SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File No. 1-11402
____________
HFS Incorporated
(Exact name of Registrant as specified in its charter)
Delaware 22-3059335
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
339 Jefferson Road
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
____________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of common
stock was 123,245,314 shares of Common Stock outstanding as at August 6, 1996.
HFS Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 1996 1995
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 387,837 $ 16,109
Royalty accounts and notes receivable, net of
allowance for doubtful accounts 82,765 37,326
Marketing and reservation receivables, net of
allowance for doubtful accounts 43,351 22,297
Relocation receivables 113,075 51,180
Other current assets 32,337 21,304
Deferred income taxes 36,456 20,200
Total current assets 695,821 168,416
Property and equipment, net 99,411 67,892
Franchise agreements, net 599,631 517,218
Excess of cost over fair value of net assets
acquired, net 1,316,146 356,754
Other assets 78,609 55,528
TOTAL ASSETS $2,789,618 $1,165,808
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and other $ 172,064 $ 73,724
Income taxes payable 62,421 38,640
Accrued acquisition obligations 32,002 10,276
Current portion of long-term debt 29,562 2,249
Total current liabilities 296,049 124,889
Long-term debt 540,530 300,778
Other liabilities 30,894 17,150
Deferred income taxes 85,400 82,800
Commitments and contingencies
Series A Adjustable Rate Preferred Stock of Century 21 -- 80,000
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 1,232 1,025
Additional paid-in capital 1,690,347 475,562
Retained earnings 145,166 83,604
Total stockholders' equity 1,836,745 560,191
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,789,618 $1,165,808
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUE:
Franchise $145,134 $ 85,634 $240,135 $151,789
Other 34,531 10,695 64,075 18,693
------ ------ ------ ------
Total revenue 179,665 96,329 304,210 170,482
------- ------ ------- -------
EXPENSES:
Marketing and reservation 43,873 37,325 75,491 66,682
Selling, general and administrative 33,957 6,881 60,311 14,967
Ramada license fee 5,156 4,770 10,045 9,283
Depreciation and amortization 13,219 6,776 23,405 13,332
Interest 7,783 5,156 14,574 10,255
Other 11,193 1,117 17,076 1,219
------ ----- ------ -----
Total expenses 115,181 62,025 200,902 115,738
------- ------ ------- -------
Income before income taxes 64,484 34,304 103,308 54,744
Provision for income taxes 25,740 14,121 41,746 22,499
------ ------ ------ ------
Net income $ 38,744 $ 20,183 $ 61,562 $ 32,245
======== ======== ======== ========
SHARE INFORMATION (fully diluted):
Net income per share $ .31 $ .19 $ .51 $ .31
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 130,159 112,942 126,275 112,276
======= ======= ======= =======
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Additional
Common Stock Paid In Retained
Shares Amount Capital Earnings Total
--------------------------------------------------------------
Balance, January 1, 1996 102,539 $ 1,025 $ 475,562 $ 83,604 $ 560,191
Issuance of common stock 20,278 203 1,205,917 -- 1,206,120
Exercise of stock options 351 4 3,748 -- 3,752
Tax benefit from exercise
of stock options -- -- 5,028 -- 5,028
Conversion of 4 1/2% Notes 5 -- 92 -- 92
Net income -- -- -- 61,562 61,562
------- ---------- ---------- ------ ------
Balance, June 30, 1996 123,173 $ 1,232 $1,690,347 $ 145,166 $1,836,745
======= ========== ========== ========== ==========
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
1996 1995
Operating Activities:
Net income $ 61,562 $32,245
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, including
amortization of deferred financing costs 24,232 13,960
Changes in operating assets and liabilities
and other (23,597) (15,397)
Net cash provided by operating activities 62,197 30,808
Investing Activities:
Property and equipment additions (13,109) (4,074)
Loans and investments (10,000) (13,000)
Net assets acquired, exclusive of cash acquired (992,163) (6,782)
Net cash used in investing activities (1,015,272) (23,856)
Financing Activities:
Issuance of common stock, net 1,163,872 2,005
Proceeds from borrowings, net 241,999 -
Redemption of Series A Preferred Stock (80,000) -
Principal payments - long-term debt (1,068) (10,810)
Net cash provided by (used in)
financing activities 1,324,803 (8,805)
Net increase (decrease) in cash and cash equivalents 371,728 (1,853)
Cash and cash equivalents, beginning of period 16,109 5,956
Cash and cash equivalents, end of period $387,837 $ 4,103
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet of HFS Incorporated (the "Company") as of
June 30, 1996, the consolidated statements of income for the three and six
months ended June 30, 1996 and 1995, the consolidated statements of cash flows
for the six months ended June 30, 1996 and 1995 and the consolidated statement
of stockholders' equity for the six months ended June 30, 1996 are unaudited and
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation. There were no adjustments of
an unusual nature recorded during the three and six months ended June 30, 1996
and 1995 except that in June 1996, the Company recorded a $7.0 million pre- tax
restructuring charge, related primarily to the contribution of owned Coldwell
Banker brokerage offices to a newly created independent entity, the National
Realty Trust (the "Trust") (See Note 2). The Company engages in the business of
franchising guest lodging facilities (lodging segment) and real estate brokerage
offices (real estate segment). The principal sources of lodging segment revenue
are based upon the annual gross room revenue of franchised properties. The
principal sources of real estate segment revenue are based upon franchisee gross
commission revenue from real estate sales and may include monthly franchisee
membership fees. As a result, the Company experiences seasonal revenue patterns
similar to those of the hotel and real estate industries wherein the summer
months produce higher revenue than other periods of the year. Accordingly, the
first and fourth quarters are traditionally weaker than the second and third
quarters and interim results are not necessarily indicative of results for a
full year.
The consolidated financial statements include the accounts and transactions
of all wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. The consolidated financial
statements of the Company include the assets and liabilities of Ramada Franchise
Systems, Inc., an entity controlled by the Company by virtue of its ownership of
100% of the common stock of such entity. The assets of Ramada Franchise Systems,
Inc. are not available to satisfy the claims of any creditors of the Company or
any of its other affiliates, except as otherwise specifically agreed by Ramada
Franchise Systems, Inc.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual consolidated financial statements. The December 31, 1995 consolidated
balance sheet was derived from the Company's audited financial statements. This
Form 10-Q should be read in conjunction with the Company's consolidated
financial statements and notes thereto, incorporated by reference in the 1995
Annual Report on Form 10-K.
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform with classifications used in 1996.
2. Acquisitions
The following acquisitions were accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed were recorded
at their estimated fair values. The results of operations of acquisitions
completed during the six months ended June 30, 1996 have been included in the
Company's consolidated results since the respective dates of acquisition.
A. TRAVELODGE: In January 1996, the Company purchased the assets comprising
the Travelodge hotel franchise system ("Travelodge") in North America ,
including the Travelodge(R) and Thriftlodge(R) service marks and the franchise
agreements from Forte Hotels, Inc. ("FHI") for $39.3 million.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 19 Travelodge motels from FHI for $32.3 million.
MOA, a significant Company franchisee, entered into twenty year Travelodge
franchise agreements. The Company financed $10 million of MOA's purchase price
under a $10 million revolving credit facility, bearing interest at 14% per
annum. The loan is guaranteed by a parent company of MOA and secured by
approximately 80% of MOA's outstanding common stock.
In addition, National Lodging Corp. ("NLC"), a former wholly owned Company
subsidiary which was distributed to the Company shareholders on November 22,
1994 (the "Distribution Date"), purchased all of the common stock of FHI for
$98.4 million. FHI owned or had an interest in 112 hotel and motel properties at
the acquisition date. In connection with NLC's acquisition, the Company
guaranteed $75 million of NLC borrowings under a $125 million revolving credit
facility entered into by NLC with certain banks. The Company is paid a guarantee
fee of 2% per annum of the outstanding guarantee commitment by the Company
pursuant to a financing agreement entered into between NLC and the Company at
the Distribution Date (the "Financing Agreement"). The Financing Agreement was
modified to provide expressly for the guaranty of such NLC borrowings. The
Company and NLC terminated or modified other agreements entered into with NLC at
the Distribution Date, including a gaming related marketing services agreement
and an advisory agreement. NLC paid the Company an advisory fee approximating $2
million in January 1996 in connection with NLC's acquisition of FHI.
B. ERA: In February 1996, the Company purchased the assets comprising the
Electronic Realty Associates ("ERA") residential real estate brokerage franchise
system and in June 1996, the Company purchased certain ERA affiliates which
conduct the ERA home warranty business in eight states. The aggregate purchase
price for ERA and ERA affiliates was approximately $40.5 million.
C. CENTURY 21 NON-OWNED REGIONS: During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S. non-owned
Century 21 regions ("Century 21 NORS") consisting of more than 1,000 franchised
real estate offices. The $147 million aggregate purchase price consisted of
approximately $96 million in cash, $5 million in notes and $46 million
(approximately 0.9 million shares) in Company common stock.
D. COLDWELL BANKER: On May 31, 1996, the Company acquired by merger (the
"Merger") Coldwell Banker Corporation ("Coldwell Banker"), the largest gross
revenue producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640 million in cash
for all of the outstanding capital stock of Coldwell Banker and repaid
approximately $105 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the sale of Company
common stock (see Note 5).
Immediately following the closing of the Merger, the Company conveyed
Coldwell Banker's 318 owned real estate brokerage offices (the "Owned Brokerage
Business") to the Trust, an independent entity governed by independent trustees.
The Company recorded a pre-tax restructuring charge of $7 million (approximately
$4.3 million, net of tax or $0.03 per share) related primarily to the
contribution of net assets to the Trust.
Pro Forma Information:
The following information reflects the comparative pro forma statements of
operations of the Company for the six months ended June 30, 1996 and 1995
assuming the following transactions occurred on January 1, 1995: (i) the August
1, 1995 acquisition of Century 21 Real Estate Corporation ("Century 21"); (ii)
the acquisition by merger in May 1995 of Casino & Credit Services, Inc.'s
gambling patron credit information business, Central Credit Inc. ("CCI"); (iii)
the 1996 acquisitions of Travelodge, ERA and the Century 21 NORS; (iv) the
Merger; (v) the contribution of Coldwell Banker's owned real estate brokerage
offices to the Trust; (vi) proceeds from an offering of the Company's common
stock (See Note 5) to the extent necessary to fund the Merger and the related
repayment of indebtedness and acquisition expenses; and (vii) the issuance of
$240 million of 4 3/4% convertible senior notes due 2003 (the "4 3/4% Notes",
see Note 6) to the extent such proceeds were used to finance acquisitions. The
acquisitions have been accounted for using the purchase method of accounting.
Accordingly, assets acquired and liabilities assumed will be recorded at their
estimated fair values, which are subject to further refinement, based upon
appraisals and other analyses with appropriate recognition given to the effect
of current interest rates and income taxes. The pro forma results are not
necessarily indicative of the results of operations that would have occurred had
the transactions been consummated as indicated nor are they intended to indicate
results that may occur in the future. The underlying pro forma information
includes the amortization expense associated with the assets acquired, the
reflection of the Company's financing arrangements, the elimination of redundant
costs and the related income tax effects. Certain other Company acquisitions
were not material and therefore were not reflected in the pro forma statements
of operations.
June 30,
(000's, except net income per share) 1996 1995
Revenue $391,966 $342,313
Income before income taxes 131,445 99,701
Net income 78,416 57,719
Net income per share (fully diluted) $ .59 $ .45
Weighted average common and common equivalent
shares outstanding (fully diluted) 137,485 131,841
3. Income Taxes
The effective income tax rate is based on estimated annual taxable income
and other factors.
4. Earnings per Share
Earnings per share for the six months ended June 30, 1996 and 1995 are
based upon the weighted average number of common and common equivalent shares
outstanding during the respective periods. The 4 3/4% Notes are antidilutive for
the six months ended June 30, 1996 and, accordingly, are not included in the
computation of earnings per share for 1996. For purposes of calculating earnings
per share, the $150 million 4 1/2% convertible senior notes are assumed to be
converted and, accordingly, interest expense, including amortization of deferred
financing costs (net of taxes) has been added back to net income.
5. Stockholders' Equity
A. Authorized Shares - On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of common stock to 300 million.
B. Public Offering - On May 9, 1996, the Company sold an aggregate 19.4
million shares of Company common stock pursuant to a public offering (the
"Offering"). Net proceeds from the Offering of $1.2 billion financed the
acquisition of Coldwell Banker and the balance is available for general
corporate purposes, including acquisitions.
6. Long-Term Debt
On February 22, 1996, the Company completed the public offering of the 4
3/4% Notes, which are convertible at the option of the holder at any time prior
to maturity into 14.993 shares of the Company's common stock per $1,000
principal amount of the 4 3/4% Notes, representing a conversion price of $66.70
per share. The 4 3/4% Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after March 3, 1998 at redemption prices
decreasing from 103.393% of principal at March 3, 1998 to 100% of principal at
March 3, 2003. However, on or after March 3, 1998 and prior to March 3, 2000,
the 4 3/4% Notes will not be redeemable at the option of the Company unless the
closing price of the Company's common stock shall have exceeded $93.38 per share
(subject to adjustment upon the occurrence of certain events) for 20 trading
days within a period of 30 consecutive trading days ending within five days
prior to redemption. Interest on the 4 3/4% Notes is payable semi-annually
commencing September 1, 1996.
7. Recent Event - Pending Acquisition of Avis, Inc.
On July 1, 1996, the Company entered into an agreement in principle to
acquire Avis, Inc., the second largest rental car system in the world, from its
shareholders. The Company agreed to pay approximately $800 million for all of
the outstanding capital stock of Avis, Inc., consisting of approximately $500
million in cash and $300 million in Company common stock. While completion of
this transaction is not assured, the Company expects that the transaction will
be completed in the fourth quarter of 1996. The acquisition of Avis, Inc., if
consummated, will be accounted for under the purchase method of accounting.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL REVIEW
HFS Incorporated (the "Company") began 1996 as the world's largest
franchisor of lodging facilities and real estate brokerage offices. In 1996, the
Company continued to pursue its strategy of adding franchise brands to its
existing franchise infrastructure with several acquisitions, including the
acquisition of Coldwell Banker Corporation ("Coldwell Banker"), the largest
gross revenue producing residential real estate company in North America and a
leading provider of relocation services.
The Company continues to pursue acquisitions and other strategic
transactions in its two primary industries and other franchise or franchisable
businesses. On July 1, 1996, the Company entered into an agreement in principle
to acquire Avis, Inc., the second largest rental car system in the world, from
its shareholders. The Company agreed to pay approximately $800 million for all
of the outstanding capital stock of Avis, Inc., consisting of approximately $500
million in cash and $300 million in Company common stock. While completion of
this transaction is not assured, the Company expects that the transaction will
be completed in the fourth quarter of 1996.
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Company revenue increased 87% ($83.3 million) to $179.7 million in the
second quarter of 1996 compared to $96.3 million in the second quarter of 1995.
Approximately $62.9 million of the increase represented incremental revenue from
the Company's real estate segment including revenue generated from the CENTURY
21(R), Electronic Realty Associates(R) (ERA(R)) and Coldwell Banker(R) franchise
systems which were acquired in August 1995, February 1996 and May 1996,
respectively. Preferred vendor revenue also increased $6.8 million representing
a 158% increase.
Company revenue increased 78% ($133.7 million) to $304.2 million during the
six months ended June 30, 1996 compared to the same period in 1995. The lodging
and real estate segments each contributed to revenue increases; the real estate
segment, which was not established until the third quarter of 1995, generated
$85.7 million of revenue for the six months ended June 30, 1996.
2Q96 vs. 2Q95
Lodging Franchise Fees
The royalty portion of lodging franchise fees increased $6.0 million (15%),
in the second quarter of 1996 compared to the same period in 1995. Room growth
through the sale of franchise agreements and the acquisitions of the Knights
Inn(R) and Travelodge(R) franchise systems in August 1995 and January 1996,
respectively, contributed to the increase. Excluding these acquisitions, the
Company added 24,712 rooms, net of terminations, during the twelve months ended
June 30, 1996, representing a 13% increase in the total number of rooms from
June 30, 1995. In the second quarter of 1996 total system revenue per available
room ("REVPAR") increased 3% driven by both increases in total system average
daily rate and occupancy percentages from the second quarter 1995 compared to
1996.
Real Estate Franchise Fees
The real estate segment contributed $50.7 million of franchise fees for the
second quarter of 1996 including $34.0 million from the CENTURY 21 franchise
system acquired in August 1995, $5.3 million from the ERA franchise system
acquired on February 12, 1996 and $11.4 million from the Coldwell Banker
franchise system acquired on May 31, 1996. Pro forma franchise fees for acquired
franchise systems increased 23% ($13.9 million) for the quarter ended June 30,
1996 compared to the same period in 1995 under predecessor company ownership.
Other
Other revenue is substantially comprised of relocation service revenue and
revenue from preferred vendor arrangements. Preferred vendor fees consist of
revenue generated from vendors seeking access to the Company's franchisees and
franchisees' customers. Preferred vendor revenue increased $6.8 million (158%)
from the second quarter of 1995 to the second quarter of 1996. The Company
acquired relocation service businesses in connection with the acquisitions of
the CENTURY 21, ERA and Coldwell Banker franchise systems. Relocation service
fees approximated $12.2 million in the second quarter of 1996, including $7.7
million from Coldwell Banker Relocation Services, Inc., the second largest
relocation business in the United States.
Year-to-date 1996 vs. 1995
Lodging Franchise Fees
Lodging segment franchise fees and the royalty portion of franchise fees
increased $14.3 million (10%) and $12.0 million (17%), respectively, in the
first six months of 1996 compared to the same period in 1995, for primarily the
same reasons as indicated for the increases in second quarter 1996 results.
Real Estate Franchise Fees
The real estate segment contributed $70.5 million of franchise fees for the
six months ended June 30, 1996 including approximately $51.8 million from the
CENTURY 21 franchise system acquired on August 1, 1995, approximately $7.3
million from the ERA franchise system acquired on February 12, 1996 and $11.4
million from the Coldwell Banker franchise system, acquired on May 31, 1996. Pro
forma franchise fees for those franchise systems increased 19% ($19.7 million)
for the six months ended June 30, 1996 compared to the same period in 1995 under
predecessor company ownership.
Other
Other revenue was substantially comprised of fees from preferred vendor
arrangements, which increased $16.1 million (181%) from the first six months of
1995 compared to the same period in 1996. Other revenue also includes $15.2
million of relocation services fees from businesses acquired in connection with
the Company's real estate segment acquisitions including $7.7 million from
Coldwell Banker Relocation Services, Inc., acquired on May 31, 1996.
RESULTS OF OPERATIONS -- EXPENSES AND INCOME
2Q96 vs 2Q95
Income before income taxes increased $30.2 million (88%) resulting from a
$83.3 million increase in revenue net of a $53.1 million (86%) increase in
expenses.
Selling, general and administrative expenses ('SG&A') increased $27.1
million for the second quarter of 1996 over the comparable period in 1995,
primarily as a result of $25.1 million of incremental expenses attributable to
the recently acquired real estate segment operations including CENTURY 21, ERA
and Coldwell Banker franchise systems following their respective August 1995,
February 1996 and May 1996 acquisitions. Included in real estate segment SG&A
expenses is a $7.0 million pre-tax restructuring charge related primarily to the
contribution of Coldwell Banker's owned brokerage business to National Realty
Trust (the "Trust"), an independent entity governed by an independent Board of
Trustees. The $6.5 million increase in marketing and reservation expenses
includes a $3.2 million increase in marketing fees from franchised lodging
properties and a $3.3 million contribution by the Company to the CENTURY 21
National Advertising Fund ("NAF"), a dedicated advertising fund for national and
local marketing. Century 21 Real Estate Corporation ("Century 21") is
contractually obligated to contribute 10% of net service fees received to the
NAF.
Depreciation and amortization for the second quarter of 1996 increased $6.4
million when compared to the same period in 1995 which is primarily attributable
to amortization of fixed assets, franchise agreements and excess of cost over
fair value of net assets acquired ("goodwill") in connection with the
acquisitions of the CENTURY 21, Coldwell Banker, ERA, Knights Inn(R) and
Travelodge(R) franchise systems, the Century 21 non-owned regions and CCI and
the issuance of Company common stock in September 1995, pursuant to an earnout
agreement (the "Earnout Agreement") entered into with Bryanston Group, Inc.
("Bryanston"), an affiliate of the sellers of the Days Inn(R) franchise system.
The issuance of common stock to Bryanston resulted in additional goodwill and
related amortization, commencing in September 1995.
Interest expense for the second quarter of 1996 increased $2.6 million as a
result of the issuance of $240 million 4 3/4% Convertible Senior Notes ("4 3/4%
Notes") in February 1996. The increase in interest expense was offset in part by
the Company's lower average borrowing rate for comparative periods. The
Company's weighted average effective interest rate decreased from 6.0% in the
second quarter 1995 to 5.6% in the second quarter of 1996 as a result of the
issuance of the 4 3/4% Notes. Outstanding borrowings at June 30, 1996 were
substantially comprised of fixed rate debt securities.
Other expenses increased $10.1 million in the second quarter of 1996
compared to the same quarter of 1995, corresponding to a $23.8 million increase
in related revenue. Other expenses include $7.9 million of relocation services
expense businesses associated with the Company's 1995 and 1996 real estate
franchise system acquisitions.
Year-To-Date 1996 vs. 1995
Income before income taxes increased $48.6 million (89%) resulting from a
$133.7 million increase in revenue net of a $85.1 million (74%) increase in
expenses.
Selling, general and administrative expenses ("SG&A") increased $45.3
million for the six months ended June 30, 1996 over the comparable period in
1995, primarily as a result of $40.3 million of incremental expenses
attributable to real estate segment operations including the CENTURY 21, ERA and
Coldwell Banker franchise systems following their respective August 1995,
February 1996 and May 1996 acquisitions. Included in real estate segment SG&A
expenses is the $7.0 million pre-tax restructuring charge related primarily to
the contribution to the Trust. The $8.8 million increase in marketing and
reservation expenses includes a $1.9 million increase in marketing fees from
franchised lodging properties and a $4.9 million contractual contribution by
Century 21 to the NAF.
Depreciation and amortization for the six months ended June 30, 1996
increased $10.1 million when compared to the same period in 1995 which is
primarily attributable to amortization of fixed assets, franchise agreements and
goodwill in connection with the acquisitions of the CENTURY 21, Coldwell Banker,
ERA, Knights Inn(R) and Travelodge(R) franchise systems, the Century 21
non-owned regions and CCI and the issuance of Company common stock in September
1995, pursuant to the Earnout Agreement.
Interest expense for the six months ended June 30, 1996 increased $4.3
million due to the issuance of the 4 3/4% Notes in February 1996. Interest
expense was offset in part by the Company's lower average borrowing rate for
comparative periods. The Company's weighted average effective interest rate
decreased from 6.0% in the first six months of 1995 to 5.6% in the six months
ended June 30, 1996 as a result of the issuance of the 4 3/4% Notes.
The $15.9 million increase in other expenses for the six months ended June
30, 1996 compared to 1995, corresponds with a $45.4 million increase in related
revenue. The increase is primarily composed of relocation service expenses
associated with real estate franchise system acquisitions and includes $10.2
million of relocation expenses and $4.0 million of home warranty expenses.
Pro Forma Results of Operations
The 36% ($20.7 million) increase in pro forma net income from the six
months ended June 30, 1995 to the comparable period in 1996 primarily results
from a $49.7 million increase in revenue and only a $17.9 million increase in
total expenses. The revenue increase includes a $24.6 million (14%) increase in
the combined lodging and real estate royalty portion of franchise fees. The
increase in lodging segment franchise fees resulted substantially from system
growth during periods of Company ownership and the increase in real estate
segment franchise fees resulted from increases in gross commission revenue from
comparable franchised brokerage offices. The increase in pro forma other income
is primarily attributable to the $16.3 million increase in the Company's
reported preferred vendor revenue, which excludes the pro forma benefits that
may be contributed from preferred vendors seeking access to the Company's newly
acquired franchisees.
LIQUIDITY AND CAPITAL RESOURCES
Pending Acquisitions
On July 1, 1996, the Company entered into an agreement in principle to
acquire the common stock of Avis, Inc., for approximately $800 million
consisting of $500 million in cash and $300 million of Company common stock.
While completion of this transaction is not assured, the Company expects that
the transaction will be completed in the fourth quarter of 1996. The Company has
sufficient existing cash, short-term marketable securities and $300 million of
available borrowings under its current revolving credit facility to fund the
cash portion of the purchase price.
Acquisitions
COLDWELL BANKER: On May 31, 1996, the Company acquired by merger Coldwell
Banker ("Merger") for $640 million of cash plus repayment of approximately $105
million of indebtedness. At the effective date of the Merger, Coldwell Banker
had 2,164 franchised brokerage offices and owned 318 residential real estate
brokerage offices ("Owned Brokerage Business") in the United States, Canada and
Puerto Rico, representing the third largest real estate brokerage system in the
United States.
The Company financed the Coldwell Banker transaction with approximately
$1.2 billion of proceeds from a public offering (the "Offering") of
approximately 19.4 million common shares in the second quarter of 1996.
Approximately $400 million of proceeds in excess of the purchase price and $300
million of borrowings available under the Company's revolving credit facility
may be used for general corporate purposes, future acquisitions and strategic
transactions in franchise or franchisable businesses. Immediately following the
closing of the Merger, the Company conveyed the Owned Brokerage Business to the
Trust, an independent entity governed by independent trustees. The Company
incurred a $7 million pre-tax restructuring expense primarily related to the
contribution of the Owned Brokerage Business to the Trust.
CENTURY 21 NON-OWNED REGIONS: During the second quarter of 1996, the
Company completed the acquisition of the six U.S. Century 21 regions which were
licensed to four independent master licensees. The aggregate purchase price
consisted of approximately $96 million of cash, $5 million of notes and $46
million (approximately 0.9 million shares) of the Company's common stock. These
regions represent more than 1,000 CENTURY 21 franchised real estate offices in
the United States and the acquisitions result in the Company receiving royalty
fees of up to 6% of franchisee gross commissions generated by such offices
compared to less than 1% previously received under the master licensing
agreements. The cash portion of the aggregate purchase price was financed with
proceeds from the issuance of the 4 3/4% Notes.
ERA: The Company purchased on February 12, 1996, the assets comprising the
ERA residential real estate brokerage franchise system and, in the second
quarter of 1996, the stock of certain ERA affiliates which conduct the ERA home
warranty business in eight states. The aggregate purchase price of $40.5 million
was financed by borrowings under the Company's revolving credit facility.
CENTURY 21: On August 1, 1995, a majority-owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 from Metropolitan Life Insurance
Company ("MetLife") for an aggregate purchase price of $245 million plus
expenses. In February 1996, the Company settled the $30 million contingent
portion of the purchase price of Century 21 and redeemed $80 million of Century
21 redeemable preferred stock issued to MetLife prior to the acquisition. The
Company financed these payments with proceeds from the 4 3/4% Notes.
TRAVELODGE: On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including the
Travelodge and Thriftlodge(R) service marks and franchise agreements, from Forte
Hotels, Inc. ("FHI") for $39.3 million. The Company financed the acquisition
with borrowings under its revolving credit facility and repaid the borrowings
with proceeds from the 4 3/4% Notes.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary (collectively
"MOA"), purchased 20 Travelodge motels from FHI for $32.3 million. MOA, a
significant Company franchisee, entered into twenty year Travelodge franchise
agreements. The Company financed $10 million of MOA's purchase price under a $10
million revolving credit facility, bearing interest at 14% per annum. The loan
is guaranteed by the parent company of MOA and secured by approximately 80% of
MOA's outstanding common stock. In addition, NLC purchased all of the common
stock of FHI for $98.4 million. FHI owned or had an interest in 112 hotel and
motel properties at the acquisition date. In connection with NLC's acquisition,
the Company guaranteed $75 million of NLC borrowings under a $125 million
revolving credit facility entered into by NLC with certain banks. The Company is
paid a guarantee fee of 2% per annum of outstanding guarantee commitment by the
Company pursuant to a Financing Agreement.
Concurrent with the acquisition of the Travelodge franchise system and
NLC's acquisition of FHI, the marketing and advisory agreements between the
Company and NLC were terminated. The corporate services agreement was modified
to provide that the Company is to provide financial and other corporate
administrative support and advisory services through September 1996 and
thereafter advisory services through January 2019 for a fee of $1.5 million per
year. NLC paid a $2.0 million advisory fee to the Company in connection with
NLC's acquisition of FHI.
Financing
The Company believes that it has excellent liquidity and access to
liquidity through various sources. The Company has generated significant
positive cash flow from operations in every quarter since its public offering in
December 1992. The Company has also demonstrated its ability to access equity
and public debt markets and financial institutions to generate capital for
strategic acquisitions. Indicative of the Company's creditworthiness, Standard &
Poors Corporation assigned an "A" credit rating to the Company's $540 million of
publicly issued debt.
The Company generated $62.2 million of cash flow from operations,
representing a $31.4 million (102%) increase from the six months ended June 30,
1995. Additional liquidity is available to the Company through a revolving
credit facility (the "Credit Facility"), which provides up to $300 million and
$200 million of unsecured borrowings through December 1996 and 1997,
respectively, at interest rates generally approximating LIBOR plus a margin not
to exceed 0.63% based on the Company's published credit rating and percentage of
facility utilized. The Company is currently arranging to replace the Credit
Facility with a revolving credit facility providing at least $500 million of
available liquidity to provide cash for acquisitions, strategic transactions and
general corporate purposes.
The Company completed an offering of 19.4 million shares of common stock in
the second quarter of 1996 which yielded net proceeds to the Company after
expenses of $1.2 billion. Approximately $ 755 million of the proceeds were used
to finance the acquisition of Coldwell Banker and repay $75 million of
outstanding borrowings under the Company's Credit Facility. The remaining $331
million of proceeds are available for general corporate purposes including
capital for acquisitions and strategic transactions.
Working capital at June 30, 1996 approximated $399.8 million including the
remaining $331 million of excess proceeds from the Offering. Excluding the
excess proceeds of the Offering, working capital increased $25.3 million at June
30, 1996 from December 31, 1995. The increase in working capital is attributable
to cash generated from operations and the seasonal increase in lodging segment
royalty receivables. Additionally, included in working capital at June 30, 1996
is $113.1 million in relocation receivables relating to the Company's relocation
services business acquired as part of the acquisitions of Century 21 and
Coldwell Banker. Outstanding relocation receivables are guaranteed by client
corporations and accordingly are, in the opinion of the Company, subject to
minimal risk.
Long-term debt consists of $540 million of publicly issued debt including
the 4 3/4% Notes, $150 million of 4 1/2% convertible senior notes due 1999 and
$150 million of 5 7/8% senior notes due December 1998. Interest on the publicly
issued debt is paid semi-annually. Long-term debt increased from $300.1 million
at December 31, 1995 to $540 million at June 30, 1996, due to the issuance of
the 4 3/4% Notes. The weighted average stated interest rate on long-term debt at
June 30, 1996 was 4.9% compared to the weighted average stated interest rate of
5.2% at December 31, 1995. weighted average stated interest rate of 5.2% at
December 31, 1995.
Capital expenditures approximating $13.1 million during the six months
ended June 30, 1996 consisted of approximately $4.5 million of software
development and the acquisition of computer equipment associated with a new
transactional data base and reporting system for the real estate segment and
$5.5 million of additions and modifications to the hotel brands' central
reservation systems, which will be reimbursed by collections of reservation fees
from the Company's lodging franchisees. Also included in capital expenditures is
$3.1 million of leasehold improvements associated with the purchase in late
1995, of a building near the Company's current headquarters.
The Company believes that based upon its analysis of its financial
position, its cash flow during the past twelve months and the expected results
of operations in the future, operating cash flow, available funding under the
revolving credit facility and issuances of securities in the capital markets, if
appropriate, will be adequate to fund operations, investments and acquisitions
for the next twelve months.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1996 Annual Meeting of Stockholders of the Company was held on May 20,
1996, and in connection therewith proxies were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934. At the meeting the following were
voted upon and approved:
1. Election of Henry R. Silverman, James E. Buckman, Martin L. Edelman,
Stephen P. Holmes, Robert E. Nederlander, Robert W. Pittman, Leonard
Schutzman, Robert F. Smith, John D. Snodgrass and Roger J. Stone, Jr., as
directors for terms expiring in 1997 and until their successors are duly
elected and qualified;
2. Approval of certain amendments to the Company's Amended and Restated 1993
Stock Option Plan; and
3. Ratification of the appointment of Deloitte & Touche LLP as auditors of the
Company's financial statements for fiscal year 1996.
The results of the voting on each such matter were as follows:
1. Directors:
Henry R. Silverman: Leonard Schutzman:
FOR: 84,218,398 WITHHELD: 2,217,235 FOR: 84,432,478 WITHHELD: 2,003,155
James E. Buckman: Robert F. Smith:
FOR: 84,218,646 WITHHELD: 2,216,987 FOR: 84,432,558 WITHHELD: 2,003,075
Martin L. Edelman: John D. Snodgrass:
FOR: 84,102,096 WITHHELD: 2,333,537 FOR: 84,406,878 WITHHELD: 2,028,755
Stephen P. Holmes: Roger J. Stone, Jr.:
FOR: 84,224,568 WITHHELD: 2,211,065 FOR: 84,432,292 WITHHELD: 2,003,341
Robert E. Nederlander:
FOR: 84,114,753 WITHHELD: 2,320,880
Robert W. Pittman:
FOR: 84,207,748 WITHHELD: 2,277,885
2. Amendments to Amended and Restated 1993 Stock Option Plan:
FOR: 59,758,136 AGAINST: 21,473,354
ABSTAINED: 92,459 BROKER NON-VOTE: NONE
5. Deloitte & Touche LLP as auditors:
FOR: 86,392,335 AGAINST: 8,925
ABSTAINED: 34,373 BROKER NON-VOTE: NONE
ITEM 5. OTHER INFORMATION
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma statements of operations for the six months ended June 30,
1996 and 1995 are each presented as if the following transactions had occurred
on January 1, 1995: (i) the May 31, 1996 acquisition of the common stock of
Coldwell Banker (the "Merger") and the related contribution of Coldwell Banker's
owned real estate brokerage offices to an independent trust (the "Trust"); (ii)
the receipt of proceeds from an offering of the Company's common stock (the
"Offering") to the extent necessary to fund the acquisition of Coldwell Banker
and the related repayment of indebtedness and acquisition expenses; (iii) the
acquisitions of: the six non-owned Century 21 regions ("Century 21 NORS"), the
Travelodge franchise system on January 23, 1996 and the ERA franchise system on
February 12, 1996 (collectively, the "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 1996 Acquisitions. The pro
forma statement of operations for the six months ended June 30, 1995 is also
presented as if the August 1, 1995 acquisition of Century 21 and the acquisition
by merger (the "CCI Merger") in May 1995 of Casino & Credit Services, Inc's
gambling patron credit information business, Central Credit Inc. ("CCI"), had
occurred on January 1, 1995.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values which are subject to further refinement,
including appraisals and other analyses, with appropriate recognition given to
the effect of current interest rates and income taxes. Management does not
expect that the final allocation of the purchase price for the above
acquisitions will differ materially from the preliminary allocations. The
Company has entered into certain immaterial transactions which are not reflected
in the pro forma statements of operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. In addition to the cost savings reflected in the pro forma
consolidated statement of operations, the pro forma consolidated statement of
operations does not reflect certain additional cost savings and revenue
enhancements that management believes may be realized following the
acquisitions. These savings are expected to be realized primarily through the
restructuring of franchise services of the acquired companies as well as revenue
enhancements expected through leveraging of the Company's preferred vendor
programs. No assurances can be made as to the amount of cost savings or revenue
enhancements, if any, that actually will be realized.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and should be read in conjunction
therewith and with "Management's Discussions and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto.
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996 and 1995
(In thousands, except per share amounts)
1996 1995
Revenue
Franchise $ 287,295 $ 265,482
Owned brokerage - -
Relocation 50,057 40,470
Other 54,614 36,361
------ ------
Total revenue 391,966 342,313
------- -------
Expenses
Marketing and reservation 76,625 77,440
Selling, general and
administrative 75,201 61,434
Ramada license fee 10,045 9,283
Owned brokerage - -
Depreciation and amortization 36,192 34,731
Interest 15,935 18,825
Relocation 38,355 31,398
Other 8,168 9,501
----- -----
Total expenses 260,521 242,612
------- -------
Income before income taxes 131,445 99,701
Provision for income taxes 53,029 41,982
------ ------
Net income $ 78,416 $ 57,719
========= =========
Per Share Information (fully diluted)
Net income $ .59 $ .45
========= =========
Weighted average common
and common equivalent
shares outstanding 137,485 131,841
======= =======
_______________
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform with the Company's classification
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(In thousands, except per share amounts)
Historical
-------------------------------
Coldwell 1996(1) Pro Forma
HFS Banker(1) Acquisitions Adjustments Pro Forma
-------------------------------------------------------
Revenue
Franchise $240,135 $ 25,694 $ 9,631 $11,835 (A) $287,295
Owned brokerage - 235,625 - (235,625) (B) -
Relocation 15,179 34,159 719 - 50,057
Other 48,896 4,067 1,651 - 54,614
------ ----- ----- ------
Total revenue 304,210 299,545 12,001 (223,790) 391,966
------- ------- ------ -------- -------
Expenses
Marketing and
reservation 75,491 - 1,134 - 76,625
Selling, general
& administrative 60,311 57,455 9,460 (52,025) (C) 75,201
Ramada license
fee 10,045 - - - 10,045
Owned brokerage - 227,363 - (227,363) (B) -
Depreciation and
amortization 23,405 9,021 421 3,345 (D) 36,192
Interest 14,574 3,155 1,493 (3,287) (E) 15,935
Relocation 10,184 27,530 641 - 38,355
Other 6,892 512 764 - 8,168
----- --- --- -------- -----
Total expenses 200,902 325,036 13,913 (279,330) 260,521
------- ------- ------ -------- -------
Income (loss) before
income taxes 103,308 (25,491) (1,912) 55,540 131,445
Provision (benefit)
for income taxes 41,746 (10,432) - 21,715 (G) 53,029
------ ------- ------- ------ ------
Net income (loss) $61,562 $(15,059) $(1,912) $33,825 $78,416
======= ======== ======= ======= =======
Per Share Information
(fully diluted)
Net income $ .51 $ .59
======= =======
Weighted average common
and common equivalent
shares outstanding 126,275 11,210 (H) 137,485
======= ====== =======
_______________
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1996 to the
respective dates of acquisition
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF 1996 ACQUISITIONS
For the Six Months Ended June 30, 1996
(In thousands)
Century 21
NORS (1) Travelodge(1) ERA(1) Total
---------------------------------------------
Revenue:
Franchise $ 6,668 $ 688 $ 2,275 $ 9,631
Relocation -- -- 719 719
Other 449 -- 1,202 1,651
--- ------- ----- -----
Total revenue 7,117 688 4,196 12,001
----- --- ----- ------
Expenses:
Marketing and
reservation 681 453 -- 1,134
Selling, general and administrative 6,885 99 2,476 9,460
Depreciation and amortization 285 -- 136 421
Interest 2 -- 1,491 1,493
Relocation -- -- 641 641
Other -- -- 764 764
Total expenses 7,853 552 5,508 13,913
----- --- ----- ------
Income (loss) before
income taxes (736) 136 (1,312) (1,912)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net income (loss) $ (736) $ 136 $ (1,312) $ (1,912)
======== ======== ======== ========
_______________
Note:Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1996 to the
respective dates of acquisition
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1995
(In thousands, except per share amounts)
Historical
---------------------------------
Other (1)
Coldwell Acquired Pro Forma
HFS Banker (1) Companies Adjustments Pro Forma
-------------------------------------------------------------------
Revenue
Franchise $151,789 $ 26,980 $ 75,209 $ 11,504 (A) $265,482
Owned brokerage -- 247,331 -- (247,331) (B) --
Relocation -- 33,302 7,168 -- 40,470
Other 18,693 3,303 14,365 -- 36,361
------ ----- ------ ------- --------
Total revenue 170,482 310,916 96,742 (235,827) 342,313
------- ------- ------ -------- -------
Expenses
Marketing and
reservation 66,682 -- 10,758 -- 77,440
Selling, general and
administrative 14,967 17,750 62,301 (33,584) (C) 61,434
Ramada license fee 9,283 -- -- -- 9,283
Owned brokerage -- 247,129 -- (247,129) (B) --
Depreciation and
amortization 13,332 11,959 6,277 3,163 (D) 34,731
Interest 10,255 1,938 3,989 2,643 (E) 18,825
Relocation -- 26,543 4,855 -- 31,398
Other 1,219 1,029 7,652 (399) (F) 9,501
----- ----- ----- ---- -----
Total expenses 115,738 306,348 95,832 (275,306) 242,612
------- ------- ------ -------- -------
Income before
income taxes 54,744 4,568 910 39,479 99,701
Provision for
income taxes 22,499 2,004 1,519 15,960 (G) 41,982
------ ----- ----- ------ ------
Net income (loss) $32,245 $ 2,564 $ (609) $ 23,519 $ 57,719
======= ========= ========= ========= =========
Per Share Information
(fully diluted)
Net income $ .31 $ .45
======= =========
Weighted average common
and common equivalent
shares outstanding 112,276 19,565 (H) 131,841
======= ====== =======
_________
Note:Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1995 to the
respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF OTHER ACQUIRED COMPANIES
For the Six Months Ended June 30, 1995
(In thousands, except per share amounts)
Century 21
CCI(1) Century 21 NORS Travelodge ERA Total
-------------------------------------------------------------
Revenue
Franchise $ - $45,190 $12,682 $ 7,715 $ 9,622 $75,209
Relocation - 5,503 - - 1,665 7,168
Other 3,326 1,920 176 40 8,903 14,365
----- ----- --- -- ----- ------
Total revenue 3,326 52,613 12,858 7,755 20,190 96,742
----- ------ ------ ----- ------ -------
Expenses
Marketing and
reservation - 4,013 1,273 5,472 - 10,758
Selling, general and
administrative - 36,603 9,986 1,118 14,594 62,301
Depreciation and
amortization 529 4,657 252 3 836 6,277
Interest - 2,786 23 - 1,180 3,989
Relocation - 4,122 - - 733 4,855
Other 1,917 - - - 5,735 7,652
----- ----- -----
Total expenses 2,446 52,181 11,534 6,593 23,078 95,832
----- ------ ------ ----- ------ ------
Income (loss) before
income taxes 880 432 1,324 1,162 (2,888) 910
Provision for
income taxes 313 728 - 478 - 1,519
--- --- --- -----
Net income (loss) $ 567 $ (296) $ 1,324 $ 684 $(2,888) $ (609)
======= ======= ======= ======== ======= =======
_______________
Note:Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification
(1) Reflects results of operations for the period from January 1, 1995 to the
respective date of acquisition.
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated
NOTES TO PRO FORMA CONSOLIDATED
BALANCE SHEET AND STATEMENTS OF OPERATIONS
A. Franchise revenue:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations, the
elimination of franchise revenue paid by the Century 21 NORS to Century 21 under
sub-franchise agreements and the addition of franchise fees to be received under
franchise contracts to be executed with owned brokerage offices upon
contribution of the Owned Brokerage Business to the Trust. Pro forma adjustments
to franchise revenue consists of the following ($000's):
For the Six Months Ended
June 30
--------------------------
1996 1995
---- ----
Eliminate:
Discontinued operations $ - $ (34)
Century 21 revenue included as
Century 21 NORS
SG&A (1,003) (2,250)
Add :
Franchise fees from Owned Brokerage Business 12,838 13,788
------ ------
Total $11,835 $11,504
======= =======
B. Owned brokerage revenue and expenses:
The pro forma adjustments reflect the elimination of revenue and expenses
for Coldwell Banker's formerly owned 318 owned offices. The Company contributed
the net assets of the Owned Brokerage Business to the Trust upon consummation of
the Coldwell Banker acquisition. The free cash flow of the Trust will be
expended at the discretion of the trustees to enhance the growth of funds
available for advertising and promotion.
C. Selling, general and administrative expense:
The pro forma adjustments eliminate redundant costs associated with the
restructuring of franchise services and other businesses and the resulting
termination of certain functions and positions in connection with Company
acquisitions. Adjustments are comprised of the following ($000's):
For the six months ended June 30, 1996:
Coldwell Century 21
Banker NORS Travelodge ERA Total
------------------------------------------------
Payroll and related $ 4,451 $ 2,424 $ 25 $ 222 $ 7,122
Stock option expense 40,801 40,801
Professional 1,055 705 4 - 1,764
Occupancy - 603 4 102 709
Conventions and meetings - 472 - - 472
Franchise fees (Note A) - 1,003 - - 1,003
Other (604) 597 4 157 154
---- --- - --- ---
Total $45,703 $ 5,804 $ 37 $ 481 $52,025
====== ======= ======= ====== =======
For the six months ended June 30, 1995:
Century Coldwell Century 21
21 Banker NORS Travelodge ERA Total
-------------------------------------------------------
Payroll & related $9,330 $5,341 $ 2,951 $ 287 $1,064 $18,973
Professional 2,308 1,073 649 40 - 4,070
Occupancy 3,110 - 1,159 48 444 4,761
Conventions and
meetings 1,116 - 179 - - 1,295
Franchise fees
(Note A) - - 2,250 - - 2,250
Other 1,561 (846) 748 43 729 2,235
----- ---- --- -- --- -----
Total $17,425 $5,568 $ 7,936 $ 418 $2,237 $33,584
======= ====== ======= ======= ====== =======
D. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the six months ended June 30, 1996:
Coldwell 1996
Banker Acquisitions Total
Elimination of historical expense $(9,021) $ (421) $(9,442)
Property, equipment & furniture & fixtures 540 - 540
Excess of cost over fair value
of net assets acquired - 974 974
Intangible assets - Coldwell Banker 10,775 - 10,775
Franchise agreements - 498 498
------- --- ---
Total $ 2,294 $ 1,051 $ 3,345
======= ======== =======
For the six months ended June 30, 1995:
CCI Coldwell 1996
Merger Century 21 Banker Acquisitions Total
---------------------------------------------------
Elimination of historical
expense $ (529) $ (4,657) $(11,959) $ (1,091) $(18,236)
Property, equipment and
furniture and fixtures 100 393 647 -- 1,140
Information data base 375 -- -- -- 375
Excess of cost over fair value
of net assets acquired 289 1,750 -- 2,053 4,092
Intangible assets - Coldwell Banker- -- 12,938 -- 12,938
Franchise agreements -- 1,396 -- 1,458 2,854
------- ----- ------- ----- -----
Total $ 235 $ (1,118) $ 1,626 $ 2,420 $ 3,163
======== ======== ======== ======== ========
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's property and equipment, franchise
agreements and excess of cost over fair value of net assets acquired are $5.5
million, $33.5 million and $140.0 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve and
forty years, respectively. The benefit periods associated with the excess cost
over fair value of net assets acquired were determined based on Century 21's
position as the world's largest franchisor of residential real estate brokerage
offices, the most recognized brand name in the residential real estate brokerage
industry and the longevity of the residential real estate brokerage business.
Coldwell Banker
The estimated fair value of Coldwell Banker's property, plant and equipment
(excluding land) of $16.7 million, is amortized on a straight-line basis over
the estimated benefit periods ranging from five to twenty-five years. The
estimated fair value of Coldwell Banker's intangible assets, comprised of
franchise agreements and excess of cost over fair value of net assets acquired,
is $768.4 million and is amortized on a straight-line basis over the periods to
be benefited. Excess of cost over fair value of net assets acquired was
determined to have a benefit period of forty years, which was based on Coldwell
Banker's position as the largest gross revenue producing real estate company in
North America, the recognition of its brand name in the real estate brokerage
industry and the longevity of the real estate brokerage business.
1996 Acquisitions
The estimated fair values of 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 1996 Acquisitions excess of cost over fair value of net
assets acquired aggregate $164.2 million and are each being amortized on a
straight-line basis over the periods to benefited which are forty years.
E. Interest expense:
The pro forma adjustment to interest expense is comprised of ($000's):
For the Six Months Ended
June 30,
1996 1995
------------------------
Elimination of historical interest expense
of 1996 Acquisitions & Century 21 $ (1,493) $(3,989)
Reversal of Coldwell Banker (3,155) (1,938)
Century 21 - 1,890
Minority interest-preferred dividends - 2,217
4 3/4% Notes 1,361 4,463
- ----- -----
Total $ (3,287) $ 2,643
======== =======
Coldwell Banker
The pro forma adjustment reflects the reversal of interest expense relating
to the following ($000's):
For the Six Months Ended
June 30,
1996 1995
---- ----
Expense (income) associated with the Owned
Brokerage Business $ (179) $ 31
Expense associated with revolving credit
facility borrowings which will be repaid
with proceeds from offering 3,334 1,907
----- -----
Total $ 3,155 $ 1,938
======= =========
Century 21
The pro forma adjustment reflects the recording of interest expense on $60
million of borrowings under the Company's revolving credit facility at an
interest rate of 6.3%. Borrowings represent the amount necessary to finance the
initial cash purchase price net of $10.2 million of acquired cash.
Minority interest - preferred dividends
The pro forma adjustment reflects dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21. Preferred dividends are
calculated based on an $80 million face value and a 6.3% dividend rate.
4 3/4% Notes
The pro forma adjustment reflects interest expense and amortization of
deferred financing costs related to the February 22, 1996 issuance of the 4 3/4%
Notes to the extent that such proceeds were used to finance the 1996
Acquisitions.
F. Other expenses:
The pro forma adjustment eliminates $399,000 of accounting, legal and other
administrative expenses allocated to CCI which would not have been incurred by
the Company.
G. Income Taxes:
The pro forma adjustment to income taxes is comprised of ($000's):
For the Six Months Ended
June 30,
1996 1995
---- ----
Reversal of historical (provision) benefit of:
Company $(41,746) $(22,499)
CCI - (313)
Century 21 - (728)
Coldwell Banker 10,432 (2,004)
Travelodge - (478)
Pro forma provision 53,029 41,982
------ ------
Total $21,715 $ 15,960
======= ========
The pro forma effective tax rates approximates the Company's historical
effective tax rates.
H. Weighted average common and common equivalent shares outstanding:
The pro forma adjustment to weighted average shares consists of the
following (000's):
For the Six Months Ended
June 30,
1996 1995
---- ----
CCI - 1,804
Century 21 - 4,000
Coldwell Banker 10,581 12,838
Century 21 NORS 629 923
------ ------
11,210 19,565
====== ======
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisitions took place at the beginning of the period presented;
thus, the stock issuances referred to above are considered outstanding as of the
beginning of the period for purposes of per share calculations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
10.1 Employment Agreement dated as of June 30, 1996 between the Company and
Henry R. Silverman.
10.2 Form of Second Amended and Restated Financing Agreement dated as of July
24, 1996 between the Company and National Lodging Corp.
10.3 Form of Amended and Restated Corporate Services Agreement dated as of
January 24, 1996 between the Company and National Lodging Corp.
11 Statement re: computation of per share earnings
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 5, 1996 for
purposes of incorporating by reference certain financial statements in the
Company's Registration Statements which were filed shortly after the filing of
such Current Report on Form 8-K. The financial statements filed included:
1. The unaudited interim financial statements of Century 21 of Southwest,
Inc., (an "S" corporation) as of December 31, 1995 and March 31, 1995 and
the related statements of income and cash flows for the nine months ended
December 31, 1995 and 1994.
2. The unaudited interim financial statements of Century 21 of Eastern
Pennsylvania, Inc., (an "S" corporation) as of January 31, 1996 and April
30, 1995 and the related statements of operations and cash flows for the
nine months ended January 31, 1996 and 1995.
3. The audited financial statements of Century 21 Real Estate of the
Mid-Atlantic States, Inc., as of December 31, 1995 and the related
statements of operations, retained earnings and cash flows for the year
then ended.
4. The unaudited consolidated interim financial statements of Century 21
Region V, Inc., as of January 31, 1996 and July 31, 1995 and the related
statements of operations and cash flows for the six months ended January
31, 1996 and 1995.
5. The audited consolidated financial statements of Electronic Realty
Associates, L.P. as of and for the years ended December 31, 1995 and 1994.
6. Pro forma financial information of HFS Incorporated.
The Company filed a Current Report on Form 8-K dated May 8, 1996 regarding
the proposed acquisition by merger of Coldwell Banker Corporation by the
Company, which acquisition was consummated on May 31, 1996. Such Current Report
on Form 8-K included as exhibits the audited, consolidated financial statements
of Coldwell Banker Corporation and subsidiaries as of and for the years ended
December 31, 1995 and 1994, the three months ended December 31, 1993 and the
nine months ended September 30, 1993, and pro forma financial information of the
Company.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HFS Incorporated
By: /s/ James E. Buckman
James E. Buckman
Executive Vice President
Date: August 13 1996 And General Counsel
By: /s/ Stephen P. Holmes
Stephen P. Holmes
Executive Vice President
Date: August 13 1996 And Chief Financial Officer
(Principal Financial Officer
And Principal Accounting Officer)
EXHIBIT INDEX
Page
Exhibit No. Description
10.1 Amended and Restated Employment Agreement dated as
of June 30, 1996 between the Company and Henry R. Silverman
10.2 Form of Second Amended and Restated Financing Agreement dated
as of July 24, 1996 between the Company and National Lodging Corp.
10.3 Form of Amended and Restated Corporate Services Agreement dated as
of January 24, 1996 between the Company and National Lodging Corp.
11 Statement re: computation of per share earnings