INDEX TO PRO FORMA FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS
Section A: Pro forma consolidated financial statements of HFS for the
Acquisition of Coldwell Banker as of and for the year ended
December 31, 1995.
Section B: Pro Forma consolidated financial information of HFS as of and
for the year ended December 31, 1995 excluding the Acquisition
of Coldwell Banker and including the acquisitions of
the six United States non-owned Century 21 regions ("Century
21 NORS"), the Travelodge (registered trademark) and
Electronic Realty Associates (registered trademark) ("ERA
(registered trademark)") franchise systems, (collectively, the
"1996 Acquisitions") and the proceeds from the February 22,
1996 issuance of $240 million of 4 3/4% convertible senior
notes (the "4 3/4% Notes") due 2003, to the extent such
proceeds were used to finance the 1996 acquisitions. The pro
forma statement of operations for the year ended December 31,
1995 is presented as if (i) the August 1, 1995 acquisition of
Century 21; (ii) the 1996 Acquisitions, (iii) 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"); and (iv) the issuance of the
4 3/4% Notes occurred on January 1, 1995.
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE ACQUISITION OF COLDWELL BANKER
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the following transactions had occurred on December 31,
1995:
(1) the acquisition by merger of Coldwell Banker Corporation
("Coldwell Banker");
(2) the receipt of proceeds from the offering of 12,500,000 shares
of the Company's Common Stock (the "Common Stock"), to the
extent necessary to finance the acquisition of Coldwell Banker and
the related repayment of indebtedness of Coldwell
Banker and to pay acquisition expenses.
The pro forma consolidated statement of operations for the year ended
December 31, 1995 is presented as if the above transactions had occurred
on January 1, 1995.
The pro forma financial statements consolidate the effects of the above
transactions with the pro forma financial results of HFS prior to the effect
of such transactions. The pro forma financial results of HFS include all of
HFS' acquisitions prior to the Coldwell Banker 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 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. The pro forma consolidated statement of operations does
not reflect cost savings and revenue enhancements that management believes may
be realized following the acquisition. 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 do not reflect
approximately $5.0 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.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statement of Operations and should be read in conjunction
therewith and with the consolidated financial statements and related notes of
the Company included in its Annual Report on Form 10-K.
1
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
Historical Pro Forma
Pro Forma Coldwell Pro Forma For Acquired
HFS(1) Banker Adjustments(A) Company
--------- ---------- -------------- ------------
ASSETS
Current assets
Cash and cash equivalents .................. $ 16,109 $ 21,449 $ (18,853) $ 18,705
Royalty accounts and notes receivable, net 41,052 12,499 (3,032) 50,519
Relocation receivables ..................... 51,180 47,313 -- 98,493
Marketing and reservation receivables, net 22,297 -- -- 22,297
Other current assets ....................... 21,875 4,686 1,453 28,014
Deferred income taxes ...................... 20,200 4,818 (4,818) 20,200
----------- ---------- ----------- ------------
Total current assets ........................ 172,713 90,765 (25,250) 238,228
Property and equipment, net ................. 67,892 63,230 (41,532) 89,590
Franchise agreements, net ................... 578,218 -- 437,200 1,015,418
Excess of cost over fair value of net assets
acquired, net .............................. 520,971 37,091 312,161 870,223
Intangible assets -- Coldwell Banker ....... -- -- -- --
Deferred income taxes ....................... 8,445 9,551 (9,551) 8,445
Other assets ................................ 60,357 9,292 (759) 68,890
----------- ---------- ----------- ------------
Total ....................................... $1,408,596 $ 209,929 $ 672,269 $ 2,290,794
=========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities ............................... $ 80,260 $ 122,617 $ (31,050) $ 171,827
Income taxes payable ....................... 38,640 9,002 (9,002) 38,640
Accrued acquisition obligations ............ 25,448 -- 23,000 48,448
Current portion of long-term debt .......... 2,249 37,425 (721) 38,953
----------- ---------- ----------- ------------
Total current liabilities ................... 146,597 169,044 (17,773) 297,868
----------- ---------- ----------- ------------
Long-term debt .............................. 475,858 84,905 (84,286) 476,477
Other non-current liabilities ............... 17,150 2,653 (2,596) 17,207
Deferred income taxes ....................... 82,800 -- -- 82,800
Series A Adjustable Rate
Preferred Stock of Century 21 .............. 80,000 -- -- 80,000
STOCKHOLDERS' EQUITY
Common Stock - Issued and Outstanding;
Pro Forma HFS. 103,462 and Pro Forma for
Acquired Company ......................... 1,035 58 67 1,160
Additional paid-in capital ................. 521,552 59,124 671,002 1,251,678
Retained earnings (deficit) ................ 83,604 (105,855) 105,855 83,604
----------- ---------- ----------- ------------
Total stockholders' equity (deficit) ....... 606,191 (46,673) 776,924 1,336,442
----------- ---------- ----------- ------------
Total ....................................... $1,408,596 $ 209,929 $ 672,269 $ 2,290,794
=========== ========== =========== ============
- ------------
(1) Pro Forma for all material transactions, excluding the Coldwell Banker
acquisition (See section B).
See notes to pro forma consolidated balance sheet
and statement of operations.
2
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
Pro Forma Coldwell Pro Forma For Acquired
HFS(1) Banker Adjustments Company
---------- ---------- ----------- ------------
REVENUE:
Franchise ........................... $ 484,914 $ 68,064 $ 30,507 (B) $ 583,485
Owned brokerage business ............ -- 535,207 (535,207)(C) --
Relocation services ................. -- 75,866 -- 75,866
Other ............................... 88,107 20,264 (4,421)(C) 103,950
---------- ----------- ---------- -----------
Total revenue ..................... 573,021 699,401 (509,121) 763,301
---------- ----------- ---------- -----------
EXPENSES:
Marketing and reservation ........... 164,961 -- -- 164,961
Selling, general and administrative 156,895 32,367 -- 189,262
Ramada license fee .................. 18,911 -- -- 18,911
Owned brokerage ..................... -- 521,376 (521,376)(C) --
Depreciation and amortization ...... 44,376 22,425 (882)(D) 65,919
Interest ............................ 34,315 5,329 (5,329)(E) 34,315
Relocation .......................... -- 62,439 -- 62,439
Other ............................... 23,257 -- -- 23,257
---------- ----------- ---------- -----------
Total expenses .................... 442,715 643,936 (527,587) 559,064
---------- ----------- ---------- -----------
Income before income taxes............ 130,306 55,465 18,466 204,237
Provision for income taxes ........... 54,042 24,385 5,483 (F) 83,910
---------- ----------- ---------- -----------
Net Income ........................... 76,264 $ 31,080 $ 12,983 $ 120,327
========== =========== ========== ===========
PER SHARE INFORMATION (PRIMARY)
Net Income .......................... $ 0.69 $ 0.96
========== ===========
Weighted average common and common
equivalent shares outstanding ...... 117,522 12,506 (G) 130,028
========== ========== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income .......................... $ 0.68 $ 0.95
========== ===========
Weighted average common and common
equivalent shares outstanding ..... 119,359 12,506 131,865
========== ========== ===========
- ------------
(1) Pro Forma for all material transaction, excluding the Coldwell Banker
acquisition (See Section B).
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification
See notes to pro forma consolidated balance sheet
and statement of operations.
3
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITION OF COLDWELL BANKER:
The purchase price for Coldwell Banker has been allocated to assets
acquired and liabilities assumed at their estimated fair values. Pro forma
adjustments consist of the elimination of certain acquired assets and assumed
liabilities, net of the fair value ascribed to such assets and liabilities.
The Company acquired Coldwell Banker for the following consideration
($000's):
Cash consideration (i).................................. $750,251
----------
TOTAL PRO FORMA ACQUISITION COST ....................... 750,251
----------
Fair value of net assets acquired:
Historical book value of acquired companies .......... (46,673)
Elimination of net assets (liabilities) not acquired
or assumed:
Cash and cash equivalents ............................ 1,147
Accounts and notes receivable ........................ (3,032)
Deferred income taxes, current ....................... (4,818)
Other current assets ................................. 1,453
Property and equipment ............................... (41,532)
Franchise agreements ................................. --
Deferred income taxes, non-current ................... (9,551)
Other assets ......................................... (759)
Accounts payable and other ........................... 31,050
Income taxes payable ................................. 9,002
Current portion of long-term debt .................... 721
Long-term debt ....................................... 84,286
Other non-current liabilities ........................ 2,596
Fair value of assets acquired and liabilities assumed:
Deferred income taxes -- current ...................... --
Franchise agreements .................................. 437,200
Accrued acquisition liabilities (ii) .................. (23,000)
----------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED ........ 438,090
==========
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED . $312,161 (iii)
==========
- ------------
(i) The adjustment reflects $646,751 for the acquisition of Coldwell
Banker, $20,000 of related expenses and repayment of $83,500 of indebtedness of
Coldwell Banker outstanding as of December 31, 1995. The Company expects that
$100,000 of such indebtedness will be outstanding and repaid upon consummation
of the Merger.
(ii) Accrued acquisition obligations consist of personnel related costs
($6.5 million), facility costs ($8.5 million), professional fees ($7.7
million), and other ($0.3 million).
(iii) Excess of cost over fair value of net assets acquired is as of
December 31, 1995, which differs from the excess of cost over fair value of net
assets acquired derived from the final purchase price at date of acquisition
of $347,000, and was used as the basis for adjustments in the pro forma
statement of operations for the year ended December 31, 1995. The difference
is primarily attributable to Coldwell Banker payments of approximately $40.0
million to holders of Coldwell Banker stock options as a result of change in
control provisions in connection with the acquisition.
4
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
A. ACQUISITION OF COLDWELL BANKER: (Continued)
The pro forma adjustments include the elimination of Coldwell Banker
stockholders' net deficit and the issuance of approximately 12.5 million shares
to finance the acquisition. The number of Company shares of common stock issued
in connection with the acquisition of Coldwell Banker assumes a market value of
Company Common Stock of $59.99 per share representing the closing price on the
date the Coldwell Banker acquisition was publicly announced and expenses
related to the offering of such shares approximating $26.5 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 .............. $125 $730,126 -- $730,251
Elimination of Coldwell Banker stockholders'
net deficit .................................. (58) (59,124) 105,855 46,673
-------- ------------ ------------- ----------
Adjustment to stockholders' equity ............ $ 67 $671,002 $105,855 $776,924
======== ============ ============= ==========
B. SERVICE FEE REVENUE:
The pro forma adjustment reflects 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. The
franchise fees from the Owned Brokerage Business, which is based on the
franchise contracts with the Trust, is calculated at a net of 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 for the year ended December 31, 1995.
C. OWNED BROKERAGE BUSINESS REVENUE AND EXPENSES:
The pro forma adjustments reflect the elimination of revenue and expenses
from Coldwell Banker's 318 formerly owned brokerage offices. HFS 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 the 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.
5
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
D. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
Elimination of historical expense ........... $(22,425)
Property and equipment ...................... 1,156
Excess of cost over fair value of net assets
acquired ................................... 8,675
Franchise agreements ........................ 11,712
-----------
Total ....................................... $ (882)
===========
6
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
D. DEPRECIATION AND AMORTIZATION: (Continued)
The estimated fair value of Coldwell Banker's property and equipment
(excluding land) of $15.7 million, is amortized on a straight-line basis over
the estimated benefit 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 years and thirty five years,
respectively. The benefit period associated with Trust franchise agreements was
based upon a long history of gross commission sustained by the Trust. The
benefit period associated with the 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.
E. INTEREST EXPENSE ($000'S):
The pro forma adjustment reflects the reversal of historical interest
expense relating to the following ($000's):
Expense associated with the Owned Brokerage Business (i) ... $ 138
Expense associated with revolving credit facility
borrowings which will be repaid with proceeds from the
offering of the shares of Common Stock relating to the
acquisition of Coldwell Banker (ii) ....................... 5,191
-------
Total ...................................................... $5,329
=======
(i) HFS primarily paid 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
indebtness which represented borrowings under a revolving credit facility
at a variable rate of interest (LIBOR plus a margin ranging from .5% to
1.25%).
7
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
F. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
Reversal of historical provision of:
Pro Forma HFS prior to Coldwell Banker
acquisition .......................... $(54,042)
Coldwell Banker ....................... (24,385)
Pro forma provision .................... 83,910
-----------
Incremental provision for income taxes $ 5,483
===========
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.
G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of an
adjustment for the second quarter 1996 Coldwell Banker offering. Coldwell
Banker was acquired May 31, 1996.
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisition 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. The pro forma adjustments
reflect the issuance of 12.5 million shares in the offering of the shares, at
an issuance price per share of $59.99. The proceeds of the offering will be
used to finance the acquisition of Coldwell Banker and the related repayments
of Coldwell Banker indebtedness and to pay acquisition expenses.
8
SECTION A
H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with its acquisition of Coldwell Banker, HFS developed a
related business plan to restructure the acquired company, which will result in
future cost savings subsequent to the acquisition. HFS's restructuring plan was
developed prior to the consummation of the acquisition. The restructuring plan
included the involuntary termination and relocation of employees, the
consolidation and closing of facilities and the elimination of duplicative
operating and overhead activities. Pursuant to HFS's specific restructuring
plans, certain selling, general and administrative expenses may not be incurred
subsequent to the acquisition that existed prior to consummation. In addition,
there are incremental costs in the conduct of activities of the acquired
company prior to the acquisition that may not be incurred subsequent to
consummation and have no future economic benefit to HFS. The estimated cost
savings that HFS believes would have been attained had its acquisition occurred
on January 1, 1995 and the related impact of such cost saving 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):
COLDWELL PRIOR
BANKER ACQUISITIONS TOTAL
------ ------------ -----
Payroll and related ........ $10,682 $26,937 $37,619
Professional ............... 1,500 4,720 6,220
Occupancy ................. -- 7,740 7,740
Other ...................... (1,517) 6,657 5,140
-------- -------- --------
Total ..................... $10,665 $46,054 $56,719
======== ======== ========
The impact on pro forma net income and net income per share of the estimated
SG&A cost savings are as follows:
Income before taxes, as reported ...................... $204,237
SG&A adjustments ...................................... 56,719
--------
Income before taxes, as adjusted ...................... 260,956
Income taxes .......................................... 106,824
--------
Net income, as adjusted ............................... 154,132
--------
Net income per share (primary):
As adjusted ......................................... $ 1.22
--------
As reported ......................................... $ 0.96
========
Net income per share (fully diluted):
As adjusted ......................................... $ 1.20
--------
As reported ......................................... $ 0.95
========
I. ACCRUED ACQUISITION LIABILITIES
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21, Century 21 NORS,
and ERA 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
Century 21 NORS ERA
---------- ---------- ---
Personnel related ........... $ 12,647 $ 1,720 $ 8,000
Facility related ............ 16,511 2,293 1,558
Other costs ................. 990 711 501
---------- ---------- -------
Total ....................... $ 30,148 $ 4,724 $10,059
========== ========== =======
Terminated employees ........ 325
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation of excess office space. As of December 31, 1995 approximately
$16.3 million was paid by Century 21, and charged against the restructuring
liability.
9
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXCLUDING THE ACQUISITION OF COLDWELL BANKER
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the acquisitions of the six United States non-owned Century 21
regions ("Century 21 NORS"), the Travelodge (registered trademark) and
Electronic Realty Associates (registered trademark) ("ERA (registered
trademark)") franchise systems, (collectively, the "1996 Acquisitions") and the
proceeds from the February 22, 1996 issuance of $240 million of 4 3/4%
convertible senior notes (the "4 3/4% Notes") due 2003, to the extent such
proceeds were used to finance the 1996 acquisitions, had occurred on December
31, 1995. The pro forma statement of operations for the year ended December 31,
1995 is presented as if (i) the August 1, 1995 acquisition of Century 21; (ii)
the 1996 Acquisitions, (iii) 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"); and (iv) the issuance of the 4 3/4%
Notes occurred on January 1, 1995. The acquisitions have been accounted for
using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been or will be recorded at their estimated fair
values which are subject to further refinement, based upon appraisals and other
analyses, with appropriate recognition given to the effect of current interest
rates and income taxes. Management does not expect that the final allocation of
the purchase price for the above acquisitions will differ materially from the
preliminary allocations.
The Company has entered into the following transactions which are not
reflected in the pro forma statements of operations:
On March 31, 1995, the Company acquired a 1% general partnership interest
for approximately $3.0 million in a limited partnership which will develop,
promote and franchise the newly established Wingate Inn franchise system
("Wingate"), a new construction hotel brand. Wingate operations did not
commence until March 1995 and are not material to the Company's financial
statements. Accordingly, this transaction is not included in the pro forma
statement of operations.
On August 31, 1995, the Company acquired the assets comprising the Knights
Inn hotel franchise system, an economy hotel franchise system, for
approximately $15 million plus expenses. Knights Inn operations are not
material to the Company's financial statements. Accordingly, this transaction
is not included in the pro forma statement of operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. The pro forma consolidated statement of operations does not reflect
cost savings and revenue enhancements that management believes may be realized
following the acquisitions. These savings are expected to be realized primarily
through the restructuring of franchise services of the acquired companies as
well as revenue enhancements expected through leveraging of the Company's
preferred 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 Statement of Operations and should be read in conjunction therewith and
with the consolidated financial statements and related notes of the Company
included in their Annual Report on Form 10-K and the financial statements and
related notes of the acquired companies included as exhibits in Item 7 of this
8-K/A.
10
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
HISTORICAL
----------------------------------------------------
CENTURY 21 PRO FORMA
HFS NORS TRAVELODGE ERA ADJUSTMENTS (A) PRO FORMA
------------ ------------ ------------ ---------- --------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 16,109 $ 4,956 $ 7,242 $(12,198) $ 16,109
Royalty accounts and notes
receivable, net 37,326 9,617 $3,726 1,707 (11,324) 41,052
Relocation receivables 51,180 51,180
Marketing and reservation
receivables, net 22,297 22,297
Other current assets 21,304 479 612 2,459 (3,550) 21,875
571 (E)
Deferred income taxes 20,200 20,200
------------ ------------ ------------ ---------- --------------- ------------
Total current assets 168,416 15,052 4,338 11,408 (26,501) 172,713
Property and equipment -net 67,892 2,674 333 710 (3,717) 67,892
Franchise agreements -net 517,218 14,780 (14,780) 578,218
61,000
Excess of cost over fair value of net
assets acquired -net 356,754 164,217 520,971
Defered income taxes 8,445 8,445
Other assets 55,528 3,562 1,420 2,526 (6,108) 60,357
3,429 (E)
------------ ------------ ------------ ---------- --------------- ------------
Total $1,165,808 $21,288 $6,091 $ 29,424 $185,985 $1,408,596
============ ============ ============ ========== =============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other
accrued liabilities $ 80,260 $ 5,058 $3,252 $ 20,063 $(28,373) $ 80,260
Income taxes payable 38,640 38,640
Accrued acquisition obligations 3,740 21,708 25,448
Current portion of long-term debt 2,249 35 4,374 (4,409) 2,249
------------ ------------ ------------ ---------- --------------- ------------
Total current liabilities 124,889 5,093 3,252 24,437 (11,074) 146,597
------------ ------------ ------------ ---------- --------------- ------------
(11,252)
Long-term debt 300,778 309 10,943 175,080 475,858
Other non-current liabilities 17,150 579 14,152 (14,731) 17,150
Deferred income taxes 82,800 82,800
Series A Adjustable Rate
Preferred Stock of Century 21 80,000 80,000
STOCKHOLDERS' EQUITY
Preferred stock
Common stock -Issued and
Outstanding; HFS Historical,
102,539 and Pro Forma, 103,462 1,025 77 (67) 1,035
Additional paid-in capital 475,562 104 38,904 6,982 521,552
Retained earnings (deficit) 83,604 15,126 2,839 (59,012) 41,047 83,604
------------ ------------ ------------ ---------- --------------- ------------
Total stockholders' equity
(deficit) 560,191 15,307 2,839 (20,108) 47,962 606,191
------------ ------------ ------------ ---------- --------------- ------------
Total $1,165,808 $21,288 $6,091 $ 29,424 $185,985 $1,408,596
============ ============ ============ ========== =============== ============
See notes to pro forma consolidated balance sheet and statement of operations.
11
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- ------------- -----------
REVENUE:
Franchise $361,238 $128,233 $ (4,557) (B) $484,914
Other 51,745 36,362 88,107
---------- ----------- ------------- -----------
Total revenue 412,983 164,595 (4,557) 573,021
---------- ----------- ------------- -----------
EXPENSES:
Marketing and reservation 143,965 20,996 164,961
Selling, general and administrative 55,538 105,857 (4,500) (B) 156,895
Ramada license fee 18,911 18,911
Depreciation and amortization 30,857 8,483 5,036 (D) 44,376
Interest 21,789 6,227 6,299 (E) 34,315
Other 7,018 16,638 (399) (C) 23,257
---------- ----------- ------------- -----------
Total expenses 278,078 158,201 6,436 442,715
---------- ----------- ------------- -----------
Income before income taxes 134,905 6,394 (10,993) 130,306
Provision for income taxes 55,175 3,542 (4,675)(F) 54,042
---------- ----------- ------------- -----------
Income before minority interest Net Income $ 79,730 $ 2,852 $ (6,318) $ 76,264
========== =========== ============= ===========
PER SHARE INFORMATION (PRIMARY)
Net income $ 0.74 $ 0.69
========== ===========
Weighted average common and common
equivalent shares outstanding 113,817 3,705 (G) 117,522
========== ============= ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 0.73 $ 0.68
========== ===========
Weighted average common and common
equivalent shares outstanding 115,654 3,705 (G) 119,359
========== ============= ===========
- ------------
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.
12
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
HISTORICAL
-----------------------------------------------------------------------------
CENTURY 21
CCI(1) CENTURY 21(1) NORS TRAVELODGE ERA TOTAL
---------- ------------- ------------ ------------ ---------- ----------
REVENUE:
Franchise............ $ $53,992 $29,021 $18,361 $26,859 $128,233
Other................ 3,326 16,678 403 79 15,876 36,362
---------- ------------- ------------ ------------ ---------- ----------
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..... -- 50,232 22,851 2,648 30,126 105,857
Depreciation and
amortization....... 529 5,217 578 8 2,151 8,483
Interest............. -- 2,904 54 -- 3,269 6,227
Other................ 1,917 4,632 -- -- 10,089 16,638
---------- ------------- ------------ ------------ ---------- ----------
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 (loss) .... $ 567 $ 460 $ 3,029 $ 1,696 $(2,900) $ 2,852
========== ============= ============ ============ ========== ==========
- ------------
(1) Reflects results of operations for the period from January 1, 1995 to
the respective dates of acquisition.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification.
See notes to pro forma consolidated balance sheet and statement of operations.
13
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITION OF CENTURY 21 NORS, TRAVELODGE AND ERA:
The pro forma acquisition costs of the 1996 Acquisitions have been
allocated to assets acquired and liabilities assumed at their estimated fair
values. Pro forma adjustments consist of the elimination of certain acquired
assets and assumed liabilities, net of the fair value ascribed to such assets
and liabilities as follows ($000's):
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ ---------- ----------
Cash consideration............................ $ 94,980 $39,300 $ 36,800 $171,080
Issuance of approximately 1 million shares of
Company common stock......................... 46,000 -- -- 46,000
------------ ------------ ---------- ----------
TOTAL PRO FORMA ACQUISITION COST.............. 140,980 39,300 36,800 217,080
------------ ------------ ---------- ----------
Fair value of net assets acquired:
Historical book value of acquired companies . 15,307 2,839 (20,108) (1,962)
Elimination of net assets (liabilities) not
acquired or assumed:
Cash and cash equivalents................... (4,956) -- (7,242) (12,198)
Accounts and notes receivable............... (9,617) -- (1,707) (11,324)
Other current assets........................ (479) (612) (2,459) (3,550)
Property and equipment...................... (2,674) (333) (710) (3,717)
Franchise agreements........................ -- -- (14,780) (14,780)
Other assets................................ (3,562) (20) (2,526) (6,108)
Accounts payable and other.................. 5,058 3,252 20,063 28,373
Current portion of long-term debt........... 35 -- 4,374 4,409
Long-term debt.............................. 309 -- 10,943 11,252
Other non-current liabilities............... 579 -- 14,152 14,731
Fair value of assets acquired and liabilities
assumed:
Deferred income taxes--current (i)........... 5,484 1,529 1,432 8,445
Franchise agreements......................... 11,000 30,000 20,000 61,000
Accrued acquisition liabilities (ii) ........ (14,098) (3,930) (3,680) (21,708)
------------ ------------ ---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED............ 2,386 32,725 17,752 52,863
------------ ------------ ---------- ----------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED..................................... $138,594 $ 6,575 $ 19,048 $164,217
============ ============ ========== ==========
(i) The pro forma adjustment to deferred income taxes recorded in
connection with acquisitions results from differences in the fair values of
net assets acquired and liabilities assumed and their respective income tax
bases.
(ii) Accrued acquisition obligation consist of
14
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
A. ACQUISITION OF CENTURY 21 NORS, TRAVELODGE AND ERA: (CONTINUED)
The pro forma adjustments include the elimination of acquired companies
stockholders' net deficit and the issuance of approximately 923,000 shares
(based on the average stock price of the Company for a period prior to
closing) in connection with the acquisition of the Century 21 NORS. The
adjustment to stockholders' equity is calculated as follows ($000's):
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ------------ ------------- ---------
Issuance of Company common stock .......... $ 10 $ 45,990 $ $46,000
Elimination of acquired companies combined
stockholders' net deficit ................ (77) (39,008) 41,047 1,962
-------- ------------ ------------- ---------
Adjustment to stockholders' equity ....... $(67) $ 6,982 $41,047 $47,962
======== ============ ============= =========
B. FRANCHISE FEES AND ASSOCIATED REVENUE:
The pro forma adjustments to franchise revenues reflect the elimination of
franchise revenue associated with discontinued Century 21 international based
operations and the elimination of franchise fees and associated franchise
revenue paid by the Century 21 NORS to Century 21 under sub-franchise
agreements.
The pro forma adjustments to franchise revenue consists of the following:
ELIMINATE:
Century 21 International discontinued operations. $ (57)
Century 21 revenue included as Century 21 NORS
SG&A ............................................. (4,500)
---------
Total ............................................... $(4,557)
=========
The pro forma adjustment to franchise fees of $4,500 reflects the elimination
of royalty payments made by the Century 21 NORS to Century 21 under
sub-franchise agreements.
15
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
C. 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.
16
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
D. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
CCI CENTURY 21
MERGER CENTURY 21 NORS TRAVELODGE ERA TOTAL
-------- ------------ ------------ ------------ ---------- ----------
Elimination of historical depreciation and
amortization................................ $(529) $(5,217) $ (578) $ (8) $(2,151) $(8,483)
Property and equipment....................... 100 425 189 714
Information data base........................ 375 375
Excess of cost over fair value of net assets
acquired.................................... 289 2,912 3,587 224 873 7,885
Franchise agreements......................... 1,628 917 1,000 1,000 4,545
-------- ------------ ------------ ------------ ---------- ----------
TOTAL........................................ $ 235 $ (252) $3,926 $1,216 $ (89) $ 5,036
======== ============ ============ ============ ========== ==========
CCI Merger
The estimated fair values of CCI's information data base, property and
equipment and excess of cost over fair value of net assets acquired are $7.5
million, $1.0 million and $33.8 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are ten, five and
forty years, respectively. The benefit periods associated with the excess cost
over fair value of net assets acquired were determined based on CCI's position
as the dominant provider of gambling patron credit information services since
1956, its ability to generate operating profits, expansion of its customer
base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.1
million, $33.5 million and $199.7 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve
and forty years, respectively. The benefit periods associated with the excess
cost over fair value of net assets acquired were determined based on Century
21's position as the world's largest franchisor of residential real estate
brokerage offices, the most recognized brand name in the residential real
estate brokerage industry and the longevity of the residential real estate
brokerage business.
17
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
D. DEPRECIATION AND AMORTIZATION: (CONTINUED)
Century 21 NORS, Travelodge and ERA
The estimated fair value of ERA property and equipment is $1.1 million, and
is being depreciated on a straight line basis over the period to be benefited,
which is five years. The estimated fair values of Century 21 NORS, Travelodge
and ERA's franchise agreements are $11.0 million, $30.0 million and $20.0
million, respectively, and are being amortized on a straight line basis over
the periods to be benefited which are twelve, thirty and twenty years,
respectively. The estimated fair values of Century 21 NORS, Travelodge and
ERA's excess cost over fair value of net assets acquired are 143.5 million, 9.0
million and 34.9 million, respectively and are each being amortized on a
straight line basis over the periods to benefited which are forty years.
E. INTEREST EXPENSE:
Elimination of historical interest
expense................................... $(6,227)
Century 21................................. 2,135
4 3/4% Notes............................... 8,595
Minority Interest-preferred dividends ..... 1,796
----------
TOTAL...................................... $ 6,299
==========
Century 21
The pro forma adjustment reflects the recording of interest expense on $70
million of borrowings under HFS's revolving credit facility at an interest rate
of approximately 6.0% which is the variable rate in effect on the date of
borrowing. Borrowings represent the amount necessary to finance the initial
cash purchase price net.
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 Century 21. The pro forma net income effects
of a 1/8% variance in the interest rate has no impact on earnings per share
for the period presented.
18
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
E. INTEREST EXPENSE (CONTINUED):
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 (5.0% effective interest rate) to the extent that such proceeds were
used to finance the Acquisitions of ERA ($37.6 million), Travelodge ($39.3
million), and Century 21 NORS ($95.0 million). The pro forma adjustment for
deferred financing fees reflects $4 million of capitalized costs associated
with the issuance of the 4 3/4% Notes which are being amortized over the term
of the 4 3/4% Notes.
19
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
E. INTEREST EXPENSE (CONTINUED):
MINORITY INTEREST--PREFERRED DIVIDENDS:
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21 issued by Century 21.
F. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
Reversal of historical provision of:
Company................................ $(55,175)
CCI.................................... (313)
Century 21............................. (2,097)
Travelodge............................. (1,132)
Pro forma provision..................... 54,042
-----------
Incremental provision for income
taxes.................................. $ (4,675)
===========
The pro forma effective tax rate approximates the Company's historical
effective tax rate. The pro forma provisions for taxes were computed using
pro forma pre-tax amounts and the provisions of Statement of Financial
Accounting Standards No. 109.
G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
ISSUANCE
PRICE PER
SHARE SHARES
----------- --------
CCI (including dilutive impact of warrants)(1) . $30.60 448
Century 21 (2).................................. $49.88 2,334
Century 21 NORS (3)............................. $49.83 923
--------
Total.......................................... 3,705
========
(1) Date of Acquisition, May 11, 1995
(2) Date of Acquisition, August 1, 1995
(3) 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 and warrants assumed referred to above are
considered outstanding as of the beginning of the period for purposes of per
share calculations.
20
H. 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 employeees, the consolidation and closing of
facilities and the elimination of duplicative operating and overhead
activities. Pursuant to HFS's specific restructuring plans, certain selling,
general and administrative expenses may not be incurred subsequent to each
acquisition that existed prior to consummation. In addition, there are
incremental costs in the conduct of activities of the acquired companies prior
to the acquisitions that may not be incurred subsequent to consummation and
have no future economic benefit to HFS. The estimated cost savings that HFS
believes would have been attained had its acquisitions occurred on January 1,
1995 and the related impact of such cost savings on pro forma net income and
net income per share are not reflected in the pro forma consolidated statements
of income, but are presented below ($000's):
CENTURY CENTURY 21
21 NORS TRAVELODGE ERA TOTAL
--------- ------------ ------------ -------- ---------
Payroll and
related............ $10,885 $ 7,706 $1,110 $7,236 $26,937
Professional........ 2,693 1,486 154 387 4,720
Occupancy........... 3,628 2,754 186 1,172 7,740
Other............... 3,128 2,326 167 1,036 6,657
--------- ------------ ------------ -------- ---------
Total.............. $20,334 $14,272 $1,617 $9,831 $46,054
========= ============ ============ ======== =========
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
Income before taxes, as report ....... $130,306
SG&A adjustments...................... 46,054
----------
Income before taxes, as adjusted ..... 176,360
Income taxes.......................... 72,648
----------
Net income, as adjusted............... $103,712
==========
Net income per share (primary):
As adjusted.......................... $ 0.92
==========
As reported.......................... $ 0.69
==========
Net income per share (fully diluted):
As adjusted.......................... $ 0.91
==========
As reported.......................... $ 0.68
==========
21