<PAGE>
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -----------------------------------------------------------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
- -----------------------------------------------------------------------------
MARCH 27, 1997 (FEBRUARY 13, 1996)
(DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED))
HFS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 1-11402 22-3059335
<S> <C> <C>
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification Number)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive) (Zip Code)
</TABLE>
(201) 428-9700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if applicable)
- -----------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K/A amends the Current Report on Form
8-K of HFS Incorporated (the "Registrant") dated February 16, 1996
for purposes of amending certain financial statements of acquired
companies.
ITEM 7. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
<S> <C>
23.2 Consent of Woolard, Krajnik & Company
23.4 Consent of White, Nelson, & Co., LLP
23.6 Consent of Tony H. Davidson, CPA
99.2 The audited financial statements, as amended and restated, of
Century 21 of Eastern Pennsylvania, Inc. (an "S" corporation) as
of April 30, 1995 and 1994 and the related statements of
operations, retained earnings and cash flows for the years
then ended.
99.4 The audited consolidated financial statements, as amended and
restated, of Century 21 Region V (Pacific Northwest and Southern
California) as of July 31, 1995 and the related statement of
operations, retained earnings and cash flows for the year
then ended.
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HFS INCORPORATED
By: /s/ Michael P. Monaco
-----------------------------------
Michael P. Monaco
Vice Chairman
and Chief Financial Officer
Date: March 26, 1997
2
<PAGE>
HOSPITALITY FRANCHISE SYSTEMS, INC.
CURRENT REPORT ON FORM 8-K
REPORT DATED MARCH 27, 1997 (FEBRUARY 13, 1996)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------ ------------
<S> <C> <C>
23.2 Consent of Woolard, Krajnik & Company
23.4 Consent of White, Nelson, & Co., LLP
23.6 Consent of Tony H. Davidson, CPA
99.2 The audited financial statements of Century 21 of
Eastern Pennsylvania, Inc. (an "S" corporation)
as of April 30, 1995 and 1994 and the related
statements of operations, retained earnings and
cash flows for the years then ended.
99.4 The audited consolidated financial statements of
Century 21 Region V (Pacific Northwest and
Southern California) as of July 31, 1995 and the
related statement of operations, retained earnings
and cash flows for the year then ended.
</TABLE>
3
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06733, 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 June 22, 1995 (except for Note 13, as to which the date is October 12,
1995) related to the financial statements of Century 21 of Eastern
Pennsylvania, Inc. as of and for the years ended April 30, 1995 and 1994.
Woolard, Krajnik & Company, LLP
Exton, Pennsylvania
March 21, 1997
4
<PAGE>
EXHIBIT 23.4
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 Registrations
Statement No. 333-11029, 333-11031, and 333-17453 of the Company on Form S-3
of our report dated January 12, 1996 related to the financial statements of
Century 21 Region V and subsidiaries as of and for the year ended July 31,
1995.
White, Nelson & Co., LLP
Anaheim, California
March 21, 1997
5
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
I consent to the incorporation by reference in Registration Statements No.
33-56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06733, and 333-06939 of
HFS Incorporated (the "Company") on Form S-8 and Registration Statement No.
333-11029, 333-11031, and 333-17453 of the Company on Form S-3 of my report
dated September 25, 1995 related to the financial statements of Century 21
Real Estate, Inc. and subsidiaries as of and for the years ended July 31,
1995, 1994, and 1993.
Tony H. Davidson, CPA
Lake Osewgo, Oregon
March 21, 1997
6
<PAGE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
Officers and Directors
Century 21 of Eastern Pennsylvania, Inc.
King of Prussia, Pennsylvania
We have audited the accompanying balance sheets of CENTURY 21 OF EASTERN
PENNSYLVANIA, INC., (an "S" corporation) as of April 30, 1995 and 1994 and
the related statements of operations and retained earnings, and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of CENTURY 21 OF
EASTERN PENNSYLVANIA, INC. as of April 30, 1995 and 1994, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 13 to the financial statements, certain errors
resulting in an overstatement of previously reported expenses as of April 30,
1995 and 1994, were discovered by management of the Company during the
current year. Accordingly, the 1995 and 1994 financial statements have been
restated to correct the error.
WOOLARD, KRAJNIK & COMPANY
Exton, Pennsylvania
June 22, 1995
(Except for Note 13,
as to which the date is
October 12, 1995)
7
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30, APRIL 30,
1995 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, unrestricted (Note 2) ........................... $ 397,329 $ 133,640 $ 121,427
Cash, restricted (Note 2) ............................. 350,868 350,868 105,854
Accounts receivable (Note 5) .......................... 150,523 153,953 179,311
Notes receivable, less allowance for bad debts of
1994--$22,499 (Note 3) ............................... 30,423 -- 3,970
Employee advances ..................................... 3,350 9,700 --
Prepaid expenses (Note 11) ............................ 37,636 48,869 30,591
------------- ----------- -----------
Total current assets ............................... 970,129 697,030 441,153
------------- ----------- -----------
Property, plant and equipment:
Furniture and fixtures ................................ 480,730 475,423 461,016
Transportation equipment .............................. 35,575 35,575 35,575
------------- ----------- -----------
516,305 510,998 496,591
Less accumulated depreciation ...................... 450,971 417,992 389,400
------------- ----------- -----------
Total property, plant and equipment ................ 65,334 93,006 107,191
------------- ----------- -----------
Other assets:
Notes receivable, less allowance for bad debts of
1995--$70,951 (Note 3) ............................... -- 1,466 --
Deposit (Note 8) ...................................... -- 21,632 40,547
Franchise cost, (net of amortization of 1995--$6,534;
1994--$6,190) ........................................ -- -- 344
Other assets .......................................... 2,718 -- --
------------- ----------- -----------
2,718 23,098 40,891
------------- ----------- -----------
$1,038,181 $ 813,134 $ 589,235
============= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 85,546 $ 119,362 $ 102,623
Pension plan payable (Note 6) ......................... 5,725 11,126 9,236
Advertising fund escrow (Note 2) ...................... 350,868 350,868 105,854
Payroll and other taxes payable ....................... 3,825 1,840 5,523
Accrued compensated absences .......................... 48,028 48,028 38,654
Accrued commissions ................................... 4,375 46,331 47,558
Accrued expenses ...................................... 121,288 32,644 10,000
------------- ----------- -----------
Total current liabilities .......................... 619,655 610,199 319,448
------------- ----------- -----------
Shareholders' equity:
Capital stock, par value $1,149,000 shares
authorized, 10,000 shares issued, 5,100 shares
outstanding ........................................... 10,000 10,000 10,000
Retained earnings ..................................... 526,526 310,935 377,787
Treasury stock, 4,900 shares at cost .................. (118,000) (118,000) (118,000)
------------- ----------- -----------
Total shareholders' equity ......................... 418,526 202,935 269,787
----------- -----------
Total liabilities and shareholders' equity ........ $1,038,181 $ 813,134 $ 589,235
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
8
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
RESTATED (NOTE 13)
FOR THE SIX MONTHS ENDED --------------------------
---------------------------- YEARS ENDED APRIL 30
OCTOBER 31 OCTOBER 31, --------------------------
1995 1994 1995 1994
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME:
SERVICE FEES .......................... $2,199,492 $2,398,417 $3,953,131 $4,059,538
FRANCHISE FEES ........................ 46,000 78,300 120,353 8,344
TRAINING FEES ......................... 28,605 26,891 55,617 86,253
------------- ------------- ------------ ------------
2,274,097 2,503,608 4,129,101 4,154,135
OPERATING EXPENSES ..................... 1,780,659 1,963,353 3,673,354 3,944,634
------------- ------------- ------------ ------------
INCOME FROM OPERATIONS ................. 493,438 540,255 455,747 209,501
------------- ------------- ------------ ------------
OTHER INCOME:
INTEREST INCOME ....................... 931 2,383 5,451 14,163
MISCELLANEOUS INCOME .................. 1,172 -- 17,617 30
GAIN ON SALE OF ASSET ................. 50 200 1,000 2,761
------------- ------------- ------------ ------------
2,153 2,583 24,068 16,954
------------- ------------- ------------ ------------
INCOME BEFORE TAXES .................... 495,591 542,838 479,815 226,455
INCOME TAXES (NOTE 7)................... -- -- -- --
------------- ------------- ------------ ------------
NET INCOME ............................. 495,591 542,838 479,815 226,455
RETAINED EARNINGS, BEGINNING OF PERIOD 310,935 377,787 377,787 398,963
------------- ------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS .......... (280,000) (326,938) (546,667) (247,631)
RETAINED EARNINGS, END OF PERIOD ...... $ 526,526 $ 593,687 $ 310,935 $ 377,787
============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
9
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
RESTATED (NOTE 13)
----------------------------
SIX MONTHS ENDED OCTOBER 31, YEARS ENDED APRIL 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers............ $ 2,248,570 $ 2,512,234 $ 4,149,014 $ 4,091,190
Interest and dividends received ........ 931 2,383 5,451 14,163
Other operating receipts................ 1,172 -- 17,617 30
Cash paid to suppliers and employees ... (1,701,727) (1,768,957) (3,333,118) (3,748,137)
Interest paid........................... -- -- -- (5)
------------- ------------- ------------- -------------
Net cash provided by operating
activities (Note 12).................... 548,946 745,660 838,964 357,241
------------- ------------- ------------- -------------
Cash flows from investing activities:
Cash payments for the purchase
of property............................ (5,307) (10,770) (36,070) (107,750)
Cash proceeds from the sale of
property................................ 50 200 1,000 3,700
------------- ------------- ------------- -------------
Net cash used by investing activities ... (5,257) (10,570) (35,070) (104,050)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Distributions to shareholders .......... (280,000) (326,931) (546,667) (247,631)
------------- ------------- ------------- -------------
Net cash used by financing activities .. (280,000) (326,931) (546,667) (247,631)
------------- ------------- ------------- -------------
Net increase in cash..................... 263,689 408,159 257,227 5,560
Cash, beginning of periods .............. 484,508 227,281 227,281 221,721
------------- ------------- ------------- -------------
Cash, end of periods .................... $ 748,197 $ 635,440 $ 484,508 $ 227,281
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
History and business activity:
CENTURY 21 OF EASTERN PENNSYLVANIA, INC. is a sub-franchiser of "CENTURY
21" franchises in Eastern Pennsylvania and New Castle County, Delaware. For a
fee, it distributes to real estate sales offices in the above areas the right
to use the "CENTURY 21" name and provides them with sales training programs
and other administrative tools.
Allowance for bad debts:
The Company considers accounts receivable to be fully collectible;
however, experience indicates that notes receivable required an allowance for
bad debts account due to the high rate of failure. An analysis of historical
data reveals that approximately 87% of all notes become uncollectible; notes
are generally made up of delinquent service fees. When notes become
uncollectible, they will be removed from the receivable and the related
allowance account.
Cash and cash equivalents:
For the purpose of the statements of cash flows, the Company considers all
securities with a maturity of three months or less to be cash equivalents.
Property and equipment:
Property and equipment are stated at cost. Expenditures for property and
those which substantially increase the useful lives are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When assets
are retired or otherwise disposed of, their cost and related accumulated
depreciation are removed from the accounts and resulting gains or losses are
included in income. Depreciation is provided by both the straight line and
accelerated methods over the estimated useful lives of the assets. Estimated
useful lives are as follows:
FURNITURE AND FIXTURES ......... 5-7 YEARS
AUTOMOBILE...................... 5 YEARS
Amortization of franchise costs:
Amortization of franchise costs is provided on the straight line method
over a twenty year period.
Revenue recognition:
Franchise fee revenue is recognized when all material conditions of the
sale have been substantially performed.
2. CASH:
Cash-restricted, in the amount of 1995--$350,868 and 1994--$105,854, is a
trust fund held by the Company on behalf of all member brokers. This trust is
restricted for use in future periods for advertising.
All funds are held in deposit accounts in a Pennsylvania bank, insured up
to $100,000 per bank by the Federal Deposit Insurance Corporation. For 1995,
these accounts exceed this insured limit by $419,997. This represents a
potential loss of $419,997 arising from a concentration of credit risk should
it become necessary for the FDIC to fund depositor accounts due to bank
failure.
11
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NOTES RECEIVABLE:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
8% Note due from a Century 21 broker. Beginning May 1, 1994,
monthly payments of $3,000 were due. Principal and accrued
interest are due in full at December 20, 1995. This note is
delinquent................................................... $70,951 $ --
$1,000 Non-interest bearing note due from Century 21
University Realty, Inc. Payments were to be made in ten
installments of $100 starting October, 1985.................. -- 400
8% Note due from Century 21 Colonial Pride. Principal and
accrued interest are due in full on October 1, 1995. This
note was prepaid............................................. -- 24,603
8% Note due from Century 21 Prestige. Principal and accrued
interest were due in full October, 1994. No payments have
been received to date........................................ 1,466 1,466
--------- --------
72,417 26,469
Less current maturities....................................... -- 26,469
--------- --------
$72,417 $ --
========= ========
</TABLE>
4. COMMITMENTS:
Franchise commitments:
The Company is obligated under the terms of its franchise agreement to pay
15.00% of the previous month's receipts, from the sale of franchise
agreements and service fees for the sale of real property, to CENTURY 21 Real
Estate Corporation. Additionally, the Company is obligated to spend 10.00% of
its receipts for advertising. The Company also is obligated to credit member
brokers for start-up costs in varying amounts not to exceed $4,500 for
brokers existing as of January 1, 1990.
Lease commitments:
The lease on the Company's main office in King of Prussia, Pennsylvania
which was set to expire March 14, 1995 has been extended to December 31,
1999. The Company leases the premises for an annual rental of $147,660,
payable in monthly installments. Rent will be increased annually, based upon
50% of the increase in the consumer price index.
5. ACCOUNTS RECEIVABLE:
Accounts receivable consists of those funds due from franchise sales and
broker's service fees. Accounts receivable from service fees represents
actual cash received through June 15, 1995. This policy is consistent with
prior years.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401K plan whereby an employee may contribute on a
voluntary basis up to 12.5% of his compensation. The Company is obligated to
match 20% of the employees' contributions starting January 1, 1991. The
Company's contribution for the fiscal year was 1995--$11,126 and
1994--$9,236.
The Company has a defined contribution profit-sharing plan for eligible
employees. Each year the Company determines the amount of its contribution,
if any, to the fund. The contributions are allocated to participating
employees from which benefits are paid. To be eligible to participate in the
plan, an
12
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS: (Continued)
employee must have completed one year of service and reached the age of 21.
Voluntary contributions up to 10% of an employee's compensation may be made
by payroll deduction. Vesting in the plan is graduated with full vesting
after seven years of service. The plan also provides for death and disability
provisions. During 1987, the Company suspended funding of the plan. During
1994, the Company reinstated funding to this plan. The Company's
contributions for the year amounted to 1995--$0 and 1994--$25,972.
7. INCOME TAXES:
The Company files its federal income tax return under the provision of an
"S" corporation of the Internal Revenue Code, whereby it pays no federal
income tax. The income or loss is included in the individual income tax
returns of the shareholders. The Company also has obtained "S" status for
Pennsylvania income tax reporting purposes.
8. DEPOSITS/TAXES RECEIVABLE:
Under the 1987 Tax Reform Act, Section 444, the Company elected to retain
its "S" Corporation fiscal year end. The election requires the Company to
maintain a deposit based on the amount of income being deferred and the
length of the deferral period. The deferred income consists of the amount of
income each shareholder will receive, i.e., salary, bonus and share of
Company profits. The deferral period is the number of months between the
Company's fiscal year end and December 31. For 1995 and 1994, a refund is due
in the amount of $18,915 and $19,582, respectively.
9. CONTINGENCIES:
Litigation--Certain claims, suits, and complaints arising in the ordinary
course of business have been filed or are pending against the Company. In the
opinion of counsel and management, most matters are adequately covered by
insurance, or if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a significant effect on the financial
position or results of operations of the Company if disposed of unfavorably.
One claim involves a plaintiff who named the Company in his suit against an
agent of one of the brokers in the eastern region of Pennsylvania. The
plaintiff's case against the Company depends on his being able to prove an
agency relationship between the real estate agent and the Company. Even
though damages could be substantial, counsel believes the likelihood of an
agency relationship being proved is minimal. The case still has not gone to
trial.
10. CONCENTRATION OF CREDIT RISK:
The Company's receivables are due from real estate brokers located in
eastern Pennsylvania.
11. RELATED PARTIES:
Related party transactions result from payments made to the two
shareholders of the Company. For 1995 and 1994, the Company paid the
shareholders a combined salary, including bonuses of $245,897 and $237,017,
respectively. The Company also paid the shareholders commissions totalling
$296,250 for 1994. Finally, the Company made payments of $24,504 to a
shareholder's life insurance trust for both 1995 and 1994. For both years,
$4,083 was prepaid.
13
<PAGE>
CENTURY 21 OF EASTERN PENNSYLVANIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 31, YEARS ENDED APRIL 30,
--------------------------- ----------------------
1995 1994 1995 1994
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income ................................ $495,591 $542,838 $479,815 $226,455
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 32,979 29,291 50,599 41,889
Bad debts ................................ -- -- 48,452 --
Allowance for bad debts................... -- 22,499 -- 22,499
Gain on disposal of property.............. (50) (200) (1,000) (2,761)
(Increase) decrease in:
Accounts receivable....................... 3,430 (3,744) 25,358 8,857
Notes receivable.......................... (28,957) (10,129) (45,948) 104,376
Employee advance.......................... 6,350 -- (9,700) --
Prepaid expenses.......................... 11,233 (5,483) (18,278) (17,156)
Deposits.................................. 18,914 19,582 18,915 19,582
Increase (decrease) in:
Accounts payable.......................... (33,816) 155,031 16,739 (7,795)
Accrued liabilities....................... 46,688 2,643 30,791 (4,120)
Pension plan payable...................... (5,401) (4,220) 1,890 1,480
Payroll taxes payable..................... 1,985 (2,448) (3,683) 3,849
Advertising fund ......................... -- -- 245,014 (39,914)
----------- ----------- ---------- ----------
Net cash provided by operating activities . $548,946 $745,660 $838,964 $357,241
=========== =========== ========== ==========
</TABLE>
13. CORRECTION OF AN ERROR:
Subsequent to the issuance of the financial statements, errors resulting
in an overstatement of commissions and officers salaries were discovered.
Correction of these errors resulted in an increase in net income of
1995--$546,667; 1994--$247,631. These amounts have been reclassified as
distributions to shareholders.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Commissions .......... $471,667 $247,631
Salaries--officer .... 75,000 --
---------- ----------
$546,667 $247,631
========== ==========
</TABLE>
Compensation expense after such restatement is reasonable for the 1 1/2
full time equivalent employee shareholder participating in the operations of
the Company. The distribution to shareholders consists of dividends which
represent a reasonable return on investment over the Company's 20 years of
operations.
14. NOTE TO (UNAUDITED) INTERIM FINANCIAL STATEMENTS
The balance sheet as of October 31, 1995, the statements of operations and
cash flows for the six months ended October 31, 1995 and October 31, 1994 and
the statements of stockholders' equity as of October 31, 1995 are unaudited.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at October 31, 1995 and
October 31, 1994 have been made.
The results of operations for the period ended October 31, 1995 are not
necessarily indicative of the operating results for the full year.
15. SUBSEQUENT EVENT (UNAUDITED)
During December 1995 the company signed a letter of intent to sell the
assets of the Company to HFS Incorporated ("HFS").
14
<PAGE>
EXHIBIT 99.4
INDEPENDENT AUDITORS' REPORT
Board of Directors
HFS Incorporated
Parsippany, New Jersey
We have audited the accompanying consolidated statement of assets and
liabilities of the Acquired Business (or the "Company" as defined in Note A
to the accompanying financial statements) as of July 31, 1995, and the
related consolidated statements of operations, changes in seller's net
investment, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Century 21 Real Estate, Inc. and subsidiaries, consolidated subsidiaries,
which statements reflect total assets of $3,086,699 as of July 31, 1995, and
total revenues of $5,306,855 for the year then ended. These statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Century 21 Real
Estate, Inc. and subsidiaries, is based solely on the report of the other
auditors.
We conducted our audit 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 audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of July 31, 1995,
and the results of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.
White, Nelson & Co. LLP
Anaheim, California
January 12, 1996
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Century 21 Real Estate, Inc. and Subsidiaries
Seattle, Washington
I have audited the accompanying consolidated balance sheet of Century 21 Real
Estate Inc. and subsidiaries, as of July 31, 1995, 1994 and 1993, and the
related statements of income and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the financial position of Century 21
Real Estate Inc. and subsidiaries, as of July 31, 1995, 1994 and 1993, and
the results of its operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Tony H. Davidson, CPA
September 25, 1995
16
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents..................... $ 2,981,969
Accounts Receivable........................... 67,254
Other Accounts and Notes Receivable........... 110,177
Inventory..................................... 33,813
Prepaid Expenses.............................. 93,749
Deferred Tax Assets........................... 181,906
-------------
Total Current Assets........................ 3,468,868
Depreciable Assets At Net Book Value........... 5,886,177
Other Assets
Notes Receivable Long-Term.................... 169,274
Other Assets.................................. 511,611
-------------
Total Other Assets.......................... 680,885
Total Assets................................ $10,035,930
=============
LIABILITIES AND SELLER'S NET INVESTMENT
Current Liabilities:
Accounts Payable and Other Accrued
Liabilities.................................. $ 817,050
Note Payable--Current.......................... 114,465
-------------
Total Current Liabilities................... 931,515
Long Term Liabilities:
Deferred Income Taxes......................... 427,517
Note Payable--Long Term....................... 1,568,147
-------------
Total Long-Term Liabilities................. 1,995,664
Total Liabilities........................... 2,927,179
Seller's Net Investment..................... 7,108,751
Total Liabilities and Seller's Net
Investment................................. $10,035,930
=============
</TABLE>
See accompanying notes and independent auditors' report
17
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Income:
Service Fees............................. $ 9,280,963
Franchise Fees........................... 129,500
Training School Fees..................... 429,472
Other Revenues........................... 663,297
------------
Total Income From Operations........... 10,503,232
Direct Costs.............................. 3,286,711
------------
Gross Profit.............................. 7,216,521
Operating Expenses........................ 7,461,321
------------
Loss From Operations...................... (244,800)
Other Income.............................. 50,314
------------
Loss Before Provision For Corporate
Taxes.................................... (194,486)
Provision For Corporate Taxes (Benefit) .. (60,012)
------------
Net Loss.................................. $ (134,474)
============
</TABLE>
See accompanying notes and independent auditors' report
18
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
CONSOLIDATED STATEMENT OF CHANGES IN SELLER'S NET INVESTMENT
YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Seller's Net Investment, Beginning of the
Year........................................... $7,810,564
Net Loss....................................... (134,474)
Seller's Net Investment Activity............... (567,339)
------------
Seller's Net Investment, End of the Year ...... $7,108,751
============
</TABLE>
See accompanying notes and independent auditors' report
19
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash Flows From Operating Activities:
Net Loss................................................ $ (134,474)
Adjustments To Reconcile Net Loss To Net Cash Provided
By
Operating Activities ..................................
Depreciation And Amortization......................... 633,335
(Gain) Loss From Disposal Of Assets .................. 3,866
Loss On Write Down Of Notes Receivable ............... 246,856
Bad Debts Expense .................................... 41,760
Deferred Income Taxes ................................ (207,266)
Accrued Interest On Seller's Net Investment Activity (205,207)
Changes In:
Accounts Receivable ................................... (31,101)
Other Accounts and Notes Receivable ................... 115,271
Inventory ............................................. (7,977)
Prepaid Expenses ...................................... (30,855)
Other Assets .......................................... (13,051)
Accounts Payable And Other Accrued Liabilities ....... (96,630)
------------
Net Cash Provided By Operating Activities ........... 314,527
Cash Flows From Investing Activities:
Purchase Of Depreciable Assets ......................... (95,275)
Advances To Seller's Non-Operating Investments ......... (362,129)
Issuance Of Other Accounts And Notes Receivable ....... (246,856)
Principal Payment On Notes Receivable .................. 2,509
------------
Net Cash Used By Investing Activities ................ (701,751)
Cash Flows From Financing Activities:
Principal Payments On Notes Payable..................... (282,388)
------------
Net Cash Used By Financing Activities ................ (282,388)
Net Decrease in Cash And Cash Equivalents ............... (669,612)
Beginning Cash And Cash Equivalents Balance ............. 3,651,581
------------
Ending Cash And Cash Equivalents Balance ................ $2,981,969
============
Supplemental Disclosures Of Cash Flow Information:
Cash Paid During The Year For:
Interest Expense ....................................... $ 165,519
============
Income Taxes............................................ $ 132,705
============
</TABLE>
See accompanying notes and independent auditors' report
20
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) The Company--Century 21 Region V, Inc. and subsidiaries are
subfranchisors for Century 21 Real Estate Corporation ("Century 21
International"). Century 21 Region V, Inc. and subsidiaries principal
operations consist of the sales of neighborhood Century 21 Broker franchises
to licensed real estate brokers and the related training and servicing of
those franchises. Century 21 Region V, Inc. and subsidiaries maintain
operations within three geographic regions: Southern California, the Pacific
Northwest, and Mexico.
On May 3, 1996, HFS Incorporated ("HFS") acquired the master franchising
business operations of Century 21 Region V, Inc. and subsidiaries in the
Southern California and the Pacific Northwest regions ("Acquired Business" or
the "Company"). The accompanying financial statements include only those
assets, liabilities, revenues and expenses arising from the operations of the
Acquired Business.
The Company's revenues consist primarily of service fees collected from
the franchisees. Service fees are equal to 6 percent of the gross revenues
received by the franchisee.
The Company is obligated to pay Century 21 International a service fee
(generally 15 percent of collected service fees). Additionally, the Company
must contribute to the Century 21 National Advertising Fund (generally 10
percent of collected service fees).
At July 31, 1995, the Company had 90 franchisees in Southern California,
and 189 franchisees in the Pacific Northwest.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
financial information included herein may not necessarily reflect the
financial position and results of operations of the Acquired Business in the
future, what the financial position, results of operations, and cash flows of
the Acquired Business would have been had it been a separate stand-alone
company.
(2) Principles of Accounting--The Company's financial and income tax
records are maintained on the accrual basis.
(3) Inventory--Inventory consist of school supplies and is stated at the
lower of cost or market using the first-in, first-out method of inventory
pricing.
(4) Depreciable Assets--Depreciable assets and improvements are stated at
cost. Major improvements and betterments are capitalized. Maintenance and
repairs are expensed as incurred. For both financial reporting and income tax
purposes, fixed assets are depreciated over lives of from three to thirty
years using both straight-line and accelerated methods.
(5) Income Taxes--The Company files a consolidated federal tax return
which includes all of its subsidiaries. The Company's income tax liability
has been determined under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," requiring an asset and
liability approach for financial accounting and reporting for income taxes.
The liability is based on the current and deferred tax consequences of all
events recognized in the consolidated financial statements as of the date of
the consolidated balance sheet. Deferred taxes are provided for temporary
differences which will result in taxable or deductible amounts in future
years, primarily attributable to a different basis in certain assets for
financial and tax reporting purposes including recognition of deferred tax
assets net of a related valuation allowance.
21
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(6) Statement of Cash Flows--For the purposes of cash flows, cash
equivalents include time deposits, certificates of deposit, and all highly
liquid debt instruments with original maturities of six months or less.
NOTE B: OTHER ACCOUNTS AND NOTES RECEIVABLE
Other accounts and notes receivable of the Company at July 31, 1995, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Interest and Other Receivables . $107,389
Notes Receivable ............... 172,062
----------
Total .......................... 279,451
Less: Current Portion .......... 110,177
----------
Notes Receivable Long-Term .... $169,274
==========
</TABLE>
Notes receivable bear interest at rates of between nine and twelve percent.
NOTE C: DEPRECIABLE ASSETS AT NET BOOK VALUE
For the year ended July 31, 1995, depreciable assets consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Automotive and Boat.................. $ 399,489
Aircraft............................. 2,700,000
Buildings and Land................... 4,306,500
Leasehold Improvements............... 951,000
Office Furniture and Equipment ...... 1,251,249
-----------
Total Depreciable Assets, Cost ...... 9,608,648
Less: Accumulated Depreciation ..... 3,722,471
-----------
Depreciable Assets at Net Book
Value............................... 5,886,177
===========
</TABLE>
NOTE D: OTHER ASSETS
Other assets at July 31, 1995, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash Surrender Value of Life Insurance Policies
(Net of related policy loans of $51,090) ...... $488,571
Franchise Cost, Net ............................ 14,150
Other .......................................... 8,890
----------
Other Assets ................................... $511,611
==========
</TABLE>
Franchise costs represent the initial cost of establishing franchises in
Southern California and the Pacific Northwest. These costs are being
amortized over period covering 25 years. Amortization expense charged to
operations for 1995 was $2,400.
22
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE E: NOTE PAYABLE
Note payable as of July 31, 1995, consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Union Bank--Note payable, interest at 9.25%, monthly principal and
interest payments of $21,765.56, due May 1, 2000. Secured by real
estate................................................................ $1,682,612
----------
Total Note Payable.................................................... 1,682,612
Less: Current Portion................................................. 114,465
----------
Note Payable--Long Term............................................... $1,568,147
==========
</TABLE>
The loan agreement with Union Bank contains various covenants pertaining
to maintenance of working capital and tangible net worth. In accordance with
that agreement, the Company is required to maintain a minimum tangible net
worth and debt to tangible net worth requirements. At July 31, 1995, the
Company was in compliance with, or had obtained waivers with respect to the
restrictive covenants.
Minimum future payments for debt for each of the next five years and in
the aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
<S> <C>
1996..................... $ 114,465
1997..................... 121,186
1998..................... 132,883
1999..................... 145,709
2000..................... 1,168,369
-----------
Total Note Payable....... $1,682,612
===========
</TABLE>
NOTE F: LEASES
The Company is obligated under operating leases for office space and
office machines. Rental expense under operating leases totaled $274,356 for
the year ended Jul......y 31, 1995. Future minimum lease payments are estimated
as follows: Minimum future obligations on operating leases that have initial or
remaining noncancellable lease terms in excess of one year for each of the
next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996........................ $191,450
1997........................ 138,742
1998........................ 33,324
1999........................ 33,324
2000........................ 33,324
----------
Total Minimum Lease Payments $430,164
==========
</TABLE>
23
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE G: INCOME TAXES
The provision for income taxes for the years ended July 31, 1995, consists
of the following:
<TABLE>
<CAPTION>
<S> <C>
Currently Payable--
Federal................................. $ 131,678
State................................... 4,617
-----------
136,295
Deferred Taxes--
Depreciation Differences................ $ (71,725)
State Income Taxes...................... (3,115)
Nondeductible Bad Debts................. (121,467)
-----------
Provision For Corporate Taxes
(Benefit)............................... $ (60,012)
===========
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Principal items
comprising net deferred income tax liabilities as of July 31, 1995, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred Tax Assets:
Bad Debt Expense........... $ 181,906
Disallowed Capital Loss ... 135,502
Valuation Allowance........ (135,502)
-----------
Deferred Tax Assets......... $ 181,906
===========
Deferred Tax Liabilities:
Tax Over Book
Depreciation............... $ 427,519
-----------
Deferred Income Taxes....... $ 427,519
===========
</TABLE>
There has been no change in the "Valuation Allowance" for the year ended
July 31, 1995.
A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is as follows:
<TABLE>
<CAPTION>
<S> <C>
Computed Tax At The Expected Statutory
Rate....................................... $(66,125)
Graduated Rates And Other Differences ...... 6,113
-----------
Income Tax Expense (Benefit)................ $(60,012)
===========
</TABLE>
NOTE H: RELATED PARTY TRANSACTIONS
At July 31, 1995, Century 21 Region V, Inc. and its subsidiaries have
advanced money to a shareholder as follows:
<TABLE>
<CAPTION>
<S> <C>
Shareholder................................. $134,713
==========
Interest Income From The Above
Transactions............................... $ 13,732
==========
</TABLE>
24
<PAGE>
CENTURY 21 REGION V
(BUSINESS ACQUIRED BY HFS INCORPORATED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995
NOTE H: RELATED PARTY TRANSACTIONS (Continued)
This loan is included in current assets under "Other Accounts And Notes
Receivable" and other assets under "Notes Receivable--Long Term." The note
bears interest at the rate of 9.5 percent.
NOTE I: ECONOMIC CONCENTRATION OF CREDIT RISKS
The Company maintains cash balances with certain financial institutions in
excess of the federally insured limits.
NOTE J: NATURE OF SIGNIFICANT INITIAL SERVICES
When an individual franchise is sold, the Company agrees to provide
certain services to the franchisee. Generally, these services include
assistance in site selection, training personnel, implementation of an
accounting system, and design of a quality control program.
25
