SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 1-11402
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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)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
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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 128,676,074 shares of Common Stock outstanding as at November
11, 1996.
HFS Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 1996 1995
- - ------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 471,194 $ 16,109
Royalty accounts and notes receivable, net of
allowance for doubtful accounts 76,975 37,326
Marketing and reservation receivables, net of
allowance for doubtful accounts 36,200 22,297
Relocation receivables 136,052 51,180
Other current assets 22,625 21,304
Deferred income taxes 36,456 20,200
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Total current assets 779,502 168,416
Property and equipment, net 106,233 67,892
Franchise agreements, net 594,415 517,218
Excess of cost over fair value of net assets
acquired, net 1,339,836 356,754
Other assets 80,064 55,528
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TOTAL ASSETS $ 2,900,050 $ 1,165,808
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LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and other $ 185,012 $ 73,724
Income taxes payable 81,633 38,640
Accrued acquisition obligations 40,287 10,276
Current portion of long-term debt 29,907 2,249
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Total current liabilities 336,839 124,889
Long-term debt 541,563 300,778
Other liabilities 31,259 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 1,237 1,025
Additional paid-in capital 1,705,541 475,562
Retained earnings 206,236 83,604
Treasury stock, at cost (8,025) --
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Total stockholders' equity 1,904,989 560,191
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 1,165,808
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-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
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REVENUE:
Franchise $ 184,027 $ 113,340 $ 424,162 $ 265,129
Other 61,773 15,909 125,848 34,602
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Total revenue 245,800 129,249 550,010 299,731
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EXPENSES:
Marketing and reservation 55,237 44,160 130,728 110,842
Selling, general and administrative 40,232 21,867 110,588 46,117
Depreciation and amortization 17,724 8,389 41,129 21,721
Interest 7,620 6,017 22,194 16,272
Other 23,033 2,376 40,109 3,595
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Total expenses 143,846 82,809 344,748 198,547
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Income before income taxes 101,954 46,440 205,262 101,184
Provision for income taxes 40,884 19,321 82,630 41,820
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Net income $ 61,070 $ 27,119 $ 122,632 $ 59,364
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SHARE INFORMATION (fully diluted):
Net income per share $ 0.44 $ 0.24 $ 0.96 $ 0.56
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 142,942 115,758 131,684 112,056
========= ========= ========= =========
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Additional
Common Stock Paid In Retained Treasury
Shares Amount Capital Earnings Stock Total
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Balance, January 1, 1996 102,539 $ 1,025 $ 475,562 $ 83,604 $ -- $ 560,191
Issuance of common stock 20,278 203 1,205,768 -- -- 1,205,971
Purchase of common stock -- -- -- -- (8,025) (8,025)
Exercise of stock options 898 9 7,973 -- -- 7,982
Tax benefit from exercise
of stock options -- -- 16,145 -- -- 16,145
Conversion of 41/2% Notes 5 -- 93 -- -- 93
Net income -- -- -- 122,632 -- 122,632
------- ------- ----------- --------- ---------- ----------
Balance, September 30, 1996 123,720 $ 1,237 $ 1,705,541 $ 206,236 $ (8,025) $1,904,989
======= ======= =========== ========= =========== ==========
-See notes to consolidated financial statements-
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
1996 1995
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Operating Activities:
Net income $ 122,632 $ 59,364
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, including
amortization of deferred financing costs 42,524 22,680
Changes in operating assets and liabilities
and other (25,777) 2,200
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Net cash provided by operating activities 139,379 84,244
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Investing Activities:
Property and equipment additions (23,578) (5,780)
Loans and investments (10,000) (13,000)
Acquisition of businesses, net of cash acquired (970,885) (70,977)
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Net cash used in investing activities (1,004,463) (89,757)
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Financing Activities:
Issuance of common stock, net 1,167,953 57,053
Proceeds from borrowings, net 242,025 -
Purchases of treasury stock (8,025) -
Redemption of Series A Preferred Stock (80,000) -
Principal payments - long-term debt (1,784) (16,252)
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Net cash provided by financing activities 1,320,169 40,801
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Net increase in cash and cash equivalents 455,085 35,288
Cash and cash equivalents, beginning of period 16,109 5,956
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Cash and cash equivalents, end of period $ 471,194 $ 41,244
========= ===========
-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
September 30, 1996, the consolidated statements of income for the three and nine
months ended September 30, 1996 and 1995, the consolidated statements of cash
flows for the nine months ended September 30, 1996 and 1995 and the consolidated
statement of stockholders' equity for the nine months ended September 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 nine months
ended September 30, 1996 and 1995 except that in June 1996, the Company recorded
a $7.0 million pre-tax restructuring charge, related primarily to the
contribution of owned Coldwell Banker brokerage offices to a newly created
independent entity, National Realty Trust (the "Trust") (See Note 2). Through
September 30, 1996, the Company has engaged principally 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 and majority owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements of the Company include the assets and
liabilities of Ramada Franchise Systems, Inc., an entity controlled by the
Company by virtue of its ownership of 100% of the common stock of such entity.
The assets of Ramada Franchise Systems, Inc. are not available to satisfy the
claims of any creditors of the Company or any of its other affiliates, except as
otherwise specifically agreed by Ramada Franchise Systems, Inc.
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 nine months ended September 30, 1996 have been included in
the Company's consolidated results since the respective dates of acquisition.
A. ACQUISITION OF RESORT CONDOMINIUMS INTERNATIONAL, INC. - On November 12,
1996, the Company completed the acquisition of all the outstanding capital stock
of Resort Condominiums International, Inc., and its affiliates ("RCI") for
approximately $625 million comprised of $550 million in cash and $75 million of
Company common stock. The purchase agreement provides for contingent payments of
up to $200 million over the next five years.
RCI, based in Indianapolis, Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately two million
timeshare owners and approximately 3,000 resorts around the world. RCI is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
B. ACQUISITION OF AVIS, INC. - On October 17, 1996, the Company completed
the acquisition of all of the outstanding capital stock of Avis, Inc. ("Avis"),
including payments under certain employee stock plans of Avis and the redemption
of certain series of preferred stock of Avis for an aggregate $806.5 million.
The purchase price was comprised of approximately $367.2 million in cash, $100.9
million in indebtedness and $338.4 million (approximately 4.6 million shares) in
Company common stock.
Avis, together with its subsidiaries, licensees and affiliates, operates
the Avis rental car business, which the Company believes is the second largest
car rental system in the world.
Prior to the consummation of the acquisition, the Company announced its
intention to dispose of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Operating Company") through an
initial public offering of the common stock of the Operating Company during
1997. The Operating Company will license the Avis trademark from the Company in
return for a license fee based on a percentage of Operating Company revenue.
C. COLDWELL BANKER - On May 31, 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), at the time the largest gross
revenue producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640 million in cash
for all of the outstanding capital stock of Coldwell Banker and repaid
approximately $105 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the sale of Company
common stock (see Note 5).
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices to
the Trust. The Company recorded a pre-tax restructuring charge of $7 million
(approximately $4.3 million, net of tax or $0.03 per share), in the second
quarter, related primarily to the contribution of net assets to the Trust.
D. CENTURY 21 NON-OWNED REGIONS - During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S.
previously non-owned Century 21 regions ("Century 21 NORS") consisting of more
than 1,000 franchised real estate offices. The $147 million aggregate purchase
price consisted of approximately $96 million in cash, $5 million in notes and
$46 million (approximately 0.9 million shares) in Company common stock.
E. ERA - In February 1996, the Company purchased substantially all of the
assets comprising the Electronic Realty Associates ("ERA") residential real
estate brokerage franchise system for approximately $40.5 million in cash.
F. 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, Chartwell Leisure Inc. ("CHRT") formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders on November 22, 1994 (the "Distribution Date"), 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
CHRT's acquisition, the Company guaranteed $75 million of CHRT borrowings under
a $125 million revolving credit facility entered into by CHRT with certain
banks. The Company is paid a guarantee fee of 2% per annum of the outstanding
guarantee commitment by the Company pursuant to a financing agreement entered
into between CHRT and the Company at the Distribution Date (the "Financing
Agreement"). The Financing Agreement was modified to provide expressly for the
guaranty of such CHRT borrowings. The Company and CHRT terminated or modified
other agreements entered into with CHRT at the Distribution Date, including a
gaming related marketing services agreement and an advisory agreement. CHRT paid
the Company an advisory fee approximating $2 million in January 1996 in
connection with CHRT's acquisition of FHI.
Pro Forma Information: The following information reflects the comparative
pro forma statements of operations of the Company for the nine months ended
September 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,
Central Credit, Inc.; (iii) the acquisition of Avis and the issuance of the
Company common stock as partial consideration for Avis; (iv) the acquisition of
RCI and the issuance of the Company common stock as partial consideration for
RCI; (v) the acquisition of Coldwell Banker and the related contribution of
Coldwell Banker's owned real estate brokerage offices to the Trust; (vi)
proceeds from an offering of the Company's common stock (See Note 5) to the
extent necessary to fund the acquisition of Coldwell Banker and the related
repayment of indebtedness and acquisition expenses; (vii) the 1996 acquisitions
of Travelodge, ERA and the Century 21 NORS; and (viii) the February 22, 1996
issuance of $240 million of 4 3/4% convertible senior notes due 2003 (the "4
3/4% Notes", see Note 6) to the extent such proceeds were used to finance
acquisitions. The acquisitions have been or will be accounted for using the
purchase method of accounting. Accordingly, assets acquired and liabilities
assumed have been or will be recorded at their estimated fair values, which are
subject to further refinement, based upon appraisals and other analyses with
appropriate recognition given to the effect of current interest rates and income
taxes. 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.
Nine Months Ended
September 30,
(000's, except net income per share) 1996 1995
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Revenue .............................................. $ 999,865 $ 841,323
Income before income taxes ........................... 332,150 232,827
Net income per share (fully diluted) ................. $ 1.35 $ 1.00
Weighted average common and common equivalent shares
outstanding (fully diluted) ................ 147,513 140,582
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 three and nine months ended September 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,
issued February 22, 1996, are antidilutive for the three and nine months ended
September 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"). A majority of the net proceeds from the Offering of $1.2 billion
financed the acquisition of Coldwell Banker and the balance was principally used
as partial consideration in the subsequent acquisition of Avis.
6. 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.
On October 2, 1996, the Company replaced an existing $300 million revolving
credit facility with $1 billion in revolving credit facilities consisting of (i)
a $500 million, five year revolving credit facility (the "Five Year Credit
Facility") and (ii) a $500 million, 364 day revolving credit facility (the "364
Day Revolving Credit Facility" (collectively the "Revolving Credit Facilities").
The Company may renew the 364 Day Revolving Credit Facility on an annual basis
for an additional 364 days up to a maximum aggregate term of five years upon
receiving lender approval. The Revolving Credit Facilities, at the option of the
Company, bear interest based on competitive bids of lenders participating in the
facilities, at the prime rate or at LIBOR plus a margin approximating 25 basis
points.
7. Recent Events
A. PENDING ACQUISITION OF PHH CORPORATION ("PHH") - On November 10, 1996,
the Company entered into a definitive merger agreement (the "Merger Agreement")
pursuant to which the Company will issue approximately $1.7 billion of Company
common stock in exchange for all of the outstanding common stock of PHH.
Pursuant to the terms of the Merger Agreement, the number of Company shares to
be issued may range from 21.3 to 28.7 million, based upon the average share
price of the Company's common stock over a period of 20 trading days ending five
days prior to the date of the vote by PHH shareholders on approval of the
transaction. PHH is the world's largest provider of corporate relocation
services and also provides mortgage banking and vehicle management services.
Consummation of the transaction is subject to customary regulatory approvals and
the approval of the shareholders of each company. The transaction, which is
expected to close in early 1997, will be accounted for as a pooling of
interests.
B. PURCHASE OF MINORITY INTEREST- Effective October 29, 1996 (the
"Effective Date"), the Company amended the Subscription and Stockholders
Agreement dated as of August 1, 1995 among C21 Holding Corp., the Company and a
group of former executives of Century 21 Real Estate Corporation (the "Former
Management") pursuant to which the Company owns 87.5% of C21 Holding Corp. and
the Former Management owns 12.5% of C21 Holding Corp. Such amendment provides
for the acceleration of the Company's option to purchase the 12.5% ownership
from the Former Management at fair market value to a date which is approximately
90 days from the Effective Date, with fair market value determined as of the
Effective Date The Company is in the process of determining the fair market
value of C21 Holding Corp. and expects to complete such purchase in the first
quarter of 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
HFS Incorporated (the "Company") provides services to various businesses in
consumer industries. 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"), at the time the largest gross
revenue producing residential real estate company in North America and a leading
provider of relocation services. The Company expanded its consumer services
business to include the car rental industry with its October 17, 1996
acquisition of Avis, Inc. ("Avis"), which the Company believes is the second
largest car rental system in the world. On November 12, 1996, the Company
continued its expansion by acquiring Resort Condominiums International, Inc.
("RCI") which is the world's largest provider of timeshare exchange programs.
See "Liquidity and Capital Resources - Acquisitions". On November 11, 1996, the
Company entered into a definitive merger agreement with PHH Corporation ("PHH"),
pursuant to which PHH will become a subsidiary of the Company. PHH is the
world's largest provider of corporate relocation services and also provides
mortgage banking and vehicle management services. See "Liquidity and Capital
Resources - Pending Acquisition". The Company continues to pursue acquisitions
and other strategic transactions within its existing industry segments as well
as other franchise or franchisable businesses and other consumer services
businesses.
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Company revenue increased 90% ($116.6 million) to $245.8 million in the
third quarter of 1996 compared to $129.2 million in the third quarter of 1995.
Approximately $78.9 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 (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 $10.4 million representing
a 241% increase over such revenue in the third quarter of 1995.
Company revenue increased 84% ($250.3 million) to $550.0 million during the
nine months ended September 30, 1996 compared to the same period in 1995. The
lodging and real estate segments each contributed to the revenue increase. The
real estate segment, which was not established until the third quarter of 1995,
generated $187.4 million of revenue for the nine months ended September 30, 1996
compared to $22.8 million for the same period in the prior year.
3Q96 vs. 3Q95
Lodging Franchise Fees
The royalty portion of lodging franchise fees increased $5.4 million (11%),
in the third 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 24,859 rooms, net of terminations, during the twelve months ended
September 30, 1996.
Real Estate Franchise Fees
The real estate segment contributed $74.4 million of franchise fees for the
third quarter of 1996 including $36.6 million from the CENTURY 21 franchise
system, acquired in August 1995, $5.6 million from the ERA franchise system,
acquired on February 12, 1996 and $32.2 million from the Coldwell Banker
franchise system, acquired on May 31, 1996. Franchise fees of acquired real
estate segment franchise systems increased $54.9 million for the quarter ended
September 30, 1996 compared to the same period in 1995, due to such real estate
segment acquisitions.
Other
Other revenue is primarily comprised of revenue from preferred vendor
arrangements and relocation service revenue. Preferred vendor fees consist of
revenue generated from vendors seeking access to the Company's franchisees and
franchisees' customers. Preferred vendor revenue increased $10.4 million (241%)
from the third quarter of 1995 to the third 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 $28.9 million in the third quarter of 1996, compared to $3.7
million in the third quarter of 1995, including $25.0 million from Coldwell
Banker Relocation Services, Inc., ("CBRS") acquired by the Company on May 31,
1996.
Year-to-date 1996 vs. 1995
Lodging Franchise Fees
Lodging segment franchise fees and the royalty portion of franchise fees
increased $30.1 million (12%) and $17.4 million (15%), respectively, in the nine
months ended September 30, 1996 compared to the same period in 1995. The
increase in lodging segment franchise fees is primarily attributable to room
growth through the sale of franchise agreements and the acquisition of the
Knights Inn and Travelodge franchise systems.
Real Estate Franchise Fees
The real estate segment contributed $148.4 million of franchise fees for
the nine months ended September 30, 1996 including approximately $91.3 million,
$13.4 million and $43.7 million from the Century 21, ERA and Coldwell Banker
franchise systems, respectively. Franchise fees of the aforementioned acquired
real estate segment franchise systems increased $128.9 million for the nine
months ended September 30, 1996 compared to the same period in 1995 due to such
real estate segment acquisitions.
Other
Other revenue is substantially comprised of fees from preferred vendor
arrangements, which increased $26.6 million (200%) from the first nine months of
1995 to the same period in 1996 and relocation services fees of $44.1 million
from businesses acquired in connection with the Company's real estate segment
acquisitions, including $32.7 million from CBRS.
RESULTS OF OPERATIONS - EXPENSES AND INCOME
3Q96 vs 3Q95
Income before income taxes for the third quarter of 1996 increased $55.5
million (120%) over the same period in 1995 as a result of the increase in
revenue for such period discussed above in "Results of Operations - Revenue
Overview", net of a $61.0 million (74%) increase in expenses.
Marketing and reservation expenses increased $11.1 million (25%) compared
to the same period in 1995. This increase includes a $9.2 million increase in
marketing fees from franchised lodging properties, $5.1 million of which is
attributable to the acquisition of Travelodge and a $1.9 million increase in
contributions 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.
Selling, general and administrative expenses ("SG&A") increased $18.4
million for the third quarter of 1996 over the comparable period in 1995,
primarily as a result of $15.7 million of incremental expenses attributable to
the recently acquired real estate segment operations.
Depreciation and amortization for the third quarter of 1996 increased $9.3
million when compared to the same period in 1995, which increase 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 and Travelodge franchise
systems and the Century 21 non-owned regions.
Interest expense for the third quarter of 1996 increased $1.6 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 decrease in the Company's weighted average effective interest rate from 6.7%
in the third quarter 1995 to 5.6% in the third quarter of 1996 as a result of
the issuance of the 4 3/4% Notes. Outstanding borrowings at September 30, 1996
were substantially comprised of fixed rate debt securities.
Other expenses increased $20.7 million in the third quarter of 1996
compared to the same quarter of 1995, corresponding to a $45.9 million increase
in related revenue. Other expenses include $17.4 million of relocation services
expenses associated with the Company's 1995 and 1996 real estate franchise
system acquisitions.
Year-To-Date 1996 vs. 1995
Income before income taxes increased $104.1 million (103%) for the nine
months ended September 30, 1996 versus the comparable period in 1995. This
increase resulted from the increase in revenue for such period as discussed
above in "Results of Operations -Revenue Overview" net of a $146.2 million (74%)
increase in expenses.
SG&A increased $64.5 million for the nine months ended September 30, 1996
over the comparable period in 1995, primarily as a result of $57.8 million of
incremental expenses attributable to real estate segment operations including
the CENTURY 21, ERA and Coldwell Banker franchise systems following their
respective acquisitions. Included in real estate segment SG&A expenses is a $7.0
million restructuring charge related primarily to the contribution to the Trust.
The $19.9 million increase in marketing and reservation expenses includes a
$13.1 million increase in marketing fees from franchised lodging properties,
$10.0 million of which is attributable to the acquisition of Travelodge, and a
$6.8 million contractual contribution by Century 21 to the NAF.
Depreciation and amortization for the nine months ended September 30, 1996
increased $19.4 million when compared to the same period in 1995. This increase
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 franchise systems; the Century 21
non-owned regions and Central Credit, Inc.
Interest expense for the nine months ended September 30, 1996 increased
$5.9 million due to the issuance of the 4 3/4% Notes in February 1996. Interest
expense was offset in part by the decrease in the Company's weighted average
effective interest rate from 6.0% in the first nine months of 1995 to 5.7% in
the nine months ended September 30, 1996 as a result of the issuance of the 4
3/4% Notes.
The $36.5 million increase in other expenses for the nine months ended
September 30, 1996 compared to the same period in 1995, corresponds to the $91.2
million increase in other revenue. The increase includes $27.5 million of
relocation expenses generated by the relocation services businesses acquired in
the real estate franchise system acquisitions.
Pro Forma Results of Operations
Pro forma net income increased $58.3 million (43%) for the nine months
ended September 30, 1996 over the comparable pro forma 1995 period. The increase
results from a $158.5 million increase in revenue with a corresponding increase
in total expenses of only $59.2 million. The revenue increase is primarily
attributable to increases in: combined lodging and real estate franchise fees of
$36.0 million (8%), relocation service fees of $11.6 million (17%), timeshare
revenue of $27.4 million (13%), net rental car operations of $64.6 million (97%)
and reported preferred vendor revenue of $26.6 million (200%). Pro forma revenue
does not reflect potential revenue enhancements which may be realized from
preferred vendors seeking access to the Company's newly acquired franchise
systems. The increase in lodging segment franchise fees is attributable
primarily to system growth during periods of Company ownership. The increase in
real estate segment franchise fees is a result of increased gross commission
revenue from franchised brokerage offices. The increase in net rental car
operations is primarily due to industry growth and an increase in market share.
Increases in relocation revenue are directly attributable to increased services
provided to relocating employees and the timeshare revenue increase is due to
increased timeshare members and related timeshares exchanges.
LIQUIDITY AND CAPITAL RESOURCES
Pending Acquisition
On November 10 1996, the Company entered into a definitive merger agreement
(the "Merger Agreement") pursuant to which the Company will issue $1.7 billion
of Company common stock in exchange for all of the outstanding common stock of
PHH. Pursuant to the terms of the Merger Agreement, the number of Company shares
to be issued may range from 21.3 million to 28.7 million, based upon the average
share price of the Company's common stock over a period of 20 trading days
ending five days prior to the date of the vote by PHH shareholders on approval
of the transaction. PHH is the world's largest provider of corporate relocation
services and also provides mortgage banking and vehicle management services.
Consummation of the transaction is subject to customary regulatory approvals and
the approval of the shareholders of each company. The transaction is expected to
close in early 1997.
Acquisitions
RCI - On November 12, 1996, the Company completed the acquisition of all
the outstanding capital stock of Resort Condominiums International, Inc. and its
affiliates ("RCI") for approximately $625 million comprised of $550 million in
cash and $75 million of Company common stock plus future contingent payments of
up to $200 million over the next five years.
RCI, based in Indianapolis Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately two million
timeshare owners and approximately 3,000 resorts around the world. RCI is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
AVIS - On October 17, 1996, the Company completed the acquisition of all of
the outstanding capital stock of Avis Inc. ("Avis"), including payments under
certain employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for $806.5 million. The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4
million (approximately 4.6 million shares) in Company common stock.
Avis, together with its subsidiaries, licensees and affiliates, operates
the Avis System, which the Company believes to be the second largest car rental
system in the world.
Prior to the consummation of the acquisition, the Company announced that it
would dispose of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Operating Company") through an
initial public offering of the common stock of the Operating Company during
1997. The Operating Company will license the Avis trademark from the Company in
return for a license fee based on a percentage of the Operating Company revenue.
COLDWELL BANKER - On May 31, 1996, the Company acquired by merger Coldwell
Banker (the "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 of approximately 19.4 million
common shares (the "Offering") in the second quarter of 1996. Immediately
following the closing of the Merger, the Company conveyed the Owned Brokerage
Business to a newly created independent trust (the "Trust"). The Company
recorded a $7 million pre-tax restructuring charge related primarily 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 - On February 12, 1996, the Company purchased substantially all of the
assets comprising the ERA residential real estate brokerage franchise system for
approximately $40.5 million which 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 paid 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.
Effective October 29, 1996 (the "Effective Date"), the Company amended the
Subscription and Stockholders Agreement dated as of August 1, 1995 among C21
Holding Corp., the Company and a group of former executives of Century 21 Real
Estate Corporation (the "Former Management") pursuant to which the Company owns
87.5% of C21 Holding Corp. and the Former Management owns 12.5% of C21 Holding
Corp. Such amendment provides for the acceleration of the Company's option to
purchase the 12.5% ownership from the Former Management at fair market value to
a date which is approximately 90 days from the Effective Date, with fair market
value determined as of the Effective Date The Company is in the process of
determining the fair market value of C21 Holding Corp. and expects to complete
such purchase in the first quarter of 1997.
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, Chartwell Leisure, Inc. ("CHRT") formerly National Lodging
Corp. a former wholly owned Company subsidiary which was distributed to the
Company sharesholders in November 1994, 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 CHRT's acquisition, the
Company guaranteed $75 million of CHRT borrowings under a $125 million revolving
credit facility entered into by CHRT with certain banks. The Company is 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
CHRT's acquisition of FHI, the marketing and advisory agreements between the
Company and CHRT 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. CHRT paid a $2.0 million advisory fee to the Company in connection with
CHRT'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 and Duff and Phelps assigned an "A" credit rating to the
Company's $540 million of publicly issued debt. The Company generated $139.4
million of cash flow from operations during the nine months ended September 30,
1996, representing a $55.1 million (65%) increase from the nine months ended
September 30, 1995.
On October 2, 1996, the Company replaced an existing $300 million revolving
credit facility with a $1 billion of revolving credit facilities consisting of
(i) a $500 million, five year revolving credit facility (the "Five Year Credit
Facility") and (ii) a $500 million, 364 day revolving credit facility (the "364
Day Revolving Credit Facility" (collectively the "Revolving Credit Facilities").
The Company may renew the 364 Day Revolving Credit Facility on an annual basis
for an additional 364 days up to a maximum aggregate term of five years upon
receiving lender approval. The Revolving Credit Facilities, at the option of the
Company, bear interest based on competitive bids of lenders participating in the
facilities, at the prime rate or at LIBOR plus a margin approximating 25 basis
points.
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 approximately $1.2 billion. Approximately $ 755 million of the
proceeds were used to finance the acquisition of Coldwell Banker and $75 million
was used to repay outstanding borrowings under the Company's existing credit
facility. The remaining $331 million of proceeds were used as partial
consideration for the October 17, 1996 acquisition of Avis.
The Company filed a shelf registration statement with the Securities and
Exchange Commission effective August 29, 1996, for the aggregate issuance of up
to $1 billion of debt and equity securities. These securities may be offered
from time to time, together or separately, based on terms to be determined at
the time of sale. The proceeds may be used for general corporate purposes, which
may include future acquisitions.
Working capital at September 30, 1996 approximated $443 million including
the remaining $331 million of excess proceeds from the Offering. Excluding the
excess proceeds of the Offering, working capital increased $68 million at
September 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 September 30, 1996 is $136 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 $300.8 million
at December 31, 1995 to $541.6 million at September 30, 1996, due to the
issuance of the 4 3/4% Notes. The weighted average stated interest rate on
long-term debt at September 30, 1996 was 5.0% compared to the weighted average
stated interest rate of 5.2% at December 31, 1995.
On October 17, 1996, the acquisition date, Avis had $2.5 billion of
outstanding borrowings associated with Avis fleet and other financing
arrangements with banks, vehicle manufacturer finance companies and other
financial institutions with a weighted average interest rate of approximately
6.3%. Avis may borrow up to $4 billion on such facilities. Approximately $2.2
billion of available borrowings are secured by Avis' fleet of vehicles and are
non-recourse to the Company. The remaining available borrowings are unsecured.
The most significant Avis financing arrangement is a $2.5 billion, 364-day
revolving credit facility which bears interest at LIBOR plus 0.63%.
Capital expenditures approximating $23.6 million during the nine months
ended September 30, 1996 consisted of approximately $14.7 million of software
development and the acquisition of computer equipment primarily associated with
a new transactional data base and reporting system for the real estate segment
and $3.2 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
$5.7 million of improvements principally associated with the purchase of a
building in 1995, which is now the Company's new 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.
ITEM 5. OTHER INFORMATION
HFS Incorporated And Subsidiaries
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated balance sheet as of September 30, 1996 is
presented as if (i) the acquisition of Avis, Inc. ("Avis") and issuance of
Company common stock (the "Avis Offering") as partial consideration for Avis
and; (ii) the acquisition of Resort Condominiums International, Inc. and its
affiliates ("RCI") and the issuance of Company common stock as partial
consideration for RCI occurred on September 30, 1996. The Company intends to
undertake an initial public offering of a majority interest in the corporation
which owns all company-owned Avis car rental locations (the "Operating Company")
in 1997 and to enter into franchise, information technology and other agreements
to provide services to the Operating Company based on terms to be determined.
Accordingly, the pro forma financial statements reflect the acquired net assets
and results of operations of the Avis rental car operating subsidiary intended
to be sold as "Investment in car rental operating company-net" and "other
revenue", respectively.
The pro forma statements of operations for the nine months ended September
30, 1996 and 1995 are presented as if the acquisitions of Avis and RCI and the
following transactions had occurred on January 1, 1995: (i) the May 31, 1996
acquisition of the common stock of Coldwell Banker Corporation ("Coldwell
Banker") and the related contribution of Coldwell Banker's owned real estate
brokerage offices (the "Owned Brokerage Business") to a newly created
independent trust (the "Trust") (the "Coldwell Banker Transaction"); (ii) the
receipt of proceeds from an offering of the Company's 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 statement of operations for
the nine months ended September 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 are accounted for using the purchase method of accounting.
Accordingly, assets acquired and liabilities assumed are recorded at their
estimated fair values which are subject to further refinement, including
appraisals and other analyses, with appropriate recognition given to the effect
of current interest rates and income taxes. Management does not expect that the
final allocation of the purchase price for the above acquisitions will differ
materially from the preliminary allocations. The Company has entered into
certain immaterial transactions which are not reflected in the pro forma
statements of operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. In addition to the cost savings reflected in the pro forma
consolidated statements of operations, the pro forma consolidated statements of
operations do not reflect certain additional cost savings and revenue
enhancements that management believes may be realized following the
acquisitions. These savings are expected to be realized primarily through the
restructuring of franchise services of the acquired companies as well as revenue
enhancements expected through leveraging of the Company's preferred vendor
programs. No assurances can be made as to the amount of cost savings or revenue
enhancements, if any, that actually will be realized.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and should be read in conjunction
therewith and with (i) the consolidated financial statements and related notes
of the Company included in its 1995 Annual Report on Form 10-K (ii) the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996; and (iii) the financial statements and related notes of certain of the
acquired companies previously filed in Current Reports on Form 8-K pursuant to
Regulation S-X Rule 3.05, "Financial Statements of Businesses Acquired or to be
Acquired".
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 1996
(In thousands)
Historical Pro Forma Adjustments
----------------------------------------- --------------------------
HFS (1) Avis (2) RCI Avis (A) RCI (B) Pro Forma
----------------------------------------- -------------------------- ------------
Assets
Current assets
Cash and cash equivalents ............. $ 471,194 $ -- $ 89,070 $ (367,166) $ (42,198) $ 150,900
Marketable securities ................. -- -- 184,599 -- (184,599) --
Accounts & notes receivable, net 76,975 1,800 33,107 -- -- 111,882
Relocation receivables ................ 136,052 -- -- -- -- 136,052
Marketing and reservation
receivables, net .................... 36,200 -- -- -- -- 36,200
Other current assets .................. 22,625 1,881 22,836 -- -- 47,342
Deferred income taxes ................. 36,456 -- -- -- -- 36,456
----------- ----------- ----------- ----------- ----------- -----------
Total current assets .................... 779,502 3,681 329,612 (367,166) (226,797) 518,832
----------- ----------- ----------- ----------- ----------- -----------
Property and equipment-net .............. 106,233 33,828 87,785 58,172 (45,000) 241,018
Franchise agreements-net ................ 594,415 -- -- -- -- 594,415
Excess of cost over fair value of
net assets acquired-net ............... 1,339,836 -- -- -- -- 1,339,836
Intangible assets ....................... -- 499,143 -- 127,426 541,831 1,168,400
Investment in car rental
operating company-net ................. -- (127,384) -- 202,384 -- 75,000
Deferred income taxes-net ............... -- -- -- 5,200 56,000 61,200
Other assets ............................ 80,064 59,633 40,936 (9,614) (33,203) 137,816
----------- ----------- ----------- ----------- ----------- -----------
Total ................................... $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517
=========== =========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other
accrued liabilities ................. $ 160,357 $ 1,954 $ 80,996 $ -- $ -- $ 243,307
Unearned income ....................... 24,655 -- 119,218 -- -- 143,873
Income taxes payable .................. 81,633 182 -- (182) -- 81,633
Accrued acquisition obligations ....... 40,287 -- -- 44,000 -- 84,287
Current portion of long-term debt 29,907 -- -- 100,930 -- 130,837
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities ............... 336,839 2,136 200,214 144,748 -- 683,937
----------- ----------- ----------- ----------- ----------- -----------
Long-term debt .......................... 534,264 -- 3,536 -- 285,000 822,800
Unearned income ......................... 7,299 -- 185,703 -- -- 193,002
Other non-current liabilities ........... 31,259 -- 1,711 -- -- 32,970
Deferred income taxes ................... 85,400 -- -- -- -- 85,400
Preferred Stock - Avis, Inc. ............ -- 72,416 -- (72,416) -- --
Redeemable portion of common
stock - ESOP ......................... -- 295,465 -- (295,465) -- --
Unearned compensation-ESOP .............. -- (257,751) -- 257,751 -- --
Stockholders' Equity:
Participating convertible
preferred stock ..................... -- 132,000 -- (132,000) -- --
Common stock .......................... 1,237 290 -- (244) 10 1,293
Additional paid-in capital ............ 1,705,541 220,401 16,189 117,972 58,801 2,118,904
Retained earnings ..................... 206,236 103,339 37,459 (103,339) (37,459) 206,236
Treasury stock ........................ (8,025) (102,269) -- 102,269 -- (8,025)
Net unrealized gain on available
for sale of securities .............. -- -- 13,521 -- (13,521) --
Foreign currency equity adjustment .... -- 2,874 -- (2,874) -- --
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity .............. 1,904,989 356,635 67,169 (18,216) 7,831 2,318,408
----------- ----------- ----------- ----------- ----------- -----------
Total ................................... $ 2,900,050 $ 468,901 $ 458,333 $ 16,402 $ 292,831 $ 4,136,517
=========== =========== =========== =========== =========== ===========
(1) Certain reclassifications have been made to the historical results of HFS to conform with the Company's pro forma
classification.
(2) See Historical Consolidated Balance Sheet of Avis, Inc. as adjusted as of August 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
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 .......... -- (127,384) (127,384)
Other assets ....................... 85,368 (25,735) 59,633
----------- ----------- -----------
Total .............................. $ 3,782,551 $(3,313,650) $ 468,901
=========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable and other ....... $ 444,867 $ (442,731) $ 2,136
----------- ----------- -----------
Long-term debt ..................... 2,488,651 (2,488,651) --
Public liability and property damage 215,135 (215,135) --
Due to affiliated company .......... 132,563 (132,563) --
Other non-current liabilities
Deferred income taxes ............ 34,570 (34,570) --
Preferred stock - Avis, Inc. ..... 72,416 -- 72,416
Redeemable portion of common
stock - ESOP ................... 295,465 -- 295,465
Unearned compensation-ESOP ....... (257,751) -- (257,751)
Stockholders' Equity
Participating convertible
preferred stock ................ 132,000 -- 132,000
Common stock ..................... 290 -- 290
Additional paid-in capital ....... 220,401 -- 220,401
Retained earnings ................ 103,339 -- 103,339
Treasury stock ................... (102,269) -- (102,269)
Foreign currency equity adjustment 2,874 -- 2,874
----------- ----------- -----------
Total stockholders' Equity ......... 356,635 -- 356,635
----------- ----------- -----------
Total .............................. $ 3,782,551 $(3,313,650) $ 468,901
=========== =========== ===========
Note: The reclassification adjustment made to the historical balance sheet of Avis, Inc. is to present the historical net
assets of car rental operations as "investment in car rental subsidiary-net".
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1996 and 1995
(In thousands, except per share amounts)
1996 1995
--------- ---------
Revenue
Franchise ......................... $471,322 $435,344
Relocation ........................ 78,993 67,394
Timeshare ......................... 236,675 209,242
Other ............................. 212,875 129,343
-------- --------
Total revenue ................... 999,865 841,323
-------- --------
Expenses
Marketing and reservation ......... 238,606 219,395
Selling, general and administrative 217,431 179,345
Depreciation and amortization ..... 102,208 100,632
Interest .......................... 36,930 41,063
Relocation ........................ 56,281 45,733
Other ............................. 16,259 22,328
-------- --------
Total expenses .................. 667,715 608,496
-------- --------
Income before income taxes .......... 332,150 232,827
Provision for income taxes .......... 137,087 96,094
-------- --------
Net income .......................... $195,063 $136,733
======== ========
Per Share Information (fully diluted)
Net income ........................ $ 1.35 $ 1.00
======== ========
Weighted average common and common
equivalent shares outstanding ..... 147,513 140,582
======== ========
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.
Historical
-----------------------
Acquired Pro Forma
HFS Companies Adjustments Pro Forma
--------- --------- ----------- ---------
Revenue
Franchise $ 424,162 $ 35,325 $ 11,835 (C) $ 471,322
Owned brokerage business - 235,625 (235,625) (D) -
Relocation services 44,115 34,878 - 78,993
Timeshare - 251,516 (14,841) (E) 236,675
Other 81,733 104,955 26,187 (F) 212,875
--------- --------- ---------- ---------
Total revenue 550,010 662,299 (212,444) 999,865
--------- --------- ----------- ---------
Expenses
Marketing and reservation 130,728 107,878 - 238,606
Selling, general
and administrative 110,588 161,833 (54,990) (G) 217,431
Owned brokerage - 227,363 (227,363) (D) -
Depreciation
and amortization 41,129 37,041 24,038 (H) 102,208
Interest 22,194 4,993 9,743 (I) 36,930
Relocation 29,121 28,171 (1,011) 56,281
Other 10,988 5,616 (345) 16,259
--------- --------- ----------- ---------
Total expenses 344,748 572,895 (249,928) 667,715
--------- --------- ----------- ---------
Income before income taxes 205,262 89,404 37,484 332,150
Provision for income taxes 82,630 21,904 32,553 (J) 137,087
--------- --------- ----------- ---------
Net income $ 122,632 $ 67,500 $ 4,931 $ 195,063
--------- --------- ----------- =========
Per Share Information
(fully diluted)
Net income $ 0.96 - - $ 1.35
Weighted average common and
common equivalent shares
outstanding 131,684 - 15,829 (K) 147,513
========= =========== =========
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 statement of operations.
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
For the Nine Months Ended September 30, 1996
(In thousands, except per share amounts)
Historical
----------------------------------------------------------
Other
Avis (1) Coldwell 1996 (2) Total
As Adjusted RCI Banker (2) Acquisitions Historical
----------- ------- ------------- ------------ ----------
Revenue
Franchise ........... $ -- $ -- $ 25,694 $ 9,631 $ 35,325
Owned brokerage
business .......... -- -- 235,625 -- 235,625
Relocation services . -- -- 34,159 719 34,878
Timeshare ........... -- 251,516 -- -- 251,516
Other ............... 99,237 -- 4,067 1,651 104,955
--------- --------- --------- --------- ---------
Total revenue ..... 99,237 251,516 299,545 12,001 662,299
--------- --------- --------- --------- ---------
Expenses
Marketing and
reservation ....... -- 106,744 -- 1,134 107,878
Selling, general and
administrative .... 20,173 74,745 57,455 9,460 161,833
Owned brokerage ..... -- -- 227,363 -- 227,363
Depreciation and
amortization ...... 14,247 13,352 9,021 421 37,041
Interest ............ -- 345 3,155 1,493 4,993
Relocation .......... -- -- 27,530 641 28,171
Other ............... -- 4,340 512 764 5,616
--------- --------- --------- --------- ---------
Total expenses .... 34,420 199,526 325,036 13,913 572,895
--------- --------- --------- --------- ---------
Income (loss) before
income taxes ........ 64,817 51,990 (25,491) (1,912) 89,404
Provision (benefit) for
income taxes ........ 29,966 2,370 (10,432) -- 21,904
--------- --------- --------- --------- ---------
Net income (loss) ..... $ 34,851 $ 49,620 $ (15,059) $ (1,912) $ 67,500
========= ========= ========= ========= =========
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) The historical financial statements of operations of Avis, as adjusted, has
been adjusted to include the historical results of Avis operations intended
to be retained by the Company and the operating results of the Avis Car
rental subsidiary, included in Other Revenue. See Historical Consolidated
Statement of Operations of Avis, Inc., as Adjusted for the nine months
ended August 31, 1996.
(2) Reflects results of operations for the period from January 1, 1996 to
the respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statement of operations.
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC., AS ADJUSTED
For the Nine Months Ended August 31, 1996
(In thousands)
Rental Car
Subsidiary Avis
Historical Adjustment As Adjusted
----------- ------------ ------------
Revenue $ 1,490,709 $(1,391,472) $ 99,237
----------- ----------- ----------
Expenses:
Selling, general and administrative....... 975,769 (955,596) 20,173
Depreciation and amortization ............. 333,147 (318,900) 14,247
Interest .................................. 116,958 (116,958) --
Other ..................................... 18 (18) --
----------- ----------- -----------
Total expenses .......................... 1,425,892 (1,391,472) 34,420
----------- ----------- -----------
Income before income taxes .................. 64,817 -- 64,817
Provision for income taxes .................. 29,966 -- 29,966
----------- ----------- -----------
Net income .................................. $ 34,851 $ -- $ 34,851
=========== =========== ===========
See notes to pro forma consolidated balance sheet and statements of operations.
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 date 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 Nine Months Ended September 30, 1995
(In thousands, except per share amounts)
Historical
-----------------------
Acquired Pro Forma
HFS Companies Adjustments Pro Forma
--------- --------- ----------- ---------
Revenue
Franchise $ 265,129 $ 150,707 $ 19,508 (C) $ 435,344
Owned brokerage business - 411,795 (411,795) (D) -
Relocation services 3,733 63,661 - 67,394
Timeshare - 222,627 (13,385) (E) 209,242
Other 30,869 66,676 31,798 (F) 129,343
--------- --------- ---------- ---------
Total revenue 299,731 915,466 (373,874) 841,323
--------- --------- ----------- ---------
Expenses
Marketing and reservation 110,842 108,553 - 219,395
Selling, general
and administrative 46,117 182,182 (48,954) (G) 179,345
Owned brokerage - 393,594 (393,594) (D) -
Depreciation
and amortization 21,721 52,566 26,345 (H) 100,632
Interest 16,272 8,135 16,656 (I) 41,063
Relocation 1,583 45,969 (1,819) 45,733
Other 2,012 21,018 (702) 22,328
--------- --------- ----------- ---------
Total expenses 198,547 812,017 (402,068) 608,496
--------- --------- ----------- ---------
Income before income taxes
and extraordinary loss 101,184 103,449 28,194 232,827
Provision for income taxes 41,820 43,250 11,024 (J) 96,094
--------- --------- ---------- ---------
Income before extraordinary loss 59,364 60,199 17,170 136,733
Extraordinary loss - 2,027 (2,027) -
--------- --------- ----------- ---------
Net income $ 59,364 $ 58,172 $ 19,197 $ 136,733
========= ========= =========== =========
Per Share Information
(fully diluted)
Net income $ 0.56 $ 1.00
========= =========
Weighted average common &
common equivalent shares
outstanding 112,056 28,526 (K) 140,582
========= =========== =========
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
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
For the Nine Months Ended September 30, 1995
(In thousands, except per share amounts)
Historical
----------------------------------------------------
Avis (1) Coldwell Other Total
As Adjusted RCI Banker Acquisitions Historical
----------- -------- -------- ------------ ----------
Revenue
Franchise $ - $ - $ 47,219 $ 103,488 $ 150,707
Owned brokerage - - 411,795 - 411,795
Relocation - - 54,469 9,192 63,661
Timeshare - 222,627 - - 222,627
Other 35,010 - 3,972 27,694 66,676
--------- -------- -------- --------- ---------
Total revenue 35,010 222,627 517,455 140,374 915,466
--------- -------- -------- --------- ---------
Expenses
Marketing and
reservation - 91,792 - 16,761 108,553
Selling, general
and administrative 7,106 62,435 25,289 87,352 182,182
Owned brokerage - - 393,594 - 393,594
Depreciation and
amortization 14,253 12,698 17,272 8,343 52,566
Interest - 402 2,958 4,775 8,135
Relocation - - 39,902 6,067 45,969
Other - 6,570 1,944 12,504 21,018
--------- -------- -------- --------- ---------
Total expenses 21,359 173,897 480,959 135,802 812,017
--------- -------- -------- --------- ---------
Income before
income taxes and
extraordinary loss 13,651 48,730 36,496 4,572 103,449
Provision for
income taxes 21,644 1,940 16,422 3,244 43,250
--------- -------- -------- --------- ---------
Income (loss) before
extraordinary loss (7,993) 46,790 20,074 1,328 60,199
Extraordinary loss - - 2,027 - 2,027
--------- -------- -------- --------- ---------
Net income (loss) $ (7,993) $ 46,790 $ 18,047 $ 1,328 $ 58,172
========= ======== ======== ========= =========
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) The historical financial statement of operations of Avis, as adjusted,
has been adjusted to present only the historical results of operations intended
to be retained by the Company. See Historical Consolidated Statement of
Operations of Avis, Inc., as Adjusted, for the six months ended August 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC. AS ADJUSTED
For the Nine Months Ended August 31, 1995
(In thousands)
Rental Car
Subsidiary Avis
Historical Adjustment As Adjusted
------------ ------------- -------------
Revenue ................................... $ 1,190,189 $(1,155,179) $ 35,010
----------- ----------- -----------
Expenses:
Selling, general & administrative 766,509 (759,403) 7,106
Depreciation & amortization ............. 304,339 (290,086) 14,253
Interest ................................ 105,379 (105,379) --
Other ................................... 311 (311) --
----------- ----------- -----------
Total expenses ........................ 1,176,538 (1,155,179) 21,359
----------- ----------- -----------
Income before income taxes ................ 13,651 -- 13,651
Provision for income taxes ................ 21,644 -- 21,644
----------- ----------- -----------
Net income ................................ $ (7,993) $ -- $ (7,993)
=========== =========== ===========
See notes to pro forma consolidated balance sheet and statements of operations.
Century Century 21
CCI (1) 21 (1) NORS Travelodge ERA Total
-------- --------- ---------- ----------- ------- ----------
Revenue:
Franchise ................. $ -- $ 53,992 $ 20,750 $ 13,476 $ 15,270 $103,488
Relocation ................ -- 6,514 -- -- 2,678 9,192
Other ..................... 3,326 10,164 288 59 13,857 27,694
-------- -------- -------- -------- -------- --------
Total revenue ........... 3,326 70,670 21,038 13,535 31,805 140,374
-------- -------- -------- -------- -------- --------
Expenses:
Marketing and
reservation ............. -- 5,128 2,082 9,551 -- 16,761
Selling, general
& administrative ........ -- 47,232 16,339 1,952 21,829 87,352
Depreciation &
amortization ............ 529 5,217 413 6 2,178 8,343
Interest .................. -- 2,904 38 -- 1,833 4,775
Relocation ................ -- 4,881 -- -- 1,186 6,067
Other ..................... 1,917 2,751 -- -- 7,836 12,504
-------- -------- -------- -------- -------- --------
Total expenses .......... 2,446 68,113 18,872 11,509 34,862 135,802
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes .............. 880 2,557 2,166 2,026 (3,057) 4,572
Provision for income taxes 313 2,097 -- 834 -- 3,244
-------- -------- -------- -------- -------- --------
Net income (loss) ........... $ 567 $ 460 $ 2,166 $ 1,192 $ (3,057) $ 1,328
======== ======== ======== ======== ======== ========
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1995 to the
respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statement of operations.
HFS Incorporated and Subsidiaries
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. Acquisition of Avis:
The purchase price for Avis has been allocated to assets acquired and
liabilities assumed at their estimated fair values. Pro forma adjustments
consist of the elimination of certain acquired assets and assumed liabilities,
net of the fair value ascribed to such assets and liabilities.
The Company acquired Avis for the following consideration ($000's):
Cash consideration (i) $ 367,166
Issuance of approximately 4.6 million shares of Company
common stock 338,419
Issuance of note to ESOP 100,930
----------
Total pro forma acquisition cost 806,515
----------
Fair value of net assets acquired:
Historical book value of acquired company 356,635
Elimination of net assets (liabilities) not acquired or assumed:
Other assets (9,614)
Preferred stock - Avis 72,416
Intangible assets - Avis (499,143)
Redeemable portion of common stock - ESOP 295,465
Unearned compensation - ESOP (257,751)
Fair value adjustments to assets acquired and liabilities assumed:
Deferred income tax asset, net (ii) 5,200
Property and equipment 58,172
Investment in car rental operating company 202,384
Accrued acquisition obligations (44,000)
Other 182
----------
Fair value of identifiable net assets acquired 179,946
----------
Intangible assets-Avis (iii) $ 626,569
==========
(i) The cash consideration of the pro forma acquisition cost was financed
by the Second Quarter 1996 Offering.
(ii) The pro forma adjustment to deferred income taxes recorded in
connection with the acquisition results from differences in the fair values of
assets acquired and liabilities assumed and their respective income tax bases.
(iii) The Company has not completed the valuation of identifiable
intangible assets.
A. Acquisition of Avis (continued)
The pro forma adjustments include the elimination of Avis stockholders'
equity and the issuance of approximately 4.6 million shares of the Company's
common stock to finance the acquisition.
Stockholders' Equity
---------------------------------------------
Issuance of Elimination of Adjustment to
Company Stockholders' Stockholders'
Common Stk. Equity Equity
------------ -------------- -------------
Participating convertible preferred stock $ -- $ 132,000 $(132,000)
Common stock ............................ 46 290 (244)
Additional paid-in capital .............. 338,373 220,401 117,972
Retained earnings ....................... -- 103,339 (103,339)
Treasury stock .......................... -- (102,269) 102,269
Foreign currency equity adjustment ...... -- 2,874 (2,874)
--------- --------- ---------
$ 338,419 $ 356,635 $ (18,216)
========= ========= =========
B. Acquisition of RCI
The purchase price for RCI has been allocated to assets acquired and
liabilities assumed at their estimated fair values. Pro forma adjustments
consist of the elimination of certain acquired assets and assumed liabilities,
net of the fair value ascribed to such assets and liabilities.
The Company acquired RCI for the following consideration ($000's):
Cash (i) $ 265,000
Borrowings under the
Company's Revolving
Credit Facilities 285,000
Issuance of approximately
one million shares of
Company common stock (ii) 75,000
-----------
Total pro forma acquisition cost $ 625,000
Fair value of net assets acquired
is as follows:
Historical book value of RCI $ 67,169
Fair value adjustments to assets acquired
and liabilities assumed:
Property and equipment (45,000)
Other non-current assets 5,000
Deferred income taxes - non -current (iii) 56,000
-----------
Fair value of net assets acquired 83,169
----------
Intangible assets - RCI (iv) $ 541,831
==========
(i) Cash consideration is comprised of $185 in marketable securities and $38
million in notes not acquired and $42 million of acquired RCI cash.
(ii) The
number of shares of Company common stock issued in connection with the
acquisition was calculated using a $75.0375 per share stock price.
(iii) The proforma adjustment to deferred income taxes recorded in the fair
value of unearned income liabilities assumed and the respective income tax
basis.
(iv) The Company has not completed the valuation of identifiable intangible
assets.
B. Acquisition of RCI (continued)
Stockholders' Equity
--------------------------------------------------
Issuance of Elimination of Adjustment to
Company Stockholders' Stockholders'
Common Stk. Equity Equity
------------ -------------- -------------
Common stock ....................... $ 10 $ -- $ 10
Additional paid-in capital ......... 74,990 (16,189) 58,801
Retained earnings .................. -- (37,459) (37,459)
Net unrealized gain on available for
sale of securities ............. -- (13,521) (13,521)
-------- -------- --------
$ 75,000 $(67,169) $ 7,831
======== ======== ========
The pro forma adjustments include the elimination of RCI stockholders'
equity and the issuance of approximately one million shares of the Company's
common stock as partial consideration for RCI.
C. 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 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 Ended
September 30,
1996 1995
---------- -----------
Eliminate:
Discontinued operations ........................... $ -- $ (34)
Century 21 revenue included as Century 21 NORS SG&A (1,003) (3,375)
Add:
Franchise fees from Owned Brokerage Business ...... 12,838 22,917
-------- --------
Total ................................................ $ 11,835 $ 19,508
======== ========
D. Owned brokerage revenue and expenses:
The pro forma adjustments reflect the elimination of revenue and expenses
for Coldwell Banker's 318 formerly owned brokerage offices. The Company
contributed the net assets of the Owned Brokerage Business to the Trust upon
consummation of the Coldwell Banker acquisition. The free cash flow of the Trust
will be expended at the discretion of the trustees to enhance the growth of
funds available for advertising and promotion.
E. Timeshare revenue
The pro forma adjustment reflects the elimination of timeshare revenue
associated with investment income generated from RCI cash and marketable
securities which were used by the Company as partial consideration for the
RCI acquisition.
F. Other revenue
The pro forma adjustment is comprised of the following:
For the Nine Months Ended
Adjustments to Rental Car Operations: September 30,
1996 1995
-------- --------
Elimination of historical expense associated with:
Long-term incentive compensation plans .............. $ 9,302 $ --
Unfavorable vehicle leases .......................... 15,488 30,478
Depreciation and amortization ....................... 26,120 23,208
Addition of pro forma expenses associated with:
Depreciation and amortization of property, equipment
and other intangibles ................................ (17,174) (17,174)
Increased financing costs ............................... (1,549) (4,714)
-------- --------
Total adjustments to rental car operations .............. 32,187 31,798
Other Adjustment:
Elimination of historical interest income related to
cash consideration portion of Avis Acquisition (i) ... (6,000) --
-------- --------
Total ................................................... $ 26,187 $ 31,798
======== ========
(i) The pro forma adjustment eliminates historical interest income on the
portion of cash generated from the Second Quarter 1996 Offering which was used
as consideration in the Avis Acquisition.
G. Selling, general and administrative expense:
The pro forma adjustments eliminate redundant costs associated with the
restructuring of franchise services and other businesses and the resulting
termination of certain functions and positions in connection with company
acquisitions. Adjustments are comprised of the following ($000's):
For the nine months ended September 30, 1996:
Coldwell Century 21
RCI Banker NORS Travelodge ERA Total
-------- -------- ---------- ----------- ------- --------
Payroll and related ...................... $ 880 $ 4,451 $ 2,425 $ 25 $ 222 $ 8,003
Stock option expense ..................... -- 40,801 -- -- -- 40,801
Professional ............................. 750 1,055 705 4 -- 2,514
Occupancy ................................ -- -- 604 4 102 710
Franchise fees (Note B) .................. -- -- 1,003 -- -- 1,003
Other .................................... 1,333 (604) 1,069 4 157 1,959
-------- -------- -------- -------- -------- --------
Total .................................... $ 2,963 $ 45,703 $ 5,806 $ 37 $ 481 $ 54,990
======== ======== ======== ======== ======== ========
For the nine months ended September 30, 1995:
Century Coldwell Century 21
21 RCI Banker NORS Travelodge ERA Total
------- ------- -------- ---------- ----------- ------ -------
Payroll and related ... $10,885 $ 914 $ 8,011 $ 5,354 $ 502 $ 1,526 $27,192
Professional .......... 2,693 750 1,573 1,063 70 -- 6,149
Occupancy ............. 3,628 -- -- 1,944 84 666 6,322
Franchise fees (Note B) -- -- -- 3,375 -- -- 3,375
Other ................. 3,128 1,275 (1,072) 1,528 74 983 5,916
------- ------- ------- ------- ------- ------- -------
Total ................. $20,334 $ 2,939 $ 8,512 $13,264 $ 730 $ 3,175 $48,954
======= ======= ======= ======= ======= ======= =======
H. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the nine months ended September 30, 1996:
Coldwell Other 1996
RCI Avis Banker Acquisitions Total
-------- --------- ---------- ------------ ---------
Elimination of historical
expense ............. $(13,352) $(14,247) $ (9,021) $ (421) $(37,041)
Property, equipment &
furniture & fixtures 3,467 9,300 540 -- 13,307
Intangible assets ....... 20,285 15,246 10,775 1,466 47,772
-------- -------- -------- -------- --------
Total ................... $ 10,400 $ 10,299 $ 2,294 $ 1,045 $ 24,038
======== ======== ======== ======== ========
For the nine months ended September 30, 1995:
CCI Century Coldwell Other 1996
Merger 21 RCI Avis Banker Acquisitions Total
--------- --------- -------- --------- --------- ------------ --------
Elimination of historical
expense ............... $ (529) $ (5,217) $(12,698) $ (14,253) ($(17,272) $ (2,597) $(52,566)
Property, equipment &
furniture and fixtures 100 534 3,467 9,300 972 -- 14,373
Information data base ... 375 -- -- -- -- -- 375
Intangible assets ....... 289 3,669 20,285 15,246 19,408 5,266 64,163
-------- -------- -------- -------- -------- -------- --------
Total ................... $ 235 $ (1,014) $ 11,054 $ 10,293 $ 3,108 $ 2,669 $ 26,345
======== ======== ======== ======== ======== ======== ========
CCI Merger
The estimated fair values of CCI's information data base, property and
equipment and excess of cost over fair value of net assets acquired are $7.5
million, $1.0 million and $33.8 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are ten , five and
forty years, respectively. The benefit periods associated with the excess cost
over fair value of net assets acquired were determined based on CCI's position
as the dominant provider of gambling patron credit information services since
1956, its ability to generate operating profits and expansion of its customer
base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.5
million, $33.5 million and $140.0 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve and
forty years, respectively. The benefit periods associated with the excess cost
over fair value of net assets acquired were determined based on Century 21's
position as the world's largest franchisor of residential real estate brokerage
offices, the most recognized brand name in the residential real estate brokerage
industry and the longevity of the residential real estate brokerage business.
RCI
The fair value of RCI's property and equipment is estimated at
approximately $37 million and is amortized on a straight line basis over the
estimated useful lives, ranging from seven to thirty years.
RCI's intangible assets consist of customer lists and excess of cost over
fair value of net assets acquired. The estimated fair value of such intangible
assets is approximately $542 million and is amortized on a straight-line basis
over the periods to be benefited. The excess of cost over fair value of net
assets acquired was determined to have a benefit period of forty years, which
was based on RCI being a leading provider of services to the timeshare industry,
which includes being the world's largest provider of timeshare exchange
programs.
Avis
The estimated fair value of Avis' property and equipment intended to be
retained by the Company, is $92 million, comprised primarily of a reservation
system and related assets. Such property and equipment is amortized on a
straight-line basis over the estimated benefit periods ranging from five to
eight years. The estimated fair values of Avis' intangible assets, comprised
principally of excess of cost over fair value of net assets acquired, are $627
million and are amortized on a straight-line basis over the respective assets
benefit periods which range between ten to forty years.
The excess of cost over fair value of net assets acquired was determined to
have a benefit period of forty years, which was based on Avis' position as the
second largest car rental system in the world, the recognition of its brand name
in the car rental industry and the longevity of the car rental business.
Coldwell Banker
The estimated fair value of Coldwell Banker's property and equipment
(excluding land) of $16.7 million, is amortized on a straight-line basis over
the estimated benefit periods ranging from five to twenty-five years. The
estimated fair value of Coldwell Banker's intangible assets, comprised of
franchise agreements and excess of cost over fair value of net assets acquired,
is $768.4 million and is amortized on a straight-line basis over the periods to
be benefited. The excess of cost over fair value of net assets acquired was
determined to have a benefit period of forty years, which was based on Coldwell
Banker's position as the largest gross revenue producing real estate company in
North American, the recognition of its brand name in the real estate brokerage
industry and the longevity of the real estate brokerage business.
Other 1996 Acquisitions
The estimated fair values of Other 1996 Acquisitions franchise agreements
aggregate $61.0 million and are being amortized on a straight line basis over
the periods to be benefited, which range from twelve to thirty years. The
estimated fair values of Other Acquisitions excess of cost over fair value of
net assets acquired aggregate $164.2 million and are each being amortized on a
straight line basis over the periods to benefited which are forty years.
I. Interest expense:
For the Nine Months Ended
September 30,
1996 1995
--------- ----------
Elimination of historical interest expense of:
Century 21 ................................. $ -- $ (2,904)
Other 1996 Acquisitions .................... (1,493) (1,871)
RCI ........................................ (345) (402)
Reversal of Coldwell Banker .................. (3,155) (2,958)
Century 21 ................................... -- 2,835
RCI .......................................... 13,466 13,466
Minority interest - preferred dividends ...... -- 1,796
43/4% Notes to finance Other 1996 Acquisitions 1,270 6,694
-------- --------
Total ........................................ $ 9,743 $ 16,656
======== ========
Century 21
The pro forma adjustment reflects the recording of interest expense on $60
million of borrowings under the Company's revolving credit facility at an
interest rate 6.3%. Borrowings represent the amount necessary to finance the
initial cash purchase price net of $10.2 million of acquired cash.
Coldwell Banker
The pro forma adjustment reflects the reversal of interest expense relating
to the following ($000's):
For the Nine Months Ended
September 30,
1996 1995
---------- ----------
Expense associated with the Owned
Brokerage Business ..................... $ (179) $ 72
Expense associated with revolving credit
facility borrowings which will be repaid
with proceeds from offering ............ 3,334 2,886
------- -------
Total ..................................... $ 3,155 $ 2,958
======= =======
RCI
The pro forma adjustment reflects the recording of interest expense on $285
million of borrowings under the Company's revolving credit facilities at an
interest rate of 6.3%. Borrowings represent the amount used as partial
consideration in the RCI acquisition.
Minority interest - preferred dividends:
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21.
4-3/4% Notes
The pro forma adjustment reflects interest expense and amortization of
deferred financing costs related to the February 22, 1996 issuance of the 4-3/4%
Notes to the extent that such proceeds were used to finance the Other 1996
Acquisitions.
J. Income Taxes
The pro forma adjustment to income taxes is comprised of ($000's):
For the Nine Months Ended
September 30,
1996 1995
---------- -----------
Reversal of historical (provision) benefit of:
Company ...................................... $ (82,630) $ (41,820)
CCI .......................................... -- (313)
Century 21 ................................... -- (2,097)
RCI .......................................... (2,370) (1,940)
Avis ......................................... (29,966) (21,644)
Coldwell Banker .............................. 10,432 (16,422)
Travelodge ................................... -- (834)
Pro forma provision ............................. 137,087 96,094
--------- ---------
Total ........................................... $ 32,553 $ 11,024
========= =========
The pro forma effective tax rates are approximately 1% higher than the
Company's historical effective tax rates due to non-deductible excess of cost
over fair value of net assets acquired to be recorded in connection with the
acquisition of Avis and RCI.
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 Months
September 30,
1996 1995
------- -------
CCI .......................................... -- 1,180
Century 21 ................................... -- 3,120
Avis Offering ................................ 4,569 4,569
RCI .......................................... 1,000 1,000
Second Quarter 1996 Offering - Coldwell Banker 7,122 12,838
Second Quarter 1996 Offering - Avis .......... 2,720 4,896
Century 21 NORS .............................. 418 923
------ ------
Total ........................................ 15,829 28,526
====== ======
The unaudited Pro Forma Consolidated Statements of Operations is presented
as if the acquisitions took place at the beginning of the periods presented;
thus, the stock issuances referred to above are considered outstanding as of the
beginning of the period for purposes of per share calculations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
2.1 Stock Purchase Agreement dated as of October 6, 1996 by and among the
Company, Christel DeHaan and Resort Condominiums International, Inc.
3.1 By laws of the Company, as amended effective October 24, 1996.
10.1 Third Amendment to Employment Agreement dated as of October 30, 1996
between the Company and John D. Snodgrass.
10.2 Employment Agreement dated October 14, 1996 between the Company and Michael
P. Monaco.
11 Computation of per share earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 29, 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. Pro forma financial statements of the Registrant as of and for the six
months ended June 30, 1996 and for the year ended December 31, 1995, including
the proposed acquisition of Avis, Inc.
2. The audited consolidated statements of financial position of Avis, Inc.
and its subsidiaries at February 29, 1996 and February 28, 1995, and the related
consolidated statements of operations, of changes in stockholders' equity, of
changes in redeemable preferred stock, and of cash flows for each of the three
years in the period ended February 29, 1996.
3. The unaudited consolidated financial statements of Avis, Inc. and its
subsidiaries at May 31, 1996 and for the three months ended May 31, 1996 and
1995.
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: November 14, 1996 And General Counsel
By: /s/ Michael P. Monaco
Michael P. Monaco
Vice Chairman
Date: November 14, 1996 And Chief Financial Officer
(Principal Financial Officer
And Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
No. Description
(a) Exhibits
2.1 Stock Purchase Agreement dated as of October 6, 1996 by and among the
Company, Christel DeHaan and Resort Condominiums International, Inc.
3.1 By laws of the Company, as amended effective October 24, 1996.
10.1 Third Amendment to Employment Agreement dated as of October 30, 1996
between the Company and John D. Snodgrass.
10.2 Employment Agreement dated October 14, 1996 between the Company and Michael
P. Monaco.
11 Computation of per share earnings.
27 Financial Data Schedule.