INDEX TO PRO FORMA FINANCIAL STATEMENTS
Page
Pro Forma Financial Statements
Section A: Pro forma consolidated financial statements of HFS for
the 1996 Acquisitions as of and for the year ended
December 31, 1995.
Section B: Pro Forma consolidated Statement of Operations of HFS
excluding the 1996 Acquisitions for the year ended
December 31, 1995.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the acquisitions of the six United States non-owned Century 21
regions ("Century 21 NORS"), the Travelodge(R) and Electronic Realty
Associates(R) ("ERA(R)") franchise systems, (collectively, the "1996
Acquisitions") and the proceeds from the February 22, 1996 issuance of $240
million of 4 3/4% convertible senior notes (the "4 3/4% Notes") due 2003, to the
extent such proceeds were used to finance the 1996 acquisitions, had occurred on
December 31, 1995. The pro forma statement of operations for the year ended
December 31, 1995 is presented as if (i) the 1996 Acquisitions and (ii) the
issuance of the 4 3/4% Notes occurred on January 1, 1995, and reflects the
consolidation of such transactions and the pro forma financial results of HFS
prior to the 1996 Acquisitions. The pro forma financial results of HFS include
all of HFS' acquisitions prior to 1996. The acquisitions have been 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. Management does not expect that the final allocation of
the purchase price for the above acquisitions will differ materially from the
preliminary allocations.
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. The pro forma consolidated statement of operations does not reflect
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
Statement of Operations and should be read in conjunction therewith and with the
consolidated financial statements and related notes of the Company included in
their Annual Report on Form 10-K and the financial statements and related notes
of the acquired companies included as exhibits in Item 7 of this 8-K/A Form 8-K
of the Company dated April 5, 1996.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
As of December 31, 1995
(In thousands)
Historical
------------------------------------------------
Century 21 Pro Forma
HFS NORS Travelodge ERA Adjustments (A) Pro Forma
----------- ---------- ---------- ---------- ---------------- -----------
Assets
Current Assets
Cash and cash equivalents ........... $ 16,109 $ 4,956 -- $ 7,242 $ (12,198) $ 16,109
Royalty accounts and notes
receivable, net ................. 37,326 9,617 $ 3,726 1,707 (11,324) 41,052
Relocation receivables .............. 51,180 -- -- -- -- 51,180
Marketing and reservation
receivables, net ................ 22,297 -- -- -- -- 22,297
Other current assets ................ 21,304 479 612 2,459 (3,550) 21,875
571 (D)
Deferred income taxes ............... 20,200 -- -- -- -- 20,200
---------- ---------- ---------- ---------- ---------- ----------
Total current assets .................... 168,416 15,052 4,338 11,408 (26,501) 172,713
Property and equipment-net .............. 67,892 2,674 333 710 (3,717) 67,892
Franchise agreements-net ................ 517,218 -- -- 14,780 (14,780) 578,218
61,000
Excess of cost over fair value of
net assets acquired-net ............. 356,754 -- -- -- 164,217 520,971
Deferred income taxes ................... -- -- -- -- 8,445 8,445
Other assets ............................ 55,528 3,562 1,420 2,526 (6,108) 60,357
3,429 (D)
---------- ---------- ---------- ---------- ---------- ----------
Total ................................... $1,165,808 $ 21,288 $ 6,091 $ 29,424 $ 185,985 $1,408,596
========== ========== ========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and other accrued
liabilities ..................... $ 80,260 $ 5,058 $ 3,252 $ 20,063 $ (28,373) $ 80,260
Income taxes payable ................ 38,640 -- -- -- -- 38,640
Accrued acquisition obligations ..... 3,740 -- -- -- 21,708 25,448
Current portion of long-term debt ... 2,249 35 -- 4,374 (4,409) 2,249
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities ............... 124,889 5,093 3,252 24,437 11,074 146,597
Long-term debt .......................... 300,778 309 -- 10,943 (11,252) 475,858
175,080
Other non-current liabilities ........... 17,150 579 -- 14,152 (14,731) 17,150
Deferred income taxes ................... 82,800 -- -- -- -- 82,800
Series A Adjustable Rate
Preferred Stock of Century 21 ....... 80,000 -- -- -- -- 80,000
Stockholders' Equity
Preferred Stock
Common Stock - issued and outstanding
HFS Historical, 102,539 and
pro forma 103,462 ............... 1,025 77 -- -- (67) 1,035
Additional paid-in capital .......... 475,562 104 -- 38,904 6,982 521,552
Retained earnings (deficit) ......... 83,604 15,126 2,839 (59,012) 41,047 83,604
---------- ---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit) .... 560,191 15,307 2,839 (20,108) 47,962 606,191
---------- ---------- ---------- ---------- ---------- ----------
Total ................................... $1,165,808 $ 21,288 $ 6,091 $ 29,424 $ 185,985 $1,408,596
========== ========== ========== ========== ========== ==========
See notes to pro forma consolidated balance sheet and statement of
operations.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share amounts)
Historical Pro Forma
Pro Forma 1996 Acquired Pro Forma For 1996
HFS (1) Companies Adjustments Acquisition
--------- ------------ ---------- ------------
Revenue:
Franchise ......................... $415,173 $ 74,241 $ (4,500) (B) $484,914
Other ............................. 71,749 16,358 -- 88,107
-------- -------- --------- --------
Total revenue ................. 486,922 90,599 (4,500) 573,021
-------- -------- --------- --------
Expenses:
Marketing and reservation ......... 149,093 15,868 -- 164,961
Selling, general and administrative 105,770 55,625 (4,500) (B) 156,895
Ramada license fee ................ 18,911 -- 18,911
Depreciation and amortization ..... 36,586 2,737 5,053 (C) 44,376
Interest .......................... 25,720 3,323 5,272 (D) 34,315
Other ............................. 13,168 10,089 -- 23,257
-------- -------- -------- --------
Total expenses ................ 349,248 87,642 5,825 442,715
-------- -------- -------- --------
Income before income taxes .............. 137,674 2,957 (10,325) 130,306
Provision for income taxes .............. 57,019 1,132 (4,109) (E) 54,042
-------- -------- -------- --------
Net income .............................. $ 80,655 $ 1,825 $ (6,216) $ 76,264
======== ======== ======== ========
Per Share Information (primary)
Net income ........................ $ 0.73 $ 0.69
======== ========
Weighted average common and common
equivalent shares outstanding ... 116,599 923 (F) 117,522
======== ======== ========
Per Share Information (fully diluted)
Net income ........................ $ 0.72 $ 0.68
======== ========
Weighted average common and common
equivalent shares outstanding ... 118,436 923 (F) 119,359
======== ======== ========
- ---------------
(1) Pro forma for all material transactions, excluding 1996 Acquisitions (See
Section B).
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.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands)
Historical
------------------------------
Century 21
NORS Travelodge ERA (1) Total
-------- ---------- -------- --------
Revenue:
Franchise ............ $ 29,021 $ 18,361 $ 26,859 $ 74,241
Other ................ 403 79 15,876 16,358
-------- -------- -------- --------
Total revenue .... 29,424 18,440 42,735 90,599
-------- -------- -------- --------
Expenses:
Marketing and
reservation ..... 2,912 12,956 -- 15,868
Selling, general and
administrative ... 22,851 2,648 30,126 55,625
Depreciation and
amortization ..... 578 8 2,151 2,737
Interest ............. 54 -- 3,269 3,323
Other ................ -- -- 10,089 10,089
-------- -------- -------- --------
Total expenses ... 26,395 15,612 45,635 87,642
-------- -------- -------- --------
Income (loss) before
income taxes ......... 3,029 2,828 (2,900) 2,957
Provision for income taxes -- 1,132 -- 1,132
-------- -------- -------- --------
Net income (loss) ........ $ 3,029 $ 1,696 $ (2,900) $ 1,825
======== ======== ======== ========
- ---------------
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.
(1) Reflects the historical statement of operations of Electronic Realty
Associates, Inc. ("ERA Inc."). The financial statements which were audited for
the year ended December 31, 1995 were those of Electronic Realty Associates LP
("ERA LP") which differ from the ERA Inc. financial statements. The difference
is primarily attributable to (i) the home warranty business which was acquired
by HFS but is excluded from the audited financial statements of ERA LP; and (ii)
an intercompany charge to ERA LP by ERA Inc. Net revenues, total expenses and
net loss of ERA LP for the year ended December 31, 1995 were $39.4 million,
$47.3 million and $7.9 million, respectively.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. Acquisition of Century 21 NORS, Travelodge and ERA:
The pro forma acquisition costs of the 1996 Acquisitions have 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 as follows ($000's):
Century 21
NORS Travelodge ERA Total
---------- ---------- --------- ---------
Cash consideration ................................... $ 94,980 $ 39,300 $ 36,800 $ 171,080
Issuance of approximately 1 million
shares of Company common stock ................... 46,000 -- -- 46,000
--------- --------- --------- ---------
Total pro forma acquisition cost ..................... 140,980 39,300 36,800 217,080
--------- --------- --------- ---------
Fair value of net assets acquired:
Historical book value of acquired companies ...... 15,307 2,839 (20,108) (1,962)
Elimination of net assets (liabilities) not
acquired or assumed:
Cash and cash equivalents ................... (4,956) -- (7,242) (12,198)
Accounts and notes receivable ............... (9,617) -- (1,707) (11,324)
Other current assets ........................ (479) (612) (2,459) (3,550)
Property and equipment ...................... (2,674) (333) (710) (3,717)
Franchise agreements ........................ -- -- (14,780) (14,780)
Other assets ................................ (3,562) (20) (2,526) (6,108)
Accounts payable and other .................. 5,058 3,252 20,063 28,373
Current portion of long-term debt ........... 35 -- 4,374 4,409
Long-term debt .............................. 309 -- 10,943 11,252
Other non-current liabilities ............... 579 -- 14,152 14,731
Fair value of assets acquired and liabilities assumed:
Deferred income taxes - current (i) .............. 5,484 1,529 1,432 8,445
Franchise agreements ............................. 11,000 30,000 20,000 61,000
Accrued acquisition liabilities (ii) ............. (14,098) (3,930) (3,680) (21,708)
---------- ---------- ---------- ----------
Fair value of net assets acquired (iii)........... 2,386 32,725 17,752 52,863
---------- ---------- ---------- ----------
Excess of cost over fair value of net assets acquired $ 138,594 $ 6,575 $ 19,048 $ 164,217
========= ========= ========= =========
(i) The pro forma adjustment to deferred income taxes recorded in connection
with acquisitions results from differences in the fair values of net
assets acquired and liabilities assumed and their respective income tax
bases.
(ii) Accrued acquisition obligations consist of personnel related costs ($6.4
million), facility costs ($5.3 million), professional fees ($8.4 million)
and other ($1.7 million).
(iii)Excess of cost over fair value of net assets acquired is as of December
31, 1995 and differs from the amount determined during the Company's
purchase price allocation at actual date of acquisition. The total amount,
which was valued at $187.4 million, was used as a basis for assumptions
made in the pro forma statements of operations.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (continued)
A. Acquisition of Century 21 NORS, Travelodge and ERA: (continued)
The pro forma adjustments include the elimination of acquired companies
stockholders' net deficit and the issuance of approximately 923,000 shares
(based on the average stock price of the Company for a period prior to closing)
in connection with the acquisition of the Century 21 NORS. The adjustment to
stockholders' equity is calculated as follows ($000's):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- ---------- ----------- -------
Issuance of Company common stock ......... $ 10 $ 45,990 $ -- $ 46,000
Elimination of acquired companies combined
stockholders' net deficit ............ (77) (39,008) 41,047 1,962
-------- -------- -------- --------
Adjustment to stockholders' equity ....... $ (67) $ 6,982 $ 41,047 $ 47,962
======== ======== ======== ========
B. Franchise fees and associated revenue:
The pro forma adjustments reflect the elimination of franchise fees and
associated franchise revenue paid by the Century 21 NORS to Century 21 under
sub-franchise agreements.
C. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
Century 21
NORS Travelodge ERA Total
---------- ---------- ------- -------
Elimination of historical
depreciation and amortization .. $ (578) $ (8) $(2,151) $(2,737)
Property and equipment .............. -- -- 189 189
Excess of cost over fair value of net
assets acquired ............... 3,587 224 873 4,684
Franchise agreements ................ 917 1,000 1,000 2,917
------- ------- ------- -------
Total ............................... $ 3,926 $ 1,216 $ (89) $ 5,053
======= ======= ======= =======
Century 21 NORS, Travelodge and ERA The estimated fair value of ERA
property and equipment is $1.1 million, and is being depreciated on a
straight-line basis over the period to be benefited, which is five years. The
estimated fair values of Century 21 NORS, Travelodge and ERA's franchise
agreements are $11.0 million, $30.0 million and $20.0 million, respectively, and
are being amortized on a straight line basis over the periods to be benefited
which are twelve, thirty and twenty years, respectively. The estimated fair
values of Century 21 NORS, Travelodge and ERA's excess cost over fair value of
net assets acquired are $143.5 million, $9.0 million and $34.9 million,
respectively and are each being amortized on a straight line basis over the
periods to be benefited which are forty years.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (continued)
D. Interest expense:
Elimination of historical interest expense $ (3,323)
4 3/4% Notes 8,595
----------
Total $ 5,272
==========
4 3/4% Notes
The pro forma adjustment reflects interest expense of $8.0 million and
amortization of deferred financing fees of $.6 million, related to the issuance
of the 4 3/4% Notes at an interest rate of 4 3/4% per annum, to the extent that
such proceeds were used to finance the 1996 Acquisitions. The pro forma
adjustment for deferred financing fees reflects $4 million of capitalized costs
associated with the issuance of the 4 3/4% Notes which are being amortized over
the term of the 4 3/4% Notes.
E. Income taxes:
The pro forma adjustment to income taxes is comprised of ($000's):
Reversal of provision of:
Pro forma Company excluding 1996 transactions $ (57,019)
Travelodge historical (1,132)
Pro forma provision 54,042
----------
Incremental provision for income taxes $ (4,109)
===========
The pro forma effective tax rate approximates the Company's historical
effective tax rate. The pro forma provisions for taxes were computed using pro
forma pre-tax amounts and the provisions of Statement of Financial Accounting
Standards No. 109.
F. Weighted average common and common equivalent shares outstanding:
The pro forma adjustment to weighted average reflects the effect of the
acquisition of the Century 21 NORS, which were acquired on April, 3, 1996. The
issuance price per share was $49.83. The unaudited Pro Forma Consolidated
Statement of Operations is presented as if the acquisitions took place at the
beginning of the period presented; thus, the stock issuance referred to above is
considered outstanding as of the beginning of the period for purposes of per
share calculations.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (continued)
G. Estimated selling and administrative cost savings:
In connection with its acquisitions, HFS developed related business plans
to restructure each of the respective acquired companiesx which will result in
future cost savings subsequent to the acquisitions. HFS's restructuring plans in
each case were developed prior to the consummation of the respective
acquisitions and were implemented concurrent with the consummation of the
acquisitions. Restructuring plans included the involuntary termination and
relocation of employees, the consolidation and closing of facilities and the
elimination of duplicative operating and overhead activities. Pursuant to HFS's
specific restructuring plans, certain selling, general and administrative
expenses may not be incurred subsequent to each acquisition that existed prior
to consummation. In addition, there are incremental costs in the conduct of
activities of the acquired companies prior to the acquisitions that may not be
incurred subsequent to consummation and have no future economic benefit to HFS.
The estimated cost savings that HFS believes would have been attained had its
acquisitions occurred on January 1, 1995 and the related impact of such cost
savings on pro forma net income and net income per share are not reflected in
the pro forma consolidated statements of income, but are presented below
($000's):
Century Century 21
21 NORS Travelodge ERA Total
------- ---------- ---------- ------- -------
Payroll and related $ 10,885 $ 7,706 $ 1,110 $ 7,236 $26,937
Professional ...... 2,693 1,486 154 387 4,720
Occupancy ......... 3,628 2,754 186 1,172 7,740
Other ............. 3,128 2,326 167 1,036 6,657
-------- ------- ------- ------- -------
Total ............. $ 20,334 $14,272 $ 1,617 $ 9,831 $46,054
======== ======= ======= ======= =======
The impact on pro forma net income and net income per share of the estimate
SG&A cost savings are as follows:
For the Year Ended
December 31, 1995
------------------
Income before taxes, as reported .... $130,306
SG&A adjustments .................... 46,054
--------
Income before taxes, as adjusted .... 176,360
Income taxes ........................ 72,236
--------
Net income, as adjusted ............. $104,124
========
Net income per share (primary):
As adjusted ................ $ 0.92
As reported ................ $ 0.69
Net income per share (fully diluted):
As adjusted ................ $ 0.91
As reported ................ $ 0.68
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma statement of operations for the year ended December 31, 1995
is presented as if (i) the August 1, 1995 acquisition of Century 21 and; (ii)
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") occurred on January 1, 1995. The acquisitions have been accounted
for using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been 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. 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 the following transactions which are not
reflected in the pro forma statements of operations:
On March 31, 1995, the Company acquired a 1% general partnership interest
for approximately $3.0 million in a limited partnership which will develop,
promote and franchise the newly established Wingate Inn franchise system
("Wingate"), a new construction hotel brand. Wingate operations did not commence
until March 1995 and are not material to the Company's financial statements.
Accordingly, this transaction is not included in the pro forma statement of
operations.
On August 31, 1995, the Company acquired the assets comprising the Knights
Inn hotel franchise system, an economy hotel franchise system for approximately
$15 million plus expenses. Knights Inn operations are not material to the
Company's financial statements. Accordingly, this transaction is not included in
the pro forma statement of operations.
The pro forma consolidated financial statement does not purport to present
the 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. The pro forma
consolidated statement of operations does not reflect 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 alliance
programs. No assurances can be made as to the amount of cost savings or revenue
enhancements, if any, that actually will be realized. The pro forma consolidated
financial statement is based on certain assumptions and adjustments described in
the Notes to Pro Forma Consolidated Statement of Operations and should be read
in conjunction therewith and with the consolidated financial statements and
related notes of the Company included in their Annual Report on Form 10-K and
the financial statements and related notes of the acquired companies included as
exhibits in Item 7 of Form 8-K of the Company dated April 5, 1996.
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share amounts)
Historical
----------------------------------
Century Pro Forma
HFS CCI (1) 21 (1) Adjustments Pro Forma
--------- ---------- ---------- ----------- ---------
Revenue:
Franchise ...................... $ 361,238 $ -- $ 53,992 $ (57) (A) $ 415,173
Other .......................... 51,745 3,326 16,678 -- 71,749
--------- --------- --------- --------- ---------
Total revenue .............. 412,983 3,326 70,670 (57) 486,922
--------- --------- --------- --------- ---------
Expenses:
Marketing and reservation ...... 143,965 -- 5,128 -- 149,093
Selling, general and
administrative ............. 55,538 -- 50,232 -- 105,770
Ramada license fee ............. 18,911 -- -- -- 18,911
Depreciation and amortization .. 30,857 529 5,217 (17) (C) 36,586
Interest ....................... 21,789 -- 2,904 1,027 (D) 25,720
Other .......................... 7,018 1,917 4,632 (399) (B) 13,168
--------- --------- --------- --------- --------
Total expenses ............. 278,078 2,446 68,113 611 349,248
--------- --------- --------- --------- --------
Income before income taxes .......... 134,905 880 2,557 (668) 137,674
Provision for income taxes .......... 55,175 313 2,097 (566) (E) 57,019
--------- --------- --------- --------- ---------
Net income .......................... $ 79,730 $ 567 $ 460 $ (102) $ 80,655
========= ========= ========= ========= =========
Per Share Information (primary)
Net income ..................... $ 0.74 $ 0.73
========= =========
Weighted average common
and common equivalent
shares outstanding ......... 113,817 2,782 (F) 116,599
========= ======== ========
Per Share Information (fully diluted)
Net income .................... $ 0.73 $ 0.72
========= ========
Weighted average common
and common equivalent
shares outstanding ......... 115,654 2,782 (F) 118,436
========= ========= ========
- ---------------
(1) Reflects results of operations for the period from January 1, 1995 to
the respective dates of acquisition.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification
See notes to pro forma consolidated balance sheet and statement of
operations.
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
A. Franchise revenue:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations.
B. Other expenses:
The pro forma adjustment eliminates $399,000 of accounting, legal and other
administrative expenses allocated to CCI from CCI's parent which would not have
been incurred by the Company.
C. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
CCI Century
Merger 21 Total
-------- -------- --------
Elimination of historical
depreciation and amortization .. $ (529) $(5,217) $(5,746)
Property and equipment .............. 100 425 525
Information data base ............... 375 -- 375
Excess of cost over fair value of net
assets acquired ................. 289 2,912 3,201
Franchise agreements ................ -- 1,628 1,628
------- ------- -------
Total ............................... $ 235 $ (252) $ (17)
======= ======= =======
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, expansion of its customer base
and the longevity of the casino gaming industry.
Century 21
The estimate fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.1
million, $33.5 million and $199.7 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve and
forty years, respectively. The benefit periods associated with the excess cost
over fair value of net assets acquired were determined based on Century 21's
position as the world's largest franchisor of residential real estate brokerage
offices, the most recognized brand name in the residential real estate brokerage
industry and the longevity of the residential real estate brokerage business.
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS (continued)
D. Interest expense:
Elimination of historical interest expense $ (2,904)
Century 21 2,135
Minority interest - preferred dividends 1,796
---------
Total $ 1,027
=========
Century 21
The pro forma adjustment reflects the recording of interest expense on $70
million of borrowings under HFS' revolving credit facility at an interest rate
of approximately 6.0% which was the variable rate in effect on the date of
borrowing. Borrowings represent the amount necessary to finance the initial cash
purchase price.
Effect of 1/8% variance in variable interest rates
As mentioned above, interest expense was incurred on borrowings under the
Company's revolving credit facility, which partially funded the acquisition of
Century 21. The Company recorded interest expense using the variable interest
rate in effect on the borrowing dates. The effect on pro forma net income
assuming a 1/8% variance in the variable interest rate used to calculate
interest expense is $26,000. The pro forma net income effect of a 1/8% variance
in the interest rate has no impact on earnings per share for the period
presented.
Minority Interest - preferred dividends
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21 issued by Century 21.
E. Income taxes:
The pro forma adjustment to income taxes is comprised of ($000's):
Reversal of historical provision of:
Company $ (55,175)
CCI (313)
Century 21 (2,097)
Pro forma provision 57,019
-----------
Incremental provision for income taxes $ (566)
============
The pro forma effective tax rate approximates the historical effective tax
rate. The pro forma provisions for taxes were computed using pro forma pre-tax
amounts and the provisions of Statement of Financial Accounting Standards No.
109.
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS (continued)
F. Weighted average common and common equivalent shares outstanding:
The pro forma adjustment to weighted average shares consists of the
following (000's):
Issuance
Price Per
Share Shares
------------ ------
CCI (including dilutive impact of warrants)(i) $ 30.60 448
Century 21 (ii)............................. 49.88 2,334
-----
Total ................................... 2,782
=====
(i) Date of Acquisition, May 11, 1995
(ii Date of Acquisition, August 1, 1995
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisitions took place at the beginning of the period presented;
thus, the stock issuances and warrants assumed referred to above are considered
outstanding as of the beginning of the period for purposes of per share
calculations.
G. Estimated selling and administrative cost savings:
In connection with its acquisition of Century 21, HFS developed a related
business plan to restructure the acquired company, which will result in future
cost savings subsequent to the acquisition. HFS's restructuring plan was
developed prior to the consummation of the acquisition and was implemented
concurrent with the consummation of the acquisition. The restructuring plan
included the involuntary termination and relocation of employees, the
consolidation and closing of facilities and the elimination of duplicative
operating and overhead activities. Pursuant to HFS's specific restructuring
plan, certain selling, general and administrative expenses may not be incurred
subsequent to the acquisition that existed prior to consummation. In addition,
there are incremental costs in the conduct of activities of the acquired company
prior to the acquisition that may not be incurred subsequent to consummation and
have no future economic benefit to HFS. The estimated cost savings that HFS
believes would have been attained had its acquisition of Century 21 occurred on
January 1, 1995 and the related impact of such cost savings on pro forma net
income and net income per share are not reflected in the pro forma consolidated
statements of income, but are presented below
($000's):
Payroll and related $ 10,885
Professional 2,693
Occupancy 3,628
Other 3,128
-----------
Total $ 20,334
===========
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS (continued)
G. Estimated selling and administrative cost savings (continued):
For the Year Ended
December 31, 1995
------------------
Income before taxes, as reported $ 137,674
SG&A adjustments 20,334
--------------
Income before taxes, as adjusted 158,008
Income taxes 63,836
--------------
Net income, as adjusted $ 94,172
==============
Net income per share (primary):
As adjusted $ 0.85
============
As reported $ 0.73
============
Net income per share (fully diluted):
As adjusted $ 0.83
============
As reported $ 0.72
============
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS (continued)
H. Accrued acquisition liabilities:
The company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21 operations. This
acquisition was consummated in 1995 and resulted in the consolidation of
facilities, involuntary termination and relocation of employees, and elimination
of duplicative operating and overhead activities. The following table provides
details of these charges by type:
Century 21
----------
Personnel related............................... $12,647
Facility related................................ 16,511
Other costs..................................... 990
-------
Total........................................... $30,148
=======
Terminated employees............................ 325
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation of excess office space. As of December 31, 1995, approximtely
$16.3 million was paid by Century 21 and charged against the restructuring
liability.