INDEX TO PRO FORMA FINANCIAL STATEMENTS PRO FORMA FINANCIAL STATEMENTS Section A: Pro forma combining consolidated financial statements of HFS for the Merger as of September 30, 1996 and for the year ended December 31, 1995 and each of the nine months ended September 30, 1995 and 1996 .................. 2 Section B: Pro Forma consolidated financial information of HFS for the Acquisition of RCI and excluding the Merger as of September 30, 1996 and for the year ended December 31, 1995 and for each of the nine month periods ended September 30, 1995 and 1996........................ 11 Section C: Pro Forma consolidated financial information of HFS excluding the Merger and the Acquisition of RCI as of September 30, 1996 and for the year ended December 31, 1995 and for each of the nine month periods ended September 30, 1995 and 1996 ..................................... 22 Section D: Combining historical consolidated financial statements of HFS for the Merger as of September 30, 1996 and for each of the years ended December 31, 1993, 1994 and 1995 and each of the nine month periods ended September 30, 1995 and 1996...................................... 52 1 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED FINANCIAL STATEMENTS FOR THE MERGER The accompanying pro forma consolidated combining financial statements give effect to the Merger, which will be accounted for as a pooling of interests. Accordingly, the underlying pro forma combining consolidated balance sheet as of September 30, 1996 and the pro forma combining consolidated statements of income for the year ended December 31, 1995 and the nine month periods ended September 30, 1995 and 1996 reflect the combining of the historical financial results of PHH with the pro forma financial results of HFS prior to HFS entering into the Merger Agreement. The pro forma financial results of HFS include all of HFS's acquisitions prior to the Merger Agreement, including the recent acquisitions of Avis and RCI. The pro forma combining consolidated financial statements reflect adjustments for the pooling of HFS and PHH, including reclassifications to conform to the presentation expected to be used by the merged companies and shares issued as consideration in connection with the Merger. The pro forma financial statements include a one-time pre-tax restructuring charge incurred in connection with the Merger. The charge includes severance, facility consolidation and other transaction related costs associated with the integration of HFS and PHH businesses. HFS estimates the charge to be approximately $267 million before related income tax benefits. HFS expects this charge to result in annual pre-tax savings of approximately $100 million with the full benefit of the cost reductions beginning in 1998. The pro forma combining consolidated financial statements do not purport to present the financial position or results of operations of HFS had the acquisitions described in Section B occurred on the dates specified, nor are they necessarily indicative of the operating results that may be achieved in the future. The pro forma combining consolidated financial statements are based on certain assumptions and adjustments described in the Pro Forma Consolidated Financial Information of HFS excluding the Merger, as set forth in Section B herein, and should be read in conjunction therewith and with the consolidated financial statements and related notes thereto of HFS and PHH and the Pro Forma Consolidated Financial Information of HFS excluding the Merger and the financial statements and related notes thereto of certain of the acquired companies previously filed with the SEC pursuant to Regulation S-X Rule 3.05, "Financial Statements of Business Acquired or to be Acquired." TERMS OF THE MERGER Approval of the share issuance by HFS stockholders and approval of the proposed Merger by PHH stockholders are conditions to consummation of the Merger. In the Merger, each outstanding share of common stock of PHH, other than PHH Common Stock held by PHH or held by HFS, will be converted into the right to receive that fraction of a share of HFS Common Stock (the "Conversion Number") represented by the number determined by dividing $49.50 by the average price of HFS Common Stock over a period of twenty trading days preceding the fifth trading day prior to the date of the special meeting of stockholders of PHH (the "Pricing Period"); provided however that in no event will such number be greater than 0.8250 or less than 0.6111. In addition, in the Merger, shares of HFS Common Stock will be issued in exchange for the currently outstanding options to purchase shares of PHH Common Stock. As a result of the conversion formula described above, if the average price of HFS Common Stock during the Pricing Period is within the range of $60.00 to $81.00, holders of PHH Common Stock will receive that fraction of a share of HFS Common Stock having a value (based on the average price of such shares during the Pricing Period) of $49.50 for each share of PHH Common Stock (and the Conversion Number will fluctuate accordingly), but if the average price of HFS Common Stock during the Pricing Period is less than $60.00 or greater than $81.00, the Conversion Number will be fixed at 0.8250 or 0.6111, respectively, resulting in the issuance of a number of shares of HFS Common Stock for each share of PHH Common Stock having a value (based on the average price of such shares during the Pricing Period) less than or more than $49.50, as the case may be. Based on the number of shares of PHH Common Stock outstanding on the Record Date, the number of shares of HFS Common Stock to be issued upon conversion of outstanding shares of PHH Common Stock will be not less than approximately 21.3 million shares and not more than approximately 28.8 million shares. 2 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED 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 .................. $ 100,751 $ 11,450 $ -- $ 112,201 Restricted cash............................. 89,849 (A) 89,849 Relocation receivables ..................... 136,052 666,905 -- 802,957 Other accounts and notes receivable--net ... 148,082 442,951 (6,800)(A) 584,233 Other current assets ....................... 112,798 58,916 56,000 (A) 227,714 ------------ ------------ ------------- ------------ TOTAL CURRENT ASSETS ......................... 497,683 1,180,222 139,049 1,816,954 ------------ ------------ ------------- ------------ Property and equipment-net .................. 253,893 92,846 (6,500)(A) 340,239 Franchise agreements--net ................... 1,027,711 -- -- 1,027,711 Excess of cost over fair value of net assets acquired--net ................... 1,350,385 47,656 (22,500)(A) 1,375,541 Intangible assets ........................... 926,569 -- -- 926,569 Investment in car rental operating company--net ............................... 75,000 -- -- 75,000 Deferred income taxes-net ................... 5,200 -- -- 5,200 Other assets ................................ 139,389 125,384 (7,300)(A) 257,473 ------------ ------------ ------------- ------------ 4,275,830 1,446,108 102,749 5,824,687 ------------ ------------ ------------- ------------ ASSETS UNDER FLEET MANAGEMENT AND MORTGAGE PROGRAMS Net investment in leases and leased vehicles -- 3,285,721 -- 3,285,721 Mortgage loans held for sale ................ -- 872,404 -- 872,404 Mortgage servicing rights and fees ......... -- 280,344 -- 280,344 ------------ ------------ ------------- ------------ -- 4,438,469 -- 4,438,469 ------------ ------------ ------------- ------------ TOTAL ASSETS ................................. $4,275,830 $5,884,577 $102,749 $10,263,156 ============ ============ ============= ============ - ------------ (1) Pro forma for all material transactions, excluding the Merger (See Section B). (2) The historical consolidated PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the pro forma HFS and historical PHH consolidated balance sheets to conform to the presentation expected to be used by the merged companies. See Notes to pro forma combining consolidated financial statements. 3 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED 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 ..................... $ 438,639 $ 418,143 $ 76,651 (B) $ 933,433 Deferred revenue--net .................... 143,873 -- -- 143,873 Income taxes payable ..................... 81,633 -- -- 81,633 Accrued acquisition obligations .......... 68,844 -- 193,900 (A) 262,744 Current portion of long-term debt ....... 130,837 -- -- 130,837 ------------ ------------- --------------- ------------ TOTAL CURRENT LIABILITIES .................. 863,826 418,143 270,551 1,552,520 ------------ ------------- --------------- ------------ Long-term debt ........................... 830,099 -- 584,796 (C) 1,504,744 89,849 (A) Deferred revenue ......................... 193,002 114,021 (76,651)(B) 230,372 Other non-current liabilities ............ 45,671 -- 30,000 (A) 75,671 Deferred income taxes .................... 42,400 -- (12,000)(A) 30,400 ------------ ------------- --------------- ------------ 1,974,998 532,164 886,545 3,393,707 ------------ ------------- --------------- ------------ LIABILITIES UNDER FLEET MANAGEMENT AND MORTGAGE PROGRAMS Debt ..................................... -- 4,476,805 (584,796)(C) 3,892,009 Deferred income taxes .................... -- 221,700 -- 221,700 ------------ ------------- --------------- ------------ -- 4,698,505 (584,796) 4,113,709 ------------ ------------- --------------- ------------ STOCKHOLDERS' EQUITY: Common stock--Issued and Outstanding; Pro Forma HFS, 129,289; Historical PHH, 34,886 and Pro Forma Combined Companies, between 150,608 and 158,070............... 1,293 99,820 (99,563)(D) 1,550 Additional paid-in capital ................ 2,093,303 -- 99,563 (D) 2,192,866 Retained earnings ......................... 206,236 568,400 (199,000)(A) 575,636 Foreign currency equity adjustment ....... -- (14,312) -- (14,312) ------------ ------------- --------------- ------------ TOTAL STOCKHOLDERS' EQUITY ................. 2,300,832 653,908 (199,000) 2,755,740 ------------ ------------- --------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,275,830 $5,884,577 $ 102,749 $10,263,156 ============ ============= =============== ============ - ------------ (1) Pro forma for all material transactions, excluding the Merger (See Section B). (2) The historical consolidated PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the pro forma HFS and historical PHH consolidated balance sheets to conform to the presentation expected to be used by the merged companies. See notes to pro forma combining consolidated financial statements. 4 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES ------------ ------------ --------------- ------------- NET REVENUES Service fees ............................. $1,061,202 $ -- $ 203,390 (F) $1,264,592 Real estate services ..................... -- 782,727 (532,573)(E) 250,154 Interest................................. (25,972)(K) (25,972) ------------ ------------ --------------- ------------- Real estate services, net................. -- 782,727 (558,545) 224,182 ------------ ------------ --------------- ------------- Service fees, net ........................ 1,061,202 782,727 (355,155) 1,488,774 ------------ ------------ --------------- ------------- Fleet management ......................... -- 1,347,870 (203,390)(F) 1,144,480 Depreciation on vehicles under operating leases ................................. -- (929,341) -- (929,341) Interest ................................ -- -- (159,652)(G) (159,652) ------------ ------------ --------------- ------------- Fleet management, net .................... -- 418,529 (363,042) 55,487 ------------ ------------ --------------- ------------- Mortgage Services......................... -- 173,787 -- 173,787 Amortization of mortgage servicing rights and fees......................... -- -- (30,667)(H) (30,667) Interest................................. -- -- (49,869)(J) (49,869) ------------ ------------ --------------- ------------- Mortgage services, net ................... -- 173,787 (80,536) 93,251 ------------ ------------ --------------- ------------- Other .................................... 89,232 -- -- 89,232 Equity in loss of car rental operating company.................................. (5,272) -- -- (5,272) ------------ ------------ --------------- ------------- Net revenues .............................. 1,145,162 1,375,043 (798,733) 1,721,472 ------------ ------------ --------------- ------------- EXPENSES Marketing and reservation ................ 274,331 -- -- 274,331 Selling, general and administrative (N) . 396,234 310,567 (29,692)(I) 677,109 Costs, including interest, of carrying and reselling homes ..................... -- 658,498 (532,573)(E) 97,324 (25,972)(K) (2,629)(I) Direct costs of mortgage services ....... -- 60,498 (30,667)(H) 29,831 Depreciation and amortization ............ 130,767 -- 32,321 (I) 163,088 Interest ................................. 52,731 212,365 (159,652)(G) 55,575 (49,869)(J) Other .................................... 18,779 -- 5,076 (M) 23,855 ------------ ------------ --------------- ------------- Total expenses .......................... 872,842 1,241,928 (793,657) 1,321,113 ------------ ------------ --------------- ------------- Income before income taxes ................ 272,320 133,115 (5,076) 400,359 Provision (benefit) for income taxes ..... 112,395 54,995 (2,096) 165,294 ------------ ------------ --------------- ------------- Net income ................................ $ 159,925 $ 78,120 $ (2,980) $ 235,065 ============ ============ =============== ============= PER SHARE INFORMATION (PRIMARY) Net Income (N)............................ $ 1.15 $ 2.25 $ 1.42 (L) ============ ============ ============= Weighted average common and common equivalent shares outstanding............ 142,498 34,755 25,677 (L) 168,175 (L) ============ ============ =============== ============= PER SHARE INFORMATION (FULLY DILUTED) Net income (N)............................ $ 1.14 $ 2.24 $ 1.41 (L) ============ ============ ============= Weighted average common and common equivalent shares outstanding ........... 144,335 34,951 25,822 (L) 170,157 (L) ============ ============ =============== ============= (1) Pro forma for all material transactions, excluding the Merger (See Section B). (2) The historical consolidated statement of income of PHH is for the twelve months ended January 31, 1996. Note: Certain reclassifications have been made to the operating results of pro forma HFS and historical PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma combining consolidated financial statements. 5 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES ----------- ------------ --------------- ------------ NET REVENUES Service fees ............................. $786,407 $ -- $ 150,028 (F) $ 936,435 Real estate services ..................... -- 590,168 (399,717)(E) 190,451 Interest................................. (19,344)(K) (19,344) ----------- ------------ --------------- ------------ Real estate services, net................. -- 590,168 (419,061) 171,107 ----------- ------------ --------------- ------------ Service fees, net ........................ 786,407 590,168 (269,033) 1,107,542 ----------- ------------ --------------- ------------ Fleet management ......................... -- 1,003,355 (150,028)(F) 853,327 Depreciation on vehicles under operating leases.................. -- (692,788) -- (692,788) Interest ................................ -- -- (117,373)(G) (117,373) ----------- ------------ --------------- ------------ Fleet management, net .................... -- 310,567 (267,401) 43,166 ----------- ------------ --------------- ------------ Mortgage Services......................... -- 124,144 -- 124,144 Amortization of mortgaging servicing rights and fees......................... -- -- (18,981)(H) (18,981) Interest................................. -- -- (35,342)(J) (35,342) ----------- ------------ --------------- ------------ Mortgage services, net.................... -- 124,144 (54,323) 69,821 ----------- ------------ --------------- ------------ Other .................................... 62,535 -- -- 62,535 Equity in loss of car rental operating company.................................. (5,096) -- -- (5,096) ----------- ------------ --------------- ------------ Net revenues .............................. 843,846 1,024,879 (590,757) 1,277,968 ----------- ------------ --------------- ------------ EXPENSES Marketing and reservation ................ 202,846 -- -- 202,846 Selling, general and administrative (N) . 289,332 232,698 (22,452)(I) 499,578 Costs, including interest, of carrying and reselling homes ..................... -- 497,415 (399,717)(E) 76,266 (19,344)(K) (2,088)(I) Direct costs of mortgage services ....... -- 40,093 (18,981)(H) 21,112 Depreciation and amortization ............ 97,972 -- 24,540 (I) 122,512 Interest ................................. 40,115 154,638 (117,373)(G) 42,038 (35,342)(J) Other .................................... 22,328 -- 3,807 (M) 26,135 ----------- ------------ --------------- ------------ Total expenses .......................... 652,593 924,844 (586,950) 990,487 ----------- ------------ --------------- ------------ Income before income taxes ................ 191,253 100,035 (3,807) 287,481 Provision (benefit) for income taxes ..... 78,935 41,397 (1,572) 118,760 ----------- ------------ --------------- ------------ Net Income ................................ $112,318 $ 58,638 $ (2,235) $ 168,721 =========== ============ =============== ============ PER SHARE INFORMATION (PRIMARY) Net Income (N)............................ $ .83 $ 1.70 $ 1.04 (L) =========== ============ ============ Weighted average common and common equivalent shares outstanding............ 139,315 34,484 25,477 (L) 164,792 (L) =========== ============ =============== ============ PER SHARE INFORMATION (FULLY DILUTED) Net income (N)............................ $ .82 $ 1.70 $ 1.03 (L) =========== ============ ============ Weighted average common and common equivalent shares outstanding ........... 141,807 34,594 25,558 (L) 167,365 (L) =========== ============ =============== ============ - ------------ (1) Pro forma for all material transactions, excluding the Merger (See Section B). (2) The historical consolidated statement of income of PHH is for the nine months ended October 31, 1995. Note: Certain reclassifications have been made to the operating results of pro forma HFS and historical PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma combining consolidated financial statements. 6 SECTION A HFS INCORPORATED AND SUBSIDIARIES PRO FORMA COMBINING CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL PRO FORMA COMBINED HFS (1) PHH (2) ADJUSTMENTS COMPANIES ----------- ------------ --------------- ------------ NET REVENUES Service fees ............................. $889,473 $ -- $ 152,602 (F) $1,042,075 Real estate services ..................... -- 619,431 (420,805)(E) 198,626 Interest................................. (22,970)(K) (22,970) ----------- ------------ --------------- ------------ Real estate services, net................. -- 619,431 (443,775) 175,656 ----------- ------------ --------------- ------------ Service fees, net ........................ 889,473 619,431 (291,173) 1,217,731 ----------- ------------ --------------- ------------ Fleet Management ......................... -- 1,042,984 (152,602)(F) 890,382 Depreciation on vehicles under operating leases ................. -- (727,457) -- (727,457) Interest ................................ (120,404)(G) (120,404) ----------- ------------ --------------- ------------ Fleet management, net .................... -- 315,527 (273,006) 42,521 ----------- ------------ --------------- ------------ Mortgage Services......................... -- 188,636 -- 188,636 Amortization of mortgage servicing rights and fees ........................ -- -- (38,720)(H) (38,720) Interest................................. -- -- (48,337)(J) (48,337) ----------- ------------ --------------- ------------ Mortgage services, net.................... -- 188,636 (87,057) 101,579 ----------- ------------ --------------- ------------ Other .................................... 81,451 -- -- 81,451 Equity in earnings of car rental operating company........................ 2,459 -- -- 2,459 ----------- ------------ --------------- ------------ Net revenues .............................. 973,383 1,123,594 (651,236) 1,445,741 ----------- ------------ --------------- ------------ EXPENSES Marketing and reservation ................ 238,018 -- -- 238,018 Selling, general and administrative (N) . 289,822 249,693 (19,808)(I) 519,707 Costs, including interest, of carrying and reselling homes ..................... -- 507,986 (420,805)(E) 62,841 (22,970)(K) (1,370)(I) Direct costs of mortgage services ....... -- 77,718 (38,720)(H) 38,998 Depreciation and amortization ............ 99,703 -- 21,178 (I) 120,881 Interest ................................. 36,930 169,933 (120,404)(G) 38,122 (48,337)(J) Other .................................... 17,359 -- 3,807 (M) 21,166 ----------- ------------ --------------- ------------ Total expenses .......................... 681,832 1,005,330 (647,429) 1,039,733 ----------- ------------ --------------- ------------ Income before income taxes ................ 291,551 118,264 (3,807) 406,008 Provision (benefit) for income taxes ..... 120,331 48,253 (1,572) 167,012 ----------- ------------ --------------- ------------ Net Income ................................ 171,220 $ 70,011 $ (2,235) $ 238,996 =========== ============ =============== ============ PER SHARE INFORMATION (PRIMARY) Net Income (N)............................ $ 1.18 $ 1.99 $ 1.40 (L) =========== ============ ============ Weighted average common and common equivalent shares outstanding............ 147,470 35,211 26,014 (L) 173,484 (L) =========== ============ =============== ============ PER SHARE INFORMATION (FULLY DILUTED) Net income (N)............................ $ 1.18 $ 1.99 $ 1.39 (L) =========== ============ ============ Weighted average common and common equivalent shares outstanding ........... 148,194 35,269 26,057 (L) 174,251 (L) =========== ============ =============== ============ - ------------ (1) Pro forma for all material transactions, excluding the Merger (See Section B). (2) The historical consolidated statement of income of PHH is for the nine months ended October 31, 1996. Note: Certain reclassifications have been made to the operating results of pro forma HFS and historical PHH to conform to the presentation expected to be used by the merged companies. See notes to pro forma combining consolidated financial statements. 7 SECTION A HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA COMBINING CONSOLIDATED FINANCIAL STATEMENTS A. RESTRUCTURING LIABILITY AND RESTRICTED CASH: The pro forma adjustment reflects a liability established for restructuring the HFS and PHH businesses, including involuntary termination of employees, facility and system terminations, costs associated with exiting certain activities, and merger related professional fees, based on management's preliminary assessment of such actions to be taken: RESTRUCTURING CHARGE (IN MILLIONS) ---------------- BOOK TAX BASIS BASIS ------- ------- Professional fees...................... $ 43 $ 20 Severance.............................. 109 74 Facility and system terminations ...... 44 44 Other transaction related costs ....... 71 37 ------- ------- Restructuring charge, pre-tax.......... 267 175 Statutory tax rate..................... 38.9% ------- Tax benefit (effective tax rate 25.5%)................................ 68 $ 68 ------- ======= After-tax charge....................... $199 ======= The restructuring charge includes the write-off or reserve of $43.1 million for impaired assets as a result of exiting certain activities and the recording of deferred taxes ($56.0 million current and $12.0 million non-current) associated with the charge. Also included in the restructure charge is the effect of $89.8 million of employee benefit related liabilities which were required to be funded prior to consummation of the Merger. PHH funded several grantor trusts in accordance with the Merger Agreement. This amount is disclosed as restricted cash in the pro forma balance sheet. B. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES: The pro forma adjustment reclassifies advances from relocation clients from deferred revenue to accounts payable and other accrued liabilities. This adjustment is made to conform to the presentation expected to be used by the merged companies. C. LONG-TERM DEBT: This pro forma adjustment reclassifies the portion of long-term debt associated with real estate services activities from Liabilities under Fleet Management and Mortgage Programs to Long-Term Debt. This adjustment is made to conform to the presentation expected to be used by the merged companies. D. EQUITY: The pro forma adjustment reflects a reclassification of equity in connection with issuance of HFS common stock to the PHH stockholders. E. SERVICES FEES: The pro forma adjustment offsets relocation expenses incurred on behalf of corporate clients with reimbursements of such expenses billed to client corporations since the Company acts in what is in economic substance an agency relationship with its relocation corporate clients (i.e., all expenses and gains and losses on disposition of properties are for the account of the corporate client). This adjustment is made to conform to the presentation expected to be used by the merged companies. 8 F. FLEET MANAGEMENT: The pro forma adjustment reclassifies fees charged for the management of corporate fleets and for fee-based services to service fees such that fleet rental revenue is reflected as fleet management revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. G. INTEREST EXPENSE -- FLEET MANAGEMENT: The pro forma adjustment reclassifies interest expense on debt incurred to finance fleet leasing activities. This adjustment is made to conform to the presentation expected to be used by the merged companies. H. AMORTIZATION EXPENSE -- MORTGAGE SERVICES: The pro forma adjustment reclassifies the amortization of mortgage servicing rights and fees from direct costs of mortgage services to mortgage services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. I. DEPRECIATION AND AMORTIZATION: The pro forma adjustment reclassifies depreciation and amortization, other than depreciation on vehicles under operating leases, to a separate financial line to conform to the presentation expected to be used by the merged companies. J. INTEREST EXPENSE -- MORTGAGE SERVICES: The pro forma adjustment reclassifies interest expense on debt incurred to finance mortgage servicing activities to mortgage services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. K. INTEREST EXPENSE -- REAL ESTATE SERVICES: The pro forma adjustment reclassifies the interest portion of the cost, including interest, of carrying and reselling homes to real estate services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. L. WEIGHTED AVERAGE SHARES AND NET INCOME PER SHARE: The pro forma adjustment to weighted average common and common equivalent shares outstanding reflects the number of shares of HFS common stock estimated to be issued by HFS in connection with the Merger. Such amount was estimated using an average HFS stock price of $67.00 per share, which was calculated using a twenty day average price of HFS common stock from November 8, 1996 through December 6, 1996. The number of HFS shares to be issued is based on a conversion formula which will be calculated based on the average price of HFS common stock over the Pricing Period (a twenty day average), within a range of $60 to $81 per share. At $67 per share the Conversion Number would be .7388, which would result in the issuance of .7388 shares of HFS common stock for every share of PHH common stock. The pro forma adjustment was calculated by multiplying PHH's historical weighted average shares outstanding by the Conversion Number using the assumed average HFS stock price of $67 per share. The underlying table summarizes pro forma weighted average shares and pro forma net income per share using the high and low ends of the range and the assumed average of $67 per share used in these Pro Forma Financial Statements. 9 AVERAGE HFS STOCK PRICE ------------------------------- $60.00 $67.00 $81.00 --------- --------- --------- PRO FORMA WEIGHTED AVERAGE SHARES (000'S) For the year ended December 31, 1995 Primary..................................... 171,171 168,175 163,737 Fully Diluted............................... 173,170 170,157 165,694 For the nine months ended September 30, 1995 Primary..................................... 167,764 164,792 160,388 Fully Diluted............................... 170,347 167,365 162,947 For the nine months ended September 30, 1996 Primary..................................... 176,519 173,484 168,987 Fully Diluted............................... 177,291 174,251 169,747 PRO FORMA NET INCOME PER SHARE For the year ended December 31, 1995 Primary..................................... $ 1.40 $ 1.42 $ 1.46 Fully Diluted............................... 1.38 1.41 1.45 For the nine months ended September 30, 1995 Primary..................................... $ 1.03 $ 1.04 $ 1.07 Fully Diluted............................... 1.01 1.03 1.06 For the nine months ended September 30, 1996 Primary..................................... $ 1.37 $ 1.40 $ 1.43 Fully Diluted............................... 1.37 1.39 1.43 M. The pro forma adjustment reflects the recording of interest expense on debt incurred to fund the grantor trusts at an interest rate of 5.65% which is the variable rate in effect on the date of borrowing. The effect on pro forma net income and net income per share assuming a 1/8% variance in the variable interest rate is immaterial. N. ESTIMATED SELLING, GENERAL AND ADMINISTRATIVE COST SAVINGS In connection with HFS's acquisitions prior to the PHH Merger, HFS developed related business plans to restructure each of the respective acquired companies which result in cost savings subsequent to the acquisitions. HFS's restructuring plans in each case were developed prior to consummation of the respective acquisitions and were implemented concurrent with the consummation of the acquisitions. Restructuring plans included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Pursuant to HFS's specific restructuring plans, certain selling, general and administrative expenses may not be incurred subsequent to each acquisition that existed prior to consummation. In addition, there are incremental costs in the conduct of activities of the acquired companies prior to the acquisitions that will not be incurred subsequent to consummation and have no future economic benefit to HFS. The estimated cost savings that HFS believes would have been attained had it's acquisitions occurred on January 1, 1995 are detailed in Section B--Note H and Section C--Note L. The impact of such cost savings on pro forma (for the Merger) net income and net income per share are not reflected in the pro forma consolidated statements of income, but are presented below ($000's): FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------- 1995 1995 1996 ------------------ ---------- ---------- Income before taxes as reported ..... $400,359 $287,481 $406,008 SG&A cost savings .................... 61,817 47,398 14,197 Income before taxes, as adjusted .... 462,176 334,879 420,205 Income taxes ......................... 193,235 140,171 174,479 ------------------ ---------- ---------- Net income, as adjusted .............. $268,941 $194,708 $245,726 ================== ========== ========== Net Income Per Share (primary): As adjusted.......................... $ 1.63 $ 1.20 $ 1.44 ================== ========== ========== As reported.......................... $ 1.42 $ 1.04 $ 1.40 ================== ========== ========== Net Income Per Share (fully diluted): As adjusted ......................... $ 1.61 $ 1.18 $ 1.43 ================== ========== ========== As reported ......................... $ 1.41 $ 1.03 $ 1.39 ================== ========== ========== 10 SECTION B HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS FOR THE ACQUISITION OF RCI AND EXCLUDING THE MERGER The pro forma consolidated balance sheet as of September 30, 1996 is presented as if the acquisition of Resort Condominiums International, Inc. and its affiliates ("RCI") and the issuance of HFS common stock as partial consideration for RCI had occurred on September 30, 1996. The pro forma consolidated statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1995 and 1996 are presented as if the acquisition of RCI had occurred on January 1, 1995. The pro forma financial statements consolidate the effects of the above transaction with the pro forma financial results of HFS prior to the effect of such transaction. The pro forma financial results of HFS include all of HFS's acquisitions prior to the RCI acquisition. The aforementioned acquisition has been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been recorded at their estimated fair values, which are subject to further refinement, including appraisals and other analyses, with appropriate recognition given to the effect of current interest rates and income taxes. Management does not expect that the final allocation of the purchase price for the above acquisition will differ materially from the preliminary allocation. The pro forma consolidated financial statements do not purport to present the financial position or results of operations of HFS had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The pro forma consolidated statements of operations do not reflect cost savings and revenue enhancements that management believes may be realized following the acquisition. These cost savings are expected to be realized primarily through the restructuring of operations as well as revenue enhancements expected to be realized through leveraging of HFS's preferred alliance programs. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that actually will be realized. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with the consolidated financial statements and related notes thereto of HFS included in its 1995 Annual Report on Form 10-K and the financial statements and related notes of the acquired companies previously filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3-05, "Financial Statements of Businesses Acquired or to be Acquired." 11 SECTION B PAGE 1 OF 2 HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) PRO FORMA HISTORICAL PRO FORMA PRO FORMA HFS (1) RCI ADJUSTMENTS (A) HFS (2) ------------ ------------ --------------- ------------ ASSETS Current assets Cash and cash equivalents........... $ 60,452 $ 89,070 $ (48,771) $ 100,751 Marketable securities............... -- 184,599 (184,599) -- Relocation receivables.............. 136,052 -- -- 136,052 Other accounts and notes receivable, net.................... 114,975 33,107 -- 148,082 Other current assets................ 60,962 22,836 29,000 112,798 ------------ ------------ --------------- ------------ TOTAL CURRENT ASSETS.................. 372,441 329,612 (204,370) 497,683 ------------ ------------ --------------- ------------ Property and equipment--net.......... 198,233 87,785 (32,125) 253,893 Franchise agreements--net............ 1,027,711 -- -- 1,027,711 Excess of cost over fair value of net assets acquired-net............. 906,540 -- 443,845 1,350,385 Intangible assets.................... 826,569 -- 100,000 926,569 Investment in car rental operating company--net........................ 75,000 -- -- 75,000 Deferred income taxes--net........... 5,200 -- -- 5,200 Other assets......................... 130,083 40,936 (31,630) 139,389 ------------ ------------ --------------- ------------ TOTAL ASSETS.......................... $3,541,777 $458,333 $ 275,720 $4,275,830 ============ ============ =============== ============ - ------------ (1) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger (see Section C). (2) Pro forma for all material transactions excluding the PHH Merger. Note: Certain reclassifications have been made to the historical HFS and RCI consolidated balance sheets to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 12 SECTION B PAGE 2 OF 2 HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) PRO FORMA HISTORICAL PRO FORMA PRO FORMA HFS (1) RCI ADJUSTMENTS (A) HFS (2) ------------ ------------ --------------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and other accrued liabilities ............................ $ 362,311 $ 76,328 $ -- $ 438,639 Deferred revenue......................... 24,655 119,218 -- 143,873 Income taxes payable..................... 81,633 -- -- 81,633 Accrued acquisition obligations.......... 58,287 -- 10,557 68,844 Current portion of long-term debt ....... 130,837 -- -- 130,837 ------------ ------------ --------------- ----------- TOTAL CURRENT LIABILITIES.................. 657,723 195,546 10,557 863,826 ------------ ------------ --------------- ----------- Long-term debt............................ 541,563 3,536 285,000 830,099 Deferred revenue.......................... 7,299 185,703 -- 193,002 Other non-current liabilities............. 23,960 1,711 20,000 45,671 Deferred income taxes..................... 85,400 -- (43,000) 42,400 STOCKHOLDERS' EQUITY Common stock--issued and outstanding; HFS Historical, 123,720 and Pro Forma, 129,289.................................. 1,283 -- 10 1,293 Additional paid-in capital ............... 2,026,338 6,392 60,573 2,093,303 Retained earnings ........................ 206,236 34,864 (34,864) 206,236 Treasury stock ........................... (8,025) -- 8,025 -- Net unrealized gain on available for sale securities............................... -- 20,784 (20,784) -- Foreign currency equity adjustment ...... -- 9,797 (9,797) -- ------------ ------------ --------------- ----------- TOTAL STOCKHOLDERS' EQUITY................. 2,225,832 71,837 3,163 2,300,832 ------------ ------------ --------------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $3,541,777 $458,333 $275,720 $4,275,830 ============ ============ =============== =========== - ------------ (1) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger (see Section C). (2) Pro forma for all material transactions excluding the PHH Merger. Note: Certain reclassifications have been made to the historical HFS and RCI consolidated balance sheets to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 13 SECTION B HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA HISTORICAL PRO FORMA PRO FORMA HFS (1) RCI ADJUSTMENTS HFS (2) ----------- ------------ ------------- ------------ NET REVENUES Service fees........................... $783,070 $278,132 -- $1,061,202 Other ................................. 89,232 17,051 (17,051)(B) 89,232 Equity in earnings of car rental operating company .................... (5,272) -- -- (5,272) ----------- ------------ ------------- ------------ Net revenues ......................... 867,030 295,183 (17,051) 1,145,162 ----------- ------------ ------------- ------------ EXPENSES Marketing and reservation ............. 143,965 130,366 -- 274,331 Selling, general and administrative (H) 304,477 91,757 -- 396,234 Depreciation and amortization ......... 101,531 14,193 15,043 (C) 130,767 Interest .............................. 34,776 536 17,419 (D) 52,731 Other ................................. 18,003 1,976 (1,200)(E) 18,779 ----------- ------------ ------------- ------------ Total expenses ....................... 602,752 238,828 31,262 872,842 ----------- ------------ ------------- ------------ Income before income taxes ............. 264,278 56,355 (48,313) 272,320 Provision for income taxes ............. 109,076 4,464 (1,145)(F) 112,395 ----------- ------------ ------------- ------------ Net income ............................. $155,202 $ 51,891 $(47,168) $ 159,925 =========== ============ ============= ============ PER SHARE INFORMATION (PRIMARY) Net income (H) ........................ $ 1.13 $ 1.15 =========== ============ Weighted average common and common equivalent shares outstanding......... 141,498 1,000 (G) 142,498 =========== ============= ============ PER SHARE INFORMATION (FULLY DILUTED) Net income (H)......................... $ 1.11 $ 1.14 =========== ============ Weighted average common and common equivalent shares outstanding ........ 143,335 1,000 (G) 144,335 =========== ============= ============ - ------------ (1) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger (see Section C). (2) Pro forma for all material transactions excluding the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statement of operations. 14 SECTION B HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA HISTORICAL PRO FORMA PRO FORMA HFS (1) RCI ADJUSTMENTS HFS (2) ----------- ------------ ------------- ----------- NET REVENUES Service fees............................ $577,165 $209,242 -- $786,407 Other .................................. 62,535 13,385 (13,385)(B) 62,535 Equity in loss of car rental operating company ............................... (5,096) -- -- (5,096) ----------- ------------ ------------- ----------- Net revenues .......................... 634,604 222,627 (13,385) 843,846 ----------- ------------ ------------- ----------- EXPENSES Marketing and reservation .............. 110,842 92,004 -- 202,846 Selling, general and administrative (H). 226,802 62,530 -- 289,332 Depreciation and amortization .......... 76,045 12,698 9,229 (C) 97,972 Interest ............................... 26,649 402 13,064 (D) 40,115 Other .................................. 16,061 6,570 (303)(E) 22,328 ----------- ------------ ------------- ----------- Total expenses ........................ 456,399 174,204 21,990 652,593 ----------- ------------ ------------- ----------- Income before income taxes .............. 178,205 48,423 (35,375) 191,253 Provision for income taxes .............. 73,549 1,940 3,446 (F) 78,935 ----------- ------------ ------------- ----------- Net income (loss)........................ $104,656 $ 46,483 $(38,821) $112,318 =========== ============ ============= =========== PER SHARE INFORMATION (PRIMARY) Net income (H) ......................... $ .78 $ .83 =========== =========== Weighted average common and common equivalent shares outstanding ......... 138,315 1,000 (G) 139,315 =========== ============= =========== PER SHARE INFORMATION (FULLY DILUTED) Net income (H).......................... $ .77 $ .82 =========== =========== Weighted average common and common equivalent shares outstanding ......... 140,807 1,000 (G) 141,807 =========== ============ ============= =========== - ------------ (1) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger (see Section C). (2) Pro forma for all material transactions excluding the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 15 SECTION B HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA HISTORICAL PRO FORMA PRO FORMA HFS (1) RCI ADJUSTMENTS HFS (2) ----------- ------------ ------------- ----------- NET REVENUES Service fees ....................... $652,968 $236,505 -- $889,473 Other .............................. 81,451 14,841 (14,841)(B) 81,451 Equity in loss of car rental operating company ................. 2,459 -- -- 2,459 ----------- ------------ ------------- ----------- Net revenues ...................... 736,878 251,346 (14,841) 973,383 ----------- ------------ ------------- ----------- EXPENSES Marketing and reservation........... 130,728 107,290 -- 238,018 Selling, general and administrative (H)................. 214,298 75,524 -- 289,822 Depreciation and amortization ..... 77,776 13,352 8,575 (C) 99,703 Interest ........................... 23,464 345 13,121 (D) 36,930 Other .............................. 12,264 5,440 (345)(E) 17,359 ----------- ------------ ------------- ----------- Total expenses .................... 458,530 201,951 21,351 681,832 ----------- ------------ ------------- ----------- Income before income taxes .......... 278,348 49,395 (36,192) 291,551 Provision for income taxes .......... 114,882 2,370 3,079 (F) 120,331 ----------- ------------ ------------- ----------- Net income .......................... $163,466 $ 47,025 $(39,271) $171,220 =========== ============ ============= =========== PER SHARE INFORMATION (PRIMARY) Net income (H) ..................... $ 1.14 $ 1.18 =========== =========== Weighted average common and common equivalent shares outstanding .... 146,470 1,000 (G) 147,470 =========== ============= =========== PER SHARE INFORMATION (FULLY DILUTED) Net income (H)...................... $ 1.13 $ 1.18 =========== =========== Weighted average common and common equivalent shares outstanding .... 147,194 1,000 (G) 148,194 =========== ============= =========== - ------------ (1) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger (see Section C). (2) Pro forma for all material transactions excluding the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 16 SECTION B HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS A. ACQUISITION OF RCI: The purchase price for RCI has been allocated to assets acquired and liabilities assumed at their estimated fair values. Pro forma adjustments consist of the elimination of certain acquired assets and assumed liabilities, net of the fair value ascribed to such assets and liabilities. HFS acquired RCI for the following consideration (000's): Cash consideration paid by HFS (i) ................................ $ 285,000 Issuance of approximately one million shares of HFS common stock . 75,000 ----------- HFS investment in RCI ............................................. $360,000 Existing cash and securities retained by RCI shareholders (ii) ... 265,000 ----------- Total consideration received by RCI shareholder ................... 625,000 =========== Fair value of net assets acquired: Historical book value of RCI ...................................... 71,837 Elimination of cash and securities retained by RCI shareholder (ii) ............................................................. (265,000) Fair value adjustment to assets acquired and liabilities assumed: Deferred income taxes--current (iv) .............................. 29,000 Property and equipment (iii) ..................................... (32,125) Deferred income taxes--non-current (iv) .......................... 43,000 Customer lists ................................................... 100,000 Accrued acquisition obligations: (v) --current........................................................ (10,557) --non-current.................................................... (20,000) ----------- Fair value of net liabilities assumed .............................. (83,845) ---------- Excess of cost over fair value on net assets acquired ............. $443,845 ========== - ------------ (i) Cash consideration paid by HFS was financed with borrowings under HFS's Revolving Credit Facilities. (ii) Prior to the closing of the RCI acquisition, the former shareholder of RCI retained, in the form of a dividend, cash and securities from the RCI business comprised of $48.8 million in cash, $184.6 million in short-term securities and $31.6 million in long-term securities. (iii) Primarily comprised of write-off of $24.1 million of capitalized costs associated with an information technology project terminated as of the acquisition date and an $8 million write-down of building and building improvements based upon fair market appraisals. (iv) The pro forma adjustment to deferred income taxes reflects deferred tax assets that will be recognized upon termination of RCI's Subchapter S Corporation status for the temporary differences between fair value of unearned income liabilities assumed and their respective income tax bases. Prior to the acquisition, RCI was a Subchapter S Corporation for tax purposes, therefore it had not recorded any tax liabilities. (v) HFS has recorded liabilities for charges to be incurred in connection with the restructuring of RCI operations. At the date of acquisition, November 12, 1996, HFS had formulated a preliminary plan that would result in the consolidation of facilities, involuntary termination and relocation of employees, and elimination of duplicative operating and overhead activities. The plan is in the early stages and is expected to be substantially complete in late 1997. The accrued acquisition liability recorded as part of the purchase price allocation consists of $9.9 million of personnel related costs, $6.9 million of facility related costs, $6.2 million of transaction costs and $7.5 million of other costs. In connection with the restructuring, HFS expects the reduction of approximately 250 employees. (vi) Excess of cost over fair value of net assets acquired for pro forma balance sheet purposes is derived from the net book value of RCI at September 30, 1996. This differs from the excess of cost over fair value of net assets acquired determined at date of acquisition which is derived from the net book 17 SECTION B HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) A. ACQUISITION OF RCI: (Continued) value at such date. The excess of cost over fair value of net assets acquired at date of acquisition of $477.7 million is used as the basis for adjustments in the pro forma statements of income (see Note C) for the year ended December 31, 1995 and nine month periods ended September 30, 1995 and 1996, respectively. 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 (6,392) 60,573 Retained earnings.................................... -- (34,864) (34,864) Treasury stock....................................... 8,025 -- 8,025 Net unrealized gain on available for sale securities.......................................... -- (20,784) (20,784) Foreign currency equity adjustment................... -- (9,797) (9,797) ------------- -------------- --------------- $75,000 $(71,837) $ 3,163 ============= ============== =============== The pro forma adjustments include the elimination of RCI stockholders' equity and the issuance of approximately one million shares of HFS's common stock as partial consideration for RCI. B. OTHER REVENUE: The pro forma adjustment reflects the elimination of revenue associated with investment income generated from RCI cash and marketable securities which were issued in the form of a dividend to the former shareholder prior to consummation of the RCI acquisition. C. DEPRECIATION AND AMORTIZATION: The pro forma adjustment for depreciation and amortization is comprised of ($000's): FOR THE YEAR FOR THE NINE MONTHS ENDED ENDED ------------------------------------- DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30,1996 ----------------- ------------------ ----------------- Elimination of historical expense .... $(14,193) $(12,698) $(13,352) Property, equipment and furniture and fixtures............................. 7,294 5,471 5,471 Information data base................. -- -- -- Intangible assets..................... 21,942 16,456 16,456 ----------------- ------------------ ----------------- Total................................ $ 15,043 $ 9,229 $ 8,575 ================= ================== ================= The fair value of RCI's property and equipment is estimated at approximately $55.7 million and is amortized on a straight line basis over the estimated useful lives, ranging from seven to thirty years. RCI's intangible assets consist of customer lists and excess of cost over fair value of net assets acquired. The estimated fair value of RCI's customer lists are approximately $100 million and are amortized on a straight-line basis over the period to be benefited which is ten years. The fair value ascribed to customer lists is determined based on the historical renewal rates of RCI members. The fair value of excess of cost over fair value of net assets acquired is estimated at approximately $477.7 million and is determined to have a benefit period of forty years, which is based on RCI being a leading provider of services to the timeshare industry, which includes being the world's largest provider of timeshare exchange programs. 18 SECTION B HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) D. INTEREST EXPENSE: The pro forma adjustment for interest expense is comprised of (000's): FOR THE NINE MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ --------- -------- Elimination of historical interest expense $ (536) $ (402) $ (345) Pro forma adjustment ....................... 17,955 13,466 13,466 ------------------ --------- -------- Total ..................................... $17,419 $13,064 $13,121 ================== ========= ======== The pro forma adjustment reflects the recording of interest expense on $285 million of borrowings under HFS's revolving credit facilities at an interest rate of 6.3% which is the variable rate in effect on the date of borrowing. Borrowings represent the amount used as partial consideration in the RCI acquisition. Interest expense was incurred on borrowings under the Company's revolving credit facility, which partially funded the acquisition of RCI. The Company recorded interest expense using the variable interest rate in effect on the respective borrowing dates. The effect on pro forma net income assuming a 1/8% variance in the variable interest rate used to calculate interest expense is as follows ($000's): Year Ended December 31, 1995......... $209 Nine Months Ended September 30, 1995................................ 157 Nine Months Ended September 30, 1996................................ 157 - ------------ The pro forma net income effects of a 1/8% variance in the interest rate has no impact on earnings per share for all periods presented. E. OTHER EXPENSES: The pro forma adjustment eliminates charitable contributions made by the former stockholder of RCI which would not have been incurred by the Company. Such expenses are summarized as follows ($000's): Year Ended December 31, 1995......... $1,200 Nine Months Ended September 30, 1995................................ 303 Nine Months Ended September 30, 1996................................ 345 F. 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: Pro forma HFS excluding RCI................... $(109,076) $(73,549) $(114,882) Historical RCI: .............................. (4,464) (1,940) (2,370) Pro forma provision............................ 112,395 78,935 120,331 ------------------ ----------- ------------ Total........................................ $ (1,145) $ 3,446 $ 3,079 ================== =========== ============ 19 SECTION B HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) F. INCOME TAXES: (Continued) The pro forma effective tax rates are approximately 1% higher than HFS's historical effective tax rates due to non-deductible excess of cost over fair value of net assets required to be recorded in connection with the acquisition of RCI. The pro forma provisions for taxes were computed using pro forma pre-tax amounts and the provisions of Statement of Financial Accounting Standards No. 109. G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: The pro forma adjustment to weighted average shares reflects the effect of the issuance of shares at a price per share of $75.00 to partially fund the November 12, 1996 acquisition of RCI. The unaudited Pro Forma Consolidated Statements of Operations are presented as if the acquisition took place at the beginning of the periods presented; thus, the stock issuance referred to above is considered outstanding as of the beginning of the period for purposes of per share calculations. H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: In connection with its acquisition of RCI, HFS developed a related business plan to restructure the acquired company which will result in future cost savings subsequent to the acquisition. HFS' restructuring plan was developed prior to the consummation of the acquisition and was implemented concurrent with the consummation of the acquisition. The restructuring plan included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Pursuant to HFS' specific restructuring plan, certain selling, general and administrative expenses may not be incurred subsequent to the acquisition that existed prior to consummation. In addition, there are incremental costs in the conduct of activities of the acquired company prior to the acquisition that may not be incurred subsequent to consummation and have no future economic benefit to HFS. The estimated cost savings that HFS believes would have been attained had its acquisition of RCI and all other acquisitions prior to RCI occurred on January 1, 1995 and the related impact of such cost savings on pro forma net income and net income per share are not reflected in the pro forma consolidated statements of income, but are presented below ($000's): FOR THE YEAR ENDED DECEMBER 31, 1995: PRIOR RCI ACQUISITIONS(I) TOTAL -------- --------------- --------- Payroll and related............ $1,198 $37,619 $38,817 Professional........ 1,000 6,220 7,220 Occupancy........... -- 7,740 7,740 Other............... 2,900 5,140 8,040 -------- --------------- --------- Total.............. $5,098 $56,719 $61,817 ======== =============== ========= FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995: PRIOR RCI ACQUISITIONS(I) TOTAL -------- --------------- --------- Payroll and related $ 914 $28,097 $29,011 Professional ........ 750 5,399 6,149 Occupancy ........... -- 6,322 6,322 Other ............... 1,275 4,641 5,916 -------- --------------- --------- Total .............. $2,939 $44,459 $47,398 ======== =============== ========= 20 SECTION B HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996: PRIOR RCI ACQUISITIONS TOTAL -------- -------------- -------- Payroll and related $ 880 $ 8,134 $ 9,014 Professional ........ 750 1,764 2,514 Occupancy ........... -- 710 710 Other ............... 1,333 626 1,959 -------- -------------- -------- Total .............. $2,963 $11,234 $14,197 ======== ============== ======== The impact on pro forma net income and net income per share of the estimated SG&A cost savings are as follows: FOR THE NINE-MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------ ---------------------- 1995 1995 1996 ------------------ ---------- ---------- Income before taxes, as reported .... $272,320 $191,253 $291,551 SG&A adjustments ..................... 61,817 47,398 14,197 Income before taxes, as adjusted .... 334,137 238,651 305,748 Income taxes ......................... 137,908 98,497 126,190 ------------------ ---------- ---------- Net income, as adjusted .............. $196,229 $140,154 $179,558 ================== ========== ========== Net income per share (primary): As adjusted ......................... $ 1.41 $ 1.03 $ 1.24 ================== ========== ========== As reported ......................... $ 1.15 $ .83 $ 1.18 ================== ========== ========== Net income per share (fully diluted): As adjusted ......................... $ 1.39 $ 1.01 $ 1.23 ================== ========== ========== As reported ......................... $ 1.14 $ .82 $ 1.18 ================== ========== ========== 21 SECTION C HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS EXCLUDING THE RCI ACQUISITION AND THE PHH MERGER The pro forma consolidated balance sheet as of September 30, 1996 is presented as if the acquisition of Avis, Inc. ("Avis") and the November 1996 issuance of HFS common stock (the "Avis Offering") as partial consideration for Avis had occurred on September 30, 1996. HFS currently intends to undertake an initial public offering of a majority interest in the corporation which owns all company-owned Avis car rental locations (the "Car Rental Operating Company") in 1997, the proceeds of which will be used to pay down indebtedness of the Car Rental Operating Company and to enter into franchise, information technology and other agreements to provide services to the Car Rental Operating Company based on terms to be determined. Accordingly, the pro forma financial statements reflect the acquired net assets and results of operations of the Avis rental car operating subsidiary intended to be sold as "Investment in car rental operating company -- net" and "Equity in earnings in car rental operating company", respectively. The pro forma consolidated statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1995 and 1996 are presented as if the acquisition of Avis and the following transactions had occurred on January 1, 1995: (i) the May 31, 1996 acquisition of the common stock of Coldwell Banker Corporation ("Coldwell Banker") and the related contribution of Coldwell Banker's owned real estate brokerage offices (the "Owned Brokerage Business") to a newly created independent trust (the "Trust") (the "Coldwell Banker Transaction"); (ii) the receipt of proceeds from an offering of HFS' common stock (the "Second Quarter 1996 Offering") to the extent necessary to fund (a) the acquisition of Coldwell Banker and the related repayment of indebtedness and acquisition expenses and (b) the cash consideration portion in the Avis acquisition; (iii) the acquisitions of the six non-owned Century 21 regions ("Century 21 NORS") during the second quarter of 1996, the Travelodge franchise system ("Travelodge") on January 23, 1996 and the Electronic Realty Associates franchise system ("ERA") on February 12, 1996 (collectively, the "Other 1996 Acquisitions"); and (iv) the February 22, 1996 issuance of $240 million of 4 3/4% convertible senior notes due 2003 to the extent such proceeds were used to finance the Other 1996 Acquisitions. The pro forma consolidated statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1995 are also presented as if the August 1, 1995 acquisition of Century 21 and the acquisition by merger (the "CCI Merger") in May 1995 of Central Credit Inc. ("CCI") had occurred on January 1, 1995. All of the aforementioned acquisitions have been accounted for using the purchase method of accounting. Accordingly, assets acquired and liabilities assumed have been recorded at their estimated fair values which are subject to further refinement, including appraisals and other analyses, with appropriate recognition given to the effect of current interest rates and income taxes. Management does not expect that the final allocation of the purchase price for the above acquisitions will differ materially from the preliminary allocations. HFS has entered into certain immaterial transactions which are not reflected in the pro forma consolidated statements of operations. The pro forma consolidated financial statements do not purport to present the financial position or results of operations of HFS had the transactions and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The pro forma consolidated statements of operations do not reflect cost savings and revenue enhancements that management believes may be realized following the acquisitions. These cost savings are expected to be realized primarily through the restructuring of operations as well as revenue enhancements expected to be realized through leveraging of HFS preferred alliance programs. No assurances can be made as to the amount of cost savings or revenue enhancements, if any, that actually will be realized. The pro forma consolidated financial statements are based on certain assumptions and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet and Statements of Operations and should be read in conjunction therewith and with the consolidated financial statements and related notes thereto of HFS included in its 1995 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and the financial statements and related notes of the acquired companies previously filed in Current Reports on Form 8-K pursuant to Regulation S-X Rule 3-05, "Financial Statements of Businesses Acquired or to be Acquired." 22 SECTION C HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) HISTORICAL ----------------------------- AVIS, PRO FORMA HFS AS ADJUSTED (1) ADJUSTMENTS (A) PRO FORMA (2) ------------ --------------- --------------- ------------- ASSETS Current assets Cash and cash equivalents.................. $ 471,194 $ -- $(410,742) $ 60,452 Marketable securities...................... -- -- -- -- Relocation receivables..................... 136,052 -- -- 136,052 Other accounts and notes receivable, net .. 113,175 1,800 -- 114,975 Other current assets....................... 59,081 1,881 -- 60,962 ------------ --------------- --------------- ------------- TOTAL CURRENT ASSETS......................... 779,502 3,681 (410,742) 372,441 ------------ --------------- --------------- ------------- Property and equipment--net................. 106,233 33,828 58,172 198,233 Franchise agreements--net................... 1,027,711 -- -- 1,027,711 Excess of cost over fair value of net assets acquired-net........................ 906,540 -- -- 906,540 Intangible assets........................... -- 499,143 327,426 826,569 Investment in car rental operating company--net............................... -- 72,616 2,384 75,000 Deferred income taxes--net.................. -- -- 5,200 5,200 Other assets................................ 80,064 59,633 (9,614) 130,083 ------------ --------------- --------------- ------------- TOTAL ASSETS................................. $2,900,050 $668,901 $ (27,174) $3,541,777 ============ =============== =============== ============= - ------------ (1) The consolidated historical balance sheet of Avis Inc., as adjusted is as of August 31, 1996. See Consolidated Historical Balance Sheet of Avis, Inc., as adjusted, as of August 31, 1996. (2) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger. Note: Certain reclassifications have been made to the historical HFS and Avis consolidated balance sheets to conform to HFS pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 23 SECTION C HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) HISTORICAL ----------------------------- AVIS, PRO FORMA HFS AS ADJUSTED (1) ADJUSTMENTS (A) PRO FORMA (2) ------------ --------------- --------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and other accrued liabilities............................ $ 160,357 $ 201,954 $ -- $ 362,311 Deferred revenue........................ 24,655 -- -- 24,655 Income taxes payable.................... 81,633 182 (182) 81,633 Accrued acquisition obligations ........ 40,287 -- 18,000 58,287 Current portion of long-term debt ...... 29,907 -- 100,930 130,837 ------------ --------------- --------------- ------------- TOTAL CURRENT LIABILITIES................. 336,839 202,136 118,748 657,723 ------------ --------------- --------------- ------------- Long-term debt........................... 541,563 -- -- 541,563 Deferred revenue......................... 7,299 -- -- 7,299 Other non-current liabilities............ 23,960 -- -- 23,960 Deferred income taxes.................... 85,400 -- -- 85,400 Preferred stock--Avis, Inc............... -- 72,416 (72,416) -- Redeemable portion of common stock--ESOP............................. -- 295,465 (295,465) -- Unearned compensation--ESOP.............. -- (257,751) 257,751 -- STOCKHOLDERS' EQUITY Participating convertible preferred stock................................... -- 132,000 (132,000) --- Common stock--issued and outstanding; HFS Historical, 123,720 and Pro Forma, 129,289................................. 1,237 290 (244) 1,283 Additional paid-in capital .............. 1,705,541 220,401 100,396 2,026,338 Retained earnings ....................... 206,236 103,339 (103,339) 206,236 Treasury stock........................... (8,025) (102,269) 102,269 (8,025) Net unrealized gain on available for sale securities......................... -- -- -- -- Foreign currency equity adjustment ..... -- 2,874 (2,874) -- ------------ --------------- --------------- ------------- TOTAL STOCKHOLDERS' EQUITY................ 1,904,989 356,635 (35,792) 2,225,832 ------------ --------------- --------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $2,900,050 $ 668,901 $ (27,174) $3,541,777 ============ =============== =============== ============= - ------------ (1) The consolidated historical balance sheet of Avis, Inc., as adjusted is as of August 31, 1996. See Consolidated Historical Balance Sheet of Avis, Inc., as adjusted, as of August 31, 1996. (2) Pro forma for all material transactions excluding the RCI acquisition and the PHH Merger. Note: Certain reclassifications have been made to the historical HFS and Avis consolidated balance sheets to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 24 SECTION C CONSOLIDATED HISTORICAL BALANCE SHEET OF AVIS, INC., AS ADJUSTED 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 . -- 72,616 72,616 Other assets .................................... 85,368 (25,735) 59,633 ------------- ---------------- ------------- TOTAL............................................ $3,782,551 $(3,113,650) $ 668,901 ============= ================ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and other ..................... $ 444,867 $ (242,731) $ 202,136 ------------- ---------------- ------------- Long-term debt .................................. 2,488,651 (2,488,651) -- Public liability and property damage............. 215,135 (215,135) -- Due to affiliated company........................ 132,563 (132,563) -- Other non-current liabilities Deferred income taxes........................... 34,570 (34,570) -- Preferred stock--Avis, Inc. .................... 72,416 -- 72,416 Redeemable portion of common stock--ESOP ....... 295,465 -- 295,465 Unearned compensation--ESOP..................... (257,751) -- (257,751) STOCKHOLDERS' EQUITY Participating convertible preferred stock ...... 132,000 -- 132,000 Common stock.................................... 290 -- 290 Additional paid-in capital...................... 220,401 -- 220,401 Retained earnings............................... 103,339 -- 103,339 Treasury stock ................................. (102,269) -- (102,269) Foreign currency equity adjustment.............. 2,874 -- 2,874 ------------- ---------------- ------------- TOTAL STOCKHOLDERS' EQUITY....................... 356,635 -- 356,635 ------------- ---------------- ------------- TOTAL............................................ $3,782,551 $(3,113,650) $ 668,901 ============= ================ ============= - ------------ Note: The reclassification adjustment made to the historical consolidated balance sheet of Avis, Inc. is to present the historical net assets of car rental operations as "Investment in car rental operating company -- net" as a result of HFS' plan to undertake an initial public offering of a majority interest in the corporation which owns all company owned Avis car rental operations. See notes to pro forma consolidated balance sheet and statements of operations. 25 SECTION C HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ------------------------ ACQUIRED PRO FORMA HFS COMPANIES ADJUSTMENTS PRO FORMA (1) ----------- ----------- --------------- ------------- NET REVENUES Service fees ....................... $369,442 $835,492 $ 25,950 (B) $783,070 (535,207)(C) 87,393 (D) Other .............................. 43,541 50,112 (4,421)(C) 89,232 Equity in loss of car rental operating company ................. -- -- (5,272)(D) (5,272) ----------- ----------- --------------- ------------- Net revenues ...................... 412,983 885,604 (431,557) 867,030 ----------- ----------- --------------- ------------- EXPENSES Marketing and reservation........... 143,965 -- 143,965 Selling, general and administrative (L)................. 78,232 752,121 (4,500)(E) 304,477 (521,376)(F) Depreciation and amortization ..... 30,857 50,591 20,083 (G) 101,531 Interest ........................... 21,789 12,017 970 (H) 34,776 Other .............................. 3,235 15,167 (399)(I) 18,003 ----------- ----------- --------------- ------------- Total expenses .................... 278,078 829,896 (505,222) 602,752 ----------- ----------- --------------- ------------- Income before income taxes .......... 134,905 55,708 73,665 264,278 Provision for income taxes .......... 55,175 32,027 21,874 (J) 109,076 ----------- ----------- --------------- ------------- Net income .......................... $ 79,730 $ 23,681 $ 51,791 $155,202 =========== =========== =============== ============= PER SHARE INFORMATION (PRIMARY) Net income (L)...................... $ .74 $ 1.13 =========== ============= Weighted average common and common equivalent shares outstanding .... 113,817 27,681 (K) 141,498 =========== =============== ============= PER SHARE INFORMATION (FULLY DILUTED) Net income (L)...................... $ .73 $ 1.11 =========== ============= Weighted average common and common equivalent shares outstanding .... 115,654 27,681 (K) 143,335 =========== =============== ============= - ------------ (1) Pro forma for all material transactions, excluding the RCI acquisition and the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 26 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF INCOME OF ACQUIRED COMPANIES FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) HISTORICAL ------------------------------------------ AVIS, (1) COLDWELL OTHER TOTAL AS ADJUSTED BANKER ACQUISITIONS HISTORICAL ------------- ----------- -------------- ------------ NET REVENUES Service fees ........................ $ 21,608 $679,137 $134,747 $835,492 Other ............................... -- 20,264 29,848 50,112 ------------- ----------- -------------- ------------ Net revenues ....................... 21,608 699,401 164,595 885,604 ------------- ----------- -------------- ------------ EXPENSES Selling, general and administrative 7,205 616,182 128,734 752,121 Depreciation and amortization ...... 19,683 22,425 8,483 50,591 Interest ............................ 461 5,329 6,227 12,017 Other ............................... 410 -- 14,757 15,167 ------------- ----------- -------------- ------------ Total expenses ..................... 27,759 643,936 158,201 829,896 ------------- ----------- -------------- ------------ Income (loss) before income taxes ... (6,151) 55,465 6,394 55,708 Provision for income taxes ........... 4,100 24,385 3,542 32,027 ------------- ----------- -------------- ------------ Net income (loss) .................... $(10,251) $ 31,080 $ 2,852 $ 23,681 ============= =========== ============== ============ - ------------ (1) The historical consolidated statement of income of Avis, as adjusted, has been adjusted to present only the historical operating results intended to be retained by HFS. The historical consolidated statement of income of Avis, Inc., as adjusted is for the year ended February 29, 1996. See Historical Consolidated Statement of Income of Avis, Inc., as Adjusted, for the year ended February 29, 1996. Note: Certain reclassifications have been made to the historical results of acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 27 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF INCOME OF AVIS, INC., AS ADJUSTED FOR THE YEAR ENDED FEBRUARY 29, 1996 (IN THOUSANDS) ADJUSTMENTS -------------------------------- ELIMINATION OF CAR RENTAL OPERATING AVIS, HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED ------------- ---------------- -------------- ------------- REVENUES........................... $1,716,677 $(21,608) $(1,695,069) $ -- Service fees ..................... -- 21,608 -- 21,608 ------------- ---------------- -------------- ------------- Net revenues .................... 1,716,677 -- (1,695,069) 21,608 ------------- ---------------- -------------- ------------- EXPENSES Selling, general and admnistrative ................... 1,119,888 (16,865) (1,095,818) 7,205 Depreciation and amortization ... 411,796 16,404 (408,517) 19,683 Interest ......................... 149,534 461 (149,534) 461 Other ............................ 410 -- -- 410 ------------- ---------------- -------------- ------------- Total expenses .................. 1,681,628 -- (1,653,869) 27,759 ------------- ---------------- -------------- ------------- Income (loss) before income taxes 35,049 -- (41,200) (6,151) Provision for income taxes ........ 23,977 -- (19,877) 4,100 ------------- ---------------- -------------- ------------- Net income (loss) ................. $ 11,072 $ -- $ (21,323) $(10,251) ============= ================ ============== ============= - ------------ Note: The reclassification adjustment made to the historical consolidated statement of income of Avis, Inc. is to present information technology services as "Service fees." The elimination of the car rental operating company is presented as a result of HFS's plan to undertake an initial public offering of a majority interest of 75 percent in the corporation which owns all company-owned Avis car rental operations (the "IPO Company"). HFS intends to substantially replace results of car rental operations with license fees from the IPO Company. See notes to pro forma consolidated balance sheet and statements of operations. 28 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF OTHER ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) CENTURY 21 CCI (1) CENTURY 21 (1) NORS TRAVELODGE ERA (2) TOTAL ------- -------------- ------------ ------------ ----------- ----------- NET REVENUES Service fees ..................... $ -- $60,506 $29,021 $18,361 $26,859 $134,747 Other ............................ 3,326 10,164 403 79 15,876 29,848 ------- -------------- ------------ ------------ ----------- ----------- Net revenues .................... 3,326 70,670 29,424 18,440 42,735 164,595 ------- -------------- ------------ ------------ ----------- ----------- EXPENSES Selling, general and administrative .................. -- 57,241 25,763 15,604 30,126 128,734 Depreciation and amortization ... 529 5,217 578 8 2,151 8,483 Interest ......................... -- 2,904 54 -- 3,269 6,227 Other............................. 1,917 2,751 -- -- 10,089 14,757 ------- -------------- ------------ ------------ ----------- ----------- Total expenses .................. 2,446 68,113 26,395 15,612 45,635 158,201 ------- -------------- ------------ ------------ ----------- ----------- Income (loss) before income taxes 880 2,557 3,029 2,828 (2,900) 6,394 Provision for income taxes ........ 313 2,097 -- 1,132 -- 3,542 ------- -------------- ------------ ------------ ----------- ----------- Net income (loss) ................. $ 567 $ 460 $ 3,029 $ 1,696 $ (2,900) $ 2,852 ======= ============== ============ ============ =========== =========== - ------------ (1) Reflects results of operations for the period from January 1, 1995 to the respective dates of acquisition. (2) Reflects the historical statement of operations of Electronic Realty Associates Inc. ("ERA Inc."). The financial statements which were audited for the year ended December 31, 1995 were those of Electronic Realty Associates LP ("ERA LP") which differ from the ERA Inc. financial statements. The difference is primarily attributable to (i) the home warranty business which was acquired by HFS but is excluded from the audited financial statements of ERA LP; and (ii) an intercompany charge to ERA LP by ERA Inc. Net revenues, total expenses and net loss of ERA LP for the year ended December 31, 1995 was $39.4 million, $47.3 million and $7.9 million, respectively. Note: Certain reclassifications have been made to the historical results of acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statement of operations. 29 SECTION C HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (1) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1996 ---------- ---------- NET REVENUES Service fees ................................................... $577,165 $652,968 Other .......................................................... 62,535 81,451 Equity in earnings (loss) of car rental operating company ..... (5,096) 2,459 ---------- ---------- Net revenues .................................................. 634,604 736,878 ---------- ---------- EXPENSES Marketing and reservation....................................... 110,842 130,728 Selling, general and administrative ............................ 226,802 214,298 Depreciation and amortization .................................. 76,045 77,776 Interest ....................................................... 26,649 23,464 Other .......................................................... 16,061 12,264 ---------- ---------- Total expenses ................................................ 456,399 458,530 ---------- ---------- Income before income taxes ...................................... 178,205 278,348 Provision for income taxes ...................................... 73,549 114,882 ---------- ---------- Net income ...................................................... $104,656 $163,466 ========== ========== PER SHARE INFORMATION (PRIMARY) Net income...................................................... $ .78 $ 1.14 ========== ========== Weighted average common and common equivalent shares outstanding ................................................... 138,315 146,470 ========== ========== PER SHARE INFORMATION (FULLY DILUTED) Net income ..................................................... $ .77 $ 1.13 ========== ========== Weighted average common and common equivalent shares outstanding ................................................... 140,807 147,194 ========== ========== - ------------ (1) Pro forma for all material transactions, excluding the RCI Acquisition and the PHH Merger. See notes to pro forma consolidated balance sheet and statements of operations. 30 SECTION C HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------- ACQUIRED PRO FORMA HFS COMPANIES ADJUSTMENTS PRO FORMA(1) ---------- ----------- -------------- ------------ NET REVENUES Service fees............................ $268,862 $639,521 $ 19,508 (B) $577,165 (411,795)(C) 61,069 (D) Other .................................. 30,869 31,666 -- 62,535 Equity in loss of car rental operating company ............................... -- -- (5,096) (D) (5,096) ---------- ----------- -------------- ------------ Net revenues .......................... 299,731 671,187 (336,314) 634,604 ---------- ----------- -------------- ------------ EXPENSES Marketing and reservation .............. 110,842 -- -- 110,842 Selling, general and administrative (L). 47,700 576,071 (3,375)(E) 226,802 (393,594)(F) Depreciation and amortization .......... 21,721 39,868 14,456 (G) 76,045 Interest ............................... 16,272 7,733 2,644 (H) 26,649 Other .................................. 2,012 14,448 (399)(I) 16,061 ---------- ----------- -------------- ------------ Total expenses ........................ 198,547 638,120 (380,268) 456,399 ---------- ----------- -------------- ------------ Income before income taxes .............. 101,184 33,067 43,954 178,205 Provision for income taxes .............. 41,820 19,684 12,045 (J) 73,549 ---------- ----------- -------------- ------------ Net income (loss)........................ $ 59,364 $ 13,383 $ 31,909 $104,656 ========== =========== ============== ============ PER SHARE INFORMATION (PRIMARY) Net income (L).......................... $ .57 $ .78 ========== ============ Weighted average common and common equivalent shares outstanding ......... 109,564 28,751 (K) 138,315 ========== ============== ============ PER SHARE INFORMATION (FULLY DILUTED) Net income (L).......................... $ .56 $ .77 ========== ============ Weighted average common and common equivalent shares outstanding ......... 112,056 28,751 (K) 140,807 ========== ============== ============ - ------------ (1) Pro forma for all material transactions, excluding the RCI acquisition and the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 31 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS) HISTORICAL ----------------------------------------- AVIS, (1) COLDWELL OTHER TOTAL AS ADJUSTED BANKER ACQUISITIONS HISTORICAL ------------- ---------- -------------- ------------ NET REVENUES Service fees ........................ $13,358 $513,483 $112,680 $639,521 Other ............................... -- 3,972 27,694 31,666 ------------- ---------- -------------- ------------ Net revenues ....................... 13,358 517,455 140,374 671,187 ------------- ---------- -------------- ------------ EXPENSES Selling, general and administrative 7,106 458,785 110,180 576,071 Depreciation and amortization ...... 14,253 17,272 8,343 39,868 Interest ............................ -- 2,958 4,775 7,733 Other ............................... -- 1,944 12,504 14,448 ------------- ---------- -------------- ------------ Total expenses ..................... 21,359 480,959 135,802 638,120 ------------- ---------- -------------- ------------ Income (loss) before income taxes ... (8,001) 36,496 4,572 33,067 Provision for income taxes ........... 18 16,422 3,244 19,684 ------------- ---------- -------------- ------------ Net income (loss) .................... $(8,019) $ 20,074 $ 1,328 $ 13,383 ============= ========== ============== ============ - ------------ (1) The historical consolidated statement of operations of Avis, as adjusted, has been adjusted to present only the historical operating results intended to be retained by HFS. The historical consolidated statement of operations of Avis, Inc., as adjusted, is for the nine months ended August 31, 1995. See Historical Consolidated Statement of Operations of Avis, Inc., as Adjusted, for the nine months ended August 31, 1995. Note: Certain reclassifications have been made to the historical results of acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statements of operations. 32 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF AVIS, INC. AS ADJUSTED FOR THE NINE MONTHS ENDED AUGUST 31, 1995 (IN THOUSANDS) ADJUSTMENT --------------------------------- ELIMINATION OF CAR RENTAL OPERATING AVIS, HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED ------------ ---------------- --------------- ------------- REVENUES ............................. $1,190,189 $(13,358) $(1,176,831) $ -- Service fees......................... -- 13,358 -- 13,358 ------------ ---------------- --------------- ------------- Net revenues........................ 1,190,189 (1,176,831) 13,358 ------------ ---------------- --------------- ------------- EXPENSES Selling, general and administrative 766,509 -- (759,403) 7,106 Depreciation and amortization ...... 304,339 -- (290,086) 14,253 Interest ............................ 105,379 -- (105,379) -- Other ............................... 311 -- (311) -- ------------ ---------------- --------------- ------------- Total expenses ..................... 1,176,538 -- (1,155,179) 21,359 ------------ ---------------- --------------- ------------- Income (loss) before income taxes ... 13,651 -- (21,652) (8,001) Provision for income taxes ........... 21,644 -- 21,626 18 ------------ ---------------- --------------- ------------- Net loss ............................. $ (7,993) $ -- $ (26) $(8,019) ============ ================ =============== ============= - ------------ Note: The reclassification adjustment made to the historical consolidated statement of income of Avis, Inc. is to present information technology services as "Service fees." The elimination of the car rental operating company is presented as a result of HFS's plan to undertake an initial public offering of a majority interest of 75% in the corporation which owns all company-owned Avis car rental operations (the "IPO Company"). HFS intends to substantially replace results of car rental operations with license fees from the IPO Company. See notes to pro forma consolidated balance sheet and statements of operations. 33 SECTION C 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 .................... $ -- $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 ======= ========= ============ ============ ========== ========== - ------------ (1) Reflects results of operations for the period from January 1, 1995 to the respective dates of acquisition. Note: Certain reclassifications have been made to the historical results of acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statement of operations. 34 SECTION C HFS INCORPORATED AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------- ACQUIRED PRO FORMA HFS COMPANIES ADJUSTMENTS PRO FORMA (1) ---------- ----------- -------------- ------------- NET REVENUES Service fees........................... $468,277 $332,699 $ 11,835 (B) $652,968 (235,625)(C) 75,782 (D) Other ................................. 81,733 5,718 (6,000)(D) 81,451 Equity in earnings of car rental operating company .................... -- -- 2,459 (D) 2,459 ---------- ----------- -------------- ------------- Net revenues ......................... 550,010 338,417 (151,549) 736,878 ---------- ----------- -------------- ------------- EXPENSES Marketing and reservation ............. 130,728 -- -- 130,728 Selling, general and administrative (L) 139,709 343,756 (41,804)(E) 214,298 (227,363)(F) Depreciation and amortization ......... 41,129 23,689 12,958 (G) 77,776 Interest .............................. 22,194 4,648 (3,378)(H) 23,464 Other ................................. 10,988 1,276 -- 12,264 ---------- ----------- -------------- ------------- Total expenses ....................... 344,748 373,369 (259,587) 458,530 ---------- ----------- -------------- ------------- Income before income taxes ............. 205,262 (34,952) 108,038 278,348 Provision for income taxes ............. 82,630 (10,336) 42,588 (J) 114,882 ---------- ----------- -------------- ------------- Net income ............................. $122,632 $(24,616) $ 65,450 $163,466 ========== =========== ============== ============= PER SHARE INFORMATION (PRIMARY) Net income (L)......................... $ .96 $ 1.14 ========== ============= Weighted average common and common equivalent shares outstanding......... 130,960 15,510 (K) 146,470 ========== ============== ============= PER SHARE INFORMATION (FULLY DILUTED) Net income (L)......................... $ .96 $ 1.13 ========== ============= Weighted average common and common equivalent shares outstanding ........ 131,684 15,510 (K) 147,194 ========== ============== ============= - ------------ (1) Pro forma for all material transactions, excluding the RCI acquisition and the PHH Merger. Note: Certain reclassifications have been made to the historical results of HFS and acquired companies to conform to HFS's pro forma classification. See notes to pro forma consolidated balance sheet and statement of operations. 35 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED 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 BANKER (2) ACQUISITIONS HISTORICAL ------------- ----------- -------------- ------------ NET REVENUES Service fees......................... $26,871 $295,478 $10,350 $332,699 Other ............................... -- 4,067 1,651 5,718 ------------- ----------- -------------- ------------ Net revenues ....................... 26,871 299,545 12,001 338,417 ------------- ----------- -------------- ------------ EXPENSES Selling, general and administrative 20,173 312,348 11,235 343,756 Depreciation and amortization ...... 14,247 9,021 421 23,689 Interest ............................ -- 3,155 1,493 4,648 Other ............................... -- 512 764 1,276 ------------- ----------- -------------- ------------ Total expenses ..................... 34,420 325,036 13,913 373,369 ------------- ----------- -------------- ------------ Income (loss) before income taxes ... (7,549) (25,491) (1,912) (34,952) Provision (benefit) for income taxes 96 (10,432) -- (10,336) ------------- ----------- -------------- ------------ Net income (loss) .................... $(7,645) $(15,059) $(1,912) $(24,616) ============= =========== ============== ============ - ------------ (1) The historical financial statement of income of Avis, as adjusted, has been adjusted to include the historical operating results of Avis intended to be retained by HFS and the operating results of the Avis Car rental subsidiary, included in Other Revenue. The historical consolidated statement of income of Avis, Inc., as adjusted is for the nine months ended August 31, 1996. See Historical Consolidated Statement of Operations of Avis, Inc., as Adjusted for the nine months ended August 31, 1996. (2) Reflects results of operations for the period from January 1, 1996 to the respective dates of acquisition. Note: Certain reclassifications have been made to the historical results of acquired companies to conform to HFS's classification. See notes to pro forma consolidated balance sheet and statement of operations. 36 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF INCOME OF AVIS, INC., AS ADJUSTED FOR THE NINE MONTHS ENDED AUGUST 31, 1996 (IN THOUSANDS) ADJUSTMENTS ---------------------------------- ELIMINATION OF CAR RENTAL OPERATING AVIS, HISTORICAL RECLASSIFICATIONS COMPANY AS ADJUSTED ------------ ----------------- --------------- ------------- REVENUES ............................ $1,490,709 $(26,871) $(1,463,838) $ -- Service fees........................ -- 26,871 26,871 ------------ ----------------- --------------- ------------- Net revenues....................... 1,490,709 -- (1,463,838) 26,871 ------------ ----------------- --------------- ------------- EXPENSES Selling, general and administrative 975,769 -- (955,596) 20,173 Depreciation and amortization ..... 333,147 -- (318,900) 14,247 Interest ........................... 116,958 -- (116,958) -- Other .............................. 18 -- (18) -- ------------ ----------------- --------------- ------------- Total expenses .................... 1,425,892 -- (1,391,472) 34,420 ------------ ----------------- --------------- ------------- Income (loss) before income taxes .. 64,817 -- (72,366) (7,549) Provision for income taxes .......... 29,966 -- (29,870) 96 ------------ ----------------- --------------- ------------- Net income (loss).................... $ 34,851 $ -- $ (42,496) $(7,645) ============ ================= =============== ============= - ------------ Note: The reclassification adjustment made to the historical consolidated statement of income of Avis, Inc. is to present information technology services as "Service fees." The elimination of the car rental operating company is presented as a result of HFS's plan to undertake an initial public offering of a majority interest of 75 percent in the corporation which owns all company-owned Avis car rental operations (the "IPO Company"). HFS intends to substantially replace results of car rental operations with license fees from the IPO Company. See notes to pro forma consolidated balance sheet and statements of operations. 37 SECTION C HFS INCORPORATED AND SUBSIDIARIES HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS OF OTHER 1996 ACQUISITIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS) CENTURY 21 NORS (1) TRAVELODGE (1) ERA (1) TOTAL ------------ -------------- ---------- --------- NET REVENUES Service fees........................ $6,668 $688 $ 2,994 $10,350 Other .............................. 449 -- 1,202 1,651 ------------ -------------- ---------- --------- Net revenues ...................... 7,117 688 4,196 12,001 ------------ -------------- ---------- --------- EXPENSES Selling, general and administrative 7,566 552 3,117 11,235 Depreciation and amortization ..... 285 -- 136 421 Interest ........................... 2 -- 1,491 1,493 Other .............................. -- -- 764 764 ------------ -------------- ---------- --------- Total expenses .................... 7,853 552 5,508 13,913 ------------ -------------- ---------- --------- Income (loss) before income taxes .. (736) 136 (1,312) (1,912) Provision for income taxes .......... -- -- -- -- ------------ -------------- ---------- --------- Net income (loss) ................... $ (736) $136 $(1,312) $(1,912) ============ ============== ========== ========= - ------------ (1) Reflects results of operations for the period from January 1, 1996 to the respective date of acquisition. Note: Certain reclassifications have been made to the historical results of Other 1996 Acquisitions to conform to HFS's classification. See notes to pro forma consolidated balance sheet and statements of operations. 38 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS A. ACQUISITION OF AVIS: At the time HFS acquired Avis, it had developed and announced a plan (the "Plan") as follows: 1. Retain certain assets acquired, including the reservation system, franchise agreements, trademarks and tradenames and certain liabilities. 2. Segregate the assets used in the car rental operations in a separate subsidiary ("Car Rental Operating Company") and to dispose of approximately 75% interest in Car Rental Operating Company within one year through an initial public offering (IPO) of Car Rental Operating Company. 3. Enter into a license agreement with Car Rental Operating Company for use of the trademarks and tradename and other franchise services. Based on the Plan, the purchase price for Avis has been allocated to the assets and liabilities acquired by HFS, including its investment in Car Rental Operating Company based on their estimated fair values. The amount allocated to Car Rental Operating Company was based on the estimated valuation of the Car Rental Operating Company including the effect of royalty, reservation and information technology agreements with HFS. Under the plan, the Car Rental Operating Company will sell approximately a 75% interest at an assumed price of $225 million thereby diluting HFS' interest to 25%. All of the proceeds from the IPO will be retained by the Car Rental Operating Company. Pro forma adjustments consist of the elimination of certain acquired assets and assumed liabilities, net of the fair value ascribed to such assets and liabilities. The Company acquired Avis for the following consideration ($000's): Cash consideration (i) ........................................... $ 410,742 Issuance of approximately 4.6 million shares HFS common stock .... 320,843 ESOP liability (ii) .............................................. 100,930 ----------- TOTAL PRO FORMA ACQUISITION COST.................................. 832,515 ----------- Fair value of net assets acquired: Historical book value of acquired company........................ 356,635 Elimination of net assets (liabilities) not acquired or assumed: Other assets.................................................... (9,614) Preferred stock--Avis........................................... 72,416 Intangible assets--Avis......................................... (499,143) Redeemable portion of common stock--ESOP........................ 295,465 Unearned compensation--ESOP..................................... (257,751) Fair value adjustments to assets acquired and liabilities assumed: Deferred income tax asset, net (iii)............................ 5,200 Property and equipment (iv) .................................... 58,172 Investment in Car Rental Operating Company (v).................. 2,384 Accrued acquisition obligations (vi)............................ (18,000) Other........................................................... 182 ----------- FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED.................... 5,946 ----------- Intangible assets--Avis (vii).................................... $ 826,569 =========== 39 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) A. ACQUISITION OF AVIS: (Continued) In connection with the Company's fair value allocation of net assets to the Car Rental Operating Company, the estimated net worth of the Car Rental Operating Company was valued at $75 million. Such net worth and corresponding company investment in the Car Rental Operating Company was allocated as follows: Historical net book value of car rental operating company................................................. $72,616 Fair value adjustments to car rental operating company .. 2,384 --------- $75,000 ========= The condensed balance sheet of the Car Rental Operating Company including fair value adjustments at September 30, 1996 is as follows: Vehicles.............................................. $ 2,567,517 Property and equipment................................ 101,000 Deferred tax asset.................................... 102,000 Excess of cost over fair value of net assets acquired............................................. 154,000 Debt.................................................. (2,488,651) Property liability and property damage................ (215,135) Other, net............................................ (145,731) ------------- Stockholder's equity.................................. $ 75,000 ============= HFS' investment in Car Rental Operating Company of $75 million represents the estimated value of its 100% interest in the Car Rental Operating Company at the date of acquisition and is accounted for under the equity method since HFS' control is temporary based on the planned IPO of the Car Rental Operating Company. Upon completion of the IPO, the value of the Car Rental Operating Company is expected to increase to $300 million (with the $225 million of IPO proceeds retained by the Car Rental Operating Company) with HFS' interest at 25% equal to $75 million, its current investment balance. If the results of the IPO do not confirm the preliminary purchase price allocation for the investment in the Car Rental Operating Company, then such investment will be adjusted with a corresponding adjustment to Excess of cost over fair value of net assets acquired. - ------------ (i) Cash consideration of $367.2 million was financed by the Second Quarter 1996 Offering. Cash consideration also includes: (a) a cash payment of $17.6 million made to General Motors Corporation ("GM"), representing the amount by which the value attributable under the Stock Purchase Agreement to the HFS Common Stock received by GM in the Avis Acquisition exceeded the proceeds realized upon the subsequent sale of such HFS Common Stock; and (b) payment of a $26 million bank facility termination fee by the Company in connection with the Avis acquisition. (ii) The ESOP liability bears interest at LIBOR plus 20 basis points for a period commencing on the acquisition date to maturity which is primarily the earlier of three days after the sale of Company shares issued to the ESOP or the first anniversary of the acquisition. (iii) The pro forma adjustment to deferred income taxes recorded in connection with the acquisition results from differences in the fair values of assets acquired and liabilities assumed and their respective income tax bases. (iv) The adjustment to property and equipment is primarily attributable to the values ascribed to reservation equipment and related assets and to the Avis headquarters office in excess of historical cost. (v) The adjustment to investment in car rental operating company reflects the net effect of push-down accounting adjustments which result in a $75 million fair value of the car rental operating company. (vi) Accrued acquisition obligations consist of professional fees ($3.7 million), investment banker fees ($8.0 million) and filing fees and other ($6.3 million). 40 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) A. ACQUISITION OF AVIS: (Continued) (vii) Intangible assets retained by HFS consist of the following: (IN MILLIONS) ------------- Avis trademark ........................................ $400.0 Reservation system and customer database .............. 109.0 Excess of cost over fair value of net assets acquired 317.6 ------------- $826.6 ============= The pro forma adjustments include the elimination of Avis stockholders' equity and the issuance of approximately 4.6 million shares of HFS's common stock to finance the acquisition. STOCKHOLDERS' EQUITY ----------------------------------------------- ($000'S) ----------------------------------------------- ISSUANCE OF ELIMINATON OF ADJUSTMENT TO HFS STOCKHOLDERS' STOCKHOLDERS' COMMON STK. EQUITY EQUITY ------------- --------------- --------------- Participating convertible preferred stock.................................... $ -- $(132,000) $(132,000) Common stock.............................. 46 (290) (244) Additional paid-in capital................ 320,797 (220,401) 100,396 Retained earnings......................... -- (103,339) (103,339) Treasury stock............................ -- 102,269 102,269 Foreign currency equity adjustment ....... -- (2,874) (2,874) ------------- --------------- --------------- $320,843 $ 356,635 $ (35,792) ============= =============== =============== B. SERVICE FEE REVENUE: The pro forma adjustment reflects the elimination of franchise revenue associated with discontinued Century 21 international based operations, the elimination of franchise revenue paid by the Century 21 NORS to Century 21 under sub-franchise agreements (offset against SG&A expense--see Note E) and the addition of franchise fees to be received under franchise contracts with owned brokerage offices upon contribution of the Owned Brokerage Business to the Trust. Pro forma adjustments to franchise revenue consists of the following: FOR THE NINE MONTHS FOR THE YEAR ENDED 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 ================== ========= ========= The Franchise fees from the Owned Brokerage Business, which is based on the franchise contracts with the Trust, is calculated at a net of approximately 5.7% of gross commissions earned by the Owned Brokerage Business on sales of real estate properties. Gross commissions earned by the Owned 41 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) B. SERVICE FEE REVENUE: (Continued) Brokerage Business were $535.2 million, $411.8 million and $235.6 million for the year ended December 31, 1995, for the nine months ended September 30, 1995 and for the five months ended May 31, 1996 (January 1 through date of acquisition). C. OWNED BROKERAGE BUSINESS REVENUE: The pro forma adjustment reflects the elimination of revenue generated from Coldwell Banker's 318 formerly owned brokerage offices. HFS contributed the net assets of the Owned Brokerage Business to the Trust upon consummation of the Coldwell Banker acquisition. The free cash flow of the Trust will be expended at the discretion of the trustees to enhance the growth of funds available for advertising and promotion. D. CAR RENTAL OPERATING COMPANY OPERATIONS: The pro forma adjustments are comprised of the following: FOR THE YEAR FOR THE NINE MONTHS ENDED ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------- 1995 1995 1996 ---------------------- ---------------------- ---------------------- Historical income before taxes from Car Rental Operating Company............................. $ 41,200 $ 21,652 $ 72,366 ADJUSTMENTS TO CAR RENTAL OPERATING COMPANY: Elimination of historical expense associated with: Long-term incentive compensation plans eliminated in connection with the Avis Acquisition ................................. $ 4,700 -- $ 9,302 Depreciation and amortization ................ 31,869 $ 23,208 26,120 Addition of pro forma expenses associated with: Depreciation and amortization (i) ............ (18,279) (13,709) (13,709) Increased financing costs (ii) ................ (8,004) 10,286 (4,714) 4,785 (1,549) 20,164 ---------- ---------- ---------- HFS SERVICE FEE ADJUSTMENT: Service fees from franchised locations (iii) . (18,366) (13,180) (14,748) Reservation and information technology services (iv)................................ (9,700) (6,700) (9,800) Gross royalty payment to HFS from Avis (v) ... (59,327) (41,189) (51,234) (87,393) (61,069) (75,782) ---------- ---------- ---------- ---------- ---------- ---------- Adjusted income (loss) before taxes from car rental operating company ..................... (35,907) (34,632) 16,748 Provision (benefit) for income taxes ......... (14,820) (14,249) 6,912 ---------- ---------- ---------- Adjusted net income (loss) from car rental operating company ............................ (21,087) (20,383) 9,836 HFS ownership percentage ...................... 25% 25% 25% ---------- ---------- ---------- HFS' equity in earnings (loss) in car rental operating company ............................ $ (5,272) $ (5,096) $ 2,459 ========== ========== ========== (OTHER REVENUE ADJUSTMENT): Elimination of historical interest income related to cash consideration portion of Avis Acquisition (vi)........................ $ -- $ -- $ 6,000 ========== ========== ========== - ------------ (i) The estimated fair value of Avis property and equipment intended to be retained by the car rental company is $101.0 million, comprised primarily of furniture, fixtures, and leasehold improvements, 42 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) D. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued) which is amortized on a straight-line basis over the estimated useful lives, which average seven years. Excess of cost over fair value of net assets acquired by the Car Rental Operating Company is valued at $154 million and is amortized on a straight line basis over a benefit period of 40 years. (ii) As a result of the merger between the Company and Avis, approximately $1 billion of tax-advantaged debt was repaid and replaced by a similar amount of non tax-advantaged debt. This resulted in an increase in interest rates, due to the loss of tax benefits from ESOP financing which were passed through from various lenders to Avis ($000's): FOR THE NINE MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ ---------- ---------- Add current facilities ... $ 129,472 $ 95,047 $ 97,854 Reverse former facilities (121,468) (90,333) (96,305) ------------------ ---------- ---------- Increased financing cost . $ 8,004 $ 4,714 $ 1,549 ================== ========== ========== (iii) Reflects historical franchise fee revenue from third parties. (iv) Subsequent to the IPO, HFS will retain and operate the telecommunications and computer processing system which services, the Avis Car Rental Operating Company for reservations, rental agreement processing, accounting and fleet control. Pursuant to a planned contractual agreement with the Car Rental Operating Company. HFS will charge the Car Rental Operating cost plus thirty-five percent for services provided. The adjustment is calculated as follows: FOR THE YEAR FOR THE NINE ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 -------------- -------- -------- Reservation and information technology costs incurred.................................... 27,714 19,143 28,000 Markup percentage (cost plus 35%)............ 35% 35% 35% -------------- -------- -------- HFS Service Fees............................. 9,700 6,700 9,800 ============== ======== ======== (v) In connection with the Company's plan to dispose of approximately 75% of the Car Rental Operating Company, the Company will enter into franchise, information technology and other agreements to provide services to the Car Rental Operating Company based on terms to be determined. The royalty payment to be made to HFS from the Car Rental Operating Company for use of the Avis trademarks and tradename is calculated at 3.5% of the revenues generated by the Car Rental Operating Company which is the net royalty percentage the Company expects to receive as a result of a planned contractual arrangement with the Avis Car Rental Operating Company subsequent to the IPO. Such payments are calculated as follows ($000's): FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ ------------ ------------- Revenues generated by Car Rental Operating Company................................... $1,695,069 $1,176,831 $1,463,838 Royalty percentage......................... 3.5% 3.5% 3.5% ------------------ ------------ ------------ Royalty payment to HFS..................... $ 59,327 $ 41,189 $ 51,234 ================== ============ ============ (vi) The pro forma adjustment eliminates historical interest income on the portion of cash generated from the Second Quarter 1996 Offering which was used as consideration in the Avis Acquisition. 43 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) E. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: The pro forma adjustments reflects the elimination of royalty payments made by the Century 21 NORS to Century 21 under subfranchise agreements (offset against service fee revenue--See Note B) and the payment of Coldwell Banker stock options as a result of change in control provisions in connection with the acquisition of Coldwell Banker by HFS. FOR THE NINE MONTH FOR THE YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ -------- -------- Franchise fees ....... $4,500 $3,375 $ 1,003 Stock option expense -- -- 40,801 ------------------ -------- -------- Total................ $4,500 $3,375 $41,804 ================== ======== ======== F. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: The pro forma adjustment reflects the elimination of expenses associated with Coldwell Banker's formerly owned brokerage offices (See Note C). The majority of Owned Brokerage Business expenses are directly attributable to the business. Based on the Company's due diligence of Coldwell Banker Corporation and subsidiaries ("CB Consolidated") the Company determined that common expenses were allocated to the owned brokerage business based on a reasonable allocation method. Such allocations were based on the ratio of number of employees, the amount of space occupied and revenue generated relative to CB Consolidated in the aggregate and multiplied by corresponding common costs as appropriate to determine allocable expenses. G. DEPRECIATION AND AMORTIZATION: The pro forma adjustment for depreciation and amortization is comprised of ($000's): For the year ended December 31, 1995: CCI CENTURY COLDWELL OTHER 1996 MERGER 21 AVIS BANKER ACQUISITIONS TOTAL -------- ----------- ----------- ----------- -------------- ----------- Elimination of historical expense.................. $(529) $ (5,217) $(19,683) $(22,425) $(2,737) $(50,591) Property, equipment and furniture and fixtures .. 100 534 5,909 1,156 189 7,888 Information data base .... 375 -- -- -- -- 375 Intangible assets......... 289 4,540 29,594 20,387 7,601 62,411 -------- ----------- ----------- ----------- -------------- ----------- Total.................... $ 235 $ (143) $ 15,820 $ (882) $ 5,053 $ 20,083 ======== =========== =========== =========== ============== =========== 44 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) G. DEPRECIATION AND AMORTIZATION: (Continued) For the nine months ended September 30, 1995: CCI CENTURY COLDWELL OTHER 1996 MERGER 21 AVIS BANKER ACQUISITIONS TOTAL -------- ----------- ----------- ----------- -------------- ----------- Elimination of historical expense.................. $(529) $ (5,217) $(14,253) $(17,272) $(2,597) $(39,868) Property, equipment and furniture and fixtures .. 100 534 4,432 867 -- 5,933 Information data base .... 375 -- -- -- -- 375 Intangible assets......... 289 4,540 22,196 15,290 5,701 48,016 -------- ----------- ----------- ----------- -------------- ----------- Total.................... $ 235 $ (143) $ 12,375 $ (1,115) $ 3,104 $ 14,456 ======== =========== =========== =========== ============== =========== For the nine months ended September 30, 1996: COLDWELL OTHER 1996 AVIS BANKER ACQUISITIONS TOTAL ----------- ---------- -------------- ----------- Elimination of historical expense.................. $(14,247) $(9,021) $ (421) $(23,689) Property, equipment and furniture and fixtures .. 4,432 482 -- 4,914 Intangible assets......... 22,196 8,495 1,042 31,733 ----------- ---------- -------------- ----------- Total.................... $ 12,381 $ (44) $ 621 $ 12,958 =========== ========== ============== =========== CCI Merger The estimated fair values of CCI's information data base, property and equipment and excess of cost over fair value of net assets acquired are $7.5 million, $1.0 million and $33.8 million, respectively, and are amortized on a straight-line basis over the periods to be benefited which are ten, five and forty years, respectively. The benefit periods associated with the excess cost over fair value of net assets acquired were determined based on CCI's position as the dominant provider of gambling patron credit information services since 1956, its ability to generate operating profits and expansion of its customer base and the longevity of the casino gaming industry. Century 21 The estimated fair values of Century 21 property and equipment, franchise agreements and excess cost over fair value of net assets acquired are $5.5 million, $33.5 million and $199.7 million, respectively, and are amortized on a straight-line basis over the periods to be benefited which are seven, twelve and forty years, respectively. The benefit periods associated with the excess cost over fair value of net assets acquired were determined based on Century 21's position as the world's largest franchisor of residential real estate brokerage offices, the most recognized brand name in the residential real estate brokerage industry and the longevity of the residential real estate brokerage business. Avis The estimated fair value of Avis' property and equipment intended to be retained by HFS is $96.0 million, comprised primarily of reservation equipment and related assets and to the Avis Headquarters office in excess of historical cost. Such property and equipment is amortized on a straight-line basis over 45 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) G. DEPRECIATION AND AMORTIZATION: (Continued) the estimated benefit periods ranging from five to thirty years. Avis's intangible assets recorded by HFS (not applicable to car rental operating subsidiary) are comprised of the Avis trademark, a reservation system and customer data base, and excess of cost over fair value of net assets acquired. The estimated fair value of the Avis trademark is approximately $400 million and is amortized on a straight line basis over a benefit period of 40 years. The estimated fair value of the reservation system and customer data base are approximately 95.0 million and 14.0 million, respectively and are amortized on a straight line basis over the periods to be benefited which are 10 years and 6.5 years, respectively. The excess of cost over fair value of net assets acquired applicable to the allocated portion of the business to be retained by HFS is estimated at approximately $317.6 million and is determined to have a benefit period of forty years, which is based on Avis' position as the second largest car rental system in the world, the recognition of its brand name in the car rental industry and the longevity of the car rental business. Coldwell Banker The estimated fair value of Coldwell Banker's property and equipment (excluding land) of $15.7 million, is amortized on a straight-line basis over the estimated benefit periods ranging from five to twenty-five years. Coldwell Banker's intangible assets are comprised of franchise agreements and excess of cost over fair value of net assets acquired. The franchise agreements with the brokerage offices comprising the Trust are valued independently of all other franchise agreements with Coldwell Banker affiliates. Franchise agreements within the Trust and independent of the Trust are valued at $218.5 million and $218.7 million, respectively and are amortized on a straight line basis over the respective benefit periods of forty years and thirty-five years, respectively. The benefit period associated with Trust franchise agreements was based upon a long history of gross commission sustained by the Trust. The benefit period associated with the Coldwell Banker affiliates' franchise agreements was based upon the historical profitability of such agreements and historical renewal rates. The excess of cost over fair value of net assets acquired is estimated at approximately $347.0 million and is determined to have a benefit period of forty years, which is based on Coldwell Banker's position as the largest gross revenue producing real estate company in North America, the recognition of its brand name in the real estate brokerage industry and the longevity of the real estate brokerage business. Other 1996 Acquisitions The estimated fair values of Other 1996 Acquisitions franchise agreements aggregate $61.0 million and are being amortized on a straight line basis over the periods to be benefited, which range from twelve to thirty years. The estimated fair values of Other Acquisitions excess of cost over fair value of net assets acquired aggregate $187.4 million and are each being amortized on a straight line basis over the periods to be benefited, which are forty years. 46 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) H. INTEREST EXPENSE: FOR THE NINE MONTHS FOR THE YEAR ENDED 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) Reversal of Coldwell Banker.................... (5,329) (2,958) (3,155) Century 21..................................... 2,135 2,135 -- Minority interest--preferred dividends ........ 1,796 1,796 -- 4 3/4% Notes to finance Other 1996 Acquisitions.................................. 8,595 6,446 1,270 ------------------ ---------- --------- Total........................................ $ 970 $ 2,644 $(3,378) ================== ========== ========= Century 21 The pro forma adjustment reflects the recording of interest expense on $60 million of borrowings under HFS's revolving credit facility at an interest rate of 6.1% which is the variable rate in effect on the date of borrowing. Borrowings represent the amount necessary to finance the initial cash purchase price net of $10.2 million of acquired cash. Effect of a 1/8% variance in variable interest rates Interest expense was incurred on borrowings under the Company's revolving credit facility which partially funded the acquisition of Century 21. The Company recorded interest expense using the variable interest rate in effect on the respective borrowing dates. The effect on pro forma net income assuming a 1/8% variance in the variable interest rate used to calculate interest expense is as follows ($000's): Year Ended December 31, 1995............. $26 Nine Months Ended September 30, 1995 .... 26 Nine Months Ended September 30, 1996 .... -- - ------------ The pro forma net income effects of a 1/8% variance in the interest rate has no impact on earnings per share for all periods presented. Coldwell Banker The pro forma adjustment reflects the reversal of historical interest expense relating to the following ($000's): FOR THE NINE FOR THE YEAR ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1995 1995 1996 ------------------ -------- -------- Expense associated with the Owned Brokerage Business (i) .................................... $ 138 $ 72 $ (179) Expense associated with revolving credit facility borrowings which will be repaid with proceeds from offering (ii)............................... 5,191 2,886 3,334 ------------------ -------- -------- Total............................................ $5,329 $2,958 $3,155 ================== ======== ======== (i) HFS paid substantially all outstanding debt of Coldwell Banker Corporation and subsidiaries ("CB Consolidated") at the consummation date of the acquisition. Therefore, a determination as to the reasonableness of allocated CB Consolidated interest to the Owned Brokerage Business is unnecessary. 47 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) H. INTEREST EXPENSE: (Continued) (ii) At the date of acquisition, HFS repaid $105 million of Coldwell Banker indebtedness which represented borrowings under a revolving credit facility at a variable rate of interest (LIBOR plus a margin ranging from .5% to 1.25%). Minority interest -- preferred dividends: The pro forma adjustment represents dividends on the redeemable Series A Adjustable Rate Preferred Stock of Century 21. 4 3/4% Notes The pro forma adjustment reflects interest expense and amortization of deferred financing costs related to the February 22, 1996 issuance of the 4 3/4% Notes (5.0% effective interest rate) to the extent that such proceeds were used to finance the Acquisitions of ERA ($36.8 million), Travelodge ($39.3 million), and Century 21 NORS ($95.0 million). I. OTHER EXPENSES: The pro forma adjustment eliminates certain accounting, legal and other administrative expenses allocated to CCI, all of which would not have been incurred by the Company. Such expenses are summarized as follows ($000's): Year Ended December 31, 1995 ...... $399 Nine Months Ended September 30, 1995.............................. 399 Nine Months Ended September 30, 1996.............................. -- J. INCOME TAXES: The pro forma adjustment to income taxes is comprised of ($000's): FOR THE NINE MONTHS FOR THE YEAR ENDED 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) -- Avis.......................................... (4,100) (18) (96) Coldwell Banker............................... (24,385) (16,422) 10,432 Travelodge.................................... (1,132) (834) -- Pro forma provision............................ 109,076 73,549 114,882 ------------------ ----------- ----------- Total........................................ $ 21,874 $ 12,045 $ 42,588 ================== =========== =========== The pro forma effective tax rates are approximately 1% higher than HFS's historical effective tax rates due to non-deductible excess of cost over fair value of net assets required to be recorded in connection with the acquisitions of Avis. The pro forma provisions for taxes were computed using pro forma pre-tax amounts and the provisions of Statement of Financial Accounting Standards No. 109. 48 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) K. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: The pro forma adjustment to weighted average shares consists of the following (000's): FOR THE NINE ISSUANCE FOR THE YEAR ENDED MONTHS ENDED PRICE PER DECEMBER 31, SEPTEMBER 30, SHARE 1995 1995 1996 ----------- ------------------ -------- ------- CCI (including dilutive impact of warrants)(1) . $15.30 896 1,180 -- Century 21 (2) ................................. $49.88 2,334 3,120 -- Avis Offering (3) .............................. $74.06 4,569 4,569 4,569 Second Quarter 1996 Offering--Coldwell Banker (4) ........................................... $59.99 12,838 12,838 7,122 Second Quarter 1996 Offering--Avis (5) ........ $59.99 6,121 6,121 3,401 Century 21 NORS (6) ............................ $49.83 923 923 418 ------------------ -------- ------- Total.......................................... 27,681 28,751 15,510 ================== ======== ======= (1) Date of Acquisition, May 11, 1995 (2) Date of Acquisition, August 1, 1995 (3) Date of Acquisition, October 17, 1996 (4) Date of Acquisition, May 31, 1996 (5) Date of Acquisition, October 17, 1996 (6) Date of Acquisition, April 3, 1996 The unaudited Pro Forma Consolidated Statements of Operations are presented as if the acquisitions took place at the beginning of the periods presented; thus, the stock issuances and warrants assumed referred to above are considered outstanding as of the beginning of the period for purposes of per share calculations. L. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: In connection with its acquisitions, HFS developed related business plans to restructure each of the respective acquired companies which will result in future cost savings subsequent to the acquisitions. HFS' restructuring plans in each case were developed prior to the consummation of the respective acquisitons and were implemented concurrent with the consummation of the acquistions. Restructuring plans included the involuntary termination and relocation of employees, the consolidation and closing of facilities and the elimination of duplicative operating and overhead activities. Pursuant to HFS' specific restructuring plans, certain selling, general and administrative expenses may not be incurred subsequent to each acquisition that existed prior to consummation. In addition, there are incremental costs in the conduct of activities of the acquired companies prior to the acquistions that may not be incurred subsequent to consummation and have no future economic benefit to HFS. The estimated cost savings that HFS believes would have been attained had its acquisitions occurred on January 1, 1995 and the 49 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) L. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued) related impact of such cost savings on pro forma net income and net income per share are not reflected in the pro forma consolidated statements of income, but are presented below ($000's): For the year ended December 31, 1995: CENTURY COLDWELL CENTURY 21 21 BANKER NORS TRAVELODGE ERA TOTAL --------- ---------- ------------ ------------ -------- --------- Payroll and related............ $10,885 $10,682 $ 7,706 $1,110 $7,236 $37,619 Professional........ 2,693 1,500 1,486 154 387 6,220 Occupancy........... 3,628 -- 2,754 186 1,172 7,740 Other............... 3,128 (1,517) 2,326 167 1,036 5,140 --------- ---------- ------------ ------------ -------- --------- Total.............. $20,334 $10,665 $14,272 $1,617 $9,831 $56,719 ========= ========== ============ ============ ======== ========= For the nine months ended September 30, 1995: CENTURY COLDWELL CENTURY 21 21 BANKER NORS TRAVELODGE ERA TOTAL --------- ---------- ------------ ------------ -------- --------- Payroll and related............ $10,885 $ 9,830 $5,354 $502 $1,526 $28,097 Professional........ 2,693 1,573 1,063 70 -- 5,399 Occupancy........... 3,628 -- 1,944 84 666 6,322 Other............... 3,128 (1,072) 1,528 74 983 4,641 --------- ---------- ------------ ------------ -------- --------- Total.............. $20,334 $10,331 $9,889 $730 $3,175 $44,459 ========= ========== ============ ============ ======== ========= For the nine months ended September 30, 1996: COLDWELL CENTURY 21 BANKER NORS TRAVELODGE ERA TOTAL ---------- ------------ ------------ ------ -------- Payroll and related............ $5,462 $2,425 $25 $222 $ 8,134 Professional........ 1,055 705 4 -- 1,764 Occupancy........... -- 604 4 102 710 Other............... (604) 1,069 4 157 626 ---------- ------------ ------------ ------ -------- Total.............. $5,913 $4,803 $37 $481 $11,234 ========== ============ ============ ====== ======== 50 SECTION C HFS INCORPORATED AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS--(CONTINUED) L. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued) The impact on pro forma net income and net income per share of the estimated SG&A cost savings are as follows: FOR THE NINE-MONTH FOR THE YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------ ---------------------- 1995 1995 1996 ------------------ ---------- ---------- Income before taxes, as reported .... $264,278 $178,205 $278,348 SG&A adjustments ..................... 56,719 44,459 11,234 Income before taxes, as adjusted .... 320,997 222,664 289,582 Income taxes ......................... 132,486 91,899 119,518 ------------------ ---------- ---------- Net income, as adjusted .............. $188,511 $130,765 $170,064 ================== ========== ========== Net Income Per Share (primary): As adjusted.......................... $ 1.36 $ .97 $ 1.18 ================== ========== ========== As reported.......................... $ 1.13 $ .78 $ 1.14 ================== ========== ========== Net income per share (fully diluted): As adjusted ......................... $ 1.35 $ .95 $ 1.18 ================== ========== ========== As reported ......................... $ 1.11 $ .77 $ 1.13 ================== ========== ========== M. ACCRUED ACQUISITION LIABILITIES: The Company has recorded liabilities for charges to be incurred in connection with the restructuring of acquired Century 21, Century 21 NORS, ERA and Coldwell Banker operations. These acquisitions were consummated in 1995 and 1996 and resulted in the consolidation of facilities, involuntary termination and relocation of employees, and elimination of duplicative operating and overhead activities. The following table provides details of these charges by type. At September 30, 1996 the Company was substantially complete with its restructuring Plan. CENTURY 21 COLDWELL CENTURY 21 NORS ERA BANKER ------------ ------------ --------- ---------- Personnel related ... $12,647 $1,720 $ 8,000 $4,237 Facility related .... 16,511 2,293 1,558 5,491 Other costs .......... 990 711 501 211 ------------ ------------ --------- ---------- Total................. $30,148 $4,724 $10,059 $9,939 ============ ============ ========= ========== Terminated employees 325 Personnel related charges include termination benefits such as severance, wage continuation, medical and other benefits. Facility related costs include contract and lease terminations, temporary storage and relocation costs associated with assets to be disposed of, and other charges incurred in the consolidation of excess office space. Through September 30, 1996 approximately $25.6 million, $2.5 million, $4.6 million and $2.9 million were paid by Century 21, Century 21 NORS, ERA and Coldwell Banker, respectively and charged against the restructuring liability. N. TRUST CONTRIBUTION Included in HFS historical SG&A for the nine months ended September 30, 1996, is a $5 million charge associated with the Company's contribution of the Owned Brokerage Business to the Trust. The charge represents the fair value of the Owned Brokerage Business based upon a valuation which considered earnings, cash flow, assets and business prospects of the contributed business. 51 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE MERGER The accompanying combining consolidated financial statements give effect to the business combination of HFS and PHH which will be accounted for as a pooling of interests. Accordingly, the underlying combining historical consolidated balance sheet as of September 30, 1996 and the combining historical consolidated statements of income for each of the years ended December 31, 1993, 1994 and 1995, and each of the nine month periods ended September 30, 1995 and 1996, reflects the combining of the historical financial results of PHH with the historical consolidated financial results of HFS. HFS expects to recognize a one-time charge related to transaction and business combination costs in connection with the Merger, which is not reflected in the combining historical consolidated statements of income. The combining historical consolidated financial statements reflect adjustments for the pooling of HFS and PHH including reclassifications to conform to the presentation expected to be used by the merged companies and shares issued as consideration in connection with the Merger. The Pro forma financial statements include a one-time pre-tax restructuring charge incurred in connection with the Merger. The charge includes severance, facility consolidation and other transaction related costs associated with the integration of HFS and PHH businesses. HFS estimates the charge to approximate $267 million before related income tax benefits. HFS expects this charge to result in annual pre-tax savings of approximately $100 million with the full benefit of the cost reductions beginning in 1998. The combining historical consolidated financial statements include certain adjustments described in the Notes to Combining Historical Consolidated Financial Statements and should be read in conjunction therewith and with the consolidated financial statements and related notes thereto of HFS and PHH. TERMS OF THE MERGER Approval of the share issuance by HFS stockholders and approval of the Merger proposed by PHH stockholders are conditions to consummation of the Merger. In the Merger, each outstanding share of common stock of PHH, other than PHH Common Stock held by PHH or held by HFS, will be converted into the right to receive that fraction of a share of HFS Common Stock (the "Conversion Number") represented by the number determined by dividing $49.50 by the average of HFS Common Stock over a period of twenty trading days preceding the fifth trading day prior to the date of the special meeting of stockholders of PHH (the "Pricing Period"); provided however that in no event will such number be greater than 0.8250 or less than 0.6111. In addition, in the Merger, shares of HFS Common Stock will be issued in exchange for the currently outstanding options to purchase shares of PHH Common Stock. As a result of the conversion formula described above, if the average price of HFS Common Stock during the Pricing Period is within the range of $60.00 to $81.00, holders of PHH Common Stock will receive that fraction of a share of HFS Common Stock having a value (based on the average price of such shares during the Pricing Period) of $49.50 for each share of PHH Common Stock (and the Conversion Number will fluctuate accordingly), but if the average price of HFS Common Stock during the Pricing Period is less than $60.00 or greater than $81.00, the Conversion Number will be fixed at 0.8250 or 0.6111, respectively, resulting in the issuance of a number of shares of HFS Common Stock for each share of PHH Common Stock having a value (based on the average price of such shares during the Pricing Period) less than or more than $49.50, as the case may be. Based on the number of shares of PHH Common Stock outstanding on the Record Date, the number of shares of HFS Common Stock to be issued upon conversion of outstanding shares of PHH Common Stock will be not less than approximately 21.3 million shares and not more than approximately 28.8 million shares. 52 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED BALANCE SHEET PAGE 1 OF 2 AS OF SEPTEMBER 30, 1996 (IN THOUSANDS) HISTORICAL -------------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES ------------ ------------ ------------- ----------- ASSETS Current assets Cash and cash equivalents ................... $ 471,194 $ 11,450 $ -- $ 482,644 Restricted Cash.............................. 89,849 (A) 89,849 Relocation receivables ...................... 136,052 666,905 -- 802,957 Other accounts and notes receivable--net .... 113,175 442,951 (6,800)(A) 549,326 Other current assets ........................ 59,081 58,916 56,000 (A) 173,997 ------------ ------------ ------------- ----------- TOTAL CURRENT ASSETS .......................... 779,502 1,180,222 139,049 2,098,773 ------------ ------------ ------------- ----------- Property and equipment--net .................. 106,233 92,846 (6,500)(A) 192,579 Franchise agreements--net .................... 1,027,711 -- 1,027,711 Excess of cost over fair value of net assets acquired--net ............................... 906,540 47,656 (22,500)(A) 931,696 Other assets ................................. 80,064 125,384 (7,300)(A) 198,148 ------------ ------------ ------------- ----------- TOTAL ......................................... 2,900,050 1,446,108 102,749 4,448,907 ------------ ------------ ------------- ----------- ASSETS UNDER FLEET MANAGEMENT AND MORTGAGE PROGRAMS Net investment in leases and leased vehicles -- 3,285,721 -- 3,285,721 Mortgage loans held for sale ................. -- 872,404 -- 872,404 Mortgage servicing rights and fees ........... -- 280,344 -- 280,344 ------------ ------------ ------------- ----------- TOTAL ......................................... -- 4,438,469 -- 4,438,469 ------------ ------------ ------------- ----------- TOTAL ASSETS .................................. $2,900,050 $5,884,577 $102,749 $8,887,376 ============ ============ ============= =========== - ------------ (1) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical consolidated balance sheets of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 53 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED BALANCE SHEET PAGE 2 OF 2 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 (B) $ 655,151 Deferred revenue--net ................... 24,655 -- -- 24,655 Income taxes payable .................... 81,633 -- -- 81,633 Accrued acquisition obligations ........ 40,287 -- 193,900 (A) 234,187 Current portion of long-term debt ...... 29,907 -- -- 29,907 ------------ ------------ -------------- ----------- TOTAL CURRENT LIABILITIES ................. 336,839 418,143 270,551 1,025,533 ------------ ------------ -------------- ----------- Long-term debt .......................... 541,563 -- 584,796 (C) 1,216,208 89,849 (A) Deferred revenue ........................ 7,299 114,021 (76,651)(B) 44,669 Other non-current liabilities ........... 23,960 -- 30,000 (A) 53,960 Deferred income taxes ................... 85,400 -- (12,000)(A) 73,400 ------------ ------------ -------------- ----------- TOTAL ..................................... 995,061 532,164 886,545 2,413,770 ------------ ------------ -------------- ----------- LIABILITIES UNDER FLEET MANAGEMENT AND MORTGAGE PROGRAMS Debt...................................... -- 4,476,805 (584,796)(C) 3,892,009 Deferred income taxes..................... -- 221,700 -- 221,700 ------------ ------------ -------------- ----------- Total.................................... -- 4,698,505 (584,796) 4,113,709 ------------ ------------ -------------- ----------- STOCKHOLDERS' EQUITY Common stock--Issued and Outstanding: Historical HFS, 123,720, Historical PHH, 34,886 and Combined Companies, between 145,039 and 152,501...................... 1,237 99,820 (99,563) (D) 1,494 Additional paid-in capital................ 1,705,541 -- 99,563 (D) 1,805,104 Retained earnings......................... 206,236 568,400 (199,000)(A) 575,636 Treasury stock............................ (8,025) -- -- (8,025) Foreign currency equity adjustment ....... -- (14,312) -- (14,312) ------------ ------------ -------------- ----------- TOTAL STOCKHOLDERS' EQUITY................. 1,904,989 653,908 (199,000) 2,359,897 ------------ ------------ -------------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $2,900,050 $5,884,577 $ 102,749 $8,887,376 ============ ============ ============== =========== - ------------ (1) The historical PHH balance sheet is as of October 31, 1996. Note: Certain reclassifications have been made to the historical consolidated balance sheets of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 54 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES ---------- ----------- -------------- ------------ NET REVENUES Service fees........................... $245,189 $ -- $ 188,060 (F) $ 433,249 Real estate services................... -- 824,872 (602,965) (E) 221,907 Interest.............................. (36,113)(K) (36,113) ---------- ----------- -------------- ------------ Real estate services, net.............. -- 824,872 (639,078) 185,794 ---------- ----------- -------------- ------------ Service fees, net...................... 245,189 824,872 (451,018) 619,043 ---------- ----------- -------------- ------------ Fleet management....................... -- 1,140,557 (188,060) (F) 952,497 Depreciation on vehicles under operating leases..................... -- (790,864) -- (790,864) Interest.............................. -- -- (111,939) (G) (111,939) ---------- ----------- -------------- ------------ Fleet management, net ................. -- 349,693 (299,999) 49,694 ---------- ----------- -------------- ------------ Mortgage Services ..................... -- 150,414 -- 150,414 Amortization of Mortgage Servicing rights and fees...................... -- -- (30,080)(H) (30,080) Interest ............................. -- -- (26,569)(J) (26,569) ---------- ----------- -------------- ------------ Mortgage Services, net ................ -- 150,414 (56,649) 93,765 ---------- ----------- -------------- ------------ Other.................................. 11,881 -- -- 11,881 ---------- ----------- -------------- ------------ Net revenues............................ 257,070 1,324,979 (807,666) 774,383 ---------- ----------- -------------- ------------ EXPENSES Marketing and reservation.............. 116,700 -- -- 116,700 Selling, general and administrative ... 40,315 293,161 (20,147)(I) 313,329 Costs, including interest, of carrying and reselling homes................... -- 728,634 (602,965)(E) 84,981 (36,113)(K) (4,575)(I) Direct costs of mortgage services ..... -- 56,557 (30,080)(H) 26,477 Depreciation and amortization.......... 19,153 -- 24,722 (I) 43,875 (111,939)(G) 21,410 Interest............................... 20,234 139,684 (26,569)(J) ---------- ----------- -------------- ------------ Total expenses........................ 196,402 1,218,036 (807,666) 606,772 ---------- ----------- -------------- ------------ Income before income taxes ............. 60,668 106,943 -- 167,611 Provision for income taxes.............. 26,345 43,917 -- 70,262 ---------- ----------- -------------- ------------ Income from continuing operations ...... $ 34,323 $ 63,026 $ -- $ 97,349 ========== =========== ============== ============ PER SHARE INFORMATION (PRIMARY) Income from continuing operations .... $ .35 $ 1.78 $ .78 (L) ========== =========== ============ Weighted average common and common equivalent shares outstanding......... 98,920 35,372 26,133 (L) 125,053 (L) ========== =========== ============== ============ PER SHARE INFORMATION (FULLY DILUTED) Income from continuing operations .... $ .34 $ 1.78 $ .77 (L) ========== =========== ============ Weighted average common and common equivalent shares outstanding......... 100,228 35,423 26,171 (L) 126,399 (L) ========== =========== ============== ============ - ------------ (1) The historical consolidated statement of income of PHH is for the twelve months ended January 31, 1994. Note: Certain reclassifications have been made to the historical operating results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 55 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES ---------- ----------- -------------- ------------ NET REVENUES Service fees.......................... $283,244 $ -- $ 202,031 (F) $ 485,275 Real estate services.................. -- 705,146 (478,726)(E) 226,420 Interest ............................ (19,993)(K) (19,993) ---------- ----------- -------------- ------------ Real estate services, net............. -- 705,146 (498,719) 206,427 ---------- ----------- -------------- ------------ Service fees, net..................... 283,244 705,146 (296,688) 691,702 ---------- ----------- -------------- ------------ Fleet management...................... -- 1,225,815 (202,031)(F) 1,023,784 Depreciation on vehicles under operating leases.................... -- (849,523) -- (849,523) Interest............................. (126,721)(G) (126,721) ---------- ----------- -------------- ------------ Fleet management, net................. -- 376,292 (328,752) 47,540 ---------- ----------- -------------- ------------ Mortgage Services .................... -- 127,551 -- 127,551 Amortization of Mortgage Servicing rights and fees ..................... -- -- (20,284)(H) (20,284) Interest ............................ -- -- (32,773)(J) (32,773) ---------- ----------- -------------- ------------ Mortgage Services, net ............... -- 127,551 (53,057) 74,494 ---------- ----------- -------------- ------------ Other................................. 29,303 -- -- 29,303 ---------- ----------- -------------- ------------ Net revenues.......................... 312,547 1,208,989 (678,497) 843,039 ---------- ----------- -------------- ------------ EXPENSES Marketing and reservation............. 130,268 -- -- 130,268 Selling, general and administrative .. 46,018 295,345 (26,230)(I) 315,133 Costs, including interest, of carrying and reselling homes......... -- 595,900 (478,726)(E) 93,422 (19,993)(K) (3,759)(I) Direct costs of mortgage services .... -- 41,221 (20,284)(H) 20,937 Depreciation and amortization......... 23,723 -- 29,989 (I) 53,712 Interest.............................. (126,721)(G) 18,685 159,765 (32,773)(J) 18,956 Other................................. 3,210 -- -- 3,210 ---------- ----------- -------------- ------------ Total expenses....................... 221,904 1,092,231 (678,497) 635,638 ---------- ----------- -------------- ------------ Income before income taxes............. 90,643 116,758 -- 207,401 Provision for income taxes............. 37,154 47,714 -- 84,868 ---------- ----------- -------------- ------------ Net income............................. $ 53,489 $ 69,044 $ -- $ 122,533 ========== =========== ============== ============ PER SHARE INFORMATION (PRIMARY) Net income ........................... $ .53 $ 1.99 $ .97 (L) ========== =========== ============ Weighted average common and common equivalent shares outstanding ...... 100,874 34,741 25,667 (L) 126,541 (L) ========== =========== ============== ============ PER SHARE INFORMATION (FULLY DILUTED) Net income............................ $ .53 $ 1.99 $ .97 (L) ========== =========== ============== ============ Weighted average common and common equivalent shares outstanding........ 100,874 34,775 25,692 (L) 126,566 (L) ========== =========== ============== ============ - ------------ (1) The historical consolidated statement of income of PHH is for the twelve months ended January 31, 1995. Note: Certain reclassifications have been made to the historical operating results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statement. 56 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------- PRO FORMA COMBINED HFS PHH (1) ADJUSTMENTS COMPANIES ---------- ----------- -------------- ------------ NET REVENUES Service fees.......................... $369,442 $ -- $ 203,390 (F) $ 572,832 Real estate services.................. -- 782,727 (532,573)(E) 250,154 Interest............................. (25,972)(K) (25,972) ---------- ----------- -------------- ------------ Real estate services, net............. -- 782,727 (558,545) 224,182 ---------- ----------- -------------- ------------ Service fees, net..................... 369,442 782,727 (355,155) 797,014 ---------- ----------- -------------- ------------ Fleet management...................... -- 1,347,870 (203,390)(F) 1,144,480 Depreciation on vehicles under operating leases.................... -- (929,341) -- (929,341) Interest............................. (159,652)(G) (159,652) ---------- ----------- -------------- ------------ Fleet management, net................. -- 418,529 (363,042) 55,487 Mortgage Services .................... -- 173,787 -- 173,787 Amortization of Mortgage Servicing rights and fees ..................... -- -- (30,667)(H) (30,667) Interest ............................ -- -- (49,869)(J) (49,869) ---------- ----------- -------------- ------------ Mortgage Services, net ............... -- 173,787 (80,536) 93,251 ---------- ----------- -------------- ------------ Other................................. 43,541 -- -- 43,541 ---------- ----------- -------------- ------------ Net revenues........................... 412,983 1,375,043 (798,733) 989,293 ---------- ----------- -------------- ------------ EXPENSES Marketing and reservation............. 143,965 -- -- 143,965 Selling, general and administrative .. 78,232 310,567 (29,692)(I) 359,107 Costs, including interest, of carrying and reselling homes......... -- 658,498 (532,573)(E) 97,324 (25,972)(K) (2,629)(I) Direct costs of mortgage services .... -- 60,498 (30,667)(H) 29,831 Depreciation and amortization......... 30,857 -- 32,321 (I) 63,178 Interest.............................. 21,789 212,365 (159,682)(G) 24,633 (49,869)(J) Other................................. 3,235 -- -- 3,235 ---------- ----------- -------------- ------------ Total expenses....................... 278,078 1,241,928 (798,733) 721,273 ---------- ----------- -------------- ------------ Income before income taxes............. 134,905 133,115 -- 268,020 Provision for income taxes............. 55,175 54,995 -- 110,170 ---------- ----------- -------------- ------------ Net income............................. $ 79,730 $ 78,120 $ -- $ 157,850 ========== =========== ============== ============ PER SHARE INFORMATION (PRIMARY) Net income ........................... $ .74 $ 2.25 $ 1.16 (L) ========== =========== ============ Weighted average common and common equivalent shares outstanding ...... 113,817 34,755 25,677 (L) 139,494 (L) ========== =========== ============== ============ PER SHARE INFORMATION (FULLY DILUTED) Net income............................ $ .73 $ 2.24 $ 1.15 (L) ========== =========== ============ Weighted average common and common equivalent shares outstanding........ 115,654 34,951 25,822 (L) 141,476 (L) ========== =========== ============== ============ - ------------ (1) The historical consolidated statement of income of PHH is for the twelve months ended January 31, 1996. Note: Certain reclassifications have been made to the historical operating results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 57 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL PRO FORMA ----------------------- PRO FORMA HISTORICAL HFS, HFS PHH (1) ADJUSTMENTS AS RESTATED ---------- ----------- -------------- --------------- NET REVENUES Service fees.......................... $268,862 $ -- $ 150,028 (F) $ 418,890 Real estate services.................. -- 590,168 (399,717)(E) 190,451 Interest ............................ (19,344)(K) (19,344) ---------- ----------- -------------- --------------- Real estate services, net............. -- 590,168 (419,061) 171,107 ---------- ----------- -------------- --------------- Service fees, net..................... 268,862 590,168 (269,033) 589,997 ---------- ----------- -------------- --------------- Fleet management...................... -- 1,003,355 (150,028)(F) 853,327 Depreciation on vehicles under operating leases.................... -- (692,788) -- (692,788) Interest............................. (117,373)(G) (117,373) ---------- ----------- -------------- --------------- Fleet management, net................. -- 310,567 (267,401) 43,166 ---------- ----------- -------------- --------------- Mortgage Services .................... -- 124,144 -- 124,144 Amortization of Mortgage Servicing rights and fees ..................... -- -- (18,981)(H) (18,981) Interest ............................ -- -- (35,342)(J) (35,342) ---------- ----------- -------------- --------------- Mortgage services, net................ -- 124,144 (54,323) 69,821 ---------- ----------- -------------- --------------- Other................................. 30,869 -- -- 30,869 ---------- ----------- -------------- --------------- Net revenues........................... 299,731 1,024,879 (590,757) 733,853 ---------- ----------- -------------- --------------- EXPENSES Marketing and reservation............. 110,842 -- -- 110,842 Selling, general and administrative .. 47,700 232,698 (22,452)(I) 257,946 Costs, including interest, of carrying and reselling homes......... -- 497,415 (399,717)(E) 76,266 (19,344)(K) (2,088)(I) Direct costs of mortgage services .... -- 40,093 (18,981)(H) 21,112 Depreciation and amortization......... 21,721 -- 24,540 (I) 46,261 Interest.............................. 16,272 154,638 (117,373)(G) 18,195 (35,342)(J) Other................................. 2,012 -- -- 2,012 ---------- ----------- -------------- --------------- Total expenses....................... 198,547 924,844 (590,757) 532,634 ---------- ----------- -------------- --------------- Income before income taxes............. 101,184 100,035 -- 201,219 Provision for income taxes............. 41,820 41,397 -- 83,217 ---------- ----------- -------------- --------------- Net income............................. $ 59,364 $ 58,638 $ -- $ 118,002 ========== =========== ============== =============== PER SHARE INFORMATION (PRIMARY) Net income............................ $ .57 $ 1.70 $ .90 (L) ========== =========== =============== Weighted average common and common equivalent shares outstanding ...... 109,564 34,484 25,477 (L) 135,041 (L) ========== =========== ============== =============== PER SHARE INFORMATION (FULLY DILUTED) Net income............................ $ .56 $ 1.70 $ .88 (L) ========== =========== ============== =============== Weighted average common and common equivalent shares outstanding........ 112,056 34,594 25,558 (L) 137,614 (L) ========== =========== ============== =============== - ------------ (1) The historical consolidated statement of income of PHH is for the nine months ended October 31, 1995. Note: Certain reclassifications have been made to the historical operating results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 58 SECTION D HFS INCORPORATED AND SUBSIDIARIES COMBINING HISTORICAL CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) HISTORICAL PRO FORMA ----------------------- PRO FORMA HISTORICAL HFS, HFS PHH (1) ADJUSTMENTS AS RESTATED ---------- ----------- -------------- --------------- NET REVENUES Service fees.............................. $468,277 $ -- $ 152,602 (F) $ 620,879 Real estate services...................... -- 619,431 (420,805)(E) 198,626 Interest................................. (22,970)(K) (22,970) ---------- ----------- -------------- --------------- Real estate services, net................. -- 619,431 (443,775) 175,656 ---------- ----------- -------------- --------------- Service fees, net......................... 468,277 619,431 (291,173) 796,535 ---------- ----------- -------------- --------------- Fleet management.......................... -- 1,042,984 (152,602)(F) 890,382 Depreciation on vehicles under operating leases.................................. -- (727,457) -- (727,457) Interest................................. (120,404)(G) (120,404) ---------- ----------- -------------- --------------- Fleet management, net..................... -- 315,527 (273,006) 42,521 ---------- ----------- -------------- --------------- Mortgage Services ........................ -- 188,636 -- 188,636 Amortization of Mortgage Servicing rights and fees .............. -- -- (38,720)(H) (38,720) Interest ................................ -- -- (48,337)(J) (48,337) ---------- ----------- -------------- --------------- Mortgage services, net.................... -- 188,636 (87,057) 101,579 ---------- ----------- -------------- --------------- Other..................................... 81,733 -- -- 81,733 ---------- ----------- -------------- --------------- Net revenues............................... 550,010 1,123,594 (651,236) 1,022,368 ---------- ----------- -------------- --------------- EXPENSES Marketing and reservation................. 130,728 -- -- 130,728 Selling, general and administrative ...... 139,709 249,693 (19,808)(I) 369,594 Costs, including interest, of carrying and reselling homes...................... -- 507,986 (420,805)(E) 62,841 (22,970)(K) (1,370)(I) Direct costs of mortgage services ........ -- 77,718 (38,720)(H) 38,998 Depreciation and amortization............. 41,129 -- 21,178 (I) 62,307 (120,404)(G) Interest.................................. 22,194 169,933 (48,337)(J) 23,386 Other..................................... 10,988 -- -- 10,988 ---------- ----------- -------------- --------------- Total expenses........................... 344,748 1,005,330 (651,236) 698,842 ---------- ----------- -------------- --------------- Income before income taxes................. 205,262 118,264 -- 323,526 Provision for income taxes................. 82,630 48,253 -- 130,883 ---------- ----------- -------------- --------------- Net income................................. $122,632 $ 70,011 $ -- $ 192,643 ========== =========== ============== =============== PER SHARE INFORMATION (PRIMARY) Net income ............................... $ .96 $ 1.99 $ 1.25 (L) ========== =============== Weighted average common and common equivalent shares outstanding ........... 130,960 35,211 26,014 (L) 156,974 (L) ========== =========== ============== =============== PER SHARE INFORMATION (FULLY DILUTED) Net income................................ $ .96 $ 1.99 $ 1.24 (L) ========== =========== ============== =============== Weighted average common and common equivalent shares outstanding............ 131,684 35,269 26,057 (L) 157,741 (L) ========== =========== ============== =============== - ------------ (1) The historical consolidated statement of income of PHH is for the nine months ended October 31, 1996. Note: Certain reclassifications have been made to the historical operating results of HFS and PHH to conform to the presentation expected to be used by the merged companies. See notes to combining historical consolidated financial statements. 59 SECTION D HFS INCORPORATED AND SUBSIDIARIES NOTES TO COMBINING HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS A. RESTRUCTURING LIABILITY AND RESTRICTED CASH: The pro forma adjustment reflects a liability established for restructuring the HFS and PHH businesses, including involuntary termination of employees, facility and system terminations, costs associated with exiting certain activities, and merger related professional fees, based on management's preliminary assessment of such actions to be taken: RESTRUCTURING CHARGE ---------------- BOOK TAX BASIS BASIS ------- ------- Professional fees...................... $ 43 $ 20 Severance.............................. 109 74 Facility and system terminations ...... 44 44 Other transaction related costs ....... 71 37 ------- ------- Restructuring charge, pre-tax.......... 267 175 Statutory tax rate..................... 38.9% ------- Tax benefit (effective tax rate 25.5%)................................ 68 $ 68 ------- ======= After-tax charge....................... $199 ======= The restructuring charge includes the write-off or reserve of $43.1 million for impaired assets as a result of exiting certain activities and the recording of deferred taxes ($56.0 million current and $12.0 million non-current) associated with the charge. Also included in the restructuring charge is the effect of $89.8 million of employee benefit related liabilities which were required to be funded prior to consummation of the Merger. PHH funded several grantor trusts in accordance with the Merger Agreement. This amount is disclosed as restricted cash in the pro forma balance sheet. B. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES: The pro forma adjustment reclassifies advances from relocation clients from deferred revenue to accounts payable and other accrued liabilities. This adjustment is made to conform to the presentation expected to be used by the merged companies. C. LONG-TERM DEBT: This pro forma adjustment reclassifies the portion of long-term debt associated with real estate services activities from Liabilities under Fleet Management and Mortgage Programs to Long-term debt. This adjustment was made to conform to the presentation expected to be used by the merged companies. D. EQUITY: The pro forma adjustment reflects a reclassification of equity in connection with issuance of HFS common stock to the PHH stockholders. E. SERVICES FEES: The pro forma adjustment offsets relocation expenses incurred on behalf of corporate clients with reimbursements of such expenses billed to client corporations since the Company acts in what is in economic substance an agency relationship with its relocation corporate clients (i.e., all expenses and gains and losses on disposition of properties are for the account of the corporate client). This adjustment is made to conform to the presentation expected to be used by the merged companies. 60 F. FLEET MANAGEMENT: The pro forma adjustment reclassifies fees charged for the management of corporate fleets and for fee-based services to service fees such that fleet rental revenue is reflected as fleet management revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. G. INTEREST EXPENSE -- FLEET MANAGEMENT: The pro forma adjustment reclassifies interest expense on debt incurred to finance fleet leasing activities. This adjustment is made to conform to the presentation expected to be used by the merged companies. H. AMORTIZATION EXPENSE -- MORTGAGE SERVICES: The pro forma adjustment reclassifies the amortization of Mortgage Servicing rights and fees from direct costs of mortgage services to mortgage services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. I. DEPRECIATION AND AMORTIZATION: The pro forma adjustment reclassifies depreciation and amortization, other than depreciation on vehicles under operating leases, to a separate financial line to conform to the presentation expected to be used by the merged companies. J. INTEREST EXPENSE--MORTGAGE SERVICES: The pro forma adjustment reclassifies interest expense on debt incurred to finance mortgage servicing activities to mortgage services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. K. INTEREST EXPENSE -- REAL ESTATE SERVICES: The pro forma adjustment reclassifies the interest portion of the cost, including interest, of carrying and reselling homes to real estate services revenue. This adjustment is made to conform to the presentation expected to be used by the merged companies. L. WEIGHTED AVERAGE SHARES AND NET INCOME PER SHARE The pro forma adjustment to weighted average common and common equivalent shares outstanding reflects the number of shares of HFS common stock estimated to be issued by HFS in connection with the Merger. Such amount was estimated using an average HFS stock price of $67.00 per share, which will be calculated using a twenty day average price of the HFS common stock from November 8, 1996 through December 6, 1996. The number of HFS shares to be issued is based on a conversion formula which is calculated based on the average price of HFS common stock over the Pricing Period (a twenty day average), within a range of $60 to $81 per share. At $67 per share, the Conversion Number would be .7388 which would result in the issuance of .7388 shares of HFS common stock for every share of PHH common stock. The Pro Forma adjustment was calculated by multiplying PHH's historical weighted average shares outstanding by the Conversion Number using the assumed average HFS stock price of $67 per share. The underlying table summarizes pro forma weighted average shares and pro forma net income per share 61 using the high and low ends of the range and the assumed average of $67 per share used in these Pro Forma Financial Statements. AVERAGE HFS STOCK PRICE ------------------------------- $60.00 $67.00 $81.00 --------- --------- --------- PRO FORMA WEIGHTED AVERAGE SHARES (000'S) For the year ended December 31, 1993 Primary ................................... 128,102 125,053 120,536 Fully Diluted ............................. 129,452 126,399 121,875 For the year ended December 31, 1994 Primary ................................... 129,535 126,541 122,104 Fully Diluted ............................. 129,563 126,566 122,125 For the year ended December 31, 1995 Primary ................................... 142,490 139,494 135,056 Fully Diluted ............................. 144,489 141,476 137,013 For the nine months ended September 30, 1995 Primary ................................... 138,013 135,041 130,637 Fully Diluted ............................. 140,596 137,614 133,196 For the nine months ended September 30, 1996 Primary ................................... 160,009 156,974 152,477 Fully Diluted ............................. 160,781 157,741 153,237 PRO FORMA NET INCOME PER SHARE For the year ended December 31, 1993 Primary ................................... $ 0.76 $ 0.78 $ 0.81 Fully Diluted ............................. 0.75 0.77 0.80 For the year ended December 31, 1994 Primary ................................... $ 0.95 $ 0.97 $ 1.00 Fully Diluted ............................. 0.95 0.97 1.00 For the year ended December 31, 1995 Primary ................................... $ 1.14 $ 1.16 $ 1.20 Fully Diluted ............................. 1.12 1.15 1.18 For the nine months ended September 30, 1995 Primary ................................... $ 0.88 $ 0.90 $ 0.93 Fully Diluted ............................. 0.86 0.88 0.91 For the nine months ended September 30, 1996 Primary ................................... $ 1.23 $ 1.25 $ 1.29 Fully Diluted ............................. 1.22 1.24 1.28 62