothers based upon its experience and expertise with respect to merger
transactions in general and the valuation of financial services companies in
particular.
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As compensation for its services in connection with the Merger, HFS has
agreed to pay Lehman Brothers a fee of $500,000 upon delivery of its opinion
(an "Opinion Fee"), and additionally, HFS has agreed to pay Lehman Brothers a
fee (including the Opinion Fee), upon consummation of the Merger, equal to
0.56% of the transaction consideration to be paid by HFS in acquiring PHH
based on a consideration paid per share of PHH Common Stock of $49.50,
resulting in an aggregate fee (including the Opinion Fee), payable to Lehman
Brothers upon consummation of the Merger of approximately $10,220,000. In
addition, HFS has agreed to reimburse Lehman Brothers for reasonable
out-of-pocket expenses incurred in connection with the Merger and to
indemnify Lehman Brothers for certain liabilities that may arise out of its
engagement by HFS and the rendering of its opinion.
Lehman Brothers is acting as financial advisor to HFS in connection with
the Merger. Lehman Brothers has also performed various investment banking
services for HFS in the past and has received customary fees for such
services. In the ordinary course of its business, Lehman Brothers may
actively trade in the debt and equity securities of HFS and PHH for its own
account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
REASONS OF PHH FOR THE MERGER; RECOMMENDATION OF THE PHH BOARD
THE PHH BOARD HAS APPROVED THE MERGER AGREEMENT, HAS DETERMINED THAT THE
MERGER IS ADVISABLE AND FAIR AND IN THE BEST INTERESTS OF PHH AND ITS
STOCKHOLDERS AND RECOMMENDS THAT HOLDERS OF SHARES OF PHH COMMON STOCK VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
In reaching its decision to approve the Merger Agreement, and to recommend
that PHH's stockholders vote to approve the Merger and adopt the Merger
Agreement, the PHH Board considered various factors, including:
(1) the business, operations, properties, assets, financial condition and
operating results of PHH and that, on a combined basis with HFS, the
companies will likely have greater financial stability and strength due to
the inherent increase in scale economies, the market diversification
resulting from the combination of divergent businesses and the impact of
the potential operating efficiencies and other synergies that are expected
to reduce operational expenses;
(2) reports, analyses and opinions of PHH's management, based on their
financial advisors' due diligence investigations and analysis of publicly
available information concerning the businesses, technology, products,
operations, financial condition and prospects of HFS and that on a
combined basis with HFS, the companies could create new avenues for
earnings growth, and the pooling of interests accounting treatment to be
accorded to the transaction (which avoids the reduction in earnings that
would result from the creation and amortization of goodwill under purchase
accounting);
(3) PHH's future prospects, including the range of reasonable prospects
for PHH stockholder value with PHH continuing as an independent entity,
compared to the effect of a combination with HFS, in light of the
financial condition and prospects of PHH and the current economic and
business environment, including, but not limited to, (i) other possible
strategic alternatives for PHH which the PHH Board had examined, including
continuing to execute its stand-alone business plan or engaging in various
restructuring strategies involving the disposition of all or parts of
certain of PHH's businesses, and (ii) the potential for increased value in
the combined HFS/PHH enterprise, as compared to PHH alone, including the
possibility of synergies from combining HFS's and PHH's complementary
business lines and potential cost savings to the combined HFS/PHH
operations;
(4) the presentation by Goldman Sachs and Beacon with respect to their
financial analyses of PHH and HFS and the oral opinions of Goldman Sachs
and Beacon as to the fairness of the Conversion Number pursuant to the
Merger Agreement to the holders of shares of PHH Common Stock (see
"--Opinions of PHH Financial Advisors");
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(5) recent and current market prices of the HFS Common Stock, including
factors affecting the trading range for HFS Common Stock prior to the
announcement of the transaction and the belief that the Merger presented
an opportunity for PHH's stockholders to realize future equity
appreciation based on the PHH Board's perception of the more favorable
prospects of the combined entity;
(6) the terms and conditions of the Merger Agreement, which were the
product of extensive arm's-length negotiations, including the Conversion
Number, the conditions to closing and rights to termination and certain
protections for employees of PHH (see "THE MERGER AGREEMENT");
(7) the fact that the Conversion Number represented a premium of
approximately 61% to the market value of PHH Common Stock on November 8,
1996, the last NYSE trading day prior to the decision of the PHH Board to
authorize execution of the definitive Merger Agreement;
(8) the fact that the $49.50 value of each share of PHH Common Stock
would be maintained so long as the average price of HFS Common Stock
during the Pricing Period did not fall below $60 per share and that the
$49.50 value could be increased if the average price of HFS Common Stock
during the Pricing Period exceeded $81 per share;
(9) the risk that the average price of HFS Common Stock during the
Pricing Period could fall below $60 per share, resulting in decreased
value of each share of PHH Common Stock;
(10) the compatibility of the respective business philosophies of HFS and
PHH, including a hands-on approach to managing their resources and
personnel;
(11) the provisions of the Merger Agreement that permit PHH to consider
additional bona fide third party offers to acquire PHH and permit PHH to
provide information to and negotiate with such parties and to terminate
the Merger Agreement, subject to the payment of significant fees and
expenses to HFS, if prior to the effective time of the Merger the PHH
Board terminates the Merger Agreement or withdraws or modifies in a manner
adverse to HFS its recommendation pursuant to the PHH Board's fiduciary
duties (see "THE MERGER AGREEMENT--No Solicitation" "--Termination" and
"--Termination Fee");
(12) the opportunity for PHH stockholders to participate, as holders of
HFS Common Stock, in a larger company of which former PHH stockholders
would hold between approximately 12% and 16%, of the equity of the
combined company following the Merger, and to do so by means of a
transaction which is designed to be tax-free to PHH's stockholders;
(13) the conditions to consummation of the Merger, including the
requirement that the Merger is conditioned upon approval of the Merger
Agreement by the holders of two-thirds of the outstanding voting power of
the PHH Common Stock and that the issuance of HFS Common Stock in the
Merger is conditioned upon the requisite vote of the HFS stockholders
pursuant to the NYSE rules or applicable law;
(14) the potential impact of the Merger on the interests of PHH's
customers, suppliers, employees, and the communities in which PHH has
operated, including the negative impact resulting from cost saving
initiatives and the positive impact resulting from being a stakeholder in
a larger, more dynamic combined company;
(15) the degree of risk that the synergies and cost savings anticipated
to be achieved in the Merger would not be achieved, and that the
operations of the two companies would not be successfully integrated;
(16) the risk that key PHH management personnel might not remain with PHH
after announcement of the Merger;
(17) the risk that HFS would be unable to maintain its recent level of
earnings growth;
(18) the adverse effects on PHH's business, operations and financial
condition should it not be possible to consummate the Merger following
public announcement that the Merger Agreement had been entered into;
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(19) the interests that the PHH Management and the PHH Board may be
deemed to have in the Merger that are in addition to their interests as
stockholders of PHH generally (see "--Interests of Certain Persons in the
Merger"); and
(20) the other risks associated with HFS's businesses described above
under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
PHH Board is not intended to be exhaustive. In view of the wide variety of
factors considered in connection with its evaluation of the Merger, the PHH
Board did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination, although individual members
of the PHH Board may have given different weights to different factors. In
the course of its deliberations, the PHH Board did not establish a range of
value for PHH; however, based on the factors outlined above, including the
advice of its financial advisors, Goldman Sachs and Beacon, the PHH Board
determined that the Merger is advisable and in the best interests of PHH and
its stockholders. The PHH Board voted unanimously to recommend to the holders
of PHH Common Stock that the Merger Agreement be approved. For a discussion
of the interests of certain members of PHH's management and the PHH Board in
the Merger, see "--Interests of Certain Persons in the Merger."
PHH FINANCIAL ADVISORS
PHH retained Goldman Sachs and Beacon to assist it in considering its
strategic and financial alternatives, including identifying, analyzing,
structuring and negotiating potential strategic transactions, including the
Merger. Both Goldman Sachs and Beacon were retained based upon their
qualifications, expertise and reputation, as well as, in the case of Goldman
Sachs, its prior investment banking relationship with PHH, and, in the case
of Beacon, the prior investment banking relationship with PHH of a current
Beacon investment banker.
On November 9, 1996, Goldman Sachs and Beacon delivered their respective
oral opinions to the PHH Board that as of the date of such opinions, the
Conversion Number pursuant to the Merger Agreement was fair to the holders of
PHH Stock other than HFS, Merger Sub or any other wholly owned subsidiary of
HFS. Both Goldman Sachs and Beacon subsequently confirmed their respective
earlier opinions by delivery of their written opinions dated as of the date
hereof.
THE FULL TEXT OF THE WRITTEN OPINIONS OF GOLDMAN SACHS AND BEACON EACH
DATED AS OF THE DATE HEREOF, WHICH SET FORTH ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE
OPINIONS, ARE ATTACHED HERETO AS ANNEXES III AND IV, RESPECTIVELY, TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AND ARE INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS OF PHH ARE URGED TO, AND SHOULD, READ SUCH OPINIONS IN THEIR
ENTIRETY.
In connection with their opinions, Goldman Sachs and Beacon reviewed,
among other things, (i) the Merger Agreement; (ii) this Joint Proxy
Statement/Prospectus; (iii) the Annual Reports to Stockholders and Annual
Reports on Form 10-K of PHH for the five fiscal years ended April 30, 1996;
(iv) certain interim reports to stockholders and Quarterly Reports on Form
10-Q of PHH; (v) certain other communications from PHH to its stockholders;
and (vi) certain internal financial analyses and forecasts for PHH prepared
by its management. With respect to HFS, Goldman Sachs and Beacon also
reviewed (i) Annual Reports to Stockholders and Annual Reports on Form 10-K
of HFS for the five years ended December 31, 1995; (ii) certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of HFS; and (iii)
certain other communications from HFS to its stockholders. Goldman Sachs and
Beacon also held discussions with members of the senior management of PHH and
HFS regarding the past and current business operations, financial condition,
and future prospects of their respective companies. In addition, Goldman
Sachs and Beacon reviewed the reported price and trading activity for the PHH
Common Stock and the HFS Common Stock, compared certain financial and stock
market information for PHH and HFS with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the mortgage and commercial
finance industry specifically and other industries generally, and performed
such other studies and analyses they considered appropriate.
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Goldman Sachs and Beacon relied without independent verification upon the
accuracy and completeness of all of the financial and other information
reviewed by them for purposes of their opinions. In addition, neither Goldman
Sachs nor Beacon made any independent evaluation or appraisal of the assets
and liabilities of PHH or HFS or any of their respective subsidiaries and
neither Goldman Sachs nor Beacon has been furnished with any such evaluation
or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs and Beacon in connection with providing their respective oral
opinions to PHH's Board on November 9, 1996. Goldman Sachs and Beacon
utilized substantially the same type of financial analyses in connection with
providing the written opinions attached hereto as Annexes III and IV.
(i) Historical Stock Trading Analysis. Goldman Sachs and Beacon reviewed
the historical trading prices and volumes for the PHH Common Stock. In
addition, Goldman Sachs and Beacon analyzed the consideration to be
received by holders of PHH Common Stock pursuant to the Merger Agreement
in relation to the November 8, 1996 market price of the PHH Common Stock
and the latest twelve months ("LTM") high market price of the PHH Common
Stock. Such analysis indicated that the price per share of PHH Common
Stock to be paid pursuant to the Merger Agreement represented a premium of
61.0% based on the November 8, 1996 market price of $30.75 per share of
PHH Common Stock and $74.13 per share of HFS Common Stock and a premium of
55.3% based on the LTM high market price of $31.88 per share of PHH Common
Stock. Goldman Sachs and Beacon also reviewed the historic trading prices
and volumes for the HFS Common Stock and analyzed the impact of certain of
HFS's acquisitions on the HFS Common Stock and other events and factors
affecting the HFS Common Stock.
(ii) Selected Companies Analysis. Goldman Sachs and Beacon reviewed and
compared certain financial information relating to PHH to corresponding
financial information, ratios and public market multiples for three
publicly traded specialty finance companies (Associates First Capital,
Finova Group and GATX Corporation) and two mortgage banks (Countrywide
Credit and North American Mortgage) (together, the "Selected Companies").
The Selected Companies were chosen because they are publicly-traded
companies with operations that for purposes of analysis may be considered
similar to PHH. The ratios and multiples of PHH and those of the Selected
Companies were calculated using the closing price of their respective
common shares on the New York Stock Exchange on November 8, 1996. The
ratios and growth rates for PHH and each of the Selected Companies were
based on information provided by the Institutional Brokers Estimate System
("IBES"). With respect to the Selected Companies, Goldman Sachs and Beacon
considered estimated calendar year 1996 and 1997 price/earnings ("P/E")
ratios. The 1996 P/E ratios ranged from 10.6x to 17.5x for estimated
calendar year 1996 for the specialty finance companies and from 9.4x to
12.0x for the mortgage banks compared to 13.2x for the twelve months ended
July 31, 1996 and 12.5x for a calendarized December 31, 1996 year end for
PHH. The 1997 P/E ratios ranged from 9.7x to 14.7x for estimated calendar
year 1997 for the specialty finance companies and from 8.0x to 10.5x for
the mortgage banks compared to 12.1x for the twelve months ended July 31,
1996 and 11.2x for the calendarized December 31, 1996 fiscal year end for
PHH. Goldman Sachs and Beacon also considered five year projected growth
rates of earnings ranging from 15.0% to 18.0% for the specialty finance
companies and 12.5% to 14.0% for the mortgage banks compared to 10.0% for
PHH; market value as a multiple of book value for PHH (as of July 31,
1996) and the Selected Companies (as of September 30, 1996) ranging from
1.30x to 2.78x for the specialty finance companies and 1.58x to 2.06x for
the mortgage banks compared to 1.69x for PHH.
(iii) Dividend Discount Analysis. Goldman Sachs and Beacon performed a
dividend discount analysis using PHH's management projections for the
years 1996--1998 and assumed growth rates ranging from 12%--16% for the
years 1999--2001 and an assumed continued dividend payout ratio of 30%.
Goldman Sachs and Beacon calculated present values of projected future
dividend payments for the years 1996 through 2000 and present values of
the terminal values in the year 2000 based on multiples ranging from 10.0x
to 14.0x calendarized 2001 net income. These dividend payments and
terminal values were then discounted to the present using discount rates
ranging from 12.5% to 17.5%. The present values of these dividend payments
and terminal values were added together and resulted in implied per share
values for the PHH Common Stock ranging from $25 to $47.
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(iv) Pro Forma Merger Analysis. Goldman Sachs and Beacon prepared pro
forma analyses of the financial impact of the Merger. Using calendarized
1997 and 1998 earnings estimates for PHH prepared by its management and
1997 and 1998 earnings estimates for HFS provided by IBES, Goldman Sachs
and Beacon compared the earnings per share ("EPS") of HFS Common Stock, on
a stand-alone basis, to the EPS of the common stock of the combined
companies on a pro forma basis. Goldman Sachs and Beacon performed this
analysis based on a price of $30.75 per share of PHH Common Stock (the
price on November 8, 1996) and $74.13 per share of HFS Common Stock (the
price on November 8, 1996) using an assumption of an exchange ratio for
the PHH Common Stock of .6678. With no cost savings, based on such
analyses, the proposed transaction would be accretive to HFS stockholders
on an earnings per share basis in the above scenarios in the years 1997
and 1998.
The preparation of fairness opinions is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the opinions of Goldman Sachs and Beacon. In arriving at
their respective fairness determinations, Goldman Sachs and Beacon considered
the results of all such analyses. No company or transaction used in the above
analyses as a comparison is directly comparable to PHH or HFS or the
contemplated transaction. The analyses were prepared solely for purposes of
Goldman Sachs and Beacon providing their opinions to the PHH Board as to the
fairness of the Conversion Number pursuant to the Merger Agreement and do not
purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts
of future results are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their
respective advisors and are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, the respective opinions of Goldman Sachs
and Beacon to the PHH Board were only one of many factors taken into
consideration by the PHH Board in making its determination to approve the
Merger Agreement. The foregoing summary does not purport to be a complete
description of the analysis performed by Goldman Sachs or Beacon and is
qualified by reference to the respective written opinions of Goldman Sachs
and Beacon set forth as Annexes III and IV hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes.
Beacon, a merchant banking firm, as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and other
purposes.
Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of PHH and/or HFS for its own account and for the account of
customers.
Pursuant to letter agreements (the "Engagement Letters"), PHH engaged
Goldman Sachs and Beacon to act as its financial advisors in connection with
the Merger. PHH has agreed to pay Goldman Sachs and Beacon upon consummation
of the Merger a transaction fee of 0.625% of the transaction consideration to
be paid by HFS in acquiring PHH based on a consideration paid per share of
PHH Common Stock of $49.50, resulting in a fee of approximately $11,400,000.
PHH has agreed to reimburse Goldman Sachs and Beacon for their reasonable
out-of-pocket expenses, including attorney's fees, and to indemnify Goldman
Sachs and Beacon against certain liabilities, including certain liabilities
under the federal securities laws.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material Federal income tax consequences
of the Merger. The discussion set forth below is based on currently existing
provisions of the Code, Treasury Regulations
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thereunder, current administrative rulings and court decisions. All of the
foregoing are subject to change and any such change could affect the
continuing validity of this discussion. The discussion does not purport to
address all of the tax consequences applicable to a particular stockholder.
In particular, the discussion does not address the special tax rules that may
apply to particular categories of stockholders of PHH Common Stock subject to
special treatment under the Code, such as foreign holders or holders whose
stock was acquired pursuant to the exercise of an employee stock option or
otherwise as compensation. In addition, there may be relevant state, local or
other tax consequences, none of which are described below. PHH STOCKHOLDERS
ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER.
HFS has received an opinion from its counsel, Skadden, Arps, Slate,
Meagher & Flom LLP, and PHH has received an opinion from its counsel, Piper &
Marbury L.L.P., each dated as of the date of this Joint Proxy
Statement/Prospectus, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinions, for federal
income tax purposes: (i) the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, and HFS, Merger Sub and PHH will
each be a party to such reorganization within the meaning of Section 368(b)
of the Code; (ii) no gain or loss will be recognized by HFS or PHH as a
result of the Merger; (iii) no gain or loss will be recognized by the
stockholders of PHH upon the exchange of their shares of PHH Common Stock
solely for shares of HFS Common Stock pursuant to the Merger, except with
respect to cash, if any, received in lieu of fractional shares of HFS Common
Stock; (iv) the aggregate tax basis of the shares of HFS Common Stock
received solely in exchange for shares of PHH Common Stock pursuant to the
Merger (including fractional shares of HFS Common Stock for which cash is
received) will be the same as the aggregate tax basis of the shares of PHH
Common Stock exchanged therefor; (v) the holding period for shares of HFS
Common Stock received in exchange for shares of PHH Common Stock pursuant to
the Merger will include the holding period of the shares of PHH Common Stock
exchanged therefor, provided such shares of PHH Common Stock were held as
capital assets by the stockholder at the Effective Time; and (vi) a
stockholder of PHH who receives cash in lieu of a fractional share of HFS
Common Stock will recognize a gain or loss equal to the difference, if any,
between such stockholder's tax basis in such fractional share (as described
in clause (iv) above) and the amount of cash received. It is a condition to
the consummation of the Merger that each opinion of counsel be confirmed on
and as of the Closing Date.
In rendering and confirming such opinions, Skadden, Arps, Slate, Meagher &
Flom LLP and Piper & Marbury L.L.P. may receive and rely upon representations
contained in certificates (and confirmations thereof) of HFS, PHH and others.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling of interests" transaction
for accounting and financial reporting purposes. The Merger Agreement
provides that it is a condition to each of HFS's and PHH's respective
obligations to consummate the Merger that HFS and PHH receive letters from
Deloitte & Touche LLP and KPMG Peat Marwick LLP, respectively, at the
Effective Time and addressed to HFS and PHH, respectively, stating that the
Merger will qualify as a pooling of interests transaction under Opinion 16 of
the Accounting Principles Board. See "THE MERGER AGREEMENT--Conditions to the
Merger." Under "pooling of interests" accounting, as of the Effective Time,
the assets and liabilities of PHH would be added to those of HFS at their
recorded book values and the stockholders' equity accounts of PHH would be
combined on HFS's consolidated balance sheet. On a pooling of interests
accounting basis, income and other financial statements of HFS issued after
consummation of the Merger would be restated retroactively to reflect the
consolidated combined financial position and results of operations of HFS and
PHH as if the Merger had taken place prior to the periods covered by such
financial statements. The unaudited pro forma financial information contained
in this Joint Proxy Statement/Prospectus has been prepared using the pooling
of interests accounting method to account for the Merger. See "HISTORICAL AND
PRO FORMA SELECTED FINANCIAL INFORMATION."
APPRAISAL RIGHTS
Under the DGCL, the holders of HFS Common Stock will not have dissenters'
appraisal rights in connection with the Share Issuance, the Merger Agreement
and the consummation of the Merger. Under
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the MGCL, the holders of PHH Common Stock will not have objecting
stockholders' appraisal rights in connection with the Merger Agreement and
the consummation of the Merger. See "COMPARATIVE RIGHTS OF STOCKHOLDERS OF
HFS AND PHH--Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the PHH management and PHH Board may be deemed to have
certain interests in the Merger that are in addition to their interests as
stockholders of PHH generally. The PHH Board was aware of these interests of
management and the PHH Board and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
Members of Board of Directors. The Merger Agreement provides that HFS will
use its best efforts to cause the HFS Board to invite Robert D. Kunisch,
Chairman, Chief Executive Officer and President of PHH, to become a member of
the HFS Board following the Closing, subject to an increase in the size of
the HFS Board. In connection therewith, HFS is hereby seeking approval to
increase the maximum number of authorized directors from 12 to 20.
Directors and Officers Insurance; Limitation of Liability of PHH Directors
and Officers. The Merger Agreement requires HFS and PHH after the Effective
Date (the "Indemnifying Parties") to indemnify, defend and hold harmless, as
and to the fullest extent permitted by law, each present and former director
or officer of PHH and its subsidiaries (each an "Indemnified Party") against
any losses, claims, damages, liabilities, costs, expenses (including
reasonable attorneys' fees and expenses in advance of the final disposition
of any claim, suit, proceeding or investigation to each Indemnified Party to
the fullest extent permitted by law upon receipt of an undertaking from such
Indemnified Party to repay such advanced expenses if it is finally and
unappealably determined that such Indemnified Party was not entitled to such
indemnification), judgments, fines and amounts paid in settlement in
connection with any such claim, action, suit, proceeding or investigation
arising in whole or in part out of (i) his or her actions as such a director
or officer or (ii) the Merger Agreement or the transactions contemplated
thereby. In the event of any such threatened or actual claim, action, suit,
proceeding or investigation (whether asserted or arising before or after the
Effective Date), the Indemnified Parties may retain counsel reasonably
satisfactory to the Indemnifying Parties. The charter of PHH also provides
for the indemnification of PHH directors and officers to the fullest extent
permitted by law. The Merger Agreement requires HFS to keep in effect and
guarantee performance of all indemnification provisions contained in the
charter and by-laws of PHH and its subsidiaries.
The Merger Agreement requires that HFS shall, to the extent such insurance
is available, cause the persons serving as officers and directors of PHH
immediately prior to the Effective Date to be covered for a period of six
years from the Effective Date by the directors' and officers' liability
insurance policy maintained by PHH (provided that HFS and PHH may substitute
therefor policies of at least the same coverage and amounts containing terms
and conditions which are not less advantageous to such directors and officers
of PHH than the terms and conditions of such existing policy) with respect to
acts or omissions occurring prior to the Effective Date which were committed
by such officers and directors in their capacity as such; provided, however,
that the surviving corporation will not be obligated to make annual premium
payments for such insurance to the extent such annual premiums exceed 200% of
the annual premiums payable in 1996 (on an annualized basis) by PHH for such
insurance.
Employee Benefit Plans. The Merger Agreement provides that the PHH benefit
plans will remain in effect or benefit plans of equivalent value (including,
in the case of PHH stock-based plans, HFS stock-based plans on an equitable
basis) will be substituted therefor for at least one year from the Effective
Date. The PHH stock option plans will not be continued, and all options
thereunder which are unexercised at the Effective Date will be settled in HFS
stock at the Effective Date by delivery of HFS stock equal to the difference
between the exercise price of, and the value of the shares subject to, the
option based on the average price of HFS Common Stock over the Pricing
Period, less applicable withholding taxes. See "THE MERGER
AGREEMENT--General; Conversion of Shares."
The approval of the Merger Agreement by the PHH stockholders or the
consummation of the Merger will constitute a change in control of PHH for
purposes of certain of the PHH benefit plans.
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Accordingly, provisions of certain of the PHH benefit plans will cause the
acceleration of vesting and/or payment or potential payment of certain
equity-based and cash-based incentives and supplemental retirement benefits.
PHH Change in Control Severance Agreements. PHH has in effect Senior
Executive Severance Agreements ("Severance Agreements") with eight current
executives, including the Chief Executive Officer and the four other most
highly compensated executive officers (the "Named Executive Officers"),
pursuant to its Senior Executive Severance Plan originally adopted in 1983 and
subsequently amended. PHH's obligations under each Severance Agreement are
triggered if the executive's employment is terminated either (a) within two
years of a change in control (as defined) either by PHH or its controlling
owner without cause (as defined) or by the executive for good reason (as
defined) or (b) within the 30-day period following the first anniversary of
change in control by the executive for any reason (other than death,
disability or normal retirement). Under each Severance Agreement, the
terminated executive would receive a cash severance payment equal to the sum
of (a) three times the highest amount of salary and incentive compensation
(as defined) paid to the executive during any consecutive 12 months in the
three-year period preceding termination, (b) the maximum amount to which the
executive would have been entitled assuming attainment of certain corporate
performance levels (as specified) under the current long-term incentive plans
in which the executive was participating, and (c) the value of three
additional years' worth of retirement benefits. The Severance Agreements also
provide for the continuation for up to three years of health care and life
insurance and certain other benefits, and protect the executives against the
assessment of certain income and excise taxes. In addition, in the event of
an actual or potential change in control, PHH is required to fund a grantor
trust in an amount sufficient to cover PHH's possible obligations under the
Severance Agreements. The monies in the trust revert to PHH if or to the
extent such obligations are not triggered. PHH Europe PLC, the principal
foreign subsidiary of PHH, has in effect a severance plan and agreement and
grantor trust having essentially the same terms, in which one executive is
participating. Such trusts have been funded in the aggregate amount of
$57,604,891.
The execution and delivery of the Merger Agreement constituted a potential
change in control and the consummation of the Merger on the Effective Date
will constitute a change in control for purposes of the applicable
agreements. If employment of any of the eight executive officers of PHH and
one executive officer of PHH Europe PLC were terminated under circumstances
entitling them to severance benefits under their agreements, such officers
would be entitled to the following approximate amounts (which amounts are
estimated based on a date of termination which is at or close to the date on
which the change in control of PHH is scheduled to occur, certain actuarial,
compensation and other assumptions, do not include estimates for possible
tax amounts which may be payable to the executive and are otherwise subject
to change, which could materially increase the amounts payable): Mr. Kunisch,
$11,600,000; Mr. Arbaugh, $4,500,000; Mr. Meierhenry, $4,100,000; Mr. Adler,
$3,700,000; Mr. Nagel, $4,000,000; and all other executive officers as a group
(4 persons in total), $7,500,000.
Equity-Based Incentive Awards. The provisions of the Merger Agreement
relating to the stock options outstanding under PHH option plans are
described under "THE MERGER AGREEMENT--General; Conversion of Shares--PHH
Stock Options." Pursuant to the terms of the PHH stock option plans, options
granted have a one-year delayed vesting provision, but vesting is accelerated
upon a change in control. Accordingly, upon the approval of the Merger
Agreement by the stockholders of PHH, each PHH stock option granted within
the past year will become immediately exercisable in full. The following
table sets forth, with respect to the Named Executive Officers and the four
other executive officers (i) the number of shares of PHH Common Stock subject
to options held by such persons that will become exercisable due to
accelerated vesting upon approval of the Merger Agreement by PHH
stockholders, (ii) the weighted average exercise price for such exercisable
options held by such persons, and (iii) the aggregate value of such
exercisable options based upon the application of the provision of the Merger
Agreement in respect of options (before deduction for applicable withholding
taxes) on the assumption that the Conversion Number will result in a market
value equivalence of $49.50 per share of PHH Common Stock (i.e., total stock
value less the exercise price).
44
<PAGE>
<TABLE>
<CAPTION>
OPTIONS WHICH BECOME
EXERCISABLE DUE TO AGGREGATE VALUE OF
APPROVAL OF MERGER EXERCISE PRICE PER SHARE OPTIONS
-------------------- ------------------------ ------------------
<S> <C> <C> <C>
Robert D. Kunisch ... 320,000 $28.4375 $6,740,000
Eugene A. Arbaugh ... 116,200 28.4375 2,447,463
Roy A. Meierhenry ... 112,800 28.4375 2,375,850
William F. Adler .... 97,400 28.4375 2,051,488
H. Robert Nagel...... 47,600 28.4375 1,002,575
All other executive
officers as a group
(4 persons in
total).............. 176,800 28.4375 3,723,850
</TABLE>
Certain Cash Based Incentive Plans. PHH has in effect certain annual and
long term incentive plans for senior executives and others providing for cash
incentive payments upon the achievement of business performance objectives
expressed in terms of the company's return on beginning equity (ROBE) over
the periods to which the plans apply. The Merger Agreement provides that HFS
and PHH shall honor payments to be made under the annual incentive plan in
accordance with its terms. The award period for the annual incentive plan
ends April 30, 1997. PHH currently has in effect a 1995-1997 Long Term
Incentive Plan and a 1997-1999 Long Term Incentive Plan. The award periods
for the 1995-1997 and 1997-1999 Long Term Incentive Plans end April 30, 1997
and April 30, 1999, respectively. These long term incentive plans provide
that if there is a change in control during the award period, a payment shall
be made based on the ROBE result through the date of change in control as if
that result represented the average for the applicable period, which payment
shall be pro rated proportionately to the actual period of time elapsed until
the date of change in control. With respect to the 1997-1999 Long Term
Incentive Plan in which senior executives participate, the Compensation
Committee of the Board of Directors also awarded tandem stock options, under
the terms of which an executive may exercise the option and terminate
participation in the potential cash award or, if the executive selects the
cash award at the end of the measuring period, the tandem stock option is
terminated. The nine senior executives referred to in the stock option table
above have advised PHH that they presently intend to select the settlement of
their tandem stock options upon the effectiveness of the Merger and, in such
case, their participation in prospective cash award rights under that plan
will be terminated. (The applicable tandem options are included in the stock
option table above.)
Outside Directors Stock Options. Non-employee Directors are also eligible
to receive stock options pursuant to the PHH Corporation Outside Directors
Stock Option Plan (the "Directors Option Plan"). Options to acquire shares of
the Company's Common Stock have been granted to the non-employee Directors
pursuant to the Directors Option Plan which was approved by stockholders and
became effective in August of 1990. Options to purchase 3,000 shares of
Common Stock are granted to each Director under the Directors Option Plan
upon the first anniversary of the Director's election to the Board. In
addition, on May 1 of each year, each Director is automatically granted an
option to purchase 1,000 shares of Common Stock. The option exercise price is
the fair market value of the shares of Common Stock represented by the stock
option on the date of grant. The option may not be exercised prior to the
first anniversary of the date of grant and may not be exercised after the
earlier of (a) 10 years following the date of grant or (b) three years
following the date the Director ceases to be a director; provided that a
stock option shall become immediately exercisable in full upon either the
retirement of the Director with the consent of the Board or the death or
permanent disability of the Director.
The consummation of the Merger and consequent resignation of the PHH
directors will cause all options granted to Directors within the last year to
be exercisable in full. Accordingly, each non-employee Director will be
entitled to exercise an option for 1,000 shares of PHH Common Stock not
otherwise exercisable until May 1, 1997, with an exercise price of $28.43 per
share. In addition, Ms. Tatlock will be entitled to exercise her option for
3,000 shares, which was granted upon the first anniversary of her election to
the Board, not otherwise exercisable until April 10, 1997, with an exercise
price of $26.56 per share. These options will, under the Merger Agreement, be
settled by the delivery of HFS stock in the same manner as the settlement of
all outstanding PHH stock options, and have an estimated value
45
<PAGE>
(determined in the same manner as shown in the table above under
"Equity-Based Incentive Awards" showing options held by senior management
that will become exercisable by virtue of the Merger) of $21,070 for each
non-employee Director other than Ms. Tatlock, and of $89,890 for Ms. Tatlock.
Non-Competition and Related Agreements. At the same time as the Merger
Agreement was executed and delivered, Robert D. Kunisch, at the request of
HFS, entered into an agreement with HFS and PHH, which will take effect at
the Effective Date. Under this agreement, Mr. Kunisch agreed that, for a
period commencing at such time as Mr. Kunisch is not serving as an officer
and director of HFS and/or PHH and ending on the sixth anniversary of the
Effective Date, he will not compete with HFS or PHH or any corporation of
which either of them owns an equity interest of 40% or more in any of the
following businesses conducted by them as of the Effective Date: vehicle
management services; corporate employee relocation services; real estate
brokerage services; and mortgage banking services. Mr. Kunisch also agreed,
during the same period, not to solicit (i) employees of those businesses to
leave their employment or (ii) customers of those businesses to change to a
competitive operation of a third party. During the period of the agreement,
HFS and PHH will pay Mr. Kunisch at the rate of $537,221.02 per quarter in
consideration of these agreements, and, at the Effective Date, HFS and PHH
will fund a grantor trust to assure those payments. Subsequent to the
execution and delivery of the Merger Agreement, at the request of HFS, Mr.
Arbaugh and Mr. Meierhenry entered into non-competition agreements to be
effective on the Effective Date. These agreements cover the period of six
years from the Effective Date and contain the same agreements as to
non-competition and non-solicitation as Mr. Kunisch's agreement. In
consideration of these agreements, Messrs. Arbaugh and Meierhenry will each
receive $92,494.17 per quarter during the term of these agreements and a
grantor trust will be created to fund these payments. In addition, at the
request of HFS, Messrs. Arbaugh and Meierhenry have entered into consulting
agreements to take effect at the Effective Date under which they will agree
to be available for a minimum of one year on a substantially full-time basis
to consult on PHH business projects as may be requested and receive
consulting fees, payable monthly, at the annual rate of $200,000 each.
Supplemental Executive Retirement Plan. PHH has in effect a Supplemental
Executive Retirement Plan ("SERP") which provides for supplemental retirement
income benefits as early as age 60 (or earlier, with reduced payments, on
early retirement or disability) after completing at least five years of
service. The amount of benefits payable under the SERP are offset by amounts
payable under the PHH Pension Plan and the PHH Excess Benefits Plan, a plan
designed to provide retirement benefits that would otherwise be paid under
the PHH Qualified Pension Plan but for certain limitations imposed by the
Internal Revenue Code. The maximum benefits payable to senior executives
under the Plans is generally 60% of final average compensation payable at a
normal retirement age, provided there has been at least 15 years of credited
executive service. In addition, in the event of an actual or potential change
in control, PHH is required to fund a separate grantor trust for all
participants in the PHH Excess Benefits Plan and the SERP in the amount of
benefits accrued to the date of the actual or potential change in control.
The monies in the trust revert to PHH if or to the extent that such
obligations are not triggered. Such trust was funded on December 10, 1996 in
the amount of $32,243,700. PHH has entered into Supplemental Executive
Retirement Agreements (the "Supplemental Agreements") with eight current
executives, including the named executive officers, which establish a floor
for Final Average Compensation and, in some cases, grant additional years of
credited executive service for purposes of the SERP. Taking into account
these Supplemental Agreements, for purposes of the SERP and for purposes of
calculating aggregate benefits under the Pension Plans, the named executive
officers are deemed to have Final Average Compensation as follows (which
amounts are estimates based on actuarial, compensation and other assumptions
and are subject to change, which could materially increase the amounts
payable): Mr. Kunisch $1,425,598; Mr. Arbaugh $558,618; Mr. Meierhenry
$560,289; Mr. Adler $538,961; and Mr. Nagel $514,179. Each of the Named
Executive Officers is vested in the SERP and each of them currently has or
is deemed to have at least 15 years of credited executive service, other than
Mr. Adler who is deemed to have 12 years of credited executive service.
In addition, the SERP provides that, if a participant's employment is
terminated for any reason other than death, disability or normal retirement,
within two years after the effective date of a change in control, the
participant may elect a lump sum settlement of his or her entitlements, in
addition to the other normal elections available under the SERP. Such lump
sum settlement shall be equal to the present value of the actuarial
equivalent of the maximum SERP benefit to which the participant would be
eligible at the
46
<PAGE>
earliest retirement date. PHH also has in effect a grantor trust providing
for the funding of the potential amounts payable under these arrangements
upon a potential change in control or change in control, subject to the
return of all amounts to PHH to the extent that the deposit exceeds the
amount required to fulfill these obligations. Assuming, for purposes of the
calculation, the termination of employment within two years of the Effective
Date of the Merger, the estimated maximum lump sum payments to which the
Named Executive Officers would be entitled are as follows (which amounts are
estimates based on actuarial, compensation and other assumptions and are
subject to change, which could materially increase such payments): Mr. Kunisch
$9,379,900; Mr. Arbaugh $3,400,100; Mr. Meierhenry $3,499,000; Mr. Adler
$2,658,300; and Mr. Nagel $2,882,000; and all other executive officers as a
group (3 persons in total), $3,836,400.
REGULATORY MATTERS
Under the HSR Act, and the rules that have been promulgated thereunder by
the FTC, the Merger may not be consummated unless certain filings have been
submitted to the Antitrust Division and the FTC and certain waiting period
requirements have been satisfied. On November 27, 1996, HFS and PHH submitted
the required filings to the FTC and the Antitrust Division. On December 27,
1996, the waiting period under the HSR Act expired.
As a result of the Merger, among other things: (i) PHH or HFS, as the case
may be, may be required to either notify or obtain the consent of (x) certain
state regulatory authorities in connection with various licenses held by PHH
Mortgage to act as a mortgage lender and servicer in those states; (y)
federal secondary market agencies and, (z) with respect to a portion of PHH
Mortgage's servicing portfolio, certain private investors for whom PHH
Mortgage services loans; (ii) HFS will be required to notify and receive
approval from the New York State Department of Insurance and the Bermuda
Monetary Authority for the acquisition of control of two insurance company
subsidiaries of PHH; and (iii) HFS will be required to either notify or
obtain the consent of certain regulatory authorities in other countries where
HFS and/or PHH conduct business pursuant to certain antitrust and foreign
investment laws and regulations governing the conduct of business in such
countries. On December 23, 1996, the Bermuda Monetary Authority expressed no
objection to the Merger. On February 28, 1997, the New York State Department
of Insurance expressed no objection to the Merger.
Under the Merger Agreement, HFS and PHH have agreed to use all reasonable
efforts to obtain all necessary material permits, licenses, franchises and
other governmental authorizations necessary or advisable to complete or
effect the Merger. While HFS and PHH believe that they will receive the
requisite regulatory approvals for the Merger, there can be no assurance as
to the timing of such approvals or the ability of the companies to obtain
such approvals on satisfactory terms or otherwise. It is a condition to the
parties' respective obligations to consummate the Merger that all necessary
material consents, approvals, actions of, filings with and notice to any
governmental authority or public or private third parties be obtained.
NYSE LISTING
HFS has filed an application to list the shares of HFS Common Stock to be
issued in connection with the Merger on the NYSE.
DELISTING AND DEREGISTRATION OF PHH COMMON SHARES
If the Merger is consummated, the shares of PHH Common Stock will be
delisted from the NYSE and will be deregistered under the Exchange Act.
PHH RIGHTS PLAN AMENDMENT
As required by the Merger Agreement, on November 13, 1996, PHH executed an
amendment (the "Rights Amendment") to that certain Rights Agreement, dated as
of March 15, 1996, between PHH and First Chicago Trust Company of New York,
as Rights Agent (the "PHH Rights Agreement"). The Rights Amendment includes a
change to the definition of "Beneficial Ownership" excepting HFS, Merger Sub
and any of their affiliates from being deemed a beneficial owner under the
PHH Rights Agreement solely by virtue of the approval, execution or delivery
of the Merger Agreement or consummation of the
47
<PAGE>
Merger. In addition, the Rights Amendment provides that none of the approval,
execution or delivery of the Merger Agreement or consummation of the Merger
will cause (i) HFS, Merger Sub or any of their affiliates to be deemed an
"Acquiring Person" (as defined in the PHH Rights Agreement), (ii) a Share
Acquisition Date (as defined in the PHH Rights Agreement) to occur, or (iii)
a Distribution Date (as defined in the PHH Rights Agreement) to occur.
CERTAIN FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of HFS Common Stock issued in connection with the Merger will
have been registered under the Securities Act. Such shares will be freely
transferable, except that shares received by any person who may be deemed to
be an affiliate within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act (each such person being an "Affiliate")
of PHH may not be resold except in transactions permitted by such Rule 145 or
as otherwise permitted under the Securities Act.
Pursuant to the Merger Agreement, PHH will deliver to HFS a list of names
and addresses of those persons who were, in PHH's reasonable judgment, on
such date, Affiliates of PHH. PHH has agreed to provide HFS with such
information and documents as HFS shall reasonably request for purposes of
reviewing such list. PHH is obligated under the Merger Agreement to use its
reasonable efforts to deliver or cause to be delivered to HFS, prior to the
Effective Time, a letter substantially in the form agreed to by PHH and HFS,
executed by each of the Affiliates of PHH identified in the foregoing list
and by any person who shall have become an Affiliate of PHH subsequent to the
delivery of such list.
48
<PAGE>
THE MERGER AGREEMENT
The following is a summary of certain material terms of the Merger
Agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is
attached as Annex I to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference.
GENERAL; CONVERSION OF SHARES
If the respective approvals of (i) HFS's stockholders with respect to the
Share Issuance by the requisite vote under applicable law and under
applicable regulations and (ii) PHH's stockholders with respect to the Merger
and the Merger Agreement are obtained, and all other conditions to the Merger
are satisfied or waived, Merger Sub will be merged with and into PHH, with
PHH being the surviving corporation after the Merger and a wholly owned
subsidiary of HFS. The date on which the closing of the Merger occurs is
referred to herein as the "Closing Date."
Conversion Number. In the Merger, among other things, each outstanding
share of PHH Common Stock, other than PHH Common Stock held by PHH or held by
HFS, Merger Sub or any other wholly owned subsidiary of HFS, will be
converted into the right to receive that fraction of a share of HFS Common
Stock (the "Conversion Number") represented by the number (rounded upward, if
necessary, to the nearest one-thousandth) determined by dividing $49.50 by
the average price of HFS Common Stock over a period of twenty (20) trading
days preceding the fifth trading day prior to the date of the PHH Special
Meeting (the "Pricing Period"); provided, however, that in no event will such
number be greater than 0.8250 or less than 0.6111. As a result of the
conversion formula described above, if the average price of HFS Common Stock
during the Pricing Period is within the range of $60.00 to $81.00, holders of
PHH Common Stock will receive that fraction of a share of HFS Common Stock
having a value (based on the average price of such shares during the Pricing
Period) of $49.50 for each share of PHH Common Stock (and the Conversion
Number will fluctuate accordingly), but if the average price of HFS Common
Stock during the Pricing Period is less than $60.00 or greater than $81.00,
the Conversion Number will be fixed at 0.8250 or 0.6111, respectively,
resulting in the issuance of a number of shares of HFS Common Stock for each
share of PHH Common Stock having a value (based on the average price of such
shares during the Pricing Period) less than or more than $49.50, as the case
may be.
The following table illustrates the effect on the Conversion Number of
average prices of HFS Common Stock ranging from $50 per share to $90 per
share:
<TABLE>
<CAPTION>
HFS CONVERSION VALUE OF ONE
AVERAGE PRICE NUMBER PHH SHARE
- --------------- ------------ --------------
<S> <C> <C>
$50.00 0.8250 $41.25
60.00 0.8250 49.50
70.00 0.7071 49.50
80.00 0.6188 49.50
81.00 0.6111 49.50
90.00 0.6111 55.00
</TABLE>
Fractional Shares. No certificates for fractional shares of HFS Common
Stock will be issued in the Merger, and to the extent that an outstanding
share of PHH Common Stock would otherwise have become a fractional share of
HFS Common Stock, the holder thereof, upon presentation of such fractional
share interest represented by an appropriate certificate for PHH Common Stock
to the Exchange Agent as described under "Exchange Procedures" below, will be
entitled to receive a cash payment therefor in an amount equal to the product
of (i) the average price of HFS Common Stock over the Pricing Period and (ii)
the fractional share interest to which the holder would otherwise be
entitled.
PHH Stock Options. The Merger Agreement provides that, at the Effective
Time, each holder of outstanding options to purchase shares of PHH Common
Stock (a "PHH Stock Option") under the PHH option plans, whether vested or
unvested, shall be entitled to receive in exchange for all of such holder's
PHH Stock Options a number of shares of HFS Common Stock equal to the number
obtained by dividing (a) the excess, if any, of (i) the product of (A) the
average price of HFS Common Stock during the Pricing Period, (B) the
Conversion Number and (C) the number of shares of PHH Common Stock subject to
such
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<PAGE>
PHH Stock Options, over (ii) the aggregate exercise price of such PHH Stock
Options by (b) the average price of HFS Common Stock during the Pricing
Period (the "First Quotient") reduced by the number obtained by dividing (c)
the aggregate amount of withholding taxes required by any governmental or
regulatory authority in connection with the transfer of a number of shares of
HFS Common Stock to such holder equal to the First Quotient by (d) the
average price of HFS Common Stock during the Pricing Period.
The following table illustrates the conversion of PHH Stock Options
representing 100 shares of PHH Common Stock, assuming an average per share
exercise price of $20.00 and a tax withholding rate of 28%:
<TABLE>
<CAPTION>
AVERAGE PRICE NUMBER OF SHARES
OF HFS COMMON STOCK OF HFS COMMON STOCK
- ------------------- -------------------
<S> <C>
$50.00 30.6
60.00 35.4
70.00 30.3
80.00 26.6
81.00 26.2
90.00 28.0
</TABLE>
Conversion of Merger Sub Common Stock. Each share of common stock, par
value $.01 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time will be converted into one share of common stock,
without par value, of PHH as the Surviving Corporation. Such newly issued
shares will thereupon constitute all of the issued and outstanding capital
stock of the Surviving Corporation.
EXCHANGE PROCEDURES
Promptly following the Effective Time, HFS will make available to the
Surviving Corporation for deposit with ChaseMellon Shareholder Services,
L.L.C. (the "Exchange Agent"), for the benefit of and to be distributed to
the holders of certificates of PHH Common Stock, certificates representing
the number of duly authorized shares of HFS Common Stock to be issued in
connection with the Merger (and cash in lieu of fractional shares of HFS
Common Stock).
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail a form of transmittal to the holders of certificates
representing shares of PHH Common Stock. The form of transmittal letter will
contain instructions with respect to the surrender of such certificates in
exchange for shares of HFS Common Stock (and cash in lieu of fractional
shares of HFS Common Stock, if applicable).
PHH STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY CARD
AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT EXCEPT WITH A TRANSMITTAL
FORM, WHICH WILL BE PROVIDED TO HOLDERS FOLLOWING THE EFFECTIVE TIME.
After the Effective Time, there will be no further transfers on the
records of PHH of certificates representing shares of PHH Common Stock, and
if such certificates are presented to the Surviving Corporation for transfer,
they shall be cancelled and exchanged for the consideration properly payable
pursuant to the Merger Agreement.
No dividends or other distributions declared or made with respect to HFS
Common Stock with a record date after the Effective Time will be paid to the
holder of any certificate representing shares of PHH Common Stock until such
certificate has been surrendered for exchange. Holders of certificates
representing shares of PHH Common Stock will be paid the amount of dividends
or other distributions with a record date after the Effective Time, which
dividends or distributions theretofore had been payable, after surrender of
such certificates, without any interest thereon.
Neither HFS nor the Surviving Corporation will be liable to any former
holder of shares of PHH Common Stock for any number of shares or amount of
cash payable in lieu of fractional share interests delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
laws.
For a description of the differences between the rights of the holders of
HFS Common Stock and PHH Common Stock, see "COMPARATIVE RIGHTS OF
STOCKHOLDERS OF HFS AND PHH."
50
<PAGE>
EFFECTIVE TIME
On the Closing Date, the parties shall file articles of merger with the
Department of Assessments and Taxation of the State of Maryland, and the
Merger will become effective at the time of such filing.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the parties, none of which will survive the consummation of the
Merger, made as of the date of the Merger Agreement and to be made as of the
Effective Date, including, among other things, representations from all
parties relating to (i) each party's organization and similar corporate
matters, (ii) the authorization, execution, delivery, performance and
enforceability of the Merger Agreement and the transactions contemplated
thereby, (iii) the governmental or regulatory consents or approvals required
to enter into the Merger Agreement and to consummate the transactions
contemplated thereby, and (iv) the absence of pending or threatened legal
proceedings.
The Merger Agreement also includes representations from PHH and HFS
relating to (i) each of PHH and HFS's capital structure, (ii) the absence of
any violation of corporate documents or applicable law in connection with
entering into the Merger Agreement, (iii) certain documents and reports filed
by PHH and HFS with the Commission and the accuracy of the information
contained therein, (iv) the absence of certain changes or events having a
material adverse effect on each company and its subsidiaries taken as a
whole, (v) the absence of undisclosed liabilities, (vi) the accuracy of the
information each party has supplied with respect to the filings required with
the Commission in order to consummate the Merger and the transactions
contemplated by the Merger Agreement, (vii) certain tax matters, (viii)
matters concerning the benefit plans of PHH and HFS and their subsidiaries,
(ix) certain environmental matters, (x) matters concerning patents,
copyrights, trademarks and other intellectual property rights, (xi) the
stockholder vote required to approve the transactions contemplated by the
Merger Agreement, (xii) certain matters concerning contracts and agreements
of each company and its subsidiaries and (xiii) certain accounting matters.
In addition, the Merger Agreement contains representations from PHH
regarding (i) the inapplicability of Sections 3-602 and 3-702 of the MGCL to
the Merger Agreement or any of the transactions or agreements contemplated
thereby, (ii) matters relating to insurance coverage of PHH, (iii) the
accuracy of PHH's corporate records, (iv) matters relating to the PHH
mortgage banking business including licenses and qualifications, and
compliance with applicable regulations and (v) the fact that the execution
and delivery of the Merger Agreement and the consummation of the transactions
contemplated by the Merger Agreement will not result in a "Distribution Date"
or a "Triggering Event" (as defined in the PHH Rights Agreement) and that PHH
has authorized the Rights Amendment, rendering the PHH Rights Agreement
inapplicable to the Merger Agreement and the Merger and the transactions
contemplated by the Merger Agreement.
CONDUCT OF BUSINESS OF PHH PENDING THE MERGER
Pursuant to the terms of the Merger Agreement, PHH has agreed that prior
to the Effective Time, unless otherwise consented to by HFS, it will, and
will cause its subsidiaries to (unless expressly provided for in the Merger
Agreement): (i) conduct their respective businesses only in the ordinary
course consistent with past practice and (ii) use all commercially reasonable
efforts to preserve intact in all material respects their present business
organizations and reputation, keep available the services of their key
officers and employees, maintain their assets and properties in good working
order and condition (ordinary wear and tear excepted), maintain insurance on
their tangible assets and businesses in such amounts and against such risks
and losses as in effect on the date of the Merger Agreement, preserve their
relationships with customers and suppliers and others having significant
business dealings with them, and comply in all material respects with all
laws and orders of all applicable governmental or regulatory authorities.
PHH has further agreed that, unless otherwise consented to by HFS, prior
to the Effective Time it will not, and will not permit any of its
subsidiaries to, except as otherwise expressly contemplated or
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<PAGE>
permitted by the Merger Agreement: (i) amend or propose to amend its articles
of incorporation or by-laws; (ii) declare, set aside or pay any dividends on
or make other distributions in respect of any of its capital stock, except
that PHH may continue the declaration and payment of regular quarterly cash
dividends (including increases consistent with past practice) on PHH Common
Stock with usual record and payment dates for such dividends in accordance
with past dividend practice, and except for the declaration and payment of
dividends by a wholly owned subsidiary solely to its parent corporation;
(iii) split, combine, reclassify or take similar action with respect to any
of its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of, or in substitution for, shares of
its capital stock; (iv) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such liquidation or a dissolution,
recapitalization or other similar reorganization; (v) directly or indirectly
redeem, repurchase or otherwise acquire any shares of its capital stock or
any option with respect thereto; (vi) issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any shares of its capital stock or
any option with respect thereto (other than the issuance of PHH Common Stock
pursuant to options outstanding on the date of the Merger Agreement under PHH
option plans and in accordance with their present terms, and the issuance by
a wholly owned subsidiary of its capital stock to its parent corporation), or
modify or amend any right of any holder of outstanding shares of capital
stock or options with respect thereto; (vii) acquire (by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner) any business or
any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets other
than in the ordinary course of its business consistent with past practice;
(viii) other than in the ordinary course of its business consistent with past
practice, sell, lease, grant any security interest in or otherwise dispose of
or encumber any of its assets or properties; (ix) except to the extent
required by applicable law, permit any material change in any pricing,
marketing, purchasing, investment, accounting, financial reporting,
inventory, credit, allowance or tax practice or policy or any method of
calculating any bad debt, contingency or other reserve for accounting,
financial reporting or tax purposes or make any material tax election or
settle or compromise any material income tax liability with any governmental
or regulatory authority; (x) incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar arrangements
until borrowings are made under such arrangements) any indebtedness for
borrowed money or guarantee any such indebtedness other than in the ordinary
course of business consistent with past practice, or voluntarily purchase,
cancel, prepay or otherwise provide for a complete or partial discharge in
advance of a scheduled repayment date with respect to, or waive any right
under, any indebtedness for borrowed money other than in the ordinary course
of its business consistent with past practice; (xi) enter into, adopt, amend
in any material respect (except as may be required by applicable law) or
terminate any employee benefit plan of PHH or other agreement, arrangement,
plan or policy between PHH and one of its subsidiaries and one or more of its
directors, officers or employees, or, except for normal increases in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to PHH and its subsidiaries taken as a whole, increase in any manner
the compensation or fringe benefits of any director, officer or employee, or
pay any benefit not required by any plan or arrangement in effect as of the
date of the Merger Agreement; (xii) enter into any contract or amend or
modify any existing contract, or engage in any new transaction outside the
ordinary course of business consistent with past practice or not on an
arm's-length basis, with any affiliate of PHH or any of its subsidiaries;
(xiii) make any capital expenditures or commitments for additions to plant,
property or equipment constituting capital assets except in the ordinary
course of business consistent with past practice; (xiv) make any change in
the lines of business in which it participates or is engaged; or (xv) enter
into any contract, commitment or arrangement to do or engage in any of the
foregoing.
CONDUCT OF BUSINESS OF HFS PENDING THE MERGER
Pursuant to the terms of the Merger Agreement, HFS has agreed that it will
not, and will not permit its subsidiaries to, unless expressly provided for
in the Merger Agreement, announce, enter into or commit to enter into any
transaction, which entry into, commitment or announcement would reasonably be
expected to cause a significant delay of the date of the mailing of the Proxy
Statement or of the scheduled date of either of the HFS Special Meeting or
PHH Special Meeting.
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EMPLOYEE BENEFIT PLANS
Pursuant to the Merger Agreement, until the first anniversary of the
Effective Time, HFS will cause the PHH employee benefit plans (other than
PHH's option plans) to remain in effect or, to the extent PHH employee
benefit plans are not continued, HFS will maintain employee benefit plans for
the employees of PHH which are no less favorable, in the aggregate, to PHH's
employee benefit plans currently in effect. HFS will, and will cause the
Surviving Corporation to, honor without modification (i) the PHH Corporate
Incentive Plan FY 1997 which terminates on April 30, 1997 provided that the
payments pursuant to such plan are: consistent with past practices; properly
accrued for under generally accepted accounting principles; and in the
aggregate, less than $10,000,000, and (ii) all employee severance plans (or
policies) and employment and severance agreements of PHH or any of its
subsidiaries disclosed to HFS in existence on the date of the Merger
Agreement and which are in effect in accordance with the terms of the Merger
Agreement at the Effective Time.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that PHH, and from and after the Effective
Time, HFS and the Surviving Corporation (each, an "Indemnifying Party"), will
maintain all rights of indemnification existing in favor of directors,
officers and employees of PHH or any of its subsidiaries or any person who
becomes an officer or director of PHH or any of its subsidiaries prior to the
Effective Time, to the full extent permitted by applicable law.
In addition, HFS and the Surviving Corporation have agreed that directors'
and officers' liability insurance policies maintained by PHH and its
subsidiaries on the date of the Merger Agreement with respect to claims
arising from facts or events that occurred on or prior to the Effective Time,
will be maintained in effect until the sixth anniversary of the Effective
Time; provided, however, that HFS or the Surviving Corporation will not be
obligated to expend any amount per annum in excess of two hundred percent
(200%) of the aggregate premiums payable by PHH and its subsidiaries in 1996
(on an annualized basis) in order to maintain or procure such insurance
coverage.
APPOINTMENT OF DIRECTOR
The Merger Agreement provides that HFS will use its best efforts to cause
the HFS Board to invite Mr. Robert D. Kunisch to become a member of the HFS
Board following the Closing, subject to an increase in the size of the HFS
Board.
NO SOLICITATION
Pursuant to the Merger Agreement, PHH has agreed that, prior to the
Effective Time, neither it nor any of its affiliates or subsidiaries will,
and it will not cause its representatives to, directly or indirectly,
initiate, solicit or encourage any inquiries or the making or implementation
of any Alternative Proposal (as defined below) or engage in any negotiations
or discussions with, any person or group relating to an Alternative Proposal
(excluding the transactions contemplated by the Merger Agreement), or
otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal. For purposes hereof, an "Alternative Proposal" shall
mean any proposal or offer with respect to a merger, consolidation or other
business combination including PHH or any of its significant subsidiaries or
any acquisition or similar transaction involving the purchase of (i) all or
any significant portion of the assets of PHH and its subsidiaries taken as a
whole, (ii) 15% or more of the outstanding shares of PHH Common Stock or
(iii) 15% or more of the outstanding shares of the capital stock of any
significant subsidiary of PHH.
PHH further agreed to immediately cease any existing activities,
discussions or negotiations with any third parties with respect to any of the
foregoing. In addition, PHH will notify HFS immediately if any such
inquiries, proposals or offers are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, PHH or its subsidiaries or representatives.
Notwithstanding the foregoing, the Merger Agreement also provides that the
PHH Board may furnish information to or enter into discussions or
negotiations with third parties that make an unsolicited bona fide
Alternative Proposal, if the PHH Board, based upon the written opinion of
outside counsel, determines in good faith that such action is required for
the PHH Board to comply with its fiduciary duties to stockholders imposed by
law. However, prior to furnishing such information to, or entering into
discussions or negotiations with any third party, PHH must provide written
notice to HFS to the effect that it is furnishing information to, or entering
into discussions or negotiations with such third parties. PHH also agreed to
keep HFS informed of the status and all material information, including the
identity
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of third parties, with respect to any such discussions or negotiations to the
extent such disclosure would not constitute a violation of any applicable
law. In addition, the Merger Agreement provides that the PHH Board may, to
the extent required, comply with Rule 14e-2 promulgated under the Exchange
Act.
PHH RIGHTS AGREEMENT
On November 13, 1996, PHH and the Rights Agent executed the Rights
Amendment which amended the PHH Rights Agreement to provide that the
execution and delivery of the Merger Agreement and the consummation of the
transactions contemplated by the Merger Agreement will not cause the rights
issued under the PHH Rights Agreement to become exercisable. In addition, the
PHH Board agreed to take all further action reasonably requested by HFS
(including redeeming the Rights (as such term is defined in the PHH Rights
Agreement) immediately prior to the Effective Time or amending the PHH Rights
Agreement) in order to render the Rights inapplicable to the Merger
Agreement, the Merger and the other transactions contemplated thereby. Prior
to the Effective Time, without the prior written consent of HFS, PHH will not
take any action to amend the PHH Rights Agreement or to redeem the Rights.
CONDITIONS PRECEDENT TO THE MERGER
In addition to the approval of the Share Issuance by the stockholders of
HFS by the requisite vote under applicable law and under applicable
regulations, and the approval of the Merger Proposal by the stockholders of
PHH, the obligations of PHH and HFS to effect the Merger are subject to the
fulfillment or waiver of certain conditions specified in the Merger
Agreement, including, among others: (i) the receipt of certain material
consents, approvals and waivers from governmental authorities and third
parties; (ii) the continuing accuracy of the representations and warranties
of the respective parties contained in the Merger Agreement; (iii) the
performance and compliance in all material respects by the respective parties
of all obligations under the Merger Agreement required to be performed on or
prior to the consummation of the Merger; (iv) the absence of any injunction
or other order by any federal or state court preventing consummation of the
Merger; (v) the applicable period under the HSR Act having expired or been
terminated; (vi) authorization of the shares of HFS common stock issuable to
PHH's stockholders for listing on the NYSE; (vii) the receipt of letters from
Deloitte & Touche LLP and KPMG Peat Marwick LLP stating that the Merger will
qualify as a pooling of interests transaction; (viii) the receipt of an
opinion from Skadden, Arps, Slate, Meagher & Flom LLP by HFS and from Piper &
Marbury L.L.P. by PHH relating to the tax free-status of the Merger; and (ix)
that the average price per share of HFS Common Stock over a period of twenty
(20) trading days preceding the fifth trading day prior to the Closing Date
shall be no less than $50.00 (the "Minimum Average Price"), subject to
adjustment.
Furthermore, the obligation of HFS to effect the Merger is subject to the
fulfillment or waiver of additional conditions specified in the Merger
Agreement, including: (i) that the PHH Rights Agreement will not have become
exercisable on or prior to the Closing Date; (ii) the receipt of required
consents from the required banks with respect to certain credit agreements
between such banks and HFS; and (iii) the receipt of required consents under,
or appropriate refinancing or replacement of, certain Master Credit
Agreements of PHH. All of such conditions have been fulfilled: the PHH Rights
Amendment was amended on November 13, 1996 (see PHH Rights Agreement above),
at March 3, 1997, HFS has received substantially all the requisite bank
consents and at March 10, 1997, PHH has entered into appropriate replacement
master credit agreements.
TERMINATION
The Merger Agreement may be terminated by mutual written consent of the
parties. The Merger Agreement may also be terminated by either PHH or HFS if
(i) the Merger has not occurred on or before June 16, 1997 and such failure
does not result from any breach by the terminating party of any obligation
under the Merger Agreement, (ii) the requisite vote of the stockholders of
PHH at the PHH Special Meeting or the requisite vote under applicable law or
applicable NYSE regulations of the stockholders of HFS at the HFS Special
Meeting has not been obtained, (iii) if there has been any material breach of
any representation, warranty, covenant or agreement on the part of the
non-terminating party set forth in the Merger Agreement, which breach is not
curable or, if curable, has not been cured within thirty days
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following the receipt by the non-terminating party of notice of such breach
from the terminating party, or (iv) any court of competent jurisdiction or
other competent governmental or regulatory authority shall have issued an
order making illegal or otherwise prohibiting the Merger and such order shall
have become final and non-appealable.
The Merger Agreement may be terminated by PHH if (i) the PHH Board
determines in good faith that termination of the Agreement is required for
the PHH Board to comply with its fiduciary duties to stockholders by reason
of an unsolicited bona fide Alternative Proposal having been made, (ii) at
any time after the PHH Special Meeting the average price of HFS Common Stock
over a period of twenty (20) trading days preceding the fifth trading day
prior to such date is less than the Minimum Average Price or (iii) the HFS
Board shall have withdrawn or modified in a manner materially adverse to PHH
its approval or recommendation of the Merger Agreement or the Merger.
The Merger Agreement may be terminated by HFS if (i) the PHH Board shall
have withdrawn or modified in a manner materially adverse to HFS its approval
or recommendation of the Merger Agreement or the Merger or recommends an
Alternative Proposal to the stockholders of PHH or (ii) at any time after the
PHH Special Meeting, the average price of HFS Common Stock over a period of
twenty (20) trading days preceding the fifth trading day prior to such date
is less than the Minimum Average Price.
TERMINATION FEE
The Merger Agreement provides that if the Merger Agreement is terminated
by PHH pursuant to the PHH Board's determination in good faith, based upon
the written opinion of outside counsel, that termination is required in order
to comply with its fiduciary duty by reason of an unsolicited Alternative
Proposal, or by HFS if the PHH Board withdraws or modifies in a manner
materially adverse to HFS its approval or recommendation of the Merger
Agreement or the Merger, or recommends an Alternative Proposal to the
stockholders of PHH, then PHH shall pay HFS a termination fee of $50,000,000.
In the event that the Merger Agreement is terminated by either party due
to PHH's failure to obtain the requisite vote upon a vote held at the PHH
Special Meeting and, prior to such termination, a third party has made an
Alternative Proposal, then PHH shall pay HFS's documented out-of-pocket
expenses relating to the Merger Agreement and the transactions contemplated
by the Merger Agreement, provided that such expenses shall not exceed
$2,500,000. In the event that within one year after the date of the
termination PHH enters into an agreement with the third party who made the
Alternative Proposal, then PHH shall pay HFS a termination fee of
$50,000,000.
In the event that the Merger Agreement is terminated by either party due
to HFS's failure to obtain the requisite vote on the Share Issuance under
applicable law or applicable regulations upon a vote held at the HFS Special
Meeting, then HFS shall pay PHH's documented out-of-pocket expenses relating
to the Merger Agreement and the transactions contemplated by the Merger
Agreement, provided that such expenses shall not exceed $2,500,000.
AMENDMENT; WAIVER
The Merger Agreement may be amended, supplemented or modified by action
taken by or on behalf of the respective boards of directors of the parties
thereto at any time prior to the Effective Time, whether prior to or after
the approval of the stockholders of PHH and HFS has been obtained, but after
such adoption and approval only to the extent permitted by applicable law.
At any time prior to the Effective Time, any of the parties to the Merger
Agreement may to the extent permitted by applicable law: (i) extend the time
for the performance of any of the obligations or other acts of the other
parties thereto; (ii) waive any inaccuracies in the representations and
warranties of the other parties thereto or in any document delivered pursuant
to the Merger Agreement; or (iii) waive compliance with any of the covenants,
agreements or conditions of the other parties contained in the Merger
Agreement.
EXPENSES
The Merger Agreement provides that each party thereto will pay its own
expenses in connection with the Merger.
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DESCRIPTION OF HFS CAPITAL STOCK
GENERAL
The authorized capital stock of HFS consists of 300,000,000 shares of
common stock, par value $.01 per share, and 10,000,000 shares of preferred
stock. If the Shares Amendment is adopted by HFS stockholders and filed with
the Secretary of State of the State of Delaware, the number of shares of HFS
Common Stock will increase to 600,000,000 shares. As of the Record Date,
127,529,530 shares of HFS Common Stock were issued and outstanding and held
of record by 504 stockholders. There are no shares of preferred stock
outstanding on the date hereof.
HFS's Amended and Restated Certificate of Incorporation and By-laws
provide that directors will be removed from office only for cause at any time
by the affirmative vote of the holders of a majority of the shares entitled
to vote for the election of directors at any annual or special meeting of
stockholders for that purpose.
COMMON STOCK
Holders of HFS Common Stock are entitled to one vote for each share held
of record on all matters on which stockholders are entitled to vote. There
are no cumulative voting rights and holders of HFS Common Stock have no
preemptive rights. All issued and outstanding shares of HFS Common Stock are
validly issued, fully paid and non-assessable. Holders of Common Stock are
entitled to such dividends as may be declared from time to time by the HFS
Board out of funds legally available for that purpose. Upon dissolution,
holders of HFS Common Stock are entitled to share pro rata in the assets of
HFS remaining after payment in full of all its liabilities and obligations,
including payment of the liquidation preference, if any, of any preferred
stock then outstanding.
PREFERRED STOCK
The HFS Board, without further action by the stockholders, is authorized
to issue preferred stock in one or more series and to designate as to any
such series the dividend rate, redemption prices, preferences on liquidation
or dissolution, conversion rights, voting rights and any other preferences,
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions. The rights of the holders of HFS
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future.
Issuance of a new series of preferred stock, while providing desirable
flexibility in connection with possible acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a majority of
the outstanding voting stock of HFS. HFS has no present plans to issue any
new series of preferred stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in any "business combination" with an "interested
stockholder" for a period of three years following the time that such
stockholder becomes an interested stockholder, unless (i) prior to such time
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding, for
purposes of determining the number of shares outstanding, those shares owned
(A) by persons who are both directors and officers and (B) certain employee
stock plans, or (iii) at or after such time the business combination is
approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes certain mergers,
consolidations, asset sales, transfers and other transactions resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within the
preceding three years, did own) 15% or more of the corporation's voting
stock.
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LIMITATIONS ON CHANGE OF CONTROL
HFS is a party to certain employment agreements, an earnout agreement,
credit agreements and certain indentures, each of which contain provisions
with respect to a change in control of HFS. In addition, certain provisions
of HFS's Amended and Restated Certificate of Incorporation may inhibit
changes in control of HFS. See "DESCRIPTION OF CAPITAL STOCK--Disqualified
Stockholders" and "RISK FACTORS--Certain Anti-takeover Effects; Divestiture
and Loss of Voting Rights."
DISQUALIFIED STOCKHOLDERS
HFS's Amended and Restated Certificate of Incorporation provides that no
holder of capital stock of HFS who: (1) beneficially owns five percent or
more of the outstanding capital stock of HFS and who has not fully cooperated
with HFS and/or any Gaming Authority (as defined below) with respect to
providing all requested information (including financial statements) relating
to such holder, responding to all inquiries and questions raised by HFS
and/or any Gaming Authority, consenting to relevant background investigations
or complying with any other requests of HFS and/or any Gaming Authority in
connection with any Gaming License (as defined below); (2) is required by any
Gaming Authority to be qualified with respect to any Gaming License and who
has neither been qualified by nor obtained a waiver of qualification from
each Gaming Authority requiring qualification with respect to any Gaming
License in a timely manner; or (3) has been found to be disqualified or
unsuitable with respect to any Gaming License, which finding has not been
reversed, vacated or superseded (each, a "Disqualified Stockholder"), shall
be entitled to vote, directly or indirectly, any shares of capital stock of
HFS beneficially owned by such holder on any matter, and no shares of capital
stock of HFS beneficially owned by a Disqualified Stockholder shall be
considered as outstanding stock entitled to vote for any purpose.
A Disqualified Stockholder shall, upon the request of HFS, dispose of such
holder's publicly-traded capital stock of HFS within 10 days after receipt of
such request. Alternatively, HFS may, at its option, redeem such Disqualified
Stockholder's capital stock of HFS as provided in HFS's Amended and Restated
Certificate of Incorporation at the Redemption Price (as defined below).
Holders of capital stock of HFS shall be required to pay any costs and
investigative fees incurred in connection with any background investigation
by, or qualification or suitability application with, any Gaming Authority.
Upon becoming a Disqualified Stockholder, such holder shall have no further
right to exercise, directly or through any trustee or nominee, any right
conferred by its capital stock of HFS and no further right to receive any
distribution with respect to any such capital stock of HFS.
As used herein, the term "Gaming Authorities" includes all federal, state,
local or foreign government authorities and the National Indian Gaming
Commission or other tribal authorities which issue or grant any license or
approval necessary or appropriate for the lawful operation of gaming and
related businesses now or hereafter engaged in by HFS or its subsidiaries;
the term "Gaming License" means all licenses and other regulatory approvals
necessary for the lawful operation of gaming and related businesses now or
hereafter engaged in by HFS or any subsidiary within or without the United
States from the Gaming Authorities empowered to issue or grant Gaming
Licenses; and the term "Redemption Price" for a share of capital stock of HFS
means the average closing sale price during the 20-day period immediately
preceding the date of the notice of redemption of a share of such capital
stock on the composite tape for NYSE listed stocks, or if such stock is not
quoted on the composite tape, on the NYSE, or if such stock is not listed on
such Exchange, on the principal United States securities exchange registered
under the Exchange Act on which such stock is listed, or if such stock is not
listed on any such exchange, the average last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market with respect to a share of such capital stock during
the 20-day period preceding the date of the notice of redemption as reported
by the National Association of Securities Dealers, Inc. Automated Quotation
System or any similar system then in use, or if no such quotations are
available, the fair market value on the date of the call for redemption of a
share of such stock as determined by the HFS Board.
TRANSFER AGENT
ChaseMellon is the Registrar and Transfer Agent for HFS Common Stock.
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COMPARATIVE RIGHTS OF STOCKHOLDERS OF HFS AND PHH
Upon consummation of the Merger, the stockholders of PHH, a Maryland
corporation, will become stockholders of HFS, a Delaware corporation.
Accordingly, the rights of stockholders of PHH following the Merger will be
governed by Delaware law, as well as the HFS Restated Certificate of
Incorporation and Amended & Restated By-Laws.
The following is a summary of the material differences between the rights
and privileges of PHH stockholders and those of HFS stockholders. References
to the "DGCL" are to the General Corporation Law of Delaware, while
references to the "MGCL" are to the General Corporation Law of Maryland. This
summary is not meant to be relied upon as an exhaustive description of such
differences and is qualified in its entirety by reference to the HFS Restated
Certificate of Incorporation and Amended & Restated By-Laws, the PHH Articles
of Incorporation (the "PHH Charter") and By-Laws, the DGCL and the MGCL.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
PHH. Under the MGCL, any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting if all stockholders
entitled to vote consent to the action in writing and any stockholder
entitled to notice of the meeting but not entitled to vote at the meeting
provides a written waiver of any right to dissent.
HFS. Consistent with the DGCL, the HFS By-Laws allow stockholders to take
any action without a meeting, without prior notice and without a vote, upon
the written consent of stockholders having not less than the minimum number
of votes that would be necessary to take such action at a meeting at which
all shares were present and voted.
AMENDMENT OF CHARTER DOCUMENTS AND BY-LAWS
PHH. Under the MGCL, unless otherwise provided in a corporation's charter,
a proposed charter amendment requires an affirmative vote of two-thirds of
all the votes entitled to be cast on the matter. However, the PHH Charter
provides that, except as provided in Section 3-602 of the MGCL (relative to
certain business combinations discussed below), the affirmative vote of a
majority of the total number of shares of outstanding PHH stock entitled to
vote thereon is sufficient to amend the PHH Charter; provided that a change
in the PHH Charter provision relating to the classification of the PHH Board
may not shorten the term of a director then holding office. Under the MGCL,
the power to adopt, alter, and repeal the by-laws is vested in the
stockholders, except to the extent that the charter or the by-laws vest it in
the board of directors. The PHH By-Laws provide that they may be amended by
the PHH Board at any regular or special meeting (except for the amendment
provision thereof, which must be approved by the stockholders).
HFS. The DGCL provides that an amendment to a corporation's certificate of
incorporation requires the recommendation of the corporation's board of
directors, the approval of a majority of all shares entitled to vote thereon
unless a higher vote is required in the corporation's certificate of
incorporation (which the HFS Certificate of Incorporation does not provide),
voting together as a single class, and the approval of a majority of the
outstanding stock of each class entitled to vote thereon. The HFS By-Laws may
be amended by the HFS Board (except with respect to the action by written
consent of the stockholders or the amendment provisions thereof) and may also
be amended by the affirmative vote of a majority of the shares present at a
stockholder's meeting at which a quorum is present.
BUSINESS COMBINATIONS
PHH. Generally, under the MGCL, the approval by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter is required for
mergers, consolidations, share exchanges, and any transfers of all or
substantially all of the assets of a corporation, unless the charter
increases or reduces the vote to not less than a majority. The PHH Charter
does not alter the two-thirds vote requirement.
Subtitle 6 of Title 3 of the MGCL prohibits any business combination
(defined to include a variety of transactions, including mergers,
consolidations, share exchanges, sales or dispositions of assets,
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issuances of stock, liquidations, reclassification and benefits from the
corporation, including loans or guarantees) between a Maryland corporation
and any interested stockholder (defined generally as any person who, directly
or indirectly, beneficially owns 10% or more of the outstanding voting stock
of the corporation) for a period of five years after the date in which the
interested stockholder became an interested stockholder. After such five-year
period, a business combination between a Maryland corporation and such
interested stockholder is prohibited unless either certain "fair-price"
provisions are complied with or the business combination is approved by
certain supermajority stockholder votes. The MGCL restrictions do not apply
to a business combination with an interested stockholder if such business
combination is approved or exempted from the MGCL by a resolution of the
board of directors adopted prior to the date on which the interested
stockholder became an interested stockholder. The PHH Board adopted such a
resolution prior to the execution of the Merger Agreement.
A Maryland corporation also may adopt an amendment to its charter electing
not to be subject to the provisions of the MGCL in whole or in part. Any such
amendment generally must be approved by the affirmative vote of at least 80
percent of the votes entitled to be cast by all holders of outstanding shares
of voting stock and two-thirds of the votes entitled to be cast by holders of
outstanding shares of voting stock who are not interested stockholders. No
such amendment to the PHH Charter has been adopted.
HFS. Section 203 of the DGCL ("Section 203") prohibits a Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" (as defined below) for three years following the date that such
person becomes an interested stockholder. With certain exceptions, an
interested stockholder is a person or group who or which owns 15% or more of
the corporation's outstanding voting stock (including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliate or associate of the corporation which was the owner of 15% or more
of such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder;
sales or other dispositions to the interested stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to 10% or more of the aggregate market
value of the corporation's consolidated assets or its outstanding stock; the
issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); and receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time on which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made
him an interested stockholder (excluding shares held by certain affiliates of
the corporation and certain employee stock plans); or (iii) at or subsequent
to the time such person becomes an interested stockholder, the business
combination is approved by both the board of directors and 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder).
Section 203 only applies to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, is quoted on
an interdealer quotation system such as Nasdaq or is held of record by more
than 2,000 stockholders. A Delaware corporation may elect in its original
certificate of incorporation, or by amending its certificate of incorporation
or bylaws, that it will not be governed by Section 203. Any such amendment
must be approved by the stockholders and may not be further amended by the
board of directors. HFS is subject to the provisions of Section 203 and has
not elected to opt out from being governed by Section 203.
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APPRAISAL RIGHTS
PHH. Under the MGCL, except as otherwise provided by the MGCL,
stockholders have the right to demand and receive payment of the "fair value"
of their stock in the event of (i) a merger or consolidation, (ii) a share
exchange, (iii) a transfer of all or substantially all assets not in the
ordinary course of business, (iv) an amendment to the charter which alters
the contract rights, as expressly set forth in the charter, of any
outstanding stock and which substantially adversely affects the stockholder's
rights, unless the right to do so is preserved by the charter (which it is
not, in the case of PHH), (v) certain business combinations or (vi) after an
approval by the stockholders of voting rights for control shares which
constitute a majority of the voting power of the corporation. However, except
as otherwise provided by the MGCL, stockholders do not have appraisal rights
if, among other things, the stock is listed on a national securities
exchange: (i) with respect to a merger of a 90% or more owned subsidiary into
its parent, on the date notice of such merger is given or waived, or (ii)
with respect to any other transaction, on the record date for determining
stockholders entitled to vote on the transaction.
HFS. The DGCL provides for dissenters' appraisal rights only in the case
of a statutory merger or consolidation of the corporation where the
petitioning stockholder has neither voted in favor of nor consented in
writing to the transaction. In addition, no dissenters' appraisal rights are
available where the corporation is to be the surviving corporation and a vote
of its stockholders is not required under DGCL Section 251(f). Unless
otherwise provided for in a corporation's certificate of incorporation, there
are no dissenters' appraisal rights for shares of stock listed on a national
securities exchange or held by more than 2,000 holders of record, unless such
stockholders would be required to accept anything other than shares of stock
of the surviving corporation, shares of another corporation so listed or held
by such number of holders or record, cash in lieu of fractional shares of
such stock or any combination thereof.
PREEMPTIVE RIGHTS
Neither PHH nor HFS stockholders have preemptive rights with respect to
issuances of capital stock.
INDEMNIFICATION
PHH. Under the MGCL, a corporation may indemnify any director or officer
made a party to any proceeding unless it is established that (i) the
director's or officer's act or omission was material to the cause of action
and was committed in bad faith or resulted from active and deliberate
dishonesty, (ii) the director or officer actually received an improper
benefit in money, property or services, or (iii) in the case of criminal
proceedings, the director or officer had reasonable cause to believe the act
or omission was unlawful. The PHH Charter provides that PHH will indemnify
its directors and its officers to the full extent required or permitted by
Maryland law.
The MGCL states that a determination must be made that a director or
officer has met the required standard of conduct before the director or
officer may be indemnified. The determination may be made by a majority vote
of disinterested directors, by special legal counsel (selected by the
disinterested directors) or by the stockholders.
The MGCL also establishes several mandatory rules for indemnification. In
a stockholder derivative suit, a corporation may not indemnify a director or
officer if he or she is adjudged liable to the corporation. Moreover, a
corporation may not indemnify a director or officer who is adjudged to be
liable, in any proceeding, for a personal benefit that was improperly
received. A director or officer who is successful, on the merits or
otherwise, in any proceeding must be indemnified by the corporation for
reasonable expenses (including attorneys' fees).
The MGCL permits a corporation to advance reasonable expenses to directors
and officers upon the director's or officer's written affirmation of his or
her good faith belief that he or she has met the required standard of conduct
and after undertaking to repay the corporation if it is determined that the
standard has not been met. Under the PHH By-Laws, a director or officer is
entitled to payment of expenses in advance of the final disposition of a
proceeding, upon receipt of such affirmation and undertaking, unless a
determination has been made that facts exist which preclude indemnification.
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HFS. Section 145 of the DGCL authorizes a Delaware corporation to
indemnify any person who was, is, or is threatened to be made, a party in any
civil, criminal, administrative or investigative pending or completed action,
suit or proceeding (other than an action by or in the right of a corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity, for
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed action, suit or proceeding. With respect
to actions by or in the right of a corporation, the DGCL authorizes
indemnification of such person for expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit. To be entitled to indemnification, a
person must have acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such conduct was unlawful with respect to actions taken by or in the
right of the corporation. With respect to actions by or in the right of the
corporation, court approval is required for indemnification relating to any
claim as to which a person has been adjudged liable to the corporation.
The DGCL requires indemnification for expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with a
proceeding against such person for actions in such capacity to the extent
that the person has been successful on the merits or otherwise. Advancement
of expenses (i.e., payment prior to a determination on the merits) is
permitted, but not required, by the DGCL. A director or officer must
undertake to repay such expenses if it is ultimately determined that he or
she is not entitled to indemnification. The disinterested members of the
board (or independent legal counsel or stockholders) must determine, in each
instance where indemnification is not required by the DGCL, that such
director, officer, employee or agent is entitled to indemnification. The DGCL
provides that the statutory indemnification is not exclusive.
The HFS Certificate of Incorporation and By-Laws each provide for
indemnification of officers and directors as permitted by Section 145 of the
DGCL.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
PHH. The MGCL provides that a corporation's charter may include a
provision eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for money damages except (i)
to the extent that it is proved that the person actually received an improper
benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property, or services actually received or (ii)
to the extent that a court finds that the person's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding. The PHH Charter provides that
its directors and officers have no personal liability to PHH or its
stockholders for money damages to the fullest extent permitted by Maryland
law.
HFS. Section 102(b)(7) of the DGCL allows a Delaware corporation to limit
or eliminate the personal liability of directors to a corporation and its
stockholders for monetary damages for breach of fiduciary duty as a director
subject to certain limitations. The HFS Certificate of Incorporation provides
for the limitation of liability as permitted by Section 102(b)(7).
CLASSIFIED BOARD OF DIRECTORS
PHH. The MGCL permits, but does not require, a classified board of
directors. The PHH Charter and By-Laws provide for three classes of
directors, with each class elected for a term of three years and consisting,
as nearly as possible, of one-third of the total number of directors on the
Board. The PHH By-Laws provide that PHH shall have thirteen directors, a
number which may be amended in accordance with the By-Laws, but shall not
have more than fifteen. At each annual meeting of PHH stockholders one class
of directors is elected for a three-year term. Classification of directors
has the effect of making it more difficult for stockholders to change the
composition of a board of directors. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change
in the majority of
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a classified board. Such a delay may help ensure that incumbent directors, if
confronted by a holder attempting to force a proxy contest, a tender or
exchange offer or other extraordinary corporate transaction, would have
sufficient time to review the proposal as well as any available alternatives
to the proposal and to act in what they believe to be the best interests of
the stockholders. On the other hand, the classification of directors may
delay, defer or prevent a takeover attempt that a stockholder might consider
in its best interest.
HFS. The DGCL permits, but does not require, a classified board of
directors. The HFS Board is not divided into classes, and the directors are
elected for one-year terms by the stockholders at their annual meeting.
Subject to stockholder approval of the Directors Amendment and the requisite
filing with the State of Delaware, the HFS Certificate of Incorporation will
provide that the number of directors of HFS will be not more than twenty (20)
(the current maximum number of directors is twelve (12)), with the precise
number determined by a majority of the HFS Board.
CUMULATIVE VOTING FOR DIRECTORS
Neither PHH nor HFS uses cumulative voting in the election of directors.
REMOVAL OF DIRECTORS
PHH. Under the MGCL, except as otherwise provided in a corporation's
charter, the stockholders generally may remove any director, with or without
cause, by the affirmative vote of a majority of all the votes entitled to be
cast for the election of the directors. The PHH Charter and By-Laws provide
that a director may only be removed for cause.
HFS. Under the DGCL, the affirmative vote of a majority of the shares
entitled to vote at the election of directors is required to remove
directors, with or without cause. The HFS By-Laws provide that a director may
only be removed for cause.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
PHH. Consistent with the MGCL, the PHH Charter provides that any vacancy
on the Board of Directors may be filled only by a majority of the directors
in office, although less than a quorum, or by a sole remaining director. Any
vacancy on the Board of Directors that results from an increase in the number
of directors may be filled only by a majority of the Board of Directors in
office. Any director elected to fill a vacancy shall have the same remaining
term as his predecessor. The PHH By-Laws provide that the stockholders may
elect a successor to fill a vacancy on the Board of Directors which results
from the removal of a director. A director elected by the stockholders to
fill a vacancy which results from the removal of a director serves for the
balance of the term of the removed director. The PHH By-Laws further provide
that a majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the Board of Directors which
occurs for any reason (except due to an increase in the number of directors),
and a majority of the entire Board of Directors may fill a vacancy which
results from an increase in the number of directors. A director elected by
the Board of Directors to fill a vacancy serves until the next annual meeting
of stockholders and until his successor is elected and qualified.
HFS. If the position of any director of HFS is or becomes vacant, a
majority of the directors of HFS remaining in office may appoint a successor
to serve the full or remaining term, as the case may be, of the directorship
in which the vacancy occurred or was created.
SPECIAL MEETINGS
PHH. The PHH By-Laws provide that special meetings of stockholders may be
called by the Chairman of the Board, the President or by a majority of the
Board of Directors by vote at a meeting or in writing, with or without a
meeting. In addition, under the MGCL, a special meeting of stockholders
generally must be called on the written request of stockholders entitled to
cast at least 25% of all the votes entitled to be cast at the meeting unless
the charter or by-laws required a greater (not more than a majority) or
lesser percentage.
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HFS. A special meeting of stockholders of HFS may be called either by the
HFS Board or by the Executive Committee thereof. The President or Secretary
of HFS is required to call a special meeting whenever requested in writing to
do so by stockholders holding not less than 20% of the HFS capital stock then
outstanding and entitled to vote.
INSPECTION RIGHTS
PHH. Under the MGCL any stockholder has the right to inspect and copy
by-laws, minutes of stockholder proceedings, annual statements of affairs,
voting trust agreements on file, and statements showing all stock and
securities issued by the corporation during a specified period of not more
than twelve months before the date of the request. In addition, one or more
persons who together are and for the last six (6) months have been
stockholders of record of at least 5% of the outstanding stock of any class
may inspect and copy the corporation's books of account and stock ledger.
HFS. Under the DGCL and the HFS By-Laws, stockholders have a right during
regular business hours and for at least ten (10) days prior to any
stockholders' meeting and during such meeting to examine a list of
stockholders of HFS for any purpose germane to such meeting. Additionally,
under the DGCL, any stockholder, following a written request, also has the
right to inspect the corporation's books and records, including the
stockholder list, during normal business hours for a proper purpose.
DIVIDENDS AND DISTRIBUTIONS
PHH. Under the MGCL, a board of directors may authorize a corporation to
make distributions to its stockholders, subject to any restrictions in its
charter and as provided under the MGCL. Under the MGCL, no distribution is
permitted, however, if, after giving effect to the distribution, the
corporation would not be able to pay its indebtedness as the indebtedness
becomes due in the usual course of business or the corporation's total assets
would be less than the sum of its total liabilities plus, unless the charter
permits otherwise, the amount needed, if the corporation were to be dissolved
at the time of the distribution, to satisfy the preferential rights upon
dissolution of stockholders whose preferential rights on dissolution are
superior to those receiving the distribution.
HFS. The DGCL provides that, subject to any restrictions in a
corporation's certificate of incorporation, dividends may be declared from a
corporation's surplus or, if there is no surplus, from its net profits for
the fiscal year in which the dividend is declared and the preceding fiscal
year. However, if the corporation's capital (generally defined in the DGCL as
the sum of the aggregate par value of all shares of the corporation's capital
stock, where all such shares have a par value and the board of directors has
not established a higher level of capital) has been diminished to an amount
less than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net profits until
the deficiency in such capital has been repaired.
RIGHTS AGREEMENT
PHH. On March 15, 1996, the PHH Board adopted the PHH Rights Agreement.
The "Rights" provided for thereunder represent the right to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock,
without par value, of PHH for every outstanding share of PHH Common Stock.
These Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire PHH in a
manner which causes the Rights to become exercisable unless the offer is
conditional on the Rights being redeemed or on a substantial number of Rights
being acquired. The Rights, however, should not interfere with any merger or
other business combination since PHH has executed the Rights Amendment,
thereby exempting the Merger and the related acquisition of shares of PHH
Common Stock by HFS from the potential dilution effects of the PHH Rights
Agreement. For further discussion of the Rights Amendment, see "THE MERGER
AGREEMENT--PHH Rights Agreement."
HFS. HFS has not adopted a shareholder rights or similar plan.
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PROPOSALS FOR CERTIFICATE OF INCORPORATION AMENDMENTS
On November 10, 1996, the HFS Board unanimously approved a resolution to
amend the HFS Certificate of Incorporation to increase the number of
authorized shares of HFS Common Stock from 300,000,000 shares to 600,000,000
shares and to amend the HFS Certificate of Incorporation and By-Laws to
increase the maximum number of authorized members of the HFS Board from
twelve (12) to twenty (20). HFS currently has authorized 310,000,000 shares
of capital stock, of which 300,000,000 are designated common stock and
10,000,000 are designated preferred stock. If the Directors Amendment is
approved, the HFS Board would be entitled to set the number of authorized
directors at no more than twenty (20) persons. If the Shares Amendment is
approved, HFS would be authorized to issue up to 600,000,000 shares of common
stock.
DIRECTORS AMENDMENT
The Directors Amendment would revise Paragraph A of Article FIFTH of the
HFS Certificate of Incorporation to read, in its entirety, as follows:
"FIFTH: A. Except as may be otherwise provided pursuant to Article FOURTH
with respect to any rights of holders of Preferred Stock to elect
directors, the number of directors of the Corporation shall be not less
than one (1) nor more than twenty (20), with the then-authorized number of
directors being fixed from time to time by or pursuant to a resolution
passed by the Board of Directors of the Corporation."
If the Directors Amendment is approved, the HFS Board will increase the
number of directors of HFS by at least one. Pursuant to the Merger Agreement,
the HFS Board has unanimously determined that if the Directors Amendment is
approved, the HFS Board will use its best efforts to invite Mr. Robert D.
Kunisch, Chairman, Chief Executive Officer and President of PHH, to serve in
this new directorship until the 1997 Annual Meeting of HFS Stockholders.
SHARES AMENDMENT
The Shares Amendment would revise Paragraph A of Article FOURTH of the HFS
Certificate of Incorporation to read, in its entirety, as follows:
"FOURTH: A. The authorized capital stock of the Corporation shall consist
of Six Hundred Ten Million (610,000,000) shares, consisting of Six Hundred
Million (600,000,000) shares of Common Stock, each having a par value of
$.01 (the "Common Stock"), and Ten Million (10,000,000) shares of
Preferred Stock, each having a par value of $1.00 (the "Preferred
Stock")."
The increase in the number of authorized shares of HFS Common Stock will
provide additional shares for issuance, without the delay and expense of
further stockholder approval, at such time or times and for such proper
corporate purposes as the HFS Board may in the future deem advisable. Such
shares may be issued if and when the HFS Board decides it is in the best
interest of HFS to do so which may include, without limitation, issuances (i)
as part of an acquisition transaction (as in the case of the Merger); (ii) to
obtain funds through the sale of HFS Common Stock; (iii) to declare a stock
split or stock dividend; (iv) in respect of the 1993 Plan or other employee
benefit or stock plan; or (v) for other purposes. The HFS Board may also deem
it advisable to issue shares of HFS Common Stock pursuant to the 1993 Plan.
Unless required by applicable law, the rules of the NYSE, the HFS Certificate
of Incorporation or the HFS By-Laws, it is not anticipated that HFS will
solicit the votes of stockholders prior to the issuance of HFS Common Stock
for any of the purposes described above.
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THE HFS BOARD UNANIMOUSLY RECOMMENDS THAT HFS STOCKHOLDERS
VOTE FOR THE CERTIFICATE OF INCORPORATION AMENDMENT
PROPOSAL FOR 1993 PLAN AMENDMENT
The 1993 Plan was adopted by the Executive Committee of the HFS Board on
March 3, 1993 and approved by the stockholders on May 12, 1993. The 1993 Plan
was amended and restated by the HFS Board on February 10, 1994, which
amendment and restatement was approved by the stockholders on June 14, 1994.
The 1993 Plan was further amended by the HFS Board on February 8, 1995, which
amendment was approved by the stockholders on May 5, 1995. The HFS Board
further amended the Plan on November 3, 1995, which amendment was approved by
the stockholders on January 22, 1996. The Plan was further amended by the HFS
Board on January 22, 1996, May 20, 1996, July 24, 1996 and September 24,
1996, which amendments did not require approval of the stockholders. The
following description of the 1993 Plan Amendment is qualified in its entirety
by the terms of the 1993 Plan Amendment, which is attached hereto as Annex
VII, with the proposed amendment highlighted in bold type. The primary
purposes of the 1993 Plan Amendment is to provide additional incentive to
officers, key employees, independent contractors and non-employee directors
and to further align their interests with the interests of stockholders.
Under the 1993 Plan, as currently in effect, 24,541,600 shares (after
taking into account equitable adjustments pursuant to the 1993 Plan) were
authorized for issuance in connection with the grant of options. As of
December 10, 1996, options to purchase a total of 22,178,694 shares of HFS
Common Stock have been granted under the 1993 Plan, of which 9,988,460 were
granted to the chief executive officer and the four other most highly
compensated executive officers of HFS and 12,190,234 were granted to other
employees, directors or independent contractors of HFS. Of the shares
authorized for issuance pursuant to the 1993 Plan, 2,362,906 shares remained
available for grant as of December 10, 1996. The HFS Board believes that the
proposed increase in the number of shares available for issuance under the
1993 Plan is necessary in order to continue the effectiveness of the 1993
Plan in permitting HFS to compete with other companies offering similar plans
in attracting and retaining the most experienced and able employees and in
order to continue to provide incentives to existing and future officers and
employees of HFS and its subsidiaries, including PHH employees. In addition,
the HFS Board believes that the availability of stock options for issuance to
officers and employees of acquired companies is important to the success of
such acquisitions.
Subject to stockholder approval, on November 10, 1996, the HFS Board
approved the amendment to provide for an increase of 10,000,000 shares in the
total number of shares of HFS Common Stock currently authorized for issuance
under the 1993 Plan (which would increase the total number of shares
authorized for issuance pursuant to the 1993 Plan from 24,541,600 to
34,541,600). If the 1993 Plan Amendment is not approved by stockholders, the
1993 Plan will remain in full force and effect, without the 1993 Plan
Amendment.
Options granted under the 1993 Plan may be "ISOs" (within the meaning of
Section 422 of the Code) or "NQSOs" not subject to Section 422 of the Code.
Each option (ISO or NQSO), when it becomes exercisable, entitles the holder
thereof to purchase a share of HFS Common Stock for an amount equal to the
exercise price of the option, payable in cash, in shares of HFS Common Stock
with an aggregate value equal to the exercise price of the option, or in a
combination thereof. The exercise price of each option under the 1993 Plan
may not be less than the fair market value of a share of HFS Common Stock on
the date the option is granted.
A limitation is placed on the number of shares available to any individual
participant. For calendar year 1996 and thereafter, the annual limitation on
the number of stock options that may be granted to any individual is the
greater of (x) stock options relating to 50% of the total number of shares
granted pursuant to the 1993 Plan in any calendar year or (y) stock options
relating to 2,000,000 shares in any calendar year.
Options are granted to non-employee directors based on a formula whereby
non-employee directors, upon initial appointment or election to the HFS
Board, are granted options to purchase 50,000 shares of
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HFS Common Stock. Options granted to non-employee directors are exercisable
as to 20% of the shares covered by the option on the first, second, third,
fourth and fifth anniversaries of the date the option is granted.
All options held by an optionee will become fully exercisable (to the
extent not already exercisable) if a "change-of-control transaction" (as
defined in the 1993 Plan) occurs. All options granted under the 1993 Plan, to
the extent not exercised and unless otherwise provided, expire on the
earliest of (i) the tenth anniversary of the date of grant, (ii) two years
following the optionee's termination of employment (or service as an
independent contractor or a non-employee director, as the case may be) on
account of death, retirement or disability or (iii) one year following the
optionee's termination of employment (or service as an independent contractor
or a non-employee director, as the case may be) for any other reason. The
terms of any options granted to participants who are not non-employee
directors may be extended at the discretion of the HFS Board, but in no event
beyond ten years from the date of grant.
The HFS Board may from time to time amend or terminate the 1993 Plan,
provided that (i) no such amendment or termination may adversely affect the
rights of any participant without the consent of such participant and (ii) to
the extent required by Rule 16b-3 under Section 16(b) of the Exchange Act or
any other law, regulation or stock exchange rule, no amendment shall be
effective without the approval of HFS's stockholders.
Certain Federal Income Tax Consequences. The following discussion is a
brief summary of the principal United States Federal Income tax consequences
under current Federal income tax laws relating to awards under the 1993 Plan.
This summary is not intended to be exhaustive and, among other things, does
not describe state, local or foreign income and other tax consequences.
NQSOs. An optionee will not recognize any taxable income upon the grant of
an NQSO. HFS will not be entitled to a tax deduction with respect to the
grant of NQSOs.
Upon exercise of an NQSO, the excess of the fair market value of the HFS
Common Stock on the exercise date over the exercise price will be taxable as
compensation income to the optionee and will be subject to applicable
withholding taxes. HFS will generally be entitled to a tax deduction in the
amount of such compensation income. The optionee's tax basis for the HFS
Common Stock received pursuant to the exercise of an NQSO will equal the sum
of the compensation income recognized and the exercise price.
In the event of a sale of HFS Common Stock received upon the exercise of
an NQSO, any appreciation or depreciation after the exercise date generally
will be taxed as capital gain or loss and will be long-term capital gain or
loss if the holding period for such HFS Common Stock was more than one year.
ISOs. An optionee will not recognize any taxable income at the time of
grant or exercise of an ISO and HFS will not be entitled to a tax deduction
with respect to such grant or exercise. Exercise of an ISO may, however, give
rise to taxable compensation income subject to applicable withholding taxes,
and a tax deduction to HFS, if the ISO is not exercised on a timely basis
(generally, while the optionee is employed by HFS or within 90 days after
termination of employment) or if the optionee engages in a "disqualifying
disposition," as described below. The amount of the excess of the fair market
value, on the date of exercise of an ISO, of the shares acquired through such
exercise over the exercise price constitutes an item of tax adjustment for
purposes of the Federal alternative minimum tax.
A sale or exchange by an optionee of shares acquired upon the exercise of
an ISO more than one year after the transfer of the shares to such optionee
and more than two years after the date of grant of the ISO will result in any
difference between the net sale proceeds and the exercise price being treated
as long-term capital gain (or loss) to the optionee. If such sale or exchange
takes place within two years after the date of grant of the ISO or within one
year from the date of transfer of the ISO shares to the optionee, such sale
or exchange will generally constitute a "disqualifying disposition" of such
shares that will have the following results: Any excess of (i) the lesser of
(a) the fair market value of the shares at the time of exercise of the ISO
and (b) the amount realized on such disqualifying disposition of the shares
over (ii)
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the exercise price of such shares, will be ordinary income to the optionee
subject to applicable withholding taxes, and HFS will be entitled to a tax
deduction in the amount of such income. Any further gain or loss after the
date of exercise generally will qualify as capital gain or loss and will not
result in any deduction by HFS.
INTERESTS OF CERTAIN PERSONS IN THE 1993 PLAN AMENDMENT
In considering the recommendation of the HFS Board with respect to the
approval of the 1993 Plan Amendment, stockholders should be aware that (i)
Mr. Silverman has an interest in and will benefit from the approval of the
1993 Plan Amendment because the grant of stock options to Mr. Silverman is
contingent upon stockholder approval of the 1993 Plan Amendment or a similar
amendment to the 1993 Plan and (ii) John D. Snodgrass has an interest in and
will benefit from the approval of the Plan Amendment because Mr. Snodgrass's
employment agreement provides that in each of May 1997 and May 1998, HFS will
grant Mr. Snodgrass stock options to purchase 250,000 shares of HFS Common
Stock, subject to adjustments for changes in capitalization.
PLAN BENEFITS
Except as set forth on the table below, awards under the 1993 Plan will be
granted at the sole discretion of the Compensation Committee of the HFS Board
and performance criteria, if any, may vary from year to year and from
participant to participant. Therefore, benefits under the 1993 Plan are not
determinable. In the event that the 1993 Plan Amendment is approved by the
stockholders and assuming that there are sufficient authorized shares in the
1993 Plan available for such grants, the following table sets forth certain
information regarding stock option grants that HFS is required to make
pursuant to employment contracts.
NEW PLAN BENEFITS
1993 PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK
NAME AND POSITION FISCAL YEAR UNDERLYING AWARDS IN SUCH YEAR
- -------------------------------------- ------------- --------------------------------
<S> <C> <C>
Henry R. Silverman 1997 2,000,000
Chairman of the Board 1998 2,000,000
and Chief Executive Officer 1999 2,000,000
2000 2,000,000
All Executives as a Group 1997 2,250,000
1998 2,250,000
1999 2,000,000
2000 2,000,000
All Non-Executive Directors as a Group 1997 0
1998 0
1999 0
2000 0
All Non-Executive Officers as a Group 1997 0
1998 0
1999 0
2000 0
</TABLE>
THE HFS BOARD UNANIMOUSLY RECOMMENDS THAT HFS STOCKHOLDERS
VOTE FOR THE 1993 PLAN AMENDMENT.
67
<PAGE>
LEGAL MATTERS AND EXPERTS
The validity of the HFS Common Stock offered hereby will be passed on for
HFS by Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York,
New York 10022.
The consolidated financial statements and the related financial statement
schedules included elsewhere herein and incorporated in this Joint Proxy
Statement/Prospectus by reference from the HFS Incorporated Annual Report on
Form 10-K for the year ended December 31, 1995 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports which are
included elsewhere herein and incorporated herein by reference and have been
so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The balance sheet of Century 21 Real Estate of the Mid-Atlantic States,
Inc. as of December 31, 1995 and the related statements of income, changes in
stockholder's equity and cash flows for the year then ended, which appear in
the Form 8-K dated April 5, 1996 of HFS Incorporated, are incorporated herein
by reference, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of Century 21 of Southwest, Inc. (an "S"
corporation) as of and for the years ended March 31, 1995 and 1994, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated May 15,
1995, of Toback CPAs, P.C., independent certified public accountants,
incorporated by reference herein, given upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Century 21 of Eastern Pennsylvania, Inc. (an
"S" corporation) as of and for the years ended April 30, 1995 and 1994, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated June 22,
1995, of Woolard, Krajnik, & Company, independent certified public
accountants, incorporated by reference herein, given upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Century 21 Real Estate of the Mid-Atlantic
States, Inc. as of and for the years ended December 31, 1994 and 1993, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated May 11,
1995, of Beers & Cutler, independent certified public accountants,
incorporated by reference herein, given upon the authority of said firm as
expert in accounting and auditing.
The consolidated financial statements of Century 21 Region V (Business
Acquired By HFS Incorporated) as of and for the year ended July 31, 1995, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated January 12,
1995, of White, Nelson & Co. LLP, independent certified public accountants,
incorporated by reference herein, given upon the authority of said firm as
expert in accounting and auditing.
The Independent Auditor's Report relating to the consolidated financial
statements of Century 21 Real Estate, Inc. and subsidiaries as of and for the
years ended July 31, 1995, 1994, and 1993, which appears in the Form 8-K dated
February 16, 1996 of HFS Incorporated has been incorporated by reference herein
in reliance upon the report dated September 25, 1995, of Tony H. Davidson, CPA
independent certified public accountant, incorporated by reference herein,
given upon the authority of said individual as expert in accounting and
auditing.
The consolidated financial statements of Electronic Realty Associates,
Inc. for the years ended December 31, 1994 and 1993, included in the HFS
Incorporated Current Report on Form 8-K dated February 16, 1996, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Electronic Realty Associates,
L.P. for the years ended December 31, 1995 and 1994, included in the HFS
Incorporated Current Report on Form 8-K dated April 5, 1996, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
68
<PAGE>
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated balance sheets of Coldwell Banker Corporation and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity (deficiency)
and cash flows for each of the two years in the period ended December 31,
1995, which appear in the Form 8-K dated May 8, 1996 of HFS Incorporated have
been incorporated by reference herein in reliance upon the report dated
February 27, 1996 of Coopers & Lybrand L.L.P., independent accountants, given
on the authority of that firm as experts in accounting and auditing
The consolidated statements of operations, stockholders' equity and cash
flows for the three months ended December 31, 1993 and the consolidated
statements of operations and cash flows for the nine months ended September
30, 1993 of Coldwell Banker Corporation and subsidiaries (formerly Coldwell
Banker Residential Holding Company and subsidiaries) have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report which
is incorporated herein by reference and has been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Avis, Inc. as of February 29,
1996 and February 28, 1995 and for each of the three years then ended,
included in the HFS Incorporated Current Report on Form 8-K dated August 29,
1996 as amended by the Form 8-K/A dated December 5, 1996, have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The combined financial statements of Resort Condominiums International, Inc.
as of and for the year ended December 31, 1995, included in the HFS Incorporated
Current Report on Form 8-K/A dated March 26, 1997, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report dated
February 23, 1996, except for Notes 9 to 11, as to which the date is
February 7, 1997 and have been incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and the related financial statement
schedule of PHH Corporation and subsidiaries have been included elsewhere
herein or incorporated herein by reference from the PHH annual report on Form
10-K and 10-K/A, for the year ended April 30, 1996 in reliance upon the reports
of KPMG Peat Marwick LLP, independent auditors, included elsewhere herein or
incorporated herein by reference, given upon the authority of said firm as
experts in accounting and auditing. Their reports contain an explanatory
paragraph that states that PHH adopted the provisions of Statement of Financial
Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights,"
in 1996.
The consolidated balance sheets of Century 21 Real Estate Corporation (a
wholly-owned subsidiary of MetLife) and its subsidiaries as of December 31,
1994, 1993 and 1992 and the related consolidated statements of income,
stockholder's equity and cash flows for the years then ended, which appear in
the Form 8-K dated August 16, 1995, as amended August 18, 1995, of HFS
Incorporated (formerly Hospitality Franchise Systems, Inc.), are incorporated
herein by reference, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
HFS
Any proposals of HFS stockholders intended to be presented at HFS's 1997
Annual Meeting must have been received by HFS for inclusion in the proxy
statement and form of proxy relating to the meeting not later than November
30, 1996.
PHH
Any proposals of PHH stockholders intended to be presented at PHH's 1997
Annual Meeting must have been received by PHH for inclusion in the proxy
statement and form of proxy relating to the meeting not later than March 14,
1997.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PRO FORMA FINANCIAL STATEMENTS
Section A: Pro forma combining consolidated financial statements of HFS for the Merger
as of September 30, 1996 and for the year ended December 31, 1995 and each
of the nine months ended September 30, 1995 and 1996 .................... F-2-F-11
Section B: Pro Forma consolidated financial information of HFS excluding the Merger
as of September 30, 1996 and for the year ended December 31, 1995 and
for each of the nine month periods ended September 30, 1995 and 1996 .... F-12-F-45
Section C: Combining historical consolidated financial statements of HFS for the
Merger as of September 30, 1996 and 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.............................................. F-46-F-56
</TABLE>
HFS INCORPORATED
<TABLE>
<CAPTION>
<S> <C> <C>
The Consolidated Financial Statements and the related notes thereto of HFS as of
September 30, 1996 and for the years ended December 31, 1995, 1994 and 1993, and
the nine months (unaudited) ended September 30, 1996 and 1995.
o Independent Auditors' Report................................................... F-57
o Consolidated Balance Sheets.................................................... F-58
o Consolidated Statements of Income.............................................. F-59
o Consolidated Statements of Stockholders' Equity................................ F-60
o Consolidated Statements of Cash Flows.......................................... F-61
o Notes to Consolidated Financial Statements..................................... F-62-F-77
PHH CORPORATION
The Consolidated Financial Statements and the related notes thereto of PHH
Corporation for the years ended April 30, 1996, 1995 and 1994, and the six
months (unaudited) ended October 31, 1996 and 1995.
o Independent Auditors' Report................................................... F-78
o Consolidated Statements of Income.............................................. F-79
o Consolidated Balance Sheets.................................................... F-80
o Consolidated Statements of Cash Flows.......................................... F-81
o Consolidated Statements of Stockholders' Equity................................ F-82
o Notes to Consolidated Financial Statements..................................... F-83-F-101
</TABLE>
F-1
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED FINANCIAL STATEMENTS
FOR THE MERGER
The accompanying pro forma consolidated combining financial statements
give effect to the Merger, which will be accounted for as a pooling of
interests. Accordingly, the underlying pro forma combining consolidated
balance sheet as of September 30, 1996 and the pro forma combining
consolidated statements of income for the year ended December 31, 1995 and
the nine month periods ended September 30, 1995 and 1996 reflect the
combining of the historical financial results of PHH with the pro forma
financial results of HFS prior to HFS entering into the Merger Agreement. The
pro forma financial results of HFS include all of HFS's acquisitions prior to
the Merger Agreement, including the recent acquisitions of Avis and RCI.
The pro forma combining consolidated financial statements reflect
adjustments for the pooling of HFS and PHH, including reclassifications to
conform to the presentation expected to be used by the merged companies and
shares issued as consideration in connection with the Merger.
The pro forma financial statements include a one-time pre-tax
restructuring charge incurred in connection with the Merger. The charge
includes severance, facility consolidation and other transaction related
costs associated with the integration of HFS and PHH businesses. HFS
estimates the charge to be approximately $267 million before related income
tax benefits and is not aware of any other material merger related costs which
will be incurred in periods subsequent to the consummation date. HFS expects
this charge to result in annual pre-tax savings of approximately $100 million
with the full benefit of the cost reductions beginning in 1998.
The pro forma combining consolidated financial statements do not purport
to present the financial position or results of operations of HFS had the
acquisitions described in Section B occurred on the dates specified, nor are
they necessarily indicative of the operating results that may be achieved in
the future.
The pro forma combining consolidated financial statements are based on
certain assumptions and adjustments described in the Pro Forma Consolidated
Financial Information of HFS excluding the Merger, as set forth in Section B
herein, and should be read in conjunction therewith and with the consolidated
financial statements and related notes thereto of HFS and PHH and the Pro
Forma Consolidated Financial Information of HFS excluding the Merger included
elsewhere in this Joint Proxy Statement/Prospectus and the financial
statements and related notes thereto of certain of the acquired companies
previously filed with the SEC pursuant to Regulation S-X Rule 3.05,
"Financial Statements of Business Acquired or to be Acquired", which are
incorporated by reference in this Joint Proxy Statement/Prospectus.
TERMS OF THE MERGER
Approval of the share issuance by HFS stockholders and approval of the
proposed Merger by PHH stockholders are conditions to consummation of the
Merger.
In the Merger, each outstanding share of common stock of PHH, other than
PHH Common Stock held by PHH or held by HFS, will be converted into the right
to receive that fraction of a share of HFS Common Stock (the "Conversion
Number") represented by the number determined by dividing $49.50 by the
average price of HFS Common Stock over a period of twenty trading days
preceding the fifth trading day prior to the date of the special meeting of
stockholders of PHH (the "Pricing Period"); provided however that in no event
will such number be greater than 0.8250 or less than 0.6111. In addition, in
the Merger, shares of HFS Common Stock will be issued in exchange for the
currently outstanding options to purchase shares of PHH Common Stock.
F-2
<PAGE>
As a result of the conversion formula described above, if the average
price of HFS Common Stock during the Pricing Period is within the range of
$60.00 to $81.00, holders of PHH Common Stock will receive that fraction of a
share of HFS Common Stock having a value (based on the average price of such
shares during the Pricing Period) of $49.50 for each share of PHH Common
Stock (and the Conversion Number will fluctuate accordingly), but if the
average price of HFS Common Stock during the Pricing Period is less than
$60.00 or greater than $81.00, the Conversion Number will be fixed at 0.8250
or 0.6111, respectively, resulting in the issuance of a number of shares of
HFS Common Stock for each share of PHH Common Stock having a value (based on
the average price of such shares during the Pricing Period) less than or more
than $49.50, as the case may be. Based on the number of shares of PHH Common
Stock outstanding on the Record Date, the number of shares of HFS Common
Stock to be issued upon conversion of outstanding shares of PHH Common Stock
will be not less than approximately 21.3 million shares and not more than
approximately 28.8 million shares. (See "The Merger Agreement--General;
conversion of shares")
F-3
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED BALANCE SHEET PAGE 1 OF 2
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
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 .................. $ 100,751 $ 11,450 $ -- $ 112,201
Restricted cash............................. 89,849(A) 89,849
Relocation receivables ..................... 136,052 666,905 -- 802,957
Other accounts and notes receivable--net ... 148,082 442,951 (6,800)(A) 584,233
Other current assets ....................... 112,798 58,916 56,000(A) 227,714
------------ ------------ ------------- ------------
TOTAL CURRENT ASSETS ......................... 497,683 1,180,222 139,049 1,816,954
------------ ------------ ------------- ------------
Property and equipment-net .................. 253,893 92,846 (6,500)(A) 340,239
Franchise agreements--net ................... 1,027,711 -- -- 1,027,711
Excess of cost over fair value of
net assets acquired--net ................... 1,667,985 47,656 (22,500)(A) 1,693,141
Intangible assets ........................... 608,969 -- -- 608,969
Investment in car rental operating
company--net ............................... 75,000 -- -- 75,000
Deferred income taxes-net ................... 5,200 -- -- 5,200
Other assets ................................ 139,389 125,384 (7,300)(A) 257,473
------------ ------------ ------------- ------------
4,275,830 1,446,108 102,749 5,824,687
------------ ------------ ------------- ------------
ASSETS UNDER FLEET 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 and fees ......... -- 280,344 -- 280,344
------------ ------------ ------------- ------------
-- 4,438,469 -- 4,438,469
------------ ------------ ------------- ------------
TOTAL ASSETS ................................. $4,275,830 $5,884,577 $102,749 $10,263,156
============ ============ ============= ============
<FN>
- ------------
(1) Pro forma for all material transactions, excluding the Merger (See
Section B).
(2) The historical consolidated PHH balance sheet is as of October 31,
1996.
Note: Certain reclassifications have been made to the pro forma HFS and
historical PHH consolidated balance sheets to conform to the
presentation expected to be used by the merged companies.
</TABLE>
See Notes to pro forma combining consolidated financial statements.
F-4
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED BALANCE SHEET PAGE 2 OF 2
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
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 ..................... $ 438,639 $ 418,143 $ 76,651 (B) $ 933,433
Deferred revenue--net .................... 143,873 -- -- 143,873
Income taxes payable ..................... 81,633 -- -- 81,633
Accrued acquisition obligations .......... 68,844 -- 193,900 (A) 262,744
Current portion of long-term debt ....... 130,837 -- -- 130,837
------------ ------------- --------------- ------------
TOTAL CURRENT LIABILITIES .................. 863,826 418,143 270,551 1,552,520
------------ ------------- --------------- ------------
584,796 (C)
Long-term debt ........................... 830,099 -- 89,849 (A) 1,504,744
Deferred revenue ......................... 193,002 114,021 (76,651)(B) 230,372
Other non-current liabilities ............ 45,671 -- 30,000 (A) 75,671
Deferred income taxes .................... 42,400 -- (12,000)(A) 30,400
------------ ------------- --------------- ------------
1,974,998 532,164 886,545 3,393,707
------------ ------------- --------------- ------------
LIABILITIES UNDER FLEET MANAGEMENT
AND MORTGAGE PROGRAMS
Debt ..................................... -- 4,476,805 (584,796)(C) 3,892,009
Deferred income taxes .................... -- 221,700 -- 221,700
------------ ------------- --------------- ------------
-- 4,698,505 (584,796) 4,113,709
------------ ------------- --------------- ------------
STOCKHOLDERS' EQUITY:
Common stock--Issued and Outstanding; Pro
Forma HFS, 129,289; Historical PHH,
34,886 and Pro Forma Combined Companies,
between 150,608 and 158,070............... 1,293 99,820 (99,563)(D) 1,550
Additional paid-in capital ................ 2,093,303 -- 99,563 (D) 2,192,866
Retained earnings ......................... 206,236 568,400 (199,000)(A) 575,636
Foreign currency equity adjustment ....... -- (14,312) -- (14,312)
------------ ------------- --------------- ------------
TOTAL STOCKHOLDERS' EQUITY ................. 2,300,832 653,908 (199,000) 2,755,740
------------ ------------- --------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,275,830 $5,884,577 $ 102,749 $10,263,156
============ ============= =============== ============
<FN>
- ------------
(1) Pro forma for all material transactions, excluding the Merger (See
Section B).
(2) The historical consolidated PHH balance sheet is as of October 31,
1996.
Note: Certain reclassifications have been made to the pro forma HFS and
historical PHH consolidated balance sheets to conform to the
presentation expected to be used by the merged companies.
</TABLE>
See notes to pro forma combining consolidated financial statements.
F-5
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED 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 COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
------------ ------------ --------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ............................. $1,088,916 $ -- $ 203,390 (E) $1,292,306
Real estate services ..................... -- 250,154 -- 250,154
------------ ------------ --------------- -------------
Service fees, net ........................ 1,088,916 250,154 203,390 1,542,460
------------ ------------ --------------- -------------
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
------------ ------------ --------------- -------------
Mortgage Services......................... -- 173,787 -- 173,787
Amortization of mortgage servicing
rights and fees......................... -- -- (30,667)(G) (30,667)
Interest................................. -- -- (49,869)(I) (49,869)
------------ ------------ --------------- -------------
Mortgage services, net ................... -- 173,787 (80,536) 93,251
------------ ------------ --------------- -------------
Other .................................... 89,232 -- -- 89,232
Equity in loss of car rental operating
company.................................. (5,272) -- -- (5,272)
------------ ------------ --------------- -------------
Net revenues .............................. 1,172,876 842,470 (240,188) 1,775,158
------------ ------------ --------------- -------------
EXPENSES
Marketing and reservation ................ 274,331 -- -- 274,331
Selling, general and administrative (K) . 423,948 310,567 (29,692)(H) 704,823
Costs, including interest, of carrying
and reselling homes ..................... -- 125,925 (2,629)(H) 123,296
Direct costs of mortgage services ....... -- 60,498 (30,667)(G) 29,831
Depreciation and amortization ............ 130,767 -- 32,321 (H) 163,088
Interest ................................. 52,731 212,365 (159,652)(F) 55,575
(49,869)(I)
Other .................................... 18,779 -- 5,076 (K) 23,855
------------ ------------ --------------- -------------
Total expenses .......................... 900,556 709,355 (235,112) 1,374,799
------------ ------------ --------------- -------------
Income before income taxes ................ 272,320 133,115 (5,076) 400,359
Provision (benefit) for income taxes ..... 112,395 54,995 (2,096) 165,294
------------ ------------ --------------- -------------
Net income (K) ............................ $ 159,925 $ 78,120 $ (2,980) $ 235,065
============ ============ =============== =============
PER SHARE INFORMATION (PRIMARY)
Net Income (K)............................ $ 1.15 $ 2.25 $ 1.42 (J)
============ ============ =============
Weighted average common and common
equivalent shares outstanding............ 142,498 34,755 25,677 (J) 168,175 (J)
============ ============ =============== =============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (K)............................ $ 1.14 $ 2.24 $ 1.41 (J)
============ ============ =============
Weighted average common and common
equivalent shares outstanding ........... 144,335 34,951 25,822 (J) 170,157 (J)
============ ============ =============== =============
</TABLE>
(1) Pro forma for all material transactions, excluding the Merger (See
Section B).
(2) The historical consolidated statement of income of PHH is for the
twelve months ended January 31, 1996.
Note: Certain reclassifications have been made to the operating results of
pro forma HFS and historical PHH to conform to the presentation
expected to be used by the merged companies.
See notes to pro forma combining consolidated financial statements.
F-6
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL PRO FORMA COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ............................. $805,550 $ -- $ 150,028 (E) $ 955,578
Real estate services ..................... -- 190,451 -- 190,451
----------- ------------ --------------- ------------
Service fees, net ........................ 805,550 190,451 150,028 1,146,029
----------- ------------ --------------- ------------
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
----------- ------------ --------------- ------------
Mortgage Services......................... -- 124,144 -- 124,144
Amortization of mortgaging servicing
rights and fees......................... -- -- (18,981)(G) (18,981)
Interest................................. -- -- (35,342)(I) (35,342)
----------- ------------ --------------- ------------
Mortgage services, net.................... -- 124,144 (54,323) 69,821
----------- ------------ --------------- ------------
Other .................................... 62,535 -- -- 62,535
Equity in loss of car rental operating
company.................................. (5,096) -- -- (5,096)
----------- ------------ --------------- ------------
Net revenues .............................. 862,989 625,162 (171,696) 1,316,455
----------- ------------ --------------- ------------
EXPENSES
Marketing and reservation ................ 202,846 -- -- 202,846
Selling, general and administrative (K) . 308,475 232,698 (22,452)(H) 518,721
Costs, including interest, of carrying
and reselling homes ..................... -- 97,698 (2,088)(H) 95,610
Direct costs of mortgage services ....... -- 40,093 (18,981)(G) 21,112
Depreciation and amortization ............ 97,972 -- 24,540 (H) 122,512
Interest ................................. 40,115 154,638 (117,373)(F) 42,038
(35,342)(I)
Other .................................... 22,328 -- 3,807 (K) 26,135
----------- ------------ --------------- ------------
Total expenses .......................... 671,736 525,127 (167,889) 1,028,974
----------- ------------ --------------- ------------
Income before income taxes ................ 191,253 100,035 (3,807) 287,481
Provision (benefit) for income taxes ..... 78,935 41,397 (1,572) 118,760
----------- ------------ --------------- ------------
Net Income ................................ $112,318 $ 58,638 $ (2,235) $ 168,721
=========== ============ =============== ============
PER SHARE INFORMATION (PRIMARY)
Net Income (K) ........................... $ .83 $ 1.70 $ 1.04 (J)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding............ 139,315 34,484 25,477 (J) 164,792 (J)
=========== ============ =============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (K)............................ $ .82 $ 1.70 $ 1.03 (J)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding ........... 141,807 34,594 25,558 (J) 167,365 (J)
=========== ============ =============== ============
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the Merger (See
Section B).
(2) The historical consolidated statement of income of PHH is for the
nine months ended October 31, 1995.
Note: Certain reclassifications have been made to the operating results of
pro forma HFS and historical PHH to conform to the presentation
expected to be used by the merged companies.
See notes to pro forma combining consolidated financial statements.
F-7
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA COMBINING CONSOLIDATED 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 COMBINED
HFS (1) PHH (2) ADJUSTMENTS COMPANIES
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ............................. $917,473 $ -- $ 152,602 (E) $1,070,075
Real estate services ..................... -- 198,626 -- 198,626
----------- ------------ --------------- ------------
Service fees, net ........................ 917,473 198,626 152,602 1,268,701
----------- ------------ --------------- ------------
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
----------- ------------ --------------- ------------
Mortgage Services......................... -- 188,636 -- 188,636
Amortization of mortgage servicing
rights and fees ........................ -- -- (38,720)(G) (38,720)
Interest................................. -- -- (48,337)(I) (48,337)
----------- ------------ --------------- ------------
Mortgage services, net.................... -- 188,636 (87,057) 101,579
----------- ------------ --------------- ------------
Other .................................... 81,451 -- -- 81,451
Equity in earnings of car rental
operating company........................ 2,459 -- -- 2,459
----------- ------------ --------------- ------------
Net revenues .............................. 1,001,383 702,789 (207,461) 1,496,711
----------- ------------ --------------- ------------
EXPENSES
Marketing and reservation ................ 238,018 -- -- 238,018
Selling, general and administrative (K) . 317,822 249,693 (19,808)(H) 547,707
Costs, including interest, of carrying
and reselling homes ..................... -- 87,181 (1,370)(H) 85,811
Direct costs of mortgage services ....... -- 77,718 (38,720)(G) 38,998
Depreciation and amortization ............ 99,703 -- 21,178 (H) 120,881
Interest ................................. 36,930 169,933 (120,404)(F) 38,122
(48,337)(I)
Other .................................... 17,359 -- 3,807 (K) 21,166
----------- ------------ --------------- ------------
Total expenses .......................... 709,832 584,525 (203,654) 1,090,703
----------- ------------ --------------- ------------
Income before income taxes ................ 291,551 118,264 (3,807) 406,008
Provision (benefit) for income taxes ..... 120,331 48,253 (1,572) 167,012
----------- ------------ --------------- ------------
Net Income ................................ $171,220 $ 70,011 $ (2,235) $ 238,996
=========== ============ =============== ============
PER SHARE INFORMATION (PRIMARY)
Net Income (K) ........................... $ 1.18 $ 1.99 $ 1.40 (J)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding............ 147,470 35,211 26,014 (J) 173,484 (J)
=========== ============ =============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (K)............................ $ 1.18 $ 1.99 $ 1.39 (J)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding ........... 148,194 35,269 26,057 (J) 174,251 (J)
=========== ============ =============== ============
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the Merger (See
Section B).
(2) The historical consolidated statement of income of PHH is for the
nine months ended October 31, 1996.
Note: Certain reclassifications have been made to the operating results of
pro forma HFS and historical PHH to conform to the presentation
expected to be used by the merged companies.
See notes to pro forma combining consolidated financial statements.
F-8
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINING CONSOLIDATED
FINANCIAL STATEMENTS
A. RESTRUCTURING LIABILITY AND RESTRICTED CASH:
The pro forma adjustment reflects a liability established for
restructuring the HFS and PHH businesses, including involuntary termination
of employees, facility and system terminations, costs associated with exiting
certain activities, and merger related professional fees, based on
management's preliminary assessment of such actions to be taken:
<TABLE>
<CAPTION>
RESTRUCTURING
CHARGE
(IN MILLIONS)
----------------
BOOK TAX
BASIS BASIS
------- -------
<S> <C> <C>
Professional fees...................... $ 43 $ 20
Severance.............................. 109 74
Facility and system terminations ...... 44 44
Other transaction related costs ....... 71 37
------- -------
Restructuring charge, pre-tax.......... 267 175
Statutory tax rate..................... 38.9%
-------
Tax benefit (effective tax rate
25.5%)................................ 68 $ 68
------- -------
After-tax charge....................... $199
-------
</TABLE>
The restructuring charge includes the write-off or reserve of $43.1
million for impaired assets as a result of exiting certain activities and the
recording of deferred taxes ($56.0 million current and $12.0 million
non-current) associated with the charge. Also included in the restructuring
charge is the effect of $89.8 million of employee benefit related liabilities
which were required to be funded prior to consummation of the Merger. PHH
funded several grantor trusts in accordance with the Merger Agreement. This
amount is disclosed as restricted cash in the pro forma balance sheet.
B. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES:
The pro forma adjustment reclassifies advances from relocation clients
from deferred revenue to accounts payable and other accrued liabilities. This
adjustment is made to conform to the presentation expected to be used by the
merged companies.
C. LONG-TERM DEBT:
This pro forma adjustment reclassifies the portion of long-term debt
associated with real estate services activities from Liabilities under Fleet
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.
D. EQUITY:
The pro forma adjustment reflects a reclassification of equity in
connection with issuance of HFS common stock to the PHH stockholders.
E. FLEET MANAGEMENT:
The pro forma adjustment reclassifies fees charged for the management of
corporate fleets and for fee-based services to service fees such that fleet
rental revenue is reflected as fleet management revenue. 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 fleet leasing activities. This adjustment is made to conform to the
presentation expected to be used by the merged companies.
F-9
<PAGE>
G. AMORTIZATION EXPENSE -- MORTGAGE SERVICES:
The pro forma adjustment reclassifies the amortization of mortgage
servicing rights and fees from direct costs of mortgage services to mortgage
services revenue. This adjustment is made to conform to the presentation
expected to be used by the merged companies.
H. 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.
I. INTEREST EXPENSE -- MORTGAGE SERVICES:
The pro forma adjustment reclassifies interest expense on debt incurred to
finance mortgage servicing activities to mortgage services revenue. This
adjustment is made to conform to the presentation expected to be used by the
merged companies.
J. WEIGHTED AVERAGE SHARES AND NET INCOME PER SHARE:
The pro forma adjustment to weighted average common and common equivalent
shares outstanding reflects the number of shares of HFS common stock
estimated to be issued by HFS in connection with the Merger. Such amount was
estimated using an average HFS stock price of $67.00 per share, which was
calculated using a twenty day average price of HFS common stock from November
8, 1996 through December 6, 1996. The number of HFS shares to be issued is
based on a conversion formula which will be calculated based on the average
price of HFS common stock over the Pricing Period (a twenty day average),
within a range of $60 to $81 per share. At $67 per share the Conversion
Number would be .7388, which would result in the issuance of .7388 shares of
HFS common stock for every share of PHH common stock. The pro forma
adjustment was calculated by multiplying PHH's historical weighted average
shares outstanding by the Conversion Number using the assumed average HFS
stock price of $67 per share. The underlying table summarizes pro forma
weighted average shares and pro forma net income per share using the high and
low ends of the range and the assumed average of $67 per share used in these
Pro Forma Financial Statements.
<TABLE>
<CAPTION>
AVERAGE HFS STOCK PRICE
-------------------------------
$60.00 $67.00 $81.00
--------- --------- ---------
<S> <C> <C> <C>
PRO FORMA WEIGHTED AVERAGE SHARES (000'S)
For the year ended December 31, 1995
Primary..................................... 171,171 168,175 163,737
Fully Diluted............................... 173,170 170,157 165,694
For the nine months ended September 30, 1995
Primary..................................... 167,764 164,792 160,388
Fully Diluted............................... 170,347 167,365 162,947
For the nine months ended September 30, 1996
Primary..................................... 176,519 173,484 168,987
Fully Diluted............................... 177,291 174,251 169,747
PRO FORMA NET INCOME PER SHARE
For the year ended December 31, 1995
Primary..................................... $ 1.40 $ 1.42 $ 1.46
Fully Diluted............................... 1.38 1.41 1.45
For the nine months ended September 30, 1995
Primary..................................... $ 1.03 $ 1.04 $ 1.07
Fully Diluted............................... 1.01 1.03 1.06
For the nine months ended September 30, 1996
Primary..................................... $ 1.37 $ 1.40 $ 1.43
Fully Diluted............................... 1.37 1.39 1.43
</TABLE>
K. INTEREST ON GRANTOR TRUSTS.
The pro forma adjustment reflects the recording of interest expense on debt
incurred to fund the grantor trusts at an interest rate of 5.65% which is the
variable rate in effect on the date of borrowing. The effect on pro forma net
income and net income per share assuming a 1/8% variance in the variable
interest rate is immaterial.
F-10
<PAGE>
L. ESTIMATED SELLING, GENERAL AND ADMINISTRATIVE COST SAVINGS
In connection with HFS's acquisitions prior to the PHH Merger, HFS
developed related business plans to restructure each of the respective
acquired companies which result in cost savings subsequent to the
acquisitions. HFS's restructuring plans in each case were developed prior to
consummation of the respective acquisitions and were implemented concurrent
with the consummation of the acquisitions. Restructuring plans included the
involuntary termination and relocation of employees, the consolidation and
closing of facilities and the elimination of duplicative operating and
overhead activities. Pursuant to HFS's specific restructuring plans, certain
selling, general and administrative expenses may not be incurred subsequent
to each acquisition that existed prior to consummation. In addition, there
are incremental costs in the conduct of activities of the acquired companies
prior to the acquisitions that will not be incurred subsequent to
consummation and have no future economic benefit to HFS. The estimated cost
savings that HFS believes would have been attained had it's acquisitions
occurred on January 1, 1995 are detailed in Section B--Note N. The impact of
such cost savings on pro forma (for the Merger) net income and net income per
share are not reflected in the pro forma consolidated statements of income,
but are presented below ($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
FOR THE YEAR ENDED
SEPTEMBER 30,
DECEMBER 31, ----------------------
1995 1995 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Income before taxes as reported ..... $400,359 $287,481 $406,008
SG&A cost savings .................... 61,817 47,398 14,197
Income before taxes, as adjusted .... 462,176 334,879 420,205
Income taxes ......................... 193,235 140,171 174,479
------------------ ---------- ----------
Net income, as adjusted .............. $268,941 $194,708 $245,726
================== ========== ==========
Net Income Per Share (primary):
As adjusted ......................... $ 1.63 $ 1.20 $ 1.44
================== ========== ==========
As reported ......................... $ 1.42 $ 1.04 $ 1.40
================== ========== ==========
Net Income Per Share (fully diluted):
As adjusted ......................... $ 1.61 $ 1.18 $ 1.43
================== ========== ==========
As reported ......................... $ 1.41 $ 1.03 $ 1.39
================== ========== ==========
</TABLE>
F-11
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS
EXCLUDING THE 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 the November 1996 issuance of HFS
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 HFS common stock as partial
consideration for RCI. HFS 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 "Car Rental Operating Company")
in 1997, the proceeds of which will be used to pay down indebtedness of the
Car Rental Operating Company and to enter into franchise, information
technology and other agreements to provide services to the Car Rental
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 "Equity in earnings
in car rental operating company", respectively.
The pro forma consolidated 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 a newly created
independent trust (the "Trust") (the "Coldwell Banker Transaction"); (ii) the
receipt of proceeds from an offering of HFS' common stock (the "Second
Quarter 1996 Offering") to the extent necessary to fund (a) the acquisition
of Coldwell Banker and the related repayment of indebtedness and acquisition
expenses and (b) the cash consideration portion in the Avis acquisition;
(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 consolidated 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. HFS has entered into certain immaterial transactions
which are not reflected in the pro forma consolidated statements of
operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of HFS 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. The pro forma consolidated statements of operations do not
reflect cost savings and revenue enhancements that management believes may be
realized following the acquisitions. These cost savings are expected to be
realized primarily through the restructuring of operations as well as revenue
enhancements expected to be realized through leveraging of HFS's preferred
alliance 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
F-12
<PAGE>
should be read in conjunction therewith and with the consolidated financial
statements and related notes thereto of HFS included elsewhere in this Joint
Proxy Statement/Prospectus and the financial statements and related notes of
the acquired companies previously filed with the Securities and Exchange
Commission pursuant to Regulation S-X Rule 3-05, "Financial Statements of
Businesses Acquired or to be Acquired" which are incorporated by reference in
this Joint Proxy Statement/Prospectus.
F-13
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------
AVIS,
HFS AS ADJUSTED (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 $(410,742) $ (48,771) $ 100,751
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 -- 29,000 112,798
------------ --------------- ---------- ------------ ----------- ------------
TOTAL CURRENT ASSETS .... 779,502 3,681 329,612 (410,742) (204,370) 497,683
------------ --------------- ---------- ------------ ----------- ------------
Property and
equipment--net......... 106,233 33,828 87,785 58,172 (32,125) 253,893
Franchise
agreements--net........ 1,027,711 -- -- -- -- 1,027,711
Excess of cost over
fair value of net
assets acquired-net ... 906,540 317,600 -- -- 443,845 1,667,985
Intangible assets....... -- 181,543 -- 327,426 100,000 608,969
Investment in car
rental operating
company--net........... -- 72,616 -- 2,384 -- 75,000
Deferred income
taxes--net............. -- -- -- 5,200 -- 5,200
Other assets............ 80,064 59,633 40,936 (9,614) (31,630) 139,389
------------ --------------- ---------- ------------ ----------- ------------
TOTAL ASSETS............. $2,900,050 $668,901 $458,333 $ (27,174) $ 275,720 $4,275,830
============ =============== ========== ============ =========== ============
</TABLE>
- ------------
(1) The consolidated historical balance sheet of Avis Inc., as adjusted
is as of August 31, 1996. See Consolidated Historical Balance Sheet
of Avis, Inc., as adjusted, as of August 31, 1996.
Note: Certain reclassifications have been made to the historical HFS, Avis
and RCI consolidated balance sheets to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-14
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
AVIS,
HFS AS ADJUSTED (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 $ 201,954 $ 76,328 $ -- $ -- $ 438,639
Deferred revenue................... 24,655 -- 119,218 -- -- 143,873
Income taxes payable............... 81,633 182 -- (182) -- 81,633
Accrued acquisition obligations ... 40,287 -- -- 18,000 10,557 68,844
Current portion of long-term debt . 29,907 -- -- 100,930 -- 130,837
------------ --------------- ---------- ----------- ---------- -----------
TOTAL CURRENT LIABILITIES............ 336,839 202,136 195,546 118,748 10,557 863,826
------------ --------------- ---------- ----------- ---------- -----------
Long-term debt...................... 541,563 -- 3,536 -- 285,000 830,099
Deferred revenue.................... 7,299 -- 185,703 -- -- 193,002
Other non-current liabilities ...... 23,960 -- 1,711 -- 20,000 45,671
Deferred income taxes............... 85,400 -- -- -- (43,000) 42,400
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--issued and
outstanding; HFS Historical,
123,720 and Pro Forma, 129,289 .... 1,237 290 -- (244) 10 1,293
Additional paid-in capital ......... 1,705,541 220,401 6,392 100,396 60,573 2,093,303
Retained earnings .................. 206,236 103,339 34,864 (103,339) (34,864) 206,236
Treasury stock...................... (8,025) (102,269) -- 102,269 8,025 --
Net unrealized gain on available
for sale securities................ -- -- 20,784 -- (20,784) --
Foreign currency equity adjustment -- 2,874 9,797 (2,874) (9,797) --
------------ --------------- ---------- ----------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY........... 1,904,989 356,635 71,837 (35,792) 3,163 2,300,832
------------ --------------- ---------- ----------- ---------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY............ $2,900,050 $ 668,901 $458,333 $ (27,174) $275,720 $4,275,830
============ =============== ========== =========== ========== ===========
</TABLE>
- ------------
(1) The consolidated historical balance sheet of Avis, Inc., as adjusted
is as of August 31, 1996. See Consolidated Historical Balance Sheet
of Avis, Inc., as adjusted, as of August 31, 1996.
Note: Certain reclassifications have been made to the historical HFS Avis
and RCI consolidated balance sheets to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-15
<PAGE>
SECTION B
CONSOLIDATED HISTORICAL BALANCE SHEET
OF AVIS, INC., AS ADJUSTED
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 . -- 72,616 72,616
Other assets .................................... 85,368 (25,735) 59,633
------------- ---------------- -------------
TOTAL............................................ $3,782,551 $(3,113,650) $ 668,901
============= ================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other ..................... $ 444,867 $ (242,731) $ 202,136
------------- ---------------- -------------
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 $(3,113,650) $ 668,901
============= ================ =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
balance sheet of Avis, Inc. is to present the historical net assets
of car rental operations as "Investment in car rental operating
company -net" as a result of HFS' plan to undertake an initial
public offering of a majority interest in the corporation which owns
all company owned Avis car rental operations.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-16
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ....................... $369,442 $1,141,338 $ 25,950 (C) $1,088,916
(535,207)(D)
87,393 (F)
Other .............................. 43,541 67,163 (4,421)(D) 89,232
(17,051)(E)
Equity in loss of car rental
operating company ................. -- -- (5,272)(F) (5,272)
----------- ------------ --------------- ------------
Net revenues ...................... 412,983 1,208,501 (448,608) 1,172,876
----------- ------------ --------------- ------------
EXPENSES
Marketing and reservation........... 143,965 130,366 274,331
Selling, general and
administrative (N)................. 78,232 871,592 (4,500)(G) 423,948
(521,376)(H)
Depreciation and amortization ..... 30,857 64,784 35,126 (I) 130,767
Interest ........................... 21,789 12,553 18,389 (J) 52,731
Other .............................. 3,235 17,143 (1,599)(K) 18,779
----------- ------------ --------------- ------------
Total expenses .................... 278,078 1,096,438 (473,960) 900,556
----------- ------------ --------------- ------------
Income before income taxes .......... 134,905 112,063 25,352 272,320
Provision for income taxes .......... 55,175 36,491 20,729 (L) 112,395
----------- ------------ --------------- ------------
Net income .......................... $ 79,730 $ 75,572 $ 4,623 $ 159,925
=========== ============ =============== ============
PER SHARE INFORMATION (PRIMARY)
Net income (N) ..................... $ .74 $ 1.15
=========== ============
Weighted average common and common
equivalent shares outstanding .... 113,817 28,681 (M) 142,498
=========== ============ =============== ============
PER SHARE INFORMATION (FULLY
DILUTED)
Net income (N)...................... $ .73 $ 1.14
=========== ============
Weighted average common and common
equivalent shares outstanding .... 115,654 28,681 (M) 144,335
=========== =============== ============
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results
of HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-17
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF INCOME
OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
AVIS, (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
------------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ....................... $ 49,322 $278,132 $679,137 $134,747 $1,141,338
Other .............................. -- 17,051 20,264 29,848 67,163
------------- ---------- ----------- -------------- ------------
Net revenues ...................... 49,322 295,183 699,401 164,595 1,208,501
------------- ---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation........... -- 130,366 -- -- 130,366
Selling, general and
administrative..................... 34,919 91,757 616,182 128,734 871,592
Depreciation and amortization ..... 19,683 14,193 22,425 8,483 64,784
Interest ........................... 461 536 5,329 6,227 12,553
Other .............................. 410 1,976 -- 14,757 17,143
------------- ---------- ----------- -------------- ------------
Total expenses .................... 55,473 238,828 643,936 158,201 1,096,438
------------- ---------- ----------- -------------- ------------
Income (loss) before income taxes .. (6,151) 56,355 55,465 6,394 112,063
Provision for income taxes .......... 4,100 4,464 24,385 3,542 36,491
------------- ---------- ----------- -------------- ------------
Net income (loss) ................... $(10,251) $ 51,891 $ 31,080 $ 2,852 $ 75,572
============= ========== =========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of income of Avis, as
adjusted, has been adjusted to present only the historical operating
results intended to be retained by HFS. The historical consolidated
statement of income of Avis, Inc., as adjusted is for the year ended
February 29, 1996. See Historical Consolidated Statement of Income
of Avis, Inc., as Adjusted, for the year ended February 29, 1996.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-18
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF INCOME
OF AVIS, INC., AS ADJUSTED
FOR THE YEAR ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
--------------------------------
ELIMINATION OF
CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES........................... $1,716,677 $(21,608) $(1,695,069) $ --
Service fees ..................... -- 49,322 -- 49,322
------------- ---------------- -------------- -------------
Net revenues .................... 1,716,677 27,714 (1,695,069) 49,322
------------- ---------------- -------------- -------------
EXPENSES
Selling, general and
admnistrative ................... 1,119,888 10,849 (1,095,818) 34,919
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 27,714 (1,653,869) 55,473
------------- ---------------- -------------- -------------
Income (loss) before income taxes 35,049 -- (41,200) (6,151)
Provision for income taxes ........ 23,977 -- (19,877) 4,100
------------- ---------------- -------------- -------------
Net income (loss) ................. $ 11,072 $ -- $ (21,323) $(10,251)
============= ================ ============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present reservation and
information technology service revenues as "Service fees" and to
record the intercompany charge (at cost) for such services rendered
under a pre-existing agreement (both revenue and expense) from Avis,
as adjusted, to Car Rental Operating Company. The elimination of the
Car Rental Operating Company is presented as a result of HFS's plan
to undertake an initial public offering of a majority interest of 75
percent in the corporation which owns all company-owned Avis car
rental operations (the "IPO Company"). HFS intends to substantially
replace results of car rental operations with license fees from the
IPO Company.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-19
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
CCI (1) CENTURY 21 (1) NORS TRAVELODGE ERA (2) TOTAL
------- -------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ..................... $ -- $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>
- ------------
(1) Reflects results of operations for the period from January 1, 1995
to the respective dates of acquisition.
(2) Reflects the historical statement of operations of Electronic Realty
Associates Inc. ("ERA Inc."). The financial statements which were
audited for the year ended December 31, 1995 were those of
Electronic Realty Associates LP ("ERA LP") which differ from the ERA
Inc. financial statements. The difference is primarily attributable
to (i) the home warranty business which was acquired by HFS but is
excluded from the audited financial statements of ERA LP; and (ii)
an intercompany charge to ERA LP by ERA Inc. Net revenues, total
expenses and net loss of ERA LP for the year ended December 31, 1995
were $39.4 million, $47.3 million and $7.9 million, respectively.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statement of
operations.
F-20
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
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 ................................................... $805,550 $ 917,473
Other .......................................................... 62,535 81,451
Equity in earnings (loss) of car rental operating company ..... (5,096) 2,459
---------- ----------
Net revenues .................................................. 862,989 1,001,383
---------- ----------
EXPENSES
Marketing and reservation....................................... 202,846 238,018
Selling, general and administrative ............................ 308,475 317,822
Depreciation and amortization .................................. 97,972 99,703
Interest ....................................................... 40,115 36,930
Other .......................................................... 22,328 17,359
---------- ----------
Total expenses ................................................ 671,736 709,832
---------- ----------
Income before income taxes ...................................... 191,253 291,551
Provision for income taxes ...................................... 78,935 120,331
---------- ----------
Net income (N) .................................................. $112,318 $171,220
========== ==========
PER SHARE INFORMATION (PRIMARY)
Net income...................................................... $ .83 $ 1.18
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 139,315 147,470
========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Net income ..................................................... $ .82 $ 1.18
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 141,807 148,194
========== ==========
</TABLE>
See notes to pro forma consolidated balance sheet and statements of
operations.
F-21
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees............................ $268,862 $867,906 $ 19,508 (C) $805,550
(411,795)(D)
61,069 (F)
Other .................................. 30,869 45,051 (13,385)(E) 62,535
Equity in loss of car rental operating
company ............................... -- -- (5,096) (F) (5,096)
---------- ----------- -------------- -----------
Net revenues .......................... 299,731 912,957 (349,699) 862,989
---------- ----------- -------------- -----------
EXPENSES
Marketing and reservation .............. 110,842 92,004 -- 202,846
Selling, general and administrative
(N)..................................... 47,700 657,744 (3,375)(G) 308,475
(393,594)(H)
Depreciation and amortization .......... 21,721 52,566 23,685 (I) 97,972
Interest ............................... 16,272 8,135 15,708 (J) 40,115
Other .................................. 2,012 21,018 (702)(K) 22,328
---------- ----------- -------------- -----------
Total expenses ........................ 198,547 831,467 (358,278) 671,736
---------- ----------- -------------- -----------
Income before income taxes .............. 101,184 81,490 8,579 191,253
Provision for income taxes .............. 41,820 21,624 15,491 (L) 78,935
---------- ----------- -------------- -----------
Net income (loss)........................ $ 59,364 $ 59,866 $ (6,912) $112,318
========== =========== ============== ===========
PER SHARE INFORMATION (PRIMARY)
Net income (N) ......................... $ .57 $ .83
========== ===========
Weighted average common and common
equivalent shares outstanding ......... 109,564 29,751 (M) 139,315
========== ============== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N).......................... $ .56 $ .82
========== ===========
Weighted average common and common
equivalent shares outstanding ......... 112,056 29,751 (M) 141,807
========== =========== ============== ===========
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results
of HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-22
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
AVIS, (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
------------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ........................ $32,501 $209,242 $513,483 $112,680 $867,906
Other ............................... -- 13,385 3,972 27,694 45,051
------------- ---------- ---------- -------------- ------------
Net revenues ....................... 32,501 222,627 517,455 140,374 912,957
------------- ---------- ---------- -------------- ------------
EXPENSES
Marketing and reservation ........... -- 92,004 -- -- 92,004
Selling, general and administrative 26,249 62,530 458,785 110,180 657,744
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 ..................... 40,502 174,204 480,959 135,802 831,467
------------- ---------- ---------- -------------- ------------
Income (loss) before income taxes ... (8,001) 48,423 36,496 4,572 81,490
Provision for income taxes ........... 18 1,940 16,422 3,244 21,624
------------- ---------- ---------- -------------- ------------
Net income (loss) .................... $(8,019) $ 46,483 $ 20,074 $ 1,328 $ 59,866
============= ========== ========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of operations of Avis, as
adjusted, has been adjusted to present only the historical operating
results intended to be retained by HFS. The historical consolidated
statement of operations of Avis, Inc., as adjusted, is for the nine
months ended August 31, 1995. See Historical Consolidated Statement
of Operations of Avis, Inc., as Adjusted, for the nine months ended
August 31, 1995.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-23
<PAGE>
SECTION B
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>
ADJUSTMENT
---------------------------------
ELIMINATION
OF CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED
------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES ............................. $1,190,189 $(13,358) $(1,176,831) $ --
Service fees......................... -- 32,501 -- 32,501
------------ ---------------- --------------- -------------
Net revenues........................ 1,190,189 19,143 (1,176,831) 32,501
------------ ---------------- --------------- -------------
EXPENSES
Selling, general and administrative 766,509 19,143 (759,403) 26,249
Depreciation and amortization ...... 304,339 -- (290,086) 14,253
Interest ............................ 105,379 -- (105,379) --
Other ............................... 311 -- (311) --
------------ ---------------- --------------- -------------
Total expenses ..................... 1,176,538 19,143 (1,155,179) 40,502
------------ ---------------- --------------- -------------
Income (loss) before income taxes ... 13,651 -- (21,652) (8,001)
Provision for income taxes ........... 21,644 -- 21,626 18
------------ ---------------- --------------- -------------
Net loss ............................. $ (7,993) $ -- $ (26) $(8,019)
============ ================ =============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present reservation and
information technology service revenues as "Service fees" and to
record the intercompany charge (at cost) for such services rendered
under a pre-existing agreement (both revenue and expense) from Avis,
as adjusted to Car Rental Operating Company. The elimination of the
Car Rental Operating Company is presented as a result of HFS's plan
to undertake an initial public offering of a majority interest of 75%
in the corporation which owns all company-owned Avis car rental
operations (the "IPO Company"). HFS intends to substantially replace
results of car rental operations with license fees from the IPO
Company.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-24
<PAGE>
SECTION B
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 .................... $ -- $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>
- ------------
(1) Reflects results of operations for the period from January 1, 1995
to the respective dates of acquisition.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statement of
operations.
F-25
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................... $468,277 $597,204 $ 11,835 (C) $917,473
(235,625)(D)
75,782 (F)
Other ................................. 81,733 20,559 (6,000)(F) 81,451
(14,841)(E)
Equity in earnings of car rental
operating company .................... -- -- 2,459 (F) 2,459
---------- ----------- --------------- -----------
Net revenues ......................... 550,010 617,763 (166,390) 1,001,383
---------- ----------- --------------- -----------
EXPENSES
Marketing and reservation ............. 130,728 107,290 -- 238,018
Selling, general and administrative
(N)................................... 139,709 447,280 (41,804)(G) 317,822
(227,363)(H)
Depreciation and amortization ......... 41,129 37,041 21,533 (I) 99,703
Interest .............................. 22,194 4,993 9,743 (J) 36,930
Other ................................. 10,988 6,716 (345)(K) 17,359
---------- ----------- --------------- -----------
Total expenses ....................... 344,748 603,320 (238,236) 709,832
---------- ----------- --------------- -----------
Income before income taxes ............. 205,262 14,443 71,846 291,551
Provision for income taxes ............. 82,630 (7,966) 45,667 (L) 120,331
---------- ----------- --------------- -----------
Net income (N) ......................... $122,632 $ 22,409 $ 26,179 $171,220
========== =========== =============== ===========
PER SHARE INFORMATION (PRIMARY)
Net income (N)......................... $ .96 $ 1.18
========== ===========
Weighted average common and common
equivalent shares outstanding......... 130,960 16,510 (M) 147,470
========== =============== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N)......................... $ .96 $ 1.18
========== ===========
Weighted average common and common
equivalent shares outstanding ........ 131,684 16,510 (M) 148,194
========== =============== ===========
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results of
HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statement of
operations.
F-26
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED 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......................... $54,871 $236,505 $295,478 $10,350 $597,204
Other ............................... -- 14,841 4,067 1,651 20,559
------------- ---------- ----------- -------------- ------------
Net revenues ....................... 54,871 251,346 299,545 12,001 617,763
------------- ---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation ........... -- 107,290 -- -- 107,290
Selling, general and administrative . 48,173 75,524 312,348 11,235 447,280
Depreciation and amortization ...... 14,247 13,352 9,021 421 37,041
Interest ............................ -- 345 3,155 1,493 4,993
Other ............................... -- 5,440 512 764 6,716
------------- ---------- ----------- -------------- ------------
Total expenses ..................... 62,420 201,951 325,036 13,913 603,320
------------- ---------- ----------- -------------- ------------
Income (loss) before income taxes ... (7,549) 49,395 (25,491) (1,912) 14,443
Provision (benefit) for income taxes 96 2,370 (10,432) -- (7,966)
------------- ---------- ----------- -------------- ------------
Net income (loss) .................... $(7,645) $ 47,025 $(15,059) $(1,912) $ 22,409
============= ========== =========== ============== ============
</TABLE>
- ------------
(1) The historical financial statement of income of Avis, as adjusted,
has been adjusted to include the historical operating results of
Avis intended to be retained by HFS and the operating results of the
Avis Car rental subsidiary, included in Other Revenue. The
historical consolidated statement of income of Avis, Inc., as
adjusted is for the nine months ended August 31, 1996. 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.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform to HFS's classification.
See notes to pro forma consolidated balance sheet and statement of
operations.
F-27
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF INCOME
OF AVIS, INC., AS ADJUSTED
FOR THE NINE MONTHS ENDED AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
ELIMINATION
OF CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATIONS COMPANY AS ADJUSTED
------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES ............................ $1,490,709 (26,871) $(1,463,838) $ --
Service fees........................ -- 54,871 54,871
------------ ----------------- --------------- -------------
Net revenues....................... 1,490,709 28,000 (1,463,838) 54,871
------------ ----------------- --------------- -------------
EXPENSES
Selling, general and administrative 975,769 28,000 (955,596) 48,173
Depreciation and amortization ..... 333,147 -- (318,900) 14,247
Interest ........................... 116,958 -- (116,958) --
Other .............................. 18 -- (18) --
------------ ----------------- --------------- -------------
Total expenses .................... 1,425,892 28,000 (1,391,472) 62,420
------------ ----------------- --------------- -------------
Income (loss) before income taxes .. 64,817 -- (72,366) (7,549)
Provision for income taxes .......... 29,966 -- (29,870) 96
------------ ----------------- --------------- -------------
Net income (loss).................... $ 34,851 -- $ (42,496) $(7,645)
============ ================= =============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present reservation and
information technology service revenues as "Service fees" and to
record the intercompany charge (at cost) for such services rendered
under a pre-existing agreement (both revenue and expense) from Avis,
as adjusted, to Car Rental Operating Company. The elimination of the
Car Rental Operating Company is presented as a result of HFS's plan
to undertake an initial public offering of a majority interest of 75
percent in the corporation which owns all company-owned Avis car
rental operations (the "IPO Company"). HFS intends to substantially
replace results of car rental operations with license fees from the
IPO Company.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-28
<PAGE>
SECTION B
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........................ $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>
- ------------
(1) Reflects results of operations for the period from January 1, 1996
to the respective date of acquisition.
Note: Certain reclassifications have been made to the historical results of
Other 1996 Acquisitions to conform to HFS's classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
F-29
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. ACQUISITION OF AVIS:
At the time HFS acquired Avis, it had developed and announced a plan (the
"Plan") to do the following:
1. Retain certain assets acquired, including the reservation system,
franchise agreements, trademarks and tradenames and certain
liabilities.
2. Segregate the assets used in the car rental operations in a separate
subsidiary ("Car Rental Operating Company") and to dispose of
approximately 75% interest in Car Rental Operating Company within one
year through an initial public offering (IPO) of Car Rental Operating
Company.
3. Enter into a license agreement with Car Rental Operating Company for
use of the trademarks and tradename and other franchise services.
Based on the Plan, the purchase price for Avis has been allocated to the
assets and liabilities acquired by HFS, including its investment in Car
Rental Operating Company based on their estimated fair values. The amount
allocated to Car Rental Operating Company was based on the estimated
valuation of the Car Rental Operating Company including the effect of
royalty, reservation and information technology agreements with HFS. Under
the plan, the Car Rental Operating Company will sell approximately a 75%
interest at an assumed price of $225 million thereby diluting HFS' interest
to 25%. All of the proceeds from the IPO will be retained by the Car Rental
Operating Company. 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) ........................................... $ 410,742
Issuance of approximately 4.6 million shares HFS common stock .... 320,843
ESOP liability (ii) .............................................. 100,930
-----------
TOTAL PRO FORMA ACQUISITION COST.................................. 832,515
-----------
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 (iii)............................ 5,200
Property and equipment (iv) .................................... 58,172
Investment in Car Rental Operating Company (v).................. 2,384
Accrued acquisition obligations (vi)............................ (18,000)
Other........................................................... 182
-----------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED.................... 5,946
-----------
Intangible assets--Avis (vii).................................... $ 826,569
===========
</TABLE>
F-30
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF AVIS: (Continued)
In connection with the Company's fair value allocation of net assets to
the Car Rental Operating Company, the estimated net worth of the Car Rental
Operating Company was valued at $75 million. Such net worth and corresponding
company investment in the Car Rental Operating Company was allocated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net book value of car rental operating
company................................................. $72,616
Fair value adjustments to car rental operating company .. 2,384
---------
$75,000
=========
</TABLE>
The condensed balance sheet of the Car Rental Operating Company including
fair value adjustments at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Vehicles.............................................. $ 2,567,517
Property and equipment................................ 101,000
Deferred tax asset.................................... 102,000
Excess of cost over fair value of net assets
acquired............................................. 154,000
Debt.................................................. (2,488,651)
Property liability and property damage................ (215,135)
Other, net............................................ (145,731)
-------------
Stockholder's equity.................................. $ 75,000
=============
</TABLE>
HFS' investment in Car Rental Operating Company of $75 million represents
the estimated value of its 100% interest in the Car Rental Operating Company
at the date of acquisition and is accounted for under the equity method since
HFS' control is temporary based on the planned IPO of the Car Rental
Operating Company. If the IPO is not consummated within one year of HFS'
acquisition of Avis, HFS will consolidate Car Rental Operating Company. Upon
completion of the IPO, the value of the Car Rental Operating Company is
expected to increase to $300 million (with the $225 million of IPO proceeds
retained by the Car Rental Operating Company) with HFS' interest at 25% equal
to $75 million, its current investment balance. If the results of the IPO do
not confirm the preliminary purchase price allocation for the investment in the
Car Rental Operating Company, then such investment will be adjusted with a
corresponding adjustment to Excess of cost over fair value of net assets
acquired.
- ------------
(i) Cash consideration of $367.2 million was financed by the Second
Quarter 1996 Offering. Cash consideration also includes: (a) a cash
payment of $17.6 million made to General Motors Corporation ("GM"),
representing the amount by which the value attributable under the
Stock Purchase Agreement to the HFS Common Stock received by GM in
the Avis Acquisition exceeded the proceeds realized upon the
subsequent sale of such HFS Common Stock; and (b) payment of $26
million credit facility termination fees which were not at the
Company's discretion since the facility termination resulted from
change of control provisions and/or the elimination of the ESOP in
connection with the Avis acquisition.
(ii) The ESOP liability bears interest at LIBOR plus 20 basis points for a
period commencing on the acquisition date to maturity which is
primarily the earlier of three days after the sale of Company shares
issued to the ESOP or the first anniversary of the acquisition.
(iii) 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.
(iv) The adjustment to property and equipment is primarily attributable to
the values ascribed to reservation equipment and related assets and
to the Avis headquarters office in excess of historical cost.
(v) The adjustment to investment in car rental operating company reflects
the net effect of push-down accounting adjustments which result in a
$75 million fair value of the car rental operating company.
F-31
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF AVIS: (Continued)
(vi) Accrued acquisition obligations consist of professional fees ($3.7
million), investment banker fees ($8.0 million) and filing fees and
other ($6.3 million).
(vii) Intangible assets retained by HFS consist of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Avis trademark ........................................ $400.0
Reservation system and customer database .............. 109.0
Excess of cost over fair value of net assets acquired 317.6
-------------
$826.6
=============
</TABLE>
The pro forma adjustments include the elimination of Avis stockholders'
equity and the issuance of approximately 4.6 million shares of HFS's common
stock to finance the acquisition.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------
($000'S)
-----------------------------------------------
ISSUANCE OF ELIMINATON OF ADJUSTMENT TO
HFS 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................ 320,797 (220,401) 100,396
Retained earnings......................... -- (103,339) (103,339)
Treasury stock............................ -- 102,269 102,269
Foreign currency equity adjustment ....... -- (2,874) (2,874)
------------- --------------- ---------------
$320,843 $ 356,635 $ (35,792)
============= =============== ===============
</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.
HFS acquired RCI for the following consideration (000's):
<TABLE>
<CAPTION>
<S> <C> <C>
Cash consideration paid by HFS (i) ................................ $ 285,000
Issuance of approximately one million shares of HFS common stock . 75,000
-----------
HFS investment in RCI.............................................. $360,000
Existing cash and securities retained by RCI shareholders (ii) ... 265,000
-----------
Total consideration received by RCI shareholder ................... 625,000
===========
Fair value of net assets acquired:
Historical book value of RCI ...................................... 71,837
Elimination of cash and securities retained by RCI shareholder
(ii) ............................................................. (265,000)
Fair value adjustment to assets acquired and liabilities assumed:
Deferred income taxes--current (iv) .............................. 29,000
Property and equipment (iii) ..................................... (32,125)
Deferred income taxes--non-current (iv) .......................... 43,000
Customer lists ................................................... 100,000
Accrued acquisition obligations:
--current........................................................ (10,557)
--non-current.................................................... (20,000)
-----------
Fair value of net liabilities assumed .............................. (83,845)
----------
Excess of cost over fair value on net assets acquired ............. $443,845
==========
</TABLE>
F-32
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
B. ACQUISITION OF RCI: (Continued)
------------
(i) Cash consideration paid by HFS was financed with borrowings under
HFS's Revolving Credit Facilities.
(ii) Prior to the closing of the RCI acquisition, the former shareholder
of RCI retained, in the form of a dividend, cash and securities from
the RCI business comprised of $48.8 million in cash, $184.6 million
in short-term securities and $31.6 million in long-term securities.
(iii) Primarily comprised of write-off of $24.1 million of capitalized
costs associated with an information technology project terminated as
of the acquisition date and an $8 million write-down of building and
building improvements based upon fair market appraisals.
(iv) The pro forma adjustment to deferred income taxes reflects deferred
tax assets that will be recognized upon termination of RCI's
Subchapter S Corporation status for the temporary differences between
fair value of unearned income liabilities assumed and their
respective income tax bases. Prior to the acquisition, RCI was a
Subchapter S Corporation for tax purposes, therefore it had not
recorded any tax liabilities.
(v) HFS has recorded liabilities for charges to be incurred in connection
with the restructuring of RCI operations. At the date of acquisition,
November 12, 1996, HFS had formulated a preliminary plan that would
result in the consolidation of facilities, involuntary termination
and relocation of employees, and elimination of duplicative operating
and overhead activities. The plan is in the early stages and is
expected to be substantially complete in late 1997. The accrued
acquisition liability recorded as part of the purchase price
allocation consists of $9.9 million of personnel related costs, $6.9
million of facility related costs, $6.2 million of transaction costs
and $7.5 million of other costs. In connection with the
restructuring, HFS expects the reduction of approximately 250
employees.
(vi) Excess of cost over fair value of net assets acquired for pro forma
balance sheet purposes is derived from the net book value of RCI at
September 30, 1996. This differs from the excess of cost over fair
value of net assets acquired determined at date of acquisition which
is derived from the net book value at such date. The excess of cost
over fair value of net assets acquired at date of acquisition of
$477.7 million is used as the basis for adjustments in the pro forma
statements of income (see Note I) for the year ended December 31,
1995 and nine month periods ended September 30, 1995 and 1996,
respectively.
<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 (6,392) 60,573
Retained earnings.................................... -- (34,864) (34,864)
Treasury stock....................................... 8,025 -- 8,025
Net unrealized gain on available for sale
securities.......................................... -- (20,784) (20,784)
Foreign currency equity adjustment................... -- (9,797) (9,797)
------------- -------------- ---------------
$75,000 $(71,837) $ 3,163
============= ============== ===============
</TABLE>
The pro forma adjustments include the elimination of RCI stockholders'
equity and the issuance of approximately one million shares of HFS's common
stock as partial consideration for RCI.
F-33
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
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 (offset against SG&A expense--see Note G) 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>
The Franchise fees from the Owned Brokerage Business, which is based on
the franchise contracts with the Trust, is calculated at a net of
approximately 5.7% of gross commissions earned by the Owned Brokerage
Business on sales of real estate properties. Gross commissions earned by the
Owned Brokerage Business were $535.2 million, $411.8 million and $235.6
million for the year ended December 31, 1995, for the nine months ended
September 30, 1995 and for the five months ended May 31, 1996 (January 1
through date of acquisition).
D. OWNED BROKERAGE BUSINESS REVENUE:
The pro forma adjustment reflects the elimination of revenue generated
from Coldwell Banker's 318 formerly owned brokerage offices. HFS 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. OTHER REVENUE:
The pro forma adjustment reflects the elimination of revenue associated
with investment income generated from RCI cash and marketable securities
which were issued in the form of a dividend to the former shareholder prior
to consummation of the RCI acquisition.
F-34
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
F. CAR RENTAL OPERATING COMPANY OPERATIONS:
The pro forma adjustments are comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------
1995 1995 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Historical income before taxes from Car Rental
Operating Company............................. $ 41,200 $ 21,652 $ 72,366
ADJUSTMENTS TO CAR RENTAL OPERATING COMPANY:
Elimination of historical expense associated
with:
Long-term incentive compensation plans
eliminated in connection with the Avis
Acquisition ................................. $ 4,700 -- $ 9,302
Depreciation and amortization ................ 31,869 $ 23,208 26,120
Addition of pro forma expenses associated
with:
Depreciation and amortization (i) ............ (18,279) (13,709) (13,709)
Increased financing costs (ii) ................ (8,004) 10,286 (4,714) 4,785 (1,549) 20,164
---------- ---------- ----------
HFS SERVICE FEE ADJUSTMENT:
Service fees from franchised locations (iii) (18,366) (13,180) (14,748)
Reservation and information technology
services (iv) ............................... (9,700) (6,700) (9,800)
Gross royalty payment to HFS from Avis (v) ... (59,327) (41,189) (51,234)
(87,393) (61,069) (75,782)
---------- ---------- ---------- ---------- ---------- ----------
Adjusted income (loss) before taxes from car
rental operating company ..................... (35,907) (34,632) 16,748
Provision (benefit) for income taxes ......... (14,820) (14,249) 6,912
---------- ---------- ----------
Adjusted net income (loss) from car rental
operating company ............................ (21,087) (20,383) 9,836
HFS ownership percentage ...................... 25% 25% 25%
---------- ---------- ----------
HFS' equity in earnings (loss) in car rental
operating company ............................ $ (5,272) $ (5,096) $ 2,459
========== ========== ==========
(OTHER REVENUE ADJUSTMENT):
Elimination of historical interest income
related to cash consideration portion of
Avis Acquisition (vi)........................ $ -- $ -- $ 6,000
========== ========== ==========
</TABLE>
- ------------
(i) The estimated fair value of Avis property and equipment intended to
be retained by the car rental company is $101.0 million, comprised
primarily of furniture, fixtures, and leasehold improvements, which
is amortized on a straight-line basis over the estimated useful
lives, which average seven years. Excess of cost over fair value of
net assets acquired by the Car Rental Operating Company is valued at
$154 million and is amortized on a straight line basis over a benefit
period of 40 years.
(ii) As a result of the merger between the Company and Avis, approximately
$1 billion of tax-advantaged debt was repaid and replaced by a
similar amount of non tax-advantaged debt. This resulted in an
increase in interest rates, due to the loss of tax benefits from ESOP
financing which were passed through from various lenders to Avis
($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Add current facilities ... $ 129,472 $ 95,047 $ 97,854
Reverse former facilities (121,468) (90,333) (96,305)
------------------ ---------- ----------
Increased financing cost . $ 8,004 $ 4,714 $ 1,549
================== ========== ==========
</TABLE>
F-35
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
F. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued)
(iii) Reflects historical franchise fee revenue from third parties.
(iv) Subsequent to the IPO, HFS will retain and operate the
telecommunications and computer processing system which services the
Avis Car Rental Operating Company for reservations, rental agreement
processing, accounting and fleet control. The historical financial
statements of Avis, Inc., as adjusted, reflect the costs incurred in
connection with providing reservation and information technology
services under a pre-existing agreement and the corresponding revenue
recorded as a result of an intercompany charge at cost for such
services rendered to the Car Rental Operating Company. The pro forma
adjustment reflects a planned contractual agreement with the Car Rental
Operating Company, under which HFS will charge the Car Rental Operating
Company a mark-up of thirty-five percent over cost for services
provided instead of at cost under the prior agreement.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ --------- ---------
<S> <C> <C> <C>
Reservation and information technology costs
incurred ................................... $27,714 $19,143 $28,000
Markup percentage (cost plus 35%)............ 35% 35% 35%
------------------ --------- ---------
HFS Service Fees ............................ $ 9,700 $ 6,700 $ 9,800
================== ========= =========
</TABLE>
(v) In connection with the Company's plan to dispose of approximately 75%
of the Car Rental Operating Company, the Company will enter into
franchise, information technology and other agreements to provide
services to the Car Rental Operating Company based on terms to be
determined. The royalty payment to be made to HFS from the Car Rental
Operating Company for use of the Avis trademarks and tradename is
calculated at 3.5% of the revenues generated by the Car Rental
Operating Company which is the net royalty percentage the Company
expects to receive as a result of a planned contractual arrangement
with the Avis Car Rental Operating Company subsequent to the IPO.
Such payments are calculated as follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ------------ ------------
<S> <C> <C> <C>
Revenues generated by Car Rental Operating
Company................................... $1,695,069 $1,176,831 $1,463,838
Royalty percentage......................... 3.5% 3.5% 3.5%
------------------ ------------ ------------
Royalty payment to HFS..................... $ 59,327 $ 41,189 $ 51,234
================== ============ ============
</TABLE>
(vi) 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 reflects the elimination of royalty payments
made by the Century 21 NORS to Century 21 under subfranchise agreements
(offset against service fee revenue--See Note C) and the payment of Coldwell
Banker stock options as a result of change in control provisions in
connection with the acquisition of Coldwell Banker by HFS.
<TABLE>
<CAPTION>
FOR THE NINE MONTH
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Franchise fees ....... $4,500 $3,375 $ 1,003
Stock option expense -- -- 40,801
------------------ -------- --------
Total................ $4,500 $3,375 $41,804
================== ======== ========
</TABLE>
F-36
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
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). The
majority of Owned Brokerage Business expenses are directly attributable to
the business. Based on the Company's due diligence of Coldwell Banker
Corporation and subsidiaries ("CB Consolidated") the Company determined that
common expenses were allocated to the owned brokerage business based on a
reasonable allocation method. Such allocations were based on the ratio of
number of employees, the amount of space occupied and revenue generated
relative to CB Consolidated in the aggregate and multiplied by corresponding
common costs as appropriate to determine allocable expenses.
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
MERGER 21 RCI
-------- ----------- -----------
<S> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(14,193)
Property, equipment and
furniture and fixtures .. 100 534 7,294
Information data base .... 375 -- --
Intangible assets......... 289 4,540 21,942
-------- ----------- -----------
Total.................... $ 235 $ (143) $ 15,043
======== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Elimination of historical
expense.................. $(19,683) $(22,425) $(2,737) $(64,784)
Property, equipment and
furniture and fixtures .. 5,909 1,156 189 15,182
Information data base .... -- -- -- 375
Intangible assets......... 29,594 20,387 7,601 84,353
----------- ----------- -------------- -----------
Total.................... $ 15,820 $ (882) $ 5,053 $ 35,126
=========== =========== ============== ===========
</TABLE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CCI CENTURY
MERGER 21 RCI
-------- ----------- -----------
<S> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(12,698)
Property, equipment and
furniture and fixtures .. 100 534 5,471
Information data base .... 375 -- --
Intangible assets......... 289 4,540 16,456
-------- ----------- -----------
Total.................... $ 235 $ (143) $ 9,229
======== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Elimination of historical
expense.................. $(14,253) $(17,272) $(2,597) $(52,566)
Property, equipment and
furniture and fixtures .. 4,432 867 -- 11,404
Information data base .... -- -- -- 375
Intangible assets......... 22,196 15,290 5,701 64,472
----------- ----------- -------------- -----------
Total.................... $ 12,375 $ (1,115) $ 3,104 $ 23,685
=========== =========== ============== ===========
</TABLE>
<PAGE>
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 .. 5,471 4,432 482 -- 10,385
Intangible assets......... 16,456 22,196 8,495 1,042 48,189
----------- ----------- ---------- -------------- -----------
Total.................... $ 8,575 $ 12,381 $ (44) $ 621 $ 21,533
=========== =========== ========== ============== ===========
</TABLE>
F-37
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
I. DEPRECIATION AND AMORTIZATION: (Continued)
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 $199.7 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 $55.7 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 RCI's customer
lists are approximately $100 million and are amortized on a straight-line
basis over the period to be benefited which is ten years. The fair value
ascribed to customer lists is determined based on the historical renewal
rates of RCI members. The fair value of excess of cost over fair value of net
assets acquired is estimated at approximately $477.7 million and is
determined to have a benefit period of forty years, which is 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.
Avis
The estimated fair value of Avis' property and equipment intended to be
retained by HFS is $96.0 million, comprised primarily of reservation
equipment and related assets and to the Avis Headquarters office in excess of
historical cost. Such property and equipment is amortized on a straight-line
basis over the estimated benefit periods ranging from five to thirty years.
Avis's intangible assets recorded by HFS (not applicable to car rental
operating subsidiary) are comprised of the Avis trademark, a reservation
system and customer data base, and excess of cost over fair value of net
assets acquired. The estimated fair value of the Avis trademark is
approximately $400 million and is amortized on a straight line basis over a
benefit period of 40 years. The estimated fair value of the reservation
system and customer data base are approximately 95.0 million and 14.0
million, respectively and are amortized on a straight line basis over the
periods to be benefited which are 10 years and 6.5 years, respectively.
The excess of cost over fair value of net assets acquired applicable to
the allocated portion of the business to be retained by HFS is estimated at
approximately $317.6 million and is determined to have a
F-38
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
I. DEPRECIATION AND AMORTIZATION: (Continued)
benefit period of forty years, which is 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 $15.7 million, is amortized on a straight-line basis over
the estimated benefit periods ranging from five to twenty-five years.
Coldwell Banker's intangible assets are comprised of franchise agreements and
excess of cost over fair value of net assets acquired. The franchise
agreements with the brokerage offices comprising the Trust are valued
independently of all other franchise agreements with Coldwell Banker
affiliates. Franchise agreements within the Trust and independent of the
Trust are valued at $218.5 million and $218.7 million, respectively and are
amortized on a straight line basis over the respective benefit periods of
forty years and thirty-five years, respectively. The benefit period
associated with Trust franchise agreements was based upon a long history of
gross commission sustained by the Trust. The benefit period associated with
the Coldwell Banker affiliates' franchise agreements was based upon the
historical profitability of such agreements and historical renewal rates. The
excess of cost over fair value of net assets acquired is estimated at
approximately $347.0 million and is determined to have a benefit period of
forty years, which is based on Coldwell Banker's position as the largest
gross revenue producing real estate company in North America, 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 $187.4 million and are each being amortized on
a straight line basis over the periods to be benefited, which are forty
years.
J. INTEREST EXPENSE:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED 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..................................... 2,135 2,135 --
RCI............................................ 17,955 13,466 13,466
Minority interest--preferred dividends ........ 1,796 1,796 --
4 3/4% Notes to finance Other 1996
Acquisitions.................................. 8,595 6,446 1,270
------------------ ---------- ---------
Total........................................ $18,389 $15,708 $ 9,743
================== ========== =========
</TABLE>
Century 21
The pro forma adjustment reflects the recording of interest expense on $60
million of borrowings under HFS's revolving credit facility at an interest
rate of 6.1% which is the variable rate in effect on the date of borrowing.
Borrowings represent the amount necessary to finance the initial cash
purchase price net of $10.2 million of acquired cash.
F-39
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
J. INTEREST EXPENSE: (Continued)
Coldwell Banker
The pro forma adjustment reflects the reversal of historical interest
expense relating to the following ($000's):
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Expense associated with the Owned Brokerage
Business (i) .................................... $ 138 $ 72 $ (179)
Expense associated with revolving credit facility
borrowings which will be repaid with proceeds
from offering (ii)............................... 5,191 2,886 3,334
------------------ -------- --------
Total............................................ $5,329 $2,958 $3,155
================== ======== ========
</TABLE>
(i) HFS paid substantially all outstanding debt of Coldwell Banker
Corporation and subsidiaries ("CB Consolidated") at the consummation
date of the acquisition. Therefore, a determination as to the
reasonableness of allocated CB Consolidated interest to the Owned
Brokerage Business is unnecessary.
(ii) At the date of acquisition, HFS repaid $105 million of Coldwell
Banker indebtedness which represented borrowings under a revolving
credit facility at a variable rate of interest (LIBOR plus a margin
ranging from .5% to 1.25%).
RCI
The pro forma adjustment reflects the recording of interest expense on
$285 million of borrowings under HFS's revolving credit facilities at an
interest rate of 6.3% which is the variable rate in effect on the date of
borrowing. 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 (5.0% effective interest rate) to the extent that such proceeds
were used to finance the Acquisitions of ERA ($36.8 million), Travelodge
($39.3 million), and Century 21 NORS ($95.0 million).
Effect of a 1/8% variance in variable interest rates
As mentioned above, interest expense was incurred on borrowings under the
Company's revolving credit facility which partially funded the acquisitions
of Century 21 and RCI. The Company recorded interest expense using the
variable interest rate in effect on the respective borrowing dates. The
F-40
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
J. INTEREST EXPENSE: (Continued)
effect on pro forma net income assuming a 1/8% variance in the variable
interest rate used to calculate interest expense is as follows ($000's):
<TABLE>
<CAPTION>
CENTURY 21 RCI TOTAL
------------ ------ -------
<S> <C> <C> <C>
Year Ended December 31, 1995......... $26 $209 $235
Nine Months Ended September 30,
1995................................ 26 157 183
Nine Months Ended September 30,
1996................................ -- 157 157
</TABLE>
- ------------
The pro forma net income effects of a 1/8% variance in the interest
rate has no impact on earnings per share for all periods presented.
K. OTHER EXPENSES:
The pro forma adjustment eliminates charitable contributions made by the
former stockholder of RCI and accounting, legal and other administrative
expenses allocated to CCI, all of which would not have been incurred by the
Company. Such expenses are summarized as follows ($000's):
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR MONTHS
ENDED ENDED
DECEMBER 31, 1995 1995 1996
----------------- ------ -----
<S> <C> <C> <C>
RCI Charitable Contributions $1,200 $303 $345
CCI Administrative Expenses . 399 399 --
----------------- ------ ------
$1,599 $702 $345
================= ====== ======
</TABLE>
L. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED 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.......................................... (4,100) (18) (96)
Coldwell Banker............................... (24,385) (16,422) 10,432
Travelodge.................................... (1,132) (834) --
Pro forma provision............................ 112,395 78,935 120,331
------------------ ----------- -----------
Total........................................ $ 20,729 $ 15,491 $ 45,667
================== =========== ===========
</TABLE>
The pro forma effective tax rates are approximately 1% higher than HFS's
historical effective tax rates due to non-deductible excess of cost over fair
value of net assets required to be recorded in connection with the
acquisitions of Avis and RCI. The pro forma provisions for taxes were
computed using pro forma pre-tax amounts and the provisions of Statement of
Financial Accounting Standards No. 109.
F-41
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
M. 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 NINE
ISSUANCE FOR THE YEAR ENDED MONTHS ENDED
PRICE PER DECEMBER 31, SEPTEMBER 30,
SHARE 1995 1995 1996
----------- ------------------ -------- -------
<S> <C> <C> <C> <C>
CCI (including dilutive impact of warrants)(1) . $15.30 896 1,180 --
Century 21 (2) ................................. $49.88 2,334 3,120 --
Avis Offering (3) .............................. $74.06 4,569 4,569 4,569
RCI (4) ........................................ $75.00 1,000 1,000 1,000
Second Quarter 1996 Offering--Coldwell Banker
(5) ........................................... $59.99 12,838 12,838 7,122
Second Quarter 1996 Offering--Avis (6) ........ $59.99 6,121 6,121 3,401
Century 21 NORS (7) ............................ $49.83 923 923 418
------------------ -------- -------
Total.......................................... 28,681 29,751 16,510
================== ======== =======
</TABLE>
(1) Date of Acquisition, May 11, 1995
(2) Date of Acquisition, August 1, 1995
(3) Date of Acquisition, October 17, 1996
(4) Date of Acquisition, November 12, 1996
(5) Date of Acquisition, May 31, 1996
(6) Date of Acquisition, October 17, 1996
(7) Date of Acquisition, April 3, 1996
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 and warrants assumed referred to above
are considered outstanding as of the beginning of the period for purposes of
per share calculations.
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with its acquisitions, HFS developed related business plans
to restructure each of the respective acquired companies which will result in
future cost savings subsequent to the acquisitions. HFS restructuring plans
in each case were developed prior to the consummation of the respective
acquisitons and were implemented concurrent with the consummation of the
acquistions. Restructuring plans included the involuntary termination and
relocation of employees, the consolidation and closing of facilities and the
elimination of duplicative operating and overhead activities. Pursuant to
HFS' specific restructuring plans, certain selling, general and
administrative expenses may not be incurred subsequent to each acquisition
that existed prior to consummation. In addition, there are incremental costs
in the conduct of activities of the acquired companies prior to the
acquistions that may not be incurred subsequent to consummation and have no
future economic benefit to HFS. The estimated cost savings that HFS believes
would have been attained had its acquisitions occurred on January 1, 1995 and
the related impact of such cost savings on pro forma net income and net
income per share are not reflected in the pro forma consolidated statements
of income, but are presented below ($000's):
F-42
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL
21 RCI BANKER
--------- -------- ----------
<S> <C> <C> <C>
Payroll and
related............ $10,885 $1,198 $10,682
Professional........ 2,693 1,000 1,500
Occupancy........... 3,628 -- --
Other............... 3,128 2,900 (1,517)
--------- -------- ----------
Total.............. $20,334 $5,098 $10,665
========= ======== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Payroll and
related............ $ 7,706 $1,110 $7,236 $38,817
Professional........ 1,486 154 387 7,220
Occupancy........... 2,754 186 1,172 7,740
Other............... 2,326 167 1,036 8,040
------------ ------------ -------- ---------
Total.............. $14,272 $1,617 $9,831 $61,817
============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL
21 RCI BANKER
--------- -------- ----------
<S> <C> <C> <C>
Payroll and
related............ $10,885 $ 914 $ 9,830
Professional........ 2,693 750 1,573
Occupancy........... 3,628 -- --
Other............... 3,128 1,275 (1,072)
--------- -------- ----------
Total.............. $20,334 $2,939 $10,331
========= ======== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Payroll and
related............ $5,354 $502 $1,526 $29,011
Professional........ 1,063 70 -- 6,149
Occupancy........... 1,944 84 666 6,322
Other............... 1,528 74 983 5,916
------------ ------------ -------- ---------
Total.............. $9,889 $730 $3,175 $47,398
============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL CENTURY 21
RCI BANKER NORS
-------- ---------- ------------
<S> <C> <C> <C>
Payroll and
related............ $ 880 $5,462 $2,425
Professional........ 750 1,055 705
Occupancy........... -- -- 604
Other............... 1,333 (604) 1,069
-------- ---------- ------------
Total.............. $2,963 $5,913 $4,803
======== ========== ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TRAVELODGE ERA TOTAL
------------ ------ --------
<S> <C> <C> <C>
Payroll and
related............ $25 $222 $ 9,014
Professional........ 4 -- 2,514
Occupancy........... 4 102 710
Other............... 4 157 1,959
------------ ------ --------
Total.............. $37 $481 $14,197
============ ====== ========
</TABLE>
F-43
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ----------------------
1995 1995 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Income before taxes, as reported .... $272,320 $191,253 $291,551
SG&A adjustments ..................... 61,817 47,398 14,197
Income before taxes, as adjusted .... 334,137 238,651 305,748
Income taxes ......................... 137,908 98,497 126,190
------------------ ---------- ----------
Net income, as adjusted .............. $196,229 $140,154 $179,558
================== ========== ==========
Net income per share (primary):
As adjusted ......................... $ 1.41 $ 1.03 $ 1.24
================== ========== ==========
As reported ......................... $ 1.15 $ .83 $ 1.18
================== ========== ==========
Net income per share (fully diluted):
As adjusted ......................... $ 1.39 $ 1.01 $ 1.23
================== ========== ==========
As reported ......................... $ 1.14 $ .82 $ 1.18
================== ========== ==========
</TABLE>
O. ACCRUED ACQUISITION LIABILITIES:
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21, Century 21 NORS,
ERA and Coldwell Banker operations. These acquisitions were consummated in
1995 and 1996 and resulted in the consolidation of facilities, involuntary
termination and relocation of employees, and elimination of duplicative
operating and overhead activities. The following table provides details of
these charges by type. At September 30, 1996 the Company was substantially
complete with its restructuring Plan.
<TABLE>
<CAPTION>
CENTURY 21 COLDWELL
CENTURY 21 NORS ERA BANKER
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Personnel related ... $12,647 $1,720 $ 8,000 $4,237
Facility related .... 16,511 2,293 1,558 5,491
Other costs .......... 990 711 501 211
------------ ------------ --------- ----------
Total................. $30,148 $4,724 $10,059 $9,939
============ ============ ========= ==========
Terminated employees 325
</TABLE>
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation of excess office space. Through September 30, 1996
approximately $25.6 million, $2.5 million, $4.6 million and $2.9 million were
paid by Century 21, Century 21 NORS, ERA and Coldwell Banker, respectively
and charged against the restructuring liability.
P. TRUST CONTRIBUTION
Included in HFS historical SG&A for the nine months ended September 30,
1996, is a $5 million charge associated with the Company's contribution of
the Owned Brokerage Business to the Trust. The charge represents the fair
value of the Owned Brokerage Business based upon a valuation which considered
earnings, cash flow, assets and business prospects of the contributed
business.
F-44
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE MERGER
The accompanying combining consolidated financial statements give effect
to the business combination of HFS and PHH which will be accounted for as a
pooling of interests. Accordingly, the underlying combining historical
consolidated balance sheet as of September 30, 1996 and the 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, reflects the combining of the historical
financial results of PHH with the historical consolidated financial results
of HFS. HFS expects to recognize a one-time charge related to transaction and
business combination costs in connection with the Merger, which is not
reflected in the combining historical consolidated statements of income.
The combining historical consolidated financial statements reflect
adjustments for the pooling of HFS and PHH including reclassifications to
conform to the presentation expected to be used by the merged companies and
shares issued as consideration in connection with the Merger.
The Pro forma financial statements include a one-time pre-tax
restructuring charge incurred in connection with the Merger. The charge
includes severance, facility consolidation and other transaction related
costs associated with the integration of HFS and PHH businesses. HFS
estimates the charge to approximate $267 million before related income tax
benefits and is not aware of any other material merger related costs which will
be incurred in periods subsequent to the consummation date. HFS expects this
charge to result in annual pre-tax savings of approximately $100 million with
the full benefit of the cost reductions beginning in 1998.
The combining historical consolidated financial statements include certain
adjustments described in the Notes to Combining Historical Consolidated
Financial Statements and should be read in conjunction therewith and with the
consolidated financial statements and related notes thereto of HFS and PHH
included elsewhere in this Joint Proxy Statement/Prospectus.
TERMS OF THE MERGER
Approval of the share issuance by HFS stockholders and approval of the
Merger proposed by PHH stockholders are conditions to consummation of the
Merger.
In the Merger, each outstanding share of common stock of PHH, other than
PHH Common Stock held by PHH or held by HFS, will be converted into the right
to receive that fraction of a share of HFS Common Stock (the "Conversion
Number") represented by the number determined by dividing $49.50 by the
average of HFS Common Stock over a period of twenty trading days preceding
the fifth trading day prior to the date of the special meeting of
stockholders of PHH (the "Pricing Period"); provided however that in no event
will such number be greater than 0.8250 or less than 0.6111. In addition, in
the Merger, shares of HFS Common Stock will be issued in exchange for the
currently outstanding options to purchase shares of PHH Common Stock.
As a result of the conversion formula described above, if the average
price of HFS Common Stock during the Pricing Period is within the range of
$60.00 to $81.00, holders of PHH Common Stock will receive that fraction of a
share of HFS Common Stock having a value (based on the average price of such
shares during the Pricing Period) of $49.50 for each share of PHH Common
Stock (and the Conversion Number will fluctuate accordingly), but if the
average price of HFS Common Stock during the Pricing Period is less than
$60.00 or greater than $81.00, the Conversion Number will be fixed at 0.8250
or 0.6111, respectively, resulting in the issuance of a number of shares of
HFS Common Stock for each share of PHH Common Stock having a value (based on
the average price of such shares during the Pricing Period) less than or more
than $49.50, as the case may be. Based on the number of shares of PHH Common
Stock outstanding on the Record Date, the number of shares of HFS Common
Stock to be issued upon conversion of outstanding shares of PHH Common Stock
will be not less than approximately 21.3 million shares and not more than
approximately 28.8 million shares. (See "The Merger Agreement--General;
conversion of shares")
F-45
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED BALANCE SHEET PAGE 1 OF 2
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
Restricted Cash.............................. 89,849 (A) 89,849
Relocation receivables ...................... 136,052 666,905 -- 802,957
Other accounts and notes receivable--net .... 113,175 442,951 (6,800)(A) 549,326
Other current assets ........................ 59,081 58,916 56,000 (A) 173,997
------------ ------------ ------------- -----------
TOTAL CURRENT ASSETS .......................... 779,502 1,180,222 139,049 2,098,773
------------ ------------ ------------- -----------
Property and equipment--net .................. 106,233 92,846 (6,500)(A) 192,579
Franchise agreements--net .................... 1,027,711 -- 1,027,711
Excess of cost over fair value of net assets
acquired--net ............................... 906,540 47,656 (22,500)(A) 931,696
Other assets ................................. 80,064 125,384 (7,300)(A) 198,148
------------ ------------ ------------- -----------
TOTAL ......................................... 2,900,050 1,446,108 102,749 4,448,907
------------ ------------ ------------- -----------
ASSETS UNDER FLEET 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 and fees ........... -- 280,344 -- 280,344
------------ ------------ ------------- -----------
TOTAL ......................................... -- 4,438,469 -- 4,438,469
------------ ------------ ------------- -----------
TOTAL ASSETS .................................. $2,900,050 $5,884,577 $102,749 $8,887,376
============ ============ ============= ===========
</TABLE>
- ------------
(1) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical
consolidated balance sheets of HFS and PHH to conform to the
presentation expected to be used by the merged companies.
See notes to combining historical consolidated financial statements.
F-46
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED BALANCE SHEET PAGE 2 OF 2
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 (B) $ 655,151
Deferred revenue--net ................... 24,655 -- -- 24,655
Income taxes payable .................... 81,633 -- -- 81,633
Accrued acquisition obligations ........ 40,287 -- 193,900 (A) 234,187
Current portion of long-term debt ...... 29,907 -- -- 29,907
------------ ------------ -------------- -----------
TOTAL CURRENT LIABILITIES ................. 336,839 418,143 270,551 1,025,533
------------ ------------ -------------- -----------
Long-term debt .......................... 541,563 -- 584,796 (C) 1,216,208
89,849 (A)
Deferred revenue ........................ 7,299 114,021 (76,651)(B) 44,669
Other non-current liabilities ........... 23,960 -- 30,000 (A) 53,960
Deferred income taxes ................... 85,400 -- (12,000)(A) 73,400
------------ ------------ -------------- -----------
TOTAL ..................................... 995,061 532,164 886,545 2,413,770
------------ ------------ -------------- -----------
LIABILITIES UNDER FLEET MANAGEMENT AND
MORTGAGE PROGRAMS
Debt...................................... -- 4,476,805 (584,796)(C) 3,892,009
Deferred income taxes..................... -- 221,700 -- 221,700
------------ ------------ -------------- -----------
Total.................................... -- 4,698,505 (584,796) 4,113,709
------------ ------------ -------------- -----------
STOCKHOLDERS' EQUITY
Common stock--Issued and Outstanding:
Historical HFS, 123,720, Historical PHH,
34,886 and Combined Companies, between
145,039 and 152,501...................... 1,237 99,820 (99,563) (D) 1,494
Additional paid-in capital................ 1,705,541 -- 99,563 (D) 1,805,104
Retained earnings......................... 206,236 568,400 (199,000)(A) 575,636
Treasury stock............................ (8,025) -- -- (8,025)
Foreign currency equity adjustment ....... -- (14,312) -- (14,312)
------------ ------------ -------------- -----------
TOTAL STOCKHOLDERS' EQUITY................. 1,904,989 653,908 (199,000) 2,359,897
------------ ------------ -------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $2,900,050 $5,884,577 $ 102,749 $8,887,376
============ ============ ============== ===========
</TABLE>
- ------------
(1) The historical PHH balance sheet is as of October 31, 1996.
Note: Certain reclassifications have been made to the historical
consolidated balance sheets of HFS and PHH to conform to the
presentation expected to be used by the merged companies.
See notes to combining historical consolidated financial statements.
F-47
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA COMBINED
HFS PHH (1) ADJUSTMENTS COMPANIES
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................... $245,189 $ -- $ 188,060 (E) $ 433,249
Real estate services................... -- 221,907 -- 221,907
---------- ----------- -------------- ------------
Service fees, net...................... 245,189 221,907 188,060 655,156
---------- ----------- -------------- ------------
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
---------- ----------- -------------- ------------
Mortgage Services ..................... -- 150,414 -- 150,414
Amortization of Mortgage Servicing
rights and fees ..................... -- -- (30,080)(G) (30,080)
Interest ............................. -- -- (26,569)(I) (26,569)
---------- ----------- -------------- ------------
Mortgage Services, net ................ -- 150,414 (56,649) 93,765
---------- ----------- -------------- ------------
Other.................................. 11,881 -- -- 11,881
---------- ----------- -------------- ------------
Net revenues............................ 257,070 722,014 (168,588) 810,496
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation.............. 116,700 -- -- 116,700
Selling, general and administrative ... 40,315 293,161 (20,147) (H) 313,329
Costs, including interest, of carrying
and reselling homes................... -- 125,669 (4,575) (H) 121,094
Direct costs of mortgage services ..... -- 56,557 (30,080) (G) 26,477
Depreciation and amortization.......... 19,153 -- 24,722 (H) 43,875
(111,939)(F) 21,410
Interest............................... 20,234 139,684 (26,569)(I)
---------- ----------- -------------- ------------
Total expenses........................ 196,402 615,071 (168,588) 642,885
---------- ----------- -------------- ------------
Income before income taxes ............. 60,668 106,943 -- 167,611
Provision for income taxes.............. 26,345 43,917 -- 70,262
---------- ----------- -------------- ------------
Income from continuing operations ...... $ 34,323 $ 63,026 $ -- $ 97,349
========== =========== ============== ============
PER SHARE INFORMATION (PRIMARY)
Income from continuing operations .... $ .35 $ 1.78 $ .78 (J)
========== =========== ============
Weighted average common and common
equivalent shares outstanding......... 98,920 35,372 26,133 (J) 125,053 (J)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Income from continuing operations .... $ .34 $ 1.78 $ .77 (J)
========== =========== ============
Weighted average common and common
equivalent shares outstanding......... 100,228 35,423 26,171 (J) 126,399 (J)
========== =========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of income of PHH is for the
twelve months ended January 31, 1994.
Note: Certain reclassifications have been made to the historical operating
results of HFS and PHH to conform to the presentation expected to be
used by the merged companies.
See notes to combining historical consolidated financial statements.
F-48
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA COMBINED
HFS PHH (1) ADJUSTMENTS COMPANIES
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees.......................... $283,244 $ -- $ 202,031 (E) $ 485,275
Real estate services.................. -- 226,420 -- 226,420
---------- ----------- -------------- ------------
Service fees, net..................... 283,244 226,420 202,031 711,695
---------- ----------- -------------- ------------
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
---------- ----------- -------------- ------------
Mortgage Services .................... -- 127,551 -- 127,551
Amortization of Mortgage Servicing
rights and fees .................... -- -- (20,284)(G) (20,284)
Interest ............................ -- -- (32,773)(I) (32,773)
---------- ----------- -------------- ------------
Mortgage Services, net ............... -- 127,551 (53,057) 74,494
---------- ----------- -------------- ------------
Other................................. 29,303 -- -- 29,303
---------- ----------- -------------- ------------
Net revenues.......................... 312,547 730,263 (179,778) 863,032
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation............. 130,268 -- -- 130,268
Selling, general and administrative .. 46,018 295,345 (26,230)(H) 315,133
Costs, including interest, of
carrying and reselling homes......... -- 117,174 (3,759)(H) 113,415
Direct costs of mortgage services .... -- 41,221 (20,284)(G) 20,937
Depreciation and amortization......... 23,723 -- 29,989 (H) 53,712
Interest.............................. 18,685 159,765 (126,721)(F) 18,956
(32,773)(I)
Other................................. 3,210 -- -- 3,210
---------- ----------- -------------- ------------
Total expenses....................... 221,904 613,505 (179,778) 655,631
---------- ----------- -------------- ------------
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 (PRIMARY)
Net income ........................... $ .53 $ 1.99 $ .97 (J)
========== =========== ============
Weighted average common and common
equivalent shares outstanding ...... 100,874 34,741 25,667 (J) 126,541 (J)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .53 $ 1.99 $ .97 (J)
========== =========== ============== ============
Weighted average common and common
equivalent shares outstanding........ 100,874 34,775 25,692 (J) 126,566 (J)
========== =========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of income of PHH is for the
twelve months ended January 31, 1995.
Note: Certain reclassifications have been made to the historical operating
results of HFS and PHH to conform to the presentation expected to be
used by the merged companies.
See notes to combining historical consolidated financial statement.
F-49
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA COMBINED
HFS PHH (1) ADJUSTMENTS COMPANIES
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees.......................... $369,442 $ -- $ 203,390 (E) $ 572,832
Real estate services.................. -- 250,154 -- 250,154
---------- ----------- -------------- ------------
Service fees, net..................... 369,442 250,154 203,390 822,986
---------- ----------- -------------- ------------
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
Mortgage Services .................... -- 173,787 -- 173,787
Amortization of Mortgage Servicing
rights and fees .................... -- -- (30,667)(G) (30,667)
Interest ............................ -- -- (49,869)(I) (49,869)
---------- ----------- -------------- ------------
Mortgage Services, net ............... -- 173,787 (80,536) 93,251
---------- ----------- -------------- ------------
Other................................. 43,541 -- -- 43,541
---------- ----------- -------------- ------------
Net revenues........................... 412,983 842,470 (240,188) 1,015,265
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation............. 143,965 -- -- 143,965
Selling, general and administrative .. 78,232 310,567 (29,692)(H) 359,107
Costs, including interest, of
carrying and reselling homes......... -- 125,925 (2,629)(H) 123,296
Direct costs of mortgage services .... -- 60,498 (30,667)(G) 29,831
Depreciation and amortization......... 30,857 -- 32,321 (H) 63,178
Interest.............................. 21,789 212,365 (159,652)(F) 24,633
(49,869)(I)
Other................................. 3,235 -- -- 3,235
---------- ----------- -------------- ------------
Total expenses....................... 278,078 709,355 (240,188) 747,245
---------- ----------- -------------- ------------
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 (PRIMARY)
Net income ........................... $ .74 $ 2.25 $ 1.16 (J)
========== =========== ============
Weighted average common and common
equivalent shares outstanding ...... 113,817 34,755 25,677 (J) 139,494 (J)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .73 $ 2.24 $ 1.15 (J)
========== =========== ============== ============
Weighted average common and common
equivalent shares outstanding........ 115,654 34,951 25,822 (J) 141,476 (J)
========== =========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of income of PHH is for the
twelve months ended January 31, 1996.
Note: Certain reclassifications have been made to the historical operating
results of HFS and PHH to conform to the presentation expected to be
used by the merged companies.
See notes to combining historical consolidated financial statements.
F-50
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL 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 PHH (1) ADJUSTMENTS AS RESTATED
---------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees.......................... $268,862 $ -- $ 150,028 (E) $ 418,890
Real estate services.................. -- 190,451 -- 190,451
---------- ----------- -------------- ---------------
Service fees, net..................... 268,862 190,451 150,028 609,341
---------- ----------- -------------- ---------------
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
---------- ----------- -------------- ---------------
Mortgage Services .................... -- 124,144 -- 124,144
Amortization of Mortgage Servicing
rights and fees .................... -- -- (18,981)(G) (18,981)
Interest ............................ -- -- (35,342)(I) (35,342)
---------- ----------- -------------- ---------------
Mortgage services, net................ -- 124,144 (54,323) 69,821
---------- ----------- -------------- ---------------
Other................................. 30,869 -- -- 30,869
---------- ----------- -------------- ---------------
Net revenues........................... 299,731 625,162 (171,696) 753,197
---------- ----------- -------------- ---------------
EXPENSES
Marketing and reservation............. 110,842 -- -- 110,842
Selling, general and administrative .. 47,700 232,698 (22,452)(H) 257,946
Costs, including interest, of
carrying and reselling homes......... -- 97,698 (2,088)(H) 95,610
Direct costs of mortgage services .... -- 40,093 (18,981)(G) 21,112
Depreciation and amortization......... 21,721 -- 24,540 (H) 46,261
Interest.............................. 16,272 154,638 (117,373)(F) 18,195
(35,342)(I)
Other................................. 2,012 -- -- 2,012
---------- ----------- -------------- ---------------
Total expenses....................... 198,547 525,127 (171,696) 551,978
---------- ----------- -------------- ---------------
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 (PRIMARY)
Net income............................ $ .57 $ 1.70 $ .90 (J)
========== =========== ===============
Weighted average common and common
equivalent shares outstanding ...... 109,564 34,484 25,477 (J) 135,041 (J)
========== =========== ============== ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .56 $ 1.70 $ .88 (J)
========== =========== ============== ===============
Weighted average common and common
equivalent shares outstanding........ 112,056 34,594 25,558 (J) 137,614 (J)
========== =========== ============== ===============
</TABLE>
- ------------
(1) The historical consolidated statement of income of PHH is for the
nine months ended October 31, 1995.
Note: Certain reclassifications have been made to the historical operating
results of HFS and PHH to conform to the presentation expected to be
used by the merged companies.
See notes to combining historical consolidated financial statements.
F-51
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
COMBINING HISTORICAL 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 PHH (1) ADJUSTMENTS AS RESTATED
---------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees.............................. $468,277 $ -- $ 152,602 (E) $ 620,879
Real estate services...................... -- 198,626 -- 198,626
---------- ----------- -------------- ---------------
Service fees, net......................... 468,277 198,626 152,602 819,505
---------- ----------- -------------- ---------------
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
---------- ----------- -------------- ---------------
Mortgage Services ........................ -- 188,636 -- 188,636
Amortization of Mortgage
Servicing rights and fees .............. -- -- (38,720)(G) (38,720)
Interest ................................ -- -- (48,337)(I) (48,337)
---------- ----------- -------------- ---------------
Mortgage services, net.................... -- 188,636 (87,057) 101,579
---------- ----------- -------------- ---------------
Other..................................... 81,733 -- -- 81,733
---------- ----------- -------------- ---------------
Net revenues............................... 550,010 702,789 (207,461) 1,045,338
---------- ----------- -------------- ---------------
EXPENSES
Marketing and reservation................. 130,728 -- -- 130,728
Selling, general and administrative ...... 139,709 249,693 (19,808)(H) 369,594
Costs, including interest, of carrying
and reselling homes...................... -- 87,181 (1,370)(H) 85,811
Direct costs of mortgage services ........ -- 77,718 (38,720)(G) 38,998
Depreciation and amortization............. 41,129 -- 21,178 (H) 62,307
Interest.................................. 22,194 169,933 (120,404)(F) 23,386
(48,337)(I)
Other..................................... 10,988 -- -- 10,988
---------- ----------- -------------- ---------------
Total expenses........................... 344,748 584,525 (207,461) 721,812
---------- ----------- -------------- ---------------
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 (PRIMARY)
Net income ............................... $ .96 $ 1.99 $ 1.25 (J)
========== ===============
Weighted average common and common
equivalent shares outstanding ........... 130,960 35,211 26,014 (J) 156,974 (J)
========== =========== ============== ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income................................ $ .96 $ 1.99 $ 1.24 (J)
========== =========== ============== ===============
Weighted average common and common
equivalent shares outstanding............ 131,684 35,269 26,057 (J) 157,741 (J)
========== =========== ============== ===============
</TABLE>
- ------------
(1) The historical consolidated statement of income of PHH is for the
nine months ended October 31, 1996.
Note: Certain reclassifications have been made to the historical operating
results of HFS and PHH to conform to the presentation expected to be
used by the merged companies.
See notes to combining historical consolidated financial statements.
F-52
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO COMBINING HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS
A. RESTRUCTURING LIABILITY AND RESTRICTED CASH:
The pro forma adjustment reflects a liability established for
restructuring the HFS and PHH businesses, including involuntary
termination of employees, facility and system terminations, costs
associated with exiting certain activities, and merger related
professional fees, based on management's preliminary assessment of such
actions to be taken:
<TABLE>
<CAPTION>
RESTRUCTURING
CHARGE
----------------
BOOK TAX
BASIS BASIS
------- -------
<S> <C> <C>
Professional fees...................... $ 43 $ 20
Severance.............................. 109 74
Facility and system terminations ...... 44 44
Other transaction related costs ....... 71 37
Restructuring charge, pre-tax.......... 267 175
Statutory tax rate..................... 38.9%
-------
Tax benefit (effective tax rate
25.5%)................................ 68 $ 68
------- -------
After-tax charge....................... $199
-------
</TABLE>
The restructuring charge includes the write-off or reserve of $43.1 million
for impaired assets as a result of exiting certain activities and the
recording of deferred taxes ($56.0 million current and $12.0 million
non-current) associated with the charge. Also included in the restructuring
charge is the effect of $89.8 million of employee benefit related
liabilities which were required to be funded prior to consummation of the
Merger. PHH funded several grantor trusts in accordance with the Merger
Agreement. This amount is disclosed as restricted cash in the pro forma
balance sheet.
B. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES:
The pro forma adjustment reclassifies advances from relocation clients
from deferred revenue to accounts payable and other accrued liabilities.
This adjustment is made to conform to the presentation expected to be used
by the merged companies.
C. LONG-TERM DEBT:
This pro forma adjustment reclassifies the portion of long-term debt
associated with real estate services activities from Liabilities under
Fleet 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.
D. EQUITY:
The pro forma adjustment reflects a reclassification of equity in
connection with issuance of HFS common stock to the PHH stockholders.
E. FLEET MANAGEMENT:
The pro forma adjustment reclassifies fees charged for the management of
corporate fleets and for fee-based services to service fees such that
fleet rental revenue is reflected as fleet management revenue. This
adjustment is made to conform to the presentation expected to be used by
the merged companies.
F-53
<PAGE>
F. INTEREST EXPENSE -- FLEET MANAGEMENT:
The pro forma adjustment reclassifies interest expense on debt incurred to
finance fleet leasing activities. This adjustment is made to conform to
the presentation expected to be used by the merged companies.
G. AMORTIZATION EXPENSE -- MORTGAGE SERVICES:
The pro forma adjustment reclassifies the amortization of Mortgage
Servicing rights and fees from direct costs of mortgage services to
mortgage services revenue. This adjustment is made to conform to the
presentation expected to be used by the merged companies.
H. 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.
I. INTEREST EXPENSE--MORTGAGE SERVICES:
The pro forma adjustment reclassifies interest expense on debt incurred to
finance mortgage servicing activities to mortgage services revenue. This
adjustment is made to conform to the presentation expected to be used by
the merged companies.
J. WEIGHTED AVERAGE SHARES AND NET INCOME PER SHARE
The pro forma adjustment to weighted average common and common equivalent
shares outstanding reflects the number of shares of HFS common stock
estimated to be issued by HFS in connection with the Merger. Such amount was
estimated using an average HFS stock price of $67.00 per share, which will be
calculated using a twenty day average price of the HFS common stock from
November 8, 1996 through December 6, 1996. The number of HFS shares to be
issued is based on a conversion formula which is calculated based on the
average price of HFS common stock over the Pricing Period (a twenty day
average), within a range of $60 to $81 per share. At $67 per share, the
Conversion Number would be .7388 which would result in the issuance of .7388
shares of HFS common stock for every share of PHH common stock. The Pro Forma
adjustment was calculated by multiplying PHH's historical weighted average
shares outstanding by the Conversion Number using the assumed average HFS
stock price of $67 per share. The underlying table summarizes pro forma
weighted average shares and pro forma net income per share using the high and
low ends of the range and the assumed average of $67 per share used in these
Pro Forma Financial Statements.
F-54
<PAGE>
<TABLE>
<CAPTION>
AVERAGE HFS STOCK PRICE
-------------------------------
$60.00 $67.00 $81.00
--------- --------- ---------
<S> <C> <C> <C>
PRO FORMA WEIGHTED AVERAGE SHARES (000'S)
For the year ended December 31, 1993
Primary ................................... 128,102 125,053 120,536
Fully Diluted ............................. 129,452 126,399 121,875
For the year ended December 31, 1994
Primary ................................... 129,535 126,541 122,104
Fully Diluted ............................. 129,563 126,566 122,125
For the year ended December 31, 1995
Primary ................................... 142,490 139,494 135,056
Fully Diluted ............................. 144,489 141,476 137,013
For the nine months ended September 30, 1995
Primary ................................... 138,013 135,041 130,637
Fully Diluted ............................. 140,596 137,614 133,196
For the nine months ended September 30, 1996
Primary ................................... 160,009 156,974 152,477
Fully Diluted ............................. 160,781 157,741 153,237
PRO FORMA NET INCOME PER SHARE
For the year ended December 31, 1993
Primary ................................... $ 0.76 $ 0.78 $ 0.81
Fully Diluted ............................. 0.75 0.77 0.80
For the year ended December 31, 1994
Primary ................................... $ 0.95 $ 0.97 $ 1.00
Fully Diluted ............................. 0.95 0.97 1.00
For the year ended December 31, 1995
Primary ................................... $ 1.14 $ 1.16 $ 1.20
Fully Diluted ............................. 1.12 1.15 1.18
For the nine months ended September 30, 1995
Primary ................................... $ 0.88 $ 0.90 $ 0.93
Fully Diluted ............................. 0.86 0.88 0.91
For the nine months ended September 30, 1996
Primary ................................... $ 1.23 $ 1.25 $ 1.29
Fully Diluted ............................. 1.22 1.24 1.28
</TABLE>
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LLP LOGO]
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF HFS INCORPORATED:
We have audited the accompanying consolidated balance sheets of HFS
Incorporated (formerly Hospitality Franchise Systems, Inc.) and its
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of HFS
Incorporated and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 22, 1996 (November 12, 1996 as to Note 2)
F-56
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
--------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 471,194 $ 16,109 $ 5,956
Royalty accounts and notes receivable, net of allowance for
doubtful accounts of $14,437, $12,354 and $9,828................... 76,975 37,326 21,665
Marketing and reservation receivables, net of allowance for
doubtful accounts of $11,511, $6,858 and $3,860.................... 36,200 22,297 19,988
Relocation receivables.............................................. 136,052 51,180 --
Other current assets................................................ 22,625 21,304 15,602
Deferred income taxes............................................... 36,456 20,200 13,200
--------------- ------------ ----------
TOTAL CURRENT ASSETS................................................ 779,502 168,416 76,411
Property and equipment--net......................................... 106,233 67,892 37,813
Franchise agreements--net of accumulated amortization of $74,757,
$65,905 and $49,250................................................ 1,027,711 517,218 495,026
Excess of cost over fair value of net assets acquired--net of
accumulated amortization of $29,497, $13,352 and $7,222 .......... 906,540 356,754 149,295
Other assets........................................................ 80,064 55,528 15,552
--------------- ------------ ----------
TOTAL ASSETS........................................................ $2,900,050 $1,165,808 $774,097
=============== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other.......................................... $ 185,012 $ 73,724 $ 44,024
Income taxes payable................................................ 81,633 38,640 24,406
Accrued acquisition obligations .................................... 40,287 10,276 --
Current portion of long-term debt................................... 29,907 2,249 1,597
--------------- ------------ ----------
TOTAL CURRENT LIABILITIES........................................... 336,839 124,889 70,027
Long-term debt...................................................... 541,563 300,778 347,416
Other liabilities................................................... 31,259 17,150 4,185
Deferred income taxes............................................... 85,400 82,800 71,900
Commitments and contingencies (Note 8)..............................
Series A Adjustable Rate Preferred Stock of Century 21 ............. -- 80,000 --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value--authorized 10,000,000 shares;
none issued and outstanding........................................ -- -- --
Common stock, $.01 par value--authorized 300,000,000 shares; issued
and outstanding, 123,720,243, 102,538,756 and 92,600,160 shares ... 1,237 1,025 926
Additional paid-in capital.......................................... 1,705,541 475,562 275,769
Retained earnings................................................... 206,236 83,604 3,874
Treasury Stock, at cost ............................................ (8,025) -- --
--------------- ------------ ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 1,904,989 560,191 280,569
--------------- ------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $2,900,050 $1,165,808 $774,097
=============== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Franchise........................................ $424,162 $265,129 $361,238 $283,244 $245,189
Other............................................ 125,848 34,602 51,745 29,303 11,881
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE.................................... 550,010 299,731 412,983 312,547 257,070
---------- ---------- ---------- ---------- ----------
EXPENSES
Marketing and reservation........................ 130,728 110,842 143,965 130,268 116,700
Selling, general and administrative.............. 110,588 46,117 74,449 46,018 40,315
Depreciation and amortization.................... 41,129 21,721 30,857 23,723 19,153
Interest......................................... 22,194 16,272 21,789 18,685 20,234
Other ........................................... 40,109 3,595 7,018 3,210 --
---------- ---------- ---------- ---------- ----------
TOTAL EXPENSES................................... 344,748 198,547 278,078 221,904 196,402
---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary loss.............................. 205,262 101,184 134,905 90,643 60,668
Provision for income taxes....................... 82,630 41,820 55,175 37,154 26,345
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss................. 122,632 59,364 79,730 53,489 34,323
Extraordinary loss, net of tax benefit of
$8,775.......................................... -- -- -- -- 12,845
---------- ---------- ---------- ---------- ----------
NET INCOME....................................... $122,632 $ 59,364 $ 79,730 $ 53,489 $ 21,478
========== ========== ========== ========== ==========
PER SHARE INFORMATION (PRIMARY)
Income before extraordinary loss................ $ .96 $ .57 $ .74 $ .53 $ .35
Extraordinary loss.............................. -- -- -- -- .13
---------- ---------- ---------- ---------- ----------
Net income...................................... $ .96 $ .57 $ .74 $ .53 $ .22
========== ========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding............................. 130,960 109,564 113,817 100,874 98,920
========== ========== ========== ========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Income before extraordinary loss................ $ .96 $ .56 $ .73 $ .53 $ .34
Extraordinary loss.............................. -- -- -- -- .13
---------- ---------- ---------- ---------- ----------
Net income...................................... $ .96 $ .56 $ .73 $ .53 $ .21
========== ========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding............................. 131,684 112,056 115,654 100,874 100,228
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
ADDITIONAL
PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- -------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 .... 85,502 $ 855 $ 217,022 $ 8,682 $ 226,559
Issuance of common stock .... 2,000 20 15,138 -- 15,158
Exercise of stock options ... 718 7 2,057 -- 2,064
Tax benefit from exercise of
stock options............... -- -- 2,150 -- 2,150
Net income................... -- -- -- 21,478 21,478
--------- -------- ------------ ---------- ---------- -----------
Balance, December 31, 1993 .. 88,220 882 236,367 30,160 267,409
Issuance of common stock .... 4,140 42 55,900 -- 55,942
Exercise of stock options ... 240 2 945 -- 947
Tax benefit from exercise of
stock options............... -- -- 1,002 -- 1,002
Distribution of Chartwell
Leisure Inc. ............... -- -- (18,445) (79,775) (98,220)
Net income................... -- -- -- 53,489 53,489
--------- -------- ------------ ---------- ---------- -----------
Balance, December 31, 1994 .. 92,600 926 275,769 3,874 280,569
Issuance of common stock .... 8,341 83 178,240 -- 178,323
Exercise of stock options ... 605 6 3,415 -- 3,421
Tax benefit from exercise of
stock options............... -- -- 3,237 -- 3,237
Exercise of stock warrants .. 991 10 14,872 -- 14,882
Conversion of 4 1/2% Notes .. 2 -- 29 -- 29
Net income................... -- -- -- 79,730 79,730
--------- -------- ------------ ---------- ---------- -----------
Balance, December 31, 1995 .. 102,539 1,025 475,562 83,604 560,191
Issuance of common stock ... 20,278 203 1,205,768 1,205,971
Purchase of common stock ... -- -- -- (8,025) (8,025)
Exercise of stock options .. 898 9 7,973 -- 7,982
Tax benefit from exercise of
stock options .............. -- -- 16,145 -- 16,145
Conversion of 4 1/2% Notes . 5 -- 93 -- 93
Net income .................. 122,632 122,632
--------- -------- ------------ ---------- ---------- -----------
BALANCE, SEPTEMBER 30, 1996
(Unaudited)................. 123,720 $1,237 $1,705,541 $206,236 $(8,025) $1,904,989
========= ======== ============ ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------
1996 1995 1995 1994 1993
------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 122,632 $ 59,364 $ 79,730 $ 53,489 $ 21,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, including
amortization of deferred financing costs .... 42,524 22,680 32,097 24,506 21,901
Provision for bad debt expense ............... 6,600 7,567 10,177 6,262 6,501
Deferred income taxes......................... 2,600 2,900 9,100 8,300 15,817
Deferred rent................................. (249) (256) (348) (285) (298)
Deferred financing costs...................... (5,649) (192) (192) (3,322) (11,017)
Extraordinary loss............................ -- -- -- -- 21,620
Gain on sale of securities.................... -- -- -- (1,044) --
Increase (decrease) from changes in:
Royalty accounts and notes receivable ....... (33,868) (13,855) (5,373) (8,633) 720
Marketing and reservation receivables ....... (13,483) (7,123) (6,134) (5,195) (2,678)
Relocation receivables....................... (3,218) (1,741) (5,984) -- --
Other assets................................. (3,451) 3,986 (4,679) (5,301) (2,590)
Accounts payable and other................... (29,598) (6,416) (5,093) (2,242) (8,933)
Income taxes payable......................... 56,138 17,984 17,471 23,541 6,276
Other liabilities............................ (1,599) (654) (1,397) (1,000) (1,125)
------------- ---------- ----------- ----------- -----------
Net cash provided by operating activities ...... 139,379 84,244 119,375 89,076 67,672
------------- ---------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of land and building................... -- -- (14,311) -- --
Other property and equipment additions ......... (23,578) (5,780) (10,212) (11,377) (8,280)
Proceeds from sale of assets.................... -- -- -- 4,697 --
Loans and investments .......................... (10,000) (13,000) (33,783) (42,524) (20,207)
Principal payments received on loans............ -- -- -- 341 4,017
Net assets acqired, excluisve of cash acquired . (970,885) (70,977) (70,647) -- (126,098)
------------- ---------- ----------- ----------- -----------
Net cash used in investing activities........... (1,004,463) (89,757) (128,953) (48,863) (150,568)
------------- ---------- ----------- ----------- -----------
FINANCING ACTIVITIES
Principal payments--long-term debt.............. (1,784) (16,252) (46,954) (152,131) (671,650)
Issuance of common stock........................ 1,167,953 57,053 51,808 933 1,892
Redemption of warrants.......................... -- -- 14,877 -- --
Cash distribution to Chartwell Leisure Inc. ... -- -- -- (50,000) --
Proceeds from borrowings........................ 242,025 -- -- 150,000 744,524
Purchase of treasury stock ..................... (8,025) -- -- -- --
Redemption of Series A Preferred Stock ........ (80,000) -- -- -- --
------------- ---------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... 1,320,169 40,801 (19,731) (51,198) 74,766
------------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... 455,085 35,288 10,153 (10,985) (8,130)
Cash and cash equivalents, beginning of period . 16,109 5,956 5,956 16,941 25,071
------------- ---------- ----------- ----------- -----------
Cash and cash equivalents, end of period ....... $ 471,194 $ 41,244 $ 16,109 $ 5,956 $ 16,941
============= ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest...................................... $ 19,161 $ 16,788 $ 17,764
----------- ----------- -----------
Taxes......................................... $ 28,139 $ 5,313 $ 1,198
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS -- HFS Incorporated (together with its
subsidiaries, the "Company"), formerly Hospitality Franchise Systems, Inc.,
engages in the business of franchising guest lodging facilities (lodging
segment) and residential real estate brokerage offices (real estate segment)
and provides operational and administrative services to its franchisees under
the names CENTURY 21(Registered Trademark), Days Inn(Registered Trademark),
Electronic Realty Associates(Registered Trademark) (ERA(Registered
Trademark)), Howard Johnson(Registered Trademark), Knights Inn(Registered
Trademark), Ramada(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) and Villager Lodge(Registered Trademark)
("Villager"). The Company also sublicenses its trademarks and provides access
to its franchisees and their customers to preferred vendors who provide
value-added services to the Company's franchisees.
B. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts and transactions of the Company together with its wholly
owned and majority owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. The consolidated
financial statements of the Company include the assets and liabilities of
Ramada Franchise Systems, Inc., an entity controlled by the Company by virtue
of its ownership of 100% of the common stock of such entity. The assets of
Ramada Franchise Systems, Inc. are not available to satisfy the claims of any
creditors of the Company or any of its other affiliates, except as otherwise
specifically agreed by Ramada Franchise Systems, Inc.
C. RELOCATION RECEIVABLES -- The Company provides relocation services to
client corporations which include responsibility for the sale of a
transferee's residence, providing equity advances on transferee residences
for the purchase of a new home and certain home management services. Advances
provided to transferees are repaid to the Company when the transferee's home
is resold. Such advances have a variable interest rate and are guaranteed by
the client corporation.
D. PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed by the straight-line
method over the estimated useful life of the related asset or the lease term,
if shorter. Interest costs associated with the purchase of a centralized
reservation system approximating $82,000, $246,000 and $440,000 in 1995, 1994
and 1993, respectively, were capitalized and are being amortized over the
estimated useful life of the related asset. The Company periodically
evaluates the recoverability of property and equipment by comparing the
carrying value to current and expected cash flows separately for each
business segment in which the property and equipment is employed.
E. FRANCHISE AGREEMENTS -- Franchise agreements are recorded at their
estimated fair values at the date acquired and amortized over the estimated
period to be benefited ranging from 22 to 40 years using the straight-line
method. The Company periodically evaluates the recoverability of franchise
agreements by comparing the carrying value to current and expected future
cash flows on a separate basis for each franchise brand.
F. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED -- The excess of
cost over fair value of net assets acquired is being amortized on a
straight-line basis over the estimated useful lives, ranging from 20 to 40
years. The Company periodically evaluates the recoverability of excess of
cost over fair value of net assets acquired by comparing the carrying value
to current and expected future cash flows on a separate basis for each
acquisition.
G. FRANCHISE ACQUISITION COSTS -- The Company expenses direct costs
relating to franchise sales on the date the property opens. These costs are
included in selling, general and administrative expenses.
H. OTHER DEFERRED COSTS -- Deferred financing costs are amortized over the
life of the related debt using the interest method.
F-61
<PAGE>
I. REVENUE RECOGNITION -- Franchise revenue consists of royalty,
marketing and reservation fees which are based on a percentage of franchised
lodging properties' gross room sales and franchised real estate brokerage
offices' gross commissions earned on sales of real estate properties.
Franchise fees are accrued as the underlying franchisee revenue is earned.
Initial fees included in franchise fees are recorded as revenue when the
lodging property or real estate brokerage office opens as a franchised unit.
Other revenue primarily consists of revenue generated from: agreements
(recognized as earned) that provide preferred vendors (vendors who provide
value-added services to the Company's franchisees) access to the Company's
franchisees and their customers; relocation services provided to client
corporations; and marketing and other services provided to casino gaming
facilities.
Other revenue consists of ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Preferred vendor and license
fees............................. $20,881 $13,901 $ 6,483
Relocation services............... 8,204 -- --
Gaming services................... 13,431 8,509 434
Other............................. 9,229 6,893 4,964
--------- --------- --------
Other revenue..................... $51,745 $29,303 $11,881
========= ========= ========
</TABLE>
J. INCOME TAXES -- The Company uses the liability method of recording
deferred income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of assets
acquired in business combinations accounted for as purchases and their tax
bases. The Company and its subsidiaries file a consolidated Federal income
tax return.
K. CASH AND CASH EQUIVALENTS -- The Company considers highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The carrying value of cash and cash equivalents
approximates fair value because of their short-term maturities.
L. SHARE INFORMATION -- Earnings per share are based upon the weighted
average number of common and common equivalent shares outstanding during the
respective periods. The $150 million 4 1/2% Convertible Senior Notes issued
in October 1994 are anti-dilutive for the year ended December 31, 1994, and
accordingly are not included in the computation of earnings per share for
1994. On November 17, 1995, the Company's Board of Directors authorized a
two-for-one stock split which was effected in the form of a 100% stock
dividend on February 14, 1996 to stockholders of record on January 30, 1996.
In February 1994, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend in April 1994. All
share, per share, stock price and stock option plan information presented
herein has been retroactively adjusted to reflect the stock splits.
M. USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
N. RECLASSIFICATIONS -- Certain reclassifications have been made to the
1994 and 1993 consolidated financial statements to conform with
classifications used in 1995.
O. INTERIM FINANCIAL INFORMATION (Unaudited) -- The financial information
with respect to the nine month periods ended September 30, 1996 and 1995 is
unaudited. In the opinion of management, such information contains all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the results of such periods. There were no adjustments of an
unusual nature recorded during the nine months ended September 30, 1996 and
1995 except that in June 1996, the Company recorded a $7.0 million pre-tax
restructuring charge, related primarily to the contribution of owned Coldwell
Banker brokerage offices to a newly created independent entity, National
Realty Trust (the "Trust"). The Company experiences seasonal revenue patterns
similar to those of the hotel and real estate industries wherein the summer
months produce higher revenue than other periods of the year.
F-62
<PAGE>
Accordingly, the first and fourth quarters are traditionally weaker than the
second and third quarters and interim results are not necessarily indicative
of results for a full year. The 4 3/4% Notes, issued February 22, 1996, are
anti-dilutive for the nine months ended September 30, 1996 and, accordingly,
are not included in the computation of earnings per share for 1996.
2. ACQUISITIONS
The following acquisitions were accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded at their estimated fair values. The results of operations of
acquisitions completed in 1995 have been included in the Company's
consolidated results since the respective dates of acquisition.
COMPLETED IN 1995
A. CENTURY 21 -- On August 1, 1995, a majority owned Company subsidiary,
C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21") from Metropolitan Life Insurance Company ("MetLife").
Aggregate consideration for the acquisition consisted of $245 million plus
expenses, including an initial cash payment of $70.2 million, 4 million
shares of the Company's common stock valued at $65 million, the assumption of
$80 million of Century 21 redeemable preferred stock issued to MetLife prior
to the acquisition and subsequently redeemed on February 28, 1996 and a $30
million contingent payment also made on February 28, 1996. The preferred
stock dividend paid by the Company in 1995 in connection with the Century 21
redeemable preferred stock was $1.7 million and is included as interest
expense in the consolidated statement of income for the year ended December
31, 1995. Excess of cost over fair value of net assets acquired recorded in
connection with the acquisition of Century 21 was $140.0 million. A
management group including Holding's chief executive officer, who is also a
director of the Company, owns 12.5% of Holding's common stock. The chief
executive officer and two management group executives entered into renewable
employment agreements with the Company with initial terms that commenced on
November 1, 1995 and expire on December 31, 1997. The Company has a call
option to purchase Holding common stock owned by the management group after
January 1, 1998 for the fair market value of such stock when and if the
option is exercised. The management group has a put option to require the
Company to purchase all their Holding common stock after January 1, 1998 at
fair market value.
The Company and certain stockholders sold approximately 6.4 million common
shares pursuant to a public offering on September 19, 1995 ("Offering").
Included in the Offering were 4 million shares issued to MetLife ("MetLife
Shares") as partial consideration for the acquisition of Century 21. In
accordance with the Century 21 acquisition agreements, the Company received
$28.9 million representing proceeds from the sale of the MetLife Shares in
excess of a $17.50 per share cap, net of certain expenses of the Offering. In
connection with the Offering, the Company also received $20.1 million of
proceeds, net of certain expenses of the Offering, from the sale of 835,800
shares issued upon the exercise of an underwriter over-allotment option. Net
proceeds from the Offering received by the Company resulted in corresponding
increases in stockholders' equity.
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21 operations. This
acquisition was consummated in 1995 and resulted in the consolidation of
facilities, involuntary termination and relocation of employees, and
elimination of duplicative operating and overhead activities. The following
table provides details of these charges by type. At December 31, 1995 the
Company was in the process of transitioning operations and expects to
complete the restructuring late in 1996.
<TABLE>
<CAPTION>
CENTURY 21
<S> <C>
Personnel related .. $10,550
Facility related .... 13,000
Other costs.......... 450
------------
Total................ $24,000
============
Terminated
employees........... 319
</TABLE>
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and
F-63
<PAGE>
relocation costs associated with assets to be disposed of, and other charges
incurred in the consolidation of excess office space. During 1995,
approximately $16,260,000 was paid and charged against the restructuring
liability.
B. KNIGHTS INN -- On August 31, 1995, the Company acquired the assets
comprising the Knights Inn hotel franchise system, an economy hotel franchise
system, for approximately $15 million plus expenses.
C. CENTRAL CREDIT, INC. -- On May 11, 1995, the Company acquired by merger
(the "CCI Merger") Casino & Credit Services, Inc.'s ("CACS") gambling patron
credit information business, Central Credit, Inc. ("CCI"). The Company
acquired all of the common stock of CACS for approximately $38 million by
issuing approximately 2.4 million shares of the Company's common stock and
warrants to acquire up to approximately 1.0 million additional shares of the
Company's common stock. The exercise price for the warrants range from 28.56
to 39.27 per share. The range of exercise prices is a result of the various
exercise prices of the underlying warrants which were issued at various dates
and prices. Prior to the acquisition, CACS distributed to its shareholders
all net assets not related to the gambling patron credit information
business.
In connection with the acquisitions completed in 1995, the Company
acquired the following net assets ($000's):
<TABLE>
<CAPTION>
CENTURY 21 OTHER TOTAL
------------ ---------- -----------
<S> <C> <C> <C>
Current assets........................................ 40,945 1,917 72,862
Franchise agreements.................................. 33,500 5,175 38,675
Excess of cost over fair value of net assets
acquired............................................. 140,000 45,449 185,449
Other................................................. 5,442 8,500 13,942
Accounts payable and other............................ (15,399) (6,317) (21,716)
Accrued acquisition obligations....................... (24,000) -- (24,000)
Deferred rent and other............................... (9,364) (3,400) (12,764)
------------ ---------- -----------
Fair value of net assets acquired..................... 201,124 51,324 252,448
Assumption of preferred stock......................... (80,000) -- (80,000)
Common stock issued................................... (65,000) (36,801) (101,801)
------------ ---------- -----------
Cash paid, net of cash acquired....................... 56,124 14,523 70,647
============ ========== ===========
</TABLE>
COMPLETED IN 1996 OR PENDING
D. TRAVELODGE -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge(Registered Trademark) service marks, and
franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3 million.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge and Ramada franchise agreements for nineteen and one acquired
motels, respectively. The Company financed $10 million of MOA's purchase
price under a $10 million revolving credit facility, bearing interest at 14%
per annum. The loan is guaranteed by a parent company of MOA and secured by
approximately 80% of MOA's outstanding common stock.
In addition, Chartwell Leisure Inc. ("CHRT"), formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders on November 22, 1994 (the "Distribution Date") (See Note
9), purchased all of the capital stock of FHI for $98.4 million. FHI owns or
has an interest in 112 hotel and motel properties. In connection with CHRT's
acquisition, the Company guaranteed $75 million of CHRT borrowings under a
$125 million revolving credit facility entered into by CHRT with certain
banks. The Company is to be paid a guarantee fee of 2% per annum of the
outstanding guarantee commitment by the Company pursuant to a financing
agreement entered into between CHRT and the Company at the Distribution Date
(the "Financing Agreement"). The Financing Agreement was modified to allow
the Company to provide credit enhancements for hotel industry investments.
The Company and CHRT terminated or modified other agreements entered into
with CHRT at the Distribution Date, including a gaming related marketing
services agreement and an advisory agreement. CHRT paid the Company an
advisory fee of approximately $2 million in connection with CHRT's
acquisition of FHI.
F-64
<PAGE>
E. ERA -- On February 12, 1996, the Company purchased the assets
comprising the Electronic Realty Associates residential real estate brokerage
franchise system for approximately $36.8 million, subject to certain working
capital adjustments. The Company has also entered into an agreement to
purchase the ERA affiliates which conduct the ERA home warranty business in
eight states for $9.2 million, subject to certain working capital
adjustments. The purchase of these affiliates is subject to the approval of
certain state insurance authorities and is expected to be completed during
the second quarter of 1996.
F. CENTURY 21 NON-OWNED REGIONS --During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S.
previously non-owned Century 21 regions ("Century 21 NORS") consisting of
more than 1,000 franchised real estate offices. The $147 million aggregate
purchase price consisted of approximately $96 million in cash, $5 million in
notes and $46 million (approximately 0.9 million shares) in Company common
stock.
G. COLDWELL BANKER -- On May 31, 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), at the time the largest
gross revenue producing residential real estate company in North America and
a leading provider of corporate relocation services. The Company paid $640
million in cash for all of the outstanding capital stock of Coldwell Banker
and repaid approximately $105 million of Coldwell Banker indebtedness. The
aggregate purchase price for the transaction was financed through the May 9,
1996 sale of Company common stock in which the Company sold an aggregate 19.4
million shares of Company common stock pursuant to a public offering (the
"Offering").
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices
("Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which the Company has no beneficial interest. The Company
recorded a $5 million expense in the second quarter of 1996 representing the
fair value of operations contributed to the Trust. The charge represents the
fair value of the Owned Brokerage Business based upon a valuation which
considered earnings, cash flow, assets and business prospects of the
contributed business.
H. ACQUISITION OF AVIS, INC. -- On October 17, 1996, the Company completed
the acquisition of all of the outstanding capital stock of Avis, Inc.
("Avis"), including payments under certain employee stock plans of Avis and
the redemption of certain series of preferred stock of Avis for an aggregate
$806.5 million. The purchase price was comprised of approximately $367.2
million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 4.6 million shares) in Company common stock.
Avis. together with its subsidiaries, licensees and affiliates, operates
the Avis rental car business, which the Company believes is the second
largest car rental system in the world.
Prior to the consummation of the acquisition, the Company announced its
intention to dispose of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Operating Company") through an
initial public offering of the common stock of the Operating Company during
1997. The Operating Company will license the Avis trademark from the Company
in return for a license fee based on a percentage of Operating Company
revenue. Accordingly, the Company intends to reflect the acquired net assets
and results of operations of the Operating Company as "investment in car
rental operating company-net" and "other revenue", respectively until such
offering.
I. ACQUISITION OF RESORT CONDOMINIUMS INTERNATIONAL, INC. -- On November
12, 1996, the Company completed the acquisition of all the outstanding
capital stock of Resort Condominiums International, Inc., and its affiliates
("RCI") for approximately $625 million comprised of $550 million in cash and
$75 million of Company common stock. The purchase agreement provides for
contingent payments of up to $200 million over the next five years.
RCI, based in Indianapolis, Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately two million
timeshare owners and approximately 3,000 resorts around the world. RCI is
also engaged in publishing related to the timeshare industry and provides
other travel-related services, integrated software systems and resort
management and consulting services.
J. PENDING ACQUISITION OF PHH CORPORATION ("PHH") -- On November 10, 1996,
the Company entered into a definitive merger agreement (the "Merger
Agreement") 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. Pursuant to the terms of ther Merger Agreement, the number of
Company shares to be issued may range from 21.3 to 28.8 million, based upon
the average share price of
F-65
<PAGE>
the Company's common stock over a period of 20 trading days ending five days
prior to the date of the vote by PHH shareholders on approval of the
transaction. PHH is the world's largest provider of corporate relocation
services and also provides mortgage banking and vehicle management services.
Consummation of the transaction is subject to customary regulatory approvals
and the approval of the shareholders of each company. The transaction, which
is expected to close in early 1997, will be accounted for as a pooling of
interests.
PRO FORMA INFORMATION
The following information reflects the pro forma results of operations of
the Company for the nine months ended September 30, 1996 and 1995 and for the
year ended December 31, 1995 assuming the following transactions using the
purchase method of accounting occurred on January 1, 1995: (i) the August 1,
1995 acquisition of Century 21 Real Estate Corporation ("Century 21"); (ii)
the acquisition by merger in May 1995 of, Central Credit, Inc.; (iii) the
acquisition of Avis and the issuance of the Company common stock as partial
consideration for Avis; (iv) the acquisition of RCI and the issuance of the
Company common stock as partial consideration for RCI; (v) the acquisition of
Coldwell Banker and the related contribution of Coldwell Banker's owned real
estate brokerage offices to the Trust; (vi) proceeds from an offering of the
Company's common stock to the extent necessary to fund the acquisition of
Coldwell Banker and the related repayment of indebtedness and acquisition
expenses; (vii) the 1996 acquisitions of Travelodge, ERA and the Century 21
NORS; and (viii) the February 22, 1996 issuance of $240 million of 4 3/4%
convertible senior notes due 2003 (the "4 3/4% Notes", see Note 6) to the
extent such proceeds were used to finance acquisitions. The acquisitions have
been or will be accounted for using the purchase method of accounting.
Accordingly, assets acquired and liabilities assumed have been or will be
recorded at their estimated fair values, which are subject to further
refinement, based upon 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 pro forma results are not necessarily indicative of the
results of operations that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that may
occur in the future. The underlying pro forma information includes the
amortization expense associated with the assets acquired, the reflection of
the Company's financing arrangements, the elimination of redundant costs and
the related income tax effects. Certain other Company acquisitions were not
material and therefore were not reflected in the pro forma statements of
operations.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------- YEAR ENDED
1996 1995 DECEMBER 31, 1995
---------- ---------- -----------------
<S> <C> <C> <C>
Net revenues ................................. $973,383 $843,846 $1,145,162
Income before income taxes.................... 291,551 191,253 272,320
Net income.................................... 171,220 112,318 159,925
Net income per share (fully diluted) ......... $ 1.18 $ .82 $ 1.14
Weighted average common and common equivalent
shares outstanding (fully diluted)........... 148,194 141,807 144,335
</TABLE>
The following information reflects the pro forma consolidated results of
operations for the year ended December 31, 1994 assuming the following
occurred on January 1, 1994: the distribution of CHRT; the acquisitions of
CENTURY 21, the Century 21 non-owned regions, and the Travelodge and ERA
franchise systems; the CCI Merger and the proceeds from the issuance of the
convertible senior notes issued February 22, 1996 (See Note 6) to the extent
such proceeds were used to finance acquisitions. The acquisitions have been
accounted for using the purchase method of accounting. Accordingly, assets
acquired and liabilities assumed will be recorded at their estimated fair
values, which are subject to further refinement, based upon appraisals and
other analyses with appropriate recognition given to the effect of current
interest rates and income taxes. Such information does not reflect the
following transactions which were completed or pending in 1996: (i) the
acquisition of Coldwell Banker and the related contribution of Coldwell
Banker's owned real estate brokerage offices to the Trust; (ii) proceeds from
an offering of the Company's common stock to the extent necessary to fund the
acquisition of Coldwell Banker and the related repayment of indebtedness and
acquisition expenses; (iii) the acquisition of RCI and the issuance of the
Company common stock as partial consideration for RCI; and (iv) the
acquisition of Avis and the issuance of the Company common stock as partial
consideration for Avis. The pro forma results are not
F-66
<PAGE>
necessarily indicative of the results of operations that would have occurred
had the transactions been consummated as indicated nor are they intended to
indicate results that may occur in the future. The pro forma results of
operations include the amortization expense associated with assets acquired,
the reflection of the Company's financing arrangements, the elimination of
redundant costs and the related income tax effects. The effect of the Knights
Inn and Villager (acquired November 4, 1994) hotel franchise systems are not
included as they are not material to the operating results of the Company.
(In thousands, except per share amounts):
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
DECEMBER 31, 1994
------------------
(UNAUDITED)
<S> <C>
Net Revenues.................................................... $542,675
Income before income taxes and minority interest................ 165,636
Net income ..................................................... 93,973
------------------
Net income per share (fully diluted)............................ $ .84
==================
Weighted average common and common equivalent shares
outstanding.................................................... 116,616
==================
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES ----------------------
IN YEARS 1995 1994
-------------- ---------- ----------
<S> <C> <C> <C>
Land...................................... $ 3,000 $ --
Building.................................. 30 11,311 --
Furniture and fixtures.................... 5-7 2,341 1,176
Leasehold improvements.................... 5-11 6,784 6,237
Information technology support systems ... 3 -10 55,730 33,625
Equipment under capital leases............ 7 8,293 8,293
-------------- ---------- ----------
87,459 49,331
Accumulated depreciation and
amortization............................. (19,567) (11,518)
-------------- ---------- ----------
Property and equipment--net............... $ 67,892 $ 37,813
========== ==========
</TABLE>
Depreciation and amortization expense was approximately $8.1 million, $5.2
million and $3.0 million for the years ended December 31, 1995, 1994 and
1993, respectively.
4. OTHER ASSETS
Other assets consist of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Investment in Insignia
(A)....................... $13,967 $ --
Investments in AMRE (B) ... 4,136 --
Investment in Wingate (C) . 3,000 --
Loan receivable--MOA (D) .. 10,000 --
Other ..................... 24,425 15,552
--------- --------
Other assets............... $55,528 $15,552
========= ========
</TABLE>
A. In connection with a strategic preferred vendor alliance with a
subsidiary of Insignia Financial Group, Inc. ("Insignia"), on December 1,
1995 the Company purchased 1.0 million shares of Insignia common stock,
representing approximately 4% of the outstanding common stock, for $14.0
million. The sale of such shares by the Company is subject to certain
contractual restrictions. The investment is recorded at cost. Fair value at
December 31, 1995, determined based on quoted market prices, was
approximately $19.2 million.
F-67
<PAGE>
B. On October 17, 1995, the Company entered into an agreement to license
the CENTURY 21 trademark to AMRE, Inc. ("AMRE") in connection with the
selling and installation of home improvement products. The license agreement
commenced on January 1, 1996, expires on December 31, 2015 and is cancelable
at AMRE's option on December 31, 2005. License fees are payable quarterly
based on the greater of 3% of AMRE's contract revenue or minimum fees ranging
from $11.0 million in 1996 to $27.9 million in 2005 and increases based on
increases in certain economic factors, thereafter.
The Company also acquired 300,000 shares of AMRE's convertible preferred
stock for $3.0 million on October 17, 1995. The preferred stock, which is
accounted for at cost, has a stated cumulative dividend rate of 8%, is
convertible by the Company into AMRE common stock at $5.90 per share at any
time and is subject to mandatory redemption by AMRE on January 1, 2000. In
December 1995, the Company acquired 87,000 shares of AMRE common stock for
approximately $1.1 million, representing less than 1% of AMRE outstanding
common stock. The investment in AMRE common stock is classified as an
available for sale security and the fair value approximates the carrying
value at December 31, 1995. The fair value of the combined AMRE investments
at December 31, 1995, determined based on quoted market prices of the AMRE
common stock, was approximately $8.7 million.
The Company also provided AMRE with a revolving credit facility of up to
$4 million of borrowings at LIBOR plus 1.5% through 1998. There were no
borrowings under the facility at December 31, 1995.
C. On March 31, 1995, the Company acquired a 1% general partnership
interest for approximately $3 million in a limited partnership which
develops, promotes and franchises the recently established Wingate InnSM
franchise system, a new construction hotel brand. Through December 31, 1995,
$15 million of capital was invested in the partnership through a private
placement of limited partner unit interests. The Company has an option to
acquire the limited partner investment at a 30% compounded annual rate of
return plus additional outstanding capital loans and an additional call
premium equal to approximately 1.5 times annual royalty revenue, as defined.
The limited partners may require the Company to acquire the limited partner
interest on August 29, 2001. The Company also agreed to finance additional
limited partner capital contributions up to $60 million at the prime lending
rate, upon the occurrence of certain events, including the addition of open
and operating Wingate Inn properties. Due to limitations on the general
partner's ability to enter into certain significant transactions, the Company
does not control the limited partnership and accounts for its investment on
the equity method.
D. On March 31, 1995, the Company made a $10 million loan to MOA's parent
company, New Image Realty Inc., bearing interest at 12% payable quarterly.
The loan, as amended, is secured by MOA common stock and matures on March 31,
1998.
5. ACCOUNTS PAYABLE AND OTHER
Accounts payable and other consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Accounts payable.................................. $ 6,887 $ 4,864
Marketing and reservation liabilities............. 12,508 10,159
Unearned franchise fees and other revenue ........ 16,733 9,903
License restructuring and acquisition
obligations...................................... 10,276 5,732
Accrued payroll and related....................... 11,809 8,724
Accrued broker incentive bonus.................... 4,738 --
Relocation home purchase liabilities.............. 6,099 --
Other............................................. 14,950 4,642
--------- --------
Accounts payable and other........................ $84,000 $44,024
========= ========
</TABLE>
F-68
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Revolving Credit Facility (A)..................... $ -- $ 45,000
5 7/8% Senior Notes (B)........................... 149,715 149,619
4 1/2% Convertible Senior Notes (C)............... 149,971 150,000
Obligations under capital leases and other loans 3,341 4,394
---------- ---------
303,027 349,013
Less current portion.............................. 2,249 1,597
---------- ---------
Long-term debt.................................... $300,778 $347,416
========== =========
</TABLE>
A. REVOLVING CREDIT FACILITY -- The Company's revolving credit facility
("Revolving Credit Facility") provides up to a maximum of $300 million and
$200 million of unsecured borrowings through December 1996 and 1997,
respectively. The Revolving Credit Facility shall, at the Company's option,
bear interest based on competitive bids of lenders participating in the
facility, the administrative agent's prime rate or LIBOR plus a margin not to
exceed 0.63%. The Company is required to pay a $150,000 annual administration
fee and a quarterly facility fee ranging between 0.19% and 0.38% of the
available facility. The Revolving Credit Facility contains covenants
including restrictions on dividends and indebtedness, sale and lease back
transactions, maintenance of minimum net worth and interest coverage ratios.
The Revolving Credit Facility had an average interest rate of approximately
6.23% at December 31, 1994. Based upon the Company's published credit rating
and the Revolving Credit Facility's variable interest rate, the carrying
value of borrowings under the Revolving Credit Facility at December 31, 1994
approximated fair value.
B. 5 7/8% SENIOR NOTES -- On December 16, 1993, the Company completed a
public offering of $150 million unsecured 5 7/8% Senior Notes due December
15, 1998 ("Senior Notes"). Interest is payable semi-annually. An original
issue discount approximating $478,000 was recorded at the date of issuance
and is being amortized over the life of the issue using the interest method.
The unamortized balance at December 31, 1995 and 1994 was $285,000 and
$381,000, respectively. Based on quoted market prices, the fair value of the
Senior Notes was approximately $150 million and $137 million at December 31,
1995 and 1994, respectively.
C. 4 1/2% CONVERTIBLE SENIOR NOTES -- On October 5, 1994, the Company
completed a public offering of Convertible Senior Notes ("4 1/2% Notes") due
1999, which are convertible at the option of the holders at any time prior to
maturity into 55.106 shares of the Company's common stock per $1,000
principal amount of the 4 1/2% Notes, representing a conversion price of
$18.15 per share. The 4 1/2% Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 1997 at a
redemption price of 101.125% of principal if redeemed prior to September 30,
1998 or at 100% of principal any time thereafter until maturity. Interest is
payable semi-annually. Based on quoted market prices, the fair value of the 4
1/2% Notes was approximately $250 million and $143 million at December 31,
1995 and 1994, respectively.
Long-term debt payments including obligations under capital leases at
December 31, 1995 are due as follows ($000's):
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------- ---------
<S> <C>
1996................. $ 2,249
1997................. 981
1998................. 149,826
1999................. 149,971
---------
303,027
Less current
portion............. 2,249
---------
Long-term debt....... $300,778
=========
</TABLE>
F-69
<PAGE>
DEBT REFINANCINGS -- On December 16, 1993, the Company refinanced its
then senior secured credit facility through a public offering of the Senior
Notes and a Revolving Credit Facility as described above. The senior secured
facility financed the April 29, 1993 acquisition of the Super 8 franchise
system and refinanced a similar existing facility. As a result of the
December 16, 1993 and April 29, 1993 refinancings of existing debt,
approximately $4.4 million and $8.4 million (net of tax), respectively, of
deferred financing costs were written off and classified as extraordinary
losses due to early extinguishment of debt.
ISSUANCE OF 4 3/4% CONVERTIBLE SENIOR NOTES -- On February 22, 1996, the
Company completed a public offering of $240 million unsecured 4 3/4%
convertible senior notes ("4 3/4% Notes") due 2003, which are convertible at
the option of the holder at any time prior to maturity into 14.993 shares of
the Company's common stock per $1,000 principal amount of the 4 3/4% Notes,
representing a conversion price of $66.70 per share. The 4 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However, on
or after March 3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not
be redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $93.38 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within
a period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4 3/4% Notes is payable semi-annually commencing
September 1, 1996.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Company, using available market information and appropriate valuation
methodologies. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on estimated fair value.
The table below provides carrying value and fair value amounts and
a cross reference to the applicable Note ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR FAIR VALUE
VALUE VALUE VALUE VALUE REFERENCE
---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivialents.............. $ 16,109 $ 16,109 $ 5,956 $ 5,956 Note 1
Other assets............... 31,103 40,959 -- -- Note 4
Long-term debt ............ 303,027 403,341 349,013 329,394 Note 6
---------- --------- ---------- --------- ------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
A. NEW WORLD LICENSE -- The Company acquired, in 1990, the U.S. Ramada
franchise agreements and the rights to sub-license the Ramada trademarks to
U.S. lodging facilities under a 40-year, extendable license agreement with
the licensor of the trademarks, New World (USA) Inc. ("New World"), that
governs the use of the Ramada trademark domestically. The original license
agreement contained covenants, including the maintenance of quality
standards, minimum system-wide room sales, and minimum net worth of the
seller in the aforementioned acquisition.
In September 1990, Prime Hospitality, Inc. ("Prime"), the seller of the
domestic Ramada franchise system filed for protection under Chapter 11 of the
United States Bankruptcy Code. In July 1991, the Company entered into a
restructuring agreement with New World to, among other things, obtain the
ability to assign the license and eliminate the existing minimum net worth
requirement. In connection with this restructuring, the Company paid to New
World $3.7 million, including $2.5 million relating to payments made prior to
the date of the agreement by New World on behalf of Prime. In addition, the
F-70
<PAGE>
Company agreed to assume certain additional obligations owed by Prime to New
World, which have been recorded at an estimated value of $10.5 million. The
payment to New World and the value of the assumed obligations have been
reflected as excess of cost over fair value of net assets acquired.
Effective August 4, 1992, New World and Prime reached a settlement which
resulted in a benefit available of $1.5 million per year through 2003 plus
$13.0 million in 2004 to reimburse the Company for advances made and to be
made by the Company pursuant to the restructuring agreement. At December 31,
1995 the Company had made advances of $14.0 million and contingencies of $5.5
million related to litigation, which are repaid at the rate of $375,000 per
quarter and is included in other income. Any additional advances, up to the
aggregate benefit described above, will be repaid in the same manner.
The license agreement, as modified, contains covenants, including
maintenance of quality standards, minimum system-wide room sales and minimum
net worth. Under the license agreement, royalty payments, subject to certain
minimums, are calculated based on a percentage of Ramada system-wide gross
room sales and are due quarterly in advance. Included in other current assets
as prepaid license fees are $4.4 million and $4.3 million as of December 31,
1995 and 1994, respectively.
B. LEASES -- The Company has noncancelable operating leases covering
various equipment and facilities, which expire through 2004. Rental expense
for the years ended December 31, 1995, 1994 and 1993 approximated $5.0
million, $3.8 million and $3.2 million respectively, excluding real estate
taxes and other fees that are also the responsibility of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
- ---------------------------------
<S> <C>
1996.............................. $ 4,215
1997.............................. 3,240
1998.............................. 3,170
1999.............................. 2,863
2000.............................. 2,870
Remaining years................... 7,346
--------
Total minimum lease payments ..... $23,704
========
</TABLE>
The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.
C. EMPLOYMENT AGREEMENTS -- The Company has employment agreements with
certain employees for remaining terms of one to five years. Annual
commitments under these agreements are as follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
- ---------------------------------
<S> <C>
1996.............................. $ 7,903
1997.............................. 6,707
1998.............................. 2,105
1999.............................. 1,541
2000.............................. 1,541
--------
Total employment agreements ...... $19,797
========
</TABLE>
Most of these agreements provide for severance pay should the employee be
terminated without cause.
D. LITIGATION -- In the normal course of business, certain litigation is
initiated against the Company. Generally, these claims are insured and, in
the opinion of management, disposition of such litigation will not have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operation.
9. RELATED PARTY
In November 1994, the Company distributed all of the capital stock of its
wholly owned subsidiary, CHRT, to its shareholders ("Distribution"). Prior to
the Distribution, CHRT engaged in the development
F-71
<PAGE>
and ownership of casino gaming facilities. The Company retained its casino
services business. The Company distributed $98.2 million of net gaming
assets, including $50 million cash and $48.2 million of gaming loans and
investments in connection with the Distribution. In connection with the
Distribution, the Company and CHRT entered into agreements pursuant to which
marketing, advisory, financing and corporate services were to be provided by
the Company. Concurrent with the acquisition of the Travelodge franchise
system and CHRT's acquisition of FHI (See Note 2), the marketing and advisory
agreements were terminated and the Financing Agreement was modified such that
the Company is to provide up to $75 million of credit enhancements to CHRT's
non-gaming industry financings for a fee of 2% per annum. The corporate
services agreement was modified to provide that the Company is to provide
financial, legal and other corporate administrative support and advisory
services through September 1996, and thereafter advisory services through
January 2019 for a fee of $1.5 million per year. Included in other income in
1995 and 1994 is $3.5 million and $0.4 million, respectively, of fees
pursuant to the financing, corporate and advisory service agreements.
10. STOCKHOLDERS' EQUITY
A. STOCK OPTIONS -- The Company has two stock option plans, the 1992 and
1993 Stock Option Plans, as amended, which provide for the granting of
options to certain officers and employees to purchase shares of the Company's
common stock generally over ten years at prices not less than the fair market
value at the date of grant. Options granted are exercisable from one to six
years from the date of grant.
The table below summarizes the activity of the plans (000's):
<TABLE>
<CAPTION>
OPTIONS OPTION
OUTSTANDING PRICE RANGE
------------- ---------------
<S> <C> <C>
Balance at January 1, 1993 .. 9,636 $ 2.87-$4.08
Granted...................... 3,582 7.94-11.17
Cancelled.................... (32) 2.87- 4.08
Exercised.................... (718) 2.87
------------- ---------------
Balance at December 31,
1993........................ 12,468 2.87-11.17
Granted...................... 3,228 11.71-13.41
Cancelled.................... (122) 3.74- 7.94
Exercised.................... (240) 3.13- 7.94
Distribution of NLC.......... 454 7.94-13.41
------------- ---------------
Balance at December 31,
1994........................ 15,788 2.87-13.41
Granted...................... 5,476 13.63-29.13
Cancelled.................... (152) 4.08-23.44
Exercised.................... (605) 3.13-12.53
------------- ---------------
BALANCE AT DECEMBER 31,
1995........................ 20,507 2.87-29.13
============= ===============
</TABLE>
Shares exercisable at December 31, 1995 and 1994 were 7,078,886 and
4,630,266 respectively. Shares available for grant at December 31, 1995 and
1994 were 35,266 and 1,249,332, respectively.
B. STOCK WARRANTS -- On December 15, 1995, the Company redeemed all
outstanding warrants in accordance with the provisions of the warrant
agreement underlying warrant obligations assumed in the CCI Merger (See Note
2). The Company received aggregate proceeds approximating $14.8 million from
the exercise of such warrants in 1995, resulting in the issuance of
approximately 1.0 million shares of Company common stock.
C. EARNOUT AGREEMENT -- On January 31, 1992, the Company acquired
substantially all of the assets comprising the franchise system of Days Inns
of America, Inc. for $275.3 million consisting of $208.3 million of cash,
$62.0 million of Company common and preferred stock and $5.0 million of
assumed liabilities. In connection with the acquisition, the Company entered
into an earnout agreement with Bryanston Group, Inc. ("Bryanston"), an
affiliate of the two controlling stockholders of the sellers of the Days Inn
franchise system which provided for the issuance of up to 7.1 million shares
of common stock based upon the cash payments of royalties and other fees from
franchised properties over a five-year period. Through December 31, 1994, 6.0
million shares were issued pursuant to the earnout agreement.
F-72
<PAGE>
In August 1995, the Company approved the accelerated vesting of the right to
receive the remaining 1.1 million unvested shares. These shares and an
additional 500,000 shares which were previously issued but not sold, were
sold in a September 19, 1995 public offering. Accordingly, as of December 31,
1995, all shares included in the earnout agreement were issued and sold. The
issuance of such shares resulted in a $28.1 million, $54.0 million and $15.3
million increase to excess of cost over fair value of net assets acquired and
a corresponding increase to stockholders' equity during 1995, 1994 and 1993,
respectively.
D. AUTHORIZED SHARES -- On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of common stock to 300 million.
E. DIVIDENDS -- The Company expects to retain its earnings for the
development and expansion of its business and the repayment of indebtedness
and does not anticipate paying dividends on common stock in the foreseeable
future.
11. MARKETING AND RESERVATION ACTIVITIES
A. DAYS INN, HOWARD JOHNSON, KNIGHTS INN, PARK INN, SUPER 8 AND VILLAGER
- -- The Company receives monthly marketing and reservation fees, each of which
is a specified percentage of gross room sales from its Days Inn, Howard
Johnson, Knights Inn, Park Inn, Super 8 and Villager franchisees. As provided
in the franchise agreements, at the Company's discretion, all of these fees
will be expended for marketing purposes and the operation of a centralized
brand-specific reservation system and are controlled by the Company until
disbursement. Franchise revenue includes marketing and reservation fees of
approximately, $93,379,000, $86,198,000 and $77,225,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
B. RAMADA -- Ramada Inns National Association ("RINA") is an
unincorporated association representing the owners of the hotels in the
Ramada system. RINA provides a worldwide reservation system and provides
advertising, promotional services and training to Ramada franchisees. The
Company receives a combined fee for marketing and reservation activities
based on a percentage of monthly gross room revenues from members of RINA
which is controlled by the Company until disbursement. As provided in the
franchise agreement, at the Company's discretion, all of these fees will be
expended for advertising, promotional services, training and the operation of
a worldwide reservation system. Included in franchise fees are RINA fees
approximating $46,655,000, $44,352,000 and $40,017,000 for the periods ended
December 31, 1995, 1994 and 1993, respectively. Included in marketing and
reservation receivables is approximately $5,815,000 and $1,725,000 due from
RINA as of December 31, 1995 and 1994, respectively.
C. CENTURY 21 -- The Century 21 National Advertising Fund ("NAF") is an
independent entity managed by the Company, the funds of which are used
exclusively for advertising and public relations purposes for the collective
benefit of the Century 21 organization, including all Century 21 franchisees.
The NAF receives fees from Century 21 franchisees equal to 2% of their
respective gross commissions earned on sales of real estate properties,
subject to monthly minimum and maximum contributions. In addition, the
Company is required to contribute 10% of royalty fees collected from Century
21 franchisees to the NAF. The contributions are expensed by the Company when
the corresponding royalty fee is recognized. Included in marketing and
reservation expense is approximately $4.2 million representing the Company's
contribution to the NAF for the five month period ended December 31, 1995.
The NAF cash balance was $4.3 million at December 31, 1995. Such amount is
not included in the Company's consolidated financial statements.
Advertising expense approximated $60.8 million, $36.2 million and $23.9
million for the years ended December 31, 1996, 1995 and 1994, respectively.
F-73
<PAGE>
12. INCOME TAXES
The income tax provision consists of ($000's)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Current
Federal................................. $41,456 $23,747 $ 1,253
State................................... 4,619 5,107 500
--------- --------- --------
46,075 28,854 1,753
--------- --------- --------
Deferred
Federal................................. 8,054 6,831 20,445
1% change in federal corporate tax
rate................................... -- -- 1,807
State................................... 1,046 1,469 2,340
--------- --------- --------
9,100 8,300 24,592
--------- --------- --------
Provision for income taxes............... $55,175 $37,154 $26,345
========= ========= ========
</TABLE>
In 1993, the Company recorded (i) a $1,200,000 increase to its provision
for income taxes in connection with the remeasurement of incremental net
deferred tax liabilities recorded primarily as a result of the Super 8
acquisition and (ii) other incremental federal income taxes on 1993 income of
$607,000 resulting from the increase in the federal corporate tax rate.
Net deferred income tax assets and liabilities are comprised of the following
($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Provision for doubtful accounts ...... $ 7,600 $ 5,400
Unearned franchise fees and other .... 7,800 6,600
Acquisition related reserves.......... 4,200 2,400
Franchise acquisition costs........... (2,400) (2,100)
Other................................. 3,000 900
----------- -----------
Current net deferred tax asset ....... $ 20,200 $ 13,200
=========== ===========
Franchise agreement amortization ..... $(73,600) $(68,300)
Other................................. (9,200) (3,600)
----------- -----------
Noncurrent net deferred tax
liability............................ $(82,800) $(71,900)
=========== ===========
</TABLE>
The Company's effective income tax rate differs from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate........................................ 35.0% 35.0% 35.0%
State income taxes net of federal benefit..................... 4.0 4.7 4.7
Change in deferred taxes due to 1% change in federal
corporate rate............................................... -- -- 2.0
Other......................................................... 1.4 1.3 1.7
------- ------- -------
Effective tax rate ........................................... 40.4% 41.0% 43.4%
======= ======= =======
</TABLE>
13. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan in which any eligible employee
may participate. The plan is a defined contribution 401(k) plan qualified
under the Internal Revenue Code. The Company contributes an amount equal to
twenty-five to fifty percent, based on years of service, of the pre-tax
contributions made by participating employees, with respect to the first six
percent of an employee's compensation. The Company has elected to pay the
administrative expenses of the plan and the total charges to income relative
to such expenses and Company matching were approximately $405,000, $332,000
and $327,000, respectively in 1995, 1994 and 1993.
F-74
<PAGE>
14. FRANCHISING ACTIVITIES
Revenue from franchising activities consists of initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property and
estimated real estate brokerage offices' gross closed commissions. Initial
franchise fees approximated $15,735,000, $13,816,000 and $10,609,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Franchising activity is summarized as follows:
<TABLE>
<CAPTION>
LODGING REAL ESTATE
--------- -------------
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993 1995
------- --------- ---------- -------------
<S> <C> <C> <C> <C>
FRANCHISES IN OPERATION
Units at end of year ... 4,603 4,229 3,783(1) 5,995(2)
EXECUTED BUT NOT OPENED
Acquired................ 31 -- 83 104
New agreements.......... 983 870 702 248
Backlog, end of year ... 682 594 577 176
</TABLE>
- ------------
(1) Includes 1,010 acquired lodging franchises.
(2) Substantially all acquired as part of the acquisition of Century 21.
15. INDUSTRY SEGMENT INFORMATION
The Company's major business segments are comprised of guest lodging
facility and real estate brokerage office franchise systems. As a franchisor,
the Company licenses the owners and operators of independent businesses,
principally hotels and real estate brokerage offices, to use the Company's
brand names. The Company provides its customers with services designed to
increase their revenue and profitability. These services permit franchisees
to retain independence and local control while benefiting from the economies
of scale of widely promoted brand names and standards of service, national
and regional direct marketing and co-marketing arrangements and global
procurement. Services provided to the lodging segment include access to a
national reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. Services provided to
the real estate segment include national and local advertising and promotion,
referrals and training and volume purchasing discounts.
Segment information ($000's):
<TABLE>
<CAPTION>
REAL
YEAR ENDED DECEMBER 31, 1995 LODGING ESTATE CORPORATE OTHER CONSOLIDATED
- ----------------------------- ---------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenue....................... $340,919 $ 47,967 $ -- $ 24,097 $ 412,983
Operating profit.............. 125,809 19,805 -- 15,617 161,231
Corporate expenses............ -- -- (4,537) -- (4,537)
Identifiable assets........... 805,380 190,257 66,453 103,718 1,165,808
Depreciation and
amortization................. 26,058 2,997 663 1,139 30,857
Capital expenditures.......... 7,206 2,540 14,706 71 24,523
========== ========= =========== ========= ==============
</TABLE>
F-75
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
TOTAL
FIRST SECOND THIRD FOURTH YEAR
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995
- ------------------------------
Franchise fees................. $66,155 $85,634 $113,340 $ 96,109 $361,238
Total revenue.................. 74,153 96,329 129,249 113,252 412,983
Income before income taxes and
minority interest............. 20,440 34,304 47,105 34,721 136,570
Net income .................... 12,062 20,183 27,119 20,366 79,730
========= ========= ========== ========= ==========
Net income per share:
Primary....................... $ .12 $ .19 $ .25 $ .18 $ .74
Fully diluted................. .12 .19 .24 .18 .73
========= ========= ========== ========= ==========
1994
- ------------------------------
Franchise fees................. $57,741 $73,974 $ 86,599 $ 64,930 $283,244
Total revenue.................. 64,286 81,036 95,018 72,207 312,547
Income before income taxes .... 16,809 23,901 31,526 18,407 90,643
Net income .................... 9,918 14,102 18,601 10,868 53,489
========= ========= ========== ========= ==========
Net income per share:
Primary and fully diluted .... $ .10 $ .14 $ .18 $ .11 $ .53
========= ========= ========== ========= ==========
</TABLE>
All per share information presented has been retroactively adjusted to
reflect the stock splits discussed in Note 1 in the Notes to the Consolidated
Financial statements.
RECENT EVENTS -- (UNAUDITED)
A. DEBT -- On October 2, 1996, the Company replaced an existing $300
million revolving credit facility with $1 billion in revolving credit
facilities consisting of (i) a $500 million, five year revolving credit
facility (the "Five Year Credit Facility") and (ii) a $500 million, 364 day
revolving credit facility (the "364 Day Revolving Credit Facility"
(collectively the "Revolving Credit Facilities")). The Company may renew the
364 Day Revolving Credit Facility on an annual basis for an additional 364
days up to a maximum aggregate term of five years upon receiving lender
approval. The Revolving Credit Facilities, at the option of the Company, bear
interest based on competitive bids of lenders participating in the
facilities, at the prime rate or at LIBOR plus a margin approximating 25
basis points.
B. PURCHASE OF MINORITY INTEREST --Effective October 29, 1996 (the
"Effective Date"), the Company amended the Subscription and Stockholders
Agreement dated as of August 1, 1995 among C21 Holding Corp., the Company and
a group of former executives of Century 21 Real Estate Corporation (the
"Former Management") pursuant to which the Company owns 87.5% of C21 Holding
Corp. and the Former Management owns 12.5% of C21 Holding Corp. Such
amendment provides for the acceleration of the Company's option to purchase
the 12.5% ownership from the Former Management at fair market value to a date
which is approximately 90 days from the Effective Date, with fair market
value determined as of the Effective Date. The Company is in the process of
determining the fair market value of C21 Holding Corp. and expects to
complete such purchase in the second quarter of 1997.
F-76
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation:
We have audited the accompanying 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. 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
F-77
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, YEARS ENDED APRIL 30,
-------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Vehicle management services ....... $1,054,379 $1,012,568 $1,371,150 $1,257,696 $1,162,483
Real estate services ............... 186,368 189,384 258,387 221,856 228,286
Mortgage banking services .......... 203,968 141,701 195,599 126,094 155,935
------------ ------------ ------------ ------------ ------------
1,444,715 1,343,653 1,825,136 1,605,646 1,546,704
------------ ------------ ------------ ------------ ------------
EXPENSES:
Depreciation on vehicles under
operating leases .................. 729,045 698,949 944,187 872,495 808,894
Costs, including interest, of
carrying and reselling homes ..... 76,378 93,424 127,125 111,405 129,818
Direct costs of mortgage banking
services .......................... 87,864 48,536 68,985 40,924 57,091
Interest ........................... 171,256 167,111 223,847 173,094 138,617
Selling, general and
administrative...................... 252,223 237,673 321,844 286,410 302,488
------------ ------------ ------------ ------------ ------------
1,316,766 1,245,693 1,685,988 1,484,328 1,436,908
------------ ------------ ------------ ------------ ------------
Income before income taxes .......... 127,949 97,960 139,148 121,318 109,796
Income taxes ........................ 52,636 40,613 57,528 49,656 45,238
------------ ------------ ------------ ------------ ------------
Net income .......................... $ 75,313 $ 57,347 $ 81,620 $ 71,662 $ 64,558
============ ============ ============ ============ ============
Net income per share* ............... $ 2.08 $ 1.63 $ 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.
F-78
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, AS OF APRIL 30,
--------------------------
1997 1996 1995
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash ............................................... $ 24,100 $ 9,288 $ 3,412
Restricted cash..................................... 89,849 -- --
Accounts receivable, less allowance for doubtful
accounts of $6,188, $5,478 and $6,689 ............. 516,956 468,938 484,230
Carrying costs on homes under management .......... 53,166 46,560 45,260
Mortgage loans held for sale ....................... 771,121 874,794 712,247
Mortgage servicing rights and fees ................. 241,648 230,209 98,003
Property and equipment, net ........................ 90,136 93,089 102,399
Goodwill, net ...................................... 47,089 49,081 51,164
Other assets ....................................... 178,300 117,999 77,929
------------- ------------ ------------
2,012,365 1,889,958 1,574,644
------------- ------------ ------------
ASSETS UNDER MANAGEMENT PROGRAMS:
Net investment in leases and leased vehicles ..... 3,414,178 3,216,224 3,017,231
Equity advances on homes .......................... 643,637 566,808 447,658
------------- ------------ ------------
4,057,815 3,783,032 3,464,889
------------- ------------ ------------
$6,070,180 $5,672,990 $5,039,533
============= ============ ============
LIABILITIES:
Accounts payable and accrued expenses .............. $ 368,881 $ 434,109 $ 424,438
Advances from clients and deferred revenue ........ 116,533 96,439 101,229
Other debt ......................................... 749,687 903,442 735,886
Deferred income taxes .............................. 237,200 191,700 158,400
------------- ------------ ------------
1,472,301 1,625,690 1,419,953
------------- ------------ ------------
LIABILITIES UNDER MANAGEMENT PROGRAMS .............. 3,920,146 3,438,804 3,079,629
------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES ......................
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 3,000,000 shares ..... -- -- --
Common stock, no par value, authorized 75,000,000
shares; issued and outstanding 34,988,485,
34,661,524* shares in 1996 and 16,890,212 shares
in 1995 .......................................... 102,843 96,081 79,210
Cumulative foreign currency translation
adjustment........................................ (16,442) (23,483) (16,913)
Retained earnings.................................. 591,332 535,898 477,654
------------- ------------ ------------
677,733 608,496 539,951
------------- ------------ ------------
$6,070,180 $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.
F-79
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY
31, YEARS ENDED APRIL 30,
---------------------------- ------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income................................. $ 75,313 $ 57,347 $ 81,620 $ 71,662 $ 64,558
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation on vehicles under operating
leases................................... 729,045 698,949 944,187 872,495 808,894
Other depreciation and amortization....... 25,073 24,069 30,020 32,095 29,000
Amortization and write-down of servicing
rights and fees.......................... 44,987 25,499 37,640 20,089 29,132
Additions to originated mortgage servicing
rights................................... (76,003) (62,895) (91,134) -- --
Additions to excess mortgage servicing
fees..................................... (46,796) (45,958) (66,432) (27,869) (39,042)
Gain on sales of servicing rights......... (8,924) (3,386) (3,426) (42,090) --
Deferred income taxes..................... 44,851 40,668 33,585 41,530 25,694
Gain on sale of subsidiary assets......... (20,444) -- (11,688) -- --
Changes in:
Accounts receivable...................... (42,077) (30,021) (31,211) (5,913) (72,536)
Carrying costs on homes under management. (4,841) (16,940) (1,507) (9,011) 15,544
Mortgage loans held for sale............. 103,673 (72,654) (162,547) (6,359) (227,230)
Accounts payable and accrued expenses.... (67,428) (19,600) 32,951 (93,033) (28,835)
Advances from clients and deferred
revenue................................. 19,201 27,813 (4,208) 21,790 (27,146)
All other operating activity............. (6,193) (42,360) (19,628) 1,043 (5,368)
------------- ------------- ------------- ------------- -------------
Cash provided by operating activities.... 769,437 580,531 768,222 876,429 572,665
------------- ------------- ------------- ------------- -------------
Investing Activities:
Investment in leases and leased vehicles... (1,347,906) (1,362,639) (1,909,805) (1,785,923) (1,578,721)
Repayment of investment in leases and
leased vehicles........................... 443,940 415,490 582,487 579,835 549,262
Proceeds from sales and transfers of leases
and leased vehicles to third parties...... -- -- 163,172 109,859 105,087
Equity advances on homes under management.. (2,434,953) (3,678,051) (4,649,297) (6,603,355) (4,101,894)
Repayment of advances on homes under
management................................ 2,364,564 3,441,497 4,530,106 6,631,414 4,301,529
Purchases of mortgage servicing rights..... -- (14,893) (13,316) (13,826) (14,223)
Proceeds from sales of mortgage servicing
rights.................................... 21,760 3,426 4,462 54,030 --
Additions to property and equipment, net of
dispositions.............................. (16,642) (14,590) (17,650) (16,429) (32,719)
Acquisitions accounted for as a purchase... -- -- -- -- (2,594)
Proceeds from sale of subsidiary........... 21,900 -- 33,618 -- --
Funding of grantor trusts.................. (89,849) -- -- -- --
All other investing activities............. (3,490) (4,675) (34,583) (21,114) 1,348
------------- ------------- ------------- ------------- -------------
Cash used in investing activities......... (1,040,676) (1,214,435) (1,310,806) (1,065,509) (772,925)
------------- ------------- ------------- ------------- -------------
Financing Activities:
Net change in borrowings with terms of less
than 90 days ............................. 791,218 (7,995) (150,349) 114,462 172,255
Proceeds from issuance of other borrowings. 1,348,118 1,604,268 1,914,461 1,195,147 1,040,092
Principal payment on other borrowings...... (1,818,787) (964,248) (1,223,110) (1,074,230) (1,011,673)
Stock option plan transactions............. 6,762 12,309 16,871 4,090 9,554
Repurchases of common shares............... -- -- -- (17,019) (8,721)
Payment of dividends....................... (19,879) (17,488) (23,376) (21,809) (20,850)
------------- ------------- ------------- ------------- -------------
Cash provided by financing activities..... 307,432 626,846 534,497 200,641 180,657
------------- ------------- ------------- ------------- -------------
Effect of exchange rate changes on cash..... (21,381) 10,460 13,963 (8,174) 19,106
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash................. 14,812 3,402 5,876 3,387 (497)
Cash at beginning of period................. 9,288 3,412 3,412 25 522
------------- ------------- ------------- ------------- -------------
Cash at end of period....................... $ 24,100 $ 6,814 $ 9,288 $ 3,412 $ 25
------------- ------------- ------------- ------------- -------------
Supplemental disclosures of cash flow
information:
Cash paid for interest..................... $ 207,959 $ 197,025 273,198 211,206 165,406
============= ============= ============= ============= =============
Cash paid for income taxes................. $ 8,126 $ 4,310 (1,330) 26,049 35,739
============= ============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-80
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, 1996, 1995 AND
1994
AND NINE MONTHS ENDED JANUARY 31, 1997
(UNAUDITED)
----------------------------------------
COMMON STOCK
------------------------
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION RETAINED
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
Net income.............................. 75,313
Cash dividends declared ($.57 per
share)................................. (19,879)
Foreign currency translation
adjustment............................. 7,041
Stock option plan transactions, net of
related income tax benefits............ 326,961 6,762
------------ ---------- ------------------- -------------------
Balance January 31, 1997.................. 34,988,485 $102,843 $(16,442) $591,332
============ ========== =================== ===================
</TABLE>
- ------------
* Reflects two-for-one common stock split declared June 24, 1996,
described in the capital stock note.
See Notes to Consolidated Financial Statements.
F-81
<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. Open-end operating leases
and direct financing leases generally have a minimum lease term of 12 months
with monthly renewal options thereafter. Closed-end operating leases
typically have a longer term, usually 30 months or more, but are cancelable
under certain conditions. 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. Vehicles under
operating leases are amortized using the straight-line method over the
expected lease term.
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.
Direct costs of managing the homes during the period the home is held for
resale, including property taxes, repairs, maintenance and continuing
mortgage payments, are generally borne by the client. Funds are normally
advanced by the client for a portion of these costs and 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. Real
estate services revenue is shown net of costs reimbursed by client
corporations. 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.
F-82
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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 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.
F-83
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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.
F-84
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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. Included in these reclassifications are
the effects of reducing real estate services revenue and "costs, including
interest, of carrying and reselling homes" for direct costs reimbursed by
client corporations. Such costs were $554,464, $464,980 and $587,975 in 1996,
1995 and 1994, respectively.
Interim Financial Information
The financial information with respect to the six-month periods ended
October 31, 1996 and 1995 is unaudited. In the opinion of management, such
information reflects 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.
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. The number of shares used in the
calculations, adjusted to reflect the two-for-one common stock split, were
35,555 and 34,886 for the six months periods ended October 31, 1996 and 1995,
respectively.
Cash payments for interest and income taxes were $135,501 and $672 and
$135,516 and $4,667 for the six months ended October 31, 1996 and 1995,
respectively.
Certain reclassifications have been made to the prior years' condensed
consolidated 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
F-85
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
adopting the fair value-based method is required to be 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 valuation reserve was $15,035 and $9,140 at
April 30, 1996 and 1995, respectively.
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 activity was as follows during 1996,
1995, and 1994:
<TABLE>
<CAPTION>
EXCESS PURCHASED ORIGINATED
SERVICING SERVICING SERVICING
FEES RIGHTS RIGHTS ALLOWANCE TOTAL
----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance April 30,
1993.................. $ 58,522 $ 5,682 $ -- $ -- $ 64,204
Additions............. 39,042 14,223 -- -- 53,265
Amortization.......... (12,031) (5,785) -- -- (17,816)
Write-down............ (11,316) -- -- -- (11,316)
----------- ----------- ------------ ----------- ----------
Balance April 30,
1994.................. 74,217 14,120 -- -- 88,337
Additions............. 27,869 13,826 -- -- 41,695
Amortization.......... (14,321) (5,768) -- -- (20,089)
Sales ................ (8,917) (3,023) -- -- (11,940)
----------- ----------- ------------ ----------- ----------
Balance April 30,
1995.................. 78,848 19,155 -- -- 98,003
Additions............. 66,432 13,316 91,134 -- 170,882
Amortization.......... (20,839) (6,224) (7,634) -- (34,697)
Sales................. (766) (270) -- -- (1,036)
Write-down/Provision . (1,630) -- -- (1,313) (2,943)
----------- ----------- ------------ ----------- ----------
Balance April 30,
1996.................. $122,045 $25,977 $83,500 $(1,313) $230,209
=========== =========== ============ =========== ==========
</TABLE>
F-86
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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. During
fiscal 1994, the Company experienced significant portfolio prepayments and
payoffs, which required the write-down of $11,316 of excess mortgage
servicing fees. 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.
Prior to the adoption of SFAS No. 122 the Company reviewed the
recoverability of purchased servicing rights by discounting anticipated
future cash flows at appropriate discount rates, utilizing externally
published prepayment rates. If the recorded balance exceeded the discounted
anticipated future cash flows, the amortization of the purchased servicing
rights was accelerated on a prospective basis.
PROPERTY AND EQUIPMENT
Property and equipment at April 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
F-87
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
OTHER ASSETS
Other assets at April 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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.
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 and accumulated depreciation of vehicles under this type of
operating lease was $4,387,252 and $1,867,521, and $3,897,794 and $1,540,369
at April 30, 1996 and 1995, 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 and accumulated depreciation of
vehicles under these agreements was $482,742 and $135,097, and $391,020 and
$102,438 at April 30, 1996 and 1995, 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.
F-88
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
Leasing revenues are included in revenues from vehicle management
services. Following is a summary of leasing revenues for years ended April
30:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
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
============ ============ ==========
</TABLE>
Other managed vehicles are subject to leases serviced by the Company for
others, and neither the vehicles nor the leases are included as assets of the
Company. The Company receives a fee under such agreements which covers or
exceeds its cost of servicing.
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 $109,200 and $118,000 at
April 30, 1996 and 1995, respectively, are included in a special purpose
entity which is not owned by the Company. This entity does not require
consolidation as it is not controlled by the Company and all risks and
rewards rest with the owners. Additionally, managed vehicles totaling $46,500
and $57,100 at April 30, 1996 and 1995, respectively, are owned by special
purpose entities which are owned by the Company. However, such assets and
related liabilities have been netted in the balance sheet since there is a
two-party agreement with determinable accounts, a legal right of setoff
exists and the Company exercises its right of setoff in settlement with
client corporations.
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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Commercial paper $803,442 $635,886
Medium-term note 100,000 100,000
---------- ----------
$903,442 $735,886
========== ==========
</TABLE>
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.
F-89
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME TAXES
Provisions (credits) for income taxes for the years ended April 30 were
comprised as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ---------
<S> <C> <C> <C>
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
========== =========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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)
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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 ........................... 0.6 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 .............................................. 0.3 0.5 0.2
------- ------- -------
Effective tax rate ................................. 41.3% 40.9% 41.2%
======= ======= =======
</TABLE>
The Company's US federal income tax returns have been examined by the
Internal Revenue Service through April 30, 1993.
F-90
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
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
============= ============
</TABLE>
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.
F-91
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS UNDER LIABILITIES UNDER
MANAGEMENT PROGRAMS MANAGEMENT PROGRAMS
------------------- -------------------
<S> <C> <C>
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
=================== ===================
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ----------------
<S> <C> <C>
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
=========== ================
</TABLE>
- ------------
* 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.
F-92
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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 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:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
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
========== ========= =========
</TABLE>
F-93
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
A summary of the plans' status and the Company's recorded liability
recognized in the Consolidated Balance Sheets at April 30 follows:
<TABLE>
<CAPTION>
FUNDED PLANS
----------------------
1996 1995
---------- ----------
<S> <C> <C>
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 (primarily common stock and bond
mutual funds)................................................ (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
========== ==========
</TABLE>
<TABLE>
<CAPTION>
UNFUNDED PLANS
----------------------
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
Significant percentage assumptions used in determining the cost and
obligations under the US pension and unfunded supplemental retirement plans
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-94
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
Postretirement Benefits Other Than Pensions
The Company provides healthcare and life insurance benefits for certain
retired employees up to the age of 65. A summary of the plan's status and the
Company's recorded liability recognized in the consolidated balance sheets at
April 30 follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
Net periodic postretirement benefit costs included the following
components for the year ended April 30,
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Service cost.................. $ 786 $ 661 $ 788
Interest cost................. 519 519 469
Net amortization and
deferral..................... 218 294 294
-------- -------- -------
$1,523 $1,474 $1,551
======== ======== =======
</TABLE>
Significant percentage assumptions used in determining the cost and
obligations under the post retirement benefit plan are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Discount rate.................................... 8.00% 8.25% 8.25%
Health care costs trend rate for subsequent
year............................................ 10.00% 12.00% 12.00%
======== ======== =======
</TABLE>
The health care cost trend rate is assumed to decrease gradually through
2004 when the ultimate trend rate of 4.75% is reached. At April 30, 1996, a
one-percentage-point increase in the assumed health care cost trends rate for
each future year would increase the annual service and interest cost by
approximately $120 and the accumulated postretirement benefit obligation by
approximately $545.
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.
F-95
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 $14,980 2001 $ 6,406
1998 $13,619 2001-2006 $13,071
1999 $10,395 2007 and thereafter $ 4,158
2000 $ 7,294
</TABLE>
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, one of which comes due in the year 2013 and the other which
comes due in the year 2014, each of which is in the amount of $3,500. 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:
o 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.
o 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.
o 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.
o Borrowings. Fair value of borrowings, other than commercial paper,
is estimated based on quoted market prices or market comparables.
o 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.
F-96
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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.
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.
F-97
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------------------------------------
TOTAL 1997 1998 1999 2000 2001 2002
------------ ------------ ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
US
- -------------------------------
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.
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
F-98
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
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.
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>
YEARS ENDED APRIL 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS)
<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>
F-99
<PAGE>
PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS EXCEPT PER SHARE DATA)
Geographic Areas
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
North America (principally U.S.) $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 (principally U.S.) $ 123,957 $ 113,942 $ 106,895
Europe ........................... 15,191 7,376 2,901
------------- ------------- -------------
Consolidated ..................... $ 139,148 $ 121,318 $ 109,796
============= ============= =============
Identifiable assets:
North America (principally U.S.) $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>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1995
-----------------------------------------------------------------
QUARTER FIRST SECOND THIRD FOURTH YEAR
- ------------------------------ ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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.
F-100
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF NOVEMBER 10, 1996
BY AND AMONG
HFS INCORPORATED,
MERCURY ACQ. CORP.
AND
PHH CORPORATION
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience only.
<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C> <C>
ARTICLE I
THE MERGER
1.01 The Merger............................................................... I-1
1.02 Closing.................................................................. I-1
1.03 Effective Time........................................................... I-1
1.04 Restated Articles and Bylaws of the Surviving Corporation................ I-2
1.05 Directors and Officers of the Surviving Corporation...................... I-2
1.06 Effects of the Merger.................................................... I-2
1.07 Further Assurances....................................................... I-2
ARTICLE II
CONVERSION OF SHARES
2.01 Conversion of Capital Stock.............................................. I-2
2.02 Exchange of Certificates................................................. I-3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01 Organization and Qualification........................................... I-5
3.02 Capital Stock............................................................ I-5
3.03 Authority Relative to this Agreement..................................... I-6
3.04 Non-Contravention; Approvals and Consents................................ I-6
3.05 SEC Reports and Financial Statements..................................... I-7
3.06 Absence of Certain Changes or Events..................................... I-8
3.07 Absence of Undisclosed Liabilities....................................... I-8
3.08 Legal Proceedings........................................................ I-8
3.09 Information Supplied..................................................... I-8
3.10 Compliance with Laws and Orders.......................................... I-9
3.11 Compliance with Agreements; Certain Agreements........................... I-9
3.12 Taxes.................................................................... I-9
3.13 Employee Benefit Plans; ERISA............................................ I-10
3.14 Labor Matters............................................................ I-12
3.15 Environmental Matters.................................................... I-12
3.16 Intellectual Property Rights............................................. I-13
3.17 Vote Required............................................................ I-14
3.18 Opinion of Financial Advisor............................................. I-14
3.19 Company Rights Agreement................................................. I-14
3.20 Ownership of Parent Common Stock......................................... I-14
3.21 Sections 3-602 and 3-702 of the MGCL Not Applicable...................... I-14
3.22 Accounting Matters....................................................... I-14
3.23 Insurance................................................................ I-14
3.24 Records.................................................................. I-14
3.25 Mortgage Banking Licenses and Qualifications............................. I-15
3.26 Loan Portfolio........................................................... I-15
3.27 Loan Documents........................................................... I-16
1
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NO.
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3.28 No Recourse.............................................................. I-16
3.29 Mortgage Servicing Agreements............................................ I-17
3.30 Compliance with Mortgage Banking Regulations............................. I-17
3.31 Custodial Accounts....................................................... I-18
3.32 Inquiries................................................................ I-18
3.33 Advances................................................................. I-18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
4.01 Organization and Qualification........................................... I-19
4.02 Capital Stock............................................................ I-19
4.03 Authority Relative to this Agreement..................................... I-20
4.04 Non-Contravention; Approvals and Consents................................ I-20
4.05 SEC Reports and Financial Statements..................................... I-21
4.06 Absence of Certain Changes or Events..................................... I-21
4.07 Absence of Undisclosed Liabilities....................................... I-21
4.08 Legal Proceedings........................................................ I-21
4.09 Information Supplied..................................................... I-22
4.10 Compliance with Laws and Orders.......................................... I-22
4.11 Compliance with Agreements; Certain Agreements........................... I-22
4.12 Taxes.................................................................... I-22
4.13 Employee Benefit Plans; ERISA............................................ I-23
4.14 Labor Matters............................................................ I-24
4.15 Environmental Matters.................................................... I-24
4.16 Intellectual Property Rights............................................. I-25
4.17 Opinion of Financial Advisor............................................. I-25
4.18 Ownership of Company Common Stock........................................ I-25
4.19 Accounting Matters....................................................... I-25
4.20 Vote Required............................................................ I-25
ARTICLE V
COVENANTS
5.01 Covenants of the Company and Parent...................................... I-26
5.02 No Solicitations......................................................... I-28
5.03 Company Rights Agreement................................................. I-28
5.04 Conduct of Business of Sub............................................... I-29
5.05 Third Party Standstill Agreements........................................ I-29
5.06 Purchases of Common Stock of the Other Party............................. I-29
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Access to Information; Confidentiality................................... I-29
6.02 Preparation of Registration Statement and Proxy Statement................ I-30
6.03 Approval of Stockholders................................................. I-30
6.04 Company Affiliates....................................................... I-31
6.05 Stock Exchange Listing................................................... I-31
6.06 Certain Tax Matters...................................................... I-31
6.07 Regulatory and Other Approvals........................................... I-31
2
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NO.
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6.08 Employee Benefit Plans................................................... I-31
6.09 Company Option Plans..................................................... I-32
6.10 Directors' and Officers' Indemnification and Insurance................... I-32
6.11 Appointment of Director.................................................. I-33
6.12 Expenses................................................................. I-33
6.13 Brokers or Finders....................................................... I-33
6.14 Takeover Statutes........................................................ I-33
6.15 Conveyance Taxes......................................................... I-34
6.16 Pooling of Interests..................................................... I-34
ARTICLE VII
CONDITIONS
7.01 Conditions to Each Party's Obligation to Effect the Merger .............. I-34
7.02 Conditions to Obligation of Parent and Sub to Effect the Merger ......... I-35
7.03 Conditions to Obligation of the Company to Effect the Merger ............ I-36
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination.............................................................. I-38
8.02 Effect of Termination.................................................... I-38
8.03 Amendment................................................................ I-39
8.04 Waiver................................................................... I-39
ARTICLE IX
GENERAL PROVISIONS
9.01 Non-Survival of Representations, Warranties, Covenants and Agreements ... I-39
9.02 Notices.................................................................. I-40
9.03 Entire Agreement; Incorporation of Exhibits.............................. I-40
9.04 Public Announcements..................................................... I-41
9.05 No Third Party Beneficiary............................................... I-41
9.06 No Assignment; Binding Effect............................................ I-41
9.07 Headings................................................................. I-41
9.08 Invalid Provisions....................................................... I-41
9.09 Governing Law............................................................ I-41
9.10 Enforcement of Agreement................................................. I-41
9.11 Certain Definitions...................................................... I-41
9.12 Counterparts............................................................. I-42
</TABLE>
EXHIBITS
EXHIBIT A Form of Affiliate Agreement
3
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GLOSSARY OF DEFINED TERMS
The following terms, when used in this Agreement, have the meanings
ascribed to them in the corresponding Sections of this Agreement listed
below:
<TABLE>
<CAPTION>
<S> <C>
"affiliate" ............................................................ Section 9.11(a)
"Affiliate Agreement"................................................... Section 6.04
"Agency"................................................................ Section 3.28
"Agreement"............................................................. Preamble
"Alternative Proposal".................................................. Section 5.02
"Antitrust Division".................................................... Section 6.07
"Articles of Merger".................................................... Section 1.03
"Audits"................................................................ Section 3.12
"Average Price"......................................................... Section 2.01(c)(i)
"beneficially".......................................................... Section 9.11(b)
"business day".......................................................... Section 9.11(c)
"CERCLA"................................................................ Section 3.15(d)
"Certificates".......................................................... Section 2.02(b)
"Closing"............................................................... Section 1.02
"Closing Date".......................................................... Section 1.02
"Code".................................................................. Preamble
"Company"............................................................... Preamble
"Company Affiliates".................................................... Section 6.04
"Company Common Stock".................................................. Section 2.01(b)
"Company Disclosure Letter"............................................. Section 3.01
"Company Employee Benefit Plans"........................................ Section 3.13(b)(i)
"Company Financial Statements".......................................... Section 3.05
"Company Option Plans".................................................. Section 2.01(d)
"Company Permits"....................................................... Section 3.10
"Company Preferred Stock"............................................... Section 3.02
"Company Rights"........................................................ Section 3.02
"Company Rights Agreement".............................................. Section 3.02
"Company SEC Reports"................................................... Section 3.05
"Company Series A Preferred Stock" ..................................... Section 3.02
"Company Stock Option".................................................. Section 6.09
"Company Stockholders' Approval"........................................ Section 6.03
"Company Stockholders' Meeting"......................................... Section 6.03
"Company Tax Certificate"............................................... Section 7.02(d)
"Confidentiality Agreement"............................................. Section 6.01(b)
"Constituent Corporations".............................................. Section 1.01
"Contracts"............................................................. Section 3.04(a)
"control," "controlling," "controlled by" and
"under common control with"............................................ Section 9.11(a)
"Conversion Number"..................................................... Section 2.01(c)
"Custodial Accounts".................................................... Section 3.31
"Department"............................................................ Section 1.03
"Effective Time"........................................................ Section 1.03
"Environmental Claim"................................................... Section 3.15(g)
"Environmental Law"..................................................... Section 3.15(g)
"Environmental Permits"................................................. Section 3.15(a)
"ERISA"................................................................. Section 3.13(d)(i)
"ERISA Affiliate"....................................................... Section 3.13(d)
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"Exchange Act".......................................................... Section 3.04(b)
"Exchange Agent"........................................................ Section 2.02(a)
"Exchange Fund"......................................................... Section 2.02(a)
"FHA"................................................................... Section 3.25
"FHA Loan".............................................................. Section 3.25
"FHLMA"................................................................. Section 3.25
"FNMA".................................................................. Section 3.25
"GNMA".................................................................. Section 3.25
"FTC"................................................................... Section 6.07
"Governmental or Regulatory Authority".................................. Section 3.04(a)
"group" ................................................................ Section 9.11(f)
"Hazardous Material".................................................... Section 3.15(g)
"HSR Act"............................................................... Section 3.04(b)
"HUD"................................................................... Section 3.30
"Indemnified Liabilities"............................................... Section 6.10(a)
"Indemnified Parties"................................................... Section 6.10(a)
"Indemnifying Party".................................................... Section 6.10(a)
"Insurer"............................................................... Section 3.27
"Intellectual Property"................................................. Section 3.16
"knowledge"............................................................. Section 9.11(d)
"laws".................................................................. Section 3.04(a)
"Lien".................................................................. Section 3.02(b)
"Licenses".............................................................. Section 3.25
"Loan Documents"........................................................ Section 3.27
"Loss".................................................................. Section 3.28
"material", "material adverse effect" and "materially adverse" ......... Section 9.11(e)
"Merger"................................................................ Preamble
"MGCL".................................................................. Section 1.01
"Minimum Average Price"................................................. Section 7.03(f)
"Mortgage Loan"......................................................... Section 3.26
"Mortgage Servicing Agreement".......................................... Section 3.26
"Mortgage Servicing Portfolio".......................................... Section 3.26
"NYSE" ................................................................. Section 2.01(c)
"Options"............................................................... Section 3.02
"orders"................................................................ Section 3.04(a)
"Parent"................................................................ Preamble
"Parent Common Stock"................................................... Section 2.01(c)
"Parent Disclosure Letter".............................................. Section 4.01
"Parent Employee Benefit Plans"......................................... Section 4.13(c)
"Parent Financial Statements"........................................... Section 4.05
"Parent Permits"........................................................ Section 4.10
"Parent Preferred Stock"................................................ Section 4.02(a)
"Parent SEC Reports".................................................... Section 4.05
"Parent Stockholders' Approval"......................................... Section 6.03(b)
"Parent Stockholders' Meeting".......................................... Section 6.03(b)
"Parent Tax Certificate"................................................ Section 7.02(d)
"PBGC".................................................................. Section 3.13(c)
"person"................................................................
"Plan".................................................................. Section 3.13(d)(ii)
"Proxy Statement"....................................................... Section 3.09
"Recent Company SEC Reports"............................................ Section 9.11(j)
5
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"Recent Parent SEC Reports"............................................. Section 9.11(k)
"Recourse Loan"......................................................... Section 3.28
"Registration Statement"................................................ Section 4.09
"Regulations"........................................................... Section 3.27
"Representatives"....................................................... Section 9.11(g)
"Sales Price"........................................................... Section 2.01(c)(i)
"SEC"................................................................... Section 3.04(b)
"Securities Act"........................................................ Section 3.04(b)
"Servicing Released Loans".............................................. Section 3.28
"Servicing Sale Loan"................................................... Section 3.28
"Significant Subsidiaries".............................................. Section 9.11(h)
"Stockholders' Meeting"................................................. Section 6.03(a)
"Sub"................................................................... Preamble
"Sub Common Stock"...................................................... Section 2.01(a)
"Subsidiary"............................................................ Section 9.11(i)
"Surviving Corporation"................................................. Section 1.01
"Surviving Corporation Common Stock".................................... Section 2.01(a)
"tax return"............................................................ Section 3.12(c)
"taxes"................................................................. Section 3.12(c)
"Trading Day"........................................................... Section 2.01(c)(i)
"VA".................................................................... Section 3.25
"VA Loans".............................................................. Section 3.25
"VA No Bids"............................................................ Section 3.28
"Warehouse Loans"....................................................... Section 3.26
</TABLE>
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This AGREEMENT AND PLAN OF MERGER dated as of November 10, 1996 (this
"Agreement") is made and entered into by and among HFS INCORPORATED, a
Delaware corporation ("Parent"), MERCURY ACQ. CORP., a Maryland corporation
wholly owned by Parent ("Sub"), and PHH CORPORATION, a Maryland corporation
(the "Company").
WHEREAS, the Boards of Directors of Parent, Sub and the Company have each
determined that it is advisable and in the best interests of their respective
stockholders to consummate, and have approved, the business combination
transaction provided for herein in which Sub would merge with and into the
Company and the Company would become a wholly-owned subsidiary of Parent (the
"Merger");
WHEREAS, the respective Boards of Directors of Parent and the Company have
determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is fair to and in the best
interests of their respective stockholders, and Parent has approved this
Agreement and the Merger as the sole stockholder of Sub;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a pooling of interests;
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I
THE MERGER
1.01 The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time, upon the terms and subject to the
conditions of this Agreement, Sub shall be merged with and into the Company
in accordance with the Maryland General Corporation Law (the "MGCL"). At the
Effective Time, the separate existence of Sub shall cease and the Company
shall continue as the surviving corporation in the Merger (the "Surviving
Corporation"). Sub and the Company are sometimes referred to herein as the
"Constituent Corporations". As a result of the Merger, the outstanding shares
of capital stock of the Constituent Corporations shall be converted or
cancelled in the manner provided in Article II.
1.02 Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
Section 8.01, and subject to the satisfaction or waiver (where applicable) of
the conditions set forth in Article VII, the closing of the Merger (the
"Closing") will take place at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 919 Third Avenue, New York, New York 10022, at 10:00 a.m., local
time, on the second business day following satisfaction of the condition set
forth in Section 7.01(a), unless another date, time or place is agreed to in
writing by the parties hereto (the "Closing Date"). At the Closing there
shall be delivered to Parent, Sub and the Company the certificates and other
documents and instruments required to be delivered under Article VII.
1.03 Effective Time. On the Closing Date, articles of merger (the
"Articles of Merger") shall be executed by the Constituent Corporations and
thereafter delivered to the Department of Assessments and Taxation of the
State of Maryland (the "Department") for filing, as provided in Section 3-107
of the MGCL, as soon as practicable on the Closing Date. The Merger shall
become effective at the time of the filing of the Articles of Merger with the
Department (the date and time of such filing being referred to herein as the
"Effective Time").
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1.04 Restated Articles and Bylaws of the Surviving Corporation. At the
Effective Time, (i) the Restated Articles of the Company as in effect
immediately prior to the Effective Time shall be the Restated Articles of the
Surviving Corporation until thereafter amended as provided by law and such
Restated Articles, and (ii) the Bylaws of Sub as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by law, the Restated Articles of the Surviving
Corporation and such Bylaws.
1.05 Directors and Officers of the Surviving Corporation. The directors
and the officers of Sub immediately prior to the Effective Time shall, from
and after the Effective Time, be the directors and officers, respectively, of
the Surviving Corporation until their successors shall have been duly elected
or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Restated Articles and
Bylaws. Upon the reasonable request of Parent, the Company will use
reasonable efforts to cause the directors of Company as of the Effective Time
to resign as directors of Company, and will cause any directors of the
Company's Subsidiaries to resign.
1.06 Effects of the Merger. Subject to the foregoing, the effects of the
Merger shall be as provided in the applicable provisions of the MGCL.
1.07 Further Assurances. Each party hereto will, either prior to or after
the Effective Time, execute such further documents, instruments, deeds, bills
of sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the others to consummate the
Merger, to vest the Surviving Corporation with full title to all assets,
properties, privileges, rights, approvals, immunities and franchises of
either of the Constituent Corporations or to effect the other purposes of
this Agreement.
ARTICLE II
CONVERSION OF SHARES
2.01 Conversion of Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Capital Stock of Sub. Each issued and outstanding share of the common
stock, par value $.01 per share, of Sub ("Sub Common Stock") shall be
converted into and become one (1) fully paid and nonassessable share of
common stock, without par value, of the Surviving Corporation ("Surviving
Corporation Common Stock"). Each certificate representing outstanding shares
of Sub Common Stock shall at the Effective Time represent an equal number of
shares of Surviving Corporation Common Stock.
(b) Cancellation of Treasury Stock and Stock Owned by Parent and
Subsidiaries. All shares of common stock, without par value, of the Company
("Company Common Stock"), together with the associated Company Rights, that
are owned by the Company as treasury stock and any shares of Company Common
Stock, together with the associated Company Rights owned by Parent, Sub or
any other wholly-owned Subsidiary of Parent shall be canceled and retired and
shall cease to exist and no stock of Parent or other consideration shall be
delivered in exchange therefor.
(c) Exchange Ratio for Company Common Stock. (i) Each issued and
outstanding share of Company Common Stock (other than shares to be canceled
in accordance with Section 2.01(b)), together with the associated Company
Right, shall be converted into the right to receive the number (the
"Conversion Number") of fully paid and nonassessable shares of common stock,
par value $.01 per share, of Parent ("Parent Common Stock") represented by a
quotient (rounded upward, if necessary, to the nearest one-thousandth)
determined by dividing $49.50 by the Average Price with respect to the date
of the Company Stockholders' Meeting; provided, however, that in no event
will such quotient be greater than .8250 or less than .6111, subject to
adjustment in accordance with the next following subsection.
The "Average Price", with respect to any date, shall be equal to the
arithmetic average of the Sales Price on each of the last twenty (20) Trading
Days preceding the fifth Trading day before such date. The term "Sales Price"
shall mean, on any Trading Day, the closing sales price of Parent Common
Stock reported on the New York Stock Exchange, Inc. ("NYSE") Composite Tape
on such day. The term "Trading Day" shall mean any day on which securities
are traded on the NYSE.
I-2
<PAGE>
(ii) If, prior to the Effective Time, Parent shall pay a dividend in,
subdivide, combine into a smaller number of shares or issue by
reclassification of its shares, any shares of Parent Common Stock, the
Conversion Number or the Minimum Average Price, as applicable, shall be
multiplied by a fraction, the numerator of which shall be the number of
shares of Parent Common Stock outstanding immediately after, and the
denominator of which shall be the number of such shares outstanding
immediately before, the occurrence of such event, and the resulting product
shall from and after the date of such event be the Conversion Number or the
Minimum Average Price, as applicable, subject to further adjustment in
accordance with this sentence.
(iii) All shares of Company Common Stock converted in accordance with
paragraph (i) of this Section 2.01(c) and associated Company Rights shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right
to receive the shares of Parent Common Stock and any cash in lieu of
fractional shares of Parent Common Stock to be issued or paid in
consideration therefor (determined in accordance with Section 2.02(e)), upon
the surrender of such certificate in accordance with Section 2.02, without
interest.
(d) Stock Option Plans. The Company stock option plans set forth in
Section 2.01(d) of the Company Disclosure Letter (the "Company Option Plans")
and each option to purchase Company Common Stock granted thereunder that is
outstanding at the Effective Time shall be converted as described in Section
6.09, subject to receipt of required consents, if any, necessary in order to
avoid a violation of any Company Option Plan or agreement thereunder.
2.02 Exchange of Certificates.
(a) Exchange Agent. Promptly following the Effective Time, Parent shall
make available to the Surviving Corporation for deposit with a bank or trust
company designated before the Closing Date by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), certificates representing
the number of duly authorized whole shares of Parent Common Stock issuable in
connection with the Merger plus an amount of cash equal to the aggregate
amount payable in lieu of fractional shares in accordance with Section
2.02(e), to be held for the benefit of and distributed to such holders in
accordance with this Section. The Exchange Agent shall agree to hold such
shares of Parent Common Stock and funds (such shares of Parent Common Stock
and funds, together with earnings thereon, being referred to herein as the
"Exchange Fund") for delivery as contemplated by this Section 2.02 and upon
such additional terms as may be agreed upon by the Exchange Agent, the
Company and Parent.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock and associated Company Rights (the "Certificates") whose
shares and associated Company Rights are converted pursuant to Section
2.01(c) into the right to receive shares of Parent Common Stock (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as the Surviving Corporation may reasonably specify
(including, but not limited to, a request that each holder surrendering a
Certificate state its adjusted tax basis, as determined for United States
federal income tax purposes, in such surrendered Certificate) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock and cash
in lieu of fractional shares. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal
duly executed and completed in accordance with its terms, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock, plus the
cash amount payable in lieu of fractional shares in accordance with Section
2.02(e), which such holder has the right to receive pursuant to the
provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. In no event shall the holder of any Certificate be
entitled to receive interest on any funds to be received in the Merger. In
the event of a transfer of ownership of Company Common Stock which is not
registered in the transfer records of the Company, a certificate
I-3
<PAGE>
representing that number of whole shares of Parent Common Stock, plus the
cash amount payable in lieu of fractional shares in accordance with Section
2.02(e), may be issued to a transferee if the Certificate representing such
Company Common Stock is presented to the Exchange Agent accompanied by all
documents required to evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.02(b), each Certificate shall be deemed at any
time after the Effective Time for all corporate purposes of Parent, except as
limited by paragraph (c) below, to represent ownership of the number of
shares of Parent Common Stock into which the number of shares of Company
Common Stock shown thereon have been converted as contemplated by this
Article II. Notwithstanding the foregoing, Certificates representing Company
Common Stock surrendered for exchange by any person constituting an
"affiliate" of the Company for purposes of Section 6.04 shall not be
exchanged until Parent has received an Affiliate Agreement as provided in
Section 6.04.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date on or after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to Section
2.02(e) until the holder of record of such Certificate shall surrender such
Certificate in accordance with this Section. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions, if
any, with a record date on or after the Effective Time which theretofore
became payable, but which were not paid by reason of the immediately
preceding sentence, with respect to such whole shares of Parent Common Stock,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date on or after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to Section
2.02(e)) shall be deemed to have been issued at the Effective Time in full
satisfaction of all rights pertaining to the shares of Company Common Stock
represented thereby, subject, however, to the Surviving Corporation's
obligation to pay any dividends which may have been declared by the Company
on such shares of Company Common Stock in accordance with the terms of this
Agreement and which remained unpaid at the Effective Time. From and after the
Effective Time, the stock transfer books of the Company shall be closed and
there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Company Common Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Section
2.02.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Parent Common Stock will be issued in the Merger upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
Parent. In lieu of any such fractional shares, each holder of Certificates
who would otherwise have been entitled to a fraction of a share of Parent
Common Stock in exchange for such Certificates pursuant to this Section shall
receive from the Exchange Agent a cash payment in lieu of such fractional
share determined by multiplying (A) the Average Price with respect to the
date of the Company Stockholders' Meeting by (B) the fractional share
interest to which such holder would otherwise be entitled.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the former stockholders of the Company for twelve
(12) months after the Effective Time shall be delivered to the Surviving
Corporation, upon demand, and any former stockholders of the Company who have
not theretofore complied with this Article II shall thereafter look only to
the Surviving Corporation (subject to abandoned property, escheat and other
similar laws) as general creditors for payment of their claim for Parent
Common Stock, any cash in lieu of fractional shares of Parent Common Stock
and any
I-4
<PAGE>
dividends or distributions with respect to Parent Common Stock if entitled
thereto under this Agreement. Neither Parent nor the Surviving Corporation
shall be liable to any holder of shares of Company Common Stock for shares of
Parent Common Stock (or dividends or distributions with respect thereto) or
cash payable in respect of fractional share interests delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
3.01 Organization and Qualification. Each of the Company and its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has full
corporate power and authority to conduct its business as and to the extent
now conducted and to own, use and lease its assets and properties, except for
such failures to be so incorporated, existing and in good standing or to have
such power and authority which, individually or in the aggregate, are not
having and are not reasonably expected to have a material adverse effect on
the Company and its Subsidiaries taken as a whole. Each of the Company and
its Subsidiaries is duly qualified, licensed or admitted to do business and
is in good standing in each jurisdiction in which the ownership, use or
leasing of its assets and properties, or the conduct or nature of its
business, makes such qualification, licensing or admission necessary, except
for such failures to be so qualified, licensed or admitted and in good
standing which, individually or in the aggregate, are not having and are not
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole. Section 3.01 of the letter dated the date
hereof and delivered to Parent and Sub by the Company concurrently with the
execution and delivery of this Agreement (the "Company Disclosure Letter")
sets forth (i) the name and jurisdiction of incorporation of each Significant
Subsidiary of the Company, (ii) its authorized capital stock, (iii) the
number of issued and outstanding shares of capital stock and (iv) the record
and beneficial owners of such shares. The Subsidiaries of the Company (other
than its Significant Subsidiaries) represent in the aggregate less than 1% of
each of the consolidated assets and earnings of the Company. All such
Subsidiaries are wholly-owned, directly or indirectly, by the Company. Except
for interests in the Subsidiaries of the Company and as disclosed in Section
3.01 of the Company Disclosure Letter, the Company does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest in,
any corporation, partnership, joint venture or other business association or
entity (other than non-controlling investments in the ordinary course of
business and corporate partnering, development, cooperative marketing and
similar undertakings and arrangements entered into in the ordinary course of
business which, in the aggregate, are less than $25,000,000). The Company has
previously delivered to Parent correct and complete copies of the certificate
or articles of incorporation and bylaws (or other comparable charter
documents) of the Company and its Significant Subsidiaries.
3.02 Capital Stock. (a) The authorized capital stock of the Company
consists solely of 75,000,000 shares of Company Common Stock and 3,000,000
shares of preferred stock, without par value ("Company Preferred Stock"). As
of November 7, 1996, 34,884,299 shares of Company Common Stock were issued
and outstanding and no shares were held in the treasury of the Company and
4,045,738 shares were held in reserve pursuant to the Company Option Plans or
Company Benefit Plans as set forth in the Company SEC Reports and of which,
on the date hereof, options for 3,371,194 shares of Company Common Stock were
outstanding. Since such date, except as set forth in Section 3.02 of the
Company Disclosure Letter, there has been no change in the number of issued
and outstanding shares of Company Common Stock or shares of Company Common
Stock held in treasury or reserved for issuance. As of the date hereof, no
shares of Company Preferred Stock are issued and outstanding and 375,000
shares are designated Series A Junior Participating Preferred Stock ("Company
Series A Preferred Stock") and are reserved for issuance in accordance with
the Rights Agreement dated as of March 15, 1996, by and between the Company
and First Chicago Trust Company of New York, as Rights Agent (the "Company
Rights Agreement"), pursuant to which the Company has issued rights (the
"Company Rights") to purchase
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shares of Company Series A Preferred Stock. All of the issued and
outstanding shares of Company Common Stock are, and all shares reserved for
issuance will be, upon issuance in accordance with the terms specified in the
instruments or agreements pursuant to which they are issuable, duly
authorized, validly issued, fully paid and nonassessable. Except pursuant to
this Agreement and the Company Rights Agreement and except as set forth in
Section 3.02 of the Company Disclosure Letter, there are no outstanding
subscriptions, options, warrants, rights (including "phantom" stock rights),
preemptive rights or other contracts, commitments, understandings or
arrangements, including any right of conversion or exchange under any
outstanding security, instrument or agreement (together, "Options"),
obligating the Company or any of its Subsidiaries to issue or sell any shares
of capital stock of the Company or to grant, extend or enter into any Option
with respect thereto.
(b) Except as disclosed in Section 3.02 of the Company Disclosure Letter,
all of the outstanding shares of capital stock of each Significant Subsidiary
of the Company are duly authorized, validly issued, fully paid and
nonassessable and are owned, beneficially and of record, by the Company or a
Subsidiary wholly owned, directly or indirectly, by the Company, free and
clear of any liens, claims, mortgages, encumbrances, pledges, security
interests, equities and charges of any kind (each a "Lien"). Except as
disclosed in Section 3.02 of the Company Disclosure Letter, there are no (i)
outstanding Options obligating the Company or any of its Significant
Subsidiaries to issue or sell any shares of capital stock of any Significant
Subsidiary of the Company or to grant, extend or enter into any such Option
or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements in favor of any person other than the Company or
a Subsidiary wholly owned, directly or indirectly, by the Company with
respect to the voting of or the right to participate in dividends or other
earnings on any capital stock of any Significant Subsidiary of the Company.
(c) Except as disclosed in Section 3.02 of the Company Disclosure Letter,
there are no outstanding contractual obligations of the Company or any
Significant Subsidiary of the Company to repurchase, redeem or otherwise
acquire any shares of Company Common Stock or any capital stock of any
Significant Subsidiary of the Company or to provide funds to, or make any
investment (in the form of a loan, capital contribution or otherwise) in, any
Subsidiary of the Company or any other person.
3.03 Authority Relative to this Agreement. The Company has full corporate
power and authority to enter into this Agreement and to perform its
obligations hereunder (subject to, in the case of consummation of the Merger,
obtaining the Company Stockholders' Approval) and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Company; the Board of Directors of the Company has
recommended adoption and approval of this Agreement by the stockholders of
the Company and directed that this Agreement be submitted to the stockholders
of the Company for their consideration; and no other corporate proceedings on
the part of the Company or its stockholders are necessary to authorize the
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby, other
than obtaining the Company Stockholders' Approval. This Agreement has been
duly and validly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms (subject to, in the case of consummation
of the Merger, obtaining the Company Stockholders' Approval), except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.04 Non-Contravention; Approvals and Consents. (a) Except as disclosed in
Section 3.04 of the Company Disclosure Letter, the execution and delivery of
this Agreement by the Company do not, and the performance by the Company of
its obligations hereunder and the consummation of the transactions
contemplated hereby will not, conflict with, result in a violation or breach
of, constitute (with or without notice or lapse of time or both) a default
under, result in or give to any person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any Lien upon any of the assets or properties of
the Company or any of its Significant
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Subsidiaries under, any of the terms, conditions or provisions of (i) the
certificates or articles of incorporation or bylaws (or other comparable
charter documents) of the Company or any of its Significant Subsidiaries, or
(ii) (x) subject to the obtaining of the Company Stockholders' Approval and
the taking of the actions described in paragraph (b) of this Section, any
statute, law, rule, regulation or ordinance (together, "laws"), or any
judgment, decree, order, writ, permit or license (together, "orders"), of any
court, tribunal, arbitrator, authority, agency, commission, official or other
instrumentality of the United States, any foreign country or any domestic or
foreign state, county, city or other political subdivision (a "Governmental
or Regulatory Authority") applicable to the Company or any of its
Subsidiaries or any of their respective assets or properties, or (y) any
note, bond, mortgage, security agreement, indenture, license, franchise,
permit, concession, contract, lease or other instrument, obligation or
agreement of any kind (together, "Contracts") to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective assets or properties is bound,
excluding from the foregoing clauses (x) and (y) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations and creations
and impositions of Liens which, individually or in the aggregate, are not
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole or on the ability of the Company to consummate
the transactions contemplated by this Agreement.
(b) Except (i) for the filing of a premerger notification report by the
Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"), (ii) for
the filing of the Proxy Statement and the Registration Statement with the
Securities and Exchange Commission (the "SEC") pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder
(the "Exchange Act"), and the Securities Act of 1933, as amended, and the
rules and regulations thereunder (the "Securities Act"), the declaration of
the effectiveness of the Registration Statement by the SEC and filings with
various state securities authorities that are required in connection with the
transactions contemplated by this Agreement, (iii) for the filing of the
Articles of Merger and other appropriate merger documents required by the
MGCL with the Department and appropriate documents with the relevant
authorities of other states in which the Constituent Corporations are
qualified to do business and (iv) as disclosed in Section 3.04 of the Company
Disclosure Letter, no consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority or other public or private third
party is necessary or required under any of the terms, conditions or
provisions of any law or order of any Governmental or Regulatory Authority or
any Contract to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or any of their respective
assets or properties is bound for the execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder or the consummation of the transactions contemplated hereby, other
than such consents, approvals, actions, filings and notices which the failure
to make or obtain, as the case may be, individually or in the aggregate, are
not reasonably expected to have a material adverse effect on the Company and
its Subsidiaries taken as a whole or on the ability of the Company to
consummate the transactions contemplated by this Agreement.
3.05 SEC Reports and Financial Statements. The Company delivered to Parent
prior to the execution of this Agreement a true and complete copy of each
form, report, schedule, registration statement, definitive proxy statement
and other document (together with all amendments thereof and supplements
thereto) filed by the Company or any of its Subsidiaries with the SEC since
April 30, 1994 (as such documents have since the time of their filing been
amended or supplemented, the "Company SEC Reports"), which are all the
documents (other than preliminary material) that the Company and its
Subsidiaries were required to file or did file with the SEC since such date.
As of their respective dates, the Company SEC Reports (i) complied as to form
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated
financial statements (including, in each case, the notes, if any, thereto)
included in the Company SEC Reports (the "Company Financial Statements")
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
generally accepted
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accounting principles applied on a consistent basis during the periods
involved (except as may be indicated therein or in the notes thereto and
except with respect to unaudited statements as permitted by Form 10-Q of the
SEC) and fairly present (subject, in the case of the unaudited interim
financial statements, to normal, recurring year-end audit adjustments (which
are not expected to be, individually or in the aggregate, materially adverse
to the Company and its Subsidiaries taken as a whole)) the consolidated
financial position of the Company and its consolidated subsidiaries as at the
respective dates thereof and the consolidated results of their operations and
cash flows for the respective periods then ended. Except as set forth in
Section 3.05 of the Company Disclosure Letter, each Significant Subsidiary of
the Company is treated as a consolidated subsidiary of the Company in the
Company Financial Statements for all periods covered thereby.
3.06 Absence of Certain Changes or Events. Except as disclosed in the
Recent Company SEC Reports filed prior to the date of this Agreement, (a)
since July 31, 1996 there has not been any change, event or development
having, or that is reasonably expected to have, individually or in the
aggregate, a material adverse effect on the Company and its Subsidiaries
taken as a whole, and (b) except as disclosed in Section 3.06 of the Company
Disclosure Letter, between such date and the date hereof (i) the Company and
its Subsidiaries have conducted their respective businesses only in the
ordinary course consistent with past practice and (ii) neither the Company
nor any of its Subsidiaries has taken any action which, if taken after the
date hereof, would constitute a breach of any provision of clause (ii) of
Section 5.01(b).
3.07 Absence of Undisclosed Liabilities. Except for matters reflected or
reserved against in the balance sheet for the period ended July 31, 1996
included in the Company Financial Statements or as disclosed in Section 3.07
of the Company Disclosure Letter, neither the Company nor any of its
Subsidiaries had at such date, or has incurred since that date, any
liabilities or obligations (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due) of any nature that would be
required by generally accepted accounting principles to be reflected on a
consolidated balance sheet of the Company and its consolidated subsidiaries
(including the notes thereto), except liabilities or obligations (i) which
were incurred in the ordinary course of business consistent with past
practice or (ii) which have not been, and are not reasonably expected to be,
individually or in the aggregate, materially adverse to the Company and its
Subsidiaries taken as a whole.
3.08 Legal Proceedings. Except as disclosed in the Recent Company SEC
Reports or in Section 3.08 of the Company Disclosure Letter, (i) there are no
actions, suits, arbitrations or proceedings pending or, to the knowledge of
the Company, threatened against, relating to or affecting, nor to the
knowledge of the Company are there any Governmental or Regulatory Authority
investigations or audits pending or threatened against, relating to or
affecting, the Company or any of its Subsidiaries or any of their respective
assets and properties which, individually or in the aggregate, are reasonably
expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole or on the ability of the Company to consummate
the transactions contemplated by this Agreement, and (ii) neither the Company
nor any of its Subsidiaries is subject to any order of any Governmental or
Regulatory Authority which, individually or in the aggregate, is having or is
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole or on the ability of the Company to consummate
the transactions contemplated by this Agreement.
3.09 Information Supplied. The proxy statement relating to the
Stockholders' Meetings, as amended or supplemented from time to time (as so
amended and supplemented, the "Proxy Statement"), and any other documents to
be filed by the Company with the SEC or any other Governmental or Regulatory
Authority in connection with the Merger and the other transactions
contemplated hereby will (in the case of the Proxy Statement and any such
other documents filed with the SEC under the Exchange Act or the Securities
Act) comply as to form in all material respects with the requirements of the
Exchange Act and the Securities Act, respectively, and will not, on the date
of its filing or, in the case of the Proxy Statement, at the date it is
mailed to stockholders of the Company and of Parent and at the times of the
Stockholders' Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading, except that no representation is made by
the Company with respect to information supplied in writing by or on behalf
of Parent or Sub expressly for inclusion therein and information incorporated
by reference therein from documents filed by Parent or any of its
Subsidiaries with the SEC.
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3.10 Compliance with Laws and Orders. The Company and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders and approvals of
all Governmental and Regulatory Authorities necessary for the lawful conduct
of their respective businesses (the "Company Permits"), except for failures
to hold such permits, licenses, variances, exemptions, orders and approvals
which, individually or in the aggregate, are not having and are not
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole. The Company and its Subsidiaries are in
compliance with the terms of the Company Permits, except failures so to
comply which, individually or in the aggregate, are not having and are not
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole. Except as disclosed in the Recent Company SEC
Reports, the Company and its Subsidiaries are not in violation of or default
under any law or order of any Governmental or Regulatory Authority, except
for such violations or defaults which, individually or in the aggregate, are
not having and are not reasonably expected to have a material adverse effect
on the Company and its Subsidiaries taken as a whole.
3.11 Compliance with Agreements; Certain Agreements. (a) Except as
disclosed in Section 3.11 of the Company Disclosure Letter or in the Recent
Company SEC Reports, neither the Company nor any of its Subsidiaries nor, to
the knowledge of the Company, any other party thereto is in breach or
violation of, or in default in the performance or observance of any term or
provision of, and no event has occurred which, with notice or lapse of time
or both, is reasonably expected to result in a default under, (i) the
certificates or articles of incorporation or bylaws (or other comparable
charter documents) of the Company or any of its Significant Subsidiaries or
(ii) any Contract to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries or any of their respective
assets or properties is bound, except in the case of clause (ii) for
breaches, violations and defaults which, individually or in the aggregate,
are not having and are not reasonably expected to have a material adverse
effect on the Company and its Subsidiaries taken as a whole.
(b) Except as disclosed in Section 3.11 of the Company Disclosure Letter
or in the Recent Company SEC Reports or as provided for in this Agreement, as
of the date hereof, neither the Company nor any of its Subsidiaries is a
party to any oral or written (i) consulting agreement not terminable on
thirty (30) days' or less notice, (ii) union or collective bargaining
agreement, (iii) agreement with any executive officer or other key employee
of the Company or any of its Subsidiaries the benefits of which are
contingent or vest, or the terms of which are materially altered, upon the
occurrence of a transaction involving the Company or any of its Subsidiaries
of the nature contemplated by this Agreement, (iv) agreement with respect to
any executive officer or other key employee of the Company or any of its
Subsidiaries providing any term of employment or compensation guarantee or
(v) agreement or plan, including any stock option, stock appreciation right,
restricted stock or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement.
3.12 Taxes. (a) Except as disclosed in Section 3.12 of the Company
Disclosure Letter, each of the Company and its Subsidiaries has filed or
caused to be filed with the appropriate Governmental or Regulatory Authority
all tax returns required to be filed by it, or requests for extensions to
file such tax returns have been timely filed or granted and have not expired,
and all such tax returns are true, complete and accurate in all respects,
except to the extent that such failures to file, have extensions granted that
remain in effect or be complete and accurate in all respects, as applicable,
individually or in the aggregate, would not have a material adverse effect on
the Company and its Subsidiaries taken as a whole. The Company and each of
its Subsidiaries has paid (or the Company has paid on its behalf) all taxes
shown as due on such tax returns or otherwise due or claimed to be due by any
Governmental or Regulatory Authority. The most recent financial statements
contained in the Company SEC Reports reflect an adequate reserve for all
taxes payable by the Company and its Subsidiaries for all taxable periods and
portions thereof accrued through the date of such financial statements, and
no deficiencies for any taxes have been proposed, asserted or assessed
against the Company or any of its Subsidiaries that are not adequately
reserved for, except for inadequately reserved taxes and inadequately
reserved deficiencies that would not, individually or in the aggregate, have
a material adverse effect on the Company and its
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Subsidiaries taken as a whole. No requests for waivers or comparable
consents with respect to the time to assess any taxes against the Company or
any of its Subsidiaries have been granted or are pending, except for requests
with respect to such taxes that have been adequately reserved for in the most
recent financial statements contained in the Company SEC Reports, or, to the
extent not adequately reserved, the assessment of which would not,
individually or in the aggregate, have a material adverse effect on the
Company and its Subsidiaries taken as a whole. The Company and its
Subsidiaries have complied in all respects with all applicable laws, rules
and regulations relating to the payment and withholding of taxes (including,
without limitation, withholding of taxes pursuant to Sections 1441 and 1442
of the Code or similar provisions under any foreign laws and withholding with
respect to employee wages) and have, within the time and manner prescribed by
law, withheld and paid over to the proper Governmental or Regulatory
Authority all amounts required to be withheld and paid over under all
applicable laws. No federal, state, local or foreign audits or other
administrative proceedings or court proceedings ("Audits") exist or have been
initiated with regard to any taxes or tax returns of the Company or any of
its Subsidiaries, and none of the Company or any of its Subsidiaries has
received any notice that such an Audit is pending or threatened with respect
to any taxes due from or with respect to the Company or any of its
Subsidiaries or any tax return filed by or with respect to the Company or any
of its Subsidiaries. The tax returns of the Company and its Subsidiaries for
the taxable periods ending before April 30, 1993 have been examined by the
appropriate Governmental or Regulatory Authority (or the applicable statute
of limitations for the assessment of taxes for such periods has expired).
None of the Company or any of its Subsidiaries is a party to, is bound by, or
has any obligation under, any tax sharing agreement, tax indemnification
agreement or similar contract or arrangement.
The Company is not and since November 1991 has not been a United States
real property holding company as defined in Section 897(c)(2) of the Code.
Neither the Company nor any Subsidiary is a party to any agreement, plan,
contract or arrangement that could result in the payment of any amount of
compensation the deduction of which would be prohibited pursuant to Section
162(m) of the Code.
The Company and its Subsidiaries have previously delivered or made
available to the Parent complete and accurate copies of each of (i) all audit
reports, letter rulings, technical advice memoranda and similar documents
issued by a Governmental or Regulatory Authority relating to the United
States federal, state, local or foreign taxes due from or with respect to the
Company and its Subsidiaries, (ii) the United States federal income tax
returns, and those state, local and foreign income tax returns filed by the
Company and its Subsidiaries and (iii) any closing agreements entered into by
the Company or any of its Subsidiaries with any taxing authority in each case
existing on the date hereof. The Company will deliver to Parent all materials
with respect to the foregoing for all matters arising after the date hereof.
(b) Neither the Company nor any of its Subsidiaries has taken any action
or has any knowledge of any fact or circumstance that is reasonably likely to
prevent the Merger from qualifying as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
(c) As used in this Section 3.12 and in Section 4.12, (i) "taxes" shall
include all federal, state, local and foreign income, franchise, property,
sales, use, excise and other taxes, including obligations for withholding
taxes from payments due or made to any other person and any interest,
penalties or additions to tax and (ii) "tax return" shall mean any return,
report, information return or other document (including any related or
supporting information) with respect to taxes.
3.13 Employee Benefit Plans; ERISA. (a) Except as described in the Recent
Company SEC Reports or as would not have a material adverse effect on the
Company and its Subsidiaries taken as a whole, (i) all Company Employee
Benefit Plans are in compliance with all applicable requirements of law,
including ERISA and the Code, and (ii) neither the Company nor any of its
Subsidiaries nor any ERISA Affiliate has any liabilities or obligations with
respect to any such Company Employee Benefit Plans, whether accrued,
contingent or otherwise, nor to the knowledge of the Company are any such
liabilities or obligations expected to be incurred. Except as described in
the Company SEC Reports or as described in Section 3.13 of the Company
Disclosure Letter, the execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any Company
Employee Benefit Plan that will or may result
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in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee. The only severance
agreements or severance policies applicable to the Company or any of its
Subsidiaries are the agreements and policies specifically referred to in
Section 3.13 of the Company Disclosure Letter.
(b) With respect to each of its Plans, the Company has heretofore
delivered to Parent true and complete copies of each of the following
documents, as applicable: (i) a copy of the Plan; (ii) a copy of the most
recent annual report; (iii) a copy of the most recent actuarial report; (iv)
a copy of the most recent Summary Plan Description; (v) a copy of the trust
or other funding agreement; and (vi) the most recent determination letter
received from the Internal Revenue Service with respect to each Plan that is
intended to be qualified under section 401 of the Code.
(c) No liability under Title IV of ERISA has been incurred by the Company
or any ERISA Affiliate within the past six years that has not been satisfied
in full. To the knowledge of the Company, no condition exists that presents a
material risk to the Company, any of the Subsidiaries or any ERISA Affiliate
of incurring a liability under such Title. The Pension Benefit Guaranty
Corporation established under ERISA ("PBGC") has not instituted proceedings
to terminate any of the Plans and no condition exists that presents a
material risk that such proceedings will be instituted. With respect to each
of the Plans that is subject to Title IV of ERISA, the present value of
accrued benefits under such plan, based upon the actuarial assumptions used
for funding purposes in the most recent actuarial report prepared by such
plan's actuary with respect to such plan, did not, as of its latest valuation
date, exceed the then current value of the assets of such plan allocable to
such accrued benefits. None of the Plans or any trust established thereunder
has incurred any "accumulated funding deficiency" (as defined in section 302
of ERISA and section 412 of the Code), whether or not waived, as of the last
day of the most recent fiscal year of each of the Plans ended prior to the
date of this Agreement. None of the Plans is a "multiemployer plan," as such
term is defined in section 3(37) of ERISA. Each of the Plans that is intended
to be "qualified" within the meaning of section 401(a) of the Code is so
qualified and the trusts maintained thereunder are exempt from taxation under
section 501(a) of the Code. Except as set forth in Section 3.13(c) of the
Company Disclosure Letter, no Plan provides benefits, including without
limitation death or medical benefits (whether or not insured), with respect
to current or former employees after retirement or other termination of
service (other than coverage mandated by applicable law or benefits, the full
cost of which is borne by the current or former employee). There are no
pending or threatened claims by or on behalf of any Plan, by any employee or
beneficiary covered under any such Plan, or otherwise involving any such Plan
(other than routine claims for benefits).
(d) As used herein:
(i) "Company Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be
contributed to by the Company, any of its Subsidiaries or ERISA Affiliates
for the benefit of the current or former employees or directors of the
Company or any of its Subsidiaries and existing on the date of this
Agreement or at any time subsequent thereto and on or prior to the
Effective Time and, in the case of a Plan which is subject to Part 3 of
Title I of the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder ("ERISA"), Section 412
of the Code or Title IV of ERISA, at any time during the five-year period
preceding the date of this Agreement;
(ii) "Plan" means any employment, bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock
option, stock ownership, stock appreciation rights, phantom stock, leave
of absence, layoff, vacation, day or dependent care, legal services,
cafeteria, life, health, medical, accident, disability, workmen's
compensation or other insurance, severance, separation, termination,
change of control or other benefit plan, agreement, practice, policy,
program or arrangement of any kind, whether written or oral, including,
but not limited to any "employee benefit plan" within the meaning of
Section 3(3) of ERISA; and
(iii) "ERISA Affiliate" means, with respect to any person, any person in
the same controlled group as such person (within the meaning of Section
414(b) and (c) of the Code).
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3.14 Labor Matters. Except as disclosed in the Recent Company SEC Reports
or in Section 3.14 of the Company Disclosure Letter, there are no material
controversies pending or, to the knowledge of the Company, threatened between
the Company or any of its Subsidiaries and any representatives of its
employees, except as would not, individually or in the aggregate, have a
material adverse effect on the Company and its Subsidiaries taken as a whole,
and, to the knowledge of the Company, there are no material organizational
efforts presently being made involving any of the now unorganized employees
of the Company or any of its Subsidiaries. Since April 30, 1994, there has
been no work stoppage, strike or other concerted action by employees of the
Company or any of its Subsidiaries except as have not, individually or in the
aggregate, had a material adverse effect on the Company and its Subsidiaries
taken as a whole.
3.15 Environmental Matters. (a) Each of the Company and its Subsidiaries
has obtained all licenses, permits, authorizations, approvals and consents
from Governmental or Regulatory Authorities which are required under any
applicable Environmental Law in respect of its business or operations
("Environmental Permits"), except for such failures to have Environmental
Permits which, individually or in the aggregate, are not reasonably expected
to have a material adverse effect on the Company and its Subsidiaries taken
as a whole. Each of such Environmental Permits is in full force and effect
and each of the Company and its Subsidiaries is in compliance with the terms
and conditions of all such Environmental Permits and with any applicable
Environmental Law, except for such failures to be in compliance which,
individually or in the aggregate, are not reasonably expected to have a
material adverse effect on the Company and its Subsidiaries taken as a whole.
(b) There is no Environmental Claim pending or to the knowledge of the
Company threatened against the Company or any of its Subsidiaries or to the
knowledge of the Company, against any person or entity whose liability for
any Environmental Claim the Company or any of its Subsidiaries has or may
have retained or assumed either contractually or by operation of law that is
reasonably expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole.
(c) Except as set forth in Section 3.15 of the Company Disclosure Letter,
to the knowledge of the Company, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, threatened release or presence of any
Hazardous Material which could form the basis of any Environmental Claim
against the Company or any of its Subsidiaries, or to the knowledge of the
Company, against any person or entity whose liability for any Environmental
Claim the Company or any of its Subsidiaries has or may have retained or
assumed either contractually or by operation of law, except for such
liabilities which, individually or in the aggregate, are not reasonably
expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole.
(d) To the knowledge of the Company, no site or facility now or previously
owned, operated or leased by the Company or any of its Subsidiaries is listed
or proposed for listing on the National Priorities List promulgated pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, and the rules and regulations thereunder ("CERCLA").
(e) No Liens have arisen under or pursuant to any Environmental Law on any
site or facility owned, operated or leased by the Company or any of its
Subsidiaries, other than any such real property not individually or in the
aggregate material to the Company and its Subsidiaries taken as a whole, and
no action of any Governmental or Regulatory Authority has been taken or, to
the knowledge of the Company, is in process which could subject any of such
properties to such Liens.
(f) The Company has delivered or otherwise made available for inspection
to the Parent true, complete and correct copies and results of any material
reports, studies, analyses, tests or monitoring possessed or initiated by the
Company or any of its Subsidiaries pertaining to Hazardous Materials in, on,
beneath or adjacent to any property currently or formerly owned, operated or
leased by the Company or any of its Subsidiaries, or regarding the Company's
or any of its Subsidiaries' compliance with applicable Environmental Laws.
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(g) As used herein:
(i) "Environmental Claim" means any claim, action, cause of action,
investigation or notice (written or oral) by any person or entity alleging
potential liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs,
natural resources damages, property damages, personal injuries, or
penalties) arising out of, based on or resulting from (a) the presence, or
release or threatened release, of any Hazardous Materials at any location,
whether or not owned or operated by the Company or any of its
Subsidiaries, or (b) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
(ii) "Environmental Law" means any law or order of any Governmental or
Regulatory Authority relating to the regulation or protection of human
health, safety or the environment or to emissions, discharges, releases or
threatened releases of Hazardous Material, pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or wastes into the
environment; and
(iii) "Hazardous Material" means (A) any petroleum or petroleum products,
flammable materials, radioactive materials, friable asbestos, urea
formaldehyde foam insulation and transformers or other equipment that
contain dielectric fluid containing regulated levels of polychlorinated
biphenyls (PCBs); (B) any chemicals or other materials or substances which
are now or hereafter become defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants" or words of similar import under any
Environmental Law; and (C) any other chemical or other material or
substance, exposure to which is now or hereafter prohibited, limited or
regulated by any Governmental or Regulatory Authority under any
Environmental Law.
3.16 Intellectual Property Rights. (a) The Company and its Subsidiaries
own or have the right to use, all Intellectual Property individually or in
the aggregate material to the conduct of the businesses of the Company and
its Subsidiaries taken as a whole. To the knowledge of the Company, neither
the Company nor any Subsidiary of the Company is in default (or with the
giving of notice or lapse of time or both, would be in default) under any
license to use such Intellectual Property, such Intellectual Property is not
being infringed by any third party, and neither the Company nor any
Subsidiary of the Company is infringing any intellectual property of any
third party, except for such defaults and infringements which, individually
or in the aggregate, are not having and are not reasonably expected to have a
material adverse effect on the Company and its Subsidiaries taken as a whole.
For purposes of this Agreement, "Intellectual Property" means patents and
patent rights, trademarks and trademark rights, trade names and trade name
rights, service marks and service mark rights, service names and service name
rights, copyrights and copyright rights and other proprietary intellectual
property rights and all pending applications for and registrations of any of
the foregoing that the Company or its Subsidiaries (or as applicable the
Parent and its Subsidiaries) own, license or otherwise have the right to use.
An accurate schedule of all Intellectual Property is set forth in Section
3.16 of the Company Disclosure Letter.
(b) Either the Company or one of its Subsidiaries currently is listed in
the records of the appropriate United States, state or foreign agency as the
sole owner of record for each application and registration included in the
Intellectual Property, except for any such failure which, individually or in
the aggregate, is not reasonably expected to have a material adverse effect
on the Company and its Subsidiaries taken as a whole.
(c) The Company and its Subsidiaries, with respect to all Intellectual
Property owned thereby, have taken or caused to be taken all reasonable steps
to obtain and retain valid and enforceable Intellectual Property rights
therein, including the submission of all necessary filings in accordance with
the legal and administrative requirements of the appropriate jurisdictions.
No application or registration listed in Section 3.16 of the Company
Disclosure Schedule is the subject of any pending, existing or, to the
Company's knowledge, threatened, opposition, interference, cancellation
proceeding or other legal or governmental proceeding before any registration
authority in any jurisdiction.
(d) The consummation of the transaction contemplated hereby will not
result in the loss or impairment of the Company's or any of its Subsidiaries'
right to own or use any of the material Intellectual
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Property nor will it require the consent of any Governmental or Regulatory
Authority or third party except for any such loss, improvement or non-consent
which, individually or in the aggregate, is not reasonably expected to have a
material adverse effect on the Company and its Subsidiaries taken as a whole.
3.17 Vote Required. Assuming the accuracy of the representation and
warranty contained in Section 4.18, the affirmative vote of the holders of
record of at least two-thirds of the outstanding shares of Company Common
Stock with respect to the adoption and approval of this Agreement is the only
vote of the holders of any class or series of the capital stock of the
Company required to adopt this Agreement and approve the Merger and the other
transactions contemplated hereby.
3.18 Opinion of Financial Advisor. The Company has received the oral
opinion of each of Goldman, Sachs & Co. and The Beacon Group to the effect
that, the consideration to be received in the Merger by the stockholders of
the Company is fair from a financial point of view to the stockholders of the
Company.
3.19 Company Rights Agreement. As of the date hereof and after giving
effect to the execution and delivery of this Agreement, each Company Right is
represented by the certificate representing the associated share of Company
Common Stock and is not exercisable or transferable apart from the associated
share of Company Common Stock, and the Company has (i) taken all necessary
actions so that the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in a
"Distribution Date" or a "Triggering Event" (as defined in the Company Rights
Agreement) and (ii) authorized an amendment to the Company Rights Agreement
to render it inapplicable to this Agreement, the Merger and the other
transactions contemplated hereby, which shall be executed as promptly as
practical after the date hereof.
3.20 Ownership of Parent Common Stock. Neither the Company nor any of its
Subsidiaries or other affiliates beneficially owns any shares of Parent
Common Stock.
3.21 Sections 3-602 and 3-702 of the MGCL Not Applicable. The Company has
taken all necessary actions so that the provisions of Sections 3-602 and
3-702 of the MGCL will not, before the termination of this Agreement, apply
to this Agreement, the Merger or the other transactions contemplated hereby.
3.22 Accounting Matters. To the knowledge of the Company, neither the
Company nor any of its affiliates has taken or agreed or failed to take any
action that (without giving effect to any action taken or agreed to be taken
by Parent or any of its affiliates) would disqualify the treatment of the
business combination to be effected by the Merger as a pooling of interests
for accounting purposes. The Company has received written advice from KPMG
Peat Marwick (addressed to both the Company and Parent) that, with respect to
the Company, the Merger will qualify as a pooling of interests transaction
under Opinion 16 of the Accounting Principles Board.
3.23 Insurance. Section 3.23 of the Company Disclosure Letter sets forth a
complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of
and/or providing insurance coverage to the Company and each of its
Subsidiaries and their respective businesses, properties and assets (or its
directors, officers, salespersons, agents or employees). All such policies
are in full force and effect. Neither the Company nor any of its Subsidiaries
has received notice of default under any such policy, and has not received
written notice of any pending or threatened termination or cancellation,
coverage limitation or reduction, or material premium increase with respect
to any such policy the failure of which to maintain, has a material adverse
effect on the Company and its Subsidiaries taken as a whole. Section 3.23 of
the Company Disclosure Letter sets forth a complete and accurate summary of
all of the self-insurance coverage provided by the Company and its
Subsidiaries and except as set forth in such Section 3.23 of the Company
Disclosure Letter, no letters of credit have been posted.
3.24 Records. (a) The respective corporate record books of the Company and
each of its Subsidiaries contain accurate and complete records of all
material meetings and accurately reflect all other actions taken by the
stockholders, Board of Directors and all material committees of the Board of
Directors of the Company and its Subsidiaries. Complete and accurate copies
of all such record books have been made available by the Company to Parent.
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(b) The books, records and work papers of the Company and its
Subsidiaries are complete and correct, have been maintained in all material
respects in accordance with applicable federal, foreign, state and local laws
and regulations and good business practices.
3.25 Mortgage Banking Licenses and Qualifications. The Company (to the
extent applicable) and each of its Subsidiaries engaged in the business of
originating or servicing loans (i) is qualified (A) by the Federal Housing
Administration ("FHA") as a mortgagee and servicer for Mortgage Loans which
satisfy all applicable rules and requirements to be insured by FHA and which
are insured by FHA ("FHA Loans"), (B) by The Veteran's Administration ("VA")
as a lender and servicer for Mortgage Loans which satisfy all applicable
rules and regulations to be guaranteed by the VA and which are guaranteed by
the VA ("VA Loans"), (C) by the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") as a
seller/servicer of first mortgages to FNMA and FHLMC and (D) by the
Government National Mortgage Association ("GNMA") as an authorized issuer and
servicer of GNMA-guaranteed mortgage-backed securities; and (ii) has all
other certifications, authorizations, franchises, licenses, permits and other
approvals (together with the items set forth in clause (i) above, the
"Licenses") necessary to conduct its current mortgage banking business, and
is in good standing under all applicable federal, state and local laws and
regulations thereunder as a mortgage lender and servicer. Section 3.25 of the
Company Disclosure Letter sets forth a true and complete list of all
Licenses. The Company and each of its Subsidiaries has complied with all such
Licenses, and to the knowledge of the Company there is no threatened
suspension, cancellation or invalidation of, or penalties (including fines or
refunds) under, any such Licenses.
3.26 Loan Portfolio. The Company has previously delivered to Parent a tape
(magnetic media) which sets forth the following information, as of September
30, 1996 with respect to each Mortgage Loan in the Mortgage Servicing
Portfolio as of such date (other than those loans set forth in Section 3.26
of the Company Disclosure Letter): (a) the loan number of each such Mortgage
Loan, (b) the unpaid principal balance of each such Mortgage Loan, (c) the
payment status of each such Mortgage Loan, (d) the monthly principal and
interest payment for each such Mortgage Loan, (e) the monthly escrow payment
for each such Mortgage Loan, (f) the interest rate of each such Mortgage
Loan, and whether such rate is adjustable, and (g) the state in which the
property securing each such Mortgage Loan is located. All information
contained in such tape is true and correct as of such date in all material
respects. To the knowledge of the Company, each Mortgage Loan is (i)
evidenced by a note with such terms as are customary in the business, (ii)
duly secured by a mortgage or deed of trust with such terms as are customary
in the business and which grants the holder thereof a first priority lien on
the subject property (including any improvements thereon), each such mortgage
or deed of trust constituting a security interest that has been duly
perfected and maintained (or is in the process of perfection in due course)
as a first lien subject only to taxes and assessments not yet delinquent as
evidenced by a lender's title insurance policy, and is in full force and
effect and (iii) accompanied by a hazard insurance policy (and a flood
insurance policy where required under the terms of the Flood Disaster
Protection Act) covering improvements on the premises subject to such
mortgage or deed of trust, with a loss payee clause in favor of the Company
or a Subsidiary of the Company or an assignee of the Company or such
Subsidiary, such insurance policy covering such risks as are customarily
insured against in accordance with industry practice and which are required
to be insured against pursuant to Investor requirements.
For the purposes of this Agreement:
"Investor" means any Person who owns a Mortgage Loan, or the servicing
rights or master servicing rights to a Mortgage Loan, subserviced, serviced
or master serviced by the Company or any Subsidiary of the Company pursuant
to a Mortgage Servicing Agreement.
"Mortgage Loan" means any closed 1-4 family residential mortgage
(including all Warehouse Loans), whether or not such mortgage is included in
a securitized portfolio, in the Mortgage Servicing Portfolio, as evidenced by
notes duly secured by mortgages or deeds of trust.
"Mortgage Servicing Agreements" means all contracts or arrangements
(written or oral) between the Company or any of its Subsidiaries and an
Investor pursuant to which the Company or any of its Subsidiaries
subservices, services or master services mortgage loans for such Investor.
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"Mortgage Servicing Portfolio" means the portfolio of mortgage loans
subserviced, serviced or master serviced by the Company or any of its
Subsidiaries pursuant to Mortgage Servicing Agreements, together with all
Warehouse Loans.
"Warehouse Loans" means Mortgage Loans owned by the Company or one of its
Subsidiaries and held for sale.
3.27 Loan Documents. The Loan Documents were in compliance with applicable
Regulations upon origination of the underlying Mortgage Loan and are complete
in all material respects. All insertions in any Loan Documents were correct
when made. All required adjustments for those Mortgage Loans that are
adjustable rate Mortgage Loans have been timely and properly made in
accordance with the underlying Loan Documents and all such adjustments are
recorded accurately and completely in the Loan Documents.
For the purposes of this Agreement:
"Agency" means FHA, VA, GNMA, FNMA, FHLMC or a state agency.
"Insurer" means a Person who insures or guarantees all or any portion of
the risk of loss upon borrower default on any of the Mortgage Loans,
including, without limitation, the FHA, the VA and any private mortgage
insurer, and providers of life, hazard, disability, title or other insurance
with respect to any of the Mortgage Loans or the property securing a Mortgage
Loan.
"Loan Documents" means the credit and closing packages, custodial
documents, escrow documents, and all other documents: (i) in the possession
of the Company or its Subsidiaries specifically pertaining to a Mortgage
Loan, (ii) reasonably necessary for prudent servicing of a Mortgage Loan or
(iii) necessary to establish the eligibility of the Mortgage Loan for
insurance by an Insurer or sale to an Investor; in each case as required by
applicable Regulations.
"Regulations" means (i) federal, state and local laws, rules and
regulations with respect to the origination, insuring, purchase, sale,
pooling, servicing, subservicing, master servicing or filing of claims in
connection with a Mortgage Loan, (ii) the responsibilities and obligations
set forth in any agreement between the Company or any of its Subsidiaries and
an Investor or Insurer (including, without limitation, any Mortgage Servicing
Agreement and selling and servicing guides), (iii) the laws, rules,
regulations, guidelines, handbooks and other requirements of (A) an Investor,
(B) an Agency, (C) an Insurer, (D) a public housing program or (E) an
Investor program with respect to the origination, insuring, purchase, sale,
pooling, servicing, subservicing, master servicing or filing of claims in
connection with a Mortgage Loan, and (iv) the terms and provisions of the
Loan Documents.
3.28 No Recourse. Except as set forth in Section 3.28 of the Company
Disclosure Letter and except with respect to delinquent Mortgage Loans with
respect to which the VA has notified the Company or one of its Subsidiaries
that it intends to exercise its option to pay the amount guaranteed by the VA
and relinquish all rights in the collateral securing such Mortgage Loan to
the Company or one of its Subsidiaries ("VA No-Bids"), neither the Company
nor any of its Subsidiaries is a party to: (i) any agreement or arrangement
with (or otherwise obligated to) any Person, including an Investor or
Insurer, to repurchase from any such Person (or effect any substitution with
respect to) any Mortgage Loan, mortgaged property serviced for others,
mortgage loan sold by the Company or any of its Subsidiaries with servicing
released ("Servicing Released Loans") or mortgage loan the servicing rights
with respect to which were sold on a bulk or flow basis by the Company or any
of its Subsidiaries ("Servicing Sale Loan") or (ii) any agreement,
arrangement or understanding to reimburse, indemnify, effect a substitution,
"make whole" or hold harmless any Person or otherwise assume any liability
with respect to any Loss suffered or incurred as a result of any default
under or the foreclosure or sale of any Mortgage Loan, mortgaged property
serviced for others, Servicing Released Loans or Servicing Sale Loans, except
with respect to any of the Mortgage Loans, mortgaged property serviced for
others, Servicing Released Loans or Servicing Sale Loans, described in clause
(i) or (ii) above, insofar as (A) such obligation to repurchase, reimburse,
indemnify, substitute, "make whole," hold harmless or otherwise assume
liability is (x) based upon a breach by the Company or any of its
Subsidiaries of a contractual representation, warranty or undertaking, or the
misfeasance or malfeasance of the Company or any such Subsidiary, and not (y)
based
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solely upon the default under or foreclosure or sale of any such Mortgage
Loan, mortgaged property, Servicing Released Loan or Servicing Sale Loan
without regard to the occurrence of any such breach, misfeasance or
malfeasance or (B) the Company or any such Subsidiary incurs expenses such as
legal fees in excess of the reimbursement limits, if any, set forth in the
applicable Mortgage Servicing Agreement.
For purposes of this Agreement:
"Loss" means any liability, loss, cost, damage, penalty, fine, obligation
or expense of any kind whatsoever (including, without limitation, reasonable
attorneys', accountants', consultants' or experts' fees and disbursements).
3.29 Mortgage Servicing Agreements. Section 3.29 of the Company Disclosure
Letter contains a list of the investors and all Mortgage Servicing Agreements
to which the Company or any of its Subsidiaries is a party as of the date
hereof. The Mortgage Servicing Agreements and the Regulations set forth all
the terms and conditions of the Company and any of its Subsidiaries' rights
against and obligations to the Agencies and Investors and, except as set
forth in Section 3.29 of the Company Disclosure Letter, there are no written
or oral agreements that modify or amend any such Mortgage Servicing Agreement
in any material respect. All of the Mortgage Servicing Agreements are valid
and binding obligations of the Company or the applicable Subsidiary of the
Company and, to the knowledge of the Company, all of the other parties
thereto, are in full force and effect, and are enforceable in accordance with
their terms, except as enforcement thereof may be limited by general
principles of equity whether applied in a court of law or a court of equity
and by bankruptcy, insolvency and similar laws affecting creditors, rights
and remedies generally. Except as set forth in Section 3.29 of the Company
Disclosure Letter, there is no default or breach under, or dispute regarding
the material terms of, or to the knowledge of the Company, claim of default
or breach by any party under any such Mortgage Servicing Agreement, and, to
the knowledge of the Company, no event has occurred which with the passage of
time or the giving of notice or both would constitute a default or breach by
any party under any such Mortgage Servicing Agreement or would permit
termination, modification or acceleration of any such Mortgage Servicing
Agreement.
3.30 Compliance with Mortgage Banking Regulations. (a) Except as disclosed
in Section 3.30 of the Company Disclosure Letter, the Company and each of its
Subsidiaries engaged in the business of originating or servicing loans and,
with respect to each Mortgage Loan, and, to the knowledge of the Company,
each prior servicer and originator of any such loan, has been and is
(including, without limitation, with respect to (i) the ownership and
operation of its properties and (ii) the documentation, underwriting,
origination, purchase, assumption, modification, sale, pooling and servicing
of Mortgage Loans by the Company and such Subsidiaries and such prior
servicers and originators) in compliance with all Regulations, orders, writs,
decrees, injunctions and other requirements of any court or Governmental
Entities applicable to it, its properties and assets and its conduct of
business (including, without limitation, (x) the rules, regulations and
requirements of FHA, VA, FNMA, the United States Department of Housing and
Urban Development ("HUD"), FHLMC and GNMA, (y) any applicable local, state or
federal law or ordinance, and any regulations or orders issued thereunder,
governing or pertaining to fair housing or unlawful discrimination in
residential lending (including without limitation anti-redlining, equal
credit opportunity, and fair credit reporting), truth-in-lending, real estate
settlement procedures, adjustable rate mortgages, adjustable rate mortgage
disclosures or consumer credit (including, without limitation, the federal
Consumer Credit Protection Act, the federal Truth-in-Lending Act and
Regulation Z thereunder, the federal Real Estate Settlement Procedures Act of
1974 and Regulation X thereunder, and the federal Equal Credit Opportunity
Act and Regulation B thereunder) or with respect to the Flood Disaster
Protection Act and (z) all applicable usury and interest limitations laws).
Without limiting the generality of the foregoing, except as set forth in
Section 3.30(a) of the Company Disclosure Letter, each of the Company and
each such Subsidiary of the Company has been and is in compliance in all
material respects with all servicer and other requirements of the FHA, VA,
FNMA, FHLMC, GNMA, Investors and any Insurer (including, without limitation,
any applicable net worth requirements) which are applicable to it, and all
applicable underwriting standards of such Agencies, Investors or Insurers,
and each correspondent or broker from whom the Company or a Subsidiary of the
Company has purchased FHA Loans or VA Loans had all FHA and VA approvals
necessary to enable it to take applications and close FHA Loans and/or VA
Loans.
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(b) Except as set forth in Section 3.30(b) of the Company Disclosure
Letter, the Company and each Subsidiary of the Company, as the case may be,
has timely filed, or will have timely filed by the Effective Time, all
reports required to be filed by any Agency, Investor or Insurer or by any
federal, state or municipal law, regulation or ordinance. Except as set forth
in Section 3.30(b) of the Company Disclosure Letter, neither the Company nor
any Subsidiary of the Company has done or failed to do, or has caused to be
done or omitted to be done, any act, the effect of which would operate to
invalidate or materially impair (i) any approvals of the FHA, VA, FNMA,
FHLMC, GNMA, HUD or any Investor, (ii) any FHA insurance or commitment of the
FHA to insure, (iii) any VA guarantee or commitment of the VA to guarantee,
(iv) any private mortgage insurance or commitment of any private mortgage
insurer to insure, (v) any title insurance policy, (vi) any hazard insurance
policy, (vii) any flood insurance policy required by the National Flood
Insurance Act of 1968, as amended, (viii) any fidelity bond, direct surety
bond, or errors and omissions insurance policy required by HUD, GNMA, FNMA,
FHA, FHLMC, VA or private mortgage insurers, (ix) any surety or guaranty
agreement or (x) any guaranty issued by GNMA to the Company or any Subsidiary
of the Company respecting mortgage-backed securities issued or serviced by
the Company or any Subsidiary of the Company and other like guaranties.
(c) Except as set forth in Section 3.30(c) of the Company Disclosure
Letter, since January 1, 1994, no Agency, Investor or Insurer has (y) to the
knowledge of the Company, claimed that the Company or any Subsidiary of the
Company has violated or not complied with the applicable underwriting
standards with respect to mortgage loans sold by the Company or any
Subsidiary of the Company to an Investor or (z) imposed restrictions on the
activities (including commitment authority) of the Company or any Subsidiary
of the Company. To the knowledge of the Company, as of the date of this
Agreement, there exist no facts or circumstances which would entitle an
Investor or other Person to demand repurchase of a Mortgage Loan, Servicing
Released Loan or Servicing Sale Loan or which would entitle an Insurer to
demand indemnification from the Company or any Subsidiary of the Company, to
cancel any mortgage insurance held for any such Subsidiary's benefit or to
reduce any mortgage insurance benefits payable to the Company or any such
Subsidiary, or would lead GNMA to require a letter of credit from the Company
or any Subsidiary of the Company.
3.31 Custodial Accounts. Each of the Company and its Subsidiaries so
required has full power and authority to maintain escrow accounts ("Custodial
Accounts") for certain of the Mortgage Loans, has established Custodial
Accounts for all escrow deposits relating to the Mortgage Loans, and is the
lawful fiduciary of all Custodial Accounts related to the Mortgage Loans.
Such Custodial Accounts comply in all material respects with (i) all
applicable Regulations (including without limitation Regulations governing
the appropriate identification of such accounts and the calculation of the
amount of the monthly payments for deposit into Custodial Accounts that
mortgagors are required to make) and (ii) any terms of the Mortgage Loans
(and Mortgage Servicing Agreements) relating thereto, and all such Custodial
Accounts have been maintained in all material respects in accordance with
usual and customary industry practice.
3.32 Inquiries. Section 3.32 of the Company Disclosure Letter contains a
true and correct list of all of the audits, investigations, complaints and
inquiries of the Company or any of its Subsidiaries by any Agency, Investor
or private mortgage insurer or HUD commenced since January 1, 1994, the
result of which audits and investigations claimed a material failure to
comply with applicable Regulations and resulted in (i) a repurchase of
Mortgage Loans or related mortgage properties by the Company or any
Subsidiary of the Company, (ii) indemnification by the Company or any
Subsidiary of the Company in connection with Mortgage Loans or related
mortgage properties, (iii) rescission of an insurance or guaranty contract or
agreement or (iv) payment of a penalty to an Agency, HUD, an Investor or
Insurer. Except for customary ongoing quality control reviews, no such audit
or investigation is pending or, to the knowledge of the Company, threatened.
The Company has made available to Parent copies of all written reports,
letters and materials received or sent by the Company or a Subsidiary of the
Company in connection with such audits, investigations, complaints and
inquiries.
3.33 Advances. Except as set forth in Section 3.3 of the Company
Disclosure Letter, there are no pooling, participation, servicing or other
agreements to which the Company or any of its Subsidiaries is a party which
obligate it to make advances with respect to defaulted or delinquent Mortgage
Loans, other than as provided in GNMA, FNMA, FHLMC or other pooling and
servicing agreements.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
4.01 Organization and Qualification. Each of Parent and its Subsidiaries
(including Sub) is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has
full corporate power and authority to conduct its business as and to the
extent now conducted and to own, use and lease its assets and properties,
except for such failures to be so incorporated, existing and in good standing
or to have such power and authority which, individually or in the aggregate,
are not having and are not reasonably expected to have a material adverse
effect on Parent and its Subsidiaries taken as a whole. Sub was formed solely
for the purpose of engaging in the transactions contemplated by this
Agreement, has engaged in no other business activities and has conducted its
operations only as contemplated hereby. Each of Parent and its Subsidiaries
is duly qualified, licensed or admitted to do business and is in good
standing in each jurisdiction in which the ownership, use or leasing of its
assets and properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for such failures to
be so qualified, licensed or admitted and in good standing which,
individually or in the aggregate, are not having and are not reasonably
expected to have a material adverse effect on Parent and its Subsidiaries
taken as a whole. Except as set forth in Section 4.01 of the Parent
Disclosure Letter, as of the date hereof, all of Parent's Significant
Subsidiaries are wholly-owned, directly or indirectly, by Parent. Parent has
previously delivered or made available to the Company correct and complete
copies of the certificate or articles of incorporation and bylaws (or other
comparable charter documents) of Parent and its Significant Subsidiaries as
of the date hereof.
4.02 Capital Stock. (a) Prior to Parent Stockholders' Meeting, the
authorized capital stock of Parent consists solely of 300,000,000 shares of
Parent Common Stock and 10,000,000 shares of preferred stock, par value $1.00
per share ("Parent Preferred Stock"). As of November 7, 1996, 128,624,074
shares of Parent Common Stock were issued and outstanding, 141,000 shares
were held in the treasury of Parent and 31,155,094 shares were reserved for
issuance pursuant to Parent's 1992 Stock Option Plan and 1993 Stock Option
Plan. Since such date, except as set forth in Section 4.02 of the letter
dated the date hereof and delivered by Parent and Sub to the Company
concurrently with the execution and delivery of this Agreement (the "Parent
Disclosure Letter"), there has been no change in the number of issued and
outstanding shares of Parent Common Stock or shares of Parent Common Stock
held in treasury or reserved for issuance since such date other than upon the
exercise of stock options or the conversion of convertible debt outstanding
as of the date hereof, or as otherwise issued after the date hereof by Parent
not in violation of this Agreement. As of the date hereof, no shares of
Parent Preferred Stock are issued and outstanding. All of the issued and
outstanding shares of Parent Common Stock are, and all shares reserved for
issuance will be, upon issuance in accordance with the terms specified in the
instruments or agreements pursuant to which they are issuable, duly
authorized, validly issued, fully paid and nonassessable. Except pursuant to
this Agreement and except as set forth in Section 4.02 of the Parent
Disclosure Letter, as of the date hereof there are no outstanding Options
obligating Parent or any of its Subsidiaries to issue or sell any shares of
capital stock of Parent or to grant, extend or enter into any Option with
respect thereto.
(b) Except as disclosed in Section 4.02 of the Parent Disclosure Letter,
as of the date hereof, all of the outstanding shares of capital stock of each
Significant Subsidiary of Parent are duly authorized, validly issued, fully
paid and nonassessable and are owned, beneficially and of record, by Parent
or a Subsidiary wholly owned, directly or indirectly, by Parent, free and
clear of any Liens. Except as disclosed in Section 4.02 of the Parent
Disclosure Letter, as of the date hereof, there are no (i) outstanding
Options obligating Parent or any of its Significant Subsidiaries to issue or
sell any shares of capital stock of any Subsidiary of Parent or to grant,
extend or enter into any such Option or (ii) voting trusts, proxies or other
commitments, understandings, restrictions or arrangements in favor of any
person other than Parent or a Significant Subsidiary wholly owned, directly
or indirectly, by Parent with respect to the voting of or the right to
participate in dividends or other earnings on any capital stock of any
Significant Subsidiary of Parent.
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(c) Except as disclosed in Section 4.02 of the Parent Disclosure Letter,
as of the date hereof, there are no outstanding contractual obligations of
Parent or any Significant Subsidiary of Parent to repurchase, redeem or
otherwise acquire any shares of Parent Common Stock or any capital stock of
any Subsidiary of Parent or to provide funds to, or make any investment (in
the form of a loan, capital contribution or otherwise) in, any Significant
Subsidiary of Parent or any other person.
4.03 Authority Relative to this Agreement. Each of Parent and Sub has full
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder (subject to, in the case of consummation of the Merger,
the issuance of Parent Common Stock and the increase in the Board of
Directors of Parent in connection therewith, obtaining the Parent
Stockholders' Approval, if required) and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement by each of Parent and Sub and the consummation by each of Parent
and Sub of the transactions contemplated hereby have been duly and validly
approved by its Board of Directors and by Parent in its capacity as the sole
stockholder of Sub; and no other corporate proceedings on the part of either
of Parent or Sub or their stockholders are necessary to authorize the
execution, delivery and performance of this Agreement by Parent and Sub and
the consummation by Parent and Sub of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Parent and Sub and constitutes a legal, valid and binding obligation of each
of Parent and Sub enforceable against each of Parent and Sub in accordance
with its terms (subject to, in the case of consummation of the Merger, and
the issuance of Parent Common Stock and the increase in the Board of
Directors of Parent in connection therewith, obtaining the Parent
Stockholders' Approval, if required), except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
4.04 Non-Contravention; Approvals and Consents. (a) The execution and
delivery of this Agreement by each of Parent and Sub do not, and the
performance by each of Parent and Sub of its obligations hereunder and the
consummation of the transactions contemplated hereby will not, conflict with,
result in a violation or breach of, constitute (with or without notice or
lapse of time or both) a default under, result in or give to any person any
right of payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any Lien upon any
of the assets or properties of Parent or any of its Significant Subsidiaries
under, any of the terms, conditions or provisions of (i) the certificates or
articles of incorporation or bylaws (or other comparable charter documents)
of Parent or any of its Significant Subsidiaries, or (ii) except as disclosed
in Section 4.04 of the Parent Disclosure Letter, (x) subject to the obtaining
of the Parent Stockholders' Approval and taking of the actions described in
paragraph (b) of this Section any laws or orders of any Governmental or
Regulatory Authority applicable to Parent or any of its Subsidiaries or any
of their respective assets or properties, or (y) any Contracts to which
Parent or any of its Subsidiaries is a party or by which Parent or any of its
Subsidiaries or any of their respective assets or properties is bound,
excluding from the foregoing clauses (x) and (y) conflicts, violations,
breaches, defaults, terminations, modifications, accelerations and creations
and impositions of Liens which, individually or in the aggregate, are not
reasonably expected to have a material adverse effect on Parent and its
Subsidiaries taken as a whole or on the ability of Parent and Sub to
consummate the transactions contemplated by this Agreement.
(b) Except (i) for the filing of a premerger notification report by Parent
under the HSR Act, (ii) for the filing of the Proxy Statement and
Registration Statement with the SEC pursuant to the Exchange Act and the
Securities Act, the declaration of the effectiveness of the Registration
Statement by the SEC and filings with various state securities authorities
that are required in connection with the transactions contemplated by this
Agreement, (iii) for the filing of the Articles of Merger and other
appropriate merger documents required by the MGCL with the Department and
appropriate documents with the relevant authorities of other states in which
the Constituent Corporations are qualified to do business and (iv) as
disclosed in Section 4.04 of the Parent Disclosure Letter, no consent,
approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any law or order
of any Governmental or Regulatory Authority or any Contract to which Parent
or any of its Subsidiaries is a
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party or by which Parent or any of its Subsidiaries or any of their
respective assets or properties is bound for the execution and delivery of
this Agreement by each of Parent and Sub, the performance by each of Parent
and Sub of its obligations hereunder or the consummation of the transactions
contemplated hereby, other than such consents, approvals, actions, filings
and notices which the failure to make or obtain, as the case may be,
individually or in the aggregate, are not reasonably expected to have a
material adverse effect on Parent and its Subsidiaries taken as a whole or on
the ability of Parent and Sub to consummate the transactions contemplated by
this Agreement.
4.05 SEC Reports and Financial Statements. Parent delivered to the Company
prior to the execution of this Agreement a true and complete copy of each
form, report, schedule, registration statement, definitive proxy statement
and other document (together with all amendments thereof and supplements
thereto) filed by Parent or any of its Subsidiaries with the SEC since
January 1, 1994 (as such documents have since the time of their filing been
amended or supplemented, the "Parent SEC Reports"), which are all the
documents (other than preliminary material) that Parent and its Subsidiaries
were required to file or did file with the SEC since such date. As of their
respective dates, the Parent SEC Reports (i) complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated
financial statements (including, in each case, the notes, if any, thereto)
included in the Parent SEC Reports (the "Parent Financial Statements")
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated therein or in the notes
thereto and except with respect to unaudited statements as permitted by Form
10-Q of the SEC) and fairly present (subject, in the case of the unaudited
interim financial statements, to normal, recurring year-end audit adjustments
(which are not expected to be, individually or in the aggregate, materially
adverse to Parent and its Subsidiaries taken as a whole)) the consolidated
financial position of Parent and its consolidated subsidiaries as at the
respective dates thereof and the consolidated results of their operations and
cash flows for the respective periods then ended. Except as set forth in
Section 4.05 of the Parent Disclosure Letter, each Significant Subsidiary of
Parent is treated as a consolidated subsidiary of Parent in the Parent
Financial Statements for all periods covered thereby.
4.06 Absence of Certain Changes or Events. Except as disclosed in the
Recent Parent SEC Reports filed prior to the date of this Agreement, (a)
since June 30, 1996 there has not been any change, event or development
having, or that is reasonably expected to have, individually or in the
aggregate, a material adverse effect on Parent and its Subsidiaries taken as
a whole.
4.07 Absence of Undisclosed Liabilities. Except for matters reflected or
reserved against in the balance sheet for the period ended June 30, 1996 or
in the Recent Parent SEC Reports included in the Parent Financial Statements
or as disclosed in Section 4.07 of the Parent Disclosure Letter, neither
Parent nor any of its Subsidiaries had at such date, or has incurred since
that date, any liabilities or obligations (whether absolute, accrued,
contingent, fixed or otherwise, or whether due or to become due) of any
nature that would be required by generally accepted accounting principles to
be reflected on a consolidated balance sheet of Parent and its consolidated
subsidiaries (including the notes thereto), except liabilities or obligations
(i) which were incurred in the ordinary course of business consistent with
past practice or (ii) which have not been, and are not reasonably expected to
be, individually or in the aggregate, materially adverse to Parent and its
Subsidiaries taken as a whole.
4.08 Legal Proceedings. Except as disclosed in the Recent Parent SEC
Reports or in Section 4.08 of the Parent Disclosure Letter, (i) there are no
actions, suits, arbitrations or proceedings pending or, to the knowledge of
Parent, threatened against, relating to or affecting, nor to the knowledge of
Parent are there any Governmental or Regulatory Authority investigations or
audits pending or threatened against, relating to or affecting, Parent or any
of its Subsidiaries or any of their respective assets and properties which,
individually or in the aggregate, are reasonably expected to have a material
adverse effect on Parent and its Subsidiaries taken as a whole or on the
ability of Parent and Sub to consummate the
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<PAGE>
transactions contemplated by this Agreement, and (ii) neither Parent nor any
of its Subsidiaries is subject to any order of any Governmental or Regulatory
Authority which, individually or in the aggregate, is having or is reasonably
expected to have a material adverse effect on Parent and its Subsidiaries
taken as a whole or on the ability of Parent and Sub to consummate the
transactions contemplated by this Agreement.
4.09 Information Supplied. The registration statement on Form S-4 to be
filed with the SEC by Parent in connection with the issuance of shares of
Parent Common Stock in the Merger or pursuant to Section 6.09, as amended or
supplemented from time to time (as so amended and supplemented, the
"Registration Statement"), and any other documents to be filed by Parent with
the SEC or any other Governmental or Regulatory Authority in connection with
the Merger and the other transactions contemplated hereby will (in the case
of the Registration Statement and any such other documents filed with the SEC
under the Securities Act or the Exchange Act) comply as to form in all
material respects with the requirements of the Exchange Act and the
Securities Act, respectively, and will not, on the date of its filing or, in
the case of the Registration Statement, at the time it becomes effective
under the Securities Act, at the date the Proxy Statement is mailed to
stockholders of the Company and of Parent and at the times of the
Stockholders' Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading, except that no representation is made by
Parent or Sub with respect to information supplied in writing by or on behalf
of the Company expressly for inclusion therein and information incorporated
by reference therein from documents filed by the Company or any of its
Subsidiaries with the SEC.
4.10 Compliance with Laws and Orders. Parent and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental and Regulatory Authorities necessary for the lawful conduct of
their respective businesses (the "Parent Permits"), except for failures to
hold such permits, licenses, variances, exemptions, orders and approvals
which, individually or in the aggregate, are not having and are not
reasonably expected to have a material adverse effect on Parent and its
Subsidiaries taken as a whole. Parent and its Subsidiaries are in compliance
with the terms of the Parent Permits, except failures so to comply which,
individually or in the aggregate, are not having and are not reasonably
expected to have a material adverse effect on Parent and its Subsidiaries
taken as a whole. Except as disclosed in the Recent Parent SEC Reports,
Parent and its Subsidiaries are not in violation of or default under any law
or order of any Governmental or Regulatory Authority, except for such
violations or defaults which, individually or in the aggregate, are not
having and are not reasonably expected to have a material adverse effect on
Parent and its Subsidiaries taken as a whole.
4.11 Compliance with Agreements; Certain Agreements. Except as disclosed
in the Recent Parent SEC Reports, neither Parent nor any of its Subsidiaries
nor, to the knowledge of Parent, any other party thereto is in breach or
violation of, or in default in the performance or observance of any term or
provision of, and no event has occurred which, with notice or lapse of time
or both, is reasonably expected to result in a default under, (i) the
certificates or articles of incorporation or bylaws (or other comparable
charter documents) of Parent or any of its Significant Subsidiaries or (ii)
any Contract to which Parent or any of its Subsidiaries is a party or by
which Parent or any of its Subsidiaries or any of their respective assets or
properties is bound, except in the case of clause (ii) for breaches,
violations and defaults which, individually or in the aggregate, are not
having and are not reasonably expected to have a material adverse effect on
Parent and its Subsidiaries taken as a whole.
4.12 Taxes. (a) Except as disclosed in Section 4.12 of the Parent
Disclosure Letter, each of Parent and its Subsidiaries has filed or caused to
be filed with the appropriate Governmental or Regulatory Authority all tax
returns required to be filed by it, or requests for extensions to file such
tax returns have been timely filed or granted and have not expired, and all
such tax returns are true, complete and accurate in all respects, except to
the extent that such failures to file, have extensions granted that remain in
effect or be complete and accurate in all respects, as applicable,
individually or in the aggregate, would not have a material adverse effect on
Parent and its Subsidiaries taken as a whole. Parent and each of its
Subsidiaries has paid (or Parent has paid on its behalf) all taxes shown as
due on such tax returns or otherwise due or claimed to be due by any
Governmental or Regulatory Authority. The most recent
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financial statements contained in the Parent SEC Reports reflect an adequate
reserve for all taxes payable by Parent and its Subsidiaries for all taxable
periods and portions thereof accrued through the date of such financial
statements, and no deficiencies for any taxes have been proposed, asserted or
assessed against Parent or any of its Subsidiaries that are not adequately
reserved for, except for inadequately reserved taxes and inadequately
reserved deficiencies that would not, individually or in the aggregate, have
a material adverse effect on Parent and its Subsidiaries taken as a whole. No
requests for waivers or comparable consents with respect to the time to
assess any taxes against Parent or any of its Subsidiaries have been granted
or are pending, except for requests with respect to such taxes that have been
adequately reserved for in the most recent financial statements contained in
the Parent SEC Reports, or, to the extent not adequately reserved, the
assessment of which would not, individually or in the aggregate, have a
material adverse effect on Parent and its Subsidiaries taken as a whole.
Parent and its Subsidiaries have complied in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of taxes
(including, without limitation, withholding of taxes pursuant to Sections
1441 and 1442 of the Code or similar provisions under any foreign laws and
withholding with respect to employee wages) and have, within the time and
manner prescribed by law, withheld and paid over to the proper Governmental
or Regulatory Authority all amounts required to be withheld and paid over
under all applicable laws.
(b) Neither Parent nor any of its Subsidiaries has taken any action or has
any knowledge of any fact or circumstance that is reasonably likely to
prevent the Merger from qualifying as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
4.13 Employee Benefit Plans; ERISA. (a) Except as described in the Recent
Parent SEC Reports or as would not have a material adverse effect on Parent
and its Subsidiaries taken as a whole, (i) all Parent Employee Benefit Plans
are in compliance with all applicable requirements of law, including ERISA
and the Code, and (ii) neither Parent nor any of its Subsidiaries nor any
Parent ERISA Affiliate has any liabilities or obligations with respect to any
such Parent Employee Benefit Plans, whether accrued, contingent or otherwise,
nor to the knowledge of Parent are any such liabilities or obligations
expected to be incurred. The execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon
the occurrence of any additional or subsequent events) constitute an event
under any Parent Employee Benefit Plan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to
fund benefits with respect to any employee.
(b) No liability under Title IV of ERISA has been incurred by Parent or
any Parent ERISA Affiliate within the past six years that has not been
satisfied in full. To the knowledge of Parent, no condition exists that
presents a material risk to Parent, any of the Subsidiaries or any Parent
ERISA Affiliate of incurring a liability under such Title. The PBGC has not
instituted proceedings to terminate any of the Plans and no condition exists
that presents a material risk that such proceedings will be instituted. With
respect to each of the Plans that is subject to Title IV of ERISA, the
present value of accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such plan's actuary with respect to such plan, did not, as of its
latest valuation date, exceed the then current value of the assets of such
plan allocable to such accrued benefits by an amount which would have, or
could reasonably be expected to have, a material adverse effect on Parent and
its Subsidiaries taken as a whole. None of the Plans or any trust established
thereunder has incurred any "accumulated funding deficiency" (as defined in
section 302 of ERISA and section 412 of the Code), whether or not waived, as
of the last day of the most recent fiscal year of each of the Plans ended
prior to the date of this Agreement. No withdrawal by Parent or any Parent
ERISA Affiliate from any Parent Employee Benefit Plan that is a
"multiemployer plan," as such term is defined in section 3(37) of ERISA,
would result in a withdrawal liability having a material adverse effect on
Parent and its Subsidiaries taken as a whole. Each of the Plans that is
intended to be "qualified" within the meaning of section 401(a) of the Code
is so qualified and the trusts maintained thereunder are exempt from taxation
under section 501(a) of the Code. No liability under any Plan which provides
benefits, including without limitation death or medical benefits (whether or
not insured), with respect to current or former employees after retirement or
other termination of service (other than coverage mandated by
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applicable law or benefits, the full cost of which is borne by the current
or former employee) would, or would reasonably be likely to, have a material
adverse effect on Parent and its Subsidiaries taken as a whole. There are no
pending or threatened claims by or on behalf of any Plan, by any employee or
beneficiary covered under any such Plan, or otherwise involving any such Plan
(other than routine claims for benefits).
(c) As used herein "Parent Employee Benefit Plan" means any Plan entered
into, established, maintained, sponsored, contributed to or required to be
contributed to by Parent or any of its Subsidiaries or ERISA Affiliates for
the benefit of the current or former employees or directors of Parent or any
of its Subsidiaries and existing on the date of this Agreement or at any time
subsequent thereto and on or prior to the Effective Time and, in the case of
a Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the
Code or Title IV of ERISA, at any time during the five-year period preceding
the date of this Agreement.
4.14 Labor Matters. Except as disclosed in the Recent Parent SEC Reports
or in Section 4.14 of the Parent Disclosure Letter, there are no material
controversies pending or, to the knowledge of Parent, threatened between
Parent or any of its Subsidiaries and any representatives of its employees,
except as would not, individually or in the aggregate, have a material
adverse effect on Parent and its Subsidiaries taken as a whole, and, to the
knowledge of Parent, there are no material organizational efforts presently
being made involving any of the now unorganized employees of Parent or any of
its Subsidiaries. Since January 1, 1994, there has been no work stoppage,
strike or other concerted action by employees of Parent or any of its
Subsidiaries except as have not, individually or in the aggregate, had a
material adverse effect on Parent and its Subsidiaries taken as a whole.
4.15 Environmental Matters. (a) Each of Parent and its Subsidiaries has
obtained all Environmental Permits which are required under any applicable
Environmental Law in respect of its business or operations, except for such
failures to have Environmental Permits which, individually or in the
aggregate, are not reasonably expected to have a material adverse effect on
Parent and its Subsidiaries taken as a whole. Each of such Environmental
Permits is in full force and effect and each of Parent and its Subsidiaries
is in compliance with the terms and conditions of all such Environmental
Permits and with any applicable Environmental Law, except for such failures
to be in compliance which, individually or in the aggregate, are not
reasonably expected to have a material adverse effect on Parent and its
Subsidiaries taken as a whole.
(b) There is no Environmental Claim pending or to the knowledge of Parent
threatened against Parent or any of its Subsidiaries or to the knowledge of
Parent, against any person or entity whose liability for any Environmental
Claim Parent or any of its Subsidiaries has or may have retained or assumed
either contractually or by operation of law that is reasonably expected to
have a material adverse effect on Parent and its Subsidiaries taken as a
whole.
(c) Except as set forth in Section 4.15 of the Parent Disclosure Letter,
to the knowledge of Parent, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, threatened release or presence of any Hazardous
Material which could form the basis of any Environmental Claim against Parent
or any of its Subsidiaries, or to the knowledge of Parent, against any person
or entity whose liability for any Environmental Claim Parent or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law, except for such liabilities which, individually or in the
aggregate, are not reasonably expected to have a material adverse effect on
Parent and its Subsidiaries taken as a whole.
(d) To the knowledge of Parent, no site or facility now or previously
owned, operated or leased by Parent or any of its Subsidiaries is listed or
proposed for listing on the National Priorities List promulgated pursuant to
CERCLA.
(e) No Liens have arisen under or pursuant to any Environmental Law on any
site or facility owned, operated or leased by Parent or any of its
Subsidiaries, other than any such real property not individually or in the
aggregate material to Parent and its Subsidiaries taken as a whole, and no
action of any Governmental or Regulatory Authority has been taken or, to the
knowledge of Parent, is in process which could subject any of such properties
to such Liens.
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(f) Prior to Closing, Parent shall have made available for inspection to
the Company true, complete and correct copies and results of any material
reports, studies, analyses, tests or monitoring possessed or initiated by
Parent or any of its Subsidiaries pertaining to Hazardous Materials in, on,
beneath or adjacent to any property currently or formerly owned, operated or
leased by Parent or any of its Subsidiaries, or regarding Parent's or any of
its Subsidiaries' compliance with applicable Environmental Laws.
4.16 Intellectual Property Rights. (a) Parent and its Subsidiaries own or
have the right to use, all Intellectual Property individually or in the
aggregate material to the conduct of the businesses of Parent and its
Subsidiaries as currently conducted taken as a whole. To the knowledge of
Parent, neither Parent nor any Subsidiary of Parent is in default (or with
the giving of notice or lapse of time or both, would be in default) under any
license to use such Intellectual Property, such Intellectual Property is not
being infringed by any third party, and neither Parent nor any Subsidiary of
Parent is infringing any intellectual property of any third party, except for
such defaults and infringements which, individually or in the aggregate, are
not having and are not reasonably expected to have a material adverse effect
on Parent and its Subsidiaries taken as a whole.
(b) Either Parent or one of its Subsidiaries currently is listed in the
records of the appropriate United States, state or foreign agency as the sole
owner of record for each application and registration included in the
Intellectual Property, except for any such failure which, individually or in
the aggregate, is not reasonably expected to have a material adverse effect
on Parent and its Subsidiaries taken as a whole.
(c) Parent and its Subsidiaries, with respect to all Intellectual Property
owned thereby, have taken or caused to be taken all reasonable steps to
obtain and retain valid and enforceable Intellectual Property rights therein,
including the submission of all necessary filings in accordance with the
legal and administrative requirements of the appropriate jurisdictions,
except where the failure to do so is not reasonably expected to have a
material adverse effect on Parent and its Subsidiaries taken as a whole.
(d) The consummation of the transaction contemplated hereby will not
result in the loss or impairment of Parent's or any of its Subsidiaries'
right to own or use any of the material Intellectual Property nor will it
require the consent of any Governmental or Regulatory Authority or third
party except for any such loss, impairment or non-consent which, individually
or in the aggregate, is not reasonably expected to have a material adverse
effect on Parent and its Subsidiaries taken as a whole.
4.17 Opinion of Financial Advisor. Parent has received the oral opinion of
Lehman Brothers Inc., dated the date hereof, to the effect that, from a
financial point of view, the consideration to be paid by Parent in the Merger
is fair to Parent.
4.18 Ownership of Company Common Stock. Neither Parent nor any of its
Subsidiaries owns any shares of Company Common Stock. No other affiliates of
Parent beneficially own in the aggregate more than 1 percent of the shares of
Company Common Stock.
4.19 Accounting Matters. (a) To the knowledge of Parent, neither Parent
nor any of its affiliates has taken or agreed or failed to take any action
that (without giving effect to any action taken or agreed to be taken by the
Company or any of its affiliates) would disqualify the treatment of the
business combination to be effected by the Merger as a pooling of interests
for accounting purposes.
(b) Parent (i) believes, based on discussions with the SEC (as and to the
extent previously disclosed to the Company), that with respect to Parent, the
SEC currently would not object to accounting for the Merger as a pooling of
interests transaction and (ii) has received written advice from Deloitte &
Touche LLP (addressed to both Parent and the Company) that, with respect to
Parent, the Merger will qualify as a pooling of interests transaction under
Opinion 16 of the Accounting Principles Board.
4.20 Vote Required. The affirmative vote of at least a majority of the
votes cast by the holders of record of shares of Parent Common Stock
represented in person or by proxy at a meeting in which a quorum of
stockholders is present with respect to the approval of the issuance of
Parent Common Stock in connection with the Merger and the increase in the
size of the Board of Directors of Parent in connection with Section 6.11 is
the only vote of the holders of any class or series of the capital stock of
Parent that may be required to approve such issuance.
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ARTICLE V
COVENANTS
5.01 Covenants of the Company and Parent. At all times from and after the
date hereof until the Effective Time, the Company and Parent each covenants
and agrees as to itself and its Subsidiaries that (except as disclosed in
Section 5.01 of the Company Disclosure Letter or the Parent Disclosure
Letter, as applicable, or as expressly contemplated or permitted by this
Agreement, or to the extent that Parent shall otherwise previously consent in
writing):
(a) Ordinary Course. The Company and its Subsidiaries shall conduct their
businesses only in, and the Company and its Subsidiaries, shall not take any
action except in the ordinary course consistent with past practice.
(b) Without limiting the generality of paragraph (a) of this Section, (i)
the Company and its Subsidiaries shall use all commercially reasonable
efforts to preserve intact in all material respects their present business
organizations and reputation, to keep available the services of their key
officers and employees, to maintain their assets and properties in good
working order and condition, ordinary wear and tear excepted, to maintain
insurance on their tangible assets and businesses in such amounts and against
such risks and losses as are currently in effect, to preserve their
relationships with significant customers and suppliers and others having
significant business dealings with them and to comply in all material
respects with all laws and orders of all Governmental or Regulatory
Authorities applicable to them, and (ii) the Company shall, and shall not
permit any of its Subsidiaries to, except as otherwise expressly provided for
in this Agreement:
(A) amend or propose to amend its certificate or articles of
incorporation or bylaws (or other comparable corporate charter documents);
(B) (w) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, except that the
Company may continue the declaration and payment of regular quarterly cash
dividends (including increases consistent with past practice) on Company
Common Stock, with usual record and payment dates for such dividends in
accordance with past dividend practice, and except for the declaration and
payment of dividends by a wholly-owned Subsidiary solely to its parent
corporation, (x) split, combine, reclassify or take similar action with
respect to any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock, (y) adopt a plan of complete
or partial liquidation or resolutions providing for or authorizing such
liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization or (z) directly or indirectly
redeem, repurchase or otherwise acquire any shares of its capital stock or
any Option with respect thereto;
(C) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any Option with
respect thereto (other than (w) the issuance of Company Common Stock or
stock appreciation or similar rights, as the case may be, pursuant to
Company Option Plans or Company Employee Benefit Plans, in each case
outstanding on the date of this Agreement and in accordance with their
present terms, (x) the issuance of options pursuant to Company Option
Plans in accordance with their present terms and only in connection with
the hiring of new employees, and the issuance of shares of Company Common
Stock upon exercise of such options, (y) the issuance by a wholly-owned
Subsidiary of its capital stock to its parent corporation and (z) the
issuance of Company Rights and reservation of Company Series A Preferred
Stock pursuant to the Company Rights Agreement in accordance with the
terms thereof) or modify or amend any right of any holder of outstanding
shares of capital stock or Options with respect thereto;
(D) acquire (by merging or consolidating with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of,
or by any other manner) any business or any corporation, partnership,
association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets other than in the
ordinary course of its business consistent with past practice;
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(E) other than dispositions in the ordinary course of its business
consistent with past practice, sell, lease, grant any security interest in
or otherwise dispose of or encumber any of its assets or properties;
(F) except to the extent required by applicable law, (x) permit any
material change in (A) any pricing, marketing, purchasing, investment,
accounting, financial reporting, inventory, credit, allowance or tax
practice or policy or (B) any method of calculating any bad debt,
contingency or other reserve for accounting, financial reporting or tax
purposes or (y) make any material tax election or settle or compromise any
material income tax liability with any Governmental or Regulatory
Authority;
(G) (x) incur (which shall not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until borrowings are
made under such arrangements) any indebtedness for borrowed money or
guarantee any such indebtedness other than in the ordinary course of its
business consistent with past practice, or (y) voluntarily purchase,
cancel, prepay or otherwise provide for a complete or partial discharge in
advance of a scheduled repayment date with respect to, or waive any right
under, any indebtedness for borrowed money other than in the ordinary
course of its business consistent with past practice;
(H) enter into, adopt, amend in any material respect (except as may be
required by applicable law) or terminate any Company Employee Benefit Plan
or other agreement, arrangement, plan or policy between the Company or one
of its Subsidiaries and one or more of its directors, officers or
employees, or, except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense to the
Company and its Subsidiaries taken as a whole, increase in any manner the
compensation or fringe benefits of any director, officer or employee or
pay any benefit not required by any plan or arrangement in effect as of
the date hereof;
(I) enter into any Contract or amend or modify any existing Contract, or
engage in any new transaction outside the ordinary course of business
consistent with past practice or not on an arm's length basis, with any
affiliate of such party or any of its Subsidiaries;
(J) make any capital expenditures or commitments for additions to plant,
property or equipment constituting capital assets except in the ordinary
course of business consistent with past practice;
(K) make any change in the lines of business in which it participates or
is engaged; or
(L) enter into any Contract, commitment or arrangement to do or engage in
any of the foregoing.
(c) Parent shall, and shall not permit any of its Subsidiaries to, except
as otherwise expressly provided for in this Agreement, announce, enter into
or commit to enter into any transaction, which entry into, commitment or
announcement would reasonably be expected to cause a significant delay of the
date of the mailing of the Proxy Statement or of the scheduled date of either
of the Stockholders' Meetings.
(d) Advice of Changes. Each party shall confer on a regular and frequent
basis with the other with respect to its business and operations and other
matters relevant to the Merger, and shall promptly advise the other, orally
and in writing, of any change or event, including, without limitation, any
complaint, investigation or hearing by any Governmental or Regulatory
Authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, is reasonably expected
to have a material adverse effect on the Company or Parent, as the case may
be, and its Subsidiaries taken as a whole or on the ability of the Company or
Parent, as the case may be, to consummate the transactions contemplated
hereby; provided that no party shall be required to make any disclosure to
the extent such disclosure would constitute a violation of any applicable
law.
(e) Notice and Cure. Each of Parent and the Company will notify the other
of, and will use all commercially reasonable efforts to cure before the
Closing, any event, transaction or circumstance, as soon as practical after
it becomes known to such party, that causes or will cause any covenant or
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agreement of Parent or the Company under this Agreement to be breached or
that renders or will render untrue any representation or warranty of Parent
or the Company contained in this Agreement. Each of Parent and the Company
also will notify the other in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any violation or breach, as
soon as practical after it becomes known to such party, of any
representation, warranty, covenant or agreement made by Parent or the
Company. No notice given pursuant to this paragraph shall have any effect on
the representations, warranties, covenants or agreements contained in this
Agreement for purposes of determining satisfaction of any condition contained
herein.
(f) Fulfillment of Conditions. Subject to the terms and conditions of this
Agreement, each of Parent and the Company will take or cause to be taken all
commercially reasonable steps necessary or desirable and proceed diligently
and in good faith to satisfy each condition to the other's obligations
contained in this Agreement and to consummate and make effective the
transactions contemplated by this Agreement, and neither Parent nor the
Company will, nor will it permit any of its Subsidiaries to, take or fail to
take any action that could be reasonably expected to result in the
nonfulfillment of any such condition. In addition, Parent will use
commercially reasonable efforts to cause the conditions set forth in Section
7.02(g) and the Company will use commercially reasonable efforts to cause the
conditions set forth in Section 7.02(h) to be satisfied promptly after the
date hereof, and in any event no later than the date of the mailing of the
Proxy Statement.
5.02 No Solicitations. Prior to the Effective Time, the Company agrees (a)
that neither it nor any of its affiliates or Subsidiaries shall, and it shall
cause its Representatives not to, initiate, solicit or encourage (including
by way of furnishing information), directly or indirectly, any inquiries or
the making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a
merger, consolidation or other business combination including the Company or
any of its Significant Subsidiaries or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving the
purchase of (i) all or any significant portion of the assets of the Company
and its Subsidiaries taken as a whole, (ii) 15% or more of the outstanding
shares of Company Common Stock or (iii) 15% of the outstanding shares of the
capital stock of any Significant Subsidiary of the Company (any such proposal
or offer being hereinafter referred to as an "Alternative Proposal"), or
engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person or group
relating to an Alternative Proposal (excluding the transactions contemplated
by this Agreement), or otherwise facilitate any effort or attempt to make or
implement an Alternative Proposal; (b) that it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties with respect to any of the foregoing, and it will take the
necessary steps to inform such parties of its obligations under this Section;
and (c) that it will notify Parent immediately if any such inquiries,
proposals or offers are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or
continued with, it or any of such persons; provided, however, that nothing
contained in this Section 5.02 shall prohibit the Board of Directors of the
Company from (i) furnishing information to (but only pursuant to a
confidentiality agreement in customary form and having terms and conditions
substantially comparable to the Confidentiality Agreement) or entering into
discussions or negotiations with any person or group that makes an
unsolicited bona fide Alternative Proposal, if, and only to the extent that,
(A) the Board of Directors of the Company, based upon the written opinion of
outside counsel (a copy of which shall be provided promptly to Parent),
determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary duties to stockholders imposed by law,
(B) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or group, the Company provides written notice
to Parent to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or group, and (C) the
Company keeps Parent informed of the status and all material information
including the identity of such person or group with respect to any such
discussions or negotiations to the extent such disclosure would not
constitute a violation of any applicable law; and (ii) to the extent
required, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Alternative Proposal.
5.03 Company Rights Agreement. The Board of Directors of the Company shall
take all further action (in addition to that referred to in Section 3.19)
reasonably requested in writing by Parent (including
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redeeming the Company Rights immediately prior to the Effective Time or
amending the Company Rights Agreement) in order to render the Company Rights
inapplicable to this Agreement, the Merger and the other transactions
contemplated hereby. Prior to the Effective Time, without the prior written
consent of Parent, the Company will not take any action to amend the Company
Rights Agreement or to redeem the Company Rights.
5.04 Conduct of Business of Sub. Prior to the Effective Time, except as
may be required by applicable law and subject to the other provisions of this
Agreement, Parent shall cause Sub to (a) perform its obligations under this
Agreement in accordance with its terms, (b) not incur directly or indirectly
any liabilities or obligations other than those incurred in connection with
the Merger and the other transactions contemplated hereby, (c) not engage
directly or indirectly in any business or activities of any type or kind and
not enter into any agreements or arrangements with any person, or be subject
to or bound by any obligation or undertaking, which is not contemplated by
this Agreement and (d) not create, grant or suffer to exist any Lien upon its
properties or assets which would attach to any properties or assets of the
Surviving Corporation after the Effective Time.
5.05 Third Party Standstill Agreements. During the period from the date of
this Agreement through the Effective Time, neither the Company nor any of its
Subsidiaries shall terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement to which it is a party. During such
period, the Company shall enforce, to the fullest extent permitted under
applicable law, the provisions of any such agreement, including, but not
limited to, by obtaining injunctions to prevent any breaches of such
agreements and to enforce specifically the terms and provisions thereof in
any court having jurisdiction.
5.06 Purchases of Common Stock of the Other Party. During the period from
the date hereof through the Effective Time, neither Parent nor any of its
Subsidiaries or other affiliates will purchase any shares of Company Common
Stock, and neither the Company nor any of its Subsidiaries or other
affiliates will purchase any shares of Parent Common Stock.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Access to Information; Confidentiality. (a) Each of the Company and
Parent shall, and shall cause each of its Subsidiaries to, throughout the
period from the date hereof to the Effective Time, (i) provide the other
party and its Representatives with full access, upon reasonable prior notice
and during normal business hours, to all officers, employees, agents and
accountants of the Company or Parent, as the case may be, and its
Subsidiaries and their respective assets, properties, books and records, but
only to the extent that such access does not unreasonably interfere with the
business and operations of the Company or Parent, as the case may be, and its
Subsidiaries, and (ii) furnish promptly to such persons (x) a copy of each
report, statement, schedule and other document filed or received by the
Company or Parent, as the case may be, or any of its Subsidiaries pursuant to
the requirements of federal or state securities laws and each material
report, statement, schedule and other document filed with any other
Governmental or Regulatory Authority, and (y) all other information and data
(including, without limitation, copies of Contracts, Company Employee Benefit
Plans or Parent Employee Benefit Plans, as the case may be, and other books
and records) concerning the business and operations of the Company or Parent,
as the case may be, and its Subsidiaries as the other party or any of such
other persons reasonably may request. No investigation pursuant to this
paragraph or otherwise shall affect any representation or warranty contained
in this Agreement or any condition to the obligations of the parties hereto.
Any such information or material obtained pursuant to this Section 6.01 that
constitutes "Evaluation Material" (as such term is defined in the letter
agreement dated as of July 9, 1996 between the Company and Parent (the
"Confidentiality Agreement")) shall be governed by the terms of the
Confidentiality Agreement.
(b) Each party will hold, and will use its best efforts to cause its
Representatives to hold, in strict confidence, unless (i) compelled to
disclose by judicial or administrative process or by other requirements of
applicable laws of Governmental or Regulatory Authorities (including, without
limitation, in
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connection with obtaining the necessary approvals of this Agreement or the
transactions contemplated hereby of Governmental or Regulatory Authorities),
or (ii) disclosed in an action or proceeding brought by a party hereto in
pursuit of its rights or in the exercise of its remedies hereunder, all
documents and information concerning the other party and its Subsidiaries
furnished to it by such other party or its Representatives in connection with
this Agreement or the transactions contemplated hereby, except to the extent
that such documents or information are not included in the term Evaluation
Material pursuant to the third paragraph of the Confidentiality Agreement. In
the event that this Agreement is terminated without the transactions
contemplated hereby having been consummated, upon the request of the Company
or Parent, as the case may be, the other party will, and will cause its
Representatives to, promptly redeliver or cause to be redelivered all copies
of documents and information furnished by the Company or Parent, as the case
may be, or its Representatives to such party and its Representatives in
connection with this Agreement or the transactions contemplated hereby and
destroy or cause to be destroyed all notes, memoranda, summaries, analyses,
compilations and other writings related thereto or based thereon prepared by
the Company or Parent, as the case may be, or its Representatives.
6.02 Preparation of Registration Statement and Proxy Statement. The
Company and Parent shall prepare and file with the SEC as soon as reasonably
practicable after the date hereof but, in any event no later than December
31, 1996, the Proxy Statement and Parent shall prepare and file with the SEC
as soon as reasonably practicable after such date, the Registration
Statement, in which the Proxy Statement will be included as the prospectus.
Parent and the Company shall use their best efforts to have the Registration
Statement declared effective by the SEC as promptly as practicable after such
filing. Parent shall also take any action (other than qualifying as a foreign
corporation or taking any action which would subject it to service of process
in any jurisdiction where Parent is not now so qualified or subject) required
to be taken under applicable state blue sky or securities laws in connection
with the issuance of Parent Common Stock in connection with the Merger. If at
any time prior to the Effective Time any event shall occur that should be set
forth in an amendment of or a supplement to the Registration Statement,
Parent shall prepare and file with the SEC such amendment or supplement as
soon thereafter as is reasonably practicable. Parent, Sub and the Company
shall cooperate with each other in the preparation of the Registration
Statement and the Proxy Statement and any amendment or supplement thereto,
and each shall notify the other of the receipt of any comments of the SEC
with respect to the Registration Statement or the Proxy Statement and of any
requests by the SEC for any amendment or supplement thereto or for additional
information, and shall provide to the other promptly copies of all
correspondence between Parent or the Company, as the case may be, or any of
its Representatives with respect to the Registration Statement or the Proxy
Statement. Parent shall give the Company and its counsel the opportunity to
review the Registration Statement and all responses to requests for
additional information by and replies to comments of the SEC before their
being filed with, or sent to, the SEC. Each of the Company, Parent and Sub
agrees to use its best efforts, after consultation with the other parties
hereto, to respond promptly to all such comments of and requests by the SEC
and to cause (x) the Registration Statement to be declared effective by the
SEC at the earliest practicable time and to be kept effective as long as is
necessary to consummate the Merger, and (y) the Proxy Statement to be mailed
to the holders of Company Common Stock and Parent Common Stock entitled to
vote at the meetings of the stockholders of the Company and Parent at the
earliest practicable time.
6.03 Approval of Stockholders. (a) The Company shall, through its Board of
Directors, duly call, give notice of, convene and hold a meeting of its
stockholders (the "Company Stockholders' Meeting" and, together with the
Parent Stockholders' Meeting, the "Stockholders' Meetings") for the purpose
of voting on the adoption of this Agreement (the "Company Stockholders'
Approval") as soon as reasonably practicable after the date hereof. Subject
to the exercise of fiduciary obligations under applicable law as advised in
writing by outside counsel (a copy of which will be provided promptly to
Parent), the Company shall, through its Board of Directors, include in the
Proxy Statement the recommendation of the Board of Directors of the Company
that the stockholders of the Company adopt this Agreement, and shall use its
best efforts to obtain such adoption. At such meeting, Parent shall, and
shall cause its Subsidiaries to, cause all shares of Company Common Stock
then owned by Parent or any such Subsidiary to be voted in favor of the
adoption of this Agreement.
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(b) Parent shall, through its Board of Directors, duly call, give notice
of, convene and hold a meeting of its stockholders (the "Parent Stockholders'
Meeting") for the purpose of voting on the issuance of Parent Common Stock in
the Merger (the "Parent Stockholders' Approval"). Parent shall, through its
Board of Directors, include in the Proxy Statement the recommendation of the
Board of Directors of Parent that the stockholders of Parent approve such
issuances of Parent Common Stock, and shall use its best efforts to obtain
such approval. At the Parent Stockholders' Meeting, Parent may seek such
other action by its stockholders as set forth in connection with the
execution of this agreement a letter of even date herewith delivered to the
Company.
(c) Parent and the Company shall coordinate and cooperate with respect to
the timing of the Stockholders' Meetings and shall use their best efforts to
cause the Stockholders' Meetings to be held on the same day and as soon as
practicable after the date hereof.
6.04 Company Affiliates. At least thirty (30) days prior to the Closing
Date the Company shall deliver a letter to Parent identifying all persons
who, at the time of the Company Stockholders' Meeting, may, in the Company's
reasonable judgment, be deemed to be "affiliates" (as such term is used in
Rule 145 under the Securities Act) of the Company ("Company Affiliates"). The
Company shall use its best efforts to cause each Company Affiliate to deliver
to Parent on or prior to the Closing Date a written agreement substantially
in the form and to the effect of Exhibit A hereto (an "Affiliate Agreement").
Parent shall be entitled to issue appropriate stop transfer instructions to
the transfer agent for the Parent Common Stock, consistent with the terms of
such Affiliate Agreements.
6.05 Stock Exchange Listing. Parent shall use its best efforts to cause
the shares of Parent Common Stock to be issued in the Merger and under the
Company Option Plans after the Merger in accordance with this Agreement to be
approved for listing on the NYSE, subject to official notice of issuance,
prior to the Closing Date.
6.06 Certain Tax Matters. Each of Parent and the Company shall not take or
fail to take any action which would cause Parent, the Company or their
respective stockholders (except to the extent that any stockholder of the
Company may receive cash in lieu of fractional shares) to recognize gain or
loss for federal income tax purposes as a result of the exchange of Parent
Common Stock for Company Common Stock in the Merger.
6.07 Regulatory and Other Approvals. (a) Subject to the terms and
conditions of this Agreement and without limiting the provisions of Sections
6.02 and 6.03, each of the Company and Parent will proceed diligently and in
good faith to, as promptly as practicable, (a) obtain all consents, approvals
or actions of, make all filings with and give all notices to Governmental or
Regulatory Authorities or any other public or private third parties required
of Parent, the Company or any of their Subsidiaries to consummate the Merger
and the other matters contemplated hereby, and (b) provide such other
information and communications to such Governmental or Regulatory Authorities
or other public or private third parties as the other party or such
Governmental or Regulatory Authorities or other public or private third
parties may reasonably request in connection therewith. In addition to and
not in limitation of the foregoing, each of the parties will (x) take
promptly all actions necessary to make the filings required of Parent and the
Company or their affiliates under the HSR Act no later than fifteen business
days after the date hereof, (y) comply at the earliest practicable date with
any request for additional information received by such party or its
affiliates from the Federal Trade Commission (the "FTC") or the Antitrust
Division of the Department of Justice (the "Antitrust Division") pursuant to
the HSR Act, and (z) cooperate with the other party in connection with such
party's filings under the HSR Act and in connection with resolving any
investigation or other inquiry concerning the Merger or the other matters
contemplated by this Agreement commenced by either the FTC or the Antitrust
Division or state attorneys general.
6.08 Employee Benefit Plans. (a) Parent shall cause the Company Employee
Benefit Plans (other than the Company Option Plans) in effect at the date of
this Agreement to remain in effect until the first anniversary of the
Effective Time or, to the extent such Company Employee Benefit Plans are not
continued, Parent will maintain until such date benefit plans which are no
less favorable, in the aggregate, to the employees covered by such Company
Employee Benefit Plans. In the case of Company Employee
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Benefit Plans which are continued and under which the employees' interests
are based on Company Common Stock, such interests shall be based on Parent
Common Stock in an equitable manner; provided, however, that nothing
contained herein shall be construed as requiring the Company or the Surviving
Corporation to continue any specific plan.
(b) Notwithstanding the provisions of Section 6.08(a), Parent will, and
will cause the Surviving Corporation to, honor without modification the PHH
Corporation Corporate Incentive Plan FY 1997 which terminates on April 30,
1997 provided that the payments pursuant to such plan are (i) consistent with
past practice, (ii) properly accrued for under generally accepted accounting
principles and (iii) in the aggregate, less than $10,000,000, and all
employee severance plans (or policies) and employment and severance
agreements of the Company or any of its Subsidiaries in existence on the date
hereof as such agreements shall be in effect in accordance with the terms of
this Agreement at the Effective Time, as such plans and agreements are
specified in Section 6.08 of the Company Disclosure Letter.
6.09 Company Option Plans. At the Effective Time, each holder of an
outstanding option to purchase shares of Company Common Stock (a "Company
Stock Option") under the Company Option Plans, whether vested or unvested,
shall be entitled to receive in exchange for all of such holder's Company
Stock Options a number of shares of Parent Common Stock equal to the quotient
obtained by dividing (a) the excess, if any, of (i) the product of (A) the
Average Price as of the Company Stockholders' Meeting, (B) the Conversion
Number and (C) the number of shares of Company Common Stock subject to such
Company Stock Options, over (ii) the aggregate exercise price of such Company
Stock Options less any applicable withholding taxes required by any
Governmental or Regulatory Authority in connection with payment of the
foregoing amount by (b) the Average Price as of the Company Stockholders'
Meeting. The provisions of Section 2.02 shall apply mutatis mutandis with
respect to the foregoing. The Company shall obtain prior to the Closing Date
all consents, if any, required from each holder of Company Stock Options to
permit the exchange contemplated by this Section 6.09.
6.10 Directors' and Officers' Indemnification and Insurance. (a) The
Company, and from and after the Effective Time Parent and the Surviving
Corporation (each, an "Indemnifying Party"), shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, a director or officer of
the Company or any of its Subsidiaries (the "Indemnified Parties") against
(i) all losses, claims, damages, costs and expenses (including reasonable
attorneys' fees), liabilities, judgments and settlement amounts that are paid
or incurred in connection with any claim, action, suit, proceeding or
investigation (whether civil, criminal, administrative or investigative and
whether asserted or claimed prior to, at or after the Effective Time) that is
based in whole or in part on, or arises in whole or in part out of, the fact
that such Indemnified Party is or was a director or officer of the Company or
any of its Subsidiaries and relates to or arises out of any action or
omission occurring at or prior to the Effective Time ("Indemnified
Liabilities"), and (ii) all Indemnified Liabilities based in whole or in part
on, or arising in whole or in part out of, or pertaining to this Agreement or
the transactions contemplated hereby, in each case to the full extent a
corporation is permitted under applicable law to indemnify its own directors
or officers, as the case may be; provided that no Indemnifying Party shall be
liable for any settlement of any claim effected without its written consent,
which consent shall not be unreasonably withheld; and provided, further, that
no Indemnifying Party shall be liable for any Indemnified Liabilities which
occur as a result of the gross negligence or willful misconduct of the
Indemnified Party. Without limiting the foregoing, in the event that any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising prior to or after the Effective Time), (w)
the Indemnifying Parties will pay expenses in advance of the final
disposition of any such claim, action suit, proceeding or investigation to
each Indemnified Party to the full extent permitted by applicable law;
provided that the person to whom expenses are advanced provides any
undertaking required by applicable law to repay such advance if it is
ultimately determined that such person is not entitled to indemnification;
(x) the Indemnified Parties shall retain counsel reasonably satisfactory to
the Indemnifying Parties; (y) the Indemnifying Parties shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
(subject to the final sentence of this paragraph) promptly as statements
therefor are received; and (z) the Indemnifying Parties shall use all
commercially reasonable efforts to assist in the defense of any such matter.
Any Indemnified Party wishing to claim
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indemnification under this Section, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify the Indemnifying Parties, but
the failure so to notify an Indemnifying Party shall not relieve it from any
liability which it may have under this paragraph except to the extent such
failure materially prejudices such Indemnifying Party. The Indemnified
Parties as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties.
(b) Except to the extent required by law, Parent will keep in effect and
guarantee performance of the provisions for indemnification of directors or
officers contained in the certificates or articles of incorporation or bylaws
(or other comparable charter documents) of the Surviving Corporation and its
Subsidiaries (which as of the Effective Time shall be those maintained by the
Company and its Subsidiaries on the date hereof) in such a manner as would
not adversely affect the rights of any individual who shall have served as a
director or officer of the Company or any of its Subsidiaries prior to the
Effective Time to be indemnified by such corporations in respect of their
serving in such capacities prior to the Effective Time.
(c) Parent and the Surviving Corporation shall, until the sixth
anniversary of the Effective Time, cause to be maintained in effect, to the
extent available, the policies of directors' and officers' liability
insurance maintained by the Company and its Subsidiaries as of the date
hereof (or policies of at least the same coverage and amounts containing
terms that are no less advantageous to the insured parties) with respect to
claims arising from facts or events that occurred on or prior to the
Effective Time; provided that in no event shall Parent or the Surviving
Corporation be obligated to expend in order to maintain or procure insurance
coverage pursuant to this paragraph any amount per annum in excess of two
hundred percent (200%) of the aggregate premiums payable by the Company and
its Subsidiaries in 1996 (on an annualized basis) for such purpose.
(d) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and each party entitled
to insurance coverage under paragraph (c) above, respectively, and his or her
heirs and legal representatives, and shall be in addition to any other rights
an Indemnified Party may have under the certificate or articles of
incorporation or bylaws of the Surviving Corporation or any of its
Subsidiaries, under the MGCL or otherwise.
6.11 Appointment of Director. Parent shall use its best efforts to cause
the Board of Directors of Parent to invite Mr. Robert D. Kunisch to become a
member of the Board of Directors of Parent following the Closing, subject to
an increase in the size of the Board of Directors of Parent.
6.12 Expenses. Except as set forth in Section 8.02, whether or not the
Merger is consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such cost or expense.
6.13 Brokers or Finders. Each of Parent and the Company represents, as to
itself and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement except Goldman,
Sachs & Co. and the Beacon Group, whose fees and expenses will be paid by the
Company in accordance with the Company's agreements with such firms which
have previously been provided to Parent, and Lehman Brothers Inc., whose fees
and expenses will be paid by Parent in accordance with Parent's agreement
with such firm, and each of Parent and the Company shall indemnify and hold
the other harmless from and against any and all claims, liabilities or
obligations with respect to any other such fee or commission or expenses
related thereto asserted by any person on the basis of any act or statement
alleged to have been made by such party or its affiliate.
6.14 Takeover Statutes. If any "fair price", "moratorium", "control share
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the
members of the Board of Directors of the Company shall grant such approvals
and take
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such actions as are reasonably necessary so that the transactions
contemplated hereby may be consummated as promptly as practicable on the
terms contemplated hereby and thereby and otherwise act to eliminate or
minimize the effects of such statute or regulation on the transactions
contemplated hereby and thereby.
6.15 Conveyance Taxes. The Company and Parent shall cooperate in the
preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or
gains, sales, use, transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar taxes which
become payable in connection with the transactions contemplated by this
Agreement that are required or permitted to be filed on or before the
Effective Time. The Company shall pay, without deduction or withholding from
any amount payable to the holders of Company Common Stock, any such taxes or
fees imposed by any Governmental or Regulatory Authority (and any penalties
and interest with respect to such taxes and fees), which become payable in
connection with the transactions contemplated by this Agreement, on behalf of
the stockholders of the Company.
6.16 Pooling of Interests (a) From and after the date hereof and until the
Effective Time, neither Parent nor the Company nor any of their respective
Subsidiaries or other affiliates shall take any action, or fail to take any
action, that would disqualify the treatment of the business combination to be
effected by the Merger as a "pooling of interests" for accounting purposes.
Following the Effective Time, Parent shall use all commercially reasonable
efforts to conduct the business of the Surviving Corporation, and shall cause
the Surviving Corporation to use all commercially reasonable efforts to
conduct its business, in a manner that would not jeopardize the
characterization of the Merger as a "pooling of interests" for accounting
purposes.
(b) Promptly following the Effective Time, and in any event within thirty
(30) business days following the end of the first calendar month beginning
thereafter, Parent will publish results covering at least thirty (30) days of
post-merger combined operations of the Company and Parent, in the form of a
quarterly earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q, or 8-K, or any
other public filing or announcement which includes the combined results of
operations including sales and net income.
ARTICLE VII
CONDITIONS
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Stockholder Approval. This Agreement shall have been adopted by the
requisite vote of the stockholders of the Company under the MGCL. The
stockholders of Parent shall have approved the issuance of Parent Common
Stock in the Merger by the requisite vote under applicable law and under the
applicable regulations of the NYSE, as the case may be.
(b) Registration Statement; State Securities Laws. The Registration
Statement shall have become effective in accordance with the provisions of
the Securities Act, and no stop order suspending such effectiveness shall
have been issued and remain in effect and no proceeding seeking such an order
shall be pending or threatened. Parent shall have received all state
securities or "Blue Sky" permits and other authorizations necessary to issue
the Parent Common Stock pursuant to this Agreement and under the Company
Option Plans after the Merger.
(c) Exchange Listing. The shares of Parent Common Stock issuable to the
Company's stockholders in the Merger and under the Company Option Plans after
the Merger in accordance with this Agreement shall have been authorized for
listing on the NYSE, upon official notice of issuance.
(d) HSR Act. Any waiting period (and any extension thereof) applicable to
the consummation of the Merger under the HSR Act shall have expired or been
terminated.
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(e) No Injunctions or Restraints. No court of competent jurisdiction or
other competent Governmental or Regulatory Authority shall have enacted,
issued, promulgated, enforced or entered any law or order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of
making illegal or otherwise restricting, preventing or prohibiting
consummation of the Merger or the other transactions contemplated by this
Agreement.
(f) Governmental and Regulatory and Other Consents and Approvals. Other
than the filing provided for by Section 1.03, all consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory
Authority or any other public or private third parties required of Parent,
the Company or any of their Subsidiaries to consummate the Merger and the
other matters contemplated hereby, the failure of which to be obtained or
taken (i) is reasonably expected to have a material adverse effect on Parent
and its Subsidiaries or the Surviving Corporation and its Subsidiaries, in
each case taken as a whole, or (ii) will result in a violation of any
criminal laws, shall have been obtained, all in form and substance reasonably
satisfactory to Parent and the Company.
(g) Pooling Letters. Parent and the Company shall have received letters
from Deloitte & Touche LLP and KPMG Peat Marwick, each dated the date of the
Proxy Statement and confirmed in writing at the Effective Time and addressed
to Parent and the Company, respectively, stating that the Merger will qualify
as a pooling of interests transaction under Opinion 16 of the Accounting
Principles Board.
7.02 Conditions to Obligation of Parent and Sub to Effect the Merger. The
obligation of Parent and Sub to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by Parent
and Sub in their sole discretion):
(a) Representations and Warranties. The representations and warranties
made by the Company in this Agreement shall be true and correct as of the
Closing Date as though made on and as of the Closing Date or, in the case of
representations and warranties made as of a specified date earlier than the
Closing Date, on and as of such earlier date, except as affected by the
transactions contemplated by this Agreement and except for such failures of
representations or warranties to be true and correct (without regard to any
materiality qualifiers contained therein) which, individually or in the
aggregate, are not having and are not reasonably expected to have a material
adverse effect on the Company and its Subsidiaries taken as a whole, and the
Company shall have delivered to Parent a certificate, dated the Closing Date
and executed in the name and on behalf of the Company by its Chairman of the
Board, President or any Executive or Senior Vice President, to such effect.
(b) Performance of Obligations. The Company shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with by
the Company at or prior to the Closing, and the Company shall have delivered
to Parent a certificate, dated the Closing Date and executed in the name and
on behalf of the Company by its Chairman of the Board, President or any
Executive or Senior Vice President, to such effect.
(c) Company Rights Agreement. On or prior to the Closing Date, the
Company Rights shall not have become exercisable or transferable apart from
the associated shares of Company Common Stock, no "Share Acquisition Date" or
"Distribution Date" (as defined in the Company Rights Agreement) shall have
occurred and the Company Rights shall not have become nonredeemable, in each
case other than as a result of actions by Parent or any of its affiliates.
(d) Tax Opinion. Parent and Sub shall have received the opinion, based on
appropriate representations of the Company and Parent, of Skadden, Arps,
Slate, Meagher & Flom LLP, special counsel to Parent, dated on or about the
date on which the Registration Statement (or the last amendment thereto)
shall have become effective, which opinion shall have been confirmed in
writing on and as of the Closing Date, to the effect that:
(i) The Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and the Company, Sub and Parent will each be a
party to such reorganization within the meaning of Section 368(b) of the
Code;
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(ii) No gain or loss will be recognized by Parent or the Company as a
result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of the
Company upon the exchange of their shares of Company Common Stock solely
for shares of Parent Common Stock pursuant to the Merger, except with
respect to cash, if any, received in lieu of fractional shares of Parent
Common Stock;
(iv) The aggregate tax basis of the shares of Parent Common Stock
received solely in exchange for shares of Company Common Stock pursuant to
the Merger (including fractional shares of Parent Common Stock for which
cash is received) will be the same as the aggregate tax basis of the
shares of Company Common Stock exchanged therefor;
(v) The holding period for shares of Parent Common Stock received in
exchange for shares of Company Common Stock pursuant to the Merger will
include the holding period of the shares of Company Common Stock exchanged
therefor, provided such shares of Company Common Stock were held as
capital assets by the stockholder at the Effective Time; and
(vi) A stockholder of the Company who receives cash in lieu of a
fractional share of Parent Common Stock will recognize gain or loss equal
to the difference, if any, between such stockholder's tax basis in such
fractional share (as described in clause (iv) above) and the amount of
cash received.
In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP may
receive and rely upon covenants, agreements, representations and warranties
contained in a certificate of the Company (the "Company Tax Certificate"), a
certificate of Parent (the "Parent Tax Certificate"), and other appropriate
certificates of Parent, the Company and others.
(e) Proceedings. All proceedings to be taken on the part of the Company in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Parent, and Parent shall have received copies of all such
documents and other evidences as Parent may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
(f) Average Price. The Average Price with respect to the Closing Date
shall be no less than $50.00 (the "Minimum Average Price"), subject to
adjustment in accordance with Section 2.01(c)(ii).
(g) Bank Consent. Parent shall have received the required consents from
the required banks pursuant to (i) Parent's 364-Day Competitive Advance and
Revolving Credit Agreement, dated as of October 2, 1996, between Parent, the
Lenders (as defined therein) and The Chase Manhattan Bank, as administrative
agent, (ii) Parent's Five Year Competitive Advance and Revolving Credit
Agreement, dated as of October 2, 1996, between Parent, the Lenders (as
defined therein) and The Chase Manhattan Bank, as administrative agent, (iii)
Parent's guaranty of the Credit Agreement, dated as of August 28, 1996, by
and among Chartwell Leisure Inc., Chartwell Canada Corp., the Banks (as
defined therein), The Bank of Nova Scotia, as syndication agent, and The
Chase Manhattan Bank, as Administrative Agent and (iv) a Guaranty of a Credit
Agreement, by and among Wingate Financial LLC, the Lenders (as defined
therein) and the Chase Manhattan Bank, as Administrative Agent.
(h) Master Credit Agreements. The Company shall have received the required
consents under, or appropriately refinanced or replaced, the credit
agreements listed in paragraph 3 of Section 3.04 of the Company Disclosure
Letter.
7.03 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by the
Company in its sole discretion):
(a) Representations and Warranties. The representations and warranties
made by Parent and Sub in this Agreement shall be true and correct as of the
Closing Date as though made on and as of the Closing Date or, in the case of
representations and warranties made as of a specified date earlier than the
Closing Date, on and as of such earlier date, except as affected by the
transactions contemplated by this
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Agreement and except for such failures of representations or warranties to
be true and correct (without regard to any materiality qualifiers contained
therein) which, individually or in the aggregate, are not having and are not
reasonably expected to have a material adverse effect on Parent and its
Subsidiaries taken as a whole, and Parent and Sub shall each have delivered
to the Company a certificate, dated the Closing Date and executed in the name
and on behalf of Parent by its Chairman of the Board, President or any
Executive Vice President and in the name and on behalf of Sub by its Chairman
of the Board, President or any Vice President, to such effect.
(b) Performance of Obligations. Parent and Sub shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with by
Parent or Sub at or prior to the Closing, and Parent and Sub shall each have
delivered to the Company a certificate, dated the Closing Date and executed
in the name and on behalf of Parent by its Chairman of the Board, President
or any Executive Vice President and in the name and on behalf of Sub by its
Chairman of the Board, President or any Vice President, to such effect.
(c) Tax Opinion. The Company shall have received the opinion, based on
appropriate representations of the Company and Parent, of Piper & Marbury
L.L.P., special counsel to the Company, dated on or about the date on which
the Registration Statement (or the last amendment thereto) shall have become
effective, which opinion shall have been confirmed in writing on and as of
the Closing Date to the effect that:
(i) The Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and the Company, Sub and Parent will each be a
party to such reorganization within the meaning of Section 368(b) of the
Code;
(ii) No gain or loss will be recognized by Parent or the Company as a
result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of the
Company upon the exchange of their shares of Company Common Stock solely
for shares of Parent Common Stock pursuant to the Merger, except with
respect to cash, if any, received in lieu of fractional shares of Parent
Common Stock;
(iv) The aggregate tax basis of the shares of Parent Common Stock
received solely in exchange for shares of Company Common Stock pursuant to
the Merger (including fractional shares of Parent Common Stock for which
cash is received) will be the same as the aggregate tax basis of the
shares of Company Common Stock exchanged therefor;
(v) The holding period for shares of Parent Common Stock received in
exchange for shares of Company Common Stock pursuant to the Merger will
include the holding period of the shares of Company Common Stock exchanged
therefor, provided such shares of Company Common Stock were held as
capital assets by the stockholder at the Effective Time; and
(vi) A stockholder of the Company who receives cash in lieu of a
fractional share of Parent Common Stock will recognize gain or loss equal
to the difference, if any, between such stockholder's tax basis in such
fractional share (as described in clause (iv) above) and the amount of
cash received.
In rendering such opinion, Piper & Marbury L.L.P. may receive and rely upon
covenants, agreements, representations and warranties contained in the
Company Tax Certificate, the Parent Tax Certificate, and other appropriate
certificates of Parent, the Company and others.
(d) Proceedings. All proceedings to be taken on the part of Parent and Sub
in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Company, and the Company shall have received copies of all
such documents and other evidences as the Company may reasonably request in
order to establish the consummation of such transactions and the taking of
all proceedings in connection therewith.
(e) Average Price. The Average Price with respect to the Closing Date
shall be no less than the Minimum Average Price, subject to adjustment in
accordance with Section 2.01(c)(ii).
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective
Time, whether prior to or after the Company Stockholders' Approval:
(a) By mutual written agreement of the parties hereto duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) By either the Company or Parent upon notification to the
non-terminating party by the terminating party:
(i) at any time after June 16, 1997 if the Merger shall not have been
consummated on or prior to such date and such failure to consummate the
Merger is not caused by a breach of this Agreement by the terminating
party;
(ii) if (A) the Company Stockholders' Approval (under the MGCL) or (B)
Parent Stockholders' Approval (under applicable law and under the
applicable regulations of the NYSE), as the case may be, shall not be
obtained by reason of the failure to obtain the requisite vote upon a vote
held at a meeting of such stockholders, or any adjournment thereof, called
therefor;
(iii) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the non-terminating party
set forth in this Agreement, which breach is not curable or, if curable,
has not been cured within thirty (30) days following receipt by the
non-terminating party of notice of such breach from the terminating party;
or
(iv) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an order making
illegal or otherwise restricting, preventing or prohibiting the Merger and
such order shall have become final and nonappealable;
(c) By the Company if (i) the Board of Directors of the Company determines
in good faith, based upon the written opinion of outside counsel (a copy of
which shall be provided promptly to Parent), that termination of the
Agreement is required for the Board of Directors to comply with its fiduciary
duties to stockholders imposed by law by reason of an unsolicited bona fide
Alternative Proposal having been made; provided that the Company shall have
complied with the provisions of clauses (B) and (C) of Section 5.02 and shall
notify Parent at least 48 hours in advance of its intention to terminate this
Agreement or enter into a definitive agreement with respect to such
Alternative Proposal; (ii) if at any time after the Company Stockholders'
Meeting, the Average Price with respect to any date thereafter shall be less
than the Minimum Average Price, subject to adjustment in accordance with
Section 2.01(c)(ii); or (iii) the Board of Directors of Parent shall have
withdrawn or modified in a manner materially adverse to the Company its
approval or recommendation of this Agreement or the Merger;
(d) By Parent if the Board of Directors of the Company (or any committee
thereof) shall have withdrawn or modified in a manner materially adverse to
Parent its approval or recommendation of this Agreement or the Merger or
shall have recommended an Alternative Proposal to the stockholders of the
Company; or
(e) By Parent if at any time after the Company Stockholders' Meeting, the
Average Price with respect to any date thereafter shall be less than the
Minimum Average Price, subject to adjustment in accordance with Section
2.01(c)(ii).
8.02 Effect of Termination. (a) If this Agreement is validly terminated by
either the Company or Parent pursuant to Section 8.01, this Agreement will
forthwith become null and void and there will be no liability or obligation
on the part of either the Company or Parent (or any of their respective
Representatives or affiliates), except (i) that the provisions of Sections
6.01(b), 6.12 and 6.13 and this Section 8.02 will continue to apply following
any such termination, (ii) that nothing contained herein shall relieve any
party hereto from liability for wilful breach of its representations,
warranties, covenants or agreements contained in this Agreement and (iii) as
provided in paragraph (b) below. The effectiveness of any termination under
this Agreement shall be subject to the payments required to be made pursuant
to paragraph (b) below being so made.
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(b) (i) If this Agreement is terminated by (x) the Company pursuant to
Section 8.01(c)(i) or (y) by Parent pursuant to Section 8.01(d), then the
Company shall pay or cause to be paid to Parent, by wire transfer of same day
funds on the day of such termination, a termination fee of $50,000,000.
(ii) In the event that (x) this Agreement is terminated by either party
pursuant to Section 8.01(b)(ii)(A) and (y) prior to such termination any
person or group shall have made an Alternative Proposal, then the Company
shall pay or cause to be paid to Parent, by wire transfer of same day funds
upon receipt of appropriate documentation therefor, Parent's documented
out-of-pocket expenses relating to this Agreement and the transactions
contemplated hereby; provided, however, that such expenses shall not exceed
$2,500,000. In the event that within one year after the date of such
termination the Company enters into an agreement with the person or group
that made such Alternative Proposal, then the Company will pay to Parent, by
wire transfer of same day funds on the closing date of such transaction, a
termination fee of $50,000,000 (less any amounts paid pursuant to the
foregoing sentence).
(iii) In the event that this Agreement is terminated by either party
pursuant to Section 8.01(b)(ii)(B), then Parent shall pay or cause to be paid
to the Company, by wire transfer of same day funds upon receipt of
appropriate documentation therefor, the Company's documented out-of-pocket
expenses relating to this Agreement and the transactions contemplated hereby;
provided, however, that such expenses shall not exceed $2,500,000.
(c) The parties acknowledges that the agreements contained in this Section
8.02 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, the parties hereto would not enter into
this Agreement; accordingly, if either party fails promptly to pay the amount
due pursuant to this Section 8.02, and in order to obtain such payment,
either party commences a suit which results in a judgment against the
non-paying party for the fee set forth in this Section 8.02, the non-paying
party shall pay to the other party as the case may be, its cost and expenses
(including reasonable attorney's fees and expenses) in connection with such
suit, together with interest on the amount of the fee at the prime rate of
Citibank N.A. in effect on the date such payment was required to be made.
8.03 Amendment. This Agreement may be amended, supplemented or modified by
action taken by or on behalf of the respective Boards of Directors of the
parties hereto at any time prior to the Effective Time, whether prior to or
after the Company Stockholders' Approval shall have been obtained, but after
such adoption and approval only to the extent permitted by applicable law. No
such amendment, supplement or modification shall be effective unless set
forth in a written instrument duly executed by or on behalf of each party
hereto.
8.04 Waiver. At any time prior to the Effective Time any party hereto, by
action taken by or on behalf of its Board of Directors, may to the extent
permitted by applicable law (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties
hereto contained herein or in any document delivered pursuant hereto or (iii)
waive compliance with any of the covenants, agreements or conditions of the
other parties hereto contained herein. No such extension or waiver shall be
effective unless set forth in a written instrument duly executed by or on
behalf of the party extending the time of performance or waiving any such
inaccuracy or non-compliance. No waiver by any party of any term or condition
of this Agreement, in any one or more instances, shall be deemed to be or
construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion.
ARTICLE IX
GENERAL PROVISIONS
9.01 Non-Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements
contained in this Agreement or in any instrument delivered pursuant to this
Agreement shall not survive the Merger but shall terminate at the Effective
Time, except for the agreements contained in Article I and Article II, in
Sections 6.01(b), 6.06, 6.08, 6.09, 6.10, 6.11,
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6.12, 6.13, 6.14 and 6.15 and 6.16, this Article IX, the covenants,
agreements, representations and warranties contained in the Company Tax
Certificate and Parent Tax Certificate and the agreements of the "affiliates"
of the Company delivered pursuant to Section 6.04, which shall survive the
Effective Time.
9.02 Notices. All notices, requests and other communications hereunder
must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile transmission or mailed (first class
postage prepaid) to the parties at the following addresses or facsimile
numbers:
If to Parent or Sub, to:
HFS INCORPORATED
6 Sylvan Way
Parsippany, New Jersey 07054
Facsimile No.: 201-359-5335
Attn: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Facsimile No.: 212-735-2000
Attn: David Fox, Esq.
If to the Company, to:
PHH CORPORATION
11333 McCormick Road
Hunt Valley, Maryland 21031
Facsimile No.: 410-771-2293
Attn: General Counsel
with a copy to:
Piper & Marbury L.L.P.
Charles Center South
36 South Charles Street
Baltimore, Maryland 21201-3018
Facsimile No.: 410-576-5052
Attn: Larry P. Scriggins, Esq.
and
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile No.: 212-530-0283
Attn: Lawrence Lederman, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number
as provided in this Section, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as provided in
this Section, be deemed given upon receipt (in each case regardless of
whether such notice, request or other communication is received by any other
person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section). Any party from time to time may change
its address, facsimile number or other information for the purpose of notices
to that party by giving notice specifying such change to the other parties
hereto.
9.03 Entire Agreement; Incorporation of Exhibits. (a) This Agreement
supersedes all prior discussions and agreements among the parties hereto with
respect to the subject matter hereof, other than
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the Confidentiality Agreement, which shall survive the execution and
delivery of this Agreement in accordance with its terms, and contains,
together with the Confidentiality Agreement, the sole and entire agreement
among the parties hereto with respect to the subject matter hereof.
(b) The Company Disclosure Letter, the Parent Disclosure Letter and any
Exhibit attached to this Agreement and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
9.04 Public Announcements. Except as otherwise required by law or the
rules of any applicable securities exchange or national market system, so
long as this Agreement is in effect, Parent and the Company will not, and
will not permit any of their respective Representatives to, issue or cause
the publication of any press release or make any other public announcement
with respect to the transactions contemplated by this Agreement without the
consent of the other party, which consent shall not be unreasonably withheld.
Parent and the Company will cooperate with each other in the development and
distribution of all press releases and other public announcements with
respect to this Agreement and the transactions contemplated hereby, and will
furnish the other with drafts of any such releases and announcements as far
in advance as practicable.
9.05 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and except as provided in
Sections 6.08 and 6.10 (which are intended to be for the benefit of the
persons entitled to therein, and may be enforced by any of such persons) or
as otherwise expressly provided for herein, it is not the intention of the
parties to confer third-party beneficiary rights upon any other person.
9.06 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any party hereto without
the prior written consent of the other parties hereto and any attempt to do
so will be void, except that Sub may assign any or all of its rights,
interests and obligations hereunder to another direct or indirect
wholly-owned Subsidiary of Parent, provided that any such Subsidiary agrees
in writing to be bound by all of the terms, conditions and provisions
contained herein. Subject to the preceding sentence, this Agreement is
binding upon, inures to the benefit of and is enforceable by the parties
hereto and their respective successors and assigns.
9.07 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define, modify or limit the
provisions hereof.
9.08 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law or order,
and if the rights or obligations of any party hereto under this Agreement
will not be materially and adversely affected thereby, (i) such provision
will be fully severable, (ii) this Agreement will be construed and enforced
as if such illegal, invalid or unenforceable provision had never comprised a
part hereof, and (iii) the remaining provisions of this Agreement will remain
in full force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.
9.09 Governing Law. Except to the extent that the MGCL is mandatorily
applicable to the Merger and the rights of the stockholders of the
Constituent Corporations, this Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to a contract
executed and performed in such State, without giving effect to the conflicts
of laws principles thereof.
9.10 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specified terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of
competent jurisdiction, this being in addition to any other remedy to which
they are entitled at law or in equity.
9.11 Certain Definitions. As used in this Agreement:
(a) except as provided in Section 6.04, the term "affiliate," as applied
to any person, shall mean any other person directly or indirectly
controlling, controlled by, or under common control with, that person;
I-41
<PAGE>
for purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of that person, whether through the ownership of voting
securities, by contract or otherwise;
(b) a person will be deemed to "beneficially" own securities if such
person would be the beneficial owner of such securities under Rule 13d-3
under the Exchange Act, including securities which such person has the right
to acquire (whether such right is exercisable immediately or only after the
passage of time);
(c) the term "business day" means a day other than Saturday, Sunday or any
day on which banks located in the States of Maryland and New York are
authorized or obligated to close;
(d) the term "knowledge" or any similar formulation of "knowledge" shall
mean, with respect to the Company, the knowledge of the Company's senior
executive officers, and with respect to Parent, the knowledge of Parent's
senior executive officers;
(e) any reference to any event, change or effect being "material" or
"materially adverse" or having a "material adverse effect" on or with respect
to an entity (or group of entities taken as a whole) means (i) such event,
change or effect is material or materially adverse, as the case may be, to
(A) the business, properties, assets, liabilities, financial condition or
results of operations of such entity (or of such group of entities) taken as
a whole, (B) the validity or enforceability of this Agreement, or (C) the
ability of the Company, Parent or any of their Subsidiaries to consummate the
transactions contemplated by this Agreement and (ii) any breach (other than
an insignificant breach) of the representation contained in the second
sentence of Section 3.02, or Section 4.02, as applicable;
(f) the term "person" shall include individuals, corporations,
partnerships, trusts, other entities and groups (which term shall include a
"group" as such term is defined in Section 13(d)(3) of the Exchange Act);
(g) the "Representatives" of any entity means such entity's directors,
officers, employees, legal, investment banking and financial advisors,
accountants and any other agents and representatives;
(h) the term "Significant Subsidiaries" means, with respect to any party,
the Subsidiaries of such party which constitute "significant subsidiaries"
under Rule 405 promulgated by the SEC under the Securities Act;
(i) the term "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated, of
which more than fifty percent (50%) of either the equity interests in, or the
voting control of, such corporation or other organization is, directly or
indirectly through Subsidiaries or otherwise, beneficially owned by such
party;
(j) the term "Recent Company SEC Reports" means the Company SEC Reports
set forth in Section 9.11(j) of the Company Disclosure Letter; and
(k) the term "Recent Parent SEC Reports" means the Parent SEC Reports set
forth in Section 9.11(k) of the Parent Disclosure Letter.
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
I-42
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
signed by its officer thereunto duly authorized as of the date first above
written.
<TABLE>
<CAPTION>
<S> <C>
Attest: HFS INCORPORATED
/s/ James E. Buckman By: /s/ Henry Silverman
- ---------------------------- ------------------------------------
Secretary Name: Henry Silverman
Title: Chairman and Chief Executive
Officer
Attest: MERCURY ACQ. CORP.
/s/ Christopher J. King By: /s/ James E. Buckman
- ---------------------------- ------------------------------------
Assistant Secretary Name: James E. Buckman
Title: Vice President and Secretary
Attest: PHH CORPORATION
/s/ Samuel H. Wright By: /s/ Robert D. Kunisch
- ---------------------------- ------------------------------------
Secretary Name: Robert D. Kunisch
Title: Chairman and Chief Executive
Officer
</TABLE>
I-43
<PAGE>
EXHIBIT A
[Form of Affiliate's Agreement]
[Date]
[Name and address of Parent]
Ladies and Gentlemen:
I have been advised that as of the date hereof I may be deemed to be an
"affiliate" of , a Maryland corporation (the "Company"), as that term is
defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Act"). Neither my entering into this agreement, nor anything contained
herein, shall be deemed an admission on my part that I am such an
"affiliate".
Pursuant to the terms of the Agreement and Plan of Merger dated as of
, 1996 (the "Merger Agreement"), among HFS Incorporated, a Delaware
corporation ("Parent"), Mercury Acq. Corp., a Maryland corporation ("Sub"),
and the Company providing for the merger of Sub with and into the Company
(the "Merger"), and as a result of the Merger, I may receive shares of
Parent's common stock, par value $ per share (the "Parent Securities"),
in exchange for the shares of common stock, without par value, of the Company
owned by me at the Effective Time (as defined in the Merger Agreement) of the
Merger.
I represent and warrant to Parent that in such event:
A. I shall not make any sale, transfer or other disposition of the Parent
Securities in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed its requirements and other applicable limitations upon my ability
to sell, transfer or otherwise dispose of Parent Securities, to the extent I
felt necessary, with my counsel or counsel for the Company.
C. I have been advised that the issuance of Parent Securities to me
pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the
stockholders of the Company I may have been deemed to have been an affiliate
of the Company and a distribution by me of Parent Securities has not been
registered under the Act, the Parent Securities must be held by me
indefinitely unless (i) a distribution of Parent Securities by me has been
registered under the Act, (ii) a sale of Parent Securities by me is made in
conformity with the volume and other limitations of Rule 145 promulgated by
the Commission under the Act or (iii) in the opinion of counsel reasonably
acceptable to Parent, some other exemption from registration is available
with respect to a proposed sale, transfer or other disposition of the Parent
Securities by me.
D. I understand that Parent is under no obligation to register the sale,
transfer or other disposition of Parent Securities by me or on my behalf or
to take any other action necessary in order to make compliance with an
exemption from registration available.
E. I also understand that stop transfer instructions will be given to
Parent's transfer agents with respect to the Parent Securities.
F. I also understand that unless the transfer by me of my Parent
Securities has been registered under the Act or is a sale made in conformity
with the provisions of Rule 145, Parent reserves the right to put the
following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and were acquired from a
person who received such shares in a transaction to which Rule 145
promulgated under such Act applies. The shares have been acquired by the
holder not with a view to, or for resale in connection with, any
distribution thereof within the meaning of such Act and may not be sold,
pledged or otherwise transferred except in accordance with an exemption
from the registration requirements of such Act."
I-44
<PAGE>
I further represent to and covenant with Parent and the Company that I
have not, within the thirty (30) days prior to the Effective Time (as defined
in the Merger Agreement), sold, transferred or otherwise disposed of any
shares of the capital stock of Parent or the Company held by me and that I
will not sell, transfer or otherwise dispose of any shares of Parent
Securities received by me in the Merger or other shares of the capital stock
of Parent until after such time as results covering at least thirty (30) days
of combined operations of the Company and Parent have been published by
Parent, in the form of a quarterly earnings report, an effective registration
statement filed with the Commission, a report to the Commission on Form 10-K,
10-Q, or 8-K, or any other public filing or announcement which includes the
combined results of operations. Parent agrees to publish such results within
the period set forth in Section 6.16(b) of the Merger Agreement.
By its acceptance hereof, Parent agrees, for a period of two years after
the Effective Time, that it will file on a timely basis all reports required
to be filed by it pursuant to Section 13 of the Securities Exchange Act of
1934, as amended, so that the public information provisions of Rule 144(c)
under the Act are satisfied and the resale provisions of Rules 145(d)(1) and
(2) under the Act are therefore available to me in the event I desire to
transfer any Parent Securities issued to me in the Merger.
Very truly yours,
-----------------------------------
Name:
Accepted this day of
, , by:
HFS INCORPORATED
By ----------------------
Name:
Title:
I-45
<PAGE>
ANNEX II
LEHMAN BROTHERS
March 27, 1997
Board of Directors
HFS Incorporated
6 Sylvan Way
Parsippany, New Jersey 07054
Members of the Board:
We understand that HFS Incorporated ("HFS" or the "Company") proposes to
acquire all of the outstanding capital stock of PHH Corporation ("PHH") by
means of a merger and the issuance of shares of HFS common stock in exchange
for all of the issued and outstanding shares of PHH common stock (the
"Proposed Transaction"). Pursuant to the Proposed Transaction each of the
outstanding shares of PHH will be converted into the right to receive the
fraction of a share of HFS common stock (the "Conversion Number") determined
by dividing $49.50 by the average price per share of HFS common stock (the
"HFS Average Stock Price") over the twenty trading days ending five trading
days before the meeting of the stockholders of PHH to be held to consider the
Proposed Transaction (the "PHH Stockholder Meeting"); provided, however, that
in no event will the Conversion Number be greater than 0.8250 or less than
0.6111. Therefore, if the HFS Average Stock Price is equal to or greater than
$60.00 but not more than $81.00, then each share of PHH common stock will be
exchanged for that fraction of a share of HFS common stock having a value of
$49.50. If the HFS Average Stock Price calculated with respect to the PHH
Stockholder Meeting is less than $60.00 or more than $81.00, then the
Conversion Number shall become fixed at 0.8250 and 0.6111, respectively,
resulting in a variable consideration for each share of PHH common stock
based upon the HFS Average Stock Price. In the event that the HFS Average
Stock Price is less than $50.00 per share calculated with respect to any date
after the PHH Stockholder Meeting up to and including the consummation of the
Proposed Transaction, both HFS and PHH will have the right to terminate the
Proposed Transaction. Additionally, it is contemplated that options to
purchase PHH common stock ("PHH Options") will be converted into that number
of shares of HFS common stock equal to the result of (i) the excess, if any,
of the sum of (A) the product of the number of shares of PHH common stock
subject to PHH Options multiplied by the Conversion Number, further
multiplied by the HFS Average Stock Price as of the PHH Stockholder Meeting,
less (B) the aggregate exercise price of the PHH Options, less (C) any
applicable withholding taxes, divided by (ii) the HFS Average Stock Price as
of the PHH Stockholder Meeting. The terms and conditions of the Proposed
Transaction are set forth in more detail in the Agreement and Plan of Merger
dated November 10, 1996, between HFS and PHH (the "Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company of the consideration to be paid by the Company in the Proposed
Transaction. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement
and specific terms of the Proposed Transaction, (2) publicly available
information concerning PHH and the Company that we believe to be relevant to
our analysis, (3) financial and operating information with respect to the
business, operations and prospects of PHH furnished to us by PHH or the
Company, including presentations made by PHH management to the Company and
projections of future financial performance of PHH prepared by PHH
management, (4) financial and operating information with respect to the
business, operations and prospects of the Company furnished to us by the
Company, (5) a comparison of historical financial results and the present
financial condition of PHH with those of other companies that we deemed
relevant, (6) a comparison of historical financial results and the present
financial condition of the Company with those of other companies that we
deemed relevant, (7) the strategic benefits, operating synergies and cost
II-1
<PAGE>
savings estimated by the management of the Company in connection with the
combination of the businesses of PHH and the Company, (8) the potential pro
forma impact on the Company of the Proposed Transaction, and (9) a comparison
of the financial terms of the Proposed Transaction with the financial terms
of certain other recent transactions that we deemed relevant. In addition, we
have had discussions with the management of PHH and the Company concerning
their respective businesses, operations, assets, financial conditions and
prospects and the strategic benefits, operating synergies and cost savings
expected to result from a combination of their businesses and have undertaken
such other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for the independent verification of such
information and have further relied upon the assurances of the managements of
PHH and the Company that they are not aware of any facts that would make such
information inaccurate or misleading. With respect to the financial
projections of PHH, upon advice of the Company we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of PHH as to
the future financial performance of PHH and that PHH will perform
substantially in accordance with such projections. With respect to the
financial projections for the Company, upon advice of the Company we have
assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the
Company and that the Company will perform substantially in accordance with
such projections. In arriving at our opinion, we have not conducted a
physical inspection of the properties or facilities of PHH or the Company and
have not made or obtained any evaluations or appraisals of the assets or
liabilities of PHH or the Company, except for an evaluation of PHH's mortgage
servicing portfolio based upon data supplied and representations made to us
by PHH. Upon the advice of the Company and its legal and accounting advisors,
we have assumed that the Proposed Transaction will qualify (i) for
pooling-of-interests accounting treatment and (ii) as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and therefore as a tax-free transaction to the stockholders of PHH.
Our opinion necessarily is based upon market, economic and other conditions
as they exist on, and can be evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
paid by the Company in the Proposed Transaction is fair to the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is
contingent upon the consummation of the Proposed Transaction. In addition,
the Company has agreed to indemnify us for certain liabilities that may arise
out of the rendering of this opinion. In the ordinary course of our business,
we may actively trade in the debt and equity securities of the Company and
PHH for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such
securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Transaction.
LEHMAN BROTHERS
II-2
<PAGE>
ANNEX III
[Letterhead of Goldman, Sachs & Co.]
PERSONAL AND CONFIDENTIAL
March 27, 1997
Board of Directors
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Gentlemen and Madame:
You have requested our opinion as to the fairness to the holders (the
"Holders") of the outstanding shares of common stock, without par value (the
"Shares"), of PHH Corporation (the "Company"), other than HFS Incorporated
("HFS"), Mercury Acq. Corp. ("Mercury") or any other wholly-owned subsidiary
of HFS of the Exchange Ratio (as hereafter defined), to be received by the
Holders pursuant to the Agreement and Plan of Merger (the "Agreement") dated
as of November 10, 1996 among HFS, Mercury, and the Company. The Agreement
provides that Mercury will be merged with and into the Company (the "Merger")
and each outstanding Share (other than Shares owned by HFS, Mercury or any
other wholly-owned subsidiary of HFS) will be converted into the right to
receive a number of shares of Common Stock, par value $.01 per share, of HFS
(the "HFS Shares") equal to the quotient (the "Exchange Ratio") of $49.50
divided by the average closing price per HFS Share for the last twenty trading
days preceding the fifth trading day prior to the date of the Company
Stockholders' Meeting (as defined in the Agreement), except that in no event
will the Exchange Ratio be greater than 0.8250 or less than 0.6111, subject to
adjustment as set forth in the Agreement.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are familiar with the Company having acted as its financial
advisor and having participated in certain of the negotiations leading to the
Agreement. We also have provided certain investment banking services to HFS
from time to time, including acting as co-manager in the April 30, 1996 and
the May 23, 1996 common stock offerings, and the February 16, 1996 4 3/4%
convertible Senior Note offering, and may provide investment banking services
to HFS and/or its affiliates in the future.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4, including the Joint Proxy
Statement/Prospectus relating to the Company Stockholders' Meeting; Annual
Reports to Stockholders and Annual Reports on Form 10-K of the Company for the
five fiscal years ended April 30, 1996; certain interim reports to
stockholders and Quarterly Reports on Form 10-Q; certain other communications
from the Company to its stockholders; and certain internal financial analyses
for the Company prepared by its management.
III-1
<PAGE>
With respect to HFS, we have also reviewed Annual Reports to Stockholders and
Annual Reports on Form 10-K of HFS for the five fiscal years ended December
31, 1995; certain interim reports to stockholders and Quarterly Reports on
Form 10-Q; certain other communications from HFS to its stockholders. We also
have held discussions with members of the senior management of the Company and
HFS regarding the past and current business operations, financial condition
and future prospects of their respective companies. In addition, we have
reviewed the reported price and trading activity for the Shares and the HFS
Shares, compared certain financial and stock market information for the
Company and HFS with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the mortgage and commercial finance
industries specifically and in other industries generally, and performed such
other studies and analyses as we considered appropriate.
We have assumed with your consent that the Merger will be accounted for as a
pooling of interests under generally accepted accounting principles and that
holders of Shares will not recognize gain or loss for tax purposes as a result
of the Merger. We have relied without independent verification upon the
accuracy and completeness of all of the financial and other information
reviewed by us for purposes of this opinion. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities of the
Company or HFS or any of their respective subsidiaries and we have not been
furnished with any such evaluation or appraisal. Our advisory services and the
opinion expressed herein are provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated by the Agreement and such opinion does not
constitute a recommendation as to how any Holder of Shares should vote with
respect to such transaction.
Based upon the foregoing and such other matters as we consider relevant, it is
our opinion that as of the date hereof the Exchange Ratio is fair to the
Holders.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ---------------------------------
GOLDMAN, SACHS & CO.
III-2
<PAGE>
ANNEX IV
[BEACON GROUP LETTERHEAD]
March 27, 1997
Board of Directors
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Gentlemen and Madam:
You have requested our opinion as to the fairness, from a financial point
of view, to holders of the outstanding shares of common stock, without par
value (the "PHH Shares"), of PHH Corporation (the "Company" or "PHH") of the
conversion number (as described below, the "Conversion Number") pursuant to
the Agreement and Plan of Merger (the "Merger Agreement") dated as of
November 10, 1996 among the Company, HFS, Incorporated ("HFS") and Mercury
Acq. Corp. Pursuant to the Merger Agreement, each outstanding PHH Share will
be converted into that number of shares (or fraction thereof) of the common
stock, par value $.01 per share, of HFS (the "HFS Shares"), obtained by
dividing $49.50 by the average of the closing prices for the HFS Shares on
the New York Stock Exchange for the 20 business days prior to the fifth
business day (the "Average Price") prior to the date of the PHH shareholder
vote on the transaction (the "PHH Meeting"); provided that the Conversion
Number shall not be greater than .8250 or less than .6111. The Merger
Agreement also provides that the Merger Agreement may be terminated if at any
time after the PHH Meeting the Average Price for the HFS Shares is less than
$50.00.
The Beacon Group Capital Services, LLC, as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, principal investments, private
placements and other purposes. We are familiar with the Company having acted
as its financial advisor in connection with, and having participated in
certain of the negotiations leading to, the Merger Agreement.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement, the Joint Proxy Statement/Prospectus relating to the
merger; the Annual Reports to Stockholders and Annual Reports on Form 10-K of
the Company and HFS for the five fiscal years ended April 1996 and December
1995, respectively; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q for both PHH and HFS; certain other communications from
the Company and HFS to their stockholders; and certain internal financial
analyses and forecasts for the Company prepared by its management. We also
have held discussions with members of the senior management of the Company
and HFS regarding the past and current business operations, financial
condition and future prospects of their respective companies. In addition, we
have reviewed the reported price and trading activity for the PHH Shares and
the HFS Shares, compared certain financial and stock market information for
the Company and HFS with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the mortgage and commercial finance
industry specifically and other industries generally, and performed such
other studies and analyses as we considered appropriate.
We have assumed with your consent, that the merger will be accounted for
as a pooling of interests under generally accepted accounting principles and
that the holders of PHH Shares will not recognize gain or loss for tax
purposes as a result of the merger. We have relied without independent
verification upon the accuracy and completeness of all of the financial and
other information reviewed by us for purposes of this opinion. In addition,
we have not made any independent evaluation or appraisal of the assets and
liabilities of the Company or HFS or any of their respective subsidiaries and
we have not been furnished with any such evaluation or appraisal. Our
advisory services and the opinion expressed herein
IV-1
<PAGE>
are provided for the information and assistance of the Board of Directors of
the Company in connection with its consideration of the transaction
contemplated by the Merger Agreement and does not constitute a recommendation
to any shareholder as to how such shareholder should vote on the proposed
merger. This opinion necessarily is based on market, economic, financial and
other conditions as they existed on, and could be evaluated as of, the date
thereof.
Based upon and subject to the foregoing and based upon such matters as we
considered relevant, it is our opinion that as of the date hereof the
Conversion Number pursuant to the Merger Agreement is fair, from a financial
point of view, to the holders of PHH Shares.
Very truly yours,
/s/ The Beacon Group Capital Services, LLC
THE BEACON GROUP CAPITAL SERVICES, LLC
IV-2
<PAGE>
ANNEX V
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
HFS INCORPORATED
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
HFS Incorporated, a Delaware corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Paragraph A of Article FIFTH of the Corporation's Restated
Certificate of Incorporation is hereby amended to read in its entirety as set
forth below:
"FIFTH: A. Except as may be otherwise provided pursuant to Article
FOURTH with respect to any rights of holders of Preferred Stock to
elect directors, the number of directors of the Corporation shall be
not less than one (1) nor more than twenty (20), with the then
authorized number of directors being fixed from time to time by or
pursuant to a resolution passed by the Board of Directors of the
Corporation."
SECOND: The foregoing amendments were duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, HFS Incorporated has caused this Certificate to be
duly executed in its corporate name this day of , 199 .
HFS INCORPORATED
By: --------------------
Name: James E. Buckman
Title: Executive Vice
President
and General Counsel
V-1
<PAGE>
ANNEX VI
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
HFS INCORPORATED
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
HFS Incorporated, a Delaware corporation (hereinafter called the
"Corporation"), does hereby certify as follows:
FIRST: Paragraph A of Article FOURTH of the Corporation's Restated
Certificate of Incorporation is hereby amended to read in its entirety as set
forth below:
"FOURTH: A. The authorized capital stock of the Corporation shall
consist of Six Hundred Ten Million (610,000,000) shares, consisting of
Six Hundred Million (600,000,000) shares of Common Stock, each having
a par value of $.01 (the "Common Stock"), and Ten Million (10,000,000)
shares of Preferred Stock, each having a par value of $1.00 (the
"Preferred Stock")."
SECOND: The foregoing amendments were duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, HFS Incorporated has caused this Certificate to be
duly executed in its corporate name this day of , 199 .
HFS INCORPORATED
By: -------------------
Name: James E. Buckman
Title: Executive Vice
President
and General Counsel
VI-1
<PAGE>
ANNEX VII
PROPOSED AMENDMENT TO
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
SEVENTH AMENDMENT TO
HFS INCORPORATED
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
AMENDED AND RESTATED
AS OF JUNE 14, 1994
FURTHER AMENDED AS OF MAY 5, 1995
FURTHER AMENDED AS OF JANUARY 22, 1995
FURTHER AMENDED AS OF MAY 20, 1996
FURTHER AMENDED AS OF JULY 24, 1996
FURTHER AMENDED AS OF SEPTEMBER 24, 1996
The HFS Incorporated Amended and Restated 1993 Stock Option Plan (the
"Restated Plan") is hereby further amended as follows:
1. Section 4(a) of the Restated Plan is hereby amended and restated in its
entirety to read as follows:
"(a) The maximum number of Shares that may be issued or transferred
pursuant to Options is 34,541,600 (or the number and kind of shares of
stock or other securities which are substituted for those Shares or to
which those Shares are adjusted upon a Change in Capitalization), and
HFS shall reserve for the purposes of the Plan, out of its authorized
but unissued Shares or out of Shares held in HFS's treasury, or partly
out of each, such number of Shares as shall be determined by the
Board."
2. Ratification. Except as expressly set forth in this First Amendment to
the Restated Plan, the Restated Plan is hereby ratified and confirmed without
modification.
3. Effective Date. The effective date of this Seventh Amendment to the
Restated Plan shall be , 1997.
VII-1
<PAGE>
HFS INCORPORATED
PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF STOCKHOLDERS ON APRIL 30, 1997
The undersigned stockholder of HFS Incorporated ("HFS") hereby appoints
Henry R. Silverman, James E. Buckman and Stephen P. Holmes, and each of them
individually, with full power of substitution, the proxy of the undersigned,
to vote all shares of Common Stock, par value $.01 per share, of HFS ("HFS
Common Stock") which the undersigned is entitled, in any capacity, to vote at
the Special Meeting of Stockholders to be held on April 30, 1997 and any and
all adjournments or postponements thereof (the "Special Meeting"), with all
powers the undersigned would possess if personally present, as follows:
This proxy, if properly executed and returned, will be voted in accordance
with the instructions appearing on the Proxy and at the discretion of the proxy
holders as to any other matters that may properly come before the Special
Meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, THIS PROXY WILL BE VOTED FOR
APPROVAL OF EACH OF THE PROPOSALS STATED AND AT THE DISCRETION OF THE PROXY
HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING.
If this card is addressed to you as a participant in the HFS Incorporated
Employee Savings Plan (the "Plan"), this card will provide voting instructions
to the Trustee of the Plan with respect to those shares of HFS Common Stock
held in the Plan's HFS Stock Fund. In order to provide effective instructions
to the Trustee, you must complete, sign and return this card to the transfer
agent in the enclosed envelope in time to be received by the transfer agent
NO LATER THAN NOON ON APRIL 23, 1997. The transfer agent will forward your
instructions to the Trustee of the Plan and such instructions will be carried
out in accordance with the terms of the Plan. After April 23, 1997, these
instructions cannot be revoked and you may not vote shares of HFS Common Stock
held in the Plan's HFS Stock Fund in person at the Special Meeting. If you have
shares of HFS Common Stock credited to your account in the Plan and also own
other shares of HFS Common Stock, you should receive separate proxy cards for
shares credited to your account in the Plan and any other shares that you own.
Please complete, sign and return all such proxy cards to register your voting
instructions for all shares owned by you or held for your benefit in the Plan's
HFS Stock Fund. You may vote shares owned by you, other than shares credited
to your account in the Plan, at the Special Meeting if you so choose.
(Continued, and to be signed and dated on reverse side)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
THE BOARD OF DIRECTORS OF HFS RECOMMENDS A VOTE Please mark [X]
FOR THE APPROVAL OF THE STATED PROPOSALS your votes as
indicated in
this example
1. To approve the issuance of up to 31.4 million FOR AGAINST ABSTAIN
shares of HFS Common Stock, to holders of the [ ] [ ] [ ]
common stock, no par value, of PHH Corporation
("PHH") in connection with the Agreement and
Plan of Merger, dated as of November 10, 1996,
among HFS, a wholly owned subsidiary of HFS and
PHH, as fully described in the Joint Proxy
Statement/Prospectus relating thereto.
2. To amend the Certificate of Incorporation of FOR AGAINST ABSTAIN
HFS to increase the maximum number of authorized [ ] [ ] [ ]
directors of HFS from twelve (12) to twenty (20),
as fully described in the Joint Proxy Statement/
Prospectus relating thereto.
3. To amend the Certificate of Incorporation of FOR AGAINST ABSTAIN
HFS to increase the number of authorized shares of [ ] [ ] [ ]
HFS Common Stock from 300,000,000 shares to
600,000,000 shares, as fully described in the Joint
Proxy Statement/Prospectus relating thereto.
4. To amend HFS's Amended and Restated 1993 Stock FOR AGAINST ABSTAIN
Option Plan to provide for an increase in the [ ] [ ] [ ]
total number of shares of HFS Common Stock
currently authorized for issuance under such plan
from 24,541,600 shares to 34,541,600 shares, as
fully described in the Joint Proxy Statement/
Prospectus relating thereto.
5. In their discretion, upon all matters incident to the conduct of the Special
Meeting and such other matters as may properly come before the Special
Meeting or any adjournments or postponements thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND THE PROXY STATEMENT/PROSPECTUS DATED MARCH 27, 1997, RELATING TO THE
SPECIAL MEETING.
Date _________________________________
______________________________________
Signature
______________________________________
Signature if held jointly
Note: Please sign this proxy exactly as
name appears herein. If shares are held
by joint tenants, both should sign.
Attorneys-in-fact, executors, adminis-
trators, trustees, guardians, corporation
officers or others signing in a represen-
tative capacity should indicate the
capacity in which they are signing.
PLEASE SIGN, DATE, AND MAIL THIS PROXY
PROMPTLY IN THE RETURN ENVELOPE whether
or not you expect to attend the Special
Meeting. You may nevertheless vote in
person if you do attend.
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
P R O X Y
PHH LOGO
PHH CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF STOCKHOLDERS ON APRIL 30, 1997
The undersigned stockholder of PHH Corporation ("PHH") hereby appoints ROBERT
D. KUNISCH, ROY A. MEIERHENRY and SAMUEL H. WRIGHT, and each of them
individually, with full power of substitution, the proxy of the undersigned,
to vote all shares of Common Stock, without par value, of PHH which the
undersigned is entitled, in any capacity, to vote at the Special Meeting of
Stockholders to be held on April 30, 1997 and any and all adjournments or
postponements thereof (the "Special Meeting"), with all powers the
undersigned would possess if personally present, as follows:
1. To approve the merger of a wholly owned subsidiary of HFS Incorporated
("HFS") with and into PHH, pursuant to the Agreement and Plan of Merger,
dated as of November 10, 1996, among HFS, a wholly owned subsidiary of HFS
and PHH, as fully described in the Joint Proxy Statement/Prospectus
relating thereto.
2. In their discretion, upon all matters incident to the conduct of the
Special Meeting and such other matters as may properly come before the
Special Meeting or any adjournments or postponements thereof.
SEE
REVERSE
SIDE
FOLD AND DETACH HERE
SPECIAL MEETING OF
PHH CORPORATION STOCKHOLDERS
APRIL 30, 1997 AT 10:00 A.M.
The Carlton Hotel
923 16th and K Streets, N.W.
Washington, DC
<PAGE>
9052
X
PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
This proxy, if properly executed and returned, will be voted in accordance
with the instructions appearing on the proxy and at the discretion of the
proxy holders as to any other matters that may properly come before the
Special Meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, THIS PROXY WILL BE
VOTED FOR APPROVAL OF THE PROPOSAL STATED AND AT THE DISCRETION OF THE PROXY
HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING.
THE BOARD OF DIRECTORS OF PHH RECOMMENDS A VOTE FOR THE APPROVAL OF
THE STATED PROPOSAL.
1. To approve
the merger
(See
Reverse)
FOR [ ]
AGAINST [ ]
ABSTAIN [ ]
THE UNDERSIGNED HEREBY ACKNOWLEDGES
RECEIPT OF THE NOTICE OF SPECIAL
MEETING AND THE PROXY STATEMENT/
PROSPECTUS DATED MARCH 27, 1997,
RELATING TO THE SPECIAL MEETING.
PLEASE SIGN, DATE, AND MAIL THIS
PROXY PROMPTLY IN THE RETURN
ENVELOPE whether or not you expect
to attend the Special Meeting. You
may nevertheless vote in person if
you do attend.
Note: Please sign this proxy
exactly as name appears hereon. If
shares are held as joint tenants,
both joint tenants should sign.
Attorneys-in-fact, executors,
administrators, trustees,
guardians, corporation officers or
others signing in a representative
capacity should indicate the
capacity in which they are signing.
-----------------------------------
-----------------------------------
SIGNATURE(S) DATE
FOLD AND DETACH HERE
March 27, 1997
To Participants of the PHH Corporation Employee Investment (401(k)) Plan:
The Notice of a Special Meeting of Stockholders, Joint Proxy
Statement/Prospectus and proxy card are furnished to you as the beneficial
owner of the shares of the Company's Common Stock allocated to your 401(k)
Plan accounts. The Notice and Joint Proxy Statement/Prospectus list the matter
subject to stockholders' vote at the Special Meeting and provide valuable
information relevant to this matter. If you also directly own shares of PHH
stock in your name, the enclosed proxy card includes such directly-owned
shares, as well as the shares beneficially owned under the 401(k) Plan.
Please complete and return the proxy card in the enclosed envelope no later
than April 21, 1997. If you do not return your proxy card, the Trustee of
the 401(k) Plan will vote your 401(k) Plan shares "FOR" the approval of the
merger of a wholly owned subsidiary of HFS Incorporated ("HFS") with and into
PHH, pursuant to the Agreement and Plan of Merger, dated as of
November 10, 1996, among HFS, a wholly-owned subsidiary of HFS and PHH, as
fully described in the Joint Proxy Statement/Prospectus relating thereto.
/s/ Robert D. Kunisch
- ------------------------------------------
Robert D. Kunisch
Chairman, Chief Executive Officer
and President
/s/ Roy A. Meierhenry
-------------------------------
Roy A. Meierhenry
Senior Vice President and Chief
Financial Officer
and Trustee of
The PHH Corporation Employee
Investment Plan
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
HFS is a Delaware corporation. Reference is made to Section 145 of the
Delaware General Corporation Law, as amended (the "DGCL"), which provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at its request in such capacity of
another corporation or business organization against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit
or proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such person's conduct was unlawful. A
Delaware corporation may indemnify officers and directors in an action by or
in the right of a corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses that such officer or director actually and reasonably incurred.
Reference is also made to Section 102(b)(7) of the DGCL, which permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL or (iv) for any transaction from which
the director derived an improper personal benefit.
Articles NINTH and TENTH of HFS's Restated Certificate of Incorporation
provide for the elimination of personal liability of a director for breach of
fiduciary duty as permitted by Section 102(b)(7) of the DGCL, and provides
that HFS shall indemnify its directors and officers to the full extent
permitted by Section 145 of the DGCL.
HFS maintains at its expense, a policy of insurance which insures its
directors and officers, subject to certain exclusions and deductions as are
usual in such insurance policies, against certain liabilities which may be
incurred in those capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS Incorporated, PHH
Corporation and Mercury Acq. Corp., included as Annex I in the Joint Proxy Statement/Prospectus
included as part of this Registration Statement. The Registrant agrees to furnish supplementally
a copy of any omitted exhibit or schedule to the Commission upon request.
4.1 Form of Certificate for HFS's Common Stock, par value $.01 per share (incorporated by reference
to HFS's Registration Statement on Form S-1, Registration No. 33-51422,
Exhibit 4.1).
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the legality of the securities
being registered hereby.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding certain tax matters.
II-1
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
8.2 Opinion of Piper & Marbury L.L.P. regarding certain tax matters.
23.1 Consent of Deloitte & Touche LLP relating to the financial statements of HFS Incorporated.
23.2 Consent of Deloitte & Touche LLP relating to the financial statements of Century 21 Real Estate
of Mid-Atlantic States, Inc.
23.3 Consent of Toback CPAs, P.C. relating to the financial statements of Century 21 of Southwest,
Inc.
23.4 Consent of Woolard, Krajnik & Company relating to the financial statements of Century 21 of
Eastern Pennsylvania, Inc.
23.5 Consent of Beers & Cutler relating to the financial statements of Century 21 Real Estate of the
Mid-Atlantic States, Inc.
23.6 Consent of White, Nelson & Co. LLP relating to the financial statements of Century 21 Region V,
Inc.
23.7 Consent of Tony H. Davidson, CPA relating to the financial statements of Century 21
Real Estate, Inc.
23.8 Consent of Ernst & Young LLP relating to the financial statements of Electronic Realty
Associates, Inc. and Electronic Realty Associates, L.P.
23.9 Consent of Coopers & Lybrand L.L.P. relating to the financial statements of Coldwell Banker
Corporation.
23.10 Consent of Deloitte & Touche LLP relating to the financial statements of Coldwell Banker
Corporation.
23.11 Consent of Price Waterhouse LLP relating to the financial statements of Avis, Inc.
23.12 Consent of Ernst & Young LLP relating to the financial statements of
Resorts Condominiums International, Inc.
23.13 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH Corporation.
23.14 Consent of Deloitte & Touche LLP relating to the financial statements of Century 21
Real Estate Corporation.
23.15 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibits 5.1 and 8.1).
23.16 Consent of Piper & Marbury L.L.P. (included in Exhibit 8.2).
23.17 Consent of Lehman Brothers Inc.
23.18 Consent of Goldman, Sachs & Co.
23.19 Consent of The Beacon Group Capital Services, LLC.
24.1 Power of Attorney (included in the signature page to the Registration Statement).
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(g) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(h) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (g) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act and is used
in connection with the offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PARSIPPANY, STATE OF NEW JERSEY, ON MARCH 27, 1997.
HFS INCORPORATED
By: /s/ James E. Buckman
-------------------------------
James E. Buckman
Executive Vice President,
General Counsel and Director
POWER OF ATTORNEY
KNOW ALL THOSE BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS EACH OF HENRY R. SILVERMAN, STEPHEN P. HOLMES
AND JAMES E. BUCKMAN, OR ANY OF THEM, EACH ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION, FOR SUCH PERSON AND IN HIS NAME, PLACE AND STEAD, IN ANY AND
ALL CAPACITIES, IN CONNECTION WITH THE REGISTRANT'S REGISTRATION STATEMENT ON
FORM S-4 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, INCLUDING, WITHOUT
LIMITATION THE GENERALITY OF THE FOREGOING, TO SIGN THE REGISTRATION
STATEMENT IN THE NAME AND ON BEHALF OF THE REGISTRANT OR ON BEHALF OF THE
UNDERSIGNED AS A DIRECTOR OR OFFICER OF THE REGISTRANT, AND ANY AND ALL
AMENDMENTS OR SUPPLEMENTS TO THE REGISTRATION STATEMENT, INCLUDING ANY AND
ALL STICKERS AND POST-EFFECTIVE AMENDMENTS TO THE REGISTRATION STATEMENT, AND
TO SIGN ANY AND ALL ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME
OFFERING OF SECURITIES AS THE REGISTRATION STATEMENT THAT ARE FILED PURSUANT
TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE
SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH,
WITH THE SECURITIES AND EXCHANGE COMMISSION AND ANY APPLICABLE SECURITIES
EXCHANGE OR SECURITIES SELF-REGULATORY BODY, GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, EACH ACTING ALONE, FULL POWER AND AUTHORITY TO
DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE
DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR THEIR SUBSTITUTES OR SUBSTITUTE, MAY
LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
II-4
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------------------- ------------------
<S> <C> <C>
/s/Henry R. Silverman Chairman of the Board, Chief Executive March 27, 1997
- ------------------------------ Officer and Director (Principal Executive
(Henry R. Silverman) Officer)
Vice Chairman of the Board, President, Chief
- ------------------------------ Operating Officer and Director
(John D. Snodgrass)
/s/Stephen P. Holmes Vice Chairman of the Board, Executive Vice March 27, 1997
- ------------------------------ President and Director
(Stephen P. Holmes)
/s/Michael P. Monaco Vice Chairman of the Board, Chief Financial March 27, 1997
- ------------------------------ Officer and Director (Principal Financial
(Michael P. Monaco) Officer and Principal Accounting Officer)
/s/James E. Buckman Executive Vice President, General Counsel and March 27, 1997
- ------------------------------ Director
(James E. Buckman)
/s/Robert F. Smith Director March 27, 1997
- ------------------------------
(Robert F. Smith)
Director
- ------------------------------
(Leonard Schutzman)
/s/Martin L. Edelman Director March 27, 1997
- ------------------------------
(Martin L. Edelman)
Director
- ------------------------------
(Robert W. Pittman)
Director
- ------------------------------
(Robert E. Nederlander)
/s/E. John Rosenwald Jr. Director March 27, 1997
- ------------------------------
(E. John Rosenwald Jr.)
Director
- ------------------------------
(Christel DeHaan)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS Incorporated, PHH
Corporation and Mercury Acq. Corp., included as Annex I in the Joint Proxy Statement/Prospectus
included as part of this Registration Statement. The Registrant agrees to furnish supplementally
a copy of any omitted exhibit or schedule to the Commission upon request.
4.1 Form of Certificate for HFS's Common Stock, par value $.01 per share (incorporated by reference
to HFS's Registration Statement on Form S-1, Registration No. 33-51422,
Exhibit 4.1).
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the legality of the securities
being registered hereby.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding certain tax matters.
8.2 Opinion of Piper & Marbury L.L.P. regarding certain tax matters.
23.1 Consent of Deloitte & Touche LLP relating to the financial statements of HFS Incorporated.
23.2 Consent of Deloitte & Touche LLP relating to the financial statements of Century 21 Real Estate
of Mid-Atlantic States, Inc.
23.3 Consent of Toback CPAs, P.C. relating to the financial statements of Century 21 of Southwest,
Inc.
23.4 Consent of Woolard, Krajnik & Company relating to the financial statements of Century 21 of
Eastern Pennsylvania, Inc.
23.5 Consent of Beers & Cutler relating to the financial statements of Century 21 Real Estate of the
Mid-Atlantic States, Inc.
23.6 Consent of White, Nelson & Co. LLP relating to the financial statements of Century 21 Region V,
Inc.
23.7 Consent of Tony H. Davidson, CPA relating to the financial statements of Century 21
Real Estate, Inc.
23.8 Consent of Ernst & Young LLP relating to the financial statements of Electronic Realty
Associates, Inc. and Electronic Realty Associates, L.P.
23.9 Consent of Coopers & Lybrand L.L.P. relating to the financial statements of Coldwell Banker
Corporation.
23.10 Consent of Deloitte & Touche LLP relating to the financial statements of Coldwell Banker
Corporation.
23.11 Consent of Price Waterhouse LLP relating to the financial statements of Avis, Inc.
23.12 Consent of Ernst & Young LLP relating to the financial statements of
Resorts Condominiums International, Inc.
23.13 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH Corporation.
23.14 Consent of Deloitte & Touche LLP relating to the financial statements of Century 21
Real Estate Corporation.
23.15 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibits 5.1 and 8.1).
23.16 Consent of Piper & Marbury L.L.P. (included in Exhibit 8.2).
23.17 Consent of Lehman Brothers Inc.
23.18 Consent of Goldman, Sachs & Co.
23.19 Consent of The Beacon Group Capital Services, LLC.
24.1 Power of Attorney (included in the signature page to the Registration Statement).
</TABLE>
<PAGE>
EXHIBIT 5.1
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
March 25, 1997
HFS Incorporated
6 Sylvan Way
Parsippany, New Jersey 07054
Re: HFS Incorporated Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to HFS Incorporated, a Delaware
corporation ("HFS"), in connection with the Registration Statement on Form
S-4 (the "Registration Statement") filed by HFS with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act of
1933, as amended (the "Securities Act"), on the date hereof. The Registration
Statement relates to the proposed issuance by HFS of up to 31.4 million
shares (the "Shares") of HFS's common stock, par value $.01 per share (the
"Common Stock"), pursuant to the Agreement and Plan of Merger, dated as of
November 10, 1996 (the "Merger Agreement"), by and among HFS, PHH
Corporation, a Maryland corporation ("PHH"), and Mercury Acq. Corp., a
Delaware corporation and a wholly owned subsidiary of HFS ("Mercury"). The
Merger Agreement provides for the acquisition of PHH by means of the merger
(the "Merger") of Mercury with and into PHH, with PHH being the surviving
corporation. The Registration Statement includes a joint proxy
statement/prospectus (the "Joint Proxy Statement/ Prospectus") to be
furnished to stockholders of PHH in connection with the approval of the
Merger and to stockholders of HFS in connection with the approval of the
issuance of the Shares in the Merger.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act.
In connection with rendering this opinion, we have examined and are
familiar with originals or copies, certified or otherwise identified to our
satisfaction, of such documents as we have deemed necessary or appropriate as
a basis for the opinion set forth herein, including, without limitation, (i)
the Registration Statement (including the Joint Proxy Statement/ Prospectus);
(ii) the Restated Certificate of Incorporation of HFS, as amended to the date
hereof (iii) the Amended and Restated By-laws of HFS, as amended to the date
hereof; (iv) the Merger Agreement; (v) resolutions of the Board of Directors
of HFS relating to the transactions contemplated by the Registration
Statement; (vi) a specimen certificate evidencing the Common Stock; and (vii)
such other certificates, instruments and documents as we considered necessary
or appropriate for the purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such copies. In making our examination
of documents executed by parties other than HFS, we have assumed that such
parties had the power, corporate or other, to enter into and perform all
obligations thereunder and also have assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof. As to
any facts material to the opinion expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of HFS and others.
For purposes of this opinion, we have assumed that prior to the issuance
of any of the Shares (i) the Registration Statement, as finally amended
(including all necessary post-effective amendments), becomes effective; (ii)
PHH's stockholders approve the Merger; (iii) HFS's stockholders approve the
Share Issuance (as defined in the Joint Proxy Statement/Prospectus); (iv) the
Certificate of Merger which will give effect to the Merger will be properly
filed with the Secretary of State of the State of Delaware; (v)
<PAGE>
the transactions contemplated by the Merger Agreement will be consummated;
and (vi) the certificates representing the Shares will be manually signed by
an authorized officer of the transfer agent for the Common Stock and will be
registered by the registrar for the Common Stock and will conform to the
specimen thereof examined by us.
Members of our firm are admitted to the Bar of the State of New York and
we do not express any opinion as to the laws of any other jurisdiction,
except the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when issued in accordance with the terms and conditions of the Merger
Agreement, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the references to us under the caption "Legal
Matters and Experts" in the Joint Proxy Statement/ Prospectus forming a part
of the Registration Statement. In giving this consent, however, we do not
hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act and the rules and regulations
of the Commission thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
<PAGE>
EXHIBIT 8.1
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NY 10022
March 25, 1997
HFS Incorporated
6 Sylvan Way
Parsippany, New Jersey 07054
Re: Merger of Mercury Acq. Corp., a wholly-owned subsidiary of HFS
Incorporated, with and into PHH Corporation
Ladies and Gentlemen:
We have acted as special counsel to HFS Incorporated ("Parent") in
connection with the transactions contemplated by the Agreement and Plan of
Merger, dated as of November 10, 1996 (the "Merger Agreement"), by and among
Parent, Mercury Acq. Corp., a wholly-owned subsidiary of Parent ("Merger
Sub") and PHH Corporation ("Company"). This opinion is delivered in
connection with the filing of a Registration Statement on Form S-4, which
includes the Joint Proxy Statement/ Prospectus of Parent and Company (the
"Registration Statement"). The delivery of an opinion in substantially the
form hereof, and the reconfirmation of this opinion on and as of the
Effective Time, is a condition to the obligations of Parent to consummate the
Merger pursuant to Section 7.02(d) of the Merger Agreement. All capitalized
terms used herein, unless otherwise specified, shall have the meanings
ascribed to them in the Merger Agreement.
In rendering our opinion, we have examined and relied upon the accuracy
and completeness of the facts, information, covenants and representations
contained in originals or copies, certified or otherwise identified to our
satisfaction, of the Merger Agreement, the Proxy Statement/ Prospectus and
such other documents as we have deemed necessary or appropriate as a basis
for the opinions set forth below. Our opinion is conditioned on, among other
things, the accuracy as of the date hereof, and continuing accuracy as of the
Effective Time, of such facts, information, covenants, statements and
representations, as well as an absence of any change in the foregoing
material to this opinion between the date hereof and the Effective Time.
We have assumed the genuineness of all signatures, the legal capacity of
all natural persons, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies and the authenticity of the originals
of such documents. We have also assumed that the transactions related to the
Merger or contemplated by the Merger Agreement will be consummated at the
Effective Time in accordance with the Merger Agreement and as described in
the Proxy Statement/ Prospectus. We have further assumed that the Merger
qualifies as a statutory merger under the laws of the state of Maryland. In
addition, our opinion is expressly conditioned on, among other things, the
accuracy as of the date hereof, and continuing accuracy as of the Effective
Time, of statements and representations contained in certificates executed by
officers of Parent and Company as to certain facts relating to, and knowledge
and intentions of, Parent and Company, and certain facts relating to the
Merger. We have assumed that such statements and representations will be
reconfirmed as of the Effective Time.
In rendering our opinion, we have considered the applicable provisions of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations promulgated thereunder by the Treasury Department (the
"Regulations"), pertinent judicial authorities, rulings of the U.S. Internal
Revenue Service and such other authorities as we have considered relevant. It
should be noted that such Code, Regulations, judicial decisions,
administrative interpretations and such other authorities are subject to
change at any time and, in some circumstances, with retroactive effect. A
material change in any of the authorities upon which our opinion is based
could affect our conclusions stated herein. In addition, there can be no
assurance that the Internal Revenue Service would not take a position
contrary to that which is stated in this opinion.
<PAGE>
OPINION
Based solely upon and subject to the foregoing, we are of the opinion that
for United States federal income tax purposes:
1. the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Company, Merger Sub and Parent will each be a
party to such reorganization within the meaning of Section 368(b) of the
Code;
2. no gain or loss will be recognized by Parent or Company as a result of
the Merger;
3. no gain or loss will be recognized by the shareholders of Company upon
the exchange of their shares of Company Common Stock solely for shares of
Parent Common Stock pursuant to the Merger (including fractional shares of
Parent Common Stock deemed issued as described below);
4. the aggregate tax basis of the shares of Parent Common Stock received
solely in exchange for shares of Company Common Stock pursuant to the Merger
(including fractional shares of Parent Common Stock for which cash is
received) will be the same as the aggregate tax basis of the shares of
Company Common Stock exchanged therefor;
5. the holding period for shares of Parent Common Stock received in
exchange for shares of Company Common Stock pursuant to the Merger will
include the holding period of the shares of Company Common Stock exchanged
therefor, provided such shares of Company Common Stock were held as capital
assets by the shareholder at the Effective Time; and
6. a shareholder of Company who receives cash in lieu of a fractional
share of Parent Common Stock will be treated as if he received a fractional
share of Parent Common Stock pursuant to the Merger and Parent then redeemed
such fractional share for the cash payment, with the result that such a
shareholder will recognize gain or loss equal to the difference, if any,
between such shareholder's tax basis in such fractional share (as described
in clause (4) above) and the amount of cash received.
Except as set forth above, we express no other opinion. We are furnishing
this opinion to you solely in connection with the filing of the Registration
Statement, and it is not to be used, relied upon, circulated, quoted or
otherwise referred to by any other person for any other purpose without our
prior written consent. This opinion is expressed as of the date hereof, and
we disclaim any undertaking to advise you of any subsequent changes of the
matters stated, represented or assumed herein or any subsequent changes in
applicable law.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name in the
Proxy Statement-Prospectus and to the filing of this opinion as an Exhibit to
the Registration Statement. In giving this consent, we do not admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
<PAGE>
EXHIBIT 8.2
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET
Baltimore, Maryland 21201-3018
410-539-2530
FAX: 410-539-0489
WASHINGTON
NEW YORK
PHILADELPHIA
EASTON
March 25, 1997
PHH Corporation
11333 McCormick Road
Hunt Valley, Maryland 21031-1000
Merger of Mercury Acq. Corp., a wholly-owned subsidiary of HFS
Incorporated, with and into PHH Corporation
Ladies and Gentlemen:
We have acted as special counsel to PHH Corporation ("Company") in
connection with the transactions contemplated by the Agreement and Plan of
Merger, dated as of November 10, 1996 (the "Merger Agreement"), by and among
HFS Incorporated ("Parent"), Mercury Acq. Corp., a wholly-owned subsidiary of
Parent ("Merger Sub") and Company. This letter is delivered on the effective
date of a Registration Statement on Form S-4 (the "Registration Statement"),
which includes the Joint Proxy Statement/Prospectus of Parent and Company
(the "Proxy Statement/Prospectus"), with respect to the transaction
contemplated by the Merger Agreement. The delivery of a letter expressing
opinions in substantially the form hereof (and the reconfirmation of such
opinions on and as of the Effective Time) are conditions to the obligations
of Company to consummate the Merger pursuant to section 7.03(c) of the Merger
Agreement. All capitalized terms used herein, unless otherwise specified,
shall have the meanings ascribed to them in the Merger Agreement.
In rendering our opinions, we have examined and relied upon the accuracy
and completeness of the facts, information, covenants and representations
contained in originals or copies, certified or otherwise identified to our
satisfaction, of the Merger Agreement, the Proxy Statement/Prospectus and
such other documents as we have deemed necessary or appropriate as a basis
for the opinions set forth below. Our opinions assume, among other things,
the accuracy as of the date hereof, and continuing accuracy as of the
Effective Time, of such facts, information, covenants, statements and
representations, as well as an absence of any change in the foregoing that
are material to such opinions between the date hereof and the Effective Time.
We have assumed the genuineness of all signatures, the legal capacity of
all natural persons, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies and the authenticity of the originals
of such documents. We have also assumed that the transactions related to the
Merger or contemplated by the Merger Agreement will be consummated at the
Effective Time in accordance with the Merger Agreement and as described in
the Proxy Statement/Prospectus. In addition, our opinion is expressly
conditioned on, among other things, the accuracy as of the date hereof, and
continuing accuracy as of the Effective Time, of statements and
representations contained in certificates executed by officers of Parent and
Company as to certain facts relating to, and knowledge and intentions of,
Parent and Company, and certain facts relating to the Merger. We have assumed
that such statements and representations will be reconfirmed as of the
Effective Time.
<PAGE>
In rendering our opinion, we have considered the applicable provisions of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations promulgated thereunder by the Treasury Department (the
"Regulations"), pertinent judicial authorities, rulings of the U.S. Internal
Revenue Service and such other authorities as we have considered relevant. It
should be noted that such Code, Regulations, judicial decisions,
administrative interpretations and such other authorities are subject to
change at any time and, in some circumstances, with retroactive effect. A
material change in any of the authorities upon which our opinion is based
could affect our conclusions stated herein. In addition, there can be no
assurance that the Internal Revenue Service would not take a position
contrary to that which is stated in this opinion.
Based upon and subject to the foregoing, we are of the opinion that, for
United States federal income tax purposes:
1. the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Company, Merger Sub and Parent will each be a
party to such reorganization within the meaning of Section 368(b) of the
Code;
2. no gain or loss will be recognized by Parent or Company as a result of
the Merger;
3. no gain or loss will be recognized by the shareholders of Company upon
the exchange of their shares of Company Common Stock solely for shares of
Parent Common Stock pursuant to the Merger (including fractional shares of
Parent Common Stock deemed issued as described below);
4. the aggregate tax basis of the shares of Parent Common Stock received
solely in exchange for shares of Company Common Stock pursuant to the Merger
(including fractional shares of Parent Common Stock for which cash is
received) will be the same as the aggregate tax basis of the shares of
Company Common Stock exchanged therefor;
5. the holding period for shares of Parent Common Stock received in
exchange for shares of Company Common Stock pursuant to the Merger will
include the holding period of the shares of Company Common Stock exchanged
therefor, provided such shares of Company Common Stock were held as capital
assets by the shareholder at the Effective Time; and
6. a shareholder of Company who receives cash in lieu of a fractional
share of Parent Common Stock will be treated as if he received a fractional
share of Parent Common Stock pursuant to the Merger and Parent then redeemed
such fractional share for the cash payment, with the result that such a
shareholder will recognize gain or loss equal to the difference, if any,
between such shareholder's tax basis in such fractional share (as described
in clause (4) above) and the amount of cash received.
Except as set forth above, we express no opinion to any party as to any
consequences of the Merger or any transactions related thereto. We are
furnishing this opinion to you solely in connection with the effectiveness of
the Registration Statement, and it is not to be used, relied upon,
circulated, quoted or otherwise referred to by any other person for any other
purpose without our prior written consent. This opinion is expressed as of
the date hereof, and we disclaim any undertaking to advise you of any
subsequent changes of the matters stated, represented or assumed herein or
any subsequent changes in applicable law.
In accordance with the requirements of Item 601(b)(23) of Regulation S-K
under the Securities Act, we hereby consent to the use of our name in the
Proxy Statement/Prospectus and to the filing of this opinion as an Exhibit to
the Registration Statement. In giving this consent, we do not admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of HFS Inc. on Form S-4
of our report dated February 22, 1996 (November 12, 1996 as to Note 17),
included and incorporated by reference in the Annual Report on Form 10-K/A
of HFS Inc. for the year ended December 31, 1995 and to the use of our report
dated February 22, 1996 (November 12, 1996 as to Note 2) appearing in the Proxy
which is part of this Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Proxy.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
March 21, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated February 19,
1996, related to the balance sheet of Century 21 Real Estate of the
Mid-Atlantic States, Inc. as of December 31, 1995 and the related statements of
income, changes in stockholders' equity and cash flows for the year then ended
included in the Company's Current Report on Form 8-K/A, dated March 26, 1997
and to the reference to us under the heading "Experts" in the Proxy, which
is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
March 21, 1997
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated May 15, 1995,
related to the financial statements of Century 21 Of The Southwest, Inc. as of
and for the years ended March 31, 1995 and 1994, included in the Company's
Current Report on Form 8-K dated February 16, 1996 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ Toback CPA's, P.C.
Phoenix, Arizona
March 21, 1997
<PAGE>
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated June 22, 1995
(except for Note 13, as to which the date is October 12, 1995), related to the
financial statements of Century 21 of Eastern Pennsylvania Inc. as of and for
the years ended April 30, 1995 and 1994, included in the Company's Current
Report on Form 8-K dated February 16, 1996 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of the Registration
Statement.
/s/ Woolard, Krajnik & Co
- -------------------------------
WOOLARD, KRAJNIK & COMPANY, LLP
Exton, Pennsylvania
March 21, 1997
<PAGE>
Exhibit 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
HFS Incorporated (the Company) on Form S-4 of our report dated May 11, 1995,
related to the financial statements of Century 21 Real Estate of the
Mid-Atlantic States, Inc. as of and for the years ended December 31, 1994 and
1993, included in the Company's Current Report on Form 8-K dated February 16,
1996 and to the reference to us under the heading "Experts" in the Prospectus,
which is part of this Registration Statement.
/s/ Beers & Cutler PLLC
- -----------------------
Beers & Cutler PLLC
Washington, D.C.
March 21, 1997
<PAGE>
Exhibit 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated January 12,
1996, related to the consolidated financial statements of Century 21 Region V
(Business Acquired By HFS Incorporated) as of and for the year ended July 31,
1995, included in the Company's Current Report on Form 8-K, as amended, dated
February 16, 1996, and to the reference to us under the heading "Experts" in
the Prospectus, which is part of this Registration.
/s/ White, Nelson & Co., LLP
WHITE, NELSON & CO., LLP
Anaheim, California
March 21, 1997
<PAGE>
Exhibit 23.7
INDEPENDENT AUDITOR'S CONSENT
I consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of my report dated September 25,
1995 related to the consolidated balance sheet of Century 21 Real Estate, Inc.
and subsidiaries as of July 31, 1995, 1994, and 1993 and the related statements
of income and retained earnings and cash flows for the years then ended
included in the Company's Current Report on Form 8-K, as amended, dated
February 16, 1996 and to the reference to me under the heading "Expert" in the
Prospectus, which is part of this Registration Statement.
/s/ Tony H. Davidson
- ----------------------
Tony H. Davidson, CPA
Lake Oswego, Oregon
March 21, 1997
<PAGE>
Exhibit 23.8
Consent of Independent Auditors
We consent to the references to our firm under the caption "Experts" in the
Proxy Statement jointly filed by HFS Incorporated and PHH Corporation and to
the incorporation by reference therein of our report dated February 27, 1995,
with respect to the consolidated financial statements of Electronic Realty
Associates, Inc. for the years ended December 31, 1994 and 1993, included in
the Current Report on Form 8-K of HFS Incorporated dated February 16, 1996,
filed with the Securities and Exchange Commission, and our report dated
February 21, 1996, with respect to the consolidated financial statements of
Electronic Realty Associates, L.P. for the years ended December 31, 1995 and
1994, included in the Current Report on Form 8-K of HFS Incorporated dated
April 5, 1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
Kansas City, Missouri
March 21, 1997
<PAGE>
Exhibit 23.9
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated February 27,
1996 related to the consolidated financial statements of Coldwell Banker
Corporation and Subsidiaries as of December 31, 1995 and 1994, and for each of
the two years in the period ended December 31, 1995 included in the Company's
Current Report on Form 8-K/A dated May 8, 1996 (filed on or about March 21,
1997) and to the reference to us under the heading "Experts" in the Prospectus,
which is part of this Registration Statement.
/s/ Coopers & Lybrand L.L.P.
Newport Beach, California
March 21, 1997
<PAGE>
Exhibit 23.10
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated March 11,
1994, related to the consolidated statements of operations, stockholders'
equity and cash flows for the three months ended December 31, 1993 and the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1993 of Coldwell Banker Corporation and subsidiaries (formerly
Coldwell Banker Residential Holding Company and subsidiaries) included in the
Company's Current Report on Form 8-K/A, dated March 26, 1997 and to the
reference to us under the heading "Experts" in the Proxy, which is part of
this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
March 21, 1997
<PAGE>
Exhibit 23.11
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of HFS, Inc. of our
report dated April 25, 1996, relating to the financial statements of Avis, Inc.
appearing in HFS's Current Report on Form 8-K, as amended, dated August 29,
1996. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
March 21, 1997
<PAGE>
EXHIBIT 23.12
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Proxy Statement jointly filed by HFS Incorporated and PHH Corporation and to
the incorporation by reference therein of our report dated February 23, 1996
(except Notes 9-11, as to which the date is February 7, 1997), with respect
to the combined financial statements of Resort Condominiums International, Inc.,
its affiliates and subsidiaries for the year ended December 31, 1995, included
in the Current Report on Form 8-K/A of HFS Incorporated dated March 27, 1997,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
-----------------------
ERNST & YOUNG LLP
March 21, 1997
Indianapolis, Indiana
<PAGE>
EXHIBIT 23.13
The Board of Directors of PHH Corporation and HFS Incorporated:
We consent to the inclusion herein and the incorporation by reference in this
Registration Statement of HFS Incorporated on Form S-4 of our reports dated
May 17, 1996, except for the note on capital stock as to which the date is
June 24, 1996 appearing herein and in the Annual Report on Form 10-K and
10-K/A for the year ended April 30, 1996 with respect to the consolidated
financial statements and related financial statement schedule of PHH
Corporation and subsidiaries. We also consent to the reference to our firm
under the heading "Experts" in the prospectus.
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
March 27, 1997
<PAGE>
Exhibit 23.14
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
HFS Incorporated (the "Company") on Form S-4 of our report dated February 7,
1995 related to the consolidated balance sheets of Century 21 Real Estate
Corporation (formerly a wholly-owned subsidiary of Metropolitan Life Insurance
Company) and subsidiaries as of December 31, 1994, 1993, and 1992, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended included in the Company's Current Report on Form 8-K,
dated August 18, 1995 and to the reference to us under the heading "Experts"
in the Proxy, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
March 21, 1997
<PAGE>
EXHIBIT 23.17
CONSENT OF LEHMAN BROTHERS INC.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of HFS Incorporated as Appendix II to the Joint Proxy
Statement/Prospectus which forms a part of the Registration Statement on
Form S-4 relating to the proposed merger of PHH Corporation and Mercury Acq.
Corp., a wholly-owned subsidiary of HFS Incorporated, to be filed with the
Securities and Exchange Commission during the week of March 24, 1997, and to
the references to such opinion in such Joint Proxy Statement/Prospectus under
the captions "Summary--Financial Advisor to HFS", "The Merger--Reasons of HFS
for the Merger; Recommendation of the HFS Board" and "The Merger--HFS Financial
Advisor". In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that
we are experts with respect to any part of such Registration Statement within
the meaning of the term "experts" as used in the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
LEHMAN BROTHERS
By: /s/ Matthew Epstein
-------------------------------
Matthew Epstein
Associate
March 27, 1997
<PAGE>
EXHIBIT 23.18
[Letterhead of Goldman, Sachs & Co.]
PERSONAL AND CONFIDENTIAL
March 27, 1997
Board of Directors
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Re: Proxy Statement of PHH Corporation
Gentlemen and Madame:
Attached is our opinion letter dated March 27, 1997 with respect to the
fairness to the holders (the "Holders") of the outstanding shares of common
stock without par value (the "Shares"), of PHH Corporation (the "Company"),
other than HFS Incorporated ("HFS"), Mercury Acq. Corp. ("Mercury") or any
other wholly-owned subsidiary of HFS, of the Exchange Ratio to be received by
the Holders pursuant to the Agreement and Plan of Merger dated as of November
10, 1996 among HFS, Mercury and the Company.
The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Proxy Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "SUMMARY - Financial Advisors to PHH" and "THE MERGER -
Background of the Merger; Reasons of PHH for the Merger; Recommendation of the
PHH Board; PHH Financial Advisors" and to the inclusion of the foregoing
opinion in the above-mentioned Proxy Statement.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ---------------------------------
GOLDMAN, SACHS & CO.
<PAGE>
EXHIBIT 23.19
[THE BEACON GROUP CAPITAL SERVICES, LLC LETTERHEAD]
March 27, 1997
Board of Directors
PHH Corporation
11333 McCormick Road
Hunt Valley, Maryland 21031
Re: Registration Statement on Form S-4 of HFS Incorporated
Gentlemen and Madam:
Attached is our opinion letter with respect to the fairness to the holders of
the outstanding shares of common stock, without par value (the "PHH Shares"),
of PHH Corporation (the "Company" or "PHH"), other than HFS Incorporated
("HFS") and Mercury Acq. Corp., a wholly-owned subsidiary of HFS, or any other
wholly-owned subsidiary of HFS, of the Conversion Number (as defined in the
attached opinion letter) to be received for the PHH Shares pursuant to the
Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS,
Mercury Acq. Corp. and the Company.
The foregoing opinion letter has been furnished for the information and
assistance of the Board of Directors of the Company in connection with its
consideration of the transaction contemplated therein and is not to be used,
circulated, quoted or otherwise referred to for any other purpose, nor is it
to be filed with, included in or referred to in whole or in part in any
registration statement, proxy statement or any other document, except in
accordance with our prior written consent.
In that regard, we hereby consent to the reference to the opinion of our firm
in the letter to PHH stockholders and under the captions "Summary--The
Merger--Financial Advisors to PHH", "The Merger--Reasons of PHH for the
Merger; Recommendation of the PHH Board" and "The Merger--PHH Financial
Advisors" and to the inclusion of the foregoing opinion in the Proxy
Statement/Prospectus included in the above-mentioned Registration Statement.
In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/ The Beacon Group Capital Services, LLC
THE BEACON GROUP CAPITAL SERVICES, LLC
