-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G8aWGDPd7nclnUJqWPY4A58u9k3qJg+T4CmWZAjjn3JsYL0t+W3E24o77Y9OfbpA oSjaZ+osS9Yt8UonoxErPw== 0000950136-97-001524.txt : 19971105 0000950136-97-001524.hdr.sgml : 19971105 ACCESSION NUMBER: 0000950136-97-001524 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971104 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971104 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HFS INC CENTRAL INDEX KEY: 0000891104 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 223059335 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11402 FILM NUMBER: 97707019 BUSINESS ADDRESS: STREET 1: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2014289700 MAIL ADDRESS: STREET 2: 339 JEFFERSON RD CITY: PARSIPPANY STATE: NJ ZIP: 07054 FORMER COMPANY: FORMER CONFORMED NAME: HOSPITALITY FRANCHISE SYSTEMS INC DATE OF NAME CHANGE: 19940202 8-K 1 CURRENT REPORT ON FORM 8-K 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) 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. 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 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. EX-15 2 EX. 15 LETTER UNAUDITED INTERIM FIN'L. INFO. 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 EX-23.1 3 EX. 23.1 CONSENT OF INDEPENDENT AUDITORS E&Y 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 EX-23.2 4 EX. 23.2 INDEPENDENT AUDITOR'S CONSENT D&T 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 EX-23.3 5 EX. 23.3 CONSENT OF INDEPENDENT AUDITORS-KPMG 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 EX-23.4 6 EX.23.4 CONSENT OF INDEPENDENT AUDITORS - PW 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 EX-99.1 7 EX. 99.1 PRO FORMA FINANCIAL INFORMATION INDEX TO PRO FORMA FINANCIAL STATEMENTS
PAGE 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
1 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 SECTION A PAGE 1 OF 2 CENDANT CORPORATION UNAUDITED PRO FORMA COMBINING BALANCE SHEET (IN THOUSANDS)
AT --------------------------- 7/31/97 6/30/97 ------------ ------------- PRO FORMA HISTORICAL HISTORICAL PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENTS COMPANIES ------------ ------------- ------------- ----------- 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 ============ ============= ============
- ------------ (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 SECTION A PAGE 2 OF 2 CENDANT CORPORATION UNAUDITED PRO FORMA COMBINING BALANCE SHEET (IN THOUSANDS)
AT --------------------------- 7/31/97 6/30/97 ------------ ------------- PRO FORMA HISTORICAL HISTORICAL PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENTS COMPANIES ------------ ------------- -------------- ----------- 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 ============ ============= ============== ============
- ------------ (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 SECTION A CENDANT CORPORATION UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED -------------------------- 1/31/97 12/31/96 ------------ ------------ PRO FORMA HISTORICAL PRO FORMA PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ------------ ------------ ----------- ----------- 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
- ------------ (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 SECTION A CENDANT CORPORATION UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED -------------------------- 7/31/97 6/30/97 ------------ ------------ PRO FORMA HISTORICAL HISTORICAL PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ------------ ------------ ----------- ------------ 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
- ------------ (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 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 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 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)
HISTORICAL ------------------------- ACQUIRED PRO FORMA HFS COMPANIES ADJUSTMENTS PRO FORMA ------------ ----------- -------------- ------------ 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 ============ ============== ============
- ------------ 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 SECTION B HFS INCORPORATED AND SUBSIDIARIES UNAUDITED HISTORICAL CONSOLIDATING STATEMENT OF OPERATIONS OF ACQUIRED COMPANIES For the Year Ended December 31, 1996 (In thousands)
HISTORICAL (1) ----------------------------------------------------- AVIS, (2) COLDWELL OTHER 1996 TOTAL AS ADJUSTED RCI BANKER ACQUISITIONS HISTORICAL ------------- ---------- ----------- -------------- ------------ 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) ============= ========== =========== ============== ============
- ------------ (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 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)
CENTURY 21 NORS (1) TRAVELODGE (1) ERA (1) TOTAL ------------ -------------- ---------- --------- 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) ============ ============== ========== =========
- ------------ (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 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):
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ 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 ==================
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 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):
FOR THE PERIOD JANUARY 1, 1996 FOR THE PERIOD OCTOBER 17, 1996 THROUGH OCTOBER 16, 1996 THROUGH DECEMBER 31, 1996 TOTAL ------------------------------ -------------------------------- ------------ 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 =========== =========== ============
- ------------ (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):
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ Eliminate former facilities ............... $(127,018) Add current facilities ... 127,821 ------------------ Increased financing cost . $ 803 ==================
13 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):
FOR THE YEAR ENDED DECEMBER 31, 1996 ---- Revenues generated by ARAC...................... $1,908,985 Royalty percentage......... 4.0% ------------------ Royalty payment to HFS .... $ 76,359 ==================
(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).
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ Franchise fees ....... $ 1,003 Stock option expense 40,801 Bonus payment......... 33,832 ------------------ Total................ $75,636 ==================
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 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:
COLDWELL OTHER 1996 RCI AVIS BANKER ACQUISITIONS TOTAL ----------- ----------- ---------- -------------- ----------- 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 =========== =========== ========== ============== ===========
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 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:
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ 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 ==================
Coldwell Banker The pro forma adjustment reflects the reversal of historical interest expense relating to the following ($000's):
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ 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 ==================
(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 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):
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------ 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 ==================
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 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):
WEIGHTED AVERAGE SHARES ISSUANCE FOR THE YEAR ENDED PRICE PER DECEMBER 31, ACQUISITION SHARE 1996 DATE ----------- ------------------ ----------------- 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 ==================
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 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 SECTION C PAGE 1 OF 2 CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING BALANCE SHEET (IN THOUSANDS)
AT --------------------------- 7/31/97 6/30/97 PRO FORMA ------------ ------------- PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENTS COMPANIES ------------ ------------- ------------- ----------- 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 ============ ============= ============
- ------------ (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 SECTION C PAGE 2 OF 2 CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING BALANCE SHEET (IN THOUSANDS)
AT -------------------------- 7/31/97 6/30/97 PRO FORMA ------------ ------------- PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENTS COMPANIES ------------ ------------- ------------- ------------ 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 ============ ============= ============
- ------------ (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 SECTION C CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED -------------------------- 1/31/95 12/31/94 ----------- ------------ PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ----------- ------------ ---------- ------------ 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
- ------------ (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 SECTION C CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED -------------------------- 1/31/96 12/31/95 ----------- ------------ PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ----------- ------------ ---------- ------------ 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
- ------------ (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 SECTION C CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED -------------------------- 1/31/97 12/31/96 ----------- ------------ PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ----------- ------------ ---------- ------------ 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
- ------------ (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 SECTION C CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED ----------------------- 7/31/96 6/30/96 ----------- ---------- PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENT COMPANIES ----------- ---------- ---------- ------------ 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
- ------------ (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 SECTION C CENDANT CORPORATION UNAUDITED HISTORICAL COMBINING STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED -------------------------- 7/31/97 6/30/97 PRO FORMA ------------ ------------- PRO FORMA COMBINED CUC(1) HFS(1) ADJUSTMENTS COMPANIES ------------ ------------- ------------- ----------- 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
- ------------ (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 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 EX-99.2 8 EX. 99-2 CUC QUARTERLY REPORT ON FORM 10-Q 7/31/97 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 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
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) 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 =======================================
See notes to condensed consolidated financial statements. 3
CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ====================================================================================================================== Three Months Ended July 31, - ---------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- 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 =======================================
See notes to condensed consolidated financial statements. 4
CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ====================================================================================================================== Six Months Ended July 31, - ---------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- 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 =======================================
See notes to condensed consolidated financial statements. 5 CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
====================================================================================================================== Six Months Ended July 31, - ---------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- 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 =======================================
See notes to condensed consolidated financial statements. 6 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 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)
At ------------------------------ 7/31/97 6/30/97 -------------- ------------- Pro Forma Combined Company HFS Adjustments Companies -------------- ------------- ----------- --------- 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 ============== =========== ===============
8 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)
For the Six Months Ended -------------------------------- 7/31/97 6/30/97 ------------- ---------------- Pro Forma Combined Company HFS Adjustment Companies ------------- ---------------- ---------- --------- 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
9 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)
For the Six Months Ended -------------------------------- 7/31/96 6/30/96 ------------- --------------- Pro Forma Combined Company HFS Adjustment Companies ------------- --------------- ----------- --------- 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
- ---------------- (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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE ------- ----------- ---- 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 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION PAGE ------- ----------- ---- 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 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION PAGE ------- ----------- ---- 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
- -------------- *Incorporated by reference CUC INTERNATIONAL INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JULY 31, ----------------------------------------- 1997 1996 ------------------- ------------------- 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 ====== ======
CUC INTERNATIONAL INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JULY 31, -------------------------------------- 1997 1996 ------------------ ----------------- 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 ====== ======
EX-27 9 FINANCIAL DATA SCEHDULE
5 0000891104 CUC INTERNATIONAL INC. 1,000 6-MOS JAN-31-1998 JUL-31-1997 725,634 468,810 582,293 0 0 2,073,315 306,593 144,707 3,232,161 472,779 562,882 0 0 4,164 1,490,735 3,232,161 1,297,359 1,297,359 0 1,045,284 0 0 (11,206) 263,281 100,498 162,783 0 0 0 162,783 .38 .38
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