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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
Commission file number 1-10308
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CUC International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-0918165
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
707 Summer Street, Stamford, Connecticut 06901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 324-9261
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 Par Value New York Stock Exchange
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Zero Coupon Convertible Debentures, $100 Face Amount New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 29, 1996, was $5,391,322,648. All officers and directors
of the registrant have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the registrant. The number of shares of the
registrant's Common Stock outstanding, $.01 par value, as of March 29, 1996 was
190,460,240 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with the registrant's annual shareholders' meeting to
be held June 5, 1996 ("Proxy Statement") are incorporated by reference into Part
III hereof.
TABLE OF CONTENTS
Item Description Page
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PART I
1 Business...............................................................................1
2 Properties.............................................................................8
3 Legal Proceedings......................................................................8
4 Submission of Matters to a Vote of Security Holders....................................8
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters................9
6 Selected Financial Data................................................................10
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................11
8 Financial Statements and Supplementary Data............................................16
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................35
PART III
10 Directors and Executive Officers of the Registrant.....................................36
11 Executive Compensation.................................................................36
12 Security Ownership of Certain Beneficial Owners and Management.........................36
13 Certain Relationships and Related Transactions.........................................36
PART IV
14 Exhibits, Financial Statement Schedules and Report on Form 8-K.........................37
Signatures.............................................................................40
Index to Exhibits......................................................................42
PART I
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ITEM 1. BUSINESS
GENERAL
CUC International Inc. (the "Company") is a membership-based consumer services
company, providing consumers with access to a variety of services. The Company
currently has approximately 46.5 million members using its various services. The
Company operates in one business segment, providing these services as
individual, wholesale or discount program memberships ("memberships") (see
"-Types of Memberships"). These memberships include such components as shopping,
travel, auto, dining, home improvement, lifestyle, vacation exchange, credit
card and checking account enhancement packages, financial products and discount
programs. The Company also administers insurance package programs which are
generally combined with discount shopping and travel for credit union members,
distributes welcoming packages which provide new homeowners with discounts for
local merchants, and provides travelers with value-added tax refunds (see
"-Membership Services"). The Company believes it is the leading provider of
membership based consumer services of these types in the United States (see
"-Competition"). The Company's activities are conducted principally through its
Comp-U-Card division ("Comp-U-Card") and the Company's wholly-owned
subsidiaries, FISI* Madison Financial Corporation ("FISI"), Benefit Consultants,
Inc. ("BCI"), Interval International Inc. ("Interval") and Entertainment
Publications, Inc. ("Entertainment").
The Company derives its revenues principally from membership fees. Membership
fees vary depending upon the particular membership program, and annual fees to
consumers generally range from $6 to $250 per year. Most of the Company's
memberships are for one-year renewable terms, and members are generally entitled
to unlimited use during the membership period of the service for which the
member has subscribed. Members generally may cancel their membership and obtain
a full refund at any point during the membership term.
The Company arranges with client financial institutions, retailers, oil
companies, credit unions, on-line networks, fundraisers and others to market
certain membership services to such clients' individual account holders and
customers. Participating institutions generally receive commissions on initial
and renewal memberships, averaging twenty percent of the net membership fees.
The Company's contracts with these clients generally grant the Company the right
to continue providing membership services directly to such clients' individual
account holders even if the client terminates the contract, provided that the
client continues to receive its commission.
The Company solicits members for many of its programs by direct marketing and by
using a direct sales force calling on financial institutions, fund raising
charitable institutions and associations. Some of the Company's individual
memberships are available on-line to interactive computer users via major
on-line services and the Internet's World Wide Web (see"-Distribution
Channels"). For the fiscal year ended January 31, 1996, approximately 442
million solicitation pieces were mailed, followed-up by approximately 59 million
telephone calls.
Individual memberships represented 63%, 65% and 69% of consolidated revenues for
the fiscal years ended January 31, 1996, 1995 and 1994, respectively. Wholesale
memberships represented 14%, 13% and 14% of consolidated revenues for the fiscal
years ended January 31, 1996, 1995 and 1994, respectively. Discount program
memberships represented 23%, 22% and 17% of consolidated revenues for the fiscal
years ended January 31, 1996, 1995 and 1994, respectively. Membership revenue is
recorded net of anticipated cancellations (see Item 7: "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Membership
Information").
TYPES OF MEMBERSHIPS
The Company offers Shoppers Advantage(R), Travelers Advantage(R),
AutoVantage(R), Premier Dining(R), PrivacyGuard(R), Buyers Advantage(R), Credit
Card Guardian(R) and other membership services. These benefits are offered as
individual memberships, as components of wholesale membership enhancement
packages and insurance products, and as components of discount program
memberships. A brief description of the different types of memberships are as
follows:
Individual Memberships. The Company classifies memberships as individual
memberships if 1) the member pays directly for the services; 2) the Company pays
for the marketing costs to solicit the member and primarily markets these
services using direct marketing techniques; 3) the membership is sold at full
price; and 4) the initial fulfillment kit consists of a variety of membership
materials such as a membership card, information describing the service and
discount coupons applicable to the service. Examples of these memberships
include Shoppers Advantage(R), Travelers Advantage(R) and AutoVantage(R) and
insurance products, which are sold at prices generally between $10 and $250 per
year.
Wholesale Memberships. The Company classifies memberships as wholesale
memberships if 1) the Company does not pay for the marketing costs to solicit
the member; 2) the initial fulfillment kit consists of a variety of membership
materials such as a membership card and information describing the service; 3)
the memberships may be sold at full or discounted group prices; and 4) the
member or the sponsor pays for the membership. Examples of these memberships
include enhancement packages sold through banks and credit unions and insurance
products sold to credit unions, for which the Company acts as a third party
administrator. Fees for these memberships are generally between $6 and $50 per
year.
Discount Program Memberships. The Company classifies memberships as discount
program memberships if 1) the initial fulfillment materials consist of various
offers of local or national discounts; 2) the primary marketing method is
through either a direct sales force contacting primarily fundraising
institutions, a participating merchant or general advertising; and 3) the member
or a local merchant generally pays for the membership. Examples of these
memberships include the Entertainment(R) and Gold C(R) coupon book programs.
Fees to consumers for these memberships generally range from $10 to $50 per
year.
MEMBERSHIP SERVICES
The various memberships may contain all or some of the features of the following
services:
Shopping. Shoppers Advantage(R) is a discount shopping program whereby the
Company, through Compu-U-Card Services, Inc., provides product price information
and home shopping services to its members. The Company's merchandise database
contains information on approximately 250,000 brand name products, including a
written description of the product, the manufacturer's suggested retail price,
the vendor's price, features and availability. All of these products may be
purchased through the Company's independent vendor network. Vendors include
manufacturers, distributors and retailers nationwide. Individual members are
entitled to an unlimited number of toll-free calls seven days a week to the
Company's shopping consultants, who access the merchandise database to obtain
the lowest available fully delivered cost from participating vendors for the
product requested and accept any orders that the member may place. The Company
informs the vendor providing the lowest price of the member's order and that
vendor then delivers the requested product directly to the member. The Company
acts as a conduit between its members and the vendors; accordingly, it does not
maintain an inventory of products.
As part of its individual member Shoppers Advantage(R) program, the Company
distributes catalogs eight to twelve times per year to certain members. In
addition, the Company automatically extends the manufacturer's warranty on all
products purchased through the Shoppers Advantage(R) program and offers a low
price guarantee.
Travel. Travelers Advantage(R) is a discount travel service program whereby the
Company, through CUC Travel Services, Inc. ("CUC Travel") (a full-service travel
agency), obtains information on schedules and rates for major scheduled
airlines, hotel chains and car rental agencies from the American Airlines
Sabre(R) Reservation System. In addition, the Company maintains its own database
containing information on tours, cruises, travel packages and short-notice
travel arrangements. Members book their reservations through CUC Travel, which
earns commissions (ranging from 5%-25%) on all travel sales from the providers
of the travel services. Certain Travelers Advantage(R) members can earn cash
awards from the Company equal to a specified percentage (generally 5%) of the
price of travel arrangements purchased by the member through CUC Travel.
Travel members may book their reservations by making toll-free telephone calls
seven days a week, twenty-four hours a day to agents at CUC Travel. CUC Travel's
agents reserve the lowest air, hotel and car rental fares available for the
members' travel requests.
Auto. The Company's auto service, AutoVantage(R), offers members comprehensive
new car summaries and discounts on new domestic and foreign cars purchased
through the Company's independent dealer network (which includes approximately
2,000 dealers); discounts on maintenance, tires and parts at more than 25 chains
and more than 23,000 locations, including well known chains such as Goodyear and
Firestone; discounts on parts and labor at participating AutoVantage(R) new car
dealers across the country; and used car valuations. AutoVantage Gold(R) offers
members additional services including road and tow emergency assistance 24 hours
a day in the United States.
Dining. Premier Dining(R) and Dinner on Us Club(R) feature two-for-one dining
offers at more than 19,000 restaurants in major metropolitan areas across the
United States. The Company also manages AAdvantage Dining, a program which
allows American AAdvantage members to earn three miles for each dollar spent
(pre-tip total) for dining at nearly 3,000 participating restaurants in the
United States.
Credit Card Guardian. Credit Card Guardian(R) enables consumers to register
their credit and debit cards with the Company so that account numbers of these
cards may be kept securely in one place. If the member notifies the Company that
any of these credit or debit cards are lost or stolen, the Company will notify
the issuers of these cards, arrange for them to be replaced and reimburse the
member for any amount for which the card issuer may hold the member liable.
Buyers Advantage. The Buyers Advantage(R) service extends the manufacturer's
warranty on products purchased by the member. This service also rebates 20% of
repair costs and offers members price protection by refunding any difference
between the price the member paid for an item and its reduced price, should the
item be sold at a lower price within sixty days after purchase.
CompleteHome. The CompleteHome(R) service is designed to save members time and
money in maintaining and improving their homes. Members can order do-it-yourself
"How-To Guides" or call the service for a tradesperson referral. Over 10,000
tradespersons are available nationally through a toll-free phone line. Members
also receive discounts on a full range of home-related products and services.
Health Services. The HealthSaver membership provides discounts ranging from 10%
to 60% off retail prices on prescription drugs, eyewear, eyecare, selected
health-related services and fitness equipment, including sporting goods. The
service also makes available to consumers health-related information through
various services, including Nurseline, which provides members with general
medical information explaining common medical conditions in simple language.
Members also receive a subscription to a leading health newsletter. Members may
also purchase prescription and over-the-counter drugs through the mail.
PrivacyGuard Service. The PrivacyGuard(R) service provides members with a
comprehensive and understandable means of monitoring key personal information.
The service offers a member access to information in four key areas: credit
history, driving records maintained by state motor vehicle authorities, Social
Security records and medical files maintained by third parties. This information
is designed to assist members in updating and correcting information concerning
themselves and in obtaining mortgages or loans, applying for insurance and
planning for retirement.
Vacation Exchange Service. The Company, primarily through Interval, provides its
members with the ability to exchange their timeshare vacation weeks with those
of other members. Members receive an annual catalog detailing all properties
available for exchange, as well as periodic communications and may use the
Company's travel services.
Lifestyle Clubs. In September 1995, the Company acquired North American
Outdoor Group, Inc. ("NAOG"). NAOG owns and operates the North American Hunting
Club(R), the North American Fishing Club(R) and the Handyman Club of America(R).
Members of these clubs receive fulfillment kits, discounts on related goods and
services, magazines and other benefits.
Enhancement Package Service. The Company, primarily through FISI, sells
enhancement package memberships for checking account holders. FISI's financial
institution clients, with whom FISI has entered into written contracts, select a
customized package of the Company's products and services. Each client then
usually adds its own services (such as unlimited check writing privileges,
personalized checks, cashiers' or travelers' checks without issue charge, or
discounts on safe deposit box charges or installment loan interest rates). With
the Company's marketing and promotional assistance, the financial institution
then offers the complete package of account enhancements to its checking account
holders as a special program for a monthly fee.
Most of the Company's financial institution clients choose a standard
enhancement package, which generally includes $10,000 of accidental death
insurance, travel discounts and a nationwide check cashing service. Others may
choose the Company's shopping and credit card registration services, a financial
newsletter or pharmacy, eyewear or entertainment discounts as enhancements. The
accidental death coverage is underwritten under group insurance policies with
independent insurers. These insurers, including Hartford Life Insurance Company,
AMEX Life Assurance Company and Continental Casualty Company, a CNA insurance
company, have agreed to return to the Company, as a commission, the excess, if
any, of the total premiums paid during each year over the sum of the claims paid
or reserved plus a specified percentage of the total premiums. The Company
continuously seeks to develop new enhancement features which may be added to any
package at an additional cost to the financial institution.
The Company generally charges a financial institution client an initial fee to
implement this program and monthly fees thereafter based on the number of member
accounts participating in that financial institution's program. The Company's
enhancement packages are designed to enable a financial institution to generate
additional fee income, because the institution should be able to charge
participating accounts more than the combined costs of the services it provides
and the payments it makes to the Company.
The Company, primarily through National Card Control Inc. ("NCCI"), a
wholly-owned subsidiary, also sells enhancement package services to credit card
issuers who make these services available to their credit card holders. NCCI's
credit card issuer clients also select a customized package of the Company's
products and services. These enhancements include many of those offered by FISI
to the checking account customers of its financial institution clients, such as
the Company's shopping, travel and credit card registration services.
Like FISI, NCCI generally charges its credit card issuer clients an initial fee
to implement the program and monthly fees thereafter, based on the number of
member accounts participating in that institution's program.
Financial Products. Essex Corporation ("Essex"), a subsidiary of the Company, is
a third-party marketer of financial product memberships for banks, primarily
marketing annuities through financial institutions. Essex generally markets
annuities issued primarily by insurance companies or their affiliates, mutual
funds issued by mutual fund companies or their affiliates, and proprietary
mutual funds of banks. Essex's contracts with the insurance companies whose
financial product memberships it distributes generally entitle Essex to a
commission of slightly less than 1% on the premiums generated through Essex's
sale of annuities for these insurance companies.
-4-
Discount Program Memberships. The Company, primarily through its wholly-owned
subsidiary, Entertainment, offers discount program membership in specific
markets throughout North America and certain international markets and enhances
other of the Company's individual and wholesale memberships. The Company
believes it is the largest marketer of discount program memberships of this type
in the United States.
The Company solicits restaurants, hotels, motels, theaters, retailers and other
businesses which agree to offer services and/or merchandise at discount prices
(primarily on a two-entrees-for-the-price-of-one or 50% discount basis). The
Company sells discount coupon memberships, under its Entertainment(R), Gold C(R)
and other trademarks, typically containing coupons for hundreds of discount
offers from participating establishments. Targeting middle to upper income
consumers, Entertainment(R) coupon books also contain selected discount travel
offers, including offers for hotels, restaurants and tourist attractions. More
than 100,000 merchants participate in these programs. Entertainment has used
this national base of merchants to develop other products, most notably,
customized memberships. Membership books customized for major corporations
typically contain portions of Entertainment(R) books, along with other discount
offers.
Entertainment(R) coupon book memberships are distributed annually by geographic
area. Members are solicited through nonprofit organizations, corporations and,
to a lesser extent, through retailers and directly from the public. Customized
books are distributed primarily by major corporations as premiums and incentives
for their employees. The coupon books are generally provided to nonprofit
organizations and corporations on a consignment basis.
While prices of local coupon memberships vary, the customary price for
Entertainment(R) and Gold C(R) coupon book memberships ranges between $10 and
$50. Customized book memberships are generally sold at significantly lower
prices. In fiscal 1996, 147 Entertainment(R) editions (1996 Edition) were
published in North America.
Sally Foster Gift Wrap, LP, a subsidiary of the Company, provides fundraising
institutions with seasonal products, primarily through public and private
elementary schools. The Company uses its Gold C(R) sales force to sell these
products, often combining the sale of gift wrap with other membership services.
In February 1995, the Company acquired Welcome Wagon International, Inc.
("Welcome Wagon"), a 67-year old organization which has over 2,000 field
representatives who visit households and campuses each year to provide consumers
with discounts for local merchants. In June 1995, the Company acquired Getko
Group Inc. ("Getko"). Getko distributes complimentary welcoming packages which
provide new homeowners throughout the United States and Canada with discounts
for local merchants. The Company plans to expand Welcome Wagon's and Getko's
market penetration and the number of their membership offerings to include some
of the Company's programs.
In January 1996, the Company acquired Advance Ross Corporation ("Advance Ross"),
a processor of value-added tax ("VAT") refunds to travelers in over 20 European
countries. Advance Ross, through its subsidiary, Europe Tax-free Shopping
("ETS") has affiliations with over 90,000 retailers as well as a presence in
most major European airports. The Company plans to expand the services ETS
provides to travelers to include Entertainment(R) coupon book memberships and
Travelers Advantage(R).
Insurance Products. The Company, through BCI, serves as a third party
administrator for marketing accidental death insurance throughout the country to
the customers of BCI's financial institution clients. This accidental death
insurance is often combined with other Company membership services to enhance
their value. These products are generally marketed through direct mail
solicitations, which generally offer $1,000 of accidental death insurance at no
cost to the member and the opportunity to choose additional coverage of up to
$250,000. The annual membership fee generally ranges from $10 to $250.
BCI's insurance products and other services are offered through credit unions to
their account holders and to the account holders of FISI's and Comp-U-Card's
financial institution clients. BCI also markets the Company's shopping, travel,
automobile and discount coupon program membership services to its clients.
-5-
DISTRIBUTION CHANNELS
The Company markets its individual, wholesale, and discount program memberships
through a variety of distribution channels. The consumer is ultimately reached
in the following ways: 1) at financial institutions or other associations
through direct marketing; 2) at financial institutions or other associations
through a direct sales force, participating merchant or general advertising; and
3) through fundraisers such as schools and charitable institutions.
Some of the Company's individual memberships, such as shopping, travel and auto
services, are available on-line to interactive computer users via on-line
services and the Internet's World Wide Web. These users are solicited primarily
through direct mail, inserts in newly-purchased computer equipment containers
and interactive communications networks, such as the CompuServe Information
Service, America Online and Prodigy. The Company believes that its interactive
users account for less than 1% of its total members. The Company is currently
working with a range of industry leaders developing interactive technologies.
Strategic alliances have been formed with major phone companies, cable companies
and on-line services. The Company has participated in the launch of interactive
services including working with Time Warner in Orlando, Florida to market
interactive TV home-shopping services.
RECENT DEVELOPMENTS
During February 1996, the Company entered into two separate agreements to
acquire Davidson & Associates, Inc. and Sierra On-Line, Inc., two
industry-leading publishers of education and entertainment software. These
proposed acquisitions should open major new opportunities in those consumer
markets (see Item 8: "Financial Statements and Supplementary Data - Note I -
Subsequent Events").
During April 1996, the Company entered into an agreement to acquire Ideon Group,
Inc. ("Ideon"), whose SafeCard Services unit is a leading provider of credit
card enhancement services across the United States. The acquisition of Ideon
should enhance the Company's product offerings as well as complement the
Company's client and membership bases (see Item 8: "Financial Statements and
Supplementary Data - Note J - Event (Unaudited) Subsequent to Date of
Independent Auditors' Report").
REGULATION
The Company markets its products and services through a number of distribution
channels including telemarketing, direct mail and on-line. These channels are
regulated on the state and federal level and the Company believes that these
activities will increasingly be subject to such regulation. Such regulation may
limit the Company's ability to solicit new members or to offer one or more
products and services to existing members and may materially affect the
Company's business and revenues.
Certain of the Company's products and services (such as Buyers Advantage(R),
certain insurance products and the Company's vacation exchange services) are
also subject to state and local regulations. The Company believes that such
regulations do not have a material impact on its business or revenues.
INTERNATIONAL
The Company has exclusive licensing agreements covering the use of its
merchandising systems in Japan, Canada and Australia, under which licensees paid
initial license fees and agree to pay royalties to the Company on membership
fees, access fees and merchandise service fees paid to them. In March 1995, the
Company acquired the parent of its European licensee, CUC Europe Limited,
pursuant to an option granted to the Company in fiscal 1993. Royalties to the
Company from these licenses and the Company's European license were less than 1%
of the Company's revenues and profits in each of the fiscal years ended January
31, 1996, 1995 and 1994.
-6-
In March 1995, the Company acquired Credit Card Sentinel (U.K.) Limited ("CCS").
CCS is a leading provider of credit card enhancement services generally marketed
through European financial institutions, with members throughout the United
Kingdom and Sweden.
In fiscal 1996, in addition to Canadian coupon book memberships,
Entertainment(R) coupon book memberships were distributed in six European
markets and Australia. The Canadian coupon book memberships are published
independently by a Canadian subsidiary of Entertainment and the European
memberships are published by the Company's European subsidiaries. The Australian
coupon book memberships are published by an Australian joint venture in which
Entertainment has a controlling interest. United States and Canadian memberships
are also made available to foreign travelers. With publication of these overseas
memberships, the Company has created additional custom-designed programs for
international use.
Interval's primary international operating facility is located in London.
Interval's overseas operations also include field offices and affiliations with
resorts in many countries.
ETS currently provides VAT refunds in over 20 European countries at refund
points at most international airports, ferry terminals and border crossings in
those countries. ETS' primary international operating facility is located in
Sweden.
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 (see Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources;
Inflation; Seasonality").
SEASONAL NATURE OF BUSINESS
Except principally for the sale of discount coupon program memberships, the
Company's business is not seasonal. Publication of Entertainment(R) and Gold C
Savings Spree(R) books is generally completed in October of each year with
significant member solicitations beginning soon thereafter. Most cash receipts
from these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and third quarters of each fiscal year. For
financial statement purposes, the Company recognizes these membership fees over
the service period.
COMPETITION
Individual Memberships. The Company believes that there are competitors which
offer membership programs similar to the Company's and some of these entities,
which include large retailers, travel agencies, insurance companies and
financial service institutions, have financial resources, product availability,
technological capabilities or customer bases substantially greater than those of
the Company. To date, the Company has been able to compete effectively with such
competitors. However, there can be no assurances that it will continue to be
able to do so. In addition, the Company competes with traditional methods of
merchandising that enjoy widespread consumer acceptance, such as catalog and
in-store retail shopping and shopping clubs (with respect to its discount
shopping service), and travel agents (with respect to its discount travel
service). The Company's systems are not protected by patent. In its vacation
exchange business, the Company believes there are various travel providers and
exchange companies with greater financial resources than itself.
Wholesale Memberships. Each of the Company's account enhancement membership
services competes with similar services offered by other companies, including
insurance companies. Many of the competitors are large and more established,
with far greater resources and financial capabilities than those of the Company.
Finally, in attempting to attract any relatively large financial institution as
-7-
a client, the Company also competes with that institution's in-house marketing
staff and the institution's possible perception that it could establish programs
with comparable features and customer appeal without paying for the services of
an outside provider.
Discount Program Memberships. The Company believes that there are a number of
competitors in most markets throughout North America which offer similar
discount program memberships. The majority of these competitors are relatively
small, with coupon books in only a few markets. To date, the Company has been
able to compete effectively in markets that include these competitors, primarily
on the basis of price and product performance. The Company does not anticipate
that these competitors will significantly affect the Company's ability to
expand.
EMPLOYEES
As of March 29, 1996, the Company had approximately 11,000 employees. None of
the Company's employees are represented by a labor union. The Company has never
experienced a strike or work stoppage, and believes its relations with its
employees are good.
OTHER
As certain of the statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995), they involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
ITEM 2.
PROPERTIES
The Company's principal executive offices are located in Stamford, Connecticut.
The Company also leases office space in Brentwood, Tennessee; San Carlos,
California; Spartanburg, South Carolina; Troy, Michigan; and Trumbull,
Connecticut, as well as several smaller locations throughout the world. In
addition, the Company owns and leases operation centers in several other states.
Management expects that, in the normal course of business, most leases will be
renewed or replaced by other leases upon expiration. The Company believes that
its properties and those of its subsidiaries and divisions are suitable to their
respective businesses and have productive capacities adequate to the needs of
such businesses.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
January 31, 1996.
-8-
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is traded
on the New York Stock Exchange ("NYSE") under the symbol CU. The following table
sets forth for the periods indicated the high and low closing sale prices per
share as reported on the NYSE.
High Low
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Fiscal Year Ended January 31, 1996
First Quarter 27 1/8 23 1/8
Second Quarter 31 1/8 24 1/2
Third Quarter 36 3/8 29 7/8
Fourth Quarter 38 30
Fiscal Year Ended January 31, 1995
First Quarter 21 7/8 18
Second Quarter 20 3/8 17 1/8
Third Quarter 23 1/8 20 3/8
Fourth Quarter 24 1/8 19 1/8
The stock prices have been adjusted to give retroactive effect to the
three-for-two stock split effective June 30, 1995 for shareholders of record on
June 19, 1995. The closing sale price for the Common Stock on March 29, 1996 was
$29 1/4, with approximately 6,854 shareholders of record as of that date.
The Company has not paid any dividends with respect to the Common Stock, since
inception, other than a special dividend of cash and convertible subordinated
debentures paid in connection with a recapitalization of the Company effected in
fiscal 1990 (the "Recapitalization"). The Amended and Restated Credit Agreement
entered into by the Company and General Electric Capital Corporation ("GECC"),
as Agents, as of June 30, 1994 (the "GECC Credit Agreement"), was terminated
effective March 19, 1996 (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources; Inflation;
Seasonality"). However, the GECC Credit Agreement contained restrictions that
precluded the payment of cash dividends on shares of Common Stock.
-9-
ITEM 6.
SELECTED FINANCIAL DATA
(In thousands, except for per common share data)
Year Ended January 31,
------------------------------------------------------------------------------------
1996 (b) 1995 (e) 1994 1993 (f) 1992
------------------------------------------------------------------------------------
Income Statement Data (a)
Total revenues $1,414,964 $1,182,896 $984,801 $800,971 $699,049
Income from continuing operations before
income taxes 266,343 (c) 201,785 153,258 101,402 60,536 (g)
Income from continuing operations 163,374 (c) 124,566 94,151 63,667 33,901 (g)
Income per common share from continuing
operations (d) $ .84(c) $ .66 $ .51 $ .38 $ .21 (g)
====================================================================================
Weighted average number of common and
dilutive common equivalent shares
outstanding (d) 194,666 189,219 183,113 167,908 163,690
====================================================================================
Balance Sheet Data (a)
Total assets $1,141,306 $ 878,637 $708,018 $569,077 $378,339
Long-term debt (h) 5,451 16,965 23,601 29,855 16,330
Zero coupon convertible notes 14,410 15,046 22,176 37,295 69,228
Stockholders' equity (i) 727,212 480,163 312,047 167,381 19,604
Working capital 617,862 424,437 281,384 134,230 99,887
(a) Includes Getko Group Inc. ("Getko"), North American Outdoor Group, Inc.
("NAOG") and Advance Ross Corporation ("Advance Ross") (see Note B to
Consolidated Financial Statements).
(b) During fiscal 1996, the Company acquired Welcome Wagon International, Inc.
("Welcome Wagon"), CUC Europe Limited and Credit Card Sentinel (U.K.)
Limited (see Note B to the Consolidated Financial Statements).
(c) Includes provision for costs incurred in connection with the acquisition of
Advance Ross. The charge aggregated $5.2 million ($4.2 million or $.02 per
common share after-tax effect).
(d) Adjusted to give retroactive effect to the three-for-two stock split
effective June 30, 1995 for shareholders of record on June 19, 1995.
(e) During fiscal 1995, the Company acquired Essex Corporation and subsidiaries
("Essex") (see Note B to the Consolidated Financial Statements).
(f) During fiscal 1993, the Company acquired Leaguestar plc and Sally Foster
Gift Wrap, LP ("Sally Foster").
(g) Includes provision for costs incurred in connection with the integration of
the operations of the Company and Entertainment Publishing Corp. (acquired
during fiscal 1992 in a transaction accounted for in accordance with the
pooling-of-interests method) and costs of professional fees and other
expenses related to the merger with Entertainment Publishing Corp. The
charge aggregated $20.7 million ($15 million or $.09 per common share
after-tax effect). Also includes a gain from the sale of an unconsolidated
affiliate of Advance Ross. The gain aggregated $11.7 million ($7 million or
$.04 per common share after-tax effect).
-10-
(h) Includes current portion of long-term debt of $1.4 million, $9 million,
$6.3 million, $3.4 million and $1.2 million at January 31, 1996, 1995,
1994, 1993 and 1992, respectively. Excludes $5.5 million, $23.2 million and
$26.7 million of amounts due under revolving credit facilities at January
31, 1994, 1993 and 1992, respectively, and $6 million due at January 31,
1993 under a note payable issued in connection with the acquisition of
Sally Foster.
(i) No Common Stock cash dividends have been paid or declared during the five
years ended January 31, 1996. However, an insignificant amount of cash
dividends were paid in respect of the NAOG common stock for the fiscal
years ended January 31, 1994, 1993 and 1992.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1996 VS. YEAR ENDED JANUARY 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
33.9 million members at January 31, 1995 to 46.5 million members at January 31,
1996), which is the largest contributing factor to the 20% increase in revenues
(from $1,182.9 million in fiscal 1995 to $1,415 million in fiscal 1996). While
the overall membership base increased by 12.6 million members, or 37%, during
the year (of which approximately 8 million members came from acquisitions
completed during the year (members resulting from acquisitions being "Acquired
Members")), the average annual fee charged for the Company's membership services
increased by 3.5%. 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.
In the 1996 fiscal year, individual, wholesale and discount program memberships
grew by 14%, 19% and 11%, respectively, in addition to the increase due to
Acquired Members. For the year ended January 31, 1996, individual, wholesale and
discount program memberships represented 63%, 14% and 23% of revenues,
respectively. Discount program memberships have incurred the largest increase
from Acquired Members. Welcome Wagon, Getko and Advance Ross, all acquired in
fiscal 1996, are classified in this membership category as their businesses
provide local discounts to consumers. The Company maintains a flexible marketing
plan so that it is not dependent on any one service for the future growth of the
total membership base. The Company completed a number of acquisitions accounted
for under the purchase method of accounting during fiscal 1996. The total
revenues contributed by these acquisitions are not material to the Company's
total reported revenues (see Note B to the Consolidated Financial Statements).
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, amortization of restricted stock compensation, merger costs and
income taxes ("EBIT") increased from $202.4 million to $270.7 million and EBIT
margins improved from 17.1% to 19.1%.
-11-
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $335
million, $315 million and $285 million, respectively, for the fiscal years ended
January 31, 1996, 1995 and 1994. This represents 19%, 21% and 22%, respectively,
of the gross revenues accrued for all services. The Company records its deferred
revenue net of estimated cancellations which are anticipated in the Company's
marketing programs. The number of cancellations has increased due to the
increased level of marketing efforts, but has decreased as a percentage of the
total number of members.
Operating costs increased 18% (from $320.8 million to $379.9 million). The major
components of the Company's operating costs continue to be personnel, telephone,
computer processing and participant insurance premiums (the cost of obtaining
insurance coverage for members). In addition, operating costs include travel
cash awards. Travel members are entitled to receive cash awards based on travel
booked with the Company. For the year ended January 31, 1996, these awards
represent less than 5% of total operating costs. 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. Historically, the Company has seen a direct correlation between
providing a high level of service to its members and improved retention.
Marketing costs decreased as a percentage of revenues, from 41% to 39%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
19% (from $388.4 million to $464 million) as a result of the increased marketing
effort which resulted in an increased number of new members acquired. Marketing
costs include the amortization of membership acquisition costs and other
marketing costs, which primarily consist of membership communications and sales
expenses. Amortization of membership acquisition costs increased by 16% (from
$361 million to $417.1 million). Other marketing costs increased by 18% (from
$118.6 million to $139.8 million). This increase resulted primarily from the
costs of servicing a larger membership base. 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
(15%). This is the result of the Company's ongoing ability to control overhead.
Interest (income) expense, net, decreased from $.6 million to $(.9) million due
to the reduced level of amortization associated with the Company's restricted
stock and zero coupon convertible notes and the net interest income from the
increased level of cash generated by the Company for investment.
YEAR ENDED JANUARY 31, 1995 VS. YEAR ENDED JANUARY 31, 1994
The Company's overall membership base continues to grow at a rapid rate (from
30.9 million members at January 31, 1994 to 33.9 million members at January 31,
1995), which is the largest contributing factor to the 20% increase in revenues
(from $984.8 million in fiscal 1994 to $1,182.9 million in fiscal 1995). While
the overall membership base increased by 3 million members before adjustment for
Acquired Members resulting from the fiscal 1996 pooling-of-interests
transactions, or 10%, during the past year, the average annual fee charged for
the Company's membership services increased by 3%. The Company divides its
memberships into three categories: individual, wholesale and discount program
memberships. All of these categories share various aspects of the Company's
marketing and operating resources. In the 1995 fiscal year, individual,
wholesale and discount program memberships grew by 11%, 6% and 11%,
respectively. For the year ended January 31, 1995, individual, wholesale and
discount program memberships represented 65%, 13% and 22% of revenues,
respectively. The Company maintains a flexible marketing plan so that it is not
dependent on any one service for the future growth of the total membership base.
The Company completed an acquisition of Essex, a privately
-12-
owned third-party marketer of financial products for banks, and certain
other entities, during fiscal 1995. The total revenues contributed by this
acquisition are not material to the Company's total reported revenues. This
acquisition was accounted for in accordance with the purchase method of
accounting and, accordingly, the results of operations have been included in the
consolidated results of operations from the date of acquisition (see Note B to
the Consolidated Financial Statements).
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. As a result, EBIT increased from
$160.3 million to $202.4 million and EBIT margins improved from 16.3% to 17.1%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $315
million, $285 million and $270 million, respectively, for the fiscal years ended
January 31, 1995, 1994 and 1993. This represents approximately 21%, 22% and 25%
of the gross revenues accrued for all services. The Company records its deferred
revenue net of estimated cancellations which are anticipated in the Company's
marketing programs. The number of cancellations has increased due to the
increased level of marketing efforts, but has decreased as a percentage of the
total number of members.
Operating costs increased 20% (from $267.8 million to $320.8 million). The major
components of the Company's operating costs continue to be personnel, telephone,
computer processing, participant insurance premiums (the cost of obtaining
insurance coverage for members) and travel cash awards. Travel members are
entitled to receive cash awards based on travel booked with the Company. For the
year ended January 31, 1995, these awards represent less than 5% of total
operating costs. 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. Historically, the Company
has seen a direct correlation between providing a high level of service to its
members and improved retention.
Marketing costs increased as a percentage of revenue, from 40% to 41%. This
increase is primarily due to a higher volume of membership communications
distributed throughout the year as well as servicing a larger membership base.
Membership acquisition costs incurred increased 13% (from $344 million to $388.4
million). Marketing costs include the amortization of membership acquisition
costs and other marketing costs, which primarily consist of membership
communications and sales expenses. Amortization of membership acquisition costs
increased by 15% (from $314.2 million to $361 million). Other marketing costs
increased by 48% (from $80.3 million to $118.6 million). This increase resulted
primarily from the costs of servicing a larger membership base as well as costs
to establish the American Airlines AAdvantage Dining program. 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 products.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Based on current
information, the Company does not anticipate that the average renewal rate will
change significantly. Renewal rates are calculated by dividing the total number
of renewing members not requesting a refund during their renewal year by the
total members up for renewal.
General and administrative costs decreased as a percentage of revenue, from 16%
to 15%. This is the result of the Company's ongoing ability to control overhead.
Interest (income) expense, net decreased from $7 million to $.6 million
primarily due to the reduction of the Company's average outstanding loan
balance.
-13-
MEMBERSHIP INFORMATION
The following chart sets forth the approximate number of members and net
additions for the last three fiscal years:
Net New Member Additions
Year Ended Number of Members for the Period
------------------------------------------------------------------------------
January 31, 1996 46,480,000 12,630,000*
January 31, 1995 33,850,000 3,000,000
January 31, 1994 30,850,000 3,250,000
*Includes approximately 8 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximates the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Cancellations for memberships processed by the Company for the years ended
January 31, 1996, 1995 and 1994 were $335 million, $315 million and $285
million, respectively. This cancellation data does not reflect cancellations
processed by certain of the Company's clients which report membership
information only on a net basis. Accordingly, the Company does not receive
actual numbers of gross additions and gross cancellations for certain types of
memberships. In calculating the number of members, the Company has deducted its
best estimate of cancellations which may occur during the trial membership
periods offered in its marketing programs. Typically, these periods range from
one to three months.
LIQUIDITY AND CAPITAL RESOURCES; INFLATION; SEASONALITY
Funds for the Company's operations have been provided principally through cash
flow from operations and credit facilities, while acquisitions have also been
funded through the issuance of Common Stock. The Company terminated the GECC
Credit Agreement effective March 19, 1996 and entered into the New Credit
Agreement during March 1996 as defined and described in Note D to the
Consolidated Financial Statements. The New Credit Agreement provides for a $500
million revolving credit facility with a variety of different types of loans
available thereunder. The New Credit Agreement contains certain customary
restrictive covenants including, without limitation, financial covenants and
restrictions on certain corporate transactions, and also contains various events
of default provisions including, without limitation, defaults arising from
certain changes in control of the Company.
The Company invested approximately $60.6 million in acquisitions, net of cash
acquired, during fiscal 1996. These acquisitions have been fully integrated into
the Company's operations. The Company is not aware of any trends, demands or
uncertainties that will have a material effect on the Company's liquidity other
than those relating to accounts receivable. The Company anticipates that cash
flow from operations and its credit agreement will be sufficient to achieve its
current long-term objectives.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases. Future repurchases will
be based upon market conditions and cannot be currently ascertained.
Repurchases, if any, would be funded through the Company's available cash or
availability under its credit agreement and would thus reduce liquidity.
-14-
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $30.2 million for the year ended January
31, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
will initially be financed through excess cash flow from operations and the
Company's credit agreement. However, depending on the financing necessary to
complete an acquisition, additional funding may be required.
The Accounting Standards Executive Committee's Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs," requires that all advertising
expenditures that are not for direct response advertising, be expensed as
incurred or the first time the advertising takes place. The Company adopted the
new method of accounting for advertising costs in the first quarter of fiscal
1996. The impact of adopting the new method did not have a significant effect on
the Company's financial statements.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's current plans, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted. In fiscal
1997, the Company intends to adopt the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will adopt SFAS No. 121 in fiscal 1997, and the
impact, if any, is not expected to be material.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's 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.
In fiscal 1996, the Company's international businesses represented less than 10%
of EBIT. Operating in international markets involves dealing with sometimes
volatile movements in currency exchange rates. The economic impact of currency
exchange rate movements on the Company is complex because it is linked to
variability in real growth, inflation, interest rates and other factors. Because
the Company operates in a mix of membership services and numerous countries,
management believes currency exposures are fairly well diversified. To date,
currency exposure has not been a significant competitive factor at the local
market operating level. As international operations continue to expand and the
number of cross-border transactions increases, the Company intends to continue
monitoring its currency exposures closely and take prudent actions as
appropriate.
-15-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-16-
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying consolidated balance sheets of CUC
International Inc. as of January 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended January 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Advance Ross Corporation, a wholly-owned subsidiary, which statements reflect
total assets of $64.1 million as of December 31, 1994 (included in the January
31, 1995 consolidated balance sheet), and total revenues of $66.5 million and
$50.3 million, for the years ended December 31, 1994 and 1993, respectively
(included in the consolidated statements of income for the years ended January
31, 1995 and 1994, respectively). Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Advance Ross Corporation, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and as to the January 31, 1995 and 1994
consolidated financial statements the report of other auditors referred to
above, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CUC
International Inc. at January 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Stamford, Connecticut
March 19, 1996
-17-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advance Ross Corporation
Chicago, Illinois
We have audited the consolidated balance sheet of Advance Ross Corporation and
subsidiaries as of December 31, 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1994 and 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Advance Ross Corporation and
subsidiaries at December 31, 1994, and the results of their operations and their
cash flows for the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 13, 1995
-18-
CUC International Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands)
January 31
1996 1995
--------------------------------
Assets
Current assets:
Cash and cash equivalents $ 269,987 $209,054
Receivables, less allowance of $10,705 and $10,548 297,842 224,856
Membership solicitations in process 60,713 45,636
Prepaid membership materials 39,061 33,268
Prepaid expenses, deferred income taxes, and other 100,104 71,892
--------------------------------
Total current assets 767,707 584,706
Contract renewal rights, net 37,943 44,705
Excess of cost over net assets acquired, net 238,104 167,311
Properties, net 61,441 43,357
Deferred income taxes and other 36,111 38,558
--------------------------------
Total assets $1,141,306 $878,637
================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 124,902 $134,578
Federal and state income taxes 24,943 25,691
--------------------------------
Total current liabilities 149,845 160,269
Deferred membership income, net 240,117 209,885
Zero coupon convertible notes (net of unamortized original issue discount of
$588 and $2,507) 14,410 15,046
Other 9,722 13,274
Shareholders' equity:
Common stock--par value $.01 per share; authorized 400 million shares; issued 191,820,896
shares and 185,359,196 shares 1,918 1,854
Additional paid-in capital 323,704 222,660
Retained earnings 434,407 271,128
Treasury stock, at cost, 3,410,631 shares and 2,757,894 shares (30,998) (10,505)
Unearned ESOP (1,758)
Foreign currency translation adjustment (1,819) (3,216)
--------------------------------
Total shareholders' equity 727,212 480,163
--------------------------------
Total liabilities and shareholders' equity $1,141,306 $878,637
================================
See accompanying notes.
-19-
CUC International Inc. and Subsidiaries
Consolidated Statements of Income
(Dollar amounts in thousands, except per common share amounts)
Year ended January 31,
1996 1995 1994
------------------------------------------------
Revenues
Membership and service fees $1,414,964 $1,182,896 $984,801
Expenses (income)
Operating 379,919 320,773 267,772
Marketing 556,920 479,590 394,505
General and administrative 207,401 180,166 162,231
Merger costs 5,247
Interest (income) expense, net (866) 582 7,035
------------------------------------------------
Total expenses 1,148,621 981,111 831,543
------------------------------------------------
Income before income taxes 266,343 201,785 153,258
Provision for income taxes 102,969 77,219 59,107
------------------------------------------------
Net income $ 163,374 $ 124,566 $ 94,151
================================================
Net income per common share $ .84 $ .66 $ .51
================================================
See accompanying notes.
-20-
CUC International Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollar amounts in thousands, except per common share amounts)
Foreign
Common Stock Additional Currency Total
-------------------------- Paid-in Retained Treasury Unearned Translation Shareholders'
Shares Issued Par Value Capital Earnings Stock ESOP Adjustment Equity
----------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1993 117,179,308 $ 1,172 $133,608 $ 57,651 $(9,745) $(11,667) $(3,638) $ 167,381
Three-for-two stock split 58,589,162 586 (586) 0
----------------------------------------------------------------------------------------------------
As restated 175,768,470 1,758 133,608 57,065 (9,745) (11,667) (3,638) 167,381
Exercise of stock options
($.36 to $12.67) 1,810,588 18 6,351 6,369
Issuance of stock under
stock purchase plan
($12.67 to $17.92) 71,031 1,364 1,364
Cancellation of stock under
restricted stock plan (113,063) (1) (240) (241)
Stock issued in conversion
of notes 3,897,290 39 18,316 18,355
Tax benefit arising from
exercise of stock options
and vesting of restricted
stock 20,748 20,748
Amortization of restricted
stock plan 871 871
Amortization of ESOP obligation 4,507 4,507
Dividends on preferred stock (25) (25)
Foreign currency translation
adjustment (1,433) (1,433)
Net income 94,151 94,151
-------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1994 181,434,316 1,814 181,018 151,191 (9,745) (7,160) (5,071) 312,047
Exercise of stock options
($.36 to $17.92) 1,875,533 19 10,016 10,035
Exercise of stock options
($1.52 to $8.11) by
payment of cash and
common stock
(37,500 shares) 187,500 2 1,165 (760) 407
Issuance of stock under stock
purchase plan
($17.40 to $21.07) 48,984 1 1,010 1,011
Stock issued in
conversion of notes 1,737,863 17 8,781 8,798
Tax benefit arising
from exercise of
stock options and
vesting of restricted
stock 18,816 18,816
Stock issued in connection
with acquisition 75,000 1 1,551 1,552
Amortization of restricted
stock plan 303 303
Amortization of ESOP obligation 2,331 2,331
Dividends on Getko and Advance Ross
preferred stock (562) (562)
Charge to reflect change in
Getko and NAOG fiscal years (4,067) 3,071 (996)
Foreign currency translation
adjustment 1,855 1,855
Net income 124,566 124,566
-------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1995 185,359,196 1,854 222,660 271,128 (10,505) (1,758) (3,216) 480,163
Exercise of stock
options
($0.01 to $27.00) 4,319,513 43 32,626 32,669
Exercise of stock options
($1.52 to $18.00)
by payment of cash and
common stock
(445,899 shares) 1,658,334 17 13,076 (13,090) 3
Payment of withholding taxes
on options by payment of
common stock
(206,838 shares) (7,403) (7,403)
Issuance of stock under stock
purchase plan ($23.31 to
$32.63) 53,824 1,624 1,624
Stock issued in conversion
of notes 387,882 4 2,279 2,283
Tax benefit arising from
exercise of stock
options 49,203 49,203
Stock issued in connection with
acquisition 42,147 994 994
Amortization of
ESOP obligation 1,242 1,758 3,000
Charge to reflect change in
Advance Ross
fiscal year (95) (95)
Foreign currency translation
adjustment 1,397 1,397
Net income 163,374 163,374
--------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1996 191,820,896 $1,918 $323,704 $434,407 $(30,998) $ 0 $(1,819) $727,212
==================================================================================================
- 21 -
CUC International Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year ended January 31,
1996 1995 1994
--------------------------------------------
Operating activities
Net income $ 163,374 $ 124,566 $ 94,151
Adjustments to reconcile net income to net cash provided by operating
activities:
Membership acquisition costs (463,958) (388,366) (344,024)
Amortization of membership acquisition costs 417,104 361,038 314,207
Deferred membership income 65,235 45,450 54,073
Amortization of prepaid commissions 472
Amortization of contract renewal rights and excess cost 19,702 15,375 15,747
Deferred income taxes 16,276 6,356 (1,734)
Amortization of original issue discount on convertible notes and
restricted stock 1,646 1,965 3,854
Depreciation 15,417 10,959 10,290
Change in working capital items, net of acquisitions:
Increase in receivables, net (67,975) (41,582) (25,975)
Increase in membership solicitations in process (15,077) (2,693) (2,889)
Increase in prepaid membership materials (5,562) (5,844) (6,350)
Increase in prepaid expenses (26,963) (19,506) (13,648)
Net increase in members' deposits, accounts payable and accrued
expenses and federal and state income taxes payable 18,944 12,011 38,971
Other, net (14,144) (1,413) (868)
--------------------------------------------
Net cash provided by operating activities 124,019 118,316 136,277
--------------------------------------------
Investing activities
Acquisitions, net of cash acquired (60,603) (26,601) (14,729)
Acquisitions of properties (30,242) (21,765) (8,912)
--------------------------------------------
Net cash used in investing activities (90,845) (48,366) (23,641)
--------------------------------------------
Financing activities
Issuance of common stock 30,316 13,368 7,250
Repayments of long-term obligations (2,557) (13,624) (25,766)
Dividends paid (562) (673)
--------------------------------------------
Net cash provided by (used in) financing activities 27,759 (818) (19,189)
============================================
Net increase in cash and cash equivalents 60,933 69,132 93,447
Cash and cash equivalents at beginning of year 209,054 139,922 46,475
--------------------------------------------
Cash and cash equivalents at end of year $ 269,987 $ 209,054 $ 139,922
============================================
See accompanying notes.
-22-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CUC International
Inc. and its wholly-owned subsidiaries (collectively, the "Company"). The
Company operates in one business segment providing a variety of membership
services to consumers. These services are distributed through various channels
which include financial institutions, credit unions, charities, other cardholder
based organizations and retail establishments. All significant intercompany
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF INVESTMENTS AND CONCENTRATION OF CREDIT RISKS
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. All current assets and current liabilities
are carried at cost, which approximates fair value, because of their short-term
nature. The fair value of zero coupon convertible notes at January 31, 1996 was
$84 million based on the quoted market price.
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable. This risk is limited due
to the large number of entities representing the Company's membership base.
These entities include major banks, financial institutions and large oil
companies and retailers which are primarily located throughout the United
States.
DEFERRED MEMBERSHIP INCOME, NET
In accordance with the provisions of Statement of Position 93-7, "Reporting on
Advertising Costs," membership acquisition costs are deferred and charged to
operations as membership fees are recognized. These costs, which relate directly
to membership solicitations (direct response advertising costs), principally
include: postage, printing, kits, mailings, publications (including coupon
books) and telemarketing costs. Substantially all of these costs are incurred
for services performed by outside sources. Such costs are amortized on a
straight-line basis as revenues are realized over the membership period which
averages twelve months. The membership acquisition costs incurred applicable to
obtaining a new member, for memberships other than coupon book memberships,
generally approximate the initial membership fee. Initial membership fees for
coupon book memberships generally exceed the membership acquisition costs
incurred applicable to obtaining a new member. However, if membership
acquisition costs were to exceed the membership fee, an appropriate adjustment
would be made for any significant impairment.
-23-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization of membership acquisition costs, including deferred renewal costs,
which consist principally of charges from sponsoring institutions and
publications, amounted to $417.1 million, $361 million and $314.2 million for
the years ended January 31, 1996, 1995 and 1994, respectively. All advertising
costs other than direct response advertising costs are expensed in the period
incurred. Such amounts were $139.8 million, $118.6 million and $80.3 million for
the years ended January 31, 1996, 1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and other
cardholder based institutions and are recorded as deferred membership income
upon acceptance of membership, net of estimated cancellations, and pro-rated
over the membership period.
Deferred membership income, net, is classified as a non-current liability since
working capital will not be required as the deferred income is recognized over
future periods. Deferred membership income, net, as of January 31 is comprised
of the following (in thousands):
1996 1995
-------------------------------
Deferred membership income $ 513,219 $ 425,601
Less unamortized membership acquisition costs (273,102) (215,716)
-------------------------------
Deferred membership income, net $ 240,117 $ 209,885
===============================
Provisions for membership cancellations were $27.4 million at January 31, 1996
and 1995. Such amounts are included in accrued expenses. In addition, accrued
expenses include commissions payable of $21 million and $21.4 million at January
31, 1996 and 1995, respectively, and accrued solicitation costs of $14.6 million
at January 31, 1995.
MEMBERSHIP SOLICITATIONS IN PROCESS
These costs consist of initial membership acquisition costs pertaining to
membership solicitation programs that were in process at year-end. Accordingly,
no membership fees had been received or recognized at year-end. The costs are
generally accumulated over a two or three month solicitation period and are
transferred to membership acquisition costs when the membership begins.
CONTRACT RENEWAL RIGHTS
Contract renewal rights represent the value assigned to acquired contracts and
are being amortized over 2 to 16 years using the straight-line method. As of
January 31, 1996 and 1995, accumulated amortization amounted to $50.4 million
and $44.4 million, respectively.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired is being amortized over 5 to 30
years using the straight-line method. As of January 31, 1996 and 1995,
accumulated amortization amounted to $42 million and $30.1 million,
respectively. The carrying value of the excess of cost over net assets acquired
will be reviewed by management if the facts and circumstances suggest that the
value may be impaired. If this review indicates that the carrying amounts will
not be recoverable, as determined based on the undiscounted cash flows of the
entities acquired over the remaining amortization period, management will reduce
the carrying amount by the estimated shortfall of cash flows.
-24-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON SHARE
Net income per common share of the Company's common stock, par value $.01 per
share ("Common Stock") has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding (after giving effect to
the acquisitions of Getko Group Inc. ("Getko"), North American Outdoor Group
("NAOG") and Advance Ross Corporation ("Advance Ross") (see Note B)). The
weighted average number of common and dilutive common equivalent shares was
194.7 million, 189.2 million and 183.1 million for the years ended January 31,
1996, 1995 and 1994, respectively. Fully diluted earnings per share did not
differ significantly from primary earnings per share in any year.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investment instruments with terms of three
months or less at the time of acquisition to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company will
adopt SFAS No. 121 in fiscal 1997, and the impact, if any, is not expected to be
material.
STOCK BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted. In fiscal 1997, the Company intends to
adopt the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
NOTE B--MERGERS AND ACQUISITIONS
During February 1995, the Company acquired all of the outstanding capital stock
of Welcome Wagon International, Inc. ("Welcome Wagon") and substantially all of
the assets of a related entity, Gifts International, Inc., for $19.5 million in
cash. Welcome Wagon provides discounts for local merchants through direct visits
by its representatives to households. In connection with this acquisition, the
Company received current assets of $4.8 million and noncurrent assets of $3.6
million and assumed current liabilities of $4.7 million. The excess of cost over
the fair value of net assets acquired ($15.8 million) is included in the excess
of cost over net assets acquired.
During March 1995, the Company acquired all of the outstanding capital stock of
the parent of its European licensee, CUC Europe Limited, for $13 million. The
purchase price was satisfied by the payment of $12 million in cash and the
issuance of 42,147 shares of Common Stock. In connection with this acquisition,
the Company received current assets of $4.5 million and noncurrent assets of
$9.6 million and assumed current liabilities of $6.2 million and noncurrent
liabilities of $3.3 million. The
-25-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)
excess of cost over the fair value of net assets acquired ($8.4 million) is
included in the excess of cost over net assets acquired. In addition, during
March 1995, the Company paid $2.4 million in cash to acquire its European
license. This amount has been included in the excess of cost over net assets
acquired.
During March 1995, the Company acquired all of the outstanding capital stock of
Credit Card Sentinel (U.K.) Limited ("CCS") for $22.5 million in cash. CCS is a
leading provider of credit card enhancement services, which are generally
marketed through European financial institutions. In connection with this
acquisition, the Company received current assets of $7.5 million and noncurrent
assets of $2.3 million and assumed current liabilities of $6.6 million and
noncurrent liabilities of $10.5 million. The excess of cost over the fair value
of net assets acquired ($29.8 million) is included in the excess of cost over
net assets acquired.
During fiscal 1996, the Company acquired several small privately-held discount
coupon book publishing companies, certain assets from insurance marketers and
franchisees and certain marketing and future renewal rights for an aggregate
cost of $4.2 million. The cost of these acquisitions has been included in the
excess of cost over net assets acquired ($3.7 million) and contract renewal
rights ($.5 million). In addition, during fiscal 1996 the Company acquired
certain assets from three timeshare-related businesses for an aggregate cost of
$5.2 million and paid $3.7 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
The preceding acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, their results of operations have been
included in the consolidated results of operations from the respective dates of
acquisition. The results of these entities' operations for the periods prior to
their respective dates of acquisition were not significant to the Company's
operations.
During June 1995, the Company acquired all of the outstanding capital stock of
Getko for a purchase price of approximately $100 million, which was satisfied by
the issuance of approximately 3.7 million shares of Common Stock. Getko
distributes complimentary welcoming packages to new homeowners throughout the
United States and Canada.
During September 1995, the Company acquired all of the outstanding capital stock
of NAOG for a purchase price of approximately $52 million, which was satisfied
by the issuance of approximately 1.5 million shares of Common Stock. NAOG owns
one of the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns a handyman membership
organization.
During January 1996, the Company acquired all of the outstanding capital stock
of Advance Ross for a purchase price of approximately $183 million, which was
satisfied by the issuance of 5.9 million shares of Common Stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
-26-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)
The acquisitions of Getko, NAOG and Advance Ross (collectively, the "Pooled
Entities") were accounted for in accordance with the pooling-of-interests method
of accounting. Therefore, the Company's financial statements have been restated
for all prior periods to include these entities. Further, all common share and
per common share data have been restated for prior periods and certain
reclassifications have been made to the historical financial statements to
conform to the Company's presentation.
The following represents revenues and net income of the Company and the Pooled
Entities for the two years and the last complete interim periods preceding the
mergers.
Nine Months Ended Year ended January 31,
October 31, 1995 1995 1994
-------------------------- ------------------------------------------
(Unaudited)
Revenues:
The Company $ 949,886 $ 1,044,669 $ 879,324
Pooled Entities 87,130 138,227 105,477
-------------------------- ------------------------------------------
$1,037,016 $ 1,182,896 $ 984,801
========================== ==========================================
Net Income:
The Company $ 113,656 $ 117,591 $ 87,371
Pooled Entities 7,103 6,975 6,780
-------------------------- ------------------------------------------
$ 120,759 $ 124,566 $ 94,151
========================== ==========================================
Getko, NAOG and Advance Ross previously used the fiscal years ended November 30,
December 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year end, Getko's operating results
for December 1993 and January 1994 and NAOG's operating results for January 1994
have been excluded from the year ended January 31, 1995 operating results in the
accompanying financial statements. The excluded periods have been adjusted by a
$4.1 million charge to retained earnings at January 31, 1995. In addition,
Advance Ross' operating results for January 1995 have been excluded from the
year ended January 31, 1996 operating results in the accompanying financial
statements. This excluded period has been adjusted by a $95,000 charge to
retained earnings at January 31, 1996.
In connection with the Advance Ross acquisition, the Company charged $5.2
million ($4.2 million or $.02 per common share after-tax effect) to fiscal 1996
operations for merger costs. These costs are nonrecurring and comprised
primarily of transaction costs and other professional fees. Costs incurred in
connection with the acquisitions of Getko and NAOG were not significant to the
Company's results of operations.
-27-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE B--MERGERS AND ACQUISITIONS (CONTINUED)
During January 1995, the Company acquired all of the outstanding capital stock
of Essex Corporation and subsidiaries ("Essex") for $27.5 million. The purchase
price was satisfied by the payment of $25.9 million in cash and the issuance of
75,000 shares of Common Stock. The former shareholders of Essex may receive
additional payments over the next two years, not to exceed $57.5 million in the
aggregate, based on the achievement of certain objectives. The Company's
management believes that payments to such shareholders aggregating in excess of
$30 million would be extremely remote. Essex is a third-party marketer of
financial products for banks, primarily marketing annuities through financial
institutions. In connection with this acquisition, the Company received current
assets of $8.1 million and noncurrent assets of $1.4 million and assumed current
liabilities of $7 million. The excess of cost over the fair value of net assets
acquired ($25 million) was included in the excess of cost over net assets
acquired.
During fiscal 1995, the Company acquired certain assets from three insurance
marketers for an aggregate cost of $4.1 million. The cost of these acquisitions
has been included in the excess of cost over net assets acquired ($3.9 million)
and contract renewal rights ($.2 million). In addition, during fiscal 1995 the
Company acquired a privately-held discount coupon book publishing company for $1
million and paid $.9 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
During fiscal 1994, the Company acquired a privately owned insurance marketer
for $6 million. The cost of this acquisition has been included in contract
renewal rights. In addition, during fiscal 1994 the Company acquired a marketer
of accidental death and dismemberment insurance and a company which markets
other insurance products for an aggregate cost of approximately $2.6 million.
The cost of these acquisitions has been included in the excess of cost over net
assets acquired ($1.4 million) and contract renewal rights ($1.2 million),
respectively. During fiscal 1994, an additional $5.8 million was paid to satisfy
contingent payment requirements in connection with previous acquisitions.
This amount was included in the excess of cost over net assets acquired.
These fiscal 1995 and fiscal 1994 acquisitions were accounted for in accordance
with the purchase method of accounting and, accordingly, the results of
operations have been included in the consolidated results of operations from the
respective dates of acquisition. The results of operations for the periods prior
to the respective dates of acquisition were not significant to the Company's
operations in fiscal 1995 and 1994.
NOTE C--PROPERTIES
Property acquired is recorded at cost. Depreciation of properties is provided
for using the straight-line method over the estimated useful lives of the
assets. The following is a summary of properties as of January 31 (in
thousands):
1996 1995
----------------------------
Computer equipment $ 48,593 $ 33,798
Telephone equipment 14,366 10,907
Furniture and other equipment 55,332 42,051
Building 3,758 2,649
Leasehold improvements 12,967 10,364
Less accumulated depreciation (73,575) (56,412)
----------------------------
Properties, net $ 61,441 $ 43,357
============================
-28-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE D--REVOLVING CREDIT FACILITY AND ZERO COUPON CONVERTIBLE NOTES
During the second quarter of fiscal 1995, the Company renegotiated its revolving
credit facility provided by General Electric Capital Corporation ("GECC"). The
Amended and Restated Credit Agreement, which was entered into as of June 30,
1994 (the "GECC Credit Agreement"), amended and restated an agreement that the
Company and GECC initially entered into in 1989 and was scheduled to expire June
1, 1997. The GECC Credit Agreement provided for a $100 million revolving credit
facility with interest at LIBOR plus 2 1/4% (7 11/16% at January 31, 1996) on
that portion of the outstanding balance which was less than or equal to $50
million and LIBOR plus 2 1/2% (7 15/16% at January 31, 1996) on the remaining
outstanding balance. In addition, the GECC Credit Agreement required the Company
to maintain certain financial ratios and other restrictive covenants, including
restrictions that preclude the payment of cash dividends on shares of Common
Stock. The Company has terminated the GECC Credit Agreement effective March 19,
1996 and entered into a credit agreement during March 1996 with certain banks
signatory thereto; The Chase Manhattan Bank, N.A., Bank of Montreal, Morgan
Guaranty Trust Company of New York and The Sakura Bank, Limited, as Co-Agents;
and The Chase Manhattan Bank, N.A. as Administrative Agent (the "New Credit
Agreement").
The New Credit Agreement provides for a $500 million revolving credit facility
with a variety of different types of loans available thereunder. Interest is
payable, depending on the type of loan utilized by the Company, at a variety of
rates based on the federal funds rate, LIBOR, the prime rate or rates quoted by
participating banks based on an auction process provided for in the New Credit
Agreement. In addition, the New Credit Agreement requires the Company to
maintain certain financial ratios and contains other restrictive covenants
including, without limitation, financial covenants and restrictions on certain
corporate transactions, and also contains various events of default provisions
including, without limitation, defaults arising from certain changes in control
of the Company.
The zero coupon convertible notes issued in connection with the Company's fiscal
1990 recapitalization were recorded at their fair value on the date of issuance
and were issued in $100 principal amounts and multiples thereof. Each $100
principal amount is convertible into 15.1875 shares of Common Stock. These zero
coupon convertible notes are redeemable at any time at the option of the
Company, in whole or in part, at 90.6% of principal amount, increasing ratably
to 100% on June 6, 1996.
No cash payments for interest were made under the Company's credit agreements
with GECC for the years ended January 31, 1996 and 1995. Cash payments for
interest thereunder amounted to $.3 million for the year ended January 31, 1994.
NOTE E--SHAREHOLDERS' EQUITY
During fiscal 1990, the Company made an administrative change to its incentive
stock option plans which had the effect of converting all options granted under
such plans to nonqualified options. Under these plans, options to purchase up to
11,029,922 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
-29-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE E--SHAREHOLDERS' EQUITY (CONTINUED)
The Company also has nonqualified option plans for certain employees. Under
these plans, including options to purchase 8,250,000 shares of Common Stock
added to these plans during fiscal 1996, nonqualified options to purchase up to
29,495,177 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
During October 1987, the Board of Directors adopted a plan ("1987 Plan") which,
as amended by a vote of the shareholders at the Company's fiscal 1992 annual
meeting, authorized the issuance of options for up to 17,718,750 shares of
Common Stock. The 1987 Plan grants the Board of Directors the discretion to
designate these options as incentive stock options or nonqualified stock
options. Options granted under the 1987 Plan are generally exercisable at 20% to
25% per year commencing one year from the date of grant. During fiscal 1996, the
Company's shareholders approved an amendment of the 1987 Plan to increase the
number of shares of Common Stock authorized for issuance under the 1987 Plan to
23,718,750 shares of Common Stock.
During June 1991, the Company's shareholders approved a plan authorizing the
issuance of options to the Company's non-employee directors to purchase up to
759,375 shares of Common Stock at not less than the fair market value on the
date of grant. In addition, during June 1993, the Company's shareholders
approved the 1992 Directors Stock Option Plan ("the 1992 Directors Plan"). The
1992 Directors Plan provides that options to acquire an aggregate of up to
450,000 shares of Common Stock may be granted to non-employee Directors. As of
January 31, 1996, nonqualified options to purchase 669,375 shares of Common
Stock have been granted under these two plans. Options granted under these plans
are generally exercisable at 20% to 25% per year commencing one year from the
date of grant.
In addition, during fiscal 1996, the Company's shareholders approved the 1994
Directors Stock Option Plan ("the 1994 Directors Plan"). The 1994 Directors Plan
provides that options to acquire an aggregate of up to 225,000 shares of Common
Stock may be granted to non-employee directors of the Company in office on each
of November 23, 1994, 1995, 1996 and 1997. Options granted under the 1994
Directors Plan are generally exercisable in full on the date of grant. As of
January 31, 1996, options to purchase 97,500 shares of Common Stock have been
granted under the plan.
As of January 31, 1996 and 1995, options to purchase 6,375,244 and
6,078,894 shares of Common Stock, respectively, were exercisable.
Changes in outstanding options were as follows:
Outstanding January 31, 1994 22,066,036
Options granted 7,379,794
Options exercised (2,063,033)
Options cancelled (332,220)
----------------
Outstanding January 31, 1995 27,050,577
Options granted 3,043,935
Options exercised (5,977,847)
Options cancelled (624,987)
----------------
Outstanding January 31, 1996 23,491,678
================
-30-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE E--SHAREHOLDERS' EQUITY (CONTINUED)
Outstanding options at January 31, 1996 have exercise prices ranging from $.36
to $35.75.
The Company has an employee stock purchase plan for which 750,000 shares of
Common Stock were authorized. This plan enables employees to purchase the
Company's Common Stock at 90% of the fair market value on the fifteenth day
following the last day of each calendar quarter. The remaining 10% is charged to
compensation expense. Employees may not purchase in excess of 25% of their
year-to-date earnings.
The following summarizes shares of Common Stock reserved for issuance as of
January 31, 1996:
Zero coupon convertible notes 2,278,088
Restricted stock plan 913,832
Stock options granted 23,491,678
Options not yet granted 10,012,706
Stock purchase plan 647,192
----------------
37,343,496
================
In July 1989, Getko established an Employee Stock Ownership Plan ("ESOP") for
substantially all of its employees by purchasing 40,300 shares of its
convertible preferred stock which was financed by a $15 million bank loan
guaranteed by Getko. Compensation expense resulting from the ESOP amounted to
$1.8 million, $5.4 million and $4.5 million for the years ended January 31,
1996, 1995 and 1994, respectively. During fiscal 1996, the remaining loan amount
was repaid with the proceeds from the sale of unallocated ESOP shares and the
remaining ESOP shares were distributed to participants.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases.
The Company has also authorized one million shares of voting preferred stock,
$.01 par value. No shares of preferred stock have been issued.
NOTE F--INCOME TAXES
The components of income before income taxes for the years ended January 31 are
as follows (in thousands):
1996 1995 1994
----------------------------------------------------
Domestic $245,711 $184,984 $142,860
Foreign 20,632 16,801 10,398
----------------------------------------------------
$266,343 $201,785 $153,258
====================================================
-31-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE F--INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of January 31 are as
follows (in thousands):
1996 1995
------------------------
Deferred tax assets:
Deferred membership income and acquisition costs, net $26,208 $30,685
Other accrued liabilities 4,660 4,626
Recapitalization expenses 1,181 862
Compensatory stock options 2,481 2,456
All other 4,888 4,776
------------------------
Total deferred tax assets 39,418 43,405
Deferred tax liabilities:
Insurance retention refund 19,546 13,229
Depreciation 5,775 1,273
All other 6,668 5,198
---------------------------
Total deferred tax liabilities 31,989 19,700
---------------------------
Net deferred tax assets $ 7,429 $23,705
===========================
The provision (benefit) for income taxes consists of the following for the years
ended January 31 (in thousands):
1996 1995 1994
----------------------------------------
Current:
Federal $ 73,703 $ 57,774 $ 52,143
State 6,591 7,856 6,150
Foreign 6,399 5,233 2,548
----------------------------------------
86,693 70,863 60,841
Deferred:
Federal 15,152 4,746 (1,456)
State 924 637 (262)
Foreign 200 973 (16)
----------------------------------------
16,276 6,356 (1,734)
----------------------------------------
Total provision $ 102,969 $ 77,219 $ 59,107
========================================
-32-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE F--INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes at the Federal statutory rate
to the Company's consolidated tax provision follows for the years ended January
31 (in thousands):
1996 1995 1994
-------------------------------------------
Income tax at statutory rate (35%) $ 93,220 $70,625 $53,640
State income taxes, net of Federal benefit 4,885 4,910 4,117
Foreign taxes differential 825 1,352 (363)
Amortization of excess costs 2,952 2,120 1,999
Other, net 1,087 (1,788) (286)
-------------------------------------------
$ 102,969 $77,219 $59,107
===========================================
Income tax payments amounted to $38.5 million, $43.1 million and $27.7
million for the years ended January 31, 1996, 1995 and 1994, respectively.
NOTE G--COMMITMENTS AND CONTINGENCIES
Rental expense under operating leases amounted to $27.7 million, $24.2 million
and $21.7 million for the years ended January 31, 1996, 1995 and 1994,
respectively. These leases provide for normal escalation charges in addition to
the base rental. At January 31, 1996, the minimum rental commitments under
non-cancellable operating leases with initial or remaining terms of more than
one year aggregated $118.8 million ($24.8 million for 1997, $21.2 million for
1998, $18 million for 1999, $14.6 million for 2000, $12.2 million for 2001 and
$28 million thereafter).
The Company has a Savings Incentive Plan ("Savings Plan") for all eligible
employees which qualifies as a 401(k) plan. Effective July 1, 1994,
Entertainment's Employee Stock Ownership Plan was merged into the Savings Plan.
The Savings Plan provides that a participant may contribute up to 15% of his or
her annual salary, subject to limitations, while the Company will contribute up
to $61 per pay period for the first $92 contributed by a participant. The
Company's contributions to the Savings Plan for fiscal 1996, 1995 and 1994 were
$3.7 million, $2.9 million and $2 million, respectively.
NOTE H--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands, except per common share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
Fiscal 1996
Total revenues $325,114 $347,759 $364,143 $377,948
Income before income taxes 59,047 67,029 71,821 68,446
Net income 36,046 41,692 43,021 42,615
Net income per common share .19 .21 .22 .22
Fiscal 1995
Total revenues $270,303 $288,143 $304,249 $320,201
Income before income taxes 45,876 48,922 53,342 53,645
Net income 27,969 29,948 33,211 33,438
Net income per common share .15 .16 .17 .18
-33-
CUC International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
NOTE H--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
The quarterly results of operations have been restated to reflect the
poolings-of-interests with Getko, NAOG and Advance Ross (see Note B). The fourth
quarter of fiscal 1996 includes $5.2 million ($4.2 million or $.02 per common
share after-tax effect) of merger costs incurred in connection with the
acquisition of Advance Ross.
NOTE I--SUBSEQUENT EVENTS
During February 1996, the Company entered into two separate Agreements and Plans
of Merger to acquire Davidson & Associates, Inc. ("Davidson") and Sierra
On-Line, Inc. ("Sierra") (collectively, the "Proposed Mergers"). Under the terms
of the respective agreements, the Company plans to issue .85 of one share of its
Common Stock for each share of Davidson common stock issued and outstanding and
1.225 shares of its Common Stock for each share of Sierra common stock issued
and outstanding, immediately prior to the respective effective dates of the
Proposed Mergers. The consummations of the Proposed Mergers are subject to
certain customary closing conditions, including the approval of the holders of
Davidson and Sierra common stock, respectively. Additionally, the Boards of
Directors of Davidson and Sierra have the right (but are not required) to
terminate the respective merger agreements if the average price per share of the
Company's Common Stock in specified periods prior to their respective
stockholders' meetings is below $29. Neither transaction is contingent upon the
consummation of the other transaction. The transactions will be accounted for
under the pooling-of-interests method of accounting and are expected to be
completed during the second quarter of fiscal 1997.
NOTE J--EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
During April 1996, the Company entered into an Agreement and Plan of Merger to
acquire Ideon Group, Inc. (the "Ideon Merger"). In the Ideon Merger, each share
of Ideon Group, Inc. ("Ideon") common stock outstanding on the effective date of
the Ideon Merger will be converted into Common Stock with a value of $13.50 per
share, subject to certain adjustments if the average stock price of a share of
Common Stock falls outside of a specified range. The consummation of the Ideon
Merger is subject to certain customary closing conditions, including the
approval of the holders of Ideon common stock. The Company expects upon closing
of the Ideon Merger to reserve for costs to be incurred related to the Ideon
Merger, which will include integration and transaction costs as well as costs
relating to certain outstanding litigation matters previously discussed in
Ideon's public filings. This transaction will be accounted for under the
pooling-of-interests method of accounting and is expected to be completed during
the second or third quarter of fiscal 1997.
-34-
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
-35-
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the sections
titled "Proposal 1: Election of Directors" and "Directors and Executive
Officers" is incorporated herein by reference in response to this item.
ITEM 11.
EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the section
titled "Executive Compensation and Other Information" is incorporated herein by
reference in response to this item, except that the information contained in the
Proxy Statement under the sub-headings "Compensation Committee Report on
Executive Compensation and "Performance Graph" is not incorporated herein by
reference and is not to be deemed "filed" as part of this filing.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Proxy Statement under the section
titled "Security Ownership of Management and Certain Beneficial Owners" is
incorporated herein by reference in response to this item.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-36-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) The following consolidated financial statements of CUC International
Inc. are filed under "Item 8. Financial Statements and Supplementary
Data":
Consolidated balance sheets--January 31, 1996 and 1995
Consolidated statements of income--Years ended January 31, 1996, 1995
and 1994
Consolidated statements of shareholders' equity--Years ended January
31, 1996, 1995 and 1994
Consolidated statements of cash flows--Years ended January 31, 1996,
1995 and 1994
Notes to consolidated financial statements
(a) (2) The following consolidated financial statement schedule of CUC
and (d) International Inc. is included in Item 14(d):
Schedule II--Valuation and qualifying accounts--Years ended January
31, 1996, 1995 and 1994
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, or are inapplicable, and
therefore have been omitted.
(b) Reports on Form 8-K
None.
(a) (3)
and (c) Exhibits:
Exhibit No. Description
- ---------- -----------
3.1 Restated Certificate of Incorporation of the Company, as filed
November 21, 1991, as amended June 25, 1992, and as amended June
7, 1995 (filed as Exhibit 3.1 to Company's Form 10-Q for the
period ended April 30, 1995).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's
Registration Statement, No. 33-44453, on Form S-4 dated December
19, 1991).*
4.2 Form of Zero Coupon Convertible Subordinated Debentures and Trust
Indenture between the Company and Morgan Guaranty Trust Company
of New York, as Trustee (filed as Exhibit 4(a) to the Company's
Current Report on Form 8-K, dated June 3, 1989).*
-37-
Exhibit No. Description
- ----------- -----------
10.1-10.16 Management Contracts, Compensatory Plans and Arrangements
---------------------------------------------------------
10.1 Form of Employment Contract with E. Kirk Shelton and Christopher
K. McLeod, dated February 1, 1987, as amended November 1, 1991
(filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended January 31, 1994).*
10.2 Amendment to Employment Contract with E. Kirk Shelton, dated
February 1, 1996.
10.3 Amendment to Employment Contract with Christopher K. McLeod,
dated February 1, 1996.
10.4 Employment Contract with Walter A. Forbes, dated January 1, 1987,
as amended January 1, 1991, January 1, 1993 and October 1, 1993
(filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended January 31, 1994) (the "Forbes Employment
Agreement").*
10.5 Fourth Amendment to Forbes Employment Agreement, dated as of June
1, 1994 (filed as Exhibit 10.3 to the Company's Form 10-Q for the
period ended July 31, 1994).*
10.6 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
10.7 Amendment to Agreement with Cosmo Corigliano, dated February 21,
1996.
10.8 Agreement with Amy N. Lipton, dated February 1, 1996.
10.9 Form of Employee Stock Option under the 1987 Stock Option Plan
(filed as Exhibit 10.6 to the Company's Form 10-Q for the period
ended April 30, 1995).*
10.10 Form of Director Stock Option for 1990 and 1992 Directors Stock
Option Plans (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1991,
as amended December 12, 1991 and December 19, 1991).*
10.11 Form of Director Stock Option for 1994 Directors Stock Option
Plan (filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1995).*
10.12 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.13 1990 Directors Stock Option Plan, as amended (filed as Exhibit
10.10 to the Company's Form 10-Q for the period ended April 30,
1995).*
10.14 1992 Directors Stock Option Plan, as amended (filed as Exhibit
10.11 to the Company's Form 10-Q for the period ended April 30,
1995).*
10.15 1994 Directors Stock Option Plan (filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1995).*
-38-
Exhibit No. Description
- ---------- -----------
10.16 Restricted Stock Plan and Form of Restricted Stock Plan Agreement
(filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1991, as amended
December 12, 1991 and December 19, 1991).*
10.17 Credit Agreement, dated as of March 26, 1996, among: CUC
International Inc.; the Banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust
Company of New York, and The Sakura Bank, Limited as Co-Agents;
and The Chase Manhattan Bank, N.A. as Administrative Agent.
10.18 Agreement and Plan of Merger, dated October 17, 1995, among CUC
International Inc., Retreat Acquisition Corporation and Advance
Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No. 33-64801,
filed on December 7, 1995).*
10.19 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Davidson & Associates, Inc., CUC International Inc. and
Stealth Acquisition I Corp. (filed as Exhibit 2(a) to the
Company's Report on Form 8-K filed March 12, 1996).*
10.20 Agreement and Plan of Merger, dated as of February 19, 1996, by
and among Sierra On-Line, Inc., CUC International Inc. and Larry
Acquisition Corp. (filed as Exhibit 2(b) to the Company's Report
on Form 8-K filed March 12, 1996).*
10.21 Agreement and Plan of Merger, dated as of April 19, 1996, by and
among Ideon Group, Inc., CUC International Inc. and IG
Acquisition Corp.
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
- ------------------------
* Incorporated by reference
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CUC International Inc.
----------------------------------------------------
(Registrant)
By /s/ Walter A. Forbes
----------------------------------------------------
Walter A. Forbes
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 10, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
by /s/ Walter A. Forbes Chief Executive Officer and
-------------------------------------- Chairman of the Board
(Walter A. Forbes) (Principal Executive Officer) April 10, 1996
by /s/ Cosmo Corigliano Senior Vice President and
-------------------------------------- Chief Financial Officer
(Cosmo Corigliano) (Principal Financial and Accounting Officer) April 10, 1996
by /s/ Bartlett Burnap Director April 10, 1996
--------------------------------------
(Bartlett Burnap)
by /s/ T. Barnes Donnelley Director April 10, 1996
--------------------------------------
(T. Barnes Donnelley)
by /s/ Stephen A. Greyser Director April 10, 1996
--------------------------------------
(Stephen A. Greyser)
by /s/ Christopher K. McLeod Director April 10, 1996
--------------------------------------
(Christopher K. McLeod)
by /s/ Burton C. Perfit Director April 10, 1996
--------------------------------------
(Burton C. Perfit)
by /s/ Robert P. Rittereiser Director April 10, 1996
--------------------------------------
(Robert P. Rittereiser)
by /s/ Stanley M. Rumbough, Jr. Director April 10, 1996
--------------------------------------
(Stanley M. Rumbough, Jr.)
by /s/ E. Kirk Shelton Director April 10, 1996
--------------------------------------
(E. Kirk Shelton)
-40-
CUC International Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged Charged to
Beginning to Costs Other Accounts Deductions Balance at
Description of Period and Expenses --Describe --Describe End of Period
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1996:
Allowance for doubtful accounts $10,548,000 $22,980,000 $ 105,000 (A) $22,928,000 (B) $10,705,000 (E)
Allowance for membership 27,412,000 335,359,000 (C) 335,336,000 (D) 27,435,000 (F)
cancellations
YEAR ENDED JANUARY 31, 1995:
Allowance for doubtful accounts 5,117,000 21,250,000 122,000 (A) 15,941,000 (B) 10,548,000 (E)
Allowance for membership
cancellations 24,353,000 317,686,000 (C) 314,627,000 (D) 27,412,000 (F)
YEAR ENDED JANUARY 31, 1994:
Allowance for doubtful accounts 5,370,000 11,615,000 11,868,000 (B) 5,117,000 (E)
Allowance for membership
cancellations 21,330,000 288,289,000 (C) 285,266,000 (D) 24,353,000 (F)
(A) Pre-acquisition balance of subsidiary purchased during fiscal year
(B) Uncollectible accounts written off
(C) Charged to balance sheet account "Deferred Membership Income"
(D) Charges for refunds upon membership cancellations
(E) Deducted from balance sheet account "Receivables"
(F) Included in accrued expenses
- 41 -
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
3.1 Restated Certificate of Incorporation of the Company, as
filed November 21, 1991, as amended June 25, 1992, and as
amended June 7, 1995 (filed as Exhibit 3.1 to the Company's
Form 10-Q for the period ended April 30, 1995).*
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement,
No. 33-44453, on Form S-4 dated December 19, 1991).*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 33-44453, on Form S-4 dated December 19, 1991).*
4.2 Form of Zero Coupon Convertible Subordinated Debentures and Trust Indenture between
the Company and Morgan Guaranty Trust Company of New York, as Trustee (filed as
Exhibit 4(a) to the Company's Current Report on Form 8-K, dated June 3, 1989).*
10.1-10.16 Management Contracts, Compensatory Plans and Arrangements
---------------------------------------------------------
10.1 Form of Employment Contract with E. Kirk Shelton and Christopher K. McLeod, dated
February 1, 1987, as amended November 1, 1991 (filed as Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended January 31, 1994).*
10.2 Amendment to Employment Contract with E. Kirk Shelton, dated February 1, 1996.
10.3 Amendment to Employment Contract with Christopher K. McLeod, dated February 1,
1996.
10.4 Employment Contract with Walter A. Forbes, dated January 1, 1987, as amended
January 1, 1991, January 1, 1993 and October 1, 1993 (filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended January 31, 1994) (the
"Forbes Employment Agreement").*
10.5 Fourth Amendment to Forbes Employment Agreement, dated as
of June 1, 1994 (filed as Exhibit 10.3 to the Company's
Form 10-Q for the period ended July 31, 1994).*
10.6 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year ended January 31,
1995).*
10.7 Amendment to Agreement with Cosmo Corigliano, dated February 21, 1996.
-42-
INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
---------- ----------- ----
10.8 Agreement with Amy N. Lipton, dated February 1, 1996.
10.9 Form of Employee Stock Option under the 1987 Stock Option Plan (filed as Exhibit
10.6 to the Company's Form 10-Q for the period ended April 30, 1995).*
10.10 Form of Director Stock Option for 1990 and 1992 Directors
Stock Option Plans (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1991, as amended December 12, 1991 and
December 19, 1991).*
10.11 Form of Director Stock Option for 1994 Directors Stock Option Plan (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1995).*
10.12 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the Company's Form
10-Q for the period ended April 30, 1995).*
10.13 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.10 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.14 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.11 to the
Company's Form 10-Q for the period ended April 30, 1995).*
10.15 1994 Directors Stock Option Plan (filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).*
10.16 Restricted Stock Plan and Form of Restricted Stock Plan Agreement (filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).*
10.17 Credit Agreement, dated as of March 26, 1996, among: CUC International Inc.; the Banks
signatory thereto; The Chase Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty
Trust Company of New York, and The Sakura Bank, Limited as Co-Agents; and The Chase
Manhattan Bank, N.A. as Administrative Agent.
10.18 Agreement and Plan of Merger, dated October 17, 1995, among
CUC International Inc., Retreat Acquisition Corporation and
Advance Ross Corporation (filed as Exhibit 2 to the Company's
Registration Statement on Form S-4, Registration No.
33-64801, filed on December 7, 1995).*
-43-
INDEX TO EXHIBITS (continued)
Exhibit No. Description Page
----------- ------------ ----
10.19 Agreement and Plan of Merger, dated as of February 19, 1996, by and among Davidson &
Associates, Inc., CUC International Inc. and Stealth Acquisition I Corp. (filed as
Exhibit 2(a) to the Company's Report on Form 8-K filed March 12, 1996).*
10.20 Agreement and Plan of Merger, dated as of February 19, 1996, by and among Sierra
On-Line, Inc., CUC International Inc. and Larry Acquisition Corp. (filed as Exhibit
2(b) to the Company's Report on Form 8-K filed March 12, 1996).*
10.21 Agreement and Plan of Merger, dated as of April 19, 1996, by and among Ideon Group,
Inc., CUC International Inc. and IG Acquisition Corp.
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
-44-