Exhibit 99.2
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
April 30, January 31,
1996 1996
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $349,563 $333,036
Marketable securities 77,022 97,164
Receivables 460,176 463,492
Prepaid membership materials 42,302 39,061
Prepaid expenses, deferred taxes and other 149,583 158,523
-----------------------------
Total Current Assets 1,078,646 1,091,276
Membership solicitations in process 61,663 60,713
Deferred membership acquisition costs 408,630 404,655
Contract renewal rights and intangible assets
- net of accumulated amortization
of $106,262 and $100,578 355,917 332,806
Properties, at cost, less accumulated
depreciation of $111,996 and $105,235 122,378 113,353
Deferred income taxes and other 71,562 65,393
-----------------------------
$2,098,796 $2,068,196
=============================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable, accrued expenses
and other accrued liabilities $252,746 $296,048
Federal and state income taxes payable 13,119 35,957
-----------------------------
Total Current Liabilities 265,865 332,005
Deferred membership income 696,240 682,823
Convertible debt - net of unamortized
original issue discount of $576 and $586 23,399 23,389
Zero coupon convertible notes - net of
unamortized original issue discount
of $178 and $588 14,709 14,410
Other 11,372 13,046
Contingencies (Note 5)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 400 million shares; issued
260,501,524 shares and 257,207,225 shares 2,605 2,572
Additional paid-in capital 484,277 429,934
Retained earnings 650,720 602,678
Treasury stock, at cost, 3,868,011
shares and 3,410,631 shares (48,161) (30,998)
Unrealized gain on marketable securities 593
Foreign currency translation (2,230) (2,256)
-----------------------------
Total Shareholders' Equity 1,087,211 1,002,523
-----------------------------
$2,098,796 $2,068,196
=============================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
===============================================================================
Three Months Ended
April 30,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
REVENUES
Membership and service fees $455,006 $382,957
Software 60,473 47,702
-----------------------------------
Total Revenues 515,479 430,659
EXPENSES
Operating 158,327 129,946
Marketing 205,202 171,148
General and administrative 70,066 62,276
Costs related to products abandoned
and restructuring 8,061
Interest income, net (2,240) (3,042)
-----------------------------------
Total Expenses 431,355 368,389
-----------------------------------
INCOME BEFORE INCOME TAXES 84,124 62,270
Provision for income taxes 32,003 23,966
-----------------------------------
NET INCOME $52,121 $38,304
===================================
Net Income Per Common Share $0.20 $0.15
===================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 264,443 258,084
===================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
APRIL 30,
- ------------------------------------------------------------------------------
THREE MONTHS ENDED 1996 1995
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $52,121 $38,304
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Membership acquisition costs (164,341) (134,434)
Amortization of membership
acquisition costs 160,366 144,678
Deferred membership income 13,179 2,869
Membership solicitations in process (950) (4,659)
Amortization of contract renewal
rights and excess cost 5,684 4,913
Deferred income taxes (2,508) (20,670)
Amortization of original issue
discount on convertible notes 739 426
Depreciation 6,925 5,946
Effect of change in amortization periods
for Ideon membership acquisition costs 65,500
Net loss during change
in fiscal year-ends (4,268) (49,944)
Changes in working capital items,
net of acquisitions:
Decrease (increase) in receivables 3,316 (17,685)
(Increase) decrease in prepaid
membership materials (3,241) 2,130
Decrease (increase) in prepaid expenses
and other current assets 9,534 (9,557)
Net decrease in accounts payable,
accrued expenses, other accrued
liabilities and federal
& state income taxes payable (36,114) (26,150)
Decrease in product abandonment and
and related liabilities (7,410)
Other, net (4,309) (6,845)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 28,723 (5,178)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 46,922 108,862
Purchases of marketable securities (28,832) (44,113)
Acquisitions, net of cash acquired (28,932) (64,149)
Acquisitions of properties (15,575) (27,206)
- ------------------------------------------------------------------------------
Net cash used in investing activities (26,417) (26,606)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of Common Stock 12,984 10,567
Repayments of long-term obligations 1,237 2,624
Dividends paid (2,956)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 14,221 10,235
- ------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 16,527 (21,549)
Cash and cash equivalents
at beginning of period 333,036 281,019
--------------------------
Cash and cash equivalents at end of period $349,563 $259,470
==========================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended April 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending January 31, 1997. For further information, refer to the supplemental
financial statements and footnotes thereto included in this 8-K.
NOTE 2 -- MERGERS AND ACQUISITIONS
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. 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 interim
consolidated financial statements have been retroactively adjusted as if the
Fiscal 1997 Pooled Entities and the Company had operated as one since
inception.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities for the three months ended April 30, 1995 and the last
complete interim period preceding the mergers (unaudited, in thousands).
Three months
ended April 30, Three months ended
1996 April 30, 1995
------------------------------------------------
Revnues:
The Company $390,026 $325,114
Fiscal 1997 Pooled Entities 125,453 105,545
-------- --------
$515,479 $430,659
======== ========
Net Income:
The Company $48,250 $36,046
Fiscal 1997 Pooled Entities 3,871 2,258
-------- --------
$52,121 $38,304
======== ========
Davidson, Sierra and Ideon previously used the fiscal year-ends December 31,
March 31 and December 31, respectively, for their financial reporting. To
conform to the Company's January 31 fiscal year-end, Davidson's and Ideon's
operating results for January 1996 have been excluded from the three months
ended April 30, 1996 operating results in the accompanying supplemental
financial statements. In addition, Sierra's operating results for February
and March 1996 have been included in the operating results for the three months
ended April 30, 1996 in the accompanying supplemental financial statements and
for the year ended January 31, 1996. The above-mentioned excluded and
duplicated periods have been adjusted by a $4.3 million charge to retained
earnings at April 30, 1996. Effective January 1, 1995, Ideon changed its
fiscal year end from October 31 to December 31 (the "Ideon Transition
Period"). The Ideon Transition Period has been excluded from the Company's
historical consolidated statements of income. Ideon's revenues and net loss
for the Ideon Transition Period were $34.7 million and $(49.9) million,
respectively. This excluded period has been 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.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's supplemental 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 6) 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 all of these 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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- SHAREHOLDERS' EQUITY
Net income per share, assuming the conversions of the zero coupon convertible
notes during the three months ended April 30, 1996 occurred at the beginning of
such period, would not differ significantly from the Company's actual earnings
per share for such period.
NOTE 4 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses and
aggregated $14.9 million and $10.8 million for the three months ended April 30,
1996 and 1995, respectively. Costs of software revenue are included in operating
expenses and aggregated $24.8 million and $19.6 million for the three months
ended April 30, 1996 and 1995, respectively.
NOTE 5 -- INCOME TAXES
The Company's effective tax rate differs from the Federal statutory rate
principally because of state income taxes and non-deductible amortization of the
excess of cost over net assets acquired.
NOTE 6 -- CONTINGENCIES - IDEON
At April 30, 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 decalatory 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (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 amendment complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answer.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (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 Ideon 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 6 -- CONTINGENCIES - IDEON (continued)
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum meruit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling
on this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company'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 2, the Company will establish a reserve upon the Ideon merger
related, in part, to the 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 7 -- SUBSEQUENT EVENT
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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended April 30, 1996 vs.
Three Months Ended April 30, 1995
The Company's overall membership base continues to grow at a rapid rate (from
49.9 million members at April 30, 1995 to 60.9 million members at April 30,
1996), which is the largest contributing factor to the 19% increase in
membership revenues (from $383 million for the quarter ended April 30, 1995 to
$455 million for the quarter ended April 30, 1996). While the overall
membership base increased by approximately 1.2 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by 1%. The Company divides its memberships into three categories:
individual, wholesale and discount program memberships. Individual memberships
consist of members that pay directly for the services and the Company pays for
the marketing costs to solicit the member primarily using direct marketing
techniques. Wholesale memberships include members that pay directly for the
services to their sponsor and the Company does not pay for the marketing costs
to solicit the members. Discount program memberships are generally marketed
through a direct sales force, participating merchants or general advertising and
the related fees are either paid directly by the member or the local retailer.
All of these categories share various aspects of the Company's marketing and
operating resources.
Compared to the previous year's first quarter, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the quarter ended April 30, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 27% from $47.7 million for the quarter ended April
30, 1995 to $60.5 million for the quarter ended April 30, 1996. Contributing to
the strong software growth in fiscal 1997 is the availability of a larger number
of titles as well as the significant increase in the installed base of CD-ROM
personal computers.
As the Company's services continue to mature, a greater percentage of the total
individual membership base is in its renewal years. This results in increased
profit margins for the Company due to the significant decrease in certain
marketing costs incurred on renewing members. Improved response rates for new
members also favorably impact profit margins. As a result, operating income
before interest, costs related to products abandoned and restructuring and taxes
("EBIT") increased from $67.3 million to $81.9 million, and EBIT margins
improved from 15.6% to 15.9%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended April 30, 1996 vs.
Three Months Ended April 30, 1995
Operating costs increased 22% (from $129.9 million to $158.3 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing and participant insurance premiums (the cost of
obtaining insurance coverage for members). The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (40%). This
is primarily due to maintained per member acquisition costs and an increase
in renewing members. Membership acquisition costs incurred increased
22% (from $134.4 million to $164.3 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 11%
(from $144.7 million to $160.4 million). Other marketing costs increased by 69%
(from $26.5 million to $44.8 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs remained constant as a percentage of revenue
(14%). This is the result of the Company's ongoing ability to control overhead.
Interest income, net, decreased from $3 million to $2.2 million primarily due to
cash used to fund acquisitions during fiscal 1996 and the first quarter of
fiscal 1997.
Costs related to products abandoned and restructuring for the three months ended
April 30, 1995 represent marketing and operational costs incurred for Ideon
products abandoned.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Membership Information
The following chart sets forth the approximate number of members and net
additions for the respective periods.
Net New Member
Number of Additions
Period Members for the Period
- --------------------------------------------------------------------------------
Quarter Ended April 30, 1996 60,875,000 1,225,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Quarter Ended April 30, 1995 49,875,000 2,975,000**
Year Ended January 31, 1995 46,900,000 3,820,000
*Includes approximately 8 million Acquired Members.
**Includes approximately 1.7 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Membership cancellations processed by certain of the Company's clients report
membership information only on a net basis. Accordingly, the Company does not
receive actual numbers of gross additions and gross cancellations for certain
types of memberships. In calculating the number of members, the Company has
deducted its best estimate of cancellations which may occur during the trial
membership periods offered in its marketing programs. Typically these periods
range from one to three months.
Liquidity And Capital Resources; Inflation; Seasonality
Funds for the Company's operations and acquisitions have been provided through
cash flow from operations. The Company also has a credit agreement, dated March
26, 1996, with certain banks signatory thereto; The Chase Manhattan Bank, N.A.,
Bank of Montreal, Morgan Guaranty Trust Company of New York and The Sakura Bank,
Limited, as Co-Agents; and The Chase Manhattan Bank, N.A., as Administrative
Agent (the "Credit Agreement"). The Credit Agreement provides for a $500 million
revolving credit facility with a variety of different types of loans available
thereunder. The Credit Agreement contains certain customary restrictive
covenants including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contains various event of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company. The amount of borrowings available to the Company
under the Credit Agreement was $500 million at April 30, 1996, as there were no
borrowings under the Credit Agreement at that date. The Credit Agreement is
scheduled to expired March 26, 2001.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity And Capital Resources; Inflation; Seasonality (continued)
In February 1996, Wright Express entered into a revolving credit facility
agreement which 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. This facility
expires December 1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's financial statements but will be reflected in
the consolidated statements of income during the periods the respective mergers
are completed. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs and are expected to approximate $28.6 million ($25.1 million
or $.10 per common share after-tax effect) in the aggregate. Such costs
associated with the Company's merger with Ideon (the "Ideon Merger") include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Note 6 to the Supplemental Condensed
Consolidated Financial Statements) giving consideration to the Company's
intended approach to these matters, which are estimated by the Company's
management to approximate $125.0 million ($80.0 million after tax effect).
Most of the reserve is related to these outstanding litigation matters.
The Company is unable at this time to determine the estimated timing of the
future cash outflows with respect to this liability. Although the Company has
attempted to estimate the amounts that will be required to settle these
litigation matters, there can be no assurance that the actual aggregate amount
of such settlements will not exceed the amount of the reserve to be accrued.
The Company invested approximately $29 million in acquisitions, net of cash
acquired, during the three months ended April 30, 1996. These acquisitions have
been fully integrated into the Company's operations. The Company is not aware of
any trends, demands or uncertainties that will have a material effect on the
Company's liquidity. The Company anticipates that cash flow from operations and
the Credit Agreement will be sufficient to achieve its current long-term
objectives.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $16 million for the three months ended
April 30, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
paid for in cash will initially be financed through excess cash flow from
operations and the Credit Agreement. However, depending on the financing
necessary to complete an acquisition, additional funding may be required.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts from
these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday season.
For the three months ended April 30, 1996, the Company's international
businesses represented less than 5% of EBIT. Operating in international markets
involves dealing with sometimes volatile movements in currency exchange rates.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because the Company operates in a mix of membership
services and numerous countries, management believes currency exposures are
fairly well diversified. To date, currency exposure has not been a significant
competitive factor at the local market operating level. As international
operations continue to expand and the number of cross-border transactions
increases, the Company intends to continue monitoring its currency exposures
closely and take prudent actions as appropriate.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- -------------------------------------------------------------------------------
July 31, January 31,
1996 1996
- -------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $336,842 $333,036
Marketable securities 99,079 97,164
Receivables 505,774 463,492
Prepaid membership materials 47,021 39,061
Prepaid expenses, deferred taxes and other 143,929 158,523
-------------------------------
Total Current Assets 1,132,645 1,091,276
Membership solicitations in process 61,881 60,713
Deferred membership acquisition costs 406,794 404,655
Contract renewal rights and intangible assets
- net of accumulated amortization
of $112,808 and $100,578 352,861 332,806
Properties, at cost, less accumulated
depreciation of $116,402 and $105,235 123,899 113,353
Deferred income taxes and other 59,372 65,393
-------------------------------
$2,137,452 $2,068,196
===============================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable, accrued expenses
and other accrued liabilities $250,224 $296,048
Federal and state income taxes payable 14,054 35,957
-------------------------------
Total Current Liabilities 264,278 332,005
Deferred membership income 679,961 682,823
Convertible debt - net of unamortized
original issue discount of $576 and $586 23,428 23,389
Zero coupon convertible notes - net of
unamortized original issue discount
of $588 14,410
Other 11,287 13,046
Contingencies (Note 6)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 600 million shares; issued
265,284,487 shares and 257,207,225 shares 2,653 2,572
Additional paid-in capital 552,956 429,934
Retained earnings 688,384 602,678
Treasury stock, at cost, 3,979,095
shares and 3,410,631 shares (52,291) (30,998)
Deferred compensation (30,485)
Unrealized (loss) gain on marketable securities (41) 593
Foreign currency translation (2,678) (2,256)
-------------------------------
Total Shareholders' Equity 1,158,498 1,002,523
-------------------------------
$2,137,452 $2,068,196
===============================
See notes to condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
================================================================================
Three Months Ended
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
REVENUES
Membership and service fees $487,164 $403,788
Software 68,580 62,260
--------------------------------
Total Revenues 555,744 466,048
EXPENSES
Operating 168,014 147,700
Marketing 209,503 178,822
General and administrative 74,210 70,956
Costs related to products abandoned
and restructuring 73,091
Merger costs 28,635
Interest income, net (1,835) (2,765)
--------------------------------
Total Expenses 478,527 467,804
INCOME (LOSS) BEFORE INCOME TAXES 77,217 (1,756)
Provision for income taxes 36,756 612
--------------------------------
NET INCOME (LOSS) $40,461 $(2,368)
================================
Net Income (Loss) Per Common Share $0.15 $(0.01)
================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 267,912 260,147
================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
================================================================================
Six Months Ended
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
REVENUES
Membership and service fees $942,170 $786,745
Software 129,053 109,962
---------------------------------
Total Revenues 1,071,223 896,707
EXPENSES
Operating 326,341 277,646
Marketing 414,705 349,970
General and administrative 144,276 133,232
Costs related to products abandoned
and restructuring 81,152
Merger costs 28,635
Interest income, net (4,075) (5,807)
---------------------------------
Total Expenses 909,882 836,193
INCOME BEFORE INCOME TAXES 161,341 60,514
Provision for income taxes 68,759 24,578
---------------------------------
NET INCOME $92,582 $35,936
=================================
Net Income Per Common Share $0.35 $0.14
=================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 266,178 259,116
=================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
JULY 31,
- --------------------------------------------------------------------------------
SIX MONTHS ENDED 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $92,582 $35,936
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Membership acquisition costs (310,392) (263,049)
Amortization of membership acquisition costs 319,514 272,386
Deferred membership income (14,361) (13,847)
Membership solicitations in process (1,168) (6,184)
Amortization of contract renewal rights
and excess cost 12,780 11,452
Deferred income taxes 11,359 (38,181)
Loss on impairment of property and equipment 4,117
Amortization of original issue discount
on convertible notes 1,291 832
Depreciation 13,367 11,275
Effect of change in amortization periods for
Ideon membership acquisition costs 65,500
Net loss during change in
fiscal year-ends (4,268) (49,944)
Changes in working capital items,
net of acquisitions:
Increase in receivables (42,282) (54,514)
Increase in prepaid membership materials (7,960) (7,938)
(Increase) decrease in prepaid expenses
and other current assets 2,830 (9,204)
Net decrease in accounts payable,
accrued expenses, other accrued
liabilities and federal & state
income taxes payable (21,210) (17,482)
(Decrease) increase in product abandonment
and related liabilities (10,700) 25,587
Other, net (7,350) (12,324)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 34,032 (45,582)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 75,460 169,916
Purchases of marketable securities (66,947) (71,209)
Acquisitions, net of cash acquired (32,964) (72,233)
Acquisitions of properties (23,546) (42,081)
- --------------------------------------------------------------------------------
Net cash used in investing activities (47,997) (15,607)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of Common Stock 18,582 15,233
Repayments of long-term obligations 1,987 4,859
Payments for purchase of treasury shares (4,576)
Dividends paid (2,798) (4,404)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 17,771 11,112
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,806 (50,077)
Cash and cash equivalents
at beginning of period 333,036 281,019
----------------------------
Cash and cash equivalents at end of period $336,842 $230,942
============================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
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.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended July 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 1997. For further information, refer to the supplemental financial
statements and footnotes thereto included in this Form 8-K.
NOTE 2 -- MERGERS AND ACQUISITIONS
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. 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 interim
consolidated financial statements have been retroactively adjusted as if the
Fiscal 1997 Pooled Entities and the Company had operated as one since inception.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities for the six months ended July 31, 1995 and the last
complete interim period preceding the mergers (unaudited, in thousands).
Three months
ended April 30, Six months ended
1996 July 31, 1995
------------------------------------------------
Revnues:
The Company $390,026 $672,873
Fiscal 1997 Pooled Entities 125,453 223,834
-------- --------
$515,479 $896,707
======== ========
Net Income:
The Company $48,250 $77,738
Fiscal 1997 Pooled Entities 3,871 (41,802)
-------- --------
$52,121 $35,936
======== ========
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- MERGERS AND ACQUISITIONS (continued)
Davidson, Sierra and Ideon previously used the fiscal year-ends December 31,
March 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year-end, Davidson's and Ideon's
operating results for January 1996 have been excluded from the six months ended
July 31, 1996 operating results in the accompanying supplemental financial
statements. In addition, Sierra's operating results for February and March 1996
have been included in the operating results for the six months ended July 31,
1996 in the accompanying supplemental financial statements and for the year
ended January 31, 1996. The above-mentioned excluded and duplicated periods
have been adjusted by a $4.3 million charge to retained earnings at July 31,
1996.
Effective January 1, 1995, Ideon changed its fiscal year end from October 31
to December 31 (the "Ideon Transition Period"). The Ideon Transition Period
has been excluded from the Company's historical consolidated statements
of income. Ideon's revenues and net loss for the Ideon Transition Period were
$34.7 million and $(49.9) million, respectively. This excluded period has been
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.
In connection with the Davidson and Sierra mergers with the Company, the
Company charged $28.6 million ($25.1 million or $.10 per common share after-tax
effect) to operations in the three months ended July 31, 1996 for merger costs.
Such costs are non-recurring and are comprised primarily of transaction costs,
other professional fees and integration costs. Such costs associated with the
Company's merger with Ideon (the "Ideon Merger") have not been reflected in the
Company's supplemental financial statements but will be reflected in the
consolidated statement of income during the period the merger is completed.
Such costs are non-recurring and include integration and transaction costs as
well as costs relating to certain outstanding litigation matters (see Note 6)
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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- SHAREHOLDERS' EQUITY
For the three and six months ended July 31, 1996, $14.7 million and $14.9
million principal of zero coupon convertible notes were converted into 2.2
million shares and 2.3 million shares of Common Stock, respectively, and the
related unamortized original issue discount ($64,000 and $68,000, respectively)
was charged against additional paid-in capital. The balance of the change in
additional paid-in capital and treasury stock principally relates to stock
option activity.
The Company's fiscal 1990 recapitalization included establishment of a
restricted stock plan designed to compensate and retain key employees of the
Company. During July 1996, 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.
Net income per share, assuming the conversions of the zero coupon convertible
notes during the six months ended July 31, 1996 occurred at the beginning of
such period, would not differ significantly from the Company's actual earnings
per share for such period.
NOTE 4 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses and
aggregated $15.3 million and $13.5 million for the three months ended July 31,
1996 and 1995, respectively, and $30.2 million and $24.3 million for the six
months ended July 31, 1996 and 1995, respectively. Costs of software revenue
are included in operating expenses and aggregated $21.1 million and
$28.4 million for the three months ended July 31, 1996 and 1995, respectively,
and $45.9 million and $47.9 million for the six months ended July 31, 1996 and
1995, respectively.
NOTE 5 -- INCOME TAXES
The Company's effective tax rate differs from the Federal statutory rate
principally because of state income taxes and non-deductible amortization of the
excess of cost over net assets acquired.
NOTE 6 -- CONTINGENCIES - IDEON
At July 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 decalatory 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (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 amendment complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answer.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (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 Ideon 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum meruit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling
on this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company'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 2, 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.
ITEM 2. CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended July 31, 1996 vs.
Three Months Ended July 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
51.2 million members at July 31, 1995 to 62.3 million members at July 31, 1996),
which is the largest contributing factor to the 21% increase in membership
revenues (from $403.8 million for the quarter ended July 31, 1995 to $487.2
million for the quarter ended July 31, 1996). While the overall membership base
increased by approximately 1.4 million members during the quarter, the average
annual fee collected for the Company's membership services increased by 1%. The
Company divides its memberships into three categories: individual, wholesale and
discount program memberships. Individual memberships consist of members that pay
directly for the services and the Company pays for the marketing costs to
solicit the member primarily using direct marketing techniques. Wholesale
memberships include members that pay directly for the services to their sponsor
and the Company does not pay for the marketing costs to solicit the members.
Discount program memberships are generally marketed through a direct sales
force, participating merchant or general advertising and the related fees are
either paid directly by the member or the local retailer. All of these
categories share various aspects of the Company's marketing and operating
resources.
Compared to the previous year's second quarter, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the quarter ended July 31, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 10% from $62.3 million for the quarter ended July
31, 1995 to $68.6 million for the quarter ended July 31, 1996. Distribution
revenue, which typically has low operating margins, was down from $28.6 million
to $12.6 million. The Company's software operations continue to focus on the
growth of selling titles through retailers. Excluding distribution revenue,
core software revenue grew by 66%. Contributing to the strong software revenue
growth in fiscal 1997 is the availability of a larger number of titles as well
as the significant increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage
of the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, operating
income before interest, costs related to products abandoned and restructuring,
merger costs and taxes ("EBIT") increased from $68.6 million to $104 million,
and EBIT margins improved from 14.7% to 18.7%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended July 31, 1996 vs.
Three Months Ended July 31, 1995
Operating costs increased 14% (from $147.7 million to $168 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). The major components of
the Company's software operating costs are material costs, manufacturing labor
and overhead, royalties paid to developers and affiliated label publishers and
research and development costs related to designing, developing and testing new
software products. The increase in overall operating costs is due principally to
the variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (38%). This
is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
14% (from $128.6 million to $146.1 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 25%
(from $127.7 million to $159.1 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. Other marketing costs
decreased by 1% (from $51.1 million to $50.4 million). The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue (from 15%
to 13%). This is a result of the Company's ongoing ability to control overhead.
Interest income, net, decreased from $2.8 million to $1.8 million primarily due
to cash used to fund acquisitions during fiscal 1996 and the first quarter of
fiscal 1997.
Included in costs related to products abandoned and restructuring for the three
months ended July 31, 1995, are special charges totaling $34.2 million related
to the abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure. The charge of $34.2 million was
composed of accrued liabilities of $25.6 million and asset impairments of $8.6
million. Also included in costs related to products abandoned and restructuring
are marketing and operational costs incurred for Ideon products abandoned of
$38.9 million.
Merger costs are non-recurring and are comprised primarily of transaction costs,
professional fees and integration costs associated with the mergers of the
Company with Davidson and Sierra.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Ended July 31, 1996 vs.
Six Months Ended July 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
51.2 million members at July 31, 1995 to 62.3 million members at July 31, 1996),
which is the largest contributing factor to the 20% increase in membership
revenues (from $786.7 million for the six months ended July 31, 1995 to $942.2
million for the six months ended July 31, 1996). While the overall membership
base increased by approximately 2.7 million members during the six months ended
July 31, 1996, the average annual fee collected for the Company's membership
services increased by 1%. The Company divides its memberships into three
categories: individual, wholesale and discount program memberships. Individual
memberships consist of members that pay directly for the services and the
Company pays for the marketing costs to solicit the member primarily using
direct marketing techniques. Wholesale memberships include members that pay
directly for the services to their sponsor and the Company does not pay for the
marketing costs to solicit the members. Discount program memberships are
generally marketed through a direct sales force, participating merchant or
general advertising and the related fees are either paid directly by the member
or the local retailer. All of these categories share various aspects of the
Company's marketing and operating resources.
Compared to the previous year's first six months, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the six months ended July 31, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 17% from $110 million for the six months ended July
31, 1995 to $129.1 million for the six months ended July 31, 1996. Distribution
revenue, which typically has low operating margins, was down from $41.7 million
to $25.7 million. The Company's software operations continue to focus on the
growth of selling titles through retailers. Excluding distribution revenue,
core software revenue grew by 57%. Contributing to the strong software revenue
growth in fiscal 1997 is the availability of a larger number of titles as well
as the significant increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, EBIT
increased from $135.9 million to $185.9 million, and EBIT margins improved from
15.2% to 17.4%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Six Months Ended July 31, 1996 vs.
Six Months Ended July 31, 1995
Operating costs increased 18% (from $277.6 million to $326.3 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). The major components of
the Company's software operating costs are material costs, manufacturing labor
and overhead, royalties paid to developers and affiliated label publishers and
research and development costs related to designing, developing and testing new
software products. The increase in overall operating costs is due principally to
the variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (39%). This
is primarily due to maintained per member acquisition costs and an increase
in renewing members. Membership acquisition costs incurred increased
18% (from $263 million to $310.4 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 17%
(from $272.4 million to $319.5 million). Other marketing costs increased by 23%
(from $77.6 million to $95.2 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue (from 15%
to 13%). This is the result of the Company's ongoing ability to control
overhead. Interest income, net, decreased from $5.8 million to $4.1 million
primarily due to cash used to fund acquisitions during fiscal 1996 and the first
six months of fiscal 1997.
Included in costs related to products abandoned and restructuring for the six
months ended July 31, 1995, are special charges totaling $34.2 million, related
to the abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure. The charge of $34.2 million was
composed of accrued liabilities of $25.6 million and asset impairments of $8.6
million. Also included in costs related to products abandoned and
restructuring are marketing and operational costs incurred for Ideon products
abandoned of $47 million.
Merger costs are non-recurring and are comprised primarily of transaction costs,
professional fees and integration costs associated with the mergers of the
Company with Davidson and Sierra.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Membership Information
The following chart sets forth the approximate number of members and net
additions for the respective periods.
Net New Member
Number of Additions
Period Members for the Period
- --------------------------------------------------------------------------------
Six Months Ended July 31, 1996 62,315,000 2,665,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Six Months Ended July 31, 1995 51,165,000 4,265,000**
Year Ended January 31, 1995 46,900,000 3,820,000
Quarter Ended July 31, 1996 62,315,000 1,440,000
Quarter Ended July 31, 1995 51,165,000 1,290,000
*Includes approximately 8 million Acquired Members.
**Includes approximately 2.1 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Membership cancellations processed by certain of the Company's clients report
membership information only on a net basis. Accordingly, the Company does not
receive actual numbers of gross additions and gross cancellations for certain
types of memberships. In calculating the number of members, the Company has
deducted its best estimate of cancellations which may occur during the trial
membership periods offered in its marketing programs. Typically these periods
range from one to three months.
Liquidity And Capital Resources; Inflation; Seasonality
Funds for the Company's operations and acquisitions have been provided through
cash flow from operations. The Company also has a credit agreement, dated March
26, 1996, with certain banks signatory thereto; The Chase Manhattan Bank, N.A.,
Bank of Montreal, Morgan Guaranty Trust Company of New York and The Sakura Bank,
Limited, as Co-Agents; and The Chase Manhattan Bank, N.A., as Administrative
Agent (the "Credit Agreement"). The Credit Agreement provides for a $500 million
revolving credit facility with a variety of different types of loans available
thereunder. The Credit Agreement contains certain customary restrictive
covenants including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contains various event of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company. The amount of borrowings available to the Company
under the Credit Agreement was $500 million at July 31, 1996, as there were no
borrowings under the Credit Agreement at that date. The Credit Agreement is
scheduled to expired March 26, 2001.
In February 1996, Wright Express entered into a revolving credit facility
agreement which has an avalaible line of $75 million of which $50 million may be
used to finance working capital requirements and for general corporate and $25
million may be used for acquisition financing. This facility expires December
1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the Ideon Merger have not been reflected in the Company's
supplemental financial statements but will be reflected in the consolidated
statement of income during the period the merger is completed. Such costs are
non-recurring and include integration and transaction costs as well as costs
relating to certain outstanding litigation matters, (see Note 6 to the
Supplemental Condensed Consolidated Financial Statements) 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.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity And Capital Resources; Inflation; Seasonality (continued)
The Company invested approximately $33 million in acquisitions, net of cash
acquired, during the six months ended July 31, 1996. These acquisitions have
been fully integrated into the Company's operations. The Company is not aware of
any trends, demands or uncertainties that will have a material effect on the
Company's liquidity. The Company anticipates that cash flow from operations and
the Credit Agreement will be sufficient to achieve its current long-term
objectives.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $24 million for the six months ended July
31, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
paid for in cash will initially be financed through excess cash flow from
operations and the Credit Agreement. However, depending on the financing
necessary to complete an acquisition, additional funding may be required.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts
from these coupon book memberships are received in the fourth quarter and, to
a lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday season.
For the six months ended July 31, 1996, the Company's international businesses
represented less than 5% of EBIT. Operating in international markets involves
dealing with sometimes volatile movements in currency exchange rates. The
economic impact of currency exchange rate movements on the Company is complex
because it is linked to variability in real growth, inflation, interest rates
and other factors. Because the Company operates in a mix of membership services
and numerous countries, management believes currency exposures are fairly well
diversified. To date, currency exposure has not been a significant competitive
factor at the local market operating level. As international operations continue
to expand and the number of cross-border transactions increases, the Company
intends to continue monitoring its currency exposures closely and take prudent
actions as appropriate.