EXHIBIT 99.1
INDEX TO PRO FORMA FINANCIAL STATEMENTS
Page
Pro Forma Financial Statements
Section A: Pro forma consolidated financial statements of HFS
for the Acquisition of Avis as of and for the six
months ended June 30, 1996 and for the year ended
December 31, 1995.
Section B: Pro forma consolidated financial information of HFS
excluding the Acquisition of Avis as of and for the
six months ended June 30, 1996 and for the year ended
December 31, 1995.
SECTION A
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE ACQUISITION OF AVIS
The pro forma consolidated balance sheet as of June 30, 1996 is presented
as if the acquisition of Avis, Inc. ("Avis") and issuance of Company common
stock (the "Avis Offering") as partial consideration for Avis occurred on June
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" and "other revenue", respectively.
The pro forma statements of operations for the year ended December 31, 1995
and the six months ended June 30, 1996 are presented as if the acquisition of
Avis had occurred on January 1, 1995 and reflects the consolidation of such
transactions and the pro forma financial results of HFS prior to the Avis
acquisition.
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, 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 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 statements of operations do 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 Statements of Operations and should be read in conjunction
therewith and with the consolidated financial statements and related notes of
the Company included in its 1995 Annual Report on Form 10-K and in its June 30,
1996 Quarterly Report on Form 10-Q, as amended and the financial statements and
related notes of the acquired or to be acquired companies included elsewhere
herein or previously filed in Current Reports on Form 8-K.
SECTION A
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1996
(In thousands)
Historical
----------------------------
Avis (1) Pro Forma Pro Forma for
HFS As Adjusted Adjustment (A) Avis Acquisition
----------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents ........ $ 387,837 $ -- $ (367,200) $ 20,637
Royalty accounts and notes
receivable, net ................ 82,765 636 -- 83,401
Relocation receivables ........... 113,075 -- -- 113,075
Marketing and reservation
receivables, net ............... 43,351 -- -- 43,351
Other current assets ............. 32,337 779 -- 33,116
Deferred income taxes ............ 36,456 -- -- 36,456
----------- --------- ---------- -----------
Total current assets ................ 695,821 1,415 (367,200) 330,036
Property and equipment-net .......... 99,411 34,024 57,976 191,411
Franchise agreements-net ............ 599,631 -- -- 599,631
Excess of cost over fair value of
net assets acquired-net .......... 1,316,146 -- -- 1,316,146
Intangible assets-Avis .............. -- 503,037 299,633 802,670
Investment in car rental
operating company, net............ -- 12,257 62,743 75,000
Deferred income taxes-net ........... -- 28,033 (28,033) --
5,200 5,200
Other assets ........................ 78,609 59,614 (9,614) 128,609
----------- ---------- ---------- -----------
Total ............................... $ 2,789,618 $ 638,380 $ 20,705 $ 3,448,703
=========== ========== ========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other
accrued liabilities ............ $ 172,064 $ 201,785 $ -- $ 373,849
Income taxes payable ............. 62,421 -- -- 62,421
Accrued acquisition obligations .. 32,002 -- 18,000 50,002
Current portion of long-term debt 29,562 -- 100,900 130,462
----------- ----------- ------------ -----------
Total current liabilities ........... 296,049 201,785 118,900 616,734
Long-term debt ...................... 540,530 -- -- 540,530
Other non-current liabilities ....... 30,894 -- -- 30,894
Deferred income taxes ............... 85,400 -- -- 85,400
Preferred Stock - Avis .............. -- 72,412 (72,412) --
Redeemable portion of common
stock - ESOP .................... -- 295,465 (295,465) --
Unearned compensation-ESOP .......... -- (261,702) 261,702 --
Stockholders' Equity
Participating convertible
preferred stock ................ -- 132,000 (132,000) --
Common stock ..................... 1,232 290 (244) 1,278
Additional paid-in capital ....... 1,690,347 217,445 120,909 2,028,701
Retained earnings ................ 145,166 79,120 (79,120) 145,166
Treasury stock ................... -- (102,269) 102,269 --
Foreign currency equity adjustment -- 3,834 (3,834) --
----------- ----------- ----------- -----------
Total stockholders' equity .......... 1,836,745 330,420 7,980 2,175,145
----------- ----------- ----------- -----------
Total ............................... $ 2,789,618 $ 638,380 $ 20,705 $ 3,448,703
=========== =========== =========== ===========
- ------------
(1) See Consolidated Historical Balance Sheet of Avis, Inc. as adjusted as of May 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A
HFS Incorporated and Subsidiaries
CONSOLIDATED HISTORICAL BALANCE SHEET
OF AVIS, INC. AS ADJUSTED
As of May 31, 1996
(In thousands)
Historical Reclassification Avis,
Avis Adjustment As Adjusted
-----------------------------------------------------
Assets
Current Assets
Cash and cash equivalents ........ $ 75,122 $ (75,122) $ --
Royalty accounts and notes
receivable, net ................ 152,224 (151,588) 636
Vehicles, net .................... 2,330,630 (2,330,630) --
Due from affiliated company ...... 44,098 (44,098) --
Other current assets ............. 45,755 (44,976) 779
Deferred income taxes ............ -- -- --
----------- ----------- ---------
Total current assets ................ 2,647,829 (2,646,414) 1,415
Property and equipment-net .......... 150,538 (116,514) 34,024
Franchise agreements-net ............ --
Excess of cost over fair value of
net assets acquired-net .......... --
Intangible assets-Avis .............. 503,037 -- 503,037
Investment in car rental
operating company, net........... -- 12,257 12,257
Deferred income taxes ............... -- 28,033 28,033
Other assets ........................ 165,881 (106,267) 59,614
----------- ----------- -----------
Total ............................... $ 3,467,285 $(2,828,905) $ 638,380
=========== =========== ===========
Liabilities and Stockholders' Equity
Accounts Payable and other ....... $ 400,814 $ (199,029) $ 201,785
----------- ----------- -----------
Long-term debt ...................... 2,262,223 (2,262,223) --
Public liability and property damage 208,692 (208,692) --
Due to affiliated company ........... 122,002 (122,002) --
Other non-current liabilities
Deferred income taxes ............ 36,959 (36,959) --
Preferred stock - Avis ....... 72,412 -- 72,412
Redeemable portion of common
stock - ESOP ................... 295,465 -- 295,465
Unearned compenstion-ESOP ........ (261,702) -- (261,702)
Stockholders' Equity
Participating convertible
preferred stock ................ 132,000 -- 132,000
Common stock ..................... 290 -- 290
Additional paid-in capital ....... 217,445 -- 217,445
Retained earnings ................ 79,120 -- 79,120
Treasury stock ................... (102,269) -- (102,269)
Foreign currency equity adjustment 3,834 -- 3,834
----------- ----------- -----------
Total stockholders' Equity .......... 330,420 -- 330,420
----------- ----------- -----------
Total ............................... $ 3,467,285 $(2,828,905) $ 638,380
=========== =========== ===========
____________
Note: The reclassification adjustment made to the historical balance sheet of Avis, Inc. is to
present the historical net assets of the car rental operations as "investment in car rental
operating company - net".
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share amounts)
Historical
Pro Forma Avis, (1) Pro Forma Pro Forma for
HFS As Adjusted Adjustments Avis Acquisition
---------------------------------------------------------------
Revenue
Franchise .......... $ 583,485 $ -- $ 87,393 (B) $ 670,878
Relocation services 90,584 -- -- 90,584
Other .............. 89,232 21,608 -- 110,840
Equity in loss of car
rental operating company -- -- (5,272) (B) (5,272)
-------- -------- -------- --------
Total revenue .... 763,301 21,608 82,121 867,030
======== ======== ======== ========
Expenses
Marketing and
reservation ...... 164,961 -- -- 164,961
Selling, general and
administrative ... 186,262 7,205 -- 193,467
Ramada license fee . 18,911 -- -- 18,911
Depreciation and
amortization ..... 65,919 19,683 15,820 (C) 101,422
Interest ........... 34,315 461 -- 34,776
Relocation ......... 71,103 -- -- 71,103
Other .............. 17,593 410 -- 18,003
-------- ------- -------- --------
Total expenses ... 559,064 27,759 15,820 602,643
-------- ------- -------- --------
Income (loss) before
income taxes ....... 204,237 (6,151) 66,301 264,387
Provision for
income taxes ....... 83,910 4,100 25,676 (D) 113,686
--------- --------- --------- ---------
Net income (loss)...... $ 120,327 $ (10,251) $ 40,625 $ 150,701
========= ========= ========= =========
Per Share Information
(primary)
Net income ......... $ 0.96 -- $ 1.10
========= ==========
Weighted average
common and
common equivalent
shares outstanding 130,476 10,690 (E) 141,166
======= ======== =======
Per Share Information
(fully diluted)
Net income ......... $ 0.94 -- $ 1.09
========= =========
Weighted average
common and
common equivalent
shares outstanding 132,313 10,690 (E) 143,003
======= ======== =======
_______________
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 car
rental operating company, which are included in "Other Revenue". See Historical
Consolidated Statement of Operations, as adjusted of Avis, Inc. for the year
ended February 29, 1996.
See notes to pro forma consolidated balance sheet and statement of operations.
SECTION A
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC. AS ADJUSTED
For the Year Ended February 29, 1996
(In thousands)
Adjustments
---------------------------------
Rental Car Avis
Historical Reclassifications Subsidiary As Adjusted
--------------------------------------------------------------------
Revenue .............................................. $ 1,716,677 $ (21,608) $(1,695,069) $ --
Service fees.......................................... -- 21,608 -- 21,608
----------- ----------- ----------- ----------
Net revenues.......................................... $ 1,716,677 $ -- $(1,695,069) $ 21,608
----------- ----------- ----------- ----------
Expenses:
Selling, general & administrative ................. 1,119,888 (16,865) (1,095,818) 7,205
Depreciation & amortization ....................... 411,796 16,404 (408,517) 19,683
Interest .......................................... 149,534 461 (149,534) 461
Other ............................................. 410 -- -- 410
----------- ----------- ----------- ----------
Total expenses .................................. 1,681,628 -- (1,653,869) 27,759
----------- ----------- ----------- ----------
Income (loss) before income taxes .................... 35,049 -- (41,200) (6,151)
Provision for income taxes ........................... 23,977 -- (19,877) 4,100
----------- ----------- ----------- ----------
Net income (loss)..................................... $ 11,072 $ -- $ (21,323) $ (10,251)
=========== =========== =========== ==========
_______________
NOTE: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present information technology
services as "Service fees". The elimination of the car rental operating company
is presented as a result of HFS' plan to undertake an initial public offering
of a majority interest of 75 percent in the corporation which owns all
company-owned Avis car rental operations (the "IPO Company"). HFS intends to
substantially replace results of car rental operations with license fees from
the IPO Company.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(In thousands, except per share amounts)
Historical
Pro forma Avis, (1) Pro Forma Pro Forma for
HFS As Adjusted Adjustments Avis Acquisition
--------------------------------------- ----------------
Revenue
Franchise .......... $ 287,295 $ -- $ 47,644 (B) $ 334,939
Owned brokerage .... -- -- -- --
Relocation ......... 50,057 -- -- 50,057
Other .............. 54,614 15,682 (1,500) (B) 68,796
Equity in loss on car
rental operating
company........... (3,680) (B) (3,680)
-------- -------- --------- ---------
Total revenue .... 391,966 15,682 42,464 450,112
-------- -------- --------- ---------
Expenses
Marketing and
reservation ...... 76,625 -- -- 76,625
Selling, general
& administrative . 85,422 3,703 -- 89,125
Ramada license fee . 10,045 -- -- 10,045
Owned brokerage .... -- -- -- --
Depreciation and
amortization ..... 37,977 9,905 7,846 (C) 55,728
Interest ........... 15,935 251 -- 16,186
Relocation ......... 38,355 -- -- 38,355
Other .............. 8,168 18 -- 8,186
-------- ------- -------- --------
Total expenses ... 272,527 13,877 7,846 294,250
-------- ------- -------- --------
Income before
income taxes ....... 119,439 1,805 34,618 155,862
Provision for
income taxes ....... 48,253 53 18,715 (D) 67,021
--------- --------- --------- ---------
Net income ............ $ 71,186 $ 1,752 $ 15,903 $ 88,841
========= ========= ========= =========
Per Share Information
(primary)
Net income ......... $ 0.54 $ 0.62
========= =========
Weighted average common
and common equivalent
shares outstanding 136,165 9,677 (E) 145,842
======= ======= =========
Per Share Information
(fully diluted)
Net income ......... $ 0.54 $ 0.62
========= =========
Weighted average common
and common equivalent
shares outstanding 137,211 9,677 (E) 146,888
======= ====== =======
_______________
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 include the historical results of operations intended to be
retained by the Company and the operating results of the car rental operating
company, which are included in "Other Revenue". See Historical Consolidated
Statement of Operations of Avis, Inc. as adjusted, for the six months ended May 31, 1996.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A
HFS Incorporated and Subsidiaries
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC. AS ADJUSTED
For the Six Months Ended May 31, 1996
(In thousands)
Adjustments
----------------------------------
Rental Car Avis
Historical (1) Reclassifications Subsidiary As Adjusted
--------------------------------------------------------------------
Revenue ............................ $ 918,698 $(15,682) $(903,016) $ --
Service fees........................ -- 15,682 -- 15,682
--------- -------- --------- ---------
Net Revenues 918,698 -- (903,016) 15,682
--------- -------- --------- ---------
Expenses:
Selling, general & administrative 624,543 (9,168) (611,672) 3,703
Depreciation & amortization ..... 199,924 8,917 (198,936) 9,905
Interest ........................ 76,013 251 (76,013) 251
Other ........................... 18 -- -- 18
--------- ------- --------- --------
Total expenses ................ 900,498 -- (886,621) 13,877
--------- ------- --------- --------
Income before income taxes ......... 18,200 -- (16,395) 1,805
Provision for income taxes ......... 8,883 -- (8,830) 53
--------- -------- --------- --------
Net income ......................... $ 9,317 $ -- $ (7,565) $ 1,752
========= ======== ========= =========
_______________
(1) The historical financial statements of Avis, Inc. are for the six months
ended May 31, 1996. The three months ended February 29, 1996 are included
in the six months ended May 31, 1996 and the year ended February 29, 1996.
Revenue and net loss for the three months ended February 29, 1996 are
$421.7 million and $9.7 million, respectively.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION A
HFS Incorporated and Subsidiaries
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. Acquisition of Avis:
At the time HFS announced its acquisition of Avis, it developed and
announced a plan (the "Plan") as follows:
1. Retain certain assets acquired, including the reservation system,
franchise agreements, trademarks and tradenames and certain liabilities.
2. Segregate the assets used in the car rental operations in a separate
subsidiary ("Car Rental Operating Company") and to dispose of approximately 75%
interest in Car Rental Operating Company within one year through an initial
public offering (IPO) of Car Rental Operating Company.
3. Enter into a license agreement with Car Rental Operating company for use
of the trademarks and tradename and other franchise services.
Based on the Plan, the purchase price for Avis has been allocated to the
assets and liabilities acquired by HFS, including its investment in Car Rental
Operating Company based on their estimated fair values. The amount allocated to
Car Rental Operating company was based on the estimated valuation of the Car
Rental Operating Company including the effect of royalty, reservation and
information technology agreements with HFS. Under the plan, Car Rental Operating
Company will sell approximately 75% interest at an assumed price of $225
million, thereby diluting HFS' interest to 25%. All of the proceeds from the IPO
will be retained by Car Rental Operating Company. Pro forma adjustments consist
of the elimination of certain acquired assets and assumed liabilities, net of
the fair value ascribed to such assets and liabilities.
The Company acquired Avis for the following consideration ($000's):
Cash consideration (i) $ 367,200
Issuance of approximately 4.6 million shares of Company
common stock 338,400
ESOP liability (ii) 100,900
---------
Total pro forma acquisition cost 806,500
---------
Fair value of net assets acquired:
Historical book value of acquired company 330,420
Elimination of net assets (liabilities) not acquired or assumed:
Deferred income taxes (28,033)
Other assets (9,614)
Preferred stock - Avis 72,412
Intangible assets - Avis (503,037)
Redeemable portion of common stock - ESOP 295,465
Unearned compensation - ESOP (261,702)
Fair value adjustments to assets acquired and liabilities assumed:
Deferred income tax asset, net (iii) 5,200
Property and equipment (iv) 57,976
Investment in car rental operating company (v) 62,743
Accrued acquisition obligations (vi) (18,000)
----------
Fair value of identifiable net assets acquired 3,830
----------
Intangible assets-Avis (vii) $ 802,670
==========
SECTION A
HFS Incorporated and Subsidiaries
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS (Continued)
A. Acquisition of Avis: (continued)
In connection with the Company's fair value allocation of net assets to the
Car Rental Operating Company, the estimated net worth of the Car Rental
Operating Company was valued at $75 million. Such net worth and corresponding
company investment in the Car Rental Operating Company was allocated as follows:
Historical net book value of car rental operating company $ 72,616
Fair value adjustments to car rental operating company 2,384
----------
$ 75,000
==========
The condensed balance sheet of the Car Rental Operating Company including
fair value adjustments at June 30, 1996 is as follows:
Vehicles $2,567,517
Property and equipment 101,000
Deferred tax asset 102,000
Excess of cost over fair value of net assets acquired 154,000
Debt (2,488,651)
Property liability and property damage (215,135)
Other, net (145,731)
----------
Stockholders' Equity $ 75,000
==========
HFS' investment in Car Rental Operating Company of $75 million represents
the estimated value of its 100% interest in the Car Rental Operating Company at
the date of acquisition and is accounted for under the equity method since HFS'
control is temporary based on the planned IPO of Car Rental Operating Company.
Upon completion of the IPO, the value of Car Rental Operating Company is
expected to increase to $300 million (with the $225 million of IPO proceeds
retained by the Car Rental Operating Company) with HFS' interest at 25% equal to
$75 million, its current investment balance. If the results of the IPO do not
confirm the preliminary purchase price allocation for the investment in Car
Rental Operating Company, then such investment will be adjusted with a
corresponding adjustment to goodwill.
(i) Cash consideration of $336.6 million was financed by the Second Quarter
1996 Offering.
(ii) The ESOP liability bears interest at LIBOR plus 20 basis points for a
period commencing on the acquisition date to maturity which is primarily
the earlier of three days after the sale of Company shares issued to the
ESOP or the first anniversary of the acquisition.
(iii)The pro forma adjustment to deferred income taxes recorded in
connection with the acquisition results from differences in the fair
values of assets acquired and liabilities assumed and their
respective income tax bases.
(iv) The adjustment to property and equipment is primarily attributable to the
values ascribed to reservation equipment and related assets and to the Avis
headquarters office in excess of historical cost.
(v) The adjustment to investment in car rental operating company reflects the
net effect of push-down accounting adjustments which result in a $75
million fair value of the car rental operating company.
(vi) Accrued acquisition obligations consist of professional fees ($3.7
million), investment banker fees ($8.0 million) and filing fees and other
($6.3 million).
(vii) Intangible assets retained by HFS consisting of the following:
(In Millions)
-------------
Avis trademark $ 400.0
Reservation system and customer database 109.0
Excess of cost over fair value of net
assets acquired 293.7
----------
$ 802.7
==========
Excess of cost over fair value of net assets acquired is as of June 30,
1996 and differs from the actual purchase price allocation at date of
acquisition. That amount, which was valued at $317.6 million, was used as a
basis for assumptions made in the pro forma statements of operations.
A. Acquisition of Avis (continued)
The pro forma adjustments include the elimination of Avis stockholders'
equity and the issuance of approximately 5.6 million shares of the Company's
common stock to finance the acquisition.
Stockholders' Equity
---------------------------------------------
Issuance of Eimination 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 .............. 338,354 217,445 120,909
Retained earnings ....................... -- 79,120 (79,120)
Treasury stock .......................... -- (102,269) 102,269
Foreign currency equity adjustment ...... -- 3,834 (3,834)
Redeemable portion of common stock ...... -- -- --
Unearned compensation ................... -- -- --
--------- --------- ---------
$ 338,400 $ 330,420 $ 7,980
========= ========= =========
B. Car Rental Operating Company Operations:
The pro forma adjustments are comprised of the following:
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
------------------------------------------------
Historical income before taxes from Car Rental
Operating Company........................ $ 41,200 $ 16,395
Adjustments to Car Rental Operating Company:
Elimination of historical expense associated with:
Long-term incentive compensation plans
eliminated in connection with the Avis
Acquisition............................. $ 4,700 $ 3,549
Depreciation and amortization........... 31,869 15,337
Addition of pro forma expenses associated with:
Depreciation and amortization (i)...... (18,279) ( 9,140)
Increased financing costs.(ii).... .... (8,004) 10,286 (3,556) 6,190
HFS Service Fee Adjustment:
Service fees from franchised locations.. (18,366) (9,419)
Reservation and information technology
services................................ (9,700) (6,619)
Gross royalty payment to HFS from
Avis (iii)............................. (59,327) (87,393) (31,606) (47,644)
Adjsuted income (loss) before taxes from
car rental operating company.......... (35,907) (25,059)
Provision (benefit) for income taxes...... (14,819) (10,339)
Adjusted net income (loss) from car rental
operating company..................... (21,088) (14,720)
HFS ownership percentage 25% 25%
HFS: equity in earnings (loss) in car rental
operating company..................... $ (5,272) $ (3,680)
======== ========
(Other Revenue Adjustment):
Elimination of historical interest income
related to cash consideration portion of
Avis Acquisition (iv)................ $ -- $ 1,500
======== =========
(i) The estimated fair value of Avis property and equipment intended to be
retained by the car rental company is $101.0 million, comprised primarily of
furniture, fixtures, and leasehold improvements, which is amortized on a
straight-line basis over the estimated useful lives, which average seven years.
Excess of cost over fair value of net assets acquired by the Car Rental
Operating Company is valued at $154 million and is amortized on a straight- line
basis over a benefit period of 40 years.
(ii) As a result of the merger between the Company and Avis, approximately
$1 billion of tax-advantaged debt was repaid and replaced by a similar amount of
non tax-advantaged debt. This resulted in an increase in interest rates, due to
the loss of tax benefits from ESOP financing which were passed through from
various lenders to Avis ($000's):
For the Year Ended For the Six Months
December 31, Ended June 30,
1995 1996
------------------ ------------------
Add current facilities........... $ 129,472 $ 76,054
Reverse former facilities....... (121,468) (72,498)
--------- --------
Increased financing cost $ 8,004 $ 3,556
========= ========
(iii) In connection with the Company's plan to dispose of approximately 75%
of the Car Rental Operating Company, the Company will enter into franchise,
information technology and other agreements to provide services to the Car
Rental Operating Company based on terms to be determined. The royalty payment
to be made to HFS from the Car Rental Operating Company for use of the Avis
trademarks and tradename is calculated at 3.5% of the revenues generated by the
Car Rental Operating Company which is the net royalty percentage the Company
expects to receive as a result of a planned contractual arrangement with the
Avis Car Rental Operating Company subsequent to the IPO. Such payment for the
year ended December 31, 1995 and the six months ended June 30, 1996 is
calculated as follows($000's):
For the Year Ended For the Six Months
December 31, Ended June 30,
1995 1996
------------------ ------------------
Revenues generated by Car Rental
Operating Company............... $1,695,069 $ 903,016
Royalty percentage................... 3.5% 3.5%
--------- --------
Royalty payment to HFS............... $ 59,327 $ 31,606
========= ========
(iv) 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.
C. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For The Year For the Six Months
Ended Ended
December 31, June 30,
1995 1996
-----------------------------
Elimination of historical
expense ............. $ (19,683) $ (9,905)
Property, equipment &
furniture & fixtures 5,909 2,954
Intangible assets ....... 29,594 14,797
-------- --------
Total ................... $ 15,820 $ 7,846
======== ========
The estimated fair value of Avis' property and equipment intended to be
retained by HFS is $96.0 million, comprised primarily of reservation equipment
and related assets and to the Avis Headquarters office in excess of historical
cost. Such property and equipment is amortized on a straight-line basis over the
estimated benefit periods ranging from five to thirty years. Avis' intangible
assets recorded by HFS (not applicable to car rental operating subsidiary) are
comprised of the Avis trademark, a reservation system and customer database, and
excess of cost over fair value of net assets acquired. The estimated fair value
of Avis trademark is approximately $400 million and is amortized on a
straight-line basis over a benefit period of 40 years. The estimated fair value
of the reservation system and customer database are approximately 95.0 million
and 14.0 million, respectively and are amortized on a straight-line basis over
the periods to be benefit which are 10 years and 6.5 years, respectively.
The excess of cost over fair value of net assets acquired applicable to the
allocated porition of the business to be retained by HFS is estimated at
approximately $317.6 million and is determined to have a benefit period of 40
years which is based on Avis' position as the second larges 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.
D. Income Taxes
The pro forma adjustment to income taxes is comprised of ($000's):
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
--------------------------------------------
Reversal of historical (provision)
benefit of:
Pro forma provision prior to
acquisition of Avis....... $ (83,910) $ (48,253)
Avis ....................... (4,100) (53)
Pro forma provision ............ 113,686 67,021
--------- ---------
Total .......................... $ 25,676 $ 18,715
========= =========
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 vaue of net assets acquired to be recorded in connection with the
acquisition of Avis. The pro forma provisions for taxes were computed using pro
forma pre-tax amounts and the provisions of Financial Accounting Standards No.
109.
E. Weighted average common and common equivalent shares outstanding
The pro forma adjustment to weighted average shares reflects the Avis
acquisition, which occurred on October 17, 1996 at an issuance price per share
of $74.06, as if it took place at the beginning of the period presented; thus,
the stock issuance is considered outstanding as of the beginning of the period
for purposes of per share calculations.
F. Estimated selling, general and administrative cost savings:
In connection with HFS's acquisitions, HFS developed related business plans
to restructure each of the respective acquired companies which will result in
future cost savings subsequent to the acquisitions. HFS'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 pror 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):
For the year ended December 31, 1995:
Century Coldwell Century 21
21 Banker NORS Travelodge ERA Total
------- ------ ------------ ---------- ---------- --------
Payroll and related... $10,885 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 37,619
Professional......... 2,693 1,500 1,486 154 387 6,220
Occupancy............ 3,629 -- 2,754 186 1,172 7,740
Other 3,128 (1,517) 2,326 167 1,036 5,140
------- ------- ------- ------- ------- --------
Total........... $20,334 $10,665 $14,272 $ 1,617 $ 9,831 $ 56,719
======= ======= ======= ======= ======= ========
For the six months ended June 30, 1996:
Coldwell Century 21
Banker NORS Travelodge ERA Total
-------- ---------- ---------- ------- ---------
Payroll and related... $ 4,451 $ 2,424 $ 25 $ 222 $ 7,122
Professional......... 1,055 705 4 -- 1,764
Occupancy............ -- 603 4 102 709
Other (604) 1,069 4 157 626
------- ------- ----- ------ -------
Total........... $ 4,902 $ 4,801 $ 37 $ 481 $10,221
======= ======= ===== ====== =======
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
--------------------------------------------
Income before taxes, as reported... $266,369 $ 155,862
SG&A adjustments.................. 56,719 10,221
Income before taxes, as adjusted.. 323,088 166,083
Income taxes...................... 138,928 71,416
-------- ---------
Net income, as adjusted $184,160 $ 94,667
======== =========
Net income per share (primary):
Ad adjusted................. $ 1.34 $ 0.66
======== =========
As reported................. $ 1.10 $ 0.62
======== =========
Net income per share (fully diluted):
Ad adjusted................. $ 1.32 $ 0.66
======== =========
As reported................. $ 1.09 $ 0.62
======== =========
SECTION B
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXCLUDING THE AVIS ACQUISITION
The pro forma statements of operations for the year ended December 31, 1995
and the six months ended June 30, 1996 are presented as if the following
transactions had occurred on January 1, 1995: (i) the May 31, 1996 acquisition
of the common stock of Coldwell Banker Corporation ("Coldwell Banker") and the
related contribution of Coldwell Banker's owned real estate brokerage offices
(the "Owned Brokerage Business") to an independent trust (the "Trust") the
("Coldwell Banker Transaction"); (ii) the receipt of the proceeds from an
offering of the Company's common stock (the CB Offering") to the extent
necessary to fund the acquiition of Coldwell Banker and the related repayment of
indebtedness and acquisition expenses: (iii) the acquisitions of: the six
non-owned Century 21 regions ("Century 21 NORS") during the second quarter of
1996, the Travelodge franchise system, ("Travelodge") on January 23, 1996 and
the Electronic Realty Associates franchise system ("ERA") on February 12, 1996
(collectively, the "Other Acquisitions"); and (iv) the February 22, 1996
issuance of $240 million of 4-3/4% convertible senior notes due 2003 to the
extend such proceeds were used to finance the Other Acquisitions. The pro forma
statement of operations for the year ended December 31, 1995 is also presented
as if the August 1, 1995 acquisition of Century 21 Real Estate Corporation
("Century 21") and the acquisition by merger (the "CCI Merger") in May 1995 of
Casino & Credit Services, Inc's. gambling patron credit information business,
Central Credit Inc. ("CCI") had occurred on January 1, 1995.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been or
will be 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
relfected 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. The pro forma consolidated statements of operations do not reflect
cost savings and revenue enhancements that management believes may be realized
following the acquisitions. These 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 statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and should be read in conjunction
therewith and with the consolidated financial statements and related notes of
the Company included in its 1995 Annual Report on Form 10-K and in its June 30,
1996 Quarterly Report on Form 10-Q, as amended and the financial statements and
related notes of the acquired or to be acquired companies included elsewhere
herein or previously filed in Current Reports on Form 8-K.
SECTION B
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share amounts)
Historical
-----------------------------------------
Coldwell Other Acquired Pro Forma
HFS Banker Companies Adjustments Pro Forma
---------------------------------------------------------------------------
Revenue
Franchise .......... $ 361,238 $ 68,064 $ 128,233 $ 25,950 (A) $ 583,485
Owned brokerage business -- 535,207 -- (535,207) (B) --
Relocation services 8,204 75,866 6,514 -- 90,584
Other .............. 43,541 20,264 29,848 (4,421) (B) 89,232
-------- -------- -------- -------- ---------
Total revenue .... 412,983 699,401 164,595 (513,678) 763,301
======== ======== ======== ======== =========
Expenses
Marketing and
reservation ...... 143,965 -- 20,996 -- 164,961
Selling, general and
administrative ... 55,538 32,367 102,857 (4,500) (C) 186,262
Ramada license fee . 18,911 -- -- -- 18,911
Owned brokerage..... -- 521,376 -- (521,376) (B) --
Depreciation and
amortization ..... 30,857 22,425 8,483 4,154 (D) 65,919
Interest ........... 21,789 5,329 6,227 970 (E) 34,315
Relocation ......... 3,783 62,439 4,881 -- 71,103
Other .............. 3,235 -- 14,757 (399) (F) 17,593
-------- ------- -------- -------- ---------
Total expenses ... 278,078 643,936 158,201 (521,151) 559,064
-------- ------- -------- -------- ---------
Income before
income taxes ....... 134,905 55,465 6,394 7,473 204,237
Provision for
income taxes ....... 55,175 24,385 3,542 808 (G) 83,910
--------- --------- --------- --------- ---------
Net income ............ $ 79,730 $ 31,080 $ 2,852 6,665 $ 120,327
========= ========= ========= ========= =========
Per Share Information
(primary)
Net income ......... $ .74 $ 0.96
========= =========
Weighted average
common and
common equivalent
shares outstanding 113,817 16,659 (H) 130,476
======= ======== =======
Per Share Information
(fully diluted)
Net income ......... $ .73 $ 0.94
========= =========
Weighted average
common and
common equivalent
shares outstanding 115,654 16,659 (H) 132,313
======= ======= ========
_______________
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
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share amounts)
Other Acquired Companies
--------------------------------------------------------------------
Century 21
CCI (l) Century 21 (1) NORS Travelodge ERA Total
-------------------------------------------------------------------------------
Revenue
Franchise .......... $ -- $ 53,992 $ 29,021 $ 18,361 $26,859 $128,233
Relocation ......... -- 6,514 -- -- -- 6,514
Other .............. 3,326 10,164 403 79 15,876 29,848
-------- -------- -------- -------- ------- --------
Total revenue .... 3,326 70,670 29,424 18,440 42,735 164,595
======== ======== ======== ======== ======= ========
Expenses
Marketing and
reservation ...... -- 5,128 2,912 12,956 -- 20,996
Selling, general and
administrative ... -- 47,232 22,851 2,648 30,126 102,857
Depreciation and
amortization ..... 529 5,217 578 8 2,151 8,483
Interest ........... -- 2,904 54 -- 3,269 6,227
Relocation ......... -- 4,881 -- -- -- 4,881
Other .............. 1,917 2,751 -- -- 10,089 14,757
-------- ------- -------- -------- ------- --------
Total expenses ... 2,446 68,113 26,395 15,612 45,635 158,201
-------- ------- -------- -------- ------- --------
Income (loss) before
income taxes ....... 880 2,557 3,029 2,828 (2,900) 6,394
Provision for
income taxes ....... 313 2,097 -- 1,132 -- 3,542
--------- --------- --------- --------- ------- --------
Net income ............ $ 567 $ 460 $ 3,029 $ 1,696 $(2,900) $ 2,852
========= ========= ========= ========= ======= ========
NOTE: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1995 to the
respective date of acquisition.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION B
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(In thousands, except per share amounts)
Historical
-----------------------------------------
Coldwell Other (2) Pro Forma
HFS Banker(2) Acquisitions Adjustments Pro Forma
---------------------------------------------------------------------------
Revenue
Franchise .......... $ 240,135 $ 25,694 $ 9,631 $ 11,835 (A) $ 287,295
Owned brokerage business -- 235,625 -- (235,625) (B) --
Relocation ............. 15,179 34,159 719 -- 50,057
Other .............. 48,896 4,067 1,651 -- 54,614
-------- -------- -------- -------- ---------
Total revenue .... 304,210 299,545 12,001 (223,790) 391,966
======== ======== ======== ======== =========
Expenses
Marketing and
reservation ...... 75,491 -- 1,134 -- 76,625
Selling, general
administrative ... 60,311 57,455 9,460 (41,804) (C) 85,422
Ramada license fee . 10,045 -- -- -- 10,045
Owned brokerage..... -- 227,363 -- (227,363) (B) --
Depreciation and
amortization ..... 23,405 9,021 421 5,130 (D) 37,977
Interest ........... 14,574 3,155 1,493 (3,287) (E) 15,935
Relocation ......... 10,184 27,530 641 -- 38,355
Other .............. 6,892 512 764 -- 8,168
-------- -------- -------- -------- ---------
Total expenses ... 200,902 325,036 13,913 (267,324) 272,527
-------- -------- -------- -------- ---------
Income (loss) before
income taxes ....... 103,308 (25,491) (1,912) 43,534 119,439
Provision for
income taxes ....... 41,746 (10,432) -- 16,939 (G) 48,253
--------- --------- --------- --------- ---------
Net income ............ $ 61,562 $ (15,059) $ (1,912) $ 26,595 $ 71,186
========= ========= ========= ========= =========
Per Share Information
(primary)
Net income ......... $ 0.51 -- -- $ 0.54
========= =========
Weighted average
common and
common equivalent
shares outstanding 125,229 10,936 (H) 136,165
======= ======== =========
Per Share Information
(fully diluted)
Net income ......... $ 0.51 $ 0.54
========= =========
Weighted average
common and
common equivalent
shares outstanding 126,275 10,936 (H) 137,211
======= ======= ========
_______________
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1996 to the
respective dates of acquisition.
See notes to pro forma consolidated balance sheet and statements of operations.
SECTION B
HFS Incorporated and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(In thousands, except per share amounts)
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
administrative ... 6,885 99 2,476 9,460
Depreciation and
amortization ..... 285 -- 136 421
Interest ........... 2 -- 1,491 1,493
Relocation ......... -- -- 641 641
Other .............. -- -- 764 764
-------- -------- -------- --------
Total expenses ... 7,853 552 5,508 13,913
-------- -------- -------- --------
Income (loss) before
income taxes ....... (736) 136 (1,312) (1,912)
Provision for
income taxes ....... -- -- -- --
--------- --------- --------- ---------
Net income (loss)...... $ (736) $ 136 $ (1,312) $ (1,912)
========= ========= ========= =========
NOTE: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
(1) Reflects results of operations for the period from January 1, 1996 to the
respective dates of acquisition.
See note to pro form consolidated balance sheet and statements of operations.
A. Franchise revenue:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations, the
elimination of franchise revenue paid by the Century 21 NORS to Century 21 under
sub-franchise agreements and the addition of franchise fees to be received under
franchise contracts with owned brokerage offices upon contribution of the Owned
Brokerage Business to the Trust. Pro forma adjustments to franchise revenue
consists of the following:
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
----------------- ------------------
Eliminate:
Discontinued operations....... $ (57) $ -
Century 21 revenue included as
Century 21 NORS SG&A....... (4,500) (1,003)
Add:
Franchise fees from Owned
Brokerage Busines......... 30,507 12,838
-------- --------
Total...................... $ 25,950 $ 11,835
======== =======
The franchise fees from the Owned Brokerage Business, which is based on the
franchise contracts with the Trust, is calculated at approximately 5.7% of gross
commissions earned by the Owned Brokerage Business on sales of real estate
properties. Gross commissions earned by the Owned Brokerage Business were $535.2
million, $225.2 million for the year ended December 31, 1995 and for the six
months ended June 30, 1996.
B. 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.
The majority of Owned Brokerage Business expenses are directly attributable
to the business. Based on the Company's due diligence of Coldwell Banker
Corporation and subsidiaries ("CB Consolidated"), the Company determined that
common expenses were allocated to the owned brokerage business based on a
reasonable allocation method. Such allocations were based on the ratio of number
of employees, the amount of space occupied and revenue generated relative to CB
Consolidated in the aggregate and multiplied by corresponding common costs as
appropriate to determine allocable expenses.
C. Selling, general and administrative expense:
The pro forma adjustments reflect the elimination of royalty payments made
by the Century 21 NORS to Century 21 under sub-franchise agreements (offset
against service fee revenue - See Note A) and the payment of Coldwell Banker
stock options as a result of change in control provisions in connection with the
acquisition of Coldwell Banker by HFS.
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
----------------- ------------------
Franchise fees................ $ 4,500 $ 1,003
Stock option expense.......... -- 40,801
-------- -------
Total...................... $ 4,500 $41,804
======== =======
D. Depreciation and amortization:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the year ended December 31, 1995:
CCI Coldwell Other
Merger Century 21 Banker Acquisitions Total
-------------------------------------------------------------
Elimination of historical
expense................ $ (529) $ (5,217) $(22,425) $(2,737) $(30,908)
Property, equipment &
furniture & fixtures... 100 425 1,156 189 1,870
Information database......... 375 -- -- -- 375
Intangible assets........... 289 -- -- -- 289
Franchise agreements....... -- 1,628 11,712 2,917 16,257
Excess of cost over fair value
of net assets acquired -- 2,912 8,675 4,684 16,271
------ -------- -------- ------- -------
Total $ 235 $ (252) $ (882) $ 5,053 $ 4,154
====== ======== ======== ======= =======
For the six months ended June 30, 1996
Coldwell Other
Banker Acquisitions Total
--------------------------------------
Elimination of historical
expense................ $(9,021) $ (421) $(9,442)
Property, equipment &
furniture & fixtures... 578 -- 578
Franchise agreements....... 5,856 1,458 7,314
Excess of cost over fair value
of net assets acquired 4,338 2,342 6,680
------- ------- -------
Total $ 1,751 $ 3,379 $ 5,130
======= ======= =======
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 ent 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 oprating profits and expansion of its customer
base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.5
million, $33.5 million and $199.7 million, respectively and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve and
forty years, respectively. The benefit periods associted 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 brnad name in the residentialr real estate
brokerage industry and the longevity of the residential real estate brokerage
business.
Coldwell Banker
The estimated fair values of Coldwell Banker's property and equipment,
(excluding land) of $16.7 million is amortized on a straight-line basis over the
estimated beneit periods ranging from five to twenty-five years. Coldwell
Banker's intangible assets are comprised of franchise agreements and excess of
cost over fair value of net assets acquired. The franchise agreements with the
brokerage offices comprising the Trust are valued independently of all other
franchise agreements with Coldwell Banker affiliates. Franchise agreements
within the Trust and independent of the Trust are valued at $218.5 million and
$218.7 million, respectively and are amortized on a straight-line basis over the
respective benefit periods of forty and thirty-five years, respectively. The
benefit period associated with Trust franchise agreements was based upon a long
history of gross commissions sustained by the Trust. The benefit period
associated with Coldwell Banker affiliates franchise agreements was based upon
the historical profitability of such agreements and historical renewal rates.
The excess of cost over fair value of net assets acquired is estimated at
approximately $347.0 million and is determined to have a benefit period of forty
years, which is based on Coldwell Banker's position as the largest gross revenue
producing real estate company in North America, the recognition of its brand
name in the real estate brokerage industry and the longevity of the real estate
brokerage business.
Other Acquisitions
The estimated fair value of Other 1996 Acquisitions property and equipment
aggregate $1.3 million and are being amortized on a straight-line basis over the
estimate benefit periods ranging from five to twenty-five years.
The estimated fair values of Other 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 thrity years. The
estimated fair values of Other Acquisitions excess of cost over fair value of
net assets acquired aggregate $187.4 million and are each being amortized on a
straight-line basis over the periods to be benefited, which are forty years.
E. Interest Expense
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
----------------- ------------------
Elimination of historical interest
expense of Other Acquisitions
and Century 21................. $ (6,227) $ (1,493)
Reversal of Coldwell Banker..... (5,329) (3,155)
Century 21...................... 2,135 --
Minority interest - preferred
dividends..................... 1,796 --
4-3/4% Notes................... 8,595 1,361
-------- -------
Total $ 970 $(3,287)
======== =======
Century 21
The pro forma adjustment reflects the recording of interest expense on $70
million of borrowings under the Company's revolving credit facility at an
interest rate of approximately 6.0%, which is the variable rate in effect on the
date of brorrowing. Borrowings represent the amount necessary to finance the
initial cash of purchase price.
Coldwell Banker
The pro forma adjustment reflects the reversal of interest expense relating
to the following ($000's):
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
----------------- ------------------
Expense associated with the Owned
Brokerage Business (i)........... $ 138 $ (179)
Expense associated with revolving
credit facility borrowings which
will be repaid with proceeds from
offering (ii)................... 5,191 3,334
------ -------
Total.............................. $5,329 $ 3,155
====== =======
(i) HFS paid substantially all outstanding debt of Coldwell Banker Corporation
and subsidiaries ("CB Consolidated") at the consummation date of the
acquisition. Therefore, a determination as to the reasonableness of allocated
CB Consolidated interest to the Owned Brokerage Business is unnecessary.
(ii) At the date of acquisition, HFS repaid $105 million of Coldwell Banker
indebtedness, which represented borrowings under a revolving credit facility at
a variable rate of interest (LIBOR plus a margin ranging from .5% to 1.25%).
Minority interest - preferred dividends
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21. Preferred dividends are
calculated based on an $80 million face value and a 4.9% dividend rate.
4-3/4% Notes
The pro forma adjustment reflects interest and amortization of deferred
financing costs related to the February 22, 1996 issuance of the 4-3/4% Notes
(5.0% effective interest rate) to the extent that such proceeds were used to
finance the acquisitions of ERA ($32.8 million), Travelodge ($39.3 million) and
Century 21 NORS ($96.4 million).
Effect of a 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 date. 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 for both the year ended December 31, 1995 and the
six months ended June 30, 1996. The pro forma net income efffects of a 1/8%
variance in the interest rate has no impact on earnigns per share for all
periods presented.
F. Other expenses
The pro forma adjustment eliminates $399,000 of accounting, legal and other
administrative expenses allocated to CCI which would not have been incurred by
the Company.
G. Income taxes
The pro forma adjustment to income taxes is comprised of ($000's):
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
----------------- ------------------
Reversal of historical (provision)
benefit of:
Company..................... $(55,175) $(41,746)
CCI......................... (313) --
Century 21.................. (2,097) --
Coldwell Banker............ (24,385) 10,432
Travelodge................. (1,132) --
Pro forma provision............. 83,910 48,253
-------- --------
Total...................... $ 808 $ 16,939
======== ========
The pro forma effective tax rate approximates the Company's historical
effective tax rate. The pro forma provision for taxes was computed using pro
forma pre-tax amounts and the provisions of Statement of Financial Accounting
Standards No. 109.
H. Weighted average common and common equivalent share outstanding.
The pro forma adjustment to weighted average shares consists of the
following ($000's):
Issuance For the Year For the Six Months
Price Per Ended Ended
Share December 31, 1995 June 30, 1996
--------- ----------------- ------------------
CCI (including dilutive impact
of warrants) (1)............ $15.30 896 --
Century 21 (2)............... $49.88 2,334 --
Coldwell Banker Offering (3).. $59.99 12,506 10,307
Century 21 NORS (4)........... $49.83 923 629
------ ------
Total........................ 16,659 10,936
====== ======
(1) Date of Acquisition, May 11, 1995
(2) Date of Acquisition, August 1, 1995
(3) Date of Acquisition, May 31, 1996
(4) Date of Acquisition, April 3, 1996
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisitions took place at the beginning of the period presented;
thus, the stock issuances referred to above are considered outstanding as of the
beginning of the period for purposes of per share calculations.
I. Estimated selling, general and administrative cost savings:
In connection with HFS' acquisitions, HFS developed related business plans
to restructure each of the respective acquired companies which will result in
future cost savings subsequent to the acquisitions. HFS' restructuring plans in
each case were developed prior to the consummation of the respective
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'
specific restructuring plans, certain selling, general and administrative
expenses may not be incurred subsequent to each acquisition that existed pror 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):
For the year ended December 31, 1995:
Century Coldwell Century 21
21 Banker NORS Travelodge ERA Total
------- -------- ---------- ---------- ------- ---------
Payroll and related... $10,885 $10,682 $ 7,706 $ 1,110 $ 7,236 $ 37,619
Professional......... 2,693 1,500 1,486 154 387 6,220
Occupancy............ 3,628 -- 2,754 186 1,172 7,740
Other 3,128 (1,517) 2,326 167 1,036 5,140
------- ------- ------- ------- ------- --------
Total........... $20,334 $10,665 $14,272 $ 1,617 $ 9,831 $ 56,719
======= ======= ======= ======= ======= ========
For the six months ended June 30, 1996:
Coldwell Century 21
Banker NORS Travelodge ERA Total
-------- ---------- ---------- ------- ---------
Payroll and related... $ 4,451 $ 2,424 $ 25 $ 222 $ 7,122
Professional......... 1,055 705 4 -- 1,764
Occupancy............ -- 603 4 102 709
Other (604) 1,069 4 157 626
------- ------- ----- ------ -------
Total........... $ 4,902 $ 4,801 $ 37 $ 481 $10,221
======= ======= ===== ====== =======
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
For the Year For the Six Months
Ended Ended
December 31, 1995 June 30, 1996
--------------------------------------------
Income before taxes, as reported... $204,237 $ 119,439
SG&A adjustments.................. 56,719 10,221
-------- ---------
Income before taxes, as adjusted.. 260,956 129,660
Income taxes...................... 105,426 52,383
-------- ---------
Net income, as adjusted $155,530 $ 77,277
======== =========
Net income per share (primary):
Ad adjusted................. $ 1.23 $ 0.58
======== =========
As reported................. $ 0.96 $ 0.54
======== =========
Net income per share (fully diluted):
Ad adjusted................. $ 1.21 $ 0.58
======== =========
As reported................. $ 0.94 $ 0.54
======== =========
J. Accrued acquisition liability:
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21, Century 21 NORS, ERA
and Coldwell Banker operations. These acquisitions were consummated in 1995 and
1996 and resulted in the consolidation of facilities, involuntary termination
and relocation of employees, and elimination of duplicative operating and
overhead activities. The following table provides details of these charges by
type.
Century 21 Coldwell
Century 21 NORS ERA Banker
---------- ---------- ------- --------
Personnel related..... $ 12,647 $ 1,720 $ 8,000 $ 4,237
Facility related...... 16,511 2,293 1,558 5,491
Other costs 990 711 501 211
-------- ------- ------- -------
Total ............ $ 30,148 $ 4,724 $10,059 $ 9,939
======== ======= ======= =======
Terminated employees.... 325
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation of excess office space. As of June 30, 1996, approximately $23.7
million, $1.6 million, $3.3 million and $1.6 million were paid by Century 21,
Century 21 NORS, ERA and Coldwell Banker, respectively and charged against the
restructuring liability.
K. Trust contribution:
Included in HFS' historical SG&A for the six months ended June 30, 1996, is
a $5 million charge associated with the Company's contribution of the Owned
Brokerage Business to the Trust. The charge represents the fair value of the
Owned Brokerage Business based upon a valuation which considered earnings, cash
flow, assets and business prospects of the contributed business.