<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------
March 27, 1997 (MAY 8, 1996)
(Date of Report (date of earliest event reported)
HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 1-11402 22-3059335
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization Identification Number)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive offices) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if applicable)
- ------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
On May 2, 1996, HFS Incorporated (the "Registrant") 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 Registrant has agreed to pay $640 million in cash for all of the
outstanding capital stock of Coldwell Banker and intends to repay approximately
$100 million of indebtedness of Coldwell Banker. While completion of this
transaction is not assured, the Registrant expects that the transaction will be
completed on or about May 31, 1996.
Coldwell Banker provides franchises to real estate brokerage offices and
provides corporate relocation services and real estate brokerage services
throughout the United States, Canada and Puerto Rico. Coldwell Banker is the
third largest real estate brokerage franchisor in the United States having
approximately 2,164 franchised offices and currently owns and operates 318
offices in the United States, Canada and Puerto Rico as of March 31, 1996. The
Registrant 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.
Certain audited consolidated financial statements of Coldwell Banker and
its subsidiaries as well as certain pro forma financial information with respect
to the Merger are included in the Exhibits hereto.
The Current Report on Form 8-K is being filed by the Registrant for
purposes of incorporating by reference the exhibits listed in Item 7 hereof in
the Registrant's effective Registration Statements currently on file with the
Commission.
ITEM 7. EXHIBITS
Exhibit
No. Description
- ------- -----------
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP
99.1 The audited consolidated financial statements of Coldwell Banker
Corporation and subsidiaries as of and for the years ended December
31, 1995 and 1994, the three months ended December 31, 1993 and the
nine months ended September 30, 1993.
99.2 Pro forma financial information of HFS Incorporated.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HFS INCORPORATED
BY: /s/ Michael Monaco
---------------------------
Michael Monaco
Vice Chairman and
Chief Financial Officer
Date: March 26, 1997
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K/A
REPORT DATED MARCH 27, 1997 (MAY 8, 1996)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP
99.1 The audited consolidated financial statements of
Coldwell Banker Corporation and subsidiaries as of
and for the years ended December 31, 1995 and 1994,
the three months ended December 31, 1993 and the nine
months ended September 30, 1993.
99.2 Pro forma financial information of HFS Incorporated.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements Nos. 33-
56354, 33-70632, 33-72752, 33-83956, 33-94756 and 333-03532 of HFS Incorporated
(the "Company") on Form S-8 and Registration Statements No. 33-87830, 333-3276
and 333-3646 of the Company on Form S-3 of our report dated February 27, 1996,
related to the consolidated financial statements of Coldwell Banker Corporation
and Subsidiaries as of December 31, 1995 and 1994, and for each of the two years
in the period ended December 31, 1995.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 21, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos. 33-
56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06939, 333-06733 and
333-03532 of HFS Incorporated (the "Company") on Form S-8 and Registration
Statements Nos. 333-11029,333-11031 and 333-17453 of the Company on Form S-3
of our report dated March 11, 1994, related to the consolidated statements of
operations, stockholders' equity and cash flows for the three months ended
December 31, 1993 and the consolidated statements of operations and cash flows
for the nine months ended September 30, 1993 of Coldwell Banker Corporation
and Subsidiaries (formerly Coldwell Banker Residential Holding Company and
Subsidiaries).
Deloitte & Touche LLP
Costa Mesa, California
March 21, 1997
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
----------------
REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994 AND FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1994,
THREE MONTHS ENDED DECEMBER 31, 1993,
AND NINE MONTHS ENDED SEPTEMBER 30, 1993
<PAGE>
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
------------
The Board of Directors and Stockholders
Coldwell Banker Corporation
We have audited the accompanying consolidated balance sheets of Coldwell Banker
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1995. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of Coldwell Banker
Corporation and Subsidiaries for the three months ended December 31, 1993 and
the nine months ended September 30, 1993 were audited by other auditors, whose
report dated March 11, 1994, expressed an unqualified opinion on these
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Coldwell Banker
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and cash flows for each of the two
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Newport Beach, California
February 27, 1996
Coopers & Lybrand L.L.P., a registered limited liability partnership is a
member firm of Coopers & Lybrand (International).
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Coldwell Banker Corporation
We have audited the consolidated statements of operations, stockholders' equity
and cash flows for the three months ended December 31, 1993 and the consolidated
statements of operations and cash flows for the nine months ended September 30,
1993 of Coldwell Banker Corporation and subsidiaries (formerly Coldwell Banker
Residential Holding Company and subsidiaries). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows for the three months
ended December 31, 1993 and the nine months ended September 30, 1993 of Coldwell
Banker Corporation and subsidiaries in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
March 11, 1994
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
---------------
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,775 $11,658
Restricted cash 9,674 17,082
Accounts and commissions receivable (net of allowance of
$1,093 in 1995 and $640 in 1994) 10,215 8,242
Subordinated receivable from sales of relocation
receivables 47,313 75,082
Notes receivable, current portion (net of allowance of
$1,442 in 1995 and $1,916 in 1994) 2,284 1,894
Deferred income taxes 4,818 5,856
Prepaid expenses and other current assets 4,686 4,397
-------- --------
Total current assets 90,765 124,211
NOTES RECEIVABLE, long-term portion (net of allowance of
$507 in 1995 and $968 in 1994) 4,811 4,573
DEFERRED INCOME TAXES 9,551 13,609
PROPERTY & EQUIPMENT, net 63,230 66,445
GOODWILL AND OTHER INTANGIBLES , net 37,091 29,710
OTHER ASSETS 4,481 3,699
-------- --------
Total assets $209,929 $242,247
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
---------------
December 31,
-------------------
1995 1994
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $102,381 $97,849
Accrued salaries and benefits 18,000 18,400
Income taxes payable 9,002 5,826
Other notes payable, current portion 37,425 19,363
Deferred revenue 2,236 1,367
-------- --------
Total current liabilities 169,044 142,805
LONG-TERM DEBT 83,500 75,350
OTHER NOTES PAYABLE, long term portion 1,405 1,329
POSTRETIREMENT BENEFITS 1,721 1,555
OTHER LIABILITIES 932 957
-------- --------
Total liabilities 256,602 221,996
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.01 par value, 10,000,000
shares authorized; 5,749,155 and 5,512,375
shares issued and outstanding
in 1995 and 1994, respectively. 58 55
Capital in excess of par value 59,124 54,369
Accumulated deficit (105,855) (34,173)
---------- ---------
Total stockholders' equity (deficiency) (46,673) 20,251
---------- ---------
Total liabilities and stockholders' equity $209,929 $242,247
(deficiency) ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
-------------
<TABLE>
<CAPTION>
Predecessor
-----------
Three Nine
Year Year months months
ended ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------ ----------- ----------- ------------
REVENUES
<S> <C> <C> <C> <C>
Real estate commissions $541,012 $523,268 $51,207 $433,716
Franchise and service fees 66,263 66,818 14,675 43,974
Fees for relocation services, net 61,447 58,967 12,616 42,020
Interest 4,447 9,128 653 12,851
Other 25,577 24,779 5,869 21,885
--------- --------- -------- --------
Total revenues 698,746 682,960 85,020 554,446
--------- --------- -------- --------
EXPENSES
Commissions, fees and other direct expenses 333,239 320,075 32,493 259,253
Selling, general and administrative 289,756 283,721 77,680 237,037
Interest 4,674 12,645 3,325 6,451
Provision for closed offices 2,354 5,250
Management fees to parent 508 550 137 1,464
Amortization of goodwill and other intangibles 9,101 32,726 38,205 2,272
Other 3,649 6,676 4,110 1,887
--------- --------- -------- --------
Total expenses 643,281 656,393 155,950 513,614
--------- --------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES AND
EXTRAORDINARY ITEM 55,465 26,567 (70,930) 40,832
PROVISION (BENEFIT) FOR INCOME TAXES 24,385 11,769 (27,922) 17,947
--------- --------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 31,080 14,798 (43,008) 22,885
EXTRAORDINARY ITEM, LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of tax benefit
of $1,593 in 1995 and $4,685 in 1994 2,027 5,963
--------- --------- -------- --------
NET INCOME (LOSS) $29,053 $8,835 ($43,008) $22,885
========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)
-------------
<TABLE>
<CAPTION>
Common Stock Capital in
------------------- excess of Accumulated
Shares Amount par value deficit Total
-------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Common stock issued upon
formation of Coldwell Banker
Corporation, October 5, 1993 5,500,000 $55 $54,245 $ -- $54,300
Net loss for three months ended
December 31, 1993 (43,008) (43,008)
--------- -------- ------------ ----------- -----------
BALANCE, December 31, 1993 5,500,000 55 54,245 (43,008) 11,292
Common stock issued 12,375 124 124
Net income 8,835 8,835
--------- -------- ------------ ----------- -----------
BALANCE, December 31, 1994 5,512,375 55 54,369 (34,173) 20,251
Common stock issued as a
result of the exercise of
stock options 274,660 3 2,744 2,747
Tax benefits related to the
exercise of stock options 2,389 2,389
Repurchase of common stock (37,880) (378) (378)
Net income 29,053 29,053
Dividends paid (100,000) (100,000)
Costs related to dividends paid (735) (735)
--------- -------- ----------- ------------ -----------
BALANCE, December 31, 1995 5,749,155 $58 $59,124 ($105,855) ($46,673)
========= ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
-------------
<TABLE>
<CAPTION>
Predecessor
------------
Year Year Three months Nine months
ended ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $29,053 $8,835 ($43,008) $22,885
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 22,423 44,680 41,141 12,384
Provision for uncollectible notes,
accounts and commissions receivable 334 685 1,018 1,568
Provision for closed offices 2,354 5,250
Discounts and other costs on sales
of relocation receivables 1,614 4,908 2,769
Proceeds from sales of relocation
receivables, client advances and
reduction in the subordinated receivable 1,359,810 1,296,642 356,182
Relocation receivables originated (1,333,655) (1,243,810) (259,509)
Loss (gain) on sales of property and
equipment 111 53 (105) 503
Extraordinary item, loss on early
extinguishment of debt, net of
income tax benefit 2,027 5,963
Changes in (net of effects from acquisitions):
Accounts and commissions receivable 2,303 12,733 108,989 (10,084)
Equity advances for residential properties, net 7,868
Notes receivable (435) (256) (257) (1,671)
Deferred income taxes 5,096 1,182 (28,655) (2,046)
Prepaid expenses and other assets (860) 6,455 (1,246) 1,016
Accounts payable and accrued expenses (10,299) (22,846) (43,651) (6,376)
Accrued salaries and benefits (581) 5,486 2,007 (2,453)
Income taxes payable 3,176 (10,893) (230) 16,949
Other liabilities (25) (485) (3,222) (2,199)
Deferred revenue and advances from
clients, net 869 (2,245) (410) 1,048
Postretirement benefits 166 212 (114) 706
---------- ------------ --------------- ----------------
Total adjustments 54,428 98,464 174,707 22,463
---------- ------------ -------------- ----------------
Net cash provided by operating
activities 83,481 107,299 131,699 45,348
========== ============ ============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
-------------
<TABLE>
<CAPTION>
Predecessor
-----------
Year Year Three months Nine months
ended ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net changes in parent advances 69 (82) 1,973 (1,836)
Expenditures for property and equipment (9,055) (10,291) (1,892) (8,498)
Proceeds from sales of property and equiment 76 1,804 1,133 5,323
Increase in notes receivable from shareholders (1,224)
Increase in notes receivable (107) (336) (278) (3,033)
Collections of notes receivable 1,350 1,845 1,485 1,117
Change in restricted cash 7,408 13,316 (2,774) (9,085)
Payments for acquisitions (9,171) (35) (154)
------------ --------------- -------------- ----------------
Net cash (used in) provided by investing
activites (10,654) 6,221 (353) (16,166)
------------ --------------- -------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in other notes 17,144 (13,884) 4,639 2,943
Payments on notes payable to bank (165,000) (60,000)
(Repayment) borrowing under senior line of credit (71,000) 71,000
(Repayments) borrowing under senior
subordinated notes (29,350) (85,650) 115,000
Extraordinary item, loss on early
extinguishment of debt, net of tax (2,027) (5,963)
Borrowings under senior revolver 37,500 46,000
Common stock issued 124 55,000
Exercise of stock options 2,747
Tax benefits related to the exercise of stock options 2,389
Purchase of common stock from former stockholder (378) (159,020)
Payment to former stockholder for covenant
not-to-compete (24,000)
Costs and fees paid at closing (8,915)
Dividends paid (100,000) (2,207)
Costs related to dividends paid (735)
--------- ------------- ---------- --------------
Net cash used in financing activities (72,710) (130,373) (111,296) (59,264)
--------- ------------- ---------- --------------
Effect of exchange rate change on cash (23)
--------- ------------- ---------- --------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 117 (16,853) 19,200 (30,105)
CASH AND CASH EQUIVALENTS, beginning of period 11,658 28,511 8,461 38,566
--------- ------------- ---------- --------------
CASH AND CASH EQUIVALENTS, end of period $11,775 $11,658 $28,511 $ 8,461
========= ============= ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
-------------
<TABLE>
<CAPTION>
Predecessor
-----------
Year Year Three month Nine months
ended ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during period for:
Interest $5,566 $13,182 $3,468 $7,824
======== ======== ======= =========
Income Taxes $11,205 $17,722 $1,636 $3,222
======== ======== ======= =========
SUPPLEMENTAL DISCLOSURES OF
NONCASH ACTIVITIES
Fair value of assets purchased $23,469 $35 $628,682 $154
Cash payments for acquisitions (9,171) (35) (183,020) (154)
-------- --------- -------- --------
Liabilities assumed $14,298 $ -- $445,662 $ --
======== ========= ======== =========
Advances from clients sold as part
of the related relocation assets $ -- $24,738 $ -- $ --
======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements for the year ended
December 31, 1995 and 1994, and the three months ended December 31,
1993, reflect the operations of Coldwell Banker Corporation and
Subsidiaries (the "Company") (formerly Coldwell Banker Residential
Holding Company and Subsidiaries). The stock of the Company was
acquired by Fremont Group, Inc. ("Fremont") and senior management of
the Company on October 5, 1993, (the "Acquisition") and accounted for
as being effective as of October 1, 1993. Because of acquisition
adjustments made, the accompanying consolidated financial statements
of the Company are not directly comparable to those of the
Predecessor.
The accompanying consolidated statement of operations for the nine
months ended September 30, 1993, reflects the operations of the
Company prior to the Acquisition when the Company was wholly owned
through a subsidiary of Sears, Roebuck and Co. ("Sears"). These
operations are referred to as the "Predecessor."
The purchase price was approximately $159.0 million, including
interest in the amount of $2.7 million paid to Sears at closing. In
addition, the Company paid to Sears $24.0 million for an agreement
not-to-compete.
The Acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations.
Accordingly, the total purchase price has been allocated to the
tangible and intangible assets and liabilities acquired based on the
Company's estimates of their respective fair values at the date of
acquisition.
The Acquisition had a significant impact on the carrying basis of
assets and liabilities. Accordingly, historical results of operations
for the three months ended December 31, 1993 and the year ended
December 31, 1994, have been significantly impacted from the effects
of acquisition accounting.
9
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
The significant effects of acquisition accounting on the Company's
historical results of operations before income taxes and
extraordinary item are as follows:
<TABLE>
<CAPTION>
Three
Year ended months ended
December 31, 1994 December 31, 1993
----------------- -----------------
<S> <C> <C>
Reduction in commission revenues related to
recording of pending contracts receivable $9,768 $89,596
Reduction in commission expense associated
with pending contracts receivable (5,861) (52,745)
Amortization of the intangible value of brokerage,
franchise and relocation listings acquired 25,274 36,246
</TABLE>
On January 6, 1995, the Company acquired certain assets and assumed
certain liabilities of Fox & Carskadon, a real estate brokerage
company, for a purchase price of approximately $14.7 million. The
acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations.
Accordingly, the total purchase price has been allocated to the
tangible and intangible assets and liabilities acquired based on the
Company's estimates of their respective fair values at the date of
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Through its subsidiaries, all of which are
wholly-owned, the Company operates a network of company-owned
brokerage offices, which conduct real estate brokerage, leasing and
management activities in the residential real estate market in the
United States. As the franchiser of the Coldwell Banker name and
systems, the Company through a subsidiary, Coldwell Banker
Residential Affiliates, Inc. ("CBRA"), also provides services,
products and certain rights to the Coldwell Banker name to
independently owned franchisees throughout the United States, Canada
and Puerto Rico. Another subsidiary, Coldwell Banker Relocation
Services, Inc. ("CBRS"), provides various relocation services to
client corporations that transfer their employees to other geographic
locations. Other subsidiaries provide various other real
estate-related services.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
10
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents - The Company considers short-term investments which
have maturities of three months or less at date of acquisition to be
cash equivalents.
Property and Equipment - Property and equipment, including
significant improvements thereto, are stated at cost. Upon retirement
or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts, and the net amount less
any proceeds, is charged or credited to income. Maintenance and
repairs are charged to expense as incurred. Facilities which have
been closed, and that management intends to sell, are carried at the
lower of cost less accumulated depreciation or estimated realizable
value.
Depreciation and Amortization - The Company provides for depreciation
on the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized on the
straight-line method over the estimated useful life of the asset or
the term of the lease, whichever is shorter.
Property and equipment are depreciated or amortized over the
following estimated useful lives:
Years
Land Improvements 20
Building and improvements 35
Leasehold improvements Lesser of estimated useful life
or remaining term of lease
Furniture and equipment 3 to 5
Leases - Aside from the Company's corporate headquarters, the Company
operates primarily in leased facilities. Lease terms are generally
five years with options to renew at varying terms. Certain facility
leases include scheduled base rent increases over the term of the
lease. The total amount of the base rent payments is being charged to
expense on the straight-line method over the term of the leases. The
Company has recorded a liability to reflect the excess of rent
expense over cash payments since the inception of the leases. In
addition to the base rent payment, the Company may also be required
to pay a monthly allocation of the buildings' operating expenses.
11
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Goodwill and Other Intangibles - Goodwill represents the excess of
cost over the fair value of net assets acquired. Goodwill is being
amortized on a straight line basis over an average life of 16 years
and 25 years. Other intangibles are stated at cost and include a
covenant not-to-compete with Sears and listing contracts. A listing
contract is a contract between a real estate broker and a potential
home seller which generally gives the real estate broker the exclusive
right to sell a listed property for a period of approximately six
months. Listing contracts are assigned fair value upon consummation
of the acquisition of a real estate brokerage firm and are amortized
over a six month period following the acquisiton date. The covenant
not-to-compete is being amortized on a straight-line basis over the
term of the covenant which is four years. The Company assesses whether
there has been a permanent impairment in the value of intangible
assets by considering factors such as expected future operating
income, trends and prospects, as well as the effects of demand,
competition and other economic factors. Management believes no
permanent impairment has occurred.
Income Taxes - The Company's operations are consolidated for federal
income tax purposes with those of Sears through October 4, 1993, and
for federal and California purposes, with those of Fremont since
October 5, 1993. In all other taxing jurisdictions, the Company files
its own tax returns. The income tax arrangement between the
Predecessor and Sears provided that the Predecessor's provision for
income taxes generally would be determined as if the Predecessor were
filing its own tax returns. Further, Sears agreed to reimburse the
Predecessor for the benefit it received from its utilization of any
federal tax losses or tax credits generated by the Predecessor. The
income tax arrangement between the Company and Fremont provides that
the Company's provision for federal and California income taxes
generally will be determined as if the Company were filing its own
tax returns and began operations on October 5, 1993.
The Company uses the liability method of accounting for income taxes
in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Deferred
income taxes are recorded based on the difference between financial
statement and income tax bases of assets and liabilities and
available tax credit carryforwards using enacted rates in effect for
the year in which the differences are expected to reverse. A
valuation allowance would be established for deferred income tax
assets if it were more likely than not that some portion or all of
the deferred income tax assets will not be realized. Income tax
expense is the tax payable for the period and the change during the
period in deferred income tax assets and liabilities.
Closed Offices - In the course of business, the Company opens and
closes real estate brokerage offices and facilities based on industry
and local market conditions. Leases related to facilities which have
been closed are evaluated taking into consideration current and
prospective real estate market conditions, sublease and lease
termination opportunities, and other factors, and a charge to
operations is recorded to reflect the expected future lease and other
expenses associated with such closed facilities.
12
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Revenue Recognition - Real estate commissions are recorded as revenue
upon close of escrow or upon transfer of title. Other commissions and
fees are recorded as revenue at the time the related services have
been performed by the Company unless significant future contingencies
exist.
Fees for relocation services are earned under contracts with client
corporations and consist of real estate related fees associated with
the acquisition, management and resale of employee-transferees' homes
and fees derived from providing additional non-real estate relocation
administration services which include the administration of client
corporations' relocation policies, the management of household goods
moves, and accounting for employee-transferees' relocation
reimbursable expenses. Real estate related relocation revenues are
recognized partially upon acquisition of the home from the
employee-transferee and the remainder upon close of escrow or
transfer of title. Fees associated with non-real estate services are
recognized over the periods in which the services are provided and
the associated expenses are incurred. All fees for relocation
services are shown net of expenses reimbursed by client corporations.
Franchise fee revenues are recognized upon substantial completion of
the Company's obligation to the franchisee. Franchise service fee
revenues are recognized when the franchisee settles or closes escrow
on real estate transactions brokered by the franchisee.
Relocation Services - Real estate related services provided by CBRS
include responsibility for the acquisition, management and sale of
the employee-transferee's home, providing equity advances on the
employee-transferee's home for purchase of a new home and certain
other relocation related services. The Company recognizes a portion
(approximately 60%) of relocation service revenue based on the
percentage of services performed through the home acquisition date.
Initial services consist of service authorizations, appraisal,
inspection and property acquisition. The remaining relocation service
revenue is recognized as services are performed through the ultimate
closing of the home.
While CBRS possesses legal or equitable title to the properties, any
difference between the purchase price and the ultimate sales proceeds
is the responsibility of the client corporation. Additionally, direct
expenses of managing the homes under contract (continuing mortgage
payments, property taxes, repairs and maintenance, etc.) are borne by
the client corporation. Funds are generally advanced by the client
corporation to CBRS for payment of these home management costs. After
the home selling transaction is completed, a settlement of actual
costs, fees and the funds advanced is made with the client
corporation.
Under certain contracts with client corporations, CBRS may provide an
advance of equity prior to the acquisition of the home and may fund
other relocation related expenses on behalf of the client
corporation. In addition, CBRS may advance funds to pay off all
mortgage debt upon purchase of the home by CBRS. These advances are
repaid to CBRS upon the close of escrow or transfer of title when the
related home is resold. All
13
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
advances generally carry an interest charge and are guaranteed by the
client corporation.
Several client corporations have arranged to fund all or a portion of
their relocation related expenses, including equity payments to their
employee-transferees. Such funding reduces the requirement for CBRS
to fund such expenses and is repaid to the client corporation upon
the close of escrow or transfer of title when the related home is
sold.
As described in Note 4, certain eligible Receivables arising from the
above transactions have been sold to an unrelated trust.
Franchise Agreements - Upon execution of the franchise agreement, a
franchisee is required to pay an initial franchise fee based on the
number of locations franchised. The franchisee is also required to
pay a service fee equal to a percentage of its gross revenues, as
defined in the franchise agreement.
Stock Options - In October 1995, the Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("SFAS 123") which is
effective for transactions entered into in fiscal years that begin
after December 15, 1995. The Company is currently studying the
effects of adopting SFAS 123 or continuing to account under the
provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.
Reclassification - Certain prior period amounts have been
reclassified to conform with the current period presentation.
3. CASH AND CASH EQUIVALENTS
Included within cash and cash equivalents is $9,674,000 and
$17,082,000 at December 31, 1995 and 1994, respectively, of funds
invested in certificates of deposit and other similar cash
equivalents that cannot be used other than to repay the loans that
provided the cash for these cash equivalents. The loans to which
these cash equivalents relate are included in other notes payable,
current portion (See Note 8).
4. SUBORDINATED RECEIVABLE FROM SALES OF RELOCATION RECEIVABLES
Effective October 5, 1993, CBRS entered into a three-year $250
million agreement to sell, on a revolving basis, its ownership
interest in the principal portion of certain of its eligible accounts
receivable and equity advances for residential properties, net
("Receivables"). On October 5, 1994, CBRS entered into a similar new
five-year agreement (the "Agreement") that replaced the agreement of
October 5, 1993. The
14
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Agreement allows for up to $250 million of outstanding cash proceeds
to be available for the sales of such eligible Receivables net of
client advances. The level of cash proceeds is subject to change
based on the level of eligible Receivables and restrictions on
concentrations of Receivables. Under terms of the Agreement, CBRS
generally receives a portion of the sale proceeds in cash from the
buyer with the remainder payable in the form of a non-interest
bearing receivable from the purchaser. Additionally, CBRS services
the Receivables portfolio for the purchaser for a fee. During the
course of the Agreement, proceeds from collection of the Receivables
are available first to repay the purchaser; at the expiration of the
Agreement, CBRS and the purchaser will share a proportionate risk of
loss as the eligible pool of Receivables is liquidated subject to the
recourse provisions of the Agreement. Included in other expenses for
the years ended December 31, 1995 and 1994, and the three months
ended December 31, 1993, are $1,614,000, $4,908,000 and $2,769,000,
respectively, of discounts and other costs recognized on sales of
such Receivables. At December 31, 1995 and 1994, all qualifying
Receivables have been sold as required by the terms of the Agreement.
The outstanding amount due under the subordinated receivable at
December 31, 1995 and 1994, was $47,313,000 and $75,082,000,
respectively, which is net of deferred interest income of $1,940,000
and $2,282,000, respectively, based on interest rates ranging FROM
6.67% to 9.05%. At December 31, 1995 and 1994, $16,023,000 and
$51,288,000, respectively, of this receivable was available on demand
and the remainder is subject to recourse provisions and is,
therefore, effectively subordinated to repayments
to investors.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,
1995 1994
---- ----
(in thousands)
Land and land improvements $9,228 $9,412
Buildings and improvements 23,143 22,880
Leasehold improvements 10,507 9,041
Furniture and equipment 40,656 33,838
------- -------
83,534 75,171
Less accumulated depreciation
and amortization (20,304) (8,726)
------- --------
Property and equipment, net $63,230 $66,445
======= =======
15
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Depreciation expense was $13,322,000 and $11,954,000 for the years
ended December 31, 1995 and 1994, respectively, $2,936,000 for the
three months ended December 31, 1993, and $10,112,000 for the nine
months ended September 30, 1993.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following at December 31,
1995 1994
---- ----
(in thousands)
Goodwill $30,257 $15,209
Listing and pending contracts 62,815 61,520
Covenant not-to-compete 24,050 24,000
-------- --------
117,122 100,729
Accumulated amortization 80,031 71,019
-------- --------
Goodwill and other intangibles, net $37,091 $29,710
======= =======
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31,
1995 1994
---- ----
(in thousands)
Accounts payable $37,762 $40,359
Reserve for closed offices 9,999 9,379
Accrued expenses and other 54,620 48,111
--------- -------
$102,381 $97,849
======== =======
16
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
8. OTHER NOTES PAYABLE
Other notes payable consist of the following at December 31,
1995 1994
------ ------
(in thousands)
Arbitrage loans $36,220 $17,082
Obligations under capital leases 2,300 1,902
Other 310 1,708
--------- --------
38,830 20,692
Less current portion 37,425 19,363
-------- -------
$1,405 $1,329
======== =======
The Company borrows money from various banks ("arbitrage loans") at a
below market interest rate and invests the money in the same banks at
a market interest rate, thereby earning the net interest spread.
Proceeds from arbitrage loans in the amount of $9,674,000 and
$17,682,000 at December 31, 1995 and 1994, respectively, are invested
in certificates of deposits and other similar cash equivalents and
cannot be used other than to repay the related loans. The loans bear
interest at rates ranging from .8% to 2.0% and are due monthly.
Additionally, proceeds from the remainder of the arbitrage loans are
unrestricted, bear interest at rates ranging from .5% to 2.0% and are
due monthly.
Obligations under capital leases bear interest at rates ranging from
6.0% to 16.0%, have terms ranging from 24 months to 80 months and are
generally collateralized by the related leased assets.
9. LONG TERM DEBT
Long Term Debt consists of the following at December 31,
1995 1994
(in thousands)
10 1/4% senior subordinated notes $ -- $29,350
Senior revolving credit facility payable 83,500 46,000
------- --------
$83,500 $75,350
======= =======
17
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Senior Subordinated Notes - In connection with the Acquisition, the
Company issued $115,000,000 of 10 1/4% Senior Subordinated Notes due
June 30, 2003. The Senior Subordinated Notes were subordinated to all
senior indebtedness of the Company and were subject to various
covenants, all of which the Company was in compliance with at
December 31, 1994. The Company repurchased, in the open market, the
remaining $29,350,000 of the Senior Subordinated Notes during the
year ended December 31, 1995 (See Note 20).
Senior Indebtedness - On October 6, 1994, the Company entered into a
credit agreement with Citicorp U.S.A., Inc. and a group of lenders to
provide the Company with a five year $100,000,000 reducing revolving
credit facility which includes a $10,000,000 subfacility for letters
of credit (the "Credit Agreement"). On July 26, 1995, the Credit
Agreement was amended to increase the revolving credit facility to
$170,000,000. Borrowings under the Credit Agreement are
collateralized by substantially all of the Company's assets,
including a pledge of the Company's common stock and that of the
Company's principal subsidiaries. Beginning June 30, 1996, the
$170,000,000 facility will be reduced semi-annually to $77,500,000 as
follows:
June 30, 1996 $155,000,000
December 31, 1996 $140,000,000
June 30, 1997 $127,500,000
December 31, 1997 $115,000,000
June 30, 1998 $102,500,000
December31, 1998 $90,000,000
June 30, 1999 $77,500,000
Interest on borrowings under the Credit Agreement is based on the
London Interbank Offered Rate ("LIBOR") or Citibank's Alternate Base
Rate ("ABR") at the Company's option. Borrowings bear interest at
LIBOR plus a margin of 0.5% to 1.25% (1.25% at December 31, 1995).
The borrowing rate at December 31, 1995, was 7.00%. Interest is paid
on the day of LIBOR maturities and in arrears on the first day of the
month for ABR advances.
The Credit Agreement contains certain covenants that, among other
things, limit the type and amount of additional indebtedness that may
be incurred by the Company and impose limitations on investments,
loans and advances, sales or transfers of assets, liens, dividends
and other payments, certain transactions with affiliates and certain
mergers. At December 31, 1995 and 1994, the Company was in compliance
with all covenants.
18
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
10. STOCK OPTIONS
In connection with the Acquisition, six members of management were
granted stock options to purchase, at the then fair value of $10.00
per share, 645,400 shares of the Company's common stock. Additionally
in March 1994, certain directors of the Company were granted options
to purchase, at $10.00 per share, 37,125 shares of the Company's
common stock. In July 1995, certain employees of the Company were
granted options to purchase, at the then estimated fair value of
$26.61 per share, 90,000 shares of the Company's common stock.
Options granted vest in five equal installments beginning one year
after the date of grant and for a five year period thereafter, except
that all options become immediately vested upon a change in control
of the Company (as defined in the option agreements). The options
expire seven years after the date of grant. On August 16, 1995,
274,660 options were exercised at $10.00 per share. At December 31,
1995 and 1994, total unexercised options were 442,545 and 682,525,
respectively, of which none and 129,080 options, respectively, were
exercisable.
11. FEES FOR RELOCATION SERVICES
Fees for relocation services, net, consist of the following:
<TABLE>
<CAPTION>
Predecessor
-----------
Three months Nine months
Year ended Year ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------ ------------ ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Gross fees and expenses incurred
for relocation services $451,061 $370,375 $73,455 $272,899
Less reimbursed expenses 389,614 311,408 60,839 230,879
------- ------- ------ -------
Fees for relocation services, net $61,447 $58,967 $12,616 $42,020
======= ======= ======= =======
</TABLE>
12. FRANCHISE OPERATIONS
Included in expenses in the accompanying consolidated statements of
operations are $49,315,000, $35,889,000, $8,674,000 and $26,987,000
of expenses (principally other operating expenses) related to
franchise operations for the years ended December 31, 1995 and 1994,
three months ended December 31, 1993, and the nine months ended
September 30, 1993, respectively.
19
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
13. INCOME TAXES
The provision (benefit) for income taxes before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
Predecessor
-----------
Three months Nine months
Year ended Year ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------ ------------ ------------ -------------
(in thousands)
Federal:
<S> <C> <C> <C> <C>
Current $14,018 $8,914 $67 $16,089
Deferred 4,934 1,034 (23,177) (2,050)
-------- -------- --------- ---------
18,952 9,948 (23,110) 14,039
-------- -------- --------- -------
State:
Current 5,271 1,673 665 3,904
Deferred 162 148 (5,477) 4
--------- --------- ---------- -----------
5,433 1,821 (4,812) 3,908
--------- -------- ---------- --------
$24,385 $11,769 ($27,922) $17,947
======= ======= ========= =======
</TABLE>
A reconciliation of income taxes at the statutory rate to the
effective rate is as follows:
<TABLE>
<CAPTION>
Predecessor
-----------
Three months Nine months
Year ended Year ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0% 35.0%
State taxes, net of
federal benefit 6.4 4.5 4.2 6.2
Goodwill amortization .8 1.9 0.2 2.2
Foreign operations .1
Other 1.7 2.9 0.6
------- ------- --------- -----
Effective rate 44.0% 44.3% 39.4% 44.0%
===== ===== ===== =====
</TABLE>
20
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Income taxes payable in the accompanying consolidated balance sheets
are comprised principally of amounts owed to Fremont for income
taxes.
The components of the Company's deferred income taxes as reflected in
the consolidated balance sheets are summarized as follows at December
31,
1995 1994
------ ------
(in thousands)
Deferred income tax assets
Closed office and other reserves $11,733 $14,454
Deferred franchise costs 2,521 1,788
Accrued vacation pay 1,605 1,524
Allowance for bad debts 1,356 1,431
Deferred rents 1,347 1,379
Postretirement benefits 757 652
Deferred gain on sale/leaseback 302 344
Deferred compensation 743 252
Other 1,846 2,344
Pending and listing contracts 547
--------- -------
Total deferred income tax assets 22,757 24,168
------- -------
Deferred income tax liabilities
Depreciation 2,395 1,693
Relocation contracts 2,899 1,656
Effects of state taxes 666 1,354
Other 2,428
-------- --------
Total deferred income tax liabilities 8,388 4,703
--------- --------
Net deferred income tax assets $14,369 $19,465
======= =======
Management believes it is more likely than not that the Company will
fully utilize its deferred tax assets by applying them against
taxable income to be generated in future years. The Company estimates
that the majority of its deferred tax assets will be realized during
the next three years.
21
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
14. LEASE COMMITMENTS
The Company leases certain of its offices and equipment under
noncancelable operating leases.
Minimum annual rental commitments under noncancelable operating
leases and related sublease rentals are as follows at December 31,
1995:
Minimum Sublease
payments rentals
---------- ---------
(in thousands)
Years ending December 31,
1996 $32,330 $3,965
1997 23,777 2,167
1998 17,764 1,167
1999 11,298 808
2000 6,298 565
Thereafter 9,426 1,126
---------- -------
$100,893 $9,798
======== ======
A portion of the above rental commitments and associated sublease
rental income for closed offices have been accrued for in the reserve
for closed offices.
Rent expense was $27,203,655 (net of sublease rentals of $453,216)
for the year ended December 31, 1995, $25,667,000 (net of sublease
rentals of $451,000) for the year ended December 31, 1994, $7,060,000
(net of sublease rentals of $864,000) for the three months ended
December 31, 1993, and $24,834,000 (net of sublease rentals of
$724,000) for the nine months ended September 30, 1993.
22
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
15. TRANSACTIONS WITH AFFILIATES
Transactions with Parent and Other Affiliates - In the ordinary
course of business, the Company has transactions with certain
affiliated companies. Transactions with its parent and other
affiliates were as follows:
<TABLE>
<CAPTION>
Predecessor
-----------
Three months Nine months
Year ended Year ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
------------ ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Management fees to parent - Fremont $508 $550 $137 $ --
Federal and state income taxes paid
to parent - Fremont 8,246 917 1,312
Relocation revenues from
Bechtel Group, Inc. 1,907
Relocation revenues from Sears
affiliated entities 2,210
Management fees to parent -
Sears affiliated entities 1,464
Insurance - Sears affiliated entities 6,133
Profit sharing - Sears affiliated entities 1,727
Data processing and other allocated
expenses - Sears affiliated entities 3,927
</TABLE>
Insurance - The Predecessor participated in a self-insured medical
insurance plan administered by Sears through September 30, 1993. The
Predecessor's portion of medical insurance expense was $4,157,000 for
the nine months ended September 30, 1993. In addition, during the
nine months ended September 30, 1993, the Predecessor paid $1,976,000
related to worker's compensation and general insurance programs
administered by its parent.
Management Fees to Parent - Management fees to Fremont for the year
ended December 31, 1995, December 31, 1994, and the three months
ended December 31, 1993, consist of charges for accounting, finance
and other support services. Management fees to Predecessor's parent,
charged through September 30, 1993, consist of charges for
accounting, legal, treasury and employee benefit administration and
other support services. These costs have been allocated to the
Company on the basis of various factors which take into consideration
the relative costs and expenses incurred by the parent in providing
such services to the Company. Management believes that the amounts
23
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
allocated to the Company have been computed and charged to the
Company on a reasonable basis.
16. COMMITMENTS AND CONTINGENCIES
Data Processing - The Company entered into an agreement as of August
1, 1994, with Advantis, a general partnership between affiliates of
Sears and International Business Machines Corporation. Under the
agreement, Advantis will continue to provide the Company with
information processing, data networking and related services. As to
central processing unit information services, the agreement is
exclusive, but there is no minimum annual commitment. The agreement
replaces an earlier agreement with Advantis which had a minimum
annual commitment of approximately $6,600,000. The agreement will
expire, unless earlier terminated or extended, on December 31, 1998.
Communications - The Company entered into an agreement as of December
13, 1994, with AT&T. Under this agreement, AT&T will provide the
Company with voice communications services formerly provided by
Advantis. Pursuant to the agreement, the Company has an aggregate
minimum annual commitment of approximately $3,000,000 subject to
various cost of living and usage adjustments. The agreement will
expire, unless earlier terminated or extended, on December 14, 1998.
Litigation - The Company and its subsidiaries are defendants in
certain lawsuits involving routine litigation incidental to the
businesses in which they are engaged. Based on the opinions of
in-house and external counsel, the Company believes that any
liability which may result from disposition of these lawsuits will
not have a material effect on the Company's consolidated financial
position or results of operations.
17. FIDUCIARY FUNDS
Fiduciary Funds - The consolidated financial statements do not
include the assets and liabilities or activities of various fiduciary
funds. At December 31, 1995 and 1994, such funds amounted to
$37,570,000 and $28,774,000, respectively. These funds are primarily
comprised of deposits by homebuyers pending close of escrow or
transfer of title. The Company is subject to various disclosure and
fiduciary duties under certain state laws with which the Company
believes it currently complies.
Advertising Fund - Under terms of CBRA's franchise agreements,
company-owned brokerages and franchisees are required to contribute
to an advertising fund administered by the Company. The consolidated
financial statements do not reflect the net assets or activities of
the advertising fund. Net assets of the advertising fund aggregated
24
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
$2,065,000 and $1,928,000 at December 31, 1995 and 1994,
respectively. For the years ended December 31, 1995 and 1994, the
three months ended December 31, 1993, and the nine months ended
September 30, 1993, the Company contributed $2,983,000, $3,087,000,
$763,000 and $2,582,000, respectively, and franchisees contributed
$13,683,000, $13,093,000, $3,026,000 and $8,325,000, respectively, to
the advertising fund.
18. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at December 31, 1995 and 1994, is made in accordance with
the requirements of Statement of Financial Accounting Standards No.
107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
The carrying values of cash and cash equivalents, accounts and
commissions receivable, accounts payable and accrued expenses, and
notes payable at December 31, 1995 and 1994, are a reasonable
estimate of their fair value.
The carrying value of notes receivable and subordinated receivable
from sale of relocation receivables, excluding notes aggregating
$208,000 and $641,000, net, at December 31, 1995 and 1994,
respectively, approximates fair value estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
remaining maturities.
The fair value of the $208,000 and $641,000 of notes receivable at
December 31, 1995 and 1994, respectively, is net of an allowance for
doubtful accounts of $175,000 and $241,000, respectively, and is
comprised of numerous notes receivable with varying interest rates,
collateral values and payment characteristics arising from the
Company's real estate brokerage operations and certain nonperforming
notes receivable; accordingly, the fair value of these notes
receivable was not estimated because it was not practical without
excessive cost in relation to the amount of the notes receivable to
reasonably assess the credit adjustment that would be applied for
such loans.
25
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
The fair value of the Company's Senior Subordinated Notes payable
with a carrying value of $29,350,000 at December 31, 1994, was
$31,929,000 based on the amount paid to repurchase the notes in the
open market in 1995.
The fair value information presented herein is based on pertinent
information available to management as of December 31, 1995 and 1994.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these
consolidated financial statements since that date, and current
estimates of fair value may differ significantly from the amounts
presented herein.
19. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain healthcare and life insurance benefits
for retired employees. Generally, qualified employees may become
eligible for these benefits if they retire in accordance with the
Company's established retirement policy and are continuously insured
under the Company's insurance plans prior to retirement. All retired
employees of the Company who are age 55 with 15 years of continuous
service in a plan offered by the Company are eligible for these
benefits. The Company's postretirement benefit plans currently are
not funded. The Company has the right to modify or terminate these
plans. The Company accrues the cost of retiree healthcare and life
insurance benefits during the employee's service with the Company.
Postretirement benefits costs were comprised of the following:
<TABLE>
<CAPTION>
Predecessor
-----------
Three months Nine months
Year ended Year ended ended ended
December 31, December 31, December 31, September 30,
1995 1994 1993 1993
---------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Service costs (benefits) earned
during the period $120 $141 ($68) $424
Interest costs on accumulated
postretirement benefit obligation 81 93 (46) 282
----- ----- ------- -----
Postretirement benefit costs (benefits) $201 $234 ($114) $706
==== ==== ====== ====
</TABLE>
26
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
Accumulated postretirement benefits were as follows at December 31,
<TABLE>
<CAPTION>
1995 1994
------ -----
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees & Dependents $85 $52
Fully eligible active plan participants 273 191
Other active plan participants 948 922
------- -------
Accumulated postretirement benefit obligation 1,306 1,165
Unrecognized gain 415 390
------- -------
Accrued postretirement benefit costs
recognized in the consolidated balance sheets $1,721 $1,555
====== ======
</TABLE>
Subsequent to the adoption of Statement of Financial Accounting
Standards No.106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, at January 1, 1992, the Company modified the
cost-sharing provisions related to retiree contributions. These
modifications reduced the Company's accumulated postretirement
benefit obligation as of December 31, 1992. The unamortized effects
of the negative plan amendments were eliminated in connection with
the accounting for the Acquisition.
The weighted average healthcare costs trend rate used in measuring
the accumulated postretirement benefit obligation and postretirement
benefit cost was 8.0% in 1995, gradually declining to 5.5% in 2001,
and remaining at that level thereafter. A 1.0% increase in the
assumed healthcare cost trend rate for each year would increase the
accumulated postretirement benefit obligation by $43,000 and would
increase the sum of the service cost and interest cost by $7,000.
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0%.
20. EXTRAORDINARY ITEM RELATED TO THE EARLY EXTINGUISHMENT OF DEBT
During the year ended December 31, 1995, the Company incurred an
extraordinary loss of $2,027,000 net of income tax benefits of
$1,593,000. The loss was related to the repurchase of senior
subordinated notes.
27
<PAGE>
COLDWELL BANKER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
During the year ended December 31, 1994, the Company incurred an
extraordinary loss of $5,963,000 net of income tax benefits of
$4,685,000. The loss was related to the refinancing of the senior
indebtedness and repurchase of senior subordinated notes.
21. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31, 1995
---------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $126,850 $186,038 $207,713 $178,145
======== ======== ======== ========
Income (loss) before provision
(benefit) for income taxes
and extraordinary item ($10,907) $ 15,473 $31,931 $18,968
========= ======== ======= =======
Income (loss) before extraordinary item ($6,231) $8,757 $17,514 $11,040
======== ====== ------- -------
Net income (loss) ($8,294) $8,829 $17,514 $11,004
======== ====== ======= =======
Year ended December 31, 1994
----------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
Revenues $129,518 $201,469 $193,973 $158,000
======== ======== ======== ========
Income (loss) before provision
(benefit) for income taxes
and extraordinary item ($30,666) $28,177 $27,775 $1,281
========= ======= ======= ======
Income (loss) before extraordinary item ($16,253) $14,934 $14,669 $1,448
========= ======= ======= ======
Net income (loss) ($16,253) $13,525 $14,669 ($3,106)
========= ======= ======= ========
</TABLE>
28
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS
Section A: Pro forma consolidated financial statements of HFS for the
Acquisition of Coldwell Banker as of and for the year ended
December 31, 1995.
Section B: Pro Forma consolidated financial information of HFS as of and
for the year ended December 31, 1995 excluding the Acquisition
of Coldwell Banker and including the acquisitions of
the six United States non-owned Century 21 regions ("Century
21 NORS"), the Travelodge (registered trademark) and
Electronic Realty Associates (registered trademark) ("ERA
(registered trademark)") franchise systems, (collectively, the
"1996 Acquisitions") and the proceeds from the February 22,
1996 issuance of $240 million of 4 3/4% convertible senior
notes (the "4 3/4% Notes") due 2003, to the extent such
proceeds were used to finance the 1996 acquisitions. The pro
forma statement of operations for the year ended December 31,
1995 is presented as if (i) the August 1, 1995 acquisition of
Century 21; (ii) the 1996 Acquisitions, (iii) the acquisition
by merger (the "CCI Merger") in May 1995 of Casino & Credit
Services, Inc.'s gambling patron credit information business,
Central Credit Inc. ("CCI"); and (iv) the issuance of the
4 3/4% Notes occurred on January 1, 1995.
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE ACQUISITION OF COLDWELL BANKER
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the following transactions had occurred on December 31,
1995:
(1) the acquisition by merger of Coldwell Banker Corporation
("Coldwell Banker");
(2) the receipt of proceeds from the offering of 12,500,000 shares
of the Company's Common Stock (the "Common Stock"), to the
extent necessary to finance the acquisition of Coldwell Banker and
the related repayment of indebtedness of Coldwell
Banker and to pay acquisition expenses.
The pro forma consolidated statement of operations for the year ended
December 31, 1995 is presented as if the above transactions had occurred
on January 1, 1995.
The pro forma financial statements consolidate the effects of the above
transactions with the pro forma financial results of HFS prior to the effect
of such transactions. The pro forma financial results of HFS include all of
HFS' acquisitions prior to the Coldwell Banker acquisition.
The acquisitions have been or will be accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
have been or will be recorded at their estimated fair values which are
subject to further refinement, including appraisals and other analyses, with
appropriate recognition given to the effect of current interest rates and
income taxes. Management does not expect that the final allocation of the
purchase price for the above acquisitions will differ materially from the
preliminary allocations. The Company has entered into certain immaterial
transactions which are not reflected in the pro forma statements of
operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. The pro forma consolidated statement of operations does
not reflect cost savings and revenue enhancements that management believes may
be realized following the acquisition. These savings are expected to be
realized primarily through the restructuring of franchise services of the
acquired companies as well as revenue enhancements expected through leveraging
of the Company's preferred alliance programs. No assurances can be made as to
the amount of cost savings or revenue enhancements, if any, that actually will
be realized.
The pro forma consolidated financial statements do not reflect
approximately $5.0 million of expenses which the Company expects to incur
following the acquisition of Coldwell Banker relating to the contribution of
Coldwell Banker's 318 owned real estate brokerage offices ("Owned Brokerage
Business") to an independent trust (the "Trust") and the relocation of Company
headquarters.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statement of Operations and should be read in conjunction
therewith and with the consolidated financial statements and related notes of
the Company included in its Annual Report on Form 10-K.
1
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Pro Forma
Pro Forma Coldwell Pro Forma For Acquired
HFS(1) Banker Adjustments(A) Company
--------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................. $ 16,109 $ 21,449 $ (18,853) $ 18,705
Royalty accounts and notes receivable, net 41,052 12,499 (3,032) 50,519
Relocation receivables ..................... 51,180 47,313 -- 98,493
Marketing and reservation receivables, net 22,297 -- -- 22,297
Other current assets ....................... 21,875 4,686 1,453 28,014
Deferred income taxes ...................... 20,200 4,818 (4,818) 20,200
----------- ---------- ----------- ------------
Total current assets ........................ 172,713 90,765 (25,250) 238,228
Property and equipment, net ................. 67,892 63,230 (41,532) 89,590
Franchise agreements, net ................... 578,218 -- 437,200 1,015,418
Excess of cost over fair value of net assets
acquired, net .............................. 520,971 37,091 312,161 870,223
Intangible assets -- Coldwell Banker ....... -- -- -- --
Deferred income taxes ....................... 8,445 9,551 (9,551) 8,445
Other assets ................................ 60,357 9,292 (759) 68,890
----------- ---------- ----------- ------------
Total ....................................... $1,408,596 $ 209,929 $ 672,269 $ 2,290,794
=========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities ............................... $ 80,260 $ 122,617 $ (31,050) $ 171,827
Income taxes payable ....................... 38,640 9,002 (9,002) 38,640
Accrued acquisition obligations ............ 25,448 -- 23,000 48,448
Current portion of long-term debt .......... 2,249 37,425 (721) 38,953
----------- ---------- ----------- ------------
Total current liabilities ................... 146,597 169,044 (17,773) 297,868
----------- ---------- ----------- ------------
Long-term debt .............................. 475,858 84,905 (84,286) 476,477
Other non-current liabilities ............... 17,150 2,653 (2,596) 17,207
Deferred income taxes ....................... 82,800 -- -- 82,800
Series A Adjustable Rate
Preferred Stock of Century 21 .............. 80,000 -- -- 80,000
STOCKHOLDERS' EQUITY
Common Stock - Issued and Outstanding;
Pro Forma HFS. 103,462 and Pro Forma for
Acquired Company ......................... 1,035 58 67 1,160
Additional paid-in capital ................. 521,552 59,124 671,002 1,251,678
Retained earnings (deficit) ................ 83,604 (105,855) 105,855 83,604
----------- ---------- ----------- ------------
Total stockholders' equity (deficit) ....... 606,191 (46,673) 776,924 1,336,442
----------- ---------- ----------- ------------
Total ....................................... $1,408,596 $ 209,929 $ 672,269 $ 2,290,794
=========== ========== =========== ============
</TABLE>
- ------------
(1) Pro Forma for all material transactions, excluding the Coldwell Banker
acquisition (See section B).
See notes to pro forma consolidated balance sheet
and statement of operations.
2
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
Pro Forma Coldwell Pro Forma For Acquired
HFS(1) Banker Adjustments Company
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Franchise ........................... $ 484,914 $ 68,064 $ 30,507 (B) $ 583,485
Owned brokerage business ............ -- 535,207 (535,207)(C) --
Relocation services ................. -- 75,866 -- 75,866
Other ............................... 88,107 20,264 (4,421)(C) 103,950
---------- ----------- ---------- -----------
Total revenue ..................... 573,021 699,401 (509,121) 763,301
---------- ----------- ---------- -----------
EXPENSES:
Marketing and reservation ........... 164,961 -- -- 164,961
Selling, general and administrative 156,895 32,367 -- 189,262
Ramada license fee .................. 18,911 -- -- 18,911
Owned brokerage ..................... -- 521,376 (521,376)(C) --
Depreciation and amortization ...... 44,376 22,425 (882)(D) 65,919
Interest ............................ 34,315 5,329 (5,329)(E) 34,315
Relocation .......................... -- 62,439 -- 62,439
Other ............................... 23,257 -- -- 23,257
---------- ----------- ---------- -----------
Total expenses .................... 442,715 643,936 (527,587) 559,064
---------- ----------- ---------- -----------
Income before income taxes............ 130,306 55,465 18,466 204,237
Provision for income taxes ........... 54,042 24,385 5,483 (F) 83,910
---------- ----------- ---------- -----------
Net Income ........................... 76,264 $ 31,080 $ 12,983 $ 120,327
========== =========== ========== ===========
PER SHARE INFORMATION (PRIMARY)
Net Income .......................... $ 0.69 $ 0.96
========== ===========
Weighted average common and common
equivalent shares outstanding ...... 117,522 12,506 (G) 130,028
========== ========== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income .......................... $ 0.68 $ 0.95
========== ===========
Weighted average common and common
equivalent shares outstanding ..... 119,359 12,506 131,865
========== ========== ===========
</TABLE>
- ------------
(1) Pro Forma for all material transaction, excluding the Coldwell Banker
acquisition (See Section B).
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform with the Company's classification
See notes to pro forma consolidated balance sheet
and statement of operations.
3
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITION OF COLDWELL BANKER:
The purchase price for Coldwell Banker has been allocated to assets
acquired and liabilities assumed at their estimated fair values. Pro forma
adjustments consist of the elimination of certain acquired assets and assumed
liabilities, net of the fair value ascribed to such assets and liabilities.
The Company acquired Coldwell Banker for the following consideration
($000's):
<TABLE>
<CAPTION>
<S> <C>
Cash consideration (i).................................. $750,251
----------
TOTAL PRO FORMA ACQUISITION COST ....................... 750,251
----------
Fair value of net assets acquired:
Historical book value of acquired companies .......... (46,673)
Elimination of net assets (liabilities) not acquired
or assumed:
Cash and cash equivalents ............................ 1,147
Accounts and notes receivable ........................ (3,032)
Deferred income taxes, current ....................... (4,818)
Other current assets ................................. 1,453
Property and equipment ............................... (41,532)
Franchise agreements ................................. --
Deferred income taxes, non-current ................... (9,551)
Other assets ......................................... (759)
Accounts payable and other ........................... 31,050
Income taxes payable ................................. 9,002
Current portion of long-term debt .................... 721
Long-term debt ....................................... 84,286
Other non-current liabilities ........................ 2,596
Fair value of assets acquired and liabilities assumed:
Deferred income taxes -- current ...................... --
Franchise agreements .................................. 437,200
Accrued acquisition liabilities (ii) .................. (23,000)
----------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED ........ 438,090
==========
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED . $312,161 (iii)
==========
</TABLE>
- ------------
(i) The adjustment reflects $646,751 for the acquisition of Coldwell
Banker, $20,000 of related expenses and repayment of $83,500 of indebtedness of
Coldwell Banker outstanding as of December 31, 1995. The Company expects that
$100,000 of such indebtedness will be outstanding and repaid upon consummation
of the Merger.
(ii) Accrued acquisition obligations consist of personnel related costs
($6.5 million), facility costs ($8.5 million), professional fees ($7.7
million), and other ($0.3 million).
(iii) Excess of cost over fair value of net assets acquired is as of
December 31, 1995, which differs from the excess of cost over fair value of net
assets acquired derived from the final purchase price at date of acquisition
of $347,000, and was used as the basis for adjustments in the pro forma
statement of operations for the year ended December 31, 1995. The difference
is primarily attributable to Coldwell Banker payments of approximately $40.0
million to holders of Coldwell Banker stock options as a result of change in
control provisions in connection with the acquisition.
4
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
A. ACQUISITION OF COLDWELL BANKER: (Continued)
The pro forma adjustments include the elimination of Coldwell Banker
stockholders' net deficit and the issuance of approximately 12.5 million shares
to finance the acquisition. The number of Company shares of common stock issued
in connection with the acquisition of Coldwell Banker assumes a market value of
Company Common Stock of $59.99 per share representing the closing price on the
date the Coldwell Banker acquisition was publicly announced and expenses
related to the offering of such shares approximating $26.5 million. The
adjustment to stockholders' equity is calculated as follows ($000's):
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ------------ ------------- ----------
$
<S> <C> <C> <C> <C>
Issuance of Company Common Stock .............. $125 $730,126 -- $730,251
Elimination of Coldwell Banker stockholders'
net deficit .................................. (58) (59,124) 105,855 46,673
-------- ------------ ------------- ----------
Adjustment to stockholders' equity ............ $ 67 $671,002 $105,855 $776,924
======== ============ ============= ==========
</TABLE>
B. SERVICE FEE REVENUE:
The pro forma adjustment reflects the addition of franchise fees to be
received under franchise contracts to be executed with owned brokerage
offices upon contribution of the Owned Brokerage Business to the Trust. The
franchise fees from the Owned Brokerage Business, which is based on the
franchise contracts with the Trust, is calculated at a net of approximately
5.7% of gross commissions earned by the Owned Brokerage Business on sales of
real estate properties. Gross commissions earned by the Owned Brokerage
Business were $535.2 million for the year ended December 31, 1995.
C. OWNED BROKERAGE BUSINESS REVENUE AND EXPENSES:
The pro forma adjustments reflect the elimination of revenue and expenses
from Coldwell Banker's 318 formerly owned brokerage offices. HFS contributed the
net assets of the Owned Brokerage Business to the Trust upon consummation of
the Coldwell Banker acquisition. The free cash flow of the Trust will be
expended at the discretion of the trustees to enhance the growth of the funds
available for advertising and promotion.
The majority of Owned Brokerage Business expenses are directly attributable
to the business. Based on the Company's due diligence of Coldwell Banker
Corporation and subsidiaries ("CB Consolidated") the Company determined that
common expenses were allocated to the owned brokerage business based on a
reasonable allocation method. Such allocations were based on the ratio of number
of employees, the amount of space occupied and revenue generated relative to CB
Consolidated in the aggregate and multiplied by corresponding common costs as
appropriate to determine allocable expenses.
5
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
D. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
<TABLE>
<CAPTION>
<S> <C>
Elimination of historical expense ........... $(22,425)
Property and equipment ...................... 1,156
Excess of cost over fair value of net assets
acquired ................................... 8,675
Franchise agreements ........................ 11,712
-----------
Total ....................................... $ (882)
===========
</TABLE>
6
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
D. DEPRECIATION AND AMORTIZATION: (Continued)
The estimated fair value of Coldwell Banker's property and equipment
(excluding land) of $15.7 million, is amortized on a straight-line basis over
the estimated benefit periods ranging from five to twenty-five years. Coldwell
Banker's intangible assets are comprised of franchise agreements and excess of
cost over fair value of net assets acquired. The franchise agreements with the
brokerage offices comprising the Trust are valued independently of all other
franchise agreements with Coldwell Banker affiliates. Franchise agreements
within the Trust and independent of the Trust are valued at $218.5 million and
$218.7 million, respectively and are amortized on a straight line basis over
the respective benefit periods of forty years and thirty five years,
respectively. The benefit period associated with Trust franchise agreements was
based upon a long history of gross commission sustained by the Trust. The
benefit period associated with the Coldwell Banker affiliates' franchise
agreements was based upon the historical profitability of such agreements and
historical renewal rates. The excess of cost over fair value of net assets
acquired is estimated at approximately $347.0 million and is determined to have
a benefit period of forty years, which is based on Coldwell Banker's position
as the largest gross revenue producing real estate company in North America,
the recognition of its brand name in the real estate brokerage industry and the
longevity of the real estate brokerage business.
E. INTEREST EXPENSE ($000'S):
The pro forma adjustment reflects the reversal of historical interest
expense relating to the following ($000's):
<TABLE>
<CAPTION>
<S> <C>
Expense associated with the Owned Brokerage Business (i) ... $ 138
Expense associated with revolving credit facility
borrowings which will be repaid with proceeds from the
offering of the shares of Common Stock relating to the
acquisition of Coldwell Banker (ii) ....................... 5,191
-------
Total ...................................................... $5,329
=======
</TABLE>
(i) HFS primarily paid all outstanding debt of Coldwell Banker Corporation
and subsidiaries ("CB Consolidated") at the consummation date of the
acquisition. Therefore, a determination as to the reasonableness of
allocated CB Consolidated interest to the Owned Brokerage Business is
unnecessary.
(ii) At the date of acquisition, HFS repaid $105 million of Coldwell Banker
indebtness which represented borrowings under a revolving credit facility
at a variable rate of interest (LIBOR plus a margin ranging from .5% to
1.25%).
7
<PAGE>
SECTION A
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS --(CONTINUED)
F. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
<S> <C>
Reversal of historical provision of:
Pro Forma HFS prior to Coldwell Banker
acquisition .......................... $(54,042)
Coldwell Banker ....................... (24,385)
Pro forma provision .................... 83,910
-----------
Incremental provision for income taxes $ 5,483
===========
</TABLE>
The pro forma effective tax rate approximates the Company's historical
effective tax rate. The pro forma provision for taxes was computed using pro
forma pre-tax amounts and the provisions of Statement of Financial
Accounting Standards No. 109.
G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of an
adjustment for the second quarter 1996 Coldwell Banker offering. Coldwell
Banker was acquired May 31, 1996.
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisition took place at the beginning of the period presented;
thus, the stock issuance is considered outstanding as of the beginning of the
period for purposes of per share calculations. The pro forma adjustments
reflect the issuance of 12.5 million shares in the offering of the shares, at
an issuance price per share of $59.99. The proceeds of the offering will be
used to finance the acquisition of Coldwell Banker and the related repayments
of Coldwell Banker indebtedness and to pay acquisition expenses.
8
<PAGE>
SECTION A
H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with its acquisition of Coldwell Banker, HFS developed a
related business plan to restructure the acquired company, which will result in
future cost savings subsequent to the acquisition. HFS's restructuring plan was
developed prior to the consummation of the acquisition. The restructuring plan
included the involuntary termination and relocation of employees, the
consolidation and closing of facilities and the elimination of duplicative
operating and overhead activities. Pursuant to HFS's specific restructuring
plans, certain selling, general and administrative expenses may not be incurred
subsequent to the acquisition that existed prior to consummation. In addition,
there are incremental costs in the conduct of activities of the acquired
company prior to the acquisition that may not be incurred subsequent to
consummation and have no future economic benefit to HFS. The estimated cost
savings that HFS believes would have been attained had its acquisition occurred
on January 1, 1995 and the related impact of such cost saving on pro forma net
income and net income per share are not reflected in the pro forma consolidated
statements of income, but are presented below ($000's):
COLDWELL PRIOR
BANKER ACQUISITIONS TOTAL
------ ------------ -----
Payroll and related ........ $10,682 $26,937 $37,619
Professional ............... 1,500 4,720 6,220
Occupancy ................. -- 7,740 7,740
Other ...................... (1,517) 6,657 5,140
-------- -------- --------
Total ..................... $10,665 $46,054 $56,719
======== ======== ========
The impact on pro forma net income and net income per share of the estimated
SG&A cost savings are as follows:
Income before taxes, as reported ...................... $204,237
SG&A adjustments ...................................... 56,719
--------
Income before taxes, as adjusted ...................... 260,956
Income taxes .......................................... 106,824
--------
Net income, as adjusted ............................... 154,132
--------
Net income per share (primary):
As adjusted ......................................... $ 1.22
--------
As reported ......................................... $ 0.96
========
Net income per share (fully diluted):
As adjusted ......................................... $ 1.20
--------
As reported ......................................... $ 0.95
========
I. ACCRUED ACQUISITION LIABILITIES
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21, Century 21 NORS,
and ERA operations. These acquisitions were consummated in 1995 and 1996 and
resulted in the consolidation of facilities, involuntary termination and
relocation of employees, and elimination of duplicative operating and overhead
activities. The following table provides details of these charges by type.
Century 21
Century 21 NORS ERA
---------- ---------- ---
Personnel related ........... $ 12,647 $ 1,720 $ 8,000
Facility related ............ 16,511 2,293 1,558
Other costs ................. 990 711 501
---------- ---------- -------
Total ....................... $ 30,148 $ 4,724 $10,059
========== ========== =======
Terminated employees ........ 325
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation of excess office space. As of December 31, 1995 approximately
$16.3 million was paid by Century 21, and charged against the restructuring
liability.
9
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXCLUDING THE ACQUISITION OF COLDWELL BANKER
The pro forma consolidated balance sheet as of December 31, 1995 is
presented as if the acquisitions of the six United States non-owned Century 21
regions ("Century 21 NORS"), the Travelodge (registered trademark) and
Electronic Realty Associates (registered trademark) ("ERA (registered
trademark)") franchise systems, (collectively, the "1996 Acquisitions") and the
proceeds from the February 22, 1996 issuance of $240 million of 4 3/4%
convertible senior notes (the "4 3/4% Notes") due 2003, to the extent such
proceeds were used to finance the 1996 acquisitions, had occurred on December
31, 1995. The pro forma statement of operations for the year ended December 31,
1995 is presented as if (i) the August 1, 1995 acquisition of Century 21; (ii)
the 1996 Acquisitions, (iii) the acquisition by merger (the "CCI Merger") in
May 1995 of Casino & Credit Services, Inc.'s gambling patron credit information
business, Central Credit Inc. ("CCI"); and (iv) the issuance of the 4 3/4%
Notes occurred on January 1, 1995. The acquisitions have been accounted for
using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been or will be recorded at their estimated fair
values which are subject to further refinement, based upon appraisals and other
analyses, with appropriate recognition given to the effect of current interest
rates and income taxes. Management does not expect that the final allocation of
the purchase price for the above acquisitions will differ materially from the
preliminary allocations.
The Company has entered into the following transactions which are not
reflected in the pro forma statements of operations:
On March 31, 1995, the Company acquired a 1% general partnership interest
for approximately $3.0 million in a limited partnership which will develop,
promote and franchise the newly established Wingate Inn franchise system
("Wingate"), a new construction hotel brand. Wingate operations did not
commence until March 1995 and are not material to the Company's financial
statements. Accordingly, this transaction is not included in the pro forma
statement of operations.
On August 31, 1995, the Company acquired the assets comprising the Knights
Inn hotel franchise system, an economy hotel franchise system, for
approximately $15 million plus expenses. Knights Inn operations are not
material to the Company's financial statements. Accordingly, this transaction
is not included in the pro forma statement of operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. The pro forma consolidated statement of operations does not reflect
cost savings and revenue enhancements that management believes may be realized
following the acquisitions. These savings are expected to be realized primarily
through the restructuring of franchise services of the acquired companies as
well as revenue enhancements expected through leveraging of the Company's
preferred alliance programs. No assurances can be made as to the amount of cost
savings or revenue enhancements, if any, that actually will be realized. The
pro forma consolidated financial statements are based on certain assumptions
and adjustments described in the Notes to Pro Forma Consolidated Balance Sheet
and Statement of Operations and should be read in conjunction therewith and
with the consolidated financial statements and related notes of the Company
included in their Annual Report on Form 10-K and the financial statements and
related notes of the acquired companies included as exhibits in Item 7 of this
8-K/A.
10
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
CENTURY 21 PRO FORMA
HFS NORS TRAVELODGE ERA ADJUSTMENTS (A) PRO FORMA
------------ ------------ ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 16,109 $ 4,956 $ 7,242 $(12,198) $ 16,109
Royalty accounts and notes
receivable, net 37,326 9,617 $3,726 1,707 (11,324) 41,052
Relocation receivables 51,180 51,180
Marketing and reservation
receivables, net 22,297 22,297
Other current assets 21,304 479 612 2,459 (3,550) 21,875
571 (E)
Deferred income taxes 20,200 20,200
------------ ------------ ------------ ---------- --------------- ------------
Total current assets 168,416 15,052 4,338 11,408 (26,501) 172,713
Property and equipment -net 67,892 2,674 333 710 (3,717) 67,892
Franchise agreements -net 517,218 14,780 (14,780) 578,218
61,000
Excess of cost over fair value of net
assets acquired -net 356,754 164,217 520,971
Defered income taxes 8,445 8,445
Other assets 55,528 3,562 1,420 2,526 (6,108) 60,357
3,429 (E)
------------ ------------ ------------ ---------- --------------- ------------
Total $1,165,808 $21,288 $6,091 $ 29,424 $185,985 $1,408,596
============ ============ ============ ========== =============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other
accrued liabilities $ 80,260 $ 5,058 $3,252 $ 20,063 $(28,373) $ 80,260
Income taxes payable 38,640 38,640
Accrued acquisition obligations 3,740 21,708 25,448
Current portion of long-term debt 2,249 35 4,374 (4,409) 2,249
------------ ------------ ------------ ---------- --------------- ------------
Total current liabilities 124,889 5,093 3,252 24,437 (11,074) 146,597
------------ ------------ ------------ ---------- --------------- ------------
(11,252)
Long-term debt 300,778 309 10,943 175,080 475,858
Other non-current liabilities 17,150 579 14,152 (14,731) 17,150
Deferred income taxes 82,800 82,800
Series A Adjustable Rate
Preferred Stock of Century 21 80,000 80,000
STOCKHOLDERS' EQUITY
Preferred stock
Common stock -Issued and
Outstanding; HFS Historical,
102,539 and Pro Forma, 103,462 1,025 77 (67) 1,035
Additional paid-in capital 475,562 104 38,904 6,982 521,552
Retained earnings (deficit) 83,604 15,126 2,839 (59,012) 41,047 83,604
------------ ------------ ------------ ---------- --------------- ------------
Total stockholders' equity
(deficit) 560,191 15,307 2,839 (20,108) 47,962 606,191
------------ ------------ ------------ ---------- --------------- ------------
Total $1,165,808 $21,288 $6,091 $ 29,424 $185,985 $1,408,596
============ ============ ============ ========== =============== ============
</TABLE>
See notes to pro forma consolidated balance sheet and statement of operations.
11
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Franchise $361,238 $128,233 $ (4,557) (B) $484,914
Other 51,745 36,362 88,107
---------- ----------- ------------- -----------
Total revenue 412,983 164,595 (4,557) 573,021
---------- ----------- ------------- -----------
EXPENSES:
Marketing and reservation 143,965 20,996 164,961
Selling, general and administrative 55,538 105,857 (4,500) (B) 156,895
Ramada license fee 18,911 18,911
Depreciation and amortization 30,857 8,483 5,036 (D) 44,376
Interest 21,789 6,227 6,299 (E) 34,315
Other 7,018 16,638 (399) (C) 23,257
---------- ----------- ------------- -----------
Total expenses 278,078 158,201 6,436 442,715
---------- ----------- ------------- -----------
Income before income taxes 134,905 6,394 (10,993) 130,306
Provision for income taxes 55,175 3,542 (4,675)(F) 54,042
---------- ----------- ------------- -----------
Income before minority interest Net Income $ 79,730 $ 2,852 $ (6,318) $ 76,264
========== =========== ============= ===========
PER SHARE INFORMATION (PRIMARY)
Net income $ 0.74 $ 0.69
========== ===========
Weighted average common and common
equivalent shares outstanding 113,817 3,705 (G) 117,522
========== ============= ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income $ 0.73 $ 0.68
========== ===========
Weighted average common and common
equivalent shares outstanding 115,654 3,705 (G) 119,359
========== ============= ===========
</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.
12
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------------------------
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
Other................ 3,326 16,678 403 79 15,876 36,362
---------- ------------- ------------ ------------ ---------- ----------
Total revenue....... 3,326 70,670 29,424 18,440 42,735 164,595
---------- ------------- ------------ ------------ ---------- ----------
EXPENSES:
Marketing and
reservation........ -- 5,128 2,912 12,956 -- 20,996
Selling, general and
administrative..... -- 50,232 22,851 2,648 30,126 105,857
Depreciation and
amortization....... 529 5,217 578 8 2,151 8,483
Interest............. -- 2,904 54 -- 3,269 6,227
Other................ 1,917 4,632 -- -- 10,089 16,638
---------- ------------- ------------ ------------ ---------- ----------
Total expenses...... 2,446 68,113 26,395 15,612 45,635 158,201
---------- ------------- ------------ ------------ ---------- ----------
Income (loss) before
income taxes........ 880 2,557 3,029 2,828 (2,900) 6,394
Provision for income
taxes............... 313 2,097 -- 1,132 -- 3,542
---------- ------------- ------------ ------------ ---------- ----------
Net income (loss) .... $ 567 $ 460 $ 3,029 $ 1,696 $(2,900) $ 2,852
========== ============= ============ ============ ========== ==========
</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.
13
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS
A. ACQUISITION OF CENTURY 21 NORS, TRAVELODGE AND ERA:
The pro forma acquisition costs of the 1996 Acquisitions have been
allocated to assets acquired and liabilities assumed at their estimated fair
values. Pro forma adjustments consist of the elimination of certain acquired
assets and assumed liabilities, net of the fair value ascribed to such assets
and liabilities as follows ($000's):
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Cash consideration............................ $ 94,980 $39,300 $ 36,800 $171,080
Issuance of approximately 1 million shares of
Company common stock......................... 46,000 -- -- 46,000
------------ ------------ ---------- ----------
TOTAL PRO FORMA ACQUISITION COST.............. 140,980 39,300 36,800 217,080
------------ ------------ ---------- ----------
Fair value of net assets acquired:
Historical book value of acquired companies . 15,307 2,839 (20,108) (1,962)
Elimination of net assets (liabilities) not
acquired or assumed:
Cash and cash equivalents................... (4,956) -- (7,242) (12,198)
Accounts and notes receivable............... (9,617) -- (1,707) (11,324)
Other current assets........................ (479) (612) (2,459) (3,550)
Property and equipment...................... (2,674) (333) (710) (3,717)
Franchise agreements........................ -- -- (14,780) (14,780)
Other assets................................ (3,562) (20) (2,526) (6,108)
Accounts payable and other.................. 5,058 3,252 20,063 28,373
Current portion of long-term debt........... 35 -- 4,374 4,409
Long-term debt.............................. 309 -- 10,943 11,252
Other non-current liabilities............... 579 -- 14,152 14,731
Fair value of assets acquired and liabilities
assumed:
Deferred income taxes--current (i)........... 5,484 1,529 1,432 8,445
Franchise agreements......................... 11,000 30,000 20,000 61,000
Accrued acquisition liabilities (ii) ........ (14,098) (3,930) (3,680) (21,708)
------------ ------------ ---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED............ 2,386 32,725 17,752 52,863
------------ ------------ ---------- ----------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED..................................... $138,594 $ 6,575 $ 19,048 $164,217
============ ============ ========== ==========
</TABLE>
(i) The pro forma adjustment to deferred income taxes recorded in
connection with acquisitions results from differences in the fair values of
net assets acquired and liabilities assumed and their respective income tax
bases.
(ii) Accrued acquisition obligation consist of
14
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
A. ACQUISITION OF CENTURY 21 NORS, TRAVELODGE AND ERA: (CONTINUED)
The pro forma adjustments include the elimination of acquired companies
stockholders' net deficit and the issuance of approximately 923,000 shares
(based on the average stock price of the Company for a period prior to
closing) in connection with the acquisition of the Century 21 NORS. The
adjustment to stockholders' equity is calculated as follows ($000's):
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Issuance of Company common stock .......... $ 10 $ 45,990 $ $46,000
Elimination of acquired companies combined
stockholders' net deficit ................ (77) (39,008) 41,047 1,962
-------- ------------ ------------- ---------
Adjustment to stockholders' equity ....... $(67) $ 6,982 $41,047 $47,962
======== ============ ============= =========
</TABLE>
B. FRANCHISE FEES AND ASSOCIATED REVENUE:
The pro forma adjustments to franchise revenues reflect the elimination of
franchise revenue associated with discontinued Century 21 international based
operations and the elimination of franchise fees and associated franchise
revenue paid by the Century 21 NORS to Century 21 under sub-franchise
agreements.
The pro forma adjustments to franchise revenue consists of the following:
<TABLE>
<CAPTION>
ELIMINATE:
<S> <C>
Century 21 International discontinued operations. $ (57)
Century 21 revenue included as Century 21 NORS
SG&A ............................................. (4,500)
---------
Total ............................................... $(4,557)
=========
</TABLE>
The pro forma adjustment to franchise fees of $4,500 reflects the elimination
of royalty payments made by the Century 21 NORS to Century 21 under
sub-franchise agreements.
15
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
C. OTHER EXPENSES:
The pro forma adjustment eliminates $399,000 of accounting, legal and other
administrative expenses allocated to CCI which would not have been incurred
by the Company.
16
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
D. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
<TABLE>
<CAPTION>
CCI CENTURY 21
MERGER CENTURY 21 NORS TRAVELODGE ERA TOTAL
-------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Elimination of historical depreciation and
amortization................................ $(529) $(5,217) $ (578) $ (8) $(2,151) $(8,483)
Property and equipment....................... 100 425 189 714
Information data base........................ 375 375
Excess of cost over fair value of net assets
acquired.................................... 289 2,912 3,587 224 873 7,885
Franchise agreements......................... 1,628 917 1,000 1,000 4,545
-------- ------------ ------------ ------------ ---------- ----------
TOTAL........................................ $ 235 $ (252) $3,926 $1,216 $ (89) $ 5,036
======== ============ ============ ============ ========== ==========
</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, expansion of its customer
base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.1
million, $33.5 million and $199.7 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are seven, twelve
and forty years, respectively. The benefit periods associated with the excess
cost over fair value of net assets acquired were determined based on Century
21's position as the world's largest franchisor of residential real estate
brokerage offices, the most recognized brand name in the residential real
estate brokerage industry and the longevity of the residential real estate
brokerage business.
17
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
D. DEPRECIATION AND AMORTIZATION: (CONTINUED)
Century 21 NORS, Travelodge and ERA
The estimated fair value of ERA property and equipment is $1.1 million, and
is being depreciated on a straight line basis over the period to be benefited,
which is five years. The estimated fair values of Century 21 NORS, Travelodge
and ERA's franchise agreements are $11.0 million, $30.0 million and $20.0
million, respectively, and are being amortized on a straight line basis over
the periods to be benefited which are twelve, thirty and twenty years,
respectively. The estimated fair values of Century 21 NORS, Travelodge and
ERA's excess cost over fair value of net assets acquired are 143.5 million, 9.0
million and 34.9 million, respectively and are each being amortized on a
straight line basis over the periods to benefited which are forty years.
E. INTEREST EXPENSE:
<TABLE>
<CAPTION>
<S> <C>
Elimination of historical interest
expense................................... $(6,227)
Century 21................................. 2,135
4 3/4% Notes............................... 8,595
Minority Interest-preferred dividends ..... 1,796
----------
TOTAL...................................... $ 6,299
==========
</TABLE>
Century 21
The pro forma adjustment reflects the recording of interest expense on $70
million of borrowings under HFS's revolving credit facility at an interest rate
of approximately 6.0% which is the variable rate in effect on the date of
borrowing. Borrowings represent the amount necessary to finance the initial
cash purchase price net.
Effect of a 1/8% variance in variable interest rates
As mentioned above, interest expense was incurred on borrowings under the
Company's revolving credit facility, which partially funded the acquisition of
Century 21. The Company recorded interest expense using the variable interest
rate in effect on the borrowing date. The effect on pro forma net income
assuming a 1/8% variance in the variable interest rate used to calculate
interest expense is $26,000 for Century 21. The pro forma net income effects
of a 1/8% variance in the interest rate has no impact on earnings per share
for the period presented.
18
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
E. INTEREST EXPENSE (CONTINUED):
4 3/4% Notes
The pro forma adjustment reflects interest expense and amortization of
deferred financing costs related to the February 22, 1996 issuance of the 4
3/4% Notes (5.0% effective interest rate) to the extent that such proceeds were
used to finance the Acquisitions of ERA ($37.6 million), Travelodge ($39.3
million), and Century 21 NORS ($95.0 million). The pro forma adjustment for
deferred financing fees reflects $4 million of capitalized costs associated
with the issuance of the 4 3/4% Notes which are being amortized over the term
of the 4 3/4% Notes.
19
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENT OF OPERATIONS (CONTINUED)
E. INTEREST EXPENSE (CONTINUED):
MINORITY INTEREST--PREFERRED DIVIDENDS:
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21 issued by Century 21.
F. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
<S> <C>
Reversal of historical provision of:
Company................................ $(55,175)
CCI.................................... (313)
Century 21............................. (2,097)
Travelodge............................. (1,132)
Pro forma provision..................... 54,042
-----------
Incremental provision for income
taxes.................................. $ (4,675)
===========
</TABLE>
The pro forma effective tax rate approximates the Company's historical
effective tax rate. The pro forma provisions for taxes were computed using
pro forma pre-tax amounts and the provisions of Statement of Financial
Accounting Standards No. 109.
G. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
<TABLE>
<CAPTION>
ISSUANCE
PRICE PER
SHARE SHARES
----------- --------
<S> <C> <C>
CCI (including dilutive impact of warrants)(1) . $30.60 448
Century 21 (2).................................. $49.88 2,334
Century 21 NORS (3)............................. $49.83 923
--------
Total.......................................... 3,705
========
</TABLE>
(1) Date of Acquisition, May 11, 1995
(2) Date of Acquisition, August 1, 1995
(3) Date of Acquisition, April 3, 1996
The unaudited Pro Forma Consolidated Statement of Operations is presented
as if the acquisitions took place at the beginning of the period presented;
thus, the stock issuances and warrants assumed referred to above are
considered outstanding as of the beginning of the period for purposes of per
share calculations.
20
<PAGE>
H. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with HFS' acquisitions, HFS developed related business
plans to restructure each of the respective acquired companies which will
result in future cost savings subsequent to the acquisitions. HFS'
restructuring plans in each case were developed prior to the consummation of
the respective acquisitions and were implemented concurrent with the
consummation of the acquisitions. Restructuring plans included the involuntary
termination and relocation of employeees, the consolidation and closing of
facilities and the elimination of duplicative operating and overhead
activities. Pursuant to HFS's specific restructuring plans, certain selling,
general and administrative expenses may not be incurred subsequent to each
acquisition that existed prior to consummation. In addition, there are
incremental costs in the conduct of activities of the acquired companies prior
to the acquisitions that may not be incurred subsequent to consummation and
have no future economic benefit to HFS. The estimated cost savings that HFS
believes would have been attained had its acquisitions occurred on January 1,
1995 and the related impact of such cost savings on pro forma net income and
net income per share are not reflected in the pro forma consolidated statements
of income, but are presented below ($000's):
<TABLE>
<CAPTION>
CENTURY CENTURY 21
21 NORS TRAVELODGE ERA TOTAL
--------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Payroll and
related............ $10,885 $ 7,706 $1,110 $7,236 $26,937
Professional........ 2,693 1,486 154 387 4,720
Occupancy........... 3,628 2,754 186 1,172 7,740
Other............... 3,128 2,326 167 1,036 6,657
--------- ------------ ------------ -------- ---------
Total.............. $20,334 $14,272 $1,617 $9,831 $46,054
========= ============ ============ ======== =========
</TABLE>
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes, as report ....... $130,306
SG&A adjustments...................... 46,054
----------
Income before taxes, as adjusted ..... 176,360
Income taxes.......................... 72,648
----------
Net income, as adjusted............... $103,712
==========
Net income per share (primary):
As adjusted.......................... $ 0.92
==========
As reported.......................... $ 0.69
==========
Net income per share (fully diluted):
As adjusted.......................... $ 0.91
==========
As reported.......................... $ 0.68
==========
</TABLE>
21
