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 October 31, 1996
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 - 396,648,457 shares as of November
30, 1996
INDEX
CUC INTERNATIONAL INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 1996
and January 31, 1996. 3
Condensed Consolidated Statements of Income - Three months
ended October 31, 1996 and 1995. 4
Condensed Consolidated Statements of Income - Nine months
ended October 31, 1996 and 1995. 5
Condensed Consolidated Statements of Cash Flows -
Nine months ended October 31, 1996 and 1995. 6
Notes to Condensed Consolidated Financial Statements. 7
Independent Accountants' Review Report. 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 24
INDEX TO EXHIBITS 25
PART I. FINANCIAL INFORMATION
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 31, January 31,
1996 1996
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $368,325 $333,036
Marketable securities 98,313 97,164
Receivables, net of allowances 537,714 463,492
Prepaid membership materials 49,447 39,061
Prepaid expenses, deferred income
taxes and other 193,282 158,523
Total Current Assets 1,247,081 1,091,276
Membership solicitations in process 70,149 60,713
Deferred membership acquisition costs 393,181 404,655
Contract renewal rights and intangible
assets - net of accumulated amortization
of $120,552 and $100,578 355,530 332,806
Properties, at cost, less accumulated
depreciation of $128,183 and $105,235 142,865 113,353
Deferred income taxes and other 53,301 65,393
$2,262,107 $2,068,196
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $348,935 $296,048
Federal and state income taxes payable 29,389 35,957
Total Current Liabilities 378,324 332,005
Deferred membership income 673,761 682,823
Convertible debt - net of unamortized
original issue discount of $518 and $586 23,457 23,389
Zero coupon convertible notes - net of
unamortized original issue discount of $588 14,410
Other 12,156 13,046
Contingencies (Note 5)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 600 million shares; issued
402,636,666 shares and 385,576,801
shares 4,026 3,856
Additional paid-in capital 593,430 429,856
Retained earnings 667,163 601,472
Treasury stock, at cost, 6,136,757
shares and 5,115,947 shares (56,618) (30,998)
Other (33,592) (1,663)
Total Shareholders' Equity 1,174,409 1,002,523
$2,262,107 $2,068,196
See notes to condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
October 31,
1996 1995
REVENUES
Membership and service fees $503,592 $420,685
Software 98,611 71,871
Total Revenues 602,203 492,556
EXPENSES
Operating 181,113 148,786
Marketing 226,347 187,341
General and administrative 81,691 70,264
Costs related to Ideon products
abandoned and restructuring 16,439
Merger, integration, restructuring and
litigation charges associated with
business combinations 147,200
Interest income, net (2,319) (2,263)
Total Expenses 634,032 420,567
INCOME (LOSS) BEFORE INCOME TAXES (31,829) 71,989
(Benefit from) provision for income taxes (13,820) 28,590
NET INCOME (LOSS) ($18,009) $43,399
Net Income (Loss) Per Common Share ($0.04) $0.11
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 407,032 395,369
See notes to condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Nine Months Ended
October 31,
1996 1995
REVENUES
Membership and service fees $1,445,330 $1,207,430
Software 228,096 181,833
Total Revenues 1,673,426 1,389,263
EXPENSES
Operating 507,454 426,432
Marketing 641,052 537,311
General and administrative 225,967 203,496
Costs related to Ideon products
abandoned and restructuring 97,591
Merger, integration, restructuring and
litigation charges associated with
business combinations 175,835
Interest income, net (6,394) (8,070)
Total Expenses 1,543,914 1,256,760
INCOME BEFORE INCOME TAXES 129,512 132,503
Provision for income taxes 54,939 53,168
NET INCOME $74,573 $79,335
Net Income Per Common Share $0.19 $0.20
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 401,854 391,290
See notes to condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
OCTOBER 31,
NINE MONTHS ENDED 1996 1995
OPERATING ACTIVITIES:
Net income $74,573 $79,335
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Membership acquisition costs (467,325) (435,093)
Amortization of membership acquisition
costs 478,762 413,954
Deferred membership income (9,263) 16,872
Membership solicitations in process (9,436) (11,567)
Amortization of contract renewal rights
and excess cost 20,013 17,775
Deferred income taxes (41,056) (33,283)
Loss on impairment of assets 4,317
Amortization of original issue discount
on convertible notes 1,743 1,236
Amortization of restricted stock 1,137
Depreciation 28,463 17,890
Effect of change in amortization
periods for Ideon membership
acquisition costs 65,500
Net loss during change in fiscal
year-ends (4,268) (49,944)
Changes in working capital items, net
of acquisitions:
Increase in receivables (71,562) (101,755)
Increase in prepaid membership
materials (9,919) (12,527)
Net decrease (increase) in prepaid
expenses and other current assets 9,634 (17,159)
Net increase (decrease) in accounts
payable, accrued expenses and
federal & state income taxes payable 101,193 (9,481)
(Decrease) increase in product
abandonment and related liabilities (10,841) 27,557
Other, net (9,169) (16,827)
Net cash provided by (used in) operating
activities 82,679 (43,200)
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 108,071 186,375
Purchases of marketable securities (96,517) (141,986)
Acquisitions, net of cash acquired (40,465) (24,890)
Acquisitions of properties (55,425) (53,444)
Net cash used in investing activities (84,336) (33,945)
FINANCING ACTIVITIES:
Issuance of Common Stock 41,879 29,292
Payments for purchase of treasury shares (9,711)
Borrowings of long-term obligations, net (2,135) 6,349
Dividends paid (2,798) (5,783)
Net cash provided by financing activities 36,946 20,147
Net increase (decrease) in cash and cash
equivalents 35,289 (56,998)
Cash and cash equivalents at beginning of
period 333,036 281,019
Cash and cash equivalents at end of period $368,325 $224,021
See notes to condensed consolidated financial statements.
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.
Operating results for the nine months ended October 31, 1996 are
not necessarily indicative of the results that may be expected
for the year ending January 31, 1997. For further information,
refer to the supplemental consolidated financial statements and
footnotes thereto included in the Company's Current Report on
Form 8-K filed on September 17, 1996 and the Company's Form 10-K
filing for the year ended January 31, 1996. The condensed
consolidated financial statements at October 31, 1996 and for the
three and nine months ended October 31, 1996 and 1995 are
unaudited, but have been reviewed by independent accountants and
their report is included herein. All periods presented reflect
the Company's reclassifications of deferred membership
acquisition costs (previously classified as an offset to deferred
membership income) and membership solicitations in process
(previously classified as a current asset) to noncurrent assets.
NOTE 2 -- MERGERS AND ACQUISITIONS
During July 1996 the Company acquired all of the outstanding
capital stock of Davidson & Associates, Inc. ("Davidson") for a
purchase price of approximately $1 billion, which was satisfied
by the issuance of approximately 45.1 million shares of the
Company's common stock, par value $.01 per share ("Common
Stock"). Also during July 1996 the Company acquired all of the
outstanding capital stock of Sierra On-Line, Inc. ("Sierra") for
a purchase price of approximately $858 million, which was
satisfied by the issuance of approximately 38.4 million shares of
Common Stock. Davidson and Sierra develop, publish and
distribute educational and entertainment software for home and
school use. During August 1996 the Company acquired all of the
outstanding capital stock of Ideon Group, Inc. ("Ideon"),
principally a provider of credit card enhancement services, for a
purchase price of approximately $393 million, which was satisfied
by the issuance of approximately 16.6 million shares of Common
Stock. The mergers with Davidson, Sierra and Ideon (the "Fiscal
1997 Pooled Entities") have been accounted for in accordance with
the pooling-of-interests method of accounting and, accordingly,
the accompanying interim consolidated financial statements have
been retroactively adjusted as if the Fiscal 1997 Pooled Entities
and the Company had operated as one since inception.
The following represents revenues and net income of the Company
and the Fiscal 1997 Pooled Entities for the nine months ended
October 31, 1995 and the last complete interim period preceding
each of such mergers (in thousands).
Nine months
Six months ended
ended July October 31,
31, 1996 1995
Revenues:
The Company $880,403 $1,037,016
Fiscal 1997 Pooled Entities 190,820 352,247
---------- ----------
$1,071,223 $1,389,263
========== ==========
Net Income (Loss):
The Company $83,558 $120,759
Fiscal 1997 Pooled Entities 9,024 (41,424)
------- -------
$92,582 $79,335
======= =======
Davidson, Sierra and Ideon previously used the fiscal year-ends
December 31, March 31 and December 31, respectively, for their
financial reporting. To conform to the Company's January 31
fiscal year-end, Davidson's and Ideon's operating results for
January 1996 have been excluded from the operating results for the
nine months ended October 31, 1996. In addition, Sierra's
operating results for February and March 1996 have been included
in the operating results for the nine months ended October 31,
1996 and for the year ended January 31, 1996. The above-mentioned
excluded and duplicated periods have been adjusted by a $4.3
million charge to retained earnings at October 31, 1996.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 2 -- MERGERS AND ACQUISITIONS (continued)
Effective January 1, 1995, Ideon changed its fiscal year end from
October 31 to December 31 (the "Ideon Transition Period"). The
Ideon Transition Period has been excluded from the Company's
historical consolidated statements of income. Ideon's revenues and
net loss for the Ideon Transition Period were $34.7 million and
$(49.9) million, respectively. This excluded period has been
reflected as a $49.9 million charge to retained earnings at
January 31, 1996. The net loss for the Ideon Transition Period was
principally the result of a $65.5 million one-time, non-cash,
pretax charge recorded in connection with a change in accounting
for deferred membership acquisition costs.
In connection with the Davidson, Sierra and Ideon mergers with the
Company, the Company charged approximately $147.2 million ($89.6
million or $.22 per common share after-tax effect) and
approximately $175.8 million ($114.6 million or $.29 per common
share after-tax effect) to operations as merger, integration,
restructuring and litigation charges during the three and nine
months ended October 31, 1996, respectively. 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 (the "Ideon Merger") (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 5) giving consideration to the Company's intended approach to
these matters. Most of the provision is related to these
outstanding litigation matters. In determining the amount of the
provision, the Company estimated the cost of settling these
litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the
estimated cost of prosecuting and defending them (including out-of-
pocket costs, such as attorneys' fees, and the cost to the Company
of having its management involved in numerous complex litigation
matters). The Company is unable at this time to determine the
estimated timing of the future cash outflows with respect to this
liability. Although the Company has attempted to estimate the
amounts that will be required to settle these litigation matters,
there can be no assurance that the actual aggregate amount of such
settlements will not exceed the amount accrued. Any payments
related to these matters will reduce the amount of the provision.
The Company does not expect any loss in revenue as a result of
these integration and consolidation efforts.
During August 1996, the Company acquired substantially all of the
assets and liabilities of Kevlin Services, Incorporated
("Kevlin") and one other corporation affiliated with Kevlin for a
purchase price of approximately $27 million, which was satisfied
by the issuance of approximately 1.2 million shares of Common
Stock. Kevlin provides membership-based consumer services to
customers of financial institutions. During September 1996, the
Company acquired all of the outstanding capital stock of Dine-A-
Mate, Inc. ("Dine-A-Mate") for a purchase price of approximately
$36 million, which was satisfied by the issuance of approximately
1.4 million shares of Common Stock. Dine-A-Mate offers discount
dining and entertainment program memberships. These acquisitions
were accounted for as poolings-of-interests; however, financial
statements for periods prior to the dates of acquisition have not
been restated due to immateriality.
On October 11, 1996, the Company entered into an agreement to
acquire all of the outstanding capital stock of Knowledge
Adventure, Inc. ("KA"), which designs, develops and markets
children's educational computer software. The consummation of
the acquisition of KA is contingent upon the satisfaction of
certain customary closing conditions, including the approval of
the transaction by the shareholders of KA. The purchase price
for this acquisition will be satisfied by the issuance of
approximately 3.4 million shares of Common Stock, subject to
certain adjustments. This transaction will be accounted for
under the pooling-of-interests method and is expected to be
completed during the fourth quarter of fiscal 1997.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- SHAREHOLDERS' EQUITY
On September 26, 1996, the Company's Board of Directors declared
a three-for-two split of the Common Stock, in the nature of a
stock dividend, effective October 21, 1996, payable to
shareholders of record on October 7, 1996. Accordingly, the
financial statements and all common share and per common share
data have been retroactively adjusted to reflect the stock split.
The par value of the additional shares of Common Stock issued in
connection with the stock split was credited to Common Stock and
charged to retained earnings.
During the nine months ended October 31, 1996, $14.9 million
principal of zero coupon convertible notes were converted into
3.4 million shares of Common Stock and the related unamortized
original issue discount ($68,000) was charged against additional
paid-in capital. The balance of the change in additional paid-in
capital and treasury stock relates principally to acquisitions
and stock option activity.
The Company's fiscal 1990 recapitalization included establishment
of a restricted stock plan designed to compensate and retain key
employees of the Company. During July 1996, 1.4 million
restricted shares of Common Stock were granted with a fair value
on the date of grant of $30.5 million, which amount was deducted
from shareholders' equity and is being amortized over the vesting
period.
Net income per share, assuming the conversions of the zero coupon
convertible notes during the nine months ended October 31, 1996
occurred at the beginning of such period, would not differ
significantly from the Company's actual earnings per share for
such period.
NOTE 4 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF
SOFTWARE REVENUE
Software research and development costs are included in operating
expenses and aggregated $15.9 million and $13.7 million for the
three months ended October 31, 1996 and 1995, respectively, and
$46.1 million and $38.0 million for the nine months ended October
31, 1996 and 1995, respectively. Costs of software revenue are
included in operating expenses and aggregated $24.0 million and
$27.3 million for the three months ended October 31, 1996 and
1995, respectively, and $69.9 million and $75.2 million for the
nine months ended October 31, 1996 and 1995, respectively.
NOTE 5 -- CONTINGENCIES - IDEON
At October 31, 1996, Ideon was defending or prosecuting claims in
thirteen complex lawsuits, twelve of which involved Peter Halmos,
former Chairman of the Board and Executive Management Consultant
to SafeCard Services, Incorporated ("SafeCard"), a subsidiary of
Ideon, and various parties related to him as adversaries. Peter
Halmos is also a plaintiff in three other lawsuits, one against a
former officer, one against a director of Ideon and one against
SafeCard's outside counsel, in which neither SafeCard nor Ideon
have been named as defendant. The thirteen cases in which Ideon or
its subsidiaries is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron
Cherry (a former lawyer for SafeCard) in April 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' claims 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 declatory judgment
action filed by Ideon in Delaware Chancery Court.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 5 -- CONTINGENCIES - IDEON (continued)
A suit which seeks monetary damages and certain equitable relief
filed by SafeCard in August 1993 in Laramie County Circuit Court
in Wyoming against Peter Halmos and related entities alleging that
Peter Halmos dominated and controlled SafeCard, breached his
fiduciary duties to SafeCard, and misappropriated material non-
public information to make $48 million in profits on sales of
SafeCard stock. In March 1994, Mr. Halmos and related entities
filed a counterclaim in which claims were made of conspiracy in
restraint to trade, monopolization and attempted monopolization,
unfair competition and restraint of trade, breach of contract for
indemnity and intentional infliction of emotional distress.
SafeCard's motion to sever the conspiracy, monopolization and
restraint of trade claims was granted in May 1994. The claims for
the conspiracy, monopolization, restraint of trade and unfair
competition were dismissed without prejudice in June 1994. On
April 12, 1995, the trial court granted the motion of Mr. Halmos
and certain related entities to amend their counterclaims. The
amended counterclaims include claims for indemnification for legal
expenses incurred in the action and a claim that SafeCard's
contract with CreditLine should be rescinded. On April 19, 1995,
the trial court granted Mr. Halmos' motion for summary judgment
that certain of SafeCard's claims against him were barred by the
statute of limitation. On March 14, 1996, the Wyoming Supreme
Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations. Pursuant to the
Court's order of July 31, 1996, the action has been abated to
permit the parties to engage in settlement negotiations.
A suit seeking monetary damages by Peter Halmos, purportedly in
his name and in the name of CreditLine Corporation and Continuity
Marketing Corporation against SafeCard, one of its officers and
three of Ideon's directors in United States District Court in the
Southern District of Florida, in September 1994 purporting to
state various tort claims, state and federal antitrust claims and
claims of copyright infringement. The claims principally relate to
the allegation by Peter Halmos and his companies that SafeCard has
taken action to prevent him from being a successful competitor.
All discovery in the case has been stayed pending a ruling on a
motion to dismiss filed by SafeCard, its officer and Ideon's
directors. On August 16, 1995, the United States Magistrate Judge
filed a Report and Recommendation that the case be dismissed. The
parties have filed various briefs and memoranda in response to
this Report. On January 4, 1996, the Magistrate recommended ruling
that the statute of limitations was tolled during pendency of the
case in federal court and the plaintiffs' state law claims were
thus not time-barred. Defendants have filed an objection to this
recommendation.
A suit seeking monetary damages by Peter Halmos, as 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 of 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 December 10, 1996, the parties filed
a joint status report on settlement negotiations requesting an
order abating the action until January 24, 1997 to permit further
settlement negotiations.
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 April 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 Early Warnings Service and 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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 5 -- CONTINGENCIES - IDEON (continued)
A suit seeking monetary damages and declatory 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 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 December 5, 1996, plaintiffs
filed a motion for leave to file an amended complaint to name
additional parties (previously named as "John Does") and to add
additional claims. On December 10, 1996, the parties filed a
joint status report on settlement negotiations requesting an order
abating the action until January 24, 1997 to permit further
settlement negotiations.
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 Partner 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 his initial brief on September 26, 1996.
The Company filed its answer brief on November 1, 1996.
Plaintiff's reply brief was filed on November 15, 1996. Oral
argument has not yet been scheduled.
A suit seeking monetary damages filed by Peter Halmos against
SafeCard, one of its directors, its former general counsel, and
its legal counsel in the Circuit Court, Fifteenth Judicial
Circuit, in and for Palm Beach County, Florida on August 10, 1995.
This litigation involves claims by Peter Halmos for breach of
fiduciary duty and constructive fraud, fraud, and negligent
misrepresentation and is based on allegations arising out of the
resolution of a shareholder class action lawsuit in 1991 and
SafeCard's subsequent filing of an action against Halmos and his
related companies in Wyoming in 1993. Plaintiff filed an amended
complaint on June 26, 1996. On July 11, 1996, Ideon moved to
dismiss plaintiff's amended complaint or, in the alternative, to
stay the action.
A declatory judgment action by Ideon and its directors against
Peter Halmos in Delaware Chancery Court, New Castle County. This
action seeks a declaration regarding Ideon's advance
indemnification obligations, if any, to Peter Halmos in connection
with his many lawsuits. Halmos filed a motion to dismiss on
jurisdictional grounds on November 17, 1995. Ideon filed a brief
in opposition and an amended complaint on February 14, 1996. On
April 22, 1996, Halmos filed an answer and amended counterclaims
in which High Plains Capital Corporation ("High Plains") and
Halmos Trading & Investment Company ("Halmos Trading") were added
as additional parties. The amended counterclaims seek advancement
and/or indemnification for Halmos, High Plains and Halmos Trading
for certain litigations and an IRS investigation. The amended
counterclaims also seek recovery against individual defendant
directors based on allegations they willfully and unjustly denied
Halmos indemnification and/or advancement.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 5 -- CONTINGENCIES - IDEON (continued)
A suit by High Plains against Ideon, SafeCard, two of its
directors and The Dilenschneider Group, Inc. in Circuit Court in
Palm Beach County, Florida. This litigation involves claims by
High Plains for certain incentive compensation arising out of
Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and
expenses, an alternative claim for quantum meruit based on written
agreement and a count for tortious interference with advantageous
business relationship. Ideon filed a motion for final summary
judgment. Discovery has been stayed pending a ruling on this
motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit
Court in Broward County, Florida. This litigation involves claims
by High Plains for alleged breach of oral contract, alleged
violation of Florida's Uniform Trade Secrets Act, alleged
misappropriation of trade secrets and for declaration that certain
alleged trade secrets are property of High Plains. Ideon filed
motions to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading,
seeking monetary damages and specific performance against
SafeCard, one of its former officers and one of Ideon's directors
in Circuit Court in Broward County, Florida, making a variety of
claims related to the contested lease of SafeCard's former Ft.
Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims.
On March 25, 1996, the parties entered into a Settlement Agreement
under which Ideon made a payment of $3.8 million to settle all
claims currently pending or previously brought in this lawsuit.
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 and affirmative defenses on September 30, 1996.
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.
The Company filed an answer on December 5, 1996.
As discussed in Note 2, the Company established a provision upon
completion of the Ideon Merger related primarily to these
litigation matters. The Company is also involved in certain other
claims and litigation arising from the ordinary course of business
which are not considered material to the operations of the
Company.
Independent AccountantsO Review Report
Shareholders and Board of Directors
CUC International Inc.
We have reviewed the accompanying condensed consolidated balance
sheets of CUC International Inc. as of October 31, 1996, and the
related condensed consolidated statements of income for the three-
month and nine-month periods ended October 31, 1996 and 1995, and
the condensed consolidated statements of cash flows for the nine-
month periods ended October 31, 1996 and 1995. These financial
statements are the responsibility of the CompanyOs management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data, and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the
objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance
sheet of CUC International Inc. as of January 31, 1996, prior to
the restatement for the fiscal 1997 poolings of interest with
Davidson & Associates, Inc. ("Davidson"), Sierra On-Line, Inc.
("Sierra") and Ideon Group, Inc. ("Ideon") described in Note 2 to
the condensed consolidated financial statements. The balance
sheets of Davidson, Sierra and Ideon included in the restated
January 31, 1996 consolidated balance sheet were audited and
reported on separately by other auditors. We have also audited,
as to combination only, the consolidated balance sheet as of
January 31, 1996, after restatement for the fiscal 1997 poolings
of interests with Davidson, Sierra and Ideon; in our opinion,
such consolidated balance sheet has been properly combined on the
basis described in Note 2 to the condensed consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January
31, 1996, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
December 2, 1996
Stamford, Connecticut
ITEM 2.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended October 31, 1996 vs.
Three Months Ended October 31, 1995
The Company's overall membership base continues to grow at a
rapid rate (from 53.2 million members at October 31, 1995 to 63.8
million members at October 31, 1996), which is the largest
contributing factor to the 20% increase in membership revenues
(from $420.7 million for the quarter ended October 31, 1995 to
$503.6 million for the quarter ended October 31, 1996). While
the overall membership base increased by approximately 1.5
million members during the quarter, the average annual fee
collected for the Company's membership services increased by
approximately 3% from the same period a year ago. 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 third quarter, individual,
wholesale and discount program memberships grew by 6%, 28% and
52%, respectively, including members which came from acquisitions
completed during fiscal 1996 (members resulting from acquisitions
being "Acquired Members"). Wholesale memberships have grown in
part due to the success of the Company's international business
in Europe. Discount program memberships have incurred the
largest increase from Acquired Members, principally from Advance
Ross Corporation, acquired during the fourth quarter of fiscal
1996, which provides local discounts to consumers. For the
quarter ended October 31, 1996, individual, wholesale and
discount program memberships represented 68%, 13% and 19% of
membership revenues, respectively. All membership data has been
restated to reflect the acquisition of Ideon, however it has not
been restated to reflect other Acquired Members. 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 37% from $71.9 million for the
quarter ended October 31, 1995 to $98.6 million for the quarter
ended October 31, 1996. Distribution revenue, which consists
principally of third-party software and typically has low
operating margins, remained constant at $11 million. The
Company's software operations continue to focus on the growth of
selling titles through retailers. Excluding distribution
revenue, core software revenue grew by 44%. Contributing to the
software revenue growth in fiscal 1997 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 in renewing existing members. Improved response
rates for new members also favorably impacted profit margins.
As a result, operating income before interest, costs related to
Ideon products abandoned and restructuring, merger, integration,
restructuring and litigation charges associated with business
combinations, and income taxes ("EBIT") increased from $86.2
million to $113.1 million, and EBIT margins improved from 17.5%
to 18.8%.
Individual membership usage continues to increase, which
contributes to additional service fees and indirectly contributes
to the Company's strong renewal rate. 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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended October 31, 1996 vs.
Three Months Ended October 31, 1995 (continued)
Operating costs increased 22% (from $148.8 million to $181.1
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). 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. Historically, the
Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue
(38%). This is primarily due to maintained per member
acquisition costs and an increase in renewing members. Membership
acquisition costs incurred decreased by 3% (from $162.0 million
to $156.9 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 increased by 12% (from $141.6 million to $159.2
million). Other marketing costs increased by 47% (from $45.7
million to $67.1 million). These increases 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 Company routinely reviews all 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 (14%). This is a result of the Company's
ongoing ability to control overhead. Interest income, net, was
$2.3 million for the three months ended October 31, 1996 and
1995.
Included in costs related to Ideon products abandoned and
restructuring for the three months ended October 31, 1995, are
special charges totaling $10.9 million related to the abandonment
of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard
division of Ideon and the Ideon corporate infrastructure. This
charge of $10.9 million was composed of accrued liabilities of
$10.7 million and asset impairments. Also included in costs
related to products abandoned and restructuring are marketing and
operational costs incurred for Ideon products abandoned of $5.5
million.
Merger, integration, restructuring and litigation charges of
$147.2 million for the three months ended October 31, 1996 are
non-recurring and are comprised primarily of transaction and
integration costs principally associated with the mergers of the
Company with Davidson, Sierra and Ideon as well as a provision
relating to certain outstanding Ideon litigation matters (see
Note 5).
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Nine Months Ended October 31, 1996 vs.
Nine Months Ended October 31, 1995
The Company's overall membership base continues to grow at a
rapid rate (from 53.2 million members at October 31, 1995 to 63.8
million members at October 31, 1996), which is the largest
contributing factor to the 20% increase in membership revenues
(from $1,207.4 million for the nine months ended October 31, 1995
to $1,445.3 million for the nine months ended October 31, 1996).
While the overall membership base increased by approximately 4.2
million members during the nine months ended October 31, 1996,
the average annual fee collected for the Company's membership
services increased by approximately 3% from the same period a
year ago. 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 nine months, individual,
wholesale and discount program memberships grew by 10%, 23% and
57%, respectively, including Acquired Members which came from
acquisitions completed during fiscal 1996. Wholesale memberships
have grown in part due to the success of the Company's
international business in Europe. Discount program memberships
have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired during the
fourth quarter of fiscal 1996, which provides local discounts to
consumers. For the nine months ended October 31, 1996,
individual, wholesale and discount program memberships
represented 68%, 13% and 19% of membership revenues,
respectively. All membership data has been restated to reflect
the acquisition of Ideon, however it has not been restated to
reflect other Acquired Members. 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 25% from $181.8 million for the nine
months ended October 31, 1995 to $228.1 million for the nine
months ended October 31, 1996. Distribution revenue, which
consists principally of third-party software and typically has
low operating margins, was down from $52.7 million to $36.7
million. The Company's software operations continue to focus on
the growth of selling titles through retailers. Excluding
distribution revenue, core software revenue grew by 48%.
Contributing to the software revenue growth in fiscal 1997 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 in renewing existing members. Improved response
rates for new members also favorably impacted profit margins. As
a result, EBIT increased from $222.0 million to $299.0 million,
and EBIT margins improved from 16.0% to 17.9%.
Individual membership usage continues to increase, which
contributes to additional service fees and indirectly contributes
to the Company's strong renewal rate. 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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Nine Months Ended October 31, 1996 vs.
Nine Months Ended October 31, 1995 (continued)
Operating costs increased 19% (from $426.4 million to $507.5
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). 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. Historically, the
Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs decreased as a percentage of revenue (from 39% to
38%). This decrease is primarily due to improved per member
acquisition costs and an increase in renewing members.
Membership acquisition costs incurred increased by 7% (from
$435.1 million to $467.3 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 increased
by 16% (from $414.0 million to $478.8 million). Other marketing
costs increased by 32% (from $123.3 million to $162.3 million).
These increases 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 Company routinely reviews all 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 decreased as a percentage of
revenue (from 15% to 14%). This is a result of the Company's
ongoing ability to control overhead. Interest income, net,
decreased from $8.1 million to $6.4 million primarily due to cash
used to fund acquisitions during fiscal 1996 and the first nine
months of fiscal 1997.
Included in costs related to Ideon products abandoned and
restructuring for the nine months ended October 31, 1995, are
special charges totaling $45.0 million related to the abandonment
of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard
division of Ideon and the Ideon corporate infrastructure. This
charge of $45.0 million was composed of accrued liabilities of
$36.2 million and asset impairments of $8.8 million. Also
included in costs related to products abandoned and restructuring
are marketing and operational costs incurred for Ideon products
abandoned of $52.6 million.
Merger, integration, restructuring and litigation charges of
$175.8 million for the nine months ended October 31, 1996 are non-
recurring and are comprised primarily of transaction and
integration costs principally associated with the mergers of the
Company with Davidson, Sierra and Ideon as well as a provision
relating to certain outstanding Ideon litigation matters (see
Note 5).
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, however it
has not been restated to reflect other Acquired Members.
Net New Member
Number of Additions
Period Members for the Period
Nine Months Ended October 31, 1996 63,835,000 4,185,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Nine Months Ended October 31, 1995 53,160,000 6,260,000**
Year Ended January 31, 1995 46,900,000 3,820,000
Quarter Ended October 31, 1996 63,835,000 1,520,000
Quarter Ended October 31, 1995 53,160,000 1,995,000
*Includes approximately 8 million Acquired Members.
**Includes approximately 3.1 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 and acquisitions have been
provided through cash flow from operations. The Company also has
a credit agreement, dated March 26, 1996, with certain banks
providing for a $500 million revolving credit facility (the
"Credit Agreement"). The amount of borrowings currently
available to the Company under the Credit Agreement was $500
million at October 31, 1996, as there were no borrowings under
the Credit Agreement to that date. The Credit Agreement is
scheduled to expire March 26, 2001.
In February 1996, Wright Express Corporation ("Wright Express"),
a subsidiary of Ideon, entered into a revolving credit facility
agreement which has an available line of credit of $75 million of
which $50 million may be used to finance working capital
requirements and for general corporate purposes and $25 million
may be used for acquisition financing. This facility expires
December 1, 1998.
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)
Costs related to the Davidson, Sierra and Ideon mergers are non-
recurring and include integration and transaction costs as well a
provision relating to certain outstanding Ideon litigation
matters (see Note 5) giving consideration to the Company's
intended approach to these litigation matters. In estimating the
cost to settle these matters, the Company considered potential
liabilities relating to these matters and the estimated cost of
prosecuting and defending them (including out-of-pocket costs,
such as attorneys' fees, and the cost to the Company of having
its management involved in numerous complex litigation matters).
The Company is unable at this time to determine the estimated
timing of the future cash outflows with respect to this
liability. Although the Company has attempted to estimate the
amounts that will be required to settle these litigation matters,
there can be no assurance that the actual aggregate amount of
such settlements will not exceed the amount of the provision.
The Company invested approximately $40 million in acquisitions,
net of cash acquired, during the nine months ended October 31,
1996. These 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 the Credit Agreement will be sufficient to
achieve its current long-term objectives.
The Company does not anticipate any material capital expenditures
for the next year. Total capital expenditures were $55 million
for the nine months ended October 31, 1996.
The Company intends to continue to review potential acquisitions
that it believes would enhance the Company's growth and
profitability. Any acquisitions paid for in cash will initially
be financed through excess cash flows from operations and the
Credit Agreement. However, depending on the financing necessary
to complete an acquisition, additional funding may be required.
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 season.
For the nine months ended October 31, 1996, the Company's
international businesses represented less than 5% 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During August 1996, the Company completed its acquisition of
Ideon. Ideon is a party to a number of lawsuits which are
described in detail in Note 5 to the Condensed Consolidated
Financial Statements of the Company.
ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended October 31, 1996, the Company
issued the following equity securities that were not registered
under the Securities Act:
(a) On August 29, 1996, the Company issued 1,155,733 shares of
Common Stock to Kevlin and to one other corporation affiliated
with Kevlin in connection with the acquisition by a subsidiary of
the Company of substantially all of the assets and liabilities of
Kevlin. This issuance was made pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act, as
this issuance of Common Stock did not involve a "public offering"
pursuant to the Securities Act given the limited number and scope
of persons to whom the securities were issued. The Company has
filed a Registration Statement with the Commission, which has
been declared effective by the Commission, with respect to the
resale of the Common Stock received from the Company in
connection with this acquisition.
(b) On September 17, 1996, the Company issued 165,630 shares of
Common Stock to Charles Stack in connection with the acquisition
by a subsidiary of the Company of Book Stacks Unlimited, Inc.
("Book Stacks"), a corporation owned by Mr. Stack. This issuance
was made pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act, as this issuance of Common
Stock did not involve a "public offering" pursuant to the
Securities Act given the limited number and scope of persons to
whom the securities were issued. The Company has filed a
Registration Statement with the Commission, which has been
declared effective by the Commission, with respect to the resale
by Mr. Stack of the Common Stock received by him from the Company
in connection with this acquisition.
(c) On September 23, 1996, the Company issued 1,394,894 shares
of Common Stock to Raymond H. Stanton II and Raymond H. Stanton
III (the "Stantons") in connection with the acquisition by the
Company of all of the outstanding capital stock of Dine-A-Mate
from the Stantons. This issuance was made pursuant to the
exemption from registration provided by Section 4(2) of the
Securities Act, as this issuance of Common Stock did not involve
a "public offering" pursuant to the Securities Act given the
limited number and scope of persons to whom the securities were
issued. The Company has filed a Registration Statement with the
Commission, which has been declared effective by the Commission,
with respect to the resale by the Stantons of 741,565 shares of
Common Stock received by them from the Company in connection with
this acquisition.
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).*
10.1-10.20 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 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).*
10.7 Employment Agreement with Robert M. Davidson, dated
July 24, 1996 (filed as Exhibit 10.7 to the Company's
Form 10-Q for the period ended July 31, 1996).*
10.8 Employment Agreement with Janice G. Davidson, dated
July 24, 1996 (filed as Exhibit 10.8 to the Company's
Form 10-Q for the period ended July 31, 1996).*
10.9 Non-Competition Agreement with Robert M. Davidson,
dated July 24, 1996 (filed as Exhibit 10.9 to the
Company's Form 10-Q for the period ended July 31,
1996).*
10.10 Non-Competition Agreement with Janice G. Davidson,
dated July 24, 1996 (filed as Exhibit 10.10 to the
Company's Form 10-Q for the period ended July 31,
1996).*
10.11 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).*
10.12 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).*
10.13 Form of Employee Stock Option under the 1987 Stock
Option Plan, as amended.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
(a) Exhibit
No. Description
10.14 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).*
10.15 Form of Director Stock Option for 1994 Directors
Stock Option Plan, as amended.
10.16 1987 Stock Option Plan, as amended.
10.17 1990 Directors Stock Option Plan, as amended.
10.18 1992 Directors Stock Option Plan, as amended.
10.19 1994 Directors Stock Option Plan, as amended.
10.20 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).*
10.21 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).*
10.22 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).*
10.23 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).*
10.24 Amendment No.1 dated as of July 24, 1996, among
Davidson & Associates, Inc., CUC International Inc. and
Stealth I Acquisition Corp. (filed as Exhibit 2.2 to
the Company's Report on Form 8-K filed August 5,
1996).*
10.25 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).*
10.26 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).*
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
(a) Exhibit
No. Description
10.27 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).*
10.28 Registration Rights Agreement dated July 24, 1996,
among CUC International Inc. and the other parties
signatory thereto (filed as Exhibit 10.1 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 April
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).*
11 Statement re: Computation of Per Share Earnings
(Unaudited)
15 Letter re: Unaudited Interim Financial
Information
27 Financial data schedule
(b) During the quarter ended October 31, 1996, the Company filed
the following Current Reports on Form 8-K:
(1) Current Report on Form 8-K, filed on August 5, 1996,
reporting an Item 2 ("Acquisition or Disposition of
Assets") event.
(2) Current Report on Form 8-K, filed on August 14, 1996,
reporting an Item 2 ("Acquisition or Disposition of
Assets") event.
(3) Current Report on Form 8-K, filed on September 17, 1996,
reporting an Item 5 ("Other Events") event and an Item
7 ("Financial Statements, Pro Forma Financial
Information and Exhibits") event.
(4) Current Report on Form 8-K, filed on September 19, 1996,
reporting an Item 5 ("Other Events") event.
(5) Current Report on Form 8-K, filed on September 26, 1996,
reporting an Item 5 ("Other Events") event.
(6) Current Report on Form 8-K, filed on October 7, 1996,
reporting an Item 5 ("Other Events") event.
(7) Current Report on Form 8-K, filed on October 28, 1996,
reporting an Item 5 ("Other Events") event.
*Incorporated by reference
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: December 12, 1996 By: WALTER A. FORBES
Walter A. Forbes - Chief
Executive Officer and Chairman
of the Board (Principal
Executive Officer)
Date: December 12, 1996 By: COSMO CORIGLIANO
Cosmo Corigliano - Senior Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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).*
10.1-10.20 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 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).*
10.7 Employment Agreement with Robert M.
Davidson, dated July 24, 1996 (filed as
Exhibit 10.7 to the Company's Form 10-Q
for the period ended July 31, 1996).*
10.8 Employment Agreement with Janice G.
Davidson, dated July 24, 1996 (filed as
Exhibit 10.8 to the Company's Form 10-Q
for the period ended July 31, 1996).*
10.9 Non-Competition Agreement with Robert M.
Davidson, dated July 24, 1996 (filed as
Exhibit 10.9 to the Company's Form 10-Q
for the period ended July 31, 1996).*
INDEX TO EXHIBITS
Exhibit
No. Description Page
10.10 Non-Competition Agreement with
Janice G. Davidson, dated July 24, 1996
(filed as Exhibit 10.10 to the Company's
Form 10-Q for the period ended July 31,
1996).*
10.11 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).*
10.12 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).*
10.13 Form of Employee Stock Option under
the 1987 Stock Option Plan, as amended.
10.14 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).*
10.15 Form of Director Stock Option for
1994 Directors Stock Option Plan, as
amended.
10.16 1987 Stock Option Plan, as amended.
10.17 1990 Directors Stock Option Plan, as amended.
10.18 1992 Directors Stock Option Plan, as amended.
10.19 1994 Directors Stock Option Plan, as amended.
10.20 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).*
10.21 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).*
10.22 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).*
INDEX TO EXHIBITS
Exhibit
No. Description Page
10.23 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).*
10.24 Amendment No.1 dated as of July 24, 1996,
among Davidson & Associates, Inc., CUC
International Inc. and Stealth I
Acquisition Corp. (filed as Exhibit 2.2
to the Company's Report on Form 8-K filed
August 5, 1996).
10.25 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).*
10.26 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).*
10.27 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).*
10.28 Registration Rights Agreement dated July
24, 1996, among CUC International Inc.
and the other parties signatory thereto
(filed as Exhibit 10.1 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
April 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).*
11 Statement re: Computation of Per Share
Earnings (Unaudited)
15 Letter re: Unaudited Interim Financial
Information
27 Financial data schedule
*Incorporated by reference