Exhibit 99.4
CUC International Inc. and Subsidiaries
Exhibit 99.4--Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year Ended January 31, 1996 vs. Year Ended January 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from 47
million members at January 31, 1995 to 59.7 million members at January 31,
1996), which is the largest contributing factor to the 20% increase in
membership revenues (from $1,363.6 million in fiscal 1995 to $1,629.8 million in
fiscal 1996). While the overall membership base increased by 12.7 million
members, or 27%, during the year (of which approximately 8 million members came
from acquisitions completed during the year (members resulting from acquisitions
being "Acquired Members")), the average annual fee charged for the Company's
membership services increased by 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 merchants 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.
In the 1996 fiscal year, individual, wholesale and discount program memberships
grew by 8%, 19% and 11%, respectively, in addition to the increase due to
Acquired Members. For the year ended January 31, 1996, individual, wholesale and
discount program memberships represented 68%, 12% and 20% of membership
revenues, respectively. Discount program memberships have incurred the largest
increase from Acquired Members. Welcome Wagon, Getko and Advance Ross, all
acquired in fiscal 1996, are classified in this membership category as their
businesses provide local discounts to consumers. 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. The Company completed a number of
acquisitions accounted for under the purchase method of accounting during fiscal
1996. The total revenues contributed by these acquisitions are not material to
the Company's total reported revenues (see Note B to the Supplemental
Consolidated Financial Statements).
Software revenues increased 60% to $305.4 million in fiscal 1996 from $191.1
million in fiscal 1995. Contributing to the strong software growth in fiscal
1996 was the release of 63 new titles and an additional 18 titles which
were acquired compared to 34 new products released in fiscal 1995. Also
contributing to the software revenue growth is the significant increase in
the installed base of CD-ROM personal computers as well as increases in
affiliated label and distribution revenues.
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 impact profit margins. As a result, operating
income before interest, amortization of restricted stock compensation, costs
related to products abandoned and restructuring, gain on sale of and equity in
loss from ImagiNation Network and income taxes ("EBIT") increased from $239.1
million to $322.7 million and EBIT margins improved from 15.4% to 16.7%.
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. Actual membership cancellations were $376
million, $354 million and $319 million, respectively, for the fiscal years ended
January 31, 1996, 1995 and 1994. This represents 19%, 21% and 22%, respectively,
of the gross membership revenues accrued for all services. The Company records
its deferred revenue net of estimated cancellations which are anticipated in the
Company's marketing programs. The number of cancellations has increased due to
the increased level of marketing efforts, but has decreased as a percentage of
the total number of members.
Operating costs increased 25% (from $474.1 million to $593.5 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 revenues, from 40% to 38%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
19% (from $508.8 million to $605.1 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 increased by 19%
(from $467 million to $556.5 million). Other marketing costs increased by 20%
(from $151.3 million to $180.9 million). This increase 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 up for
renewal.
General and administrative costs increased as a percentage of revenues, from 14%
to 15%. This is principally due to acquisitions completed during fiscal 1996.
Interest income, net, increased from $7.9 million to $9.7 million due to the
reduced level of amortization associated with the Company's restricted stock and
zero coupon convertible notes and the net interest income from the increased
level of cash generated by the Company for investment.
Included in costs related to products abandoned and restructuring for the year
ended January 31, 1996, are special charges totaling $43.8 million, net of
recoveries, 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.
The original charge of $45 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 $53.2 million.
Year Ended January 31, 1995 vs. Year Ended January 31, 1994
The Company's overall membership base continues to grow at a rapid rate (from
42.9 million members at January 31, 1994 to 47 million members at January 31,
1995), which is the largest contributing factor to the 19% increase in
membership revenues (from $1,143.2 million in fiscal 1994 to $1,363.6 million in
fiscal 1995). While the overall membership base increased by 4.1 million members
before adjustment for Acquired Members resulting from the fiscal 1996
pooling-of-interests transactions, or 10%, during the past year, the average
annual fee charged for the Company's membership services increased by 3%. The
Company divides its memberships into three categories: individual, wholesale and
discount program memberships. All of these categories share various aspects of
the Company's marketing and operating resources. In the 1995 fiscal year,
individual, wholesale and discount program memberships grew by 11%, 6% and 11%,
respectively. For the year ended January 31, 1995, individual, wholesale and
discount program memberships represented 70%, 11% 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. The Company completed an acquisition of Essex, a privately
owned third-party marketer of financial products for banks, and certain other
entities, during fiscal 1995. The total revenues contributed by this acquisition
are not material to the Company's total reported revenues. This acquisition was
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 date of acquisition (see Note B to the
Consolidated Financial Statements).
Software revenues increased 41% to $191.1 million in fiscal 1995 from $135.5
million in fiscal 1994. Contributing to the strong software growth in fiscal
1995 was the release of 34 new titles. Also contributing to the software growth
is the expansion in the installed base of personal computers as well as an
increase in affiliated label revenues.
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. As a result, EBIT
increased from $200.2 million to $239.1 million, however EBIT margins decreased
slightly from 15.7% to 15.4%, due principally to increased software research and
development.
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. Actual membership cancellations were $354
million, $319 million and $292 million, respectively, for the fiscal years ended
January 31, 1995, 1994 and 1993. This represents approximately 21%, 22% and 24%
of the gross membership revenues accrued for all services. The Company records
its deferred revenue net of estimated cancellations which are anticipated in the
Company's marketing programs. The number of cancellations has increased due to
the increased level of marketing efforts, but has decreased as a percentage of
the total number of members.
Operating costs increased 29% (from $368.8 million to $474.1 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing, 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 (40%). This is
primarily due to improved per member acquisition costs and an increase in
renewing members. Membership acquisition costs incurred increased 11% (from
$457.3 million to $508.8 million). 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 14% (from $409.5
million to $467 million). Other marketing costs increased by 44% (from $105.1
million to $151.3 million). This increase resulted primarily from the costs of
servicing a larger membership base, costs to establish the American Airlines
AAdvantage Dining program 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.
Based on current information, the Company does not anticipate that the
average renewal rate will change significantly. Renewal rates are calculated
by dividing the total number of renewing members not requesting a refund
during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue, from 15%
to 14%. This is the result of the Company's ongoing ability to control overhead.
Interest income, net, increased from $3.2 million to $7.9 million primarily due
to the reduction of the Company's average outstanding loan balance and the net
interest income from the increased level of cash generated by the Company for
investment.
Membership Information
The following chart sets forth the approximate number of members and net
additions for the last three fiscal years:
Net New Member Additions
Year Ended Number of Members for the Period
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January 31, 1996 59,650,000 12,700,000*
January 31, 1995 46,950,000 4,050,000
January 31, 1994 42,900,000 3,820,000
*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 approximates the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Cancellations for memberships processed by the Company for the years ended
January 31, 1996, 1995 and 1994 were $376 million, $353 million and $321
million, respectively. This cancellation data does not reflect cancellations
processed by certain of the Company's clients which 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
flow from operations and credit facilities, while acquisitions have also been
funded through the issuance of Common Stock. The Company terminated the GECC
Credit Agreement effective March 19, 1996 and entered into the New Credit
Agreement during March 1996 as defined and described in Note E to the
Supplemental Consolidated Financial Statements. The New Credit Agreement
provides for a $500 million revolving credit facility with a variety of
different types of loans available thereunder. The New Credit Agreement contains
certain customary restrictive covenants including, without limitation, financial
covenants and restrictions on certain corporate transactions, and also contains
various events of default provisions including, without limitation, defaults
arising from certain changes in control of the Company.
In 1994, Ideon assumed a revolving loan agreement in connection with its
acquisition of Wright Express Corporation ("Wright Express"). The agreement, as
originally structured, provided for maximum borrowings equal to the lesser of
$17.5 million or an amount based on a percentage of eligible accounts receivable
as defined therein. In November 1994, the revolving credit agreement was amended
increasing the available line to $27.5 million. At January 31, 1996, Ideon had
$15.4 million outstanding under the revolving line of credit. In February 1996,
Wright Express entered into a new revolving credit facility agreement replacing
the previous revolving line of credit. The new credit facility has an available
line 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. The new credit facility expires December 1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's financial statements but will be reflected in
the consolidated statements of income during the periods the respective mergers
are completed. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs and are expected to approximate $28.6 million ($25.1 million
or $.10 per common share after-tax effect) in the aggregate. Such costs
associated with the Company's merger with Ideon (the "Ideon Merger") include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Note 5) giving consideration to the
Company's intended approach to these matters, which are estimated by the
Company's management to approximate $125.0 million ($80.0 million after tax
effect). Most of the reserve is related to these outstanding 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 reserve to be accrued.
The Company invested approximately $75 million in acquisitions, net of cash
acquired, during fiscal 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 other
than those relating to the above-mentioned litigation matters. The Company
anticipates that cash flow from operations and its credit facilities will be
sufficient to achieve its current long-term objectives.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases. Future repurchases will
be based upon market conditions and cannot be currently ascertained.
Repurchases, if any, would be funded through the Company's available cash or
availability under its credit agreement and would thus reduce liquidity.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $63 million for the year ended January
31, 1996.
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 excess cash flow from operations and the
Company's credit agreement. However, depending on the financing necessary to
complete an acquisition, additional funding may be required.
The Accounting Standards Executive Committee's Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs," requires that all advertising
expenditures that are not for direct response advertising, be expensed as
incurred or the first time the advertising takes place. The Company adopted the
new method of accounting for advertising costs in the first quarter of fiscal
1996. The impact of adopting the new method did not have a significant effect on
the Company's financial statements.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's current plans, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted. In fiscal
1997, the Company intends to adopt the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will adopt SFAS No. 121 in fiscal 1997, and the
impact, if any, is not expected to be material.
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.
In fiscal 1996, 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.