<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 1-11402
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HFS Incorporated
(Exact name of Registrant as specified in its charter)
Delaware 22-3059335
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the Registrant's classes of
common stock was 128,676,074 shares of Common Stock outstanding as at November
11, 1996.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
HFS Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 471,194 $ 16,109
Royalty accounts and notes receivable, net of
allowance for doubtful accounts 76,975 37,326
Marketing and reservation receivables, net of
allowance for doubtful accounts 36,200 22,297
Relocation receivables 136,052 51,180
Other current assets 22,625 21,304
Deferred income taxes 36,456 20,200
----------- -----------
Total current assets 779,502 168,416
Property and equipment, net 106,233 67,892
Franchise agreements, net 594,415 517,218
Excess of cost over fair value of net assets
acquired, net 1,339,836 356,754
Other assets 80,064 55,528
----------- -----------
TOTAL ASSETS $ 2,900,050 $ 1,165,808
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and other $ 185,012 $ 73,724
Income taxes payable 81,633 38,640
Accrued acquisition obligations 40,287 10,276
Current portion of long-term debt 29,907 2,249
----------- -----------
Total current liabilities 336,839 124,889
Long-term debt 541,563 300,778
Other liabilities 31,259 17,150
Deferred income taxes 85,400 82,800
Commitments and contingencies
Series A Adjustable Rate Preferred Stock of Century 21 -- 80,000
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 1,237 1,025
Additional paid-in capital 1,705,541 475,562
Retained earnings 206,236 83,604
Treasury stock, at cost (8,025) --
------------ -----------
Total stockholders' equity 1,904,989 560,191
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,900,050 $ 1,165,808
=========== ===========
-See notes to consolidated financial statements-
</TABLE>
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Franchise $ 184,027 $ 113,340 $ 424,162 $ 265,129
Other 61,773 15,909 125,848 34,602
--------- --------- --------- ---------
Total revenue 245,800 129,249 550,010 299,731
--------- --------- --------- ---------
EXPENSES:
Marketing and reservation 55,237 44,160 130,728 110,842
Selling, general and administrative 40,232 21,867 110,588 46,117
Depreciation and amortization 17,724 8,389 41,129 21,721
Interest 7,620 6,017 22,194 16,272
Other 23,033 2,376 40,109 3,595
--------- --------- --------- ---------
Total expenses 143,846 82,809 344,748 198,547
--------- --------- --------- ---------
Income before income taxes 101,954 46,440 205,262 101,184
Provision for income taxes 40,884 19,321 82,630 41,820
--------- --------- --------- ---------
Net income $ 61,070 $ 27,119 $ 122,632 $ 59,364
========= ========= ========= =========
SHARE INFORMATION (fully diluted):
Net income per share $ 0.44 $ 0.24 $ 0.96 $ 0.56
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 142,942 115,758 131,684 112,056
========= ========= ========= =========
</TABLE>
-See notes to consolidated financial statements-
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid In Retained Treasury
Shares Amount Capital Earnings Stock Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 102,539 $ 1,025 $ 475,562 $ 83,604 $ -- $ 560,191
Issuance of common stock 20,278 203 1,205,768 -- -- 1,205,971
Purchase of common stock -- -- -- -- (8,025) (8,025)
Exercise of stock options 898 9 7,973 -- -- 7,982
Tax benefit from exercise
of stock options -- -- 16,145 -- -- 16,145
Conversion of 41/2% Notes 5 -- 93 -- -- 93
Net income -- -- -- 122,632 -- 122,632
------- ------- ----------- --------- ---------- ----------
Balance, September 30, 1996 123,720 $ 1,237 $ 1,705,541 $ 206,236 $ (8,025) $1,904,989
======= ======= =========== ========= =========== ==========
</TABLE>
-See notes to consolidated financial statements-
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------- -----------
<S> <C> <C>
Operating Activities:
Net income $ 122,632 $ 59,364
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, including
amortization of deferred financing costs 42,524 22,680
Changes in operating assets and liabilities
and other (25,777) 2,200
----------- -----------
Net cash provided by operating activities 139,379 84,244
---------- -----------
Investing Activities:
Property and equipment additions (23,578) (5,780)
Loans and investments (10,000) (13,000)
Acquisition of businesses, net of cash acquired (970,885) (70,977)
----------- ------------
Net cash used in investing activities (1,004,463) (89,757)
----------- ------------
Financing Activities:
Issuance of common stock, net 1,167,953 57,053
Proceeds from borrowings, net 242,025 -
Purchases of treasury stock (8,025) -
Redemption of Series A Preferred Stock (80,000) -
Principal payments - long-term debt (1,784) (16,252)
----------- ------------
Net cash provided by financing activities 1,320,169 40,801
---------- -----------
Net increase in cash and cash equivalents 455,085 35,288
Cash and cash equivalents, beginning of period 16,109 5,956
---------- -----------
Cash and cash equivalents, end of period $ 471,194 $ 41,244
========= ===========
</TABLE>
-See notes to consolidated financial statements-
<PAGE>
HFS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet of HFS Incorporated (the "Company") as of
September 30, 1996, the consolidated statements of income for the three and
nine months ended September 30, 1996 and 1995, the consolidated statements of
cash flows for the nine months ended September 30, 1996 and 1995 and the
consolidated statement of stockholders' equity for the nine months ended
September 30, 1996 are unaudited and reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a fair
presentation. There were no adjustments of an unusual nature recorded during
the three and nine months ended September 30, 1996 and 1995 except that in June
1996, the Company recorded a $7.0 million pre-tax restructuring charge, related
primarily to the contribution of owned Coldwell Banker brokerage offices to a
newly created independent entity, National Realty Trust (the "Trust") (See Note
2). Through September 30, 1996, the Company has engaged principally in the
business of franchising guest lodging facilities (lodging segment) and real
estate brokerage offices (real estate segment). The principal sources of
lodging segment revenue are based upon the annual gross room revenue of
franchised properties. The principal sources of real estate segment revenue are
based upon franchisee gross commission revenue from real estate sales and may
include monthly franchisee membership fees. As a result, the Company
experiences seasonal revenue patterns similar to those of the hotel and real
estate industries wherein the summer months produce higher revenue than other
periods of the year. Accordingly, the first and fourth quarters are
traditionally weaker than the second and third quarters and interim results are
not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts and
transactions of all wholly-owned and majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements of the Company include the assets and
liabilities of Ramada Franchise Systems, Inc., an entity controlled by the
Company by virtue of its ownership of 100% of the common stock of such entity.
The assets of Ramada Franchise Systems, Inc. are not available to satisfy the
claims of any creditors of the Company or any of its other affiliates, except
as otherwise specifically agreed by Ramada Franchise Systems, Inc.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual consolidated financial statements. The December 31, 1995 consolidated
balance sheet was derived from the Company's audited financial statements. This
Form 10-Q should be read in conjunction with the Company's consolidated
financial statements and notes thereto, incorporated by reference in the 1995
Annual Report on Form 10-K.
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform with classifications used in 1996.
2. Acquisitions
The following acquisitions were accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed were recorded
at their estimated fair values. The results of operations of acquisitions
completed during the nine months ended September 30, 1996 have been included in
the Company's consolidated results since the respective dates of acquisition.
<PAGE>
A. ACQUISITION OF RESORT CONDOMINIUMS INTERNATIONAL, INC. - On November
12, 1996, the Company completed the acquisition of all the outstanding capital
stock of Resort Condominiums International, Inc., and its affiliates ("RCI")
for approximately $625 million comprised of $550 million in cash and $75
million of Company common stock. The purchase agreement provides for contingent
payments of up to $200 million over the next five years.
RCI, based in Indianapolis, Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately two million
timeshare owners and approximately 3,000 resorts around the world. RCI is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
B. ACQUISITION OF AVIS, INC. - On October 17, 1996, the Company completed
the acquisition of all of the outstanding capital stock of Avis, Inc. ("Avis"),
including payments under certain employee stock plans of Avis and the
redemption of certain series of preferred stock of Avis for an aggregate $806.5
million. The purchase price was comprised of approximately $367.2 million in
cash, $100.9 million in indebtedness and $338.4 million (approximately 4.6
million shares) in Company common stock.
Avis, together with its subsidiaries, licensees and affiliates, operates
the Avis rental car business, which the Company believes is the second largest
car rental system in the world.
Prior to the consummation of the acquisition, the Company announced its
intention to dispose of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Operating Company") through or an
initial public offering of the common stock of the Operating Company during
1997. The Operating Company will license the Avis trademark from the Company in
return for a license fee based on a percentage of Operating Company revenue.
C. COLDWELL BANKER - On May 31, 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), at the time the largest gross
revenue producing residential real estate company in North America and a
leading provider of corporate relocation services. The Company paid $640
million in cash for all of the outstanding capital stock of Coldwell Banker and
repaid approximately $105 million of Coldwell Banker indebtedness. The
aggregate purchase price for the transaction was financed through the sale of
Company common stock (see Note 5).
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices to
the Trust. The Company recorded a pre-tax restructuring charge of $7 million
(approximately $4.3 million, net of tax or $0.03 per share), in the second
quarter, related primarily to the contribution of net assets to the Trust.
D. CENTURY 21 NON-OWNED REGIONS - During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S.
previously non-owned Century 21 regions ("Century 21 NORS") consisting of more
than 1,000 franchised real estate offices. The $147 million aggregate purchase
price consisted of approximately $96 million in cash, $5 million in notes and
$46 million (approximately 0.9 million shares) in Company common stock.
E. ERA - In February 1996, the Company purchased substantially all of the
assets comprising the Electronic Realty Associates ("ERA") residential real
estate brokerage franchise system for approximately $40.5 million in cash.
<PAGE>
F. TRAVELODGE - In January 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system ("Travelodge") in North
America including the Travelodge(R) and Thriftlodge(R) service marks and the
franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3 million.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary
(collectively "MOA"), purchased 19 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge franchise agreements. The Company financed $10 million of MOA's
purchase price under a $10 million revolving credit facility, bearing interest
at 14% per annum. The loan is guaranteed by a parent company of MOA and secured
by approximately 80% of MOA's outstanding common stock.
In addition, Chartwell Leisure Inc. ("CHRT") formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders on November 22, 1994 (the "Distribution Date"), purchased
all of the common stock of FHI for $98.4 million. FHI owned or had an interest
in 112 hotel and motel properties at the acquisition date. In connection with
CHRT's acquisition, the Company guaranteed $75 million of CHRT borrowings under
a $125 million revolving credit facility entered into by CHRT with certain
banks. The Company is paid a guarantee fee of 2% per annum of the outstanding
guarantee commitment by the Company pursuant to a financing agreement entered
into between CHRT and the Company at the Distribution Date (the "Financing
Agreement"). The Financing Agreement was modified to provide expressly for the
guaranty of such CHRT borrowings. The Company and CHRT terminated or modified
other agreements entered into with CHRT at the Distribution Date, including a
gaming related marketing services agreement and an advisory agreement. CHRT
paid the Company an advisory fee approximating $2 million in January 1996 in
connection with CHRT's acquisition of FHI.
Pro Forma Information: The following information reflects the comparative
pro forma statements of operations of the Company for the nine months ended
September 30, 1996 and 1995 assuming the following transactions occurred on
January 1, 1995: (i) the August 1, 1995 acquisition of Century 21 Real Estate
Corporation ("Century 21"); (ii) the acquisition by merger in May 1995 of,
Central Credit Inc.; (iii) the acquisition of Avis and the issuance of the
Company common stock as partial consideration for Avis; (iv) the acquisition of
RCI and the issuance of the Company common stock as partial consideration for
RCI; (v) the acquisition of Coldwell Banker and the related contribution of
Coldwell Banker's owned real estate brokerage offices to the Trust; (vi)
proceeds from an offering of the Company's common stock (See Note 5) to the
extent necessary to fund the acquisition of Coldwell Banker and the related
repayment of indebtedness and acquisition expenses; (vii) the 1996 acquisitions
of Travelodge, ERA and the Century 21 NORS; and (viii) the February 22, 1996
issuance of $240 million of 4 3/4% convertible senior notes due 2003 (the
"4 3/4% Notes", see Note 6) to the extent such proceeds were used to finance
acquisitions. The acquisitions have been or will be accounted for using the
purchase method of accounting. Accordingly, assets acquired and liabilities
assumed 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. The pro forma results are not necessarily indicative of the
results of operations that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that may
occur in the future. The underlying pro forma information includes the
amortization expense associated with the assets acquired, the reflection of the
Company's financing arrangements, the elimination of redundant costs and the
related income tax effects. Certain other Company acquisitions were not
material and therefore were not reflected in the pro forma statements of
operations.
<PAGE>
Nine Months Ended
September 30,
(000's, except net income per share) 1996 1995
----------- ----------
Revenue .............................................. $ 973,383 $ 843,846
Income before income taxes ........................... 291,551 191,253
Net income per share (primary) ....................... $ 1.18 $ .83
Weighted average common equivalent shares (primary)... 147,470 139,315
Net income per share (fully diluted) ................. $ 1.18 $ .82
Weighted average common and common equivalent shares
outstanding (fully diluted) ................ 148,194 141,807
3. Income Taxes
The effective income tax rate is based on estimated annual taxable income
and other factors.
4. Earnings per Share
Earnings per share for the three and nine months ended September 30, 1996
and 1995 are based upon the weighted average number of common and common
equivalent shares outstanding during the respective periods. The 4 3/4% Notes,
issued February 22, 1996, are antidilutive for the three and nine months ended
September 30, 1996 and, accordingly, are not included in the computation of
earnings per share for 1996. For purposes of calculating earnings per share,
the $150 million 4 1/2% convertible senior notes are assumed to be converted
and, accordingly, interest expense, including amortization of deferred
financing costs (net of taxes) has been added back to net income.
5. Stockholders' Equity
A. Authorized Shares - On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of common stock to 300 million.
B. Public Offering - On May 9, 1996, the Company sold an aggregate 19.4
million shares of Company common stock pursuant to a public offering (the
"Offering"). A majority of the net proceeds from the Offering of $1.2 billion
financed the acquisition of Coldwell Banker and the balance was principally
used as partial consideration in the subsequent acquisition of Avis.
6. Debt
On February 22, 1996, the Company completed the public offering of the
4 3/4% Notes, which are convertible at the option of the holder at any time
prior to maturity into 14.993 shares of the Company's common stock per $1,000
principal amount of the 4 3/4% Notes, representing a conversion price of $66.70
per share. The 4 3/4% Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after March 3, 1998 at redemption prices
decreasing from 103.393% of principal at March 3, 1998 to 100% of principal at
<PAGE>
March 3, 2003. However, on or after March 3, 1998 and prior to March 3,
2000, the 4 3/4% Notes will not be redeemable at the option of the Company
unless the closing price of the Company's common stock shall have exceeded
$93.38 per share (subject to adjustment upon the occurrence of certain events)
for 20 trading days within a period of 30 consecutive trading days ending
within five days prior to redemption. Interest on the 4 3/4% Notes is payable
semi-annually commencing September 1, 1996.
On October 2, 1996, the Company replaced an existing $300 million
revolving credit facility with $1 billion in revolving credit facilities
consisting of (i) a $500 million, five year revolving credit facility (the
"Five Year Credit Facility") and (ii) a $500 million, 364 day revolving credit
facility (the "364 Day Revolving Credit Facility" (collectively the "Revolving
Credit Facilities"). The Company may renew the 364 Day Revolving Credit
Facility on an annual basis for an additional 364 days up to a maximum
aggregate term of five years upon receiving lender approval. The Revolving
Credit Facilities, at the option of the Company, bear interest based on
competitive bids of lenders participating in the facilities, at the prime rate
or at LIBOR plus a margin approximating 25 basis points.
7. Recent Events
A. PENDING ACQUISITION OF PHH CORPORATION ("PHH") - On November 10, 1996,
the Company entered into a definitive merger agreement (the "Merger Agreement")
pursuant to which the Company will issue approximately $1.7 billion of Company
common stock in exchange for all of the outstanding common stock of PHH.
Pursuant to the terms of the Merger Agreement, the number of Company shares to
be issued may range from 21.3 to 28.7 million, based upon the average share
price of the Company's common stock over a period of 20 trading days ending
five days prior to the date of the vote by PHH shareholders on approval of the
transaction. PHH is the world's largest provider of corporate relocation
services and also provides mortgage banking and vehicle management services.
Consummation of the transaction is subject to customary regulatory approvals
and the approval of the shareholders of each company. The transaction, which is
expected to close in early 1997, will be accounted for as a pooling of
interests.
B. PURCHASE OF MINORITY INTEREST- Effective October 29, 1996 (the
"Effective Date"), the Company amended the Subscription and Stockholders
Agreement dated as of August 1, 1995 among C21 Holding Corp., the Company and a
group of former executives of Century 21 Real Estate Corporation (the "Former
Management") pursuant to which the Company owns 87.5% of C21 Holding Corp. and
the Former Management owns 12.5% of C21 Holding Corp. Such amendment provides
for the acceleration of the Company's option to purchase the 12.5% ownership
from the Former Management approximately 90 days from the Effective Date at
fair market value as of the Effective Date. The Company is in the process of
determining the fair market value of C21 Holding Corp. and expects to complete
such purchase in the first quarter of 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
HFS Incorporated (the "Company") provides services to various businesses
in consumer industries businesses. The Company began 1996 as the world's
largest franchisor of lodging facilities and real estate brokerage offices. In
1996, the Company continued to pursue its strategy of adding franchise brands
to its existing franchise infrastructure with several acquisitions, including
the acquisition of Coldwell Banker Corporation ("Coldwell Banker"), at the time
the largest gross revenue producing residential real estate company in North
America and a leading provider of relocation services. The Company expanded its
consumer services business to include the car rental industry with its October
17, 1996 acquisition of Avis, Inc. ("Avis"), which the Company believes is the
second largest car rental system in the world. On November 12, 1996, the
Company continued its expansion by acquiring Resort Condominiums International,
Inc. ("RCI") which is the world's largest provider of timeshare exchange
programs. See "Liquidity and Capital Resources - Acquisitions". On November 11,
1996, the Company entered into a definitive merger agreement with PHH
Corporation ("PHH"), pursuant to which PHH will become a subsidiary of the
Company. PHH is the world's largest provider of corporate relocation services
and also provides mortgage banking and vehicle management services. See
"Liquidity and Capital Resources - Pending Acquisition". The Company continues
to pursue acquisitions and other strategic transactions within its existing
industry segments as well as other franchise or franchisable businesses and
other consumer services businesses.
RESULTS OF OPERATIONS -- REVENUE OVERVIEW
Company revenue increased 90% ($116.6 million) to $245.8 million in the
third quarter of 1996 compared to $129.2 million in the third quarter of 1995.
Approximately $78.9 million of the increase represented incremental revenue
from the Company's real estate segment including revenue generated from the
CENTURY 21(R), Electronic Realty Associates (ERA(R)) and Coldwell Banker(R)
franchise systems which were acquired in August 1995, February 1996 and May
1996, respectively. Preferred vendor revenue also increased $10.4 million
representing a 241% increase over such revenue in the third quarter of 1995.
Company revenue increased 84% ($250.3 million) to $550.0 million during
the nine months ended September 30, 1996 compared to the same period in 1995.
The lodging and real estate segments each contributed to the revenue increase.
The real estate segment, which was not established until the third quarter of
1995, generated $187.4 million of revenue for the nine months ended September
30, 1996 compared to $22.8 million for the same period in the prior year.
3Q96 vs. 3Q95
Lodging Franchise Fees
The royalty portion of lodging franchise fees increased $5.4 million
(11%), in the third quarter of 1996 compared to the same period in 1995. Room
growth through the sale of franchise agreements and the acquisitions of the
Knights Inn(R) and Travelodge(R) franchise systems in August 1995 and January
1996, respectively, contributed to the increase. Excluding these acquisitions,
the Company added 24,859 rooms, net of terminations, during the twelve months
ended September 30, 1996.
<PAGE>
Real Estate Franchise Fees
The real estate segment contributed $74.4 million of franchise fees for
the third quarter of 1996 including $36.6 million from the CENTURY 21 franchise
system, acquired in August 1995, $5.6 million from the ERA franchise system,
acquired on February 12, 1996 and $32.2 million from the Coldwell Banker
franchise system, acquired on May 31, 1996. Franchise fees of acquired real
estate segment franchise systems increased $54.9 million for the quarter ended
September 30, 1996 compared to the same period in 1995, due to such real estate
segment acquisitions.
Other
Other revenue is primarily comprised of revenue from preferred vendor
arrangements and relocation service revenue. Preferred vendor fees consist of
revenue generated from vendors seeking access to the Company's franchisees and
franchisees' customers. Preferred vendor revenue increased $10.4 million (241%)
from the third quarter of 1995 to the third quarter of 1996. The Company
acquired relocation service businesses in connection with the acquisitions of
the CENTURY 21, ERA and Coldwell Banker franchise systems. Relocation service
fees approximated $28.9 million in the third quarter of 1996, compared to $3.7
million in the third quarter of 1995, including $25.0 million from Coldwell
Banker Relocation Services, Inc., ("CBRS") acquired by the Company on May 31,
1996.
Year-to-date 1996 vs. 1995
Lodging Franchise Fees
Lodging segment franchise fees and the royalty portion of franchise fees
increased $30.1 million (12%) and $17.4 million (15%), respectively, in the
nine months ended September 30, 1996 compared to the same period in 1995. The
increase in lodging segment franchise fees is primarily attributable to room
growth through the sale of franchise agreements and the acquisition of the
Knights Inn and Travelodge franchise systems.
Real Estate Franchise Fees
The real estate segment contributed $148.4 million of franchise fees for
the nine months ended September 30, 1996 including approximately $91.3 million,
$13.4 million and $43.7 million from the Century 21, ERA and Coldwell Banker
franchise systems, respectively. Franchise fees of the aforementioned acquired
real estate segment franchise systems increased $128.9 million for the nine
months ended September 30, 1996 compared to the same period in 1995 due to such
real estate segment acquisitions.
Other
Other revenue is substantially comprised of fees from preferred vendor
arrangements, which increased $26.6 million (200%) from the first nine months
of 1995 to the same period in 1996 and relocation services fees of $44.1
million from businesses acquired in connection with the Company's real estate
segment acquisitions, including $32.7 million from CBRS.
<PAGE>
RESULTS OF OPERATIONS - EXPENSES AND INCOME
3Q96 VS 3Q95
Income before income taxes increased $55.5 million (120%) resulting from a
$116.6 (90%) increase in revenue as discussed above in "Results of
Operations - Revenue Overview", net of a $61.0 million (74%) of increased
expenses. Operating profits (pre-tax income plus interest expense) for all
segments increased $57.1 million or 109% during the same comparable
period. Interest expense for the third quarter of 1996 increased $1.6
million as a result of the issuance of $240 million 4 3/4% Convertible
Senior Notes ("4 3/4% Notes") in February 1996. The increase in interest
expense was offset in part by the decrease in the Company's weighted
average effective interest rate from 6.7% in the third quarter 1995 to
5.6% in the third quarter of 1996 as a result of the issuance of the
4-3/4% Notes.
LODGING SEGMENT
Operating profits increased 15% to $43.1 million from 1995 to 1996. A
$16.8 million (17%) increase in revenue was offset by an $11.2 million
(18.0%) increase in expenses. The increase in expenses primarily consisted
of a $9.2 million increase in marketing expenditures corresponding with
marketing fees collected from lodging franchisees and a $1.2 million
increase in depreciation and amortization expenses related to goodwill
associated with the January 1996 and August 1995 acquisitions of the
Travelodge and the Knights Inn franchise systems, respectively. Selling,
general and administrative ("SG&A") expenses increased only $0.7 million
as a result of economies achieved as the Company's corporate
infrastructure benefited both its lodging and recently acquired real
estate segment businesses.
REAL ESTATE SEGMENT
Third quarter 1996 operating profits of $46.7 million included the results
of operations of the Company's three real estate brands compared to third
quarter 1995 operating profits of $9.6 million, when only Century 21
contributed to operations. Revenue improved $65.7 million to $86.7 million
and expenses increased $28.5 million to $40.0 million. Expenses consisted
primarily of $24.5 million of SG&A and $9.3 million of depreciation and
amortization primarily related to goodwill and franchise agreements
associated with recently acquired franchise systems.
OTHER SEGMENT
Other segment operating profits increased $14.2 million (261%) to $19.7
million from 1995 to 1996. The increase in other segment operating profits
was substantially generated from the corporate relocation service
businesses acquired as part of the August 1995 and May 1996 acquisitions
of Century 21 and Coldwell Banker, respectively.
YEAR-TO-DATE 1996 VS. 1995
Income before income taxes increased $104.1 million (103%) for the nine
months ended September 30, 1996 versus the comparable period in 1995. This
increase resulted from the $36.7 increase in revenue discussed above in
"Results of Operations -Revenue Overview" net of a $146.2 million (74%)
increase in expenses. Operating profits increased $110.0 million (94%)
during the same comparable period. Interest expense for the nine months
ended September 30, 1996 increased $5.9 million due to the issuance of the
4 3/4% Notes in February 1996. Interest expense was offset in part by the
decrease in the Company's
<PAGE>
weighted average effective interest rate from 6.0% in the first nine
months of 1995 to 5.7% in the nine months ended September 30, 1996 as a
result of the issuance of the 4 3/4% Notes.
LODGING SEGMENT
Operating profits increased 15% to $111.0 million from 1995 to 1996. A
$36.7 million (14%) increase in revenue was offset by a $22.3 million
(14%) increase in expenses. The increase in expenses primarily consisted
of a $13.1 million increase in marketing expenditures corresponding with
increased marketing fees collected from lodging franchisees and $3.1
million of depreciation and amortization primarily corresponding with
goodwill and franchise agreements associated with the January 1996
Travelodge franchise system acquisition. The $5.8 million increase in SG&A
expenses consisted of $3.9 million of franchise sales related expenses
associated with system growth.
REAL ESTATE SEGMENT
Operating profits of $81.4 million included the results of operations for
Century 21 for the full period and ERA and Coldwell Banker from their
respective February and May 1996 acquisition dates. Operating profits for
the comparable 1995 period included $9.6 million of operating profits
generated from Century 21 since the Company's August 1, 1995 acquisition
date of the franchise system. The 1996 operating profits resulted from
$178.3 million of revenue and $96.9 million of expenses. Included in
expenses were $61.4 million of SG&A primarily associated with Century 21
operations since the Coldwell Banker franchise system was acquired in May
1995 and a $5 million restructuring charge associated with the
contribution of Coldwell Banker's former owned brokerage business assets
to National Realty Trust (the "Trust") an independent entity governed by
an independent Board of Trustees. Expenses also included $6.5 million of
depreciation and amortization primarily related to goodwill and franchise
agreements associated with the Century 21, ERA and Coldwell Banker
franchise system acquisitions.
OTHER SEGMENT
Other segment operating profits increased $23.8 million (211%) to $35.0
million from 1995 to 1996. The increase in other segment operating profits
was substantially generated from the corporate relocation service business
acquired as part of the August 1995 and May 1996 acquisitions of Century
21 and Coldwell Banker, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Pending Acquisition
On November 10 1996, the Company entered into a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company will issue
$1.7 billion of Company common stock in exchange for all of the outstanding
common stock of PHH. Pursuant to the terms of the Merger Agreement, the number
of Company shares to be issued may range from 21.3 million to 28.7 million,
based upon the average share price of the Company's common stock over a period
of 20 trading days ending five days prior to the date of the vote by PHH
shareholders on approval of the transaction. PHH is the world's largest
provider of corporate relocation services and also provides mortgage banking
and vehicle management services. Consummation of the transaction is subject to
customary regulatory approvals and the approval of the shareholders of each
company. The transaction is expected to close in early 1997.
<PAGE>
Acquisitions
RCI - On November 12, 1996, the Company completed the acquisition of all
the outstanding capital stock of Resort Condominiums International, Inc. and
its affiliates ("RCI") for approximately $625 million comprised of $550 million
in cash and $75 million of Company common stock plus future contingent payments
of up to $200 million over the next five years.
RCI, based in Indianapolis Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately two million
timeshare owners and approximately 3,000 resorts around the world. RCI is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
AVIS - On October 17, 1996, the Company completed the acquisition of all
of the outstanding capital stock of Avis Inc. ("Avis"), including payments
under certain employee stock plans of Avis and the redemption of certain series
of preferred stock of Avis for $806.5 million. The purchase price was comprised
of approximately $367.2 million in cash, $100.9 million in indebtedness and
$338.4 million (approximately 4.6 million shares) in Company common stock.
Avis, together with its subsidiaries, licensees and affiliates, operates
the Avis System, which the Company believes to be the second largest car rental
system in the world.
Prior to the consummation of the acquisition, the Company announced that
it would dispose of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Operating Company") through or an
initial public offering of the common stock of the Operating Company during
1997. The Operating Company will license the Avis trademark from the Company in
return for a license fee based on a percentage of the Operating Company
revenue.
COLDWELL BANKER - On May 31, 1996, the Company acquired by merger Coldwell
Banker (the "Merger") for $640 million of cash plus repayment of approximately
$105 million of indebtedness. At the effective date of the Merger, Coldwell
Banker had 2,164 franchised brokerage offices and owned 318 residential real
estate brokerage offices ("Owned Brokerage Business") in the United States,
Canada and Puerto Rico, representing the third largest real estate brokerage
system in the United States.
The Company financed the Coldwell Banker transaction with approximately
$1.2 billion of proceeds from a public offering of approximately 19.4 million
common shares (the "Offering") in the second quarter of 1996. Immediately
following the closing of the Merger, the Company conveyed the Owned Brokerage
Business to a newly created independent trust (the "Trust"). The Company
recorded a $7 million pre-tax restructuring charge related primarily to the
contribution of the Owned Brokerage Business to the Trust.
CENTURY 21 NON-OWNED REGIONS - During the second quarter of 1996, the
Company completed the acquisition of the six U.S. Century 21 regions which were
licensed to four independent master licensees. The aggregate purchase price
consisted of approximately $96 million of cash, $5 million of notes and $46
million (approximately 0.9 million shares) of the Company's common stock. These
regions represent more than 1,000 CENTURY 21 franchised real estate offices in
the United States and the acquisitions result in the Company receiving royalty
fees of up to 6% of franchisee gross commissions generated by such offices
compared to less than 1% previously received under the master licensing
agreements. The cash portion of the aggregate purchase price was financed with
proceeds from the issuance of the 4 3/4% Notes.
<PAGE>
ERA - On February 12, 1996, the Company purchased substantially all of the
assets comprising the ERA residential real estate brokerage franchise system
for approximately $40.5 million which was financed by borrowings under the
Company's revolving credit facility.
CENTURY 21 - On August 1, 1995, a majority-owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 from Metropolitan Life Insurance
Company ("MetLife") for an aggregate purchase price of $245 million plus
expenses. In February 1996, the Company paid the $30 million contingent portion
of the purchase price of Century 21 and redeemed $80 million of Century 21
redeemable preferred stock issued to MetLife prior to the acquisition. The
Company financed these payments with proceeds from the 4 3/4% Notes.
Effective October 29, 1996 (the "Effective Date"), the Company amended the
Subscription and Stockholders Agreement dated as of August 1, 1995 among C21
Holding Corp., the Company and a group of former executives of Century 21 Real
Estate Corporation (the "Former Management") pursuant to which the Company owns
87.5% of C21 Holding Corp. and the Former Management owns 12.5% of C21 Holding
Corp. Such amendment provides for the acceleration of the Company's option to
purchase the 12.5% ownership from the Former Management approximately 90 days
from the Effective Date at fair market value as of the Effective Date. The
Company is in the process of determining the fair market value of C21 Holding
Corp. and expects to complete such purchase in the first quarter of 1997.
TRAVELODGE - On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge(R) service marks and franchise agreements, from
Forte Hotels, Inc. ("FHI") for $39.3 million. The Company financed the
acquisition with borrowings under its revolving credit facility and repaid the
borrowings with proceeds from the 4 3/4% Notes.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge franchise agreements. The Company financed $10 million of MOA's
purchase price under a $10 million revolving credit facility, bearing interest
at 14% per annum. The loan is guaranteed by the parent company of MOA and
secured by approximately 80% of MOA's outstanding common stock.
In addition, Chartwell Leisure, Inc. ("CHRT") formerly National Lodging
Corp. a former wholly owned Company subsidiary which was distributed to the
Company sharesholders in November 1994, purchased all of the common stock of
FHI for $98.4 million. FHI owned or had an interest in 112 hotel and motel
properties at the acquisition date. In connection with CHRT's acquisition, the
Company guaranteed $75 million of CHRT borrowings under a $125 million
revolving credit facility entered into by CHRT with certain banks. The Company
is paid a guarantee fee of 2% per annum of outstanding guarantee commitment by
the Company pursuant to a Financing Agreement.
Concurrent with the acquisition of the Travelodge franchise system and
CHRT's acquisition of FHI, the marketing and advisory agreements between the
Company and CHRT were terminated. The corporate services agreement was modified
to provide that the Company is to provide financial and other corporate
administrative support and advisory services through September 1996 and
thereafter advisory services through January 2019 for a fee of $1.5 million per
year. CHRT paid a $2.0 million advisory fee to the Company in connection with
CHRT's acquisition of FHI.
<PAGE>
Financing
The Company believes that it has excellent liquidity and access to
liquidity through various sources. The Company has generated significant
positive cash flow from operations in every quarter since its public offering
in December 1992. The Company has also demonstrated its ability to access
equity and public debt markets and financial institutions to generate capital
for strategic acquisitions. Indicative of the Company's creditworthiness,
Standard & Poors Corporation and Duff and Phelps assigned an "A" credit rating
to the Company's $540 million of publicly issued debt. The Company generated
$139.4 million of cash flow from operations during the nine months ended
September 30, 1996, representing a $55.2 million (65%) increase from the nine
months ended September 30, 1995.
On October 2, 1996, the Company replaced an existing $300 million
revolving credit facility with a $1 billion of revolving credit facilities
consisting of (i) a $500 million, five year revolving credit facility (the
"Five Year Credit Facility") and (ii) a $500 million, 364 day revolving credit
facility (the "364 Day Revolving Credit Facility" (collectively the "Revolving
Credit Facilities"). The Company may renew the 364 Day Revolving Credit
Facility on an annual basis for an additional 364 days up to a maximum
aggregate term of five years upon receiving lender approval. The Revolving
Credit Facilities, at the option of the Company, bear interest based on
competitive bids of lenders participating in the facilities, at the prime rate
or at LIBOR plus a margin approximating 25 basis points.
The Company completed an offering of 19.4 million shares of common stock
in the second quarter of 1996 which yielded net proceeds to the Company after
expenses of approximately $1.2 billion. Approximately $ 755 million of the
proceeds were used to finance the acquisition of Coldwell Banker and repay $75
million of outstanding borrowings under the Company's existing credit facility.
The remaining $331 million of proceeds were used as partial consideration for
the October 17, 1996 acquisition of Avis.
The Company filed a shelf registration statement with the Securities and
Exchange Commission effective August 29, 1996, for the aggregate issuance of up
to $1 billion of debt and equity securities. These securities may be offered
from time to time, together or separately, based on terms to be determined at
the time of sale. The proceeds may be used for general corporate purposes,
which may include future acquisitions.
Working capital at September 30, 1996 approximated $438 million including
the remaining $331 million of excess proceeds from the Offering. Excluding the
excess proceeds of the Offering, working capital increased $63 million at
September 30, 1996 from December 31, 1995. The increase in working capital is
attributable to cash generated from operations and the seasonal increase in
lodging segment royalty receivables. Additionally, included in working capital
at September 30, 1996 is $136 million in relocation receivables relating to the
Company's relocation services business acquired as part of the acquisitions of
Century 21 and Coldwell Banker. Outstanding relocation receivables are
guaranteed by client corporations and accordingly are, in the opinion of the
Company, subject to minimal risk.
Long-term debt consists of $540 million of publicly issued debt including
the 4 3/4% Notes, $150 million of 4 1/2% convertible senior notes due 1999 and
$150 million of 5 7/8% senior notes due December 1998. Interest on the publicly
issued debt is paid semi-annually. Long-term debt increased from $300.8 million
at December 31, 1995 to $539.8 million at September 30, 1996, due to the
issuance of the 4 3/4% Notes. The weighted average stated interest rate on
long-term debt at September 30, 1996 was 5.0% compared to the weighted average
stated interest rate of 5.2% at December 31, 1995.
<PAGE>
On October 17, 1996, the acquisition date, Avis had $2.5 billion of
outstanding borrowings associated with Avis fleet and other financing
arrangements with banks, vehicle manufacturer finance companies and other
financial institutions with a weighted average interest rate of approximately
6.3%. Avis may borrow up to $4 billion on such facilities. Approximately $2.2
billion of available borrowings are secured by Avis' fleet of vehicles and are
non-recourse to the Company. The remaining available borrowings are unsecured.
The most significant Avis financing arrangement is a $2.5 billion, 364-day
revolving credit facility which bears interest at LIBOR plus 0.63%.
Capital expenditures approximating $23.6 million during the nine months
ended September 30, 1996 consisted of approximately $14.7 million of software
development and the acquisition of computer equipment primarily associated with
a new transactional data base and reporting system for the real estate segment
and $3.2 million of additions and modifications to the hotel brands' central
reservation systems, which will be reimbursed by collections of reservation
fees from the Company's lodging franchisees. Also included in capital
expenditures is $5.7 million of improvements principally associated with the
purchase of a building in 1995, whiich is now the Company's new headquarters.
The Company believes that based upon its analysis of its financial
position, its cash flow during the past twelve months and the expected results
of operations in the future, operating cash flow, available funding under the
revolving credit facility and issuances of securities in the capital markets,
if appropriate, will be adequate to fund operations, investments and
acquisitions for the next twelve months.
Impact of New Accounting Pronouncement
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for the Company in financial statements issued after January 1, 1997.
The Company does not expect the adoption of SFAS 125 to have a material impact
on the financial condition or results of operations.
<PAGE>
Part II - OTHER INFORMATION
Item 5. OTHER INFORMATION
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF HFS
The pro forma consolidated balance sheet as of September 30, 1996 is
presented as if the following had occurred on September 30, 1996: (i) the
acquisition of Avis, Inc. ("Avis") and the November 1996 issuance of HFS
common stock (the "Avis Offering") as partial consideration for Avis and;
(ii) the acquisition of Resort Condominiums International, Inc. and its
affiliates ("RCI") and the issuance of HFS common stock as partial
consideration for RCI. HFS currently intends to undertake an initial public
offering of a majority interest in the corporation which owns all
company-owned Avis car rental locations (the "Car Rental Operating Company")
in 1997, the proceeds of which will be used to pay down indebtedness of the
Car Rental Operating Company and to enter into franchise, information
technology and other agreements to provide services to the Car Rental
Operating Company based on terms to be determined. Accordingly, the pro forma
financial statements reflect the acquired net assets and results of
operations of the Avis rental car operating subsidiary intended to be sold as
"Investment in car rental operating company -net" and "Equity in earnings
in car rental operating company", respectively.
The pro forma consolidated statements of operations for the year ended
December 31, 1995 and the nine months ended September 30, 1995 and 1996 are
presented as if the acquisitions of Avis and RCI and the following
transactions had occurred on January 1, 1995: (i) the May 31, 1996
acquisition of the common stock of Coldwell Banker Corporation ("Coldwell
Banker") and the related contribution of Coldwell Banker's owned real estate
brokerage offices (the "Owned Brokerage Business") to a newly created
independent trust (the "Trust") (the "Coldwell Banker Transaction"); (ii) the
receipt of proceeds from an offering of HFS' common stock (the "Second
Quarter 1996 Offering") to the extent necessary to fund (a) the acquisition
of Coldwell Banker and the related repayment of indebtedness and acquisition
expenses and (b) the cash consideration portion in the Avis acquisition;
(iii) the acquisitions of: the six non-owned Century 21 regions ("Century 21
NORS") during the second quarter of 1996, the Travelodge franchise system
("Travelodge") on January 23, 1996 and the Electronic Realty Associates
franchise system ("ERA") on February 12, 1996 (collectively, the "Other 1996
Acquisitions"); and (iv) the February 22, 1996 issuance of $240 million of 4
3/4% convertible senior notes due 2003 to the extent such proceeds were used
to finance the Other 1996 Acquisitions. The pro forma consolidated statements
of operations for the year ended December 31, 1995 and the nine months ended
September 30, 1995 are also presented as if the August 1, 1995 acquisition of
Century 21 and the acquisition by merger (the "CCI Merger") in May 1995 of
Central Credit Inc. ("CCI") had occurred on January 1, 1995.
All of the aforementioned acquisitions have been accounted for using the
purchase method of accounting. Accordingly, assets acquired and liabilities
assumed have been 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. HFS has entered into certain immaterial transactions
which are not reflected in the pro forma consolidated statements of
operations.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of HFS had the transactions
and events assumed therein occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be achieved in
the future. The pro forma consolidated statements of operations do not
reflect cost savings and revenue enhancements that management believes may be
realized following the acquisitions. These cost savings are expected to be
realized primarily through the restructuring of operations as well as revenue
enhancements expected to be realized through leveraging of HFS's preferred
alliance programs. No assurances can be made as to the amount of cost savings
or revenue enhancements, if any, that actually will be realized.
The pro forma consolidated financial statements are based on certain
assumptions and adjustments described in the Notes to Pro Forma Consolidated
Balance Sheet and Statements of Operations and
<PAGE>
should be read in conjunction therewith and with (i) the consolidated
financial statements and related notes of the Company included in its 1995
Annual Report on Form 10-K (ii) the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996; and (iii) the financial statements
and related notes of certain of the acquired companies previously filed in
Current Reports on Form 8-K pursuant to Regulation S-X Rule 3.05, "Financial
Statements of Businesses Acquired or to be Acquired".
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES PAGE 1 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------- PRO FORMA ADJUSTMENTS
AVIS, -------------------------
HFS AS ADJUSTED (1) RCI AVIS (A) RCI (B) PRO FORMA
------------ --------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents........... $ 471,194 $ -- $ 89,070 $(410,742) $ (48,771) $ 100,751
Marketable securities . -- -- 184,599 -- (184,599) --
Relocation
receivables........... 136,052 -- -- -- -- 136,052
Other accounts and
notes receivable,
net................... 113,175 1,800 33,107 -- -- 148,082
Other current assets .. 59,081 1,881 22,836 -- 29,000 112,798
------------ --------------- ---------- ------------ ----------- ------------
TOTAL CURRENT ASSETS .... 779,502 3,681 329,612 (410,742) (204,370) 497,683
------------ --------------- ---------- ------------ ----------- ------------
Property and
equipment--net......... 106,233 33,828 87,785 58,172 (32,125) 253,893
Franchise
agreements--net........ 1,027,711 -- -- -- -- 1,027,711
Excess of cost over
fair value of net
assets acquired-net ... 906,540 -- -- -- 443,845 1,350,385
Intangible assets....... -- 499,143 -- 327,426 100,000 926,569
Investment in car
rental operating
company--net........... -- 72,616 -- 2,384 -- 75,000
Deferred income
taxes--net............. -- -- -- 5,200 -- 5,200
Other assets............ 80,064 59,633 40,936 (9,614) (31,630) 139,389
------------ --------------- ---------- ------------ ----------- ------------
TOTAL ASSETS............. $2,900,050 $668,901 $458,333 $ (27,174) $ 275,720 $4,275,830
============ =============== ========== ============ =========== ============
</TABLE>
- ------------
(1) The consolidated historical balance sheet of Avis Inc., as adjusted
is as of August 31, 1996. See Consolidated Historical Balance Sheet
of Avis, Inc., as adjusted, as of August 31, 1996.
Note: Certain reclassifications have been made to the historical HFS, Avis
and RCI consolidated balance sheets to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES PAGE 2 OF 2
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------- PRO FORMA ADJUSTMENTS
AVIS, -----------------------
HFS AS ADJUSTED (1) RCI AVIS (A) RCI (B) PRO FORMA
------------ --------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued
liabilities....................... $ 160,357 $ 201,954 $ 76,328 $ -- $ -- $ 438,639
Deferred revenue................... 24,655 -- 119,218 -- -- 143,873
Income taxes payable............... 81,633 182 -- (182) -- 81,633
Accrued acquisition obligations ... 40,287 -- -- 18,000 10,557 68,844
Current portion of long-term debt . 29,907 -- -- 100,930 -- 130,837
------------ --------------- ---------- ----------- ---------- -----------
TOTAL CURRENT LIABILITIES............ 336,839 202,136 195,546 118,748 10,557 863,826
------------ --------------- ---------- ----------- ---------- -----------
Long-term debt...................... 541,563 -- 3,536 -- 285,000 830,099
Deferred revenue.................... 7,299 -- 185,703 -- -- 193,002
Other non-current liabilities ...... 23,960 -- 1,711 -- 20,000 45,671
Deferred income taxes............... 85,400 -- -- -- (43,000) 42,400
Preferred stock--Avis, Inc.......... -- 72,416 -- (72,416) -- --
Redeemable portion of common
stock--ESOP........................ -- 295,465 -- (295,465) -- --
Unearned compensation--ESOP......... -- (257,751) -- 257,751 -- --
STOCKHOLDERS' EQUITY
Participating convertible preferred
stock.............................. -- 132,000 -- (132,000) -- ---
Common stock--issued and
outstanding; HFS Historical,
123,720 and Pro Forma, 129,289 .... 1,237 290 -- (244) 10 1,293
Additional paid-in capital ......... 1,705,541 220,401 6,392 100,396 60,573 2,093,303
Retained earnings .................. 206,236 103,339 34,864 (103,339) (34,864) 206,236
Treasury stock...................... (8,025) (102,269) -- 102,269 8,025 --
Net unrealized gain on available
for sale securities................ -- -- 20,784 -- (20,784) --
Foreign currency equity adjustment -- 2,874 9,797 (2,874) (9,797) --
------------ --------------- ---------- ----------- ---------- -----------
TOTAL STOCKHOLDERS' EQUITY........... 1,904,989 356,635 71,837 (35,792) 3,163 2,300,832
------------ --------------- ---------- ----------- ---------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY............ $2,900,050 $ 668,901 $458,333 $ (27,174) $275,720 $4,275,830
============ =============== ========== =========== ========== ===========
</TABLE>
- ------------
(1) The consolidated historical balance sheet of Avis, Inc., as adjusted
is as of August 31, 1996. See Consolidated Historical Balance Sheet
of Avis, Inc., as adjusted, as of August 31, 1996.
Note: Certain reclassifications have been made to the historical HFS Avis
and RCI consolidated balance sheets to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
CONSOLIDATED HISTORICAL BALANCE SHEET
OF AVIS, INC., AS ADJUSTED
AS OF AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL RECLASSIFICATION AVIS,
AVIS ADJUSTMENT AS ADJUSTED
------------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $ 75,683 $ (75,683) $ --
Accounts and notes receivable, net.............. 174,047 (172,247) 1,800
Vehicles, net................................... 2,567,517 (2,567,517) --
Due from affiliated company..................... 114,976 (114,976) --
Other current assets ........................... 45,296 (43,415) 1,881
Deferred income taxes........................... 68,667 (68,667) --
------------- ---------------- -------------
TOTAL CURRENT ASSETS............................. 3,046,186 (3,042,505) 3,681
------------- ---------------- -------------
Property and equipment-net....................... 151,854 (118,026) 33,828
Intangible assets--Avis.......................... 499,143 -- 499,143
Investment in car rental operating company--net . -- 72,616 72,616
Other assets .................................... 85,368 (25,735) 59,633
------------- ---------------- -------------
TOTAL............................................ $3,782,551 $(3,113,650) $ 668,901
============= ================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other ..................... $ 444,867 $ (242,731) $ 202,136
------------- ---------------- -------------
Long-term debt .................................. 2,488,651 (2,488,651) --
Public liability and property damage............. 215,135 (215,135) --
Due to affiliated company........................ 132,563 (132,563) --
Other non-current liabilities
Deferred income taxes........................... 34,570 (34,570) --
Preferred stock--Avis, Inc. .................... 72,416 -- 72,416
Redeemable portion of common stock--ESOP ....... 295,465 -- 295,465
Unearned compensation--ESOP..................... (257,751) -- (257,751)
STOCKHOLDERS' EQUITY
Participating convertible preferred stock ...... 132,000 -- 132,000
Common stock.................................... 290 -- 290
Additional paid-in capital...................... 220,401 -- 220,401
Retained earnings............................... 103,339 -- 103,339
Treasury stock ................................. (102,269) -- (102,269)
Foreign currency equity adjustment.............. 2,874 -- 2,874
------------- ---------------- -------------
TOTAL STOCKHOLDERS' EQUITY....................... 356,635 -- 356,635
------------- ---------------- -------------
TOTAL............................................ $3,782,551 $(3,113,650) $ 668,901
============= ================ =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
balance sheet of Avis, Inc. is to present the historical net assets
of car rental operations as "Investment in car rental operating
company -net" as a result of HFS' plan to undertake an initial
public offering of a majority interest in the corporation which owns
all company owned Avis car rental operations.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
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>
NET REVENUES
Service fees ....................... $369,442 $1,113,624 $ 25,950 (C) $1,061,202
(535,207)(D)
87,393 (F)
Other .............................. 43,541 67,163 (4,421)(D) 89,232
(17,051)(E)
Equity in loss of car rental
operating company ................. -- -- (5,272)(F) (5,272)
----------- ------------ ------------- ------------
Net revenues ...................... 412,983 1,180,787 (448,608) 1,145,162
----------- ------------ ------------- ------------
EXPENSES
Marketing and reservation........... 143,965 130,366 274,331
Selling, general and
administrative (N)................. 78,232 843,878 (4,500)(G) 396,234
(521,376)(H)
Depreciation and amortization ..... 30,857 64,784 35,126 (I) 130,767
Interest ........................... 21,789 12,553 18,389 (J) 52,731
Other .............................. 3,235 17,143 (1,599)(K) 18,779
----------- ------------ ------------- ------------
Total expenses .................... 278,078 1,068,724 (473,960) 872,842
----------- ------------ ------------- ------------
Income before income taxes .......... 134,905 112,063 25,352 272,320
Provision for income taxes .......... 55,175 36,491 20,729 (L) 112,395
----------- ------------ ------------- ------------
Net income .......................... $ 79,730 $ 75,572 $ 4,623 $ 159,925
=========== ============ ============= ============
PER SHARE INFORMATION (PRIMARY)
Net income (N) ..................... $ .74 $ 1.15
=========== ============
Weighted average common and common
equivalent shares outstanding .... 113,817 28,681 (M) 142,498
=========== ============= ============
PER SHARE INFORMATION (FULLY
DILUTED)
Net income (N)...................... $ .73 $ 1.14
=========== ============
Weighted average common and common
equivalent shares outstanding .... 115,654 28,681 (M) 144,335
=========== ============= ============
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results
of HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF INCOME
OF ACQUIRED COMPANIES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
AVIS, (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
------------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ....................... $ 21,608 $278,132 $679,137 $134,747 $1,113,624
Other .............................. -- 17,051 20,264 29,848 67,163
------------- ---------- ----------- -------------- ------------
Net revenues ...................... 21,608 295,183 699,401 164,595 1,180,787
------------- ---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation........... -- 130,366 -- -- 130,366
Selling, general and
administrative...................... 7,205 91,757 616,182 128,734 843,878
Depreciation and amortization ..... 19,683 14,193 22,425 8,483 64,784
Interest ........................... 461 536 5,329 6,227 12,553
Other .............................. 410 1,976 -- 14,757 17,143
------------- ---------- ----------- -------------- ------------
Total expenses .................... 27,759 238,828 643,936 158,201 1,068,724
------------- ---------- ----------- -------------- ------------
Income (loss) before income taxes .. (6,151) 56,355 55,465 6,394 112,063
Provision for income taxes .......... 4,100 4,464 24,385 3,542 36,491
------------- ---------- ----------- -------------- ------------
Net income (loss) ................... $(10,251) $ 51,891 $ 31,080 $ 2,852 $ 75,572
============= ========== =========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of income of Avis, as
adjusted, has been adjusted to present only the historical operating
results intended to be retained by HFS. The historical consolidated
statement of income of Avis, Inc., as adjusted is for the year ended
February 29, 1996. See Historical Consolidated Statement of Income
of Avis, Inc., as Adjusted, for the year ended February 29, 1996.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF INCOME
OF AVIS, INC., AS ADJUSTED
FOR THE YEAR ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
--------------------------------
ELIMINATION OF
CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES........................... $1,716,677 $(21,608) $(1,695,069) $ --
Service fees ..................... -- 21,608 -- 21,608
------------- ---------------- -------------- -------------
Net revenues .................... 1,716,677 -- (1,695,069) 21,608
------------- ---------------- -------------- -------------
EXPENSES
Selling, general and
admnistrative ................... 1,119,888 (16,865) (1,095,818) 7,205
Depreciation and amortization ... 411,796 16,404 (408,517) 19,683
Interest ......................... 149,534 461 (149,534) 461
Other ............................ 410 -- -- 410
------------- ---------------- -------------- -------------
Total expenses .................. 1,681,628 -- (1,653,869) 27,759
------------- ---------------- -------------- -------------
Income (loss) before income taxes 35,049 -- (41,200) (6,151)
Provision for income taxes ........ 23,977 -- (19,877) 4,100
------------- ---------------- -------------- -------------
Net income (loss) ................. $ 11,072 $ -- $ (21,323) $(10,251)
============= ================ ============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present information
technology services as "Service fees." The elimination of the car
rental operating company is presented as a result of HFS's plan to
undertake an initial public offering of a majority interest of 75
percent in the corporation which owns all company-owned Avis car
rental operations (the "IPO Company"). HFS intends to substantially
replace results of car rental operations with license fees from the
IPO Company.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
CCI (1) CENTURY 21 (1) NORS TRAVELODGE ERA (2) TOTAL
------- -------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ..................... $ -- $60,506 $29,021 $18,361 $26,859 $134,747
Other ............................ 3,326 10,164 403 79 15,876 29,848
------- -------------- ------------ ------------ ----------- -----------
Net revenues .................... 3,326 70,670 29,424 18,440 42,735 164,595
------- -------------- ------------ ------------ ----------- -----------
EXPENSES
Selling, general and
administrative .................. -- 57,241 25,763 15,604 30,126 128,734
Depreciation and amortization ... 529 5,217 578 8 2,151 8,483
Interest ......................... -- 2,904 54 -- 3,269 6,227
Other............................. 1,917 2,751 -- -- 10,089 14,757
------- -------------- ------------ ------------ ----------- -----------
Total expenses .................. 2,446 68,113 26,395 15,612 45,635 158,201
------- -------------- ------------ ------------ ----------- -----------
Income (loss) before income taxes 880 2,557 3,029 2,828 (2,900) 6,394
Provision for income taxes ........ 313 2,097 -- 1,132 -- 3,542
------- -------------- ------------ ------------ ----------- -----------
Net income (loss) ................. $ 567 $ 460 $ 3,029 $ 1,696 $ (2,900) $ 2,852
======= ============== ============ ============ =========== ===========
</TABLE>
- ------------
(1) Reflects results of operations for the period from January 1, 1995
to the respective dates of acquisition.
(2) Reflects the historical statement of operations of Electronic Realty
Associates Inc. ("ERA Inc."). The financial statements which were
audited for the year ended December 31, 1995 were those of
Electronic Realty Associates LP ("ERA LP") which differ from the ERA
Inc. financial statements. The difference is primarily attributable
to (i) the home warranty business which was acquired by HFS but is
excluded from the audited financial statements of ERA LP; and (ii)
an intercompany charge to ERA LP by ERA Inc. Net revenues, total
expenses and net loss of ERA LP for the year ended December 31, 1995
were $39.4 million, $47.3 million and $7.9 million, respectively.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statement of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
NET REVENUES
Service fees ................................................... $786,407 $889,473
Other .......................................................... 62,535 81,451
---------- ----------
Equity in earnings (loss) of car rental operating company ..... (5,096) 2,459
Net revenues .................................................. 843,846 973,383
---------- ----------
EXPENSES
Marketing and reservation....................................... 202,846 238,018
Selling, general and administrative ............................ 289,332 289,822
Depreciation and amortization .................................. 97,972 99,703
Interest ....................................................... 40,115 36,930
Other .......................................................... 22,328 17,359
---------- ----------
Total expenses ................................................ 652,593 681,832
---------- ----------
Income before income taxes ...................................... 191,253 291,551
Provision for income taxes ...................................... 78,935 120,331
---------- ----------
Net income (N) .................................................. $112,318 $171,220
========== ==========
PER SHARE INFORMATION (PRIMARY)
Net income...................................................... $ .83 $ 1.18
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 139,315 147,470
========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Net income ..................................................... $ .82 $ 1.18
========== ==========
Weighted average common and common equivalent shares
outstanding ................................................... 141,807 148,194
========== ==========
</TABLE>
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees............................ $268,862 $848,763 $ 19,508 (C) $786,407
(411,795)(D)
61,069 (F)
Other .................................. 30,869 45,051 (13,385)(E) 62,535
Equity in loss of car rental operating
company ............................... -- -- (5,096) (F) (5,096)
---------- ----------- -------------- -----------
Net revenues .......................... 299,731 893,814 (349,699) 843,846
---------- ----------- -------------- -----------
EXPENSES
Marketing and reservation .............. 110,842 92,004 -- 202,846
Selling, general and administrative
(N)..................................... 47,700 638,601 (3,375)(G) 289,332
(393,594)(H)
Depreciation and amortization .......... 21,721 52,566 23,685 (I) 97,972
Interest ............................... 16,272 8,135 15,708 (J) 40,115
Other .................................. 2,012 21,018 (702)(K) 22,328
---------- ----------- -------------- -----------
Total expenses ........................ 198,547 812,324 (358,278) 652,593
---------- ----------- -------------- -----------
Income before income taxes .............. 101,184 81,490 8,579 191,253
Provision for income taxes .............. 41,820 21,624 15,491 (L) 78,935
---------- ----------- -------------- -----------
Net income (loss)........................ $ 59,364 $ 59,866 $ (6,912) $112,318
========== =========== ============== ===========
PER SHARE INFORMATION (PRIMARY)
Net income (N) ......................... $ .57 $ .83
========== ===========
Weighted average common and common
equivalent shares outstanding ......... 109,564 29,751 (M) 139,315
========== ============== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N).......................... $ .56 $ .82
========== ===========
Weighted average common and common
equivalent shares outstanding ......... 112,056 29,751 (M) 141,807
========== ============== ===========
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results
of HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
AVIS, (1) COLDWELL OTHER TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
------------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ........................ $13,358 $209,242 $513,483 $112,680 $848,763
Other ............................... -- 13,385 3,972 27,694 45,051
------------- ---------- ---------- -------------- ------------
Net revenues ....................... 13,358 222,627 517,455 140,374 893,814
------------- ---------- ---------- -------------- ------------
EXPENSES
Marketing and reservation ........... -- 92,004 -- -- 92,004
Selling, general and administrative 7,106 62,530 458,785 110,180 638,601
Depreciation and amortization ...... 14,253 12,698 17,272 8,343 52,566
Interest ............................ -- 402 2,958 4,775 8,135
Other ............................... -- 6,570 1,944 12,504 21,018
------------- ---------- ---------- -------------- ------------
Total expenses ..................... 21,359 174,204 480,959 135,802 812,324
------------- ---------- ---------- -------------- ------------
Income (loss) before income taxes ... (8,001) 48,423 36,496 4,572 81,490
Provision for income taxes ........... 18 1,940 16,422 3,244 21,624
------------- ---------- ---------- -------------- ------------
Net income (loss) .................... $(8,019) $ 46,483 $ 20,074 $ 1,328 $ 59,866
============= ========== ========== ============== ============
</TABLE>
- ------------
(1) The historical consolidated statement of operations of Avis, as
adjusted, has been adjusted to present only the historical operating
results intended to be retained by HFS. The historical consolidated
statement of operations of Avis, Inc., as adjusted, is for the nine
months ended August 31, 1995. See Historical Consolidated Statement
of Operations of Avis, Inc., as Adjusted, for the nine months ended
August 31, 1995.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF AVIS, INC. AS ADJUSTED
FOR THE NINE MONTHS ENDED AUGUST 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENT
---------------------------------
ELIMINATION
OF CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATION COMPANY AS ADJUSTED
------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES ............................. $1,190,189 $(13,358) $(1,176,831) $ --
Service fees......................... -- 13,358 -- 13,358
------------ ---------------- --------------- -------------
Net revenues........................ 1,190,189 (1,176,831) 13,358
------------ ---------------- --------------- -------------
EXPENSES
Selling, general and administrative 766,509 -- (759,403) 7,106
Depreciation and amortization ...... 304,339 -- (290,086) 14,253
Interest ............................ 105,379 -- (105,379) --
Other ............................... 311 -- (311) --
------------ ---------------- --------------- -------------
Total expenses ..................... 1,176,538 -- (1,155,179) 21,359
------------ ---------------- --------------- -------------
Income (loss) before income taxes ... 13,651 -- (21,652) (8,001)
Provision for income taxes ........... 21,644 -- 21,626 18
------------ ---------------- --------------- -------------
Net loss ............................. $ (7,993) $ -- $ (26) $(8,019)
============ ================ =============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present information
technology services as "Service fees." The elimination of the car
rental operating company is presented as a result of HFS's plan to
undertake an initial public offering of a majority interest of 75%
in the corporation which owns all company-owned Avis car rental
operations (the "IPO Company"). HFS intends to substantially
replace results of car rental operations with license fees from the
IPO Company.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER ACQUISITIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY CENTURY 21
CCI (1) 21 (1) NORS TRAVELODGE ERA TOTAL
------- --------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
Service fees .................... $ -- $60,506 $20,750 $13,476 $17,948 $112,680
Other ........................... 3,326 10,164 288 59 13,857 27,694
------- --------- ------------ ------------ ---------- ----------
Net revenues ................... 3,326 70,670 21,038 13,535 31,805 140,374
------- --------- ------------ ------------ ---------- ----------
EXPENSES
Selling, general and
administrative ................. -- 57,241 18,421 11,503 23,015 110,180
Depreciation and amortization .. 529 5,217 413 6 2,178 8,343
Interest ........................ -- 2,904 38 -- 1,833 4,775
Other ........................... 1,917 2,751 -- -- 7,836 12,504
------- --------- ------------ ------------ ---------- ----------
Total expenses ................. 2,446 68,113 18,872 11,509 34,862 135,802
------- --------- ------------ ------------ ---------- ----------
Income (loss) before income
taxes............................ 880 2,557 2,166 2,026 (3,057) 4,572
Provision for income taxes ...... 313 2,097 -- 834 -- 3,244
------- --------- ------------ ------------ ---------- ----------
Net income (loss) ................ $ 567 $ 460 $ 2,166 $ 1,192 $(3,057) $ 1,328
======= ========= ============ ============ ========== ==========
</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 to HFS's pro forma classification.
See notes to pro forma consolidated balance sheet and statement of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
---------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................... $468,277 $569,204 $ 11,835 (C) $889,473
(235,625)(D)
75,782 (F)
Other ................................. 81,733 20,559 (6,000)(F) 81,451
(14,841)(E)
Equity in earnings of car rental
operating company .................... -- -- 2,459 (F) 2,459
---------- ----------- --------------- -----------
Net revenues ......................... 550,010 589,763 (166,390) 973,383
---------- ----------- --------------- -----------
EXPENSES
Marketing and reservation ............. 130,728 107,290 -- 238,018
Selling, general and administrative
(N)................................... 139,709 419,280 (41,804)(G) 289,822
(227,363)(H)
Depreciation and amortization ......... 41,129 37,041 21,533 (I) 99,703
Interest .............................. 22,194 4,993 9,743 (J) 36,930
Other ................................. 10,988 6,716 (345)(K) 17,359
---------- ----------- --------------- -----------
Total expenses ....................... 344,748 575,320 (238,236) 681,832
---------- ----------- --------------- -----------
Income before income taxes ............. 205,262 14,443 71,846 291,551
Provision for income taxes ............. 82,630 (7,966) 45,667 (L) 120,331
---------- ----------- --------------- -----------
Net income (N) ......................... $122,632 $ 22,409 $ 26,179 $171,220
========== =========== =============== ===========
PER SHARE INFORMATION (PRIMARY)
Net income (N)......................... $ .96 $ 1.18
========== ===========
Weighted average common and common
equivalent shares outstanding......... 130,960 16,510 (M) 147,470
========== =============== ===========
PER SHARE INFORMATION (FULLY DILUTED)
Net income (N)......................... $ .96 $ 1.18
========== ===========
Weighted average common and common
equivalent shares outstanding ........ 131,684 16,510 (M) 148,194
========== =============== ===========
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results of
HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to pro forma consolidated balance sheet and statement of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------
OTHER
AVIS, (1) COLDWELL 1996 (2) TOTAL
AS ADJUSTED RCI BANKER (2) ACQUISITIONS HISTORICAL
------------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees......................... $26,871 $236,505 $295,478 $10,350 $569,204
Other ............................... -- 14,841 4,067 1,651 20,559
------------- ---------- ----------- -------------- ------------
Net revenues ....................... 26,871 251,346 299,545 12,001 589,763
------------- ---------- ----------- -------------- ------------
EXPENSES
Marketing and reservation ........... -- 107,290 -- -- 107,290
Selling, general and administrative . 20,173 75,524 312,348 11,235 419,280
Depreciation and amortization ...... 14,247 13,352 9,021 421 37,041
Interest ............................ -- 345 3,155 1,493 4,993
Other ............................... -- 5,440 512 764 6,716
------------- ---------- ----------- -------------- ------------
Total expenses ..................... 34,420 201,951 325,036 13,913 575,320
------------- ---------- ----------- -------------- ------------
Income (loss) before income taxes ... (7,549) 49,395 (25,491) (1,912) 14,443
Provision (benefit) for income taxes 96 2,370 (10,432) -- (7,966)
------------- ---------- ----------- -------------- ------------
Net income (loss) .................... $(7,645) $ 47,025 $(15,059) $(1,912) $ 22,409
============= ========== =========== ============== ============
</TABLE>
- ------------
(1) The historical financial statement of income of Avis, as adjusted,
has been adjusted to include the historical operating results of
Avis intended to be retained by HFS and the operating results of the
Avis Car rental subsidiary, included in Other Revenue. The
historical consolidated statement of income of Avis, Inc., as
adjusted is for the nine months ended August 31, 1996. See
Historical Consolidated Statement of Operations of Avis, Inc., as
Adjusted for the nine months ended August 31, 1996.
(2) Reflects results of operations for the period from January 1, 1996
to the respective dates of acquisition.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform to HFS's classification.
See notes to pro forma consolidated balance sheet and statement of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF INCOME
OF AVIS, INC., AS ADJUSTED
FOR THE NINE MONTHS ENDED AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
ELIMINATION
OF CAR RENTAL
OPERATING AVIS,
HISTORICAL RECLASSIFICATIONS COMPANY AS ADJUSTED
------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES ............................ $1,490,709 (26,871) $(1,463,838) $ --
Service fees........................ -- 26,871 26,871
------------ ----------------- --------------- -------------
Net revenues....................... 1,490,709 -- (1,463,838) 26,871
------------ ----------------- --------------- -------------
EXPENSES
Selling, general and administrative 975,769 -- (955,596) 20,173
Depreciation and amortization ..... 333,147 -- (318,900) 14,247
Interest ........................... 116,958 -- (116,958) --
Other .............................. 18 -- (18) --
------------ ----------------- --------------- -------------
Total expenses .................... 1,425,892 -- (1,391,472) 34,420
------------ ----------------- --------------- -------------
Income (loss) before income taxes .. 64,817 -- (72,366) (7,549)
Provision for income taxes .......... 29,966 -- (29,870) 96
------------ ----------------- --------------- -------------
Net income (loss).................... $ 34,851 -- $ (42,496) $(7,645)
============ ================= =============== =============
</TABLE>
- ------------
Note: The reclassification adjustment made to the historical consolidated
statement of income of Avis, Inc. is to present information
technology services as "Service fees." The elimination of the car
rental operating company is presented as a result of HFS's plan to
undertake an initial public offering of a majority interest of 75
percent in the corporation which owns all company-owned Avis car
rental operations (the "IPO Company"). HFS intends to substantially
replace results of car rental operations with license fees from the
IPO Company.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
OF OTHER 1996 ACQUISITIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CENTURY 21
NORS (1) TRAVELODGE (1) ERA (1) TOTAL
------------ -------------- ---------- ---------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees........................ $6,668 $688 $ 2,994 $10,350
Other .............................. 449 -- 1,202 1,651
------------ -------------- ---------- ---------
Net revenues ...................... 7,117 688 4,196 12,001
------------ -------------- ---------- ---------
EXPENSES
Selling, general and administrative 7,566 552 3,117 11,235
Depreciation and amortization ..... 285 -- 136 421
Interest ........................... 2 -- 1,491 1,493
Other .............................. -- -- 764 764
------------ -------------- ---------- ---------
Total expenses .................... 7,853 552 5,508 13,913
------------ -------------- ---------- ---------
Income (loss) before income taxes .. (736) 136 (1,312) (1,912)
Provision for income taxes .......... -- -- -- --
------------ -------------- ---------- ---------
Net income (loss) ................... $ (736) $136 $(1,312) $(1,912)
============ ============== ========== =========
</TABLE>
- ------------
(1) Reflects results of operations for the period from January 1, 1996
to the respective date of acquisition.
Note: Certain reclassifications have been made to the historical results of
Other 1996 Acquisitions to conform to HFS's classification.
See notes to pro forma consolidated balance sheet and statements of operations.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
A. ACQUISITION OF AVIS:
At the time HFS acquired Avis, it had developed and announced a plan (the
"Plan") to do the following:
1. Retain certain assets acquired, including the reservation system,
franchise agreements, trademarks and tradenames and certain
liabilities.
2. Segregate the assets used in the car rental operations in a separate
subsidiary ("Car Rental Operating Company") and to dispose of
approximately 75% interest in Car Rental Operating Company within one
year through an initial public offering (IPO) of Car Rental Operating
Company.
3. Enter into a license agreement with Car Rental Operating Company for
use of the trademarks and tradename and other franchise services.
Based on the Plan, the purchase price for Avis has been allocated to the
assets and liabilities acquired by HFS, including its investment in Car
Rental Operating Company based on their estimated fair values. The amount
allocated to Car Rental Operating Company was based on the estimated
valuation of the Car Rental Operating Company including the effect of
royalty, reservation and information technology agreements with HFS. Under
the plan, the Car Rental Operating Company will sell approximately a 75%
interest at an assumed price of $225 million thereby diluting HFS' interest to
25%. All of the proceeds from the IPO will be retained by the Car Rental
Operating Company. Pro forma adjustments consist of the elimination of certain
acquired assets and assumed liabilities, net of the fair value ascribed to such
assets and liabilities.
The Company acquired Avis for the following consideration ($000's):
<TABLE>
<CAPTION>
<S> <C>
Cash consideration (i) ........................................... $ 410,742
Issuance of approximately 4.6 million shares HFS common stock .... 320,843
ESOP liability (ii) .............................................. 100,930
-----------
TOTAL PRO FORMA ACQUISITION COST.................................. 832,515
-----------
Fair value of net assets acquired:
Historical book value of acquired company........................ 356,635
Elimination of net assets (liabilities) not acquired or assumed:
Other assets.................................................... (9,614)
Preferred stock--Avis........................................... 72,416
Intangible assets--Avis......................................... (499,143)
Redeemable portion of common stock--ESOP........................ 295,465
Unearned compensation--ESOP..................................... (257,751)
Fair value adjustments to assets acquired and liabilities
assumed:
Deferred income tax asset, net (iii)............................ 5,200
Property and equipment (iv) .................................... 58,172
Investment in Car Rental Operating Company (v).................. 2,384
Accrued acquisition obligations (vi)............................ (18,000)
Other........................................................... 182
-----------
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED.................... 5,946
-----------
Intangible assets--Avis (vii).................................... $ 826,569
===========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF AVIS: (Continued)
In connection with the Company's fair value allocation of net assets to
the Car Rental Operating Company, the estimated net worth of the Car Rental
Operating Company was valued at $75 million. Such net worth and corresponding
company investment in the Car Rental Operating Company was allocated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net book value of car rental operating
company................................................. $72,616
Fair value adjustments to car rental operating company .. 2,384
---------
$75,000
=========
</TABLE>
The condensed balance sheet of the Car Rental Operating Company including
fair value adjustments at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Vehicles.............................................. $ 2,567,517
Property and equipment................................ 101,000
Deferred tax asset.................................... 102,000
Excess of cost over fair value of net assets
acquired............................................. 154,000
Debt.................................................. (2,488,651)
Property liability and property damage................ (215,135)
Other, net............................................ (145,731)
-------------
Stockholder's equity.................................. $ 75,000
=============
</TABLE>
HFS' investment in Car Rental Operating Company of $75 million represents
the estimated value of its 100% interest in the Car Rental Operating Company
at the date of acquisition and is accounted for under the equity method since
HFS' control is temporary based on the planned IPO of the Car Rental Operating
Company. Upon completion of the IPO, the value of the Car Rental Operating
Company is expected to increase to $300 million (with the $225 million of IPO
proceeds retained by the Car Rental Operating Company) with HFS' interest at
25% equal to $75 million, its current investment balance. If the results of
the IPO do not confirm the preliminary purchase price allocation for the
investment in the Car Rental Operating Company, then such investment will be
adjusted with a corresponding adjustment to Excess of cost over fair value of
net assets acquired.
- ------------
(i) Cash consideration of $367.2 million was financed by the Second
Quarter 1996 Offering. Cash consideration also includes: (a) a cash
payment of $17.6 million made to General Motors Corporation ("GM"),
representing the amount by which the value attributable under the
Stock Purchase Agreement to the HFS Common Stock received by GM in
the Avis Acquisition exceeded the proceeds realized upon the
subsequent sale of such HFS Common Stock; and (b) payment of a $26
million bank facility termination fee by the Company in connection
with the Avis acquisition.
(ii) The ESOP liability bears interest at LIBOR plus 20 basis points for a
period commencing on the acquisition date to maturity which is
primarily the earlier of three days after the sale of Company shares
issued to the ESOP or the first anniversary of the acquisition.
(iii) The pro forma adjustment to deferred income taxes recorded in
connection with the acquisition results from differences in the fair
values of assets acquired and liabilities assumed and their
respective income tax bases.
(iv) The adjustment to property and equipment is primarily attributable to
the values ascribed to reservation equipment and related assets and
to the Avis headquarters office in excess of historical cost.
(v) The adjustment to investment in car rental operating company reflects
the net effect of push-down accounting adjustments which result in a
$75 million fair value of the car rental operating company.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
A. ACQUISITION OF AVIS: (Continued)
(vi) Accrued acquisition obligations consist of professional fees ($3.7
million), investment banker fees ($8.0 million) and filing fees and
other ($6.3 million).
(vii) Intangible assets retained by HFS consist of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Avis trademark ........................................ $400.0
Reservation system and customer database .............. 109.0
Excess of cost over fair value of net assets acquired 317.6
-------------
$826.6
=============
</TABLE>
The pro forma adjustments include the elimination of Avis stockholders'
equity and the issuance of approximately 4.6 million shares of HFS's common
stock to finance the acquisition.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------
($000'S)
-----------------------------------------------
ISSUANCE OF ELIMINATON OF ADJUSTMENT TO
HFS STOCKHOLDERS' STOCKHOLDERS'
COMMON STK. EQUITY EQUITY
------------- --------------- ---------------
<S> <C> <C> <C>
Participating convertible preferred
stock.................................... $ -- $(132,000) $(132,000)
Common stock.............................. 46 (290) (244)
Additional paid-in capital................ 320,797 (220,401) 100,396
Retained earnings......................... -- (103,339) (103,339)
Treasury stock............................ -- 102,269 102,269
Foreign currency equity adjustment ....... -- (2,874) (2,874)
------------- --------------- ---------------
$320,843 $(356,635) $ (35,792)
============= =============== ===============
</TABLE>
B. ACQUISITION OF RCI:
The purchase price for RCI 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.
HFS acquired RCI for the following consideration (000's):
<TABLE>
<CAPTION>
<S> <C> <C>
Cash consideration paid by HFS (i) ................................ $ 285,000
Issuance of approximately one million shares of HFS common stock . 75,000
-----------
HFS investment in RCI ............................................. $360,000
Existing cash and securities retained by RCI shareholders (ii) ... 265,000
-----------
Total consideration received by RCI shareholder ................... 625,000
-----------
Fair value of net assets acquired:
Historical book value of RCI ...................................... 71,837
Elimination of cash and securities retained by RCI shareholder
(ii) ............................................................. (265,000)
Fair value adjustment to assets acquired and liabilities assumed:
Deferred income taxes--current (iv) .............................. 29,000
Property and equipment (iii) ..................................... (32,125)
Deferred income taxes--non-current (iv) .......................... 43,000
Customer lists ................................................... 100,000
Accrued acquisition obligations:
--current........................................................ (10,557)
--non-current.................................................... (20,000)
-----------
Fair value of net liabilities assumed .............................. (83,845)
----------
Excess of cost over fair value on net assets acquired ............. $443,845
==========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
B. ACQUISITION OF RCI: (Continued)
- ------------
(i) Cash consideration paid by HFS was financed with borrowings under
HFS's Revolving Credit Facilities.
(ii) Prior to the closing of the RCI acquisition, the former shareholder
of RCI retained, in the form of a dividend, cash and securities from
the RCI business comprised of $48.8 million in cash, $184.6 million
in short-term securities and $31.6 million in long-term securities.
(iii) Primarily comprised of write-off of $24.1 million of capitalized
costs associated with an information technology project terminated as
of the acquisition date and an $8 million write-down of building and
building improvements based upon fair market appraisals.
(iv) The pro forma adjustment to deferred income taxes reflects deferred
tax assets that will be recognized upon termination of RCI's
Subchapter S Corporation status for the temporary differences between
fair value of unearned income liabilities assumed and the respective
income tax bases. Prior to the acquisition, RCI was a Subchapter S
Corporation for tax purposes, therefore it had not recorded any tax
liabilities.
(v) HFS has recorded liabilities for charges to be incurred in connection
with the restructuring of RCI operations. At the date of acquisition,
November 12, 1996, HFS had formulated a preliminary plan that would
result in the consolidation of facilities, involuntary termination
and relocation of employees, and elimination of duplicative operating
and overhead activities. The plan is in the early stages and is
expected to be substantially complete in late 1997. The accrued
acquisition liability recorded as part of the purchase price
allocation consists of $9.9 million of personnel related costs, $6.9
million of facility related costs, $6.2 million of transaction costs
and $7.5 million of other costs. In connection with the
restructuring, HFS expects the reduction of approximately 250
employees.
(vi) Excess of cost over fair value of net assets acquired for pro forma
balance sheet purposes is derived from the net book value of RCI at
September 30, 1996. This differs from the excess of cost over fair
value of net assets acquired determined at date of acquisition which
is derived from the net book value at such date. The excess of cost
over fair value of net assets acquired at date of acquisition of
$477.7 million is used as the basis for adjustments in the pro forma
statements of income (see Note I) for the year ended December 31,
1995 and nine month periods ended September 30, 1995 and 1996,
respectively.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------
ISSUANCE OF ELIMINATION OF ADJUSTMENT TO
COMPANY STOCKHOLDERS' STOCKHOLDERS'
COMMON STK. EQUITY EQUITY
------------- -------------- ---------------
<S> <C> <C> <C>
Common stock......................................... $ 10 $ -- $ 10
Additional paid-in capital........................... 66,965 (6,392) 60,573
Retained earnings.................................... -- (34,864) (34,864)
Treasury stock....................................... 8,025 -- 8,025
Net unrealized gain on available for sale
securities.......................................... -- (20,784) (20,784)
Foreign currency equity adjustment................... -- (9,797) (9,797)
------------- -------------- ---------------
$75,000 $(71,837) $ 3,163
============= ============== ===============
</TABLE>
The pro forma adjustments include the elimination of RCI stockholders'
equity and the issuance of approximately one million shares of HFS's common
stock as partial consideration for RCI.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
C. SERVICE FEE REVENUE:
The pro forma adjustment reflects the elimination of franchise revenue
associated with discontinued Century 21 international based operations, the
elimination of franchise revenue paid by the Century 21 NORS to Century 21
under sub-franchise agreements (offset against SG&A expense--see Note G) and
the addition of franchise fees to be received under franchise contracts with
owned brokerage offices upon contribution of the Owned Brokerage Business to
the Trust. Pro forma adjustments to franchise revenue consists of the
following:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ --------- ---------
<S> <C> <C> <C>
Eliminate:
Discontinued operations...................... $ (57) $ (34) $ --
Century 21 revenue included as Century 21
NORS SG&A................................... (4,500) (3,375) (1,003)
Add:
Franchise fees from Owned Brokerage
Business..................................... 30,507 22,917 12,838
------------------ --------- ---------
Total....................................... $25,950 $19,508 $11,835
================== ========= =========
</TABLE>
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, $411.8 million and $235.6
million for the year ended December 31, 1995, for the nine months ended
September 30, 1995 and for the five months ended May 31, 1996 (January 1
through date of acquisition).
D. OWNED BROKERAGE BUSINESS REVENUE:
The pro forma adjustment reflects the elimination of revenue generated
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 funds
available for advertising and promotion.
E. OTHER REVENUE:
The pro forma adjustment reflects the elimination of revenue associated
with investment income generated from RCI cash and marketable securities
which were issued in the form of a dividend to the former shareholder prior
to consummation of the RCI acquisition.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
F. CAR RENTAL OPERATING COMPANY OPERATIONS:
The pro forma adjustments are comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------
1995 1995 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Historical income before taxes from Car Rental
Operating Company............................. $ 41,200 $ 21,652 $ 72,366
ADJUSTMENTS TO CAR RENTAL OPERATING COMPANY:
Elimination of historical expense associated
with:
Long-term incentive compensation plans
eliminated in connection with the Avis
Acquisition ................................. $ 4,700 -- $ 9,302
Depreciation and amortization ................ 31,869 $ 23,208 26,120
Addition of pro forma expenses associated
with:
Depreciation and amortization (i) ............ (18,279) (13,709) (13,709)
Increased financing costs (ii) ................ (8,004) 10,286 (4,714) 4,785 (1,549) 20,164
---------- ---------- ----------
HFS SERVICE FEE ADJUSTMENT:
Service fees from franchised locations (iii) (18,366) (13,180) (14,748)
Reservation and information technology
services (iv) ............................... (9,700) (6,700) (9,800)
Gross royalty payment to HFS from Avis (v) ... (59,327) (41,189) (51,234)
(87,393) (61,069) (75,782)
---------- ---------- ---------- ---------- ---------- ----------
Adjusted income (loss) before taxes from car
rental operating company ..................... (35,907) (34,632) 16,748
Provision (benefit) for income taxes ......... (14,820) (14,249) 6,912
---------- ---------- ----------
Adjusted net income (loss) from car rental
operating company ............................ (21,087) (20,383) 9,836
HFS ownership percentage ...................... 25% 25% 25%
---------- ---------- ----------
HFS' equity in earnings (loss) in car rental
operating company ............................ $ (5,272) $ (5,096) $ 2,459
========== ========== ==========
(OTHER REVENUE ADJUSTMENT):
Elimination of historical interest income
related to cash consideration portion of
Avis Acquisition (vi)........................ $ -- $ -- $ 6,000
========== ========== ==========
</TABLE>
- ------------
(i) The estimated fair value of Avis property and equipment intended to
be retained by the car rental company is $101.0 million, comprised
primarily of furniture, fixtures, and leasehold improvements, which
is amortized on a straight-line basis over the estimated useful
lives, which average seven years. Excess of cost over fair value of
net assets acquired by the Car Rental Operating Company is valued at
$154 million and is amortized on a straight line basis over a benefit
period of 40 years.
(ii) As a result of the merger between the Company and Avis, approximately
$1 billion of tax-advantaged debt was repaid and replaced by a
similar amount of non tax-advantaged debt. This resulted in an
increase in interest rates, due to the loss of tax benefits from ESOP
financing which were passed through from various lenders to Avis
($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1995 1995 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Add current facilities ... $ 129,472 $ 95,047 $ 97,854
Reverse former facilities (121,468) (90,333) (96,305)
------------------ ---------- ----------
Increased financing cost . $ 8,004 $ 4,714 $ 1,549
================== ========== ==========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
F. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued)
(iii) Reflects historical franchise fee revenue from third parties.
(iv) Subsequent to the IPO, HFS will retain and operate the
telecommunications and computer processing system which services the
Avis Car Rental Operating Company for reservations, rental agreement
processing, accounting and fleet control. Pursuant to a planned
contractual agreement with the Car Rental Operating Company, HFS will
charge the Car Rental Operating cost plus thirty-five percent for
services provided. The adjustment is calculated as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------------ --------- ---------
<S> <C> <C> <C>
Reservation and information technology costs
incurred ................................... $27,714 $19,143 $28,000
Markup percentage (cost plus 35%)............ 35% 35% 35%
------------------ --------- ---------
HFS Service Fees ............................ $ 9,700 $ 6,700 $ 9,800
================== ========= =========
</TABLE>
(v) In connection with the Company's plan to dispose of approximately 75%
of the Car Rental Operating Company, the Company will enter into
franchise, information technology and other agreements to provide
services to the Car Rental Operating Company based on terms to be
determined. The royalty payment to be made to HFS from the Car Rental
Operating Company for use of the Avis trademarks and tradename is
calculated at 3.5% of the revenues generated by the Car Rental
Operating Company which is the net royalty percentage the Company
expects to receive as a result of a planned contractual arrangement
with the Avis Car Rental Operating Company subsequent to the IPO.
Such payments are calculated as follows ($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1995 1995 1996
------------------ ------------ ------------
<S> <C> <C> <C>
Revenues generated by Car Rental Operating
Company................................... $1,695,069 $1,176,831 $1,463,838
Royalty percentage......................... 3.5% 3.5% 3.5%
------------------ ------------ ------------
Royalty payment to HFS..................... $ 59,327 $ 41,189 $ 51,234
================== ============ ============
</TABLE>
(vi) The pro forma adjustment eliminates historical interest income on the
portion of cash generated from the Second Quarter 1996 Offering which
was used as consideration in the Avis Acquisition.
G. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
The pro forma adjustments reflects the elimination of royalty payments
made by the Century 21 NORS to Century 21 under subfranchise agreements
(offset against service fee revenue--See Note C) and the payment of Coldwell
Banker stock options as a result of change in control provisions in
connection with the acquisition of Coldwell Banker by HFS.
<TABLE>
<CAPTION>
FOR THE NINE MONTH
ENDED
FOR THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Franchise fees ....... $4,500 $3,375 $ 1,003
Stock option expense -- -- 40,801
------------------ -------- --------
Total................ $4,500 $3,375 $41,804
================== ======== ========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
H. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
The pro forma adjustment reflects the elimination of expenses associated
with Coldwell Banker's formerly owned brokerage offices (See Note D). 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.
I. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CCI CENTURY
MERGER 21 RCI
-------- ----------- -----------
<S> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(14,193)
Property, equipment and
furniture and fixtures .. 100 534 7,294
Information data base .... 375 -- --
Intangible assets......... 289 4,540 21,942
-------- ----------- -----------
Total.................... $ 235 $ (143) $ 15,043
======== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Elimination of historical
expense.................. $(19,683) $(22,425) $(2,737) $(64,784)
Property, equipment and
furniture and fixtures .. 5,909 1,156 189 15,182
Information data base .... -- -- -- 375
Intangible assets......... 29,594 20,387 7,601 84,353
----------- ----------- -------------- -----------
Total.................... $ 15,820 $ (882) $ 5,053 $ 35,126
=========== =========== ============== ===========
</TABLE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CCI CENTURY
MERGER 21 RCI
-------- ----------- -----------
<S> <C> <C> <C>
Elimination of historical
expense.................. $(529) $ (5,217) $(12,698)
Property, equipment and
furniture and fixtures .. 100 534 5,471
Information data base .... 375 -- --
Intangible assets......... 289 4,540 16,456
-------- ----------- -----------
Total.................... $ 235 $ (143) $ 9,229
======== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Elimination of historical
expense.................. $(14,253) $(17,272) $(2,597) $(52,566)
Property, equipment and
furniture and fixtures .. 4,432 867 -- 11,404
Information data base .... -- -- -- 375
Intangible assets......... 22,196 15,290 5,701 64,472
----------- ----------- -------------- -----------
Total.................... $ 12,375 $ (1,115) $ 3,104 $ 23,685
=========== =========== ============== ===========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
RCI AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Elimination of historical
expense.................. $(13,352) $(14,247) $(9,021) $ (421) $(37,041)
Property, equipment and
furniture and fixtures .. 5,471 4,432 482 -- 10,385
Intangible assets......... 16,456 22,196 8,495 1,042 48,189
----------- ----------- ---------- -------------- -----------
Total.................... $ 8,575 $ 12,381 $ (44) $ 621 $ 21,533
=========== =========== ========== ============== ===========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
I. DEPRECIATION AND AMORTIZATION: (Continued)
CCI Merger
The estimated fair values of CCI's information data base, property and
equipment and excess of cost over fair value of net assets acquired are $7.5
million, $1.0 million and $33.8 million, respectively, and are amortized on a
straight-line basis over the periods to be benefited which are ten, five and
forty years, respectively. The benefit periods associated with the excess
cost over fair value of net assets acquired were determined based on CCI's
position as the dominant provider of gambling patron credit information
services since 1956, its ability to generate operating profits and expansion
of its customer base and the longevity of the casino gaming industry.
Century 21
The estimated fair values of Century 21 property and equipment, franchise
agreements and excess cost over fair value of net assets acquired are $5.5
million, $33.5 million and $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.
RCI
The fair value of RCI's property and equipment is estimated at
approximately $55.7 million and is amortized on a straight line basis over
the estimated useful lives, ranging from seven to thirty years.
RCI's intangible assets consist of customer lists and excess of cost over
fair value of net assets acquired. The estimated fair value of RCI's customer
lists are approximately $100 million and are amortized on a straight-line
basis over the period to be benefited which is ten years. The fair value
ascribed to customer lists is determined based on the historical renewal
rates of RCI members. The fair value of excess of cost over fair value of net
assets acquired is estimated at approximately $477.7 million and is
determined to have a benefit period of forty years, which is based on RCI
being a leading provider of services to the timeshare industry, which
includes being the world's largest provider of timeshare exchange programs.
Avis
The estimated fair value of Avis' property and equipment intended to be
retained by HFS is $96.0 million, comprised primarily of reservation
equipment and related assets and to the Avis Headquarters office in excess of
historical cost. Such property and equipment is amortized on a straight-line
basis over the estimated benefit periods ranging from five to thirty years.
Avis's intangible assets recorded by HFS (not applicable to car rental
operating subsidiary) are comprised of the Avis trademark, a reservation
system and customer data base, and excess of cost over fair value of net
assets acquired. The estimated fair value of the Avis trademark is
approximately $400 million and is amortized on a straight line basis over a
benefit period of 40 years. The estimated fair value of the reservation
system and customer data base are approximately 95.0 million and 14.0
million, respectively and are amortized on a straight line basis over the
periods to be benefited which are 10 years and 6.5 years, respectively.
The excess of cost over fair value of net assets acquired applicable to
the allocated portion of the business to be retained by HFS is estimated at
approximately $317.6 million and is determined to have a
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
I. DEPRECIATION AND AMORTIZATION: (Continued)
benefit period of forty years, which is based on Avis' position as the second
largest car rental system in the world, the recognition of its brand name in
the car rental industry and the longevity of the car rental business.
Coldwell Banker
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.
Other 1996 Acquisitions
The estimated fair values of Other 1996 Acquisitions franchise agreements
aggregate $61.0 million and are being amortized on a straight line basis over
the periods to be benefited, which range from twelve to thirty years. The
estimated fair values of Other Acquisitions excess of cost over fair value of
net assets acquired aggregate $187.4 million and are each being amortized on
a straight line basis over the periods to be benefited, which are forty
years.
J. INTEREST EXPENSE:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ---------- ---------
<S> <C> <C> <C>
Elimination of historical interest expense of:
Century 21.................................... $(2,904) $(2,904) $ --
Other 1996 Acquisitions....................... (3,323) (1,871) (1,493)
RCI........................................... (536) (402) (345)
Reversal of Coldwell Banker.................... (5,329) (2,958) (3,155)
Century 21..................................... 2,135 2,135 --
RCI............................................ 17,955 13,466 13,466
Minority interest--preferred dividends ........ 1,796 1,796 --
4 3/4%Notes to finance Other 1996
Acquisitions.................................. 8,595 6,446 1,270
------------------ ---------- ---------
Total........................................ $18,389 $15,708 $ 9,743
================== ========== =========
</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.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
J. INTEREST EXPENSE: (Continued)
Coldwell Banker
The pro forma adjustment reflects the reversal of historical interest
expense relating to the following ($000's):
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ -------- --------
<S> <C> <C> <C>
Expense associated with the Owned Brokerage
Business (i) .................................... $ 138 $ 72 $ (179)
Expense associated with revolving credit facility
borrowings which will be repaid with proceeds
from offering (ii)............................... 5,191 2,886 3,334
------------------ -------- --------
Total............................................ $5,329 $2,958 $3,155
================== ======== ========
</TABLE>
(i) HFS paid substantially all outstanding debt of Coldwell Banker
Corporation and subsidiaries ("CB Consolidated") at the consummation
date of the acquisition. Therefore, a determination as to the
reasonableness of allocated CB Consolidated interest to the Owned
Brokerage Business is unnecessary.
(ii) At the date of acquisition, HFS repaid $105 million of Coldwell
Banker indebtedness which represented borrowings under a revolving
credit facility at a variable rate of interest (LIBOR plus a margin
ranging from .5% to 1.25%).
RCI
The pro forma adjustment reflects the recording of interest expense on
$285 million of borrowings under HFS's revolving credit facilities at an
interest rate of 6.3% which is the variable rate in effect on the date of
borrowing. Borrowings represent the amount used as partial consideration in
the RCI acquisition.
Minority interest - Preferred dividends:
The pro forma adjustment represents dividends on the redeemable Series A
Adjustable Rate Preferred Stock of Century 21.
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).
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 acquisitions
of Century 21 and RCI. The Company recorded interest expense using the
variable interest rate in effect on the respective borrowing dates. The
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
J. INTEREST EXPENSE: (Continued)
effect on pro forma net income assuming a 1/8% variance in the variable
interest rate used to calculate interest expense is as follows ($000's):
<TABLE>
<CAPTION>
CENTURY 21 RCI TOTAL
------------ ------ -------
<S> <C> <C> <C>
Year Ended December 31, 1995......... $26 $209 $235
Nine Months Ended September 30,
1995................................ 26 157 183
Nine Months Ended September 30,
1996................................ -- 157 157
</TABLE>
- ------------
The pro forma net income effects of a 1/8% variance in the interest
rate has no impact on earnings per share for all periods presented.
K. OTHER EXPENSES:
The pro forma adjustment eliminates charitable contributions made by the
former stockholder of RCI and accounting, legal and other administrative
expenses allocated to CCI, all of which would not have been incurred by the
Company. Such expenses are summarized as follows ($000's):
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR MONTHS
ENDED ENDED
DECEMBER 31, 1995 1995 1996
----------------- ------ ------
<S> <C> <C> <C>
RCI Charitable Contributions $1,200 $303 $345
CCI Administrative Expenses . 399 399 --
----------------- ------ ------
$1,599 $702 $345
================= ====== ======
</TABLE>
L. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------------ ----------- -----------
<S> <C> <C> <C>
Reversal of historical (provision) benefit of:
Company....................................... $(55,175) $(41,820) $(82,630)
CCI........................................... (313) (313) --
Century 21.................................... (2,097) (2,097) --
RCI........................................... (4,464) (1,940) (2,370)
Avis.......................................... (4,100) (18) (96)
Coldwell Banker............................... (24,385) (16,422) 10,432
Travelodge.................................... (1,132) (834) --
Pro forma provision............................ 112,395 78,935 120,331
------------------ ----------- -----------
Total........................................ $ 20,729 $ 15,491 $ 45,667
================== =========== ===========
</TABLE>
The pro forma effective tax rates are approximately 1% higher than HFS's
historical effective tax rates due to non-deductible excess of cost over fair
value of net assets required to be recorded in connection with the
acquisitions of Avis and RCI. 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.
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
M. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
<TABLE>
<CAPTION>
FOR THE NINE
ISSUANCE FOR THE YEAR ENDED MONTHS ENDED
PRICE PER DECEMBER 31, SEPTEMBER 30,
SHARE 1995 1995 1996
----------- ------------------ -------- -------
<S> <C> <C> <C> <C>
CCI (including dilutive impact of warrants)(1) . $15.30 896 1,180 --
Century 21 (2) ................................. $49.88 2,334 3,120 --
Avis Offering (3) .............................. $74.06 4,569 4,569 4,569
RCI (4) ........................................ $75.00 1,000 1,000 1,000
Second Quarter 1996 Offering--Coldwell Banker
(5) ........................................... $59.99 12,838 12,838 7,122
Second Quarter 1996 Offering--Avis (6) ........ $59.99 6,121 6,121 3,401
Century 21 NORS (7) ............................ $49.83 923 923 418
------------------ -------- -------
Total.......................................... 28,681 29,751 16,510
================== ======== =======
</TABLE>
(1) Date of Acquisition, May 11, 1995
(2) Date of Acquisition, August 1, 1995
(3) Date of Acquisition, October 17, 1996
(4) Date of Acquisition, November 12, 1996
(5) Date of Acquisition, May 31, 1996
(6) Date of Acquisition, October 17, 1996
(7) Date of Acquisition, April 3, 1996
The unaudited Pro Forma Consolidated Statements of Operations are
presented as if the acquisitions took place at the beginning of the periods
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.
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS:
In connection with its 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
acquisitons and were implemented concurrent with the consummation of the
acquistions. Restructuring plans included the involuntary termination and
relocation of employees, the consolidation and closing of facilities and the
elimination of duplicative operating and overhead activities. Pursuant to
HFS' specific restructuring plans, certain selling, general and
administrative expenses may not be incurred subsequent to each acquisition
that existed prior to consummation. In addition, there are incremental costs
in the conduct of activities of the acquired companies prior to the
acquistions 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):
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL
21 RCI BANKER
--------- -------- ----------
<S> <C> <C> <C>
Payroll and
related............ $10,885 $1,198 $10,682
Professional........ 2,693 1,000 1,500
Occupancy........... 3,628 -- --
Other............... 3,128 2,900 (1,517)
--------- -------- ----------
Total.............. $20,334 $5,098 $10,665
========= ======== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Payroll and
related............ $ 7,706 $1,110 $7,236 $38,817
Professional........ 1,486 154 387 7,220
Occupancy........... 2,754 186 1,172 7,740
Other............... 2,326 167 1,036 8,040
------------ ------------ -------- ---------
Total.............. $14,272 $1,617 $9,831 $61,817
============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
CENTURY COLDWELL
21 RCI BANKER
--------- -------- ----------
<S> <C> <C> <C>
Payroll and
related............ $10,885 $ 914 $ 9,830
Professional........ 2,693 750 1,573
Occupancy........... 3,628 -- --
Other............... 3,128 1,275 (1,072)
--------- -------- ----------
Total.............. $20,334 $2,939 $10,331
========= ======== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CENTURY 21
NORS TRAVELODGE ERA TOTAL
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Payroll and
related............ $5,354 $502 $1,526 $29,011
Professional........ 1,063 70 -- 6,149
Occupancy........... 1,944 84 666 6,322
Other............... 1,528 74 983 5,916
------------ ------------ -------- ---------
Total.............. $9,889 $730 $3,175 $47,398
============ ============ ======== =========
</TABLE>
For the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
COLDWELL CENTURY 21
RCI BANKER NORS
-------- ---------- ------------
<S> <C> <C> <C>
Payroll and
related............ $ 880 $5,462 $2,425
Professional........ 750 1,055 705
Occupancy........... -- -- 604
Other............... 1,333 (604) 1,069
-------- ---------- ------------
Total.............. $2,963 $5,913 $4,803
======== ========== ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TRAVELODGE ERA TOTAL
------------ ------ --------
<S> <C> <C> <C>
Payroll and
related............ $25 $222 $ 9,014
Professional........ 4 -- 2,514
Occupancy........... 4 102 710
Other............... 4 157 1,959
------------ ------ --------
Total.............. $37 $481 $14,197
============ ====== ========
</TABLE>
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS--(CONTINUED)
N. ESTIMATED SELLING GENERAL AND ADMINISTRATIVE COST SAVINGS: (Continued)
The impact on pro forma net income and net income per share of the
estimated SG&A cost savings are as follows:
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
FOR THE YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ----------------------
1995 1995 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Income before taxes, as reported .... $272,320 $191,253 $291,551
SG&A adjustments ..................... 61,817 47,398 14,197
Income before taxes, as adjusted .... 334,137 238,651 305,748
Income taxes ......................... 137,908 98,497 126,190
------------------ ---------- ----------
Net income, as adjusted .............. $196,229 $140,154 $179,558
================== ========== ==========
Net income per share (primary):
As adjusted ......................... $ 1.41 $ 1.03 $ 1.24
================== ========== ==========
As reported ......................... $ 1.15 $ .83 $ 1.18
================== ========== ==========
Net income per share (fully diluted):
As adjusted ......................... $ 1.39 $ 1.01 $ 1.23
================== ========== ==========
As reported ......................... $ 1.14 $ .82 $ 1.18
================== ========== ==========
</TABLE>
O. 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,
ERA and Coldwell Banker operations. These acquisitions were consummated in
1995 and 1996 and resulted in the consolidation of facilities, involuntary
termination and relocation of employees, and elimination of duplicative
operating and overhead activities. The following table provides details of
these charges by type. At September 30, 1996 the Company was substantially
complete with its restructuring Plan.
<TABLE>
<CAPTION>
CENTURY 21 COLDWELL
CENTURY 21 NORS ERA BANKER
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Personnel related ... $12,647 $1,720 $ 8,000 $4,237
Facility related .... 16,511 2,293 1,558 5,491
Other costs .......... 990 711 501 211
------------ ------------ --------- ----------
Total................. $30,148 $4,724 $10,059 $9,939
============ ============ ========= ==========
Terminated employees 325
</TABLE>
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. Through September 30, 1996
approximately $25.6 million, $2.5 million, $4.6 million and $2.9 million were
paid by Century 21, Century 21 NORS, ERA and Coldwell Banker, respectively
and charged against the restructuring liability.
P. TRUST CONTRIBUTION
Included in HFS historical SG&A for the nine months ended September 30,
1996, is a $5 million charge associated with the Company's contribution of
the Owned Brokerage Business to the Trust. The charge represents the fair
value of the Owned Brokerage Business based upon a valuation which considered
earnings, cash flow, assets and business prospects of the contributed
business.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HFS Incorporated
By: /s/ Michael P. Monaco
Michael P. Monaco
Vice Chairman
Date: March 26, 1997 And Chief Financial Officer
(Principal Financial Officer
And Principal Accounting Officer)
