<PAGE>
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
------------
November 4, 1997 (November 4, 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 offices) (Zip Code)
(973) 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 is being filed by HFS Incorporated ("HFS" or the
"Registrant") for purposes of incorporating by reference the exhibits listed in
Item 7 hereof in Registration Statement No.
333-11031 filed by the Registrant on August 29, 1996.
Item 7. Exhibits
Exhibit
No. Description
15 Letter of Ernst & Young LLP re: unaudited interim financial
information of CUC
International Inc. ("CUC") for the three months ended April 30,
1997.
23.1 Consent of Ernst & Young LLP relating to the audited financial
statements of CUC International Inc.
23.2 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Sierra On-Line, Inc.
23.3 Consent of KPMG Peat Marwick LLP relating to the audited
financial statements of Davidson & Associates, Inc.
23.4 Consent of Price Waterhouse LLP relating to the audited financial
statements of Ideon Group, Inc.
99.1 Pro forma financial information:
Section A - Unaudited pro forma combining financial statements
which give effect to the proposed merger of HFS with and into CUC
(the "Merger").
The pro forma combining balance sheet as of June 30, 1997 and
statements of income for the year ended December 31, 1996 and six
months ended June 30, 1997 are presented to reflect the combining
of the historical financial results of CUC with the pro forma
financial results of HFS.
Section B - Unaudited pro forma statement of income of HFS,
excluding the Merger, for the year ended December 31, 1996.
The pro forma statement of income is presented to reflect all of
HFS's transactions prior to the Merger.
Section C - Unaudited historical combining financial statements
which gives effect to the Merger.
The historical combining balance sheet as of June 30, 1997 and
statements of income for the six months ended June 30, 1996 and
1997 and for each of the years in the three year period ended
December 31, 1996 are presented to reflect the combining of the
historical financial results of CUC with the historical financial
results of HFS.
99.2 Quarterly Report on Form 10-Q of CUC International Inc. for the
quarterly period ended July 31, 1997.
<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-Finance
and Chief Accounting Officer
Date: November 4, 1997
<PAGE>
HFS INCORPORATED
CURRENT REPORT ON FORM 8-K
Report Dated November 4, 1997 (November 4, 1997)
EXHIBIT INDEX
Exhibit No. Description
15. Letter of Ernst & Young LLP re: unaudited interim financial
information of CUC International Inc. for the three months
ended April 30, 1997.
23.1 Consent of Ernst & Young LLP relating to the audited financial
statements of CUC International Inc.
23.2 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Sierra On-Line, Inc.
23.3 Consent of KPMG Peat Marwick LLP relating to the audited
financial statements of Davidson & Associates, Inc.
23.4 Consent of Price Waterhouse LLP relating to the audited
financial statements of Ideon Group, Inc.
99.1 Pro forma financial information:
Section A - Unaudited pro forma combining financial statements
which give effect to the proposed merger of HFS with and into
CUC (the "Merger").
The pro forma combining balance sheet as of June 30, 1997 and
statements of income for the year ended December 31, 1996 and
six months ended June 30, 1997 are presented to reflect the
combining of the historical financial results of CUC with the
pro forma financial results of HFS.
Section B - Unaudited pro forma statement of income of HFS,
excluding the Merger, for the year ended December 31, 1996.
The pro forma statement of income is presented to reflect all
of HFS's transactions prior to the Merger.
Section C - Unaudited historical combining financial
statements which gives effect to the Merger.
The historical combining balance sheet as of June 30, 1997 and
statements of income for the six months ended June 30, 1996
and 1997 and for each of the years in the three year period
ended December 31, 1996 are presented to reflect the combining
of the historical financial results of CUC with the historical
financial results of HFS.
99.2 Quarterly Report on Form 10-Q of CUC International Inc. for
the quarterly period ended July 31, 1997.
<PAGE>
EXHIBIT 15
CUC INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT15-LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
October 31, 1997
Shareholders and Board of Directors
CUC International Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-3, No. 333-11031) and related Prospectus of HFS Incorporated, dated
August 29, 1996, of our report dated June 13, 1997 relating to the unaudited
condensed consolidated interim financial statements of CUC International Inc.
that is included in its Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997, and incorporated by reference in the Joint Proxy Statement filed
by CUC International Inc. and HFS Incorporated that is made a part of CUC
International Inc.'s Registration Statement (Form S-4, No. 333-34517).
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3, No. 333-11031) and related Prospectus of HFS Incorporated, dated August 29,
1996, of our report dated March 10, 1997, with respect to the consolidated
financial statements and schedule of CUC International Inc. included in its
Annual Report (Form 10-K) for the year ended January 31, 1997, and incorporated
by reference in the Joint Proxy Statement filed by CUC International Inc. and
HFS Incorporated that is made a part of CUC International Inc.'s Registration
Statement (Form S-4, No. 333-34517).
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
October 31, 1997
<PAGE>
EXHIBIT 23.2
Independent Auditor's Consent
We consent to the incorporation by reference in Registration Statement No. 333-
11031 of HFS Incorporated on Form S-3 and in this Current Report on Form 8-K of
our report dated June 24, 1996 relating to the consolidated balance sheet of
Sierra On-Line, Inc. and subsidiaries for the year ended March 31, 1997 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the two years ended March 31, 1996 (not presented separately therein).
/s/ Deloitte & Touche LLP
Seattle, Washington
October 30, 1997
<PAGE>
EXHIBIT 23.3
Consent of Independent Auditors
The Board of Directors
Davidson & Associates, Inc.
We consent to the use of our report, incorporated by reference into the CUC/HFS
Joint Proxy, which joint proxy is incorporated by reference into the HFS Form
S-3 (No. 333-11031), with respect to the consolidated balance sheet of Davidson
& Associates, Inc. and subsidiaries as of December 31, 1995 and the related
consolidated statements of earnings, shareholders' equity, and cash flows and
related schedule for each of the years in the two-year period ended December 31,
1995.
/s/ KPMG Peat Marwick LLP
Long Beach, California
October 31, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-11031) of
HFS Incorporated of our report dated February 2, 1996, relating to the
consolidated financial statements of Ideon Group, Inc., which appears in the
Annual Report on Form 10-K of CUC International Inc. for the year ended January
31, 1997.
/s/ PRICE WATERHOUSE LLP
Tampa, Florida
October 31, 1997
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section A: Unaudited pro forma combining financial statements of HFS giving effect to
the merger of HFS with and into CUC International Inc. ("CUC") (the "Merger")
as of June 30, 1997 and for the year ended December 31, 1996 and the six
months ended June 30, 1997................................................... 2-7
Section B: Unaudited pro forma statement of income of HFS excluding the Merger for
the year ended December 31, 1996 ............................................ 8-18
Section C: Unaudited historical combining financial statements of HFS giving
effect to the Merger as of June 30, 1997 and for each of the years
ended December 31, 1994, 1995 and 1996 and each of the six months ended
June 30, 1996 and 1997....................................................... 19-27
</TABLE>
1
<PAGE>
SECTION A
CENDANT CORPORATION
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
FOR THE MERGER
The following unaudited pro forma combining financial statements give
effect to the proposed merger of HFS with and into CUC (the postmerger
company "Cendant Corporation"), which will be accounted for as a pooling of
interests. Upon consummation of the Merger, CUC intends to change its fiscal
year end from January 31 to December 31. The underlying pro forma combining
balance sheet as of June 30, 1997 and statement of income for the six months
ended June 30, 1997 reflect the combining of the historical financial results
of CUC with the historical financial results of HFS and give effect to the
conversion of HFS Common Stock into CUC Common Stock. The underlying pro
forma combining statement of income for the year ended December 31, 1996
reflects the combining of the historical financial results of CUC with the pro
forma financial results of HFS. The pro forma financial results of HFS
include all of HFS's transactions prior to the Merger.
The pro forma combining financial statements of Cendant Corporation
reflect adjustments for the pooling of CUC and HFS, including
reclassifications to conform to the presentation expected to be used by the
merged companies and shares issued in connection with the Merger.
The pro forma combining financial statements do not purport to present the
results of operations of (i) Cendant Corporation, had the Merger occurred or
(ii) HFS had the business combinations described in Section B occurred on the
dates specified, nor are they necessarily indicative of the operating results
that may be achieved in the future.
The unaudited pro forma combining financial statements of Cendant
Corporation are based on certain assumptions and adjustments described in the
pro forma financial statements of HFS excluding the Merger, as set forth in
Section B herein, and should be read in conjunction therewith and with the
consolidated financial statements and related notes thereto of HFS, as
included in the Current Report on Form 8-K of HFS Incorporated dated July 16,
1997 and CUC, as included in the Annual Report on Form 10-K of CUC
International Inc. for the fiscal year ended January 31, 1997. The financial
statements and related notes thereto of certain of the acquired companies
previously filed with the SEC pursuant to Regulation S-X Rule 3-05,
"Financial Statements of Businesses Acquired or to be Acquired."
TERMS OF THE MERGER
The Agreement and Plan of Merger between CUC and HFS provides, among other
things, for a "merger of equals" transaction involving the merger of HFS with
and into CUC, with CUC surviving the Merger and changing its name to Cendant
Corporation.
In the Merger, each issued and outstanding share of HFS Common Stock,
other than HFS Common Stock owned by HFS or CUC, will be converted into the
right to receive 2.4031 shares of CUC Common Stock.
2
<PAGE>
SECTION A
PAGE 1 OF 2
CENDANT CORPORATION
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT
---------------------------
7/31/97 6/30/97
------------ ------------- PRO FORMA
HISTORICAL HISTORICAL PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENTS COMPANIES
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............. $ 725,634 $ 58,511 $ 784,145
Restricted cash....................... 23,742 23,742
Marketable securities................. 468,810 468,810
Receivables, net...................... 582,293 840,941 1,423,234
Other current assets.................. 296,578 252,331 548,909
------------ ------------- ------------
Total current assets................. 2,073,315 1,175,525 3,248,840
------------ ------------- ------------
Deferred membership acquisition costs . 383,177 383,177
Franchise agreements, net.............. 948,753 948,753
Excess of costs over fair value of net
assets acquired, net.................. 449,503 1,868,438 2,317,941
Other intangible assets, net........... 28,710 588,710 617,420
Other assets........................... 297,456 848,357 1,145,813
------------ ------------- ------------
3,232,161 5,429,783 8,661,944
------------ ------------- ------------
Assets under management and mortgage
programs
Net investment in leases and leased
vehicles............................. 3,643,601 3,643,601
Relocation receivables ............... 579,575 579,575
Mortgage loans held for sale.......... 820,615 820,615
Mortgage servicing rights and fees ... 272,042 272,042
------------- ------------
5,315,833 5,315,833
------------ ------------- ------------
Total assets........................... $3,232,161 $10,745,616 $13,977,777
============ ============= ============
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statements to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited pro forma combining financial statements.
3
<PAGE>
SECTION A
PAGE 2 OF 2
CENDANT CORPORATION
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT
---------------------------
7/31/97 6/30/97
------------ ------------- PRO FORMA
HISTORICAL HISTORICAL PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENTS COMPANIES
------------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities--accounts payable,
accrued expenses, and other current
liabilities.............................. $ 472,779 $ 1,279,038 $ 1,751,817
Deferred income........................... 692,855 250,525 943,380
Long-term debt............................ 562,882 1,173,967 1,736,849
Other non-current liabilities............. 8,746 120,165 128,911
------------ ------------- ------------
1,737,262 2,823,695 4,560,957
------------ ------------- ------------
Liabilities under management and mortgage
programs
Debt..................................... 4,776,153 4,776,153
Deferred income taxes.................... 301,200 301,200
------------- ------------
5,077,353 5,077,353
------------- ------------
Shareholders' equity
Common stock............................. 4,164 1,614 $ 2,190 (a) 7,968
Additional paid-in capital............... 696,929 2,234,646 (192,660)(a) 2,738,915
Retained earnings........................ 892,168 808,982 1,701,150
Treasury stock........................... (57,436) (190,470) 190,470 (a) (57,436)
Restricted stock, deferred compensation . (27,357) (27,357)
Foreign currency translation adjustment . (13,569) (10,204) (23,773)
------------ ------------- ------------
Total shareholders' equity............... 1,494,899 2,844,568 4,339,467
------------ ------------- -------------- ------------
Total liabilities and shareholders'
equity.................................... $3,232,161 $10,745,616 $ $13,977,777
============ ============= ============== ============
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statements to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited pro forma combining financial statements.
4
<PAGE>
SECTION A
CENDANT CORPORATION
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------
1/31/97 12/31/96
------------ ------------ PRO FORMA
HISTORICAL PRO FORMA PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net ..... $1,972,430 $1,915,999 $3,888,429
Software.............................. 375,225 375,225
Fleet leasing (net of depreciation
and interest costs of $1,132,408) ... 56,660 56,660
Other................................. 30,279 30,279
------------ ------------ ------------
Net revenues.......................... 2,347,655 2,002,938 4,350,593
------------ ------------ ------------
EXPENSES
Operating............................. 688,280 916,041 1,604,321
Marketing and reservation............. 887,852 285,954 1,173,806
General and administrative............ 266,228 73,373 339,601
Depreciation and amortization......... 58,658 164,212 222,870
Merger and restructuring charges .... 179,945 179,945
Interest, net......................... (9,549) 42,460 32,911
Other ................................ 5,698 5,698
------------ ------------ ------------
Total expenses........................ 2,071,414 1,487,738 3,559,152
------------ ------------ ------------
Income before income taxes............ 276,241 515,200 791,441
Provision for income taxes............ 112,142 208,141 320,283
------------ ------------ ------------
Net income ........................... $ 164,099 $ 307,059 $ 471,158
============ ============ ============
PER SHARE INFORMATION (B)
Net income per share
Primary.............................. $ 0.41 $ 1.76 $ 0.57
Fully diluted........................ 0.40 1.75 0.57
Weighted average shares outstanding
Primary.............................. 405,073 177,072 248,450 830,595
Fully diluted ....................... 409,521 177,840 249,527 836,888
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and pro
forma HFS financial statements to conform to the presentation expected
to be used by the combined companies.
See notes to unaudited pro forma combining financial statements.
5
<PAGE>
SECTION A
CENDANT CORPORATION
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
--------------------------
7/31/97 6/30/97
------------ ------------ PRO FORMA
HISTORICAL HISTORICAL PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net.......... $1,125,159 $ 830,346 $1,955,505
Software.................................. 172,200 172,200
Fleet leasing (net of depreciation and
interest costs of $584,275).............. 146,581 146,581
Other..................................... 122,670 122,670
------------ ------------ ------------
Net revenues.............................. 1,297,359 1,099,597 2,396,956
------------ ------------ ------------
EXPENSES
Operating................................. 408,990 435,062 844,052
Marketing and reservation................. 461,906 130,481 592,387
General and administrative................ 140,991 57,112 198,103
Merger and restructuring charge
associated with business combination (c) 303,000 303,000
Depreciation and amortization............. 33,397 86,534 119,931
Interest, net............................. (11,206) 30,747 19,541
------------ ------------ ------------
Total expenses............................ 1,034,078 1,042,936 2,077,014
------------ ------------ ------------
Income before income taxes................ 263,281 56,661 319,942
Provision for income taxes................ 100,498 72,005 172,503
------------ ------------ ------------
Net income ............................... $ 162,783 $ (15,344) $ 147,439
============ ============ ============
PER SHARE INFORMATION (B)
Net income per common share
Primary and fully diluted ............... $ 0.38 $ (0.10) $ 0.18
Weighted average number of common and
dilutive common equivalent shares
outstanding
Primary.................................. 436,237 158,342 266,714 861,293
Fully diluted ........................... 439,166 158,342 266,680 864,188
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statements to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited pro forma combining financial statements.
6
<PAGE>
SECTION A
CENDANT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINING
FINANCIAL STATEMENTS
(A) EQUITY
In connection with the Merger, each outstanding share of HFS Common Stock
will be converted into the right to receive 2.4031 shares of CUC Common
Stock. In addition each share of HFS Common Stock that is owned by HFS or
CUC will be cancelled and retired. The pro forma adjustment assumes that
all 158.3 million shares of HFS Common Stock outstanding at June 30, 1997
(exclusive of 3.1 million shares of HFS Common Stock in treasury which
will be cancelled and retired in connection with the Merger) will be
converted into approximately 380.4 million shares of CUC Common Stock in
accordance with the Exchange Ratio.
(B) PER SHARE INFORMATION
Net income per share has been computed based upon the combined weighted
average outstanding shares of CUC Common Stock and HFS Common Stock for
each period. The historical weighted average number of equivalent
outstanding shares of HFS Common Stock for each period has been adjusted
to reflect the Exchange Ratio of 2.4031 shares of CUC Common Stock for
each share of HFS Common Stock.
(C) HFS/PHH MERGER COSTS AND RESTRUCTURING
Includes a one-time pre-tax merger and restructuring charge of $303
million (after-tax of $227 million or $.26 per common share for the six
months ended June 30, 1997) recorded by HFS in connection with its merger
with PHH Corporation ("PHH").
CUC/HFS MERGER COSTS
It is expected that Cendant Corporation will incur pre-tax transaction
costs associated with the Merger which are expected to range from $600
million to $650 million, of which approximately $150 million will be lump
sum payments. These costs associated with the Merger are being
established by the combined management. In determining the amount of the
reserve for these costs, management is considering the costs relating to
facility and systems consolidations and the costs associated with exiting
certain activities.
7
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF INCOME OF HFS
EXCLUDING THE MERGER
The accompanying unaudited pro forma statement of income gives effect to
the April 30, 1997 business combination of HFS and PHH which was accounted
for as a pooling of interests (the "PHH Merger"). Accordingly, the underlying
historical consolidated statement of income of HFS for the year ended
December 31, 1996, reflects the combining of the historical financial results
of PHH with the historical financial results of HFS.
The pro forma statement of income for the year ended December 31, 1996 is
also presented as if the following transactions had occurred on January 1,
1996: (i) the acquisition of Avis, Inc. ("Avis") and the November 1996
issuance of HFS Common Stock (the "Avis Offering") as partial consideration
for Avis; (ii) the September 1997 initial public offering of a majority
interest in the corporation which owns all company-owned Avis car rental
locations; (iii) the acquisition of Resort Condominiums International, Inc.
and its affiliates ("RCI") and the issuance of HFS common stock as partial
consideration for RCI; (iv) the May 31, 1996 acquisition of the common stock
of Coldwell Banker and the related contribution of Coldwell Banker's owned
real estate brokerage offices (the "Owned Brokerage Business") to a newly
created independent trust (the "Trust") (the "Coldwell Banker Transaction");
(v) the receipt of proceeds from an offering of HFS's common stock (the
"Second Quarter 1996 Offering") to the extent necessary to fund (a) the
acquisition of Coldwell Banker and the related repayment of indebtedness and
acquisition expenses and (b) the cash consideration portion in the Avis
acquisition; (vi) the acquisitions of: the six non-owned Century 21 NORS
during the second quarter of 1996, Travelodge on January 23, 1996 and ERA on
February 12, 1996 (collectively, the "Other 1996 Acquisitions"); and (vii)
the February 22, 1996 issuance of $240 million of 4 3/4% Convertible Senior
Notes Due 2003 to the extent such proceeds were used to finance the Other
1996 Acquisitions.
All of HFS's aforementioned acquisitions (other than PHH) have been
accounted for using the purchase method of accounting. Accordingly, assets
acquired and liabilities assumed have been recorded at their estimated fair
values, with appropriate recognition given to the effect of current interest
rates and income taxes. Management believes that the accounting used to
reflect the above transactions provides a reasonable basis on which to
present the unaudited pro forma statement of income of HFS for the year ended
December 31, 1996. HFS has entered into certain immaterial transactions which
are not reflected in the pro forma statement of income.
The pro forma statement of income does not purport to present the
financial position or results of operations of HFS had the transactions and
events assumed therein occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be achieved in
the future. The pro forma statement of income does not reflect cost savings
and revenue enhancements that management believes have been and may continue
to be realized following the acquisitions. These cost savings have been and
are expected to be realized primarily through the restructuring of operations
as well as revenue enhancements realized through the leveraging of HFS's
preferred alliance programs. No assurances can be made as to the amount of
cost savings or revenue enhancements, if any, that were actually realized or
will be realized.
The pro forma statement of income is based on certain assumptions and
adjustments described in the Notes to Unaudited Pro Forma Statement of Income
and should be read in conjunction therewith and with the consolidated
financial statements and related notes thereto of HFS, as included in the
Current Report on Form 8-K of HFS Incorporated dated July 16, 1997, and the
financial statements and related notes of the acquired companies previously
filed with the Securities and Exchange Commission pursuant to Regulation S-X
Rule 3-05, "Financial Statements of Businesses Acquired or to be Acquired."
8
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF INCOME
For the Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
ACQUIRED PRO FORMA
HFS COMPANIES ADJUSTMENTS PRO FORMA
------------ ----------- -------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees, net ..................... $1,340,534 $623,159 $ 11,835 (a) $1,915,999
(235,625)(b)
176,096 (d)
Fleet leasing (net of depreciation
and interest costs of $1,132,408) ... 56,660 56,660
Other.................................. 40,717 5,718 46,435
Equity in earnings (loss) of Avis Inc.
car rental operations................. 2,261 (18,417)(d) (16,156)
------------ ----------- -------------- ------------
Net revenues............................ 1,440,172 628,877 (66,111) 2,002,938
------------ ----------- -------------- ------------
EXPENSES
Operating.............................. 660,079 479,075 79,886 (d)
(75,636)(e)
(227,363)(f) 916,041
Marketing and reservation.............. 157,347 128,607 285,954
General and administrative............. 73,373 73,373
Depreciation and amortization.......... 97,811 40,884 25,517 (g) 164,212
Interest, net.......................... 19,695 (17,728) 11,718 (h) 42,460
6,000 (d)
22,775 (c)
Other.................................. 6,114 (416)(i) 5,698
------------ ----------- -------------- ------------
Total expenses.......................... 1,008,305 636,952 (157,519) 1,487,738
------------ ----------- -------------- ------------
Income (loss) before income taxes ...... 431,867 (8,075) 91,408 515,200
Provision (benefit) for income taxes ... 174,626 (6,689) 40,204 (j) 208,141
------------ ----------- -------------- ------------
Net income (loss)....................... $ 257,241 $ (1,386) $ 51,204 $ 307,059
============ =========== ============== ============
PER SHARE INFORMATION (PRIMARY)
Net income ............................ $ 1.59 $ 1.76
============ ============
Weighted average shares outstanding .. 164,378 12,694 (k) 177,072
============ ============== ============
PER SHARE INFORMATION (FULLY DILUTED)
Net income ............................ $ 1.58 $ 1.75
============ ============
Weighted average shares outstanding . 165,146 12,694 (k) 177,840
============ ============== ============
</TABLE>
- ------------
Note: Certain reclassifications have been made to the historical results
of HFS and acquired companies to conform to HFS's pro forma
classification.
See notes to unaudited pro forma financial statements.
9
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
UNAUDITED HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF ACQUIRED COMPANIES
For the Year Ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
HISTORICAL (1)
-----------------------------------------------------
AVIS, (2) COLDWELL OTHER 1996 TOTAL
AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL
------------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
Service fees ........................ $32,335 $284,996 $295,478 $10,350 $623,159
Other ............................... 4,067 1,651 5,718
------------- ---------- ----------- -------------- ------------
Net revenues ....................... 32,335 284,996 299,545 12,001 628,877
------------- ---------- ----------- -------------- ------------
EXPENSES
Operating ........................... 25,379 130,113 312,348 11,235 479,075
Marketing and reservation............ 128,607 128,607
Depreciation and amortization ...... 15,345 16,097 9,021 421 40,884
Interest, net ....................... (22,376) 3,155 1,493 (17,728)
Other ............................... 4,838 512 764 6,114
------------- ---------- ----------- -------------- ------------
Total expenses ..................... 40,724 257,279 325,036 13,913 636,952
------------- ---------- ----------- -------------- ------------
Income (loss) before income taxes ... (8,389) 27,717 (25,491) (1,912) (8,075)
Provision (benefit) for income taxes 99 3,644 (10,432) (6,689)
------------- ---------- ----------- -------------- ------------
Net income (loss) .................... $(8,488) $ 24,073 $(15,059) $(1,912) $ (1,386)
============= ========== =========== ============== ============
</TABLE>
- ------------
(1) Reflects results of operations for the period from January 1, 1996
to the respective dates of acquisition.
(2) The historical consolidated statement of operations of Avis, as
adjusted, has been adjusted to present only the historical operating
results of the portion of Avis intended to be retained by HFS.
Note: Certain reclassifications have been made to the historical results of
acquired companies to conform to HFS's pro forma classification.
See notes to unaudited pro forma financial statements.
10
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
UNAUDITED HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS
OF OTHER 1996 ACQUISITIONS
For the Year Ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
CENTURY 21
NORS (1) TRAVELODGE (1) ERA (1) TOTAL
------------ -------------- ---------- ---------
<S> <C> <C> <C> <C>
NET REVENUES
Service fees ..................... $6,668 $688 $ 2,994 $10,350
Other ............................ 449 1,202 1,651
------------ -------------- ---------- ---------
Net revenues .................... 7,117 688 4,196 12,001
------------ -------------- ---------- ---------
EXPENSES
Operating......................... 7,566 552 3,117 11,235
Depreciation and amortization ... 285 136 421
Interest, net .................... 2 1,491 1,493
Other............................. 764 764
------------ -------------- ---------- ---------
Total expenses .................. 7,853 552 5,508 13,913
------------ -------------- ---------- ---------
Income (loss) before income taxes (736) 136 (1,312) (1,912)
Provision for income taxes ........
------------ -------------- ---------- ---------
Net income (loss) ................. $ (736) $136 $(1,312) $(1,912)
============ ============== ========== =========
</TABLE>
- ------------
(1) Reflects results of operations for the period from January 1, 1996
to the respective dates of acquisition.
Note: Certain reclassifications have been made to the historical results
of acquired companies to conform to HFS's pro forma classification.
See notes to unaudited pro forma financial statements.
11
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
A. SERVICE FEE REVENUE:
The pro forma adjustment reflects the elimination of franchise revenue
paid by the Century 21 NORS to Century 21 under sub-franchise agreements
(offset against operating expense--see Note e) and the addition of franchise
fees to be received under franchise contracts with owned brokerage offices
upon contribution of the Owned Brokerage Business to the Trust. Pro forma
adjustments to service fee revenue consist of the following ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Eliminate:
Century 21 revenue included as Century 21 NORS operating expense $(1,003)
Add:
Franchise fees from Owned Brokerage Business..................... 12,838
------------------
Total........................................................... $11,835
==================
</TABLE>
The Franchise fees from the Owned Brokerage Business, which are based on
the franchise contracts with the Trust, are calculated at approximately 5.7%
of gross commissions earned by the Owned Brokerage Business on sales of real
estate properties.
B. OWNED BROKERAGE BUSINESS REVENUE:
The pro forma adjustment reflects the elimination of revenue generated
from Coldwell Banker's 318 formerly owned brokerage offices. HFS contributed
the net assets of the Owned Brokerage Business to the Trust upon consummation
of the Coldwell Banker acquisition. The free cash flow of the Trust is
expended at the discretion of the trustees to enhance the growth of funds
available for advertising and promotion.
C. OTHER REVENUE:
The pro forma adjustment reflects the elimination of revenue associated
with investment income generated from RCI cash and marketable securities
which were distributed in the form of a dividend to the former shareholder of
RCI prior to consummation of the RCI acquisition.
D. CAR RENTAL OPERATING COMPANY OPERATIONS:
At the time HFS acquired Avis, it had developed and announced a plan (the
"Plan") to do the following:
1. Retain certain assets acquired, including the reservation system,
franchise agreements, trademarks and tradenames and certain
liabilities.
2. Segregate the assets used in the car rental operations in ARAC and to
dispose of approximately 75% of ARAC within one year through an initial
public offering ("IPO") thereby diluting HFS's interest to
approximately 25%. All of the proceeds from the IPO would be retained
by ARAC.
3. Enter into a license agreement with ARAC licencing its use of the
trademarks and tradename under which HFS is to provide other franchise
services.
12
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
D. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued)
The pro forma adjustments are comprised of the following ($000's):
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 1, 1996 FOR THE PERIOD OCTOBER 17, 1996
THROUGH OCTOBER 16, 1996 THROUGH DECEMBER 31, 1996 TOTAL
------------------------------ -------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Historical income before taxes from ARAC car
rental operations................................. $ 69,799 --
ADJUSTMENTS TO ARAC:
ELIMINATION OF HISTORICAL EXPENSE ASSOCIATED
WITH:
Reservation and information technology services
(HFS Expense)(i)................................ $ 63,594 $ 16,292 $ 79,886
============
Depreciation and amortization.................... 27,425 --
ADDITION OF PRO FORMA EXPENSES ASSOCIATED WITH:
Depreciation and amortization (ii)............... (14,504) --
Increased financing costs (iii).................. (803) 75,712 -- $ 16,292
---------- ----------
HFS SERVICE FEE ADJUSTMENTS:
Reservation and information technology services
(i)............................................ (63,594) (16,292)
Service fees from franchised locations (iv) .... (15,562) (4,289)
Royalty payment from Avis Inc. to HFS (v) ...... (61,505) (140,661) (14,854) (35,435) $(176,096)
---------- ----------- ---------- ----------- ============
Adjusted income (loss) before taxes from ARAC .... 4,850 (19,143)
Provision for income taxes........................ 1,945 --
----------- -----------
Adjusted net income (loss) from ARAC ............. 2,905 (19,143)
HFS ownership percentage........................... 25% 100%
----------- -----------
HFS's equity in earnings (loss) of Avis Inc.'s car
rental operations................................. $ 726 $(19,143) $ (18,417)
=========== =========== ============
OTHER REVENUE ADJUSTMENT:
Elimination of historical interest income related
to cash consideration portion of Avis
acquisition (vi)................................. $ 6,000 -- $ 6,000
=========== =========== ============
</TABLE>
- ------------
(i) Subsequent to the IPO, HFS will retain and operate the
telecommunications and computer processing system which services ARAC
for reservations, rental agreement processing, accounting and fleet
control. The pro forma adjustment reflects a planned contractual
agreement with ARAC, under which HFS will charge ARAC at cost for
reservation and information technology services provided.
(ii) The estimated fair value of Avis property and equipment intended to
be retained by ARAC is $101.0 million, comprised primarily of
furniture, fixtures, and leasehold improvements, which is amortized
on a straight-line basis over the estimated useful lives, which
average seven years. Excess of cost over fair value of net assets
acquired by ARAC is valued at $154.0 million and is amortized on a
straight line basis over a benefit period of 40 years.
(iii) In connection with the acquisition of Avis, approximately $1 billion
of tax-advantaged debt was repaid and replaced by a similar amount of
non tax-advantaged debt. This resulted in an increase in interest
rates, due to the loss of tax benefits from the Employee Stock
Ownership Plan ("ESOP") financing which were passed through from
various lenders to Avis ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Eliminate former
facilities ............... $(127,018)
Add current facilities ... 127,821
------------------
Increased financing cost . $ 803
==================
</TABLE>
13
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
D. CAR RENTAL OPERATING COMPANY OPERATIONS: (Continued)
(iv) Reflects historical franchise fee revenue from third parties.
(v) In connection with HFS's plan to dispose of approximately 75% of
ARAC, HFS will enter into a franchise agreement with ARAC for ARAC's
use of the Avis trademarks and tradename. The royalty payment to be
made to HFS from ARAC for use of the Avis trademarks and tradename is
calculated at 4.0% of the revenues generated by ARAC which is the net
royalty percentage HFS expects to receive pursuant to the franchise
agreement. Such payments are calculated as follows ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
----
<S> <C>
Revenues generated by
ARAC...................... $1,908,985
Royalty percentage......... 4.0%
------------------
Royalty payment to HFS .... $ 76,359
==================
</TABLE>
(vi) The pro forma adjustment eliminates historical interest income on the
portion of cash generated from the Second Quarter 1996 Offering which
was used to finance the Avis acquisition.
In September 1997, HFS completed the IPO of ARAC which diluted HFS's
ownership interest to approximately 27.5%. The actual results of the IPO and
its related impact on the unaudited pro forma statement of income for the
year ended December 31, 1996 does not differ materially from the pro forma
effects of the assumptions and estimates used in the preparation of such
financial statement.
E. OPERATING EXPENSE:
The pro forma adjustments reflects the elimination of; (i) royalty
payments made by the Century 21 NORS to Century 21 under subfranchise
agreements (offset against service fee revenue--see Note a); (ii) the payment
of Coldwell Banker stock options as a result of change in control provisions
in connection with the acquisition of Coldwell Banker by HFS and; (iii) a
one-time bonus payment paid to RCI employees by the former shareholder of RCI
pursuant to the stock purchase agreement in connection with the acquisition
of RCI by HFS ($000's).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Franchise fees ....... $ 1,003
Stock option expense 40,801
Bonus payment......... 33,832
------------------
Total................ $75,636
==================
</TABLE>
F. OPERATING EXPENSE:
The pro forma adjustment reflects the elimination of expenses associated
with Coldwell Banker's formerly owned brokerage offices (see Note b). The
majority of Owned Brokerage Business expenses are directly attributable to
the business. Based on HFS's due diligence of Coldwell Banker the Company
determined that common expenses were allocated to the owned brokerage
business based on a reasonable allocation method. Such allocations were based
on the ratio of number of employees, the amount of space occupied and revenue
generated by the Owned Brokerage Business relative to Coldwell Banker in the
aggregate and multiplied by corresponding common costs as appropriate to
determine allocable expenses.
14
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
G. DEPRECIATION AND AMORTIZATION:
The pro forma adjustment for depreciation and amortization is comprised of
($000's):
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
COLDWELL OTHER 1996
RCI AVIS BANKER ACQUISITIONS TOTAL
----------- ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Elimination of historical
expense.................. $(16,097) $(15,345) $(9,021) $ (421) $(40,884)
Property, equipment and
furniture and fixtures .. 6,686 4,924 482 -- 12,092
Intangible assets......... 20,114 24,658 8,495 1,042 54,309
----------- ----------- ---------- -------------- -----------
Total.................... $ 10,703 $ 14,237 $ (44) $ 621 $ 25,517
=========== =========== ========== ============== ===========
</TABLE>
RCI
The fair value of RCI's property and equipment is estimated at
approximately $55.7 million and is amortized on a straight-line basis over
the estimated useful lives, ranging from seven to thirty years.
RCI's intangible assets consist of customer lists and excess of cost over
fair value of net assets acquired. Estimated fair value of RCI's customer
lists are approximately $100 million and are amortized on a straight-line
basis over the period to be benefited which is 10 years. The fair value
ascribed to customer lists is determined based on the historical renewal
rates of RCI members. The excess of cost over fair value of net assets
acquired is estimated at approximately $477.7 million and is determined to
have a benefit period of forty years, which is based on RCI being a leading
provider of services to the timeshare industry, which includes being the
world's largest provider of timeshare exchange programs.
Avis
The estimated fair value of Avis's property and equipment retained by HFS
is $96.0 million, comprised primarily of reservation equipment and related
assets and to the Avis Headquarters office. Such property and equipment is
amortized on a straight-line basis over the estimated benefit periods ranging
from 5 to 30 years. Avis's intangible assets recorded by HFS (not applicable
to ARAC) are comprised of the Avis trademark, a reservation system and
customer data base, and excess of cost over fair value of net assets
acquired. The estimated fair value of the Avis trademark is approximately
$400 million and is amortized on a straight-line basis over a benefit period
of 40 years. The estimated fair value of the reservation system and customer
data base are approximately $95.0 million and $14.0 million, respectively and
are amortized on a straight line basis over the periods to be benefited which
are 10 years and 6.5 years, respectively.
The excess of cost over fair value of net assets acquired applicable to
the allocated portion of the business to be retained by HFS is estimated at
approximately $317.6 million and is determined to have a benefit period of 40
years, which is based on Avis' position as the second largest car rental
system in the world, the recognition of its brand name in the car rental
industry and the longevity of the car rental business.
Coldwell Banker
The estimated fair value of Coldwell Banker's property and equipment
(excluding land) of $15.7 million, is amortized on a straight-line basis over
the estimated benefit periods ranging from five to 25 years. Coldwell
Banker's intangible assets are comprised of franchise agreements and excess
of cost over fair value of net assets acquired. The franchise agreements with
the brokerage offices comprising the Trust
15
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
G. DEPRECIATION AND AMORTIZATION: (Continued)
are valued independently of all other franchise agreements with Coldwell
Banker affiliates. Franchise agreements within the Trust and independent of
the Trust are valued at $218.5 million and $218.7 million, respectively, and
are amortized on a straight line basis over the respective benefit periods of
40 years and 35 years, respectively. The benefit period associated with Trust
franchise agreements was based upon a long history of gross commission
sustained by the Trust. The benefit period associated with the Coldwell
Banker affiliates' franchise agreements was based upon the historical
profitability of such agreements and historical renewal rates. The excess of
cost over fair value of net assets acquired is estimated at approximately
$347.0 million and is determined to have a benefit period of 40 years, which
is based on Coldwell Banker's position as the largest gross revenue producing
real estate company in North America, the recognition of its brand name in
the real estate brokerage industry and the longevity of the real estate
brokerage business.
Other 1996 Acquisitions
The estimated fair values of Other 1996 Acquisitions franchise agreements
aggregate $61.0 million and are being amortized on a straight-line basis over
the periods to be benefited, which range from twelve to thirty years. The
estimated fair values of Other Acquisitions excess of cost over fair value of
net assets acquired aggregate $187.4 million and are each being amortized on
a straight-line basis over the periods to be benefited, which are 40 years.
H. INTEREST EXPENSE:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Elimination of historical interest expense of ($000's):
Other 1996 Acquisitions...................................................... $(1,493)
RCI.......................................................................... (399)
Reversal of Coldwell Banker................................................... (3,155)
RCI........................................................................... 15,495
4 3/4% Notes to finance Other 1996 Acquisitions .............................. 1,270
------------------
Total....................................................................... $11,718
==================
</TABLE>
Coldwell Banker
The pro forma adjustment reflects the reversal of historical interest
expense relating to the following ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Expense associated with the Owned Brokerage Business (i) ..................... $ (179)
Expense associated with revolving credit facility borrowings which were
repaid with proceeds from offering (ii)...................................... 3,334
------------------
Total........................................................................ $3,155
==================
</TABLE>
(i) HFS paid substantially all outstanding debt of Coldwell Banker at the
consummation date of the acquisition. Therefore, a determination as
to the reasonableness of allocated Coldwell Banker interest to the
Owned Brokerage Business is unnecessary.
(ii) At the date of acquisition, HFS repaid $105 million of Coldwell
Banker indebtedness which represented borrowings under a revolving
credit facility at a variable rate of interest (LIBOR plus a margin
ranging from .5% to 1.25%).
16
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
H. INTEREST EXPENSE: (Continued)
RCI
The pro forma adjustment reflects the recording of interest expense on
$285 million of borrowings under HFS's revolving credit facilities at an
interest rate of 6.3% which is the variable rate in effect on the date of
borrowing. Borrowings represent the amount used as partial consideration in
the RCI acquisition.
4 3/4% Notes
The pro forma adjustment reflects interest expense and amortization of
deferred financing costs related to the February 22, 1996 issuance of the 4
3/4% Notes (5.0% effective interest rate) to the extent that such proceeds
were used to finance the acquisitions of ERA ($36.8 million), Travelodge
($39.3 million), and the Century 21 NORS ($95.0 million).
Effect of a 1/8% variance in variable interest rates
As mentioned above, interest expense was incurred on borrowings under the
HFS's revolving credit facility which partially funded the acquisition of
RCI. HFS recorded interest expense using the variable interest rate in effect
on the respective borrowing dates. The effect on pro forma net income
assuming a 1/8% variance in the variable interest rate used to calculate
interest expense is immaterial.
I. OTHER EXPENSES:
The pro forma adjustment eliminates charitable contributions made by the
former stockholder of RCI.
J. INCOME TAXES:
The pro forma adjustment to income taxes is comprised of ($000's):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996
------------------
<S> <C>
Reversal of historical (provision) benefit of:
HFS........................................... $(174,626)
RCI........................................... (3,644)
Avis.......................................... (99)
Coldwell Banker............................... 10,432
Pro forma provision............................ 208,141
------------------
Total........................................ $ 40,204
==================
</TABLE>
The pro forma provisions for taxes were computed using pro forma pre-tax
amounts and the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
17
<PAGE>
SECTION B
HFS INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME--(CONTINUED)
K. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
The pro forma adjustment to weighted average shares consists of the
following (000's):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES
ISSUANCE FOR THE YEAR ENDED
PRICE PER DECEMBER 31, ACQUISITION
SHARE 1996 DATE
----------- ------------------ -----------------
<S> <C> <C> <C>
Avis Offering.................................. $74.06 3,621 October 17, 1996
RCI............................................ $75.00 863 November 12, 1996
Second Quarter 1996 Offering--Coldwell Banker . $59.99 5,350 May 31, 1996
Second Quarter 1996 Offering--Avis............. $59.99 2,550 October 17, 1996
Century 21 NORS................................ $49.83 310 April 3, 1996
------------------ -----------------
Total......................................... 12,694
==================
</TABLE>
The unaudited Pro Forma Statement of Income of HFS for the year ended
December 31, 1996 is presented as if the acquisitions took place at the
beginning of the period thus, the stock issuances referred to above are
considered outstanding as of the beginning of the period for purposes of per
share calculations.
18
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING FINANCIAL STATEMENTS FOR THE MERGER
The following unaudited historical combining financial statements give
effect to the proposed merger of HFS with and into CUC (the postmerger
company "Cendant Corporation"), which will be accounted for as a pooling of
interests. Upon consummation of the Merger, CUC intends to change its fiscal
year end from January 31 to December 31. The underlying historical combining
balance sheet as of June 30, 1997 and historical combining statements of
income for the six months ended June 30, 1996 and 1997 and for each of the
years in the three year period ended December 31, 1996 reflect the combining
of the historical financial results of CUC with the historical financial
results of HFS and give effect to the conversion of HFS Common Stock into CUC
Common Stock.
The unaudited historical combining financial statements of Cendant
Corporation reflect adjustments for the pooling of CUC and HFS, including
reclassifications to conform to the presentation expected to be used by the
merged companies and shares issued in connection with the Merger.
The unaudited historical combining financial statements do not purport to
present the results of operations of Cendant Corporation, had the Merger
occurred, nor are they necessarily indicative of the operating results that
may be achieved in the future.
The unaudited historical combining financial statements of Cendant
Corporation should be read in conjunction with the consolidated financial
statements and related notes thereto of HFS, as included in the Current
Report on Form 8-K of HFS Incorporated dated July 16, 1997 and CUC, as
included in the Annual Report on Form 10-K of CUC International Inc. for the
fiscal year ended January 31, 1997.
TERMS OF THE MERGER
The Agreement and Plan of Merger between CUC and HFS provides, among other
things, for a "merger of equals" transaction involving the merger of HFS with
and into CUC, with CUC surviving the Merger and changing its name to Cendant
Corporation.
In the Merger, each issued and outstanding share of HFS Common Stock,
other than HFS Common Stock owned by HFS or CUC, will be converted into the
right to receive 2.4031 shares of CUC Common Stock.
19
<PAGE>
SECTION C
PAGE 1 OF 2
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT
---------------------------
7/31/97 6/30/97 PRO FORMA
------------ ------------- PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENTS COMPANIES
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................. $ 725,634 $ 58,511 $ 784,145
Restricted cash ............................ 23,742 23,742
Marketable securities ...................... 468,810 468,810
Receivables, net ........................... 582,293 840,941 1,423,234
Other current assets ....................... 296,578 252,331 548,909
------------ ------------- ------------
Total current assets ......................... 2,073,315 1,175,525 3,248,840
------------ ------------- ------------
Deferred membership acquisition costs ...... 383,177 383,177
Franchise agreements, net ................... 948,753 948,753
Excess of cost over fair value of net assets
acquired, net .............................. 449,503 1,868,438 2,317,941
Other intangible assets, net ................ 28,710 588,710 617,420
Other assets ................................ 297,456 848,357 1,145,813
------------ ------------- ------------
3,232,161 5,429,783 8,661,944
------------ ------------- ------------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,643,601 3,643,601
Relocation receivables ...................... 579,575 579,575
Mortgage loans held for sale ................ 820,615 820,615
Mortgage servicing rights and fees ......... 272,042 272,042
------------- ------------
5,315,833 5,315,833
------------ ------------- ------------
Total assets ................................. $3,232,161 $10,745,616 $13,977,777
============ ============= ============
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statements to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited historical combining financial statements.
20
<PAGE>
SECTION C
PAGE 2 OF 2
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT
--------------------------
7/31/97 6/30/97 PRO FORMA
------------ ------------- PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENTS COMPANIES
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities--accounts
payable, accrued expenses, and
other current liabilities ......... $ 472,779 $ 1,279,038 $ 1,751,817
Deferred income .................... 692,855 250,525 943,380
Long-term debt ..................... 562,882 1,173,967 1,736,849
Other non-current liabilities ..... 8,746 120,165 128,911
------------ ------------- ------------
1,737,262 2,823,695 4,560,957
------------ ------------- ------------
Liabilities under management and
mortgage programs ..................
Debt ............................... 4,776,153 4,776,153
Deferred income taxes .............. 301,200 301,200
------------- ------------
5,077,353 5,077,353
------------- ------------
SHAREHOLDERS' EQUITY
Common stock ....................... 4,164 1,614 $ 2,190 (a) 7,968
Additional paid-in capital ......... 696,929 2,234,646 (192,660)(a) 2,738,915
Retained earnings .................. 892,168 808,982 1,701,150
Treasury stock ..................... (57,436) (190,470) 190,470 (a) (57,436)
Restricted stock, deferred
compensation ...................... (27,357) (27,357)
Foreign currency translation
adjustment ........................ (13,569) (10,204) (23,773)
------------ ------------- ------------
Total shareholders' equity .......... 1,494,899 2,844,568 4,339,467
------------ ------------- ------------
Total liabilities and shareholders'
equity ............................. $3,232,161 $10,745,616 $13,977,777
============ ============= ============
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statements to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited historical combining financial statements.
21
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------
1/31/95 12/31/94
----------- ------------ PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net ........ $1,363,561 $815,423 $2,178,984
Software.................................. 191,050 191,050
Fleet leasing (net of depreciation and
interest costs of $976,244) ............. 47,860 47,860
Other..................................... 28,837 28,837
------------ ---------- ------------
Net revenues.............................. 1,554,611 892,120 2,446,731
------------ ---------- ------------
EXPENSES
Operating................................. 463,370 458,462 921,832
Marketing and reservation................. 618,330 124,603 742,933
General and administrative................ 190,303 29,452 219,755
Depreciation and amortization............. 43,463 53,712 97,175
Costs related to Ideon products abandoned
and restructuring........................ 7,900 7,900
Interest, net............................. (7,937) 18,490 10,553
Other..................................... (17,749) (17,749)
------------ ---------- ------------
Total expenses............................ 1,297,680 684,719 1,982,399
------------ ---------- ------------
Income before income taxes................ 256,931 207,401 464,332
Provision for income taxes................ 94,874 84,868 179,742
------------ ---------- ------------
Net income before cumulative effect of
accounting change for income taxes ...... 162,057 122,533 284,590
Cumulative effect of accounting change
for income taxes......................... 2,000 2,000
------------ ---------- ------------
Net income ............................... $ 164,057 $122,533 $ 286,590
============ ========== ============
PER SHARE INFORMATION (D)
Net income per share
Primary ................................. $ 0.43 $ 0.95 $ 0.42
Fully diluted ........................... $ 0.43 $ 0.95 $ 0.41
Weighted average shares outstanding
Primary ................................. 379,261 129,535 181,751 690,547
Fully diluted............................ 390,856 129,563 181,790 702,209
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and
historical HFS financial statements to conform to the presentation
expected to be used by the combined companies.
See notes to unaudited historical combining financial statements.
22
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------
1/31/96 12/31/95
----------- ------------ PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net ....... $1,643,242 $ 962,954 $2,606,196
Software................................. 291,990 291,990
Fleet leasing (net of depreciation and
interest costs of $1,088,993) .......... 52,079 52,079
Other.................................... 41,857 41,857
------------ ----------- ------------
Net revenues............................. 1,935,232 1,056,890 2,992,122
------------ ----------- ------------
EXPENSES
Operating................................ 582,357 528,571 1,110,928
Marketing and reservation................ 737,440 137,715 875,155
General and administrative............... 243,043 36,457 279,500
Depreciation and amortization............ 49,736 63,178 112,914
Costs related to Ideon products
abandoned and restructuring............. 97,029 97,029
Interest, net............................ (9,685) 22,949 13,264
------------ ----------- ------------
Total expenses........................... 1,699,920 788,870 2,488,790
------------ ----------- ------------
Income before income taxes............... 235,312 268,020 503,332
Provision for income taxes............... 90,337 110,170 200,507
------------ ----------- ------------
Net income .............................. $ 144,975 $ 157,850 $ 302,825
============ =========== ============
PER SHARE INFORMATION (D)
Net income per share
Primary................................. $ 0.37 $ 1.14 $ 0.42
Fully diluted........................... $ 0.37 $ 1.12 $ 0.41
Weighted average shares outstanding
Primary................................. 392,208 142,490 199,927 734,625
Fully diluted........................... 401,483 144,489 202,733 748,705
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and
historical HFS financial statements to conform to the presentation
expected to be used by the combined companies.
See notes to unaudited historical combining financial statements.
23
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------
1/31/97 12/31/96
----------- ------------ PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net .............. $1,972,430 $1,340,534 $3,312,964
Software ...................................... 375,225 375,225
Fleet leasing (net of depreciation and
interest costs of $1,132,408) ................ 56,660 56,660
Other ......................................... 42,978 42,978
------------ ------------ ------------
Net revenues .................................. 2,347,655 1,440,172 3,787,827
------------ ------------ ------------
EXPENSES
Operating ..................................... 688,280 660,079 1,348,359
Marketing and reservation ..................... 887,852 157,347 1,045,199
General and administrative .................... 266,228 73,373 339,601
Depreciation and amortization ................. 58,658 97,811 156,469
Merger and restructuring costs ................ 179,945 179,945
Interest, net ................................. (9,549) 19,695 10,146
------------ ------------ ------------
Total expenses ................................ 2,071,414 1,008,305 3,079,719
------------ ------------ ------------
Income before income taxes .................... 276,241 431,867 708,108
Provision for income taxes .................... 112,142 174,626 286,768
------------ ------------ ------------
Net income .................................... $ 164,099 $ 257,241 $ 421,340
============ ============ ============
PER SHARE INFORMATION (D)
Net income per share
Primary ...................................... $ 0.41 $ 1.59 $ 0.53
Fully diluted ................................ $ 0.40 $ 1.58 $ 0.53
Weighted average shares outstanding
Primary ...................................... 405,073 164,378 230,639 800,090
Fully diluted ................................ 409,521 165,146 231,716 806,383
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and
historical HFS financial statements to conform to the presentation
expected to be used by the combined companies.
See notes to unaudited historical combining financial statements.
24
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
-----------------------
7/31/96 6/30/96
----------- ---------- PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENT COMPANIES
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net ...... $ 942,170 $423,022 $1,365,192
Software............................... 129,053 129,053
Fleet leasing (net of depreciation and
interest costs of $555,994)........... 133,770 133,770
Other.................................. 66,252 66,252
----------- ---------- ------------
Net revenues............................ 1,071,223 623,044 1,694,267
EXPENSES
Operating.............................. 326,341 295,383 621,724
Marketing and reservation.............. 414,705 65,950 480,655
General and administrative ............ 118,129 39,189 157,318
Merger costs (c)....................... 28,635 28,635
Depreciation and amortization.......... 26,147 36,982 63,129
Interest, net.......................... (4,075) 10,766 6,691
----------- ---------- ------------
Total expenses......................... 909,882 448,270 1,358,152
----------- ---------- ------------
Income before income taxes............. 161,341 174,774 336,115
Provision for income taxes............. 68,759 71,157 139,916
----------- ---------- ------------
Net income............................. $ 92,582 $103,617 $ 196,199
=========== ========== ============
PER SHARE INFORMATION (D)
Net income per share
Primary................................ $ 0.23 $ 0.69 $ 0.26
Fully diluted.......................... $ 0.23 $ 0.68 $ 0.26
Weighted average shares outstanding
Primary ............................... 399,267 154,232 216,403 769,902
Fully diluted.......................... 405,054 155,398 218,039 778,491
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and
historical HFS financial statements to conform to the presentation
expected to be used by the combined companies.
See notes to unaudited historical combining financial statements.
25
<PAGE>
SECTION C
CENDANT CORPORATION
UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
--------------------------
7/31/97 6/30/97 PRO FORMA
------------ ------------- PRO FORMA COMBINED
CUC(1) HFS(1) ADJUSTMENTS COMPANIES
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES
Membership and service fees, net........... $1,125,159 $ 830,346 $1,955,505
Software................................... 172,200 172,200
Fleet leasing (net of depreciation and
interest costs of $584,275)............... 146,581 146,581
Other...................................... 122,670 122,670
------------ ------------ ------------
Net revenues................................ 1,297,359 1,099,597 2,396,956
EXPENSES
Operating.................................. 408,990 435,062 844,052
Marketing and reservation.................. 461,906 130,481 592,387
General and administrative................. 140,991 57,112 198,103
Merger and restructuring charge associated
with business combination (b)............. 303,000 303,000
Depreciation and amortization.............. 33,397 86,534 119,931
Interest, net.............................. (11,206) 30,747 19,541
------------ ------------ ------------
Total expenses.............................. 1,034,078 1,042,936 2,077,014
Income before income taxes................. 263,281 56,661 319,942
Provision for income taxes................. 100,498 72,005 172,503
------------ ------------ ------------
Net income................................. $ 162,783 $ (15,344) $ 147,439
PER SHARE INFORMATION (D)
Net income per common share ...............
Primary and fully diluted................. $ 0.38 $ (0.10) $ 0.18
Weighted average shares outstanding
Primary................................... 436,237 158,342 266,714 861,293
Fully diluted............................. 439,166 158,342 266,680 864,188
</TABLE>
- ------------
(1) Certain reclassifications have been made to the historical CUC and HFS
financial statement to conform to the presentation expected to be used
by the combined companies.
See notes to unaudited historical combining financial statements.
26
<PAGE>
SECTION C
CENDANT CORPORATION
NOTES TO UNAUDITED HISTORICAL COMBINING
FINANCIAL STATEMENTS
(A) EQUITY
In connection with the Merger, each outstanding share of HFS common stock
will be converted into the right to receive 2.4031 shares of Common
Stock. In addition, each share of HFS common stock that is owned by HFS
or CUC will be cancelled and retired. The pro forma adjustments assume
that all 158.3 million shares of HFS common stock outstanding at June 30,
1997, respectively, (exclusive of 3.1 million shares of HFS common stock
in treasury which will be cancelled and retired in connection with the
Merger) will be converted into approximately 380.4 million shares of CUC
Common Stock in accordance with the exchange ratio.
(B) HFS/PHH MERGER COSTS AND RESTRUCTURING
Includes a one-time pre-tax merger and restructuring charge of $303
million (after-tax of $227 million or $.26 per common share for the six
months ended June 30, 1997) recorded by HFS in connection with its merger
with PHH Corporation ("PHH").
(C) CUC MERGER COSTS AND RESTRUCTURING
Includes a one-time pre-tax merger and restructuring charge of $28.6
million (after-tax of $25.1 million or $.03 per common share for the six
months ended July 31, 1996) recorded by CUC in connection with its
mergers with Davidson & Associates, Inc. ("Davidson") and Sierra On-Line
("Sierra").
(D) PER SHARE INFORMATION
Net income per share has been computed based upon the combined weighted
average outstanding shares of CUC Common Stock and HFS common stock for
each period. The historical weighted average number of outstanding shares
of HFS stock has been adjusted to reflect the average ratio of 2.4031
shares of CUC Common Stock for each share of HFS common stock.
CUC/HFS MERGER COSTS
It is expected that Cendant Corporation will incur pre-tax transaction
costs associated with the Merger which are expected to range from $600
million to $650 million, of which approximately $150 million will be lump
sum payments. These costs associated with the Merger are being
established by the combined management. In determining the amount of the
reserve for these costs, management is considering the costs relating to
facility and systems consolidations and the costs associated with exiting
certain activities.
27
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended July 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-10308
CUC International Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-0918165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Summer Street
Stamford, Connecticut 06901
(Address of principal executive offices) (Zip Code)
(203) 324-9261
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 410,678,615 shares as of August 29, 1997
<PAGE>
INDEX
CUC INTERNATIONAL INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - July 31, 1997
and January 31, 1997. 3
Condensed Consolidated Statements of Income - Three months
ended July 31, 1997 and 1996. 4
Condensed Consolidated Statements of Income - Six months
ended July 31, 1997 and 1996. 5
Condensed Consolidated Statements of Cash Flows -
Six months ended July 31, 1997 and 1996. 6
Notes to Condensed Consolidated Financial Statements. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 25
INDEX TO EXHIBITS 26
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
======================================================================================================================
July 31, January 31,
1997 1997
======================================================================================================================
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $725,634 $553,144
Marketable securities 468,810 69,139
Receivables, net of allowances 582,293 578,630
Prepaid membership materials 52,049 37,579
Prepaid expenses, deferred income taxes and other 244,529 191,583
---------------------------------------
Total Current Assets 2,073,315 1,430,075
Membership solicitations in process 75,712 76,281
Deferred membership acquisition costs 383,177 401,564
Contract renewal rights and intangible assets -
net of accumulated amortization of $139,126 and $126,013 478,213 366,038
Properties, at cost, less accumulated depreciation
of $144,707 and $132,090 161,886 145,620
Deferred income taxes and other 59,858 53,794
---------------------------------------
$3,232,161 $2,473,372
=======================================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $459,443 $405,388
Federal and state income taxes 13,336 75,988
---------------------------------------
Total Current Liabilities 472,779 481,376
Deferred membership income 692,855 702,359
Convertible debt - net of unamortized
original issue discount of $7,808 and $488 562,882 23,487
Other 8,746 11,060
Contingencies (Note 6)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 600 million shares; issued
416,353,522 shares and 409,011,654 shares 4,164 4,090
Additional paid-in capital 696,929 619,532
Retained earnings 892,168 722,354
Treasury stock, at cost, 6,168,382 shares and
6,136,757 shares (56,618)
(57,436)
Other (40,926) (34,268)
---------------------------------------
Total Shareholders' Equity 1,494,899 1,255,090
---------------------------------------
$3,232,161 $2,473,372
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
======================================================================================================================
Three Months Ended
July 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Membership and service fees $581,122 $487,164
Software 91,566 68,580
---------------------------------------
Total Revenues 672,688 555,744
EXPENSES
Operating 199,451 168,014
Marketing 242,113 209,503
General and administrative 88,028 74,210
Other interest income, net (10,276) (1,835)
Merger costs 28,635
Interest expense, 3% convertible notes 4,125
---------------------------------------
Total Expenses 523,441 478,527
---------------------------------------
INCOME BEFORE INCOME TAXES 149,247 77,217
Provision for income taxes 56,937 36,756
---------------------------------------
NET INCOME $92,310 $40,461
=======================================
Net Income Per Common Share $0.22 $0.10
=======================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 438,468 401,868
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
======================================================================================================================
Six Months Ended
July 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Membership and service fees $1,125,159 $942,170
Software 172,200 129,053
---------------------------------------
Total Revenues 1,297,359 1,071,223
EXPENSES
Operating 408,990 326,341
Marketing 461,906 414,705
General and administrative 174,388 144,276
Other interest income, net (18,965) (4,075)
Merger costs 28,635
Interest expense, 3% convertible notes 7,759
---------------------------------------
Total Expenses 1,034,078 909,882
---------------------------------------
INCOME BEFORE INCOME TAXES 263,281 161,341
Provision for income taxes 100,498 68,759
---------------------------------------
NET INCOME $162,783 $92,582
=======================================
Net Income Per Common Share $0.38 $0.23
=======================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 436,237 399,267
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
======================================================================================================================
Six Months Ended
July 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $162,783 $92,582
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Membership acquisition costs (283,164) (310,392)
Amortization of membership acquisition costs 301,551 319,514
Deferred membership income (9,504) (14,361)
Membership solicitations in process 569 (1,168)
Amortization of contract renewal rights and excess cost 13,680 12,780
Deferred income taxes 13,734 11,359
Amortization of restricted stock and original issue discount
on convertible notes 3,872 1,291
Depreciation 19,717 13,367
Net loss during change in fiscal year-ends (4,268)
Changes in working capital items, net of acquisitions:
Receivables 4,316 (42,282)
Prepaid membership materials (11,597) (7,960)
Prepaid expenses and other current assets (56,788) 2,830
Accounts payable, accrued expenses and
federal & state income taxes payable (78,873) (21,210)
Product abandonment and related liabilities (10,700)
Other, net (15,861) (7,350)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,435 34,032
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 58,417 75,460
Purchases of marketable securities (458,088) (66,947)
Acquisitions, net of cash acquired (58,911) (32,964)
Acquisitions of properties (31,478) (23,546)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (490,060) (47,997)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of Common Stock 59,460 18,582
Long-term obligations, net (3,908) 1,987
Dividends paid (2,798)
Net proceeds from the issuance of convertible notes 542,563
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 598,115 17,771
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 172,490 3,806
Cash and cash equivalents at beginning of period 553,144 333,036
---------------------------------------
Cash and cash equivalents at end of period $725,634 $336,842
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management of CUC
International Inc. (the "Company"), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The January 31, 1997 consolidated balance sheet was derived from the
Company's audited financial statements. Operating results for the three and six
months ended July 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending January 31, 1998 (see Note 2). For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K filing for the year ended January
31, 1997.
NOTE 2 -- PENDING MERGER WITH HFS INCORPORATED
On May 27, 1997, the Company entered into an agreement to merge with HFS
Incorporated ("HFS") in a tax-free exchange of common shares. Under the terms
of the agreement and plan of merger with HFS (the "Merger"), the Company plans
to exchange 2.4031 shares of the Company's common stock, par value $.01 per
share ("Common Stock"), for each outstanding share of HFS common stock. The
consummation of this Merger is subject to certain customary closing conditions,
including the approval of the shareholders of both companies. Special meetings
of the shareholders of each of the Company and HFS have been scheduled for
October 1, 1997 to approve the Merger. The transaction will be accounted for in
accordance with the pooling-of-interests method of accounting and is expected
to be completed during the Fall of 1997. Pursuant to the merger agreement, HFS
shall be merged with and into the Company at the effective time of the Merger.
Following the effective time of the Merger, the Company shall be the surviving
corporation and shall succeed to and assume all the rights and obligations of
HFS. Also, following consummation of the Merger, the Company will change its
name to "Cendant Corporation". In connection with the Merger, the Company
intends to change its fiscal year end from January 31 to December 31.
The following information reflects unaudited proforma combined condensed
financial statements of the Company and HFS. These financial statements include
certain proforma adjustments which give effect to the Merger and certain
reclassifications to conform to the presentation to be used by the Company,
post Merger.
The balance sheet at July 31, 1997 reflects the historical financial position
of the Company and HFS as of July 31, 1997 and June 30, 1997, respectively. The
statements of income for the six months ended July 31, 1997 include the
historical operating results of the Company and HFS for the six months ended
July 31, 1997 and June 30, 1997, respectively. The statements of income for the
six months ended July 31, 1996 include the historical operating results of the
Company and HFS for the six months ended July 31, 1996 and June 30, 1996,
respectively.
7
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2 -- PENDING MERGER WITH HFS INCORPORATED (CONTINUED)
ProForma Combined Condensed Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
At
------------------------------
7/31/97 6/30/97
-------------- ------------- Pro Forma Combined
Company HFS Adjustments Companies
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 725,634 $ 58,511 $ 784,145
Restricted cash 23,742 23,742
Marketable securities 468,810 468,810
Receivables, net 582,293 840,941 1,423,234
Other current assets 296,578 252,331 548,909
-------------- ------------ ---------------
Total Current Assets 2,073,315 1,175,525 3,248,840
Deferred membership acquisition costs 383,177 383,177
Franchise agreements, net 948,753 948,753
Excess of cost over fair value of
net assets acquired, net 449,503 1,868,438 2,317,941
Other intangible assets, net 28,710 588,710 617,420
Other assets 297,456 848,357 1,145,813
-------------- ------------ ---------------
3,232,161 5,429,783 8,661,944
Assets under management
and mortgage programs
Net investment in leases
and leased vehicles 3,643,601 3,643,601
Relocation receivables 579,575 579,575
Mortgage loans held for sale 820,615 820,615
Mortgage servicing rights and fees 272,042 272,042
-------------- ------------ ---------------
5,315,833 5,315,833
-------------- ------------ ---------------
Total Assets $3,232,161 $10,745,616 $13,977,777
============== ============ ===============
Liabilities and Shareholders' Equity
Current Liabilities - accounts payable,
accrued expenses and other
current liabilities $ 472,779 $1,279,038 $ 1,751,817
Deferred income 692,855 250,525 943,380
Long-term debt 562,882 1,173,967 1,736,849
Other non-current liabilities 8,746 120,165 128,911
-------------- ------------ ---------------
1,737,262 2,823,695 4,560,957
Liabilities under management
and mortgage programs
Debt 4,776,153 4,776,153
Deferred income taxes 301,200 301,200
------------ ---------------
5,077,353 5,077,353
------------ ---------------
Shareholders' Equity
Common stock 4,164 1,614 2,190 (a) 7,968
Additional paid-in capital 696,929 2,234,646 (192,660)(a) 2,738,915
Retained earnings 892,168 808,982 1,701,150
Treasury stock (57,436) (190,470) 190,470 (a) (57,436)
Restricted stock, deferred compensation (27,357) (27,357)
Foreign currency translation adjustment (13,569) (10,204) (23,773)
-------------- ----------- ---------------
Total shareholders' equity 1,494,899 2,844,568 4,339,467
-------------- ----------- ---------------
Total Liabilities and Shareholders' Equity $3,232,161 $10,745,616 $13,977,777
============== =========== ===============
</TABLE>
8
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2 -- PENDING MERGER WITH HFS INCORPORATED (CONTINUED)
Pro Forma Combined Condensed Statements of Income
(In thousand, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------
7/31/97 6/30/97
------------- ---------------- Pro Forma Combined
Company HFS Adjustment Companies
------------- ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues
Membership and service fees, net $ 1,125,159 $ 830,346 $ 1,955,505
Software 172,200 172,200
Fleet leasing (net of depreciation and
interest costs of $584,275) 146,581 146,581
Other 122,670 122,670
-------------- -------------- ---------------
Net revenues 1,297,359 1,099,597 2,396,956
Expenses
Operating 408,990 435,062 844,052
Marketing and reservation 461,906 130,481 592,387
General and administrative 140,991 57,112 198,103
Merger and restructuring charge
associated with business combination (b) 303,000 303,000
Depreciation and amortization 33,397 86,534 119,931
Interest, net (11,206) 30,747 19,541
-------------- -------------- ---------------
Total expenses 1,034,078 1,042,936 2,077,014
-------------- -------------- ---------------
Income before income taxes 263,281 56,661 319,942
Provision for income taxes 100,498 72,005 172,503
-------------- -------------- ---------------
Net income (loss) $162,783 ($15,344) $147,439
============== ============== ===============
PER SHARE INFORMATION (D)
Net income (loss) per share
Primary and fully diluted $0.38 ($0.10) $0.18
Weighted average shares outstanding
Primary 436,237 158,342 266,714 861,293
Fully diluted 439,166 158,342 266,680 864,188
</TABLE>
9
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2 -- PENDING MERGER WITH HFS INCORPORATED (CONTINUED)
Pro Forma Combined Condensed Statements of Income
(In thousand, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------
7/31/96 6/30/96
------------- --------------- Pro Forma Combined
Company HFS Adjustment Companies
------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Membership and service fees, net $ 942,170 $ 423,022 $ 1,365,192
Software 129,053 129,053
Fleet leasing (net of depreciation and
interest costs of $555,994) 133,770 133,770
Other 66,252 66,252
--------- ------------ -----------
Net revenues 1,071,223 623,044 1,694,267
Expenses
Operating 326,341 295,383 621,724
Marketing and reservation 414,705 65,950 480,655
General and administrative 118,129 39,189 157,318
Merger costs (c) 28,635 28,635
Depreciation and amortization 26,147 36,982 63,129
Interest, net (4,075) 10,766 6,691
--------- ------------ -----------
Total expenses 909,882 448,270 1,358,152
Income before income taxes 161,341 174,774 336,115
Provision for income taxes 68,759 71,157 139,916
--------- ------------ -----------
Net income $92,582 $103,617 $196,199
========= ============ ===========
PER SHARE INFORMATION (D)
Net income per share
Primary $0.23 $0.69 $0.26
Fully diluted $0.23 $0.68 $0.26
Weighted average shares outstanding
Primary 399,267 154,232 216,403 769,902
Fully diluted 405,054 155,398 218,039 778,491
</TABLE>
- ----------------
(a) In connection with the Merger, each outstanding share of HFS common stock
will be converted into the right to receive 2.4031 shares of Common Stock.
In addition, each share of HFS common stock that is owned by HFS or the
Company will be cancelled and retired. The proforma adjustments assume
that all 158.3 million and 158.4 million shares of HFS common stock
outstanding at June 30, 1997 and 1996, respectively, (exclusive of 3.1
million and .3 million shares of HFS common stock in treasury which will
be cancelled and retired in connection with the Merger) will be converted
into approximately 380.4 million and 380.7 million shares of Common Stock
in accordance with the exchange ratio.
(b) Includes a one-time pre-tax merger and restructuring charge of $303
million (after-tax of $227 million or $.26 per common share for the six
months ended July 31, 1997) recorded by HFS in connection with its merger
with PHH Corporation ("PHH").
(c) Includes a one-time pre-tax merger and restructuring charge of $28.6
million (after-tax of $25.1 million or $.03 per common share for the six
months ended July 31, 1996) recorded by the Company in connection with the
mergers with Davidson & Associates, Inc. ("Davidson") and Sierra On-Line
("Sierra").
(d) Net income per share has been computed based upon the combined weighted
average outstanding shares of Common Stock and HFS common stock for each
period. The historical weighted average number of outstanding shares of
HFS stock has been adjusted to reflect the exchange ratio of 2.4031 shares
of Common Stock for each share of HFS common stock.
10
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 2 -- PENDING MERGER WITH HFS INCORPORATED (CONTINUED)
It is expected that the Company will incur pre-tax transaction costs associated
with the Merger which are expected to range from $600 million to $650 million,
of which approximately $125 million will be lump sum payments. These costs
associated with the Merger are being established by the combined management. In
determining the amount of the reserve for these costs, management is
considering the costs relating to facility and systems consolidations, the
costs associated with exiting certain activities and the costs associated with
implementing the combined business strategy.
NOTE 3 -- MERGERS AND ACQUISITIONS
On August 13, 1997, the Company signed a definitive share purchase agreement to
acquire Hebdo Mag International Inc., a leading publisher and distributor of
classified advertising information, in a stock transaction valued at
approximately $440 million. The consummation of the acquisition is subject to
certain customary closing conditions. This acquisition will be accounted for in
accordance with the pooling-of-interests method of accounting and is expected
to be completed during the Fall of 1997.
During the six months ended July 31, 1997, the Company acquired certain
entities for an aggregate purchase price of $49.0 million, satisfied by the
payment of $11.2 million in cash and the issuance of 1.5 million shares of
Common Stock. The excess of cost over net assets acquired resulting from these
acquisitions aggregated $68.8 million. These acquisitions were accounted for in
accordance with the purchase method of accounting and, accordingly, the results
of operations have been included in the consolidated results of operations from
the respective dates of acquisition. The results of operations for the periods
prior to the respective dates of acquisition were not significant to the
Company's operations.
During February 1997, the Company acquired substantially all of the assets and
assumed specific liabilities of Numa Corporation for $73.5 million. The
purchase price was satisfied by the issuance of 3.4 million shares of Common
Stock. This acquisition was accounted for as a pooling-of-interests; however,
financial statements for periods prior to the date of acquisition have not been
restated due to immateriality.
Principally in connection with the Davidson, Sierra and Ideon Group, Inc.
("Ideon") mergers which occurred during fiscal 1997, the Company charged
approximately $179.9 million to operations as merger, integration,
restructuring and litigation charges during the year ended January 31, 1997.
Such costs in connection with the Davidson and Sierra mergers with the Company
(approximately $48.6 million) are non-recurring and are comprised primarily of
transaction costs, other professional fees and integration costs. Such costs
associated with the Company's merger with Ideon (approximately $127.2 million)
are non-recurring and include integration and transaction costs as well as a
provision relating to certain litigation matters (see Note 6) giving
consideration to the Company's intended approach to these matters. To date,
such payments amounted to $125.9 million.
NOTE 4 -- SHAREHOLDERS' EQUITY AND NET INCOME PER COMMON SHARE
The change in common stock, additional paid-in capital and treasury stock
relates principally to acquisitions and stock option activity.
Net income per common share, assuming the conversions of subordinated
convertible notes during the three and six months ended July 31, 1997 occurred
at the beginning of such period, would not differ significantly from the
Company's actual earnings per share for such period.
Net income per common share includes the weighted average number of common and
common equivalent shares outstanding during the respective periods. Common
stock equivalents for the three and six month periods ended July 31, 1997
includes the dilutive effect of the 3% convertible subordinated notes issued
February 11, 1997 using the if-converted method.
On January 31, 1998, the Company is required to adopt Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". This new rule
requires the Company to change the method currently used to compute earnings
per share and requires restatement of all prior periods. Under the new
requirements, the dilutive effect of stock options and convertible securities
are excluded from computing primary earnings per share. The impact of SFAS No.
128 on the calculation of primary and fully diluted earnings per share for the
three and six months ended July 31, 1997 and 1996 is not expected to be
material.
11
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 5 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE
REVENUE
Software research and development costs are included in operating expenses and
aggregated $28.7 million and $15.3 million for the three months ended July 31,
1997 and 1996, respectively, and $52.9 million and $30.2 million for the six
months ended July 31, 1997 and 1996, respectively. Costs of software revenue
are included in operating expenses and aggregated $28.0 million and $21.1
million for the three months ended July 31, 1997 and 1996, respectively, and
$57.0 million and $45.9 million for the six months ended July 31, 1997 and
1996, respectively.
NOTE 6 -- CONTINGENCIES - IDEON
On June 13, 1997, the Company entered into an agreement (the "Agreement") with
Peter Halmos, the co-founder of SafeCard Services, Incorporated ("SafeCard"),
which was reorganized in 1995 as Ideon. The Company acquired Ideon in August
1996. The Agreement, provides for the settlement of all of the outstanding
litigations involving Peter Halmos, SafeCard and Ideon previously described in
the Company's Form 10-K. The Agreement became effective in July 1997. The
Agreement calls for the dismissal with prejudice of these outstanding
litigation matters and the payment to Peter Halmos, over a six-year period, of
$70.5 million. Specifically, the Agreement requires that the Company pay Peter
Halmos one up-front payment of $13.5 million and six subsequent annual payments
of $9.5 million each. The Agreement also calls for the transfer to the Company
of assets related to SafeCard's CreditLine business, including the transfer by
CreditLine Corporation to the Company of all of CreditLine Corporation's rights
under a marketing agreement between it and SafeCard dated November 1, 1988.
The following Halmos related cases have been or will be dismissed:
1. Halmos Trading & Investing Company v. SafeCard Services, Inc. and Gerald
Cahill v. Peter A. Halmos and Steven J. Halmos and Halmos Trading &
Investment Co., Case No. 93-04354 (06) in the Circuit Court for the 17th
Judicial Circuit in and for Broward County, Florida.
2. SafeCard Services, Inc. v. Peter Halmos, a Florida resident; High Plains
Capital Corporation, a Wyoming corporation; and CreditLine Corporation, a
Wyoming corporation which is pending in the District Court, First Judicial
District of Laramie County, Wyoming; Case No. Doc. 134, No. 192.
3. Peter Halmos, CreditLine Corporation and Continuity Marketing Corporation
v. Paul G. Kahn, William T. Bacon, Robert L. Dilenschneider, Eugene Miller
and SafeCard Services, Inc., in the United States District Court, Southern
District of Florida, Case No. 94-6920 CG-NESBITT.
4. Peter Halmos v. SafeCard Services, Inc., William T. Bacon, Jr., Barry I.
Tillis and Barry Natter, Case No. 95-6325 (AJ) filed in the Circuit Court,
Fifteenth Judicial Circuit, in and for Palm Beach County, Florida.
5. Ideon Group, Inc., SafeCard Services, Inc., Paul G. Kahn, William T.
Bacon, Jr., Marshall L. Burman, John Ellis (Jeb) Bush, Robert L.
Dilenschneider, Adam W. Herbert, Eugene Miller, and Thomas F. Petway, III
v. Peter Halmos, Civil Action No. 14600, filed in the Court of Chancery of
New Castle County, Delaware.
6. High Plains Capital Corporation f/k/a Halmos & Company, Inc. v. Ideon
Group, Inc., SafeCard Services, Inc., Eugene Miller, Robert L.
Dilenschneider, and the Dilenschneider Group, Inc., Palm Beach County,
Florida, Civil Action No. CL 95 8313 AE (Hon. Walter Colbath).
7. High Plains Capital Corporation v. Ideon Group, Inc., and SafeCard
Services, Inc., Civil Action No. 95 015024, Seventeenth Judicial Circuit,
Broward County, Florida.
12
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 6 -- CONTINGENCIES - IDEON (CONTINUED)
The following actions remain pending, in whole or in part, as described below:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former
lawyer for SafeCard) in July 1993 in Cook County Circuit Court in Illinois
against SafeCard and one of Ideon's directors, purporting to state claims
aggregating in excess of $100 million, principally relating to alleged rights
to "incentive compensation," stock options or their equivalent,
indemnification, wrongful termination and defamation. On February 7, 1995, the
court dismissed with prejudice Peter Halmos' claim regarding alleged rights to
"incentive compensation," stock options or their equivalent, wrongful
termination and defamation. Mr. Halmos has appealed this ruling. SafeCard has
filed an answer to the remaining indemnification claims. Its obligation to file
an answer to the claims of Myron Cherry have been stayed pending settlement
discussions. On December 28, 1995, the court stayed Halmos' indemnification
claims pending resolution of a declaratory judgment action filed by Ideon in
Delaware Chancery Court. As a result of the Halmos settlement only the claims
of Myron Cherry remain pending.
A suit seeking monetary damages by Peter Halmos, a trustee for the Peter A.
Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc.
individually and certain other named parties on behalf of themselves and all
others similarly situated against SafeCard, one its officers, one of its former
officers and three of Ideon's directors in the United States District Court for
the Southern District of Florida in December 1994. This litigation involves
claims by a putative class of sellers of SafeCard Stock for the period January
11, 1993 through December 8, 1994 for alleged violations of the federal and
states securities laws in connection with alleged improprieties in SafeCard's
investor relations program. The complaint also includes individual claims made
by Peter Halmos in connection with the sale of stock by two trusts controlled
by him. SafeCard and the individual defendants have filed a motion to dismiss.
There has been limited discovery on class certification and identification of
"John Doe" defendant issues. Ideon filed its opposition to the pending motion
for class certification on December 11, 1995. Plaintiffs' reply was filed March
19, 1996. On September 9, 1996, the Court entered an order abating the action
until December 9, 1996 to permit the parties to engage in settlement
negotiations. On February 11, 1997, the Court entered an order abating the
stay. On August 8, 1997, the Court entered an order setting the case for trial
on December 8, 1997. As a result of the settlement, Halmos released all
individual claims against defendants, while reserving the right to seek
reimbursement (for his former efforts and expenses on behalf of class members)
from any potential judgment the remaining class plaintiffs might obtain. Halmos
will dismiss with prejudice his individual claims against the defendants, which
included claims on behalf of the Halmos Trust (counts VIII-XIX). Halmos has
also agreed under the Settlement not to aid parties in litigation against the
Company, its officers or directors.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation companies affiliated with Peter Halmos, in the
State Circuit Court in Palm Beach County, Florida in July 1995 against Ideon,
Family Protection Network, Inc., SafeCard, one of Ideon's directors and Ideon's
Chief Executive Officer purporting to state various statutory and tort claims.
The claims principally relate to the allegation by these companies that
SafeCard's Family Protection Network were conceived and commercialized by,
among others, Peter Halmos and have been improperly copied. An amended
complaint filed on June 14, 1995 seeking monetary damages adds to the prior
claims certain claims by Nicholas Rubino that principally relate to the
allegation that SafeCard's Pet Registration Product was conceived by Mr. Rubino
and has been improperly copied. The Company has filed an appropriate answer. As
a result of the Halmos settlement, all claims of Continuity Marketing
Corporation will be dismissed, leaving pending only the claims related to
Family Protection Network and the Pet Registration Program.
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of
himself and all others similarly situated against Ideon, SafeCard, each of the
members of Ideon's Board of Directors, three non-board member officers of
Ideon, Ideon's previous outside auditor and one of Ideon's outside counsel in
the United States District Court for the Southern District of Florida in June
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock between December 14, 1994 and May 25, 1995 and on behalf of a separate
class of all record holders of SafeCard stock as of April 27, 1995. The
putative class claims are for alleged
13
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
NOTE 6 -- CONTINGENCIES - IDEON (CONTINUED)
violations of the federal securities laws, for alleged breach of fiduciary duty
and alleged negligence in connection with certain matters voted on at the
Annual Meeting of SafeCard stockholders held on April 27, 1995. Ideon and the
individual defendants have filed a motion to dismiss these claims. There has
been limited discovery on class certification issues. Ideon filed its
opposition to the pending motion for class certification on December 11, 1995.
Plaintiffs' reply was filed March 19, 1996. On September 9, 1996, the Court
entered an order abating the action until December 9, 1996 to permit the
parties to engage in settlement negotiations. On December 5, 1996, plaintiffs
filed a motion for leave to file an amended complaint, name additional parties
(previously named as "John Does") and include additional legal claims. The
amended complaint is a purported buyer and class action under the securities
and racketeering laws alleging Ideon and others engaged in a stock manipulation
scheme to artificially inflate the price of SafeCard/Ideon stock between
January 1993 and December 1995. On August 8, 1997, the Court entered an order
resetting the trial date beginning February 16, 1998. On June 13, 1997, Peter
Halmos and the Company entered into a settlement in which Peter Halmos released
all individual claims against defendants, while reserving the right to seek
reimbursement (for his former efforts and expenses on behalf of class members)
from any potential judgment the remaining class plaintiffs might obtain. Peter
Halmos will dismiss with prejudice his individual claims in counts VIII - XIX
against the defendants. Peter Halmos has also agreed in the Settlement not to
aid any parties in litigation against the Company, its officers or directors.
A purported shareholder derivative action initiated by Michael P. Pisano, on
behalf of himself and other stockholders of SafeCard and Ideon against
SafeCard, Ideon, two of their officers, and Ideon's directors in United States
District Court, Southern District of Florida. This litigation involves claims
that the officers and directors of SafeCard have improperly refused to accede
Peter Halmos' litigation and indemnification demands against Ideon. Ideon and
the individual defendants have filed motions to dismiss the first amended
complaint. On September 29, 1995, Pisano filed a second amended complaint which
made additional allegations of waste and mismanagement against Ideon's officers
and directors in connection with the Family Protection Network and PGA Tour
Partners products. On December 26, 1995, Ideon filed motions to dismiss the
Second Amended Complaint. On June 4 and June 19, 1996, orders were entered
dismissing plaintiff's claims with prejudice for failure to join an
indispensable party, Peter Halmos. On June 27, 1996, plaintiff filed a notice
of appeal. Plaintiff filed initial and reply briefs and Ideon filed an answer
brief. On June 6, 1997, the Appellate Court affirmed the dismissal.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer
in the United States District Court for the Middle District of Florida on July
28, 1995. The litigation involves claims by a putative class of purchasers of
Ideon stock for the period April 25, 1995 through May 25, 1995 for alleged
violation of the federal securities laws in connection with statements made
about Ideon's business and financial performance. Defendants filed a motion to
dismiss on October 2, 1995. On January 3, 1996, the court stayed all merits
discovery pending rulings on the motion to dismiss and on the plaintiff's
motion for class certification. On August 19, 1996, the court denied the
Company's motion to dismiss. The Company filed its answer. On May 6, 1997, the
Court entered an order abating the action while the parties engage in
settlement negotiations.
A suit by Frist Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court for
the Southern District of New York. The litigation involves claims against
Ideon, its former CEO and its Vice President of Investor Relations for alleged
material misrepresentations and omissions in connection with announcements
relating to Ideon's expected earnings per share in 1995 and its new product
sales, which included the PGA Tour Card Program, Family Protection Network and
Collections of the Vatican Museums. On July 15, 1996, Ideon filed a motion to
dismiss. The Company withdrew its motion to dismiss and answered the complaint
on December 5, 1996.
The Company established a reserve upon the consummation of the merger with
Ideon during the third quarter of fiscal 1997 related, in part, to these
litigation matters. The Company is also involved in certain other claims and
litigation arising in the ordinary course of business, which are not considered
material to the financial position, operations or cash flows of the Company.
Although not anticipated, the outcome of the class action matters described
above could also exceed the amount accrued.
14
<PAGE>
ITEM 2.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1997 VS.
THREE MONTHS ENDED JULY 31, 1996
The Company's overall membership base continues to grow at a rapid rate (from
62.3 million members at July 31, 1996 to 70.7 million members at July 31,
1997), which is the largest contributing factor to the 19% increase in
membership revenues (from $487.2 million for the quarter ended July 31, 1996 to
$581.1 million for the quarter ended July 31, 1997). While the overall
membership base increased by approximately 2.1 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by approximately 1%. The Company divides its memberships into three
categories: individual, wholesale and discount program memberships. Individual
memberships consist of members that pay directly for the services and the
Company pays for the marketing costs to solicit the member, primarily using
direct marketing techniques. Wholesale memberships include members that pay
directly for the services to their sponsor and the Company does not pay for the
marketing costs to solicit the members. Discount program memberships are
generally marketed through a direct sales force, participating merchant or
general advertising and the related fees are either paid directly by the member
or the local retailer. All of these categories share various aspects of the
Company's marketing and operating resources.
Compared to the previous year's second quarter, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended July 31, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively. The Company maintains a flexible
marketing plan so that it is not dependent on any one service for the future
growth of the total membership base.
Software revenues increased 34% from $68.6 million for the quarter ended July
31, 1996 to $91.6 million for the quarter ended July 31, 1997. Distribution
revenue, which consists principally of third-party software and typically has
low operating margins, increased 56% from $12.6 million for the quarter ended
July 31, 1996 to $19.7 million for the quarter ended July 31, 1997. The
Company's software operations continue to grow by focusing on selling titles
through retailers. Excluding distribution revenue, core software revenue grew
by 28%. Contributing to the software revenue growth in the current fiscal year
is the availability of a larger number of titles as well as the significant
increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage
of the total individual membership base is in its renewal years. This results
in increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impacted profit margins. As a result, operating
income before other interest income, net, interest expense on 3% convertible
notes, merger costs and income taxes ("EBIT") increased from $104.0 million to
$143.1 million and EBIT margins improved from 18.7% to 21.3%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs. Included in total revenues for the quarter ended July 31, 1997, are
revenues resulting from acquisitions which were completed during the six months
ended July 31, 1997. However, total revenues contributed from these
acquisitions are not material to the Company's total reported revenues.
15
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JULY 31, 1997 VS.
THREE MONTHS ENDED JULY 31, 1996 (CONTINUED)
Operating costs increased 19% (from $168.0 million to $199.5 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). Historically, the
Company has seen a direct correlation between providing a high level of service
to its members and improved retention. The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Marketing costs decreased as a percentage of revenue, from 38% to 36%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
3% (from $146.1 million to $150.1 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs decreased by 6%
(from $159.1 million to $150.3 million), which reflects a reduction in
membership acquisition costs period to period resulting from increased
conversion rates in the Company's membership marketing programs. Other
marketing costs increased by 82% (from $50.4 million to $91.8 million). The
overall increase in marketing costs resulted primarily from the costs of
servicing a larger membership base and expenses incurred when selling and
marketing a larger number of software titles. The marketing functions for the
Company's membership services are combined for its various services, and,
accordingly, there are no significant changes in marketing costs by membership
service.
The Company routinely reviews all membership renewal rates and has not seen any
material change over the last year in the average renewal rate. Renewal rates
are calculated by dividing the total number of renewing members not requesting
a refund during their renewal year by the total members eligible for renewal.
General and administrative costs remained constant as a percentage of revenue
(13%). This is a result of the Company's ongoing focus on controlling overhead.
Other interest income, net, increased from $1.8 million to $10.3 million
primarily due to the increased level of cash generated by the Company from the
proceeds of its issuance of 3% convertible subordinated notes in February 1997
(see "Liquidity And Capital Resources; Inflation; Seasonality").
16
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JULY 31, 1997 VS.
SIX MONTHS ENDED JULY 31, 1996
The Company's overall membership base continues to grow at a rapid rate (from
62.3 million members at July 31, 1996 to 70.7 million members at July 31,
1997), which is the largest contributing factor to the 19% increase in
membership revenues (from $942.2 million for the six months ended July 31, 1996
to $1,125.2 million for the six months ended July 31, 1997). While the overall
membership base increased by approximately 4.4 million members during the six
months ended July 31, 1997, the average annual fee collected for the Company's
membership services increased by approximately 3%. The Company divides its
memberships into three categories: individual, wholesale and discount program
memberships. Individual memberships consist of members that pay directly for
the services and the Company pays for the marketing costs to solicit the
member, primarily using direct marketing techniques. Wholesale memberships
include members that pay directly for the services to their sponsor and the
Company does not pay for the marketing costs to solicit the members. Discount
program memberships are generally marketed through a direct sales force,
participating merchant or general advertising and the related fees are either
paid directly by the member or the local retailer. All of these categories
share various aspects of the Company's marketing and operating resources.
Compared to the previous year's first six months, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the six months ended July 31, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively. The Company maintains a flexible
marketing plan so that it is not dependent on any one service for the future
growth of the total membership base.
Software revenues increased 33% from $129.1 million for the six months ended
July 31, 1996 to $172.2 million for the six months ended July 31, 1997.
Distribution revenue, which consists principally of third-party software and
typically has low operating margins, increased 39% from $25.7 million for the
six months ended July 31, 1996 to $35.8 million for the six months ended July
31, 1997. The Company's software operations continue to grow by focusing on
selling titles through retailers. Excluding distribution revenue, core software
revenue grew by 32%. Contributing to the software revenue growth in the current
fiscal year is the availability of a larger number of titles as well as the
significant increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage
of the total individual membership base is in its renewal years. This results
in increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impacted profit margins. As a result, EBIT
increased from $185.9 million to $252.1 million and EBIT margins improved from
17.4% to 19.4%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs. Included in total revenues for the six months ended July 31, 1997,
are revenues resulting from acquisitions which were completed during the six
months ended July 31, 1997. However, total revenues contributed from these
acquisitions are not material to the Company's total reported revenues.
17
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JULY 31, 1997 VS.
SIX MONTHS ENDED JULY 31, 1996 (CONTINUED)
Operating costs increased 25% (from $326.3 million to $409.0 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). Historically, the
Company has seen a direct correlation between providing a high level of service
to its members and improved retention. The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Marketing costs decreased as a percentage of revenue, from 39% to 36%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred decreased
9% (from $310.4 million to $283.2 million) primarily due to increased
conversion rates in the Company's various membership marketing programs.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs decreased by 6%
(from $319.5 million to $301.6 million), which reflects a reduction in
membership acquisition costs period to period resulting from increased
conversion rates in the Company's membership marketing programs. Other
marketing costs increased by 68% (from $95.2 million to $160.3 million). The
overall increase in marketing costs resulted primarily from the costs of
servicing a larger membership base and expenses incurred when selling and
marketing a larger number of software titles. The marketing functions for the
Company's membership services are combined for its various services, and,
accordingly, there are no significant changes in marketing costs by membership
service.
The Company routinely reviews all membership renewal rates and has not seen any
material change over the last year in the average renewal rate. Renewal rates
are calculated by dividing the total number of renewing members not requesting
a refund during their renewal year by the total members eligible for renewal.
General and administrative costs remained constant as a percentage of revenue
(13%). This is a result of the Company's ongoing focus on controlling overhead.
Other interest income, net, increased from $4.1 million to $19.0 million
primarily due to the increased level of cash generated by the Company from the
proceeds of its issuance of 3% convertible subordinated notes in February 1997
(see "Liquidity And Capital Resources; Inflation; Seasonality").
18
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MEMBERSHIP INFORMATION
The following chart sets forth the approximate number of members and net
additions for the respective periods. All membership data has been restated to
reflect the acquisition of Ideon in August 1996; however it has not been
restated to reflect other members added through acquisitions ("Acquired
Members").
Net New Member
Number of Additions
Period Members for the Period
- ------------------------------- -------------- ----------------
Six Months Ended July 31, 1997 70,685,000 4,350,000
Year Ended January 31, 1997 66,335,000 6,685,000
Six Months Ended July 31, 1996 62,315,000 2,665,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Quarter Ended July 31, 1997 70,685,000 2,125,000
Quarter Ended July 31, 1996 62,315,000 1,440,000
*Includes approximately 8 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Membership cancellations processed by certain of the Company's clients report
membership information only on a net basis. Accordingly, the Company does not
receive actual numbers of gross additions and gross cancellations for certain
types of memberships. In calculating the number of members, the Company has
deducted its best estimate of cancellations which may occur during the trial
membership periods offered in its marketing programs.
Typically, these periods range from one to three months.
LIQUIDITY AND CAPITAL RESOURCES; INFLATION; SEASONALITY
Funds for the Company's operations have been provided principally through cash
flows from operations and credit facilities, while acquisitions have also been
funded through the issuance of Common Stock. The Company entered into a credit
agreement effective March 26, 1996 which provides for a $500 million revolving
credit facility with a variety of different types of loans available thereunder
("Credit Agreement"). At July 31, 1997, no borrowings under the Credit
Agreement were outstanding. The Credit Agreement is scheduled to expire March
26, 2001.
On February 11, 1997, the Company issued $550 million in principal amount of 3%
convertible subordinated notes (the "3% Notes") due February 15, 2002. Interest
on the 3% Notes is payable semi-annually on February 15 and August 15 of each
year, commencing August 15, 1997. For the six month period ended July 31, 1997,
interest expense on the 3% Notes was $7.8 million. As a result of the failure
of the Company to comply with certain registration requirements set forth in a
registration rights agreement between the Company and the initial purchasers of
the 3% Notes, commencing on August 11, 1997 the Company began to accrue
interest under the 3% Notes at the rate of 3.25% until such time as the Company
complies with such requirements of that agreement. The Company anticipates
complying with such registration requirements as soon as practicable.
The Company invested approximately $58.9 million in acquisitions, net of cash
acquired, during the six months ended July 31, 1997. Substantially all
acquisitions have been fully integrated into the Company's operations. The
Company is not aware of any trends, demands or uncertainties that will have a
material effect on the Company's liquidity. The Company anticipates that cash
flows from operations and its credit facilities will be sufficient to achieve
its current long-term objectives.
The Company does not anticipate any material capital expenditures for the
remainder of the year. Total capital expenditures were $31.5 million for the
six months ended July 31, 1997.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
will initially be financed through the issuance of Common Stock, excess cash
flows from operations, the Company's Credit Agreement or from the proceeds of
the issuance of the 3% Notes. However, depending on the financing necessary to
complete an acquisition, additional funding may be required.
19
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES; INFLATION; SEASONALITY (CONTINUED)
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts
from these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday selling season.
For the six months ended July 31, 1997, the Company's international businesses
represented less than 10% of EBIT. Operating in international markets involves
dealing with sometimes volatile movements in currency exchange rates. The
economic impact of currency exchange rate movements on the Company is complex
because it is linked to variability in real growth, inflation, interest rates
and other factors. Because the Company operates in a mix of membership services
and numerous countries, management believes currency exposures are fairly well
diversified. To date, currency exposure has not been a significant competitive
factor at the local market operating level. As international operations
continue to expand and the number of cross-border transactions increases, the
Company intends to continue monitoring its currency exposures closely and take
prudent actions as appropriate.
Forward-Looking Statements
Except for historical information contained herein, the above discussion
contains certain forward-looking statements that involve potential risks and
uncertainties. The Company's future results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, changes in market conditions, effects of state
and federal regulations and risks inherent in international operations. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof or to reflect the occurrence of
unanticipated events.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ideon and certain of its subsidiaries are defending or prosecuting a number of
complex lawsuits (See Note 6 to Condensed Consolidated Financial Statements).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the fiscal quarter ended July 31, 1997, the Company issued the following
equity securities that were not registered under the Securities Act:
(a) During February and March 1997, the Company issued 150,000 shares
of restricted Common Stock to four employees of its CUC Software
division in connection with their employment by the Company. The
issuance was made pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act, as this issuance
did not involve a "public offering" pursuant to the Securities
Act given the limited number and scope of person to whom the
securities were issued.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 11, 1997. The
results of the matters voted on by the Company's shareholders at such meeting
were described in Part II, Item 4 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1997. These matters included: the
election of Bartlett Burnap, Walter A. Forbes and Robert P. Rittereiser to the
Board of Directors of the Company, each for a term expiring in 2000; the
approval of the Company's 1997 Stock Option Plan; and the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors.
The Company has scheduled a special meeting of its shareholders for October 1,
1997, pursuant to a Notice of Special Meeting and Proxy Statement dated August
28, 1997, a copy of which has been filed previously with the Securities and
Exchange Commission, at which shareholders of the Company will consider
approval of the proposed merger of the Company and HFS (and related
transactions contemplated thereby), and approval of the Company's 1997 Stock
Incentive Plan.
ITEM 5. OTHER INFORMATION
On May 27, 1997, the Company entered into an agreement to merge with HFS
Incorporated ("HFS"). The consummation of this merger is subject to certain
customary closing conditions, including the approval of the shareholders of
both companies. See Note 2 to Condensed Consolidated Financial Statements for
additional information relating to the HFS merger including unaudited pro forma
combined condensed financial statements as of July 31, 1997 and for the six
months ended July 31, 1997 and 1996.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company, as filed June 5, 1996 (filed as Exhibit 3.1 to the
Company's Form 10-Q for the period ended April 30, 1996).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement, No. 33-44453, on
Form S-4 dated December 19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement, No. 33-44453, on Form S-4
dated December 19, 1991).*
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee (filed
as Exhibit 4(a) to the Company's Report on Form 8-K filed
February 13, 1997).*
10.1-10.26 Management Contracts, Compensatory Plans and Arrangements
10.1 Agreement with E. Kirk Shelton, dated as of May 15,
1996 (filed as Exhibit 10.1 to the Company's Form 10-Q for
the period ended July 31, 1996).*
10.2 Agreement with Christopher K. McLeod, dated as of May
15, 1996 (filed as Exhibit 10.2 to the Company's Form 10-Q
for the period ended July 31, 1996).*
10.3 Amended and Restated Employment Contract with Walter A.
Forbes, dated as of May 15, 1996 (filed as Exhibit 10.3 to
the Company's Form 10-Q for the period ended July 31, 1996).*
10.4 Agreement with Cosmo Corigliano, dated February 1, 1994
(filed as Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1995).*
10.5 Amendment to Agreement with Cosmo Corigliano, dated February
21, 1996 (filed as Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31,
1996).*
10.6 Amendment to Agreement with Cosmo Corigliano, dated
January 1, 1997 (filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1997).*
10.7 Agreement with Amy N. Lipton, dated February 1, 1996
(filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1996).*
10.8 Amendment to Agreement with Amy N. Lipton, dated
January 1, 1997 (filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1997).*
10.9 Employment Agreement with Kenneth A. Williams, dated
July 24, 1996 (filed as Exhibit 10.11 to the Company's Form
10-Q for the period ended July 31, 1996).*
10.10 Non-Competition Agreement with Kenneth A. Williams,
dated July 24, 1996 (filed as Exhibit 10.12 to the Company's
Form 10-Q for the period ended July 31, 1996).*
10.11 Form of Employee Stock Option under the 1987 Stock Option
Plan, as amended (filed as Exhibit 10.13 to the Company's
Form 10-Q for the period ended October 31, 1996).*
10.12 Form of Director Stock Option for 1990 and 1992 Directors
Stock Options Plans (filed as Exhibit 10.4 to the Company's
Annual Report for the fiscal year ended January 31, 1991, as
amended December 12, 1991 and December 19, 1991).*
10.13 Form of Director Stock Option for 1994 Directors Stock Option
Plan, as amended (filed as Exhibit 10.15 to the Company's
Form 10-Q for the period ended October 31, 1996).*
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBIT
NO. DESCRIPTION
------- -----------
10.14 1987 Stock Option Plan, as amended (filed as Exhibit 10.16
to the Company's Form 10-Q for the period ended October 31,
1996).*
10.15 1990 Directors Stock Option Plan, as amended (filed as
Exhibit 10.17 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.16 1992 Directors Stock Option Plan, as amended (filed as
Exhibit 10.18 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.17 1994 Directors Stock Option Plan, as amended (filed as
Exhibit 10.19 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.18 1996 Executive Retirement Plan (filed as Exhibit 10.22
to the Company's Form 10-Q for the period ended April 30,
1997).*
10.19 1997 Stock Option Plan (filed as Exhibit 10.23 to the
Company's Form 10-Q for the period ended April 30, 1997).*
10.20 Form of Employee Stock Option under the 1997 Stock Option
Plan (filed as Exhibit 10.24 to the Company's Form 10-Q for
the period ended April 30, 1997).*
10.21 Restricted Stock Plan and Form of Restricted Stock Plan
Agreement (filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31,
1991, as amended December 12, 1991 and December 19, 1991).*
10.22 Credit Agreement, dated as of March 26, 1996, among: CUC
International Inc.; the banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and The Sakura Bank, Limited as
Co-Agents; and The Chase Manhattan Bank, N.A., as
Administrative Agent (filed as Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1996).*
10.23 Agreement and Plan of Merger, dated October 17, 1995, among
CUC International Inc., Retreat Acquisition Corporation and
Advance Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No.
33-64801, filed on December 7, 1995).*
10.24 Agreement and Plan of Merger, dated as of
February 19, 1996, by and among Davidson & Associates, Inc.,
CUC International Inc. and Stealth Acquisition I Corp. (filed
as Exhibit 2(a) to the Company's Report on Form 8-K filed
March 12, 1996).*
10.25 Amendment No.1 dated as of July 24, 1996, among Davidson &
Associates, Inc., CUC International Inc. and Stealth
Acquisition I Corp. (filed as Exhibit 2.2 to the Company's
Report on Form 8-K filed August 5, 1996).*
10.26 Agreement and Plan of Merger, dated as of February 19,
1996, by and among Sierra On-Line, Inc., CUC International
Inc. and Larry Acquisition Corp. (filed as Exhibit 2(b) to
the Company's Report on Form 8-K filed March 12, 1996).*
10.27 Amendment No.1 dated as of March 27, 1996, among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition
Corp. (filed as Exhibit 2.4 to the Company's Report on Form
8-K filed August 5, 1996).*
10.28 Amendment No.2 dated as of July 24, 1996, among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition
Corp. (filed as Exhibit 2.5 to the Company's Report on Form
8-K filed August 5, 1996).*
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) EXHIBIT
NO. DESCRIPTION
------- -----------
10.29 Agreement of Sale dated July 23, 1996, between Robert M.
Davidson and Janice G. Davidson and CUC Real Estate Holdings,
Inc. (filed as Exhibit 10.2 to the Company's Report on Form
8-K filed August 5, 1996).*
10.30 Agreement and Plan of Merger, dated as of July 19, 1996,
by and among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp. (filed as Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1996).*
10.31 Form of U.S. Underwriting Agreement dated October 1996, among
CUC International Inc., certain selling stockholders and the
U.S. Underwriters (filed as Exhibit 1.1 (a) to the Company's
Registration Statement on Form S-3, Registration No.
333-13537, filed on October 9, 1996).*
10.32 Form of International Underwriting Agreement dated October
1996, among CUC International Inc., certain selling
stockholders and the International Underwriters (filed as
Exhibit 1.1 (b) to the Company's Registration Statement on
Form S-3, Registration No. 333-13537, filed on October 9,
1996).*
10.33 Registration Rights Agreement dated as of February 11, 1997,
between CUC International Inc. and Goldman, Sachs & Co. (for
itself and on behalf of the other purchasers party thereto)
(filed as Exhibit 4(b) to the Company's Report on Form 8-K
filed February 13, 1997).*
10.34 Agreement and Plan of Merger between CUC International Inc.
and HFS Incorporated, dated as of May 27, 1997 (filed as
Exhibit 2.1 to the Company's Report on Form 8-K filed on May
29, 1997).*
10.35 Plan for Corporate Governance of CUC International Inc.
following the Effective Time (filed as Exhibit 99.2 to the
Company's Report on Form 8-K filed on May 29, 1997).*
11 Statement re: Computation of Per Share Earnings (Unaudited)
27 Financial data schedule
(b) During the quarter ended July 31, 1997, the Company filed the following
Current Reports on Form 8-K:
(1) Current Report on Form 8-K, filed on May 29, 1997, reporting
an Item 5 ("Other Events") event and an Item 7 ("Financial
Statements, Pro Forma Financial Information and Exhibits")
event.
- ----------
*Incorporated by reference
24
<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 thereunto duly authorized.
CUC INTERNATIONAL INC.
----------------------
(Registrant)
Date: September 15, 1997 By: WALTER A. FORBES
------------------- ----------------
Walter A. Forbes -
Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
Date: September 15, 1997 By: COSMO CORIGLIANO
------------------ ----------------
Cosmo Corigliano - Senior Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company, as filed June 5, 1996 (filed as Exhibit 3.1 to the
Company's Form 10-Q for the period ended April 30, 1996).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement, No. 33-44453, on Form S-4
dated December 19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement, No. 33-44453, on Form S-4
dated December 19, 1991).*
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee (filed
as Exhibit 4(a) to the Company's Report on Form 8-K filed
February 13, 1997).*
10.1-10.26 Management Contracts, Compensatory Plans and Arrangements
10.1 Agreement with E. Kirk Shelton, dated as of May 15, 1996
(filed as Exhibit 10.1 to the Company's Form 10-Q for the
period ended July 31, 1996).*
10.2 Agreement with Christopher K. McLeod, dated as of May 15,
1996 (filed as Exhibit 10.2 to the Company's Form 10-Q for
the period ended July 31, 1996).*
10.3 Amended and Restated Employment Contract with Walter A.
Forbes, dated as of May 15, 1996 (filed as Exhibit 10.3 to
the Company's Form 10-Q for the period ended July 31, 1996).*
10.4 Agreement with Cosmo Corigliano, dated February 1, 1994
(filed as Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1995).*
10.5 Amendment to Agreement with Cosmo Corigliano, dated February
21, 1996 (filed as Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31,
1996).*
10.6 Amendment to Agreement with Cosmo Corigliano, dated January
1, 1997 (filed as Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997).*
10.7 Agreement with Amy N. Lipton, dated February 1, 1996 (filed
as Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1996).*
10.8 Amendment to Agreement with Amy N. Lipton, dated January 1,
1997 (filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1997).*
10.9 Employment Agreement with Kenneth A. Williams, dated
July 24, 1996 (filed as Exhibit 10.11 to the Company's Form
10-Q for the period ended July 31, 1996).*
10.10 Non-Competition Agreement with Kenneth A. Williams, dated
July 24, 1996 (filed as Exhibit 10.12 to the Company's Form
10-Q for the period ended July 31, 1996).*
26
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.11 Form of Employee Stock Option under the 1987 Stock Option
Plan, as amended (filed as Exhibit 10.13 to the Company's
Form 10-Q for the period ended October 31, 1996).*
10.12 Form of Director Stock Option for 1990 and 1992 Directors
Stock Option Plans (filed as Exhibit 10.4 to the Company's
Annual Report for the fiscal year ended January 31, 1991, as
amended December 12, 1991 and December 19, 1991).*
10.13 Form of Director Stock Option for 1994 Directors Stock Option
Plan, as amended (filed as Exhibit 10.15 to the Company's
Form 10-Q for the period ended October 31, 1996).*
10.14 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to
the Company's Form 10-Q for the period ended October 31,
1996).*
10.15 1990 Directors Stock Option Plan, as amended (filed as
Exhibit 10.17 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.16 1992 Directors Stock Option Plan, as amended (filed as
Exhibit 10.18 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.17 1994 Directors Stock Option Plan, as amended (filed as
Exhibit 10.19 to the Company's Form 10-Q for the period ended
October 31, 1996).*
10.18 1996 Executive Retirement Plan (filed as Exhibit 10.22 to
the Company's Form 10-Q for the period ended April 30,
1997).*
10.19 1997 Stock Option Plan (filed as Exhibit 10.23 to the
Company's Form 10-Q for the period ended April 30, 1997).*
10.20 Form of Employee Stock Option under the 1997 Stock Option
Plan (filed as Exhibit 10.24 to the Company's Form 10-Q for
the period ended April 30, 1997).*
10.21 Restricted Stock Plan and Form of Restricted Stock Plan
Agreement (filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31,
1991, as amended December 12, 1991 and December 19, 1991).*
10.22 Credit Agreement, dated as of March 26, 1996, among: CUC
International Inc.; the Banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and the Sakura Bank, Limited as
Co-Agents; and The Chase Manhattan Bank, N.A., as
Administrative Agent (filed as Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1996).*
10.23 Agreement and Plan of Merger, dated October 17, 1995, among
CUC International Inc., Retreat Acquisition Corporation and
Advance Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No.
33-64801, filed on December 7, 1995).*
10.24 Agreement and Plan of Merger, dated as of February 19,
1996, by and among Davidson & Associates, Inc., CUC
International Inc. and Stealth Acquisition I Corp. (filed as
Exhibit 2(a) to the Company's Report on Form 8-K filed March
12, 1996).*
27
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.25 Amendment No.1 dated as of July 24, 1996, among Davidson &
Associates, Inc., CUC International Inc. and Stealth
Acquisition I Corp. (filed as Exhibit 2.2 to the Company's
Report on Form 8-K filed August 5, 1996). *
10.26 Agreement and Plan of Merger, dated as of February 19,
1996, by and among Sierra On-Line, Inc., CUC International
Inc. and Larry Acquisition Corp. (filed as Exhibit 2(b) to
the Company's Report on Form 8-K filed March 12, 1996).*
10.27 Amendment No.1 dated as of March 27, 1996, among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition
Corp.(filed as Exhibit 2.4 to the Company's Report on Form
8-K filed August 5, 1996).*
10.28 Amendment No.2 dated as of July 24, 1996, among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition
Corp. (filed as Exhibit 2.5 to the Company's Report on Form
8-K filed August 5, 1996).*
10.29 Agreement of Sale dated July 23, 1996, between Robert M.
Davidson and Janice G. Davidson and CUC Real Estate Holdings,
Inc. (filed as Exhibit 10.2 to the Company's Report on Form
8-K filed August 5, 1996).*
10.30 Agreement and Plan of Merger, dated as of July 19, 1996,
by and among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp. (filed as Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1996).*
10.31 Form of U.S. Underwriting Agreement dated October 1996, among
CUC International Inc., certain selling stockholders and the
U.S. Underwriters (filed as Exhibit 1.1 (a) to the Company's
Registration Statement on Form S-3, Registration No.
333-13537, filed on October 9, 1996).*
10.32 Form of International Underwriting Agreement dated October
1996, among CUC International Inc., certain selling
stockholders and the International Underwriters (filed as
Exhibit 1.1 (b) to the Company's Registration Statement on
Form S-3, Registration No. 333-13537, filed on October 9,
1996).*
10.33 Registration Rights Agreement dated as of February 11,
1997, between CUC International Inc. and Goldman, Sachs & Co.
(for itself and on behalf of the other purchasers party
thereto) (filed as Exhibit 4(b) to the Company's Report on
Form 8-K filed February 13, 1997).*
10.34 Agreement and Plan of Merger between CUC International Inc.
and HFS Incorporated, dated as of May 27, 1997 (filed as
Exhibit 2.1 to the Company's Report on Form 8-K filed on May
29, 1997).*
10.35 Plan for Corporate Governance of CUC International Inc.
following the Effective Time (filed as Exhibit 99.2 to the
Company's Report on Form 8-K filed on May 29, 1997).*
11 Statement re: Computation of Per Share Earnings (Unaudited)
27 Financial data schedule
</TABLE>
- --------------
*Incorporated by reference
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31,
-----------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
PRIMARY
Average shares outstanding 409,500 388,582
Net effect of dilutive stock options and restricted
stock - based on the treasury stock method
using average market price 11,009 13,286
Assumed conversion of 3% convertible notes 17,959
----------- ------------
Total 438,468 401,868
=========== ============
Net income $92,310 $40,461
Interest expense on 3% convertible
notes, net of tax benefit 2,551
------------ ------------
$94,861 $40,461
======= =======
Net income per common share $0.216 $0.101
====== ======
FULLY DILUTED
Average shares outstanding 409,500 388,582
Net effect of dilutive stock options and restricted stock -
based on the treasury stock method using the
period - end market price, if higher than the average
market price 11,115 13,288
Assumed conversion of convertible notes 20,626 4,344
------------ ------------
Total 441,241 406,214
======= =======
Net income $92,310 $40,461
Interest expense on convertible
notes, net of tax benefit 2,758 522
------------ ------------
$95,068 $40,983
======= =======
Net income per common share $0.215 $0.101
====== ======
</TABLE>
<PAGE>
CUC INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JULY 31,
--------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
PRIMARY
Average shares outstanding 408,473 385,832
Net effect of dilutive stock options and restricted
stock - based on the treasury stock method
using average market price 11,302 13,435
Assumed conversion of 3% convertible notes 16,462
----------- ------------
Total 436,237 399,267
======= =======
Net income $162,783 $92,582
Interest expense on 3% convertible
notes, net of tax benefit 4,797
------------ ------------
$167,580 $92,582
======== =======
Net income per common share $0.384 $0.232
====== ======
FULLY DILUTED
Average shares outstanding 408,473 385,832
Net effect of dilutive stock options and restricted stock -
based on the treasury stock method using the
period - end market price, if higher than the
average market price 11,354 13,775
Assumed conversion of convertible notes 19,339 5,447
------------ ------------
Total 439,166 405,054
======= =======
Net income $162,783 $92,582
Interest expense on convertible
notes, net of tax benefit 5,245 991
------------ ------------
$168,028 $93,573
======== =======
Net income per common share $0.383 $0.231
====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000891104
<NAME> CUC INTERNATIONAL INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 725,634
<SECURITIES> 468,810
<RECEIVABLES> 582,293
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,073,315
<PP&E> 306,593
<DEPRECIATION> 144,707
<TOTAL-ASSETS> 3,232,161
<CURRENT-LIABILITIES> 472,779
<BONDS> 562,882
0
0
<COMMON> 4,164
<OTHER-SE> 1,490,735
<TOTAL-LIABILITY-AND-EQUITY> 3,232,161
<SALES> 1,297,359
<TOTAL-REVENUES> 1,297,359
<CGS> 0
<TOTAL-COSTS> 1,045,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,206)
<INCOME-PRETAX> 263,281
<INCOME-TAX> 100,498
<INCOME-CONTINUING> 162,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162,783
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
