<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
MARCH 27, 1997 (NOVEMBER 10, 1996)
(Date of Report (date of earliest event reported))
HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 22-3059335
(State or other jurisdiction 1-11402 (I.R.S. Employer
of incorporation or organization) (Commission File No.) Identification No.)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
</TABLE>
<PAGE>
This Current Report on Form 8-K/A amends the Current Report on Form 8-K/A
of HFS Incorporated (the "Company" or "Registrant") dated November 15, 1996,
as amended December 4, 1996.
ITEM 7. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------------
<S> <C>
99.3 Pro forma financial information of the Company
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
Section B: Pro Forma consolidated financial information of HFS for the Acquisition
of RCI and 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
Section C: Pro Forma consolidated financial information of HFS excluding the Merger
and the Acquisition of RCI 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
Section D: 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
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HFS INCORPORATED
By: /s/ Michael P. Monaco
-------------------------------
Michael P. Monaco
Vice Chairman
and Chief Financial Officer
Date: March 26, 1997
2
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K
REPORT DATED MARCH 27, 1997 (NOVEMBER 10, 1996)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------
<S> <C>
99.3 Pro forma financial information of the Company ......................................
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 ............................................
Section B: Pro Forma consolidated financial information of HFS for the Acquisition
of RCI and 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 ............................................................................
Section C: Pro Forma consolidated financial information of HFS excluding the Merger
and the Acquisition of RCI 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 ..
Section D: 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 ..
</TABLE>
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL STATEMENTS
<S> <C>
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 .................. 2
Section B: Pro Forma consolidated financial information of HFS for the
Acquisition of RCI and 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........................ 11
Section C: Pro Forma consolidated financial information of HFS excluding the
Merger and the Acquisition of RCI 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 ..................................... 22
Section D: 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...................................... 52
</TABLE>
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. 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 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."
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.
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.
2
<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 ................... 1,350,385 47,656 (22,500)(A) 1,375,541
Intangible assets ........................... 926,569 -- -- 926,569
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
============ ============ ============= ============
- ------------
(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.
3
<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
------------ ------------- --------------- ------------
Long-term debt ........................... 830,099 -- 584,796 (C) 1,504,744
89,849 (A)
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
============ ============= =============== ============
- ------------
(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.
4
<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 ............................. $1,061,202 $ -- $ 203,390 (F) $1,264,592
Real estate services ..................... -- 782,727 (532,573)(E) 250,154
Interest................................. (25,972)(K) (25,972)
------------ ------------ --------------- -------------
Real estate services, net................. -- 782,727 (558,545) 224,182
------------ ------------ --------------- -------------
Service fees, net ........................ 1,061,202 782,727 (355,155) 1,488,774
------------ ------------ --------------- -------------
Fleet management ......................... -- 1,347,870 (203,390)(F) 1,144,480
Depreciation on vehicles under operating
leases ................................. -- (929,341) -- (929,341)
Interest ................................ -- -- (159,652)(G) (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)(H) (30,667)
Interest................................. -- -- (49,869)(J) (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 .............................. 1,145,162 1,375,043 (798,733) 1,721,472
------------ ------------ --------------- -------------
EXPENSES
Marketing and reservation ................ 274,331 -- -- 274,331
Selling, general and administrative (N) . 396,234 310,567 (29,692)(I) 677,109
Costs, including interest, of carrying
and reselling homes ..................... -- 658,498 (532,573)(E) 97,324
(25,972)(K)
(2,629)(I)
Direct costs of mortgage services ....... -- 60,498 (30,667)(H) 29,831
Depreciation and amortization ............ 130,767 -- 32,321 (I) 163,088
Interest ................................. 52,731 212,365 (159,652)(G) 55,575
(49,869)(J)
Other .................................... 18,779 -- 5,076 (M) 23,855
------------ ------------ --------------- -------------
Total expenses .......................... 872,842 1,241,928 (793,657) 1,321,113
------------ ------------ --------------- -------------
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 ................................ $ 159,925 $ 78,120 $ (2,980) $ 235,065
============ ============ =============== =============
PER SHARE INFORMATION (PRIMARY)
Net Income (N)............................ $ 1.15 $ 2.25 $ 1.42 (L)
============ ============ =============
Weighted average common and common
equivalent shares outstanding............ 142,498 34,755 25,677 (L) 168,175 (L)
============ ============ =============== =============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N)............................ $ 1.14 $ 2.24 $ 1.41 (L)
============ ============ =============
Weighted average common and common
equivalent shares outstanding ........... 144,335 34,951 25,822 (L) 170,157 (L)
============ ============ =============== =============
</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.
5
<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 ............................. $786,407 $ -- $ 150,028 (F) $ 936,435
Real estate services ..................... -- 590,168 (399,717)(E) 190,451
Interest................................. (19,344)(K) (19,344)
----------- ------------ --------------- ------------
Real estate services, net................. -- 590,168 (419,061) 171,107
----------- ------------ --------------- ------------
Service fees, net ........................ 786,407 590,168 (269,033) 1,107,542
----------- ------------ --------------- ------------
Fleet management ......................... -- 1,003,355 (150,028)(F) 853,327
Depreciation on vehicles
under operating leases.................. -- (692,788) -- (692,788)
Interest ................................ -- -- (117,373)(G) (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)(H) (18,981)
Interest................................. -- -- (35,342)(J) (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 .............................. 843,846 1,024,879 (590,757) 1,277,968
----------- ------------ --------------- ------------
EXPENSES
Marketing and reservation ................ 202,846 -- -- 202,846
Selling, general and administrative (N) . 289,332 232,698 (22,452)(I) 499,578
Costs, including interest, of carrying
and reselling homes ..................... -- 497,415 (399,717)(E) 76,266
(19,344)(K)
(2,088)(I)
Direct costs of mortgage services ....... -- 40,093 (18,981)(H) 21,112
Depreciation and amortization ............ 97,972 -- 24,540 (I) 122,512
Interest ................................. 40,115 154,638 (117,373)(G) 42,038
(35,342)(J)
Other .................................... 22,328 -- 3,807 (M) 26,135
----------- ------------ --------------- ------------
Total expenses .......................... 652,593 924,844 (586,950) 990,487
----------- ------------ --------------- ------------
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 (N)............................ $ .83 $ 1.70 $ 1.04 (L)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding............ 139,315 34,484 25,477 (L) 164,792 (L)
=========== ============ =============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N)............................ $ .82 $ 1.70 $ 1.03 (L)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding ........... 141,807 34,594 25,558 (L) 167,365 (L)
=========== ============ =============== ============
</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.
6
<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 ............................. $889,473 $ -- $ 152,602 (F) $1,042,075
Real estate services ..................... -- 619,431 (420,805)(E) 198,626
Interest................................. (22,970)(K) (22,970)
----------- ------------ --------------- ------------
Real estate services, net................. -- 619,431 (443,775) 175,656
----------- ------------ --------------- ------------
Service fees, net ........................ 889,473 619,431 (291,173) 1,217,731
----------- ------------ --------------- ------------
Fleet Management ......................... -- 1,042,984 (152,602)(F) 890,382
Depreciation on vehicles
under operating leases ................. -- (727,457) -- (727,457)
Interest ................................ (120,404)(G) (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)(H) (38,720)
Interest................................. -- -- (48,337)(J) (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 .............................. 973,383 1,123,594 (651,236) 1,445,741
----------- ------------ --------------- ------------
EXPENSES
Marketing and reservation ................ 238,018 -- -- 238,018
Selling, general and administrative (N) . 289,822 249,693 (19,808)(I) 519,707
Costs, including interest, of carrying
and reselling homes ..................... -- 507,986 (420,805)(E) 62,841
(22,970)(K)
(1,370)(I)
Direct costs of mortgage services ....... -- 77,718 (38,720)(H) 38,998
Depreciation and amortization ............ 99,703 -- 21,178 (I) 120,881
Interest ................................. 36,930 169,933 (120,404)(G) 38,122
(48,337)(J)
Other .................................... 17,359 -- 3,807 (M) 21,166
----------- ------------ --------------- ------------
Total expenses .......................... 681,832 1,005,330 (647,429) 1,039,733
----------- ------------ --------------- ------------
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 (N)............................ $ 1.18 $ 1.99 $ 1.40 (L)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding............ 147,470 35,211 26,014 (L) 173,484 (L)
=========== ============ =============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N)............................ $ 1.18 $ 1.99 $ 1.39 (L)
=========== ============ ============
Weighted average common and common
equivalent shares outstanding ........... 148,194 35,269 26,057 (L) 174,251 (L)
=========== ============ =============== ============
</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.
7
<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 restructure
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. SERVICES FEES:
The pro forma adjustment offsets relocation expenses incurred on behalf of
corporate clients with reimbursements of such expenses billed to client
corporations since the Company acts in what is in economic substance an
agency relationship with its relocation corporate clients (i.e., all expenses
and gains and losses on disposition of properties are for the account of the
corporate client). This adjustment is made to conform to the presentation
expected to be used by the merged companies.
8
<PAGE>
F. 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.
G. 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.
H. 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.
I. 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.
J. 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.
K. INTEREST EXPENSE -- REAL ESTATE SERVICES:
The pro forma adjustment reclassifies the interest portion of the cost,
including interest, of carrying and reselling homes to real estate services
revenue. This adjustment is made to conform to the presentation expected to
be used by the merged companies.
L. 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.
9
<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, 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>
M. 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.
N. 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 H and Section
C--Note L. 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>
10
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS
FOR THE ACQUISITION OF RCI AND EXCLUDING THE MERGER
The pro forma consolidated balance sheet as of September 30, 1996 is
presented as if the acquisition of Resort Condominiums International, Inc.
and its affiliates ("RCI") and the issuance of HFS common stock as partial
consideration for RCI had occurred on September 30, 1996. 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
acquisition of RCI had occurred on January 1, 1995.
The pro forma financial statements consolidate the effects of the above
transaction with the pro forma financial results of HFS prior to the effect
of such transaction. The pro forma financial results of HFS include all of
HFS's acquisitions prior to the RCI acquisition.
The aforementioned acquisition has 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 acquisition will differ materially from the preliminary
allocation.
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 acquisition. 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 should be read in conjunction
therewith and with the consolidated financial statements and related notes
thereto of HFS included in its 1995 Annual Report on Form 10-K and the
financial statements and related notes of the acquired companies previously
filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3-05,
"Financial Statements of Businesses Acquired or to be Acquired."
11
<PAGE>
SECTION B
PAGE 1 OF 2
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
HFS (1) RCI ADJUSTMENTS (A) HFS (2)
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........... $ 60,452 $ 89,070 $ (48,771) $ 100,751
Marketable securities............... -- 184,599 (184,599) --
Relocation receivables.............. 136,052 -- -- 136,052
Other accounts and notes
receivable, net.................... 114,975 33,107 -- 148,082
Other current assets................ 60,962 22,836 29,000 112,798
------------ ------------ --------------- ------------
TOTAL CURRENT ASSETS.................. 372,441 329,612 (204,370) 497,683
------------ ------------ --------------- ------------
Property and equipment--net.......... 198,233 87,785 (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 -- 443,845 1,350,385
Intangible assets.................... 826,569 -- 100,000 926,569
Investment in car rental operating
company--net........................ 75,000 -- -- 75,000
Deferred income taxes--net........... 5,200 -- -- 5,200
Other assets......................... 130,083 40,936 (31,630) 139,389
------------ ------------ --------------- ------------
TOTAL ASSETS.......................... $3,541,777 $458,333 $ 275,720 $4,275,830
============ ============ =============== ============
</TABLE>
- ------------
(1) Pro forma for all material transactions excluding the RCI acquisition
and the PHH Merger (see Section C).
(2) Pro forma for all material transactions excluding the PHH Merger.
Note: Certain reclassifications have been made to the historical HFS 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.
12
<PAGE>
SECTION B
PAGE 2 OF 2
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
HFS (1) RCI ADJUSTMENTS (A) HFS (2)
------------ ------------ --------------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities ............................ $ 362,311 $ 76,328 $ -- $ 438,639
Deferred revenue......................... 24,655 119,218 -- 143,873
Income taxes payable..................... 81,633 -- -- 81,633
Accrued acquisition obligations.......... 58,287 -- 10,557 68,844
Current portion of long-term debt ....... 130,837 -- -- 130,837
------------ ------------ --------------- -----------
TOTAL CURRENT LIABILITIES.................. 657,723 195,546 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
STOCKHOLDERS' EQUITY
Common stock--issued and outstanding; HFS
Historical, 123,720 and Pro Forma,
129,289.................................. 1,283 -- 10 1,293
Additional paid-in capital ............... 2,026,338 6,392 60,573 2,093,303
Retained earnings ........................ 206,236 34,864 (34,864) 206,236
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) --
------------ ------------ --------------- -----------
TOTAL STOCKHOLDERS' EQUITY................. 2,225,832 71,837 3,163 2,300,832
------------ ------------ --------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $3,541,777 $458,333 $275,720 $4,275,830
============ ============ =============== ===========
</TABLE>
- ------------
(1) Pro forma for all material transactions excluding the RCI acquisition
and the PHH Merger (see Section C).
(2) Pro forma for all material transactions excluding the PHH Merger.
Note: Certain reclassifications have been made to the historical HFS 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.
13
<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>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
HFS (1) RCI ADJUSTMENTS HFS (2)
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................... $783,070 $278,132 -- $1,061,202
Other ................................. 89,232 17,051 (17,051)(B) 89,232
Equity in earnings of car rental
operating company .................... (5,272) -- -- (5,272)
----------- ------------ ------------- ------------
Net revenues ......................... 867,030 295,183 (17,051) 1,145,162
----------- ------------ ------------- ------------
EXPENSES
Marketing and reservation ............. 143,965 130,366 -- 274,331
Selling, general and administrative (H) 304,477 91,757 -- 396,234
Depreciation and amortization ......... 101,531 14,193 15,043 (C) 130,767
Interest .............................. 34,776 536 17,419 (D) 52,731
Other ................................. 18,003 1,976 (1,200)(E) 18,779
----------- ------------ ------------- ------------
Total expenses ....................... 602,752 238,828 31,262 872,842
----------- ------------ ------------- ------------
Income before income taxes ............. 264,278 56,355 (48,313) 272,320
Provision for income taxes ............. 109,076 4,464 (1,145)(F) 112,395
----------- ------------ ------------- ------------
Net income ............................. $155,202 $ 51,891 $(47,168) $ 159,925
=========== ============ ============= ============
PER SHARE INFORMATION (PRIMARY)
Net income (H) ........................ $ 1.13 $ 1.15
=========== ============
Weighted average common and common
equivalent shares outstanding......... 141,498 1,000 (G) 142,498
=========== ============= ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (H)......................... $ 1.11 $ 1.14
=========== ============
Weighted average common and common
equivalent shares outstanding ........ 143,335 1,000 (G) 144,335
=========== ============= ============
</TABLE>
- ------------
(1) Pro forma for all material transactions excluding the RCI acquisition
and the PHH Merger (see Section C).
(2) Pro forma for all material transactions excluding the PHH Merger.
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.
14
<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>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
HFS (1) RCI ADJUSTMENTS HFS (2)
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees............................ $577,165 $209,242 -- $786,407
Other .................................. 62,535 13,385 (13,385)(B) 62,535
Equity in loss of car rental operating
company ............................... (5,096) -- -- (5,096)
----------- ------------ ------------- -----------
Net revenues .......................... 634,604 222,627 (13,385) 843,846
----------- ------------ ------------- -----------
EXPENSES
Marketing and reservation .............. 110,842 92,004 -- 202,846
Selling, general and administrative (H). 226,802 62,530 -- 289,332
Depreciation and amortization .......... 76,045 12,698 9,229 (C) 97,972
Interest ............................... 26,649 402 13,064 (D) 40,115
Other .................................. 16,061 6,570 (303)(E) 22,328
----------- ------------ ------------- -----------
Total expenses ........................ 456,399 174,204 21,990 652,593
----------- ------------ ------------- -----------
Income before income taxes .............. 178,205 48,423 (35,375) 191,253
Provision for income taxes .............. 73,549 1,940 3,446 (F) 78,935
----------- ------------ ------------- -----------
Net income (loss)........................ $104,656 $ 46,483 $(38,821) $112,318
=========== ============ ============= ===========
PER SHARE INFORMATION (PRIMARY)
Net income (H) ......................... $ .78 $ .83
=========== ===========
Weighted average common and common
equivalent shares outstanding ......... 138,315 1,000 (G) 139,315
=========== ============= ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income (H).......................... $ .77 $ .82
=========== ===========
Weighted average common and common
equivalent shares outstanding ......... 140,807 1,000 (G) 141,807
=========== ============ ============= ===========
</TABLE>
- ------------
(1) Pro forma for all material transactions excluding the RCI acquisition
and the PHH Merger (see Section C).
(2) Pro forma for all material transactions excluding the PHH Merger.
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.
15
<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>
PRO FORMA HISTORICAL PRO FORMA PRO FORMA
HFS (1) RCI ADJUSTMENTS HFS (2)
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ....................... $652,968 $236,505 -- $889,473
Other .............................. 81,451 14,841 (14,841)(B) 81,451
Equity in loss of car rental
operating company ................. 2,459 -- -- 2,459
----------- ------------ ------------- -----------
Net revenues ...................... 736,878 251,346 (14,841) 973,383
----------- ------------ ------------- -----------
EXPENSES
Marketing and reservation........... 130,728 107,290 -- 238,018
Selling, general and
administrative (H)................. 214,298 75,524 -- 289,822
Depreciation and amortization ..... 77,776 13,352 8,575 (C) 99,703
Interest ........................... 23,464 345 13,121 (D) 36,930
Other .............................. 12,264 5,440 (345)(E) 17,359
----------- ------------ ------------- -----------
Total expenses .................... 458,530 201,951 21,351 681,832
----------- ------------ ------------- -----------
Income before income taxes .......... 278,348 49,395 (36,192) 291,551
Provision for income taxes .......... 114,882 2,370 3,079 (F) 120,331
----------- ------------ ------------- -----------
Net income .......................... $163,466 $ 47,025 $(39,271) $171,220
=========== ============ ============= ===========
PER SHARE INFORMATION (PRIMARY)
Net income (H) ..................... $ 1.14 $ 1.18
=========== ===========
Weighted average common and common
equivalent shares outstanding .... 146,470 1,000 (G) 147,470
=========== ============= ===========
PER SHARE INFORMATION (FULLY
DILUTED)
Net income (H)...................... $ 1.13 $ 1.18
=========== ===========
Weighted average common and common
equivalent shares outstanding .... 147,194 1,000 (G) 148,194
=========== ============= ===========
</TABLE>
- ------------
(1) Pro forma for all material transactions excluding the RCI acquisition
and the PHH Merger (see Section C).
(2) Pro forma for all material transactions excluding the PHH Merger.
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.
16
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. 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: (v)
--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>
- ------------
(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
17
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF RCI: (Continued)
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
C) 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.
B. 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.
C. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS ENDED
ENDED -------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30,1996
----------------- ------------------ -----------------
<S> <C> <C> <C>
Elimination of historical expense .... $(14,193) $(12,698) $(13,352)
Property, equipment and furniture and
fixtures............................. 7,294 5,471 5,471
Information data base................. -- -- --
Intangible assets..................... 21,942 16,456 16,456
----------------- ------------------ -----------------
Total................................ $ 15,043 $ 9,229 $ 8,575
================= ================== =================
</TABLE>
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.
18
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
D. INTEREST EXPENSE:
The pro forma adjustment for interest expense 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>
Elimination of historical interest expense $ (536) $ (402) $ (345)
Pro forma adjustment ....................... 17,955 13,466 13,466
------------------ --------- --------
Total ..................................... $17,419 $13,064 $13,121
================== ========= ========
</TABLE>
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.
Interest expense was incurred on borrowings under the Company's revolving
credit facility, which partially funded the acquisition of RCI. The Company
recorded interest expense using the variable interest rate in effect on the
respective borrowing dates. The 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>
<S> <C>
Year Ended December 31, 1995......... $209
Nine Months Ended September 30,
1995................................ 157
Nine Months Ended September 30,
1996................................ 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.
E. OTHER EXPENSES:
The pro forma adjustment eliminates charitable contributions made by the
former stockholder of RCI which would not have been incurred by the Company.
Such expenses are summarized as follows ($000's):
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31, 1995......... $1,200
Nine Months Ended September 30,
1995................................ 303
Nine Months Ended September 30,
1996................................ 345
</TABLE>
F. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ----------- ------------
<S> <C> <C> <C>
Reversal of historical (provision) benefit of:
Pro forma HFS excluding RCI................... $(109,076) $(73,549) $(114,882)
Historical RCI: .............................. (4,464) (1,940) (2,370)
Pro forma provision............................ 112,395 78,935 120,331
------------------ ----------- ------------
Total........................................ $ (1,145) $ 3,446 $ 3,079
================== =========== ============
</TABLE>
19
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
F. INCOME TAXES: (Continued)
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
acquisition of 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.
G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares reflects the effect of
the issuance of shares at a price per share of $75.00 to partially fund the
November 12, 1996 acquisition of RCI.
The unaudited Pro Forma Consolidated Statements of Operations are
presented as if the acquisition took place at the beginning of the periods
presented; thus, the stock issuance referred to above is considered
outstanding as of the beginning of the period for purposes of per share
calculations.
H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with its acquisition of RCI, HFS developed a related
business plan to restructure the acquired company which will result in future
cost savings subsequent to the acquisition. HFS' restructuring plan was
developed prior to the consummation of the acquisition and was implemented
concurrent with the consummation of the acquisition. The restructuring plan
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
plan, certain selling, general and administrative expenses may not be
incurred subsequent to the acquisition that existed prior to consummation. In
addition, there are incremental costs in the conduct of activities of the
acquired company prior to the acquisition 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 acquisition
of RCI and all other acquisitions prior to RCI 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):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995:
PRIOR
RCI ACQUISITIONS(I) TOTAL
-------- --------------- ---------
<S> <C> <C> <C>
Payroll and
related............ $1,198 $37,619 $38,817
Professional........ 1,000 6,220 7,220
Occupancy........... -- 7,740 7,740
Other............... 2,900 5,140 8,040
-------- --------------- ---------
Total.............. $5,098 $56,719 $61,817
======== =============== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995:
PRIOR
RCI ACQUISITIONS(I) TOTAL
-------- --------------- ---------
<S> <C> <C> <C>
Payroll and related $ 914 $28,097 $29,011
Professional ........ 750 5,399 6,149
Occupancy ........... -- 6,322 6,322
Other ............... 1,275 4,641 5,916
-------- --------------- ---------
Total .............. $2,939 $44,459 $47,398
======== =============== =========
</TABLE>
20
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
PRIOR
RCI ACQUISITIONS TOTAL
-------- -------------- --------
<S> <C> <C> <C>
Payroll and related $ 880 $ 8,134 $ 9,014
Professional ........ 750 1,764 2,514
Occupancy ........... -- 710 710
Other ............... 1,333 626 1,959
-------- -------------- --------
Total .............. $2,963 $11,234 $14,197
======== ============== ========
</TABLE>
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-MONTHS
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>
21
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS
EXCLUDING THE RCI ACQUISITION AND THE PHH MERGER
The pro forma consolidated balance sheet as of September 30, 1996 is
presented as if the acquisition of Avis, Inc. ("Avis") and the November 1996
issuance of HFS common stock (the "Avis Offering") as partial consideration
for Avis had occurred on September 30, 1996. 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 acquisition of Avis 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 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 should be read in conjunction
therewith and with the consolidated financial statements and related notes
thereto of HFS included in its 1995 Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q and the financial statements and related notes of the
acquired companies previously filed in Current Reports on Form 8-K pursuant
to Regulation S-X Rule 3-05, "Financial Statements of Businesses Acquired or
to be Acquired."
22
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
AVIS, PRO FORMA
HFS AS ADJUSTED (1) ADJUSTMENTS (A) PRO FORMA (2)
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................. $ 471,194 $ -- $(410,742) $ 60,452
Marketable securities...................... -- -- -- --
Relocation receivables..................... 136,052 -- -- 136,052
Other accounts and notes receivable, net .. 113,175 1,800 -- 114,975
Other current assets....................... 59,081 1,881 -- 60,962
------------ --------------- --------------- -------------
TOTAL CURRENT ASSETS......................... 779,502 3,681 (410,742) 372,441
------------ --------------- --------------- -------------
Property and equipment--net................. 106,233 33,828 58,172 198,233
Franchise agreements--net................... 1,027,711 -- -- 1,027,711
Excess of cost over fair value of net
assets acquired-net........................ 906,540 -- -- 906,540
Intangible assets........................... -- 499,143 327,426 826,569
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 (9,614) 130,083
------------ --------------- --------------- -------------
TOTAL ASSETS................................. $2,900,050 $668,901 $ (27,174) $3,541,777
============ =============== =============== =============
</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.
(2) Pro forma for all material transactions excluding the RCI
acquisition and the PHH Merger.
Note: Certain reclassifications have been made to the historical HFS and
Avis consolidated balance sheets to conform to HFS pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
23
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
AVIS, PRO FORMA
HFS AS ADJUSTED (1) ADJUSTMENTS (A) PRO FORMA (2)
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities............................ $ 160,357 $ 201,954 $ -- $ 362,311
Deferred revenue........................ 24,655 -- -- 24,655
Income taxes payable.................... 81,633 182 (182) 81,633
Accrued acquisition obligations ........ 40,287 -- 18,000 58,287
Current portion of long-term debt ...... 29,907 -- 100,930 130,837
------------ --------------- --------------- -------------
TOTAL CURRENT LIABILITIES................. 336,839 202,136 118,748 657,723
------------ --------------- --------------- -------------
Long-term debt........................... 541,563 -- -- 541,563
Deferred revenue......................... 7,299 -- -- 7,299
Other non-current liabilities............ 23,960 -- -- 23,960
Deferred income taxes.................... 85,400 -- -- 85,400
Preferred stock--Avis, Inc............... -- 72,416 (72,416) --
Redeemable portion of common
stock--ESOP............................. -- 295,465 (295,465) --
Unearned compensation--ESOP.............. -- (257,751) 257,751 --
STOCKHOLDERS' EQUITY
Participating convertible preferred
stock................................... -- 132,000 (132,000) ---
Common stock--issued and outstanding;
HFS Historical, 123,720 and Pro Forma,
129,289................................. 1,237 290 (244) 1,283
Additional paid-in capital .............. 1,705,541 220,401 100,396 2,026,338
Retained earnings ....................... 206,236 103,339 (103,339) 206,236
Treasury stock........................... (8,025) (102,269) 102,269 (8,025)
Net unrealized gain on available for
sale securities......................... -- -- -- --
Foreign currency equity adjustment ..... -- 2,874 (2,874) --
------------ --------------- --------------- -------------
TOTAL STOCKHOLDERS' EQUITY................ 1,904,989 356,635 (35,792) 2,225,832
------------ --------------- --------------- -------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY................. $2,900,050 $ 668,901 $ (27,174) $3,541,777
============ =============== =============== =============
</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.
(2) Pro forma for all material transactions excluding the RCI
acquisition and the PHH Merger.
Note: Certain reclassifications have been made to the historical HFS and
Avis consolidated balance sheets to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of
operations.
24
<PAGE>
SECTION C
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.
25
<PAGE>
SECTION C
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 (1)
----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ....................... $369,442 $835,492 $ 25,950 (B) $783,070
(535,207)(C)
87,393 (D)
Other .............................. 43,541 50,112 (4,421)(C) 89,232
Equity in loss of car rental
operating company ................. -- -- (5,272)(D) (5,272)
----------- ----------- --------------- -------------
Net revenues ...................... 412,983 885,604 (431,557) 867,030
----------- ----------- --------------- -------------
EXPENSES
Marketing and reservation........... 143,965 -- 143,965
Selling, general and
administrative (L)................. 78,232 752,121 (4,500)(E) 304,477
(521,376)(F)
Depreciation and amortization ..... 30,857 50,591 20,083 (G) 101,531
Interest ........................... 21,789 12,017 970 (H) 34,776
Other .............................. 3,235 15,167 (399)(I) 18,003
----------- ----------- --------------- -------------
Total expenses .................... 278,078 829,896 (505,222) 602,752
----------- ----------- --------------- -------------
Income before income taxes .......... 134,905 55,708 73,665 264,278
Provision for income taxes .......... 55,175 32,027 21,874 (J) 109,076
----------- ----------- --------------- -------------
Net income .......................... $ 79,730 $ 23,681 $ 51,791 $155,202
=========== =========== =============== =============
PER SHARE INFORMATION (PRIMARY)
Net income (L)...................... $ .74 $ 1.13
=========== =============
Weighted average common and common
equivalent shares outstanding .... 113,817 27,681 (K) 141,498
=========== =============== =============
PER SHARE INFORMATION (FULLY
DILUTED)
Net income (L)...................... $ .73 $ 1.11
=========== =============
Weighted average common and common
equivalent shares outstanding .... 115,654 27,681 (K) 143,335
=========== =============== =============
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the RCI
acquisition and the PHH Merger.
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.
26
<PAGE>
SECTION C
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 BANKER ACQUISITIONS HISTORICAL
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ........................ $ 21,608 $679,137 $134,747 $835,492
Other ............................... -- 20,264 29,848 50,112
------------- ----------- -------------- ------------
Net revenues ....................... 21,608 699,401 164,595 885,604
------------- ----------- -------------- ------------
EXPENSES
Selling, general and administrative 7,205 616,182 128,734 752,121
Depreciation and amortization ...... 19,683 22,425 8,483 50,591
Interest ............................ 461 5,329 6,227 12,017
Other ............................... 410 -- 14,757 15,167
------------- ----------- -------------- ------------
Total expenses ..................... 27,759 643,936 158,201 829,896
------------- ----------- -------------- ------------
Income (loss) before income taxes ... (6,151) 55,465 6,394 55,708
Provision for income taxes ........... 4,100 24,385 3,542 32,027
------------- ----------- -------------- ------------
Net income (loss) .................... $(10,251) $ 31,080 $ 2,852 $ 23,681
============= =========== ============== ============
</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.
27
<PAGE>
SECTION C
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 ..................... -- 21,608 -- 21,608
------------- ---------------- -------------- -------------
Net revenues .................... 1,716,677 -- (1,695,069) 21,608
------------- ---------------- -------------- -------------
EXPENSES
Selling, general and
admnistrative ................... 1,119,888 (16,865) (1,095,818) 7,205
Depreciation and amortization ... 411,796 16,404 (408,517) 19,683
Interest ......................... 149,534 461 (149,534) 461
Other ............................ 410 -- -- 410
------------- ---------------- -------------- -------------
Total expenses .................. 1,681,628 -- (1,653,869) 27,759
------------- ---------------- -------------- -------------
Income (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 information
technology services as "Service fees." 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.
28
<PAGE>
SECTION C
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
was $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.
29
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (1)
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 ................................................... $577,165 $652,968
Other .......................................................... 62,535 81,451
Equity in earnings (loss) of car rental operating company ..... (5,096) 2,459
---------- ----------
Net revenues .................................................. 634,604 736,878
---------- ----------
EXPENSES
Marketing and reservation....................................... 110,842 130,728
Selling, general and administrative ............................ 226,802 214,298
Depreciation and amortization .................................. 76,045 77,776
Interest ....................................................... 26,649 23,464
Other .......................................................... 16,061 12,264
---------- ----------
Total expenses ................................................ 456,399 458,530
---------- ----------
Income before income taxes ...................................... 178,205 278,348
Provision for income taxes ...................................... 73,549 114,882
---------- ----------
Net income ...................................................... $104,656 $163,466
========== ==========
PER SHARE INFORMATION (PRIMARY)
Net income...................................................... $ .78 $ 1.14
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 138,315 146,470
========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Net income ..................................................... $ .77 $ 1.13
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 140,807 147,194
========== ==========
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the RCI Acquisition
and the PHH Merger.
See notes to pro forma consolidated balance sheet and statements of
operations.
30
<PAGE>
SECTION C
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(1)
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees............................ $268,862 $639,521 $ 19,508 (B) $577,165
(411,795)(C)
61,069 (D)
Other .................................. 30,869 31,666 -- 62,535
Equity in loss of car rental operating
company ............................... -- -- (5,096) (D) (5,096)
---------- ----------- -------------- ------------
Net revenues .......................... 299,731 671,187 (336,314) 634,604
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation .............. 110,842 -- -- 110,842
Selling, general and administrative (L). 47,700 576,071 (3,375)(E) 226,802
(393,594)(F)
Depreciation and amortization .......... 21,721 39,868 14,456 (G) 76,045
Interest ............................... 16,272 7,733 2,644 (H) 26,649
Other .................................. 2,012 14,448 (399)(I) 16,061
---------- ----------- -------------- ------------
Total expenses ........................ 198,547 638,120 (380,268) 456,399
---------- ----------- -------------- ------------
Income before income taxes .............. 101,184 33,067 43,954 178,205
Provision for income taxes .............. 41,820 19,684 12,045 (J) 73,549
---------- ----------- -------------- ------------
Net income (loss)........................ $ 59,364 $ 13,383 $ 31,909 $104,656
========== =========== ============== ============
PER SHARE INFORMATION (PRIMARY)
Net income (L).......................... $ .57 $ .78
========== ============
Weighted average common and common
equivalent shares outstanding ......... 109,564 28,751 (K) 138,315
========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (L).......................... $ .56 $ .77
========== ============
Weighted average common and common
equivalent shares outstanding ......... 112,056 28,751 (K) 140,807
========== ============== ============
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the RCI
acquisition and the PHH Merger.
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.
31
<PAGE>
SECTION C
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 BANKER ACQUISITIONS HISTORICAL
------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ........................ $13,358 $513,483 $112,680 $639,521
Other ............................... -- 3,972 27,694 31,666
------------- ---------- -------------- ------------
Net revenues ....................... 13,358 517,455 140,374 671,187
------------- ---------- -------------- ------------
EXPENSES
Selling, general and administrative 7,106 458,785 110,180 576,071
Depreciation and amortization ...... 14,253 17,272 8,343 39,868
Interest ............................ -- 2,958 4,775 7,733
Other ............................... -- 1,944 12,504 14,448
------------- ---------- -------------- ------------
Total expenses ..................... 21,359 480,959 135,802 638,120
------------- ---------- -------------- ------------
Income (loss) before income taxes ... (8,001) 36,496 4,572 33,067
Provision for income taxes ........... 18 16,422 3,244 19,684
------------- ---------- -------------- ------------
Net income (loss) .................... $(8,019) $ 20,074 $ 1,328 $ 13,383
============= ========== ============== ============
</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.
32
<PAGE>
SECTION C
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......................... -- 13,358 -- 13,358
------------ ---------------- --------------- -------------
Net revenues........................ 1,190,189 (1,176,831) 13,358
------------ ---------------- --------------- -------------
EXPENSES
Selling, general and administrative 766,509 -- (759,403) 7,106
Depreciation and amortization ...... 304,339 -- (290,086) 14,253
Interest ............................ 105,379 -- (105,379) --
Other ............................... 311 -- (311) --
------------ ---------------- --------------- -------------
Total expenses ..................... 1,176,538 -- (1,155,179) 21,359
------------ ---------------- --------------- -------------
Income (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 information
technology services as "Service fees." 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.
33
<PAGE>
SECTION C
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.
34
<PAGE>
SECTION C
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 (1)
---------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................... $468,277 $332,699 $ 11,835 (B) $652,968
(235,625)(C)
75,782 (D)
Other ................................. 81,733 5,718 (6,000)(D) 81,451
Equity in earnings of car rental
operating company .................... -- -- 2,459 (D) 2,459
---------- ----------- -------------- -------------
Net revenues ......................... 550,010 338,417 (151,549) 736,878
---------- ----------- -------------- -------------
EXPENSES
Marketing and reservation ............. 130,728 -- -- 130,728
Selling, general and administrative (L) 139,709 343,756 (41,804)(E) 214,298
(227,363)(F)
Depreciation and amortization ......... 41,129 23,689 12,958 (G) 77,776
Interest .............................. 22,194 4,648 (3,378)(H) 23,464
Other ................................. 10,988 1,276 -- 12,264
---------- ----------- -------------- -------------
Total expenses ....................... 344,748 373,369 (259,587) 458,530
---------- ----------- -------------- -------------
Income before income taxes ............. 205,262 (34,952) 108,038 278,348
Provision for income taxes ............. 82,630 (10,336) 42,588 (J) 114,882
---------- ----------- -------------- -------------
Net income ............................. $122,632 $(24,616) $ 65,450 $163,466
========== =========== ============== =============
PER SHARE INFORMATION (PRIMARY)
Net income (L)......................... $ .96 $ 1.14
========== =============
Weighted average common and common
equivalent shares outstanding......... 130,960 15,510 (K) 146,470
========== ============== =============
PER SHARE INFORMATION (FULLY DILUTED)
Net income (L)......................... $ .96 $ 1.13
========== =============
Weighted average common and common
equivalent shares outstanding ........ 131,684 15,510 (K) 147,194
========== ============== =============
</TABLE>
- ------------
(1) Pro forma for all material transactions, excluding the RCI
acquisition and the PHH Merger.
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.
35
<PAGE>
SECTION C
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 BANKER (2) ACQUISITIONS HISTORICAL
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees......................... $26,871 $295,478 $10,350 $332,699
Other ............................... -- 4,067 1,651 5,718
------------- ----------- -------------- ------------
Net revenues ....................... 26,871 299,545 12,001 338,417
------------- ----------- -------------- ------------
EXPENSES
Selling, general and administrative 20,173 312,348 11,235 343,756
Depreciation and amortization ...... 14,247 9,021 421 23,689
Interest ............................ -- 3,155 1,493 4,648
Other ............................... -- 512 764 1,276
------------- ----------- -------------- ------------
Total expenses ..................... 34,420 325,036 13,913 373,369
------------- ----------- -------------- ------------
Income (loss) before income taxes ... (7,549) (25,491) (1,912) (34,952)
Provision (benefit) for income taxes 96 (10,432) -- (10,336)
------------- ----------- -------------- ------------
Net income (loss) .................... $(7,645) $(15,059) $(1,912) $(24,616)
============= =========== ============== ============
</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.
36
<PAGE>
SECTION C
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........................ -- 26,871 26,871
------------ ----------------- --------------- -------------
Net revenues....................... 1,490,709 -- (1,463,838) 26,871
------------ ----------------- --------------- -------------
EXPENSES
Selling, general and administrative 975,769 -- (955,596) 20,173
Depreciation and amortization ..... 333,147 -- (318,900) 14,247
Interest ........................... 116,958 -- (116,958) --
Other .............................. 18 -- (18) --
------------ ----------------- --------------- -------------
Total expenses .................... 1,425,892 -- (1,391,472) 34,420
------------ ----------------- --------------- -------------
Income (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 information
technology services as "Service fees." 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.
37
<PAGE>
SECTION C
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.
38
<PAGE>
SECTION C
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") as follows:
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>
39
<PAGE>
SECTION C
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. 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 a $26
million bank facility termination fee by the Company 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.
(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).
40
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF AVIS: (Continued)
(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. 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 E) 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 NINE MONTHS
FOR THE YEAR ENDED 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
41
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
B. SERVICE FEE REVENUE: (Continued)
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).
C. 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.
D. 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,
42
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
D. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued)
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>
(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. Pursuant to a planned
contractual agreement with the Car Rental Operating Company. HFS will
charge the Car Rental Operating cost plus thirty-five percent for
services provided. The adjustment is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS 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.
43
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
E. 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 B) 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. 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 C). 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.
G. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CCI CENTURY COLDWELL OTHER 1996
MERGER 21 AVIS BANKER ACQUISITIONS TOTAL
-------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(19,683) $(22,425) $(2,737) $(50,591)
Property, equipment and
furniture and fixtures .. 100 534 5,909 1,156 189 7,888
Information data base .... 375 -- -- -- -- 375
Intangible assets......... 289 4,540 29,594 20,387 7,601 62,411
-------- ----------- ----------- ----------- -------------- -----------
Total.................... $ 235 $ (143) $ 15,820 $ (882) $ 5,053 $ 20,083
======== =========== =========== =========== ============== ===========
</TABLE>
44
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
G. DEPRECIATION AND AMORTIZATION: (Continued)
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CCI CENTURY COLDWELL OTHER 1996
MERGER 21 AVIS BANKER ACQUISITIONS TOTAL
-------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(14,253) $(17,272) $(2,597) $(39,868)
Property, equipment and
furniture and fixtures .. 100 534 4,432 867 -- 5,933
Information data base .... 375 -- -- -- -- 375
Intangible assets......... 289 4,540 22,196 15,290 5,701 48,016
-------- ----------- ----------- ----------- -------------- -----------
Total.................... $ 235 $ (143) $ 12,375 $ (1,115) $ 3,104 $ 14,456
======== =========== =========== =========== ============== ===========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
AVIS BANKER ACQUISITIONS TOTAL
----------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Elimination of historical
expense.................. $(14,247) $(9,021) $ (421) $(23,689)
Property, equipment and
furniture and fixtures .. 4,432 482 -- 4,914
Intangible assets......... 22,196 8,495 1,042 31,733
----------- ---------- -------------- -----------
Total.................... $ 12,381 $ (44) $ 621 $ 12,958
=========== ========== ============== ===========
</TABLE>
CCI Merger
The estimated fair values of CCI's information data base, property and
equipment and excess of cost over fair value of net assets acquired are $7.5
million, $1.0 million and $33.8 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are ten, five and
forty years, respectively. The benefit periods associated with the excess
cost over fair value of net assets acquired were determined based on CCI's
position as the dominant provider of gambling patron credit information
services since 1956, its ability to generate operating profits and expansion
of its customer base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.5
million, $33.5 million and $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.
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
45
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
G. DEPRECIATION AND AMORTIZATION: (Continued)
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 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.
46
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
H. 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)
Reversal of Coldwell Banker.................... (5,329) (2,958) (3,155)
Century 21..................................... 2,135 2,135 --
Minority interest--preferred dividends ........ 1,796 1,796 --
4 3/4% Notes to finance Other 1996
Acquisitions.................................. 8,595 6,446 1,270
------------------ ---------- ---------
Total........................................ $ 970 $ 2,644 $(3,378)
================== ========== =========
</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.
Effect of a 1/8% variance in variable interest rates
Interest expense was incurred on borrowings under the Company's revolving
credit facility which partially funded the acquisition of Century 21. The
Company recorded interest expense using the variable interest rate in effect
on the respective borrowing dates. The 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>
<S> <C>
Year Ended December 31, 1995............. $26
Nine Months Ended September 30, 1995 .... 26
Nine Months Ended September 30, 1996 .... --
</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.
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.
47
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
H. INTEREST EXPENSE: (Continued)
(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%).
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).
I. OTHER EXPENSES:
The pro forma adjustment eliminates certain 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>
<S> <C>
Year Ended December 31, 1995 ...... $399
Nine Months Ended September 30,
1995.............................. 399
Nine Months Ended September 30,
1996.............................. --
</TABLE>
J. 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) --
Avis.......................................... (4,100) (18) (96)
Coldwell Banker............................... (24,385) (16,422) 10,432
Travelodge.................................... (1,132) (834) --
Pro forma provision............................ 109,076 73,549 114,882
------------------ ----------- -----------
Total........................................ $ 21,874 $ 12,045 $ 42,588
================== =========== ===========
</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. 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.
48
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
K. 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
Second Quarter 1996 Offering--Coldwell Banker
(4) ........................................... $59.99 12,838 12,838 7,122
Second Quarter 1996 Offering--Avis (5) ........ $59.99 6,121 6,121 3,401
Century 21 NORS (6) ............................ $49.83 923 923 418
------------------ -------- -------
Total.......................................... 27,681 28,751 15,510
================== ======== =======
</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, May 31, 1996
(5) Date of Acquisition, October 17, 1996
(6) 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.
L. 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
49
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
L. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
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):
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL CENTURY 21
21 BANKER NORS TRAVELODGE ERA TOTAL
--------- ---------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Payroll and
related............ $10,885 $10,682 $ 7,706 $1,110 $7,236 $37,619
Professional........ 2,693 1,500 1,486 154 387 6,220
Occupancy........... 3,628 -- 2,754 186 1,172 7,740
Other............... 3,128 (1,517) 2,326 167 1,036 5,140
--------- ---------- ------------ ------------ -------- ---------
Total.............. $20,334 $10,665 $14,272 $1,617 $9,831 $56,719
========= ========== ============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL CENTURY 21
21 BANKER NORS TRAVELODGE ERA TOTAL
--------- ---------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Payroll and
related............ $10,885 $ 9,830 $5,354 $502 $1,526 $28,097
Professional........ 2,693 1,573 1,063 70 -- 5,399
Occupancy........... 3,628 -- 1,944 84 666 6,322
Other............... 3,128 (1,072) 1,528 74 983 4,641
--------- ---------- ------------ ------------ -------- ---------
Total.............. $20,334 $10,331 $9,889 $730 $3,175 $44,459
========= ========== ============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL CENTURY 21
BANKER NORS TRAVELODGE ERA TOTAL
---------- ------------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Payroll and
related............ $5,462 $2,425 $25 $222 $ 8,134
Professional........ 1,055 705 4 -- 1,764
Occupancy........... -- 604 4 102 710
Other............... (604) 1,069 4 157 626
---------- ------------ ------------ ------ --------
Total.............. $5,913 $4,803 $37 $481 $11,234
========== ============ ============ ====== ========
</TABLE>
50
<PAGE>
SECTION C
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
L. 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 .... $264,278 $178,205 $278,348
SG&A adjustments ..................... 56,719 44,459 11,234
Income before taxes, as adjusted .... 320,997 222,664 289,582
Income taxes ......................... 132,486 91,899 119,518
------------------ ---------- ----------
Net income, as adjusted .............. $188,511 $130,765 $170,064
================== ========== ==========
Net Income Per Share (primary):
As adjusted.......................... $ 1.36 $ .97 $ 1.18
================== ========== ==========
As reported.......................... $ 1.13 $ .78 $ 1.14
================== ========== ==========
Net income per share (fully diluted):
As adjusted ......................... $ 1.35 $ .95 $ 1.18
================== ========== ==========
As reported ......................... $ 1.11 $ .77 $ 1.13
================== ========== ==========
</TABLE>
M. 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.
N. 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.
51
<PAGE>
SECTION D
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. 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.
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.
52
<PAGE>
SECTION D
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.
53
<PAGE>
SECTION D
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.
54
<PAGE>
SECTION D
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 (F) $ 433,249
Real estate services................... -- 824,872 (602,965) (E) 221,907
Interest.............................. (36,113)(K) (36,113)
---------- ----------- -------------- ------------
Real estate services, net.............. -- 824,872 (639,078) 185,794
---------- ----------- -------------- ------------
Service fees, net...................... 245,189 824,872 (451,018) 619,043
---------- ----------- -------------- ------------
Fleet management....................... -- 1,140,557 (188,060) (F) 952,497
Depreciation on vehicles under
operating leases..................... -- (790,864) -- (790,864)
Interest.............................. -- -- (111,939) (G) (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)(H) (30,080)
Interest ............................. -- -- (26,569)(J) (26,569)
---------- ----------- -------------- ------------
Mortgage Services, net ................ -- 150,414 (56,649) 93,765
---------- ----------- -------------- ------------
Other.................................. 11,881 -- -- 11,881
---------- ----------- -------------- ------------
Net revenues............................ 257,070 1,324,979 (807,666) 774,383
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation.............. 116,700 -- -- 116,700
Selling, general and administrative ... 40,315 293,161 (20,147)(I) 313,329
Costs, including interest, of carrying
and reselling homes................... -- 728,634 (602,965)(E) 84,981
(36,113)(K)
(4,575)(I)
Direct costs of mortgage services ..... -- 56,557 (30,080)(H) 26,477
Depreciation and amortization.......... 19,153 -- 24,722 (I) 43,875
(111,939)(G) 21,410
Interest............................... 20,234 139,684 (26,569)(J)
---------- ----------- -------------- ------------
Total expenses........................ 196,402 1,218,036 (807,666) 606,772
---------- ----------- -------------- ------------
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 (L)
========== =========== ============
Weighted average common and common
equivalent shares outstanding......... 98,920 35,372 26,133 (L) 125,053 (L)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Income from continuing operations .... $ .34 $ 1.78 $ .77 (L)
========== =========== ============
Weighted average common and common
equivalent shares outstanding......... 100,228 35,423 26,171 (L) 126,399 (L)
========== =========== ============== ============
</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.
55
<PAGE>
SECTION D
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 (F) $ 485,275
Real estate services.................. -- 705,146 (478,726)(E) 226,420
Interest ............................ (19,993)(K) (19,993)
---------- ----------- -------------- ------------
Real estate services, net............. -- 705,146 (498,719) 206,427
---------- ----------- -------------- ------------
Service fees, net..................... 283,244 705,146 (296,688) 691,702
---------- ----------- -------------- ------------
Fleet management...................... -- 1,225,815 (202,031)(F) 1,023,784
Depreciation on vehicles under
operating leases.................... -- (849,523) -- (849,523)
Interest............................. (126,721)(G) (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)(H) (20,284)
Interest ............................ -- -- (32,773)(J) (32,773)
---------- ----------- -------------- ------------
Mortgage Services, net ............... -- 127,551 (53,057) 74,494
---------- ----------- -------------- ------------
Other................................. 29,303 -- -- 29,303
---------- ----------- -------------- ------------
Net revenues.......................... 312,547 1,208,989 (678,497) 843,039
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation............. 130,268 -- -- 130,268
Selling, general and administrative .. 46,018 295,345 (26,230)(I) 315,133
Costs, including interest, of
carrying and reselling homes......... -- 595,900 (478,726)(E) 93,422
(19,993)(K)
(3,759)(I)
Direct costs of mortgage services .... -- 41,221 (20,284)(H) 20,937
Depreciation and amortization......... 23,723 -- 29,989 (I) 53,712
Interest.............................. (126,721)(G)
18,685 159,765 (32,773)(J) 18,956
Other................................. 3,210 -- -- 3,210
---------- ----------- -------------- ------------
Total expenses....................... 221,904 1,092,231 (678,497) 635,638
---------- ----------- -------------- ------------
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 (L)
========== =========== ============
Weighted average common and common
equivalent shares outstanding ...... 100,874 34,741 25,667 (L) 126,541 (L)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .53 $ 1.99 $ .97 (L)
========== =========== ============== ============
Weighted average common and common
equivalent shares outstanding........ 100,874 34,775 25,692 (L) 126,566 (L)
========== =========== ============== ============
</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.
56
<PAGE>
SECTION D
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 (F) $ 572,832
Real estate services.................. -- 782,727 (532,573)(E) 250,154
Interest............................. (25,972)(K) (25,972)
---------- ----------- -------------- ------------
Real estate services, net............. -- 782,727 (558,545) 224,182
---------- ----------- -------------- ------------
Service fees, net..................... 369,442 782,727 (355,155) 797,014
---------- ----------- -------------- ------------
Fleet management...................... -- 1,347,870 (203,390)(F) 1,144,480
Depreciation on vehicles under
operating leases.................... -- (929,341) -- (929,341)
Interest............................. (159,652)(G) (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)(H) (30,667)
Interest ............................ -- -- (49,869)(J) (49,869)
---------- ----------- -------------- ------------
Mortgage Services, net ............... -- 173,787 (80,536) 93,251
---------- ----------- -------------- ------------
Other................................. 43,541 -- -- 43,541
---------- ----------- -------------- ------------
Net revenues........................... 412,983 1,375,043 (798,733) 989,293
---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation............. 143,965 -- -- 143,965
Selling, general and administrative .. 78,232 310,567 (29,692)(I) 359,107
Costs, including interest, of
carrying and reselling homes......... -- 658,498 (532,573)(E) 97,324
(25,972)(K)
(2,629)(I)
Direct costs of mortgage services .... -- 60,498 (30,667)(H) 29,831
Depreciation and amortization......... 30,857 -- 32,321 (I) 63,178
Interest.............................. 21,789 212,365 (159,682)(G) 24,633
(49,869)(J)
Other................................. 3,235 -- -- 3,235
---------- ----------- -------------- ------------
Total expenses....................... 278,078 1,241,928 (798,733) 721,273
---------- ----------- -------------- ------------
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 (L)
========== =========== ============
Weighted average common and common
equivalent shares outstanding ...... 113,817 34,755 25,677 (L) 139,494 (L)
========== =========== ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .73 $ 2.24 $ 1.15 (L)
========== =========== ============
Weighted average common and common
equivalent shares outstanding........ 115,654 34,951 25,822 (L) 141,476 (L)
========== =========== ============== ============
</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.
57
<PAGE>
SECTION D
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 (F) $ 418,890
Real estate services.................. -- 590,168 (399,717)(E) 190,451
Interest ............................ (19,344)(K) (19,344)
---------- ----------- -------------- ---------------
Real estate services, net............. -- 590,168 (419,061) 171,107
---------- ----------- -------------- ---------------
Service fees, net..................... 268,862 590,168 (269,033) 589,997
---------- ----------- -------------- ---------------
Fleet management...................... -- 1,003,355 (150,028)(F) 853,327
Depreciation on vehicles under
operating leases.................... -- (692,788) -- (692,788)
Interest............................. (117,373)(G) (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)(H) (18,981)
Interest ............................ -- -- (35,342)(J) (35,342)
---------- ----------- -------------- ---------------
Mortgage services, net................ -- 124,144 (54,323) 69,821
---------- ----------- -------------- ---------------
Other................................. 30,869 -- -- 30,869
---------- ----------- -------------- ---------------
Net revenues........................... 299,731 1,024,879 (590,757) 733,853
---------- ----------- -------------- ---------------
EXPENSES
Marketing and reservation............. 110,842 -- -- 110,842
Selling, general and administrative .. 47,700 232,698 (22,452)(I) 257,946
Costs, including interest, of
carrying and reselling homes......... -- 497,415 (399,717)(E) 76,266
(19,344)(K)
(2,088)(I)
Direct costs of mortgage services .... -- 40,093 (18,981)(H) 21,112
Depreciation and amortization......... 21,721 -- 24,540 (I) 46,261
Interest.............................. 16,272 154,638 (117,373)(G) 18,195
(35,342)(J)
Other................................. 2,012 -- -- 2,012
---------- ----------- -------------- ---------------
Total expenses....................... 198,547 924,844 (590,757) 532,634
---------- ----------- -------------- ---------------
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 (L)
========== =========== ===============
Weighted average common and common
equivalent shares outstanding ...... 109,564 34,484 25,477 (L) 135,041 (L)
========== =========== ============== ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income............................ $ .56 $ 1.70 $ .88 (L)
========== =========== ============== ===============
Weighted average common and common
equivalent shares outstanding........ 112,056 34,594 25,558 (L) 137,614 (L)
========== =========== ============== ===============
</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.
58
<PAGE>
SECTION D
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 (F) $ 620,879
Real estate services...................... -- 619,431 (420,805)(E) 198,626
Interest................................. (22,970)(K) (22,970)
---------- ----------- -------------- ---------------
Real estate services, net................. -- 619,431 (443,775) 175,656
---------- ----------- -------------- ---------------
Service fees, net......................... 468,277 619,431 (291,173) 796,535
---------- ----------- -------------- ---------------
Fleet management.......................... -- 1,042,984 (152,602)(F) 890,382
Depreciation on vehicles under operating
leases.................................. -- (727,457) -- (727,457)
Interest................................. (120,404)(G) (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)(H) (38,720)
Interest ................................ -- -- (48,337)(J) (48,337)
---------- ----------- -------------- ---------------
Mortgage services, net.................... -- 188,636 (87,057) 101,579
---------- ----------- -------------- ---------------
Other..................................... 81,733 -- -- 81,733
---------- ----------- -------------- ---------------
Net revenues............................... 550,010 1,123,594 (651,236) 1,022,368
---------- ----------- -------------- ---------------
EXPENSES
Marketing and reservation................. 130,728 -- -- 130,728
Selling, general and administrative ...... 139,709 249,693 (19,808)(I) 369,594
Costs, including interest, of carrying
and reselling homes...................... -- 507,986 (420,805)(E) 62,841
(22,970)(K)
(1,370)(I)
Direct costs of mortgage services ........ -- 77,718 (38,720)(H) 38,998
Depreciation and amortization............. 41,129 -- 21,178 (I) 62,307
(120,404)(G)
Interest.................................. 22,194 169,933 (48,337)(J) 23,386
Other..................................... 10,988 -- -- 10,988
---------- ----------- -------------- ---------------
Total expenses........................... 344,748 1,005,330 (651,236) 698,842
---------- ----------- -------------- ---------------
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 (L)
========== ===============
Weighted average common and common
equivalent shares outstanding ........... 130,960 35,211 26,014 (L) 156,974 (L)
========== =========== ============== ===============
PER SHARE INFORMATION (FULLY DILUTED)
Net income................................ $ .96 $ 1.99 $ 1.24 (L)
========== =========== ============== ===============
Weighted average common and common
equivalent shares outstanding............ 131,684 35,269 26,057 (L) 157,741 (L)
========== =========== ============== ===============
</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.
59
<PAGE>
SECTION D
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. SERVICES FEES:
The pro forma adjustment offsets relocation expenses incurred on behalf of
corporate clients with reimbursements of such expenses billed to client
corporations since the Company acts in what is in economic substance an
agency relationship with its relocation corporate clients (i.e., all
expenses and gains and losses on disposition of properties are for the
account of the corporate client). This adjustment is made to conform to
the presentation expected to be used by the merged companies.
60
<PAGE>
F. 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.
G. 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.
H. 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.
I. 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.
J. 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.
K. INTEREST EXPENSE -- REAL ESTATE SERVICES:
The pro forma adjustment reclassifies the interest portion of the cost,
including interest, of carrying and reselling homes to real estate
services revenue. This adjustment is made to conform to the presentation
expected to be used by the merged companies.
L. 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
61
<PAGE>
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, 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>
62
