<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
COMMISSION FILE NO. 1-11402
HFS INCORPORATED
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 22-3059335
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
339 JEFFERSON ROAD
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
</TABLE>
(201) 428-9700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------- ---------------------------
<S> <C>
Common Stock, Par Value $.01 New York Stock Exchange
5 7/8% Senior Notes due 1998 New York Stock Exchange
4 1/2% Convertible Senior Notes due 1999 New York Stock Exchange
4 3/4% Convertible Senior Notes due 2003 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on March 21, 1996, was
$4,997,430,777.
The number of shares outstanding of each of the Registrant's classes of
common stock was 102,775,148 shares of Common Stock outstanding as at March
21, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Notice of Annual Meeting of Stockholders and Proxy
Statement dated March 29, 1996 and the Annual Report to Shareholders of the
Registrant have been incorporated by reference into the following parts of
this Annual Report on Form 10-K: Part II, Items 5, 6, 7; Part III, Items
10-13
<PAGE>
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the notes thereto, the
"Independent Auditors' Report" and the Selected Quarterly Consolidated
Financial Data, which were previously incorporated by reference from pages 16
through 37 of the Registrant's 1995 Annual Report to Stockholders, are hereby
amended and restated in their entirety and included on pages F-1 through
F-21.
2
<PAGE>
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
ITEM 14 (a)(1) FINANCIAL STATEMENTS
The financial statements of the Company are included in Part II, Item 8
hereof.
ITEM 14 (a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
HFS Incorporated and subsidiaries for the years ended December 31, 1995,
1994 and 1993.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
3
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
--------------------------
-(2)-
COLUMN B-- -(1)- CHARGED COLUMN E--
BALANCE AT CHARGED TO TO OTHER COLUMN D-- BALANCE
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS AT END
COLUMN A--DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts:
Royalty accounts and notes
receivable........................ $6,363 $3,896 $665(1) $1,484(2) $ 9,440
Marketing and reservation accounts
receivable........................ 2,808 2,605 243(1) 859(2) 4,797
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts:
Royalty accounts and notes
receivable........................ 9,440 3,970 -- 3,582(2) 9,828
Marketing and reservation accounts
receivable........................ 4,797 2,292 -- 3,229(2) 3,860
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts:
Royalty accounts and notes
receivable........................ 9,828 6,352 -- 3,826(2) 12,354
Marketing and reservation accounts
receivable........................ 3,860 3,825 -- 827(2) 6,858
</TABLE>
- ------------
(1) Allowance for doubtful accounts recorded as a result of the purchase of
all the outstanding stock of the company that owned the Super 8 Motel
System.
(2) Uncollectible accounts written off, net of recoveries.
4
<PAGE>
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, filed on March 31,
1996. The following exhibit is by this amendment, added thereto:
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------
23.1 CONSENT OF DELOITTE & TOUCHE LLP
See Exhibit Index commencing on page E-1 hereof for a listing of exhibits
previously filed with or incorporated by referecence into the Registrants
1995 Form 10-K.
ITEM 14(B) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated December 11, 1995
reporting that on November 30, 1995, the Company and Compleat Resource Group,
Inc. ("CRG"), a subsidiary of Insignia Financial Group, Inc. ("Insignia"),
entered into a Purchasing Services Agreement, pursuant to which the Company
and CRG will jointly develop preferred vendor programs for marketing products
and services to members of associations established by CRG consisting of
tenants of the apartment units managed by Insignia and its affiliates, as
well as properties owned or managed by other property management companies,
and which may also include other groups of entities with which Insignia or
its affiliates has relationships. In addition, on November 30, 1995, the
Company and Insignia entered into a Stock Purchase Agreement pursuant to
which, on December 6, 1995, the Company purchased 1,000,000 shares of common
stock of Insignia, at a price of approximately $13.938 per share (after
adjustment for a two-for-one stock split effected by Insignia in 1996). Such
common stock is subject to restrictions on transfer while the Purchasing
Services Agreement remains in effect, after which the Company will have
certain registration rights pursuant to the Registration Rights Agreement
dated as of November 30, 1995, between the Company and Insignia.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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/ Henry R. Silverman
-------------------------------
Henry R. Silverman
Chairman of the Board and
Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ------------------------------------- -----------------
<S> <C> <C>
/s/ Henry R. Silverman Chairman of the Board, Chief March 26, 1997
-------------------------- Executive Officer and Director
Henry R. Silverman (Principal Executive Officer)
/s/ Michael P. Monaco Vice Chairman and Chief Financial March 26, 1997
-------------------------- Officer (Principal Financial
Michael P. Monaco Officer and Principal Accounting
Officer)
Vice Chairman
--------------------------
Stephen P. Holmes
Vice Chairman, President, Chief
-------------------------- Operating Officer and Director
John D. Snodgrass
/s/ James E. Buckman Executive Vice President and General March 26, 1997
-------------------------- Counsel and Director
James E. Buckman
Director
--------------------------
Martin L. Edelman
/s/ Robert E. Nederlander Director March 26, 1997
--------------------------
Robert E. Nederlander
/s/ E. John Rosenwald, Jr. Director March 26, 1997
--------------------------
E. John Rosenwald, Jr.
Director
--------------------------
Robert W. Pittman
/s/ Leonard Schutzman Director March 26, 1997
--------------------------
Leonard Schutzman
/s/ Robert F. Smith Director March 26, 1997
--------------------------
Robert F. Smith
Director
--------------------------
Christel DeHaan
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in
Registration Statements Nos. 33-56354, 33-70632, 33-72752, 33-83956, 33-94756,
333-06733, 333-03532, and 333-06939 of HFS Incorporated (the "Company") on
Form S-8 and Registration Statements No. 333-11029, 333-11031, and 333-17453
of the Company on Form S-3 of our report dated February 22, 1996
(November 12, 1996 as to Note 17) related to the consolidated financial
position of HFS Incorporated and subsidiaries at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995.
Deloitte & Touche LLP
Parsippany, New Jersey
March 21, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
#############################################################################
GRAPHIC OMITTED
IGT: "Deloitte & Touche LLP"
#############################################################################
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF HFS INCORPORATED:
We have audited the accompanying consolidated balance sheets of HFS
Incorporated (formerly Hospitality Franchise Systems, Inc.) and its
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also included
the financial statement schedules listed in the Index at Item 14(a)(2). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of HFS
Incorporated and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 22, 1996 (November 12, 1996 as to Note 17)
F-1
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 16,109 $ 5,956
Royalty accounts and notes receivable, net of allowance for
doubtful accounts of $12,354 and $9,828............................ 37,326 21,665
Marketing and reservation receivables, net of allowance for
doubtful accounts of $6,858 and $3,860............................. 22,297 19,988
Relocation receivables.............................................. 51,180 --
Other current assets................................................ 21,304 15,602
Deferred income taxes............................................... 20,200 13,200
------------ ----------
TOTAL CURRENT ASSETS................................................ 168,416 76,411
Property and equipment--net......................................... 67,892 37,813
Franchise agreements--net of accumulated amortization of $65,905
and $49,250........................................................ 517,218 495,026
Excess of cost over fair value of net assets acquired--net of
accumulated amortization of $13,352 and $7,222 .................... 356,754 149,295
Other assets........................................................ 55,528 15,552
------------ ----------
TOTAL ASSETS........................................................ $1,165,808 $774,097
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other.......................................... $ 73,724 $ 44,024
Income taxes payable................................................ 38,640 24,406
Accrued acquisition obligations .................................... 10,276 --
Current portion of long-term debt................................... 2,249 1,597
------------ ----------
TOTAL CURRENT LIABILITIES........................................... 124,889 70,027
Long-term debt...................................................... 300,778 347,416
Other liabilities................................................... 17,150 4,185
Deferred income taxes............................................... 82,800 71,900
Commitments and contingencies (Note 8) .............................
Series A Adjustable Rate Preferred Stock of Century 21 ............. 80,000 --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value--authorized 10,000,000 shares;
none issued and outstanding........................................ -- --
Common stock, $.01 par value--authorized 300,000,000 shares; issued
and outstanding, 102,538,756 and 92,600,160 shares................. 1,025 926
Additional paid-in capital.......................................... 475,562 275,769
Retained earnings................................................... 83,604 3,874
Treasury Stock, at cost ............................................ -- --
------------ ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 560,191 280,569
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $1,165,808 $774,097
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Franchise........................................ $361,238 $283,244 $245,189
Other............................................ 51,745 29,303 11,881
---------- ---------- ----------
TOTAL REVENUE.................................... 412,983 312,547 257,070
---------- ---------- ----------
EXPENSES
Marketing and reservation........................ 143,965 130,268 116,700
Selling, general and administrative.............. 74,449 46,018 40,315
Depreciation and amortization.................... 30,857 23,723 19,153
Interest......................................... 21,789 18,685 20,234
Other ........................................... 7,018 3,210 --
---------- ---------- ----------
TOTAL EXPENSES................................... 278,078 221,904 196,402
---------- ---------- ----------
Income before income taxes and
extraordinary loss.............................. 134,905 90,643 60,668
Provision for income taxes....................... 55,175 37,154 26,345
---------- ---------- ----------
Income before extraordinary loss................. 79,730 53,489 34,323
Extraordinary loss, net of tax benefit of
$8,775.......................................... -- -- 12,845
---------- ---------- ----------
NET INCOME....................................... $ 79,730 $ 53,489 $ 21,478
========== ========== ==========
PER SHARE INFORMATION (PRIMARY)
Income before extraordinary loss................ $ .74 $ .53 $ .35
Extraordinary loss.............................. -- -- .13
---------- ---------- ----------
Net income...................................... $ .74 $ .53 $ .22
========== ========== ==========
Weighted average common and common equivalent
shares outstanding............................. 113,817 100,874 98,920
========== ========== ==========
PER SHARE INFORMATION (FULLY DILUTED)
Income before extraordinary loss................ $ .73 $ .53 $ .34
Extraordinary loss.............................. -- -- .13
---------- ---------- ----------
Net income...................................... $ .73 $ .53 $ .21
---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding............................. 115,654 100,874 100,228
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 .... 85,502 $ 855 $217,022 $ 8,682 $226,559
Issuance of common stock .... 2,000 20 15,138 -- 15,158
Exercise of stock options ... 718 7 2,057 -- 2,064
Tax benefit from exercise of
stock options............... -- -- 2,150 -- 2,150
Net income................... -- -- -- 21,478 21,478
--------- -------- ------------ ---------- ----------
Balance, December 31, 1993 .. 88,220 882 236,367 30,160 267,409
Issuance of common stock .... 4,140 42 55,900 -- 55,942
Exercise of stock options ... 240 2 945 -- 947
Tax benefit from exercise of
stock options............... -- -- 1,002 -- 1,002
Distribution of Chartwell
Leisure Inc. ............... -- -- (18,445) (79,775) (98,220)
Net income................... -- -- -- 53,489 53,489
--------- -------- ------------ ---------- ----------
Balance, December 31, 1994 .. 92,600 926 275,769 3,874 280,569
Issuance of common stock .... 8,341 83 178,240 -- 178,323
Exercise of stock options ... 605 6 3,415 -- 3,421
Tax benefit from exercise of
stock options............... -- -- 3,237 -- 3,237
Exercise of stock warrants .. 991 10 14,872 -- 14,882
Conversion of 4 1/2% Notes .. 2 -- 29 -- 29
Net income................... -- -- -- 79,730 79,730
--------- -------- ------------ ---------- ----------
Balance, December 31, 1995 .. 102,539 $1,025 $475,562 $ 83,604 $560,191
========= ======== ============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 79,730 $ 53,489 $ 21,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, including amortization
of deferred financing costs.......................... 32,097 24,506 21,901
Provision for bad debt expense ....................... 10,177 6,262 6,501
Deferred income taxes................................. 9,100 8,300 15,817
Deferred rent......................................... (348) (285) (298)
Deferred financing costs.............................. (192) (3,322) (11,017)
Extraordinary loss.................................... -- -- 21,620
Gain on sale of securities............................ -- (1,044) --
Increase (decrease) from changes in:
Royalty accounts and notes receivable................ (5,373) (8,633) 720
Marketing and reservation receivables................ (6,134) (5,195) (2,678)
Relocation receivables............................... (5,984) -- --
Other assets......................................... (4,679) (5,301) (2,590)
Accounts payable and other........................... (5,093) (2,242) (8,933)
Income taxes payable................................. 17,471 23,541 6,276
Other liabilities.................................... (1,397) (1,000) (1,125)
----------- ----------- -----------
Net cash provided by operating activities............... 119,375 89,076 67,672
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of land and building........................... (14,311) -- --
Other property and equipment additions.................. (10,212) (11,377) (8,280)
Proceeds from sale of assets............................ -- 4,697 --
Loans and investments .................................. (33,783) (42,524) (20,207)
Principal payments received on loans.................... -- 341 4,017
Net assets acqired, excluisve of cash acquired ......... (70,647) -- (126,098)
----------- ----------- -----------
Net cash used in investing activities................... (128,953) (48,863) (150,568)
----------- ----------- -----------
FINANCING ACTIVITIES
Principal payments--long-term debt...................... (46,954) (152,131) (671,650)
Issuance of common stock................................ 51,808 933 1,892
Redemption of warrants.................................. 14,877 -- --
Cash distribution to Chartwell Leisure Inc. ........... -- (50,000) --
Proceeds from borrowings................................ -- 150,000 744,524
Purchase of treasury stock ............................. -- -- --
Redemption of Series A Preferred Stock ................. -- -- --
Net cash provided by (used in) financing activities .... (19,731) (51,198) 74,766
----------- ----------- -----------
Net increase (decrease) in cash and cash eqluivalents .. 10,153 (10,985) (8,130)
Cash and cash equivalents, beginning of period ......... 5,956 16,941 25,071
----------- ----------- -----------
Cash and cash equivalents, end of period................ $ 16,109 $ 5,956 $ 16,941
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $ 19,161 $ 16,788 $ 17,764
----------- ----------- -----------
Taxes................................................. $ 28,139 $ 5,313 $ 1,198
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS -- HFS Incorporated (together with its
subsidiaries, the "Company"), formerly Hospitality Franchise Systems, Inc.,
engages in the business of franchising guest lodging facilities (lodging
segment) and residential real estate brokerage offices (real estate segment)
and provides operational and administrative services to its franchisees under
the names CENTURY 21(Registered Trademark), Days Inn(Registered Trademark),
Electronic Realty Associates(Registered Trademark) (ERA(Registered
Trademark)), Howard Johnson(Registered Trademark), Knights Inn(Registered
Trademark), Ramada(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) and Villager Lodge(Registered Trademark)
("Villager"). The Company also sublicenses its trademarks and provides access
to its franchisees and their customers to preferred vendors who provide
value-added services to the Company's franchisees.
B. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts and transactions of the Company together with its 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.
C. RELOCATION RECEIVABLES -- The Company provides relocation services to
client corporations which include responsibility for the sale of a
transferee's residence, providing equity advances on transferee residences
for the purchase of a new home and certain home management services. Advances
provided to transferees are repaid to the Company when the transferee's home
is resold. Such advances have a variable interest rate and are guaranteed by
the client corporation.
D. PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed by the straight-line
method over the estimated useful life of the related asset or the lease term,
if shorter. Interest costs associated with the purchase of a centralized
reservation system approximating $82,000, $246,000 and $440,000 in 1995, 1994
and 1993, respectively, were capitalized and are being amortized over the
estimated useful life of the related asset. The Company periodically
evaluates the recoverability of property and equipment by comparing the
carrying value to current and expected cash flows seperately for each
business segment in which the property and equipment is employed.
E. FRANCHISE AGREEMENTS -- Franchise agreements are recorded at their
estimated fair values at the date acquired and amortized over the estimated
period to be benefited ranging from 22 to 40 years using the straight-line
method. The Company periodically evaluates the recoverability of franchise
agreements by comparing the carrying value to current and expected future
cash flows on a separate basis for each franchise brand.
F. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED -- The excess of
cost over fair value of net assets acquired is being amortized on a
straight-line basis over the estimated useful lives, ranging from 20 to 40
years. The Company periodically evaluates the recoverability of excess of
cost over fair value of net assets acquired by comparing the carrying value
to current and expected future cash flows on a separate basis for each
acquisition.
G. FRANCHISE ACQUISITION COSTS -- The Company expenses direct costs
relating to franchise sales on the date the property opens. These costs are
included in selling, general and administrative expenses.
H. OTHER DEFERRED COSTS -- Deferred financing costs are amortized over the
life of the related debt using the interest method.
F-6
<PAGE>
I. REVENUE RECOGNITION -- Franchise revenue consists of royalty,
marketing and reservation fees which are based on a percentage of franchised
lodging properties' gross room sales and franchised real estate brokerage
offices' gross commissions earned on sales of real estate properties.
Franchise fees are accrued as the underlying franchisee revenue is earned.
Initial fees included in franchise fees are recorded as revenue when the
lodging property or real estate brokerage office opens as a franchised unit.
Other revenue primarily consists of revenue generated from: agreements
(recognized as earned) that provide preferred vendors (vendors who provide
value-added services to the Company's franchisees) access to the Company's
franchisees and their customers; relocation services provided to client
corporations; and marketing and other services provided to casino gaming
facilities.
Other revenue consists of ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Preferred vendor and license
fees............................. $20,881 $13,901 $ 6,483
Relocation services............... 8,204 -- --
Gaming services................... 13,431 8,509 434
Other............................. 9,229 6,893 4,964
--------- --------- --------
Other revenue..................... $51,745 $29,303 $11,881
========= ========= ========
</TABLE>
J. INCOME TAXES -- The Company uses the liability method of recording
deferred income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of assets
acquired in business combinations accounted for as purchases and their tax
bases. The Company and its subsidiaries file a consolidated Federal income
tax return.
K. CASH AND CASH EQUIVALENTS -- The Company considers highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The carrying value of cash and cash equivalents
approximates fair value because of their short-term maturities.
L. SHARE INFORMATION -- Earnings per share are based upon the weighted
average number of common and common equivalent shares outstanding during the
respective periods. The $150 million 4 1/2% Convertible Senior Notes issued
in October 1994 are anti-dilutive for the year ended December 31, 1994, and
accordingly are not included in the computation of earnings per share for
1994. On November 17, 1995, the Company's Board of Directors authorized a
two-for-one stock split which was effected in the form of a 100% stock
dividend on February 14, 1996 to stockholders of record on January 30, 1996.
In February 1994, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend in April 1994. All
share, per share, stock price and stock option plan information presented
herein has been retroactively adjusted to reflect the stock splits.
M. USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
N. RECLASSIFICATIONS -- Certain reclassifications have been made to the
1994 and 1993 consolidated financial statements to conform with
classifications used in 1995.
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 in 1995 have been included in the Company's
consolidated results since the respective dates of acquisition.
COMPLETED IN 1995
A. CENTURY 21 -- On August 1, 1995, a majority owned Company subsidiary,
C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21") from Metropolitan Life
F-7
<PAGE>
Insurance Company ("MetLife"). Aggregate consideration for the acquisition
consisted of $245 million plus expenses, including an initial cash payment of
$70.2 million, 4 million shares of the Company's common stock valued at $65
million, the assumption of $80 million of Century 21 redeemable preferred
stock issued to MetLife prior to the acquisition and subsequently redeemed on
February 28, 1996 and a $30 million contingent payment also made on February
28, 1996. The preferred stock dividend paid by the Company in 1995 in
connection with the Century 21 redeemable preferred stock was $1.7 million
and is included as interest expense in the consolidated statement of income
for the year ended December 31, 1995. Excess of cost over fair value of net
assets acquired recorded in connection with the acquisition of Century 21 was
$140.0 million. A management group including Holding's chief executive
officer, who is also a director of the Company, owns 12.5% of Holding's
common stock. The chief executive officer and two management group executives
entered into renewable employment agreements with the Company with initial
terms that commenced on November 1, 1995 and expire on December 31, 1997. The
Company has a call option to purchase Holding common stock owned by the
management group after January 1, 1998 for the fair market value of such
stock when and if the option is exercised. The management group has a put
option to require the Company to purchase all their Holding common stock
after January 1, 1998 at fair market value.
The Company and certain stockholders sold approximately 6.4 million common
shares pursuant to a public offering on September 19, 1995 ("Offering").
Included in the Offering were 4 million shares issued to MetLife ("MetLife
Shares") as partial consideration for the acquisition of Century 21. In
accordance with the Century 21 acquisition agreements, the Company received
$28.9 million representing proceeds from the sale of the MetLife Shares in
excess of a $17.50 per share cap, net of certain expenses of the Offering. In
connection with the Offering, the Company also received $20.1 million of
proceeds, net of certain expenses of the Offering, from the sale of 835,800
shares issued upon the exercise of an underwriter over-allotment option. Net
proceeds from the Offering received by the Company resulted in corresponding
increases in stockholders' equity.
The Company has recorded liabilities for charges to be incurred in
connection with the restructuring of acquired Century 21 operations. This
acquisition was consummated in 1995 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 December 31, 1995 the
Company was in the process of transitioning operations and expects to
complete the restructuring late in 1996.
<TABLE>
<CAPTION>
CENTURY 21
<S> <C>
Personnel related .. $10,550
Facility related .... 13,000
Other costs.......... 450
------------
Total................ $24,000
============
Terminated
employees........... 319
</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. During 1995, approximately $16,260,000
was paid and charged against the restructuring liability.
B. KNIGHTS INN -- On August 31, 1995, the Company acquired the assets
comprising the Knights Inn hotel franchise system, an economy hotel franchise
system, for approximately $15 million plus expenses.
C. CENTRAL CREDIT, INC. -- On May 11, 1995, the Company acquired by merger
(the "CCI Merger") Casino & Credit Services, Inc.'s ("CACS") gambling patron
credit information business, Central Credit, Inc. ("CCI"). The Company
acquired all of the common stock of CACS for approximately $38 million by
issuing approximately 2.4 million shares of the Company's common stock and
warrants to acquire up to approximately 1.0 million additional shares of the
Company's common stock. The exercise
F-8
<PAGE>
price for the warrants range from 28.56 to 39.27 per share. The range of
exercise price is a result of the various exercise prices of the underlying
warrants which were issued at various dates and prices. Prior to the
acquisition, CACS distributed to its shareholders all net assets not related
to the gambling patron credit information business.
In connection with the acquisitions completed in 1995, the Company
acquired the following net assets ($000's):
<TABLE>
<CAPTION>
CENTURY 21 OTHER TOTAL
------------ ---------- -----------
<S> <C> <C> <C>
Current assets........................................ 40,945 1,917 72,862
Franchise agreements.................................. 33,500 5,175 38,675
Excess of cost over fair value of net assets
acquired............................................. 140,000 45,449 185,449
Other................................................. 5,442 8,500 13,942
Accounts payable and other............................ (15,399) (6,317) (21,716)
Accrued acquisition obligations....................... (24,000) -- (24,000)
Deferred rent and other............................... (9,364) (3,400) (12,764)
------------ ---------- -----------
Fair value of net assets acquired..................... 201,124 51,324 252,448
Assumption of preferred stock......................... (80,000) -- (80,000)
Common stock issued................................... (65,000) (36,801) (101,801)
------------ ---------- -----------
Cash paid, net of cash acquired....................... 56,124 14,523 70,647
============ ========== ===========
</TABLE>
COMPLETED IN 1996 OR PENDING
D. TRAVELODGE -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge(Registered Trademark) service marks, and
franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3 million.
Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge and Ramada franchise agreements for nineteen and one acquired
motels, respectively. The Company financed $10 million of MOA's purchase
price under a $10 million revolving credit facility, bearing interest at 14%
per annum. The loan is guaranteed by a parent company of MOA and secured by
approximately 80% of MOA's outstanding common stock.
In addition, 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") (See Note
9), purchased all of the capital stock of FHI for $98.4 million. FHI owns or
has an interest in 112 hotel and motel properties. 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 to be paid a guarantee fee of 2% per annum of the
outstanding guarantee commitment by the Company pursuant to a financing
agreement entered into between CHRT and the Company at the Distribution Date
(the "Financing Agreement"). The Financing Agreement was modified to allow
the Company to provide credit enhancements for hotel industry investments.
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 of approximately $2 million in connection with CHRT's
acquisition of FHI.
E. ERA -- On February 12, 1996, the Company purchased the assets
comprising the Electronic Realty Associates residential real estate brokerage
franchise system for approximately $36.8 million, subject to certain working
capital adjustments. The Company has also entered into an agreement to
purchase the ERA affiliates which conduct the ERA home warranty business in
eight states for $9.2 million, subject to certain working capital
adjustments. The purchase of these affiliates is subject to the approval of
certain state insurance authorities and is expected to be completed during
the second quarter of 1996.
F-9
<PAGE>
F. 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.
PRO FORMA INFORMATION
The following information reflects the pro forma consolidated results of
operations for the years ended December 31, 1995 and 1994 assuming the
following occurred on January 1, 1994: the distribution of CHRT; the
acquisitions of Century 21, the CENTURY 21 NORS, and the Travelodge and ERA
franchise systems; the CCI Merger and the proceeds from the issuance of the
convertible senior notes issued February 22, 1996 (See Note 6) to the extent
such proceeds were used to finance acquisitions. The acquisitions have been
accounted for using the purchase method of accounting. Accordingly, assets
acquired and liabilities assumed will be recorded at their estimated fair
values, which are subject to further refinement, based upon appraisals and
other analyses with appropriate recognition given to the effect of current
interest rates and income taxes. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
transactions been consummated as indicated nor are they intended to indicate
results that may occur in the future. The pro forma results of operations
include the amortization expense associated with assets acquired, the
reflection of the Company's financing arrangements, the elimination of
redundant costs and the related income tax effects. The effect of the
acquisitions of the Knights Inn and Villager (acquired November 4, 1994)
hotel franchise systems are not included as they are not material to the
operating results of the Company.
<TABLE>
<CAPTION>
PRO FORMA
(In thousands, except per share amounts): (UNAUDITED)
----------------------
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenue.............................................. $573,021 $542,675
Income before income taxes........................... 130,306 100,169
Net income........................................... 76,264 58,071
---------- ----------
Net income per share (fully diluted)................. $ .68 $ .50
---------- ----------
Weighted average common and common equivalent shares
outstanding......................................... 119,359 116,616
---------- ----------
</TABLE>
In connection with its acquisitions, HFS developed related business plans
to restructure each of the respective acquired companies, which may result in
future cost savings subsequent to the acquisitions. HFS's restructuring plans
in each case were developed prior to the consummation of the respective
acquisitions and were implemented concurrent with the consummation of the
acquisitions. Restructuring plans included the involuntary termination and
relocation of employees, the consolidation and closing of facilities and the
elimination of duplicative operating and overhead activities. Pursuant to
HFS's specific restructuring plans, certain selling, general and
administrative expenses may not be incurred subsequent to each acquisition
that existed prior to consummation. In addition, there are incremental costs
in the conduct of activities of the acquired companies prior to the
acquisitions that may not be incurred subsequent to consummation and have no
future economic benefit to HFS. The estimated cost savings that HFS believes
would have been attained had its acquisitions occurred on January 1, 1994 and
the related impact of such cost savings on pro forma net income and net
income per share for the years ended December 31, 1995 and 1994 are $27.9
million or $0.23 per share and $35.9 million or $0.31 per share,
respectively. Such estimated cost savings are not reflected in the pro forma
results of operations presented above.
F-10
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES ----------------------
IN YEARS 1995 1994
-------------- ---------- ----------
<S> <C> <C> <C>
Land...................................... $ 3,000 $ --
Building.................................. 30 11,311 --
Furniture and fixtures.................... 5-7 2,341 1,176
Leasehold improvements.................... 5-11 6,784 6,237
Information technology support systems ... 3 -10 55,730 33,625
Equipment under capital leases............ 7 8,293 8,293
-------------- ---------- ----------
87,459 49,331
Accumulated depreciation and
amortization............................. (19,567) (11,518)
---------- ----------
Property and equipment--net............... $ 67,892 $ 37,813
========== ==========
</TABLE>
Depreciation and amortization expense was approximately $8.1 million, $5.2
million and $3.0 million for the years ended December 31, 1995, 1994 and
1993, respectively.
4. OTHER ASSETS
Other assets consist of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Investment in Insignia
(A)....................... $13,967 $ --
Investments in AMRE (B) ... 4,136 --
Investment in Wingate (C) . 3,000 --
Loan receivable--MOA (D) .. 10,000 --
Other ..................... 24,425 15,552
--------- --------
Other assets............... $55,528 $15,552
========= ========
</TABLE>
A. In connection with a strategic preferred vendor alliance with a
subsidiary of Insignia Financial Group, Inc. ("Insignia"), on December 1,
1995 the Company purchased 1.0 million shares of Insignia common stock,
representing approximately 4% of the outstanding common stock, for $14.0
million. The sale of such shares by the Company is subject to certain
contractual restrictions. The investment is recorded at cost. Fair value at
December 31, 1995, determined based on quoted market prices, was
approximately $19.2 million.
B. On October 17, 1995, the Company entered into an agreement to license
the CENTURY 21 trademark to AMRE, Inc. ("AMRE") in connection with the
selling and installation of home improvement products. The license agreement
commenced on January 1, 1996, expires on December 31, 2015 and is cancelable
at AMRE's option on December 31, 2005. License fees are payable quarterly
based on the greater of 3% of AMRE's contract revenue or minimum fees ranging
from $11.0 million in 1996 to $27.9 million in 2005 and increases based on
increases in certain economic factors, thereafter.
The Company also acquired 300,000 shares of AMRE's convertible preferred
stock for $3.0 million on October 17, 1995. The preferred stock, which is
accounted for at cost, has a stated cumulative dividend rate of 8%, is
convertible by the Company into AMRE common stock at $5.90 per share at any
time and is subject to mandatory redemption by AMRE on January 1, 2000. In
December 1995, the Company acquired 87,000 shares of AMRE common stock for
approximately $1.1 million, representing less than 1% of AMRE outstanding
common stock. The investment in AMRE common stock is classified as an
available for sale security and the fair value approximates the carrying
value at December 31, 1995. The fair value of the combined AMRE investments
at December 31, 1995, determined based on quoted market prices of the AMRE
common stock, was approximately $8.7 million.
The Company also provided AMRE with a revolving credit facility of up to
$4 million of borrowings at LIBOR plus 1.5% through 1998. There were no
borrowings under the facility at December 31, 1995.
F-11
<PAGE>
C. On March 31, 1995, the Company acquired a 1% general partnership
interest for approximately $3 million in a limited partnership which
develops, promotes and franchises the recently established Wingate InnSM
franchise system, a new construction hotel brand. Through December 31, 1995,
$15 million of capital was invested in the partnership through a private
placement of limited partner unit interests. The Company has an option to
acquire the limited partner investment at a 30% compounded annual rate of
return plus additional outstanding capital loans and an additional call
premium equal to approximately 1.5 times annual royalty revenue, as defined.
The limited partners may require the Company to acquire the limited partner
interest on August 29, 2001. The Company also agreed to finance additional
limited partner capital contributions up to $60 million at the prime lending
rate, upon the occurrence of certain events, including the addition of open
and operating Wingate Inn properties. Due to limitations on the general
partner's ability to enter into certain significant transactions, the Company
does not control the limited partnership and accounts for its investment on
the equity method.
D. On March 31, 1995, the Company made a $10 million loan to MOA's parent
company, New Image Realty Inc., bearing interest at 12% payable quarterly.
The loan, as amended, is secured by MOA common stock and matures on March 31,
1998.
5. ACCOUNTS PAYABLE AND OTHER
Accounts payable and other consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Accounts payable.................................. $ 6,887 $ 4,864
Marketing and reservation liabilities............. 12,508 10,159
Unearned franchise fees and other revenue ........ 16,733 9,903
License restructuring and acquisition
obligations...................................... 10,276 5,732
Accrued payroll and related....................... 11,809 8,724
Accrued broker incentive bonus.................... 4,738 --
Relocation home purchase liabilities.............. 6,099 --
Other............................................. 14,950 4,642
--------- --------
Accounts payable and other........................ $84,000 $44,024
========= ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Revolving Credit Facility (A)..................... $ -- $ 45,000
5 7/8% Senior Notes (B)........................... 149,715 149,619
4 1/2% Convertible Senior Notes (C)............... 149,971 150,000
Obligations under capital leases and other loans 3,341 4,394
---------- ---------
303,027 349,013
Less current portion.............................. 2,249 1,597
---------- ---------
Long-term debt.................................... $300,778 $347,416
========== =========
</TABLE>
A. REVOLVING CREDIT FACILITY -- The Company's revolving credit facility
("Revolving Credit Facility") provides up to a maximum of $300 million and
$200 million of unsecured borrowings through December 1996 and 1997,
respectively. The Revolving Credit Facility shall, at the Company's option,
bear interest based on competitive bids of lenders participating in the
facility, the administrative agent's prime rate or LIBOR plus a margin not to
exceed 0.63%. The Company is required to pay a $150,000 annual administration
fee and a quarterly facility fee ranging between 0.19% and 0.38% of the
available facility. The Revolving Credit Facility contains covenants
including restrictions on dividends and indebtedness, sale and lease back
transactions, maintenance of minimum net worth and interest coverage ratios.
The Revolving Credit Facility had an average interest rate of approximately
6.23% at December 31, 1994. Based upon the Company's published credit rating
and the Revolving Credit Facility's variable interest rate, the carrying
value of borrowings under the Revolving Credit Facility at December 31, 1994
approximated fair value.
F-12
<PAGE>
B. 5 7/8% SENIOR NOTES -- On December 16, 1993, the Company completed a
public offering of $150 million unsecured 5 7/8% Senior Notes due December
15, 1998 ("Senior Notes"). Interest is payable semi-annually. An original
issue discount approximating $478,000 was recorded at the date of issuance
and is being amortized over the life of the issue using the interest method.
The unamortized balance at December 31, 1995 and 1994 was $285,000 and
$381,000, respectively. Based on quoted market prices, the fair value of the
Senior Notes was approximately $150 million and $137 million at December 31,
1995 and 1994, respectively.
C. 4 1/2% CONVERTIBLE SENIOR NOTES -- On October 5, 1994, the Company
completed a public offering of Convertible Senior Notes ("4 1/2% Notes") due
1999, which are convertible at the option of the holders at any time prior to
maturity into 55.106 shares of the Company's common stock per $1,000
principal amount of the 4 1/2% Notes, representing a conversion price of
$18.15 per share. The 4 1/2% Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 1997 at a
redemption price of 101.125% of principal if redeemed prior to September 30,
1998 or at 100% of principal any time thereafter until maturity. Interest is
payable semi-annually. Based on quoted market prices, the fair value of the
4 1/2% Notes was approximately $250 million and $143 million at December 31,
1995 and 1994, respectively.
Long-term debt payments including obligations under capital leases at
December 31, 1995 are due as follows ($000's):
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------- ---------
<S> <C>
1996................. $ 2,249
1997................. 981
1998................. 149,826
1999................. 149,971
---------
303,027
Less current
portion............. 2,249
---------
Long-term debt....... $300,778
=========
</TABLE>
DEBT REFINANCINGS -- On December 16, 1993, the Company refinanced its then
senior secured credit facility through a public offering of the Senior Notes
and a Revolving Credit Facility as described above. The senior secured
facility financed the April 29, 1993 acquisition of the Super 8 franchise
system and refinanced a similar existing facility. As a result of the
December 16, 1993 and April 29, 1993 refinancings of existing debt,
approximately $4.4 million and $8.4 million (net of tax), respectively, of
deferred financing costs were written off and classified as extraordinary
losses due to early extinguishment of debt.
ISSUANCE OF 4 3/4% CONVERTIBLE SENIOR NOTES -- On February 22, 1996, the
Company completed a public offering of $240 million unsecured 4 3/4%
convertible senior notes ("4 3/4% Notes") due 2003, which are convertible at
the option of the holder at any time prior to maturity into 14.993 shares of
the Company's common stock per $1,000 principal amount of the 4 3/4% Notes,
representing a conversion price of $66.70 per share. The 4 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However, on
or after March 3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not
be redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $93.38 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within
a period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4 3/4% Notes is payable semi-annually commencing
September 1, 1996.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair
F-13
<PAGE>
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgement is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on estimated fair value.
The table below provides carrying value and fair value amounts and
a cross reference to the applicable Note ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR FAIR VALUE
VALUE VALUE VALUE VALUE REFERENCE
---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivialents.............. $ 16,109 $ 16,109 $ 5,956 $ 5,956 Note 1
Other assets............... 31,103 40,959 -- -- Note 4
Long-term debt ............ 303,027 403,341 349,013 329,394 Note 6
---------- --------- ---------- --------- ------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
A. NEW WORLD LICENSE -- The Company acquired, in 1990, the U.S. Ramada
franchise agreements and the rights to sub-license the Ramada trademarks to
U.S. lodging facilities under a 40-year, extendable license agreement with
the licensor of the trademarks, New World (USA) Inc. ("New World"), that
governs the use of the Ramada trademark domestically. The original license
agreement contained covenants, including the maintenance of quality
standards, minimum system-wide room sales, and minimum net worth of the
seller in the aforementioned acquisition.
In September 1990, Prime Hospitality, Inc. ("Prime"), the seller of the
domestic Ramada franchise system filed for protection under Chapter 11 of the
United States Bankruptcy Code. In July 1991, the Company entered into a
restructuring agreement with New World to, among other things, obtain the
ability to assign the license and eliminate the existing minimum net worth
requirement. In connection with this restructuring, the Company paid to New
World $3.7 million, including $2.5 million relating to payments made prior to
the date of the agreement by New World on behalf of Prime. In addition, the
Company agreed to assume certain additional obligations owed by Prime to New
World, which have been recorded at an estimated value of $10.5 million. The
payment to New World and the value of the assumed obligations have been
reflected as excess of cost over fair value of net assets acquired.
Effective August 4, 1992, New World and Prime reached a settlement which
resulted in a benefit available of $1.5 million per year through 2003 plus
$13.0 million in 2004 to reimburse the Company for advances made and to be
made by the Company pursuant to the restructuring agreement. At December 31,
1995 the Company had made advances of $14.0 million and contingencies of $5.5
million related to litigation, which are repaid at the rate of $375,000 per
quarter and is included in other income. Any additional advances, up to the
aggregate benefit described above, will be repaid in the same manner.
The license agreement, as modified, contains covenants, including
maintenance of quality standards, minimum system-wide room sales and minimum
net worth. Under the license agreement, royalty payments, subject to certain
minimums, are calculated based on a percentage of Ramada system-wide gross
room sales and are due quarterly in advance. Included in other current assets
as prepaid license fees are $4.4 million and $4.3 million as of December 31,
1995 and 1994, respectively.
B. LEASES -- The Company has noncancelable operating leases covering
various equipment and facilities, which expire through 2004. Rental expense
for the years ended December 31, 1995, 1994 and 1993 approximated $5.0
million, $3.8 million and $3.2 million respectively, excluding real estate
taxes and other fees that are also the responsibility of the Company.
F-14
<PAGE>
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
- ---------------------------------
<S> <C>
1996.............................. $ 4,215
1997.............................. 3,240
1998.............................. 3,170
1999.............................. 2,863
2000.............................. 2,870
Remaining years................... 7,346
--------
Total minimum lease payments ..... $23,704
========
</TABLE>
The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.
C. EMPLOYMENT AGREEMENTS -- The Company has employment agreements with
certain employees for remaining terms of one to five years. Annual
commitments under these agreements are as follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
- ---------------------------------
<S> <C>
1996.............................. $ 7,903
1997.............................. 6,707
1998.............................. 2,105
1999.............................. 1,541
2000.............................. 1,541
--------
Total employment agreements ...... $19,797
========
</TABLE>
Most of these agreements provide for severance pay should the employee be
terminated without cause.
D. LITIGATION -- In the normal course of business, certain litigation is
initiated against the Company. Generally, these claims are insured and, in
the opinion of management, disposition of such litigation will not have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operation.
9. RELATED PARTY
In November 1994, the Company distributed all of the capital stock of its
wholly owned subsidiary, CHRT, to its shareholders ("Distribution"). Prior to
the Distribution, CHRT engaged in the development and ownership of casino
gaming facilities. The Company retained its casino services business. The
Company distributed $98.2 million of net gaming assets, including $50 million
cash and $48.2 million of gaming loans and investments in connection with the
Distribution. In connection with the Distribution, the Company and CHRT
entered into agreements pursuant to which marketing, advisory, financing and
corporate services were to be provided by the Company. Concurrent with the
acquisition of the Travelodge franchise system and CHRT's acquisition of FHI
(See Note 2), the marketing and advisory agreements were terminated and the
Financing Agreement was modified such that the Company is to provide up to
$75 million of credit enhancements to CHRT's non-gaming industry financings
for a fee of 2% per annum. The corporate services agreement was modified to
provide that the Company is to provide financial, legal 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. Included in other income in 1995 and 1994 is $3.5 million and $0.4
million, respectively, of fees pursuant to the financing, corporate and
advisory service agreements.
10. STOCKHOLDERS' EQUITY
A. STOCK OPTIONS -- The Company has two stock option plans, the 1992 and
1993 Stock Option Plans, as amended, which provide for the granting of
options to certain officers and employees to
F-15
<PAGE>
purchase shares of the Company's common stock generally over ten years at
prices not less than the fair market value at the date of grant. Options
granted are exercisable from one to six years from the date of grant.
The table below summarizes the activity of the plans (000's):
<TABLE>
<CAPTION>
OPTIONS OPTION
OUTSTANDING PRICE RANGE
------------- ---------------
<S> <C> <C>
Balance at January 1, 1993 .. 9,636 $ 2.87-$4.08
Granted...................... 3,582 7.94-11.17
Cancelled.................... (32) 2.87- 4.08
Exercised.................... (718) 2.87
------------- ---------------
Balance at December 31,
1993........................ 12,468 2.87-11.17
Granted...................... 3,228 11.71-13.41
Cancelled.................... (122) 3.74- 7.94
Exercised.................... (240) 3.13- 7.94
Distribution of NLC.......... 454 7.94-13.41
------------- ---------------
Balance at December 31,
1994........................ 15,788 2.87-13.41
Granted...................... 5,476 13.63-29.13
Cancelled.................... (152) 4.08-23.44
Exercised.................... (605) 3.13-12.53
------------- ---------------
BALANCE AT DECEMBER 31,
1995........................ 20,507 2.87-29.13
============= ===============
</TABLE>
Shares exercisable at December 31, 1995 and 1994 were 7,078,886 and
4,630,266 respectively. Shares available for grant at December 31, 1995 and
1994 were 35,266 and 1,249,332, respectively.
B. STOCK WARRANTS -- On December 15, 1995, the Company redeemed all
outstanding warrants in accordance with the provisions of the warrant
agreement underlying warrant obligations assumed in the CCI Merger (See Note
2). The Company received aggregate proceeds approximating $14.8 million from
the exercise of such warrants in 1995, resulting in the issuance of
approximately 1.0 million shares of Company common stock.
C. EARNOUT AGREEMENT -- On January 31, 1992, the Company acquired
substantially all of the assets comprising the franchise system of Days Inns
of America, Inc. for $275.3 million consisting of $208.3 million of cash,
$62.0 million of Company common and preferred stock and $5.0 million of
assumed liabilities. In connection with the acquisition, the Company entered
into an earnout agreement with Bryanston Group, Inc. ("Bryanston"), an
affiliate of the two controlling stockholders of the sellers of the Days Inn
franchise system which provided for the issuance of up to 7.1 million shares
of common stock based upon the cash payments of royalties and other fees from
franchised properties over a five-year period. Through December 31, 1994, 6.0
million shares were issued pursuant to the earnout agreement. In August 1995,
the Company approved the accelerated vesting of the right to receive the
remaining 1.1 million unvested shares. These shares and an additional 500,000
shares which were previously issued but not sold, were sold in a September
19, 1995 public offering. Accordingly, as of December 31, 1995, all shares
included in the earnout agreement were issued and sold. The issuance of such
shares resulted in a $28.1 million, $54.0 million and $15.3 million increase
to excess of cost over fair value of net assets acquired and a corresponding
increase to stockholders' equity during 1995, 1994 and 1993, respectively.
D. 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.
E. DIVIDENDS -- The Company expects to retain its earnings for the
development and expansion of its business and the repayment of indebtedness
and does not anticipate paying dividends on common stock in the foreseeable
future.
11. MARKETING AND RESERVATION ACTIVITIES
A. DAYS INN, HOWARD JOHNSON, KNIGHTS INN, PARK INN, SUPER 8 AND VILLAGER
- -- The Company receives monthly marketing and reservation fees, each of which
is a specified
F-16
<PAGE>
percentage of gross room sales from its Days Inn, Howard Johnson, Knights
Inn, Park Inn, Super 8 and Villager franchisees. As provided in the franchise
agreements, at the Company's discretion, all of these fees will be expended
for marketing purposes and the operation of a centralized brand-specific
reservation system and are controlled by the Company until disbursement.
Franchise revenue includes marketing and reservation fees of approximately,
$93,379,000, $86,198,000 and $77,225,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
B. RAMADA -- Ramada Inns National Association ("RINA") is an
unincorporated association representing the owners of the hotels in the
Ramada system. RINA provides a worldwide reservation system and provides
advertising, promotional services and training to Ramada franchisees. The
Company receives a combined fee for marketing and reservation activities
based on a percentage of monthly gross room revenues from members of RINA
which is controlled by the Company until disbursement. As provided in the
franchise agreement, at the Company's discretion, all of these fees will be
expended for advertising, promotional services, training and the operation of
a worldwide reservation system. Included in franchise fees are RINA fees
approximating $46,655,000, $44,352,000 and $40,017,000 for the periods ended
December 31, 1995, 1994 and 1993, respectively. Included in marketing and
reservation receivables is approximately $5,815,000 and $1,725,000 due from
RINA as of December 31, 1995 and 1994, respectively.
C. CENTURY 21 -- The Century 21 National Advertising Fund ("NAF") is an
independent entity managed by the Company, the funds of which are used
exclusively for advertising and public relations purposes for the collective
benefit of the Century 21 organization, including all Century 21 franchisees.
The NAF receives fees from Century 21 franchisees equal to 2% of their
respective gross commissions earned on sales of real estate properties,
subject to monthly minimum and maximum contributions. In addition, the
Company is required to contribute 10% of royalty fees collected from Century
21 franchisees to the NAF. The contributions are expensed by the Company when
the corresponding royalty fee is recognized. Included in marketing and
reservation expense is approximately $4.2 million representing the Company's
contribution to the NAF for the five month period ended December 31, 1995.
The NAF cash balance was $4.3 million at December 31, 1995. Such amount is
not included in the Company's consolidated financial statements.
Advertising expense approximated $58.0 million, $42.8 million and $29.7
million for the years ended December 31, 1995, 1994 and 1993, respectively.
12. INCOME TAXES
The income tax provision consists of ($000's)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
Current
Federal............................................. $41,456 $23,747 $ 1,253
State............................................... 4,619 5,107 500
--------- ----------- -----------
46,075 28,854 1,753
--------- ----------- -----------
Deferred
Federal............................................. 8,054 6,831 20,445
1% change in federal corporate tax rate............. -- -- 1,807
State............................................... 1,046 1,469 2,340
--------- ----------- -----------
9,100 8,300 24,592
--------- ----------- -----------
Provision for income taxes........................... $55,175 $37,154 $26,345
========= =========== ===========
</TABLE>
In 1993, the Company recorded (i) a $1,200,000 increase to its provision
for income taxes in connection with the remeasurement of incremental net
deferred tax liabilities recorded primarily as a result of the Super 8
acquisition and (ii) other incremental federal income taxes on 1993 income of
$607,000 resulting from the increase in the federal corporate tax rate.
F-17
<PAGE>
Net deferred income tax assets and liabilities are comprised of the
following ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Provision for doubtful accounts............................... $ 7,600 $ 5,400
Unearned franchise fees and other............................. 7,800 6,600
Acquisition related reserves.................................. 4,200 2,400
Franchise acquisition costs................................... (2,400) (2,100)
Other......................................................... 3,000 900
----------- -----------
Current net deferred tax asset................................ $ 20,200 $ 13,200
=========== ===========
Franchise agreement amortization.............................. $(73,600) $(68,300)
Other......................................................... (9,200) (3,600)
----------- -----------
Noncurrent net deferred tax liability......................... $(82,800) $(71,900)
=========== ===========
</TABLE>
The Company's effective income tax rate differs from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate........................................ 35.0% 35.0% 35.0%
State income taxes net of federal benefit..................... 4.0 4.7 4.7
Change in deferred taxes due to 1% change in federal
corporate rate............................................... -- -- 2.0
Other......................................................... 1.4 1.3 1.7
------- ------- -------
Effective tax rate ........................................... 40.4% 41.0% 43.4%
======= ======= =======
</TABLE>
13. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan in which any eligible employee
may participate. The plan is a defined contribution 401(k) plan qualified
under the Internal Revenue Code. The Company contributes an amount equal to
twenty-five to fifty percent, based on years of service, of the pre-tax
contributions made by participating employees, with respect to the first six
percent of an employee's compensation. The Company has elected to pay the
administrative expenses of the plan and the total charges to income relative
to such expenses and Company matching were approximately $405,000, $332,000
and $327,000, respectively in 1995, 1994 and 1993.
14. FRANCHISING ACTIVITIES
Revenue from franchising activities consists of initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property and
estimated real estate brokerage offices' gross closed commissions. Initial
franchise fees approximated $15,735,000, $13,816,000 and $10,609,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Franchising activity is summarized as follows:
<TABLE>
<CAPTION>
LODGING REAL ESTATE
--------- -------------
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993 1995
------- --------- ---------- -------------
<S> <C> <C> <C> <C>
FRANCHISES IN OPERATION
Units at end of year................................. 4,603 4,229 3,783(1) 5,995(2)
EXECUTED BUT NOT OPENED
Acquired............................................. 31 -- 83 104
New agreements....................................... 983 870 702 248
Backlog, end of year................................. 682 594 577 176
</TABLE>
- ------------
(1) Includes 1,010 acquired lodging franchises.
(2) Substantially all acquired as part of the acquisition of Century 21.
15. INDUSTRY SEGMENT INFORMATION
The Company's major business segments are comprised of guest lodging
facility and real estate brokerage office franchise systems. As a franchisor,
the Company licenses the owners and operators of
F-18
<PAGE>
independent businesses, principally hotels and real estate brokerage
offices, to use the Company's brand names. The Company provides its customers
with services designed to increase their revenue and profitability. These
services permit franchisees to retain independence and local control while
benefiting from the economies of scale of widely promoted brand names and
standards of service, national and regional direct marketing and co-marketing
arrangements and global procurement. Services provided to the lodging segment
include access to a national reservation system, national advertising and
promotional campaigns, co-marketing programs and volume purchasing discounts.
Services provided to the real estate segment include national and local
advertising and promotion, referrals and training and volume purchasing
discounts.
Segment information ($000's):
<TABLE>
<CAPTION>
REAL
YEAR ENDED DECEMBER 31, 1995 LODGING ESTATE CORPORATE OTHER CONSOLIDATED
- ----------------------------- ---------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenue....................... $340,919 $ 47,967 $ -- $ 24,097 $ 412,983
Operating profit.............. 125,809 19,805 -- 15,617 161,231
Corporate expenses............ -- -- (4,537) -- (4,537)
Identifiable assets........... 805,380 190,257 66,453 103,718 1,165,808
Depreciation and
amortization................. 26,058 2,997 663 1,139 30,857
Capital expenditures.......... 7,206 2,540 14,706 71 24,523
========== ========= =========== ========= ==============
</TABLE>
16. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
TOTAL
FIRST SECOND THIRD FOURTH YEAR
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995
- ------------------------------
Franchise fees................. $66,155 $85,634 $113,340 $ 96,109 $361,238
Total revenue.................. 74,153 96,329 129,249 113,252 412,983
Income before income taxes and
minority interest............. 20,440 34,304 47,105 34,721 136,570
Net income .................... 12,062 20,183 27,119 20,366 79,730
========= ========= ========== ========= ==========
Net income per share:
Primary....................... $ .12 $ .19 $ .25 $ .18 $ .74
Fully diluted................. .12 .19 .24 .18 .73
========= ========= ========== ========= ==========
1994
- ------------------------------
Franchise fees................. $57,741 $73,974 $ 86,599 $ 64,930 $283,244
Total revenue.................. 64,286 81,036 95,018 72,207 312,547
Income before income taxes .... 16,809 23,901 31,526 18,407 90,643
Net income .................... 9,918 14,102 18,601 10,868 53,489
========= ========= ========== ========= ==========
Net income per share:
Primary and fully diluted .... $ .10 $ .14 $ .18 $ .11 $ .53
========= ========= ========== ========= ==========
</TABLE>
All per share information presented has been retroactively adjusted to
reflect the stock splits discussed in Note 1 in the Notes to the Consolidated
Financial statements.
17. RECENT ACQUISITIONS
A. 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
F-19
<PAGE>
approximately $105 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 9, 1996 sale
of Company common stock in which the Company sold an aggregate 19.4 million
shares of Company common stock pursuant to a public offering (the
"Offering").
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices
("Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which the Company has no beneficial interest. The Company
recorded a $5 million expense in the second quarter of 1996 representing the
fair value of operations contributed 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.
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 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. Accordingly, the Company intends to reflect the acquired net assets
and results of operations of the Operating Company as "investment in car
rental operating company-net" and "other revenue", respectively until such
offering.
C. 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.
D. 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 ther Merger Agreement, the number of
Company shares to be issued may range from 21.3 to 28.8 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.
PRO FORMA INFORMATION
The following information reflects the pro forma results of operations of
the Company for the year ended December 31, 1995 assuming the following
transactions using the purchase method of accounting 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
F-20
<PAGE>
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 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.
Management does not expect that the final allocation of the purchase price
for the above acquisitions will differ materially from the preliminary
allocations. 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 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.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Net revenues ................................. $1,145,162
Income before income taxes.................... 272,320
Net income.................................... 159,925
Net income per share (fully diluted) ......... $ 1.14
Weighted average common and common equivalent
shares outstanding (fully diluted)........... 144,335
</TABLE>
RECENT EVENTS -- (UNAUDITED)
A. DEBT -- 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.
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 at fair market value to a date
which is approximately 90 days from the Effective Date, with fair market
value determined 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 second quarter of 1997.
F-21
