Exhibit 99.1
CUC International Inc. and Subsidiaries
Exhibit 99.1--Supplemental Consolidated Financial Statements
January 31, 1996 and 1995
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying supplemental consolidated balance sheets of
CUC International Inc. ("CUC") as of January 31, 1996 and 1995, and the
related supplemental consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended January 31, 1996.
The supplemental consolidated financial statements give retroactive effect to
the mergers of CUC and Davidson & Associates, Inc. ("Davidson") on July 24,
1996, CUC and Sierra On-Line, Inc. ("Sierra") on July 24, 1996 and CUC and
Ideon Group, Inc. ("Ideon") on August 7, 1996, which have been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of CUC. Our responsibility
is to express an opinion on these supplemental financial statements based on
our audits. We did not audit the financial statements of Advance Ross
Corporation ("Advance Ross"), a wholly-owned subsidiary, as of December 31, 1994
and for the years ended December 31, 1994 and 1993, Davidson as of December 31,
1995 and 1994 and for each of the three years in the period ended in December
31, 1995, Sierra as of March 31, 1996 and 1995 and for each of the three years
in the period ended March 31, 1996 and Ideon as of December 31, 1995 and
October 31, 1994, and for the year ended December 31, 1995 and for the years
ended October 31, 1994 and 1993. Effective January 1, 1995, Ideon changed its
fiscal year end from October 31 to December 31 (the "Ideon Transition
Period"). We also did not audit the statement of operations for the Ideon
Transition Period which includes a loss of $49.9 million included as a charge
to retained earnings in 1996 supplemental consolidated financial statements.
These financial statements reflect total assets constituting 31.5% for 1996 and
41.9% for 1995 of the related supplemental consolidated financial statements
totals and reflect total revenues constituting 27.6%, 28.2% and 26.9% of the
related supplemental consolidated financial statements totals for the years
ended January 31, 1996, 1995 and 1994, respectively, and were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to Advance Ross, Davidson, Sierra and Ideon for the periods
indicated above, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors
referred to above, the supplemental financial statements referred to above
present fairly, in all material resects, the consolidated financial position
of CUC at January 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1996 after giving retroactive effect to the mergers of Davidson,
Sierra, and Ideon, as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Stamford, Connecticut
September 12, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advance Ross Corporation
Chicago, Illinois
We have audited the consolidated balance sheet of Advance Ross Corporation and
subsidiaries as of December 31, 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1994 and 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Advance Ross Corporation and
subsidiaries at December 31, 1994, and the results of their operations and their
cash flows for the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 13, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of SafeCard Services, Inc.
In our opinion, the consolidated balance sheet (not included herein) presents
fairly, in all material respects, the financial position of SafeCard Services,
Inc. and its subsidiaries at October 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 14 to the consolidated financial statements, the Company's
former Executive Management Consultant has asserted certain claims against the
Company. The ultimate outcome of these claims cannot presently be determined.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in November 1993.
PRICE WATERHOUSE LLP
Tampa, Florida
December 5, 1994
CUC International Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
(Dollar amounts in thousands)
January 31
1996 1995
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 333,036 $ 281,019
Marketable securities 97,164 101,108
Receivables, less allowances of $39,051 and $23,964 463,492 306,908
Prepaid membership materials 39,061 33,268
Prepaid expenses, deferred income taxes, and other 158,523 94,716
----------------------------------
Total current assets 1,091,276 817,019
Marketable securities 13,328 127,363
Membership solicitations in process 60,713 45,636
Deferred membership acquisition costs 404,655 411,113
Contract renewal rights, net 38,845 45,207
Excess of cost over net assets acquired, net 293,961 204,484
Properties, net 113,353 75,364
Deferred income taxes and other 52,065 45,936
----------------------------------
Total assets $2,068,196 $1,772,122
==================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 296,048 $ 244,809
Federal and state income taxes 35,957 48,214
----------------------------------
Total current liabilities 332,005 293,023
Deferred membership income 682,823 584,155
Convertible debt (net of unamortized original issue discount of $586 and $1,066) 23,389 34,634
Zero coupon convertible notes (net of unamortized original issue discount of $588 and
$2,507) 14,410 15,046
Other 13,046 19,181
Commitments and contingencies (Note I)
Shareholders' equity:
Common stock--par value $.01 per share; authorized 400 million shares; issued 257,207,225
shares and 249,348,821 shares 2,572 2,493
Additional paid-in capital 429,934 318,764
Retained earnings 602,678 520,934
Treasury stock, at cost, 3,410,631 shares and 2,757,894 shares (30,998) (10,505)
Unearned ESOP - (1,758)
Unrealized gain (loss) on marketable securities 593 (748)
Foreign currency translation adjustment (2,256) (3,097)
----------------------------------
Total shareholders' equity 1,002,523 826,083
----------------------------------
Total liabilities and shareholders' equity $2,068,196 $1,772,122
==================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Income
(Dollar amounts in thousands, except per common share amounts)
Year ended January 31,
1996 1995 1994
------------------------------------------------
Revenues
Membership, service fees and other $1,629,829 $1,363,561 $1,143,191
Software 305,403 191,050 135,473
------------------------------------------------
Total revenue 1,935,232 1,554,611 1,278,664
Expenses
Operating 593,508 474,126 368,825
Marketing 737,440 618,330 514,634
General and administrative 281,628 223,010 195,041
Costs related to products abandoned and restructuring 97,029 7,900 -
Gain on sale of ImagiNation Network - (19,739) -
Equity in loss from ImagiNation Network - 1,990 5,066
Interest income, net (9,685) (7,937) (3,221)
------------------------------------------------
Total expenses 1,699,920 1,297,680 1,080,345
------------------------------------------------
Income before income taxes 235,312 256,931 198,319
Provision for income taxes 90,337 94,874 73,614
------------------------------------------------
Income before cumulative effect of accounting change for income taxes 144,975 162,057 124,705
Cumulative effect of change in accounting for income taxes - 2,000 -
------------------------------------------------
Net income $ 144,975 $ 164,057 $ 124,705
================================================
Income before cumulative effect of accounting change $ .55 $ .64 $ .51
Cumulative effect of accounting change .01
------------------------------------------------
Net income per common share $ .55 $ .65 $ .51
================================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Shareholders' Equity
(Dollar amounts in thousands, except per common share amounts)
Common Stock
------------------------ Additional
Shares Par Paid-in Retained Treasury Unearned
Issued Value Capital Earnings Stock ESOP
---------------------------------------------------------------------------
Balance at January 31, 1993 154,939,880 $1,549 $152,893 $260,316 $ (9,745) $(11,667)
Three-for-two stock split 77,469,448 775 (775)
---------------------------------------------------------------------------
As restated 232,409,328 2,324 152,893 259,541 (9,745) (11,667)
Exercise of stock options ($.36 to
$32.96) 2,911,124 29 14,976
Issuance of stock under stock purchase
plan ($12.67 to $17.92) 71,031 1 1,363
Cancellation of stock under restricted
stock plan (113,063) (1) (240)
Stock issued in conversion of notes 3,897,290 39 18,316
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 23,342
Amortization of restricted stock 871
Amortization of ESOP obligation 4,507
Equity distributions 1,943
Cash dividends (7,586)
ImagiNation Network liquidation
preference 3,977
Proceeds from issuance of common stock 3,723,000 37 25,545
Purchase of treasury stock (1,368,513) (14) (41,685)
Foreign currency translation adjustment
Net income 124,705
---------------------------------------------------------------------------
Balance at January 31, 1994 241,530,197 2,415 199,358 378,603 (9,745) (7,160)
Exercise of stock options ($.36 to
$32.96) 4,222,946 42 47,352 (10,140)
Exercise of stock options ($1.52 to
$8.11) by payment of cash and common
stock (37,500 shares) 187,500 2 1,165 (760)
Issuance of stock under stock purchase
plan ($17.40 to $21.07) 48,984 1,011
Stock issued in conversion of notes 2,989,104 30 22,665
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 42,216
Stock issued in connection with
acquisition 379,851 4 5,134
Amortization of restricted stock 303
Amortization of ESOP obligation 2,331
Cash dividends (7,519)
Charge to reflect change in Getko and
NAOG fiscal years (4,067) 3,071
Net unrealized loss on marketable
securities
Purchase of treasury stock (9,761) (440)
Foreign currency translation adjustment
Net income 164,057
---------------------------------------------------------------------------
Balance at January 31, 1995 249,348,821 2,493 318,764 520,934 (10,505) (1,758)
Exercise of stock options ($0.01 to
$52.61) 4,630,254 46 34,486
Exercise of stock options ($1.52 to
$18.00) by payment of cash and
common stock (445,899 shares) 1,658,334 17 13,076 (13,090)
Payment of withholding taxes on options
by payment of common stock (206,838
shares) (7,403)
Issuance of stock under stock purchase
plan ($23.31 to $32.63) 63,647 1 1,789
Stock issued in conversion of notes 1,413,817 14 13,648
Stock issued for bonuses and incentives 223,299 2 4,105
Tax benefit arising from exercise of
stock options 51,357
Stock issued in connection with
acquisition 264,084 3 1,089
Amortization of ESOP obligation 1,242 1,758
Equity distributions 175 (5,033)
Cash dividends (8,159)
Charge to reflect change in Advance
Ross and Ideon fiscal years (50,039)
Net unrealized gain on marketable
securities
Purchase of treasury stock (395,031) (4) (9,797)
Foreign currency translation adjustment
Net income 144,975
---------------------------------------------------------------------------
Balance at January 31, 1996 257,207,225 $2,572 $429,934 $602,678 $(30,998) $ 0
===========================================================================
Net
Unrealized
Gain Foreign
(Loss) on Currency Total
Marketable Translation Shareholders'
Securities Adjustment Equity
---------------------------------------
Balance at January 31, 1993 $(3,885) $ 389,461
Three-for-two stock split
---------------------------------------
As restated (3,885) 389,461
Exercise of stock options ($.36 to
$32.96) 15,005
Issuance of stock under stock purchase
plan ($12.67 to $17.92) 1,364
Cancellation of stock under restricted
stock plan (241)
Stock issued in conversion of notes 18,355
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 23,342
Amortization of restricted stock plan 871
Amortization of ESOP obligation 4,507
Equity distributions 1,943
Cash dividends (7,586)
ImagiNation Network liquidation
preference 3,977
Proceeds from issuance of common stock 25,582
Purchase of treasury stock (41,699)
Foreign currency translation adjustment (1,405) (1,405)
Net income 124,705
---------------------------------------
Balance at January 31, 1994 (5,290) 558,181
Exercise of stock options ($.36 to
$32.96) 37,254
Exercise of stock options ($1.52 to
$8.11) by payment of cash and common
stock (37,500 shares) 407
Issuance of stock under stock purchase
plan ($17.40 to $21.07) 1,011
Stock issued in conversion of notes 22,695
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 42,216
Stock issued in connection with
acquisition 5,138
Amortization of restricted stock plan 303
Amortization of ESOP obligation 2,331
Cash dividends (7,519)
Charge to reflect change in Getko and
NAOG fiscal years (996)
Net unrealized loss on marketable
securities $(748) (748)
Purchase of treasury stock (440)
Foreign currency translation adjustment 2,193 2,193
Net income 164,057
---------------------------------------
Balance at January 31, 1995 (748) (3,097) 826,083
Exercise of stock options ($0.01 to
$52.61) 34,532
Exercise of stock options ($1.52 to
$18.00) by payment of cash and
common stock (445,899 shares) 3
Payment of withholding taxes on options
by payment of common stock (206,838
shares) (7,403)
Issuance of stock under stock purchase
plan ($23.31 to $32.63) 1,790
Stock issued in conversion of notes 13,662
Stock issued for bonuses and incentives 4,107
Tax benefit arising from exercise of
stock options 51,357
Stock issued in connection with
acquisition 1,092
Amortization of ESOP obligation 3,000
Equity distributions (4,858)
Cash dividends (8,159)
Charge to reflect change in Advance
Ross and Ideon fiscal years (50,039)
Net unrealized gain on marketable
securities 1,341 1,341
Purchase of treasury stock (9,801)
Foreign currency translation adjustment 841 841
Net income 144,975
---------------------------------------
Balance at January 31, 1996 $ 593 $(2,256) $1,002,523
=======================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year ended January 31,
1996 1995 1994
---------------------------------------------
Operating activities
Net income $ 144,975 $ 164,057 $ 124,705
Adjustments to reconcile net income to net cash provided by operating
activities:
Membership acquisition costs (605,058) (508,807) (457,252)
Amortization of membership acquisition costs 556,548 467,019 409,455
Deferred membership income 76,285 61,941 71,242
Membership solicitations in process (15,077) (2,693) (2,889)
Amortization of prepaid commissions - - 472
Amortization of contract renewal rights and excess cost 24,349 27,058 25,354
Gain on sale of The ImagiNation Network - (19,739) -
Equity loss from The ImagiNation Network - 1,990 5,066
Write-off of purchased in-process research and development - 3,587 -
Cumulative effect of change in accounting for income taxes - (2,000) -
Deferred income taxes (32,068) 12,487 (9,337)
Amortization of original issue discount on convertible notes and
restricted stock 1,646 1,965 3,854
Loss on impairment of assets 7,569 - -
Depreciation 25,387 16,405 14,957
Effect of change in amortization periods for Ideon membership
acquisition costs 65,500 - -
Net loss during change in Ideon fiscal year-end (49,944) - -
Change in working capital items, net of acquisitions:
Increase in receivables (152,392) (51,638) (35,560)
Increase in prepaid membership materials (5,562) (5,844) (6,350)
Increase in prepaid expenses and other current assets (36,130) (20,755) (13,595)
Net increase in accounts payable and accrued expenses and federal and
state income taxes payable 57,891 40,245 43,296
Increase in product abandonment and related liabilities 20,796 - -
Other, net (30,499) (8,512) (8,644)
---------------------------------------------
Net cash provided by operating activities 54,216 176,766 164,774
---------------------------------------------
Investing activities
Proceeds from sale of The ImagiNation Network - 19,739 -
(Loan to) repayments from The ImagiNation Network, net - (2,895) 1,646
Proceeds from sales of marketable securities 255,916 136,977 138,195
Purchases of marketable securities (138,198) (161,585) (140,487)
Acquisitions, net of cash acquired (75,142) (63,437) (17,526)
Acquisitions of properties (63,148) (39,561) (14,329)
---------------------------------------------
Net cash used in investing activities (20,572) (110,762) (32,501)
---------------------------------------------
Financing activities
Issuance of common stock 35,269 40,321 41,467
Proceeds from convertible debt offering, net - 48,250 -
Payments for purchase of treasury shares (9,801) (483) (41,699)
Payment of dividend notes to shareholders - - (10,458)
Borrowings (repayments) of long-term obligations, net 1,064 (16,416) (25,766)
Dividends paid (8,159) (7,519) (7,586)
---------------------------------------------
Net cash provided by (used in) financing activities 18,373 64,153 (44,042)
---------------------------------------------
Net increase in cash and cash equivalents 52,017 130,157 88,231
Cash and cash equivalents at beginning of period 281,019 150,862 62,631
---------------------------------------------
Cash and cash equivalents at end of period $ 333,036 $ 281,019 $ 150,862
=============================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
Note A--Summary of Significant Accounting Policies
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of CUC
International Inc., its wholly-owned subsidiaries and its joint ventures
(collectively, the "Company"). The Company operates in two business segments:
membership services and software. Membership services are distributed to
consumers through various channels which include financial institutions,
credit unions, charities, other cardholder based organizations and retail
establishments. The software segment develops, publishes and distributes
educational and entertainment software for home and school use. These
supplemental consolidated financial statements give retroactive effect to the
mergers of Davidson & Associates, Inc. ("Davidson") (on July 24, 1996),
Sierra On-Line, Inc. ("Sierra") (on July 24, 1996) and Ideon Group, Inc.
("Ideon") (on August 7, 1996) with wholly-owned subsidiaries of the Company,
which have been accounted for using the pooling-of-interests method. These
supplemental consolidated financial statements will become the Company's
primary historical financial statements upon issuance of financial statements
that include the date of consummation of all of the above-described mergers.
All significant intercompany transactions have been eliminated in
consolidation. 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the supplemental financial statements and
accompanying notes. Actual results could differ from those estimates.
The software segment of the Company is subject to certain business risks which
could effect future operations and financial performance. The risks include
changing computer environments, rapid technological change, development of new
products, concentrations in manufacturing facilities, competitive pricing and
reliance on distribution channels.
Cash and Cash Equivalents
The Company considers highly liquid investment instruments with terms of three
months or less at the time of acquisition to be cash equivalents.
Marketable Securities
Marketable securities consist principally of corporate bonds, tax-free municipal
obligations, U.S. Treasury notes and commercial paper. All securities are
classified as available-for-sale and are reported at fair value with net
unrealized holding gains and losses, net of tax effect, reported in
stockholders' equity until realized. Marketable securities (see Note C) are
valued based upon quoted market prices or investment adviser estimates and
those securities not maturing within one year are classified as non-current
assets. Declines in the market value of available-for-sale securities deemed
to be other than temporary result in charges to current earnings and
establishment of a new cost basis.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Concentration of Credit Risks
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. All current assets (with the exception
of marketable securities) and current liabilities are carried at cost, which
approximates fair value, because of their short-term nature. The fair values
of the convertible debt and zero coupon convertible notes at January 31, 1996
were $42.6 million and $84 million, respectively, based on the quoted market
prices.
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable. This risk is limited in
the membership services segment due to the large number of entities representing
the Company's membership base. These entities include major banks, financial
institutions and large oil companies and retailers which are primarily located
throughout the United States. Software accounts receivable include amounts
principally from geographically dispersed dealers, distributors, retail chains
and superstores in the software industry, as well as schools and school
districts. The Company performs periodic credit evaluations of its software
customers and maintains reserves which estimate the potential for future product
returns. Such reserves have been included in allowances for accounts receivable.
Software Research and Development Costs and Costs of Software Revenue
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. Costs meeting this criteria are insignificant and,
therefore, research and development costs related to designing, developing and
testing new software products are charged to operating expenses as incurred.
Purchased in-process research and development costs are charged to expense on
the date acquired if it has no alternative future use and technological
feasibility is not established. Software research and development costs
aggregated $55.6 million, $36.3 million and $22.3 million for the years ended
January 31, 1996, 1995 and 1994, respectively. Costs of software revenue
include material costs, manufacturing labor and overhead and royalties paid
to developers and affiliated label publishers. Costs of software revenue are
included in operating expenses and aggregated $117.1 million, $73.3 million
and $53.4 million for the years ended January 31, 1996, 1995 and 1994,
respectively.
Membership Acquisition Costs and Deferred Membership Income
In accordance with the provisions of Statement of Position 93-7, "Reporting on
Advertising Costs," membership acquisition costs are deferred and charged to
operations as membership fees are recognized. These costs, which relate directly
to membership solicitations (direct response advertising costs), principally
include: postage, printing, kits, mailings, publications (including coupon
books) and telemarketing costs. Substantially all of these costs are incurred
for services performed by outside sources. Such costs are amortized on a
straight-line basis as revenues are realized over the average membership period.
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. However, if membership acquisition costs were to exceed
the membership fee, an appropriate adjustment would be made for any significant
impairment.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Amortization of membership acquisition costs, including deferred renewal costs,
which consist principally of charges from sponsoring institutions and
publications, amounted to $556.5 million, $467 million and $409.5 million for
the years ended January 31, 1996, 1995 and 1994, respectively. All advertising
costs other than direct response advertising costs are expensed in the period
incurred. Such amounts were $172.3 million, $133.8 million and $92 million for
the years ended January 31, 1996, 1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and other
cardholder based institutions and are recorded as deferred membership income
upon acceptance of membership, net of estimated cancellations, and pro-rated
over the membership period.
Deferred membership income is classified as non-current in the supplemental
consolidated balance sheet items since working capital will not be required as
the deferred income is recognized over future periods.
Provisions for membership cancellations were $37 million and $36.6 million at
January 31, 1996 and 1995, respectively. Such amounts are included in accrued
expenses. In addition, accrued expenses include commissions payable of $21.6
million and $23.2 million at January 31, 1996 and 1995, respectively.
Membership Solicitations In Process
These costs consist of initial membership acquisition costs pertaining to
membership solicitation programs that were in process at year-end. Accordingly,
no membership fees had been received or recognized at year-end. The costs are
generally accumulated over a two or three month solicitation period and are
transferred to membership acquisition costs when the membership begins.
Software Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement of
Position No. 91-1, "Software Revenue Recognition." Revenue from software sales
is recognized upon shipment, provided no significant vendor obligations remain
and collection of the resulting receivable is deemed probable. Other
insignificant vendor obligations consisting primarily of costs associated with
telephone support to customers after delivery of software are accrued. The
Company's agreements with certain distributors and retailers permit them to
exchange products or provide price protection under certain circumstances. The
Company provides an allowance for estimated exchanges and price protection.
Contract Renewal Rights
Contract renewal rights represent the value assigned to acquired contracts and
are being amortized over 2 to 16 years using the straight-line method. As of
January 31, 1996 and 1995, accumulated amortization amounted to $51.5 million
and $45.9 million, respectively.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is being amortized over 5 to 30
years using the straight-line method. As of January 31, 1996 and 1995,
accumulated amortization amounted to $49.1 million and $33.2 million,
respectively. The carrying value of the excess of cost over net assets acquired
will be reviewed by management if the facts and circumstances suggest that the
value may be impaired. If this review indicates that the carrying amounts will
not be recoverable, as determined based on the undiscounted cash flows of the
entities acquired over the remaining amortization period, management will reduce
the carrying amount by the estimated shortfall of cash flows.
Net Income Per Common Share
Net income per common share of the Company's common stock, par value $.01 per
share ("Common Stock"), has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding (after giving effect to
the acquisitions of Getko Group Inc. ("Getko"), North American Outdoor Group,
Inc. ("NAOG"), Advance Ross Corporation ("Advance Ross"), Davidson, Sierra and
Ideon (see Note B)). The weighted average number of common and dilutive common
equivalent shares was 261.5 million, 252.8 million and 243.9 million for the
years ended January 31, 1996, 1995 and 1994, respectively. Fully diluted
earnings per share did not differ significantly from primary earnings per share
in any year.
Impairment of Long-Lived Assets
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.
Stock Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board 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 SFAS No. 123, "Accounting for Stock-Based
Compensation."
Note B--Mergers and Acquisitions
Pooling-of-Interests Business Combinations
During July 1996 the Company acquired all of the outstanding capital stock of
Davidson for a purchase price of approximately $1 billion, which was satisfied
by the issuance of approximately 30.1 million shares of Common Stock. Also
during July 1996 the Company acquired all of the outstanding capital stock of
Sierra for a purchase price of approximately $858 million, which was satisfied
by the issuance of approximately 25.6 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, principally a provider of credit card
enhancement services, for a purchase price of approximately $393 million, which
was satisfied by the issuance of approximately 11 million shares of Common
Stock.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
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 supplemental consolidated
financial statements have been retroactively adjusted as if the Fiscal 1997
Pooled Entities and the Company had operated as one since inception. These
supplemental consolidated financial statements will become the primary
historical consolidated financial statements upon issuance of financial
statements that include the dates of consummation of all of the mergers with the
Fiscal 1997 Pooled Entities.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities prior to restatement.
Year ended January 31,
1996 1995 1994
----------------------------------------------
Revenues:
The Company $1,401,551 $1,182,896 $ 984,801
Fiscal 1997 Pooled Entities 533,681 371,715 293,863
----------------------------------------------
$1,935,232 $1,554,611 $1,278,664
==============================================
Net Income (Loss):
The Company $ 164,669 $ 124,566 $ 94,151
Fiscal 1997 Pooled Entities (19,694) 39,491 30,554
----------------------------------------------
$ 144,975 $ 164,057 $ 124,705
==============================================
Davidson, Sierra and Ideon previously used the fiscal years ended December 31,
March 31 and December 31, respectively for their financial reporting. The Fiscal
1997 Pooled Entities will be conformed to the Company's January 31 fiscal
year-end in fiscal 1997. 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 accompanying supplemental
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 adjusted by 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. Prior to the change, membership acquisition costs were
generally amortized up to ten years for single year membership periods and up to
twelve years for multi-year membership periods. These amortization periods
represented the estimated life of the member. At December 31, 1994, the
amortization periods were shortened to one year and three years for single and
multi-year membership periods, respectively (initial membership period without
regard for anticipated renewals).
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
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 I) 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.
In determining such portion, 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 of the reserve
to be accrued. The reserve for these matters will be expensed in the
consolidated statement of income subsequent to the closing of the Ideon Merger,
and any subsequent payments related to these matters will reduce the amount of
the reserve. The Company considered litigation-related costs and liabilities,
as well as integration and transaction costs, in determining the agreed upon
exchange ratio in respect of the Ideon Merger.
In determining the amount of the reserve related to the Company's proposed
integration and consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger and
costs relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party and
which are neither terminable at will nor automatically terminated upon a
change-in-control of Ideon. The Company expects to incur significant integration
costs because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and enhancement
services. All of the business activities related to the operations performed by
Ideon's Jacksonville, Florida office were transferred to the Company's
Comp-U-Card Division in Stamford, Connecticut upon the consummation of the
Ideon Merger. The Company also expects that there will be additional
consolidation affecting other parts of Ideon's business that are substantially
the same as the Company's existing businesses. The Company does not expect any
loss in revenue as a result of these integration and consolidation efforts.
During June 1995, the Company acquired all of the outstanding capital stock of
Getko for a purchase price of approximately $100 million, which was satisfied by
the issuance of approximately 3.7 million shares of Common Stock. Getko
distributes complimentary welcoming packages to new homeowners throughout the
United States and Canada.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During September 1995, the Company acquired all of the outstanding capital stock
of NAOG for a purchase price of approximately $52 million, which was satisfied
by the issuance of approximately 1.5 million shares of Common Stock. NAOG owns
one of the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns a handyman membership
organization.
During January 1996, the Company acquired all of the outstanding capital stock
of Advance Ross for a purchase price of approximately $183 million, which was
satisfied by the issuance of 5.9 million shares of Common Stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
The acquisitions of Getko, NAOG and Advance Ross (collectively, the "Fiscal 1996
Pooled Entities") were accounted for in accordance with the pooling-of-interests
method of accounting. Therefore, the Company's financial statements have been
restated for all prior periods to include these entities. Further, all common
share and per common share data have been restated for prior periods and certain
reclassifications have been made to the historical financial statements to
conform to the Company's presentation.
The following represents revenues and net income of the Company and the Fiscal
1996 Pooled Entities for the two years and the last complete interim periods
preceding the mergers, not giving effect to the Fiscal 1997 Pooled Entities.
Nine Months Ended Year ended January 31,
October 31, 1995 1995 1994
----------------- ----------------------------
(Unaudited)
Revenues:
The Company $ 949,886 $1,044,669 $879,324
Fiscal 1996 Pooled Entities 87,130 138,227 105,477
----------------- ----------------------------
$1,037,016 $1,182,896 $984,801
================= ============================
Net Income:
The Company $ 113,656 $ 117,591 $ 87,371
Fiscal 1996 Pooled Entities 7,103 6,975 6,780
----------------- ----------------------------
$ 120,759 $ 124,566 $ 94,151
================= ============================
Getko, NAOG and Advance Ross previously used the fiscal years ended November 30,
December 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year end, Getko's operating results
for December 1993 and January 1994 and NAOG's operating results for January 1994
have been excluded from the year ended January 31, 1995 operating results in the
accompanying financial statements. The excluded periods have been adjusted by a
$4.1 million charge to retained earnings at January 31, 1995. In addition,
Advance Ross' operating results for January 1995 have been excluded from the
year ended January 31, 1996 operating results in the accompanying financial
statements. This excluded period has been adjusted by a $95,000 charge to
retained earnings at January 31, 1996.
In connection with the Advance Ross acquisition, the Company charged $5.2
million ($4.2 million or $.02 per common share after-tax effect) to fiscal 1996
operations for merger costs. These costs are nonrecurring and are comprised
primarily of transaction costs and other professional fees. Costs incurred in
connection with the acquisitions of Getko and NAOG were not significant to the
Company's results of operations.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During fiscal 1996, Davidson acquired all of the outstanding capital stock of
Maverick Software, Inc. ("Maverick") and The Cute Company, which subsequently
changed its name to FUNNYBONE Interactive ("FUNNYBONE"), by issuing an aggregate
of .6 million shares of Davidson's common stock (.5 million equivalent shares of
Common Stock). During fiscal 1995, Davidson acquired all of the outstanding
shares of Chaos Studios, Inc., which subsequently changed its name to Blizzard
Entertainment ("Blizzard"), by issuing .6 million shares of Davidson's common
stock (.5 million equivalent shares of Common Stock).
During fiscal 1996, Sierra acquired all of the outstanding capital stock of The
Pixellite Group ("Pixellite"), Software Inspiration Limited ("Inspiration") and
Papyrus Design Group, Inc. ("Papyrus") by issuing an aggregate of 2.1 million
shares of Sierra's common stock (2.6 million equivalent shares of Common Stock).
The acquisitions of Maverick, FUNNYBONE, Blizzard, Pixellite, Inspiration and
Payrus were accounted for in accordance with the pooling-of-interests method of
accounting. Therefore, the Company's financial statements, including all common
and per common share data, have been restated to include these entities.
During fiscal 1996, Sierra acquired all of the outstanding capital stock of
Arion Software, Inc. ("Arion") and Green Thumb Software, Inc. ("Green Thumb") by
issuing an aggregate of 147,958 shares of Sierra's common stock (181,249
equivalent shares of Common Stock). The acquisitions of Arion and Green Thumb
were accounted for in accordance with the pooling-of-interests method of
accounting. However, the Company's financial statements have not been restated
for the Arion and Green Thumb mergers as these companies did not significantly
impact the Company's operations.
Purchase Business Combinations
During February 1995, the Company acquired all of the outstanding capital stock
of Welcome Wagon International, Inc. ("Welcome Wagon") and substantially all of
the assets of a related entity, Gifts International, Inc., for $19.5 million in
cash. Welcome Wagon provides discounts for local merchants through direct visits
by its representatives to households. In connection with this acquisition, the
Company received current assets of $4.8 million and noncurrent assets of $3.6
million and assumed current liabilities of $4.7 million. The excess of cost over
the fair value of net assets acquired ($15.8 million) is included in the excess
of cost over net assets acquired.
During March 1995, the Company acquired all of the outstanding capital stock of
the parent of its European licensee, CUC Europe Limited, for $13 million. The
purchase price was satisfied by the payment of $12 million in cash and the
issuance of 42,147 shares of Common Stock. In connection with this acquisition,
the Company received current assets of $4.5 million and noncurrent assets of
$9.6 million and assumed current liabilities of $6.2 million and noncurrent
liabilities of $3.3 million. The excess of cost over the fair value of net
assets acquired ($8.4 million) is included in the excess of cost over net assets
acquired. In addition, during March 1995, the Company paid $2.4 million in cash
to acquire its European license. This amount has been included in the excess of
cost over net assets acquired.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During March 1995, the Company acquired all of the outstanding capital stock of
Credit Card Sentinel (U.K.) Limited ("CCS") for $22.5 million in cash. CCS is a
leading provider of credit card enhancement services, which are generally
marketed through European financial institutions. In connection with this
acquisition, the Company received current assets of $7.5 million and noncurrent
assets of $2.3 million and assumed current liabilities of $6.6 million and
noncurrent liabilities of $10.5 million. The excess of cost over the fair value
of net assets acquired ($29.8 million) is included in the excess of cost over
net assets acquired.
During fiscal 1996, the Company acquired several small privately-held discount
coupon book publishing companies, certain assets from insurance marketers and
franchisees and certain marketing and future renewal rights for an aggregate
cost of $4.2 million. The cost of these acquisitions has been included in the
excess of cost over net assets acquired ($3.7 million) and contract renewal
rights ($.5 million). In addition, during fiscal 1996 the Company acquired
certain assets from three timeshare-related businesses for an aggregate cost of
$5.2 million and paid $3.7 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
During fiscal 1996, Ideon acquired substantially all of the assets and
liabilities of National Leisure Group, Inc., a provider of vacation travel
packages to credit card companies, retailers and wholesale clubs in the United
States, for $15 million in cash and an agreement to issue shares of common stock
with a value of $1.4 million on the third anniversary of the acquisition. In
connection with this acquisition, Ideon received assets of $5.6 million and
assumed liabilities of $7.2 million. The excess of cost over the fair value of
net assets acquired of $18.3 million is included in the excess of cost over net
assets acquired.
Also during fiscal 1995, Ideon acquired all of the outstanding capital stock of
Wright Express Corporation ("Wright Express"), a provider of transaction and
information processing services, for $35.5 million in cash. The excess of cost
over the fair value of net assets acquired of $28.9 million is included in the
excess of cost over net assets acquired.
During January 1995, the Company acquired all of the outstanding capital stock
of Essex Corporation and subsidiaries ("Essex") for $27.5 million. The purchase
price was satisfied by the payment of $25.9 million in cash and the issuance of
75,000 shares of Common Stock. The former shareholders of Essex may receive
additional payments over the next two years, not to exceed $57.5 million in the
aggregate, based on the achievement of certain objectives. The Company's
management believes that payments to such shareholders aggregating in excess of
$30 million would be extremely remote. Essex is a third-party marketer of
financial products for banks, primarily marketing annuities through financial
institutions. In connection with this acquisition, the Company received current
assets of $8.1 million and noncurrent assets of $1.4 million and assumed current
liabilities of $7 million. The excess of cost over the fair value of net assets
acquired ($25 million) was included in the excess of cost over net assets
acquired.
During fiscal 1995, the Company acquired certain assets from three insurance
marketers for an aggregate cost of $4.1 million. The cost of these acquisitions
has been included in the excess of cost over net assets acquired ($3.9 million)
and contract renewal rights ($.2 million). In addition, during fiscal 1995 the
Company acquired a privately-held discount coupon book publishing company for $1
million and paid $.9 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During fiscal 1995, Davidson acquired all of the outstanding capital stock of
Learningways, Inc. ("Learningways") for $4.2 million. The purchase price was
satisfied by the payment of $.7 million in cash and the issuance of 358,648
shares of Davidson's common stock (304,851 equivalent shares of Common Stock).
In connection with the acquisition, certain in-process research and development
costs for technology in process of approximately $3.9 million were expensed in
fiscal 1995. The excess of cost over the fair value of net assets acquired is
included in the excess of cost over net assets acquired.
During fiscal 1994, the Company acquired a privately owned insurance marketer
for $6 million. The cost of this acquisition has been included in contract
renewal rights. In addition, during fiscal 1994 the Company acquired a marketer
of accidental death and dismemberment insurance and a company which markets
other insurance products for an aggregate cost of approximately $2.6 million.
The cost of these acquisitions has been included in the excess of cost over net
assets acquired ($1.4 million) and contract renewal rights ($1.2 million),
respectively. During fiscal 1994, an additional $5.8 million was paid to satisfy
contingent payment requirements in connection with previous acquisitions. This
amount was included in the excess of cost over net assets acquired.
During fiscal 1994, Sierra acquired all of the outstanding capital stock of
Coktel Vision S.A. ("Coktel"), a French software company, for $5.3 million in
cash. In connection with this acquisition, $1.1 million was attributed to
in-process research and development and accordingly was charged to expense at
the date of acquisition. Amounts allocated to software development costs and the
excess of cost over net assets acquired were $1.4 million and $2.4 million,
respectively. Former Coktel shareholders earned contingent purchase payments of
$1.6 million and $1.3 million for the years ended January 31, 1995 and 1994,
respectively. During fiscal 1996, Sierra amended the Coktel agreement whereby it
issued 150,000 shares of Sierra's common stock (183,750 equivalent shares of
Common Stock) in satisfaction of any further incentive payments. As a result of
this amendment, an additional $4.1 million has been included in the excess of
cost over net assets acquired.
The preceding acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, the results of operations have been
included in the consolidated results of operations from the respective dates of
acquisition. The results of operations for the periods prior to the respective
dates of acquisition were not significant to the Company's operations.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note C--Marketable Securities
The Company's marketable securities, including aggregate fair value and cost
were as follows as of January 31 (in thousands):
Fair Value Cost
--------------------------------
1996:
U.S. Government obligations $ 22,886 $ 22,896
Corporate debt securities 27,438 27,521
Tax-exempt municipal bonds 54,081 53,724
Commercial paper 5,832 5,832
Other 255 255
--------------------------------
$110,492 $110,228
================================
1995:
U.S. Government obligations $ 10,394 $ 10,357
Corporate debt securities 23,050 22,996
Tax-exempt municipal bonds 177,898 178,747
Commercial paper 17,129 17,067
--------------------------------
$228,471 $229,167
================================
Maturities of the Company's investment portfolio as of January 31, 1996 were as
follows:
Fair
Value Cost
--------------------------------
Within one year $ 97,164 $ 97,003
One to five years 9,282 9,187
More than five years 4,046 4,038
--------------------------------
$110,492 $110,228
================================
Note D--Properties
Property acquired is recorded at cost. Depreciation of properties is provided
for using the straight-line method over the estimated useful lives of the
assets. The following is a summary of properties as of January 31 (in
thousands):
1996 1995
---------------------------------
Computer equipment $ 70,077 $ 50,500
Telephone equipment 34,113 22,274
Furniture and other equipment 74,290 52,771
Buildings 23,309 11,197
Leasehold improvements 16,798 13,606
Less accumulated depreciation (105,234) (74,984)
---------------------------------
Properties, net $ 113,353 $ 75,364
=================================
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note E-- Credit Facilities and Convertible Notes
During the second quarter of fiscal 1995, the Company renegotiated its revolving
credit facility provided by General Electric Capital Corporation ("GECC"). The
Amended and Restated Credit Agreement, which was entered into as of June 30,
1994 (the "GECC Credit Agreement"), amended and restated an agreement that the
Company and GECC initially entered into in 1989 and which was scheduled to
expire June 1, 1997. The GECC Credit Agreement provided for a $100 million
revolving credit facility with interest at LIBOR plus 2 1/4% (7 11/16% at
January 31, 1996) on that portion of the outstanding balance which was less
than or equal to $50 million and LIBOR plus 2 1/2% (7 15/16% at January 31,
1996) on the remaining outstanding balance. In addition, the GECC Credit
Agreement required the Company to maintain certain financial ratios and
other restrictive covenants, including restrictions that preclude the payment
of cash dividends on shares of Common Stock. The Company has terminated the
GECC Credit Agreement effective March 19, 1996 and entered into a credit
agreement during March 1996 with certain 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; nd The Chase Manhattan
Bank, N.A. as Administrative Agent (the "New Credit Agreement").
The New Credit Agreement provides for a $500 million revolving credit facility
with a variety of different types of loans available thereunder. Interest is
payable, depending on the type of loan utilized by the Company, at a variety of
rates based on the federal funds rate, LIBOR, the prime rate or rates quoted by
participating banks based on an auction process provided for in the New Credit
Agreement. In addition, the New Credit Agreement requires the Company to
maintain certain financial ratios and contains other 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.
The zero coupon convertible notes issued in connection with the Company's fiscal
1990 recapitalization were recorded at their fair value on the date of issuance
and were issued in $100 principal amounts and multiples thereof. Each $100
principal amount is convertible into 15.1875 shares of Common Stock. These zero
coupon convertible notes are redeemable at any time at the option of the
Company, in whole or in part, at 90.6% of principal amount, increasing ratably
to 100% on June 6, 1996, the maturity date of such notes. Virtually all of the
zero coupon convertible notes were converted into Common Stock by June 6, 1996.
Cash payments for interest made by the Company to all its obligations amounted
to $5.1 million, $4.6 million and $.3 million for the years
ended January 31, 1996, 1995 and 1994, respectively.
Ideon
In 1994, Ideon assumed a revolving loan agreement in connection with its
acquisition of 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 and Ideon was added as a
guarantor under the amended agreement. Interest on the outstanding borrowings
was, at Wright Express' option, either the bank's prime rate minus 0.5% or LIBOR
plus 0.625%. Borrowings are secured by substantially all assets of Wright
Express. At January 31, 1996, Ideon had $15.4 million outstanding under the
revolving line of credit with interest rates ranging from 6.31% to 7.25%. Such
amount is included in other current liabilities.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note E--Revolving Credit Facilities and Convertible Notes (continued)
Sierra
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. Any
borrowings under this line of credit would be collateralized by substantially
all of Sierra's assets and incur interest at either the bank's prime rate or
IBOR plus 150 basis points, at Sierra's choice. The line contains covenants
requiring Sierra to maintain certain financial ratios and minimum balances in
cash and cash equivalents. Sierra is in compliance with all covenants under this
line of credit as of January 31, 1996. There have been no borrowing by Sierra
under this line of credit to date. This line of credit expired August 31, 1996.
On April 12, 1994, Sierra issued $50 million in principal amount of 6 1/2%
convertible subordinated notes due April 1, 2001 (the "Notes"). Interest on the
Notes is payable semi-annually on April 1 and October 1 of each year. Each
$11.43 principal amount is convertible into one share of Common Stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of the Company, at specified redemption prices. The Notes
will be subordinated to all existing and future Senior Indebtedness (as defined
in the Indenture governing the Notes) of the Company. Issuance costs have been
netted against the principal convertible debt balance are being amortized on a
straight-line basis over seven years. During fiscal 1996 and 1995, Sierra paid
$0.9 million and $1.0 million, included in interest expense, to induce
conversion of $11.7 million and $14.3 million of Notes into 837,500 shares and
1,021,421 shares of Sierra common stock (1,025,938 equivalent shares and
1,251,241 equivalent shares of Common Stock), respectively.
Note F--Shareholders' Equity
During fiscal 1990, the Company made an administrative change to its incentive
stock option plans which had the effect of converting all options granted under
such plans to nonqualified options. Under these plans, options to purchase up to
11,029,922 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
The Company also has nonqualified option plans for certain employees. Under
these plans, including options to purchase 8,250,000 shares of Common Stock
added to these plans during fiscal 1996, nonqualified options to purchase up to
29,495,177 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
During October 1987, the Board of Directors adopted a plan ("1987 Plan") which,
as amended by votes of the Company's shareholders, authorizes the issuance of
options for upock. The 1987 Plan grants the Board of Directors the discretion to
designate these options as incentive stock options or nonqualified stock
options. Options granted under the 1987 Plan are generally exercisable at 20% to
25% per year commencing one year from the date of grant. During fiscal 1996, the
Company's shareholders approved an amendment of the 1987 Plan to increase the
number of shares of Common Stock authorized for issuance under the 1987 Plan to
23,718,750 shares of Common Stock.
During June 1991, the Company's shareholders approved the 1990 Directors Stock
Option Plan authorizing the issuance of options to the Company's non-employee
directors to purchase up to 759,375 shares of Common Stock at not less than the
fair market value on the date of grant. In addition, during June 1993, the
Company's shareholders approved the 1992 Directors Stock Option Plan, which
provides that options to acquire an aggregate of up to 450,000 shares of
Common Stock may be granted to non-employee Directors. As of January 31, 1996,
nonqualified options to purchase 669,375 shares of Common Stock have been
granted under these two plans. Options granted under these plans are generally
exercisable at 20% to 25% per year commencing one year from the date of grant.
In addition, during fiscal 1996, the Company's shareholders approved the 1994
Directors Stock Option Plan ("the 1994 Directors Plan"). The 1994 Directors Plan
provides that options to acquire an aggregate of up to 225,000 shares of Common
Stock may be granted to non-employee directors of the Company in office on each
of November 23, 1994, 1995, 1996 and 1997. Options granted under the 1994
Directors Plan are generally exercisable in full on the date of grant. As of
January 31, 1996, options to purchase 97,500 shares of Common Stock have been
granted under the plan.
The Company had reserved an aggregate of 2,550,000 shares of Common Stock for
issuance under three Davidson stock option plans: Davidson & Associates, Inc.
1992 Incentive Stock Option Plan, Davidson & Associates, Inc. 1992 Nonstatutory
Stock Option Plan and Davidson & Associates, Inc. 1992 Stock Purchase Plan
(collectively, the "Davidson Plans"). The Davidson Plans provided for the grant
of options to purchase Common Stock to officers, directors and consultants or
independent contractors of Davidson, or of any subsidiary of Davidson. Only
Davidson employees may be granted options under the Davidson & Associates, Inc.
1992 Incentive Stock Option Plan. The exercise price of the Davidson incentive
stock options was not less than the fair market value of Common Stock on
the date of grant. The exercise price of the options under the other two
Davidson plans were at the discretion of Davidson's Board of Directors.
These plans provided that the options were exercisable based upon vesting
schedules, as determined by Davidson's Board of Directors and were
exercisable no later than nine years from the date of grant. Options issued
under the plans generally vest ratably over a five-year period. The Davidson
Plans were terminated in connection with the Davidson merger and the options
outstanding under the Davidson Plans were assumed under existing plans of
the Company.
The Company has reserved 7,558,250 shares of Common Stock for issuance under
Sierra's 1995 Stock Option and Award Plan and Sierra's 1987 Stock Option Plan
for officers, employees, directors, vendors, consultants and independent
contractors of Sierra. Options granted under these plans may be either incentive
stock options or nonqualified stock options and are granted at the fair market
value of Common Stock at the date of grant. Options vest and expire under the
terms established at the date of grant. The Company also has 267,731 shares of
Common Stock reserved for issuance under an option plan acquired through
Sierra's merger with Papyrus.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
The Company had reserved 1,212,517 shares of Common Stock for issuance under
six Ideon stock option arrangements: Outside Directors' Options, 1991
Employee Stock Option Plan, 1992 Employee Stock Option Plan, 1994 Long-Term
Stock-Based Incentive Plan, Employee Stock Option Plan and Directors Stock
Plan (collectively, the "Ideon Plans") for officers, employees and directors
of Ideon. The stock option exercise prices of the Ideon Plans were generally
based on the fair market price of Common Stock on the date of grant. The Ideon
Plans provided that the options were exercisable upon vesting schedules from
one to four years and certain portions vest based on certain stock price
hurdles. The Ideon Plans and the options outstanding thereunder were either
terminated or assumed under existing plans of the Company.
As of January 31, 1996 and 1995, options to purchase 8,128,710 and 7,073,693
shares of Common Stock, respectively, were exercisable.
Changes in outstanding options were as follows:
Outstanding January 31, 1994 26,938,598
Options granted 10,101,612
Options exercised (4,410,446)
Options cancelled (670,319)
-------------
Outstanding January 31, 1995 31,959,445
Options granted 4,795,912
Options exercised (6,288,588)
Options cancelled (1,222,722)
-------------
Outstanding January 31, 1996 29,244,047
=============
Outstanding options at January 31, 1996 have exercise prices ranging from $.07
to $52.61.
The Company has an employee stock purchase plan for which 750,000 shares of
Common Stock are authorized. This plan enables employees to purchase the
Company's Common Stock at 90% of the fair market value on the fifteenth day
following the last day of each calendar quarter. The remaining 10% is charged
to compensation expense. Employees may not purchase in excess of 25% of their
year-to-date earnings.
The following summarizes shares of Common Stock reserved for issuance as of
January 31, 1996:
Convertible debt 2,097,813
Zero coupon convertible notes 2,278,088
Restricted stock plan 913,832
Stock options granted 29,244,047
Options not yet granted 15,848,835
Stock purchase plan 647,192
-------------
51,029,807
=============
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
In July 1989, Getko established an Employee Stock Ownership Plan ("ESOP") for
substantially all of its employees by purchasing 40,300 shares of its
convertible preferred stock which was financed by a $15 million bank loan
guaranteed by Getko. Compensation expense resulting from the ESOP amounted to
$1.8 million, $5.4 million and $4.5 million for the years ended January 31,
1996, 1995 and 1994, respectively. During fiscal 1996, the remaining loan amount
was repaid with the proceeds from the sale of unallocated ESOP shares and the
remaining ESOP shares were distributed to participants.
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.
During each of the years ended January 31, 1996, 1995 and 1994, cash dividends
per common share paid to Ideon's common stockholders were $.02 per share of
Common Stock.
The Company's authorized capital stock also includes one million shares of
preferred stock, $.01 par value. No shares of preferred stock have been issued.
Note G--Income Taxes
The components of income before income taxes for the years ended January 31 are
as follows (in thousands):
1996 1995 1994
----------------------------------------------------
Domestic $210,211 $238,219 $187,413
Foreign 25,101 18,712 10,906
----------------------------------------------------
$235,312 $256,931 $198,319
====================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of January 31 are as
follows (in thousands):
1996 1995
---------------------------
Deferred tax assets:
Deferred membership income
and acquisition costs, net $18,421 $ (3,156)
Other accrued liabilities 10,836 (532)
Recapitalization expenses 1,181 862
Compensatory stock options 972 2,456
Net operating loss carryforwards 1,347 7,883
Relocation expenses 3,439 3,749
Valuation allowance - 3,230
All other 9,060 7,740
---------------------------
Total deferred tax assets 45,256 22,232
Deferred tax liabilities:
Insurance retention refund 19,546 13,229
Depreciation 7,195 2,015
All other 6,569 5,093
---------------------------
Total deferred tax liabilities 33,310 20,337
---------------------------
Net deferred tax assets $11,946 $ 1,895
===========================
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note G--Income Taxes (continued)
The provision (benefit) for income taxes consists of the following for the years
ended January 31 (in thousands):
1996 1995 1994
-------------------------------------
Current:
Federal $72,665 $83,333 $72,408
State 9,820 10,351 7,399
Foreign 7,606 5,178 2,691
-------------------------------------
90,091 98,862 82,498
Deferred:
Federal 493 (5,544) (6,888)
State (447) 791 (1,980)
Foreign 200 765 (16)
-------------------------------------
246 (3,988) (8,884)
-------------------------------------
Total provision $90,337 $94,874 $73,614
=====================================
A reconciliation of the provision for income taxes at the Federal statutory rate
to the Company's consolidated tax provision follows for the years ended January
31 (in thousands):
1996 1995 1994
---------------------------------------
Income tax at statutory rate (35%) $81,778 $89,926 $69,215
State income taxes,
net of Federal benefit 7,334 6,769 5,248
Foreign taxes differential 825 1,352 (363)
Tax exempt interest - (2,613) (3,061)
Amortization of excess costs 4,627 2,237 2,327
Technology under development - 1,381 -
Nonconsolidated losses - (849) 1,565
Change in valuation allowance (1,215) - -
Other, net (3,012) (3,329) (1,317)
---------------------------------------
$90,337 $94,874 $73,614
=======================================
Income tax payments amounted to $56.3 million, $55.3 million and $49.7 million
for the years ended January 31, 1996, 1995 and 1994, respectively.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note H--Transactions with Related Parties
Ideon
Until his resignation as Chief Executive Office and a director of SafeCard
Services, Incorporated ("SafeCard"), a subsidiary of Ideon, on December 19,
1992, Steven J. Halmos, SafeCard's co-founder, provided his services to SafeCard
through High Plains Capital Corporation ("HPCC"), a company owned by himself and
his brother, Peter Halmos, SafeCard's other co-founder. After that date, Steven
J. Halmos, acting in the capacity of an Advisor on Marketing and Operational
Strategy, provided services directly to SafeCard pursuant to a written agreement
(as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement").
On May 26, 1994, SafeCard reached a settlement with Steven J. Halmos to
terminate the Steven J. Halmos Agreement and various other agreements between
SafeCard and Mr. Halmos that provided for payments to Mr. Halmos of $2 million a
year through March 31, 1998. The settlement, which arose in connection with
Ideon's management restructuring in April 1994 and a resulting decision to cease
using Mr. Halmos' services, resulted in a $4.4 million cash payment to Mr.
Halmos and charge to fiscal 1995 earnings. Subsequent to his termination Mr.
Halmos exercised options to purchase 3.9 million shares of Ideon's common stock
(approximately 1.5 million equivalent shares of Common Stock). Shareholders'
equity increased $37.8 million resulting from the exercise of such options and
the related tax benefit.
In September 1994, Ideon acquired Wright Express. Ideon's former Chairman
and Chief Executive Officer, Paul G. Kahn, was a director of Wright Express
prior to its acquisition by Ideon. During negotiations between Ideon and Wright
Express, Mr. Kahn did not attend any meetings or participate in any discussions
of the Board of Directors of Wright Express and abstained from voting on the
acquisition by Ideon's Board of Directors.
SafeCard markets its CreditLine product pursuant to an agreement (as amended,
the "CreditLine Agreement") with CreditLine Corporation ("CLC"), a corporation
owned by Steven J. Halmos and Peter Halmos, and their families. The CreditLine
Agreement grants SafeCard an exclusive license to market CreditLine through
certain credit card issuers (including all issuers with which SafeCard has
contractual relationships) and provides that profits and losses, if any, are
shared equally between CLC and SafeCard. The CreditLine Agreement is the subject
of litigation as described in Note I.
Sierra
In July 1996, the Company acquired Sierra. The Company's Chairman and Chief
Executive Officer, Walter A. Forbes, was a director of Sierra prior to its
acquisition by the Company (the "Sierra Merger"). During negotiations between
the Company and Sierra, Mr. Forbes did not participate in any meetings or
deliberations of Sierra's Board of Directors with respect to the Sierra Merger
and abstained from the vote of the Board of Directors of the Company to approve
the Sierra Merger agreement.
Note I--Commitments and Contingencies
Rental expense under operating leases amounted to $37.6 million, $27.7 million
and $24 million for the years ended January 31, 1996, 1995 and 1994,
respectively. These leases provide for normal escalation charges in addition to
the base rental. At January 31, 1996, the minimum rental commitments under
non-cancelable operating leases with initial or remaining terms of more than one
year aggregated $153.8 million ($33.9 million for 1997, $29.7 million for 1998,
$24.1 million for 1999, $19 million for 2000, $15.2 million for 2001 and $31.9
million thereafter).
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
The Company has a Savings Incentive Plan ("Savings Plan") for all eligible
employees which qualifies as a 401(k) plan. Effective July 1, 1994,
Entertainment's Employee Stock Ownership Plan was merged into the Savings Plan.
The Savings Plan provides that a participant may contribute up to 15% of his or
her annual salary, subject to limitations, while the Company will contribute up
to $61 per pay period for the first $92 contributed by a participant. Davidson's
401(k) plan covers eligible employees who elect to participate and Davidson has
the discretion to make contributions to this plan, which vest based on length of
service. The Company's contributions to the Savings Plan and Davidson's
contributions to its 401(k) plan for fiscal 1996, 1995 and 1994 aggregated $4.1
million, $3.2 million and $2.2 million, respectively.
Ideon
At January 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, 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.
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.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
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
beliefs 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
SafeCards' investor relations program. The complaint also includes individual
claims made by Peter Halmos in connection with the sale of stock by two trusts
controlled by him. SafeCard and the individual defendants have filed a motion to
dismiss. There has been limited discovery on class certification and
identification of "John Doe" defendant issues. Ideon filed its opposition to the
pending motion for class certification on December 11, 1995. Plaintiffs' reply
was filed March 19, 1996. On September 9, 1996, the Court entered an order
abating the action until December 9, 1996 to permit the parties to engage in
settlement negotiations.
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 answser.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of himself
and all others similarly situated against Ideon, SafeCard, each of the members
of Ideon's Board of Directors, three non-board member officers of Ideon, Ideon's
previous outside auditor and one of Ideon's outside counsel in the United States
District Court for the Southern District of Florida in June 1995. The litigation
involves claims by a putative class of purchasers of Ideon stock between
December 14, 1994 and May 25, 1995 and on behalf of a separate class of all
record holders of SafeCard stock as of April 27, 1995. The putative class claims
are for alleged violations of the federal securities laws, for alleged breach of
fiduciary duty and alleged negligence in connection with certain matters voted
on at the Annual Meeting of SafeCard stockholders held on April 27, 1995.
Ideon and the individual defendants have filed a motion to dismiss these claims.
There has been limited discovery on class certification issues. Ideon filed its
opposition to the pending motion for class certification on December 11, 1995.
Plaintiffs' reply was filed March 19, 1996. On September 9, 1996, the Court
entered an order abating the action until December 9, 1996 to permit the
parties to engage in settlement negotiations.
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.
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 and on July 11, 1996 the Company moved to
dismiss plaintiff's amended complaint or in the alternative to stay the action.
A declaratory 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 Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (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's answer is currently scheduled to be filed on September
23, 1996.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court for
the Southern District of New York. The litigation involves claims against
Ideon, its former CEO and its Vice President of Investor Relations for alleged
material misrepresentations and omissions in connection with announcements
relating to Ideon's expected earnings per share in 1995 and its new product
sales, which included the PGA Tour Card Program, Family Protection Network and
Collections of the Vatican Museums. On July 15, 1996, Ideon filed a motion to
dismiss.
As noted in Note B, the Company will establish a reserve upon the Ideon merger
related, in part, 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.
Note J--Cost Related to Products Abandoned and Restructuring - Ideon
Included in costs related to products abandoned and restructuring in the
Supplemental Consolidated Statement of Income 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 as discussed below. The original
charge of $45 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995 Ideon recovered $1.2 million
of a $3.9 million deposit included in the above charges. Also included in costs
related to products abandoned and restructuring are marketing and operational
costs incurred for products abandoned of $53.2 million.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note J--Cost Related to Products Abandoned and Restructuring - Ideon
The components of the product abandonment and related liabilities as of January
31, 1996 are as follows (in thousands):
Fiscal 1996 Balance at
Provisions Activity 1/31/96
------------------------------------------
Severance and other employee costs $14,960 $ 8,950 $ 6,010
Costs to terminate equipment
and facilities leases 9,593 2,656 6,937
Liability for contract impairments 8,400 1,000 7,400
Other costs 3,295 2,846 449
------------------------------------------
$36,248 $15,452 $20,796
==========================================
The balance of the product abandonment and related liabilities at January 31,
1996 is included in accrued expenses and represents Ideon's best estimate of the
amounts expected to be incurred with respect to its product abandonment and
restructuring efforts. The amounts that will ultimately be paid could differ
from the amounts included in the product abandonment and related liabilities
estimate. Ideon anticipates completion of the majority of the actions related to
the product abandonment and restructuring during fiscal 1997.
During fiscal 1996, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA TOUR
Partners program that provided various benefits to members. Consumer response
rates after the launch were significantly less than Ideon management's
expectations, the product as configured was deemed not economically viable and a
charge of $18 million was incurred associated with the abandonment of the
product marketing including employee severance payments (approximately 130
employees), costs to terminate equipment and facilities leases, costs for
contract impairments and write-downs taken for asset impairments. In September
1995, after a period of product redesign and test marketing, Ideon discontinued
its PGA TOUR Partners credit card servicing role and recorded a charge of $3.6
million for costs associated with the abandonment of this role, including
employee severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments. In
April 1995, Ideon launched a nationwide child registration and missing child
search program. Consumer response rates after the launch were significantly less
than Ideon management's expectations and a charge of $9 million was incurred to
cover severance payments (approximately 100 employees), costs to terminate
equipment and facilities leases and write-down taken for asset impairments. As a
result of the discontinuance of these products, Ideon undertook an overall
restructuring of its operations and incurred charges of $7.2 million to
terminate operating leases and write-down assets to realizable value,
$3 million for restructuring its SafeCard division and $4.2 million for
restructuring its corporate infrastructure.
During fiscal 1995, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior management
team, resulting in $7.9 million of charges for various severance agreements and
a lease termination.
Note K--Sale of The ImagiNation Network - Sierra
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993,
Sierra sold 42% of INN's voting stock and reduced its ownership interest to 58%
and reduced its voting control such that Sierra recorded its liquidation
preference in excess of recorded book value as shareholders' equity.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note K--Sale of The ImagiNation Network - Sierra (continued)
In December 1994, Sierra sold its remaining equity interest in INN to AT&T and
recorded a gain of $19.7 million. Sierra also entered into a multi-year
publishing agreement with AT&T for Sierra to provide content for INN.
The publishing agreement provides for AT&T to fund up to $4 million of
Sierra's development expenditures under an existing publishing agreement and
up to $23 million of Sierra's development expenditures, subject to certain
limitations, through non-refundable royalty advances. The non-refundable
royalty advances are reflected net of research and development expense.
Non-refundable royalty advances from AT&T for the years ended January 31,
1996 and 1995 were $3.8 million and $1.6 million, respectively.
Note L--Business Segments
Business segment data consists of the following at or for the years ended
January 31 (in thousands):
1996 1995 1994
----------------------------------------------
Revenues:
Membership services $1,629,829 $1,363,561 $1,143,191
Software 305,403 191,050 135,473
----------------------------------------------
$1,935,232 $1,554,611 $1,278,664
==============================================
Operating Profit:
Membership services $ 184,699 $ 218,145 $ 194,002
Software 40,928 30,849 1,096
----------------------------------------------
$ 225,627 $ 248,994 $ 195,098
==============================================
Identifiable Assets:
Membership services $1,803,577 $1,566,186 $1,274,693
Software 264,619 205,936 113,500
----------------------------------------------
$2,068,196 $1,772,122 $1,388,193
==============================================
Capital Expenditures:
Membership services $ 53,048 $ 29,809 $ 9,631
Software 10,100 9,752 4,698
----------------------------------------------
$ 63,148 $ 39,561 $ 14,329
==============================================
Depreciation and Amortization:
Membership services $ 40,358 $ 27,683 $ 26,901
Software 9,378 15,780 13,410
----------------------------------------------
$ 49,736 $ 43,463 $ 40,311
==============================================
Note M--Subsequent Events
During February 1996, Ideon acquired all of the outstanding capital stock of
United Bank Services ("UBS") for $18.3 million. UBS is a provider of value-added
products and services through a diverse group of financial institutions. In
connection with this acquisition, Ideon recorded $14.7 million in the excess of
cost over net assets acquired and $4.4 million in contract renewal rights. The
UBS purchase agreement provides that the former shareholders of UBS are
eligible to receive additional payments over the next three years, not to exceed
$22 million in the aggregate, based on the achievement of certain objectives.
This acquisition was accounted for in accordance with the purchase method of
accounting and, accordingly, its results of operations will be included in the
consolidated results of operations from the date of acquisition.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note M--Subsequent Events (continued)
During March 1996, Davidson acquired all of the outstanding capital stock of
Condor, Inc. (subsequently renamed "Blizzard North"), a developer of
entertainment software. This acquisition was accounted for in accordance with
the pooling-of-interests method of accounting. However, the Company's financial
statements have not been restated for the Blizzard North merger as it did not
impact the Company's operations significantly.
In February 1996, Wright Express entered into a new revolving credit facility
agreement replacing its 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. Interest on the outstanding borrowings is computed, at
the option of Wright Express, under various methods including the bank's prime
rate or LIBOR plus 0.75%. Borrowings are secured by substantially all assets of
Wright Express.
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, 910,000 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.
Note N--Quarterly Results of Operations (unaudited)
(Dollar amounts in thousands, except per common share amounts)
The quarterly results of operations have been restated to reflect the
poolings-of-interests transactions with the Fiscal 1997 Pooled Entities
discussed in Note B.
First Second Third Fourth
Restated: Quarter Quarter Quarter Quarter
- --------- ----------------------------------------------
Fiscal 1996
Total revenues $430,659 $466,048 $492,556 $545,969
Income (loss) before
income taxes 62,270 (1,756) 71,989 102,809
Net income (loss) 38,304 (2,368) 43,399 65,640
Net income (loss)
per common share .15 (.01) .16 .25
Fiscal 1995
Total revenues $340,230 $375,305 $413,228 $425,848
Income before income taxes 51,303 51,440 91,988 62,200
Net income 33,191 30,122 61,389 39,355
Net income per common share .13 .12 .24 .15
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note N--Quarterly Results of Operations (unaudited) (continued)
The fourth quarter of fiscal 1996 includes $5.2 million ($4.2 million or $.02
per common share after-tax effect) of merger costs incurred in connection with
the acquisition of Advance Ross. The first, second, third and fourth quarters of
fiscal 1996 include $8.1 million, $73.1 million, $16.4 million and ($.6
million), respectively, of Ideon's costs related to products abandoned and
restructuring.
First Second Third Fourth
Prior to restatement: Quarter Quarter Quarter Quarter
- --------------------- -----------------------------------------------
Fiscal 1996
Total revenues $325,114 $347,759 $364,143 $377,948
Income before income taxes 59,047 67,029 71,821 68,446
Net income 36,046 41,692 43,021 42,615
Net income per common share .19 .21 .22 .22
Fiscal 1995
Total revenues $270,303 $288,143 $304,249 $320,201
Income before income taxes 45,876 48,922 53,342 53,645
Net income 27,969 29,948 33,211 33,438
Net income per common share .15 .16 .17 .18