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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
COMMISSION FILE NO. 1-11402
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HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3059335
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
339 JEFFERSON ROAD
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if applicable)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of common
stock was 103,764,297 shares of Common Stock outstanding as at May 6, 1996.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HFS INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
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CURRENT ASSETS
Cash and cash equivalents $ 81,432 $ 16,109
Royalty accounts and notes receivable, net of
allowance for doubtful accounts 59,917 37,326
Marketing and reservation receivables, net of
allowance for doubtful accounts 35,829 22,297
Relocation receivables 44,043 51,180
Other current assets 35,060 21,304
Deferred income taxes 23,192 20,200
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Total current assets 279,473 168,416
Property and equipment, net 72,380 67,892
Franchise agreements, net 564,057 517,218
Excess of cost over fair value of net assets
acquired, net 411,090 356,754
Other assets 71,148 55,528
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TOTAL ASSETS $1,398,148 $1,165,808
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Accounts payable and other $ 101,990 $ 84,000
Income taxes payable 51,591 38,640
Current portion of long-term debt 2,352 2,249
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Total current liabilities 155,933 124,889
Long-term debt 554,373 300,778
Other liabilities 16,842 17,150
Deferred income taxes 82,800 82,800
Commitments and contingencies
Series A Adjustable Rate Preferred Stock of Century 21 -- 80,000
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 1,027 1,025
Additional paid-in capital 480,751 475,562
Retained earnings 106,422 83,604
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Total stockholders' equity 588,200 560,191
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,398,148 $1,165,808
========== ==========
-See notes to consolidated financial statements-
2
HFS INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
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1996 1995
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REVENUE:
Franchise $ 95,001 $ 66,155
Other 29,544 7,998
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Total revenue 124,545 74,153
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EXPENSES:
Marketing and reservation 31,618 29,357
Selling, general and administrative 26,354 8,086
Ramada license fee 4,889 4,513
Depreciation and amortization 10,186 6,556
Interest 5,995 5,099
Other 5,883 102
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Total expenses 84,925 53,713
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Income before income taxes and minority interest 39,620 20,440
Provision for income taxes 16,006 8,378
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Income before minority interest 23,614 12,062
Minority interest - preferred dividend 796 --
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Net income $ 22,818 $ 12,062
======== ========
SHARE INFORMATION (FULLY DILUTED):
Net income per share $ .20 $ .12
======== ========
Weighted average common and common
equivalent shares outstanding 121,088 102,556
======== ========
-See notes to consolidated financial statements-
3
HFS INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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(In thousands)
Common Stock Additional
-------------------------- Paid In Retained
Shares Amount Capital Earnings Total
-------- --------- ----------- ----------- -----------
Balance, January 1, 1996 102,539 $ 1,025 $ 475,562 $ 83,604 $ 560,191
Exercise of stock options 236 2 2,215 -- 2,217
Tax benefit from exercise
of stock options -- -- 2,882 -- 2,882
Conversion of 4 1/2% Notes 5 -- 92 -- 92
Net income -- -- -- 22,818 22,818
-------- --------- ----------- ----------- ----------
Balance, March 31, 1996 102,780 $ 1,027 $ 480,751 $ 106,422 $ 588,200
======== ========= =========== =========== ==========
-See notes to consolidated financial statements-
4
HFS INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
THREE MONTHS ENDED
MARCH 31,
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1996 1995
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OPERATING ACTIVITIES:
Net income $ 22,818 $ 12,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, including
amortization of deferred financing costs 10,556 6,870
Decrease in accured acquisition obligations (8,239) (1,826)
Changes in operating assets and liabilities
and other (13,053) (8,110)
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Net cash provided by operating activities 12,082 8,996
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INVESTING ACTIVITIES:
Property and equipment additions (7,075) (2,191)
Loans and investments (10,000) (12,827)
Net assets acquired, exclusive of cash acquired (99,959) --
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Net cash used in investing activities (117,034) (15,018)
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FINANCING ACTIVITIES:
Redemption of Series A Preferred Stock (80,000) --
Principal payments - long-term debt (545) (415)
Issuance of common stock 2,217 1,347
Proceeds from borrowings, net 248,603 4,808
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Net cash provided by financing activities 170,275 5,740
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Net increase (decrease) in cash and cash equivalents 65,323 (282)
Cash and cash equivalents, beginning of period 16,109 5,956
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Cash and cash equivalents, end of period $ 81,432 $ 5,674
========= =========
-See notes to consolidated financial statements-
5
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Basis of Presentation
The consolidated balance sheet of HFS Incorporated (the "Company") as
of March 31, 1996, the consolidated statements of income and cash flows
for the three months ended March 31, 1996 and 1995 and the consolidated
statement of stockholders' equity for the three months ended March 31,
1996 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring items. The
Company engages in the business of franchising guest lodging facilities
(lodging segment) and real estate brokerage offices (real estate
segment). The principal sources of lodging segment revenue are based upon
the annual gross room revenue of franchised properties. The principal
sources of real estate segment revenue are based upon franchisee gross
commission revenue from real estate sales. As a result, the Company
experiences seasonal revenue patterns similar to those of the hotel and
real estate industries wherein the summer months produce higher revenue
than other periods of the year. Accordingly, the first and fourth
quarters are traditionally weaker than the second and third quarters and
interim results are not necessarily indicative of results for a full
year.
The consolidated financial statements include the accounts and
transactions of all wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements of the Company include the assets and
liabilities of Ramada Franchise Systems, Inc., an entity controlled by
the Company by virtue of its ownership of 100% of the common stock of
such entity. The assets of Ramada Franchise Systems, Inc. are not
available to satisfy the claims of any creditors of the Company or any of
its other affiliates, except as otherwise specifically agreed by Ramada
Franchise Systems, Inc.
The consolidated financial statements and notes are presented as
required by Form 10-Q and do not contain certain information included in
the Company's annual consolidated financial statements. The December 31,
1995 consolidated balance sheet was derived from the Company's audited
financial statements. This Form 10-Q should be read in conjunction with
the Company's consolidated financial statements and notes thereto,
incorporated by reference in the 1995 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform with classifications used in 1996.
2. Acquisitions
The following completed or pending acquisitions were or will be
accounted for using the purchase method of accounting. Accordingly,
assets acquired and liabilities assumed were or will be recorded at their
estimated fair values. The results of operations of acquisitions
completed during the three months ended March 31, 1996 have been included
in the Company's consolidated results since the respective dates of
acquisition.
A. TRAVELODGE - On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system ("Travelodge") in North
America , including the Travelodge(R) and Thriftlodge(R) service marks
and the franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3
million.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 20 Travelodge motels from FHI for
6
$32.3 million. MOA, a significant Company franchisee, entered into twenty
year Travelodge and Ramada franchise agreements for nineteen and one
acquired motels, respectively. The Company financed $10 million of MOA's
purchase price under a $10 million revolving credit facility, bearing
interest at 14% per annum. The loan is guaranteed by a parent company of
MOA and secured by approximately 80% of MOA's outstanding common stock.
In addition, National Lodging Corp. ("NLC"), formerly National Gaming
Corp., a former wholly owned Company subsidiary which was distributed to
the Company shareholders on November 22, 1994 (the "Distribution Date"),
purchased all of the capital stock of FHI for $98.4 million. FHI owned or
had an interest in 112 hotel and motel properties at the acquisition
date. In connection with NLC's acquisition, the Company guaranteed $75
million of NLC borrowings under a $125 million revolving credit facility
entered into by NLC with certain banks. The Company is to be paid a
guarantee fee of 2% per annum of the outstanding guarantee commitment by
the Company pursuant to a financing agreement entered into between NLC
and the Company at the Distribution Date (the "Financing Agreement"). The
Financing Agreement was modified to provide expressly for the guaranty of
such NLC borrowings. The Company and NLC terminated or modified other
agreements entered into with NLC at the Distribution Date, including a
gaming related marketing services agreement and an advisory agreement.
NLC paid the Company an advisory fee of approximately $2 million in
January 1996 in connection with NLC's acquisition of FHI.
B. ERA - On February 12, 1996, the Company purchased the assets
comprising the Electronic Realty Associates ("ERA") residential real
estate brokerage franchise system for approximately $38.0 million. The
Company has also entered into an agreement to purchase the ERA affiliates
which conduct the ERA home warranty business in eight states for $9.2
million, subject to certain working capital adjustments. The purchase of
these affiliates is subject to the approval of certain state insurance
authorities and is expected to be completed during the second quarter of
1996.
C. CENTURY 21 NON-OWNED REGIONS - During the second quarter of 1996,
the Company purchased from four independent master licensees, the six
U.S. non-owned Century 21 regions ("Century 21 NORS") consisting of more
than 1,000 franchised real estate offices. The aggregate purchase price
was $95 million in cash and approximately 0.9 million shares of Company
common stock.
D. PENDING ACQUISITION OF COLDWELL BANKER - On May 2, 1996, the
Company entered into an agreement to acquire by merger (the "Merger")
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross
revenue producing residential real estate company in North America and a
leading provider of corporate relocation services. The Company agreed to
pay $640 million in cash for all of the outstanding capital stock of
Coldwell Banker and to repay approximately $100 million of indebtedness
of Coldwell Banker. The aggregate purchase price for the transaction will
be financed through the sale of Company common stock (see Note 5). While
completion of this transaction is not assured, the Company expects that
the transaction will be completed on or about May 31, 1996. The Merger,
if consummated, will be accounted for under the purchase method of
accounting.
Immediately following the closing of the Merger, the Company expects
to convey Coldwell Banker's 318 owned real estate brokerage offices (the
"Owned Brokerage Business") to an independent trust (the "Trust")
governed by independent trustees. The Company expects to incur
approximately $16 million of restructuring expenses ($11.6 million net of
tax) related to the contribution to the Trust and relocation of Company
headquarters in the second quarter of 1996.
7
Pro Forma Information:
The following information reflects the comparative pro forma
statements of operations of the Company for the three months ended March
31, 1996 and 1995 assuming the following transactions occurred on January
1, 1995: (i) the August 1, 1995 acquisition of Century 21 Real Estate
Corporation ("Century 21"); (ii) the acquisition by merger in May 1995 of
Casino & Credit Services, Inc.'s gambling patron credit information
business, Central Credit Inc. ("CCI"); (iii) the acquisitions of
Travelodge, ERA and the Century 21 NORS; (iv) the Merger; (v) proceeds
from the proposed May 1996 offering of Company common stock (see Note 5)
and the February 22, 1996 issuance of $240 million of 4 3/4% convertible
senior notes due 2003 (the "4 3/4% Notes") to the extent such proceeds
were used or are expected to be used to finance acquisitions. The
acquisitions have been or will be accounted for using the purchase method
of accounting. Accordingly, assets acquired and liabilities assumed will
be recorded at their estimated fair values, which are subject to further
refinement, based upon appraisals and other analyses with appropriate
recognition given to the effect of current interest rates and income
taxes. The pro forma results are not necessarily indicative of the
results of operations that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that
may occur in the future. The underlying pro forma information includes
the amortization expense associated with the assets acquired, the
reflection of the Company's financing arrangements, the elimination of
redundant costs and the related income tax effects. The August 31, 1995
acquisition of the Knights Inn franchise system is immaterial and
therefore is not reflected in the 1995 pro forma statement of operations.
March 31,
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(000's, except net income per share) 1996 1995
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Revenue $ 181,829 $ 159,998
Income before income taxes and minority interest 51,625 32,335
Net income 30,025 18,159
Net income per share (fully diluted) .23 .15
Weighted average common and common equivalent shares
outstanding (fully diluted) 135,711 131,921
3. Income Taxes
The effective income tax rate is based on estimated annual taxable
income and other factors.
4. Earnings per Share
Earnings per share for the three months ended March 31, 1996 and 1995
are based upon the weighted average number of common and common
equivalent shares outstanding during the respective periods. The $240
million 4 3/4% Notes issued in February 1996 are antidilutive for the
three months ended March 31, 1996 and, accordingly, are not included in
the computation of earnings per share for 1996. The $150 million 4 1/2%
convertible senior notes (the "4 1/2% Notes") issued in October 1994 are
antidilutive for the three months ended March 31, 1995 and, accordingly,
are not included in the computation of earnings per share for 1995. For
purposes of calculating earnings per share, interest expense, including
amortization of deferred financing costs (net of taxes) associated with
the 4 1/2% Notes has been added back to net income.
5. Stockholders' Equity
A. AUTHORIZED SHARES - On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock
to 300 million.
8
B. PENDING PUBLIC OFFERING - On May 9, 1996, the Company filed a
prospectus supplement pursuant to an effective Registration Statement on
Form S-3 for the public offering of approximately 15 million shares of
Company common stock (the "Offering"). Net proceeds from the Offering will
be used to finance the acquisition of Coldwell Banker and for general
corporate purposes. The Offering is expected to be completed in May 1996.
6. Long-Term Debt
On February 22, 1996, the Company completed the public offering of
the 4 3/4% Notes, which are convertible at the option of the holder at any
time prior to maturity into 14.993 shares of the Company's common stock
per $1,000 principal amount of the 4 3/4% Notes, representing a conversion
price of $66.70 per share. The 4 3/4% Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after March 3, 1998
at redemption prices decreasing from 103.393% of principal at March 3,
1998 to 100% of principal at March 3, 2003. However, on or after March 3,
1998 and prior to March 3, 2000, the 4 3/4% Notes will not be redeemable
at the option of the Company unless the closing price of the Company's
common stock shall have exceeded $93.38 per share (subject to adjustment
upon the occurrence of certain events) for 20 trading days within a period
of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4 3/4% Notes is payable semi-annually
commencing September 1, 1996.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
HFS Incorporated (the "Company") began 1996 as the world's largest franchisor
of lodging facilities and real estate brokerage offices. In 1996, the Company
continued to pursue its strategy of adding franchise brands to its existing
franchise infrastructure with several acquisitions including the pending
acquisition of Coldwell Banker Corporation ("Coldwell Banker"), the largest
gross revenue producing residential real estate company in North America and a
leading provider of relocation services. The Company continues to pursue
acquisitions and other strategic transactions in its two primary industries
and other franchise or franchisable businesses.
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Company revenue increased 68% ($50.4 million) to $124.5 million in the first
quarter of 1996 compared to $74.2 million in the first quarter of 1995.
Approximately $21.2 million of the increase represented incremental franchise
fees from the Company's real estate segment including revenue generated from
the CENTURY 21(R) and Electronic Realty Associates(R) (ERA(R)) franchise
systems which were acquired in August 1995 and February 1996, respectively.
Preferred vendor revenue also increased $9.8 million representing a 231%
increase.
LODGING
Lodging segment franchise fees and the royalty portion of franchise fees
increased $7.6 million (11.5%) and $6.0 million (19.6%), respectively, in
the first quarter of 1996 compared to the same period in 1995. Once
again, room growth represented the most significant revenue outcome
driver contributing to the increase. The Company added 57,061 rooms, net
of terminations, during the twelve months ended March 31, 1996,
representing a 13.4% increase from March 31, 1995. In the first quarter
of 1996 total system revenue per available room ("REVPAR") increased 3.5%
driven primarily by a 2.5% increase in total system average daily rate
from the first quarter 1995 to 1996. Additionally, the average royalty
rate for the first quarter of 1996 increased 2.4% when compared to the
same period in 1995.
REAL ESTATE
The real estate segment contributed $21.2 million of franchise fees for
the first quarter of 1996 including approximately $19.2 million from the
CENTURY 21 franchise system acquired in August 1995 and approiximately
$2.0 million from the ERA franchise system acquired on February 12, 1996.
OTHER
Other revenue was substantially comprised of fees from preferred vendor
arrangements, which consists of revenue generated from vendors seeking
access to the Company's franchisees and franchisees' customers. Preferred
vendor revenue increased $9.8 million (231%) from the first quarter of
1995 to the first quarter of 1996. Other revenue also includes $3.4
million of relocation services fees and $1.7 million of home warranty
product sales from businesses acquired in connection with the
acquisitions of CENTURY 21 and ERA franchise systems.
10
RESULTS OF OPERATIONS - EXPENSES AND INCOME
1Q96 VS 1Q95
Income before income taxes and minority interest increased $19.2 million
(94%) resulting from a $50.4 million increase in revenue net of a $31.2
million (58%) increase in expenses.
Selling, general and administrative expenses ("SG&A") increased $18.3
million for the first quarter of 1996 over the comparable period in 1995,
primarily as a result of $12.8 million of incremental expenses
attributable to real estate segment operations including CENTURY 21 and
ERA following their respective August 1995 and February 1996
acquisitions. The $2.3 million increase in marketing and reservation
expenses includes a $0.7 million increase in marketing fees from
franchised lodging properties and a $1.6 million contribution by the
Company to the CENTURY 21 National Advertising Fund ("NAF"), a dedicated
advertising fund for national and local marketing. Contractually, Century
21 is obligated to contribute 10% of net service fees received to the
NAF.
Depreciation and amortization for the first quarter of 1996 increased
$3.6 million when compared to the same period in 1995 which is primarily
attributable to amortization of fixed assets, franchise agreements and
excess of cost over fair value of net assets acquired ("goodwill") in
connection with the acquisitions of the CENTURY 21, ERA, Knights Inn(R)
and Travelodge(R) franchise systems and CCI and the issuance of Company
common stock in September 1995, pursuant to an earnout agreement entered
into with Bryanston Group, Inc. ("Bryanston"), an affiliate of the
sellers of the Days Inn(R) franchise system. Such issuance to Bryanston
resulted in additional goodwill and related amortization, commencing in
September 1995.
Interest expense for the first quarter of 1996 increased $0.9 million as
a result of increased borrowings due to the acquisition of Century 21
Real Estate Corporation ("Century 21") in 1995 and the acquisitions of
the ERA and Travelodge franchise systems in the first quarter of 1996,
reduced in part by the Company's lower average borrowing rate for
comparative periods. The Company's weighted average effective interest
rate decreased from 5.9% in the first quarter 1995 to 5.3% in the first
quarter of 1996 as a result of the issuance of $240 million 4 3/4%
Convertible Senior Notes ("4 3/4% Notes"). Outstanding borrowings at
March 31, 1996 were substantially comprised of fixed rate debt
securities.
PRO FORMA RESULTS OF OPERATIONS
The 65% ($11.9 million) increase in pro forma net income from the first
quarter of 1995 to 1996 primarily results from a $21.8 million increase
in revenue and only a $2.5 million increase in total expenses. The
revenue increase includes a $7.6 million (6.6%) increase in combined
lodging and real estate franchise fees. The increase in lodging segment
franchise fees resulted substantially from system growth during periods
of Company ownership and the increase in real estate segment franchise
fees resulted from increases in gross commission revenue from comparable
franchised brokerage offices. The increase in pro forma other income is
primarily attributable to the $9.8 million increase in the Company's
reported preferred vendor revenue, which excludes the pro forma benefits
that may be contributed from preferred vendors seeking access to the
Company's newly acquired franchisees.
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITIONS
COLDWELL BANKER - On May 2, 1996, the Company entered into an agreement
to acquire by merger Coldwell Banker for $640 million of cash plus
repayment of approximately $100 million of indebtedness. Coldwell
11
Banker franchises 2,164 brokerage offices and owns 318 residential real
estate brokerage offices ("Owned Brokerage Business") in the United
States, Canada and Puerto Rico, representing the third largest real
estate brokerage system in the United States. While completion of this
transaction is not assured, the Company expects that the transaction will
be completed on or about May 31, 1996.
The Company intends to finance the Coldwell Banker transaction with
proceeds from a public offering of approximately 15 million shares of its
common stock in May 1996. On May 9, 1996, the Company filed a prospectus
supplement to an effective shelf registration of up to $1.0 billion of
equity and debt securities. Proceeds in excess of the purchase price and
remaining availability under the shelf offering may be used for general
corporate purposes or future acquisitions and strategic transactions in
franchise or franchisable businesses. Immediately following the closing
of the merger, the Company expects to convey the Owned Brokerage Business
to an independent trust (the "Trust") governed by independent trustees.
The Company expects to incur approximately $16 million of restructuring
expenses ($11.6 million net of tax) related to the contribution of the
Trust and relocation of Company headquarters in the second quarter of
1996.
CENTURY 21 NON-OWNED REGIONS - During the second quarter of 1996, the
Company completed the acquisition of the six U.S. non-owned CENTURY 21
regions owned by four independent master licensees. The aggregate
purchase price consisted of approximately $95 million of cash and
approximately 0.9 million shares of the Company's common stock. These
regions represent more than 1,000 CENTURY 21 franchised real estate
offices in the United States and the acquisitions result in the Company
receiving royalty fees of up to 6% of franchisee gross commissions
generated by such offices compared to less than 1% previously received
under the master licensing agreements. The cash portion of the aggregate
purchase price was financed with proceeds from the issuance of the 4 3/4%
Notes.
ERA - On February 12, 1996, the Company purchased the assets comprising
the ERA residential real estate brokerage franchise system for
approximately $38.0 million and entered into an agreement to purchase ERA
affiliates which conduct the ERA home warranty business in eight states
for $9.2 million, subject to certain working capital adjustments. The
purchase price was financed by borrowings under the Company's revolving
credit facility and subsequently repaid with proceeds from the issuance
of the 4 3/4% Notes.
CENTURY 21 - On August 1, 1995, a majority-owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 from Metropolitan Life
Insurance Company ("MetLife") for an aggregate purchase price of $245
million plus expenses. The Company financed the $30 million contingent
portion of the purchase price and $80 million redemption of Century 21
redeemable preferred stock issued to MetLife prior to the acquisition
with proceeds from the 4 3/4% Notes.
TRAVELODGE - On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America,
including the Travelodge and Thriftlodge(R) service marks and franchise
agreements, from Forte Hotels, Inc. ("FHI") for $39.3 million. The
Company financed the acquisition with borrowings under its revolving
credit facility and repaid the borrowings with proceeds from the 4 3/4%
Notes.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge and Ramada franchise agreements for nineteen and one acquired
motels, respectively. The Company financed $10 million of MOA's purchase
price under a $10 million revolving credit facility, bearing interest at
14% per annum. The loan is guaranteed by the parent company of MOA and
secured by approximately 80% of MOA's outstanding common stock.
In addition, NLC purchased all of the capital stock of FHI for $98.4
million. FHI owned or had an interest in 112 hotel and motel properties
at the acquisition date. In connection with NLC's acquisition, the Company
12
guaranteed $75 million of NLC borrowings under a $125 million revolving
credit facility entered into by NLC with certain banks. The Company is to
be paid a guarantee fee of 2% per annum of outstanding guarantee
commitment by the Company pursuant to a Financing Agreement.
Concurrent with the acquisition of the Travelodge franchise system and
NLC's acquisition of FHI, the marketing and advisory agreements between
the Company and NLC were terminated. The corporate services agreement was
modified to provide that the Company is to provide financial and other
corporate administrative support and advisory services through September
1996 and thereafter advisory services through January 2019 for a fee of
$1.5 million per year. NLC paid the Company a $2.0 million advisory fee
in connection with NLC's acquisition of FHI.
FINANCING
During the Company's seasonally weakest quarter of cash flow, the Company
generated $12.1 million of cash flow from operations, representing a $3.1
million (34%) increase from the first quarter of 1995. First quarter 1996
cash flow from operations included $6.4 million of acquisition related
expenditures in excess of similar expenditures in the first quarter 1995.
First quarter 1996 also included $4.5 million of payments to real estate
franchisees under gross commission incentive programs which are remitted
once annually. Additional liquidity is available to the Company through a
revolving credit facility which provides up to a maximum of $300 million
and $200 million of unsecured borrowings through December 1996 and 1997,
respectively, at interest rates generally approximating LIBOR plus a
margin not to exceed 0.63% based on the Company's published credit rating
and percentage of facility utilized. At March 31, 1996, the Company had
$284.0 million of available borrowings under the revolving credit
facility.
Working capital at March 31, 1996 approximated $123.5 million,
representing an $80.0 million increase from December 31, 1995. The
increase in working capital is primarily a result of the excess proceeds
received from the issuance of the 4 3/4% Notes. Additionally, included in
working capital at March 31, 1995 is $44.0 million in relocation
receivables relating to the Company's relocation services business
acquired as part of the acquisition of Century 21. Outstanding relocation
receivables are guaranteed by client corporations and accordingly are, in
the opinion of the Company, subject to minimal risk.
On February 22, 1996, the Company completed the public offering of the 4
3/4% Notes, which are convertible at the option of the holder at any time
prior to maturity into 14.993 shares of the Company's common stock per
$1,000 principal amount of the 4 3/4% Notes, representing a conversion
price of $66.70 per share. The 4 3/4% Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after March 3,
1998 at a redemption price decreasing from 103.393% of principal at March
3, 1998 to 100% of principal at March 3, 2003. However, on or after March
3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not be
redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $93.38 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days
within a period of 30 consecutive trading days ending within five days
prior to redemption. Interest on the 4 3/4% Notes is payable
semi-annually commencing September 1, 1996. Standard & Poors Corporation
and Moody's Investors Service Inc. assigned investment grade ratings of
A- and Baa2, respectively to the 4 3/4% Notes and Standard & Poors
Corporation subsequently upgraded the credit rating for the Company's
existing public debt issues to A.
In 1994, the Company issued $150 million 4 1/2% Convertible Senior Notes
due 1999 (the "4 1/2% Notes") which are convertible at the option of the
holders into 55.106 shares of the Company's common stock per $1,000
principal amount of the 4 1/2% Notes, representing a conversion price of
$18.15 per share. The 4 1/2% Notes are redeemable at the option of the
Company in whole or in part at any time on or after October 1, 1997 at a
redemption price of 101.125% of principal if redeemed prior to September
30, 1998 or 100% of principal any time thereafter until maturity. The
Company also has outstanding $150 million 5 7/8% Senior Notes (the
13
"Senior Notes") due December 1998. Interest on each of the 4 1/2% Notes
and the Senior Notes is paid semi-annually.
Long-term debt, which consists primarily of publicly issued debt,
approximated $556.7 million at March 31, 1996 representing an increase of
approximately $253.7 million from December 31, 1995 primarily due to the
issuance of the 4 3/4% Notes. The weighted average stated interest rate
on long-term debt at March 31, 1996 was 5.0% compared to the weighted
average stated interest rate of 5.2% at December 31, 1995.
Capital expenditures approximating $7.1 million during the first quarter
of 1996 consisted primarily of the cost of software development and
computer equipment associated with a new transaction data base and
reporting system for Century 21 and additions and modifications to the
hotel brands' central reservation systems.
The Company believes that based upon its analysis of its financial
position, its cash flow during the past twelve months and the expected
results of operations in the future, operating cash flow, available
funding under the revolving credit facility and issuances of securities
in the capital markets, if appropriate, will be adequate to fund
operations, investments and acquisitions of other franchise related
businesses for the next twelve months.
14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company was held on January 22,
1996 and in connection therewith, proxies were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. At the meeting, the
following were voted upon and approved:
1. Approval and adoption of an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares
of Common Stock, par value $.01 per share, from 100,000,000 shares to
300,000,000 shares;
2. Approval of an amendment to the Company's Amended and Restated 1993
Stock Option Plan, as amended to date;
3. Approval of an incentive bonus arrangement with respect to Henry R.
Silverman, Chairman and Chief Executive Officer of the Company, and
4. Approval of an incentive bonus arrangement with respect to Robert W.
Pittman, a Director of the Company and Chief Executive Officer of
Century 21 Real Estate Corporation, a subsidiary of the Company.
The results of the voting on each such matter is as follows:
1. Increase in authorized stock:
For: 33,356,594 Against: 5,991,551
Abstained: 223,056
2. Amendment to Amended and Restated 1993 Stock Option Plan:
For: 28,715,011 Against: 8,892,398
Abstained: 226,607
3. Incentive bonus arrangement for Henry R. Silverman:
For: 37,651,797 Against: 1,661,884
Abstained: 257,520
4. Incentive bonus arrangement for Robert W. Pittman:
For: 37,913,655 Against: 1,400,841
Abstained: 256,705
There were no broker non-votes.
15
ITEM 5. OTHER INFORMATION
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated balance sheet as of March 31, 1996 is presented as
if the following transactions had occurred on March 31, 1996:
(1) the acquisition of the common stock of Coldwell Banker (the "Merger");
(2) the receipt of proceeds from an offering of the Company's common
stock (the "Offering") to the extent necessary to fund the
acquisition of Coldwell Banker and the related repayment of
indebtedness and acquisition expenses;
(3) the acquisition of the six non-owned Century 21 regions
("Century 21 NORS");
The pro forma statements of operations for the three months ended March 31,
1996 and 1995 are presented as if the above transactions and the acquisitions
of the Travelodge and ERA franchise systems and the February 22, 1996 issuance
of $240 million of 4 3/4% convertible senior notes due 2003 to the extent such
proceeds were used to finance these acquisitions, had occurred on January 1,
1995. The pro forma statement of operations for the three months ended March
31, 1995 is also presented as if the August 1, 1995 acquisition of Century 21
and the acquisition by merger (the "CCI Merger") in May 1995 of Casino &
Credit Services, Inc's gambling patron credit information business, Central
Credit Inc. ("CCI") had occurred on January 1, 1995.
The acquisitions have been 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 Company has entered into certain immaterial transactions
which are not reflected in the pro forma statements of operations.
The pro forma consolidated financial statements do not purport to present the
financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. In addition to the cost savings reflected in the pro
forma consolidated statement of operations, the pro forma consolidated
statement of operations does not reflect certain additional cost savings and
revenue enhancements that management believes may be realized following the
acquisitions. These savings are expected to be realized primarily through the
restructuring of franchise services of the acquired companies as well as
revenue enhancements expected through leveraging of the Company's preferred
vendor programs. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that actually will be realized. In addition,
there can be no assurance the Company will complete the acquisition of
Coldwell Banker, in which case the Company would retain the proceeds from the
Offering for general corporate purposes, including acquisitions.
The pro forma consolidated financial statements do not reflect approximately
$16 million of expenses which the Company expects to incur following the
acquisition of Coldwell Banker relating to the contribution of Coldwell
Banker's 318 owned real estate brokerage offices ("Owned Brokerage Business")
to an independent trust (the "Trust") and the relocation of Company
headquarters.
16
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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes thereto.
17
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
HISTORICAL
COLDWELL CENTURY 21 PRO FORMA
HFS BANKER NORS ADJUSTMENT (A) PRO FORMA
----------- ----------- --------- -------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 81,432 $ 23,149 $ 3,933 $ (99,832) $ 8,682
Royalty accounts and notes
receivable, net 59,917 11,045 7,776 (10,997) 67,741
Relocation receivables 44,043 83,670 - - 127,713
Marketing and reservation
receivables, net 35,829 - - - 35,829
Other current assets 35,060 4,742 738 792 41,332
Deferred income taxes 23,192 4,541 - (4,541) 23,192
----------- ----------- --------- ----------- -----------
Total current assets 279,473 127,147 12,447 (114,578) 304,489
Property and equipment-net 72,380 63,210 3,538 (41,748) 97,380
Franchise agreements-net 564,057 - - 11,000 575,057
Excess of cost over fair value of
net assets acquired-net 411,090 35,275 - 135,784 582,149
Intangible assets - Coldwell Banker - - - 702,935 702,935
Deferred income taxes - 9,503 - (9,503) 3,695
3,695
Other assets 71,148 11,020 4,522 (5,308) 81,382
----------- ----------- --------- ----------- -----------
Total $ 1,398,148 $ 246,155 $ 20,507 $ 682,277 $ 2,347,087
=========== =========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other
accrued liabilities $ 101,990 $ 112,952 $ 6,442 $ (43,465) $ 177,919
Income taxes payable 51,591 8,175 - (8,175) 51,591
Accrued acquisition obligations - - - 9,499 9,499
Current portion of long-term debt 2,352 33,370 35 (12,875) 22,822
----------- ----------- --------- ----------- -----------
Total current liabilities 155,933 154,497 6,477 (55,016) 261,891
----------- ----------- --------- ----------- -----------
Long-term debt 554,373 133,316 328 (133,063) 554,954
Other non-current liabilities 16,842 5,860 95 (2,555) 20,242
Deferred income taxes 82,800 - - - 82,800
STOCKHOLDERS' EQUITY
Common stock 1,027 58 77 11 1,173
Additional paid-in capital 480,751 59,124 104 779,626 1,319,605
Retained earnings (deficit) 106,422 (106,700) 13,426 93,274 106,422
----------- ----------- --------- ----------- -----------
Total stockholders' equity (deficit) 588,200 (47,518) 13,607 872,911 1,427,200
----------- ----------- --------- ----------- -----------
Total $ 1,398,148 $ 246,155 $ 20,507 $ 682,277 $ 2,347,087
=========== =========== ========= =========== ===========
- ---------------
Note: Certain reclassifications have been made to the historical balance
sheets of acquired companies to conform with the Company's
classification.
See notes to pro forma consolidated balance sheet and
statement of operations.
18
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
HISTORICAL
----------------------------------------------
COLDWELL 1996 PRO FORMA
HFS BANKER ACQUISITIONS(1) ADJUSTMENTS PRO FORMA
----------- ----------- --------------- ------------- ------------
REVENUE:
Franchise $ 95,001 $ 13,010 $ 8,899 $ 5,497 (B) $ 122,407
Owned brokerage - 112,283 - (112,283)(C) -
Relocation 2,960 20,537 719 - 24,216
Other 26,584 7,079 1,543 - 35,206
----------- ----------- ----------- ---------- -----------
Total revenue 124,545 152,909 11,161 (106,786) 181,829
----------- ----------- ----------- ----------- -----------
EXPENSES:
Marketing and reservation 31,618 - 1,050 - 32,668
Selling, general and administrative 26,354 6,991 8,636 (5,602)(D) 36,379
Ramada license fee 4,889 - - - 4,889
Owned brokerage - 117,507 - 117,507)(C) -
Depreciation and amortization 10,186 5,273 368 3,469 (E) 19,296
Interest 5,995 2,125 1,493 (2,343)(F) 7,270
Relocation 2,298 18,970 641 - 21,909
Other 3,585 3,444 764 - 7,793
----------- ----------- ----------- ---------- -----------
Total expenses 84,925 154,310 12,952 (121,983) 130,204
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest 39,620 (1,401) (1,791) 15,197 51,625
Provision (benefit) for income taxes 16,006 (556) - 5,354 (H) 20,804
----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest 23,614 (845) (1,791) 9,843 30,821
Minority interest-preferred dividend 796 - - - 796
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 22,818 $ (845) $ (1,791) $ 9,843 $ 30,025
=========== =========== =========== =========== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ .20 $ .23
=========== ===========
Weighted average common
and common equivalent
shares outstanding 121,088 14,623 (J) 135,711
=========== =========== ===========
- ---------------
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification
(1) Represents the acquisitions of the Travelodge and ERA franchise
systems and the Century 21 NORS (collectively, the "1996
Acquisitions").
See notes to pro forma consolidated balance sheet and statement of
operations.
19
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF 1996 ACQUISITIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
CENTURY 21
NORS TRAVELODGE(1) ERA (1) TOTAL
----------- ---------- ---------- ----------
REVENUE:
Franchise $ 5,936 $ 688 $ 2,275 $ 8,899
Relocation - - 719 719
Other 341 - 1,202 1,543
----------- ---------- ---------- ----------
Total revenue 6,277 688 4,196 11,161
----------- ---------- ---------- ----------
EXPENSES:
Marketing and
reservation 597 453 - 1,050
Selling, general and
administrative 6,061 99 2,476 8,636
Depreciation and
amortization 232 - 136 368
Interest 2 - 1,491 1,493
Relocation - - 641 641
Other - - 764 764
----------- ---------- ---------- ----------
Total expenses 6,892 552 5,508 12,952
----------- ---------- ---------- ----------
Income (loss) before
income taxes (615) 136 (1,312) (1,791)
Provision for income taxes - - - -
----------- ---------- ---------- ----------
Net income (loss) $ (615) $ 136 $ (1,312) $ (1,791)
=========== ========== ========== ==========
- ---------------
Note: Certain reclassifications have been made to the historical results of
the 1996 Acquisitions 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
statement of operations.
20
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
HISTORICAL
--------------------------------------------
COLDWELL ACQUIRED PRO FORMA
HFS BANKER COMPANIES ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ------------
REVENUE:
Franchise $ 66,155 $ 11,353 $ 32,855 $ 4,434 (B) $ 114,797
Owned brokerage - 94,337 - (94,337)(C) -
Relocation - 16,776 3,021 - 19,797
Other 7,998 4,971 12,435 - 25,404
----------- ----------- ----------- ---------- -----------
Total revenue 74,153 127,437 48,311 (89,903) 159,998
----------- ----------- ----------- ---------- -----------
EXPENSES:
Marketing and reservation 29,357 - 4,993 - 34,350
Selling, general and administrative 8,086 8,538 35,691 (14,477)(D) 37,838
Ramada license fee 4,513 - - - 4,513
Owned brokerage - 104,980 - (104,980)(C) -
Depreciation and amortization 6,556 5,934 3,183 2,612 (E) 18,285
Interest 5,099 1,486 2,168 (476)(F) 8,277
Relocation - 14,534 2,715 - 17,249
Other 102 2,872 4,454 (277)(G) 7,151
----------- ----------- ----------- --------- -----------
Total expenses 53,713 138,344 53,204 (117,598) 127,663
----------- ----------- ----------- --------- -----------
Income (loss) before income taxes and
minority interest 20,440 (10,907) (4,893) 27,695 32,335
Provision (benefit) for income taxes 8,378 (4,675) (356) 10,008 (H) 13,355
----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest 12,062 (6,232) (4,537) 17,687 18,980
Minority interest-preferred dividend - - - 821 (I) 821
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 12,062 $ (6,232) $ (4,537) $ 16,866 $ 18,159
=========== =========== =========== =========== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ .12 $ .15
=========== ===========
Weighted average common
and common equivalent
shares outstanding 102,556 29,365 (J) 131,921
=========== =========== ===========
- ---------------
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.
21
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
CENTURY 21
CCI CENTURY 21 NORS TRAVELODGE ERA TOTAL
--------- ----------- ---------- ----------
REVENUE:
Franchise $ - $ 18,940 $ 5,527 $ 3,763 $ 4,625 $ 32,855
Relocation 2,264 - - 757 3,021
Other 2,310 5,482 314 - 4,329 12,435
--------- ----------- ---------- ---------- --------- ---------
Total revenue 2,310 26,686 5,841 3,763 9,711 48,311
--------- ----------- ---------- ---------- --------- ---------
EXPENSES:
Marketing and
reservation - 1,802 536 2,655 - 4,993
Selling, general and
administrative - 23,162 5,488 543 6,498 35,691
Depreciation and
amortization 367 2,201 220 - 395 3,183
Interest - 1,329 15 2 822 2,168
Relocation - 2,000 - - 715 2,715
Other 1,332 - - - 3,122 4,454
--------- ----------- ---------- ---------- --------- ---------
Total expenses 1,699 30,494 6,259 3,200 11,552 53,204
--------- ----------- ---------- ---------- --------- ---------
Income (loss) before
income taxes 611 (3,808) (418) 563 (1,841) (4,893)
Provision (benefit)
for income taxes 217 (805) - 232 - (356)
--------- ------------ ----------- ---------- --------- ----------
Net income (loss) $ 394 $ (3,003) $ (418) $ 331 $ (1,841) $ (4,537)
========= ============ ============ ========== ========= ==========
- ---------------
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.
22
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITIONS OF COLDWELL BANKER AND THE CENTURY 21 NORS:
The purchase price for the Coldwell Banker and the Century 21 NORS
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.
The Company will acquire Coldwell Banker and the Century 21 NORS for
the following consideration ($000's):
COLDWELL CENTURY 21
BANKER NORS TOTAL
---------- ---------- --------
Cash consideration (i) $ 792,000 $ 94,980 $ 886,980
Issuance of approximately 0.9 million
shares of Company common stock - 46,000 46,000
----------- ---------- ---------
TOTAL PRO FORMA ACQUISITION COST 792,000 140,980 932,980
----------- ---------- ---------
Fair value of net assets acquired:
Historical book value of acquired companies (47,518) 13,607 (33,911)
Elimination of net assets (liabilities) not acquired
or assumed:
Cash and cash equivalents (1,919) (3,933) (5,852)
Accounts and notes receivable (3,221) (7,776) (10,997)
Deferred income taxes, current (4,541) -- (4,541)
Other current assets 1,530 (738) 792
Property and equipment (38,210) (3,538) (41,748)
Deferred income taxes, non current (9,503) -- (9,503)
Other assets (786) (4,522) (5,308)
Accounts payable and other 37,023 6,442 43,465
Income taxes payable 8,175 -- 8,175
Current portion of long-term debt 12,840 35 12,875
Long-term debt 132,735 328 133,063
Other non-current liabilities 2,460 95 2,555
Fair value of assets acquired and liabilities assumed:
Deferred income taxes - non-current (ii) -- 3,695 3,695
Franchise agreements -- 11,000 11,000
Accrued acquisition liabilities -- (9,499) (9,499)
----------- ---------- ---------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED 89,065 5,196 $94,261
----------- ---------- =========
Intangible assets - Coldwell Banker (iii) $ 702,935 $ 702,935
=========== =========
Excess of cost over fair value of net
assets acquired $ 135,784 $135,784
========== =========
(i) The adjustment reflects $640,000 for the acquisition of
Coldwell Banker, $20,000 of related expenses and repayment
of $132,000 of indebtedness of Coldwell Banker outstanding
as of March 31, 1996. The Company expects that $100,000 of
such indebtedness will be outstanding and repaid upon
consummation of the merger.
(ii) The pro forma adjustment to deferred income taxes recorded
in connection with the acquisitions results from differences
in the fair values of assets acquired and liabilities
assumed and their respective income taxes bases.
(iii) The Company has not completed the valuation of franchise
agreements and other identifiable intangible assets.
23
A. ACQUISITIONS OF COLDWELL BANKER AND CENTURY 21 NORS: (CONTINUED)
The pro forma adjustments include the elimination of Coldwell Banker and
Century 21 NORS stockholders' net deficit, the issuance of approximately
13.7 million shares to finance the acquisition of Coldwell Banker and
approximately 923,000 shares in connection with the acquisition of
certain Century 21 NORS entities. The number of shares of Company common
stock issued in connection with the acquisition of Coldwell Banker
assumes a market value of Company common stock of $60.00 per share and
expenses related to the Offering approximating $29.0 million. 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 $ 146 $ 838,854 $ - $ 839,000
Elimination of Coldwell Banker
stockholders' net deficit (58) (59,124) 106,700 47,518
Elimination of Century 21 NORS
stockholders' net deficit (77) (104) (13,426) (13,607)
---------- ----------- ----------- -----------
Adjustment to stockholders' equity $ 11 $ 779,626 $ 93,274 $ 872,911
========= =========== =========== ===========
B. FRANCHISE REVENUE:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations,
the elimination of franchise revenue paid by the Century 21 NORS to
Century 21 under sub-franchise agreements and the addition of franchise
fees to be received under franchise contracts to be executed with owned
brokerage offices upon contribution of the Owned Brokerage Business to
the Trust. Pro forma adjustments to franchise revenue consists of the
following:
For the Three Months Ended
March 31,
----------------------------
Eliminate: 1996 1995
---------- ---------
Discontinued operations $ - $ (17)
Century 21 revenue included as Century 21 NORS
(1996 acquisitions) SG&A (878) (823)
Add :
Franchise fees from Owned Brokerage Business 6,375 5,274
---------- ----------
Total $ 5,497 $ 4,434
========== ==========
C. OWNED BROKERAGE REVENUE AND EXPENSES:
The pro forma adjustments reflect the elimination of revenue and
expenses for Coldwell Banker's 318 owned offices involved in the Owned
Brokerage Business. The Company intends to contribute the Owned
Brokerage Business following the acquisition of Coldwell Banker by
contributing corresponding net assets to the Trust. 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.
24
D. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
The pro forma adjustments eliminate redundant costs associated with the
restructuring of franchise services and the resulting termination of
certain functions and positions in connection with Company acquisitions.
Adjustments are comprised of the following ($000's):
For the three months ended March 31, 1996:
COLDWELL CENTURY 21
BANKER NORS TRAVELODGE ERA TOTAL
---------- ----------- ----------- --------- --------
Payroll and related $ - $ 2,147 $ 25 $ 222 $ 2,394
Professional 420 569 4 - 993
Occupancy - 519 4 102 625
Conventions and
meetings - 420 - 420
Franchise fees
(see Note B) - 878 - 878
Other (372) 503 4 157 292
---------- ----------- ------- --------- --------
TOTAL $ 48 $ 5,036 $ 37 $ 481 $ 5,602
========== =========== ======= ========= ========
For the three months ended March 31, 1995:
COLDWELL CENTURY 21
CENTURY 21 BANKER NORS TRAVELODGE ERA TOTAL
------------ ---------- ----------- ----------- --------- -------
Payroll and related $ 4,665 $ - $ 1,623 $ 139 $ 462 $ 6,889
Professional 1,154 608 423 19 - 2,204
Occupancy 1,555 - 666 23 222 2,466
Conventions and
meetings 558 - 405 - - 963
Franchise fees
(see Note B) - - 823 - - 823
Other 781 (418) 523 22 224 1,132
----------- --------- --------- ------- --------- --------
TOTAL $ 8,713 $ 190 $ 4,463 $ 203 $ 908 $ 14,477
=========== ======== ========= ======= ========= ========
E. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised
of ($000's):
For the three months ended March 31, 1996:
COLDWELL 1996
BANKER ACQUISITIONS TOTAL
-------- ------------ -------
Elimination of historical
expense $ (5,273) $ (368) $(5,641)
Property and equipment 293 - 293
Excess of cost over fair value
of net assets acquired - 945 945
Intangible assets-Coldwell Banker 7,382 - 7,382
Franchise agreements - 490 490
-------- ----------- --------
Total $ 2,402 $ 1,067 $ 3,469
======== =========== ========
25
For the three months ended March 31, 1995:
CCI COLDWELL 1996
MERGER CENTURY 21 BANKER ACQUISITIONS TOTAL
------- ---------- -------- ------------ ------
Elimination of historical
expense $ (367) $ (2,201) $(5,934) $ (615) $ (9,117)
Property and equipment 69 196 293 - 558
Information data base 260 - - - 260
Excess of cost over fair value
of net assets acquired 201 875 - 1,026 2,102
Intangible assets-Coldwell Banker - - 7,382 - 7,382
Franchise agreements - 698 - 729 1,427
-------- ----------- -------- ------------ --------
Total $ 163 $ (432) $ 1,741 $ 1,140 $ 2,612
======== =========== ======== ============ ========
CCI Merger
The estimated fair values of CCI's information data base, property
and equipment and excess of cost over fair value of net assets acquired
are $7.5 million, $1.0 million and $33.8 million, respectively, and are
amortized on a straight-line basis over the periods to be benefited
which are ten, five and forty years, respectively. The benefit periods
associated with the excess cost over fair value of net assets acquired
were determined based on CCI's position as the dominant provider of
gambling patron credit information services since 1956, its ability to
generate operating profits and expansion of its customer base and the
longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment,
franchise agreements and excess cost over fair value of net assets
acquired are $5.5 million, $33.5 million and $140.0 million,
respectively, and are amortized on a straight-line basis over the
periods to be benefited which are seven, twelve and forty years,
respectively. The benefit periods associated with the excess cost over
fair value of net assets acquired were determined based on Century 21's
position as the world's largest franchisor of residential real estate
brokerage offices, the most recognized brand name in the residential
real estate brokerage industry and the longevity of the residential real
estate brokerage business.
Coldwell Banker
The estimated fair values of Coldwell Banker's property and
equipment of $25 million is amortized over the estimated average benefit
period of seven to twenty-five years.
The Company has not completed its valuation of franchise agreements
and therefore has not determined the amount of costs in excess of fair
value of net identifiable assets acquired. However, based on a
preliminary analysis, the Company believes that the aggregate
intangibles will have a benefit period of twelve to forty years. For
purposes of the pro forma financial statements, an estimated average
life of twenty-five years was used to calculate the amortization
expense.
26
1996 Acquisitions
The estimated fair value of franchise agreements acquired in
connection with the acquisition of Century 21 NORS, Travelodge and ERA
aggregate $61.0 million and is being amortized on a straight line basis
over the periods to be benefited, which ranges from twelve to thirty
years. The estimated fair value of 1996 Acquisitions excess of cost over
fair value of net assets acquired aggregate $164.2 million and is each
being amortized on a straight line basis over the period to be benefited
which is forty years.
F. INTEREST EXPENSE:
For the Three Months Ended
March 31,
------------------------------
1996 1995
----------- -----------
Elimination of historical interest expense of
1996 Acquisitions and Century 21 $ (1,493) $ (2,168)
Reversal of Coldwell Banker (2,125) (1,486)
Century 21 - 945
4 3/4% Notes 1,275 2,233
----------- ----------
TOTAL $ (2,343) $ (476)
============ ==========
Century 21
The pro forma adjustment reflects the recording of interest expense
on $60 million of borrowings under the Company's revolving credit
facility at an interest rate of 6.3%. Borrowings represent the amount
necessary to finance the initial cash purchase price net of $10.2
million of acquired cash.
Coldwell Banker
The pro forma adjustment reflects the reversal of interest expense
relating to the following ($000's):
For the Three Months Ended
March 31,
----------------------------
1996 1995
---------- -----------
Expense associated with the Owned Brokerage Business $ (59) $ 24
Expense associated with revolving credit facility borrowings
which will be repaid with proceeds from the Offering 2,184 1,462
---------- -----------
Total $ 2,125 $ 1,486
========== ===========
4 3/4% Notes
The pro forma adjustment reflects interest expense and amortization
of deferred financing costs related to the February 22, 1996 issuance of
the 4 3/4% Notes to the extent that such proceeds were used to finance
the 1996 Acquisitions.
27
G. OTHER EXPENSES:
The pro forma adjustment eliminates $277,000 of accounting, legal and
other administrative expenses allocated to CCI which would not have been
incurred by the Company.
H. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
For the Three Months Ended
March 31,
------------------------------
1996 1995
----------- -----------
Reversal of historical (provision) benefit of:
Company $ (16,006) $ (8,378)
CCI - (217)
Century 21 - 805
Coldwell Banker 556 4,675
Travelodge - (232)
Pro forma provision 20,804 13,355
----------- ----------
Incremental provision for income taxes $ 5,354 $ 10,008
=========== ==========
The pro forma effective tax rates approximates the Company's
historical effective tax rates.
I. 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 4.7%
dividend rate.
28
J. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
For the Three Months Ended
March 31,
------------------------------
1996 1995
------------- -----------
CCI - 2,476
Century 21 - 4,000
Coldwell Banker 13,700 13,700
Century 21 NORS 923 923
Assumed conversion of the $150 million
4 1/2% convertible senior notes due 1999 - 8,266
------------ -----------
Total 14,623 29,365
============ ===========
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.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C-21
Holding Corp., Century 21 Real Estate of the Mid-Atlantic States, Inc. and George F.
Kettle
2.2 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C21
Holding Corp., Century 21 of Eastern Pennsylvania, Inc., George F. Kettle and James
O. Nelson
2.3 Agreement and Plan of Merger and Reorganization dated as of April 15, 1996 among
the Registrant, Century 21 Region V, Inc. and Yeager Real Estate and Financial
Services, Inc.
2.4 Agreement and Plan of Merger dated as of May 1, 1996 among the Registrant, CBC
Acquisition Corp., Fremont Investors, Inc. and Coldwell Banker Corporation
10.1 Asset Purchase Agreement dated as of April 2, 1996 among Century 21 Real Estate of
Southern Florida, Inc., the Registrant and Richard C. Ritchey.
10.2 Asset Purchase Agreement dated as of April 3, 1996 among Century 21 Real Estate
Corporation, the Registrant, Century 21 of the Southwest, Inc. and Larry E. Bryson.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 16,
1996 which included, as exhibits, the financial statements of
businesses acquired or to be acquired in order to incorporate such
exhibits in the Company's Registration Statement on Form S-3,
originally filed with the Commission on December 21, 1994 (File
number 33-87830)
.
30
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HFS INCORPORATED
BY: /s/ James E. Buckman
-----------------------------------------
James E. Buckman
Executive Vice President
Date: May 15, 1996 And General Counsel
BY: /s/ Stephen P. Holmes
-----------------------------------------
Stephen P. Holmes
Executive Vice President
Date: May 15, 1996 And Chief Financial Officer
(Principal Financial Officer
And Principal Accounting Officer)
31
EXHIBIT INDEX
PAGE
----
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant,
C-21 Holding Corp., Century 21 Real Estate of the Mid-Atlantic States, Inc.
and George F. Kettle
2.2 Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant,
C21 Holding Corp., Century 21 of Eastern Pennsylvania, Inc., George F. Kettle
and James O. Nelson
2.3 Agreement and Plan of Merger and Reorganization dated as of April 15, 1996
among the Registrant, Century 21 Region V, Inc. and Yeager Real Estate and Financial
Services, Inc.
2.4 Agreement and Plan of Merger dated as of May 1, 1996 among the Registrant, CBC
Acquisition Corp., Fremont Investors, Inc. and Coldwell Banker Corporation
10.1 Asset Purchase Agreement dated as of April 2, 1996 among Century 21 Real Estate
of Southern Florida, Inc., the Registrant and Richard C. Ritchey.
10.2 Asset Purchase Agreement dated as of April 3, 1996 among Century 21 Real Estate
Corporation, the Registrant, Century 21 of the Southwest, Inc. and Larry E. Bryson.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
33