-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SnRdB6xJoVJpmq7KLsLKWAWcPcgq4pHpRRy9L39WANAoOtgWL41pKxQaaVWnkK5I bPWSrs9/eq1/FlVQ7APnXA== 0000950136-96-001166.txt : 19961205 0000950136-96-001166.hdr.sgml : 19961205 ACCESSION NUMBER: 0000950136-96-001166 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961204 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961204 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HFS INC CENTRAL INDEX KEY: 0000891104 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 223059335 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11402 FILM NUMBER: 96675556 BUSINESS ADDRESS: STREET 1: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2014289700 MAIL ADDRESS: STREET 2: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 FORMER COMPANY: FORMER CONFORMED NAME: HOSPITALITY FRANCHISE SYSTEMS INC DATE OF NAME CHANGE: 19940202 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ Form 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------ DECEMBER 4, 1996 (NOVEMBER 10, 1996) (Date of Report (date of earliest event reported)) HFS INCORPORATED (Exact name of Registrant as specified in its charter) DELAWARE 1-11402 22-3059335 (State or other jurisdiction (Commission File No. (I.R.S. Employer of incorporation or organization) Identification No.) 6 SYLVAN WAY PARSIPPANY, NEW JERSEY 07054 (Address of principal executive office) (Zip Code) (201) 428-9700 (Registrant's telephone number, including area code) This Current Report on Form 8-K/A amends the Current Report on Form 8-K of HFS Incorporated (the "Company" or "Registrant") dated November 15, 1996. ITEM 7. EXHIBITS Exhibit No. Description - ------- ----------- 23.1 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH Corporation. 99.1 The audited consolidated balance sheets of PHH Corporation and subsidiaries as of April 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended April 30, 1996. 99.2 The unaudited consolidated balance sheet of PHH Corporation and subsidiaries as of October 31, 1996 and the related unaudited consolidated statements of income for the three and six months ended October 31, 1996 and 1995 and cash flows for the six months ended October 31, 1996 and 1995. 99.3 Pro forma financial information of the Company - - Section I Pro forma consolidated combining financial statements of the Company for the PHH Merger, including the following: The pro forma consolidated combining balance sheet of the Company, which combines the pro forma consolidated balance sheet of the Company with the consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related pro forma consolidated combining statements of income for the year ended December 31, 1995, and each of the nine month periods ended September 30, 1995 and 1996. - - Section II Pro forma consolidated financial information of the Company excluding the PHH Merger. Such financial information includes the following: The pro forma consolidated balance sheet of the Company as of September 30, 1996 and the pro forma consolidated statements of operations of the Company for the year ended December 31, 1995 and each of the nine month periods ended September 30, 1995 and 1996. Section III Combining historical consolidated financial statements of the Company for the PHH Merger, including the following: The combining historical consolidated balance sheet of the Company, which combines the consolidated balance sheet of the Company with and into the historical consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related combining historical consolidated statements of income for each of the years ended December 31, 1993, 1994 and 1995 and each of the nine month periods ended September 30, 1995 and 1996. 1 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HFS INCORPORATED BY: /s/ Michael P. Monaco ----------------------------------- Michael P. Monaco Vice Chairman and Chief Financial Officer Date: December 4, 1996 2 HFS INCORPORATED CURRENT REPORT ON FORM 8-K REPORT DATED DECEMBER 4, 1996 (NOVEMBER 10, 1996) EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.1 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH Corporation. 99.1 The audited consolidated balance sheets of PHH Corporation and subsidiaries as of April 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended April 30, 1996. 99.2 The unaudited consolidated balance sheet of PHH Corporation and subsidiaries as of October 31, 1996 and the related unaudited consolidated statements of income for the three and six months ended October 31, 1996 and 1995 and cash flows for the six months ended October 31, 1996 and 1995. 99.3 Pro forma financial information of the Company - - Section I Pro forma consolidated combining financial statements of the Company for the PHH Merger, including the following: The pro forma consolidated combining balance sheet of the Company, which combines the pro forma consolidated balance sheet of the Company with the consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related pro forma consolidated combining statements of income for the year ended December 31, 1995, and each of the nine month periods ended September 30, 1995 and 1996. - - Section II Pro forma consolidated financial information of the Company excluding the PHH Merger. Such financial information includes the following: The pro forma consolidated balance sheet of the Company as of September 30, 1996 and the pro forma consolidated statements of operations of the Company for the year ended December 31, 1995 and each of the nine month periods ended September 30, 1995 and 1996. Section III Combining historical consolidated financial statements of the Company for the PHH Merger, including the following: The combining historical consolidated balance sheet of the Company, which combines the consolidated balance sheet of the Company with the historical consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related combining historical consolidated statements of income for each of the years ended December 31, 1993, 1994 and 1995 and each of the nine month periods ended September 30, 1995 and 1996. 3 EX-23.1 2 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.1 KPMG Peat Marwick LLP 111 South Calvert Street Telephone 410 783 8300 Telefax 410 625 9231 Baltimore, MD 21202 The Board of Directors PHH Corporation: We consent to the incorporation by reference in the registration statements (No. 33-56354), (No. 33-70632), (No. 33-72752), (No. 33-83956), (No. 33-94756), (No. 333-06733) and (No. 333-06939) on Form S-8 and (No. 333-11029) and (No. 333-11031) on Form S-3 of HFS Incorporated of our report dated May 17, 1996, except for the note on capital stock as to which the date is June 24, 1996 with respect to the consolidated balance sheets of PHH Corporation and subsidiaries as of April 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended April 30, 1996, which report appears in the Form 8-K/A of HFS Incorporated dated December 4, 1996. Our report contains an explanatory paragraph that states that the company adopted the provisions of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," in 1996. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Baltimore, Maryland December 4, 1996 EX-99.1 3 AUDITED CONSOLIDATED BALANCE SHEETS OF PHH CORPORATION INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors PHH Corporation: We have audited the consolidated financial statements of PHH Corporation and subsidiaries as of April 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended April 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PHH Corporation and subsidiaries as of April 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1996, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company adopted the provisions of statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," in 1996. KPMG Peat Marwick LLP Baltimore, Maryland May 17, 1996, except for the note on capital stock as to which the date is June 24, 1996 PHH Corporation and Subsidiaries Consolidated Statements of Income
(In thousands except per share data) Years ended April 30, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Revenues: Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483 Real estate services 812,851 686,836 816,261 Mortgage banking services 195,599 126,094 155,935 - --------------------------------------------------------------------------------------------------------------------------- 2,379,600 2,070,626 2,134,679 Expenses: Depreciation on vehicles under operating leases 944,187 872,495 808,894 Costs, including interest, of carrying and reselling homes 681,589 576,385 717,793 Direct costs of mortgage banking services 68,985 40,924 57,091 Interest 223,847 173,094 138,617 Selling, general and administrative 321,844 286,410 302,488 - --------------------------------------------------------------------------------------------------------------------------- 2,240,452 1,949,308 2,024,883 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 139,148 121,318 109,796 Income taxes 57,528 49,656 45,238 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 81,620 $ 71,662 $ 64,558 - --------------------------------------------------------------------------------------------------------------------------- Net income per share* $ 2.33 $ 2.08 $ 1.82 - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in the capital stock note. See Notes to Consolidated Financial Statements. PHH Corporation and Subsidiaries Consolidated Balance Sheets
(In thousands) As of April 30, 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Assets: Cash $ 9,288 $ 3,412 Accounts receivable, less allowance for doubtful accounts of $5,478 in 1996 and $6,689 in 1995 468,938 484,230 Carrying costs on homes under management 46,560 45,260 Mortgage loans held for sale 874,794 712,247 Mortgage servicing rights and fees 230,209 98,003 Property and equipment, net 93,089 102,399 Goodwill, net 49,081 51,164 Other assets 117,999 77,929 - --------------------------------------------------------------------------------------------------------------------------- 1,889,958 1,574,644 - --------------------------------------------------------------------------------------------------------------------------- Assets Under Management Programs: Net investment in leases and leased vehicles 3,216,224 3,017,231 Equity advances on homes 566,808 447,658 - --------------------------------------------------------------------------------------------------------------------------- 3,783,032 3,464,889 - --------------------------------------------------------------------------------------------------------------------------- $ 5,672,990 $ 5,039,533 - --------------------------------------------------------------------------------------------------------------------------- Liabilities: Accounts payable and accrued expenses $ 434,109 $ 424,438 Advances from clients and deferred revenue 96,439 101,229 Other debt 903,442 735,886 Deferred income taxes 191,700 158,400 - --------------------------------------------------------------------------------------------------------------------------- 1,625,690 1,419,953 - --------------------------------------------------------------------------------------------------------------------------- Liabilities Under Management Programs 3,438,804 3,079,629 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, authorized 3,000,000 shares -- -- Common stock, no par value, authorized 50,000,000 shares; issued and outstanding 34,661,524* shares in 1996 and 16,890,212 shares in 1995 96,081 79,210 Cumulative foreign currency translation adjustment (23,483) (16,913) Retained earnings 535,898 477,654 - --------------------------------------------------------------------------------------------------------------------------- 608,496 539,951 - --------------------------------------------------------------------------------------------------------------------------- $ 5,672,990 $ 5,039,533 - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in the capital stock note. See Notes to Consolidated Financial Statements. PHH Corporation and Subsidiaries Consolidated Statements of Cash Flows
(In thousands) Years ended April 30, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 81,620 $ 71,662 $ 64,558 Adjustments to reconcile income to cash provided by operating activities: Depreciation on vehicles under operating leases 944,187 872,495 808,894 Other depreciation and amortization 30,020 32,095 29,000 Amortization and write-down of servicing rights and fees 37,640 20,089 29,132 Additions to originated mortgage servicing rights (91,134) -- -- Additions to excess mortgage servicing fees (66,432) (27,869) (39,042) Deferred income taxes 33,585 41,530 25,694 Gain on sale of subsidiary (11,688) -- -- Changes in: Accounts receivable (31,211) (5,913) (72,536) Carrying costs on homes under management (1,507) (9,011) 15,544 Mortgage loans held for sale (162,547) (6,359) (227,230) Accounts payable and accrued expenses 32,951 (93,033) (28,835) Advances from clients and deferred revenue (4,208) 21,790 (27,146) All other operating activity (18,592) 12,983 (5,368) - --------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 772,684 930,459 572,665 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities: Investment in leases and leased vehicles (1,909,805) (1,785,923) (1,578,721) Repayment of investment in leases and leased vehicles 582,487 579,835 549,262 Proceeds from sales and transfers of leases and leased vehicles to third parties 163,172 109,859 105,087 Value of homes acquired (4,649,297) (6,603,355) (4,101,894) Value of homes sold 4,530,106 6,631,414 4,301,529 Purchases of mortgage servicing rights (13,316) (13,826) (14,223) Additions to property and equipment, net of dispositions (17,650) (16,429) (32,719) Acquisitions accounted for as a purchase -- -- (2,594) Proceeds from sale of subsidiary 33,618 -- -- All other investing activities (34,583) (21,114) 1,348 - --------------------------------------------------------------------------------------------------------------------------- Cash used in investing activities (1,315,268) (1,119,539) (772,925) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in borrowings with terms of less than 90 days (150,349) 114,462 172,255 Proceeds from issuance of other borrowings 1,914,461 1,195,147 1,040,092 Principal payment on other borrowings (1,223,110) (1,074,230) (1,011,673) Stock option plan transactions 16,871 4,090 9,554 Repurchases of common shares -- (17,019) (8,721) Payment of dividends (23,376) (21,809) (20,850) - --------------------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 534,497 200,641 180,657 - --------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 13,963 (8,174) 19,106 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 5,876 3,387 (497) Cash at beginning of period 3,412 25 522 - --------------------------------------------------------------------------------------------------------------------------- Cash at end of period $ 9,288 $ 3,412 $ 25 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. PHH Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
Cumulative Foreign Currency (Dollars in thousands except per share data) Common Stock Translation Retained Years Ended April 30, 1996, 1995 and 1994 Shares Amount Adjustment Earnings - --------------------------------------------------------------------------------------------------------------------------- Balance April 30, 1993 17,197,785 $ 91,306 $ (17,916) $ 384,093 Net income 64,558 Cash dividends declared ($.60 per share)* (20,850) Foreign currency translation adjustment (3,711) Stock option plan transactions, net of related income tax benefits 305,062 9,554 Repurchases of common shares (257,174) (8,721) - --------------------------------------------------------------------------------------------------------------------------- Balance April 30, 1994 17,245,673 92,139 (21,627) 427,801 Net income 71,662 Cash dividends declared ($.64 per share)* (21,809) Foreign currency translation adjustment 4,714 Stock option plan transactions, net of related income tax benefits 129,660 4,090 Repurchases of common shares (485,121) (17,019) - --------------------------------------------------------------------------------------------------------------------------- Balance April 30, 1995 16,890,212 79,210 (16,913) 477,654 Net income 81,620 Cash dividends declared ($.68 per share)* (23,376) Foreign currency translation adjustment (6,570) Stock option plan transactions, net of related income tax benefits 440,550 16,871 Two-for-one common stock split* 17,330,762 - --------------------------------------------------------------------------------------------------------------------------- Balance April 30, 1996 34,661,524 $ 96,081 $ (23,483) $ 535,898 - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996, described in the capital stock note. See Notes to Consolidated Financial Statements. PHH Corporation and Subsidiaries Notes to Consolidated Financial Statements (In thousands except per share data) Accounting Policies The accounting policies of PHH Corporation conform to generally accepted accounting principles. The consolidated financial statements include the accounts of PHH Corporation and its wholly owned domestic and foreign subsidiaries (the Company). Policies outlined below include all policies considered significant. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements, and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. Vehicle Management Services Vehicle management services primarily consist of the management, purchase, leasing, and resale of vehicles for corporate clients and government agencies. These services also include fuel, maintenance, safety and accident management programs and other fee-based services for clients' vehicle fleets. Revenues from these services other than leasing are taken into income over the periods in which the services are provided and the related expenses are incurred. The Company leases vehicles primarily to corporate fleet users under operating and direct financing lease arrangements. The initial lease term typically covers a period of twelve months or more and thereafter may be extended at the option of the lessee. The Company records the cost of leased vehicles as an "investment in leases and leased vehicles." Amounts charged to lessees for interest on the unrecovered investment are credited to income on a level yield method which approximates the contractual terms. Real Estate Services Real estate services primarily consist of the purchase, management and resale of homes for transferred employees of corporations and government agencies. The Company pays transferring employees their equity based on an appraised value of their homes, determined by independent appraisers, after deducting any outstanding mortgages. The Company normally retires the mortgage concurrently with the purchase of the equity; but, in certain circumstances, the Company accepts administrative responsibility for making payments on the mortgages. These mortgages are retired at settlement when the homes are resold, which generally is within six months. The client normally pays an advance billing for a portion of the costs to be incurred during the period the home is held for resale. These advances are included in "advances from clients." These costs are paid by the Company and are identified as "carrying costs on homes under management" until resale. After resale, a settlement of actual costs and the advance billing is made with the client. Revenues and the related "costs, including interest, of carrying and reselling homes" are recognized at closing on the resale of a home. Under the terms of contracts with clients, the Company is generally protected against losses from changes in real estate market conditions. The Company also offers fee-based programs such as home marketing assistance, household goods moves, destination services, property dispositions for financial institutions and government agencies and strategic management consulting. Revenues from these fee-based services are taken into income over the periods in which the services are provided and the related expenses are incurred. Mortgage Banking Services Mortgage banking services primarily include the origination, sale and servicing of residential first mortgage loans. The Company markets a variety of first mortgage products to consumers through relationships with corporations, affinity groups, financial institutions, real estate brokerage firms and other mortgage banks. Loan origination fees, commitment fees paid in connection with the sale of loans, and direct loan origination costs associated with loans held for resale, are deferred until the loan is sold. Fees received for servicing loans owned by investors are based on the difference between the weighted average yield received on the mortgages and the amount paid to the investor, or on a stipulated percentage of the outstanding monthly principal balance on such loans. Servicing fees are credited to income when received. Costs associated with loan servicing are charged to expense as incurred. Sales of mortgage loans are generally recorded on the date a loan is delivered to an investor. Sales of mortgage securities are recorded on the settlement date. Gains or losses on sales of mortgage loans are recognized based upon the difference between the selling price and the carrying value of the related mortgage loans sold. Beginning in 1996, the carrying value of the loans excludes the cost assigned to originated servicing rights. (See note for mortgage servicing rights and fees). Such gains and losses are also increased or decreased by the amount of deferred mortgage servicing fees recorded. The Company acquires mortgage servicing rights and excess servicing fees by originating or purchasing mortgage loans and selling those loans with servicing retained, or it may purchase mortgage servicing rights separately. The carrying value of mortgage servicing rights and excess servicing fees is amortized over the estimated life of the related loan portfolio. Gains or losses on the sale of mortgage servicing rights are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies. The Company reviews the recoverability of excess servicing fees by discounting anticipated future excess servicing cash flows at original discount rates utilizing externally published prepayment rates. If the discounted value is less than the recorded balance due to higher than expected prepayments, the difference is recognized as a write-down in the consolidated statement of income. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation of property and equipment is provided by charges to income over the estimated useful lives of such assets. Buildings are depreciated using the straight-line method (25 to 50 years); building improvements, using the straight-line method (10 to 20 years); equipment and leasehold improvements, using either the double-declining balance or straight-line method (3 to 10 years); and externally developed software is capitalized and amortized using the straight-line method (5 years). Expenditures for improvements that increase PHH Corporation and Subsidiaries value or that extend the life of the assets are capitalized; maintenance and repairs are charged to operations. Gains or losses from retirements and disposals of property and equipment are included in selling, general and administrative expense. Goodwill, Net Goodwill, net represents the excess of cost over the net tangible and intangible assets of businesses acquired net of accumulated amortization. It is being amortized by the straight-line method over various periods up to 40 years and such amortization is included in selling, general and administrative expense. Assets Under Management Programs Assets under management programs are held subject to leases or other client contracts. The effective interest rates and maturity characteristics of the leases and other contracts are generally matched with the characteristics of the overall funding program. Translation of Foreign Currencies Assets and liabilities of the foreign subsidiaries are translated at the exchange rates as of the balance sheet dates; equity accounts are translated at historical exchange rates. Revenues, expenses and cash flows are translated at the average exchange rates for the periods presented. Translation gains and losses are included in stockholders' equity including, for years prior to 1991, transaction gains and losses resulting from forward exchange contracts on foreign equity amounts net of income tax effects. Gains and losses resulting from the change in exchange rates realized upon settlement of foreign currency transactions are substantially offset by gains and losses realized upon settlement of forward exchange contracts. Therefore, the resulting net income effect of transaction gains and losses in fiscal years 1994 through 1996 was not significant. Interest Interest expense consists of interest on debt incurred to fund working capital requirements and to finance vehicle leasing activities, real estate services and mortgage banking operations. Interest on borrowings used to finance equity advances on homes is included in "costs, including interest, of carrying and reselling homes" and was $29,119 in 1996, $21,102 in 1995, and $23,491 in 1994. Total interest paid, including amounts within "costs, including interest, of carrying and reselling homes," was $273,198 in 1996, $211,206 in 1995, and $165,406 in 1994. Income Taxes The provision for income taxes includes deferred income taxes resulting from items reported in different periods for income tax and financial statement purposes. Deferred tax assets and liabilities represent the expected future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. No provision has been made for US income taxes on cumulative undistributed earnings of foreign subsidiaries since it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Undistributed earnings of the foreign subsidiaries at April 30, 1996, were approximately $105,000. The determination of unrecognized deferred US tax liability for unremitted earnings is not practicable. However, it is estimated that foreign withholding taxes of approximately $5,500 may be payable if such earnings were remitted. Net Income Per Share Net income per share is based on the weighted average number of shares of common stock outstanding during the year and common stock equivalents arising from the assumed exercise of outstanding stock options under the treasury stock method. The number of shares used in the calculations, adjusted to reflect the two-for-one common stock split, (see note for capital stock), were 35,074,920 for 1996, 34,505,686 for 1995, and 35,482,068 for 1994. Derivative Financial Instruments As a matter of policy, the Company does not engage in derivatives trading or market-making activities. Rather, derivative financial instruments such as interest rate swaps are used by the Company principally in the management of its interest rate exposures and foreign currency exposures on intercompany borrowings. Additionally, the Company enters into forward delivery contracts, financial futures programs and options to reduce the risks of adverse price fluctuation with respect to both mortgage loans held for sale and anticipated mortgage loan closings arising from commitments issued. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The fair value of the swap agreements is not recognized in the consolidated financial statements since they are accounted for as hedges. Market value gains and losses on the Company's foreign currency transaction hedges are recognized in income and substantially offset the foreign exchange gains and losses on the underlying transactions. Market value gains and losses on positions used as hedges in the mortgage banking services operations are deferred and considered in the valuation of the lower of cost or market value of mortgage loans held for sale. Reclassifications Certain reclassifications have been made to the prior years' financial statements for comparative purposes. New Accounting Pronouncements In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective in 1997. Application of this statement will require the Company to review long-lived assets and certain intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement is not expected to significantly affect the consolidated financial statements of the Company. The Company uses the intrinsic value method to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock to employees under compensatory plans only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement permits companies to adopt a new fair value-based method to account for stock-based employee compensation plans or to continue using the intrinsic value method. If the intrinsic value method is used, information concerning the pro forma effects on net income and net income per share of adopting the fair value-based method is required to be PHH Corporation and Subsidiaries presented in the notes to the financial statements. The Company intends to continue using the intrinsic value method and will provide disclosures about its stock-based employee compensation plans in its 1997 financial statements, as required by Statement No. 123. Divestiture In February 1996 the Company sold its North American truck fuel and management operations resulting in a net gain of $11,688, which is reflected in vehicle management services revenues. Mortgage Loans Held for Sale Mortgage loans held for sale represent mortgage loans originated by the Company and held pending sale to permanent investors. Such mortgage loans are recorded at the lower of cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. The Company issues mortgage-backed certificates insured or guaranteed by the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and other private insurance agencies. The insurance provided by FNMA and FHLMC and other private insurance agencies are on a non-recourse basis to the Company. However, the guarantee provided by GNMA is only to the extent recoverable from insurance programs of the Federal Housing Administration and the Veterans Administration. The outstanding principal balance of mortgages backing GNMA certificates issued by the Company aggregated approximately $2,483,000 and $1,699,000 at April 30, 1996 and 1995, respectively. Additionally, the Company sells mortgage loans as part of various mortgage-backed security programs sponsored by FNMA, FHLMC and GNMA. Certain of these sales are subject to recourse or indemnification provisions in the event of default by the borrower. As of April 30, 1996, mortgage loans sold with recourse amounted to $113,000. The Company believes adequate reserves are maintained to cover all potential losses. Mortgage Servicing Rights and Fees Mortgage servicing rights and fees at April 30 consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Excess servicing fees $122,045 $ 78,848 Purchased mortgage servicing rights 25,977 19,155 Originated mortgage servicing rights 83,500 -- Valuation allowance (1,313) -- - -------------------------------------------------------------------------------- $230,209 $ 98,003 - -------------------------------------------------------------------------------- Excess servicing fees represent the present value of the differential between the actual servicing fees and normal servicing fees which are capitalized at the time loans are sold with servicing rights retained. Purchased servicing rights represent the cost of acquiring the rights to service mortgage loans for others. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" (SFAS No. 122). This Statement requires that mortgage servicing rights be recognized when a mortgage loan is sold and servicing rights are retained. The Company adopted SFAS No. 122 effective May 1, 1995, and, accordingly, capitalized originated servicing rights, net of amortization and valuation allowances, of $82,187 in 1996. SFAS No. 122 requires that a portion of the cost of originating a mortgage loan be allocated to the mortgage servicing rights based on the servicing rights' fair value relative to the loan as a whole. To determine the fair value of mortgage servicing rights, the Company uses market prices for comparable mortgage servicing, when available, or alternatively uses a valuation model that calculates the present value of future net servicing income using assumptions that market participants would use in estimating future net servicing income. SFAS No. 122 also requires the impairment of originated and purchased servicing rights to be measured based on the difference between the carrying amount and current fair value of the servicing rights. In determining impairment, the Company aggregates all mortgage servicing rights, excluding those capitalized prior to the adoption of SFAS No. 122, and stratifies them based on the predominant risk characteristic of interest rate band. For each risk stratification, a valuation allowance is maintained for any excess of amortized book value over the current fair value by a charge or credit to income. Property and Equipment Property and equipment at April 30 consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Land $ 9,082 $ 9,584 Buildings and leasehold improvements 55,215 58,305 Equipment 102,353 111,909 Accumulated depreciation and amortization (81,607) (87,342) - -------------------------------------------------------------------------------- 85,043 92,456 Capitalized software costs, net 8,046 9,943 - -------------------------------------------------------------------------------- $ 93,089 $102,399 - -------------------------------------------------------------------------------- Other Assets Other assets at April 30 consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Mortgage-related notes receivable $ 62,242 $ 27,659 Residential properties held for resale 11,048 14,596 Other 44,709 35,674 - -------------------------------------------------------------------------------- $117,999 $ 77,929 - -------------------------------------------------------------------------------- Mortgage-related notes receivable are loans secured by residential real estate. Residential properties held for resale are located primarily in the US and are carried at the lower of cost or net realizable value. Assets Under Management Programs Net Investment in Leases and Leased Vehicles The net investment in leases and leased vehicles at April 30 consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Vehicles under open-end operating leases $2,519,731 $2,357,425 Vehicles under closed-end operating leases 347,645 288,582 Direct financing leases 348,043 370,234 Accrued interest on leases 805 990 - -------------------------------------------------------------------------------- $3,216,224 $3,017,231 - -------------------------------------------------------------------------------- The Company leases vehicles for initial periods of twelve months or more under either operating or direct financing lease agreements. The Company's experience indicates that the full term of the leases may vary considerably due to extensions beyond the minimum lease term. Lessee repayments of investments in leases and leased vehicles for 1996 and 1995 were $1,527,000 and $1,452,000, respectively; and the ratio of such repayments to the average net investment in leases and leased vehicles was 49% in 1996 and 50% in 1995. PHH Corporation and Subsidiaries The Company has two types of operating leases. Under one type, open-end operating leases, resale of the vehicles upon termination of the lease is generally for the account of the lessee except for a minimum residual value which the Company has guaranteed. The Company's experience has been that vehicles under this type of lease agreement have consistently been sold for amounts exceeding the residual value guarantees. Maintenance and repairs of vehicles under these agreements are the responsibility of the lessee. The original cost of vehicles under this type of operating lease at April 30, 1996 and 1995, was $4,387,000 and $3,898,000, respectively. Under the other type of operating lease, closed-end operating leases, resale of the vehicles on termination of the lease is for the account of the Company. The lessee generally pays for or provides maintenance, vehicle licenses and servicing. The original cost of vehicles under these agreements at April 30, 1996 and 1995, was $483,000 and $391,000, respectively. The Company believes adequate reserves are maintained in the event of loss on vehicle disposition. Under the direct financing lease agreements, resale of the vehicles upon termination of the lease is generally for the account of the lessee. Maintenance and repairs of these vehicles are the responsibility of the lessee. Leasing revenues are included in revenues from vehicle management services. Following is a summary of leasing revenues for years ended April 30: 1996 1995 1994 - -------------------------------------------------------------------------------- Operating leases $1,111,812 $1,017,521 $939,297 Direct financing leases, primarily interest 42,460 40,937 28,852 - -------------------------------------------------------------------------------- $1,154,272 $1,058,458 $968,149 - -------------------------------------------------------------------------------- The Company has transferred existing managed vehicles and related leases to unrelated investors and has retained servicing responsibility. Credit risk for such agreements is retained by the Company to a maximum extent in one of two forms: excess assets transferred, which were $10,088 and $8,389 at April 30, 1996 and 1995, respectively; or guarantees to a maximum extent of $21 and $907 at April 30, 1996 and 1995, respectively. All such credit risk has been included in the Company's consideration of related reserves. The outstanding balances under such agreements aggregated $237,104 and $166,379 at April 30, 1996 and 1995, respectively. Other managed vehicles with balances aggregating $155,723 and $175,111 at April 30, 1996 and 1995, respectively, are included in special purpose entities whose ownership is deemed unrelated to the Company and whose credit and residual value risk characteristics are ultimately not the Company's responsibility. Equity Advances on Homes Equity advances on homes represent advances paid to transferring employees of clients for their equity based on appraised values of their homes. Other Debt Other debt at April 30 consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Commercial paper $803,442 $635,886 Medium-term note 100,000 100,000 - -------------------------------------------------------------------------------- $903,442 $735,886 - -------------------------------------------------------------------------------- Commercial paper programs are more fully described in the note for Liabilities Under Management Programs. The medium-term note represents an unsecured obligation having a fixed interest rate of 6.5% with interest payable semi-annually and a term of seven years payable in full in fiscal 2000. Income Taxes Provisions (credits) for income taxes for the years ended April 30 were comprised as follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Current income taxes: Federal $ 12,305 $ (2,958) $ 7,550 State and local 3,783 3,464 9,938 Foreign 8,140 6,979 2,739 - -------------------------------------------------------------------------------- 24,228 7,485 20,227 - -------------------------------------------------------------------------------- Deferred income taxes: Federal 27,700 39,600 24,452 State and local 5,400 4,500 (1,033) Foreign 200 (1,929) 1,592 - -------------------------------------------------------------------------------- 33,300 42,171 25,011 - -------------------------------------------------------------------------------- $ 57,528 $ 49,656 $ 45,238 - -------------------------------------------------------------------------------- Deferred income taxes are recorded based upon differences between the financial statement and the tax bases of assets and liabilities and available tax credit carryforwards. There was no valuation allowance relating to deferred tax assets. Net deferred tax liabilities as of April 30 were comprised as follows: 1996 1995 - -------------------------------------------------------------------------------- Depreciation $(208,100) $(197,800) Accrued liabilities and deferred income 47,500 41,900 Unamortized mortgage servicing rights (31,100) (2,500) - -------------------------------------------------------------------------------- $(191,700) $(158,400) - -------------------------------------------------------------------------------- The portions of the 1996 income tax liability and provision classified as current and deferred are subject to final determination based on the actual 1996 income tax returns. The liability and provision amounts for 1995 have been reclassified to reflect the final determination made in filing the 1995 income tax returns. The Company received net income tax refunds of $1,330 in 1996 and paid income taxes of $26,049 in 1995 and $35,739 in 1994. A summary of the differences between the statutory federal income tax rate and the Company's effective income tax rate follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Federal income tax statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.3 4.5 5.3 Amortization of goodwill .6 1.0 0.7 Rate increase on deferred taxes -- -- 3.0 Adjustments of tax accruals -- -- (3.0) Foreign tax in excess of (less than) domestic rate 1.1 (0.1) -- Other .3 0.5 0.2 - -------------------------------------------------------------------------------- Effective tax rate 41.3% 40.9% 41.2% - -------------------------------------------------------------------------------- The Company's US federal income tax returns have been examined by the Internal Revenue Service through April 30, 1993. PHH Corporation and Subsidiaries Liabilities Under Management Programs Borrowings to fund assets under management programs are classified as "liabilities under management programs" and, at April 30, consisted of the following: 1996 1995 - -------------------------------------------------------------------------------- Commercial paper $ 1,404,094 $1,665,193 Medium-term notes 1,981,200 1,261,000 Limited recourse debt 8,595 8,357 Secured notes payable on vehicles under lease 11,570 39,446 Other unsecured debt 33,345 105,633 - -------------------------------------------------------------------------------- $ 3,438,804 $3,079,629 - -------------------------------------------------------------------------------- Commercial paper, all of which matures within 90 days, is supported by committed revolving credit agreements described below and short-term lines of credit. The weighted average interest rates on the Company's outstanding commercial paper were 5.5% and 6.3% at April 30, 1996 and 1995, respectively. Medium-term notes represent unsecured loans which mature in 1997. The weighted average interest rates on medium-term notes were 5.5% and 6.4% at April 30, 1996 and 1995, respectively. Limited recourse debt and secured notes payable on vehicles under lease primarily consist of secured loans arranged for certain clients for their convenience. The lenders hold a security interest in the lease payments and the clients' leased vehicles. The debt and notes payable mature concurrently with the related lease payments. The aggregate lease payments due from the lessees exceed the loan repayment requirements. The weighted average interest rates on secured debt were 5.2% and 6.4% at April 30, 1996 and 1995, respectively. The Company has unsecured committed credit agreements with various banks totaling $2,377,000. These agreements have both fixed and evergreen maturities ranging from June 13, 1996, to April 30, 1999. The evergreen revolving credit agreements require a notice of termination of one to three years. Interest rates under all revolvers are either at fixed rates or vary with the prime rate or the London Interbank Offered Rate. Under these agreements, the Company is obligated to pay annual commitment fees which were $2,471 and $2,904 in 1996 and 1995, respectively. The Company has other unused lines of credit of $341,000 and $262,000 at April 30, 1996 and 1995, respectively, with various banks. Other unsecured debt, all of which matures in 1997, includes other borrowings under short-term lines of credit and other bank facilities. The weighted average interest rates on unsecured debt was 6.2% at both April 30, 1996 and 1995. Although the period of service for a vehicle is at the lessee's option, and the period a home is held for resale varies, management estimates, by using historical information, the rate at which vehicles will be disposed and the rate at which homes will be resold. These projections of estimated liquidations of assets under management programs and the related estimated repayment of liabilities under management programs as of April 30, 1996, as set forth in the table below, indicate that the actual repayments of liabilities under management programs will be different than required by contractual maturities. Assets Under Liabilities Under Management Programs Management Programs - -------------------------------------------------------------------------------- 1997 $ 1,999,332 $ 1,754,684 1998 1,062,884 990,171 1999 480,217 455,905 2000 154,399 153,038 2001 51,583 51,497 2002-2006 34,617 33,509 - -------------------------------------------------------------------------------- $ 3,783,032 $ 3,438,804 - -------------------------------------------------------------------------------- Stock Option Plans The Company's employee stock option plan allows for options to be granted to key employees for the purchase of common stock at prices not less than fair market value on the date of grant. Either incentive stock options or non-statutory stock options may be granted under the plans. The Company's Directors' stock option plan allows for options to be granted to outside Directors of the Company for the purchase of common stock at prices not less than fair market value on the date of grant. Options become exercisable after one year from date of grant on a vesting schedule provided by the plans, and expire ten years after the date of the grant. Option transactions during 1996, 1995, and 1994 were as follows: Number of Option Price Shares per Share - -------------------------------------------------------------------------------- Outstanding April 30, 1993 1,971,570 $18.13 to $39.63 Granted 199,450 $39.00 to $42.00 Exercised (305,062) $18.13 to $37.75 Canceled (97,785) $27.00 to $39.63 - -------------------------------------------------------------------------------- Outstanding April 30, 1994 1,768,173 $19.88 to $42.00 Granted 234,700 $35.50 to $37.00 Exercised (129,660) $19.88 to $37.75 Canceled (200,245) $24.50 to $41.13 - -------------------------------------------------------------------------------- Outstanding April 30, 1995 1,672,968 $19.88 to $42.00 Granted 190,750 $39.88 to $53.12 Exercised (443,083) $27.00 to $40.62 Canceled (112,650) $27.00 to $39.88 Two-for-one common stock split 1,307,985 - -------------------------------------------------------------------------------- Outstanding April 30, 1996* 2,615,970 $9.94 to $26.56 - -------------------------------------------------------------------------------- Exercisable April 30, 1996* 2,256,070 $9.94 to $21.00 - -------------------------------------------------------------------------------- * Reflects two-for-one common stock split declared on June 24, 1996, described in the capital stock note. In addition to outstanding options, at April 30, 1996, there were 2,543,402 shares of common stock reserved (adjusted for the two-for-one common stock split), including 1,571,544 shares for issuance under future employee stock option plan awards, 863,858 shares for future issuance under the employee investment plan and 108,000 shares for future issuance under the Director's stock option plan. Capital Stock On June 24, 1996, the Board of Directors authorized a two-for-one common stock split, distributable July 31, 1996, to stockholders of record on July 5, 1996. All per share amounts herein and data as to outstanding and exercisable common stock options at April 30, 1996, have been adjusted for the common stock split. On April 10, 1996, the Company declared a dividend of one preferred share purchase right for each share of common stock outstanding on April 10, 1996. This dividend is a continuation of the dividend which expired on April 10, 1996. Each right entitles the PHH Corporation and Subsidiaries holder to purchase 1/100th of a share of series A Junior Participating Preferred Stock at an exercise price of $88 (adjusted for the two-for-one common stock split), subject to future adjustment. The rights become exercisable in the event any party acquires or announces an offer to acquire 20% or more of the Company's common stock. The rights expire April 10, 2006, and are redeemable at $.025 (adjusted for the two-for-one common stock split) per right prior to the time any party owns 20% or more of the Company's outstanding common stock. In the event the Company enters into a consolidation or merger after the time rights are exercisable, the rights provide that the holder will receive, upon exercise of the right, shares of common stock of the surviving company having a market value of twice the exercise price of the right. Until the earlier of the time the rights become exercisable, are redeemed or expire, the Company will issue one right with each new share of common stock issued. The Company has designated 400,000 (adjusted for the two-for-one common stock split) shares of the authorized preferred shares as series A Junior Participating Preferred Stock for issuance upon exercise of the rights. Pension and Other Employee Benefit Plans Pension and Supplemental Retirement Plans The Company has a non-contributory defined benefit pension plan covering substantially all US employees of the Company and its subsidiaries. The Company's subsidiary located in the UK has a contributory defined benefit pension plan, with participation at the employee's option. Under both the US and UK plans, benefits are based on an employee's years of credited service and a percentage of final average compensation. The Company's policy for both plans is to contribute amounts sufficient to meet the minimum requirements plus other amounts as the Company deems appropriate from time to time. The Company also sponsors two unfunded supplemental retirement plans to provide certain key executives with benefits in excess of limits under the federal tax law and to include annual incentive payments in benefit calculations. Net costs included the following components for the years ended April 30: 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost $ 5,038 $ 4,597 $ 4,604 Interest cost 7,607 6,742 6,181 Actual return on assets (10,977) (3,144) (2,049) Net amortization and deferral 5,515 (1,698) (2,050) - -------------------------------------------------------------------------------- Net cost $ 7,183 $ 6,497 $ 6,686 - -------------------------------------------------------------------------------- A summary of the plans' status and the Company's recorded liability recognized in the Consolidated Balance Sheets at April 30 follows: Funded Plans - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Accumulated benefit obligation: Vested $ 61,766 $ 49,799 Unvested 6,447 6,428 - -------------------------------------------------------------------------------- $ 68,213 $ 56,227 - -------------------------------------------------------------------------------- Projected benefit obligation $ 88,892 $ 75,537 Funded assets, at fair value (78,851) (60,558) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (6,409) (8,906) Unrecognized prior service cost (62) (94) Unrecognized net obligation (137) (93) - -------------------------------------------------------------------------------- Recorded liability $ 3,433 $ 5,886 - -------------------------------------------------------------------------------- Unfunded Plans 1996 1995 - -------------------------------------------------------------------------------- Accumulated benefit obligation: Vested $ 12,196 $ 8,591 Unvested 786 965 - -------------------------------------------------------------------------------- $ 12,982 $ 9,556 - -------------------------------------------------------------------------------- Projected benefit obligation $ 16,167 $ 13,433 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (1,885) (849) Unrecognized prior service cost (3,049) (2,598) Unrecognized net obligation (1,392) (1,624) Minimum liability adjustment 3,141 1,194 - -------------------------------------------------------------------------------- Recorded liability $ 12,982 $ 9,556 - -------------------------------------------------------------------------------- Significant percentage assumptions used in determining the cost and obligations under the US pension and unfunded supplemental retirement plans are as follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate 8.00% 8.50% 8.25% Rate of increase in compensation 5.00 5.00 5.00 Long-term rate of return on assets 9.50 9.50 10.00 - -------------------------------------------------------------------------------- Postretirement Benefits Other Than Pensions The Company provides healthcare and life insurance benefits for certain retired employees up to the age of 65. Such postretirement benefits costs for 1996, 1995 and 1994 were $1,523, $1,474 and $1,551, respectively. A summary of the plan's status and the Company's recorded liability recognized in the consolidated balance sheets at April 30 follows: 1996 1995 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Active employees $ 5,732 $ 5,574 Current retirees 1,743 1,785 - -------------------------------------------------------------------------------- 7,475 7,359 Unrecognized transition obligation (4,995) (5,289) Unrecognized net gain 1,081 248 - -------------------------------------------------------------------------------- Recorded liability $ 3,561 $ 2,318 - -------------------------------------------------------------------------------- Investment Plan Under provisions of the Company's employee investment plan, a qualified retirement plan, eligible employees may generally have up to 10% of their base salaries withheld and placed with an independent custodian and elect to invest in common stock of the Company, an index equity fund, a growth equity fund, an international equity fund, a fixed income fund, an asset allocation fund and/or a money market fund. The Company's contributions vest proportionately in accordance with an employee's years of vesting service, with an employee being 100% vested after three years of vesting service. The Company matches, in common stock of the Company, employee contributions to 3% of their base salaries, with an additional 3% match available at the end of the year based on the Company's operating results. The Company's additional matches of employee contributions greater than 3% up to 6%, were 75% in 1996 and 50% in 1995 and 1994. The additional match, initially invested in a money market fund, can be redirected by the employee into any of the investment elections noted above. The Company's expenses for contributions were $4,810, $4,483, and $4,020 for the years ended April 30, 1996, 1995 and 1994, respectively. PHH Corporation and Subsidiaries Lease Commitments Total rental expenses relating to office facilities and equipment were $23,519, $24,195, and $27,264 for 1996, 1995 and 1994, respectively. Minimum rental commitments under non-cancelable leases with remaining terms in excess of one year are as follows: - -------------------------------------------------------------------------------- 1997 $ 14,980 2001 $ 6,406 1998 $ 13,619 2001-2006 $ 13,071 1999 $ 10,395 2007 and thereafter $ 4,158 2000 $ 7,294 - -------------------------------------------------------------------------------- These leases provide for additional rentals based on the lessors' increased property taxes, maintenance and operating expenses. Contingent Liabilities The Company and its subsidiaries are involved in pending litigation of the usual character incidental to the business transacted by them. In the opinion of management, such litigation will not have a material effect on the Company's consolidated financial statements. The Company is contingently liable under the terms of an agreement involving its discontinued aviation services segment for payment of Industrial Revenue Bonds issued by local governmental authorities operating at two airports. The Company believes its allowance for disposition loss is sufficient to cover all potential liability. Fair Value of Financial Instruments and Servicing Rights The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: (bullet) Cash, accounts receivable, certain other assets and commercial paper borrowings. Due to the short-term nature of these financial instruments, the carrying value equals or approximates fair value. (bullet) Mortgage loans held for sale. Fair value is estimated using the quoted market prices for securities backed by similar types of loans and current dealer commitments to purchase loans. These loans are priced to be sold with servicing rights retained. Gains (losses) on mortgage-related positions, used to reduce the risk of adverse price fluctuations, for both mortgage loans held for sale and anticipated mortgage loan closings arising from commitments issued, are included in the carrying amount of mortgage loans held for sale. (bullet) Mortgage servicing rights and fees. Fair value is estimated by discounting the expected net cash flow of servicing rights and deferred mortgage servicing fees using discount rates that approximate market rates and externally published prepayment rates, adjusted, if appropriate, for individual portfolio characteristics. (bullet) Borrowings. Fair value of borrowings, other than commercial paper, is estimated based on quoted market prices or market comparables. (bullet) Interest rate swaps, foreign exchange contracts, forward delivery commitments, futures contracts and options. The fair value of interest rate swaps, foreign exchange contracts, forward delivery commitments, futures contracts and options is estimated, using dealer quotes, as the amount that the Company would receive or pay to execute a new agreement with terms identical to those remaining on the current agreement, considering interest rates at the reporting date. The following table sets forth information about financial instruments, except for those noted above for which the carrying value approximates fair value, at April 30, 1996 and 1995:
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Estimated Estimated Notional Carrying Fair Notional Carrying Fair Amount Amount Value Amount Amount Value Assets: Mortgage loans held for sale $ -- $ 874,794 $ 874,794 $ -- $ 712,247 $ 712,247 Excess mortgage servicing fees -- 122,045 132,586 -- 78,848 86,982 Originated mortgage servicing rights -- 82,187 88,516 -- -- -- Purchased mortgage servicing rights -- 25,977 34,241 -- 19,155 20,333 Liabilities--Medium-term notes -- 2,081,200 2,080,827 -- 1,361,000 1,361,198 Off balance sheet: Interest rate swaps 1,858,597 1,740,964 In a gain position -- 3,164 -- 8,350 In a loss position -- (11,192) -- (4,693) Foreign exchange forwards 125,031 -- (12) 80,600 -- (54) Mortgage-related positions:* Forward delivery commitments 1,630,000 (1,156) 11,402 1,089,500 12,951 (3,441) Option contracts to sell 345,000 1,786 518 143,500 729 (318) Option contracts to buy 800,000 4,280 148 110,000 483 488
* Gains (losses) on mortgage-related positions are already included in the determination of market value of mortgage loans held for sale. PHH Corporation and Subsidiaries Derivative Financial Instruments The Company employs interest rate swap agreements to match effectively the fixed or floating rate nature of liabilities to the assets funded. A key assumption in the following information is that rates remain constant at April 30, 1996 levels. To the extent that rates change, both the maturity and variable interest rate information will change. However, the net rate the Company pays remains matched with the assets funded. The following table summarizes the maturity and weighted average rates of the Company's interest rate swaps employed at April 30, 1996. These characteristics are effectively offset within the portfolio of assets funded by the Company.
Maturities Total 1997 1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------- US - ----------------------------------------------------------------------------------------------------------------------- Commercial Paper: Pay fixed/receive floating: Notional value $ 467,301 $ 189,564 $ 152,628 $ 75,786 $ 31,423 $ 11,250 $ 6,650 Weighted average receive rate 5.43% 5.43% 5.43% 5.43% 5.43% 5.43% Weighted average pay rate 6.22% 6.26% 6.48% 6.56% 6.34% 6.50% Medium-Term Notes: Pay floating/receive fixed: Notional value 150,000 150,000 Weighted average receive rate 6.98% Weighted average pay rate 5.39% Pay floating/receive floating: Notional value 806,200 806,200 Weighted average receive rate 5.49% Weighted average pay rate 5.37% Canada - ----------------------------------------------------------------------------------------------------------------------- Commercial Paper: Pay fixed/receive floating: Notional value 63,504 33,296 20,212 8,085 1,911 Weighted average receive rate 4.85% 4.85% 4.85% 4.85% Weighted average pay rate 6.97% 6.85% 6.49% 7.29% Pay floating/receive floating: Notional value 76,488 39,078 24,439 10,321 2,261 389 Weighted average receive rate 6.92% 7.24% 7.41% 7.40% 7.70% Weighted average pay rate 5.22% 5.22% 5.22% 5.22% 5.22% UK - ----------------------------------------------------------------------------------------------------------------------- Commercial Paper: Pay fixed/receive floating: Notional value 295,104 87,521 90,083 67,788 33,141 16,571 Weighted average receive rate 6.07% 6.07% 6.07% 6.07% 6.07% Weighted average pay rate 7.46% 6.05% 8.11% 6.93% 7.18% - ----------------------------------------------------------------------------------------------------------------------- Total $1,858,597 $1,305,659 $ 287,362 $ 161,980 $ 68,736 $ 28,210 $ 6,650 - -----------------------------------------------------------------------------------------------------------------------
For the years ended April 30, 1996 and 1995, the Company's hedging activities increased interest expense $1,510 and $1,496, respectively, and had no effect on its weighted average borrowing rate. For the same period in 1994, hedging activities increased interest expense $12,632 and increased the weighted average borrowing rate 0.3%. The Company enters into foreign exchange contracts as hedges against currency fluctuation on certain intercompany loans. Such contracts effectively offset the currency risk applicable to approximately $125,031 and $80,600 of obligations at April 30, 1996 and 1995, respectively. The Company is exposed to credit-related losses in the event of non-performance by counterparties to certain derivative financial instruments. The Company manages such risk by periodically evaluating the financial condition of counterparties and spreading its positions among multiple counterparties. The Company presently does not expect non-performance by any of the counterparties. PHH Corporation and Subsidiaries Business Segments The Company's operations are classified into three business segments: vehicle management services, real estate services and mortgage banking services. Vehicle management services and real estate services are provided in North America and Europe. Mortgage banking services are provided in the US. Selected information by business segment and geographic area follows: Business Segments
(In thousands) Years Ended April 30, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Revenues: Vehicle management services $ 1,371,150 $ 1,257,696 $ 1,162,483 Real estate services 812,851 686,836 816,261 Mortgage banking services 195,599 126,094 155,935 - -------------------------------------------------------------------------------------------------- Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679 - -------------------------------------------------------------------------------------------------- Income before income taxes: Vehicle management services $ 64,536 $ 55,668 $ 46,230 Real estate services 31,841 35,219 21,500 Mortgage banking services 42,771 30,431 42,066 - -------------------------------------------------------------------------------------------------- Consolidated $ 139,148 $ 121,318 $ 109,796 - -------------------------------------------------------------------------------------------------- Identifiable assets: Vehicle management services $ 3,562,737 $ 3,413,080 $ 3,120,154 Real estate services 841,881 723,698 807,119 Mortgage banking services 1,268,372 902,755 839,510 - -------------------------------------------------------------------------------------------------- Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783 - -------------------------------------------------------------------------------------------------- Capital expenditures: Vehicle management services $ 10,663 $ 8,536 $ 10,250 Real estate services 9,775 9,103 8,839 Mortgage banking services 3,090 1,668 17,023 - -------------------------------------------------------------------------------------------------- Consolidated $ 23,528 $ 19,307 $ 36,112 - -------------------------------------------------------------------------------------------------- Depreciation and amortization: Vehicle management services $ 960,584 $ 891,361 $ 825,609 Real estate services 10,290 10,054 8,921 Mortgage banking services 40,973 23,264 32,496 - -------------------------------------------------------------------------------------------------- Consolidated $ 1,011,847 $ 924,679 $ 867,026 - --------------------------------------------------------------------------------------------------
Geographic Areas
(In thousands) Years Ended April 30, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Revenues: North America $ 2,181,805 $ 1,894,050 $ 1,954,106 Europe 197,795 176,576 180,573 - -------------------------------------------------------------------------------------------------- Consolidated $ 2,379,600 $ 2,070,626 $ 2,134,679 - -------------------------------------------------------------------------------------------------- Income before income taxes: North America $ 123,957 $ 113,942 $ 106,895 Europe 15,191 7,376 2,901 - -------------------------------------------------------------------------------------------------- Consolidated $ 139,148 $ 121,318 $ 109,796 - -------------------------------------------------------------------------------------------------- Identifiable assets: North America $ 5,086,009 $ 4,492,213 $ 4,211,169 Europe 586,981 547,320 555,614 - -------------------------------------------------------------------------------------------------- Consolidated $ 5,672,990 $ 5,039,533 $ 4,766,783 - --------------------------------------------------------------------------------------------------
PHH Corporation and Subsidiaries Quarterly Financial Data (Unaudited)
(In thousands except per share data) Year ended April 30, 1996 - --------------------------------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year Revenues $ 581,857 $ 589,770 $ 586,717 $ 621,256 $ 2,379,600 Income before income taxes $ 31,663 $ 33,217 $ 33,080 $ 41,188 $ 139,148 Net income $ 18,301 $ 19,564 $ 19,482 $ 24,273 $ 81,620 - --------------------------------------------------------------------------------------------------------------------------- Net income per share* $ .52 $ .57 $ .54 $ .70 $ 2.33 - --------------------------------------------------------------------------------------------------------------------------- Cash dividends per share* $ .17 $ .17 $ .17 $ .17 $ .68 - --------------------------------------------------------------------------------------------------------------------------- Closing price range of stock:* High $ 23 3/4 $ 23 3/8 $ 25 3/4 $ 28 3/8 $ 28 3/8 Low $ 19 5/8 $ 21 $ 21 7/8 $ 24 1/2 $ 19 5/8 - --------------------------------------------------------------------------------------------------------------------------- Year ended April 30, 1995 - --------------------------------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year Revenues $ 520,308 $ 510,137 $ 494,141 $ 546,040 $ 2,070,626 Income before income taxes $ 28,035 $ 29,874 $ 28,254 $ 35,155 $ 121,318 Net income $ 16,515 $ 17,612 $ 16,762 $ 20,773 $ 71,662 - --------------------------------------------------------------------------------------------------------------------------- Net income per share* $ .47 $ .51 $ .49 $ .61 $ 2.08 - --------------------------------------------------------------------------------------------------------------------------- Cash dividends per share* $ .16 $ .16 $ .16 $ .16 $ .64 - --------------------------------------------------------------------------------------------------------------------------- Closing price range of stock:* High $ 19 3/8 $ 19 $ 19 $ 20 1/4 $ 20 1/4 Low $ 17 1/2 $ 17 3/8 $ 16 3/4 $ 17 5/8 $ 16 3/4 - ---------------------------------------------------------------------------------------------------------------------------
* Reflects two-for-one common stock split declared June 24, 1996. See capital stock note in Notes to Consolidated Financial Statements. EX-99.2 4 UNAUDITED CONSOLIDATED BALANCE SHEET OF PHH CORPORATION PHH CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) (In thousands except per share data)
Three Months Ended Six Months Ended October 31, October 31, 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Vehicle management services $ 345,166 $ 334,291 $ 684,402 $ 668,053 Real estate services 193,626 207,064 410,655 411,516 Mortgage banking services 65,346 48,415 134,738 92,058 -------- -------- ---------- ---------- 604,138 589,770 1,229,795 1,171,627 ------- ------- --------- --------- Expenses: Depreciation on vehicles under operating leases 243,734 230,908 482,219 462,396 Costs, including interest, of carrying and reselling homes 154,140 171,489 334,512 347,032 Direct costs of mortgage banking services 27,457 15,851 57,269 28,131 Interest 55,966 55,932 113,197 109,384 Selling, general and administrative 82,878 82,373 165,522 159,804 -------- -------- ---------- ---------- 564,175 556,553 1,152,719 1,106,747 ------- ------- --------- --------- Income before income taxes 39,963 33,217 77,076 64,880 Income taxes 15,997 13,653 31,338 27,015 -------- --------- ----------- --------- Net income $ 23,966 $ 19,564 $ 45,738 $ 37,865 ======== ========= =========== ========= Net income per share $ .68 $ .57 $ 1.29 $ 1.09 ========== =========== ============ ==========
See accompanying notes. -3- PHH CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets
October 31, 1996 April 30, 1996 (in thousands) (Unaudited) ASSETS: Cash $ 11,450 $ 9,288 Accounts receivable, less allowance for doubtful accounts of $6,232 at October 31, 1996 and $5,478 at April 30, 1996 442,951 468,938 Carrying costs on homes under management 58,916 46,560 Mortgage loans held for sale 872,404 874,794 Mortgage servicing rights and fees 280,344 230,209 Property and equipment, net 92,846 93,089 Goodwill, net 47,656 49,081 Other assets 125,384 117,999 ---------- ---------- 1,931,951 1,889,958 --------- --------- ASSETS UNDER MANAGEMENT PROGRAMS: Net investment in leases and leased vehicles 3,285,721 3,216,224 Equity advances on homes 666,905 566,808 ---------- ---------- 3,952,626 3,783,032 --------- --------- $ 5,884,577 $ 5,672,990 ========= ========= LIABILITIES: Accounts payable and accrued expenses $ 418,143 $ 434,109 Advances from clients and deferred revenue 114,021 96,439 Other debt 814,560 903,442 Deferred income taxes 221,700 191,700 ---------- ---------- 1,568,424 1,625,690 --------- --------- LIABILITIES UNDER MANAGEMENT PROGRAMS 3,662,245 3,438,804 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, authorized 3,000,000 shares -- -- Common stock, no par value, authorized 75,000,000 shares; issued and outstanding 34,885,942 shares at October 31, 1996 and 34,661,524 shares at April 30, 1996 99,820 96,081 Cumulative foreign currency translation adjustment (14,312) (23,483) Retained earnings 568,400 535,898 --------- --------- 653,908 608,496 --------- --------- $ 5,884,577 $ 5,672,990 ========= =========
See accompanying notes. -4- PHH CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended October 31, (In thousands) 1996 1995 ---- ---- Operating Activities: Net income $ 45,738 $ 37,865 Adjustments to reconcile income to cash provided by operating activities: Depreciation on vehicles under operating leases 482,219 462,396 Other depreciation and amortization 16,359 15,933 Amortization of capitalized servicing rights and fees 27,620 15,016 Additions to originated mortgage servicing rights (29,841) (40,613) Additions to excess mortgage servicing fees (48,768) (30,263) Deferred income taxes 29,167 20,095 Gain on sale of assets (2,944) - Changes in: Accounts receivable 33,960 2,112 Carrying costs on homes under management (11,717) (5,888) Mortgage loans held for sale 2,390 (69,622) Accounts payable and accrued expenses (22,797) (13,907) Advances from clients and deferred revenue 16,367 10,205 All other operating activity 13,238 (17,505) ------------- ------------- Cash provided by operating activities 550,991 385,824 ------------- ------------- Investing Activities: Investment in leases and leased vehicles (805,638) (761,320) Repayment of investment in leases and leased vehicles 290,395 271,379 Value of homes acquired (1,776,201) (2,695,199) Value of homes sold 1,682,051 2,427,642 Purchases of mortgage servicing rights - (7,718) Additions to property and equipment, net of dispositions (12,615) (8,913) Proceeds from sale of assets 4,400 - All other investing activities (7,887) (28,128) ------------- ------------- Cash used in investing activities (625,495) (802,257) ------------- ------------- Financing Activities: Net change in borrowings with terms of less than 90 days (156,217) 431,999 Proceeds from issuance of other borrowings 1,024,486 748,915 Principal payment on other borrowings (751,365) (765,534) Stock option plan transactions 3,739 9,250 Payment of dividends (13,236) (11,628) ------------- ------------- Cash provided by financing activities 107,407 413,002 ------------- ------------- Effect of exchange rate changes on cash (27,041) 1,339 ------------- ------------- Increase (decrease) in cash 5,862 (2,092) Cash at beginning of period 9,288 3,412 -------------- ------------- Cash at end of period $ 15,150 $ 1,320 -------------- ============= Supplemental disclosures of cash flow information: Cash payments for interest $ 135,501 $ 135,516 ============== ============= Cash payments for income taxes $ 672 $ 4,667 ============== =============
See accompanying notes. -5- PHH CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) SUMMARY OF ACCOUNTING POLICIES Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report included as part of Form 10-K for the year ended April 30, 1996. Capital Stock and Net Income Per Share On June 24, 1996, the Board of Directors authorized a two-for-one common stock split which was distributed on July 31, 1996, to stockholders of record on July 5, 1996. All per share amounts herein and data as to outstanding common stock at have been adjusted for the common stock split. Net income per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period and common stock equivalents arising from the assumed exercise of outstanding stock options under the treasury stock method. See Exhibit 11 to this Form 10-Q which details the computation of net income per share. Reclassifications Certain reclassifications have been made to the prior years' condensed consolidated financial statements for comparative purposes. CONTINGENT LIABILITIES The Company and its subsidiaries are involved in pending litigation of the usual character incidental to the business transacted by them. In the opinion of management, such litigation will not have a material effect on the Company's consolidated financial statements. SUBSEQUENT EVENT On November 10, 1996, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with HFS Incorporated ("HFS"), and Mercury Acq. Corp., a wholly-owned subsidiary of HFS. Pursuant to the Merger Agreement, shares of the Company's common stock will be converted into a right to receive shares of HFS's common stock as determined in the Merger Agreement. The Merger is conditioned, among other things, upon the approval of the Company's and HFS's shareholders and upon certain regulatory approvals. The merger will be accounted for as a pooling of interests, and is expected to close in the first quarter of calendar year 1997. In connection with the Merger Agreement, on November 13, 1996, the Company and First Chicago Trust company of New York, as Rights Agent, entered into an amendment to the Rights Agreement, dated as of March 15, 1996, by and between the Company and the Rights Agent (the "Rights Agreement"), having the effect of exempting the events and transactions contemplated by the Merger Agreement from the Rights Agreement. -6- EX-99.3 5 PRO FORMA FINANCIAL INFORMATION OF THE COMPANY EXHIBIT 99.3 PRO FORMA FINANCIAL INFORMATION OF THE COMPANY Index Section I - Pro forma consolidated combining financial statements of the Company for the PHH Merger, including the following: The pro forma consolidated combining balance sheet of the Company, which combines the pro forma consolidated balance sheet of the Company with the consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related pro forma consolidated combining statements of income for the year ended December 31, 1995, and each of the nine month periods ended September 30, 1995 and 1996. Section II - Pro forma consolidated financial information of the Company excluding the PHH Merger. Such pro forma consolidated financial information includes the following: The pro forma consolidated balance sheet of the Company as of September 30, 1996 and the pro forma consolidated statements of operations of the Company for the year ended December 31, 1995 and each of the nine month periods ended September 30, 1995 and 1996. Section III - Combining historical consolidated financial statements of the Company for the PHH Merger, including the following: The combining historical consolidated balance sheet of the Company, which combines the consolidated balance sheet of the Company with the historical consolidated balance sheet of PHH Corporation as of September 30, 1996 and the related combining historical consolidated statements of income for each of the years ended December 31, 1993, 1994 and 1995 and each of the nine month periods ended September 30, 1995 and 1996. 4 SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING FINANCIAL STATEMENTS FOR THE PHH MERGER On November 10, 1996, the Company entered into a definitive merger agreement (the "PHH Merger") pursuant to which the Company will issue approximately $1.7 billion of Company common stock in exchange for all of the outstanding common stock of PHH Corporation ("PHH"). The accompanying pro forma consolidated combining financial statements give effect to the business combination of the Company and PHH which will be accounted for as a pooling of interests. Accordingly, the underlying pro forma consolidated combining balance sheet as of September 30, 1996 and the pro forma consolidated combining statements of income for the year ended December 31, 1995 and the nine month periods ended September 30, 1995 and 1996 reflects the combining of the historical financial results of PHH Corporation with the pro forma financial results of the Company prior to the Company entering into the PHH Merger. The pro forma financial results of the Company include all of the Company's acquisitions prior to the PHH Merger, including the recent acquisitions of Avis, Inc. and Resort Condominiums International, Inc. See Section II of Exhibit 99.3 herein for the Pro Forma Consolidated Financial Statements of the Company prior to the PHH Merger related to the aforementioned periods. Additionally, the pro forma consolidated combining financial statements reflect adjustments for the pooling of the Company and PHH including reclassifications to conform accounting policies and shares issued as consideration in connection with the PHH Merger. The Company expects to recognize a one-time charge related to transaction and business combination costs in connection with the PHH Merger, which is not reflected in the pro forma consolidated combining statements of income. The pro forma consolidated combining financial statements do not purport to present the financial position or results of operations of the Company had the PHH Merger occurred on the dates specified, nor are they necessarily indicative of the operating results that may be achieved in the future. The pro forma consolidated combining financial statements are based on certain assumptions and adjustments described in the Pro Forma consolidated financial information of the Company as set forth in Section II, herein and should be read in conjunction therewith and with (i) the consolidated financial statements and related notes of the Company included in its 1995 Annual Report on Form 10-K (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (iii) the consolidated financial statements of PHH Corporation included elsewhere in this report; and (iv) the financial statements and related notes of certain of the acquired companies previously filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3.05, "Financial Statements of Business Acquired or to be Acquired". 5
SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING BALANCE SHEET PAGE 1 OF 2 AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES ------------- ------------- ------------- ----------- ASSETS Current assets Cash and cash equivalents $ 150,900 $ 11,450 $ - $ 162,350 Relocation receivables 136,052 666,905 - 802,957 Other accounts and notes receivable, net 148,082 442,951 - 591,033 Other current assets 83,798 58,916 - 142,714 -------------- ------------- ------------ ------------- TOTAL CURRENT ASSETS 518,832 1,180,222 - 1,699,054 -------------- ------------- ------------ ------------- Property and equipment-net 241,018 92,846 - 333,864 Franchise agreements-net 594,415 - - 594,415 Excess of cost over fair value of net assets acquired-net 1,339,836 47,656 - 1,387,442 Intangible assets 1,168,400 - - 1,168,400 Investment in car rental operating company-net 75,000 - - 75,000 Deferred income taxes-net 61,200 - - 61,200 Other assets 137,816 125,384 - 263,200 -------------- ------------- ---------- ------------- TOTAL 4,136,517 1,446,108 - 5,582,625 -------------- ------------- ------------ ------------- ASSETS UNDER VEHICLE MANAGEMENT AND MORTGAGE PROGRAMS Net investment in leases and leased vehicles - 3,285,721 - 3,285,721 Mortgage loans held for sale - 872,404 - 872,404 Mortgage servicing rights & fees - 280,344 - 280,344 -------------- ------------- ------------ ------------- TOTAL - 4,438,469 - 4,438,469 -------------- ------------- ------------ ------------- TOTAL ASSETS $ 4,136,517 $ 5,884,577 $ - $ 10,021,094 ============== ============= ============ =============
- ------------- (1) Pro forma for all material transactions, excluding the PHH Merger (See Section II). (2) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See Notes to pro forma consolidated combining financial statements. 6
SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING BALANCE SHEET PAGE 2 OF 2 AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other accrued liabilities $ 243,307 $ 418,143 $ 76,651 (A) $ 738,101 Deferred revenue - net 143,873 - - 143,873 Income taxes payable 81,633 - - 81,633 Accrued acquisition obligations 84,287 - - 84,287 Current portion of long-term debt 130,837 - - 130,837 -------------- ------------ ---------- ----------- TOTAL CURRENT LIABILITIES 683,937 418,143 76,651 1,178,731 -------------- ------------ ---------- ----------- Long-term debt 822,800 - 584,796 (B) 1,407,596 Deferred revenue 193,002 114,021 (76,651) (A) 230,372 Other non-current liabilities 32,970 - - 32,970 Deferred income taxes 85,400 - - 85,400 -------------- ------------ ---------- ----------- TOTAL 1,818,109 532,164 508,145 2,935,069 -------------- ------------ ---------- ----------- LIABILITIES UNDER VEHICLE MANAGEMENT AND MORTGAGE PROGRAMS Debt - 4,476,805 (584,796) (B) 3,892,009 Deferred income taxes - 221,700 - 221,700 -------------- ------------ ---------- ----------- TOTAL - 4,698,505 (584,796) 4,113,709 -------------- ------------ ---------- ----------- STOCKHOLDERS' EQUITY: Common stock 1,293 99,820 (99,563) (C) 1,550 Additional paid-in capital 2,110,879 - 99,563 (C) 2,210,442 Retained earnings 206,236 568,400 - 774,636 Foreign currency equity adjustment - (14,312) - (14,312) -------------- ------------- ---------- ----------- TOTAL STOCKHOLDERS' EQUITY 2,318,408 653,908 - 2,972,316 -------------- ------------ ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,136,517 $ 5,884,577 $ - $10,021,094 ============== ============ =========== ===========
- ------------- (1) Pro forma for all material transactions, excluding the PHH Merger (See Section II). (2) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma consolidated combining financial statements. 7 SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS, HFS (1) PHH (2) ADJUSTMENTS AS RESTATED -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 834,038 $ - $ 203,390 (E) $ 1,037,428 Real estate services - 782,727 (532,573) (D) 250,154 Mortgage services - 173,787 - 173,787 ------------ ------------ ------------ --------------- Service fees, net 834,038 956,514 (329,183) 1,461,369 Fleet management - 1,347,870 (203,390) (E) 1,144,480 Depreciation on vehicles under operating leases - (929,341) - (929,341) Interest - - (159,652) (F) (159,652) ------------ ------------ ------------- --------------- Fleet management, net - 418,529 (363,042) 55,487 ------------ ------------ ------------- --------------- Other 169,510 - - 169,510 ------------ ------------ ------------ --------------- Net revenues 1,003,548 1,375,043 (692,225) 1,686,366 ------------ ------------ ------------- --------------- EXPENSES Selling, general and administrative 452,491 310,567 (29,692) (G) 733,366 Costs, including interest,of carrying and reselling homes - 658,498 (532,573) (D) 97,324 (25,972) (H) (2,629) (G) Direct costs of mortgage services - 60,498 (30,667) (G) 29,831 ------------ ------------ ------------- --------------- Total selling, general and administrative 452,491 1,029,563 (621,533) 860,521 Depreciation and amortization 136,319 - 62,988 (G) 199,307 Interest 53,534 212,365 (159,652) (F) 132,219 25,972 (H) Other 33,527 - - 33,527 ------------ ------------ ------------ --------------- Total expenses 675,871 1,241,928 (692,225) 1,225,574 ------------ ------------ ------------- --------------- Income before income taxes 327,677 133,115 - 460,792 Provision for income taxes 135,243 54,995 - 190,238 ------------ ------------ ------------ --------------- Net income $ 192,434 $ 78,120 $ - $ 270,554 ============ ============ ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ 1.38 $ 1.63 ============ =============== Weighted average common and common equivalent shares outstanding 143,110 25,700 (I) 168,810 ============ ============ ===============
- ---------------- (1) Pro forma for all material transactions, excluding the PHH Merger (See Section II). 0 (2) The historical statement of operations of PHH is for the twelve months ended January 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform ato the presentation expected to be used by the merged companies. See notes to pro forma consolidated combining financial statements. 8
SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS, HFS (1) PHH (2) ADJUSTMENTS AS RESTATED -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 616,268 $ - $ 150,028 (E) $ 766,296 Real estate services - 590,168 (399,717) (D) 190,451 Mortgage services - 124,144 - 124,144 ------------ ------------ ------------ --------------- Service fees, net 616,268 714,312 (249,689) 1,080,891 ------------ ------------ ------------ --------------- Fleet management - 1,003,355 (150,028) (E) 853,327 Depreciation on vehicles under operating leases - (692,788) - (692,788) Interest - - (117,373) (F) (117,373) ------------ ------------ ------------ ---------------- Fleet management, net - 310,567 (267,401) 43,166 ------------ ------------ ------------ --------------- Other 115,985 - - 115,985 ------------ ------------ ------------ --------------- Net revenues 732,253 1,024,879 (517,090) 1,240,042 ------------ ------------ ------------ --------------- EXPENSES Selling, general and administrative 335,403 232,698 (22,452) (G) 545,649 Costs, including interest, of carrying and reselling homes - 497,415 (399,717) (D) 76,266 (19,344) (H) (2,088) (G) Direct costs of mortgage services - 40,093 (18,981) (G) 21,112 ------------ ------------ ------------ --------------- Total selling, general and administrative 335,403 770,206 (462,582) 643,027 ------------ ------------ ------------ --------------- Depreciation and amortization 100,632 - 43,521 (G) 144,153 Interest 41,063 154,638 (117,373) (F) 97,672 19,344 (H) Other 22,328 - - 22,328 ------------ ------------ ---------- --------------- Total expenses 499,426 924,844 (517,090) 907,180 ------------ ------------ ---------- --------------- Income before income taxes 232,827 100,035 - 332,862 Provision for income taxes 96,094 41,397 - 137,491 ------------ ------------ ---------- --------------- Net Income $ 136,733 $ 58,638 $ - $ 195,371 ============ ============ ========== =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ 1.00 $ 1.19 ============ =============== Weighted average common and common equivalent shares outstanding 140,582 25,700 (I) 166,282 ============ ============ ===============
- ----------------- (1) Pro forma for all material transactions, excluding the PHH Merger (See Section II). (2) The historical statement of operations of PHH is for the nine months ended October 31, 1995. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma consolidated combining financial statements. 9 SECTION I HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED COMBINING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HISTORICAL PRO FORMA HISTORICAL HFS, HFS (1) PHH (2) ADJUSTMENTS AS RESTATED -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 691,711 $ - $ 152,602 (E) $ 844,313 Real estate services - 619,431 (420,805) (D) 198,626 Mortgage services - 188,636 - 188,636 -------------- ------------ ------------- --------------- Service fees, net 691,711 808,067 (268,203) 1,231,575 -------------- ------------ ------------- --------------- Fleet Management - 1,042,984 (152,602) (E) 890,382 Depreciation on vehicles under operating leases - (727,457) - (727,457) Interest (120,404) (F) (120,404) -------------- ------------- ------------- ---------------- Fleet management, net - 315,527 (273,006) 42,521 -------------- ------------ ------------- --------------- Other 186,004 - - 186,004 -------------- ------------ ------------ --------------- Net revenues 877,715 1,123,594 (541,209) 1,460,100 -------------- ------------ ------------- --------------- EXPENSES Selling, general and administrative 390,168 249,693 (19,808) (G) 620,053 Costs, including interest, of carrying and reselling homes - 507,986 (420,805) (D) 62,841 (22,970) (H) (1,370) (G) Direct costs of mortgage services - 77,718 (38,720) (G) 38,998 -------------- ------------ ------------- --------------- Total selling, general and administrative 390,168 835,397 (503,673) 721,892 -------------- ------------ ------------- --------------- Depreciation and amortization 102,208 - 59,898 (G) 162,106 Interest 36,930 169,933 (120,404) (F) 109,429 22,970 (H) Other 16,259 - - 16,259 -------------- ------------ ------------ --------------- Total expenses 545,565 1,005,330 (541,209) 1,009,686 -------------- ------------ ------------- --------------- Income before income taxes 332,150 118,264 - 450,414 Provision for income taxes 137,087 48,253 - 185,340 -------------- ------------ ------------ --------------- Net Income $ 195,063 $ 70,011 $ - $ 265,074 ============== ============ ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ 1.35 $ 1.55 ============== =============== Weighted average common and common equivalent shares outstanding 147,513 25,700 (I) 173,213 ============== ============ ===============
- ----------------- (1) Pro forma for all material transactions, excluding the PHH Merger (See Section II). (2) The historical statement of operations of PHH is for the nine months ended October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma consolidated combining financial statements. 10 HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED COMBINING FINANCIAL STATEMENTS A. OTHER CURRENT ASSETS: The pro forma adjustment reclassifies advances from clients to accounts payable and other accrued liabilities. This adjustment is made to conform to the presentation expected to be used by the merged companies. This adjustment was made to conform to the presentation expected to be used by the merged companies. B. Long-Term Debt: This pro forma adjustment reclassifies the portion of long-term debt associated with real estate services activities from Liabilities under Vehicle Management and Mortgage Programs to Long-Term Debt. This adjustment is made to conform to the presentation expected to be used by the merged companies. C. EQUITY: The pro forma adjustment reflects a reclassification of equity in connection with issuance of Company common stock to the PHH shareholders. D. SERVICES FEES: The pro forma adjustment offsets amounts billed (PHH revenue) to client corporations with expenses incurred (PHH expense) on behalf of client corporations. This adjustment is made to conform to the presentation expected to be used by the merged companies. E. FLEET MANAGEMENT: The pro forma adjustment reclassifies service fees generated from fee-based services provided to clients' vehicle fleets. This adjustment is made to conform to the presentation expected to be used by the merged companies. F. INTEREST EXPENSE--FLEET MANAGEMENT: The pro forma adjustment reclassifies interest expense on debt incurred to finance vehicle leasing activities. This adjustment is made to conform to the presentation expected to be used by the merged companies. G. DEPRECIATION AND AMORTIZATION: The pro forma adjustment reclassifies depreciation and amortization, other than depreciation on vehicles under operating leases, to a separate financial line to conform to the presentation expected to be used by the merged companies. H. INTEREST EXPENSE--REAL ESTATE SERVICES: The pro forma adjustment reclassifies the interest portion of the cost of carrying and reselling homes from selling general and administrative expense to interest expense. This adjustment is made to conform to the presentation expected to be used by the merged companies. I. WEIGHTED AVERAGE SHARES: The pro forma adjustment reflects the number of shares of Company common stock estimated to be issued by the Company in connection with the PHH Merger at an assumed $67.00 per share price. 11 SECTION II HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY EXCLUDING THE PHH MERGER The pro forma consolidated balance sheet as of September 30, 1996 is presented as if the following had occurred on September 30, 1996:(i) the acquisition of Avis, Inc. ("Avis") and issuance of Company common stock (the "Avis Offering") as partial consideration for Avis and; (ii) the acquisition of Resort Condominiums International, Inc. and its affiliates ("RCI") and the issuance of Company common stock as partial consideration for RCI. The Company currently intends to undertake an initial public offering of a majority interest in the corporation which owns all company-owned Avis car rental locations (the "Operating Company") in 1997 and to enter into franchise, information technology and other agreements to provide services to the Operating Company based on terms to be determined. Accordingly, the pro forma financial statements reflect the acquired net assets and results of operations of the Avis rental car operating subsidiary intended to be sold as "Investment in car rental operating company-net" and "Other revenue", respectively. The pro forma statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1995 and 1996 are presented as if the acquisitions of Avis and RCI and the following transactions had occurred on January 1, 1995: (i) the May 31, 1996 acquisition of the common stock of Coldwell Banker Corporation ("Coldwell Banker") and the related contribution of Coldwell Banker's owned real estate brokerage offices (the "Owned Brokerage Business") to an independent trust (the "Trust") (the "Coldwell Banker Transaction"); (ii) the receipt of proceeds from an offering of the Company's common stock (the "CB Offering") to the extent necessary to fund the acquisition of Coldwell Banker and the related repayment of indebtedness and acquisition expenses; (iii) the acquisitions of: the six non-owned Century 21 regions ("Century 21 NORS") during the second quarter of 1996, the Travelodge franchise system ("Travelodge") on January 23, 1996 and the Electronic Realty Associates franchise system ("ERA") on February 12, 1996 (collectively, the "Other 1996 Acquisitions"); and (iv) the February 22, 1996 issuance of $240 million of 4 3/4% convertible senior notes due 2003 to the extent such proceeds were used to finance the Other 1996 Acquisitions. The pro forma statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1995 are also presented as if the August 1, 1995 acquisition of Century 21 and the acquisition by merger (the "CCI Merger") in May 1995 of Central Credit Inc. ("CCI") had occurred on January 1, 1995. All of the aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been recorded at their estimated fair values which are subject to further refinement, including appraisals and other analyses, with appropriate recognition given to the effect of current interest rates and income taxes. Management does not expect that the final allocation of the purchase price for the above acquisitions will differ materially from the preliminary allocations. The Company has entered into certain immaterial transactions which are not reflected in the pro forma statements of operations. The pro forma consolidated financial statements do not purport to present the financial position or results of operations of the Company had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. In addition to the cost savings reflected in the pro forma consolidated statements of operations, the pro forma consolidated statements of operations do not reflect certain additional cost savings and revenue enhancements that management believes may be realized following the acquisitions. These savings are expected to be realized primarily through the restructuring of franchise services of the acquired companies as well as revenue enhancements expected through leveraging of the Company's preferred vendor programs. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that actually will be realized. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with (i) the consolidated financial statements and related notes of the Company included in its 1995 Annual Report on Form 10-K; (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 12 as amended by the Form 10-Q/A and September 30, 1996; and (iii) the financial statements and related notes of the acquired companies previously filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3-05, "Financial Statements of Businesses Acquired or to be Acquired." 13
SECTION II HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) HISTORICAL ------------------------------------- PRO FORMA ADJUSTMENTS -------------------------- HFS AVIS (1) RCI AVIS (A) RCI (B) PRO FORMA ----------- --------- --------- ---------- ------------ ---------- ASSETS Current assets Cash and cash equivalents $ 471,194 $ - $ 89,070 $ (367,166) $ (42,198) $ 150,900 Marketable securities - - 184,599 - (184,599) - Relocation receivables 136,052 - - - - 136,052 Other accounts and notes receivable, net 113,175 1,800 33,107 - - 148,082 Other current assets 59,081 1,881 22,836 - - 83,798 ----------- --------- --------- ---------- ----------- ----------- TOTAL CURRENT ASSETS 779,502 3,681 329,612 (367,166) (226,797) 518,832 ----------- --------- --------- ----------- ------------ ----------- Property and equipment-net 106,233 33,828 87,785 58,172 (45,000) 241,018 Franchise agreements-net 594,415 - - - - 594,415 Excess of cost over fair value of net assets acquired-net 1,339,836 - - - - 1,339,836 Intangible assets - 499,143 - 127,426 541,831 1,168,400 Investment in car rental operating company-net - (127,384) - 202,384 - 75,000 Deferred income taxes-net - - - 5,200 56,000 61,200 Other assets 80,064 59,633 40,936 (9,614) (33,203) 137,816 ----------- --------- --------- ----------- ------------ ----------- TOTAL ASSETS $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517 =========== ========= ========= =========== =========== ===========
Note: Certain reclassifications have been made to the historical results of HFS to conform with the Company's pro forma classification. (1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of August 31, 1996. See notes to pro forma consolidated balance sheet and statements of operations. 14
SECTION II HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) HISTORICAL ------------------------------------- PRO FORMA ADJUSTMENTS -------------------------- HFS AVIS (1) RCI AVIS (A) RCI (B) PRO FORMA ----------- --------- --------- ---------- ------------ ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and other accrued liabilities $ 160,357 $ 1,954 $ 80,996 $ - $ - $ 243,307 Deferred revenue 24,655 - 119,218 - - 143,873 Income taxes payable 81,633 182 - (182) - 81,633 Accrued acquisition obligations 40,287 - - 44,000 - 84,287 Current portion of long-term debt 29,907 - - 100,930 - 130,837 ----------- --------- --------- --------- --------- ------------- TOTAL CURRENT LIABILITIES 336,839 2,136 200,214 144,748 - 683,937 ----------- --------- --------- --------- --------- ------------- Long-term debt 534,264 - 3,536 - 285,000 822,800 Deferred revenue 7,299 - 185,703 - - 193,002 Other non-current liabilities 31,259 - 1,711 - - 32,970 Deferred income taxes 85,400 - - - - 85,400 Preferred stock - Avis, Inc. - 72,416 - (72,416) - - Redeemable portion of common stock-ESOP - 295,465 - (295,465) - - Unearned compensation-ESOP - (257,751) - 257,751 - - STOCKHOLDERS' EQUITY Participating convertible preferred stock - 132,000 - (132,000) - - Common stock 1,237 290 - (244) 10 1,293 Additional paid-in capital 1,705,541 220,401 16,189 117,972 50,776 2,110,879 Retained earnings 206,236 103,339 37,459 (103,339) (37,459) 206,236 Treasury stock (8,025) (102,269) - 102,269 8,025 - Net unrealized gain on available for sale of securities - - 13,521 - (13,521) - Foreign currency equity adjustment - 2,874 - (2,874) - - ----------- --------- --------- ---------- --------- ------------- TOTAL STOCKHOLDERS' EQUITY 1,904,989 356,635 67,169 (18,216) 7,831 2,318,408 ----------- --------- --------- ---------- --------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517 =========== ========= ========= ========== ========= =============
- -------------- Note: Certain reclassifications have been made to the historical results of HFS to conform with the Company's pro forma classification. (1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of August 31, 1996. See notes to pro forma consolidated balance sheet and statements of operations. 15 SECTION II HFS INCORPORATED AND SUBSIDIARIES CONSOLIDATED HISTORICAL BALANCE SHEET AS OF AUGUST 31, 1996 (IN THOUSANDS)
HISTORICAL RECLASSIFICATION AVIS, AVIS ADJUSTMENT AS ADJUSTED --------------- ---------------- ------------- ASSETS Current assets Cash and cash equivalents $ 75,683 $ (75,683) $ - Accounts and notes receivable, net 174,047 (172,247) 1,800 Vehicles, net 2,567,517 (2,567,517) - Due from affiliated company 114,976 (114,976) - Other current assets 45,296 (43,415) 1,881 Deferred income taxes 68,667 (68,667) - -------------- -------------- ------------- Total current assets 3,046,186 (3,042,505) 3,681 -------------- --------------- ------------- Property and equipment-net 151,854 (118,026) 33,828 Intangible assets-Avis 499,143 - 499,143 Investment in car rental operating company-net - (127,384) (127,384) Other assets 85,368 (25,735) 59,633 -------------- --------------- ------------- Total $ 3,782,551 $ (3,313,650) $ 468,901 ============== =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and other $ 444,867 $ (442,731) $ 2,136 -------------- --------------- ------------- Long-term debt 2,488,651 (2,488,651) - Public liability and property damage 215,135 (215,135) - Due to affiliated company 132,563 (132,563) - Other non-current liabilities Deferred income taxes 34,570 (34,570) - Preferred stock-Avis, Inc. 72,416 - 72,416 Redeemable portion of common stock - ESOP 295,465 - 295,465 Unearned compensation - ESOP (257,751) - (257,751) Stockholders' Equity Participating convertible preferred stock 132,000 - 132,000 Common stock 290 - 290 Additional paid-in capital 220,401 - 220,401 Retained earnings 103,339 - 103,339 Treasury stock (102,269) - (102,269) Foreign currency equity adjustment 2,874 - 2,874 -------------- --------------- ------------- Total stockholders' equity 356,635 - 356,635 -------------- --------------- ------------- Total $ 3,782,551 $ (3,313,650) $ 468,901 ============== =============== =============
- -------------- Note: The reclassification adjustment made to the historical balance sheet of Avis, Inc. is to present the historical net assets of car rental operations as "investment in car rental subsidiary-net". See notes to pro forma consolidated balance sheet and statements of operations. 16 SECTION II HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------- ACQUIRED PRO FORMA HFS (1) COMPANIES ADJUSTMENTS PRO FORMA ------------ ------------- ------------- --------------- NET REVENUES Service fees, net $ 229,671 $ 1,130,675 $ 25,950 (C) $ 834,038 (535,207) (D) (17,051) (E) Other 43,541 91,312 (4,421) 169,510 - - 39,078 (F) ------------ ------------- ------------ --------------- Net revenues 273,212 1,221,987 (491,651) 1,003,548 ------------ ------------- ------------- --------------- EXPENSES Selling, general and administrative 82,426 957,758 (66,317) (G) 452,491 (521,376) (H) Depreciation and amortization 30,857 66,522 38,940 (I) 136,319 Interest 21,789 12,553 19,192 (J) 53,534 Other 3,235 31,891 (1,599) 33,527 ------------ ------------- ------------- --------------- Total expenses 138,307 1,068,724 (531,160) 675,871 ------------ ------------- ------------- --------------- Income before income taxes and extraordinary loss 134,905 153,263 39,509 327,677 Provision for income taxes 55,175 56,368 23,700 (K) 135,243 ------------ ------------- ------------ --------------- Income before extraordinary loss 79,730 96,895 15,809 192,434 Extraordinary loss - 2,027 (2,027) - ------------ ------------- ------------- --------------- Net income $ 79,730 $ 94,868 $ 17,836 $ 192,434 ============ ============= ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .73 $ 1.38 ============ =============== Weighted average common and common equivalent shares outstanding 115,654 27,456 (L) 143,110 ============ ============ ===============
- ----------------- Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform with the Company's pro forma classification. The historical statement of income has been adjusted to reclassify $139,771 of marketing and reservations expenses against related service fees. See notes to pro forma consolidated balance sheet and statements of operations. 17 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------------------------------------------- AVIS (1) COLDWELL OTHER TOTAL AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL ----------- ---------- ---------- ------------ ---------- NET REVENUES Service fees, net $ 21,608 $ 295,183 $ 679,137 $ 134,747 $ 1,130,675 Other 41,200 - 20,264 29,848 91,312 ----------- ---------- ---------- ----------- ----------- Net revenues 62,808 295,183 699,401 164,595 1,221,987 ----------- ---------- ---------- ----------- ----------- EXPENSES Selling, general and administrative 7,205 205,637 616,182 128,734 957,758 Depreciation and amortization 19,683 15,931 22,425 8,483 66,522 Interest 461 536 5,329 6,227 12,553 Other 410 16,724 - 14,757 31,891 ----------- ---------- ---------- ----------- ----------- Total expenses 27,759 238,828 643,936 158,201 1,068,724 ----------- ---------- ---------- ----------- ----------- Income before income taxes and extraordinary loss 35,049 56,355 55,465 6,394 153,263 Provision for income taxes 23,977 4,464 24,385 3,542 56,368 ----------- ---------- ---------- ----------- ----------- Income before extraordinary loss 11,072 51,891 31,080 2,852 96,895 Extraordinary loss - - 2,027 - 2,027 ----------- ---------- ---------- ----------- ----------- Net income $ 11,072 $ 51,891 $ 29,053 $ 2,852 $ 94,868 =========== ========== ========== =========== ===========
- -------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's pro forma classification. (1) The historical financial statement of operations of Avis, as adjusted, has been adjusted to present only the historical results of operations intended to be retained by the Company. See Historical Consolidated Statement of Operations of Avis, Inc., as Adjusted, for the year ended February 29, 1996. See notes to pro forma consolidated balance sheet and statements of operations. 18 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC., AS ADJUSTED FOR THE YEAR ENDED FEBRUARY 29, 1996 (IN THOUSANDS)
ADJUSTMENTS ----------------------------------- RENTAL CAR AVIS, HISTORICAL RECLASSIFICATION SUBSIDIARY AS ADJUSTED -------------- ---------------- ------------- --------------- REVENUES $ 1,716,677 $ -- $ (1,653,869) $ 62,808 EXPENSES Selling, general and administrative 1,119,888 (16,865) (1,095,818) 7,205 Depreciation and amortization 411,796 16,404 (408,517) 19,683 Interest 149,534 461 (149,534) 461 Other 410 -- -- 410 ------------- ------------- ------------ ------------- Total expenses 1,681,628 -- (1,653,869) 27,759 ------------- ------------- ------------- ------------- Income before income taxes 35,049 -- -- 35,049 Provision for income taxes 23,977 -- -- 23,977 ------------- ------------- ------------ ------------- Net income $ 11,072 $ -- $ -- $ 11,072 ============= ============= ============ =============
- --------------- See notes to pro forma consolidated balance sheet and statements of operations. 19 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF OTHER ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
CENTURY CENTURY 21 CCI (1) 21 (1) NORS TRAVELODGE ERA TOTAL --------- --------- ----------- ----------- --------- ----- NET REVENUES Service fees, net $ - $ 60,506 $ 29,021 $ 18,361 $ 26,859 $ 134,747 Other 3,326 10,164 403 79 15,876 29,848 --------- --------- ----------- ----------- --------- --------- Net revenues 3,326 70,670 29,424 18,440 42,735 164,595 --------- --------- ----------- ----------- --------- --------- EXPENSES Selling, general and administrative - 57,241 25,763 15,604 30,126 128,734 Depreciation and amortization 529 5,217 578 8 2,151 8,483 Interest - 2,904 54 - 3,269 6,227 Other 1,917 2,751 - - 10,089 14,757 --------- --------- ----------- ----------- --------- --------- Total expenses 2,446 68,113 26,395 15,612 45,635 158,201 --------- --------- ----------- ----------- --------- --------- Income (loss) before income taxes 880 2,557 3,029 2,828 (2,900) 6,394 Provision for income taxes 313 2,097 - 1,132 - 3,542 --------- --------- ----------- ----------- --------- --------- Net income (loss) $ 567 $ 460 $ 3,029 $ 1,696 $ (2,900) $ 2,852 ========= ========= =========== =========== =========== =========
- --------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's pro forma classification. (1) Reflects results of operations for the period from January 1, 1995 to the respective dates of acquisition. See notes to pro forma consolidated balance sheet and statement of operations. 20 SECTION II HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 ------------- ------------- NET REVENUES Service fees, net $ 616,268 $ 691,711 Other 115,985 186,004 ------------- ------------- Net revenues 732,253 877,715 ------------- ------------- EXPENSES Selling, general and administrative 335,403 390,168 Depreciation and amortization 100,632 102,208 Interest 41,063 36,930 Other 22,328 16,259 ------------- ------------- Total expenses 499,426 545,565 ------------- ------------- Income before income taxes 232,827 332,150 Provision for income taxes 96,094 137,087 ------------- ------------- Net income $ 136,733 $ 195,063 ============= ============= PER SHARE INFORMATION (FULLY DILUTED) Net income $ 1.00 $ 1.35 ============= ============ Weighted average common and common equivalent shares outstanding 140,582 147,513 ============== =============
See notes to pro forma consolidated balance sheet and statements of operations. 21 SECTION II HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL --------------------------- ACQUIRED PRO FORMA HFS (1) COMPANIES ADJUSTMENTS PRO FORMA ---------- ----------- -------------- ------------ NET REVENUES Service fees, net $ 159,792 $ 862,148 $ 19,508 (C) $ 616,268 (411,795) (D) (13,385) (E) Other 30,869 53,318 31,798 (F) 115,985 ---------- ----------- ------------ ---------- Net revenues 190,661 915,466 (373,874) 732,253 ---------- ----------- ------------- ---------- EXPENSES Selling, general and administrative 49,472 730,298 (50,773) (G) 335,403 (393,594) (H) Depreciation and amortization 21,721 52,566 26,345 (I) 100,632 Interest 16,272 8,135 16,656 (J) 41,063 Other 2,012 21,018 (702) 22,328 ---------- ----------- ------------- ---------- Total expenses 89,477 812,017 (402,068) 499,426 ---------- ----------- ------------- ---------- Income before income taxes and extraordinary loss 101,184 103,449 28,194 232,827 Provision for income taxes 41,820 43,250 11,024 (K) 96,094 ---------- ----------- ------------ ---------- Income before extraordinary loss 59,364 60,199 17,170 136,733 Extraordinary loss - 2,027 (2,027) - ---------- ----------- ------------- ---------- Net income $ 59,364 $ 58,172 $ 19,197 $ 136,733 ========== =========== ============ ========== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .56 $ 1.00 ========== ========== Weighted average common and common equivalent shares outstanding 112,056 28,526 (L) 140,582 ========== ============ ==========
- ----------------- (1) The historical statement of income has been adjusted to reclassify $109,070 of marketing and reservation expenses against related service fees. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform with the Company's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 22 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL -------------------------------------------------------- AVIS (1) COLDWELL OTHER TOTAL AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL ----------- ---------- ---------- ------------ ----------- NET REVENUES Service fees, net $ 13,358 $ 222,627 $ 513,483 $ 112,680 $ 862,148 Other 21,652 - 3,972 27,694 53,318 ---------- ---------- ---------- ----------- ----------- Net revenues 35,010 222,627 517,455 140,374 915,466 ---------- ---------- ---------- ----------- ----------- EXPENSES Selling, general and administrative 7,106 154,227 458,785 110,180 730,298 Depreciation and amortization 14,253 12,698 17,272 8,343 52,566 Interest - 402 2,958 4,775 8,135 Other - 6,570 1,944 12,504 21,018 ---------- ---------- ---------- ----------- ----------- Total expenses 21,359 173,897 480,959 135,802 812,017 ---------- ---------- ---------- ----------- ----------- Income before income taxes and extraordinary loss 13,651 48,730 36,496 4,572 103,449 Provision for income taxes 21,644 1,940 16,422 3,244 43,250 ---------- ---------- ---------- ----------- ----------- Income (loss) before extraordinary loss (7,993) 46,790 20,074 1,328 60,199 Extraordinary loss - - 2,027 - 2,027 ---------- ---------- ---------- ----------- ----------- Net income (loss) $ (7,993) $ 46,790 $ 18,047 $ 1,328 $ 58,172 =========== ========== ========== =========== ===========
- -------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's pro forma classification. (1) The historical financial statement of operations of Avis, as adjusted, has been adjusted to present only the historical results of operations intended to be retained by the Company. See Historical Consolidated Statement of Operations of Avis, Inc., as Adjusted, for the nine months ended August 31, 1995. See notes to pro forma consolidated balance sheet and statements of operations. 23 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC. AS ADJUSTED FOR THE NINE MONTHS ENDED AUGUST 31, 1995 (IN THOUSANDS)
RENTAL CAR SUBSIDIARY AVIS HISTORICAL ADJUSTMENT AS ADJUSTED ------------ ------------- ------------ REVENUES $ 1,190,189 $ (1,155,179) $ 35,010 ------------ ------------- ----------- EXPENSES Selling, general and administrative 766,509 (759,403) 7,106 Depreciation and amortization 304,339 (290,086) 14,253 Interest 105,379 (105,379) - Other 311 (311) - ------------ ------------- ----------- Total expenses 1,176,538 (1,155,179) 21,359 ------------ ------------- ----------- Income before income taxes 13,651 - 13,651 Provision for income taxes 21,644 - 21,644 ------------ ------------ ----------- Net loss $ (7,993) $ - $ (7,993) ============= ============ ============
- --------------- See notes to pro forma consolidated balance sheet and statements of operations. 24 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF OTHER ACQUISITIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS)
CENTURY CENTURY 21 CCI (1) 21 (1) NORS TRAVELODGE ERA TOTAL --------- --------- ----------- ----------- --------- ----- NET REVENUES Service fees, net $ - $ 60,506 $ 20,750 $ 13,476 $ 17,948 $ 112,680 Other 3,326 10,164 288 59 13,857 27,694 --------- --------- ----------- ----------- --------- --------- Net revenues 3,326 70,670 21,038 13,535 31,805 140,374 --------- --------- ----------- ----------- --------- --------- EXPENSES Selling, general and administrative - 57,241 18,421 11,503 23,015 110,180 Depreciation and amortization 529 5,217 413 6 2,178 8,343 Interest - 2,904 38 - 1,833 4,775 Other 1,917 2,751 - - 7,836 12,504 --------- --------- ----------- ----------- --------- --------- Total expenses 2,446 68,113 18,872 11,509 34,862 135,802 --------- --------- ----------- ----------- --------- --------- Income (loss) before income taxes 880 2,557 2,166 2,026 (3,057) 4,572 Provision for income taxes 313 2,097 - 834 - 3,244 --------- --------- ----------- ----------- --------- --------- Net income (loss) $ 567 $ 460 $ 2,166 $ 1,192 $ (3,057) $ 1,328 ========= ========= =========== =========== =========== =========
- --------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's pro forma classification. (1) Reflects results of operations for the period from January 1, 1995 to the respective dates of acquisition. See notes to pro forma consolidated balance sheet and statement of operations. 25 SECTION II HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ----------------------------- ACQUIRED PRO FORMA HFS (1) COMPANIES ADJUSTMENTS PRO FORMA ---------- ------------ --------------- ------------- NET REVENUES Service fees, net $ 346,127 $ 584,215 $ 11,835 (C) $ 691,711 (235,625) (D) (14,841) (E) Other 81,733 78,084 26,187 (F) 186,004 ---------- ----------- ------------ ---------- Net revenues 427,860 662,299 (212,444) 877,715 ---------- ----------- ------------- ---------- EXPENSES Selling, general and administrative 148,287 525,245 (56,001) (G) 390,168 (227,363) (H) Depreciation and amortization 41,129 37,041 24,038 (I) 102,208 Interest 22,194 4,993 9,743 (J) 36,930 Other 10,988 5,616 (345) 16,259 ---------- ----------- ------------- ---------- Total expenses 222,598 572,895 (249,928) 545,565 ---------- ----------- ------------- ---------- Income before income taxes 205,262 89,404 37,484 332,150 Provision for income taxes 82,630 21,904 32,553 (K) 137,087 ---------- ----------- ------------ ---------- Net income $ 122,632 $ 67,500 $ 4,931 $ 195,063 ========== =========== ============ ========= PER SHARE INFORMATION (FULLY DILUTED) Net income $ .96 - - $ 1.35 ========== ========== Weighted average common and common equivalent shares outstanding 131,684 - 15,829 (L) 147,513 ========== ============ ==========
- --------------- (1) The historical statement of income has been adjusted to reclassify $122,150 of marketing and reservation expenses against related service fees. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform with the Company's pro forma classification. See notes to pro forma consolidated balance sheet and statement of operations. 26 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS)
HISTORICAL ------------------------------------------------------------ OTHER AVIS (1) COLDWELL 1996 (2) TOTAL AS ADJUSTED RCI BANKER (2) ACQUISITIONS HISTORICAL -------------- ---------- ----------- ------------ ---------- NET REVENUES Service fees, net $ 26,871 $ 251,516 $ 295,478 $ 10,350 $ 584,215 Other 72,366 - 4,067 1,651 78,084 ---------- ---------- ----------- ----------- ----------- Net revenues 99,237 251,516 299,545 12,001 662,299 ---------- ---------- ----------- ----------- ----------- EXPENSES Selling, general and administrative 20,173 181,489 312,348 11,235 525,245 Depreciation and amortization 14,247 13,352 9,021 421 37,041 Interest - 345 3,155 1,493 4,993 Other - 4,340 512 764 5,616 ---------- ---------- ----------- ----------- ----------- Total expenses 34,420 199,526 325,036 13,913 572,895 ---------- ---------- ----------- ----------- ----------- Income (loss) before income taxes 64,817 51,990 (25,491) (1,912) 89,404 Provision (benefit) for income taxes 29,966 2,370 (10,432) - 21,904 ---------- ---------- ------------ ----------- ----------- Net income (loss) $ 34,851 $ 49,620 $ (15,059) $ (1,912) $ 67,500 ========== ========== ============ ============ ===========
- --------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) The historical financial statements of operations of Avis, as adjusted, has been adjusted to include the historical results of Avis operations intended to be retained by the Company and the operating results of the Avis Car rental subsidiary, included in Other Revenue. See Historical Consolidated Statement of Operations of Avis, Inc., as Adjusted for the nine months ended August 31, 1996. (2) Reflects results of operations for the period from January 1, 1996 to the respective dates of acquisition. See notes to pro forma consolidated balance sheet and statement of operations. 27 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC., AS ADJUSTED FOR THE NINE MONTHS ENDED AUGUST 31, 1996 (IN THOUSANDS)
RENTAL CAR SUBSIDIARY AVIS HISTORICAL ADJUSTMENT AS ADJUSTED ------------- ------------- ------------- REVENUES $ 1,490,709 $ (1,391,472) $ 99,237 ------------- ------------- ------------ EXPENSES Selling, general and administrative 975,769 (955,596) 20,173 Depreciation and amortization 333,147 (318,900) 14,247 Interest 116,958 (116,958) - Other 18 (18) - ------------- -------------- ------------- Total expenses 1,425,892 (1,391,472) 34,420 ------------- -------------- ------------- Income before income taxes 64,817 - 64,817 Provision for income taxes 29,966 - 29,966 ------------- ------------- ------------- Net income $ 34,851 $ - $ 34,851 ============= ============= =============
- --------------- See notes to pro forma consolidated balance sheet and statements of operations. 28 SECTION II HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF OTHER 1996 ACQUISITIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS)
CENTURY 21 NORS (1) TRAVELODGE (1) ERA (1) TOTAL ----------- -------------- ----------- ------------ NET REVENUES Service fees, net $ 6,668 $ 688 $ 2,994 $ 10,350 Other 449 - 1,202 1,651 ---------- -------------- ---------- ------------ Net revenues 7,117 688 4,196 12,001 ---------- -------------- ---------- ------------ EXPENSES Selling, general and administrative 7,566 552 3,117 11,235 Depreciation and amortization 285 - 136 421 Interest 2 - 1,491 1,493 Other - - 764 764 ---------- -------------- ---------- ------------ Total expenses 7,853 552 5,508 13,913 ---------- -------------- ---------- ------------ Income (loss) before income taxes (736) 136 (1,312) (1,912) Provision for income taxes - - - - ---------- -------------- ---------- ------------ Net income (loss) $ (736) $ 136 $ (1,312) $ (1,912) =========== ============== =========== =============
- --------------- Note: Certain reclassifications have been made to the historical results of acquired companies to conform with the Company's classification. (1) Reflects results of operations for the period from January 1, 1996 to the respective date of acquisition. See notes to pro forma consolidated balance sheet and statements of operations. 29 HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS A. ACQUISITION OF AVIS: The purchase price for Avis has been allocated to assets acquired and liabilities assumed at their estimated fair values. Pro forma adjustments consist of the elimination of certain acquired assets and assumed liabilities, net of the fair value ascribed to such assets and liabilities. The Company acquired Avis for the following consideration ($000's):
Cash consideration (i) $ 367,166 Issuance of approximately 4.6 million shares of Company common stock 338,419 Issuance of note to ESOP 100,930 ------------- TOTAL PRO FORMA ACQUISITION COST 806,515 ------------- Fair value of net assets acquired: Historical book value of acquired company 356,635 Elimination of net assets (liabilities) not acquired or assumed: Other assets (9,614) Preferred stock - Avis 72,416 Intangible assets - Avis (499,143) Redeemable portion of common stock - ESOP 295,465 Unearned compensation - ESOP (257,751) Fair value adjustments to assets acquired and liabilities assumed: Deferred income tax asset, net (ii) 5,200 Property and equipment 58,172 Investment in car rental operating company 202,384 Accrued acquisition obligations (44,000) Other 182 ------------- FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED 179,946 ------------- Intangible assets-Avis (iii) $ 626,569 =============
(i) The cash consideration of the pro forma acquisition cost was financed by the Second Quarter 1996 Offering. (ii) The pro forma adjustment to deferred income taxes recorded in connection with the acquisition results from differences in the fair values of assets acquired and liabilities assumed and their respective income tax bases. (iii) The Company has not completed the valuation of identifiable intangible assets. 30 A. ACQUISITION OF AVIS (CONTINUED) The pro forma adjustments include the elimination of Avis stockholders' equity and the issuance of approximately 4.6 million shares of the Company's common stock to finance the acquisition.
STOCKHOLDERS' EQUITY ------------------------------------------------- ISSUANCE OF ELIMINATION OF ADJUSTMENT TO COMPANY STOCKHOLDERS' STOCKHOLDERS' COMMON STK. EQUITY EQUITY -------------- -------------- -------------- Participating convertible preferred stock $ - $ 132,000 $ (132,000) Common stock 46 290 (244) Additional paid-in capital 338,373 220,401 117,972 Retained earnings - 103,339 (103,339) Treasury stock - (102,269) 102,269 Foreign currency equity adjustment - 2,874 (2,874) ---------- ------------ ------------ $ 338,419 $ 356,635 $ (18,216) ========== ============ =============
B. ACQUISITION OF RCI: The purchase price for RCI has been allocated to assets acquired and liabilities assumed at their estimated fair values. Pro forma adjustments consist of the elimination of certain acquired assets and assumed liabilities, net of the fair value ascribed to such assets and liabilities. The Company acquired RCI for the following consideration ($000's):
Cash (i) $ 265,000 Borrowings under the Company's Revolving Credit Facilities 285,000 Issuance of approximately one million shares of Company common stock (ii) 75,000 ------------------------------- Total pro forma acquisition cost $ 625,000 Fair value of net assets acquired is as follows: Historical book value of RCI $ 67,169 Fair value adjustments to assets acquired and liabilities assumed: Property and equipment (45,000) Other non-current assets 5,000 Deferred income taxes - non -current (iii) 56,000 ------------------------------ Fair value of net assets acquired 83,169 ------------- Intangible assets - RCI (iv) $ 541,831 =============
(i) Cash consideration is comprised of $185 million in marketable securities, $38 million in notes not acquired and $42 million of acquired RCI cash. (ii) The number of shares of Company common stock issued in connection with the acquisition was calculated using a $75.0375 per share stock price. (iii) The pro forma adjustment to deferred income taxes recorded is the fair value of unearned income liabilities assumed and the respective income tax basis. (iv) The Company has not completed the valuation of identifiable intangible assets. 31 B. ACQUISITION OF RCI (continued)
STOCKHOLDERS' EQUITY ------------------------------------------------ ISSUANCE OF ELIMINATION OF ADJUSTMENT TO COMPANY STOCKHOLDERS' STOCKHOLDERS' COMMON STK. EQUITY EQUITY ------------- -------------- ------------- Common stock $ 10 $ - $ 10 Additional paid-in capital 66,965 (16,189) 50,776 Retained earnings - (37,459) (37,459) Treasury stock 8,025 - 8,025 Net unrealized gain on available for sale of securities - (13,521) (13,521) ---------- ------------- ------------- $ 75,000 $ (67,169) $ 7,831 ========== ============= ============
The pro forma adjustments include the elimination of RCI stockholders' equity and the issuance of approximately one million shares of the Company's common stock as partial consideration for RCI. C. SERVICE FEE REVENUE: The pro forma adjustment reflects the elimination of franchise revenue associated with discontinued Century 21 international based operations, the elimination of franchise revenue paid by the Century 21 NORS to Century 21 under sub-franchise agreements and the addition of franchise fees to be received under franchise contracts with owned brokerage offices upon contribution of the Owned Brokerage Business to the Trust. Pro forma adjustments to franchise revenue consists of the following:
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ ----------- ----------- 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 ========== ========== ==========
D. SERVICE FEE REVENUE: The pro forma adjustment reflect the elimination of revenue generated from Coldwell Banker's 318 formerly owned brokerage offices. The Company contributed the net assets of the Owned Brokerage Business to the Trust upon consummation of the Coldwell Banker acquisition. The free cash flow of the Trust will be expended at the discretion of the trustees to enhance the growth of funds available for advertising and promotion. E. SERVICE FEE REVENUE: The pro forma adjustment reflects the elimination of revenue associated with investment income generated from RCI cash and marketable securities which were used by the Company as partial consideration for the RCI acquisition. 32 F. OTHER REVENUE: The pro forma adjustment is comprised of the following:
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ADJUSTMENTS TO RENTAL CAR OPERATIONS: 1995 1995 1996 ------------------- ----------- ------------ Elimination of historical expense associated with: Long-term incentive compensation plans $ 4,700 $ - $ 9,302 Unfavorable vehicle leases 33,411 30,478 15,488 Depreciation and amortization 31,869 23,208 26,120 Addition of pro forma expenses associated with: Depreciation and amortization of property, equipment and other intangibles (22,898) (17,174) (17,174) Increased financing costs (8,004) (4,714) (1,549) ------------- ---------- ----------- Total adjustments to rental car operations 39,078 31,798 32,187 OTHER ADJUSTMENT: Elimination of historical interest income related to cash consideration portion of Avis Acquisition (i) - - (6,000) ------------ ---------- ------------ Total $ 39,078 $ 31,798 $ 26,187 ============ ========== ===========
(i) The pro forma adjustment eliminates historical interest income on the portion of cash generated from the Second Quarter 1996 Offering which was used as consideration in the Avis Acquisition. G. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: The pro forma adjustments eliminate redundant costs associated with the restructuring of franchise services and other businesses and the resulting termination of certain functions and positions in connection with company acquisitions. Adjustments are comprised of the following ($000's): For the year ended December 31, 1995:
CENTURY COLDWELL CENTURY 21 21 RCI BANKER NORS TRAVELODGE ERA TOTAL --------- -------- ------- ----------- ----------- --------- -------- Payroll and related $ 10,885 $ 1,198 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 38,817 Professional 2,693 1,000 1,500 1,486 154 387 7,220 Occupancy 3,628 - - 2,754 186 1,172 7,740 Franchise fees (Note B) - - - 4,500 - - 4,500 Other 3,128 2,900 (1,517) 2,326 167 1,036 8,040 -------- -------- -------- ----------- --------- --------- -------- Total $ 20,334 $ 5,098 $10,665 $ 18,772 $ 1,617 $ 9,831 $ 66,317 ======== ======== ======= =========== ========= ========= ========
33 For the nine months ended September 30, 1995:
CENTURY COLDWELL CENTURY 21 21 RCI BANKER NORS TRAVELODGE ERA TOTAL --------- -------- ------- ----------- ----------- --------- ----- Payroll and related $ 10,885 $ 914 $ 9,830 $ 5,354 $ 502 $ 1,526 $ 29,011 Professional 2,693 750 1,573 1,063 70 - 6,149 Occupancy 3,628 - - 1,944 84 666 6,322 Franchise fees (Note B) - - - 3,375 - - 3,375 Other 3,128 1,275 (1,072) 1,528 74 983 5,916 -------- -------- -------- ----------- --------- --------- -------- Total $ 20,334 $ 2,939 $10,331 $ 13,264 $ 730 $ 3,175 $ 50,773 ======== ======== ======= =========== ========= ========= ========
For the nine months ended September 30, 1996:
COLDWELL CENTURY 21 RCI BANKER NORS TRAVELODGE ERA TOTAL -------- -------- ---------- ----------- ---------- --------- Payroll and related $ 880 $ 5,462 $ 2,425 $ 25 $ 222 $ 9,014 Stock option expense - 40,801 - - - 40,801 Professional 750 1,055 705 4 - 2,514 Occupancy - - 604 4 102 710 Franchise fees (Note B) - - 1,003 - - 1,003 Other 1,333 (604) 1,069 4 157 1,959 ------- -------- --------- ----------- ---------- --------- Total $ 2,963 $46,714 $ 5,806 $ 37 $ 481 $ 56,001 ======= ======= ========= =========== ========== =========
H. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: The pro forma adjustment reflects the elimination of expenses associated with Coldwell Banker's formerly owned brokerage offices (See Note D). I. DEPRECIATION AND AMORTIZATION: The pro forma adjustment for depreciation and amortization is comprised of ($000's): For the year ended December 31, 1995:
CCI CENTURY COLDWELL OTHER 1996 MERGER 21 RCI AVIS BANKER ACQUISITIONS TOTAL -------- --------- ------ -------- -------- ------------ ----- Elimination of historical expense $ (529) $ (5,217) $(14,193) $(19,683) $(22,425) $ (2,737) $(64,784) Property, equipment and furniture and fixtures 100 534 4,623 12,400 1,295 - 18,952 Information data base 375 - - - - - 375 Intangible assets 289 3,669 27,211 20,327 25,877 7,024 84,397 ------- -------- -------- ------- ------- --------- -------- Total $ 235 $ (1,014) $ 17,641 $13,044 $ 4,747 $ 4,287 $ 38,940 ======= ========= ======== ======= ======= ========= ========
34 For the nine months ended September 30, 1995:
CCI CENTURY COLDWELL OTHER 1996 MERGER 21 RCI AVIS BANKER ACQUISITIONS TOTAL -------- --------- ------ -------- -------- ------------ ----- Elimination of historical expense $ (529) $ (5,217) $(12,698) $(14,253) $(17,272) $ (2,597) $(52,566) Property, equipment and furniture and fixtures 100 534 3,467 9,300 972 - 14,373 Information data base 375 - - - - - 375 Intangible assets 289 3,669 20,285 15,246 19,408 5,266 64,163 ------- -------- -------- ------- ------- --------- -------- Total $ 235 $ (1,014) $ 11,054 $10,293 $ 3,108 $ 2,669 $ 26,345 ======= ========= ======== ======= ======= ========= ========
For the nine months ended September 30, 1996:
COLDWELL OTHER 1996 RCI AVIS BANKER ACQUISITIONS TOTAL --------- --------- ----------- -------------- ----------- Elimination of historical expense $(13,352) $(14,247) $ (9,021) $ (421) $ (37,041) Property, equipment and furniture and fixtures 3,467 9,300 540 - 13,307 Intangible assets 20,285 15,246 10,775 1,466 47,772 ------- ------- ---------- ----------- ---------- Total $10,400 $10,299 $ 2,294 $ 1,045 $ 24,038 ======= ======= ========== =========== ==========
CCI Merger The estimated fair values of CCI's information data base, property and equipment and excess of cost over fair value of net assets acquired are $7.5 million, $1.0 million and $33.8 million, respectively, and are amortized on a straight-line basis over the periods to be benefited which are ten , five and forty years, respectively. The benefit periods associated with the excess cost over fair value of net assets acquired were determined based on CCI's position as the dominant provider of gambling patron credit information services since 1956, its ability to generate operating profits and expansion of its customer base and the longevity of the casino gaming industry. Century 21 The estimated fair values of Century 21 property and equipment, franchise agreements and excess cost over fair value of net assets acquired are $5.5 million, $33.5 million and $140.0 million, respectively, and are amortized on a straight-line basis over the periods to be benefited which are seven, twelve and forty years, respectively. The benefit periods associated with the excess cost over fair value of net assets acquired were determined based on Century 21's position as the world's largest franchisor of residential real estate brokerage offices, the most recognized brand name in the residential real estate brokerage industry and the longevity of the residential real estate brokerage business. RCI The fair value of RCI's property and equipment is estimated at approximately $37 million and is amortized on a straight line basis over the estimated useful lives, ranging from seven to thirty years. RCI's intangible assets consist of customer lists and excess of cost over fair value of net assets acquired. The estimated fair value of such intangible assets is approximately $542 million and is amortized on a straight-line basis over the periods to be benefited. The excess of cost over fair value of net assets acquired was determined to have a benefit period of forty years, which was based on RCI being a leading provider of services to the timeshare industry, which includes being the world's largest provider of timeshare exchange programs. 35 Avis The estimated fair value of Avis' property and equipment intended to be retained by the Company, is $92 million, comprised primarily of a reservation system and related assets. Such property and equipment is amortized on a straight-line basis over the estimated benefit periods ranging from five to eight years. The estimated fair values of Avis' intangible assets, comprised principally of excess of cost over fair value of net assets acquired, are $627 million and are amortized on a straight-line basis over the respective assets benefit periods which range between ten to forty years. The excess of cost over fair value of net assets acquired was determined to have a benefit period of forty years, which was based on Avis' position as the second largest car rental system in the world, the recognition of its brand name in the car rental industry and the longevity of the car rental business. Coldwell Banker The estimated fair value of Coldwell Banker's property and equipment (excluding land) of $16.7 million, is amortized on a straight-line basis over the estimated benefit periods ranging from five to twenty-five years. The estimated fair value of Coldwell Banker's intangible assets, comprised of franchise agreements and excess of cost over fair value of net assets acquired, is $768.4 million and is amortized on a straight-line basis over the periods to be benefited. The excess of cost over fair value of net assets acquired was determined to have a benefit period of forty years, which was based on Coldwell Banker's position as the largest gross revenue producing real estate company in North American, the recognition of its brand name in the real estate brokerage industry and the longevity of the real estate brokerage business. Other 1996 Acquisitions The estimated fair values of Other 1996 Acquisitions franchise agreements aggregate $61.0 million and are being amortized on a straight line basis over the periods to be benefited, which range from twelve to thirty years. The estimated fair values of Other Acquisitions excess of cost over fair value of net assets acquired aggregate $164.2 million and are each being amortized on a straight line basis over the periods to benefited which are forty years. J. INTEREST EXPENSE:
For the Year Ended For the Nine Months Ended December 31, September 30, 1995 1995 1996 ------------------ ----------- ----------- Elimination of historical interest expense of: Century 21 $ (2,904) $ (2,904) $ - Other 1996 Acquisitions (3,323) (1,871) (1,493) RCI (536) (402) (345) Reversal of Coldwell Banker (5,329) (2,958) (3,155) Century 21 2,835 2,835 - RCI 17,955 13,466 13,466 Minority interest - preferred dividends 1,796 1,796 - 4 3/4% Notes to finance Other 1996 Acquisitions 8,698 6,694 1,270 ---------- ---------- ---------- Total $ 19,192 $ 16,656 $ 9,743 ========== ========== ==========
36 Century 21 The pro forma adjustment reflects the recording of interest expense on $60 million of borrowings under the Company's revolving credit facility at an interest rate 6.3%. Borrowings represent the amount necessary to finance the initial cash purchase price net of $10.2 million of acquired cash. Coldwell Banker The pro forma adjustment reflects the reversal of interest expense relating to the following ($000's):
For the Year Ended For the Nine Months Ended December 31, September 30, 1995 1995 1996 ------------------ ----------- ----------- Expense associated with the Owned Brokerage Business $ 138 $ 72 $ (179) Expense associated with revolving credit facility borrowings which will be repaid with proceeds from offering 5,191 2,886 3,334 ----------- ----------- ----------- Total $ 5,329 $ 2,958 $ 3,155 =========== =========== ===========
RCI The pro forma adjustment reflects the recording of interest expense on $285 million of borrowings under the Company's revolving credit facilities at an interest rate of 6.3%. Borrowings represent the amount used as partial consideration in the RCI acquisition. Minority interest - preferred dividends: The pro forma adjustment represents dividends on the redeemable Series A Adjustable Rate Preferred Stock of Century 21. 4-3/4% Notes The pro forma adjustment reflects interest expense and amortization of deferred financing costs related to the February 22, 1996 issuance of the 4-3/4% Notes to the extent that such proceeds were used to finance the Other 1996 Acquisitions. K. INCOME TAXES: The pro forma adjustment to income taxes is comprised of ($000's):
For the Year Ended For the Nine Months Ended December 31, September 30, 1995 1995 1996 ------------------ ----------- ----------- Reversal of historical (provision) benefit of: Company $ (55,175) $ (41,820) $ (82,630) CCI (313) (313) - Century 21 (2,097) (2,097) - RCI (4,464) (1,940) (2,370) Avis (23,977) (21,644) (29,966) Coldwell Banker (24,385) (16,422) 10,432 Travelodge (1,132) (834) - Pro forma provision 135,243 96,094 137,087 ---------- ---------- ---------- Total $ 23,700 $ 11,024 $ 32,553 ========== ========== ==========
37 The pro forma effective tax rates are approximately 1% higher than the Company's historical effective tax rates due to non-deductible excess of cost over fair value of net assets acquired to be recorded in connection with the acquisitions of Avis and RCI. L. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: The pro forma adjustment to weighted average shares consists of the following (000's):
For The Year Ended For the Nine Months Ended December 31, September 30, 1995 1995 1996 ------------------ ----------- ----------- CCI 896 1,180 - Century 21 2,334 3,120 - Avis Offering 4,569 4,569 4,569 RCI 1,000 1,000 1,000 Second Quarter 1996 Offering - Coldwell Banker 12,838 12,838 7,122 Second Quarter 1996 Offering - Avis 4,896 4,896 2,720 Century 21 NORS 923 923 418 ----------- ----------- ----------- Total 27,456 28,526 15,829 =========== =========== ===========
The unaudited Pro Forma Consolidated Statements of Operations are presented as if the acquisitions took place at the beginning of the periods presented; thus, the stock issuances referred to above are considered outstanding as of the beginning of the period for purposes of per share calculations. 38 SECTION III HFS Incorporated and Subsidiaries COMBINING HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE PHH MERGER On November 10, 1996, the Company entered into a definitive merger agreement (the "PHH Merger") pursuant to which the Company will issue approximately $1.7 billion of Company common stock in exchange for all of the outstanding common stock of PHH Corporation ("PHH"). The accompanying combining consolidated financial statements give effect to the business combination of the Company and PHH which will be accounted for as a pooling of interests. Accordingly, the underlying consolidated combining balance sheet as of September 30, 1996 and the consolidated combining statements of income for each of the years ended December 31, 1993, 1994 and 1995, and each of the nine month periods ended September 30, 1995 and 1996, reflects the combining of the historical financial results of PHH Corporation with and into the historical consolidated financial results of the Company. The Company expects to recognize a one-time charge related to transaction and business combination costs in connection with the PHH Merger, which is not reflected in the combining statements of income. Additionally, the combining historical consolidated financial statements reflect adjustments for the pooling of the Company and PHH including reclassifications to conform accounting policies and shares issued as consideration in connection with the PHH merger. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with (i) the consolidated financial statements and related notes of the Company included in its 1995 Annual Report on Form 10-K (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996; and (iii) the consolidated financial statements of PHH Corporation included elsewhere in this report. 39 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS)
PAGE 1 OF 2 HISTORICAL ------------------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ----------- ASSETS Current assets Cash and cash equivalents $ 471,194 $ 11,450 $ - $ 482,644 Relocation receivables 136,052 666,905 - 802,957 Other accounts and notes receivable, net 113,175 442,951 - 556,126 Other current assets 59,081 58,916 - 117,997 -------------- ------------- ------------- ------------- TOTAL CURRENT ASSETS 779,502 1,180,222 - 1,959,724 -------------- ------------- ------------- ------------- Property and equipment-net 106,233 92,846 - 199,079 Franchise agreements-net 594,415 - - 594,415 Excess of cost over fair value of net assets acquired-net 1,339,836 47,656 - 1,387,492 Other assets 80,064 125,384 - 205,448 -------------- ------------- ------------- ------------- TOTAL 2,900,050 1,446,108 - 4,346,158 -------------- ------------- ------------- ------------- ASSETS UNDER VEHICLE MANAGEMENT AND MORTGAGE PROGRAMS Net investment in leases and leased vehicles - 3,285,721 - 3,285,721 Mortgage loans held for sale - 872,404 - 872,404 Mortgage servicing rights & fees - 280,344 - 280,344 -------------- ------------- ------------- ------------- TOTAL - 4,438,469 - 4,438,469 -------------- ------------- ------------- ------------- TOTAL ASSETS $ 2,900,050 $ 5,884,577 $ - $ 8,784,627 ============== ============= ============= =============
- ------------- (1) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 40 PAGE 2 OF 2 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS)
HISTORICAL ------------------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other accrued liabilities $ 160,357 $ 418,143 $ 76,651 (A) $ 655,151 Deferred revenue - net 24,655 - - 24,655 Income taxes payable 81,633 - - 81,633 Accrued acquisition obligations 40,287 - - 40,287 Current portion of long-term debt 29,907 - - 29,907 -------------- ------------- ------------- ------------- TOTAL CURRENT LIABILITIES 336,839 418,143 76,651 831,633 -------------- ------------- ------------- ------------- Long-term debt 534,264 - 584,796 (B) 1,119,060 Deferred revenue 7,299 114,021 (76,651) (A) 44,669 Other non-current liabilities 31,259 - - 31,259 Deferred income taxes 85,400 - - 85,400 -------------- ------------- ------------- ------------- TOTAL 995,061 532,164 584,796 2,112,021 -------------- ------------- ------------- ------------- LIABILITIES UNDER VEHICLE MANAGEMENT AND MORTGAGE PROGRAMS Debt - 4,476,805 (584,796) 3,892,009 Deferred income taxes - 221,700 - 221,700 -------------- ------------- ------------- ------------- Total - 4,698,505 (584,796) 4,113,709 -------------- ------------- ------------- ------------- STOCKHOLDERS' EQUITY Common stock 1,237 99,820 (99,563) (C) 1,494 Additional paid-in capital 1,705,541 - 99,563 (C) 1,805,104 Retained earnings 206,236 568,400 - 774,636 Treasury stock (8,025) - - (8,025) Foreign currency equity adjustment - (14,312) - (14,312) -------------- -------------- ------------- -------------- TOTAL STOCKHOLDERS' EQUITY 1,904,989 653,908 - 2,558,897 -------------- ------------- ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 5,884,577 $ - $ 8,784,627 ============== ============= ============= =============
- ------------- (1) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 41 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------- PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 128,489 $ - $ 188,060 (E) $ 316,549 Real estate services - 824,872 (602,965) (D) 221,907 Mortgage services - 150,414 - 150,414 ------------ ------------ ------------- --------------- Service fees, net 128,489 975,286 (414,905) 688,870 ------------ ------------ ------------- --------------- Fleet management - 1,140,557 (188,060) (E) 952,497 Depreciation on vehicles under operating leases - (790,864) - (790,864) Interest - - (111,939) (F) (111,939) ------------ ------------ ------------- ---------------- Fleet management, net - 349,693 (299,999) 49,694 ------------ ------------ ------------- --------------- Other 11,881 - - 11,881 ------------ ------------ ------------ --------------- Net revenues 140,370 1,324,979 (714,904) 750,445 ------------ ------------ ------------ --------------- EXPENSES Selling, general and administrative 40,315 293,161 (20,147) (G) 313,329 Costs, including interest, of carrying and reselling homes - 728,634 (602,965) (D) 84,981 (36,113) (H) (4,575) (G) Direct costs of mortgage services - 56,557 (30,080) (G) 26,477 ------------ ------------ ------------- --------------- Total selling, general and administrative 40,315 1,078,352 (693,880) 424,787 Depreciation and amortization 19,153 - 54,802 (G) 73,955 Interest 20,234 139,684 (111,939) (F) 84,092 36,113 (H) ------------ ------------ ------------- --------------- Total expenses 79,702 1,218,036 (714,904) 582,834 ------------ ------------ ------------- --------------- Income before income taxes and extraordinary loss 60,668 106,943 - 167,611 Provision for income taxes 26,345 43,917 - 70,262 ------------ ------------ ------------- --------------- Income before extraordinary loss 34,323 63,026 - 97,349 Extraordinary loss 12,845 - - 12,845 ------------ ------------ ------------- --------------- Net income $ 21,478 $ 63,026 $ - $ 84,504 ============ ============ ============= =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .21 $ .67 ============ =============== Weighted average common and common equivalent shares outstanding 100,228 25,700 (I) 125,928 ============ ============= ===============
- ---------------- (1) The historical statement of income has been adjusted to reclassify $116,700 of marketing and reservation expenses against related service fees. (2) The historical statement of operations of PHH is for the twelve months ended January 31, 1994. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 42 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------- PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 152,976 $ - $ 202,031 (E) $ 355,007 Real estate services - 705,146 (478,726) (D) 226,420 Mortgage services - 127,551 - 127,551 ------------ ------------ ------------ --------------- Service fees, net 152,976 832,697 (276,695) 708,978 ------------ ------------ ------------ --------------- Fleet management - 1,225,815 (202,031) (E) 1,023,784 Depreciation on vehicles under operating leases - (849,523) - (849,523) Interest (126,721) (F) (126,721) ------------ ------------- ------------ ---------------- Fleet management, net - 376,292 (328,752) 47,540 ------------ ------------ ------------- --------------- Other 29,303 - - 29,303 ------------ ------------ ------------ --------------- Net revenues 182,279 1,208,989 (605,447) 785,821 ------------ ------------ ------------ --------------- EXPENSES Selling, general and administrative 46,018 295,345 (26,230) (G) 315,133 Costs, including interest, of carrying and reselling homes - 595,900 (478,726) (D) 93,422 (19,993) (H) (3,759) (G) Direct costs of mortgage services - 41,221 (20,284) (G) 20,937 ------------ ------------ ------------- --------------- Total selling, general and administrative 46,018 932,466 (548,992) 429,492 Depreciation and amortization 23,723 - 50,273 (G) 73,996 Interest 18,685 159,765 (126,721) (F) 71,722 19,993 (H) Other 3,210 - - 3,210 ------------ ------------ ------------ --------------- Total expenses 91,636 1,092,231 (605,447) 578,420 ------------ ------------ ------------- --------------- Income before income taxes 90,643 116,758 - 207,401 Provision for income taxes 37,154 47,714 - 84,868 ------------ ------------ ------------ --------------- Net income $ 53,489 $ 69,044 $ - $ 122,533 ============ ============ ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .53 $ .97 ============ =============== Weighted average common and common equivalent shares outstanding 100,874 25,700 (I) 126,574 ============ ============= ===============
- ----------------- (1) The historical statement of income has been adjusted to reclassify $130,268 of marketing and reservation expenses against related service fees. (2) The historical statement of operations of PHH is for the twelve months ended January 31, 1995. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statement. 43 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------- PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 229,671 $ - $ 203,390 (E) $ 433,061 Real estate services - 782,727 (532,573) (D) 250,154 Mortgage services - 173,787 - 173,787 ------------ ------------ ------------- --------------- Service fees, net 229,671 956,514 (329,183) 857,002 ------------ ------------ ------------- --------------- Fleet management - 1,347,870 (203,390) (E) 1,144,480 Depreciation on vehicles under operating leases - (929,341) - (929,341) Interest (159,652) (F) (159,652) ------------ ------------- ------------- ---------------- Fleet management, net - 418,529 (363,042) 55,487 ------------ ------------ ------------- --------------- Other 43,541 - - 43,541 ------------ ------------ ------------ --------------- Net revenues 273,212 1,375,043 (692,225) 956,030 ------------ ------------ ------------ --------------- EXPENSES Selling, general and administrative 82,426 310,567 (29,692) (G) 363,301 Costs, including interest, of carrying and reselling homes - 658,498 (532,573) (D) 97,324 (25,972) (H) (2,629) (G) Direct costs of mortgage services - 60,498 (30,667) (G) 29,831 ------------ ------------ ------------ --------------- Total selling, general and administrative 82,426 1,029,563 (621,533) 490,456 Depreciation and amortization 30,857 - 62,988 (G) 93,845 Interest 21,789 212,365 (159,652) (F) 100,474 25,972 (H) Other 3,235 - - 3,235 ------------ ------------ ------------ --------------- Total expenses 138,307 1,241,928 (692,225) 688,010 ------------ ------------ ------------- --------------- Income before income taxes 134,905 133,115 - 268,020 Provision for income taxes 55,175 54,995 - 110,170 ------------ ------------ ------------ --------------- Net income $ 79,730 $ 78,120 $ - $ 157,850 ============ ============ ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .73 $ 1.15 ============ =============== Weighted average common and common equivalent shares outstanding 115,654 25,700 (I) 141,354 ============ ============= ===============
- ----------------- (1) The historical statement of income has been adjusted to reclassify $139,771 of marketing and reservation expenses against related service fees. (2) The historical statement of operations of PHH is for the twelve months ended January 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 44 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA ------------------------------- PRO FORMA HISTORICAL HFS, HFS (1) PHH (2) ADJUSTMENTS AS RESTATED -------------- ------------- ------------- ---------------- NET REVENUES Service fees, net $ 159,792 $ - $ 150,028 (E) $ 309,820 Real estate services - 590,168 (399,717) (D) 190,451 Mortgage services - 124,144 - 124,144 ------------ ------------- ------------ --------------- Service fees, net 159,792 714,312 (249,689) 624,415 ------------ ------------- ------------ --------------- Fleet management - 1,003,355 (150,028) (E) 853,327 Depreciation on vehicles under operating leases - (692,788) - (692,788) Interest (117,373) (F) (117,373) ------------ ------------ ------------ ---------------- Fleet management, net - 310,567 (267,401) 43,166 ------------ ------------ ------------ ---------------- Other 30,869 - - 30,869 ------------ ------------ ------------ ---------------- Net revenues 190,661 1,024,879 (517,090) 698,450 ------------ ------------ ------------ ---------------- EXPENSES Selling, general and administrative 49,472 232,698 (22,452) (G) 259,718 Costs, including interest, of carrying and reselling homes - 497,415 (399,717) (D) 76,266 (19,344) (H) (2,088) (G) Direct costs of mortgage services - 40,093 (18,981) (G) 21,112 ------------ ------------ ------------ --------------- Total selling, general and administrative 49,472 770,206 (462,582) 357,096 Depreciation and amortization 21,721 - 43,521 (G) 65,242 Interest 16,272 154,638 (117,373) (F) 72,881 19,344 (H) Other 2,012 - - 2,012 ------------ ------------ ------------ --------------- Total expenses 89,477 924,844 (517,090) 497,231 ------------ ------------ ------------ --------------- Income before income taxes 101,184 100,035 - 201,219 Provision for income taxes 41,820 41,397 - 83,217 ------------ ------------ ------------ --------------- Net income $ 59,364 $ 58,638 $ - $ 118,002 ============ ============ ============ =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .56 $ .88 ============ =============== Weighted average common and common equivalent shares outstanding 112,056 25,700 (I) 137,756 ============ ============ ===============
- ----------------- (1) The historical statement of income has been adjusted to reclassify $109,070 of marketing and reservation expenses against related service fees. (2) The historical statement of operations of PHH is for the nine months ended October 31, 1995. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 45 SECTION III HFS INCORPORATED AND SUBSIDIARIES COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA ------------------------------- PRO FORMA HISTORICAL HFS, HFS (1) PHH (2) ADJUSTMENTS AS RESTATED -------------- ------------- ------------- ------------- NET REVENUES Service fees, net $ 346,127 $ - $ 152,602 (E) $ 498,729 Real estate services - 619,431 (420,805) (D) 198,626 Mortgage services - 188,636 - 188,636 ------------ ------------ ------------ --------------- Service fees, net 346,127 808,067 (268,203) 885,991 ------------ ------------ ------------- --------------- Fleet management - 1,042,984 (152,602) (E) 890,382 Depreciation on vehicles under operating leases - (727,457) - (727,457) Interest (120,404) (F) (120,404) ------------ ------------- ------------- ---------------- Fleet management, net - 315,527 (273,006) 42,521 ------------ ------------ ------------- --------------- Other 81,733 - - 81,733 ------------ ------------ ------------ --------------- Net revenues 427,860 1,123,594 (541,209) 1,010,245 ------------ ------------ ------------- --------------- EXPENSES Selling, general and administrative 148,287 249,693 (19,808) (G) 378,172 Costs, including interest, of carrying and reselling homes - 507,986 (420,805) (D) 62,841 (22,970) (H) (1,370) (G) Direct costs of mortgage services - 77,718 (38,720) (G) 38,998 ------------ ------------ ------------- --------------- Total selling, general and administrative 148,287 835,397 (503,673) 480,011 Depreciation and amortization 41,129 - 59,898 (G) 101,027 Interest 22,194 169,933 (120,404) (F) 94,693 22,970 (H) Other 10,988 - - 10,988 ------------ ------------ ------------ --------------- Total expenses 222,598 1,005,330 (541,209) 686,719 ------------ ------------ ------------- --------------- Income before income taxes 205,262 118,264 - 323,526 Provision for income taxes 82,630 48,253 - 130,883 ------------ ------------ ------------- --------------- Net income $ 122,632 $ 70,011 $ - $ 192,643 ============ ============ ============= =============== PER SHARE INFORMATION (FULLY DILUTED) Net income $ .96 $ 1.25 ============ =============== Weighted average common and common equivalent shares outstanding 131,684 25,700 (I) 157,384 ============ ============= ===============
- ----------------- (1) The historical statement of income has been adjusted to reclassify $122,150 of marketing and reservation expenses against related service fees. (2) The historical statement of operations of PHH is for the nine months ended October 31, 1996. Note: Certain reclassifications have been made to the historical results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining consolidated financial statements. 46 HFS Incorporated and Subsidiaries NOTES TO PRO FORMA CONSOLIDATING COMBINING FINANCIAL STATEMENTS A. OTHER CURRENT ASSETS: The pro forma adjustment reclassifies advances from clients to accounts payable and other accrued liabilities. This adjustment is made to conform to the presentation expected to be used by the merged companies. B. LONG-TERM DEBT: This pro forma adjustment reclassifies the portion of long-term debt associated with real estate services activities from Liabilities under vehicle management and mortgage programs to Long-term debt. This adjustment was made to conform to the presentation expected to be used by the merged companies. C. EQUITY: The pro forma adjustment reflects a reclassification of equity in connection with issuance of Company common stock to the PHH shareholders. D. SERVICES FEES: The pro forma adjustment offsets amounts billed (PHH revenue) to client corporations with expenses incurred (PHH expense) on behalf of client corporations. This adjustment is made to conform to the presentation expected to be used by the merged companies. E. FLEET MANAGEMENT: The pro forma adjustment reclassifies service fees generated from fee-based services provided to clients' vehicle fleets. This adjustment is made to conform to the presentation expected to be used by the merged companies. F. INTEREST EXPENSE - FLEET MANAGEMENT: The pro forma adjustment reclassifies interest expense on debt incurred to finance vehicle leasing activities. This adjustment is made to conform to the presentation expected to be used by the merged companies. G. DEPRECIATION AND AMORTIZATION: The pro forma adjustment reclassifies depreciation and amortization, other than depreciation on vehicles under operating leases, to a separate financial line to conform to the presentation expected to be used by the merged companies. H. INTEREST EXPENSE - REAL ESTATE SERVICES: The pro forma adjustment reclassifies the interest portion of the cost of carrying and reselling homes from selling general and administrative expense to interest expense. This adjustment is made to conform to the presentation expected to be used by the merged companies. I. WEIGHTED AVERAGE SHARES: The pro forma adjustment reflects the number of shares of Company common stock estimated to be issued by the Company in connection with the PHH Merger at an assumed $67.00 per share price. 47 -----END PRIVACY-ENHANCED MESSAGE-----