<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-3276
<PAGE>
Information contained in this preliminary prospectus supplement is subject
to completion or amendment. This prospectus supplement and the accompanying
prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
PROSPECTUS SUPPLEMENT ISSUED MAY 8, 1996 (SUBJECT TO COMPLETION)
(To Prospectus dated April 30, 1996)
[LOGO]
15,000,000 SHARES
HFS Incorporated
COMMON STOCK
OF THE 15,000,000 SHARES OF COMMON STOCK BEING OFFERED, 12,000,000 SHARES ARE
BEING OFFERED IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
3,000,000 SHARES ARE BEING OFFERED OUTSIDE THE UNITED STATES AND CANADA BY
THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL SHARES OF COMMON
STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMPANY'S COMMON
STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "HFS." ON MAY
7, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK
STOCK EXCHANGE WAS $55 3/4 PER SHARE.
SEE "RISK FACTORS" ON PAGE 3 IN THE PROSPECTUS FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE $ A SHARE
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
----------------- -------------------------- ----------------
<S> <C> <C> <C>
Per Share .... $ $ $
Total (3) .... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
2,250,000 additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriters."
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal
matters by Shearman & Sterling, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about May , 1996 at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in same day funds.
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
CHASE SECURITIES INC.
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
May , 1996
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREBY SHALL
UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
PAGE
--------
Prospectus Summary ......................... S-3
The Company ................................ S-6
The Coldwell Banker Acquisition ............ S-8
Recent Developments ........................ S-10
Use of Proceeds ............................ S-11
Common Stock Price Range and Dividend
Policy .................................... S-12
Capitalization ............................. S-13
Pro Forma Consolidated Financial
Information ............................... S-14
Underwriters ............................... S-24
Legal Matters .............................. S-26
PROSPECTUS
PAGE
--------
Incorporation of Certain Documents by
Reference ................................. 2
The Company ................................ 3
Risk Factors ............................... 3
Use of Proceeds ............................ 5
Consolidated Ratio of Earnings to Fixed
Charges ................................... 5
General Description of Securities .......... 6
Description of the Debt Securities ........ 6
Description of Capital Stock ............... 20
Plan of Distribution ....................... 22
Legal Opinion .............................. 23
Experts .................................... 23
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere or incorporated by reference in this Prospectus Supplement or the
Prospectus. Unless otherwise indicated, the information in this Prospectus
Supplement and the Prospectus is adjusted to reflect the two-for-one Common
Stock split effected on February 14, 1996 and assumes that the Underwriters'
over-allotment option is not exercised.
THE COMPANY
HFS Incorporated ("HFS" or the "Company"), formerly named Hospitality
Franchise Systems, Inc., is the world's largest franchisor of hotels and
residential real estate brokerage offices. The Company operates nine national
hotel franchise systems: Days Inn(Registered Trademark), Ramada(Registered
Trademark) (in the United States), Howard Johnson(Registered Trademark),
Super 8(Registered Trademark), Travelodge(Registered Trademark) (in North
America), Park Inn International(Registered Trademark) (in the United States
and Canada), Villager Lodge(Registered Trademark), Knights Inn(Registered
Trademark) and Wingate Inn (Service Mark) (managed by the Company on behalf
of a partnership). In the aggregate, these franchise systems consist of
approximately 5,200 properties and 482,000 hotel rooms worldwide. The Company
also operates the CENTURY 21(Registered Trademark) and Electronic Realty
Associates(Registered Trademark) or ERA(Registered Trademark) real estate
brokerage franchise systems, which it acquired on August 1, 1995 and February
12, 1996, respectively. The Century 21 and ERA systems are the world's
largest and fourth largest franchisors, respectively, of residential real
estate brokerage offices, with an aggregate of more than 8,600 independently
owned and operated franchised offices located worldwide.
As a franchisor, the Company licenses the owners and operators of
independent businesses, principally hotels and real estate brokerage offices,
to use the Company's brand names. The Company does not own or operate hotels
or real estate brokerage offices. Instead, the Company provides its customers
with services designed to increase their revenue and profitability. These
services allow customers to retain independence and local control while
benefiting from the economies of scale of widely promoted brand names and
standards of service, national and regional direct marketing and co-marketing
arrangements and global procurement. The most important of these services for
hotel owners are access to a national reservation system, national
advertising and promotional campaigns, co-marketing programs and volume
purchasing discounts. The most significant services for real estate
brokerages are national advertising and promotion, referrals, training,
co-marketing programs and volume purchasing discounts. The Company believes
significant opportunities exist to expand the co-marketing and volume
purchasing benefits that it currently provides to its hotel franchisees and
to its real estate brokerage franchisees.
The Company also provides preferred vendor and co-marketing arrangements
with an array of national purveyors of goods and services, corporate
relocation services and casino marketing services and gambling patron credit
information to casino gaming and entertainment facilities. The Company
continually explores and conducts discussions with regard to acquisitions and
other strategic corporate transactions in its two primary industries and
other franchise or franchisable businesses. See "The Company."
THE COLDWELL BANKER ACQUISITION
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 has agreed
to pay $640 million in cash for all of the outstanding capital stock of
Coldwell Banker. The proceeds of the offering of the Shares will be used,
among other things, to finance the purchase of Coldwell Banker and to repay
approximately $100 million of indebtedness of Coldwell Banker. See "Use of
Proceeds." While completion of this transaction is not assured, the Company
expects that the transaction will be completed on or about May 31, 1996.
Coldwell Banker franchises and owns real estate brokerage offices and
provides corporate relocation services throughout the United States, Canada
and Puerto Rico. Coldwell Banker is the third largest real estate brokerage
system in the United States with approximately 2,164 franchised offices and
318 owned offices (the "Owned Brokerage Business") in the United States,
Canada and Puerto Rico as of March 31, 1996. Immediately following the
closing of the Merger, the Company will convey the Owned Brokerage
S-3
<PAGE>
Business to an independent trust governed by independent trustees (the
"Trust") and convert the related offices into franchisees. The Company
estimates that Coldwell Banker is the second largest provider of corporate
employee relocation services in the United States based on the number of
transferred employees assisted. See "The Coldwell Banker Acquisition."
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered
United States offering ................................ 12,000,000 shares
International offering ................................ 3,000,000 shares
Total ................................................ 15,000,000 shares(1)
Common Stock to be outstanding after this offering .... 118,764,297 shares(1)(2)
Use of proceeds ........................................ The net proceeds from the sale of the Common Stock
offered hereby are estimated to be approximately
$ million ($ million if the Underwriters'
over-allotment option is exercised in full) after
deduction of underwriting discounts and expenses
related to the offering of the Shares. While
completion of the transaction is not assured, the
Company expects that $760 million of the net proceeds
from the issuance of the Shares will be used to finance,
and pay certain expenses in connection with, the
purchase of Coldwell Banker, and to repay
approximately $100 million of indebtedness of
Coldwell Banker, with the remaining proceeds used
for general corporate purposes, including
acquisitions. See "Use of Proceeds," "The Company"
and "The Coldwell Banker Acquisition."
New York Stock Exchange symbol ......................... "HFS"
</TABLE>
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(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Does not include (i) 26,247,292 shares of Common Stock reserved for
issuance upon exercise of the outstanding stock options; and (ii)
11,856,739 shares of Common Stock issuable upon conversion of the
Company's 4-1/2% Convertible Senior Notes due 1999 and 4-3/4%
Convertible Senior Notes due 2003.
S-4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
of the Company should be read in conjunction with the historical consolidated
financial statements and the notes thereto incorporated by reference in this
Prospectus Supplement and the Prospectus and "Pro Forma Consolidated
Financial Information" and the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
PRO FORMA
1993 1994 1995 1995 (A)
---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Franchise ........................... $245,189 $283,244 $361,238 $583,485
Relocation services ................. -- -- 8,204 90,584
Other ............................... 11,881 29,303 43,541 89,232
---------- ---------- ---------- -----------
Total revenue ..................... $257,070 $312,547 $412,983 $763,301
========== ========== ========== ===========
Expenses:
Marketing and reservation ........... $116,700 $130,268 $143,965 $164,961
Selling, general and administrative 24,966 28,654 55,538 140,225
Ramada license fee .................. 15,349 17,364 18,911 18,911
Depreciation and amortization ...... 19,153 23,723 30,857 72,814
Interest ............................ 20,234 18,685 20,124 31,657
Relocation .......................... -- -- 3,783 71,103
Other ............................... -- 3,210 3,235 17,593
---------- ---------- ---------- -----------
Total expenses .................... $196,402 $221,904 $276,413 $517,264
========== ========== ========== ===========
Income before income taxes, minority
interest and extraordinary loss .... $ 60,668 $ 90,643 $136,570 $246,037
Income before minority interest and
extraordinary loss (b) .............. 34,323 53,489 81,395 146,638
Minority interest--preferred
dividend (c) ........................ -- -- 1,665 3,461
Net income (d) ....................... 21,478 53,489 79,730 143,177
Income per share (fully diluted) (e):
Before extraordinary loss ........... 0.34 0.53 0.73 1.11
Net income .......................... 0.21 0.53 0.73 1.11
Weighted average common and common
equivalent shares outstanding (fully
diluted) (e) ........................ 100,228 100,874 115,654 133,443
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
PRO FORMA (F)
1993 1994 1995 1995
---------- ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Franchise agreements, net .......... $504,572 $495,026 $ 517,218 $ 578,218(g)
Total assets ....................... 735,821 774,097 1,165,808 2,261,043
Long-term debt ..................... 347,712 347,416 300,778 476,477
Century 21 Series A Adjustable Rate
Preferred Stock ................... -- -- 80,000 80,000
Stockholders' equity ............... 267,409 280,569 560,191 1,329,691
</TABLE>
- ------------
(a) The pro forma consolidated statement of operations data for the year
ended December 31, 1995 is presented as if (i) the acquisition of
Century 21, (ii) the acquisition of the ERA franchise system, (iii) the
acquisitions of the six United States non-owned Century 21 regions,
("NORs") (iv) the acquisition of the Travelodge franchise system, (v)
the acquisitions by merger of Casino & Credit Services, Inc.'s ("CACS")
gambling patron credit information business, Central Credit, Inc.
("CCI"), (vi) the receipt of the proceeds from the issuance of 4-3/4%
Convertible Senior Notes due 2003 to the extent such proceeds were used
to finance the acquisitions of the NORs, and the Travelodge and ERA
franchise systems, (vii) the offering of the Shares, to the extent such
proceeds were used to finance the Merger and to repay indebtedness of
Coldwell Banker and acquisition expenses, and (viii) the Merger and
conveyance to the Trust of the Owned Brokerage Business had all
occurred on January 1, 1995. See "The Coldwell Banker Acquisition,"
"Recent Developments" and "Pro Forma Consolidated Financial
Information."
(b) Includes provisions for income taxes of $26,345, $37,154, $55,175 and
$99,399 for the years ended December 31, 1993, 1994, 1995 and Pro Forma
1995, respectively.
(c) Represents dividends on the Series A Adjustable Rate Preferred Stock of
Century 21.
(d) Includes extraordinary losses of $12,845 (net of tax benefit of $8,775)
for the year ended December 31, 1993.
(e) All share and per share information has been adjusted to reflect a
two-for-one stock split paid on April 4, 1994 to stockholders of record
on March 14, 1994 and a two-for-one stock split paid on February 14,
1996 to stockholders of record on January 30, 1996. The pro forma data
reflects the issuance of 13.6 million shares in the offering of the
Shares, the proceeds of which will be used to finance the acquisition
of Coldwell Banker and the related repayment of Coldwell Banker
indebtedness and to pay acquisition expenses.
(f) The pro forma consolidated balance sheet data as of December 31, 1995
is presented as if the transactions described in footnote (a) above in
clauses (i) and (v) thereof occurred as of December 31, 1995.
(g) Does not include the fair value of franchise agreements of Coldwell
Banker for which valuations are not yet complete.
S-5
<PAGE>
THE COMPANY
HFS is the world's largest franchisor of hotels and residential real
estate brokerage offices. The Company operates nine national hotel franchise
systems: Days Inn(Registered Trademark), Ramada(Registered Trademark) (in the
United States), Howard Johnson(Registered Trademark), Super 8(Registered
Trademark), Travelodge(Registered Trademark) (in North America), Park Inn
International(Registered Trademark) (in the United States and Canada),
Villager Lodge(Registered Trademark), Knights Inn (Service Mark) and Wingate
Inn (Service Mark) (managed by the Company on behalf of a partnership). In
the aggregate, these franchise systems consist of approximately 5,200
properties and 482,000 hotel rooms worldwide. The Company also operates the
CENTURY 21(Registered Trademark) and Electronic Realty Associates(Registered
Trademark) or ERA(Registered Trademark) real estate brokerage franchise
systems which it acquired on August 1, 1995 and February 12, 1996,
respectively. The Century 21 and ERA systems are the world's largest and
fourth largest franchisors, respectively, of residential real estate
brokerage offices, with an aggregate of more than 8,600 independently owned
and operated franchised offices located worldwide. See "Recent Developments."
As a franchisor, the Company licenses the owners and operators of
independent businesses, principally hotels and real estate brokerage offices,
to use the Company's brand names. The Company does not own or operate hotels
or real estate brokerage offices. Instead, the Company provides its customers
with services designed to increase their revenue and profitability. These
services allow customers to retain independence and local control while
benefiting from the economies of scale of widely promoted brand names and
standards of service, national and regional direct marketing and co-marketing
arrangements and global procurement. The most important of these services for
hotel owners are access to a national reservation system, national
advertising and promotional campaigns, co-marketing programs and volume
purchasing discounts. The most significant services for real estate
brokerages are national advertising and promotion, referrals, training,
co-marketing programs and volume purchasing discounts. The Company believes
significant opportunities exist to expand the co-marketing and volume
purchasing benefits that it currently provides to its hotel franchisees and
to its real estate brokerage franchisees.
The Company also provides preferred vendor and co-marketing arrangements
with an array of national purveyors of goods and services, corporate
relocation services and casino marketing services and gambling patron credit
information to casino gaming and entertainment facilities.
The Company continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its two primary
industries and other franchise or franchisable businesses. Historically, the
Company has been involved in numerous transactions of various magnitudes, for
consideration which included cash or securities (including Common Stock) or
combinations thereof. The Company is continuing to evaluate and to pursue
appropriate acquisition and combination opportunities as they arise, in the
expansion of its operations. No assurance can be given with respect to the
timing, likelihood or financial or business effect of any possible
transaction. In the past, acquisitions by the Company have involved both
relatively small acquisitions and acquisitions which have been significant,
including the pending acquisition of Coldwell Banker in the Merger for
approximately $640 million in cash and the related repayment of approximately
$100 million of indebtedness of Coldwell Banker. See "The Coldwell Banker
Acquisition."
As part of its regular on-going evaluation of acquisition opportunities,
the Company is currently engaged in a number of separate and unrelated
preliminary discussions concerning possible acquisitions which may involve
consideration substantially in excess of amounts previously payable by the
Company in any single acquisition. The Company is in the early stages of such
discussions and has not entered into any agreement in principle with respect
to any of these possible acquisitions. The purchase price for the possible
acquisitions may be paid in cash, through the issuance of Common Stock (which
would increase the number of shares of Common Stock outstanding) or other
securities of the Company, borrowings, or a combination thereof. Prior to
consummating any such possible acquisitions, the Company, among other things,
will have to initiate and satisfactorily complete its due diligence
investigation; negotiate the financial and other terms (including price) and
conditions of such acquisitions; obtain appropriate Board of Directors,
regulatory and other necessary consents and approvals; and secure financing.
The Company cannot predict whether any such acquisitions will be consummated
or, if consummated, will result in a financial or other benefit to the
Company.
S-6
<PAGE>
The Company's principal executive offices are located at 339 Jefferson
Road, Parsippany, New Jersey 07054 and the telephone number is (201)
428-9700.
FRANCHISE MANAGEMENT STRATEGY
HFS believes its success as a franchisor results from the consistent
application of a service-driven strategy focused on enhancing the revenue
and, indirectly, the profitability of its franchisee customers. The Company's
approach to franchise management emphasizes the following key themes.
o Pure Franchise Strategy. HFS avoids competition with its franchisee
customers. HFS does not own or manage hotels or real estate brokerage
offices. The Company believes franchisees prefer to affiliate with
franchisors who do not compete for desirable locations and who do not have a
major incentive to favor one class of franchisees over another. The pure
franchise strategy also intensifies HFS' internal focus on franchisee service
by requiring the Company to rely on franchisees as its primary means to
benefit from increases in brand revenue.
Since franchise fees are generally linked to franchisee revenue, not profits,
HFS' pure franchise strategy reduces its exposure to changes in the
profitability of its franchisees' businesses. It also significantly reduces
HFS' capital expenditures since franchisees in HFS' hotel and real estate
brokerage systems are responsible for financing their own property, plant and
equipment.
HFS believes its lack of Company owned units enhances its strategic
flexibility and significantly differentiates HFS from a large number of its
potential competitors in franchised industries.
o Franchisee Partnership. HFS actively seeks to involve its franchisees
as partners in new initiatives. New programs involving the franchisees are
generally structured to extend a portion of the potential economic benefit of
the preferred vendor and similar programs to franchisees.
o Multiple Brands. HFS is the largest franchisor of multiple hotel and
real estate brokerage brands in the world. HFS believes its ability to
franchise multiple brands successfully stems from its ability to spread the
economic benefits of a common overhead structure across multiple brands while
carefully segregating marketing, promotion and reservation activities in a
manner that is generally perceived as fair and equitable by franchisees.
o Operating Leverage. As a result of the size and growth of the franchise
systems managed by HFS, the Company has the ability to leverage operating
functions such as information technology, accounting, legal and other
services over a large franchisee base. This operating leverage has the
benefit of permitting the Company to provide high quality services to the
franchisees at a significantly lower average cost to the Company.
HOTEL FRANCHISE BUSINESS
Since the Company's organization in mid-1990, HFS has experienced
significant growth in revenue, net income and earnings per share. A
significant portion of these gains has been achieved through a series of
acquisitions of hotel franchise chains. HFS commenced operations in July 1990
with the acquisition of the Howard Johnson franchise system and the rights to
operate the U.S. Ramada franchise system. The Company acquired the Days Inn
franchise system in 1992, the Super 8 franchise system and substantially all
of the assets of the Park Inn International franchise system in the U.S. and
Canada in 1993, the Villager Lodge franchise system in 1994, the Knights Inn
franchise system in August 1995 and the Travelodge franchise system in
January 1996. Each of these acquisitions has increased the Company's earnings
per share on a pro forma basis.
Growth of the franchise systems through the sale of long-term franchise
contracts to operators of existing and newly constructed hotels, excluding
the positive effect of acquisitions, has been a leading source of revenue and
earnings growth in the Company's hotel franchise business. The Company
expects this to continue to be the case for the foreseeable future. In 1995,
the Ramada and Howard Johnson brands began to restructure and reposition the
properties in their franchise systems into separate classifications,
reflecting the level of services and amenities available at their respective
properties. The
S-7
<PAGE>
Company expects that this restructuring may provide an opportunity to
attract properties with higher average daily rates and may also result in an
increase in terminations of properties failing to meet Ramada or Howard
Johnson standards, as the case may be.
REAL ESTATE FRANCHISE BUSINESS
In early 1995, the Company identified the real estate brokerage industry
as a potential target for expansion of its franchising activities. In August
1995, the Company acquired Century 21 Real Estate Corporation ("Century 21"),
the world's largest franchisor of residential real estate brokerage offices
with more than 6,000 independently owned and operated franchised offices and
approximately 75,000 sales agents worldwide. In February 1996, the Company
continued its expansion into the real estate brokerage industry with the
acquisition of the Electronic Realty Associates(Registered Trademark) or
ERA(Registered Trademark) franchise system. The ERA system is the world's
fourth largest residential real estate brokerage franchise system with
approximately 2,600 independently owned and operated franchised offices and
approximately 27,000 sales agents worldwide.
Similar to the strategy employed in the hotel franchise industry, the
Company plans to maintain the separate brand identities of the Century 21 and
ERA systems and, assuming the Merger is consummated, the Coldwell Banker
system, while taking advantage of economies of scale and purchasing power of
the largest, fourth largest and second largest brands, respectively, in
residential real estate brokerage.
Since the acquisition of Century 21 in August 1995, the Company has
successfully streamlined the operations, significantly reduced the overhead
and delivered significant preferred vendor and license opportunities to the
Century 21 system. The Company plans to continue to deliver preferred vendor
opportunities to the Century 21 system and to expand certain of these
programs to encompass the franchisees and customers of the ERA system and,
assuming the Merger is consummated, the Coldwell Banker system.
PREFERRED VENDOR AND CO-MARKETING ARRANGEMENTS
The Company believes an increasing portion of its revenue growth
opportunities will arise from its ability to capitalize on the significant
and increasing amount of aggregate purchasing power and marketing outlets
contained in the businesses in the HFS franchise systems. HFS initially
tapped the potential of this market leverage in 1993 when it launched its
Preferred Vendor Program, under which vendors provide significant discounts,
commissions and co-marketing revenue to the Company's franchisees plus
preferred vendor fees to HFS in exchange for being designated as the
preferred provider of goods or services to the owners of the Company's
franchised hotels and real estate brokerage offices or the preferred marketer
of goods and services to the approximately 200 million hotel guests who stay
in the hotels each year and the clients of the Company's real estate
brokerage franchises.
The Company currently participates in preferred vendor relationships with
more than 50 companies, including AT&T, Pizza Hut, Alamo car rental,
Coca-Cola, MetLife and CUC International (a provider of discount travel
services). Fees to HFS from these contracts have increased from $6.5 million
in 1993 to $20.7 million in 1995. The operating profit generated by most new
preferred vendor arrangements closely approximates the incremental revenue
produced by such arrangements since the costs of the existing infrastructure
required to negotiate and operate these programs are largely fixed.
THE COLDWELL BANKER ACQUISITION
GENERAL
On May 2, 1996, the Company entered into an agreement to acquire by merger
Coldwell Banker, the largest gross revenue producing real estate company in
North America and a leading provider of corporate relocation services. The
Company has agreed to pay $640 million in cash for all of the outstanding
capital stock of Coldwell Banker. The proceeds of the offering of the Shares
will be used, among other things, to finance the purchase of Coldwell Banker
and to repay approximately $100 million
S-8
<PAGE>
of indebtedness of Coldwell Banker. See "Use of Proceeds." While completion
of this transaction is not assured, the Company expects that the transaction
will be completed on or about May 31, 1996. The waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired
without the issuance of a request for additional information by the Federal
Trade Commission or the Department of Justice.
COLDWELL BANKER
Coldwell Banker franchises and owns real estate brokerage offices and
provides corporate relocation services throughout the United States, Canada
and Puerto Rico.
Real Estate Brokerage Franchisor. Coldwell Banker is the third largest
real estate brokerage franchisor in the United States with approximately
2,164 franchised offices and 318 owned offices in the United States, Canada
and Puerto Rico as of March 31, 1996. Immediately following the closing of
the Merger, the Company will convey the Owned Brokerage Business to the Trust
and convert these related offices into franchisees. Franchise-related revenue
is derived from various fees paid by franchisees, including initial franchise
fees and ongoing service fees. New franchise agreements generally have a term
of seven to ten years for which franchisees pay an initial fee, based on the
relative size of their local market and their number of offices, and annual
fees consisting of ongoing service and advertising fees, which are generally
6.0% and 2.5%, respectively, of a franchisee's annual gross revenues (subject
to annual rebates to franchisees who pay a certain threshold level of service
fees annually). The services Coldwell Banker provides to franchisees include
access to the Coldwell Banker name and systems, referrals from the corporate
relocation business and the combined market presence of its owned and
franchised offices.
Corporate Employee Relocation Services. The Company estimates that
Coldwell Banker is the second largest provider of corporate employee
relocation services in the United States based on the number of transferred
employees assisted. Coldwell Banker entered the corporate relocation business
in 1978. In 1995, it assisted in the relocation of over 34,000 employees of
over 230 corporate customers. Coldwell Banker's relocation customers are
almost exclusively comprised of Fortune 1000 companies and large financial
services companies.
Coldwell Banker offers its relocation clients a variety of services in
connection with the transfer of its clients' employees. These services
include the selling of a transferee's home, appraisals, inspections,
assistance in finding a new home, property marketing advice, rental
assistance, equity advances, purchasing a transferee's home at the appraised
value when no higher bid is obtained, educational and school placement
counseling, career counseling, spouse/partner employment assistance and group
move services. In its relocation services business, Coldwell Banker is
increasingly assuming activities traditionally provided by its clients' human
resource departments, including relocation policy administration, expense
accounting and brokering household goods shipments. The outsourcing of such
services is a growing segment of the corporate relocation industry.
Corporate clients are obligated to reimburse all costs incurred by
Coldwell Banker related to relocation services provided, including any losses
on the resale of a transferee's home purchased by Coldwell Banker, and to pay
Coldwell Banker a fee for services performed. Coldwell Banker's exposure on
the value of the homes in inventory is subject solely to the credit risk of
its corporate clients and not to the underlying value of the home.
As of March 31, 1996, Coldwell Banker employed 794 employees in its
relocation business at its corporate office and three regional offices.
Owned Brokerage Services. Coldwell Banker's Owned Brokerage Business is
the largest network of owned residential brokerage offices in the United
States. As of March 31, 1996, Coldwell Banker's owned brokerage operations
consisted of 318 residential brokerage offices in the United States. 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. Prior to
the conveyance of the Owned Brokerage Business to the Trust, each of the
brokerage offices will be subject to a standard Coldwell Banker franchise
agreement having a term of ten years. The Trust may also acquire other
brokerage offices for operation.
S-9
<PAGE>
RESIDENTIAL REAL ESTATE INDUSTRY
The Coldwell Banker operations to be acquired and retained by HFS include
real estate brokerage franchising and corporate relocation services. Demand
for real estate brokerage franchises and franchising services is based on
relative levels of profitability of independent real estate brokers, the
competition they face from other brokers operating with the benefit of
national brand names and the perceived benefit of revenue enhancement and
cost reduction services offered by the franchisor.
Management believes that sales of existing homes in the United States have
been less affected by economic fluctuations and changes in levels of interest
rates than have the levels of sales in commercial real estate and the amount
of new residential home construction. However, the Company believes that the
long term level of home sale activity is affected by changes in demographics
and consumer lifestyle preferences. Year to year increases or decreases in
the aggregate level of United States existing home sales over the last six
years have averaged 3.6%.
The Company believes that real estate brokers are involved in most single
family existing home sales. Real estate brokers include independent companies
and franchisees of national franchisors. The number of franchised real estate
brokers increased significantly during the 1970s and 1980s when seven of the
eight largest national franchisors were founded. Management believes the
growth in the number of franchisees has resulted from the perceived benefits
by individual agents of national affiliation, in particular, brand name
awareness, greater advertising leverage, access to referrals from other
franchise members and related corporate relocation companies.
Real estate brokerage firms generate revenue by providing independently
contracted sales associates with a variety of productivity enhancing services
including administrative support, advertising, office space and ancillary
products. In return, brokerage firms receive a percentage of the sales
associates' commission from closed transactions. Sales associate commissions
and the percentage of gross commission income ("GCI") retained by the firm
(the "Retention") depend on the associate's productivity, the particular
brokerage firm's policy and regional standards. Some of Coldwell Banker's
competitors have unbundled services to allow sales associates to pay for only
those services utilized.
Franchisors receive compensation through an initial franchise fee and
ongoing service fees. The amounts of such fees depend on a franchisor's GCI
level and number of offices. In addition, franchisees typically contribute to
pooled advertising.
RECENT DEVELOPMENTS
FIRST QUARTER 1996 FINANCIAL RESULTS
For the quarter ended March 31, 1996, HFS reported earnings per share of
$.20, an increase of 67 percent compared to $.12 per share reported in the
first quarter of last year. Revenue increased 68% to $124.5 million from
$74.2 million in the first quarter of 1995. Net income increased 89% to $22.8
million from $12.1 million in the first quarter of last year. Results for the
first quarter of 1996 include the operations of the Century 21 and Knights
Inn franchise systems, and Central Credit, Inc. which were acquired during
1995 and the Travelodge and ERA franchise systems which were acquired on
January 23, 1996 and February 12, 1996, respectively.
INCOME STATEMENT CHARGES IN SECOND QUARTER 1996
Following the Merger, the Company will relocate Company headquarters due
to the increasing number of franchised brands managed by the Company and
convey the Owned Brokerage Business to the Trust. As a result, HFS
anticipates that it will record a non-recurring restructuring charge of
approximately $16 million in the second quarter of 1996.
S-10
<PAGE>
ACQUISITION OF CENTURY 21 SUBFRANCHISORS
On April 3, 1996, the Company purchased four U.S. non-owned Century 21
regions controlled by three independent master licensees, which include
approximately 750 franchised real estate offices in the Southwest, South
Florida, the Mid-Atlantic States and Eastern Pennsylvania. The aggregate
purchase price approximated $95 million in cash and notes. On May 3, 1996,
the Company completed the acquisition of the remaining two U.S. non-owned
Century 21 regions, which include approximately 300 franchised real estate
offices in the Pacific Northwest and Central California, for $46 million of
Company Common Stock. Service fees generally average 6% of gross commission
income (subject to annual rebates to franchisees who pay a certain threshold
level of service fees annually) from brokers in Century 21-owned regions and
slightly less than 1% of gross commission income from brokers in non-Century
21-owned regions.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and expenses of the offering related to the Shares. While
completion of the transaction is not assured, the Company expects that $760
million of the net proceeds from the issuance of the Shares will be used (i)
to finance, and pay certain expenses in connection with, the purchase of
Coldwell Banker and (ii) to repay approximately $100 million of indebtedness
of Coldwell Banker. The remaining net proceeds will be used for general
corporate purposes, including acquisitions. Pending application for specific
purposes, the remainder of the net proceeds may be invested in short-term
marketable securities. The Company continually explores and conducts
discussions with regard to acquisitions and other strategic transactions in
its two primary industries and other franchise or franchisable businesses.
See "The Company" and "The Coldwell Banker Acquisition."
S-11
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Company's Common Stock, par value $.01 per share, is listed on the New
York Stock Exchange (the "NYSE") under the symbol "HFS". The following table
sets forth for the periods indicated the high and low sale prices per share
for the Company's Common Stock as reported on the NYSE.
<TABLE>
<CAPTION>
COMMON
STOCK PRICE (1)
-----------------
HIGH LOW
-------- -------
<S> <C> <C>
Year Ended December 31, 1994
First Quarter ........................... $15 -7/8 $ 12-5/8
Second Quarter .......................... 16-1/4 11 -1/8
Third Quarter ........................... 16-3/4 12
Fourth Quarter .......................... 16 -3/8 10 -3/8
Year Ended December 31, 1995
First Quarter ........................... 16-3/4 12-1/2
Second Quarter .......................... 17 -5/8 13 -7/8
Third Quarter ........................... 27 17
Fourth Quarter .......................... 40 -7/8 25- 3/8
Year Ended December 31, 1996
First Quarter ........................... 51-1/2 36-1/2
Second Quarter (through May 6, 1996) ... 56-3/4 45-1/2
</TABLE>
- ------------
(1) The prices in this table have been adjusted to reflect the two-for-one
stock split effected in the form of a stock dividend paid on April 4,
1994 to stockholders of record on March 14, 1994, and to reflect the
two-for-one stock split effected in the form of a stock dividend paid
on February 14, 1996 to stockholders of record on January 30, 1996.
A recently reported last sale price of the Company's Common Stock on the
NYSE is set forth on the cover page of this Prospectus Supplement. At May 6,
1996, there were 312 holders of record of the Company's Common Stock.
The Company distributed its casino development business to its
stockholders in November 1994. The Company has never declared or paid any
cash dividends on the Common Stock. The Company expects to retain its
earnings for the development and expansion of its business and the repayment
of indebtedness and, therefore, does not intend to pay dividends on its
Common Stock in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and
will depend upon the earnings of the Company, its financial condition,
capital requirements and other factors as the Company's Board of Directors
may deem relevant.
S-12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995 and pro forma as adjusted to give effect to (i) the
offering of the Shares (assuming that the Underwriters' over-allotment option
is not exercised); (ii) the issuance of the Company's Common Stock in
connection with the acquisition of two United States non-owned Century 21
regions; and (iii) the February 22, 1996 issuance of $240 million of 4 3/4 %
Convertible Senior Notes.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
PRO FORMA AS
HISTORICAL ADJUSTED
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt ....................... $ 2,249 $ 2,249
============ =============
Long-term debt(1):
5 7/8 % Senior Notes due 1998 .......................... $149,715 $ 149,715
41/2% Convertible Senior Notes due 1999 ................ 149,971 149,971
43/4% Convertible Senior Notes due 2003 ................ -- 240,000
Other long-term debt ................................... 1,092 1,092
------------ -------------
Total long-term debt ................................ 300,778 540,778
------------ -------------
Series A Adjustable Rate Preferred Stock of Century 21 . 80,000 80,000(2)
Stockholders' equity:
Preferred Stock, $1.00 par value, authorized
10,000,000 shares; none issued and outstanding ....... -- --
Common Stock, $0.01 par value, authorized 300,000,000
shares; 102,538,756 shares issued and outstanding
(118,461,756 shares issued and outstanding, pro forma
as adjusted) .......................................... 1,025 1,184
Additional paid-in capital ............................. 475,562 1,346,403
Retained earnings ...................................... 83,604 83,604
------------ -------------
Total stockholders' equity ............................ 560,191 1,431,191
------------ -------------
Total capitalization ................................ $940,969 $2,051,969
============ =============
</TABLE>
- ------------
(1) The Company has 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 December 31, 1995 the
Company had no outstanding borrowings under its revolving credit
facility.
(2) On February 28, 1996, the Company redeemed $80 million of the Series A
Adjustable Rate Preferred Stock of Century 21.
S-13
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the following transactions had occurred on December 31, 1995:
(1) the Merger;
(2) the receipt of proceeds from the offering of the Shares, to the
extent necessary to finance the purchase of Coldwell Banker and the
related repayment of indebtedness of Coldwell Banker and to pay
acquisition expenses;
(3) the following acquisitions (collectively the "1996 Acquisitions"):
[a] six non-owned Century 21 regions ("Century 21 NORS");
[b] assets comprising the Travelodge franchise system
("Travelodge");
[c] assets comprising the Electronic Realty Associates franchise
system ("ERA");
(4) the February 22, 1996 issuance of $240 million of 4-3/4%
Convertible Senior Notes due 2003 (the "43/4% Notes") 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 the above transactions and 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, management believes that certain
additional cost savings and revenue enhancements 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 that the Company will complete the acquisition of
Coldwell Banker, in which case the Company would retain the proceeds from the
offering of the Shares 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.
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 Company" and "Recent Developments" in this Prospectus
Supplement and the consolidated financial statements and related notes of the
Company included in its Annual Report on Form 10-K and the financial
statements and related notes of the acquired companies included or
incorporated by reference in this Prospectus Supplement.
S-14
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
COLDWELL 1996 PRO FORMA
HFS BANKER ACQUISITIONS ADJUSTMENT (A) PRO FORMA
------------ ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................. $ 16,109 $ 21,449 $ 12,198 $(31,051) $ 18,705
Royalty accounts and notes receivable, net 37,326 12,499 15,050 (14,356) 50,519
Relocation receivables ..................... 51,180 47,313 -- -- 98,493
Marketing and reservation receivables, net 22,297 -- -- -- 22,297
Other current assets ....................... 21,304 4,686 3,550 (2,097) 28,014
571
Deferred income taxes ...................... 20,200 4,818 -- (4,818) 20,200
------------ ----------- -------------- -------------- ------------
Total current assets ........................ 168,416 90,765 30,798 (51,751) 238,228
Property and equipment, net ................. 67,892 63,230 3,717 (41,947) 92,892
Franchise agreements, net ................... 517,218 14,780 46,220 578,218
Excess of cost over fair value of net assets
acquired, net .............................. 356,754 37,091 -- 164,217 558,062
Intangible assets -- Coldwell Banker ....... -- -- -- 716,308 716,308
Deferred income taxes ....................... -- 9,551 -- (1,106) 8,445
Other assets ................................ 55,528 9,292 7,508 (6,867) 68,890
3,429
------------ ----------- -------------- -------------- ------------
Total ....................................... $1,165,808 $ 209,929 $ 56,803 $828,503 $2,261,043
============ =========== ============== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities ............................... $ 80,260 $ 122,617 $ 28,373 $(59,423) $ 171,827
Income taxes payable ....................... 38,640 9,002 -- (9,002) 38,640
Accrued acquisition obligations ............ 3,740 -- -- 21,708 25,448
Current portion of long-term debt .......... 2,249 37,425 4,409 (5,130) 38,953
------------ ----------- -------------- -------------- ------------
Total current liabilities ................... 124,889 169,044 32,782 (51,847) 274,868
------------ ----------- -------------- -------------- ------------
Long-term debt .............................. 300,778 84,905 11,252 (95,538) 476,477
175,080
Other non-current liabilities ............... 17,150 2,653 14,731 (17,327) 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 ............................... 1,025 58 77 11 1,171
Additional paid-in capital ................. 475,562 59,124 39,008 671,222 1,244,916
Retained earnings (deficit) ................ 83,604 (105,855) (41,047) 146,902 83,604
------------ ----------- -------------- -------------- ------------
Total stockholders' equity (deficit) ....... 560,191 (46,673) (1,962) 818,135 1,329,691
------------ ----------- -------------- -------------- ------------
Total ....................................... $1,165,808 $ 209,929 $ 56,803 $828,503 $2,261,043
============ =========== ============== ============== ============
</TABLE>
- ------------
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.
S-15
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL COMBINED BALANCE SHEET OF 1996 ACQUISITIONS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................. $ 4,956 $ -- $ 7,242 $ 12,198
Royalty accounts and notes receivable, net 9,617 3,726 1,707 15,050
Other current assets ...................... 479 612 2,459 3,550
------------ ------------ ---------- ----------
Total current assets ....................... 15,052 4,338 11,408 30,798
Property and equipment, net ................ 2,674 333 710 3,717
Franchise agreements, net .................. -- -- 14,780 14,780
Other assets ............................... 3,562 1,420 2,526 7,508
------------ ------------ ---------- ----------
Total ...................................... $21,288 $6,091 $ 29,424 $ 56,803
============ ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities .............................. $ 5,058 $3,252 $ 20,063 $ 28,373
Current portion of long-term debt ........ 35 -- 4,374 4,409
------------ ------------ ---------- ----------
Total current liabilities .................. 5,093 3,252 24,437 32,782
Long-term debt ............................. 309 -- 10,943 11,252
Other non-current liabilities .............. 579 -- 14,152 14,731
STOCKHOLDERS' EQUITY
Common stock .............................. 77 -- -- 77
Additional paid-in capital ................ 104 -- 38,904 39,008
Retained earnings (deficit) ............... 15,126 2,839 (59,012) (41,047)
------------ ------------ ---------- ----------
Total stockholders' equity (deficit) ...... 15,307 2,839 (20,108) (1,962)
------------ ------------ ---------- ----------
Total ...................................... $21,288 $6,091 $ 29,424 $ 56,803
============ ============ ========== ==========
</TABLE>
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.
S-16
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
COLDWELL ACQUIRED PRO FORMA
HFS BANKER COMPANIES ADJUSTMENTS PRO FORMA
---------- ---------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE:
Franchise ........................... $361,238 $ 68,064 $128,233 $ 25,950 (B) $583,485
Owned brokerage business ............ -- 535,207 -- (535,207)(C) --
Relocation services ................. 8,204 75,866 6,514 -- 90,584
Other ............................... 43,541 20,264 29,848 (4,421) 89,232
---------- ---------- ----------- -------------- -----------
Total revenue ..................... 412,983 699,401 164,595 (513,678) 763,301
---------- ---------- ----------- -------------- -----------
EXPENSES:
Marketing and reservation ........... 143,965 -- 20,996 -- 164,961
Selling, general and administrative 55,538 32,367 102,857 (50,537)(D) 140,225
Ramada license fee .................. 18,911 -- -- -- 18,911
Owned brokerage ..................... -- 521,376 -- (521,376)(C) --
Depreciation and amortization ...... 30,857 22,425 8,483 11,049 (E) 72,814
Interest ............................ 20,124 5,329 6,227 (23) (F) 31,657
Relocation .......................... 3,783 62,439 4,881 -- 71,103
Other ............................... 3,235 -- 14,757 (399)(G) 17,593
---------- ---------- ----------- -------------- -----------
Total expenses .................... 276,413 643,936 158,201 (561,286) 517,264
---------- ---------- ----------- -------------- -----------
Income before income taxes and
minority interest ................... 136,570 55,465 6,394 47,608 246,037
Provision for income taxes ........... 55,175 24,385 3,542 16,297 (H) 99,399
---------- ---------- ----------- -------------- -----------
Income before minority interest ..... 81,395 31,080 2,852 31,311 146,638
Minority interest-preferred dividend 1,665 -- -- 1,796 (I) 3,461
---------- ---------- ----------- -------------- -----------
Net income ........................... $ 79,730 $ 31,080 $ 2,852 $ 29,515 $143,177
========== ========== =========== ============== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income .......................... $ 0.73 $ 1.11
========== ===========
Weighted average common and common
equivalent shares outstanding ..... 115,654 17,789 (J) 133,443
========== ============== ===========
</TABLE>
- ------------
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.
S-17
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL COMBINED STATEMENTS OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
CCI(1) CENTURY 21(1) NORS TRAVELODGE ERA TOTAL
------- ------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Franchise .......................... $ -- $53,992 $29,021 $18,361 $26,859 $128,233
Relocation services ................ -- 6,514 -- -- -- 6,514
Other .............................. 3,326 10,164 403 79 15,876 29,848
------- ------------- ------------ ------------ ---------- ----------
Total revenue .................... 3,326 70,670 29,424 18,440 42,735 164,595
------- ------------- ------------ ------------ ---------- ----------
EXPENSES:
Marketing and reservation .......... -- 5,128 2,912 12,956 -- 20,996
Selling, general and administrative -- 47,232 22,851 2,648 30,126 102,857
Depreciation and amortization ..... 529 5,217 578 8 2,151 8,483
Interest ........................... -- 2,904 54 -- 3,269 6,227
Relocation ......................... -- 4,881 -- -- -- 4,881
Other .............................. 1,917 2,751 -- -- 10,089 14,757
------- ------------- ------------ ------------ ---------- ----------
Total expenses ................... 2,446 68,113 26,395 15,612 45,635 158,201
------- ------------- ------------ ------------ ---------- ----------
Income (loss) before income taxes .. 880 2,557 3,029 2,828 (2,900) 6,394
Provision for income taxes .......... 313 2,097 -- 1,132 -- 3,542
------- ------------- ------------ ------------ ---------- ----------
Net income (loss) ................... $ 567 $ 460 $ 3,029 $ 1,696 $(2,900) $ 2,852
======= ============= ============ ============ ========== ==========
</TABLE>
- ------------
(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.
S-18
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITION OF COLDWELL BANKER AND 1996 ACQUISITIONS:
The purchase price for the Coldwell Banker and 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.
The Company acquired Coldwell Banker and the 1996 Acquisitions for the
following consideration ($000's):
<TABLE>
<CAPTION>
COLDWELL 1996
BANKER ACQUISITIONS TOTAL
---------- -------------- ----------
<S> <C> <C> <C>
Cash consideration (i) ................................. $743,500 $171,080 $914,580
Issuance of approximately 0.9 million shares of Company
Common Stock .......................................... -- 46,000 46,000
---------- -------------- ----------
TOTAL PRO FORMA ACQUISITION COST ....................... 743,500 217,080 960,580
---------- -------------- ----------
Fair value of net assets acquired:
Historical book value of acquired companies .......... (46,673) (1,962) (48,635)
Elimination of net assets (liabilities) not acquired
or assumed:
Cash and cash equivalents ............................ 1,147 (12,198) (11,051)
Accounts and notes receivable ........................ (3,032) (11,324) (14,356)
Deferred income taxes, current ....................... (4,818) -- (4,818)
Other current assets ................................. 1,453 (3,550) (2,097)
Property and equipment ............................... (38,230) (3,717) (41,947)
Franchise agreements ................................. -- (14,780) (14,780)
Deferred income taxes, non-current ................... (9,551) -- (9,551)
Other assets ......................................... (759) (6,108) (6,867)
Accounts payable and other ........................... 31,050 28,373 59,423
Income taxes payable ................................. 9,002 -- 9,002
Current portion of long-term debt .................... 721 4,409 5,130
Long-term debt ....................................... 84,286 11,252 95,538
Other non-current liabilities ........................ 2,596 14,731 17,327
Fair value of assets acquired and liabilities assumed:
Deferred income taxes -- current (ii) ................. -- 8,445 8,445
Franchise agreements .................................. 61,000 61,000
Accrued acquisition liabilities ....................... -- (21,708) (21,708)
---------- -------------- ----------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED ........ 27,192 52,863 $ 80,055
---------- -------------- ==========
INTANGIBLE ASSETS -- COLDWELL BANKER (III) ............. $716,308
==========
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED . $164,217
==============
</TABLE>
- ------------
(i) The adjustment reflects $640,000 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. The pro forma adjustment to cash includes $20,000
of purchase price paid with acquired Coldwell Banker cash.
(ii) 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.
(iii) The Company has not completed the valuation of franchise agreements and
other identifiable intangible assets.
S-19
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
A. ACQUISITION OF COLDWELL BANKER AND 1996 ACQUISITIONS: (Continued)
The pro forma adjustments include the elimination of Coldwell Banker and
1996 Acquisitions' stockholders' net deficit, the issuance of approximately
13.6 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 among the 1996 Acquisitions. 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 $55 per share
representing the closing price on the date the Coldwell Banker acquisition
was publicly announced and expenses related to the offering of the Shares
approximating $26.5 million. The adjustment to stockholders' equity is
calculated as follows ($000's):
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ------------ ------------- ----------
$
<S> <C> <C> <C> <C>
Issuance of Company Common Stock .............. $146 $769,354 -- $769,500
Elimination of Coldwell Banker stockholders'
net deficit .................................. (58) (59,124) 105,855 46,673
Elimination of 1996 Acquisitions stockholders'
net deficit .................................. (77) (39,008) 41,047 1,962
-------- ------------ ------------- ----------
Adjustment to stockholders' equity ............ $ 11 $671,222 $146,902 $818,135
======== ============ ============= ==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Eliminate:
Discontinued operations ............................. $ (57)
Century 21 revenue included as Century 21 NORS (1996
Acquisitions) SG&A ................................. (4,500)
Add:
Franchise fees from Owned Brokerage Business ...... 30,507
---------
Total ............................................... $25,950
=========
</TABLE>
C. OWNED BROKERAGE BUSINESS 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 for the benefit of the real estate franchisees
represented by the owned brokerage offices of the Trust.
S-20
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
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):
<TABLE>
<CAPTION>
COLDWELL CENTURY 21
CENTURY 21 BANKER NORS TRAVELODGE ERA TOTAL
------------ ---------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Payroll and related ........ $10,885 $ -- $ 7,706 $1,110 $7,236 $26,937
Professional ............... 2,693 1,500 1,486 154 387 6,220
Occupancy .................. 3,628 2,754 186 1,172 7,740
Conventions and meetings .. 1,302 410 1,712
Franchise fees (see Note B) 4,500 4,500
Other ...................... 1,826 (1,517) 1,916 167 1,036 3,428
------------ ---------- ------------ ------------ -------- ---------
SUB-TOTAL .................. $20,334 $ (17) $18,772 $1,617 $9,831 $50,537
============ ========== ============ ============ ======== =========
</TABLE>
E. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
<TABLE>
<CAPTION>
CCI COLDWELL 1996
MERGER CENTURY 21 BANKER ACQUISITIONS TOTAL
-------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Elimination of historical expense ........... $(529) $(5,217) $(22,425) $(2,737) $(30,908)
Property and equipment ...................... 100 534 1,314 -- 1,948
Information data base ....................... 375 -- -- 375
Excess of cost over fair value of net assets
acquired ................................... 289 2,041 -- 4,107 6,437
Intangible assets -- Coldwell Banker ....... -- -- 28,652 -- 28,652
Franchise agreements ........................ 1,628 -- 2,917 4,545
-------- ------------ ----------- -------------- -----------
Total ....................................... $ 235 $(1,014) $ 7,541 $ 4,287 $ 11,049
======== ============ =========== ============== ===========
</TABLE>
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 of 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.
S-21
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
E. DEPRECIATION AND AMORTIZATION: (Continued)
Coldwell Banker
The estimated fair value 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.
1996 Acquisitions
The estimated fair values of 1996 Acquisitions franchise agreements
aggregate $61.0 million and are being amortized on a straight line basis over
the periods to be benefited, which range from twelve to thirty years. The
estimated fair values of 1996 Acquisitions excess of cost over fair value of
net assets acquired aggregate $164.2 million, and are each being amortized on
a straight line basis over the periods to be benefited, which are forty
years.
F. INTEREST EXPENSE ($000'S):
<TABLE>
<CAPTION>
<S> <C>
Elimination of historical interest expense of 1996
Acquisitions and Century 21 $(6,227)
Reversal of Coldwell Banker ................................... (5,329)
Century 21 .................................................... 2,835
4-3/4 % Notes ................................................. 8,698
----------
TOTAL ......................................................... $ (23)
==========
</TABLE>
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):
<TABLE>
<CAPTION>
<S> <C>
Expense associated with the Owned Brokerage Business ...... $ 138
Expense associated with revolving credit facility
borrowings which will be repaid with proceeds from the
offering of the Shares .................................... 5,191
-------
Total ...................................................... $5,329
=======
</TABLE>
S-22
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
F. INTEREST EXPENSE ($000'S): (Continued)
4 3/4 % Notes
The pro forma adjustment reflects interest expense of $8.7 million related
to the issuance of the 4-3/4% Notes to the extent that such proceeds were
used to finance the 1996 Acquisitions.
G. 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.
H. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
<S> <C>
Reversal of historical provision of:
Company ............................... $(55,175)
CCI ................................... (313)
Century 21 ............................ (2,097)
Coldwell Banker ....................... (24,385)
Travelodge ............................ (1,132)
Pro forma provision .................... 99,399
-----------
Incremental provision for income taxes $ 16,297
===========
</TABLE>
The pro forma effective tax rate approximates the Company's historical
effective tax rate.
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 4.9% dividend rate.
J. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
<TABLE>
<CAPTION>
<S> <C>
CCI ............ 896
Century 21 ..... 2,334
Coldwell Banker 13,636
Century 21 NORS 923
--------
Total .......... 17,789
========
</TABLE>
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. The pro
forma adjustment reflects the issuance of 13.6 million shares in the offering
of the Shares, the proceeds of which will be used to finance the acquisition
of Coldwell Banker and the related repayment of Coldwell Banker indebtedness
and to pay acquisition expenses.
S-23
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated the date hereof, (the "Underwriting Agreement"),
a syndicate of United States underwriters (the "U.S. Underwriters") named
below has severally agreed to purchase, and the Company has agreed to sell to
them, severally, Shares of the Company's Common Stock, and a syndicate of
international underwriters (the "International Underwriters") named below has
severally agreed to purchase, and the Company has agreed to sell to them,
severally, the respective number of Shares of Common Stock set forth opposite
the names of such Underwriters below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------- ------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated ..........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ...............................
Bear, Stearns & Co. Inc. ...................
Chase Securities Inc. ......................
Goldman, Sachs & Co. .......................
Montgomery Securities ......................
------------
Subtotal .................................. 12,000,000
------------
International Underwriters:
Morgan Stanley & Co. International Limited
Merrill Lynch International ................
Bear, Stearns International Limited .......
Chase Securities Inc. ......................
Goldman Sachs International ................
Montgomery Securities ......................
------------
Subtotal .................................. 3,000,000
------------
Total ................................... 15,000,000
============
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that
the obligations of the several Underwriters to pay for and accept delivery of
the Shares are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the Shares offered hereby if any such Shares are
taken (other than those covered by the Underwriters' over-allotment option
described below).
Pursuant to the Agreement Between U.S. and International Underwriters
dated the date hereof, each U.S. Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any U.S. Shares (as defined
below) for the account of anyone other than a United States or Canadian
Person (as defined below) and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any U.S. Shares or distribute any
prospectus relating to the U.S. Shares outside the United States or Canada or
to anyone other than a United States or Canadian Person. Pursuant to the
Agreement Between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions: (i) it
is not purchasing any International Shares (as defined below) for the account
of any United States or Canadian Person and (ii) it has not offered or sold,
and will not offer or sell,
S-24
<PAGE>
directly or indirectly, any International Shares or distribute any
prospectus relating to the International Shares within the United States or
Canada or to any United States or Canadian Person. The foregoing limitations
do not apply to stabilization transactions or to certain other transactions
specified in the Agreement Between U.S. and International Underwriters. As
used herein, "United States or Canadian Person" means any national or
resident of the United States or Canada, or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All the
Shares to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the
"International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and the International
Underwriters of any number of Shares to be purchased pursuant to the
Underwriting Agreement, as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concessions to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters,
each U.S. Underwriter has represented that it has not offered or sold, and
has agreed not to offer or sell, any of the Shares, directly or indirectly,
in any province or territory of Canada in contravention of the securities
laws thereof and has represented that any offer or sale of the Shares in
Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer
or sale is made. Each U.S. Underwriter has further agreed to send to any
dealer who purchases from it any Shares a notice stating in substance that,
by purchasing such Shares, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, directly or indirectly, any of
such Shares in any province or territory of Canada or to, or for the benefit
of, any resident of any province or territory of Canada in contravention of
the securities laws thereof and that any offer or sale of the Shares in
Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer
or sale is made, and that such dealer will deliver to any other dealer to
whom it sells any of such Shares a notice to the foregoing effect.
Each International Underwriter has represented and agreed that (i) it has
not offered or sold and will not offer or sell any Shares to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purpose of their business or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations
1995 (the "Regulations"), (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 and the Regulations
with respect to anything done by it in relation to the Shares in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the offering of the Shares if
that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person
to whom such document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page of this
Prospectus Supplement, and part to certain dealers at a price which
represents a concession not in excess of $ per Share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share to other Underwriters or to certain
dealers. After the offering of the Shares, the public offering price and
other selling terms may from time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to an aggregate of 2,250,000 additional Shares at the public
offering price set forth on the cover page hereof less underwriting discounts
and commissions. The Underwriters may exercise such option to purchase solely
for the purpose of covering
S-25
<PAGE>
over-allotments, if any, made in connection with the offering of the Shares.
To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Shares as the number of Shares set forth
opposite to such Underwriter's name in the preceding table bears to the total
number of Shares in this offering.
The Company and certain of its officers and directors have agreed that,
for a period of 90 days from the date of this Prospectus Supplement, they
will not, without the prior written consent of Morgan Stanley & Co.
Incorporated, in any transaction settled by delivery of Common Stock or other
securities, in cash or otherwise, (i) register, offer, pledge, sell, contract
to sell, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, Common Stock of the Company or (ii) enter
into any swap or similar agreement that transfers, in whole or in part, the
economic risk of ownership of such Common Stock (except for Common Stock
issued as part of the offering of the Shares, upon conversion of the
Company's 4 1/2 % Convertible Senior Notes due 1999, upon conversion of the
Company's 4 3/4 % Convertible Senior Notes due 2003 or pursuant to the
Company's stock option plan or shares of Common Stock issued by the Company
in connection with strategic acquisitions, provided that any such shares in
excess of 5% of the then outstanding shares of Common Stock shall remain
subject to the foregoing restrictions).
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Certain of the Underwriters have provided, and may from time to time
continue to provide, investment banking and other financial services for the
Company and its affiliates.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York,
New York 10022 and for the Underwriters by Shearman & Sterling, New York, New
York.
S-26
<PAGE>
PROSPECTUS
----------
HFS INCORPORATED
DEBT SECURITIES AND COMMON STOCK
HFS Incorporated (the "Company"), directly or through such agents, dealers
or underwriters as may be designated from time to time, may offer, issue and
sell, together or separately, its (i) debt securities (the "Debt
Securities"), which may be senior debt securities (the "Senior Debt
Securities") or subordinated debt securities (the "Subordinated Debt
Securities"), and (ii) shares of its common stock, par value $0.01 per share
(the "Common Stock", together with the Debt Securities, the "Securities"),
with an aggregate public offering price of up to $1,000,000,000 (or its
equivalent in foreign currencies or foreign currency units based on the
applicable exchange rate at the time of offering) in amounts, at prices and
on terms to be determined at the time of sale. The Debt Securities may be
issued as exchangeable and/or convertible Debt Securities exchangeable for or
convertible into shares of Common Stock. When a particular series of
Securities is offered, a supplement to this Prospectus (each a "Prospectus
Supplement") will be delivered with this Prospectus. The Prospectus
Supplement will set forth the terms of the offering and sale of the offered
Securities.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "HFS". On April 22, 1996, the last reported sale price of the
Common Stock on the New York Stock Exchange was $51.875 per share. The
Company has not yet determined whether any of the Debt Securities offered
hereby will be listed on any exchange or over-the-counter market. If the
Company decides to seek listing of any such Debt Securities, the Prospectus
Supplement relating thereto will disclose such exchange or market.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" ON PAGE 3.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
The Securities may be sold directly by the Company, through agents
designated from time to time or to or through underwriters or dealers. The
Company reserves the sole right to accept, and together with its agents, from
time to time, to reject in whole or in part any proposed purchase of
Securities to be made directly or through agents. See "Plan of Distribution."
If any agents or underwriters are involved in the sale of any Securities, the
names of such agents or underwriters and any applicable fees, commissions or
discounts will be set forth in the applicable Prospectus Supplement.
This Prospectus may not be used to consummate any sale of Securities
unless accompanied by a Prospectus Supplement.
----------------
The date of this Prospectus is April 30, 1996.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the year ended December
31, 1995; (ii) the description of the Company's Capital Stock which is
contained in its Registration Statement on Form 8-A dated September 16, 1992,
including the amendment on Form 8-A/A dated September 1, 1995, including any
amendment or report filed for the purpose of updating such description; (ii)
Current Reports on Form 8-K dated February 16, 1996, March 8, 1996 and April
5, 1996; and (iii) Current Report on Form 8-K/A, dated August 18, 1995, all
of which have previously been filed by the Company with the Commission, are
incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to
be incorporated herein by reference and to be a part hereof from the date of
filing of such documents. Any statement contained in this Prospectus or in a
document incorporated or deemed to be incorporated herein by reference shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated herein by reference or
in any Prospectus Supplement modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have
been or may be incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to James E.
Buckman, Esq., Executive Vice President and General Counsel, 339 Jefferson
Road, Parsippany, New Jersey 07054, (201) 428-9700.
IN CONNECTION WITH ANY UNDERWRITTEN OFFERING OF THE SECURITIES, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICES OF SUCH SECURITIES OR OTHER SECURITIES OF THE
COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
THE COMPANY
The Company's principal executive offices are located at 339 Jefferson
Road, Parsippany, New Jersey 07054 (telephone number: (201) 428-9700).
HFS Incorporated ("HFS" or the "Company"), formerly named Hospitality
Franchise Systems, Inc., is the world's largest franchisor of hotels and
residential real estate brokerage offices. The Company operates nine national
hotel franchise systems: Days Inn(Registered Trademark), Ramada(Registered
Trademark) (in the United States), Howard Johnson's(Registered Trademark),
Super 8(Registered Trademark), Travelodge(Registered Trademark) (in North
America), Park Inn International(Registered Trademark) (in the United States
and Canada), Villager(Service Mark) Lodge, Knights Inn(Registered Trademark) and
Wingate Inn(Service Mark). In aggregate, these franchise systems consist of
approximately 5,000 properties and 475,000 hotel rooms worldwide. The Company
also operates the Century 21(Registered Trademark) and Electronic Realty
Associates or ERA(Registered Trademark) (collectively "ERA") real estate
brokerage franchise systems which it acquired on August 1, 1995 and February 12,
1996, respectively. Century 21 and ERA are the world's largest and fourth
largest franchisors, respectively, of residential real estate brokerage offices,
with more than an aggregate of 8,400 independently owned and operated franchised
offices located worldwide.
As a franchisor, the Company licenses the owners and operators of
independent businesses, principally hotels and real estate brokerage offices,
to use the Company's brand names. The Company does not own or operate hotels
or real estate brokerage offices. Instead, the Company provides its customers
with services designed to increase their revenue and profitability. These
services allow customers to retain independence and local control while
benefiting from the economies of scale of widely promoted brand names and
standards of service, national and regional direct marketing and co-marketing
arrangements and global procurement. The most important of these services for
hotel owners are access to a national reservation system, national
advertising and promotional campaigns, co-marketing programs, and volume
purchasing discounts. The most significant services to real estate brokerages
are national advertising and promotion, referrals, and training. The Company
believes significant opportunities exist to expand the co-marketing and
volume purchasing benefits that it currently provides to its hotel
franchisees and to its real estate brokerage franchisees.
RISK FACTORS
Prior to making an investment decision with respect to the Securities
offered hereby, prospective investors should carefully consider the specific
factors set forth below, together with all of the other information appearing
herein, in light of their particular investment objectives and financial
circumstances.
HOLDING COMPANY STRUCTURE
The Company has no significant operations other than those incidental to
its ownership of the capital stock of its subsidiaries. As a holding company,
the Company is dependent on dividends or other intercompany transfers of
funds from its subsidiaries to meet the Company's debt service and other
obligations. Claims of creditors of the Company's subsidiaries, including
trade creditors, will generally have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Debt Securities. See "Description of the Debt
Securities."
COMPETITION FOR NEW FRANCHISE PROPERTIES AND GENERAL RISKS OF THE LODGING AND
RESIDENTIAL REAL ESTATE BROKERAGE INDUSTRIES
As a franchisor, the Company's products are its brand names and the
support services it provides to its franchisees. Competition among national
brand franchisors in the lodging and residential real estate brokerage
industries to grow their franchise systems is intense. In addition, smaller
chains pose some degree of competitive pressure in selected markets. The
Company believes that competition for the sale of franchises in such
industries is based principally upon the perceived value and quality of the
brand and services as well as the nature of those services offered to
franchisees. The Company believes that prospective franchisees value a
franchise based upon their view of the relationship of conversion costs and
future charges to the potential for increased revenue and profitability.
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<PAGE>
The Company's revenue varies directly with franchisees' gross revenue, but
is not directly dependent upon franchisees' profitability. However, the
Company believes that the perceived value of its brand names to prospective
franchisees is in part a function of the success of its existing franchisees.
The ability of the Company's franchisees to compete in the lodging and
residential real estate brokerage industries is important to the Company's
prospects because franchise fees are based on franchisees' gross revenue. The
Company's franchisees are generally in intense competition with franchisees
of other systems, independent properties and realtors, and owner-operated
chains. Competition in the lodging business for hotel guests and in the
residential real estate brokerage business for house sales is based upon many
factors, each of which may be more or less important in a given market and
location. A franchisee's success may also be affected by general, regional
and local economic conditions.
REGULATION
The sale of franchises is regulated by various state laws as well as by
the Federal Trade Commission (the "FTC"). The FTC requires that franchisors
make extensive disclosure to prospective franchisees but does not require
registration. A number of states require registration or disclosure in
connection with franchise offers and sales. In addition, several states have
"franchise relationship laws" or "business opportunity laws" that limit the
ability of franchisors to terminate franchise agreements or to withhold
consent to the renewal or transfer of these agreements. While the Company's
franchising operations are not materially adversely affected by such existing
regulations, the Company cannot predict the effect any future legislation or
regulation may have on its business operations or financial condition. The
Company's casino marketing business is also subject to extensive government
regulation and licensing requirements. The Federal Real Estate Settlement
Procedures Act and state real estate brokerage laws restrict payments which
real estate brokers may receive in connection with the sale of residences.
Such laws may to some extent restrict preferred vendor arrangements involving
the Company's real estate brokerage franchisees.
DEPENDENCE ON RAMADA LICENSE AGREEMENT
The Company franchises the Ramada brand names to lodging facility owners
in the United States pursuant to a license agreement from an indirect
subsidiary of New World Development Co., Ltd., a Hong Kong company ("New
World"). The license terminates in 2024, but the Company has the right to
renew the license for up to an additional 45 years. In addition, the license
may be terminated by New World for the failure on the part of the Company to
satisfy certain conditions. Termination of this license would result in the
loss of the income stream from franchising the Ramada brand names and, if
such termination occurred prior to its scheduled termination date, would
result in the payment by the Company of liquidated damages equal to three
years of license fees. The license termination provisions are such that the
Company does not believe that it will have any difficulty complying with all
of the material terms of the license agreement; however, termination of such
license, if it occurred, would have a material adverse effect on the
Company's business and financial condition and would constitute an event of
default under the Company's Credit Agreement, dated as of December 16, 1993,
among the Company, Chemical Bank, as agent, and the banks signatories thereto
(the "Credit Agreement").
CERTAIN ANTI-TAKEOVER EFFECTS; DIVESTITURE AND LOSS OF VOTING RIGHTS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation may have the effect of requiring a stockholder of the Company
to divest its shares of Common Stock or Debt Securities or forfeit its voting
rights in certain circumstances where such stockholder's ownership of Common
Stock or Debt Securities would adversely affect the Company's ability to
secure requisite gaming related approvals or comply with certain governmental
requirements (the "Gaming Provisions"). The Gaming Provisions may be deemed
to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that a stockholder might consider in its best interest.
In addition, the Company's Board of Directors has the ability to establish
by resolution one or more series of preferred stock having such number of
shares, designation, relative voting rights, dividend rate, liquidation and
other rights, preferences and limitations as may be fixed by the Company's
Board of
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Directors, without any further stockholder approval. The issuance of a new
series of preferred stock could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. See "Description of
the Debt Securities--Disqualified Holders."
ABSENCE OF PUBLIC MARKET
There is currently no established market for the Debt Securities. It is
uncertain whether the Company will seek to list the Debt Securities on any
recognized stock exchange or on the Nasdaq National Market. If the Company
applies to list the Debt Securities on any stock exchange or on the Nasdaq
National Market there can be no assurance that such a listing will occur,
that an active trading market for the Debt Securities will develop subsequent
to such listing, or as to the price at which the Debt Securities may trade in
the public market from time to time subsequent to such listing. The absence
of an active trading market for the Debt Securities may adversely affect the
liquidity of the Debt Securities. Such a decline may adversely affect the
liquidity of, and trading markets, if available, for the Debt Securities,
independent of the financial performance of the Company. The Company's 5 7/8%
Senior Notes due 1998, 4 1/2% Convertible Senior Notes due 1999 and 4 3/4%
Convertible Senior Notes due 2003 are listed on the New York Stock Exchange.
USE OF PROCEEDS
Unless otherwise set forth in the Prospectus Supplement, the net proceeds
from the offering of the Securities will be used for general corporate
purposes, which may include acquisitions, repayment of other debt, working
capital and capital expenditures. When a particular series of Securities is
offered, the Prospectus Supplement relating thereto will set forth the
Company's intended use for the net proceeds received from the sale of such
Securities. Pending application for specific purposes, the net proceeds may
be invested in short-term marketable securities.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the unaudited consolidated ratio of
earnings to fixed charges of the Company for the periods indicated.
<TABLE>
<CAPTION>
PRO FORMA (2) HISTORICAL
------------- ------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1995 1994 1993 1992 1991
------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges (1) ....... 6.42 7.27 5.48 3.77 2.10 *
Excess (deficiency) of
earnings to fixed
charges
(amounts in thousands) . $180,546 $136,570 $90,397 $60,228 $28,703 $(4,909)
</TABLE>
- ------------
* Earnings were inadequate to cover fixed charges.
(1) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and extraordinary items plus fixed charges, less
capitalized interest by fixed charges. Fixed charges consist of
interest expense on all indebtedness (including amortization of
deferred financing costs) and the portion of operating lease rental
expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals).
(2) The pro forma Consolidated Ratio of Earnings to Fixed Charges for the
year ended December 31, 1995 is presented as if each of the following
occurred as of January 1, 1995: the acquisition of Century 21, ERA, the
six non-owned Century 21 regions, Travelodge and Casino & Credit
Services, Inc.'s gambling patron credit information business, Central
Credit, Inc.
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GENERAL DESCRIPTION OF SECURITIES
The Company directly or through agents, dealers, or underwriters
designated from time to time, may offer, issue and sell, together or
separately, its (a) secured or unsecured debt securities (the "Debt
Securities") of the Company, in one or more series, which may be either
senior debt securities (the "Senior Debt Securities") and/or subordinated
debt securities (the "Subordinated Debt Securities") and/or (b) shares of
common stock of the Company, par value $.01 per share (the "Common Stock",
together with the Debt Securities, the "Securities"), or any combination of
the foregoing, with an aggregate public offering price of up to
$1,000,000,000 (or its equivalent in foreign currencies or foreign currency
units based on the applicable exchange rate at the time of offering) in
amounts, at prices and on terms to be determined at the time of sale. The
Debt Securities may be issued as exchangeable and/or convertible Debt
Securities exchangeable for or convertible into shares of Common Stock. When
a particular series of Securities is offered, a supplement to this Prospectus
(each a "Prospectus Supplement") will be delivered with this Prospectus. The
Prospectus Supplement will set forth the terms of the offering and sale of
the offered Securities.
DESCRIPTION OF THE DEBT SECURITIES
The Debt Securities may be offered from time to time by the Company as
Senior Debt Securities and/or as Subordinated Debt Securities. The Senior
Debt Securities will be issued under an Indenture, as it may be supplemented
from time to time (the "Senior Indenture"), between the Company and The Bank
of Nova Scotia Trust Company of New York, as trustee (the "Senior Trustee").
The Subordinated Debt Securities will be issued under an Indenture, as it may
be supplemented from time to time (the "Subordinated Indenture"), between the
Company and The Bank of Nova Scotia Trust Company of New York, as trustee
(the "Subordinated Trustee"). The term, "Trustee", as used herein refers to
either the Senior Trustee or the Subordinated Trustee, as appropriate. The
forms of the Senior Indenture and the Subordinated Indenture (being sometimes
referred to herein collectively as the "Indentures" and individually as an
"Indenture") have been filed as exhibits to the Registration Statement. The
terms of the Indentures are also governed by certain provisions of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain material provisions of the Debt Securities does not
purport to be complete and is qualified in its entirety by reference to the
Indentures. All capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to such terms in the Indentures. For a summary of
certain definitions used in this section, see "Certain Definitions" below.
GENERAL
The Indentures will provide for the issuance of Debt Securities in series
up to the aggregate amount from time to time authorized by the Company for
each series. The Prospectus Supplement sets forth the following terms (to the
extent such terms are applicable to such Debt Securities) of and information
relating to the Debt Securities in respect of which this Prospectus is
delivered: (1) the designation of such Debt Securities; (2) classification as
senior or subordinated Debt Securities; (3) the aggregate principal amount of
such Debt Securities; (4) the percentage of their principal amount at which
such Debt Securities will be issued; (5) the date or dates on which such Debt
Securities will mature; (6) the rate or rates, if any, per annum, at which
such Debt Securities will bear interest, or the method of determination of
such rate or rates; (7) the times and places at which such interest, if any,
will be payable; (8) provisions for sinking, purchase or other analogous
fund, if any; (9) the date or dates, if any, after which such Debt Securities
may be redeemed at the option of the Company or of the holder and the
redemption price or prices; (10) the date or the dates, if any, after which
such Debt Securities may be converted or exchanged at the option of the
holder into or for shares of Common Stock of the Company and the terms for
any such conversion or exchange; and (11) any other specific terms of the
Debt Securities. Principal, premium, if any, and interest, if any, will be
payable and the Debt Securities offered hereby will be transferable, at the
corporate trust office of the Trustee's agent in the borough of Manhattan,
City of New York, provided that payment of interest, if any, may be made at
the option of the Company by check mailed to the address of the person
entitled thereto as it appears in the Security Register. (Section 301 of each
Indenture).
If the Prospectus Supplement specifies that a series of Debt Securities is
denominated in a currency or currency unit other than United States dollars,
such Prospectus Supplement shall also specify the
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<PAGE>
denomination in which such Debt Securities will be issued and the coin or
currency in which the principal, premium, if any, and interest, if any, on
such Debt Securities will be payable, which may be United States dollars
based upon the exchange rate for such other currency or currency unit
existing on or about the time a payment is due. Special United States federal
income tax considerations applicable to any Debt Securities so denominated
are also described in the Prospectus Supplement.
The Debt Securities may be issued in registered or bearer form and, unless
otherwise specified in the Prospectus Supplement, in denominations of $1,000
and integral multiples thereof. Debt Securities may be issued in book-entry
form, without certificates. Any such issue will be described in the
Prospectus Supplement relating to such Debt Securities. No service charge
will be made for any transfer or exchange of the Debt Securities, but the
Company or the Trustee may require payment of a sum sufficient to cover any
tax or other government charge payable in connection therewith.
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount from their stated
principal amount. United States Federal income tax consequences and other
considerations applicable thereto will be described in the Prospectus
Supplement.
CERTAIN COVENANTS
The Indentures will contain, among others, the covenants described below.
Limitation on Liens. The Indentures will provide that, subject to the next
succeeding paragraph, neither the Company nor any Restricted Subsidiary shall
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it, except:
(A) Liens existing on the Issue Date, or arising after the Issue Date
pursuant to contracts existing on the Issue Date and any extensions or
renewals thereof not in excess of the amount of the original Lien;
(B) Liens for taxes or assessments and similar charges either (x) not
delinquent or (y) contested in good faith by appropriate proceedings;
(C) Liens incurred or pledges and deposits in connection with
workmen's compensation, unemployment insurance and other social security
benefits, or securing the performance of bids, tenders, leases, contracts
(other than for the repayment of borrowed money), statutory obligations,
progress payments, surety and appeal bonds and other obligations of like
nature, incurred in the ordinary course of business;
(D) Liens imposed by law, such as mechanics', carriers',
warehousemen's, landlords', materialmen's and vendors' liens, incurred in
good faith in the ordinary course of business;
(E) purchase money Liens granted to the vendor or Person financing
the acquisition of property, plant or equipment if (i) limited to the
specific assets acquired; (ii) the debt secured by the Lien is the unpaid
balance of the acquisition cost of the specific assets on which the Lien
is granted; and (iii) the total amount of all such purchase money Liens
does not exceed $30 million at any one time on a consolidated basis;
(F) Liens upon real and/or personal property (whether tangible or
intangible), which property was acquired after the Issue Date (by
purchase, construction or otherwise) by the Company or any Subsidiary,
each of which Lien existed on such property before the time of its
acquisition and was not created in anticipation thereof; provided,
however, that no such Lien shall extend to or cover any property of the
Company or such Subsidiary other than the respective property so acquired
and improvements thereon;
(G) Liens arising under or in connection with sale and leaseback
transactions permitted under Limitation on Sale and Leaseback
Transactions;
(H) Liens arising by reason of any attachment, judgment, decree or
order of any court, so long as any appropriate legal proceedings which
may have been initiated shall not have been finally terminated or so long
as the period within which such proceedings may be initiated shall not
have
7
<PAGE>
expired, any deposit or pledge with any surety company or clerk of any
court, or in escrow, as collateral in connection with, or in lieu of, any
bond on appeal from any judgment or decree against the Company or any
Restricted Subsidiary, or in connection with other proceedings or actions
at law or in equity by or against the Company, provided that such
deposits, pledges, or bonds in the aggregate shall not exceed $10 million
at any one time;
(I) Liens other than those enumerated paragraphs (A) through (H)
above arising in connection with Debt of the Company and of any one or
more Restricted Subsidiaries in an aggregate amount not exceeding at any
one time 10% of Consolidated Net Tangible Assets; and
(J) any extension, renewal, substitution or replacement (or
successive extensions, renewals, substitutions or replacements), as a
whole or in part, of any of the Liens referred to in paragraphs (A)
through (I) above or the Debt secured thereby; provided that (1) such
extension, renewal, substitution or replacement Lien shall be limited to
all or any part of the same Principal Property that secured the Lien
extended, renewed, substituted or replaced (plus improvements on such
property, and plus any other property or assets not then constituting a
Principal Property) and (2) in the case of paragraphs (A) and (F) above,
the Debt secured by such Lien at such time is not increased.
The Company or any Restricted Subsidiary may create or assume any Lien not
permitted by the previous paragraph upon any of its property or assets,
whether now owned or hereafter acquired, if (i) prior written consent to the
creation or assumption thereof shall have been obtained from the Trustee with
the consent of the Holders of a majority in principal amount of the then
Outstanding Debt Securities, or (ii) the Company will make or cause to be
made effective a provision whereby the Debt Securities and all coupons
appertaining thereto will be secured by such Lien equally and ratably with
any and all other Debt so secured. (Section 1009 of each Indenture)
Limitation on Sale and Leaseback Transactions. The Indentures will provide
that the Company will not itself, and will not permit any Restricted
Subsidiary to, enter into any arrangement after the Issue Date with any bank,
insurance company or other lender or investor (other than the Company or
another Restricted Subsidiary) providing for the leasing by the Company or
any such Restricted Subsidiary of any Principal Property (except a lease for
a temporary period not to exceed three years by the end of which it is
intended that the use of such Principal Property by the lessee will be
discontinued) which was or is owned or leased by the Company or a Restricted
Subsidiary and which has been or is to be sold or transferred, more than 120
days after the completion of construction and commencement of full operation
thereof by the Company or such Restricted Subsidiary, to such lender or
investor or to any Person to whom funds have been or are to be advanced by
such lender or investor on the security of such Principal Property (herein
referred to as a "sale and leaseback transaction") unless, either:
(1) the Attributable Debt of the Company and its Restricted
Subsidiaries in respect of such sale and leaseback transaction and all
other sale and leaseback transactions entered into after the Issue Date
(other than such sale and leaseback transactions as are permitted by
paragraph (2) below), plus the aggregate principal amount of Debt secured
by Liens on Principal Properties then outstanding (excluding any such
Debt secured by Liens covered in paragraphs (A) through (H) of Limitation
on Liens above) without equally and ratably securing the Debt Securities,
would not exceed 10% of Consolidated Net Tangible Assets, or
(2) the Company, within 120 days after the sale or transfer, applies
or causes a Restricted Subsidiary to apply an amount equal to the greater
of the net proceeds of such sale or transfer or the fair market value of
the Principal Property so sold and leased back at the time of entering
into such sale and leaseback transaction (in either case as determined by
any two of the following: the Chairman, the President, any Vice
President, the Treasurer and the Controller of the Company) to the
retirement of Debt Securities of any series or other Debt of the Company
(other than Debt subordinated to the Debt Securities) or Debt of a
Restricted Subsidiary, having a stated maturity more than 12 months from
the date of such application or which is extendible at the option of the
obligor thereon to a date more than 12 months from the date of such
application and, unless otherwise expressly provided with respect to any
one or more series of Debt Securities, any
8
<PAGE>
redemption of Debt Securities pursuant to this provision shall not be
deemed to constitute a refunding operation or anticipated refunding
operation for the purposes of any provision limiting the Company's right
to redeem Debt Securities of any one or more such series when such
redemption involves a refunding operation or anticipated refunding
operation; provided that the amount to be so applied shall be reduced by
(i) the principal amount of Debt Securities delivered within 120 days
after such sale or transfer to the Trustee for retirement and
cancellation, and (ii) the principal amount of any such Debt of the
Company or a Restricted Subsidiary, other than Debt Securities
voluntarily retired by the Company or a Restricted Subsidiary within 120
days after such sale or transfer. Notwithstanding the foregoing, no
retirement referred to in this paragraph (2) may be effected by payment
at maturity or pursuant to any mandatory sinking fund payment or any
mandatory prepayment provision.
Notwithstanding the foregoing, where the Company or any Restricted
Subsidiary is the lessee in any sale and leaseback transaction, Attributable
Debt shall not include any Debt resulting from the guarantee by the Company
or any other Restricted Subsidiary of the lessee's obligation thereunder.
(Section 1010 of each Indenture)
Limitation on Debt of Restricted Subsidiaries. The Indentures will provide
that the Company will not permit any Restricted Subsidiary to create, incur,
assume or directly or indirectly guarantee or in any manner become directly
liable for the payment of, any Debt other than (i) trade debt incurred in the
ordinary course of business; (ii) Debt owing by any Restricted Subsidiary to
the Company or any other Restricted Subsidiary arising in the ordinary course
of business for normal business purposes; (iii) Debt in existence on the
Issue Date or required to be incurred pursuant to a contractual obligation in
existence on the Issue Date; or (iv) other Debt not in excess of 10% of Pro
Forma Consolidated Net Tangible Assets. (Section 1011 of each Indenture)
Limitation on Transfers of Principal Franchise Assets. The Indentures will
provide that, except as permitted under the "Merger, Consolidation and Sale
of Assets" section below, neither the Company nor any of its Restricted
Subsidiaries shall in one or a series of related transactions convey, sell,
lease, transfer, assign or otherwise dispose of, directly or indirectly, any
of its Principal Franchise Assets (an "Asset Sale") other than in the
ordinary course of business (which shall be any transaction or series of
related transactions having a dollar amount of less than $3 million), unless
the consideration received is at least equal to the Fair Market Value of the
assets sold or otherwise disposed of. (Section 1012 of each Indenture)
Limitation on Restrictions on Subsidiary Dividends and Other
Distributions. The Indentures will provide that the Company shall not permit
any Restricted Subsidiary to suffer to exist any encumbrance or restriction
(other than pursuant to law, regulation or order or in accordance with the
terms of the Credit Agreement or agreements entered into in connection with
the Credit Agreement) on the ability of any Restricted Subsidiary (i) to pay,
directly or indirectly, dividends or make any other distributions in respect
of its Capital Stock or pay any Debt or other obligation owed to the Company
or any other Restricted Subsidiary; (ii) to make loans or advances to the
Company or any Restricted Subsidiary; or (iii) to transfer any of its
property or assets to the Company or any Restricted Subsidiary, except any
encumbrance or restriction (a) pursuant to any agreement in effect on the
Issue Date, including, without limitation, the Credit Agreement, (b) pursuant
to an agreement entered into by such Restricted Subsidiary prior to the date
on which such Restricted Subsidiary was acquired by the Company and not
entered into in anticipation of becoming a Restricted Subsidiary, (c)
permitted under Limitation on Transfers of Principal Franchise Assets above,
(d) pursuant to customary non-assignment provisions of any lease governing a
leasehold interest, a security agreement, mortgage or deed of trust issued in
connection with Liens permitted under Limitation on Liens above or any other
agreement which does not relate to Debt, provided that any such
non-assignment provision would not have a material adverse effect on the
Company and its Restricted Subsidiaries taken as a whole (as determined in
good faith by the Board of Directors of the Company) or (e) pursuant to an
agreement effecting a renewal, extension, refinancing or refunding of Debt
incurred pursuant to an agreement referred to in clause (a) or (b) above,
provided, however, that the provisions contained in such renewal, extension,
refinancing or refunding agreement relating to such encumbrance or
restriction are no more restrictive in any material respect than the
provisions contained in the agreement the subject thereof. (Section 1013 of
each Indenture)
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<PAGE>
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indentures will provide that the Company shall not consolidate with or
merge into any other corporation or convey, transfer or lease its properties
and assets substantially as an entirety to any Person, unless: (1) the
corporation formed by such consolidation or into which the Company is merged
or the Person which acquires by conveyance or transfer, or which leases, the
properties and assets of the Company substantially as an entirety (A) shall
be a corporation, partnership, limited liability company or trust organized
and validly existing under the laws of the United States of America, any
state thereof or the District of Columbia and (B) shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, the Company's obligation for the due and
punctual payment of the principal of (and premium, if any, on) and interest
on all the Debt Securities and the performance and observance of every
covenant of the Indentures on the part of the Company to be performed or
observed; (2) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; and (3) the
Company or such Person shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and such supplemental indenture comply
with this "Merger, Consolidation and Sale of Assets" section and that all
conditions precedent herein provided for relating to such transaction have
been complied with. This paragraph shall apply only to a merger or
consolidation in which the Company is not the surviving corporation and to
conveyances, leases and transfers by the Company as transferor or lessor.
(Section 801 of each Indenture)
The Indentures will further provide that upon any consolidation by the
Company with or merger by the Company into any other corporation or any
conveyance, transfer or lease of the properties and assets of the Company
substantially as an entirety to any Person in accordance with the preceding
paragraph, the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, transfer or lease is made
shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under the Indentures with the same effect as if such
successor Person had been named as the Company therein, and in the event of
any such conveyance or transfer, the Company (which term shall for this
purpose mean HFS Incorporated or any successor Person which shall theretofore
become such in the manner described in the preceding paragraph), except in
the case of a lease, shall be discharged of all obligations and covenants
under the Indentures and the Debt Securities and the coupons and may be
dissolved and liquidated. (Section 802 of each Indenture)
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indentures with
respect to Debt Securities of any series:
(1) default in the payment of any interest on any Debt Securities of
that series or any related coupon, when such interest or coupon becomes
due and payable, and continuance of such default for a period of 30 days;
or
(2) default in the payment of the principal of (or premium, if any,
on) any Debt Securities of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment when and as
due pursuant to the terms of the Debt Securities of that series and
Article Twelve of the Indentures; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in the Indentures (other than a default in the
performance, or breach, of a covenant or warranty which is specifically
dealt with elsewhere under this "Events of Default" section), and
continuance of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25%
in principal amount of all Outstanding Debt Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" thereunder; or
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<PAGE>
(5) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company under the Federal
Bankruptcy Code or any other applicable federal or state law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for a
period of 90 consecutive days; or
(6) the institution by the Company of proceedings to be adjudicated
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable federal or state law, or
the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Company or of any substantial part of
its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due; or
(7) (A) there shall have occurred one or more defaults by the Company
or any Restricted Subsidiary in the payment of the principal of (or
premium, if any, on) Debt aggregating $10 million or more, when the same
becomes due and payable at the stated maturity thereof, and such default
or defaults shall have continued after any applicable grace period and
shall not have been cured or waived or (B) Debt of the Company or any
Restricted Subsidiary aggregating $10 million or more shall have been
accelerated or otherwise declared due and payable, or required to be
prepaid or repurchased (other than by regularly scheduled required
prepayment), prior to the stated maturity thereof; or
(8) any other Event of Default provided with respect to Debt
Securities of that series.
If an Event of Default described in clause (1), (2), (3), (4), (7) or (8)
above with respect to Debt Securities of any series at the time Outstanding
occurs and is continuing, then in every such case the Trustee or the Holders
of not less than 25% in principal amount of the Outstanding Debt Securities
of that series may declare the principal amount (or, if the Debt Securities
of that series are Original Issue Discount Securities or Indexed Securities,
such portion of the principal amount as may be specified in the terms of that
series) of all of the Debt Securities of that series to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if
given by Holders), and upon any such declaration such principal amount (or
specified portion thereof) shall become immediately due and payable. If an
Event of Default described in clause (5) or (6) above occurs and is
continuing, then the principal amount of all the Debt Securities shall ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration with respect to Debt
Securities of any series (or of all series, as the case may be) has been made
and before a judgment or decree for payment of the money due has been
obtained by the Trustee as provided in Article Five of the Indentures, the
Holders of a majority in principal amount of the Outstanding Debt Securities
of that series (or of all series, as the case may be), by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay in the Currency in which the Debt Securities of such
series are payable (except as otherwise specified pursuant to Section 301
of the Indentures for the Debt Securities of such series and except, if
applicable, as provided in certain provisions of Section 312 of the
Indentures):
(A) all overdue interest on all Outstanding Debt Securities of
that series (or of all series, as the case may be) and any related
coupons,
(B) all unpaid principal of (and premium, if any, on) any
Outstanding Debt Securities of that series (or of all series, as the
case may be) which has become due otherwise than by such declaration
of acceleration, and interest on such unpaid principal at the rate
or rates prescribed therefor in such Debt Securities,
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(C) to the extent that payment of such interest is lawful,
interest on overdue interest at the rate or rates prescribed
therefor in such Debt Securities, and
(D) all sums paid or advanced by the Trustee thereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default with respect to Debt Securities of that
series (or of all series, as the case may be), other than the non-payment
of amounts of principal of (or premium, if any, on) or interest on Debt
Securities of that series (or of all series, as the case may be) which
have become due solely by such declaration of acceleration, have been
cured or waived as provided in Section 513 of the Indentures.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Debt Securities because of an Event of Default
specified in clause (7) of the first paragraph of this section shall have
occurred and be continuing, such declaration of acceleration shall be
automatically annulled if the Debt that is the subject of such Event of
Default has been discharged or the holders thereof have rescinded their
declaration of acceleration in respect of such Debt, and written notice of
such discharge or rescission, as the case may be, shall have been given to
the Trustee by the Company and countersigned by the holders of such Debt or a
trustee, fiduciary or agent for such holders, within 30 days after such
declaration of acceleration in respect of the Debt Securities, and no other
Event of Default has occurred during such 30-day period which has not been
cured or waived during such period. (Section 502 of each Indenture)
Subject to Section 502 of each Indenture, the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
may on behalf of the Holders of all the Debt Securities of such series waive
any past default described in clause (1), (2), (3), (4), (7) or (8) of the
first paragraph of this section (or, in the case of a default described in
clause (5) or (6) of the first paragraph of this section, the Holders of not
less than a majority in principal amount of all Outstanding Debt Securities
may waive any such past default), and its consequences, except a default (i)
in respect of the payment of the principal of (or premium, if any, on) or
interest on any Debt Security or any related coupon, or (ii) in respect of a
covenant or provision which under the Indentures cannot be modified or
amended without the consent of the Holder of each Outstanding Debt Security
of such series affected. (Section 513 of each Indenture)
Upon any such waiver, any such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of the Indentures; but no such waiver shall extend to any subsequent
or other default or Event of Default or impair any right consequent thereon.
(Section 513 of each Indenture)
No Holder of any Debt Security of any series or any related coupons shall
have any right to institute any proceeding, judicial or otherwise, with
respect to the Indentures, or for the appointment of a receiver or trustee,
or for any other remedy thereunder, unless (i) such Holder has previously
given written notice to the Trustee of a continuing Event of Default with
respect to the Debt Securities of that series; (ii) the Holders of not less
than 25% in principal amount of the Outstanding Debt Securities of that
series in the case of any Event of Default under clause (1), (2), (3), (4),
(7) or (8) of the first paragraph of this section, or, in the case of any
Event of Default described in clause (5) or (6) of the first paragraph of
this section, the Holders of not less than 25% in principal amount of all
Outstanding Debt Securities, shall have made written request to the Trustee
to institute proceedings in respect of such Event of Default in its own name
as Trustee under each of the Indentures; (iii) such Holder or Holders have
offered to the Trustee reasonable indemnity against the costs, expenses and
liabilities to be incurred in compliance with such request; (iv) the Trustee
for 60 days after its receipt of such notice, request and offer of indemnity
has failed to institute any such proceeding; and (v) no direction
inconsistent with such written request has been given to the Trustee during
such 60-day period by the Holders of a majority or more in principal amount
of the Outstanding Debt Securities of that series in the case of any Event of
Default described
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in clause (1), (2), (3), (4), (7) or (8) of the first paragraph of this
section, or, in the case of any Event of Default described in clause (5) or
(6) of the first paragraph of this section, by the Holders of a majority or
more in principal amount of all Outstanding Debt Securities. (Section 507 of
each Indenture)
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under either Indenture in good
faith. Subject to the provisions of the Indentures relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee under the Indentures is not under any obligation to exercise any of
its rights or powers under the Indentures at the request or direction of any
of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity. Subject to certain provisions concerning
the rights of the Trustee, with respect to the Securities of any series, the
Holders of not less than a majority in principal amount of the Outstanding
Debt Securities of such series shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee under the
Indentures.
Within 90 days after the occurrence of any Default with respect to Debt
Securities of any series, the Trustee shall transmit in the manner and to the
extent provided in TIA Section 313(c), notice of such Default known to the
Trustee, unless such Default shall have been cured or waived; provided,
however, that, except in the case of a Default in the payment of the
principal of (or premium, if any, on) or interest on any Debt Securities of
such series, or in the payment of any sinking fund installment with respect
to Debt Securities of such series, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determines that the withholding of such
notice is in the interest of the Holders of Debt Securities of such series
and any related coupons; and provided further that, in the case of any
Default of the character specified in clause (7) of the first paragraph of
this section with respect to Debt Securities of such series, no such notice
to Holders shall be given until at least 30 days after the occurrence
thereof.
The Company is required to deliver to the Trustee, within 120 days after
the end of each fiscal year, a brief certificate of the Company's compliance
with all of the conditions and covenants under the Indentures.
DISQUALIFIED HOLDERS
The Company's Amended and Restated Certificate of Incorporation provides
that no holder of debt securities who: (1) beneficially owns five percent or
more of the outstanding Capital Stock (whether by reason of ownership of debt
securities or otherwise) and who has not fully cooperated with the Company
and/or any Gaming Authority with respect to providing all requested
information (including financial statements) relating to such holder,
responding to all inquiries and questions raised by the Company and/or any
Gaming Authority, consenting to relevant background investigations or
complying with any other requests of the Company and/or any Gaming Authority
in connection with any Gaming License; (2) is required by any Gaming
Authority to be qualified with respect to any Gaming License and who has
neither been qualified by nor obtained a waiver of qualification from each
Gaming Authority requiring qualification with respect to any Gaming License
in a timely manner; or (3) has been found to be disqualified or unsuitable
with respect to any Gaming License, which finding has not been reversed,
vacated or superseded (each, a "Disqualified Holder"), shall be entitled to
vote, directly or indirectly, any shares of Capital Stock beneficially owned
by such holder on any matter, and no shares of Capital Stock beneficially
owned by a Disqualified Holder shall be considered as outstanding stock
entitled to vote for any purpose.
A Disqualified Holder shall, upon the request of the Company, dispose of
such holder's debt securities (and publicly-traded Capital Stock) within 10
days after receipt of such request. Alternatively, the Company may, at its
option, redeem such Disqualified Holder's Capital Stock as provided in the
Company's Amended and Restated Certificate of Incorporation and such
Disqualified Holder's debt securities at the lowest of: (i) the market value
thereof; (ii) the principal amount thereof; and (iii) the amount which such
holder paid for the debt securities, together with accrued and unpaid
interest, if any, to the date upon which such holder is determined to be a
Disqualified Holder. (Section 1108 of each Indenture)
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Holders of debt securities shall be required to pay any costs and
investigative fees incurred in connection with any background investigation
by, or qualification or suitability application with, any Gaming Authority.
Upon becoming a Disqualified Holder, such holder shall have no further right
to exercise, directly or through any trustee or nominee, any right conferred
by its debt securities and no further right to receive any interest or other
distribution with respect to any such debt securities. (Section 1108 of each
Indenture)
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURES
The Indentures will provide that the Company may, at its option and at any
time, terminate the obligations of the Company with respect to the
Outstanding Debt Securities of any series ("defeasance"). Such defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the Outstanding Debt Securities and any related
coupons, except for the following which shall survive until otherwise
terminated or discharged under the Indentures: (A) the rights of Holders of
such Outstanding Debt Securities and any related coupons (i) to receive,
solely from the trust fund described in the Indentures, payments in respect
of the principal of (and premium, if any, on) and interest on such Debt
Securities and any related coupons when such payments are due, and (ii) to
receive shares of common stock or other Securities from the Company upon
conversion of any convertible securities issued hereunder, (B) the Company's
obligations to issue temporary Debt Securities, register the transfer or
exchange of any Debt Securities, replace mutilated, destroyed, lost or stolen
Debt Securities, maintain an office or agency for payments in respect of the
Debt Securities and, if the Company acts as its own Paying Agent, hold in
trust, money to be paid to such Persons entitled to payment, and with respect
to Additional Amounts, if any, on such Debt Securities as contemplated in the
Indentures, (C) the rights, powers, trusts, duties and immunities of the
Trustee under the Indentures and (D) the defeasance provisions of the
Indentures. With respect to Subordinated Debt Securities, money and
securities held in trust pursuant to the Defeasance and Covenant Defeasance
provisions described herein, shall not be subject to the subordination
provisions of the Subordinated Indenture. In addition, the Company may, at
its option and at any time, elect to terminate the obligations of the Company
with respect to certain covenants that are set forth in the Indentures, some
of which are described in the "Certain Covenants" section above, and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Debt Securities ("covenant defeasance").
(Section 1403 of each Indenture)
In order to exercise either defeasance or covenant defeasance, (1) the
Company shall irrevocably have deposited or caused to be deposited with the
Trustee, in trust, for the purpose of making the following payments,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders of such Debt Securities and any related coupons, (A) money in an
amount (in such Currency in which such Debt Securities and any related
coupons are then specified as payable at Stated Maturity), or (B) Government
Obligations applicable to such Debt Securities (determined on the basis of
the Currency in which such Debt Securities are then specified as payable at
Stated Maturity) which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment of principal (including
any premium) and interest, if any, under such Debt Securities and any related
coupons, money in an amount or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants to
pay and discharge (i) the principal of (and premium, if any, on) and interest
on the Outstanding Debt Securities and any related coupons on the Stated
Maturity (or Redemption Date, if applicable) of such principal (and premium,
if any) or installment or interest and (ii) any mandatory sinking fund
payments or analogous payments applicable to the Outstanding Debt Securities
and any related coupons on the day on which such payments are due and payable
in accordance with the terms of the Indentures and of such Debt Securities
and any related coupons; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such Government
Obligations to said payments with respect to such Debt Securities and any
related coupons. Before such a deposit, the Company may give to the Trustee,
in accordance with certain redemption provisions in the Indentures, a notice
of its election to redeem all or any portion of such Outstanding Debt
Securities at a future date in accordance with the terms of the Debt
Securities of such series and the redemption provisions of the Indentures,
which notice
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shall be irrevocable. Such irrevocable redemption notice, if given, shall be
given effect in applying the foregoing; (2) no Default or Event of Default
with respect to the Debt Securities and any related coupons shall have
occurred and be continuing on the date of such deposit or, insofar as the
Event of Default described in clauses (5) and (6) of the Events of Default
section above are concerned, at any time during the period ending on the 91st
day after the date of such deposit (it being understood that this condition
shall not be deemed satisfied until the expiration of such period); (3) such
defeasance or covenant defeasance shall not result in a breach or violation
of, or constitute a default under, the Indentures or any other material
agreement or instrument to which the Company is a party or by which it is
bound; (4) in the case of a defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel stating that (x) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (y) since the Issue Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion shall confirm that, the Holders of the Outstanding Debt
Securities and any related coupons will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (5) in the case of a covenant defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the Holders
of the Outstanding Debt Securities and any related coupons will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred; (6) notwithstanding any other
provisions of the defeasance and covenant defeasance provisions of the
Indentures, such defeasance or covenant defeasance shall be effected in
compliance with any additional or substitute terms, conditions or limitations
in connection therewith pursuant to Section 301 of the Indentures; and (7)
the Company shall have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent under the
Indentures to either defeasance or covenant defeasance, as the case may be,
have been complied with. (Section 1404 of each Indenture)
SATISFACTION AND DISCHARGE
The Indentures shall upon Company Request cease to be of further effect
with respect to any series of Debt Securities (except as to any surviving
rights of registration of transfer or exchange of Debt Securities of such
series herein expressly provided for and the obligation of the Company to pay
any Additional Amounts as contemplated by Section 1005 of each Indenture) and
the Trustee, at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of such Indenture as to such series
when (1) either (A) all Debt Securities of such series theretofore
authenticated and delivered and all coupons, if any, appertaining thereto
(other than (i) coupons appertaining to Bearer Securities surrendered for
exchange for Registered Securities and maturing after such exchange, whose
surrender is not required or has been waived as provided in Section 305 of
the Indentures, (ii) Debt Securities and coupons of such series which have
been destroyed, lost or stolen and which have been replaced or paid as
provided in Section 306 of the Indentures, (iii) coupons appertaining to Debt
Securities called for redemption and maturing after the relevant Redemption
Date, whose surrender has been waived as provided in Section 1106 of the
Indentures, and (iv) Debt Securities and coupons of such series for whose
payment money has theretofore been deposited in trust with the Trustee or any
Paying Agent or segregated and held in trust by the Company and thereafter
repaid to the Company, as provided in Section 1003 of the Indentures) have
been delivered to the Trustee for cancellation; or (B) all Debt Securities of
such series and, in the case of (i) or (ii) below, any coupons appertaining
thereto not theretofore delivered to the Trustee for cancellation (i) have
become due and payable, or (ii) will become due and payable at their Stated
Maturity within one year, or (iii) if redeemable at the option of the
Company, are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company, in
the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to
be deposited with the Trustee as trust funds in trust for the purpose an
amount, in the Currency in which the Debt Securities of such series are
payable, sufficient to pay and discharge the entire indebtedness on such Debt
Securities not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest to the date of such deposit (in
the case of Debt Securities which have become due and
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payable) or to the Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and (3) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent herein provided for relating to the satisfaction and
discharge of the Indentures as to such series have been complied with.
(Section 401 of each Indenture)
AMENDMENTS AND WAIVERS
The Indentures will provide that at any time and from time to time, the
Company and the Trustee may, without the consent of any holder of Debt
Securities, enter into one or more indentures supplemental thereto for
certain specified purposes, including, among other things, (i) to cure
ambiguities, defects or inconsistencies, or to make any other provisions with
respect to questions or matters arising under the Indentures (provided that
such action shall not adversely affect the interests of the Holders in any
material respect), (ii) to effect or maintain the qualification of the
Indentures under the Trust Indenture Act, or (iii) to evidence the succession
of another person to the Company and the assumption by any such successor of
the obligations of the Company in accordance with the Indentures and the Debt
Securities. (Section 901 of each Indenture). Other amendments and
modifications of the Indentures or the Debt Securities may be made by the
Company and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of all of the then Outstanding
Debt Securities of any Series; provided, however, that no such modification
or amendment may, without the consent of the holder of each Outstanding Debt
Security affected thereby, (1) change the Stated Maturity of the principal
of, or any installment of interest on, any Debt Security or reduce the
principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or change any obligation of the Company
to pay Additional Amounts contemplated by Section 1005 of each Indenture
(except as contemplated and permitted by certain provisions of the
Indentures), or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502 of the
Indentures of the amount thereof provable in bankruptcy pursuant to Section
504 of the Indentures, or adversely affect any right of repayment at the
option of any Holder of any Debt Security, or change any Place of Payment
where, or the Currency in which, any Debt Security or any premium or the
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof (or,
in the case of redemption or repayment at the option of the Holder, on or
after the Redemption Date or Repayment Date, as the case may be), or
adversely affect any right to convert or manage any Debt Securities as may be
provided pursuant to Section 301 of the Indentures, or (2) reduce the percent
in principal amount of the Outstanding Debt Securities of any series, the
consent of whose Holders is required for any such supplemental indenture, for
any waiver of compliance with certain provisions of the Indentures or certain
defaults thereunder and their consequences provided for in the Indentures, or
reduce the requirements for quorum or voting.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by and construed
in accordance with the laws of the State of New York. The Indentures are
subject to the provisions of the Trust Indenture Act that are required to be
a part thereof and shall, to the extent applicable, be governed by such
provisions.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
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"Attributable Debt" means, as to any particular lease that is the subject
of a sale and leaseback transaction which has a remaining term of more than
12 months, at any date as of which the amount thereof is to be determined,
the principal amount of outstanding Capital Lease Obligation.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors (or a committee of the Board of Directors empowered to
exercise all of the powers of the Board of Directors) and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Capital Lease Obligation" means any obligation that, in accordance with
generally accepted accounting principles, is required to be classified and
accounted for as a capital lease, and the principal amount of Debt
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with such principles; provided, however,
Capital Lease Obligation shall not include any operating lease of the Company
or any of its Subsidiaries in existence prior to the Issue Date which has
been or is recharacterized as a capital lease in accordance with generally
accepted accounting principles after the Issue Date. The stated maturity of
any Capital Lease Obligation shall be the last payment of rent or any other
amount due under such lease.
"Capital Stock" means any and all shares, interests, participations,
rights or equivalents (however designated) of corporate stock of the Company
or any Restricted Subsidiary.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Consolidated Net Tangible Assets", as of any date of determination, means
the total amount of assets, including, without limitation, franchise
agreements, which would appear on the most currently available consolidated
balance sheet of the Company determined in accordance with generally accepted
accounting principles, after deducting therefrom, to the extent otherwise
included, goodwill.
"Credit Agreement" means the Credit Agreement dated as of December 16,
1993 among the Company, Chemical Bank, as agent, and the banks signatories
thereto, as the same may be amended from time to time, be further
supplemented or amended, or the terms thereof waived or modified, to the
extent permitted by, and in accordance with, the terms thereof and any credit
agreement entered into in replacement of or refinancing of the existing
Credit Agreement.
"Debt" means notes, bonds, debentures or other similar evidences of
indebtedness for money borrowed.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Fair Market Value" means the fair market value of the item in question as
determined by the Board of Directors acting in good faith and in exercise of
its fiduciary duties.
"Franchise Contract" means any contract between the Company and its
subsidiaries and a third party for the franchise of a Days Inn, Ramada,
Howard Johnson, Super 8, Park Inn International or Villager Lodge.
"Franchise Fee Revenues" means the total amount of revenues derived from
franchise fees as set forth on the most recent year-end income statement of
the Company and its consolidated Subsidiaries and computed in accordance with
generally accepted accounting principles.
"Gaming Authority" means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States federal or foreign government, any state, province or any city or
other political subdivision or otherwise and whether now or hereafter in
existence (including, without limitation, the National Indian Gaming
Commission or any other tribal authority), or any officer or official thereof
with authority to regulate any gaming operation (or proposed gaming
operation) owned, managed, or operated by the Company or any of its
Subsidiaries.
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"Gaming License" means all licenses and other regulatory approvals
necessary for the lawful operation of any gaming and related business.
"Holder" means a Person in whose name a Debt Security is registered in the
Security Register.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Debt Securities.
"Issue Date" means the date of first issuance of the Debt Securities under
either Indenture.
"Lien" means any pledge, mortgage, lien, charge, encumbrance or security
interest except that a Lien shall not mean any license or right to use
intellectual property of the Company or a Subsidiary granted by the Company
or a Subsidiary.
"Maturity", when used with respect to any Debt Securities, means the date
on which the principal of such Debt Security or an installment of principal
becomes due and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption, notice of
option to elect repayment or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman, the
President or a Vice President, and by the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, including an employee of the Company, and who shall
be acceptable to the Trustee.
"Original Issue Discount Security" means any Debt Security which provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration of the Maturity thereof pursuant to
Section 502 of the Indentures.
"Outstanding", when used with respect to Debt Securities, means, as of the
date of determination, all Debt Securities theretofore authenticated and
delivered under the Indentures, except:
(i) Debt Securities theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Debt Securities, or portions thereof, for whose payment, money
in the necessary amount has been theretofore deposited with the Trustee
or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Debt Securities;
(iii) Debt Securities, except to the extent provided in the
"Defeasance or Covenant Defeasance of the Indentures" section, with
respect to which the Company has effected defeasance and/or covenant
defeasance as provided in the Indenture; and
(iv) Mutilated, destroyed, lost or stolen Debt Securities which have
become or are about to become due and payable which have been paid
pursuant to Section 306 of the Indentures or in exchange for or in lieu
of which other Debt Securities have been authenticated and delivered
pursuant to the Indenture, other than any such Debt Securities in respect
of which there shall have been presented to the Trustee proof
satisfactory to it that such Debt Securities are held by a bona fide
purchaser in whose hands the Debt Securities are valid obligations of the
Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Debt Securities have given any request,
demand, authorization, direction, notice, consent or waiver under the
Indentures, and for the purpose of making the calculations required by TIA
Section 313, Debt Securities owned by the Company or any other obligor upon
the Debt Securities or any Affiliate of the Company or such other obligor
shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in making such calculation
or in relying upon any such request, demand, authorization, direction,
notice, consent or waiver, only Debt Securities which the Trustee knows to be
so owned shall be so disregarded. Debt Securities so owned which have been
pledged
18
<PAGE>
in good faith may be regarded as Outstanding if the pledgee establishes to
the satisfaction of the Trustee the pledgee's right so to act with respect to
such Debt Securities and that the pledgee is not the Company or any other
obligor upon the Debt Securities or any Affiliate of the Company or such
other obligor.
"Paying Agent" means any Person (including the Company acting as Paying
Agent) authorized by the Company to pay the principal of (and premium, if
any, on) or interest on any Debt Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Principal Franchise Assets" means (i) any intellectual property rights
that are associated with Days Inn, Ramada, Howard Johnson and Super 8 but
excluding Villager Lodge and Park Inn International, including, without
limitation, service marks, trademarks, trade names and licenses to use the
same but excluding service marks and trademarks which do not incorporate Days
Inn, Ramada, Howard Johnson or Super 8 Motel names or marks, and (ii)
Franchise Contracts from which the Company derived during the preceding 12
full calendar months an aggregate revenue on the date as of which the
determination of such revenue is being made and determined in accordance with
generally accepted accounting principles in excess of 10% of Franchise Fee
Revenues.
"Principal Property" means any reservation centers, leaseholds,
telecommunications contracts, computerized systems contracts, intellectual
property rights, or franchise contracts, owned by the Company or any
Restricted Subsidiary and located in the United States, the gross book value
(without deduction of any reserve for depreciation) of which on the date as
of which the determination is being made is an amount which exceeds 5% of
Total Assets, other than any such property which, in the opinion of the Board
of Directors, is not of material importance to the total business conducted
by the Company and its Subsidiaries, taken as a whole.
"Pro Forma Consolidated Net Tangible Assets" means, in connection with the
acquisition of a Restricted Subsidiary, Consolidated Net Tangible Assets
after giving effect to such acquisition on a pro forma basis.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer,
the cashier, any assistant cashier, any trust officer or assistant trust
officer, the controller or any assistant controller or any other officer of
the Trustee customarily performing functions similar to those performed by
any of the above-designated officers, and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"Restricted Subsidiary" means any Subsidiary (other than Park Inn
International and Villager Lodge) of which, at the time of determination, all
of the outstanding capital stock (other than directors' qualifying shares) is
owned by the Company directly and/or indirectly and which, at the time of
determination, is primarily engaged in the franchising, developing,
financing, and providing marketing services for hotel systems and casino
gaming facilities. In the event that there shall at any time be a question as
to whether a Subsidiary is primarily engaged in franchising, developing,
financing, and providing marketing services for hotel systems and casino
gaming facilities, or a combination thereof, such matter shall be determined
for all purposes of the Indentures by a Board Resolution.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305 of the Indenture.
"Stated Maturity", when used with respect to any Debt Security or any
installment of principal thereof or interest thereon, means the date
specified in such Debt Security as the fixed date on which the principal of
such Debt Security or such installment of principal or interest is due and
payable.
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<PAGE>
"Subsidiary" means any corporation of which at the time of determination
the Company, directly and/or indirectly through one or more Subsidiaries,
owns more than 50% of the Voting Stock.
"Total Assets" means the total amount of assets (less applicable reserves
and other properly deductible items), as set forth on the most recent balance
sheet of the Company and its consolidated Subsidiaries and computed in
accordance with generally accepted accounting principles.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force at the date as of which the Indentures were executed, except that any
supplemental indenture executed pursuant to the Indentures shall conform to
the requirements of the Trust Indenture Act as in effect on the date of
execution thereof.
"Trustee" means Bank of Nova Scotia until a successor Trustee shall have
become such pursuant to the applicable provisions of the Indentures, and
thereafter "Trustee" shall mean such successor Trustee.
"Vice President", when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
"Voting Stock" means stock of the class or classes having general voting
power under ordinary circumstances to elect at least a majority of the board
of directors, managers or trustees of a corporation (irrespective of whether
or not at the time stock of any other class or classes shall have or might
have voting power by reason of the happening of any contingency).
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 300,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock. As of April 22, 1996, 102,833,191 shares of Common Stock were issued
and outstanding and held of record by 301 stockholders. There are no shares
of Preferred Stock outstanding on the date hereof.
The Company's Amended and Restated Certificate of Incorporation and
By-laws provide that directors shall be removed from office only for cause at
any time by the affirmative vote of the holders of a majority of the shares
entitled to vote for the election of directors at any annual or special
meeting of stockholders for that purpose.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which shareholders are entitled to vote. There are
no cumulative voting rights and holders of Common Stock have no preemptive
rights. All issued and outstanding shares of Common Stock are validly issued,
fully paid and non-assessable. Holders of Common Stock are entitled to such
dividends as may be declared from time to time by the Board of Directors out
of funds legally available for that purpose. Upon dissolution, holders of
Common Stock are entitled to share pro rata in the assets of the Company
remaining after payment in full of all its liabilities and obligations,
including payment of the liquidation preference, if any, of any preferred
stock then outstanding.
PREFERRED STOCK
The Board of Directors, without further action by the stockholders, is
authorized to issue Preferred Stock in one or more series and to designate as
to any such series the dividend rate, redemption prices, preferences on
liquidation or dissolution, conversion rights, voting rights and any other
preferences, and relative, participating, optional or other special rights
and qualifications, limitations or restrictions. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future.
Issuance of a new series of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions or other corporate
20
<PAGE>
purposes, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a majority of
the outstanding voting stock of the Company. The Company has no present plans
to issue any new series of Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law (the
"DGCL") prohibits a publicly held Delaware corporation from engaging in any
"business combination" with an "interested stockholder" for a period of three
years following the time that such stockholder became an interested
stockholder, unless (i) prior to such time either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder is approved by the board of directors of the corporation, (ii)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding, for purposes of determining the number of
shares outstanding, those shares owned (A) by persons who are both directors
and officers and (B) certain employee stock plans, or (iii) at or after such
time the business combination is approved by the board and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. A "business combination" includes
certain mergers, consolidations, asset sales, transfers and other
transactions resulting in a financial benefit to the interested stockholder.
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within the preceding three years, did own) 15% or more
of the corporation's voting stock.
LIMITATIONS ON CHANGE OF CONTROL
The Company is a party to certain employment agreements, an earnout
agreement, the Credit Agreement and certain indentures, each of which contain
provisions with respect to a change in control of the Company. In addition,
certain provisions of the Company's Amended Restated Certificate of
Incorporation may inhibit changes in control of the Company. See "Description
of Capital Stock-- Disqualified Stockholders" and "Risk Factors--Certain
Anti-takeover Effects; Divestiture and Loss of Voting Rights."
DISQUALIFIED STOCKHOLDERS
The Company's Amended and Restated Certificate of Incorporation provides
that no holder of capital stock of the Company who: (1) beneficially owns
five percent or more of the outstanding capital stock of the Company and who
has not fully cooperated with the Company and/or any Gaming Authority with
respect to providing all requested information (including financial
statements) relating to such holder, responding to all inquiries and
questions raised by the Company and/or any Gaming Authority, consenting to
relevant background investigations or complying with any other requests of
the Company and/or any Gaming Authority in connection with any Gaming
License; (2) is required by any Gaming Authority to be qualified with respect
to any Gaming License and who has neither been qualified by nor obtained a
waiver of qualification from each Gaming Authority requiring qualification
with respect to any Gaming License in a timely manner; or (3) has been found
to be disqualified or unsuitable with respect to any Gaming License, which
finding has not been reversed, vacated or superseded (each, a "Disqualified
Stockholder"), shall be entitled to vote, directly or indirectly, any shares
of capital stock of the Company beneficially owned by such holder on any
matter, and no shares of capital stock of the Company beneficially owned by a
Disqualified Stockholder shall be considered as outstanding stock entitled to
vote for any purpose.
A Disqualified Stockholder shall, upon the request of the Company, dispose
of such holder's publicly-traded capital stock of the Company within 10 days
after receipt of such request. Alternatively, the Company may, at its option,
redeem such Disqualified Stockholder's capital stock of the Company as
provided in the Company's Amended and Restated Certificate of Incorporation
at the Redemption Price.
Holders of capital stock of the Company shall be required to pay any costs
and investigative fees incurred in connection with any background
investigation by, or qualification or suitability application
21
<PAGE>
with, any Gaming Authority. Upon becoming a Disqualified Stockholder, such
holder shall have no further right to exercise, directly or through any
trustee or nominee, any right conferred by its capital stock of the Company
and no further right to receive any distribution with respect to any such
capital stock of the Company.
As used herein, the term "Gaming Authorities" includes all federal, state,
local or foreign government authorities and the National Indian Gaming
Commission or other tribal authorities which issue or grant any license or
approval necessary or appropriate for the lawful operation of gaming and
related businesses now or hereafter engaged in by the Company or its
subsidiaries; the term "Gaming License" means all licenses and other
regulatory approvals necessary for the lawful operation of gaming and related
businesses now or hereafter engaged in by the Company or any subsidiary
within or without the United States from the Gaming Authorities empowered to
issue or grant Gaming Licenses; and the term "Redemption Price" for a share
of capital stock of the Company means the average closing sale price during
the 20-day period immediately preceding the date of the notice of redemption
of a share of such capital stock on the composite tape for New York Stock
Exchange Listed Stocks, or if such stock is not quoted on the composite tape,
on the New York Stock Exchange, or if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such stock is listed, or if such stock is not
listed on any such exchange, the average last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market with respect to a share of such capital stock during
the 20-day period preceding the date of the notice of redemption as reported
by the National Association of Securities Dealers, Inc. Automated Quotation
System or any similar system then in use, or if no such quotations are
available, the fair market value on the date of the call for redemption of a
share of such stock as determined by the Board of Directors of the Company.
TRANSFER AGENT
Mellon Securities Trust Company is the Registrar Agent for the Company's
Common Stock.
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities being offered hereby in any of,
or any combination of, the following ways: (i) directly to purchasers, (ii)
through agents, (iii) through underwriters and/or (iv) through dealers.
Offers to purchase Securities may be solicited directly by the Company or
by agents designated by the Company from time to time. Any such agent, who
may be deemed to be an underwriter as that term is defined in the Securities
Act, involved in the offer or sale of Securities, will be named, and any
commissions payable by the Company to such agent will be set forth, in the
Prospectus Supplement. Unless otherwise indicated in the Prospectus
Supplement, any such agent will be acting on a best efforts basis for the
period of its appointment (ordinarily five business days or less).
If an underwriter or underwriters are utilized in the offer or sale of
Securities, the Company will execute an underwriting agreement with such
underwriters at the time of sale of such Securities to such underwriters and
the names of such underwriters and the principal terms of the Company's
agreement with such underwriters will be set forth in the Prospectus
Supplement.
If a dealer is utilized in the offer or sale of Securities, the Company
will sell such Securities to such dealer, as principal. Such dealer may then
resell such Securities to the public at varying prices to be determined by
such dealer at the time of resale. The name of such dealer and the principal
terms of the Company's agreement with such dealer will be set forth in the
Prospectus Supplement.
Agents, underwriters, and dealers may be entitled under agreements with
the Company to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act. Agents, dealers and
underwriters may also be customers of, engage in transactions with, or
perform services for the Company in the ordinary course of their business.
The place and time of delivery for Securities will be set forth in the
accompanying Prospectus Supplement.
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<PAGE>
LEGAL OPINION
The validity of the Securities offered hereby will be passed on for the
Company by Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York,
New York 10022.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this Prospectus by reference from the HFS
Incorporated Annual Report on Form 10-K for the year ended December 31, 1995
have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their reports which are incorporated herein by reference and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The balance sheet of Century 21 Real Estate of the Mid-Atlantic States,
Inc. as of December 31, 1995 and the related statements of income, changes in
stockholder's equity and cash flows for the year then ended, which appear in
the Form 8-K dated April 5, 1996 of HFS Incorporated, are incorporated herein
by reference, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated balance sheets of Century 21 Real Estate Corporation (a
wholly-owned subsidiary of MetLife) and its subsidiaries as of December 31,
1994, 1993 and 1992 and the related consolidated statements of income,
stockholder's equity and cash flows for the years then ended, which appear in
the Form 8-K dated August 8, 1995 of HFS Incorporated (formerly Hospitality
Franchise Systems, Inc.), are incorporated herein by reference, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated herein by reference and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Century 21 of Southwest, Inc. (an "S"
corporation) as of and for the years ended March 31, 1995 and 1994, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated May 15,
1995, of Toback CPAs, P.C., independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Century 21 of Eastern Pennsylvania, Inc. (an
"S" corporation) as of and for the years ended April 30, 1995 and 1994, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated June 22,
1995, of Woolard, Krajnik, & Company, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Century 21 Real Estate of the Mid-Atlantic
States, Inc. as of and for the years ended December 31, 1994 and 1993, which
appear in the Form 8-K dated February 16, 1996 of HFS Incorporated have been
incorporated by reference herein in reliance upon the report dated May 11,
1995, of Beers & Cutler, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
expert in accounting and auditing.
The consolidated financial statements of Century 21 Region V, Inc. as of
and for the year ended July 31, 1995, which appear in the Form 8-K dated
February 16, 1996 of HFS Incorporated have been incorporated by reference
herein in reliance upon the report dated January 12, 1995, of White, Nelson &
Co. LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as expert in accounting and
auditing.
The consolidated financial statements of Electronic Realty Associates,
Inc. for the years ended December 31, 1994 and 1993, included in the HFS
Incorporated Current Report on Form 8-K dated February 16, 1996, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
23
<PAGE>
The consolidated financial statements of Electronic Realty Associates,
L.P. for the years ended December 31, 1995 and 1994, included in the HFS
Incorporated Current Report on Form 8-K dated April 5, 1996, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
24
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<PAGE>
LOGO
<PAGE>
Information contained in this preliminary prospectus supplement is subject
to completion or amendment. This prospectus supplement and the accompanying
prospectus shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
ALTERNATE COVER FOR INTERNATIONAL PROSPECTUS
PROSPECTUS SUPPLEMENT ISSUED MAY 8, 1996 (SUBJECT TO COMPLETION)
(To Prospectus dated April 30, 1996)
[LOGO]
15,000,000 SHARES
HFS Incorporated
COMMON STOCK
----------------
OF THE 15,000,000 SHARES OF COMMON STOCK BEING OFFERED, 3,000,000 SHARES ARE
BEING OFFERED OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND 12,000,000 SHARES ARE BEING OFFERED IN THE UNITED STATES AND
CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL SHARES OF COMMON
STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMPANY'S COMMON
STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "HFS." ON MAY
7, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NEW YORK
STOCK EXCHANGE WAS $55 3/4 PER SHARE.
SEE "RISK FACTORS" ON PAGE 3 IN THE PROSPECTUS FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $ A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
----------------- -------------------------- ----------------
<S> <C> <C> <C>
Per Share .... $ $ $
Total (3) .... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
2,250,000 additional shares at the price to public less underwriting
discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal
matters by Shearman & Sterling, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about May , 1996 at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in same day funds.
----------------
MORGAN STANLEY & CO.
International
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
CHASE SECURITIES INC.
GOLDMAN SACHS INTERNATIONAL
MONTGOMERY SECURITIES
May , 1996
