SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------
July 15, 1997 (July 15, 1997)
(Date of Report (date of earliest event reported))
HFS Incorporated
(Exact name of Registrant as specified in its charter)
Delaware 1-11402 22-3059335
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification Number)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive office) (Zip Code)
(201) 428-9700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if applicable)
<PAGE>
Item 5. Other Events
This Current Report on Form 8-K includes the financial statements and
management's discussion and analysis of financial condition and results of
operations of HFS Incorporated (the "Company") and gives retroactive effect to
the acquisition by merger of PHH Corporation with and into the Company which has
been accounted for as a pooling of interests.
Item 7. Exhibits
Exhibit
No. Description
11 Computation of per share earnings
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial data schedule
99.1 Management's discussion and analysis of financial condition and
results of operations of HFS Incorporated.
99.2 The financial statements of HFS Incorporated as restated to give
effect to the acquisition by merger of PHH Corporation which has
been accounted for as a pooling of interests.
<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/ Scott E. Forbes
Scott E. Forbes
Senior Vice President
and Chief Accounting Officer
Date: July 15, 1997
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K/A
Report Dated July 15, 1997 (July 15, 1997)
EXHIBIT INDEX
Exhibit No. Description Page No.
11 Computation of per share earnings
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial data schedule
99.1 Management's discussion and analysis of financial condition
and results of operations of HFS Incorporated.
99.2 The financial statements of HFS Incorporated as restated to
give effect to the acquisition by merger of PHH Corporation
which has been accounted for as a pooling of interests.
HFS Incorporated and Subsidiaries
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
---------------------------------------------------------------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 257,241 $ 257,241 $ 157,850 $ 157,850 $ 122,533 $ 122,533
Convertible debt interest and
amortization of deferred
loan costs, net of tax 4,500 4,500 4,505 4,505 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income, as adjusted $ 261,741 $ 261,741 $ 162,355 $ 162,355 $ 122,533 $ 122,533
=========== =========== =========== =========== =========== ===========
Weighted average common
shares outstanding 144,784 144,784 125,967 125,967 118,746 118,746
Incremental shares for
outstanding stock options
and warrants 11,342 12,110 8,257 10,256 7,663 7,691
Contingent shares -- -- -- -- 3,126 3,126
Convertible debt 8,252 8,252 8,266 8,266 -- --
----------- ----------- ----------- ----------- ----------- -----------
Weighted average common
common equivalent
shares outstanding 164,378 165,146 142,490 144,489 129,535 129,563
=========== =========== =========== =========== =========== ===========
Net income per share $ 1.59 $ 1.58 $ 1.14 $ 1.12 $ .95 $ .95
=========== =========== =========== =========== =========== ===========
</TABLE>
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, 333-06939 and
333-25635 of HFS Incorporated (the "Company") on Form S-8 and Registration
Statements No. 333-11031 and 333-17453 of the Company on Form S-3 of our report
dated March 31, 1997 (May 27, 1997 as to note 2a, April 30, 1997 as to Note 2b)
related to the consolidated financial position of HFS Incorporated and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
July 15, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.s
33-56354, 33-70632, 33-72752, 33-83956, 33-94756, 333-06733, 333-06939 and
333-25635 of HFS Incorporated (the "Company) on Form S-8 and Registration
Statements No. 333-11031 and 333-17453 of the Company on Form S-3 of our report
dated April 30, 1997 related to the consolidated balance sheets of PHH
Corporation and subsidiaries at December 31, 1996 and January 31, 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year ended December 31, 1996 and each of the years in the two year
period ended January 31, 1996. Our report contains an explanatory paragraph that
states that the Company adopted the provisions of Statement of Financial
Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" in the
year ended January 31, 1996.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
July 15, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCED TO SUCH
FINANCIAL STATEMENTS. AMOUNTS ARE IN THOUSANDS, EXCEPT PER SHARE DATA.
[/LEGEND]
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 153,390
<SECURITIES> 22,500
<RECEIVABLES> 687,907
<ALLOWANCES> 27,265
<INVENTORY> 0
<CURRENT-ASSETS> 1,058,415
<PP&E> 328,528
<DEPRECIATION> 128,723
<TOTAL-ASSETS> 10,866,000
<CURRENT-LIABILITIES> 1,070,572
<BONDS> 748,421
0
0
<COMMON> 1,588
<OTHER-SE> 3,145,473
<TOTAL-LIABILITY-AND-EQUITY> 10,866,000
<SALES> 0
<TOTAL-REVENUES> 1,440,172
<CGS> 0
<TOTAL-COSTS> 817,426
<OTHER-EXPENSES> 171,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,695
<INCOME-PRETAX> 431,867
<INCOME-TAX> 174,626
<INCOME-CONTINUING> 257,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,241
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.58
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
In 1996, HFS Incorporated (together with its subsidiaries, the "Company")
evolved from the world's largest franchisor of lodging properties and real
estate brokerage offices to a leading global service provider. Although the
Company provides fee-based services that primarily fall within the Travel and
Real Estate industries, the Company generally neither owns the assets nor shares
the risks associated with the underlying businesses of its customers. The
businesses acquired by merger with PHH Corporation ("PHH") on April 30, 1997 are
consistent with this profile and provide the Company with various
cross-marketing opportunities within its business segments.
On May 27, 1997, the Company entered into a definitive merger agreement
with CUC International, Inc. ("CUC") pursuant to which the Company's
shareholders will exchange all Company common stock for approximately $11
billion of CUC common stock. CUC, a leading membership-based consumer services
company with shares traded on the New York Stock Exchange, reported $2.5 billion
of total assets at January 31, 1997 and $2.3 billion and $164.1 million of
revenue and net income, respectively, for the fiscal year ended January 31,
1997. CUC's business profile is consistent with the Company's in that CUC's
primary revenue source consists of recurring membership revenue rather than
revenue from the sale of goods and services to club members. Membership is
generated through CUC's technology-driven direct marketing efforts. The
combination of CUC and HFS is intended to provide CUC's membership businesses
access to the Company's' more than 100 million consumer contacts, while
providing Company businesses with the technology-driven, direct marketing
expertise necessary to successfully cross-market within its existing business
units.
In the travel industry, the Company is the world's largest franchisor of
lodging facilities ("Lodging"), the leading provider of vacation timeshare
exchange services ("Timeshare") and a leading provider of international fleet
management services. The Company also owns HFS Car Rental, Inc., (formerly Avis,
Inc.) which through an indirect subsidiary ("ARAC") operates directly or through
licensees, the second largest car rental system worldwide. The Company expects
to undertake an initial public offering (the "IPO") of ARAC in September 1997.
The IPO is expected to dilute the Company's interest in ARAC to 25% and replace
car rental ownership earnings with revenue from reservation and information
technology agreements in 1996 and from a master franchise agreement to be
effective as of January 1, 1997 ("Car Rental").
In the real estate industry, the Company is the world's largest franchisor
of real estate brokerage offices ("Real Estate Franchise"), the world's largest
provider of corporate relocation services ("Relocation") and operates the
twelfth largest mortgage service business in the United States.
Since the merger with PHH was accounted for as a pooling of interests,
the financial results discussed herein have been restated to include PHH for all
periods presented. All comparisons within the following discussion are to the
comparable period in previous year, unless otherwise stated.
<PAGE>
RESULTS OF OPERATIONS
1996 Compared to 1995
Consolidated net income increased 63% ($99.4 million) to $257.2 million in
1996 while earnings per share ("EPS") increased 41% ($.46) to $1.58. Operating
income (revenue less expenses excluding interest and income taxes increased 55%
($160.6 million) to $451.6 million. Consolidated net revenue increased 36%
($383.3 million) to $1.44 billion.
Net interest expense decreased 14% ($3.3 million) to $19.7 million
primarily as a result of $11.4 million of incremental interest income earned
primarily from excess cash generated from a June 1996 equity offering. Gross
interest expense increased 33% ($8.1 million) as a result of the issuance of
$240 million, 4-3/4% Convertible Senior Notes ("4-3/4% Notes") in February 1996.
The Company's weighted average effective interest rate decreased from 5.94% to
5.67%.
The Company collects certain service fees from lodging and real estate
franchisees, which it disburses completely for marketing and reservation
activities on behalf of franchisees. Since the Company administers such funds on
a pass through basis, management analyzes business results for the Lodging and
Real Estate franchise segments in terms of revenue, net of marketing and
reservation expenses ("adjusted net revenue") and operating expenses. Adjusted
net revenue consists of net revenue of $1.44 billion, $1.06 billion and $892.1
million for 1996, 1995 and 1994, respectively, less $169.3 million, $144.0
million and $130.3 million of marketing and reservation expenses, for the same
respective periods. Operating expenses include depreciation and amortization but
exclude interest expense and income taxes. Results for the combined segments are
as follows:
Operating income ($000's) 1996 1995 Variance
- ------------------------- ---------- ---------- ---------
Adjusted net revenue .......... $1,270,856 $ 912,925 39%
Operating expenses ............ 819,294 621,956 32%
---------- ----------
Operating income .............. $ 451,562 $ 290,969 55%
========== ==========
TRAVEL INDUSTRY
Lodging
The Company operates eight nationally recognized brands with approximately
5,400 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and national
marketing programs, which are completely funded by its franchisees based on a
designated portion of its franchise fee. The Company charges a royalty fee based
on a percentage of franchisee gross room sales to fund all expenses not covered
by marketing and reservation fees, such as quality inspections and franchise
sales and service functions as well as generates profits for the Company.
Accordingly, the significant revenue drivers of the Company are the number of
royalty-paying franchise units and the average rate at which they pay. Relevant
but less significant are the average daily rates and occupancy percentage of the
underlying lodging properties.
Operating income ($000's) 1996 1995 Variance
------------------------- -------- -------- ----------
Adjusted net revenue ............. $228,349 $195,631 17%
Operating expenses ............... 82,551 75,025 10%
-------- --------
Operating income ................. $145,798 $120,606 21%
======== ========
<PAGE>
Operating income increased 21% and adjusted net revenue increased 17% as a
result of a 13% increase in royalty fees and 41% increase in revenue from
preferred alliance partners seeking access to the Company's franchisees and
their underlying consumer base. Results for 1996 demonstrated that room growth
is the most significant outcome driver for franchisee royalty, as the Company
added 55,253 net rooms in 1996, representing a 133% increase from 1995 results.
The Company added 94,506 rooms in 1996 (including 30,274 rooms added by the
acquisition of Travelodge franchise contracts) and terminated 39,253 rooms in
1996 (including 6,053 Park Inn International rooms, comprising the franchise
system sold in September 1996 for $2.2 million). In 1995, the Company added
63,280 rooms (including 9,780 rooms added by the acquisition of Knights Inn
franchise contracts) and terminated 39,603 rooms (including 22,151 related to a
special year-end removal of properties as a result of the repositioning and
tightening of quality standards of the Company's brands). Total U.S. system
revenue per available room ("REVPAR") increased 1.3% primarily due to a 1.9%
increase in the average ("same store basis") daily rates ("ADR") charged at
franchised lodging facilities, however, REVPAR for comparable properties
increased 3.3% as a result of increases in ADR.
The 10% ($7.5 million) increase in operating expenses included an 18%
increase ($4.8 million) in depreciation and amortization, primarily related to
the excess of cost over net assets acquired ("goodwill") associated with the
acquisitions of the Travelodge and Knights Inn franchise systems in January 1996
and August 1995, respectively. Other operating expenses increased 6% ($2.7
million), primarily as a result of $1.9 million of scheduled Ramada license fee
increases and increases in franchise sales and other expenses associated with
system growth.
Car Rental
The Company acquired Avis, Inc. on October 17, 1996 for $806.5 million in
cash, indebtedness and Company common stock. Prior to the acquisition date, the
Company announced its plan to undertake an initial public offering ("IPO") of
Avis' car rental subsidiary ("ARAC") within one year of the acquisition date and
dilute its interest in ARAC to approximately 25%. The Company will retain assets
that are consistent with the Company's service provider business profile,
including the trademarks, franchise agreements, reservation system and
information technology system assets. ARAC will pay fees to the Company pursuant
to a master franchise agreement commencing in 1997 (as well as fees associated
with reservation and information technology agreements) that are typical of a
traditional franchise relationship. The car rental segment generated $537,000 of
operating income which was comprised of $10.0 million of revenue and $9.5
million of operating expenses for the period October 17, 1996 to December 31,
1996. Net revenue consisted primarily of fees for information technology
services provided to ARAC from the October 17, 1996 acquisition date. Operating
expenses consisted of $3.4 million of depreciation and amortization expenses
primarily associated with the Avis trademark and goodwill and $6.0 million of
technology related expenses for services provided to ARAC and other rental car
companies.
Timeshare
The Company acquired RCI on November 12, 1996 for $487.1 million plus up to
$200 million of contingent consideration. RCI sells subscription memberships to
owners of vacation timeshare resorts which allow members to exchange their
timeshare accommodations for timeshare accommodations owned by other members at
participating affiliated resorts worldwide. In addition to membership fees, RCI
earns fees for exchanges processed by its call center. The key timeshare revenue
drivers include the number of fee paying members and exchanges and the
corresponding average fees. The operating income summary for the period November
12, 1996 to December 31, 1996 is as follows:
<PAGE>
Operating income ($000's)
- -------------------------
Adjusted net revenue ..................................... $30,723
Operating expenses ....................................... 27,404
-------
Operating income ......................................... $ 3,319
=======
Adjusted net revenue primarily consists of $ 11.3 million of membership
fees and $12.1 million of exchange fees. Assuming Company ownership of timeshare
operations since January 1, 1995, pro forma annual membership and exchange fee
revenue increased 12% to $102.0 million and 11% to $157.6 million, respectively.
Total members and exchanges for calendar year 1996 increased 8% to 2.2 million
and 9% to 1.7 million compared to 1995, respectively. Operating expenses
consisted primarily of $15.4 million and $2.5 million for staff and
communication costs associated with member services (call centers),
respectively, and other timeshare functions for the period November 12, 1996 to
December 31, 1996.
Fleet Management Services
Fleet management services are offered to corporate clients and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Services consist of leasing (which generally requires an investment by the
Company in the vehicle and includes new vehicle purchasing, open and closed-end
operating leasing, direct finance leasing and used vehicle marketing) as well as
a variety of fee-based services including fuel purchasing, maintenance
management programs, expense reporting, fuel management programs, accident and
safety programs and other driver services for managing clients' vehicle fleets.
The Company has experienced minimal losses associated with its investment in
vehicles due to the overall creditworthiness of its corporate clients.
Operating income ($000's) 1996 1995 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............ $260,740 $258,877 1%
Operating expenses .............. 184,480 201,959 (9%)
-------- --------
Operating income ................ $ 76,260 $ 56,918 34%
======== ========
Operating income increased $19.3 million (34%) to $76.3 million, primarily
as a result of an increase in fee-based services and an $11.7 million gain on
the sale of the Company's truck fuel management business ("NTS") which was sold
in January 1996. The adjusted net revenue increase generated in 1996 included
the increase in fee-based services but was offset by the absence of
approximately $21.8 million of revenue from the sold NTS business. The $17.5
million (9%) decrease in operating expenses was primarily associated with $19.1
million of expenses associated with the sold NTS business.
REAL ESTATE INDUSTRY
Real Estate Franchise
The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21 system, in
August 1995, the ERA franchise system in February 1996 and the Coldwell Banker
franchise system in May 1996. The most significant revenue driver for real
estate franchise is the number of transactions for which the broker receives
commission revenue. Royalties are calculated based on a percentage of franchisee
commission revenue and fund franchise sales, service and training expenses.
Marketing fee collections fund national advertising expenditures and other
marketing activities.
<PAGE>
Operating income ($000's) 1996 1995 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............. $221,724 $ 43,771 407%
Operating expenses ............... 111,189 24,494 354%
-------- --------
Operating income ................. $110,535 $ 19,277 473%
======== ========
Operating income and adjusted net revenue increased 473% and 407%,
respectively, as a result of the CENTURY 21 franchise system's first full year
contribution to operating results and partial year contributions from the
acquired Coldwell Banker and ERA franchise systems. These franchises systems
licensed their trademarks to approximately 184,000 sales associates at December
31, 1996. The royalty portion of revenue increased $162.8 million (361%) and
revenue from preferred affiliates grew from $208,000 to $13.4 million, net of
the Company's $11.0 million fourth quarter write-off of revenue associated with
the license of the CENTURY 21 trademark to Amre, Inc., which filed for
bankruptcy protection in February 1997. The Company is currently negotiating
with home improvement companies to license the CENTURY 21 trademark.
Operating expenses increased 354% ($86.7 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with the
second quarter 1996 contribution of Coldwell Banker's former owned brokerage
business to National Realty Trust ("Trust"), an independent entity governed by
independent trustees.
Relocation
Relocation segment services primarily consist of the purchase, management
and resale of homes for transferred employees of corporate clients, members of
affinity group clients and government agencies. Although the Company acquires
the homes of client employees, the client corporations reimburse the Company for
carrying costs until the home is sold and for home sale losses. Accordingly, the
Company earns a fee for services with minimal real estate risk. Operating
expenses primarily consist of staffing and related costs for sales and service
functions. Operating results include contributions from PHH Relocation for all
periods shown, from Coldwell Banker Relocation Services, Inc. ("CBRS") since the
May 31, 1996 acquisition date and from Worldwide Relocation Management, Inc.
("WRM") since the August 1, 1995 acquisition date.
Operating income ($000's) 1996 1995 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............. $344,865 $301,667 14%
Operating expenses ............... 290,563 259,949 12%
-------- --------
Operating income ................. $ 54,302 $ 41,718 30%
======== ========
Operating income increased 30% ($12.6 million) as a result of a 14% ($43.2
million) increase in adjusted net revenue, net of a 12% ($30.6 million) increase
in operating expenses. Acquired CBRS and WRM operations generated $19.2 million
of operating income and PHH Relocation operating income decreased $6.6 million
(18%). PHH relocation adjusted net revenue increased $23.7 million due to an
expansion of services provided to corporate clients while revenue from home sale
assistance was flat compared to 1995. The revenue increase was offset by $30.3
million of increased expenses associated with the development of the expanded
full service infrastructure.
Mortgage Services
Mortgage services primarily consist of the origination, sale and servicing
of residential first mortgage loans. The Company packages its originated loans
for sale in secondary markets generally within 90 days of origination and
retains servicing rights. The Company markets a variety of first mortgage
products to
<PAGE>
consumers through relationships with corporations, affinity groups, government
agencies, financial institutions, real estate brokerage firms and mortgage banks
by a combination of retail teleservices delivery and wholesale correspondent
lending arrangements.
Operating income ($000's) 1996 1995 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............ $126,570 $ 93,251 36%
Operating expenses .............. 85,268 51,507 66%
-------- --------
Operating income ................ $ 41,302 $ 41,744 (1%)
======== ========
Operating income decreased 1% as a result of a 36% increase in adjusted net
revenue, net of a 66% increase in operating expenses. The increase in adjusted
net revenue resulted from a 149% increase in loan origination revenue offset by
a 28% decrease in loan servicing fees. The volume of loan closings increased 34%
from $6.3 billion to $8.4 billion and the average fee increased from 54 to 100
basis points. Whereas the portfolio of loans serviced increased 16% from $19.4
billion to $22.5 billion, the average fee decreased 38% from 30.8 to 19.2 basis
points. The increase in origination fees and decrease in servicing fees results
from the implementation of SFAS 122 in 1995, which had the effect of
reallocating revenue from servicing fees to origination fees. A reduction in
gains recorded from the sale of a portion of the loan servicing portfolio also
contributed to the decrease in service fees. The gain on the sale of servicing
amounted to $17.4 million in 1995 compared to $1.5 million in 1996. Operating
expenses increased as a result of higher closing volume experienced in expanded
retail teleservices delivery arrangements in 1996.
Other Segment
Other segment business operations primarily consist of casino credit
information and marketing services ("Casino Services"), the equity in earnings
from the Company's investment in ARAC (net of information technology fees
charged to ARAC) and other operations or transactions which are not included in
the Company's primary business segments. Operating expenses also include
corporate overhead expenses which could not be allocated to other operating
business segments. Operating income is summarized as follows:
Operating income ($000's) 1996 1995 Variance
- ------------------------- ------- ------- ----------
Adjusted net revenue ............. $47,871 $19,728 143%
Operating expenses ............... 28,362 9,022 214%
------- -------
Operating income ................. $19,509 $10,706 82%
======= =======
Operating income increased $8.8 million primarily as a result of $9.5 million of
consideration received by the Company related to the termination of a corporated
services agreement and $2.3 million equity in earnings from the Company's
investment in ARAC, which was acquired on October 17, 1996.
1995 Compared to 1994
Consolidated net income increased 29% ($35.3 million) to $157.9 million in 1995
while EPS increased 18% to $1.12. Consolidated revenue increased 19% to $1.1
billion in 1995.
Net interest expense increased $4.5 million as a result of incremental financing
costs associated with the CENTURY 21 transaction, and a general rise in interest
rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.
<PAGE>
Results for the combined segments on an operating income basis follows:
Operating income ($000's) 1995 1994 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............. $912,925 $761,852 20%
Operating expenses ............... 621,956 535,961 16%
-------- --------
Operating income ................. $290,969 $225,891 29%
======== ========
TRAVEL INDUSTRY
Lodging
Operating income ($000's) 1995 1994 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............. $195,631 $170,426 15%
Operating expenses ............... 75,025 67,939 10%
-------- --------
Operating income ................. $120,606 $102,487 18%
======== ========
Adjusted net revenue increased 15% as a result of a $20.7 million (16%)
increase in royalty fees and a $6.8 million (49%) increase in revenue from
preferred alliances seeking access to franchisees and their customers. Room
growth represented the most significant revenue outcome driver contributing to
the revenue increase. The Company added 63,280 rooms during 1995, representing
an 18.8% increase, but also terminated 39,603 rooms including 22,151 rooms in a
special year-end removal of properties as a result of the repositioning and
tightening of quality standards of the Company's brands. Total REVPAR increased
3.0% primarily due to a 2.6% increase in the average daily rates charged at
franchisee hotels and a 1.8% increase in average royalty rates.
Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $18.1 million (18%) while operating expenses
increased only $7.1 million (10%). The increase in operating expenses included
$4.6 million of franchise sales and bad debt expenses associated with system
growth as well as $1.5 million of scheduled Ramada license fee increases.
Depreciation expense also increased $4.1 million in part from a full year's
expense in 1995 related to the newly developed reservation system for Days Inn
which was implemented in October 1994. The increase was also attributable to
goodwill amortization associated with the issuance of Company common stock in
December 1994 and September 1995, pursuant to an earnout agreement entered into
with Bryanston Group, Inc., an affiliate of the sellers of the Days Inn
franchise system.
Fleet Management Services
Operating income ($000's) 1995 1994 Variance
- ------------------------- -------- -------- ------------
Adjusted net revenue ............. $258,877 $249,571 4%
Operating expenses ............... 201,959 197,248 2%
-------- --------
Operating income ................. $ 56,918 $ 52,323 9%
======== ========
Operating income increased 9% ($4.6 million) to $56.9 million in 1995 as a
result of a 4% ($9.3 million) increase in adjusted net revenue, net of 2% ($4.7
million) increase in operating expenses. The revenue increase primarily resulted
from an increase in service fees generated by growth in fuel and maintenance
management programs. Such growth reflects increased market penetration in the
United States and United Kingdom. Operating expenses increased only 2%
reflecting a cost reduction program implemented in 1995 net of certain expenses
that vary with revenue growth.
<PAGE>
REAL ESTATE INDUSTRY
Real Estate Franchise
The CENTURY 21 franchise system contributed $43.8 million of adjusted net
revenue and $19.3 million of operating profit for the five months following the
Company's August 1, 1995 acquisition. Franchise fees paid by the approximately
6,000 CENTURY 21 franchised brokerage offices approximated $42.1 million and
comprised the significant portion of Real Estate Franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.
Relocation
The Company operated PHH Relocation in both 1994 and 1995 and WRM from
August 1, 1995, the date it was acquired.
Operating income ($000's) 1995 1994 Variance
- ------------------------- -------- -------- ----------
Adjusted net revenue ............. $301,667 $255,974 18%
Operating expenses ............... 259,949 221,440 17%
-------- --------
Operating income ................. $ 41,718 $ 34,534 21%
======== ========
Operating income increased 21% ($7.2 million) as a result of an 18% ($45.7
million) increase in adjusted net revenue offset by a 17% ($38.5 million)
increase in operating expenses. The 18% increase in adjusted net revenue
resulted primarily from an expansion of full service products offered to
corporate clients and a 7% ($7.8 million) increase in home sale assistance fees.
1995 also included revenue and expense contributions from WRM which was acquired
on August 1, 1995. The operating expense increase resulted from growth in the
infrastructure necessary to match competition for fee-based services other than
home sale assistance and system related expenses associated with U.S. and
Canadian asset management businesses.
Mortgage Services
Operating income ($000's) 1995 1994 Variance
- ------------------------- ------- ------- ----------
Adjusted net revenue ............. $93,251 $74,494 25%
Operating expenses ............... 51,507 44,322 16%
------- -------
Operating income ................. $41,744 $30,172 38%
======= =======
Operating income increased 38% ($11.6 million) as a result of a 25% ($18.8
million) increase in adjusted net revenue partially offset by a 16% ($7.2
million) increase in operating expenses. Adjusted net revenue increased as a
result of $55.6 million of higher net revenue associated with the capitalization
of originated mortgage servicing rights partially offset by a $10.7 million
reduction in the gain on sale of servicing rights and a 32% increase in total
loan closings from 1994 to 1995. In addition, operating expenses increased as
the Company responded to the increase in loan production volume and the
increased servicing portfolio.
Mortgage loan closings increased from $3.4 billion to $6.3 billion in 1995.
These increases resulted from the increased consumer demand discussed above and
the Company's increased market share due primarily to expanded relationships
with affinity groups which represented 29% of the total increase, and with
financial institutions which represented 24% of the total increase. Servicing
net revenue increased 13% as a result of an increase in the average servicing
portfolio partially offset by increased amortization of servicing rights.
<PAGE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
122, "Accounting for Mortgage Servicing Rights," effective May 1, 1995. This
statement requires that originated mortgage servicing rights be recognized as
income when the loan is sold and servicing is retained. The effect of this
change in accounting was partially offset by a decrease in margins realized on
loans sold. This decline in margins reflects the competition in the industry to
capture lower demand for mortgages created by the changes in interest rates
during 1995.
Other Segment
Operating income ($000's) 1995 1994 Variance
- ------------------------- ------- ------- ----------
Adjusted net revenue ............. $19,728 $11,387 73%
Operating expenses ............... 9,022 5,012 80%
------- -------
Operating income ................. $10,706 $ 6,375 68%
======= =======
Operating income increased 68% ($4.3 million) as a result of the incremental
profits from Central Credit Inc. ("CCI"), which conducts a casino credit
information business and was acquired by the Company in May 1995.
LIQUIDITY AND CAPITAL RESOURCES
Acquisition Overview
The Company continues to seek to expand and strengthen its leadership
position in its travel and real estate industry segments with additional
acquisitions. Following the April 30, 1997 merger with PHH, the Company believes
it has achieved, annually, points of contact with over 100 million consumers
involved in significant dollar volumes of transactions in the travel and real
estate industries. The Company's desire to cross-market within its businesses
and expand the revenue streams of each business as well as market to its
millions of consumer contacts was the primary motivation for the proposed merger
with CUC, which the Company believes currently possesses expertise in direct
marketing necessary to accomplish the Company's objectives.
The Company's acquired businesses share similar characteristics, foremost
of which is that each was immediately accretive to Company cash flow and
earnings. Revenue is substantially generated from service fees and not dependent
on tangible assets or the need for capital expenditures other than technology
investments which support and historically have been significantly funded by the
Company's customers. These service businesses each generate significant cash
flow which is enhanced by the Company's operating leverage that supports
acquired revenue streams without corresponding increases in operating
infrastructure expenses.
Assuming the successful completion of the proposed CUC merger, the Company
is imminently positioned to cross-market within its existing business segments.
The Company continues to pursue acquisitions and/or investments in service
businesses that fit the profile described above.
PHH Merger
On April 30, 1997, the Company acquired PHH by merger (the "PHH Merger")
for approximately 30.3 million shares of Company common stock in exchange for
all of the outstanding common stock of PHH. PHH is the world's largest provider
of corporate relocation services and also provides mortgage and fleet
<PAGE>
management services. Since this transaction has been accounted for as a pooling
of interests, all financial information has been restated for the PHH merger.
The Company will incur a one-time restructuring charge of approximately
$287 million before related tax benefits in the second quarter of 1997 in
connection with the merger. The charge includes severance, facility
consolidation and other transaction related costs associated with the
restructuring of Company and PHH businesses. The restructuring charge will be
paid with borrowings under the Company's revolving credit facility and cash flow
from operations. The Company estimates the charge to result in annual pre-tax
savings of approximately $100 million with the full benefit of cost reductions
beginning in 1998.
Although PHH debt to equity ratio approximates 7 to 1, such debt
corresponds directly with related net investments in leased vehicles, equity
advances on homes and mortgage loans held for sale. Accordingly, Standard and
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's")
assigned investment grade ratings of A+ and A2, respectively, to PHH debt and A1
and P1, respectively to PHH commercial paper.
Pending Acquisitions
Value - On March 3, 1997, the Company announced that it reached an agreement in
principle to acquire Value Rent-A-Car ("Value") for $175 million in cash. The
Company determined not to pursue the acquisition of Value and terminated such
agreement in April 1997.
Sheraton - On January 27, 1997, Hilton Hotels Corporation ("Hilton") announced
that it had reached a preliminary understanding to license certain assets to the
Company in connection with its pending tender offer for the outstanding common
stock of ITT Corporation ("ITT"). Pursuant to the preliminary understanding,
subject to Hilton's successful acquisition of ITT, the Company would license the
Sheraton trademark, franchise system and management agreements worldwide under a
long-term contract. The transaction is subject to Hilton's acquisition of ITT as
well as negotiation of definitive agreements relating to the proposed license
agreement. There can be no assurance that Hilton's attempt to acquire ITT will
be successful or that the Company and Hilton will consummate their proposed
transaction.
Completed Acquisitions
RCI - On November 12, 1996, the Company completed the acquisition of all the
outstanding common stock of RCI for approximately $487 million comprised of $412
million in cash and $75 million of Company common stock plus future contingent
payments of up to $200 million over the next five years. The cash portion of the
purchase price was funded with borrowings under a revolving credit facility,
acquired RCI cash and excess proceeds from a second quarter public offering of
approximately 19.4 million shares which generated $1.2 billion of proceeds (the
"Offering").
RCI, based in Indianapolis Indiana, is the world's largest provider of timeshare
exchange programs, providing services for approximately 2.2 million timeshare
owners and approximately 3,100 resorts around the world. RCI is also engaged in
publishing related to the timeshare industry and provides other travel-related
services, integrated software systems and resort management and consulting
services.
Avis - On October 17, 1996, the Company completed the acquisition of all of the
outstanding capital stock HFS Car Rental Inc. (formerly Avis, Inc.) ("Avis"),
including payments under certain employee stock plans of Avis and the redemption
of certain series of preferred stock of Avis for $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4
<PAGE>
million (approximately 4.6 million shares) of Company common stock. The cash
portion of the purchase price was funded with excess proceeds from the Offering.
Prior to the consummation of the acquisition, the Company announced its plan to
undertake an IPO of ARAC within one year of the acquisition date and dilute its
interest in ARAC to approximately 25%. ARAC will license the Avis trademark from
the Company in return for a license fee based on a percentage of ARAC revenue.
The Company also provides reservation and information technology services to
ARAC.
Coldwell Banker - On May 31, 1996, the Company acquired by merger Coldwell
Banker for $640 million of cash plus repayment of approximately $105 million of
indebtedness. At that time, Coldwell Banker Corporation ("Coldwell Banker") had
2,164 franchised brokerage offices and owned 318 residential real estate
brokerage offices ("Owned Brokerage Business") in the United States, Canada and
Puerto Rico, representing the third largest real estate brokerage system in the
United States.
The Company financed the Coldwell Banker transaction with a portion of the
approximately $1.2 billion of proceeds from the Offering. Immediately following
the closing of the Coldwell Banker merger, the Company conveyed the Owned
Brokerage Business to the Trust and recorded a $5 million pre-tax restructuring
charge.
CENTURY 21 Non-owned Regions - During the second quarter of 1996, the Company
completed the acquisition of six U.S. CENTURY 21 regions which were licensed to
four independent master licensees. The aggregate purchase price consisted of
approximately $96.4 million of cash, $5 million of notes and $46 million
(approximately 0.9 million shares) of the Company's common stock. These
acquisitions resulted in the Company receiving royalty fees of up to 6% of the
franchisee gross commissions generated by such offices compared to less than 1%
previously received under the master licensing agreements. The cash portion of
the aggregate purchase price was financed with proceeds from the issuance of 4
3/4% Notes.
ERA - On February 12, 1996, the Company purchased substantially all of the
assets comprising the ERA residential real estate brokerage system for
approximately $39.4 million, which was financed by borrowings under the
Company's revolving credit facility.
CENTURY 21 - On August 1, 1995, a majority-owned Company subsidiary, C21 Holding
Corp. ("Holding"), acquired Century 21 from Metropolitan Life Insurance Company
("MetLife") for an aggregate purchase price of $245 million plus expenses. In
February 1996, the Company paid the $30 million contingent portion of the
purchase price of Century 21 and redeemed $80 million of Century 21 redeemable
preferred stock issued by MetLife prior to the acquisition. The Company financed
these payments with proceeds from the 4-3/4% Notes.
Effective October 29, 1996 (the "Effective Date"), the Company amended the
Subscription and Stockholders' Agreement dated as of August 1, 1995 among C21
Holding Corp., the Company and a group of former executives of Century 21 Real
Estate Corporation ("the Former Management") pursuant to which the Company owned
87.5% of C21 Holding Corp. and the Former Management owned 12.5% of C21 Holding
Corp. Such amendment provided for the acceleration of the Company's option to
purchase the 12.5% ownership from the Former Management at fair market value,
determined as of the Effective Date. The Company completed such purchase in the
second quarter of 1997 for $52.8 million.
Travelodge - On January 23, 1996, the Company purchased the assets comprising
the Travelodge hotel franchise system in North America, including the Travelodge
and Thriftlodge service marks and franchise agreements from Forte Hotels, Inc.
("FHI") for $39.3 million. The Company financed the acquisition with
<PAGE>
borrowings under its revolving credit facility and repaid the borrowings with
proceeds from the 4-3/4% Notes.
Concurrent with the Company's acquisition of the Travelodge franchise system,
Motels of America, Inc., through a wholly owned subsidiary, (collectively
"MOA"), purchased 20 Travelodge motels from FHI for $32.3 million. Chartwell
Leisure, Inc. ("CHRT") (formerly National Lodging Corp.), a former wholly owned
Company subsidiary which was distributed to the Company shareholders in November
1994, purchased all of the capital stock of FHI for $98.4 million. FHI owned or
had an interest in 112 hotel and motel properties at the acquisition date. MOA,
a significant Company franchisee, entered into twenty year Travelodge franchise
agreements for the lodging properties it acquired from FHI. The Company financed
$10 million of MOA's purchase price under a $10 million revolving credit
facility, bearing interest at 14% per annum. The loan is guaranteed by the
parent company of MOA and secured by approximately 80% of MOA's outstanding
common stock.
In connection with CHRT's acquisition of FHI, the Company guaranteed $75 million
of CHRT borrowings under a $125 million revolving credit facility entered into
by CHRT with certain banks. The Company is paid a guarantee fee of 2% per annum
of the outstanding guarantee commitment by the Company pursuant to a Financing
Agreement.
Concurrent with the acquisition of the Travelodge franchise system and CHRT's
acquisition of FHI, the marketing and advisory agreements between the Company
and CHRT were terminated. The corporate services agreement was modified to
provide that the Company was to provide financial and other corporate
administrative support and advisory services through September 1996 and
thereafter advisory services through January 2019 for a fee of $1.5 million per
year. This agreement was terminated in November 1996 by mutual agreement, with
the Company receiving $9.5 million in consideration for consenting to early
termination of such agreement. Additionally, CHRT paid a $2.0 million advisory
fee to the Company in connection with CHRT's acquisition of FHI.
Equity Transactions
Treasury Purchases - On January 7, 1997, the Board of Directors authorized the
purchase of 2.6 million shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund future
acquisitions. The Company acquired approximately 2.6 million treasury shares in
January and February 1997 for $179.4 million with revolving credit borrowings.
The Company completed the offering of 19.4 million shares of common stock in the
second quarter of 1996 which yielded net proceeds to the Company after expenses
of approximately $1.2 billion. Approximately $755 million of the proceeds were
used to finance the acquisition of Coldwell Banker and $75 million was used to
repay outstanding borrowings under the Company's revolving credit facility. The
remaining $331 million of proceeds were used as partial consideration for the
October 17, 1996 and November 12, 1996 acquisitions of Avis and RCI,
respectively.
The Company issued 0.9 million shares of common stock in May 1996 in connection
with the acquisition of the CENTURY 21 non-owned regions. Also, the Company
issued 4.6 million and 1.0 million shares in connection with the October 17,
1996 and November 12, 1996 acquisitions of Avis and RCI, respectively.
Financing
The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. Most significant, the Company has
generated significant positive cash flow from operations in
<PAGE>
every quarter since its initial public offering in December 1992. The Company
has also demonstrated its ability to access equity and public debt markets and
financial institutions to generate capital for strategic acquisitions.
Indicative of the Company's creditworthiness, following the announcement of the
PHH merger, S&P and Duff & Phelps affirmed their A credit rating of the
Company's publicly issued debt and Moody's upgraded the Company's debt rating to
A3.
Liquidity is available to the Company through revolving credit facilities
which may provide up to $1.5 billion of unsecured borrowings at interest rates
generally approximating LIBOR plus a margin of 25 basis points. At December 31,
1996, the Company had $205 million of outstanding borrowings under its revolving
credit facilities.
The Company filed a shelf registration statement with the Securities and
Exchange Commission effective August 29, 1996, for the aggregate issuance of up
to $1 billion of debt and equity securities. These securities may be offered
from time to time, or separately based on terms to be determined at the time of
sale. The proceeds may be used for general corporate purposes, which may include
future acquisitions.
Long-term debt, which totaled $748.4 million at December 31, 1996,
primarily consists of $537 million of publicly issued debt and $205 million of
borrowings under the Revolving Credit Facilities. Publicly issued debt includes
the $240 million of 4-3/4% Notes (convertible) due 2003, $147 million of 4-1/2%
convertible senior notes due 1999 and $150 million of 5-7/8% senior notes due
December 1998. Interest on the publicly issued debt is paid semi-annually.
Long-term debt increased from $303.0 million at December 31, 1995 to $748.4
million at December 31, 1996, due to the issuance of the 4-3/4% Notes and $205
million of borrowings under the Revolving Credit Facilities which partially
financed the November acquisition of RCI.
PHH operates mortgage services, fleet management and relocation businesses
as a separate public reporting entity and supports purchases of leased vehicles
and originated mortgages primarily with $5.1 billion of borrowings at December
31, 1996, including the issuance of $3.1 billion of commercial paper and $1.7
billion of medium term notes. Such borrowings are included in liabilities under
management and mortgage programs rather than long-term debt since such debt
corresponds directly with high quality related assets. Although PHH's debt to
equity ratio approximates 7 to 1, in recognition of the relationship between
borrowings and high quality assets, following the announcement of the PHH
merger, S&P and Moody's affirmed investment grade ratings of A+ and A2,
respectively to PHH debt and A1 and P1, respectively to PHH commercial paper.
Although PHH debt is issued without recourse to the Company, the combined
company will continue to maintain broad access to global capital markets by
maintaining the quality of its assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, PHH
utilizes the United States, European and Canadian commercial paper markets, as
well as other cost-effective short-term instruments. In addition, PHH will
continue to utilize the public and private debt markets to issue unsecured
senior corporate debt. Augmenting these sources, PHH will periodically reduce
outstanding debt by the sale or transfer of managed assets to third parties
while retaining fee-related servicing responsibility.
To provide additional financial flexibility, PHH's current policy is to
ensure that minimum committed facilities aggregate 80 percent of the average
amount of outstanding commercial paper. PHH maintains a $2.5 billion syndicated
unsecured credit facility which is backed by domestic and foreign banks and is
comprised of $1.25 billion of lines of credit maturing in 364 days and $1.25
billion maturing in five years. In addition, PHH has approximately $300 million
of uncommitted lines of credit with various financial institutions. Management
closely evaluates not only the credit of the banks but the terms of the various
<PAGE>
agreements to ensure ongoing availability. The full amount of PHH's committed
facilities in 1997 to date are undrawn and available. Management believes that
its current policy provides adequate protection should volatility in the
financial markets limit PHH's access to commercial paper or medium-term notes
funding.
The Company minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities.
The Company generated $1.2 billion of cash flow from operations during the
year ended December 31, 1996, representing a $372.4 million (44%) increase from
the year ended December 31, 1995. The Company reported a $12.2 million working
capital deficiency at December 31, 1996 primarily as a result of $313 million of
deferred subscription revenue acquired in the November 1996 RCI acquisition
without the benefit of acquiring the corresponding up-front cash collected for
the same subscriptions.
Cash and cash equivalents increased $46.6 million from December 31, 1995 to
December 31, 1996. Approximately $372.4 million and $1.1 billion of the increase
was attributable to net cash provided by operating activities and financing
activities, respectively. This increase was offset by $1.4 billion of net cash
used in investing activities. The increase from operating activities was
primarily attributable to $99.4 million of incremental net income and $98.5
million of incremental depreciation and amortization. Investing activities
required the use of $1.5 billion more cash in 1996 to purchase the net assets of
acquired business exclusive of acquired cash, and $14.2 million of incremental
property and equipment additions including company headquarters improvements
(first occupied in September 1996), a new reservation system for the Super 8
franchise systems and computer equipment following the Company's termination of
a contract with an information technology services provider. The $1.1 billion
increase in net cash provided by financing activities resulted from
approximately $1.2 billion and $447.1 million of proceeds received in connection
with the Offering and borrowings under the Revolving Credit Facilities,
respectively.
On October 2, 1996, the Company replaced an existing $300 million revolving
credit facility with $1 billion of revolving credit facilities consisting of (i)
a $500 million, five year revolving credit facility and a $500 million, 364 day
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 at rates based on
competitive bids of lenders participating in the facilities, at the prime rate
or at LIBOR plus a margin approximating 25 basis points. In 1997, the Company
has requested and received an additional $500 million of credit availability
under the Revolving Credit Agreement. Outstanding borrowings under the Revolving
Credit Facilities approximates $205 million at December 31, 1996.
IMPACT OF INFLATION
The primary source of revenue of the Company through December 31, 1996 is
based on a percentage of the franchised lodging facilities' gross room revenue
and franchised real estate brokerage offices' gross commission revenue. As a
result, the Company's revenue (excluding those changes attributable to a change
in the number of franchises) is expected to change consistent with the trend of
the consumer price index. The Company does not believe that inflation would have
an unfavorable impact on its operations.
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for the Company in financial statements issued after January 1, 1997.
The Company does not expect the adoption of SFAS 125 to have a material impact
on the financial condition or results of operations.
In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS 128 supersedes APB 15 and replaces the presentations of primary EPS
with a presentation of Basic EPS. It also requires presentation of Basic and
Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS 128 was applicable for 1996, the Company would have
reported the following:
Pro forma:
Basic EPS $ 1.78
Diluted EPS $ 1.59
As reported:
Primary EPS $ 1.59
Diluted EPS $ 1.58
SEASONALITY
The principal sources of revenue for the Company are fees for services
provided. Lodging and Car Rental franchise royalty fees share the same pattern
of revenue experienced by their respective underlying industries, wherein summer
months produce higher revenue due to increased leisure travel. Although the
Timeshare business services the leisure traveler, exchanges are made and earned
consistently throughout the year. The Fleet Management segment services
corporate fleet consumers that lease vehicles throughout the year and
accordingly, earnings from such services are earned consistently throughout the
year. Real Estate franchise fees and Relocation service fees are earned when
residential home sale closings peak, which is generally in summer months.
Mortgage service fees are amortized and earned consistently over the term of the
loan being serviced: however; revenue derived from loan originations and sales
of servicing may fluctuate depending on interest rate changes which influence
the market for loan refinancings, pay-offs and lending activity. On a weighted
average basis, pro forma for acquired companies, the aggregate principal sources
of revenue generate 22%, 26%, 28% and 24% of total annual revenue in the first,
second, third and fourth calendar quarters, respectively.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of HFS Incorporated:
We have audited the consolidated balance sheets of HFS Incorporated and its
subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. 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. The consolidated financial statements give retroactive effect to the
merger of HFS Incorporated and PHH Corporation, which has been accounted for as
a pooling of interests as described in Note 2 to the consolidated financial
statements. We did not audit the financial statements of PHH Corporation for the
years ended December 31, 1996, January 31, 1996 and January 31, 1995, which
statements reflect assets of $6,574,646,000 and $5,775,627,000 as of December
31, 1996 and January 31, 1996, respectively, and revenues of $1,938,537,000,
$1,815,120,000, $1,609,340,000 for the years ended December 31, 1996, January 31
1996 and January 31, 1995, respectively. Those financial statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for PHH Corporation for such
periods, is based solely on the report of such other auditors.
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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of HFS Incorporated and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", in the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 31, 1997 (May 27, 1997 as to Note 2a and April 30, 1997 as to Note 2b)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation
We have audited the consolidated balance sheets of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended December 31, 1996 and each of the years in the two-year period ended
January 31, 1996, not presented separately herein. 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the results of
their operations and their cash flows for the year ended December 31, 1996 and
for each of the years in the two-year period ended January 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", in the year ended January 31, 1996.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
ASSETS 1996 1995
----------- -----------
CURRENT ASSETS
Cash and cash equivalents .......................... $ 69,541 $ 22,923
Restricted cash .................................... 89,849 --
Investment in equity securities .................... 22,500 --
Other accounts and notes receivable,
net of allowance for doubtful
accounts of $27,265 and $27,008,
respectively .................................. 687,907 565,484
Other current assets ............................... 94,820 83,220
Deferred income taxes .............................. 93,798 41,242
----------- -----------
TOTAL CURRENT ASSETS ............................... 1,058,415 712,869
Property and equipment - net ....................... 328,528 164,220
Franchise agreements - net of
accumulated amortization of
$87,876 and $65,905, respectively ............. 995,947 517,218
Excess of cost over fair value of
net assets acquired net of
accumulated amortization of
$63,725 and $25,021, respectively ............ 1,783,409 406,414
Other intangibles - net of accumulated
amortization of $4,441 ....................... 604,535 --
Investment in car rental operations
of Avis, Inc. ................................ 76,540 --
Other assets ....................................... 289,392 172,483
----------- -----------
Total assets exclusive of assets under programs .... 5,136,766 1,973,204
----------- -----------
Assets under management and mortgage programs:
Net investment in leases and leased vehicles .. 3,418,666 3,243,236
Relocation receivables ........................ 773,326 736,038
Mortgage loans held for sale .................. 1,248,299 784,901
Mortgage servicing rights and fees ............ 288,943 191,434
----------- -----------
5,729,234 4,955,609
----------- -----------
TOTAL ASSETS ....................................... $10,866,000 $ 6,928,813
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
CURRENT LIABILITIES
Accounts payable and other accrued expenses .... $ 855,770 $ 600,203
Short-term debt ................................ 150,000 --
Due to car rental operations of
Avis, Inc., net ............................... 61,807 --
Current portion of long-term debt .............. 2,995 2,249
------------ ------------
TOTAL CURRENT LIABILITIES ...................... 1,070,572 602,452
Long-term debt ................................. 748,421 300,778
Deferred revenue ............................... 397,034 64,591
Other liabilities .............................. 131,021 72,079
------------ ------------
Total liabilities exclusive of
liabilities under programs .................... 2,347,048 1,039,900
------------ ------------
Liabilities under management and
mortgage programs:
Debt ...................................... 5,089,943 4,427,872
Deferred income taxes ..................... 281,948 234,918
------------ ------------
5,371,891 4,662,790
Series A adjustable rate Preferred Stock ....... -- 80,000
------------ ------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value
- authorized 10,000,000 shares;
none issued and outstanding ............... -- --
Common stock, $.01 par value
- authorized 600,000,000 shares;
issued and outstanding 158,728,807
and 130,991,148 shares, respectively .......... 1,588 1,310
Additional paid-in capital ..................... 2,337,297 566,795
Retained earnings .............................. 830,970 601,118
Net unrealized gain on investment .............. 4,366 --
Currency translation adjustment ................ (8,008) (23,100)
Treasury stock, at cost (322,500 shares) ....... (19,152) --
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................... 3,147,061 1,146,123
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $ 10,866,000 $ 6,928,813
============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
REVENUES
Service fees, net ................... $1,340,534 $ 962,954 $ 815,423
Fleet leasing (net of depreciation
and interest costs of
$1,132,408, $1,088,993 and $976,244,
respectively) ...................... 56,660 52,079 47,860
Other, net .......................... 42,978 41,857 28,837
---------- ---------- ----------
Net revenues ........................ 1,440,172 1,056,890 892,120
---------- ---------- ----------
EXPENSES
Operating ........................... 660,079 528,571 458,462
Marketing and reservation ........... 157,347 137,715 124,603
General and administrative .......... 73,373 36,457 29,452
Depreciation and amortization ....... 97,811 63,178 53,712
Interest, net ....................... 19,695 22,949 18,490
---------- ---------- ----------
Total expenses ...................... 1,008,305 788,870 684,719
---------- ---------- ----------
Income before income taxes .......... 431,867 268,020 207,401
Provision for income taxes .......... 174,626 110,170 84,868
---------- ---------- ----------
NET INCOME .......................... $ 257,241 $ 157,850 $ 122,533
========== ========== ==========
PER SHARE INFORMATION
Net income
Primary ........................ $ 1.59 $ 1.14 $ 0.95
Fully diluted .................. 1.58 1.12 0.95
Weighted average shares outstanding
Primary ........................ 164,378 142,490 129,535
Fully diluted .................. 165,146 144,489 129,563
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net
Additional Unrealized Currency
Common Stock Paid-in Retained Gain on Translation Treasury
Shares Amount Capital Earnings Investment Adjustment Stock
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 116,997 $ 1,170 $ 334,449 $ 445,002 $ -- $ (21,191) $ --
Issuance of common stock 4,140 41 55,901 -- -- -- --
Exercise of stock options 464 5 5,154 -- -- -- --
Tax benefit from exercise of
stock options -- -- 1,935 -- -- -- --
Cash dividends declared(1) -- -- -- (21,680) -- -- --
Retirement of common stock (1,180) (12) (25,433) -- -- -- --
Currency translation adjustment -- -- -- -- -- 2,336 --
Distribution of Chartwell
Leisure Inc. -- -- (18,445) (79,775) -- -- --
Net income -- -- -- 122,533 -- -- --
--------- --------- ----------- ----------- ----------- --------- ---------
Balance, December 31, 1994 120,421 1,204 353,561 466,080 -- (18,855) --
Issuance of common stock 8,341 83 178,240 -- -- -- --
Exercise of stock options 1,249 13 16,891 -- -- -- --
Tax benefit from exercise of
stock options -- -- 3,484 -- -- -- --
Exercise of stock warrants 991 10 14,872 -- -- -- --
Cash dividends declared(1) -- -- -- (22,812) -- -- --
Conversion of 4 1/2%
Senior Notes 2 -- 29 -- -- -- --
Retirement of common stock (13) -- (282) -- -- -- --
Currency translation adjustment -- -- -- -- -- (4,245) --
Net income -- -- -- 157,850 -- -- --
--------- --------- ----------- ----------- ----------- ---------- ----------
Balance, December 31, 1995 130,991 1,310 566,795 601,118 -- (23,100) --
Issuance of common stock 25,706 257 1,712,015 -- -- -- --
Exercise of stock options 1,879 19 25,909 -- -- -- --
Tax benefit from exercise
of stock options -- -- 29,922 -- -- -- --
Cash dividends declared(1) -- -- -- (24,984) -- -- --
Conversion of 4 1/2%
Senior Notes 181 2 3,291 -- -- -- --
Purchase of common stock -- -- -- -- -- -- (19,152)
Currency translation adjustment -- -- -- -- -- 12,712 --
Net unrealized gain on investment -- -- -- -- 4,366 -- --
Net income -- -- -- 257,241 -- -- --
Less PHH activity for January
1996 to reflect change in PHH
fiscal year:
Exercise of stock options (28) -- (635) -- -- -- --
Cash dividend declared(1) -- -- -- 5,859 -- -- --
Currency translation adjustment -- -- -- -- -- 2,380 --
Net income -- -- -- (8,264) -- -- --
--------- --------- ----------- ----------- ----------- ---------- ----------
Balance, December 31, 1996 158,729 $ 1,588 $2,337,297 $ 830,970 $ 4,366 $ (8,008) $ (19,152)
========= ========= =========== ========== =========== ========== ==========
</TABLE>
(1) Represents cash dividends declared and paid to PHH Corporation common
shareholders prior to the merger between HFS Incorporated and
PHH Corporation.
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
Operating Activities 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income ...................................... $ 257,241 $ 157,850 $ 122,533
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ................ 103,279 65,649 58,239
Depreciation on vehicles under
operating leases ........................... 970,633 929,341 849,523
Amortization and write-down of
mortgage servicing rights and fees ......... 51,128 31,572 20,284
Additions to originated mortgage
servicing rights ........................... (97,568) (61,095) --
Additions to excess mortgage
servicing rights ........................... (66,825) (51,191) (24,679)
Gain on sales of mortgage servicing rights ... (5,194) (17,400) (28,076)
Deferred income taxes ........................ 92,351 54,700 45,900
Proceeds from repayment of relocation
receivables and equity advances ............ 4,348,857 6,070,490 5,059,017
Relocation receivables and equity
advances generated ......................... (4,307,978) (6,238,538) (4,989,953)
Gain on sale of subsidiaries ................. (14,632) -- --
Increase (decrease) from changes in:
Accounts and notes receivable .............. (43,620) (32,409) (52,050)
Accounts payable, accrued expenses and other (42,105) 65,156 (75,770)
Mortgage loans held for sale ............... (73,308) (139,520) 42,562
All other operating activity ............... 43,491 9,116 (46,038)
----------- ----------- -----------
Net cash provided by operating activities ....... 1,215,750 843,721 981,492
----------- ----------- -----------
Investing Activities
Property and equipment additions ................ (66,595) (45,554) (34,243)
Due to car rental operations of Avis, Inc. ...... (11,228) -- --
Loans and investments ........................... (12,721) (33,783) (42,524)
Net assets acquired, exclusive of
cash acquired ............................... (1,597,231) (70,647) --
Investment in leases and leased vehicles ........ (1,738,426) (2,008,559) (1,703,690)
Repayment of investment in leases
and leased vehicles ......................... 595,852 576,670 593,155
Proceeds from sales and transfers of leases and
leased vehicles to third parties ............. -- 109,859 105,087
Purchases of mortgage servicing rights .......... -- (17,849) (17,241)
Proceeds from sales of mortgage servicing rights 7,113 21,742 36,836
Proceeds from sale of subsidiaries .............. 38,018 -- --
Funding of grantor trusts ....................... (89,849) -- --
All other investing activities .................. 6,844 (23,821) 10,511
----------- ----------- -----------
Net cash used in investing activities ........... (2,868,223) (1,491,942) (1,052,109)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Financing Activities
Principal payments on borrowings ............. $(1,649,040) $(1,283,975) $(1,236,563)
Net change in borrowings with terms
of less than 90 days ...................... 231,819 17,419 27,852
Proceeds from other borrowings ............... 2,103,104 1,858,826 1,365,449
Issuance of common stock ..................... 1,179,388 65,537 6,080
Redemption of warrants ....................... -- 14,877 --
Cash distribution ............................ -- -- (50,000)
Purchases of treasury stock .................. (19,152) (282) (25,445)
Redemption of Series A Preferred Stock ....... (80,000) -- --
Payment of dividends ......................... (24,984) (22,812) (21,680)
----------- ----------- -----------
Net cash provided by financing activities .... 1,741,135 649,590 65,693
----------- ----------- -----------
Effect of changes in exchange rates
on cash and cash equivalents .............. (46,321) 6,545 2,665
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents ...................... 42,341 7,914 (2,259)
Add PHH activity for January 1996 to reflect
change in PHH fiscal year (Note 2b) ....... 4,277 -- --
Cash and cash equivalents, beginning of period 22,923 15,009 17,268
----------- ----------- -----------
Cash and cash equivalents, end of period ..... $ 69,541 $ 22,923 $ 15,009
=========== =========== ===========
Supplemental Disclosures of Cash Flow
Information Cash paid during the year for:
Interest .................................. $ 287,339 $ 280,279 $ 203,259
=========== =========== ===========
Taxes ..................................... $ 58,637 $ 34,410 $ 32,317
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HFS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS: HFS Incorporated (together with its subsidiaries,
the "Company"), is a leading global provider of services to businesses
serving consumer industries. The Company primarily engages in travel
related and real estate related industries.
TRAVEL RELATED BUSINESSES:
o Lodging franchise (lodging segment). The Company franchises guest
lodging facilities and residential real estate brokerage offices and
provides operational and administrative services to its franchisees
under the Days Inn(R), Howard Johnson(R), Knights Inn(R), Ramada(R),
Super 8(R), Travelodge(R), Villager Lodge(R) ("Villager") and Wingate
Inn(R) service marks.
As a franchisor, the Company licenses the owners and operators of
independent hotels 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 include access to a national reservation system,
national advertising and promotional campaigns, co- marketing programs
and volume purchasing discounts.
o Car Rental (car rental segment). The Company currently owns HFS Car
Rental Inc. (formerly Avis, Inc.) ("Avis"), including the car rental
operations of Avis ("ARAC") which provides vehicle rentals to
businesses and individual customers worldwide as well as other
rental-related products such as insurance, refueling services and loss
damage waivers. The Company intends to undertake an initial public
offering of ARAC (the "IPO") in 1997 which will dilute the Company's
ownership interest to 25%. The Company will retain the Avis trademark
and entered into a franchise agreement with ARAC effective as of
January 1, 1997. (See "Principles of Consolidation"). In 1996, the
Company provided franchise services to licensees other than ARAC, and
operated a telecommunications and computer processing system which
is used by ARAC and other independent car rental companies for
reservations, rental agreement processing, accounting, fleet control
and other purposes.
o Timeshare (timeshare segment). The Company operates Resort Condominiums
International ("RCI"), a provider of timeshare exchange programs,
publications and other travel related services to the timeshare
industry. The "RCI network" enables members who own timeshare interests
in resort properties that are affiliated with the RCI Network to
exchange such timeshare interests for an equivalent value in other
affiliated resorts.
o Fleet Management (fleet management segment). The Company provides
services which primarily consist of the management, purchase, leasing,
and resale of vehicles for corporate clients and government agencies.
These services also include fuel, maintenance, safety and accident
management programs and other fee-based services for clients' vehicle
fleets.
The Company leases vehicles primarily to corporate fleet users under
operating and direct financing lease arrangements. Open-end operating
leases and direct financing leases generally have a minimum lease
<PAGE>
term of 12 months with monthly renewal options thereafter. Closed-end
operating leases typically have a longer term, usually 30 months or
more, but are cancelable under certain conditions.
REAL ESTATE RELATED BUSINESSES:
o Real estate franchise (real estate segment). The Company franchises
residential real estate brokerage offices and provides operational and
administrative services to its franchisees under the CENTURY 21(R),
Coldwell Banker(R), and Electronic Realty Associates(R) (ERA(R))
service marks. As franchisor, the Company licenses the owners and
operators of independent real estate brokerage offices to use the
Company's brand names. The Company provides services designed to
increase franchisee revenue and profitability including national
advertising and promotions, referrals, training and volume purchasing
discounts.
o Relocation (relocation segment). The Company provides relocation
services to client corporations through its HFS Mobility Services
Division. These services include the responsibility of selling
transferee residences, providing equity advances on transferee
residences for the purchase of new homes and certain home management
services. The Company also offers fee-based programs such as home
marketing assistance, household goods moves, destination services and
property dispositions for financial institutions and government
agencies.
o Mortgage services (mortgage services segment). The Company provides
services which primarily include the origination, sale and servicing of
residential first mortgage loans. The Company markets a variety of
first mortgage products to consumers through relationships with
corporations, affinity groups, financial institutions, real estate
brokerage firms and other mortgage banks.
OTHER (other segment). The Company records equity in the earnings from
its investment in ARAC and provides marketing and other services to
casino gaming facilities.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts and transactions of the Company together with its wholly owned
and majority owned subsidiaries except for the Company's ownership of ARAC
which is accounted for under the equity method. ARAC is not consolidated
because of the Company's plan to undertake the IPO which will dilute the
Company's ownership interest to 25%. If the IPO is not consummated within
one year of the Company's acquisition of Avis, the Company will consolidate
ARAC. On April 30, 1997, HFS (the Company prior to the merger with PHH
Corporation) acquired PHH Corporation ("PHH") by merger which has been
accounted for as a pooling of interests. Accordingly, the accompanying
consolidated financial statements have been restated as if PHH and HFS had
operated as one entity since inception (See Note 2b). All material
intercompany balances and transactions have been eliminated in
consolidation.
ASSETS AND LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS: The
Company presents assets and liabilities of its fleet management and
mortgage programs relating to leases, receivable under relocation programs
and residential mortgage services in an unclassified manner in its
balance sheet.
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
RESTRICTED CASH: Restricted cash consists of cash held in trust for
employee benefit liabilities which were required to be funded prior to
consummation of the merger of HFS with PHH. PHH funded several grantor
trusts in accordance with the merger agreement.
INVESTMENT SECURITIES: The Company determines the appropriate
classifications of its investment securities at the time of purchase and
periodically reevaluates such determinations. Unrestricted investment
securities for which the Company does not have the intent or ability to
hold to maturity are classified as "available for sale".
<PAGE>
Available for sale securities are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity.
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 lives of the related assets or the lease
term, if shorter. Interest costs of $564,000, $82,000 and $246,000 in 1996,
1995 and 1994, respectively, for the construction of property and equipment
were capitalized and are being amortized over the estimated useful lives of
the related assets. The Company periodically evaluates the recoverability
of property and equipment by comparing the carrying value to current and
expected cash flows separately for each business segment in which the
property and equipment is employed.
FRANCHISE AGREEMENTS: Franchise agreements are recorded at their estimated
fair values upon acquisition and amortized over the estimated period to be
benefited, ranging from 12 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.
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.
OTHER INTANGIBLES: Other intangibles, consisting of the Avis trademark,
customer lists and a reservation system are recorded at their estimated
fair values at the dates acquired and are amortized on a straight-line
basis over the estimated periods to be benefited, ranging from 6.5 to 40
years. The Company periodically evaluates the recoverability of other
intangibles by comparing the carrying values to current and expected future
cash flows.
FRANCHISE ACQUISITION COSTS : The Company expenses direct costs relating to
franchise sales on the date the property opens.
OTHER DEFERRED COSTS: Deferred financing costs are amortized over the life
of the related debt using the interest method.
REVENUE RECOGNITION: Revenue primarily consists of fees for providing
services to businesses in consumer industries.
Franchise revenue: Franchise revenue principally consists of royalty,
marketing and reservation fees which are based on a percentage of
franchised lodging properties' gross room sales ("Gross Room Sales") and
franchised real estate brokerage offices' gross commissions earned on sales
of residential real estate properties ("Gross Closed Commissions").
Royalty, marketing and reservation fees are accrued as the underlying
franchisee revenue is earned. Franchise revenue also includes initial
franchise fees which are recorded as revenue when the lodging property or
real estate brokerage office opens as a franchised unit.
Relocation services revenue: The relocation services provided by the
Company include facilitating the purchase and resale of the transferee's
residence, providing equity advances on the transferee's residence and home
management services. The home is purchased under a contract of sale and the
Company obtains a deed
<PAGE>
to the property; however, it does not generally record the deed or transfer
of title. Transferring employees are provided equity on their home based on
an appraised value determined by independent appraisers, after deducting
any outstanding mortgages. The mortgage is generally retired concurrently
with the advance of the equity and the purchase of the home. Based on its
client agreements, the Company is given parameters under which it
negotiates for the ultimate sale of the home. The gain or loss on resale is
generally borne by the client corporation.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate based on various indices.
Direct costs of managing the home during the period the home is held for
resale, including property taxes and repairs and maintenance are generally
borne by the client. All such advances are generally guaranteed by the
client corporation. The client normally advances funds to cover a portion
of such carrying costs. When the home is sold, a settlement is made with
the client corporation netting actual costs with any advanced billing.
The fair value of equity advances and other relocation receivables
approximates the carrying value. Revenues associated with the resale of a
residence are recognized when services are performed from the date the
property is acquired through the date the residence is sold to a third
party.
Timeshare revenue: Revenues generated from services provided to the
timeshare industry include subscription and exchange revenue. Subscription
revenue is deferred upon receipt and recorded as income as the contractual
services (delivery of publications) are provided to subscribers. Exchange
fees are recognized as revenue when the exchange request has been confirmed
to the subscriber.
Fleet management revenue: Revenues from fleet management services other
than leasing are recognized over the period in which services are provided
and the related expenses are incurred. The Company records the cost of
leased vehicles as " net investment in leases and leased vehicles." Amounts
charged to lessees for interest on the unrecovered investment are credited
to income on a level yield method which approximates the contractual terms.
Vehicles under operating leases are amortized using the straight-line
method over the expected lease term.
Mortgage services revenue: Loan origination fees, commitment fees paid in
connection with the sale of loans, and direct loan origination costs
associated with the loans held for resale, are deferred until the loan is
sold. Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages and
the amount paid to the investor, or on a stipulated percentage of the
outstanding monthly principal balance on such loans. Servicing fees are
credited to income when received. Costs associated with loan servicing are
charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Sales of mortgage securities are recorded on the
settlement date. Gains or losses on sales of mortgage loans are recognized
based upon the difference between the selling price and the carrying value
of the related mortgage loans sold. Beginning May 1, 1995 the carrying
value of the loans excludes the cost assigned to originated servicing
rights (see Note 7). Such gains and losses are also increased or decreased
by the amount of deferred mortgage servicing fees recorded.
The Company acquires mortgage servicing rights and excess servicing fees by
originating or purchasing mortgage loans and selling those loans with
servicing retained, or it may purchase mortgage servicing rights
separately. The carrying value of mortgage servicing rights and excess
servicing fees is amortized over the estimated life of the related loan
portfolio. Such amortization is recorded net within service fees in the
consolidated statements of income.
Gains or losses on the sale of mortgage servicing rights are recognized
when title and all risks and rewards have irrevocably passed to the buyer
and there are no significant unresolved contingencies.
<PAGE>
The Company reviews the recoverability of excess servicing fees by
discounting anticipated future excess servicing cash flows at original
discount rates utilizing externally published prepayment rates. If the
discounted value is less than the recorded balance, due to higher than
expected prepayments, the difference is recognized as a write-down in the
consolidated statement of income.
Other revenue: Other principal sources of revenue included in each business
segment primarily consist of service fees from agreements that provide
preferred alliance partners access to the Company's customers and its
customers' customers; telecommunications and computer processing services
provided to the car rental industry; and marketing and other services
provided to casino gaming facilities which are recognized as services are
provided.
DIVESTITURE: In 1996, the Company sold its North American truck fuel
management operations, and recorded an $11.7 million net gain which is
reflected in other net revenues.
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 for periods subsequent to each acquisition.
SHARE INFORMATION: Earnings per share are based upon the weighted average
number of common and common equivalent shares outstanding during the
respective periods. The $240 million 4-3/4% Convertible Senior Notes issued
in February 1996 are antidilutive and, accordingly, are not included in the
computation of earnings per share. In addition, 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. In each of November 1995 and
February 1994, the Company's Board of Directors authorized a two-for-one
split of the Company's common stock which was effected in the form of a
100% stock dividend in February 1996 and April 1994, respectively. All
share, per share, stock price and stock award plan information presented
herein has been retroactively adjusted to reflect the stock splits.
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.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" but applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its stock option plans. Under APB No. 25, because the exercise prices of
the Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized.
DERIVATIVE FINANCIAL INSTRUMENTS: As a matter of policy, the Company does
not engage in derivatives trading or market-making activities. Rather,
derivative financial instruments including interest rate swaps and
forward exchange contracts are used by the Company principally in the
management of its interest rate exposures and foreign currency
exposures on intercompany borrowings. Additionally, the Company
enters into forward delivery contracts, financial futures programs
and options to reduce the risks of adverse price fluctuation with respect
to both mortgage loans held for sale and anticipated mortgage loan closings
arising from commitments issued.
<PAGE>
Amounts to be paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized over the life of the
swap agreements as an adjustment to interest expense. The fair value of the
swap agreements is not recognized in the consolidated financial statements
since they are accounted for as hedges. Market value gains and losses on
the Company's foreign currency transaction hedges are recognized in income
and substantially offset related foreign exchange gains and losses. Market
value gains and losses on positions used as hedges in the mortgage banking
services operations are deferred and considered in the valuation of lower
of cost or market value of mortgage loans held for sale.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of the foreign
subsidiaries are translated at the exchange rates as of the balance sheet
dates, equity accounts are translated at historical exchange rates and
revenues, expenses and cash flows are translated at the average exchange
rates for the periods presented. Translation gains and losses are included
in stockholders' equity. Gains and losses resulting from the change in
exchange rates realized upon settlement of foreign currency transactions
are substantially offset by gains and losses realized upon settlement of
forward exchange contracts. Therefore, the resulting net income effect of
transaction gains and losses in the years ended December 31, 1996, 1995 and
1994, was not significant.
NEW ACCOUNTING PRONOUNCEMENT: In 1996, the FASB issued SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The statement provides accounting and
reporting standards for transfers and servicing of financial assets and,
among other things, SFAS No. 125 also requires that previously recognized
servicing receivables that exceed contractually specified servicing fees
shall be reclassified as interest-only strips receivable, and subsequently
measured under the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The Company will adopt the
provisions of SFAS No. 125 on January 1, 1997 and will reclassify a portion
of its excess servicing fees to interest-only strips. The effect of
adopting SFAS No. 125 was not material to the Company's operations or
financial condition.
RECLASSIFICATIONS: Certain reclassifications have been made to the
historical financial statements of HFS and PHH to conform to the restated
presentation.
2. Mergers and Acquisitions
2a. Pending Merger with CUC International, Inc. (the "CUC Merger")
On May 27, 1997, the Company entered into a definitive merger agreement
(the "Merger Agreement") with CUC International Inc. ("CUC") pursuant to which
each share of the Company's common stock shall be converted into the right to
receive 2.4031 shares of CUC common stock. CUC is a leading technology-driven,
membership- based consumer services company, providing its members with access
to a variety of goods and services worldwide, including such components as
shopping, travel, auto, dining, home improvement, lifestyle, vacation exchange,
credit card and checking account enhancement packages, financial products and
discount programs. CUC recorded total revenues and net income of $2.3 billion
and $164.1 million, respectively, for the year ended January 31, 1997.
Consummation of the transaction is subject to approval of the shareholders of
each company at special meetings of such shareholders to be held in the second
half of 1997. The CUC Merger will be accounted for as a pooling of interests.
2b. Merger with PHH Corporation (the "PHH Merger")
On April 30, 1997, HFS acquired PHH by merger for which was satisfied by
the issuance of 30.3 million shares of Company common stock in exchange for all
of the outstanding common stock of PHH. The PHH Merger has been accounted for as
a pooling of interests. Accordingly, the accompanying consolidated financial
<PAGE>
statements have been restated as if PHH and HFS had operated as one entity since
inception. PHH is the world's largest provider of corporate relocation services
and also provides mortgage services and vehicle management services.
Prior to the merger, PHH had an April 30 fiscal year end. In connection
with the merger, PHH prepared financial statements for the twelve month periods
ended December 31, 1996, January 31, 1996 and January 31, 1995. To conform to
the HFS calendar year end, the PHH statements of income for the aforementioned
twelve month periods have been combined with the HFS statements of income for
the years ended December 31, 1996, 1995 and 1994, respectively. In combining
PHH's twelve month periods to the HFS calendar years, the consolidated statement
of income for the year ended December 31, 1996 included one month (January 1996)
of PHH's operating results which was also included in the consolidated statement
of income for the year ended December 31, 1995. Accordingly, an adjustment has
been made to the Company's 1996 retained earnings for the duplication of net
income of $8.3 million and cash dividends declared of $5.9 million for such one
month period.
The following table shows the historical results of HFS and PHH for the
periods prior to the PHH merger ($000's):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Net revenues
HFS $ 785,980 $ 411,299 $ 312,081
PHH 654,192 645,591 580,039
-------------- ------------- -------------
Total $ 1,440,172 $ 1,056,890 $ 892,120
============== ============= =============
For the Years Ended December 31,
1996 1995 1994
-------------- ------------- -------------
Net income
HFS $ 169,584 $ 79,730 $ 53,489
PHH 87,657 78,120 69,044
-------------- ------------- -------------
Total $ 257,241 $ 157,850 $ 122,533
============== ============= =============
</TABLE>
The Company recorded a one-time pre-tax restructuring charge of
approximately $287 million upon consummation of the PHH merger for severance,
facility consolidation, professional fees and other transaction related costs to
be incurred in connection with the PHH Merger.
2c. Completed 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 operating results of the following acquired
companies are reflected in the Company's consolidated statements of income since
the respective dates of acquisition.
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 $487.1 million.
The purchase price was comprised of $412.1 million in cash and $75.0 million
(approximately 1.0 million shares) of Company common stock. The purchase
agreement provides for contingent payments of up to $200 million over the next
five years which are based on components which measure RCI's
<PAGE>
future performance, including EBITDA, net revenues and number of members, as
defined. Any contingent payments made will be accounted for as additional excess
of cost over fair value of net assets acquired.
HFS CAR RENTAL INC.: On October 17, 1996, the Company completed the
acquisition of all of the outstanding capital stock of Avis, initially 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 $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million (4.6 million shares) in Company common stock.
Subsequently, the Company made contingent cash payments of: (a) $17.6 million to
General Motors Corporation ("GM"), representing the amount by which the value
attributable under the Stock Purchase Agreement to the Company common stock
received by GM in the Avis acquisition exceeded the proceeds realized upon the
subsequent sale of such Company common stock; and (b) $26.0 million of credit
facility termination fees which were not at the Company's discretion since the
facility termination resulted from change of control provisions and the
elimination of the ESOP in connection with the Avis acquisition. See Note 21 for
a discussion of the Company's business plan and related accounting treatment
regarding Avis.
COLDWELL BANKER CORPORATION: On May 31, 1996, the Company acquired by
merger Coldwell Banker Corporation ("Coldwell Banker"), the largest gross
revenue producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640.0 million in
cash for all of the outstanding capital stock of Coldwell Banker and repaid
$105.0 million of Coldwell Banker indebtedness. The aggregate purchase price for
the transaction was financed through the May 9, 1996 sale of an aggregate 19.4
million shares of Company common stock pursuant to a public offering. Subsequent
to the acquisition of Coldwell Banker, the Company acquired for $2.8 million a
relocation consulting firm which was merged into the Coldwell Banker relocation
business.
Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices (the
"Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which the Company has no beneficial interest. The Company
recorded a $5.0 million charge ($3.1 million, net of tax or $.02 per share) 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 to the contributed business.
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 $147.4 million aggregate purchase
price for the Century 21 NORS consisted of $96.4 million in cash, $5 million of
notes and $46.0 million (0.9 million shares) of Company common stock.
ELECTRONIC REALTY ASSOCIATES: On February 12, 1996, the Company purchased
substantially all the assets comprising the Electronic Realty Associates ("ERA")
residential real estate brokerage franchise system, the fourth largest franchise
system in terms of franchised brokerage offices, for $39.4 million in cash.
TRAVELODGE: On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including the
Travelodge and Thriftlodge(R) service marks, and franchise agreements from Forte
Hotels, Inc. ("FHI") for $39.3 million in cash.
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.
In addition MOA, a significant Company franchisee, entered into twenty year
franchise agreements for nineteen of its acquired Travelodge motels and one
acquired Ramada motel.
<PAGE>
In addition, Chartwell Leisure Inc. ("CHRT"), formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders in November, 1994 (the "Distribution Date"), 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 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. In connection with the acquisition of the Travelodge
franchise system and CHRT's acquisition of FHI, the marketing and advisory
agreements previously entered into by the Company and CHRT at the Distribution
Date were terminated. In November 1996, the Corporate Services Agreement was
terminated by mutual agreement. The Company received $9.5 million in
consideration for consenting to the early termination of such agreement which
was recorded as other revenue. Additionally, CHRT paid a $2.0 million advisory
fee to the Company in connection with CHRT's acquisition of FHI.
KNIGHTS INN: In August 1995, the Company acquired the assets comprising the
Knights Inn hotel franchise system, an economy hotel franchise system, for $14.5
million plus expenses.
CENTURY 21: On August 1, 1995, a majority owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation ("Century
21"), the world's largest residential real estate brokerage franchisor, from
Metropolitan Life Insurance Company ("MetLife"). Aggregate consideration for the
acquisition consisted of $245.0 million plus expenses, including an initial cash
payment of $70.2 million, 4.0 million shares of the Company's common stock
valued at $64.8 million, the assumption of $80.0 million of Century 21
redeemable preferred stock issued to MetLife prior to the acquisition
(subsequently redeemed in February 1996) and a $30.0 million contingent payment
made in February 1996. The excess of cost over fair value of net assets acquired
recorded in connection with the acquisition, includes the contingent payment and
purchase price adjustments subsequent to the acquisition.
In connection with the acquisition, the Company executed an agreement, the
Subscription and Stockholders' Agreement, with a management group pursuant to
which the ownership of Century 21 Holding Corp. common stock would be divided
87.5% to the Company and 12.5% to the management group. In addition, the
management group executives entered into renewable employment agreements with
the Company with initial terms that commenced on November 1, 1995 and would
expire on December 31, 1997. The Company had 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 and the
management group had a put option to require the Company to purchase all their
Holding common stock after January 1, 1998 at fair market value. Effective
October 29, 1996 (the "Effective Date"), the Company amended the Subscription
and Stockholders' Agreement to provide that the Company's call option to
purchase Holding common stock at fair value from the management group was
accelerated to the Effective Date with the fair value determined as of the
Effective Date. Pursuant to such amendment, the employment agreements were
terminated in October 1996 and the put and call options have been exercised. The
12.5% interest was acquired by the Company for $52.8 million in the second
quarter of 1997.
The Company and certain stockholders sold approximately 6.4 million common
shares pursuant to a public offering in September 1995 (the "C21 Offering").
Included in the C21 Offering were 4.0 million shares issued to MetLife (the
"MetLife Shares") as partial consideration for the acquisition of Century 21. In
accordance with Century 21 acquisition agreements, the Company received $28.9
million representing proceeds from the sale of the MetLife Shares in excess of
$17.50 per share, net of certain expenses of the C21 Offering. In connection
with the C21 Offering, the Company also received $20.1 million of proceeds, net
of certain expenses from the sale of shares issued upon the exercise of an
underwriter over-allotment option. Net proceeds from the C21 Offering received
by the Company resulted in corresponding increases in stockholders' equity.
<PAGE>
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 $36.8 million by issuing 2.4 million shares of the
Company's common stock and warrants to acquire up to 1.0 million additional
shares of the Company's common stock. The exercise prices for the warrants
ranged from $28.56 to $39.27 per share. The range of exercise prices 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.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the acquisitions described above. The
excess of cost over fair value of net assets acquired for each of the
acquisitions is being amortized on a straight-line basis over 40 years.
<TABLE>
<CAPTION>
(In Millions) Acquired in 1996
-----------------------------------------------------------------------
Century 21
Coldwell Non-owned
RCI Avis Banker Regions ERA Travelodge
---------- ----------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash paid $ 412.1 $ 367.2 $ 747.8 $ 96.4 $ 39.4 $ 39.3
Common stock issued 75.0 338.4 - 46.0 - -
Note issued - 100.9 - 5.0 - -
---------- ----------- -------- ----------- --------- -----------
Total consideration 487.1 806.5 747.8 147.4 39.4 39.3
---------- ----------- --------- ----------- --------- -----------
Cash and cash equivalents 144.9 2.4 (16.2) - 3.9 -
Royalty and notes receivable 37.9 12.0 88.4 - 3.0 5.7
Investment in ARAC - 75.0 - - - -
Property and equipment 55.7 61.8 21.7 .2 1.1 -
Intangibles 100.0 509.0 437.2 11.0 20.0 30.0
Other assets 100.6 123.7 10.6 5.6 4.1 1.5
Accounts payable and other 221.3 223.5 118.3 9.4 25.3 6.9
Due to ARAC - 73.0 - - - -
Other non-current liabilities 208.4 14.9 30.2 3.5 2.2 -
---------- ----------- --------- ----------- --------- -----------
Fair value of net assets acquired 9.4 472.5 393.2 3.9 4.6 30.3
---------- ----------- --------- ----------- --------- -----------
Excess of cost over fair value of
net assets acquired $ 477.7 $ 334.0 $ 354.6 $ 143.5 $ 34.8 $ 9.0
========== =========== ========= =========== ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In Millions) Acquired in 1995
-------------------------------------
Knights
Inn Century 21 CCI
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid $ 14.5 $ 100.2 $ -
Common stock issued - 64.8 36.8
Preferred stock issued - 80.0 -
----------- ----------- -----------
Total consideration 14.5 245.0 36.8
----------- ----------- -----------
Cash and cash equivalents - 14.0 -
Royalty and notes receivable - 57.4 -
Property and equipment - 4.6 8.5
Intangibles 5.2 33.5 -
Other assets .4 11.1 1.5
Accounts payable and other 1.0 58.9 5.9
Other non-current liabilities - 16.4 3.8
----------- ----------- -----------
Fair value of net assets acquired 4.6 45.3 .3
----------- ----------- -----------
Excess of cost over fair value of
net assets acquired $ 9.9 $ 199.7 $ 36.5
=========== =========== ===========
</TABLE>
<PAGE>
In connection with the acquisitions of Century 21, the CENTURY 21 NORS,
ERA, Coldwell Banker and RCI, the Company developed related business plans to
restructure each of the respective companies. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These liabilities include costs associated with
restructuring activities such as planned involuntary termination and relocation
of employees, the consolidation and closing of certain facilities and the
elimination of duplicative operating and overhead activities. Restructuring
costs recognized as accrued acquisition obligations related to each acquired
entity are summarized by type as follows ($000's):
Century Century Coldwell
21 21 NORS ERA Banker RCI
------- ------- ------- ------- -------
Personnel-related .. $12,647 $ 1,720 $ 3,822 $ 4,237 $ 9,845
Facility-related ... 16,511 2,293 1,558 5,491 6,929
Other costs ........ 990 711 169 211 7,025
------- ------- ------- ------- -------
Total .............. $30,148 $ 4,724 $ 5,549 $ 9,939 $23,799
======= ======= ======= ======= =======
Terminated employees 319 73 202 87 252
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 and closure of excess space.
During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $2.6 million, $5.1
million, $3.9 million and $0.5 million was paid and charged against the
acquisition liabilities for restructuring charges related to the Century 21,
CENTURY 21 NORS, ERA, Coldwell Banker and RCI acquisitions, respectively.
Additional restructuring charges were accrued during 1996 for Century 21 of $6.1
million. The adjustment to the restructuring liability represented revised cost
estimates for activities contemplated in management's original restructuring
plans.
The Company has fully executed its business plans to restructure Century
21, the CENTURY 21 NORS, ERA and Coldwell Banker. Remaining accrued acquisition
obligations related to the restructuring of such acquired companies pertain
primarily to future lease commitments and other contractual obligations that
existed at the respective acquisition dates. The Company is in the process of
executing and completing its current business plan to restructure RCI, which it
expects to complete in the second half of 1997.
Pro Forma Information (Unaudited)
The following information reflects pro forma statements of income data for
the years ended December 31, 1996 and 1995 assuming the aforementioned completed
acquisitions were consummated on January 1, 1995.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which are subject to further
refinement, 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 operating results
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
<PAGE>
information includes the amortization expense associated with the assets
acquired, the reflection of the Company's financing arrangements, the
elimination of redundant costs and the related income tax effects.
(In thousands, except per share amounts)
Years Ended December 31,
------------------------
1996 1995
---------- ----------
Net revenues ....................... $2,002,938 $1,775,158
Income before income taxes ......... 515,200 400,359
Net income ......................... 307,059 235,065
Net income per share:
Primary ................... $ 1.76 $ 1.42
Fully diluted ............. $ 1.75 $ 1.41
Weighted average shares outstanding:
Primary ................... 177,072 168,175
Fully diluted ............. 177,840 170,157
3. Property and Equipment
Property and equipment consists of ($000's):
<TABLE>
<CAPTION>
Useful Lives December 31,
In Years 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Land $ 12,122 $ 12,082
Building and leasehold improvements 5 - 50 163,750 73,924
Furniture, fixtures and equipment 5 - 7 121,214 123,832
Information technology support systems 3 - 10 160,165 65,341
------------- -----------
457,251 275,179
Accumulated depreciation and amortization (128,723) (110,959)
------------- ------------
Property and equipment - net $ 328,528 $ 164,220
============ ===========
</TABLE>
4. Accounts Payable and Other Accrued Expenses
Accounts payable and other accrued expenses consist of ($000's):
December 31,
--------------------
1996 1995
-------- ----------
Accounts payable ................................ $415,847 $311,438
License restructuring and acquisition obligations 65,649 13,227
Accrued payroll and related ..................... 89,938 36,500
Advances from relocation clients ................ 78,761 95,869
Other ........................................... 205,575 143,169
-------- --------
Accounts payable and other accrued expenses ..... $855,770 $600,203
======== ========
<PAGE>
5. Net Investment in Leases and Leased Vehicles
The net investment in leases and leased vehicles consisted of ($000's):
December 31,
-----------------------
1996 1995
---------- ----------
Vehicles under open-end operating leases .... $2,617,263 $2,585,953
Vehicles under closed-end operating leases .. 443,853 320,894
Direct financing leases ..................... 356,699 335,498
Accrued interest on leases .................. 851 891
---------- ----------
Net investments in leases and leased vehicles $3,418,666 $3,243,236
========== ==========
The Company leases vehicles for initial periods of twelve months or more
under either operating or direct financing lease agreements. The Company's
experience indicates that the full term of the leases may vary considerably due
to extensions beyond the minimum lease term. Lessee repayments of investments in
leases and leased vehicles for 1996 and 1995 were $1.6 billion and $1.5 billion,
respectively, and the ratio of such repayments to the average net investment in
leases and leased vehicles was 47.19% and 47.96%, respectively.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost and accumulated depreciation of vehicles under this type of
operating lease was $4.6 billion and $2.0 billion, respectively at December 31,
1996 and $4.4 billion and $1.8 billion, respectively at December 31, 1995.
Under the other type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of the
Company. The lessee generally pays for or provides maintenance, vehicle licenses
and servicing. The original cost and accumulated depreciation of vehicles under
these agreements was $600.6 million and $156.7 million, respectively at December
31, 1996 and $482.9 million and $162.0 million, respectively at December 31,
1995. The Company believes adequate reserves are maintained in the event of loss
on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee. Maintenance
and repairs of these vehicles are the responsibility of the lessee.
Leasing revenues, which are reflected in fleet leasing on the consolidated
statement of income consist of ($000's):
For the years ended December 31, 1996 1995 1994
- ------------------------------- ---------- ---------- ----------
Operating leases ....................... $1,145,745 $1,098,697 $ 982,416
Direct financing leases, primarily
interest 43,323 42,375 41,688
---------- ---------- ----------
$1,189,068 $1,141,072 $1,024,104
========== ========== ==========
<PAGE>
Other managed vehicles are subject to leases serviced by the Company for
others, and neither the vehicles nor the leases are included as assets of the
Company. The Company receives a fee under such agreements which covers or
exceeds its cost of servicing.
The Company has transferred existing managed vehicles and related leases to
unrelated investors and has retained servicing responsibility. Credit risk for
such agreements is retained by the Company to a maximum extent in one of two
forms: excess assets transferred, which were $7.1 million and $5.9 million at
December 31, 1996 and 1995, respectively; or guarantees to a maximum extent of
$0 and $263,000 at December 31, 1996 and 1995, respectively. All such credit
risk has been included in the Company's consideration of related reserves. The
outstanding balances under such agreements aggregated $158.5 million and $98.4
million at December 31, 1996 and 1995, respectively.
Other managed vehicles with balances aggregating $93.9 million and $114.9
million at December 31, 1996 and 1995, respectively, are included in a special
purpose entity which is not owned by the Company. This entity does not require
consolidation as it is not controlled by the Company and all risks and rewards
rest with the owners. Additionally, managed vehicles totaling approximately
$47.4 million and $48.5 million at December 31, 1996 and 1995, respectively, are
owned by special purpose entities which are owned by the Company. However, such
assets and related liabilities have been netted in the balance sheet since there
is a two-party agreement with determinable accounts, a legal right of setoff
exists and the Company exercises its right of setoff in settlement with client
corporations.
6. Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. Such mortgage loans are
recorded at the lower of cost or market value as determined by outstanding
commitments from investors or current investor yield requirements calculated on
the aggregate loan basis. The valuation reserve was approximately $10.1 million
and $1.9 million at December 31, 1996 and 1995, respectively.
The Company issues mortgage-backed certificates insured or guaranteed by
the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Government National Mortgage Association (GNMA) and other
private insurance agencies. The insurance provided by FNMA and FHLMC and other
private insurance agencies are on a non-recourse basis to the Company. However,
the guarantee provided by GNMA is only to the extent recoverable from insurance
programs of the Federal Housing Administration and the Veterans Administration.
The outstanding principal balance of mortgages backing GNMA certificates issued
by the Company aggregated approximately $3.4 billion and $2.3 billion at
December 31, 1996 and 1995, respectively. Additionally, the Company sells
mortgage loans as part of various mortgage-backed security programs sponsored by
FNMA, FHLMC and GNMA. Certain of these sales are subject to recourse or
indemnification provisions in the event of default by the borrower. As of
December 31, 1996, mortgage loans sold with recourse amounted to approximately
$83.0 million. The Company believes adequate reserves are maintained to cover
all potential losses.
<PAGE>
7. Mortgage Servicing Rights and Fees
Mortgage servicing rights and fees activity was as follows ($000's):
<TABLE>
<CAPTION>
Excess Purchased Originated
Servicing Servicing Servicing Impairment
Fees Rights Rights Allowance Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 75,529 $ 8,808 $ - $ - $ 84,337
Additions 24,679 17,241 - - 41,920
Amortization (13,512) (6,772) - - (20,284)
Sales (8,729) (31) - - (8,760)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1994 77,967 19,246 - - 97,213
Additions 51,191 17,849 61,095 - 130,135
Amortization (18,609) (5,858) (4,089) - (28,556)
Write-down/provision (1,630) - - (1,386) (3,016)
Sales (1,080) (3,262) - - (4,342)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 107,839 27,975 57,006 (1,386) 191,434
Less: PHH activity for January
1996 to reflect change in
PHH fiscal year (3,623) (170) (10,227) 183 (13,837)
Additions 66,825 - 97,568 - 164,393
Amortization (31,235) (4,763) (15,752) - (51,750)
Write-down/provision - - - 622 622
Sales (1,291) (628) - - (1,919)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 $ 138,515 $ 22,414 $ 128,595 $ (581) $ 288,943
========== ========== ========== ========== ==========
</TABLE>
Excess servicing fees represent the present value of the differential
between the actual servicing fees and normal servicing fees which are
capitalized at the time loans are sold with servicing rights retained. Purchased
servicing rights represent the cost of acquiring the rights to service mortgage
loans for others. Originated servicing rights represents the present value of
normal servicing fees which are capitalized at the time loans are sold with
servicing rights retained.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122). This
Statement requires that mortgage servicing rights be recognized when a mortgage
loan is sold and servicing rights are retained. The Company adopted SFAS No. 122
effective May 1, 1995 and, accordingly, capitalized originated servicing rights,
net of amortization and valuation allowances of approximately $82.4 million and
$55.6 million in the years ended December 31, 1996 and 1995, respectively.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on the fair value of
the servicing rights' fair value relative to the loan as a whole. To determine
the fair value of mortgage servicing rights, the Company uses market prices for
comparable mortgage servicing, when available, or alternatively uses a valuation
model that calculates the present value of future net servicing income using
assumptions that market participants would use in estimating future net
servicing income.
SFAS No. 122 also requires the impairment of originated and purchased
servicing rights to be measured based on the difference between the carrying
amount and current fair value of the servicing rights. In determining
<PAGE>
impairment, the Company aggregates all mortgage servicing rights, excluding
those capitalized prior to the adoption of SFAS No. 122, and stratifies them
based on the predominant risk characteristic of interest rate band. For each
risk stratification, a valuation allowance is maintained for any excess of
amortized book value over the current fair value by a charge or credit to
income.
Prior to the adoption of SFAS No. 122, the Company reviewed the
recoverability of purchased servicing rights by discounting anticipated future
cash flows at appropriate discount rates, utilizing externally published
prepayment rates. If the recorded balance exceeded the discounted anticipated
future cash flows, the amortization of the purchased servicing rights was
accelerated on a prospective basis.
8. Marketing And Reservation Activities
DAYS INN, HOWARD JOHNSON, SUPER 8, TRAVELODGE, KNIGHTS INN, VILLAGER,
COLDWELL BANKER AND ERA: The Company receives marketing and reservation fees
from its Days Inn, Howard Johnson, Super 8, Travelodge, Knights Inn, Villager,
Coldwell Banker and ERA franchisees. Marketing and reservation fees related to
the Company's lodging brands' franchisees are calculated based on a specified
percentage of gross room sales. Marketing and reservation fees received from the
Company's real estate brands' franchisees are based on a specified percentage of
gross closed commissions earned on the sale of real estate. As provided in the
franchise agreements, at the Company's discretion, all of these fees are to be
expended for marketing purposes and the operation of a centralized
brand-specific reservation system for the respective franchisees and are
controlled by the Company until disbursement. Franchise revenue includes
marketing and reservation fees of $110.6 million, $93.4 million, $86.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
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 are 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.
Franchise revenue includes RINA fees of $47.0 million, $46.7 million and $44.4
million for the periods ended December 31, 1996, 1995 and 1994, respectively.
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 closed commissions earned on sales of residential real estate
properties, subject to monthly minimum and maximum contributions. In addition,
the Company is required to contribute 10% of net royalty fees collected from
CENTURY 21 franchisees to the NAF. The contributions are expensed by the Company
when the corresponding royalty fee is recognized. Marketing and reservation
expense includes $11.7 million and $4.2 million, for the year ended December 31,
1996 and the five month period ended December 31, 1995, respectively. The NAF
cash balance was $7.0 million and $4.3 million at December 31, 1996 and 1995,
respectively. Such amount is not included in the Company's consolidated
financial statements.
Advertising Expense: Advertising expense approximated $55.2 million, $48.0
million and $43.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
9. Debt
Short-term debt
Short-term debt consists of acquired Avis fleet financing, borrowed on
behalf of ARAC, and is expected to be repaid upon settlement of the
corresponding intercompany loan due from ARAC prior to the IPO. The credit
facilities provide up to $150 million of financing and expire in September 1997.
The outstanding borrowings under these facilities as of December 31, 1996 were
$150 million and had a weighted average interest rate of 7.47%.
Long-term debt
Long-term debt consists of ($000's):
December 31,
--------------------
1996 1995
-------- --------
Revolving Credit Facilities (A) ................ $205,000 $ --
5-7/8% Senior Notes (B) ...................... 149,811 149,715
4-1/2% Convertible Senior Notes (C) ............ 146,678 149,971
4-3/4% Convertible Senior Notes (D) ............ 240,000 --
Obligations under capital leases and other loans 9,927 3,341
-------- --------
751,416 303,027
Less current portion ........................... 2,995 2,249
-------- --------
Long-term debt ................................. $748,421 $300,778
======== ========
A. REVOLVING CREDIT FACILITIES: At December 31, 1996, the Company had $1
billion in revolving credit facilities consisting of (i) a $500 million, five
year revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $500 million, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility" and collectively with the five year Revolving Credit Facility
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 Five Year
Revolving Credit Facility and the 364 Day Revolving Credit Facility, at the
option of the Company, bear interest based on competitive bids of lenders
participating in the facilities, at the prime rates or at LIBOR plus a margin of
16 basis points.
The Company is also required to pay a per annum facility fee of .09% and
.07% of the average daily availability of the Five Year Revolving Credit
Facility and 364 Revolving Credit Facility, respectively. The interest rates and
facility fees are subject to change based upon credit ratings on the Company's
senior unsecured long-term debt by nationally recognized statistical rating
companies. The Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness, mergers, liquidations and sale and
leaseback transactions and requires the maintenance of certain financial ratios,
including a 3:1 minimum interest average ratio and a 3.5:1 maximum coverage
ratio, as defined. Amounts outstanding under the Revolving Credit Facilities as
of December 31, 1996 are classified as long-term based on the Company's intent
and ability to maintain these loans on a long-term basis.
B. SENIOR NOTES: In December 1993, the Company completed a public offering
of $150 million, unsecured 5-7/8% Senior Notes due December 15, 1998 the
("Senior Notes"). Interest is payable semi-annually.
C. 4-1/2% CONVERTIBLE SENIOR NOTES: In October 1994, the Company completed
a public offering of $150 million unsecured 4-1/2% Convertible Senior Notes (the
"4-1/2% Notes") due 1999, which are convertible at the option of the holders at
<PAGE>
any time prior to maturity into shares of the Company's common stock at a
conversion price of $18.15 per $1,000 principal amount of the 4-1/2% Notes. The
4-1/2 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 commencing
April 1995.
D. 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 (the "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.
Long-term debt payments including obligations under capital leases at December
31, 1996 are due as follows ($000's):
Year Amount
----------- -----------
1997 $ 2,995
1998 151,542
1999 148,333
2000 977
2001 205,925
Thereafter 241,644
-----------
Total $ 751,416
===========
10. Liabilities Under Management and Mortgage Programs
Borrowings to fund assets under management and mortgage programs,
classified as "Liabilities under management and mortgage programs" consisted of
($000's):
December 31,
-----------------------
1996 1995
---------- ----------
Commercial paper ............... $3,090,843 $2,348,732
Medium-term notes .............. 1,662,200 2,031,200
Other .......................... 336,900 47,940
---------- ----------
Liabilities under management and
mortgage programs - debt .. $5,089,943 $4,427,872
========== ==========
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term lines of
credit. The weighted average interest rates on the Company's outstanding
commercial paper were 5.4% and 5.8% at December 31, 1996 and 1995, respectively.
Medium-term notes of $1.6 billion represent unsecured loans which mature in
1997. The weighted average interest rates on such medium-term notes were 5.7%
and 5.8% at December 31, 1996 and 1995, respectively. The
<PAGE>
remaining $0.1 billion of medium-term notes represents an unsecured obligation
having a fixed interest rate of 6.5% with interest payable semi-annually and a
term of seven years payable in full in 2000.
Other liabilities under management and mortgage programs is principally
comprised of unsecured debt, all of which matures in 1997, which includes
borrowings under short-term lines of credit and other bank facilities. The
weighted average interest rate on unsecured debt was 5.8% and 6.9% at December
31, 1996 and 1995, respectively.
Interest expense is incurred on indebtedness which is used to finance
vehicle leasing activities, relocation services, and mortgage servicing
activities. Interest incurred on borrowings used to finance vehicle leasing
activities of $161.8 million, $159.7 million and $126.7 million for the years
ended December 31, 1996, 1995 and respectively is included net within fleet
leasing revenue in the consolidated statements of income. Interest on borrowings
used to finance both equity advances on homes and mortgage servicing activities
are recorded net within service fee revenue in the consolidated statements of
income. Interest related to equity advances on homes were $35.0, $26.0 and $20.0
for the years ended December 31, 1996, 1995 and 1994, respectively. Interest
related to mortgage servicing activities were $63.4 million, $49.9 million and
$32.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company has a $2.5 billion syndicated unsecured credit facility backed
by a consortium of domestic and foreign banks. The facility is comprised of
$1.25 billion of lines maturing in 364 days and $1.25 billion maturing in five
years. Under the credit facilities, the Company is obligated to pay annual
commitment fees which were $2,417 and $2,297 for the years ended December 31,
1996 and 1995, respectively. The Company had other unused lines of credit of
$301,468 at December 31, 1996 with various banks.
Although the period of service for a vehicle is at the lessee's option, and
the period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the rate
at which homes will be resold. Projections of estimated liquidations of assets
under management and mortgage programs and the related estimated repayment of
liabilities under management and mortgage programs as of December 31, 1996, as
set forth in the table below, indicate that the actual repayments of liabilities
under management and mortgage programs will be different than required by
contractual maturities. ($000's)
Assets under Management Liabilities Under Management
Years and Mortgage Programs and Mortgage Programs
- --------- -------------------------- ----------------------------
1997 $2,961,264 $2,608,179
1998 1,539,172 1,471,407
1999 673,535 671,623
2000 318,643 217,143
2001 53,843 71,061
2002-2006 182,777 50,530
---------- ----------
$5,729,234 $5,089,943
========== ==========
11. Fair Value of Financial Instruments and Servicing Rights
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments. The
fair values of the financial instruments presented may not be indicative of
their future values.
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
<PAGE>
Investment in securities: The Company has classified a certain equity
security as available-for-sale at December 31, 1996. In accordance with SFAS
115, the security is recorded at fair value with an unrealized holding gain of
$4.4 million, net of the related tax effect, reported as a component of
stockholders' equity. The fair value recorded is based on quoted market prices.
Mortgage loans held for sale: Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and current dealer
commitments to purchase loans. These loans are priced to be sold with servicing
rights retained. Gains (losses) on mortgage-related positions, used to reduce
the risk of adverse price fluctuations, for both mortgage loans held for sale
and anticipated mortgage loan closings arising from commitments issued, are
included in the carrying amount of mortgage loans held for sale.
Mortgage servicing rights and fees: Fair value is estimated by discounting
the expected net cash flow of servicing rights and fees using discount rates
that approximate market rates and externally published prepayment rates,
adjusted, if appropriate, for individual portfolio characteristics.
Long and short-term debt: The carrying amount of the Company's borrowings
under its revolving credit facilities and commercial paper borrowings
approximates fair value. The fair values of the Company's Senior Notes,
Convertible Senior Notes and Medium-term Notes are estimated based on quoted
market prices.
Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options. The fair value of interest rate
swaps, foreign exchange contracts, forward delivery commitments, futures
contracts and options is estimated, using dealer quotes, as the amount that the
company would receive or pay to execute a new agreement with terms identical to
those remaining on the current agreement, considering interest rates at the
reporting date.
<PAGE>
The carrying amounts and fair values of the Company's financial instruments
at December 31, are as follows ($000's):
<TABLE>
<CAPTION>
1996 1995
------------------------------------- -------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ - $ 159,390 $ 159,390 $ - $ 22,923 $ 22,923
Investment in securities (a) 22,500 22,500 - 15,353 19,200
Relocation receivables - 773,326 773,326 - 736,038 736,038
Mortgage loans held for sale - 1,248,299 1,248,299 - 784,901 784,901
Excess mortgage servicing fees - 138,515 155,033 - 107,839 107,966
Originated mortgage servicing
rights - 128,014 139,776 - 55,620 58,764
Purchased mortgage servicing
rights - 22,414 29,326 - 27,975 33,268
Liabilities
Long-term debt and medium-
term notes - 2,413,616 2,841,579 - 2,334,227 2,439,720
Off balance sheet
Interest rate swaps 1,670,155 - - 2,630,567 - -
In a gain position - - 2,457 - - 4,969
In a loss position - - (10,704) - - (13,828)
Foreign exchange forwards 329,088 - 10,010 118,069 - 6,413
Mortgage-related positions:(b)
Forward delivery commitments 1,703,495 11,425 7,448 1,323,285 5,407 (6,997)
Option contracts to sell 265,000 952 746 330,000 839 69
Option contracts to buy 350,000 1,346 (463) 485,000 3,388 528
Treasury options used to hedge
servicing rights 313,900 1,327 278 - - -
</TABLE>
- ---------
(a) At December 31, 1995, the sale of the Company's investment in equity
security was restricted by contractual requirement.
(b) Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
<PAGE>
12. Commitments And Contingencies
LEASES: The Company has noncancelable operating leases covering various
equipment and facilities, which expire through 2004. Rental expense for the
years ended December 31, 1996, 1995 and 1994 approximated $40.7 million, $29.3
million and $26.8 million respectively, excluding real estate taxes and other
fees that are also the responsibility of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
For the year ending December 31,
1997 $ 49,462
1998 43,560
1999 30,939
2000 23,527
2001 16,193
Remaining years 29,930
-----------
Total minimum lease payments $ 193,611
===========
The future minimum lease payments exclude future minimum sublease income of
approximately $1.0 million annually for each year presented.
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.
DISCONTINUED AVIATION SERVICES SEGMENT: The Company is contingently liable
under the terms of an agreement involving its discontinued aviation services
segment for payment of Industrial Revenue Bonds issued by local governmental
authorities operating at two airports, one of which comes due in the year 2013
and the other which comes due in the year 2014, each of which is in the amount
of $3.5 million. The Company believes its allowance for disposition loss is
sufficient to cover all potential liability.
LITIGATION: In the normal course of business, 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.
<PAGE>
13. Income Taxes
The income tax provision consists of ($000's):
For the years ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Current
Federal .............. $ 22,215 $ 36,102 $ 23,498
State ................ 7,681 12,230 9,387
Foreign .............. 8,806 7,138 6,083
-------- -------- --------
38,702 55,470 38,968
-------- -------- --------
Deferred
Federal .............. 116,823 51,954 42,231
State ................ 18,301 1,746 4,669
Foreign .............. 800 1,000 (1,000)
-------- -------- --------
135,924 54,700 45,900
-------- -------- --------
Provision for income taxes $174,626 $110,170 $ 84,868
======== ======== ========
Net deferred income tax assets and liabilities are comprised of the following
($000's):
December 31,
1996 1995
--------- ---------
Provision for doubtful accounts ............. $ 8,100 $ 7,600
Deferred income ............................. 46,400 7,800
Acquisition related reserves ................ 19,600 4,200
Franchise acquisition costs ................. (2,600) (2,400)
Accrued liabilities and deferred income ..... 21,598 21,042
Other ....................................... 700 3,000
--------- ---------
Current net deferred tax asset .............. $ 93,798 $ 41,242
========= =========
Intangible asset amortization ............... $(166,800) $ (73,600)
Accrued liabilities and deferred income ..... 46,250 20,276
Acquired net operating loss carryforward .... 85,900 --
Other ....................................... (24,300) (9,200)
--------- ---------
Noncurrent net deferred tax liability ....... $ (58,950) $ (62,524)
========= =========
Depreciation ................................ $(245,146) $(223,337)
Unamortized mortgage servicing rights ....... (51,239) (23,489)
Accrued liabilities and deferred income ..... 1,359 2,101
Alternative minimum tax and net operating
loss carryforwards ........................ 13,078 9,807
--------- ---------
Net deferred tax liabilities under management
and mortgage programs ................... $(281,948) $(234,918)
========= =========
Net operating loss carryforwards at December 31, 1996 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2001, $14.8
million; 2002, $89.6 million; 2005, $7.2 million; 2009, $17.7 million; and 2010,
$116.0 million.
<PAGE>
The Company's effective income tax rate differs from the statutory federal rate
as follows:
For the years ending December 31,
1996 1995 1994
----- ----- -----
Federal statutory rate .................. 35.0% 35.0% 35.0%
State income taxes net of federal benefit 3.8% 4.1% 4.4%
Amortization of non-deductible goodwill . 1.0% 0.9% 1.6%
Other ................................... 0.6% 1.1% (0.1%)
---- ---- ----
Effective tax rate ...................... 40.4% 41.1% 40.9%
==== ==== ====
14. Shareholders' Equity
A. 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 transaction (See Note
2). The Company received aggregate proceeds approximating $14.8 million from the
exercise of such warrants, resulting in the issuance of approximately 1.0
million shares of Company common stock.
B. 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. On
April 30, 1997, 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 600 million.
15. Stock Option Plans
The Company has two stock option plans, the 1992 Stock Option Plan (the
"1992 Plan") and the amended and restated 1993 Stock Option Plan, (the "1993
Plan"). The 1993 Plan provides for the granting of options to certain directors,
officers, employees and independent contractors of the Company's common stock at
prices not less than the fair market values at the date of grant. No further
grants will be made under the 1992 Plan. Generally, stock options have a
ten-year term and vest within five years from the date of grant. On April 30,
1997, the Company's stockholders approved an amendment to the 1993 Plan to
increase the number of authorized shares of common stock, for which options may
be granted, to 34,541,600.
Prior to the PHH Merger, PHH had stock option plans for its key employees
and outside directors. The plans allowed for the purchase of common stock at
prices not less than fair market value on the date of grant. Either incentive
stock options or non-statutory stock options were granted under the plans.
Options became exercisable after one year from date of grant on a vesting
schedule provided by the plans and expired ten years after the date of the
grant. On April 30, 1997, in connection with the PHH Merger, all unexercised PHH
stock options were canceled and converted to 736,903 shares of Company common
stock. The table below summarizes the annual activity of the Company's stock
option plans ($000's):
<PAGE>
<TABLE>
<CAPTION>
Options Options
Outstanding Price Range
----------- --------------------------
<S> <C> <C>
Balance at January 1, 1994 15,468 $ 2.87 to $ 25.45
Granted 3,631 11.71 to 23.64
Canceled (447) 3.74 to 24.02
Exercised (464) 3.13 to 22.88
Distribution of CHRT 454 7.94 to 13.41
Balance at December 31, 1994 18,642 2.87 to 25.45
Granted 5,786 13.63 to 29.13
Canceled (371) 4.08 to 24.17 Weighted
Exercised (1,249) 3.31 to 24.62 Avg. Exercise
Price
-------------
Balance at December 31, 1995 22,808 2.87 to 29.13 10.97
Granted 11,858 30.38 to 77.88 56.24
Canceled (513) 7.94 to 76.75 55.32
Exercised (1,879) 2.87 to 40.31 13.86
Less: PHH activity for January 1996
to reflect change in PHH fiscal year 20
Balance at December 31, 1996 32,294 2.87 to 77.88 24.29
</TABLE>
The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its stock
option plans. Had the Company elected to recognize compensation cost for its
stock option plans based on the calculated fair value at the grant dates for
awards under such plans, consistent with the method prescribed by SFAS No. 123,
net income per share would have reflected the pro forma amounts indicated below
($000's, except per share data):
For the years ended December 31,
1996 1995
------------- -------------
Net income:
as reported $ 257,241 $ 157,850
pro forma 178,388 155,399
Net income per share:
Primary as reported $ 1.59 $ 1.14
pro forma 1.14 1.13
Fully diluted as reported 1.58 1.12
pro forma 1.13 1.11
<PAGE>
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 1996 and 1995:
<TABLE>
<CAPTION>
HFS PHH
Plans Plans
--------------------- ----------------------
1996 1995 1996 1995
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Dividend yield 0% 0% 2.8% 3.5%
Expected volatility 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 6.4% 6.4% 6.5% 6.9%
Expected holding period 9.1 years 9.1 years 7.5 years 7.5 years
</TABLE>
The weighted average fair values of stock options granted during the years
ended December 31, 1996 and 1995 were $26.33 and $11.51, respectively.
The effect of applying SFAS 123 on the pro forma net income per share
disclosures is not indicative of future amounts because it does not take into
consideration option grants made prior to 1995 or in future years.
The tables below summarize information regarding stock options outstanding and
exercisable as of December 31, 1996 (shares in 000's):
<TABLE>
<CAPTION>
HFS Options Options Outstanding Options Exercisable
------------------------------ --------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
---------------------- --------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 2.87 to $ 19.99 17,776 6.4 $ 8.68 14,792 $ 8.09
$ 20.00 to $ 39.99 1,262 8.6 24.11 226 24.21
$ 40.00 to $ 59.99 5,276 9.2 44.92 2,016 40.31
$ 60.00 to $ 77.88 5,189 9.6 69.16 320 62.13
--------- -----------
Total 29,503 7.5 26.46 17,354 13.04
========= ===========
PHH Options
Less than $16.50 1,425 4.5 $ 20.28 1,452 $ 20.28
Greater than $16.50 1,366 8.7 31.14 439 24.38
--------- -----------
Total 2,791 6.5 25.49 1,891 21.23
========= ===========
</TABLE>
Shares exercisable and available for grant were as follows (000's):
HFS Options PHH Options
---------------- ----------------
At December 31, At December 31,
1996 1995 1996 1995
------ ----- ----- ------
Shares exercisable ....... 17,354 7,079 1,891 2,451
Shares available for grant 1,647 35 492 1,380
<PAGE>
16. Employee Savings and Pension Plans
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate funds for
their retirement. The Company matches the contributions of participating
employees on the basis of the percentages specified in the plans. The Company's
matching contributions to the plans were approximately $5,546, $4,850 and $4,757
in 1996, 1995 and 1994, respectively.
During 1996, the Company implemented a Deferred Compensation Plan providing
senior executives with the opportunity to participate in a funded, deferred
compensation program. The assets of the Plan are held in an irrevocable rabbi
trust. Under the program, participants may defer up to 80% of their base
compensation and up to 98% of bonuses earned. The Company contributes $0.50 for
each $1.00 contributed by a participant, regardless of length of service, up to
a maximum of six percent of the employee's compensation. The program is not
qualified under Section 401 of the Internal Revenue Code. The Company's matching
contribution to the Deferred Compensation Plan in 1996 was approximately
$111,000.
Pension and Supplemental Retirement Plans
The Company's PHH subsidiary has a non-contributory defined benefit pension
plan covering substantially all US employees of the Company and its
subsidiaries. PHH's subsidiary located in the UK has a contributory defined
benefit pension plan, with participation at the employee's option. Under both
the US and UK plans, benefits are based on an employee's years of credited
service and a percentage of final average compensation. The Company's policy for
both plans is to contribute amounts sufficient to meet the minimum requirements
plus other amounts as the Company deems appropriate from time to time. The
Company also sponsors two unfunded supplemental retirement plans to provide
certain key executives with benefits in excess of limits under the federal tax
law and to include annual incentive payments in benefit calculations.
Net costs included the following ($000's):
For the Years Ended December 31,
1996 1995 1994
-------- -------- ---------
Service cost ................ $ 5,594 $ 4,927 $ 4,599
Interest cost ............... 8,268 7,391 6,602
Actual return on assets ..... (10,313) (9,019) (2,870)
Net amortization and deferral 3,905 3,712 (1,786)
-------- -------- --------
Net cost .................... $ 7,454 $ 7,011 $ 6,545
======== ======== ========
<PAGE>
A summary of the plans' status and the Company's recorded liability
recognized in the Consolidated Balance Sheets is as follows ($000's):
Funded Plans December 31,
1996 1995
-------- --------
Accumulated benefit obligation:
Vested ...................................... $ 69,743 $ 58,774
Unvested .................................... 7,058 6,442
-------- --------
$ 76,801 $ 65,216
======== ========
Projected benefit obligation ..................... $ 97,145 $ 85,553
Funded assets, at fair value
(primarily common stock and bond
mutual funds) ............................... (88,416) (74,278)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in assumptions (4,544) (7,033)
Unrecognized prior service cost .................. (761) (70)
Unrecognized net obligation ...................... (356) (126)
-------- --------
Recorded liability ............................... $ 3,068 $ 4,046
======== ========
Unfunded Plans ................................... December 31,
1996 1995
-------- --------
Accumulated benefit obligation:
Vested ...................................... $ 13,031 $ 11,295
Unvested .................................... 601 831
-------- --------
$ 13,632 $ 12,126
======== ========
Projected benefit obligation ..................... $ 17,977 $ 15,484
Unrecognized net loss from past
experience different from that
assumed and effects of changes in assumptions ... (3,087) (1,626)
Unrecognized prior service cost .................. (2,641) (2,936)
Unrecognized net obligation ...................... (1,237) (1,450)
Minimum liability adjustment ..................... 2,620 2,654
-------- --------
Recorded liability ............................... $ 13,632 $ 12,126
======== ========
Significant percentage assumptions used in determining the cost and related
obligations under the US pension and unfunded supplemental retirement plans are
as follows:
For the Years Ended December 31,
1996 1995 1994
------ ----- -----
Discount rate .................... 8.00% 8.00% 8.50%
Rate of increase in compensation . 5.00% 5.00% 5.00%
Long-term rate of return on assets 10.00% 9.50% 9.50%
<PAGE>
Postretirement Benefits Other Than Pensions
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. A summary of the
plan's status and the Company's recorded liability recognized in the
consolidated balance sheets was as follows ($000's):
<TABLE>
<CAPTION>
December 31,
1996 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Active employees ..................................................... $ 5,811 $ 5,693
Current retirees ..................................................... 1,670 1,754
------- -------
7,481 7,447
Unrecognized transition obligations ....................................... (4,799) (5,069)
Unrecognized net gain ..................................................... 1,832 873
------- -------
Recorded liability ........................................................ $ 4,514 $ 3,251
======= =======
</TABLE>
Net periodic postretirement benefit costs included the following components
($000's):
For the Years Ended December 31,
1996 1995 1994
------ ------ ------
Service cost ................ $ 830 $ 755 $ 693
Interest cost ............... 526 519 507
Net amortization and deferral 199 237 294
------ ------ ------
Net cost .................... $1,555 $1,511 $1,494
====== ====== ======
Significant percentage assumptions used in determining the cost and
obligations under the postretirement benefit plan are as follows:
For the Years Ended December 31,
1996 1995 1994
------ ------ ------
Discount rate .............. 8.00% 8.00% 8.25%
Health care costs trend rate
for subsequent year ....... 10.00% 10.00% 12.00%
The health care cost trend rate is assumed to decrease gradually through
2004 when the ultimate trend rate of 4.75% is reached. At December 31, 1996, a
one-percentage-point increased in the assumed health care cost trend rate for
each future year would increase the annual service interest cost by
approximately $126,000 and the accumulated postretirement benefit obligations by
approximately $582,000.
17. 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 approximate $24.2 million, $15.7 million and $13.8 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
Franchising activity for the years ended December 31, 1996, 1995 and 1994 is as
follows:
Lodging Real Estate
----------------------- ----------------
1996 1995 1994 1996 1995
----- ----- ----- ------ -----
Franchises in Operation
Units at end of year .... 5,397 4,603 4,229 11,349 5,990
Executed but Not Opened
Acquired ........... 24 31 -- 110 104
New agreements ..... 1,142 983 870 829 248
Backlog, end of year 786 682 594 275 176
18. Derivative Financial Instruments
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. A key
assumption in the following information is that rates remain constant at
December 31, 1996 levels. To the extent that rates change, both the maturity and
variable interest rate information will change. However, the net rate the
Company pays remains matched with the assets funded.
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps employed at December 31, 1996. These
characteristics are effectively offset within the portfolio of assets funded by
the Company ($000's):
<TABLE>
<CAPTION>
Maturities
---------------------------------------------------------------------------
Total 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
United States
Commercial Paper:
Pay fixed/receive floating:
Notional value $427,181 $199,528 $136,176 $ 59,346 $ 20,531 $ 4,625 $ 6,975
Weighted average receive rate 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Weighted average pay rate 6.21% 6.33% 6.47% 6.37% 6.51% 6.60%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 336,000 250,000 86,000
Weighted average receive rate 6.59% 6.50%
Weighted average pay rate 5.95% 5.86%
Pay floating/receive floating:
Notional value 357,200 357,200
Weighted average receive rate 5.51%
Weighted average pay rate 5.90%
Canada
Commercial Paper:
Pay fixed/receive floating:
Notional value 68,255 32,631 22,849 10,585 2,190
Weighted average receive rate 3.11% 3.11% 3.11% 3.11%
Weighted average pay rate 6.25% 5.89% 5.63% 4.58%
Pay floating/receive floating:
Notional value 52,730 28,010 14,961 4,342 2,853 2,564
Weighted average receive rate 7.21% 7.09% 6.93% 7.61% 7.61%
Weighted average pay rate 3.38% 3.38% 3.38% 3.38% 3.38%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Continued)
Maturities
-------------------------------------------------------------------------
Total 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Pay floating/receive fixed:
Notional value 36,481 36,481
Weighted average receive rate 4.92%
Weighted average pay rate 3.07%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 379,308 37,708 93,070 138,834 109,696
Weighted average receive rate 6.56% 6.56% 6.56% 6.56%
Weighted average pay rate 6.17% 7.85% 6.96% 7.10%
Germany
Commercial Paper:
Pay fixed/receive fixed:
Notional value 13,000 1,950 2,925 (6,825) 3,575 11,375
Weighted average receive rate 3.25% 3.25% 3.25% 3.25% 3.25%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34% 5.34%
--------- -------- -------- -------- -------- ---------
Total $1,670,155 $943,508 $269,981 $292,282 $138,845 $ 18,564 $ 6,975
========== ======== ======== ======== ======== ========= =========
</TABLE>
For the years ended December 31, 1996 and 1995, the Company's hedging
activities increased interest expense $4.1 million and $2.0 million
respectively, and had no effect on its weighted average borrowing rate. For the
same period in the year ended December 31, 1994, hedging activities increased
interest expense $8,389 and increased the weighted average borrowing rate 0.2%.
The Company enters into foreign exchange contracts as hedges against
currency fluctuations on certain intercompany loans. Such contracts effectively
offset the currency risk applicable to approximately $329.1 million and $118.1
million of obligations at December 31, 1996 and 1995, respectively.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to certain derivative financial instruments.
The Company manages such risk by periodically evaluating the financial position
of counterparties and spreading its positions among multiple counterparties. The
Company presently does not expect non-performance by any of the counterparties.
19. Industry Segment Information
The Company is principally in the business of providing services to
businesses that serve consumer industry customers. The Company's major business
segments are reflective of the industries in which it serves. See Note 1.
"Summary of Significant Accounting Policies - Description of Business" for a
more detailed description of each of the Company's industry segments. The
following table presents certain financial information regarding the company's
industry segments.
<PAGE>
Operations by segment ($000's):
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------
Real Estate Mortgage
Consolidated Franchise Relocation Services
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 1,440,172 $ 233,469 $ 344,865 $ 126,570
Operating income 451,562 110,535 54,302 41,302
Identifiable assets 10,866,000 1,295,501 1,086,374 1,742,409
Depreciation and amortization 97,811 27,317 11,168 4,442
Capital expenditures 66,595 9,932 9,112 9,859
Travel
-----------------------------------------------------------
Car
Lodging Rental Timeshare Fleet Other
----------- ----------- ----------- ------------- -----------
Net revenues $ 385,920 $ 10,014 $ 30,723 $ 260,740 $ 47,871
Operating income 145,798 537 3,319 76,260 19,509
Identifiable assets 954,649 882,397 772,585 3,868,472 263,613
Depreciation and amortization 30,852 3,439 2,559 13,214 4,820
Capital expenditures 19,302 -- 1,473 9,999 6,918
Year Ended December 31, 1995
Real Estate
--------------------------------------------
Real Estate Mortgage
Consolidated Franchise Relocation Services
------------ ----------- ----------- -------------
Net revenues $ 1,056,890 $ 47,965 $ 301,667 $ 93,251
Operating income 290,969 19,277 41,718 41,744
Identifiable assets 6,928,813 195,157 1,031,978 1,142,272
Depreciation and amortization 63,178 2,997 10,385 3,099
Capital expenditures 45,554 2,034 8,678 2,987
Travel
--------------------------
Lodging Fleet Other
----------- ----------- -----------
Net revenues $ 335,402 $ 258,877 $ 19,728
Operating income 120,606 56,918 10,706
Identifiable assets 724,673 3,641,536 193,197
Depreciation and amortization 26,058 18,837 1,802
Capital expenditures 5,059 9,872 16,924
Year Ended December 31, 1994
Real Estate
---------------------------
Mortgage
Consolidated Relocation Services
------------ ----------- -----------
Net revenues $ 892,120 $ 255,974 $ 74,494
Operating income 225,891 34,534 30,172
Identifiable assets 5,664,920 794,372 849,131
Depreciation and amortization 53,712 9,280 2,944
Capital expenditures 34,243 11,541 2,471
</TABLE>
<PAGE>
Travel
--------------------------
Lodging Fleet Other
----------- ----------- -----------
Net revenues $ 300,694 $ 249,571 $ 11,387
Operating income 102,487 52,323 6,375
Identifiable assets 738,543 3,247,320 35,554
Depreciation and amortization 21,921 17,765 1,802
Capital expenditures 9,378 8,854 1,999
The Company's operations outside of North America principally include fleet
management and relocation segment operations in Europe. Geographic operations of
the Company are as follows ($000's):
North
Year Ended December 31, 1996 America Europe Consolidated
- ---------------------------- ---------- --------- -----------
Net revenues ............... 1,372,840 67,332 1,440,172
Income before income taxes . 409,682 22,185 431,867
Identifiable assets ........ 10,146,012 719,988 10,866,000
Year Ended December 31, 1995
Net revenues ............... 994,910 61,980 1,056,890
Income before income taxes . 254,182 13,838 268,020
Identifiable assets ........ 6,331,896 596,917 6,928,813
Year Ended December 31, 1994
Net revenues ............... 836,182 55,938 892,120
Income before income taxes . 201,171 6,230 207,401
Identifiable assets ........ 5,150,232 514,688 5,664,920
20. Selected Quarterly Financial Data - (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
1996 First Second Third Fourth Total Year
---- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 278,956 $ 344,777 $ 410,525 $ 405,914 $ 1,440,172
Income before income taxes 73,823 100,951 141,822 115,271 431,867
Net income 43,678 59,942 84,880 68,741 257,241
Net income per share:
Primary $ .30 $ .39 $ .54 $ .36 $ 1.59
Fully diluted $ .30 $ .39 $ .54 $ .36 $ 1.58
1995
Net revenues $ 230,621 $ 256,523 $ 294,594 $ 275,152 $ 1,056,890
Income before income taxes 55,595 65,967 79,657 66,801 268,020
Net income 32,835 38,484 46,683 39,848 157,850
Net income per share:
Primary $ .25 $ .28 $ .34 $ .27 $ 1.14
Fully diluted $ .25 $ .28 $ .33 $ .27 $ 1.12
</TABLE>
<PAGE>
21. Investment in ARAC
As discussed in Note 1, at the time the Company acquired Avis, it had
developed and announced a plan (the "Plan") to do the following:
1. Retain certain assets acquired, including the reservations system,
franchise agreements, trademarks and tradenames and certain
liabilities.
2. Segregate the assets used in the car rental operations in ARAC, a
separate subsidiary, and within one year, undertake an initial public
offering (the "IPO") of ARAC, which would result in deleting the
Company's interest in ARAC to approximately 25%.
3. Enter into a license agreement with ARAC for use of the trademarks and
tradename and other franchise services.
Based on the Plan, the purchase price for Avis has been allocated to the
assets acquired and liabilities assumed by the Company, including its
investment in ARAC, based on their respective estimated fair values at the
date of acquisition. The amount allocated to ARAC was based on the
estimated valuation of ARAC including the effect of royalty, reservation
and information technology agreements with the Company. Under the Plan,
ARAC will sell approximately a 75% interest at an assumed price of $225
million thereby diluting the Company's interest to 25%. All of the proceeds
from the IPO will be retained by ARAC.
<PAGE>
The condensed balance sheet at December 31, 1996 and the condensed income
statement for the period October 17, 1996 through December 31, 1996 of ARAC
is as follows:
Rental Car Operations of Avis, Inc. (ARAC)
Combined Balance Sheet
(in thousands)
ASSETS
Cash and cash equivalents ............................. $ 50,886
Accounts receivable, net .............................. 311,179
Due from affiliates, net .............................. 61,807
Vehicles, net ......................................... 2,243,492
Property and equipment ................................ 98,887
Cost in excess of net assets acquired net ............. 196,765
Other ................................................. 168,341
----------
Total Assets ...................................... $3,131,357
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable on accrued liabilities ............... $ 504,780
Income tax liabilities ................................ 40,778
Public liability, property damage and other liabilities 213,785
Debt .................................................. 2,295,474
----------
Total Liabilities ................................. 3,054,817
Stockholders' Equity .................................. 76,540
----------
Total Liabilities and Stockholders' Equity ........ $3,131,357
==========
* * *
Rental Car Operations of Avis, Inc. (ARAC)
Combined Income Statement
(in thousands)
Revenue ................................................. $362,844
--------
Costs and expenses
Direct operating .................................... 167,682
Vehicle depreciation and lease charges .............. 89,448
Selling general and administrative .................. 68,215
Interest, net ....................................... 34,212
Amortization of cost in excess of net assets acquired 1,026
--------
360,583
Income before provision for income tax .................. 2,261
Provision for income tax ................................ 1,040
--------
Net income .............................................. $ 1,221
========
* * *
<PAGE>
Note A - Summary of Significant Accounting Policies of ARAC
Vehicles
Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are reflected as
an adjustment to depreciation. Vehicles are generally depreciated at rates
ranging from 10% to 25% per annum. Manufacturers provide ARAC with incentives
and allowances (such as rebates and volume discounts) which are amortized to
income over the holding period of the vehicles.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $1.0 million at December 31,
1996.
Public Liabilities, Property Damage and Other Insurance Liabilities
Insurance liabilities on the accompanying combined statement of financial
position include additional liability insurance, personal effects protection
insurance, public liability and property damage ("PLPD") and personal accident
insurance claims for which ARAC is self-insured. ARAC is self-insured up to $1.0
million per claim under its auto liability insurance program for PLPD and
additional liability insurance. Costs in excess of $1.0 million per claim are
insured under various contracts with commercial insurance carriers. The
insurance liabilities include a provision for both claims reported to ARAC as
well as claims incurred but not yet reported to ARAC.
The insurance liabilities include a provision for both claims reported to
ARAC as well as claims incurred but not yet reported to ARAC. This method is an
actuarially accepted loss reserve method. Adjustments to this estimate and
differences between estimates and the amounts subsequently paid are reflected in
operations as they occur.
Income Taxes
ARAC is included in the consolidated federal income tax return of the
Company. Pursuant to the regulations promulgated under the Internal Revenue
Code, ARAC's pro rate share of the consolidated federal income tax liability of
the Company is allocated to ARAC on a separate return basis. ARAC files separate
income tax returns in states where a consolidated return is not permitted. In
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", deferred income tax assets and liabilities are measured based
upon the difference between the financial accounting and tax basis of assets and
liabilities.
Note B - Intercompany Transactions of ARAC
Amount due from affiliates represents the net balance due to or from the
Company which will be settled upon or before consummation of the IPO. Net amount
of approximately $61.8 million consists of notes receivable due to the Company
from an indirect wholly owned subsidiary of the Company, long term subordinated
vehicle financing notes payable to the Vehicle Trust (see note C) and
miscellaneous non-interest bearing advances made by ARAC to the Company. Expense
items include charges from the Company and affiliates of the Company totaling
$31.8 million.
Reservations and data processing services are charged to ARAC based on
actual cost. All other charges are based on actual costs incurred. Effective
January 1, 1997, the Company will charge ARAC a royalty fee of 4.0% of revenue
for the use of the Avis trade name. On an unaudited pro forma basis, had the
franchise fee been charged
<PAGE>
to ARAC beginning on October 17, 1996, net income for the period October 17,
1996 to December 31, 1996 would have been reduced by $8.7 million resulting in a
pro forma net loss of approximately $7.5 million.
Note C - Financing and Debt of ARAC
Debt outstanding at December 31, 1996 is not guaranteed by the Company and
consists of the following ($000's):
VEHICLE TRUST FINANCING
Short term vehicle trust financing -
revolving credit facilities $ 1,970,000
Long term vehicle manufacturer's
notes - payable through 2001 185,000
OTHER FINANCING
Short term debt including foreign short term notes,
capital leases and
current portion of other long term debt 106,745
Floating rate notes - foreign subsidiaries due
through August 1998 30,813
Other debt - domestic 2,916
-------------
$ 2,295,474
=============
The primary source of funding for domestic vehicles is provided by the
Vehicle Trust (a grantor trust). Amounts drawn against this facility may be used
to purchase vehicles and pay certain expenses of the Vehicle Trust. The security
for the Vehicle Trust financing facility consists of a lien on the vehicles
acquired under the facility, which at December 31, 1996 totaled approximately
$2.1 billion, exclusive of related valuation reserves. The security for the
Vehicle Trust financing facility also consists of security interests in certain
other assets of the Vehicle Trust. Additionally, the Vehicle Trust and its
security agreement require that there be outstanding, at all times, subordinated
debt in a specified percentage range (10% - 25%) of the net book value of the
vehicles owned by the Vehicle Trust. Pursuant to the agreement, the subordinated
debt is to be provided by vehicle manufacturer finance companies and by a
Company subsidiary. The Vehicle Trust consists of loans from banks, vehicle
manufacturer finance companies and a Company subsidiary. The short term notes
are issued pursuant to a $2.5 billion revolving credit facility dated as of
October 17, 1996 which expires on October 16, 1997. On December 31, 1996, the
weighted average interest rate of borrowings under this facility was 6.00%. For
the period from October 17, 1996 to December 31, 1996, the average outstanding
borrowings under this facility were $2.0 billion with a weighted average
interest rate of 5.98%. This facility requires a fee of 1/8 of 1% on the
committed amount. Subordinated debt of $318 million was required under the
Vehicle Trust financing, of which $247.5 million is due to a Company subsidiary.
At December 31, 1996, the Vehicle Trust had financing outstanding from vehicle
manufacturer finance companies under terms of loan agreements dated October 17,
1996. Under these agreements, the maximum amount of borrowings allowed is $267
million, of which up to $260 million may be issued as subordinated debt. On
December 31, 1996, $185 million was outstanding, of which $70.5 million of the
outstanding debt was deemed subordinated. On December 31, 1996, the weighted
average interest rate of borrowings under this facility was 8.50%. For the
period October 17, 1996 to December 31, 1996, the average outstanding borrowings
under this facility was $185 million with a weighted average interest rate of
8.41%.
In November 1992, the predecessor to ARAC entered into a five year capital
lease under which $96.7 million of vehicles were leased. The lease is cancelable
at ARAC's option, however, additional costs may be incurred upon
<PAGE>
termination based upon the fair value of the vehicles at the time the option is
exercised. At the termination of the lease, ARAC may purchase the vehicles at an
agreed upon fair market value or return them to the lessor.
The future minimum lease payments due under ARAC's capital lease
obligation, which terminates on November 30, 1997 are $41,500,000 (including
interest of $1,331,000).
Mandatory maturities of long term obligations for each of the five years
ending December 31, and thereafter, are as follows ($000's):
1997 $ 41,229
1998 98,950
1999 1,086
2000 209
2001 118,228
Thereafter 256
Other Credit Facilities
At December 31, 1996, ARAC had letters of credit/working capital agreements
totaling $102.6 million, which may be renewed bi-annually at ARAC's option and
the banks' discretion. The collateral for certain of these agreements consists
of a lien on property and equipment and certain receivables with a carrying
value of $136.9 million. At December 31, 1996, ARAC has outstanding letters of
credit amounting to $55.1 million.
In addition, for certain of its international operations, ARAC has
available at December 31, 1996, unused lines of credit of $224.3 million. The
unused lines of credit agreements require a quarterly fee of 0.2% to 0.5% of the
unused line.
Interest Rate Swap Agreements
ARAC has entered into interest rate swap agreements to reduce the impact of
changes in interest rates on certain outstanding debt obligations. These
agreements effectively change ARAC's interest rate exposure on $44.0 million of
its outstanding debt from a weighted average variable interest rate to a fixed
rate of 7.1% at December 31, 1996. The variable interest element with respect to
these interest rate swap agreements is reset quarterly. The interest rate swap
agreements will terminate in March 1997, July 1998 and November 1998. The
differential to be paid or received is recognized ratably as interest rates
change over the life of the agreements as an adjustment to interest expense.
The net interest differential charge to interest expense for the period
October 17, 1996 to December 31, 1996 was $285,000. ARAC is exposed to credit
risk in the event of nonperformance by counter parties to its interest rate swap
agreements. Credit risk is limited by entering into such agreements with primary
dealers only; therefore, ARAC does not anticipate that nonperformance by counter
parties will occur. Notwithstanding this, ARAC's treasury department monitors
counter party credit ratings at least quarterly through reviewing independent
credit agency reports. Both current and potential exposure are evaluated as
necessary, by obtaining replacement cost information from alternative dealers.
Potential loss to ARAC from credit risk on these agreements is limited to
amounts receivable, if any.
<PAGE>
Note D - Litigation Related to ARAC
Certain litigation has been initiated against ARAC which has arisen during
the normal course of operations. Since litigation is subject to many
uncertainties, the outcome of any individual matter is not predictable with any
degree of certainty, and it is reasonably possible that one or more of these
matters could be decided unfavorably against ARAC. The Company maintains
insurance policies that cover most of the actions brought against ARAC. Two
legal actions have been filed against ARAC alleging discrimination in the rental
of vehicles. The Company has agreed to indemnify ARAC from any unfavorable
outcome with respect to these matters upon the consummation of an IPO. ARAC is
not currently involved in any legal proceeding which it believes would have a
material adverse effect upon its combined financial condition or results of
operations.
***
Accounting Treatment for ARAC
The Company's interest in ARAC of $75 million at the October 17, 1996
acquisition date represents the estimated value of its 100% interest in ARAC at
the date of acquisition and is accounted for under the equity method since the
Company's control is temporary based on the planned IPO of ARAC. Upon completion
of the IPO, the value of ARAC is expected to increase to $300 million (with the
$225 million of IPO proceeds retained by ARAC) with the Company's interest at
25% equal to $75 million, its current investment balance. If the results of the
IPO do not confirm the preliminary purchase price allocation, for the investment
in ARAC, then such investment will be adjusted with a corresponding adjustment
to excess of cost over fair value of net assets acquired.
<PAGE>
Following is a Pro Forma Condensed Consolidated Balance Sheet at December
31, 1996 and a Pro Forma Condensed Consolidated Income Statement for the year
ended December 31, 1996 assuming the ARAC was consolidated.
HFS Incorporated
Pro Forma Condensed Consolidated Balance Sheet
(in thousands)
Assets
Cash and cash equivalents ........................................ $ 120,427
Restricted cash .................................................. 89,849
Accounts receivable - net ........................................ 999,086
Other current assets ............................................. 211,118
-----------
Total current assets ......................................... 1,420,480
----------
Property and equipment, net ...................................... 427,415
Vehicles, net ................................................... 2,243,492
Franchise agreements, net ......................................... 995,947
Other intangibles ................................................... 604,535
Excess of cost over fair value of net assets acquired ............... 1,980,174
Other assets ..................................................... 457,733
-----------
8,129,776
-----------
Assets under Management and Mortgage Programs:
Net investment in leases and leased vehicles ............ ... 3,418,666
Equity advances on homes .................................... 773,326
Mortgage loans held for sale ................................ 1,248,299
Mortgage servicing rights and fees .......................... 288,943
-----------
5,729,234
-----------
Total Assets ..................................................... $13,859,010
===========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses ............................. $ 1,401,328
Short term debt .................................................. 150,000
Current portion of long term debt ................................. 2,995
-----------
Total Current Liabilities ..................................... 1,554,323
----------
Public liability, property damage and other ...................... 213,785
Long term debt ................................................... 3,043,895
Deferred revenue ................................................ 397,034
Other liabilities ................................................ 131,021
-----------
3,785,735
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Liabilities under management and mortgage programs:
Debt ........................................................ 5,089,943
Deferred income taxes ........................................ 281,948
-----------
5,371,891
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Total Liabilities .................................................. 10,711,949
-----------
Stockholders' equity ............................................... 3,147,061
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$13,859,010
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HFS Incorporated
Pro Forma Consolidated Income Statement
(in thousands)
Revenues $ 1,801,795
Expenses
Operating ............................ 827,761
Marketing and reservation ............ 157,347
Vehicle depreciation and lease charges 95,245
Selling and administrative ........... 135,791
Depreciation and amortization ........ 98,837
Interest ............................. 53,907
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Total expenses .................. 1,368,888
Income before income taxes ........... 432,907
Provision for income taxes ........... 175,666
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Net income ........................... $ 257,241
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