SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): July 24, 1996
CUC International Inc.
----------------------
(Exact name of registrant as specified in its Charter)
Delaware 1-10308 06-0918165
- -------------------------------------------------------------------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
707 Summer Street, Stamford, Connecticut 06901
- ---------------------------------------- ---------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (203) 324-9261
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report
ITEM 5.
OTHER EVENTS
As previously disclosed by CUC International Inc., a Delaware corporation (the
"Company") in prior fillings: During July 1996, the Company merged certain of
its subsidiaries with Davidson & Associates, Inc. ("Davidson") and Sierra
On-Line, Inc. ("Sierra") by issuing approximately 30.1 million shares and
25.6 million shares of the Company's common stock, par value $.01 per share
("Common Stock"), respectively. Davidson and Sierra develop, publish and
distribute educational and entertainment software for home and school use.
During August 1996, the Company merged one of its subsidiaries with Ideon Group,
Inc. ("Ideon"), principally a provider of credit card enhancement services,
by issuing approximately 11 million shares of Common Stock (the "Ideon Merger").
The above mergers have been accounted for as poolings-of-interests. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The Company has
prepared restated supplemental consolidated financial statements reflecting the
above-described transactions and is filing them as Exhibit 99.1 to this Current
Report on Form 8-K so that the Company may incorporate such financial
statements into any future registration statements by reference to this report.
Unaudited restated supplemental interim consolidated financial statements as of
April 30, 1996 and July 31, 1996 and for the three month periods ended April 30,
1996 and 1995 and for the three month and the six month periods ended July 31,
1996 and 1995 reflecting the above-described transactions have also been
included herein as Exhibit 99.2.
The supplemental consolidated financial statements do not extend through the
date of consummation of the Ideon Merger. However, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
In addition, the selected supplemental consolidated financial data and
management's discussion and analysis of financial condition and results of
operations of the Company have been prepared to give retroactive effect to
the above-described transactions and appear herein as Exhibits 99.3 and 99.4,
respectively.
ITEM 7.
FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of businesses acquired:
1. Audited consolidated financial statements of Sierra On-Line, Inc. and
subsidiaries for the fiscal year ended March 31, 1996.
2. Audited consolidated financial statements of Davidson & Associates,
Inc. for the year ended December 31, 1995.
3. Audited consolidated financial statements of Ideon Group, Inc. for the
year ended December 31, 1995.
(b) Exhibits
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
-1-
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
99.1 Supplemental Consolidated Financial Statements of CUC International
Inc. for the fiscal year ended January 31, 1996 (as restated to
reflect the acquisitions of Sierra On-Line, Inc. on July 24, 1996,
Davidson & Associates Inc. on July 24, 1996 and Ideon Group, Inc. on
August 7, 1996).
99.2 Supplemental Interim Consolidated Financial Statements of CUC
International Inc. for the three month period ended April 30, 1996 and
for the three month and the six month periods ended July 31, 1996 (as
restated to reflect the acquisitions of Sierra On-Line, Inc. on July
24, 1996, Davidson & Associates, Inc. on July 24, 1996 and Ideon Group
Inc. on August 7, 1996).
99.3 Selected Supplemental Consolidated Financial Data of CUC International
Inc. (as restated to reflect the acquisitions of Sierra On-Line Inc.
on July 24, 1996, Davidson & Associates, Inc. on July 24, 1996 and
Ideon Group, Inc. on August 7, 1996).
99.4 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of CUC International Inc. (as
restated to reflect the acquisitions of Sierra On-Line, Inc. on July
24, 1996, Davidson & Associates, Inc. on July 24, 1996 and Ideon
Group, Inc. on August 7, 1996).
-2-
(a) 1.
Sierra On-Line, Inc. and Subsidiaries
Consolidated Financial Statements
March 31, 1996 and 1995
With Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Sierra On-Line,
Inc. and subsidiaries (the "Company") as of March 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. 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 referred to above present
fairly, in all material respects, the financial position of the Company as of
March 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
June 24, 1996
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(in thousands, except share data)
ASSETS
1996 1995
-------- --------
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 40,220 $ 50,186
Marketable investment securities ................................................ 48,741 50,573
Accounts receivable, net of allowances of $14,022 and $7,265........................ 43,677 12,984
Inventories ....................................................................... 8,054 4,903
Deferred income taxes............................................................... 8,159 1,777
Other current assets (including $792 note receivable from related
parties at March 31, 1995) .................................................. 5,945 4,932
---------- ----------
Total Current Assets ..................................................... 154,796 125,355
PROPERTY, PLANT AND EQUIPMENT, net ................................................. 11,490 9,068
GOODWILL, net of accumulated amortization of $4,635 and $2,871...................... 9,785 6,498
DEFERRED INCOME TAXES .............................................................. 1,241 1,522
OTHER ASSETS ...................................................................... 1,585 2,911
---------- ----------
$ 178,897 $ 145,354
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 15,536 $ 6,127
Accrued compensation and related benefits ...................................... 7,012 4,118
Accrued incentive payments ..................................................... 538 1,562
Royalties payable (including $10 and $633 payable to a related party)............ 2,327 2,938
Deferred revenue ............................................................... 3,906 1,261
Accrued interest ................................................................ 33 1,160
Other accrued expenses (including $1,954 and $247 payable to related parties).... 7,268 5,028
---------- ----------
Total Current Liabilities .................................................. 36,620 22,194
ADVANCES UNDER PUBLISHING AGREEMENT AND
OTHER LIABILITIES .............................................................. 1,030 5,907
MINORITY INTEREST IN JOINT VENTURE ................................................. 1,233 ---
CONVERTIBLE DEBT, net of unamortized discount and issuance costs
of $586 and $1,066.............................................................. 23,389 34,634
COMMITMENTS AND CONTINGENCIES (Note 9) ........................................... --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
1,000,000 shares authorized, none outstanding ................................ --- ---
Common stock and paid-in capital, par value $.01 per share; 40,000,000
shares authorized; 20,518,871 and 18,726,519 shares issued and outstanding..... 93,018 70,052
Retained earnings ............................................................... 24,728 12,696
Net unrealized holding gains (losses)............................................ (67) 101
Cumulative translation adjustment .............................................. (705) 119
---------- ----------
116,974 82,968
Less common stock in treasury, 94,154 shares, at cost .......................... 349 349
---------- ----------
Total Stockholders' Equity ............................................... 116,625 82,619
---------- ----------
$ 178,897 $ 145,354
========== ==========
See Notes to Consolidated Financial Statements.
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands, except per share data)
1996 1995 1994
---------- ---------- ----------
REVENUES:
Net sales.............................................. $ 156,123 $ 95,821 $ 70,712
Other ................................................. 2,054 2,058 2,389
---------- ---------- ----------
158,177 97,879 73,101
---------- ---------- ----------
OPERATING EXPENSES:
Manufacturing costs ................................... 32,821 21,663 20,058
Amortization of software development costs ............ 865 9,689 8,379
Royalties (including $1,294, $819, and $256 earned
by related party)................................... 11,777 7,370 4,005
Selling, general and administrative ................... 52,135 32,777 25,685
Research and development .............................. 35,899 21,967 17,686
Purchased in-process research and development ......... --- --- 1,102
Amortization .......................................... 2,075 1,212 722
---------- ---------- ----------
135,572 94,678 77,637
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .............................. 22,605 3,201 (4,536)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Gain on sale of The ImagiNation Network ............... --- 19,739 ---
Equity in loss from The ImagiNation Network............ --- (1,990) (5,066)
Shareholder litigation costs........................... --- (1,500) ---
Contract termination and consulting fees .............. (2,302)
Interest income (including $12, $84 and $152
earned from related parties)........................ 5,022 3,713 1,331
Interest expense ...................................... (2,690) (4,306) (280)
---------- ---------- ----------
30 15,656 (4,015)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .......................... 22,635 18,857 (8,551)
INCOME TAX PROVISION (BENEFIT) ............................. 7,680 5,865 (679)
CHANGE IN VALUATION ALLOWANCE .............................. (1,215) --- ---
---------- ---------- ----------
NET INCOME (LOSS) .......................................... $ 16,170 $ 12,992 $ (7,872)
========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Primary ............................................... $ 0.77 $ 0.70 $ (0.46)
Fully diluted ......................................... 0.76 0.68 (0.46)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ............................................... 21,007 18,513 17,143
Fully diluted ......................................... 23,009 22,216 17,143
See Notes to Consolidated Financial Statements.
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands, except share data)
Common Stock Net Total
and Paid-in Capital Retained Unrealized Cumulative Treasury Stock Stock-
------------------- Earnings Holding Translation ---------------- holders'
Shares Amount (Deficit) Gains Adjustment Shares Amount Equity
------ ------ --------- ---------- ----------- ------ ------ --------
BALANCE, APRIL 1, 1993 16,776,183 $44,311 $ 7,898 $ --- $ (247) 104,474 $ (392) $ 51,570
Net loss (7,872) (7,872)
Stock options exercised 595,108 3,256 3,256
Tax benefit of stock option
transactions 442 442
INN liquidation preference 3,977 3,977
S Corporation distributions (295) (295)
Foreign currency translation
adjustment 28 28
---------- ------- ------- --------- ----------- ------- ------- --------
BALANCE, MARCH 31, 1994 17,371,291 51,986 (269) (219) 104,474 (392) 51,106
Net income 12,992 12,992
Equity contributions 266 266
Stock options exercised 333,807 2,131 2,131
Tax benefit of stock option
transactions 1,772 1,772
Conversion of convertible debt 1,021,421 13,897 13,897
Treasury stock issued (10,320) 43 43
S Corporation distributions (27) (27)
Net unrealized holding gains
on marketable investment
securities available-for-sale 101 101
Foreign currency translation
adjustment 338 338
---------- ------- ------- --------- ---------- ------- ------- --------
BALANCE, MARCH 31, 1995 18,726,519 70,052 12,696 101 119 94,154 (349) 82,619
Net income 16,170 16,170
Stock options exercised
and stock purchased under
the Employee Stock
Purchase Plan 624,611 3,758 3,758
Tax benefit of stock option
transactions 3,624 3,624
Conversion of convertible debt 837,498 11,379 11,379
S Corporation distributions (4,138) (4,138)
Stock issued for bonuses and
an amendment to an incentive
payment plan 182,285 4,107 4,107
Stock issued in business
acquisitions 147,958 98 98
Net unrealized holding gains
on marketable investment
securities available-for-sale (168) (168)
Foreign currency translation
adjustment (824) (824)
---------- ------- ------- --------- ---------- ------- ------- --------
BALANCE, MARCH 31, 1996 20,518,871 $93,018 $24,728 $ (67) $ (705) 94,154 $ (349) $ 116,625
========== ======= ======= ========= ========== ======= ======= =========
See Notes to Consolidated Financial Statements.
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands)
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 16,170 $ 12,992 $ (7,872)
Reconciliation to net cash provided by (used for) operating activities:
Depreciation ....................................................... 4,187 3,298 3,085
Amortization of intangible assets and issuance costs ............... 2,763 11,153 9,102
Gain on sale of The ImagiNation Network ............................ --- (19,739) ---
Equity loss from The ImagiNation Network ........................... --- 1,990 5,066
Sierra Pioneer Joint Venture minority interest...................... 1,233 --- ---
Purchased in-process research and development ...................... --- --- 1,102
Provision for doubtful accounts ................................... 1,205 829 650
Deferred income taxes ............................................. (2,476) (2,840) (1,394)
Other ............................................................. --- 1,880 (661)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable ............................................... (32,370) (2,670) (5,020)
Inventories ....................................................... (3,151) 127 (898)
Other current assets .............................................. (1,013) 2,937 1,880
Software development costs ........................................ --- (5,037) (6,060)
Research and development acquired ................................. --- --- (2,452)
Other assets ...................................................... 461 (1,090) (225)
Accounts payable .................................................. 9,125 1,498 (219)
Accrued compensation and related benefits .......................... 2,894 2,067 212
Royalties payable ................................................. (611) 1,583 570
Deferred revenue .................................................. 2,645 268 993
Accrued interest ................................................... (1,127) 1,160 ---
Other accrued expenses ............................................ 218 1,093 489
Advances under publishing agreement and other liabilities........... (4,877) 4,692 (14)
----------- ----------- -----------
Net cash provided by (used for) operating activities ............ (4,724) 16,191 (1,666)
INVESTING ACTIVITIES:
Proceeds from sale of The ImagiNation Network ........................ --- 19,739 ---
Proceeds from matured marketable investment securities................ 93,556 40,319 67,865
Purchases of marketable investment securities .......................... (91,724) (69,880) (65,550)
Net purchases of property, plant and equipment ......................... (6,609) (4,901) (3,628)
Loan to The ImagiNation Network ......................................... --- (2,895) ---
Payment for purchase of subsidiaries, net of cash acquired
and research and development ....................................... (1,987) (1,620) (2,797)
Net repayment of advances to The ImagiNation Network ................. --- --- 1,646
----------- ----------- -----------
Net cash used by investing activities ............................. (6,764) (19,238) (2,464)
FINANCING ACTIVITIES:
Net proceeds from convertible debt offering .......................... --- 48,250 ---
Proceeds from exercise of options and warrants ...................... 3,758 2,131 3,255
S Corporation distributions .......................................... (2,184) (27) (295)
Other ................................................................ (312) (780) 40
----------- ----------- -----------
Net cash provided by financing activities ......................... 1,262 49,574 3,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................................... (10,226) 46,527 (1,130)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 260 96 ---
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................................................... 50,186 3,563 4,693
----------- ----------- -----------
END OF YEAR ....................................................... $ 40,220 $ 50,186 $ 3,563
=========== =========== ===========
See Notes to Consolidated Financial Statements
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow and noncash investing and financing
information for the years ended March 31 is as follows (in thousands):
1996 1995 1994
---- ---- ----
Cash paid (received) during the year for:
Income taxes, net ...................... $ 9,584 $ 7,181 $ (739)
Interest ............................... $ 3,817 $ 4,578 $ ---
During fiscal 1996 and 1995, the Company converted $11,725,000 and $14,300,000
of convertible debt into 837,500 and 1,021,421 shares of common stock,
respectively.
In fiscal 1994, the Company purchased all of the capital stock of Coktel Vision
for $5,332,000. In connection with the acquisition, liabilities assumed were as
follows (in thousands):
Fair value of net assets acquired ............................... $ 7,641
Cash paid ...................................................... (5,332)
--------
Liabilities assumed ............................................ $ 2,309
========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
NOTE 1: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Pending Sale of the Company to CUC International, Inc.
On February 17, 1996, the Board of Directors approved the sale of the Company
to CUC International Inc. (CUC). Under the terms of the merger agreement, the
shareholders of the Company will receive 1.225 shares of CUC common stock for
each share of the Company's common stock. The sale is subject to shareholder
approval.
Consulting fees related to the merger have been expensed as incurred and
approximate $0.6 million. Upon shareholder approval of the merger, the
Company will be obligated to pay approximately $7.7 million in additional
consulting fees.
Basis of Presentation
The consolidated financial statements include the accounts of Sierra On-Line,
Inc. (Sierra), a Delaware corporation, its wholly-owned subsidiaries, and its
51% interest in a corporate joint venture (collectively referred to as the
Company). Significant subsidiaries include Sierra On-Line Limited (Sierra
U.K.), Dynamix, Inc. (Dynamix), Bright Star Technology, Inc. (Bright Star),
Coktel Vision, S.A. (Coktel), Software Inspiration, Ltd. (Inspiration), PXL
Acquisition Corp. (Pixellite), Papyrus Design Group, Inc. (Papyrus), and
Sierra/Pioneer Joint Venture (Pioneer). The accounts of The ImagiNation
Network, Inc. (INN) were consolidated with those of the Company through July
26, 1993 and accounted for under the equity method from July 1993 to December
1994 when the Company sold its remaining interest in INN to AT&T Corp.
All significant intercompany balances and transactions are eliminated.
Nature of Operations
The Company designs, develops, publishes, markets and distributes interactive
entertainment and education software for personal computers, CD-ROM-based PC
systems and selected emerging platforms. Using its design and development
capabilities, the Company creates branded product series for existing and
emerging hardware platforms. The Company's products are distributed in North
America, Europe, and Asia. Sales are generated through a domestic field sales
organization and electronic superstores, software specialty stores, mass
merchants, direct mail, and bundling arrangements. The Company performs its
own disk duplicating and packaging for diskette-based products at its
Oakhurst, California and Paris, France facilities. The Company does not
internally replicate CD-ROM-based products but rather subcontracts that work
to several third parties.
The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include changing computing
environments, rapid technological change, development of new products,
concentrations in manufacturing facilities, competitive pricing, and reliance
on distribution channels.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements.
Changes in these estimates and assumptions may have a material impact on the
financial statements. The Company has used estimates in determining certain
provisions including sales returns, uncollectible trade accounts receivable,
useful lives for fixed assets and intangible assets, and tax liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash, certificates of deposit and short
term investments with original maturities of three months or less.
Marketable Investment Securities
Marketable investment securities consist of corporate bonds, U.S. Treasury
notes, and commercial paper. All securities are classified as
available-for-sale and are reported at fair value with net unrealized holding
gains and losses excluded from earnings and reported in stockholders' equity.
Fair value is based upon quoted market prices using the specific
identification method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization are provided using a straight-line method over estimated useful
lives ranging from two to 18 years.
Software Development Costs and Purchased In-Process Research and Development
Expenses
Under the criteria set forth in SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. The establishment of technological feasibility
and the on-going assessment of the recoverability of costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware technology.
Amounts that have been capitalized under this statement, after consideration
of the above factors, are amortized on either a straight-line basis over the
estimated useful lives of the products (six to 24 months) or the ratio of
current product revenues to the total revenues expected over the life of the
product, whichever produces the greater expense.
Purchased in-process research and development is charged to expense on the
date acquired if it has no alternative future use and technological
feasibility is not established.
Goodwill
Goodwill represents the excess purchase price paid over the net assets of
acquired companies. Goodwill is amortized on a straight-line basis over seven
years.
The carrying value of goodwill is reviewed on a regular basis for the
existence of facts or circumstances both internally and externally that may
suggest impairment. To date, no such impairment has been indicated. Should
there be an impairment in the future, the Company will measure the amount of
the impairment based on the discounted expected future cash flows from the
impaired assets.
Foreign Currency
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the year. The translation adjustment resulting from this process is presented
separately in shareholders' equity. The gains and losses from foreign
currency transactions are included in selling, general and administrative
expense in the statements of operations.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) No. 91-1, Software
Revenue Recognition. Revenue from product sales is recognized upon shipment,
provided no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Other insignificant vendor
obligations consisting primarily of costs associated with telephone support
to customers after delivery of software are accrued. Revenue from royalty and
service arrangements is insignificant.
The Company's agreements with certain distributors and retailers permit them
to exchange products or provide price protection under certain circumstances.
The Company provides an allowance for estimated exchanges and price
protection.
Advertising
The Company accounts for advertising costs in accordance with SOP No. 93-7,
Reporting on Advertising Costs. Direct response advertising is capitalized
only if customer sales can be directly correlated to the advertising and if
future benefit can be demonstrated. Capitalized advertising costs are
amortized using the straight-line method over the estimated benefit period of
three months. Advertising expense for fiscal 1996, 1995 and 1994 was
$7,530,000, $8,750,000 and $7,850,000, respectively. Amounts capitalized at
March 31, 1996 and 1995 approximated $561,000 and $598,000, respectively.
Income Taxes (Benefit)
The Company computes income taxes using an asset and liability method, under
which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities.
Net Income (Loss) Per Share
Net income (loss) per share is based upon the weighted average number of
common shares outstanding during the period and after consideration of the
dilutive effect, if any, of stock options granted using the treasury stock
method. In addition, conversion of the Company's 6-1/2% Convertible
Subordinated Notes are included in fully diluted income per share using the
if-converted method when such securities are dilutive.
As a result of applying the if-converted method, net income for the purposes
of computing fully diluted net income per share amounts has been adjusted for
the assumed decrease in interest expense, net of income taxes, as follows (in
thousands):
1996 1995
--------- ---------
Net income.................................. $ 16,170 $ 12,992
Adjustment.................................. 1,205 2,115
--------- ---------
$ 17,375 $ 15,107
========= =========
Stock Split
On March 3, 1995, the Company recorded a two-for-one stock split to holders
of record on February 17, 1995. Outstanding shares, stock options and per
share data have been retroactively restated for all periods to give effect to
the stock split.
Concentration of Credit Risk
Accounts receivable include amounts from geographically dispersed dealers and
distributors in the computer software industry. Concentrations of credit risk
are considered minimal and bad debts have not been significant. The Company
does not require collateral or other security to support credit sales.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 balances to
conform with the 1996 presentation.
NOTE 2: BUSINESS COMBINATIONS
Pixellite, Inspiration and Papyrus
On May 31, 1995 the Company merged with Pixellite, a developer of personal
printing software, in exchange for 245,779 shares of Sierra's common stock.
On June 20, 1995 the Company also merged with Inspiration, a developer of
strategy games, in exchange for 730,352 shares of Sierra's common stock. On
November 30, 1995 the Company merged with Papyrus, developers of NASCAR
Racing and Indy Car Racing, in exchange for 1,169,404 shares of Sierra's
common stock.
These mergers have been accounted for as poolings-of-interests. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the mergers are restated as though the companies had been combined.
The following summarizes amounts previously reported by Sierra prior to the
transaction for the years ended March 31, 1995 and 1994 (in thousands, except
per share data):
1995 1994
---------- ----------
REVENUES:
Sierra.................................. $ 83,440 $ 62,745
Pixellite, Inspiration and Papyrus .... 14,439 10,356
---------- ----------
Combined ............................... $ 97,879 $ 73,101
========== ==========
NET INCOME (LOSS)
Sierra.................................. $ 11,938 $ (8,676)
Pixellite, Inspiration and Papyrus ..... 1,054 804
---------- ----------
Combined ............................... $ 12,992 $ (7,872)
========== ==========
PRIMARY NET INCOME (LOSS) PER SHARE:
Sierra ................................. $ 0.74 $ (0.59)
Pixellite, Inspiration and Papyrus ..... (0.04) 0.13
---------- ----------
Combined ............................... $ 0.70 $ (0.46)
========== ==========
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Sierra ................................. $ 0.71 $ (0.59)
Pixellite, Inspiration and Papyrus...... (0.03) 0.13
---------- ----------
Combined ............................... $ 0.68 $ (0.46)
========== =========
Green Thumb and Arion
The Company also merged with Green Thumb in July 1995 and with Arion in
September 1995 in exchange for 87,762 and 60,196 shares of Sierra Common
Stock, respectively. The financial statements have not been restated for the
Green Thumb and Arion mergers as these companies did not impact the Company's
operations significantly.
All fees and expenses related to the Pixellite, Inspiration, Papyrus, Green
Thumb and Arion mergers have been expensed as required under the
pooling-of-interests accounting method. Such fees and expenses approximated $2.3
million and include legal, accounting and finders fees.
Coktel
On October 29, 1993, the Company acquired Coktel Vision S.A. ("Coktel"), a
French developer and publisher of educational and entertainment software
products, for an initial purchase price of approximately $5,332,000. This
business combination was accounted for as a purchase, and, accordingly, the
net assets and operations of Coktel have been included in the Company's
consolidated financial statements since October 29, 1993. Approximately
$1,102,000 of the purchase price was attributed to in-process research and
development and accordingly was charged to expense at the date of
acquisition. Amounts allocated to software development costs approximated
$1,350,000 and amounts allocated to goodwill were approximately $2,419,000.
Goodwill is being amortized over an estimated useful life of seven years on a
straight-line basis.
Contingent purchase payments were due under an incentive payment plan. During
fiscal years 1995 and 1994, approximately $1,562,000 and $1,313,000 was
earned and paid under this plan. At March 31, 1995, incentive payments due
approximated $1,562,000. In December 1995, the Company amended the Coktel
acquisition agreement whereby it issued 150,000 shares of Common Stock in
exchange for each former Coktel shareholder relinquishing their rights to
receive any further incentive payments. As a result of this amendment, the
Company recorded goodwill of approximately $4.1 million which is being
amortized over its remaining useful life of approximately five years on a
straight-line basis.
The Company could be obligated to make additional payments as provided in the
agreement, however, management believes that the likelihood of additional
payments is remote.
NOTE 3: MARKETABLE INVESTMENT SECURITIES
The Company's investments, including aggregate fair values, cost, gross
unrealized holding gains, and gross unrealized holding losses, consist of the
following at March 31 (in thousands):
Gross Gross
Unrealized Unrealized
Fair Holding Holding
Value Cost Gains Losses
----------- ----------- ----------- -----------
1996:
U.S. Government obligations $ 15,471 $ 15,481 $ --- $ 10
Corporate debt securities 27,438 27,521 24 107
Commercial paper 5,832 5,832 --- ---
----------- ----------- ----------- -----------
$ 48,741 $ 48,834 $ 24 $ 117
=========== =========== =========== ===========
1995:
U.S. Government obligations $ 10,394 $ 10,357 $ 39 $ 2
Corporate debt securities 23,050 22,996 80 26
Commercial paper 17,129 17,067 64 2
----------- ----------- ----------- -----------
$ 50,573 $ 50,420 $ 183 $ 30
=========== =========== =========== ===========
Fair values of investments are based on quoted market prices on the last
business day of the fiscal year. All investments available-for-sale at March 31,
1996 will mature within one year.
NOTE 4: INVENTORIES
Inventories consist of the following at March 31 (in thousands):
1996 1995
--------- ---------
Raw materials ......................... $ 3,207 $ 2,841
Work in progress ...................... --- 65
Finished goods ........................ 4,847 1,997
--------- ---------
$ 8,054 $ 4,903
========= =========
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at March 31 (in
thousands):
1996 1995
---------- ----------
Land .................................. $ 142 $ 203
Buildings and improvements ............ 3,858 3,591
Computers and equipment ............... 20,669 16,703
Furniture and fixtures ................ 1,936 1,312
---------- ----------
26,605 21,809
Less accumulated depreciation and
amortization.......................... (15,115) (12,741)
---------- ----------
$ 11,490 $ 9,068
========== ==========
NOTE 6: FINANCING ARRANGEMENTS
Line of Credit
In fiscal 1996, the Company entered into an unsecured bank line of credit
that provides for borrowings of up to $10 million, expiring August 31, 1996.
Any borrowings under this line of credit would be collateralized by
substantially all the Company's assets and incur interest at either the
bank's prime rate or IBOR plus 150 basis points, at the Company's choice. The
line contains covenants requiring the Company to maintain certain financial
ratios and minimum balances in cash and cash equivalents. The Company is in
compliance with all covenants under this line of credit as of March 31, 1996.
There have been no borrowings by the Company under this line of credit to
date.
Convertible Notes
On April 12, 1994, the Company issued $50,000,000 in principal amount of
6-1/2% convertible subordinated notes due April 1, 2001 (the "Notes").
Interest on the Notes is payable semi-annually on April 1 and October 1 of
each year. The Notes are convertible into common stock of the Company, at a
conversion price of $14.00 per share, subject to adjustment under certain
conditions. The Notes are redeemable after April 2, 1997, at the option of
the Company, at specified redemption prices. The Notes will be subordinated
to all existing and future Senior Indebtedness (as defined in the Indenture
governing the Notes) of the Company. Issuance costs have been netted against
the principal convertible debt balance are being amortized on a straight-line
basis over seven years. The fair value of these notes at March 31, 1996 was
$58.3 million as determined by the Private Offerings, Resales and Trading
through Automated Linkages Market.
During fiscal 1996 and 1995 the Company paid $0.9 million and $1.0 million,
included in interest expense, to induce conversion of $11,725,000 and
$14,300,000 of convertible debt into 837,500 and 1,021,421 shares of common
stock.
NOTE 7: INCOME TAX PROVISION (BENEFIT)
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows for the years ended March 31:
1996 1995 1994
------- -------- --------
Statutory rate .............................................. 35.0% 35.0% (35.0)%
State income taxes, net of federal income tax benefit ....... 3.0 3.0 ---
Utilization of net operating losses ......................... --- (3.9) ---
Non-consolidated losses ..................................... --- (4.5) 18.3
Foreign subsidiaries ........................................ --- (2.2) 3.4
Non-deductible expenses ..................................... 8.9 4.5 2.1
Subchapter S Corporation earnings ........................... (5.5) (1.3) (0.6)
Reduction in valuation allowance ............................ (14.3) --- ---
Other ....................................................... 1.4 0.5 3.9
------- -------- --------
Effective rate ............................................. 28.5% 31.1% (7.9)%
======= ======== ========
The provision for income taxes (benefit) consists of the following for the years
ended March 31 (in thousands):
1996 1995 1994
---------- ---------- ----------
Current:
Federal .................................................. $ 6,095 $ 7,772 $ 540
State .................................................... 516 922 32
Foreign .................................................. 1,207 (55) 143
---------- ---------- ----------
7,818 8,639 715
Deferred:
Federal .................................................. (1,179) (2,298) (1,003)
State .................................................... (183) (268) (391)
Foreign ................................................... --- (208) ---
---------- ---------- ----------
(1,362) (2,774) (1,394)
---------- ---------- ----------
$ 6,456 $ 5,865 $ (679)
========== ========== ==========
Deferred income tax liabilities (assets) reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and amounts as measured for tax purposes. A valuation
allowance against deferred tax assets has been provided for when it is more
likely than not that some or all of the deferred tax assets will not be
realized. The effect of temporary differences that cause significant portions of
deferred tax assets and liabilities are as follows at March 31 (in thousands):
1996 1995
--------- ---------
Deferred Assets:
Inventory overhead allocation .. $ (327) $ (398)
Accrued expenses ............... (7,012) (5,638)
Tax credits ..................... --- (77)
Stock Option Benefit ............ (1,509) ---
Net operating losses ............ --- (334)
Other ........................... (651) (187)
--------- ---------
Subtotal ....................... (9,499) (6,634)
Valuation allowance.............. --- 3,230
--------- ---------
(9,499) (3,404)
Deferred Liabilities:
Software development costs ..... 99 105
--------- ---------
$ (9,400) $ (3,299)
========= =========
NOTE 8: STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans
The Company has reserved 6,170,000 shares of common stock for issuance under
its 1995 Stock Option and Award Plan and the 1987 Stock Option Plan for
officers, employees, directors, vendors, consultants and independent
contractors. Options granted under these plans may be either incentive stock
options or nonqualified stock options and are granted at the fair market
value of the Company's common stock at the date of grant. Options vest and
expire under the terms established at the date of grant. The Company also has
218,556 shares reserved for issuance under an option plan it acquired through
its merger with Papyrus. A summary of stock option transactions under all
plans follows:
Range of Price
Shares Per Share
----------- ------------------
Options outstanding, April 1, 1993 ... 2,114,768 $0.47 - $10.13
Granted .......................... 760,838 0.09 - 11.50
Exercised ........................ (541,108) 0.47 - 10.13
Canceled ......................... (457,366) 3.86 - 10.13
----------- ------------------
Options outstanding, March 31, 1994.... 1,877,132 0.09 - 11.50
Granted ........................... 963,217 0.09 - 22.00
Exercised ......................... (333,807) 0.47 - 11.50
Canceled .......................... (215,482) 4.59 - 11.88
----------- ------------------
Options outstanding, March 31, 1995 ... 2,291,060 0.09 - 22.00
Granted ........................... 754,613 0.80 - 41.75
Exercised ......................... (616,592) 0.09 - 17.69
Canceled .......................... (229,161) 4.92 - 35.13
----------- ------------------
Options outstanding, March 31, 1996 ... 2,199,920 $0.09 - $41.75
============
Of the options outstanding at March 31, 1996, 501,888 options are currently
exercisable at prices ranging from $0.09 to $22.00 per share, and 1,770,873
options remain available for future grants.
Employee Stock Purchase Plan
The Company has reserved 200,000 shares of common stock for issuance under
the Employee Stock Purchase Plan for officers and full-time employees with
six months of service. Under the Plan, stock may be purchased at the
completion of the semi-annual purchase periods at a price equal to 85% of the
lowest fair market value of either the first or last day of the purchase
period. During fiscal 1996, 8,019 shares of common stock was purchased under
the Plan. The Board of Directors has approved the termination of the Plan
effective June 30, 1996, subject to completion of the merger with CUC
International Inc.
New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, Accounting for Stock-Based Compensation (SFAS
123), which will be effective for the Company beginning April 1, 1996. SFAS
123 requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies
are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into long-term lease obligations for certain office
and warehouse facilities in addition to various leases for office equipment
and company vehicles. These commitments expire at various times through
fiscal 2003. The Company's expense for lease obligations for the years ended
March 31, 1996, 1995 and 1994 were $2,774,000, $2,062,000, and $1,356,000,
respectively.
Future minimum annual lease payments on these obligations are as follows for
the years ended March 31 (in thousands):
Payments
--------
1997 .................................... $ 2,852
1998 .................................... 2,672
1999 .................................... 2,190
2000 .................................... 2,071
2001 .................................... 1,537
Thereafter .............................. 1,192
----------
Total ................................ $ 12,514
==========
Contingencies
The Company is a defendant in various lawsuits arising in the ordinary course
of business. Management believes that losses to the Company from these
lawsuits, if any, will not have a material adverse effect on its financial
condition or results of operations. In fiscal 1995, the Company paid
approximately $1.5 million in shareholder litigation costs in settlement of a
securities class action lawsuit filed in December 1992.
NOTE 10: SALE OF THE IMAGINATION NETWORK
The operating activities of INN were consolidated with those of the Company
through July 26, 1993. On July 27, 1993, the Company sold 42% of INN's voting
stock and reduced its ownership interest to 58% and reduced its voting control
such that the Company began recording INN operations utilizing the equity
method. Upon sale of its 42% interest, the Company recorded its liquidation
preference in excess of recorded book value as shareholders' equity.
In December 1994, the Company sold its remaining equity interest in INN to AT&T
and recorded a gain of $19,739,000. The Company also entered into a multi-year
publishing agreement with AT&T to provide content for INN. The publishing
agreement provides for AT&T to fund up to $4,000,000 of the Company's
development expenditures under an existing publishing agreement and up to
$23,000,000 of Sierra's development expenditures, subject to certain
limitations, through non-refundable royalty advances. The non-refundable royalty
advances are reflected net of research and development expense. A summary of
gross research and development expense and non-refundable royalty advances for
the years ended March 31, are as follows (in thousands):
1996 1995
--------- -------
Research and development expense $ 39,685 $23,552
Non-refundable royalty advances (3,786) (1,585)
--------- -------
$ 35,899 $21,967
========= =======
NOTE 11: RELATED PARTY TRANSACTIONS
The Company pays royalties to certain independent developers, including a
director of the Company. Royalty expense related to this director was
approximately $1,294,000, $819,000, and $256,000 during the years ended March
31, 1996, 1995 and 1994, respectively. Royalties payable to the director at
March 31, 1996 and 1995 were $10,000 and $633,000, respectively.
From July 1993 through December 1994, the Company paid certain operating
expenses on behalf of INN. Total amounts advanced under this arrangement totaled
$456,000 and $3,271,000 during fiscal 1995 and fiscal 1994, respectively. In
April 1994, the Company accepted an unsecured Promissory Note from INN for
approximately $2,895,000. This amount was paid in full, including interest
accrued at Bank of America's prime rate, in December 1994.
The Company held certain notes receivable from officers of a subsidiary. Amounts
receivable from those officers at March 31, 1995 was $792,000. Interest earned
under these agreements was $12,000, $84,000, and $152,000 for the years ended
March 31, 1996, 1995 and 1994, respectively. The notes were paid in full in May
1995.
During fiscal years 1996, 1995 and 1994, the Company has reported distributions
which represent dividends for undistributed S Corporation earnings to the
shareholders of Pixellite and Papyrus. At March 31, 1996 and 1995, notes payable
associated with these dividends approximated $2.0 million and $247,000,
respectively.
NOTE 12: GEOGRAPHIC INFORMATION
The following schedule presents financial information of the Company classified
by geographic area for the years ended March 31 (in thousands):
United
States Europe Eliminations Consolidated
----------- ----------- ------------ ------------
1996
Sales to unaffiliated customers $ 119,014 $ 37,109 $ --- $ 156,123
=========== =========== =========== ===========
Income from operations $ 17,914 $ 4,691 $ --- $ 22,605
=========== =========== =========== ===========
Identifiable assets $ 161,788 $ 17,109 $ --- $ 178,897
=========== =========== =========== ===========
1995
Sales to unaffiliated customers $ 76,305 $ 19,516 $ --- $ 95,821
Intercompany transfers 880 --- (880) ---
----------- ----------- ----------- -----------
$ 77,185 $ 19,516 $ (880) $ 95,821
=========== =========== =========== ===========
Income from operations $ 1,291 $ 1,910 $ --- $ 3,201
=========== =========== =========== ===========
Identifiable assets $ 137,116 $ 8,238 $ --- $ 145,354
=========== =========== =========== ===========
1994
Sales to unaffiliated customers $ 61,606 $ 9,106 $ --- $ 70,712
Intercompany transfers 3,901 720 (4,621) ---
----------- ----------- ----------- -----------
$ 65,507 $ 9,826 $ (4,621) $ 70,712
=========== =========== =========== ===========
Income (loss) from operations $ (4,962) $ 514 $ (88) $ (4,536)
=========== =========== =========== ===========
Identifiable assets $ 63,003 $ 5,902 $ --- $ 68,905
=========== =========== =========== ===========
Intercompany transfers primarily represent shipments of finished goods inventory
to international subsidiaries. The intercompany transfers are made at transfer
prices which approximate prices charged to unaffiliated customers and have been
eliminated from consolidated net sales. In the years ended March 31, 1996, 1995
and 1994, the majority of the Company's sales in Europe were conducted by
Coktel, a French corporation, and Papyrus and Sierra U.K., both U.K.
corporations.
NOTE 13: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial information for fiscal 1996 and fiscal 1995 is as
follows (in thousands, except per share data):
Primary Fully
Net Diluted
Net Income Net
Income (Loss) Income
Revenues (Loss) Per Share Per Share
-------- ------ --------- ---------
Quarter ended:
June 30, 1995 $ 24,872 $ 852 $ 0.04 $ 0.04
September 30, 1995 34,522 3,609 0.17 0.15
December 31, 1995 63,220 12,284 0.58 0.55
March 31, 1996 35,563 (575) (0.03) (0.03)
---------- ----------
$ 158,177 $ 16,170
========== ==========
Quarter ended:
June 30, 1994 $ 13,550 $ (4,304) $ (0.25) $ (0.25)
September 30, 1994 20,966 (1,220) (0.07) (0.07)
December 31, 1994(1) 41,213 17,796 0.97 0.83
March 31, 1995 22,150 720 0.05 0.05
---------- ----------
$ 97,879 $ 12,992
========== ==========
- ----------
(1) Includes $19,739,000 gain on sale of the Company's 58% interest in The
ImagiNation Network to AT&T.
(a) 2.
Davidson & Associates, Inc.
Consolidated Financial Statements
December 31, 1995 and 1994
With Independent Auditors' Report
The Board of Directors
Davidson & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Davidson &
Associates, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Davidson &
Associates, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
Consolidated Balance Sheets -- December 31, 1995 and 1994
Assets 1995 1994
--------------- ---------------
Current assets:
Cash and cash equivalents $ 3,117,000 3,858,000
Marketable investment securities 14,682,000 11,286,000
Accounts receivable:
Trade, less allowance for doubtful receivables and
returns of $10,363,000 for 1995 and $4,556,000 for 1994 36,637,000 23,937,000
Other 251,000 568,000
Inventories 11,792,000 7,444,000
Prepaid expenses and other current assets 1,340,000 1,528,000
Deferred tax assets 5,324,000 2,240,000
--------------- ---------------
Total current assets 73,143,000 50,861,000
Net property and equipment, at cost 8,001,000 6,529,000
Intangible assets, net of accumulated amortization 2,029,000 2,438,000
Other assets 2,549,000 754,000
--------------- ---------------
$ 85,722,000 60,582,000
--------------- ---------------
Liabilities and Shareholders' Equity :
Current liabilities
Accounts payable $ 13,032,000 7,407,000
Accrued expenses 7,722,000 5,211,000
Deferred revenues 199,000 791,000
Income taxes payable 4,123,000 1,464,000
--------------- ---------------
Total current liabilities 25,076,000 14,873,000
--------------- ---------------
Minority interest 1,048,000 --
--------------- ---------------
Shareholders' equity:
Preferred stock, no par value. Authorized 1,000,000 shares;
no shares issued and outstanding in 1995 and 1994 -- --
Common stock, $.00025 par value. Authorized 100,000,000
shares in 1995 and 60,000,000 shares in 1994; issued and outstanding
34,965,904 shares in 1995 and 34,868,504 shares in 1994 8,000 8,000
Additional paid-in capital 35,432,000 34,103,000
Retained earnings 24,158,000 11,840,000
Net unrealized loss on marketable investment securities -- (242,000)
--------------- ---------------
Net shareholders' equity 59,598,000 45,709,000
Contingencies
--------------- ---------------
$ 85,722,000 60,582,000
--------------- ---------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings -- Three-year period ended December 31, 1995
1995 1994 1993
--------------- -------------- --------------
Net revenues $ 147,226,000 93,171,000 62,372,000
Cost of revenues 72,527,000 44,262,000 29,385,000
--------------- -------------- --------------
Gross profit 74,699,000 48,909,000 32,987,000
--------------- -------------- --------------
Operating costs and expenses:
Research and development 19,745,000 10,419,000 3,547,000
Selling, general and administrative 33,861,000 23,224,000 18,654,000
Non-recurring expense (in-process
research & development) -- 3,950,000 --
--------------- -------------- --------------
Total operating costs and expenses 53,606,000 37,593,000 22,201,000
--------------- -------------- --------------
Operating income 21,093,000 11,316,000 10,786,000
Other income (expense):
Interest income, net 819,000 691,000 469,000
Other income (expense), net 1,000 83,000 (88,000)
--------------- -------------- --------------
Earnings before income taxes 21,913,000 12,090,000 11,167,000
Income taxes 8,225,000 5,612,000 4,218,000
Earnings before minority interest 13,688,000 6,478,000 6,949,000
Minority interest in net earnings of subsidiary 111,000 -- --
--------------- -------------- --------------
Net earnings $ 13,577,000 6,478,000 6,949,000
--------------- -------------- --------------
Net earnings per share $ .38 .19 .21
--------------- -------------- --------------
Weighted average number of common shares and common
share equivalents outstanding during year 35,768,000 34,986,000 33,599,000
--------------- -------------- --------------
Additional unaudited pro forma data (note 10)
Earnings before income taxes $ 21,913,000 12,090,000 11,167,000
Less: Pro forma income tax expense 8,525,000 6,145,000 4,406,000
Less: Minority interest in net earnings of subsidiary 111,000 -- --
--------------- -------------- --------------
Pro forma net earnings $ 13,277,000 5,945,000 6,761,000
--------------- -------------- --------------
Pro forma net earnings per share $ .37 .17 .20
--------------- -------------- --------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity -- Three-year period ended
December 31, 1995
Unrealized
gain (loss)
Common Stock Additional Investment Net
---------------------- paid-in Retained Securities shareholders'
Shares Amount capital earnings Valued at Market equity
------ ------ ------- -------- ---------------- ------
Balance at December 31, 1992 30,095,106 $ 7,000 4,772,000 233,000 -- 5,012,000
Proceeds from issuance of
common stock, net of offering costs 4,380,000 1,000 25,581,000 -- -- 25,582,000
Net earnings -- -- -- 6,949,000 -- 6,949,000
Distributions to shareholders
of pooled companies (note 2) -- -- -- (210,000) -- (210,000)
----------------------------------------------------------------------------------
Balance at December 31, 1993 34,475,106 8,000 30,353,000 6,972,000 -- 37,333,000
Issuance of stock in connection with
acquisition of Learningways, Inc. 358,648 -- 3,586,000 -- -- 3,586,000
Exercise of stock options 34,750 -- 164,000 -- -- 164,000
Valuation of marketable investment
securities to market -- -- -- -- (242,000) (242,000)
Net earnings -- -- -- 6,478,000 -- 6,478,000
Distributions to shareholders of
pooled companies (note 2) -- -- -- (1,610,000) -- (1,610,000)
----------------------------------------------------------------------------------
Balance at December 31, 1994 34,868,504 8,000 34,103,000 11,840,000 (242,000) 45,709,000
Exercise of stock options 97,400 -- 717,000 -- -- 717,000
Tax benefits arising from exercise of
non-qualified stock options -- -- 437,000 -- -- 437,000
Net increase in unrealized gain -- -- -- -- 242,000 242,000
Net earnings -- -- -- 13,577,000 -- 13,577,000
Undistributed earnings of subchapter
S subsidiaries -- -- 175,000 (175,000) -- --
Distributions to shareholders of
pooled companies (note 2) -- -- -- (1,084,000) -- (1,084,000)
----------------------------------------------------------------------------------
Balance at December 31, 1995 34,965,904 $ 8,000 35,432,000 24,158,000 -- 59,598,000
----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows -- Three-year period ended
December 31, 1995
1995 1994 1993
Cash flows from operating activities:
Net earnings $ 13,577,000 6,478,000 6,949,000
Adjustments to reconcile net earnings to net cash
provided by operating
activities:
Depreciation and amortization 2,428,000 1,329,000 1,223,000
Non-recurring expense: write-off of purchased in-
process research & development (non-cash portion)
-- 3,587,000 --
Proceeds from sales of capital equipment -- 19,000 --
Increase in allowance for doubtful receivables and returns 5,807,000 974,000 1,901,000
Changes in assets and liabilities, net of effects
from acquisition of business:
Accounts receivable (18,507,000) (13,119,000) (5,988,000)
Other receivables 317,000 (140,000) (251,000)
Inventories (4,348,000) (3,606,000) (345,000)
Prepaid expenses and other current assets 188,000 (707,000) (584,000)
Deferred tax assets (3,084,000) (444,000) (1,016,000)
Other assets (1,795,000) (1,031,000) (102,000)
Accounts payable 5,625,000 3,752,000 1,829,000
Accrued expenses 2,511,000 3,535,000 75,000
Income taxes payable 3,096,000 (46,000) 1,159,000
Deferred revenues (592,000) 23,000 384,000
Minority interest 111,000 -- --
----------------------------------------------------
Total adjustments (8,243,000) (5,874,000) (1,715,000)
----------------------------------------------------
Net cash provided by operating activities 5,334,000 604,000 5,234,000
----------------------------------------------------
Cash flows from investing activities:
Marketable investment securities, net (3,154,000) 5,468,000 (16,996,000)
Capital expenditures (3,491,000) (4,870,000) (1,070,000)
Acquisition of business, net of cash acquired -- 60,000 --
----------------------------------------------------
Net cash provided (used) by investing activities (6,645,000) 658,000 (18,066,000)
----------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 717,000 164,000 25,582,000
Payment of distributions payable to shareholders -- -- (1,295,000)
Payment of dividend notes to shareholders -- -- (10,458,000)
Capital contribution from minority interest 937,000 -- --
Distribution of S corporation earnings to pooled companies (1,084,000) (1,610,000) (210,000)
----------------------------------------------------
Net cash provided (used) by financing activities 570,000 (1,446,000) 13,619,000
----------------------------------------------------
Net increase in cash and cash equivalents (741,000) (184,000) 787,000
Cash and cash equivalents at beginning of year 3,858,000 4,042,000 3,255,000
----------------------------------------------------
Cash and cash equivalents at end of year $ 3,117,000 3,858,000 4,042,000
----------------------------------------------------
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 8,182,000 4,999,000 590,000
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements -- December 31, 1995 and 1994
(1) Summary of Significant Accounting Principles
Principles of Consolidation
The consolidated financial statements include the accounts of Davidson &
Associates, Inc. , its wholly owned subsidiaries, First Byte and Davidson &
Associates Europe Limited, and its 75%-owned subsidiary, New Media Express
L.L.C. (collectively the "Company"). All significant intercompany transactions
and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper, money market funds and
certificates of deposit having original maturities of three months or less.
Marketable Investment Securities
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (Statement 115) at December 31, 1994. Under Statement 115, the
Company classifies its marketable investment securities as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of shareholders'
equity until realized. Declines in the market value of available-for-sale
securities deemed to be other than temporary result in charges to current
earnings and establishment of a new cost basis.
At December 31, 1995 and 1994 the Company's marketable investment securities
consisted principally of highly liquid investments in tax-free municipal
obligations with various maturity dates through 2010. As of December 31, 1995,
the Company's aggregate investment securities had a cost basis of $14,670,000
and a fair market value of $14,671,000. Unrealized holding losses and unrealized
holding gains were immaterial as of December 31, 1995.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash, short-term investments, and accounts
receivable. The Company has investment policies that limit investments to
short-term investment grade securities.
Accounts receivable are principally from distributors, retail chains,
software specialty retail chains, computer superstores, school districts and
individual schools. The Company performs periodic credit evaluations of its
customers and maintains reserves, including reserves under the Company's stock
balancing policy, which estimate the potential for future product returns.
Allowance for returns at December 31, 1995 and 1994 was approximately
$9,634,000 and $2,684,000, respectively. Such reserves have been included in
allowance for doubtful receivables. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost includes materials, labor and overhead for published software and
acquisition cost for computer manuals and peripheral equipment.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
furniture and equipment using the straight-line method over the estimated
economic life of the assets, generally five years. Depreciation is provided on
leasehold improvements using the straight-line method over the estimated
economic life or the lease term, whichever is shorter.
Intangible Assets
Intangible assets primarily consist of goodwill and capitalized costs related
to a non-competition agreement. Such assets are amortized on a straight-line
basis over the expected periods to be benefited, generally five to twenty years.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the balance over their remaining lives
can be recovered by undiscounted future operating cash flows.
Revenue Recognition
The Company recognizes revenues as products are shipped, net of allowances
for returns, provided that no significant vendor obligations remain and
collection of the resulting receivable is deemed probable by management. Returns
by the Company's publishing business customers aggregated $7,226,000, $4,229,000
and $1,773,000 in 1995, 1994 and 1993, respectively. The Company provides
customer support as an accommodation to purchasers of its products for a limited
time. Costs associated with such post-sale customer support were immaterial.
Revenues from non-refundable license fees are recognized as income when earned.
Revenue under royalty arrangements is recognized as unit sales are reported by
the licensee.
The Company also develops software for others under contracts calling for
payment of development fees and ongoing royalties in certain circumstances.
Development revenues are recognized as earned and the related costs under
development contracts are recognized as incurred in the same period.
Royalty Costs
Royalties are accrued based on net revenues, pursuant to contractual
agreements with authors of software products published by the Company. Royalty
costs, which are included in cost of revenues, for each of the years in the
three-year period ended December 31, 1995 were $14,748,000, $8,719,000, and
$554,000 in 1995, 1994 and 1993, respectively.
Research and Development Costs
Research and development costs related to designing, developing and testing
new software products are charged to expense as incurred.
Investments in Joint Ventures
The Company accounts for investments in joint ventures on the equity method
of accounting when its ownership percentage is between 20% and 50%. The joint
ventures had minimal operations during 1995 and 1994 and accordingly, the
investments were immaterial to the accompanying consolidated financial
statements.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement 109). Statement 109
requires that deferred income taxes be recognized for the tax consequences of
"temporary differences." This is achieved by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 123 which
is effective for years commencing after December 15, 1995. The Company intends
to apply the pro forma disclosure requirements of Statement No. 123 in its 1996
financial statements. Accordingly, the pro forma effect of stock options granted
during the year ended December 31, 1995 has not yet been determined.
Net Earnings per Share
Net earnings per share is based on the weighted average number of common and
common equivalent shares outstanding during each period, after retroactive
adjustment for stock splits, plus the shares that would be outstanding assuming
exercise of dilutive stock options, which are considered common stock
equivalents. The number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares that could have been
purchased from the proceeds at the current market price of the Company's common
stock (see note 8).
Following is an analysis of the components of the shares used to compute net
earnings per share in 1995, 1994 and 1993:
1995 1994 1993
-----------------------------------------------
Weighted average shares outstanding during the period* 33,659,000 33,408,000 32,119,000
Incremental shares issued in connection with mergers
accounted for as poolings of interest (note 2) 1,274,000 1,274,000 1,274,000
Incremental shares issuable under stock option plans 835,000 304,000 206,000
-----------------------------------------------
Number of shares used in the computation of net earnings per share 35,768,000 34,986,000 33,599,000
-----------------------------------------------
*All share data has been adjusted retroactively to reflect the 2-for-1 stock
split effected on September 6, 1995.
Reclassifications
Certain 1994 and 1993 accounts have been reclassified to be consistent with
1995. The effect of the reclassifications was not material to the accompanying
financial statements.
(2) Acquisitions
On November 21, 1995, the Company acquired all of the outstanding shares of
Maverick Software, Inc. by issuing 223,476 shares of its common stock. On March
1, 1995, the Company acquired all of the outstanding shares of The Cute Company,
which subsequently changed its name to FUNNYBONE Interactive, by issuing 423,076
shares of its common stock. Both mergers were accounted for as poolings of
interests. Maverick Software, Inc. and FUNNYBONE Interactive are now operated as
divisions of the Company. All financial information included in the accompanying
consolidated financial statements has been restated to include the operating
results of FUNNYBONE Interactive and Maverick Software, Inc.
A summary of the impact of these poolings on operations for 1994 and 1993, as
previously reported, is as follows:
As Previously Effect of Pooled Restated
Reported Companies for Poolings
---------------------------------------------------
1994:
Net revenues $ 87,914,000 5,257,000 93,171,000
Earnings before income taxes 10,756,000 1,334,000 12,090,000
Net earnings 5,144,000 1,334,000 6,478,000
Pro forma net earnings 5,144,000 801,000 5,945,000
As Previously Effect of Pooled Restated
Reported Companies for Poolings
---------------------------------------------------
1993:
Net revenues $ 59,078,000 3,294,000 62,372,000
Earnings before income taxes 10,696,000 471,000 11,167,000
Net earnings 6,478,000 471,000 6,949,000
Pro forma net earnings 6,478,000 283,000 6,761,000
On June 1, 1994, the Company acquired all of the outstanding shares of
Learningways, Inc. ("Learningways") for cash of approximately $664,000 and
358,648 shares of the Company's common stock. Total consideration was valued at
$4,225,000. The acquisition was accounted for as a purchase. In connection with
this acquisition, the Company expensed certain in-process research and
development for technology in process of approximately $3.9 million which was
recorded as a non-recurring expense in the accompanying 1994 consolidated
statement of earnings. The results of operations of Learningways have been
included in the Company's consolidated financial statements since the date of
acquisition. Had the acquisition occurred at the beginning of 1994, the impact
on the Company's reported results of operations would not have been material.
Learningways is now operated as a division of the Company.
On February 18, 1994, the Company acquired all of the outstanding shares of
Chaos Studios, Inc., which subsequently changed its name to Blizzard
Entertainment, by issuing 626,980 shares of its common stock. The merger was
accounted for as a pooling of interests. All financial information included in
the accompanying consolidated financial statements has been restated to include
Blizzard's operating results. Blizzard Entertainment is now operated as a
division of the Company.
In May, 1992, the Company acquired Educational Resources Ltd. (Educational
Resources). The acquisition was accounted for as a purchase. The Company issued
2,400,000 shares of its common stock for all of the outstanding common stock of
Educational Resources. The value of the consideration given exceeded the fair
value of the net assets of Educational Resources, resulting in goodwill totaling
$1,387,000. Educational Resources is now operated as a division of the Company.
In connection with the acquisition of Educational Resources, the Company
entered into employment and non-competition agreements with the former sole
stockholder and with an officer of Educational Resources. The non-competition
agreements required the immediate payment of an aggregate $1,500,000 by the
Company to the sole stockholder and to an officer of Educational Resources for
agreements not to compete with the Company for a five-year period.
Intangible assets arising from the above transactions at December 31, 1995
and 1994 consist of the following:
1995 1994
----------------------------------
Goodwill $ 1,936,000 1,936,000
Covenant not to compete 1,650,000 1,650,000
Other intangible assets 364,000 364,000
Less accumulated amortization (1,921,000) (1,512,000)
----------------------------------
$ 2,029,000 2,438,000
----------------------------------
(3) Inventories
Inventories at December 31, 1995 and 1994 consist of the following:
1995 1994
---------------------------------
Raw materials $ 2,611,000 2,051,000
Finished goods 9,181,000 5,393,000
---------------------------------
$ 11,792,000 7,444,000
---------------------------------
(4) Property and Equipment
Property and equipment at December 31, 1995 and 1994 consist of the following:
1995 1994
---------------------------------
Furniture and equipment $ 10,669,000 7,363,000
Leasehold improvements 2,628,000 2,280,000
---------------------------------
13,297,000 9,643,000
Less accumulated depreciation and amortization (5,296,000) (3,114,000)
---------------------------------
$ 8,001,000 6,529,000
---------------------------------
(5) Other Assets
In 1995, the Company made a $2,000,000 investment in IVI Publishing, Inc. In
exchange, the Company received 2,000 shares of six percent, preferred stock
which are convertible into the investee's common shares at $11.21 per share,
representing less than 3% of the investee's common shares outstanding at the
time of the Company's investment. In addition, the Company received 12,500
common share warrants to purchase shares of the investee's common stock at
$11.21 per share. The Company has recorded this investment under the cost method
and has included the investment in other assets in the accompanying consolidated
balance sheet.
(6) Line of Credit
The Company has an unsecured working capital line of credit agreement with a
bank (the Agreement). The Agreement expires in April 1996 and provides for total
advances up to $1,000,000 bearing interest at the bank's prime rate. As of
December 31, 1995, there were no borrowings under the agreement.
(7) Accrued Expenses
Accrued expenses at December 31, 1995 and 1994 consist of the following:
1995 1994
---------------------------------
Due to affiliated label companies $ 675,000 1,709,000
Accrued royalties 1,488,000 225,000
Accrued payroll and related expenses 2,033,000 977,000
Other 3,526,000 2,300,000
---------------------------------
$ 7,722,000 5,211,000
---------------------------------
(8) Shareholders' Equity
Common Stock
On September 6, 1995, the Company effected a 2-for-1 stock split.
Concurrently, the par value of the common stock was decreased to $.00025 from
$.0005. The accompanying consolidated financial statements and related notes
have been retroactively adjusted to reflect this stock split and the change in
par value.
In April 1995, the Board of Directors and the Company's shareholders approved
an increase in the number of authorized shares of common stock from 60,000,000
to 100,000,000.
During 1995, the Company issued 423,076 shares and 223,476 shares in
connection with its acquisitions of FUNNYBONE Interactive and Maverick Software,
Inc., respectively. Since both acquisitions were accounted for as poolings of
interests, the accompanying consolidated financial statements and related notes
have been retroactively adjusted for such shares issued in connection with the
acquisitions.
At the time of the mergers, both FUNNYBONE Interactive and Maverick Software,
Inc. (the Acquirees) were "S corporations." During 1995, the Acquirees'
undistributed earnings under S corporation status have been reclassified to
additional paid-in capital in the consolidated financial statements.
Distributions to the Acquirees' shareholders, amounting to $1,084,000,
$1,610,000 and $210,000 for the years ended December 31, 1995, 1994 and 1993,
respectively, have been charged to retained earnings.
During 1994, the Company issued 626,980 shares and 358,648 shares in
connection with its acquisition of Chaos Studios, Inc. (Chaos) and Learningways,
Inc., respectively. Since the acquisition of Chaos was accounted for as a
pooling of interests, the accompanying consolidated financial statements and
related notes have been retroactively adjusted for such shares issued in
connection with the acquisition.
On March 31, 1993, the Company issued 4,380,000 shares of common stock, at
$6.50 a share in an initial public offering. The proceeds to the Company
aggregated $25,581,000, net of underwriting discount and direct expenses.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of a series of no
par value preferred stock. As of December 31, 1995, no shares of preferred stock
had been issued by the Company.
Stock Option Plans
The Company has the following stock option plans: (i) Davidson & Associates,
Inc. 1992 Incentive Stock Option Plan, (ii) Davidson & Associates, Inc. 1992
Nonstatutory Stock Option Plan and (iii) Davidson & Associates, Inc. 1992 Stock
Purchase Plan (collectively, the Plans).
The Plans provide for the grant of options to purchase the Company's common
stock to officers, directors and consultants or independent contractors of the
Company, or of any subsidiary of the Company. Only employees may be granted
options under the Davidson & Associates, Inc. 1992 Incentive Stock Option Plan.
The exercise price of the incentive stock options shall not be less than the
fair market value of the Company's stock on the date of grant. The exercise
price of the options under other plans are at the discretion of the Board of
Directors. The Plans provide that the options are exercisable upon vesting
schedules, as determined by the Board of Directors and are exercisable no later
than ten years from the date of grant. Options issued under the Plans generally
vest ratably over a five-year period. The Plans expire December 31, 2002.
The Board of Directors has set aside 3,000,000 shares of the Company's common
stock for issuance under the plans.
The stock option activity for the Plans follows:
Number of shares Price per share
Balance at December 31, 1992 518,000 $ 4.75
Options granted 70,000 5.50
Options terminated (39,000) 4.75
Options exercised -- --
---------------------------
Balance at December 31, 1993 549,000 $ 4.75-5.50
Options granted 720,000 7.5-11.75
Options terminated (29,200) 4.75-10.75
Options exercised (34,750) 4.75
---------------------------
Balance at December 31, 1994 1,205,050 $ 4.75-11.75
Options granted 905,000 10.88-27.25
Options terminated (97,200) 4.75-10.75
Options exercised (97,400) 4.75-10.88
---------------------------
Balance at December 31, 1995 1,915,450 $ 4.75-27.25
---------------------------
At December 31, 1995, 420,360 of the above options were exercisable at $4.75
to $13.88 per share, and 952,400 options were available for grant.
(9) License, Royalty and Development Revenues
The Company has certain license and royalty agreements with manufacturers of
personal computers, multimedia components, integrated circuits,
telecommunications products, hand-held electronic products and certain software
publishers to license its First Byte "text-to-speech" technology.
Certain agreements provide for an up-front non-refundable license fee upon
signing of the agreement. Revenue under such arrangements is recognized upon the
delivery of the related software and documentation. Additionally, the agreements
typically provide for continuing royalties on unit sales by the licensee which
may be partially prepaid by the licensee. The royalty fees under these
agreements are either based on unit sales or a fixed annual fee and are
recognized as unit sales are reported by the licensee. Royalties received in
advance are deferred until shipments are reported by licensees.
License fees and royalty revenues earned for 1995, 1994 and 1993 were
$1,530,000, $2,475,000 and $2,032,000, respectively.
Additionally, the Company develops software for others under contracts
calling for payment of development fees and ongoing royalties in certain
circumstances. Development revenues aggregated $7,716,000 and $3,344,000 in 1995
and 1994, respectively, and were nominal in 1993. Costs incurred under
development contracts are included in research and development in the
accompanying consolidated financial statements.
(10) Income Taxes
The provisions for income taxes consist of the following for each respective
year:
1995 1994 1993
---------------------------------------------------
Income taxes
Federal:
Current $ 8,503,000 4,755,000 4,117,000
Deferred (2,438,000) (352,000) (841,000)
----------------------------------------------------
Total Federal 6,065,000 4,403,000 3,276,000
----------------------------------------------------
State:
Current 2,806,000 1,301,000 1,116,000
Deferred (646,000) (92,000) (174,000)
----------------------------------------------------
Total state 2,160,000 1,209,000 942,000
----------------------------------------------------
Total income taxes 8,225,000 5,612,000 4,218,000
Incremental pro forma tax expense
related to pooled "S corporations" 300,000 533,000 188,000
----------------------------------------------------
Pro forma tax expense $ 8,525,000 6,145,000 4,406,000
----------------------------------------------------
Income tax expense differs from the statutory tax rate of 35% (34% for 1993)
as applied to earnings before income taxes as follows:
1995 1994 1993
----------------------------------------------------
Expected income tax expense $ 7,670,000 4,231,000 3,797,000
Technology under development at Learningways.
Recorded as an expense for financial reporting
purposes not deductible for tax purposes. -- 1,381,000 --
State income taxes, net of Federal benefit 1,404,000 785,000 622,000
Federal environmental taxes -- 16,000 --
Earnings of pooled companies under S corporation
status not subject to corporate tax (262,000) (466,000) (160,000)
Tax-exempt interest (279,000) (233,000) (175,000)
Research and experimentation credits (594,000) (219,000) (194,000)
Other, principally non-deductible amortization of goodwill 286,000 117,000 328,000
--------------------------------------------
$ 8,225,000 5,612,000 4,218,000
----------------------------------------------------
Prior to their acquisition during 1995, Maverick Software, Inc. and FUNNYBONE
Interactive elected to be taxed as S corporations whereby the income tax effects
of their activities accrued directly to their shareholders. Maverick and
FUNNYBONE Interactive terminated their S corporation election on their
respective dates of acquisition. The consolidated statements of operations
include a pro forma presentation for income taxes which would have been recorded
if Maverick and FUNNYBONE Interactive had been C corporations for all periods
presented.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
1995 1994
--------------------------------
Allowance for doubtful accounts and reserve for returns $ 4,290,000 1,510,000
Inventories 556,000 120,000
Accrued expenses 337,000 480,000
Deferred revenues 249,000 323,000
--------------------------------
Deferred tax assets 5,432,000 2,433,000
Deferred tax liability - accelerated depreciation and amortization (108,000) (193,000)
--------------------------------
Net deferred tax assets $ 5,324,000 2,240,000
--------------------------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the level of
historical taxable income and projections of future taxable income over the
periods in which the deferred tax assets are deductible, as of December 31, 1995
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. Accordingly, no valuation allowance
has been provided against deferred tax assets for any period presented.
(11) Commitments
The Company's corporate offices are leased from the Company's principal
shareholders. The corporate offices lease is renewable at a rental amount
mutually agreed upon by the Company and the shareholders. The minimum rental
commitments under all leases are as follows:
Year ending Related
December 31: Parties Other
------------------------------------------------------------------
1996 $ 649,000 1,153,000
1997 536,000 973,000
1998 424,000 580,000
1999 424,000 418,000
2000 424,000 175,000
Thereafter 566,000 --
--------------------------------
$ 3,032,000 3,299,000
--------------------------------
Total rent expense aggregated $1,648,000, $1,157,000, and $937,000 in 1995,
1994 and 1993, respectively. Total rent expense paid to related parties
aggregated $649,000, $713,000, and $756,000 in 1995, 1994 and 1993,
respectively.
(12) 401(k) Plan
The Company's 401(k) plan covers eligible employees who elect to participate
and the Company has the discretion to make contributions to the plan. Company
contributions vest based on length of service and were $372,000, $264,000 and
$168,000 in 1995, 1994 and 1993, respectively.
(13) Significant Customers
The Company has a significant customer that comprised 7% and 18% of total
trade accounts receivable at December 31, 1995 and 1994, respectively.
Two other customers comprised 24% of total trade accounts receivable at
December 31, 1995 and had immaterial balances at December 31, 1994. These two
customers constituted over 15% of net revenues during 1995. There were no
customers constituting over 10% of net revenues during 1994 and 1993.
(14) Supplemental Disclosure of Non-Cash Financing and Investing Activities
On June 1, 1994, the Company acquired Learningways, Inc. (Learningways) by
exchanging 358,648 shares of its common stock and $664,000 cash for all of the
common stock of Learningways. In connection with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 622,000
In-process research and development,
written off as non-recurring expense 3,950,000
Value of common stock issued (3,561,000)
Cash paid (664,000)
---------------
Liabilities assumed $ 347,000
---------------
(15) Contingencies
The Company is involved from time to time in litigation incidental to its
business. The management of the Company believes that none of its litigation
individually or in the aggregate will have a material adverse effect on the
Company's financial position.
(16) Subsequent Events
On February 20, 1996, the Company entered into an agreement to merge with CUC
International, Inc. Under the terms of the agreement, Company shareholders
receive .85 shares of CUC stock for each share of Company stock. The merger will
be structured as a tax-free reorganization and accounted for as a pooling of
interests. The merger is subject to regulatory approval.
On February 26, 1996, the Company acquired Condor, Inc., a developer of
entertainment software. The acquisition was financed through the issuance of
225,409 shares of common stock for all of the outstanding shares of Condor, Inc.
The acquisition will be accounted under the pooling-of-interests method. Pro
forma results of operations for 1995 are not presented, as the impact of this
pooling of interests is not material.
(17) Quarterly Financial Data (Unaudited)
The following selected quarterly financial data for the years ended December
31, 1995 and 1994 has been restated to reflect the poolings of Blizzard
Entertainment (formerly Chaos Studios, Inc.), FUNNYBONE Interactive and Maverick
Software, Inc.:
First Second Third Fourth
quarter quarter quarter quarter
---------------------------------------------------------------------
1995:
Net revenues $ 25,552,000 37,388,000 37,349,000 46,937,000
Gross profit 13,568,000 15,955,000 20,133,000 25,043,000
Net earnings 1,237,000 1,758,000 4,547,000 6,035,000
Net earnings per share .03 .05 .13 .17
Pro forma net earnings 1,162,000 1,683,000 4,472,000 5,960,000
Pro forma net earnings per share .03 .05 .12 .17
---------------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
1994:
Net revenues $ 14,684,000 18,934,000 23,517,000 36,036,000
Gross profit 8,021,000 9,228,000 13,298,000 18,362,000
Net earnings (loss) 1,082,000 (2,410,000) 3,747,000 4,059,000
Net earnings (loss) per share .03 (.07) .11 .11
Pro forma net earnings 949,000 (2,543,000) 3,614,000 3,925,000
Pro forma net earnings per share .03 (.07) .10 .11
---------------------------------------------------------------------
(a) 3.
Ideon Group, Inc.
Consolidated Financial Statements
December 31, 1995 and 1994
With Independent Auditors' Report
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Ideon
Group, Inc. (formerly known as SafeCard Services, Incorporated), and its
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for the year ended December 31, 1995, the two months ended
December 31, 1994, and each of the two years in the period ended October 31,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, the Company changed the amortization periods for
deferred subscriber acquisition costs effective December 31, 1994.
PRICE WATERHOUSE LLP
Tampa, Florida
February 2, 1996
Ideon Group, Inc.
Consolidated Balance Sheet
(in thousands, except share data)
December 31,
1995 1994
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 25,071 $ 9,315
Securities available for sale maturing within one year 33,741 43,532
Receivables, net 71,953 58,337
Income taxes receivable 16,153 11,441
Deferred subscriber acquisition costs and
related commissions amortizing within one year 91,150 85,435
Deferred income tax asset 3,370 995
Other current assets 3,228 3,262
----------- -----------
Total current assets 244,666 212,317
Securities available for sale maturing after one year 13,328 116,134
Deferred subscriber acquisition costs and
related commissions amortizing after one year 40,403 46,482
Property and equipment, net 32,389 23,381
Excess of cost over fair value of net assets acquired 45,002 28,451
Deferred income tax asset, noncurrent 5,223
Other assets 4,899 1,949
----------- -----------
Total assets $ 385,910 $ 428,714
=========== ===========
Liabilities
Current liabilities:
Notes payable to bank $ 15,414 $ 12,083
Accounts payable 32,523 33,037
Accrued expenses 35,165 30,535
Product abandonment and related liabilities 20,796
Subscribers' advance payments amortizing
within one year 119,805 117,203
Allowance for cancellations 9,548 9,197
----------- -----------
Total current liabilities 233,251 202,055
Subscriber advance payments amortizing after one year 49,799 54,862
Deferred income tax liability 4,991
----------- -----------
Total liabilities 283,050 261,908
----------- -----------
Commitments and Contingencies (Note 16)
Stockholders' Equity
Preferred stock--authorized 10,000,000 shares ($.01 par
value); no shares issued or outstanding
Common stock--authorized 90,000,000 shares ($.01 par value); 34,946,000 shares
issued (34,946,000 at December 31, 1994); 27,981,831 shares outstanding
(28,933,599 at
December 31, 1994) 349 349
Additional paid-in capital 41,230 41,058
Retained earnings 118,999 174,066
Unrealized gain on securities available for sale 345
-----------
160,923 215,473
Less cost of 6,964,169 common shares in treasury
(6,012,401 shares at December 31, 1994) (58,063) (48,667)
----------- -----------
Total stockholders' equity 102,860 166,806
----------- -----------
Total liabilities and stockholders' equity $ 385,910 $ 428,714
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
Ideon Group, Inc.
Consolidated Statement of Operations
(in thousands, except per share data)
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
Revenues
Membership and subscription revenue, net $ 176,951 $ 28,579 $ 162,591 $ 146,173
Card acquisition and services revenue 23,332 2,915 2,107
Consumer marketing revenue 26,337 1,796 10,843 10,427
Interest income 5,690 1,394 8,421 8,736
Other income 1,658 14 5,124 1,790
------------- ------------ ------------ ------------
233,968 34,698 189,086 167,126
------------- ------------ ------------ ------------
Costs and expenses
Subscriber acquisition costs and
related commissions 112,632 14,967 98,150 87,852
Other costs of revenue 22,837 4,475 8,353 7,396
Research and product development costs 7,043 8,163 7,682
Service costs and other operating expenses 38,351 10,063 26,351 16,891
General and administrative expenses 33,318 5,606 16,451 12,542
Costs related to products abandoned
and restructuring 97,029 7,900
Unrealized loss on securities available for sale 1,943
Effect of change in amortization periods
for deferred subscriber acquisition costs 65,500
311,210 110,717 164,887 124,681
------------- ------------ ------------ ------------
Income (loss) before income taxes (77,242) (76,019) 24,199 42,445
Provision for (benefit from) income taxes (27,801) (26,075) 6,178 10,968
------------- ------------ ------------ ------------
Income (loss) before cumulative
effect of change in accounting
for income taxes (49,441) (49,944) 18,021 31,477
Cumulative effect of change in
accounting for income taxes 2,000
Net income (loss) $ (49,441) $ (49,944) $ 20,021 $ 31,477
============= ============ ============ ============
Earnings per share:
Income (loss) before cumulative
effect of accounting change $ (1.73) $ (1.70) $ .63 $ 1.10
Cumulative effect of accounting change .07
-------------- ------------- ------------ ------------
Net income (loss) $ (1.73) $ (1.70) $ .70 $ 1.10
============= ============ ============ ============
Weighted average number of common
and common equivalent shares 28,500 29,297 28,411 28,572
The accompanying notes are an integral part of
these consolidated financial statements.
Ideon Group, Inc.
Consolidated Statement of Changes In Stockholders' Equity
(in thousands, except share data)
Unrealized
Gain (Loss) on Common Stock
Common Stock Additional Securities in Treasury Total
------------------ Paid-in Retained Available ------------------------ Stockholders'
Shares Amount Capital Earnings for Sale Shares Amount Equity
---------- ------ --------- ---------- ------------ ----------- ----------- ----------
Balance at October 31, 1992 33,426,048 $ 334 $ 9,625 $ 194,534 (6,780,015) $ (38,995) $ 165,498
Net earnings 31,477 31,477
Cash dividends paid,
$.20 per share (5,113) (5,113)
Exercise of employee
stock options 769,952 8 4,213 172,059 1,159 5,380
Tax benefit from exercise
of employee stock options 2,152 2,152
Purchase of treasury stock (3,469,860) (41,699) (41,699)
---------- ----- --------- ---------- ------ ---------- ---------- ----------
Balance at October 31, 1993 34,196,000 342 15,990 220,898 (10,077,816) ( 79,535) 157,695
Net earnings 20,021 20,021
Cash dividends paid,
$.20 per share (5,320) (5,320)
Exercise of employee
stock options 750,000 7 3,440 (10,140) 4,090,165 31,351 24,658
Tax benefit from exercise
of employee stock options 21,628 21,628
Issuance of restricted
common stock 11,950
Change in unrealized gain
(loss) on securities
available for sale $ (607) (607)
Purchase of treasury stock (36,700) (483) (483)
---------- ----- --------- ---------- ------ ---------- ---------- ----------
Balance at October 31, 1994 34,946,000 349 41,058 225,459 (607) (6,012,401) (48,667) 217,592
Net loss (49,944) (49,944)
Cash dividends paid,
$.05 per share (1,449) (1,449)
Change in unrealized gain
(loss) on securities
available for sale 607 607
---------- ----- --------- ---------- ------ ---------- ---------- ----------
Balance at December 31, 1994 34,946,000 349 41,058 174,066 (6,012,401) (48,667) 166,806
Net loss (49,441) (49,441)
Cash dividends paid,
$.20 per share (5,626) (5,626)
Exercise of employee
stock options 51 49,832 405 456
Tax benefit from exercise
of employee stock options 121 121
Issuance of restricted
common stock 3,500
Change in unrealized gain
(loss) on securities
available for sale 345 345
Purchase of treasury stock (1,005,100) (9,801) (9,801)
---------- ----- --------- ---------- ------ ---------- ---------- ----------
Balance at December 31, 1995 34,946,000 $ 349 $ 41,230 $ 118,999 $ 345 (6,964,169) $ (58,063) $ 102,860
========== ===== ========= ========== ====== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
Ideon Group, Inc.
Consolidated Statement of Cash Flows
(in thousands)
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
Cash Flows From Operating Activities
Net cash received from subscribers/customers $ 238,835 $ 31,070 $ 194,584 $ 175,596
Cash paid to suppliers and employees (311,971) (38,763) (168,831) (139,290)
Interest received 7,857 3,094 13,922 13,952
Interest paid (1,287) (146)
Income tax refunds (payments), net 11,047 (7) 3,114 (21,413)
Gain from litigation settlements 4,257
------------ ------------ ------------ -----------
Net cash (used in) provided by operating
activities (55,519) (4,752) 47,046 28,845
------------ ------------ ------------ -----------
Cash Flows From Investing Activities
Purchases of investment securities (52,961) (12,752) (96,986) (63,174)
Proceeds from sales of investment securities 135,111 17,463 73,748 64,539
Proceeds from maturing investment securities 30,185 18,035 7,068
Cost of acquisitions, net of cash acquired (12,977) (35,276)
Acquisition of property and equipment, net (16,443) (7,406) (8,044) (719)
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 82,915 (2,695) (48,523) 7,714
------------ ------------ ------------ ------------
Cash Flows From Financing Activities
Net borrowings (repayments) on notes
payable to bank 3,331 290 (2,792)
Proceeds from exercise of stock options 456 24,658 5,380
Dividends paid (5,626) (1,449) (5,320) (5,113)
Payments for purchase of treasury shares (9,801) (483) (41,699)
------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities (11,640) (1,159) 16,063 (41,432)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 15,756 (8,606) 14,586 (4,873)
Cash and cash equivalents at
beginning of period 9,315 17,921 3,335 8,208
------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period $ 25,071 $ 9,315 $ 17,921 $ 3,335
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
Ideon Group, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
On April 27, 1995, the stockholders of SafeCard Services, Incorporated
("SafeCard") approved a plan of reorganization whereby SafeCard became a
wholly-owned subsidiary of Ideon Group, Inc. ("Ideon" or the "Company"), a newly
formed Delaware corporation. All shares of SafeCard common stock were converted
into shares of Ideon common stock. Ideon is a holding company with current
business units as follows: SafeCard, Wright Express Corporation, National
Leisure Group, Inc. and Ideon Marketing and Services Company. The operations of
an additional business unit, Family Protection Network, Inc., have been
discontinued as described in Note 10 Costs Related to Products Abandoned and
Restructuring.
SafeCard, the Company's principal operating subsidiary, is a credit card
enhancement marketing company. Subscriptions for continuity services are
primarily marketed through credit card issuers by mail or telephone. SafeCard's
principal service is credit card registration and loss notification
("Hot-Line"), whereby SafeCard gives prompt notice to credit card issuers upon
being informed that a subscriber's credit cards have been lost or stolen.
Subscriptions for continuity services typically continue annually or
periodically unless canceled by the subscriber. SafeCard also markets other
continuity services including those related to fee-based credit cards ("Fee
Card"), date reminder services, a personal credit information service
("CreditLine"). SafeCard is also developing new lines of business including
travel and shopping related products.
Wright Express Corporation ("Wright Express"), acquired in September 1994,
provides transaction and information processing services to oil companies and
commercial transportation fleets primarily through a national credit card
network program, the Wright Express Universal Fleet card (the "WEX card") and
through private label processing arrangements for retail fuel marketers.
National Leisure Group, Inc. ("National Leisure Group"), acquired in January
1995, provides vacation travel packages and cruises directly to the public in
partnership with established retailers and warehouse clubs throughout New
England and with credit card issuers and membership clubs nationwide.
Ideon Marketing and Services Company ("IMS") manages an initiative between the
Company, the PGA TOUR and SunTrust BankCard, N.A. to develop and market an
expanded PGA TOUR Partners program, including a co-branded credit card. The
activities of IMS have been significantly curtailed due to lower than expected
response rates to the expanded PGA TOUR Partners program and related credit card
offering during 1995 (see Note 10 - Costs Related to Products Abandoned and
Restructuring).
On February 14, 1995, the Company filed a Transition Period Form 10-Q for the
two months ended December 31, 1994 in order to effect a change in its year end
from October 31 to December 31. References herein to the year 1995 refer to the
Company's calendar year ended December 31, 1995. References herein to the
Transition Period refer to the two months ended December 31, 1994. References
herein to the years 1994 and 1993 refer to the Company's previous fiscal years
ended October 31.
Principles of Consolidation
The consolidated financial statements include the accounts of Ideon and its
subsidiaries, after elimination of intercompany accounts and transactions. On
September 14, 1994, the Company acquired 100% of the outstanding common stock of
Wright Express. Effective January 1, 1995, the Company acquired substantially
all of the assets and assumed substantially all of the liabilities of National
Leisure Group. These transactions were accounted for under the purchase method
and accordingly the consolidated financial statements include the results of
operations of Wright Express and National Leisure Group from the respective
dates of purchase (see Note 3 Acquisitions).
Cash and Cash Equivalents
Cash and cash equivalents include cash-on-hand, demand deposits and short-term
investments with original maturities of three months or less.
Securities Available for Sale
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, ("FAS 115") "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires that all
investments in debt and equity securities that fall within its scope be
classified as either held to maturity, trading or available for sale. Management
elected early adoption of FAS 115 as of October 31, 1994 and classified its
entire securities portfolio as "available for sale" at that time. Securities
classified as available for sale are stated at market value with any unrealized
gains or losses included as a separate component of stockholders' equity.
Approximately $11,600,000 of securities available for sale at December 31, 1995
were held in escrow as required contractually by certain credit card issuers
(see "Revenue Recognition/Cost Amortization").
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense while betterments are
capitalized. Depreciation is computed using the straight-line method over the
assets' estimated useful lives. Estimated useful lives range from 3 to 7 years
for equipment, furniture and fixtures to 30 years for buildings. Capitalized
leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the lease term.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired ("goodwill") represents
the difference between the purchase price of Wright Express and National Leisure
Group and the value of the net assets acquired in each of the acquisitions (see
Note 3 Acquisitions). Such goodwill is being amortized on a straight-line basis
over 25 years. Accumulated amortization was $2,216,000 and $440,000 as of
December 31, 1995 and 1994, respectively. Periodically, the Company reviews its
intangible assets for events or changes in circumstances that may indicate that
the carrying amounts of the assets are not recoverable. Based upon this review,
the Company believes that the unamortized balance of goodwill at December 31,
1995 is fully recoverable.
Revenue Recognition/Cost Amortization
Subscription Revenue and Commission Expense
The Company generally receives advance payments from subscribers for its
products and services. The subscription period and advance payments are
generally for periods of 12 or 36 months. These advance payments, less an
appropriate allowance for cancellations, are deferred and amortized to revenue
ratably over the subscription period. Credit card issuers earn commissions based
on percentages of subscription billings or other profit sharing arrangements.
Such commissions, less an appropriate allowance for cancellations, are also
deferred and amortized to expense ratably over the subscription period.
The allowance for cancellations, net of related commissions, relates to amounts
which may be refunded at a future time to subscribers who may cancel their
subscriptions prior to the completion of the subscription period. Previously
paid commissions related to canceled subscriptions are reimbursed to the Company
by the credit card issuer.
The Company places funds in escrow as required contractually by certain credit
card issuer clients. The contractual requirement as of December 31, 1995 was
approximately $11,600,000. Restricted funds are released ratably over the
subscription period (which coincides with the period of revenue recognition) and
are invested primarily in tax-exempt municipal securities and United States
Treasury securities.
Card Acquisition and Services Revenue
Card acquisition and services revenue is principally in the form of transaction
fees deducted from amounts remitted to retail fueling merchants and monthly fees
charged to fleet customers of Wright Express.
Consumer Marketing Revenue
Revenue from the sale of vacation packages by National Leisure Group, which is
included in the "Consumer marketing revenue" caption in the consolidated
statement of operations, is recognized at the date when substantially all
obligations to the customer have been performed and at least 90 percent of the
total booking price has been received (see Note 3 - Acquisitions). Consumer
marketing revenue also includes revenues from SafeCard's date reminder service
which is amortized over each calendar year.
Subscriber Acquisition Costs
Subscriber acquisition expenditures directly relate to the acquisition of new
subscribers through "direct-response" type marketing campaigns and primarily
include payments for telemarketing, printing, postage, mailing services, certain
direct salaries and other direct costs incurred to acquire new subscribers.
Prior to December 31, 1994, these expenditures were deferred and amortized to
expense in proportion to expected revenues over the expected subscription
periods, including renewal periods (life of subscriber). These amortization
periods ranged from 10 to 12 years for single year and multi-year subscriptions,
respectively.
After a general review of the Company's business plans and related accounting
practices during the Transition Period, the Company's Board of Directors
approved a change in the amortization periods for deferred subscriber
acquisition costs. The change was made in response to the Company's plans to
incur additional marketing expenditures to enhance renewal rates. Under
generally accepted accounting principles, if additional expenditures are
incurred to maintain or enhance the renewal stream, the Company is required to
amortize such subscriber acquisition costs over periods greater than the initial
subscription period. Accordingly, based on efforts to enhance renewal rates, the
Company changed its amortization periods. Effective December 31, 1994, the
amortization periods were shortened to one year and three years for single year
and multi-year subscriptions, respectively (initial subscription period without
regard for anticipated renewals). The effect of reducing the amortization
periods resulted in a one-time, non-cash, pre-tax charge to earnings of
$65,500,000 during the two months ended December 31, 1994.
The change in the amortization periods for deferred subscriber acquisition costs
does not affect the amortization of commissions which continue to be amortized
over the one to three year subscription period, as appropriate.
Income Taxes
Effective November 1, 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Adoption of FAS 109 required a change from the deferred method to the
liability method of accounting for income taxes. One of the principal
differences of the liability method from the deferred method used in previous
financial statements is that changes in tax laws and rates are reflected in
income from continuing operations in the period such changes are enacted. The
impact of the adoption of FAS 109 had a cumulative positive effect on the
Company's reported earnings in 1994 of $2,000,000.
Income (Loss) Per Share
Income per share is calculated by dividing net income by the weighted average
number of shares of common stock and common stock equivalents (common stock
issuable upon exercise of stock options) outstanding. Loss per share is
calculated by dividing net loss by the weighted average number of shares of
common stock outstanding.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior period financial statements to
conform to the 1995 presentation.
2. Change in Fiscal Year End
On February 14, 1995, SafeCard filed a Transition Period Form 10-Q for the two
months ended December 31, 1994 in order to effect a change in its year end from
October 31 to December 31. As a result, the consolidated audited financial
statements contain information as of and for the two months ended December 31,
1994. The following supplemental unaudited consolidated statement of operations
and unaudited consolidated statement of cash flows for the two months ended
December 31, 1993 is presented for comparative purposes only and was presented
in the Transition Period Form 10-Q filed in February 1995.
Consolidated Statement of Operations
Two Months Ended
December 31, 1993
(unaudited)
----------------
Revenues
Membership and subscription revenue, net $ 25,775,000
Card acquisition and services revenue
Consumer marketing revenue 1,743,000
Interest income 1,334,000
Other income 280,000
----------------
29,132,000
Costs and expenses
Subscriber acquisition costs and related commissions 15,652,000
Other costs of revenue 1,239,000
Service costs and other operating expenses 3,282,000
General and administrative expenses 2,480,000
----------------
22,653,000
Income before income taxes 6,479,000
Provision for income taxes 1,652,000
Income before cumulative effect of change in accounting
for income taxes 4,827,000
Cumulative effect of change in accounting for income taxes 2,000,000
----------------
Net Income $ 6,827,000
================
Earnings per share
Income before cumulative effect of accounting change $ .18
Cumulative effect of accounting change .07
Net income $ .25
=====
Weighted average number of common
and common equivalent shares 27,325,000
================
Consolidated Statement of Cash Flows
Two Months Ended
December 31, 1993
(unaudited)
-----------------
Cash Flows From Operating Activities
Net cash received from subscribers/customers $ 33,523,000
Net cash paid to suppliers and employees (31,601,000)
Interest received 3,627,000
Income tax refunds (payments), net 515,000
----------------
Net cash provided by operating activities 6,064,000
----------------
Cash Flows From Investing Activities
Purchases of investment securities (18,350,000)
Proceeds from sale of investment securities 15,438,000
Proceeds from maturing investment securities 710,000
Acquisition of property and equipment, net (410,000)
-----------------
Net cash used in investing activities (2,612,000)
-----------------
Cash Flows From Financing Activities
Proceeds from exercise of stock options 36,000
Dividends paid (1,207,000)
Payments for purchase of treasury shares (483,000)
-----------------
Net cash used in financing activities (1,654,000)
-----------------
Net increase in cash and cash equivalents 1,798,000
Cash and cash equivalents at beginning of period 3,335,000
----------------
Cash and cash equivalents at end of period $ 5,133,000
================
3. Acquisitions
National Leisure Group
On February 10, 1995, the Company completed its acquisition of substantially all
of the assets and liabilities of National Leisure Group, a provider of vacation
travel packages to credit card companies, retailers and wholesale clubs in the
United States. The Company paid cash of $15,048,000 and agreed to issue
$1,400,000 of common stock on the third anniversary of the acquisition. Also, up
to $2,800,000 of additional common stock is issuable based on the attainment of
certain earnings hurdles. The acquisition was effective as of January 1, 1995
and was accounted for under the purchase method. Accordingly, the consolidated
results of operations of the Company include the results of operations of
National Leisure Group for the year ended December 31, 1995.
As part of the transaction, the Company acquired $5,631,000 of assets, which
included $2,395,000 of cash, and assumed liabilities of $7,153,000. The Company
recorded $18,327,000 of goodwill which is being amortized on a straight-line
basis over 25 years. Amortization expense through December 31, 1995 related to
this acquisition was approximately $725,000.
The following presents the unaudited pro forma results of operations of the
Company and National Leisure Group as if combined throughout the two months
ended December 31, 1994 and the year ended October 31, 1994:
Two Months Ended Year Ended
December 31, October 31,
1994 1994
(unaudited) (unaudited)
----------- -----------
Revenues, net $ 36,933,000 $ 201,940,000
Costs and expenses 112,708,000 176,570,000
----------------- ------------------
Income (loss) before provision for income taxes
and cumulative effect of accounting change $ (75,775,000) $ 25,370,000
================= ==================
Net (loss) income $ (49,769,000) $ 20,980,000
================= ==================
(Loss) earnings per share $ (1.70) $ .74
========= =====
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented,
nor are they intended to be a projection of future results.
Wright Express Corporation
On September 14, 1994, the Company acquired 100% of the outstanding common stock
of Wright Express, a provider of transaction and information processing services
to oil companies and commercial transportation fleets in the United States, for
$35,500,000 in cash. The acquisition was accounted for under the purchase method
and, accordingly, the results of operations of Wright Express are included in
the Company's consolidated financial statements from the date of acquisition. In
connection with the acquisition, the Company recorded $28,891,000 of goodwill
which is being amortized on a straight-line basis over 25 years.
The following presents the unaudited pro forma results of operations of the
Company and Wright Express as if combined throughout the year ended October 31,
1994:
Year Ended
October 31,
1994
(unaudited)
-----------
Revenues, net $ 200,955,000
Costs and expenses 176,060,000
------------------
Income before provision for income taxes
and cumulative effect of accounting change $ 24,895,000
==================
Net income $ 20,149,000
==================
Earnings per share $ .71
=====
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented,
nor are they intended to be a projection of future results.
4. Investments
The Company's investment portfolio is invested primarily in tax-exempt municipal
bonds. Because there is not a regularly published source of accurate current
market values for tax-exempt municipal bonds, the Company's investment adviser
estimates market values for the Company's securities available for sale using a
pricing matrix commonly used in the municipal bond industry, or in certain
cases, by soliciting quotations from municipal bond dealers.
The financial statement carrying amount, gross unrealized gains, gross
unrealized losses and estimated market value of the Company's securities
available for sale were as follows:
December 31, 1995
----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------ ----- ------ -----
Tax-exempt municipal bonds $ 39,054,000 $ 366,000 $ (21,000) $ 39,399,000
U.S. Treasury bills 7,415,000 7,415,000
Other 255,000 255,000
----------------- ------------ ------------ -----------------
$ 46,724,000 $ 366,000 $ (21,000) $ 47,069,000
================= ============ ============ =================
December 31, 1994
----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------ ----- ------ -----
Tax-exempt municipal bonds $ 159,473,000 $ 159,473,000
Other 193,000 193,000
----------------- ------------ ------------ -----------------
$ 159,666,000 $ 159,666,000
================= ============ ============ =================
Maturities of the Company's investment portfolio at December 31, 1995 were as
follows:
Carrying Market
Value Value
----- -----
Within one year $ 33,499,000 $ 33,741,000
One to five years 9,187,000 9,282,000
More than five years 4,038,000 4,046,000
---------------- -----------------
$ 46,724,000 $ 47,069,000
================ =================
Gross realized gains on sales of securities available for sale totaled
$1,237,000, $620,000 and $1,290,000 for the years ended December 31, 1995 and
October 31, 1994 and 1993, respectively. Gross realized losses on sales of
securities available for sale totaled $143,000, $97,000, $27,000 and $12,000 for
the years ended December 31, 1995, the two months ended December 31, 1994 and
the years ended October 31, 1994 and 1993, respectively. Gains and losses on
sales of securities are computed on the specific identification basis and are
included as a component of other income.
On October 31, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115 ("FAS 115"), "Accounting for Investments in Certain Debt and
Equity Securities." Upon adoption of FAS 115, the Company classified its
securities portfolio, principally consisting of municipal bonds, as available
for sale and disclosed the unrealized loss of $607,000 as a separate component
of stockholders' equity. During the two months ended December 31, 1994, the
Company experienced further market value declines in its investment portfolio as
a result of the increasing interest rate environment. Given the Company's
strategy to redeploy its investment resources into operating assets and in view
of the then current interest rate environment, management elected to reposition
the portfolio. This repositioning helped to minimize additional market risk and
complete the Company's effort to shorten the overall maturity of the portfolio.
Due to the decision to sell a significant portion of the Company's investment
portfolio, management determined that there was an other than temporary decline
in the market value of its available for sale portfolio, and consequently the
net unrealized losses of $1,943,000 were charged against earnings for the two
months ended December 31, 1994.
5. Receivables, net
Receivables and the related allowance for doubtful accounts were as follows at
December 31:
1995 1994
---- ----
Receivables for transportation fleet services $ 47,041,000 $ 31,402,000
Receivables for continuity services 24,086,000 25,391,000
Other receivables 1,700,000
Accrued interest receivable 1,121,000 3,288,000
--------------- ----------------
73,948,000 60,081,000
Allowance for doubtful accounts (1,995,000) (1,744,000)
--------------- --------------
$ 71,953,000 $ 58,337,000
=============== ================
The receivables for transportation fleet services primarily relate to amounts
due from customers of Wright Express for fleet fueling and other transportation
services.
6. Property and Equipment
Property and equipment consisted of the following at December 31:
1995 1994
---- ----
Equipment $ 19,747,000 $ 13,457,000
Building 16,204,000 5,582,000
Furniture and fixtures 7,053,000 1,481,000
Construction in progress 6,877,000
Land 447,000 447,000
--------------- ----------------
43,451,000 27,844,000
Less: accumulated depreciation (11,062,000) (4,463,000)
--------------- ----------------
$ 32,389,000 $ 23,381,000
=============== ================
Construction in progress related to improvements and additions made to
SafeCard's operations center in Cheyenne, Wyoming. All costs associated with
this project were capitalized as construction in progress and began to be
depreciated when the improvements and additions were placed in service during
1995.
7. Accrued Expenses
Included within "Accrued expenses" as of December 31, 1995 and 1994 is a
disputed liability recorded in 1992 of approximately $10,500,000 relating to the
Company's estimated net obligation under a contested lease (the "Ft. Lauderdale
Lease") of its former Ft. Lauderdale headquarters. The Company no longer
occupies these premises and is no longer making payments on the Ft. Lauderdale
Lease, which is now the subject of litigation (see Note 16 - Commitments and
Contingencies).
8. Notes Payable to Bank
Notes payable to bank represents a revolving loan agreement assumed in
connection with the acquisition of Wright Express in 1994. The agreement, as
originally structured, provided for maximum borrowings equal to the lesser of
$17,500,000 or an amount based on a percentage of eligible accounts receivable
as defined therein. In November 1994, the revolving credit agreement was amended
increasing the available line to $27,500,000 and the Company was added as a
guarantor under the amended agreement.
Interest on the outstanding borrowings was, at Wright Express' option, either
the bank's prime rate minus 0.5% or the London Interbank Offering Rate ("LIBOR")
plus 0.625%. Wright Express paid a fee of 0.25% per annum on the average daily
unused portion of the line of credit. Borrowings are secured by substantially
all assets of Wright Express.
At December 31, 1995, the Company had $15,414,000 outstanding under the
revolving line of credit with interest rates ranging from 6.31% to 7.25%.
In February 1996, Wright Express entered into a new revolving credit facility
agreement replacing the previous revolving line of credit. The new credit
facility has an available line of $75,000,000 of which $50,000,000 may be used
to finance working capital requirements and for general corporate purposes and
$25,000,000 may be used for acquisition financing. The new credit facility
expires December 1, 1998. Interest on the outstanding borrowings is computed, at
the option of Wright Express, under various methods including the bank's prime
rate or LIBOR plus 0.75%. Wright Express pays a quarterly fee of 0.25% on the
average daily unused portion of the line of credit and an annual agent's fee of
$25,000. Borrowings are secured by substantially all assets of Wright Express.
In February 1996, Wright Express also entered into a $5,000,000 capital
expenditure line of credit arrangement with a bank.
9. Subscriber Acquisition Costs and Commissions
Deferred subscriber acquisition costs and related commissions were as follows at
December 31:
1995 1994
---- ----
Hot-Line $ 65,232,000 $ 61,006,000
Fee Card 5,597,000 4,540,000
Other services 15,905,000 19,500,000
------------- -------------
Total deferred subscriber acquisition costs 86,734,000 85,046,000
Commissions 44,819,000 46,871,000
------------- -------------
Total deferred subscriber acquisition
costs and commissions $ 131,553,000 $ 131,917,000
============= =============
10. Costs Related to Products Abandoned and Restructuring
Included in costs related to products abandoned and restructuring in the
Consolidated Statement of Operations for the year ended December 31, 1995 are
special charges totaling $43,817,000, net of recoveries, related to the
abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of SafeCard and the corporate
infrastructure as discussed below. The original charge of $45,017,000 was
composed of accrued liabilities of $36,248,000 and asset impairments of
$8,769,000. As discussed below, in December 1995 the Company recovered
$1,200,000 of a $3,900,000 deposit included in the above charges.
The components of the product abandonment and related liabilities as of December
31, 1995 are as follows:
1995 Balance at
Provisions Activity 12/31/95
---------- -------- --------
Severance and other employee costs $ 14,960,000 $ 8,950,000 $ 6,010,000
Costs to terminate equipment and facilities leases 9,593,000 2,656,000 6,937,000
Liability for contract impairments 8,400,000 1,000,000 7,400,000
Other costs 3,295,000 2,846,000 449,000
--------------- --------------- ----------------
$ 36,248,000 $ 15,452,000 $ 20,796,000
=============== =============== ================
The $20,796,000 balance of the product abandonment and related liabilities at
December 31, 1995 represents the Company's best estimate of the amounts expected
to be incurred with respect to its product abandonment and restructuring
efforts. The amounts that will ultimately be paid could differ from the amounts
included in the product abandonment and related liabilities estimate. The
Company anticipates completion of the majority of the actions related to the
product abandonment and restructuring during 1996.
PGA TOUR Partners
In late March and early April 1995, the Company launched an expanded PGA TOUR
Partners program through its IMS subsidiary. The program provided various
benefits to members including access to PGA TOUR events and a co-branded credit
card. Consumer response rates after the launch were significantly less than
management's expectations and it was determined that the product as configured
was not economically viable. The Company discontinued marketing the product and
recorded a special charge of $17,993,000 at June 30, 1995 for costs associated
with the abandonment of the product marketing including employee severance
payments (approximately 130 employees), costs to terminate equipment and
facilities leases, costs for contract impairments and write-downs taken for
asset impairments.
On September 14, 1995, after a period of product redesign and test marketing,
the Company announced that it would discontinue its credit card servicing role
in connection with the PGA TOUR Partners credit card program. In connection with
this decision, the Company recorded a special charge of $3,612,000 for costs
associated with the abandonment of this role, including employee severance
payments (approximately 60 employees), costs to terminate equipment and
facilities leases and the recognition of certain commitments. The Company
continues to provide membership (non-credit card) servicing for the PGA TOUR
Partners program.
Family Protection Network
In April 1995, Family Protection Network launched a nationwide child
registration and missing child search program. Consumer response rates from the
initial product launch were significantly lower than anticipated and the Company
closed this business unit. As a result, the Company recorded an $8,987,000
charge in the second quarter 1995 to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and write-downs
taken for asset impairments. As of December 31, 1995, all employees of Family
Protection Network have been terminated.
Corporate and SafeCard Restructurings
As a result of the discontinuance of these products, the Company undertook an
overall restructuring of its operations, including a significant reduction of
its workforce at its corporate headquarters and at SafeCard. The decision to
abandon these products and restructure the Company resulted in the recording of
a charge of $7,176,000 in the second quarter 1995 to cover costs to terminate
certain operating leases and write-down certain assets to their estimated net
realizable value. The Company recorded additional charges of $3,010,000 in the
third quarter 1995 for costs associated with the restructuring of SafeCard and
$4,239,000 for a restructuring of the corporate infrastructure. Restructuring
costs include severance payments and costs to terminate equipment and facilities
leases.
In May 1995, the Company signed a definitive purchase agreement to acquire a
350,000 square foot building and related property for approximately $39,000,000.
As part of the agreement, the Company paid $3,900,000 into an escrow account as
a nonrefundable deposit pending the completion of the purchase in early 1996.
Included in the $7,176,000 corporate charge recorded in the second quarter was a
provision for the full impairment of this deposit. Management worked with the
building owner to facilitate a sale of the building to a third party. As a
result, the building owner and a third party entered into a purchase agreement
and the Company recovered $1,200,000 of its deposit in the fourth quarter of
1995.
In April 1994, the Company announced a reorganization of its operations and
named a new senior management team. As a part of the reorganization, nine senior
executives left the Company and the Ft. Lauderdale sales office was closed. As a
result of this reorganization, the Company recorded a restructuring charge of
$3,500,000 to cover severance agreements and a lease termination. In addition,
the Company recorded an additional charge of $4,400,000 paid to Steven J.
Halmos, the Company's co-founder (see Note 14 Transactions with Related
Parties). At December 31, 1995 the remaining balance of these reserves of
$285,000 was included in "Accrued expenses."
11. Segment Information
The operations of the Company are managed along business unit lines and,
accordingly, the Company considers each operating subsidiary a separate business
segment for financial reporting purposes. Due to their nature and stage of
development, the operations of IMS and Family Protection Network have been
combined and presented as Developmental Operations in the segment information
table below.
Two Months Year Ended
Year Ended Ended October 31,
December 31, December 31, ----------------------------
1995 1994 1994 1993
---- ---- ---- ----
SafeCard
Operating revenue $ 187,875,000 $ 30,375,000 $ 173,663,000 $ 157,112,000
Operating income (loss) 32,446,000 (59,450,000) 41,961,000 44,682,000
Identifiable assets 195,769,000 217,679,000 270,636,000 206,331,000
Depreciation and amortization 2,549,000 236,000 1,094,000 864,000
Capital expenditures, net 9,881,000 7,241,000 7,913,000 719,000
Wright Express
Operating revenue 23,332,000 2,915,000 2,107,000
Operating income 3,434,000 512,000 250,000
Identifiable assets 77,309,000 32,737,000 32,471,000
Depreciation and amortization 1,721,000 421,000 255,000
Capital expenditures, net 1,663,000 165,000 131,000
National Leisure Group
Operating revenue 16,018,000
Operating income 1,973,000
Identifiable assets 27,237,000
Depreciation and amortization 1,066,000
Capital expenditures, net 1,969,000
Developmental Operations
Operating revenue
Operating loss (83,803,000) (6,565,000) (5,006,000)
Identifiable assets 521,000 4,218,000
Depreciation and amortization 384,000
Capital expenditures, net 664,000
Corporate and Other
Operating revenue 6,743,000 1,408,000 13,316,000 10,014,000
Operating income (loss) (31,292,000) (10,516,000) (13,006,000) (2,237,000)
Identifiable assets 85,074,000 174,080,000 177,266,000 171,956,000
Depreciation and amortization 437,000 66,000
Capital expenditures, net 2,266,000
Consolidated Totals
Operating revenue 233,968,000 34,698,000 189,086,000 167,126,000
Operating income (loss) (77,242,000) (76,019,000) 24,199,000 42,445,000
Identifiable assets 385,910,000 428,714,000 480,373,000 378,287,000
Depreciation and amortization 6,157,000 723,000 1,349,000 864,000
Capital expenditures, net 16,443,000 7,406,000 8,044,000 719,000
Identifiable assets are those assets of the Company that are identified with the
operations of each of the individual business units. Corporate assets are
principally cash, securities available for sale and property and equipment.
National Leisure Group's identifiable assets include $17,607,000 of unamortized
goodwill as of December 31, 1995. Wright Express' identifiable assets included
unamortized goodwill of $27,395,000, $28,451,000 and $28,739,000 as of December
31, 1995 and 1994 and October 31, 1994, respectively. Operating income for
SafeCard for the two months ended December 31, 1994 includes a pre-tax charge of
$65,500,000 for a change in amortization periods for deferred subscriber
acquisition costs. Operating revenue for the year ended October 31, 1994 for
Corporate and Other includes a gain on litigation settlements of $4,257,000.
The Company does not earn material amounts of revenue from sources outside the
United States.
12. Income Taxes
As discussed in Note 1, the Company changed its method of accounting for income
taxes as of November 1, 1993. The components of the provision for (benefit from)
income taxes for the year ended December 31, 1995, the two months ended December
31, 1994 and the years ended October 31, 1994 and 1993 were as follows:
Two Months Year Ended
Year Ended Ended October 31,
December 31, December 31, ------------------------
1995 1994 1994 1993
---- ---- ---- ----
Current
Federal $ (15,636,000) $ (1,887,000) $ 13,032,000 $ 15,608,000
State (93,000) (54,000) 272,000 101,000
----------------- ---------------- ---------------- -----------------
Total current (15,729,000) (1,941,000) 13,304,000 15,709,000
----------------- ---------------- ---------------- -----------------
Deferred
Federal (11,530,000) (23,815,000) (7,640,000) (3,588,000)
State (542,000) (319,000) 514,000 (1,153,000)
----------------- ---------------- ---------------- -----------------
Total deferred (12,072,000) (24,134,000) (7,126,000) (4,741,000)
----------------- ---------------- ---------------- -----------------
Total $ (27,801,000) $ (26,075,000) $ 6,178,000 $ 10,968,000
================= ================ ================ =================
The following is a reconciliation of the statutory U.S. federal income tax rate
and the Company's effective income tax rate for the year ended December 31,
1995, the two months ended December 31, 1994 and the years ended October 31,
1994 and 1993:
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0% 34.8%
Increase (reduction) in tax rates
resulting from:
State income tax, net of federal benefit 2.1 1.2
Tax-exempt interest income (1.7) (.6) (10.8) (6.8)
Amortization of non-deductible goodwill .5 .1
Reversal of prior years' deferred taxes
at the rates in effect at that time (2.9)
Other 2.2 (.2) (.8) (.5)
---- ---- ---- ----
Effective tax rate 36.0% 34.3% 25.5% 25.8%
==== ==== ==== ====
The components of the Company's deferred income tax assets and liabilities under
FAS 109 were as follows:
December 31, December 31, October 31, November 1,
1995 1994 1994 1993
---- ---- ---- ----
Deferred tax liabilities:
Subscriber acquisition costs $ 47,255,000 $ 45,915,000 $ 71,585,000 $ 68,391,000
Depreciation 1,312,000 432,000 549,000 382,000
----------------- ---------------- ---------------- -----------------
48,567,000 46,347,000 72,134,000 68,773,000
----------------- ---------------- ---------------- -----------------
Deferred tax assets:
Multi-year subscription revenues 41,928,000 36,968,000 36,226,000 29,051,000
Relocation expenses 3,439,000 3,606,000 3,749,000 3,736,000
Product abandonment and
related liabilities 8,005,000
Net operating loss carryforwards 1,347,000 1,474,000 8,217,000
Reminder/reference subscription revenue (2,709,000) (3,643,000) 1,195,000 (1,945,000)
Other 5,150,000 3,946,000 1,996,000 1,829,000
----------------- ---------------- ---------------- -----------------
57,160,000 42,351,000 51,383,000 32,671,000
----------------- ---------------- ---------------- -----------------
Net deferred tax (asset) liability $ (8,593,000) $ 3,996,000 $ 20,751,000 $ 36,102,000
================= ================ ================ =================
The deferred income tax benefit for the year ended October 31, 1993 (under prior
accounting method) resulted from the following items:
Subscriber costs, net $ 450,000
Multi-year subscription revenues (7,310,000)
Reminder/reference subscription revenue 1,952,000
Relocation expenses 698,000
Other (531,000)
----------------
$ (4,741,000)
================
At December 31, 1995, the Company had $4,298,000 of net operating loss
carryforwards for tax purposes which, if unused, will expire in 2001.
13. Common Stock And Stock Options
The following table presents information for the year ended December 31, 1995,
the two months ended December 31, 1994 and the years ended October 31, 1994 and
1993 with respect to options granted and outstanding as follows:
Shares Under Option
--------------------------------------------------------------------------
Outstanding Outstanding
Option at beginning at end of
Price Range of period Granted Canceled Exercised period
----------- --------- ------- -------- --------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended October 31, 1993
1979 Plan $ 5.875 141,040 (141,040)
Outside Directors' Options $ 6.375-13.00 200,000 200,000 (100,000) 300,000
1987 Plan $ 5.875 348,100 (348,100)
1989 Executive Options $ 5.125 980,000 (230,000) 750,000
1989 Employee Stock Option Plan $ 6.00 361,004 (5,333) (102,671) 253,000
Peter & Steven J. Halmos $ 5.125-5.50 5,850,000 (1,950,000) 3,900,000
1991 Employee Stock Option Plan $ 9.00 138,000 (24,333) (38,334) 75,333
1992 Employee Stock Option Plan $ 8.875 75,000 (12,500) 62,500
--------- --------- ---------- ---------- ---------
8,018,144 275,000 (1,992,166) (960,145) 5,340,833
========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended October 31, 1994
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Executive Options $ 5.125 750,000 (750,000)
1989 Employee Stock Option Plan $ 6.00 253,000 (234,000) 19,000
Steven J. Halmos $ 5.125-5.50 3,900,000 (3,900,000)
1991 Employee Stock Option Plan $ 9.00 75,333 (11,667) (36,333) 27,333
1992 Employee Stock Option Plan $ 8.875 62,500 (13,335) (14,164) 35,001
1994 Long-Term Stock-Based
Incentive Plan $ 12.625-18.375 2,315,000 (3,000) 2,312,000
Employee Stock Option Plan $ 16.50 42,700 (2,700) 40,000
--------- --------- ---------- ---------- ---------
5,340,833 2,357,700 (30,702) (4,934,497) 2,733,334
========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Two months ended December 31, 1994
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Employee Stock Option Plan $ 6.00 19,000 19,000
1991 Employee Stock Option Plan $ 9.00 27,333 27,333
1992 Employee Stock Option Plan $ 8.875 35,001 35,001
1994 Long-Term Stock-Based
Incentive Plan $ 12.625-18.938 2,312,000 193,500 2,505,500
Employee Stock Option Plan $16.50-17.50 40,000 21,500 61,500
--------- ---------- ---------
2,733,334 215,000 2,948,334
========= ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995
Outside Directors' Options $ 9.00 - 13.00 300,000 300,000
1989 Employee Stock Option Plan $ 6.00 19,000 (19,000)
1991 Employee Stock Option Plan $ 9.00 27,333 (1,667) (17,333) 8,333
1992 Employee Stock Option Plan $ 8.875 35,001 (12,501) (12,500) 10,000
1994 Long-Term Stock-Based
Incentive Plan $ 7.625 - 20.75 2,505,500 1,049,200 (936,000) (1,000) 2,617,700
Employee Stock Option Plan $ 9.875 - 19.125 61,500 74,300 (27,500) 108,300
Directors Stock Plan $15.875 30,000 30,000
--------- --------- ---------- ---------- ---------
2,948,334 1,153,500 (977,668) (49,833) 3,074,333
========= ========= ========== ========== =========
All options to purchase common shares are exercisable and no additional shares
are available for granting options under each plan except as noted below.
Of the options to purchase 2,617,700 shares outstanding under the 1994 Long-Term
Stock-Based Incentive Plan (as amended, the "1994 Plan"), options to purchase
655,583 shares were exercisable at December 31, 1995. A portion of the stock
options outstanding under the 1994 Plan vest over time (becoming fully vested in
two or four years) beginning one year from the date of grant and a portion vests
based on certain stock price hurdles. Of the options to purchase 108,300 shares
outstanding under the Employee Stock Option Plan, options to purchase 48,600
shares were exercisable at December 31, 1995. The options under the Employee
Stock Option Plan vest one year from the date of grant.
Of the options to purchase 30,000 shares outstanding under the Directors Stock
Plan, none of the options were exercisable at December 31, 1995. Sixty percent
of the options, which are granted automatically upon a director's election to
the Board, vest over four years beginning one year after the date of grant and
forty percent of the options vest in three equal installments based on
achievement of certain stock price hurdles.
In addition to the options granted under the 1994 Plan as discussed above,
15,450 shares of restricted stock have been awarded under the 1994 Plan through
December 31, 1995. Of the 15,450 shares of restricted stock issued through
December 31, 1995, 12,450 shares are vested and 1,000 shares of restricted stock
were forfeited upon the grantee's termination of employment.
In connection with the exercise of options to purchase common stock, certain
employees exchanged 94,332 and 18,134 shares of common stock in lieu of cash in
1994 and 1993, respectively. The exchanged shares are deducted from the number
of shares issued upon the exercise of employee stock options for purposes of
presentation in the consolidated statement of changes in stockholders' equity.
The 1994 Plan was approved by the stockholders at the 1994 Annual Meeting of
Stockholders held on March 7, 1994 and amended at the 1995 Annual Meeting of
Stockholders held on April 27, 1995. The 1994 Plan, as amended, provides for the
award of stock options, stock appreciation rights and restricted stock covering
a maximum of 3,740,000 shares. The Directors Stock Plan was approved by the
stockholders at the 1995 Annual Meeting of Stockholders and provides for the
automatic grant of an option to purchase 15,000 shares of the Company's common
stock upon a director's initial election or appointment to the Board. Up to
105,000 shares may be issued pursuant to the Directors Stock Plan.
All stock options granted in 1995 and in prior years, except for the grants
under the Employee Stock Option Plan, were administered by the Board of
Directors or a committee thereof and had an exercise price based on the market
price of the Company's common stock on the date of grant. The Employee Stock
Option Plan is administered by a committee of Company officers who are not
eligible to participate in this plan. As of December 31, 1995, 3,074,333 of the
shares held in treasury were reserved for the issuance of shares under the above
described stock options.
14. Transactions with Related Parties
Until his resignation as Chief Executive Officer and a director on December 19,
1992, Steven J. Halmos, SafeCard's co-founder, provided his services to SafeCard
through High Plains Capital Corporation ("HPCC"), a company owned by himself and
his brother, Peter Halmos, SafeCard's other co-founder. After that date, Steven
J. Halmos, acting in the capacity of an Advisor on Marketing and Operational
Strategy, provided services directly to SafeCard pursuant to a written agreement
(as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement").
On May 26, 1994, SafeCard reached a settlement with Steven J. Halmos to
terminate the Steven J. Halmos Agreement and various other agreements between
SafeCard and Mr. Halmos that provided for payments to Mr. Halmos of $2,000,000 a
year through March 31, 1998. The settlement, which arose in connection with the
Company's management restructuring in April 1994 and a resulting decision to
cease using Mr. Halmos' services, resulted in a $4,400,000 cash payment to Mr.
Halmos and charge to 1994 earnings. Subsequent to his termination Mr. Halmos
exercised options to purchase 3,900,000 shares of the Company's common stock.
Stockholders' equity increased $37,800,000 resulting from the exercise of such
options and the related tax benefit (see Note 13 - Common Stock and Stock
Options). In 1993, SafeCard paid Steven J. Halmos (or HPCC for Steven J. Halmos'
services) a total of approximately $2,100,000.
In 1993, SafeCard also entered into an agreement that called for Steven J.
Halmos to sell the 1,645,760 shares of Company stock he owned at that time (this
representing approximately 6.2% of total outstanding shares at April 1, 1993) to
the Company as part of the Company's stock repurchase program. The shares were
acquired by the Company on April 21, 1993 for a price of $11.50 per share, a
price equal to the average trading price of the Company's common stock over a
specific period of days following public disclosure of the repurchase.
SafeCard markets its CreditLine product pursuant to an agreement (as amended,
the "CreditLine Agreement") with CreditLine Corporation ("CLC"), a corporation
owned by Steven J. Halmos and Peter Halmos, SafeCard's co-founders, and their
families. The CreditLine Agreement grants SafeCard an exclusive license to
market CreditLine through certain credit card issuers (including all issuers
with which SafeCard has contractual relationships) and provides that profits and
losses, if any, are shared equally between CLC and SafeCard. Net CreditLine
billings to subscribers totaled approximately $30,710,000, $7,000,000,
$22,900,000 and $15,800,000 while marketing and other expenditures totaled
$23,488,000, $3,060,000, $17,400,000 and $13,400,000 for the year ended December
31, 1995, the two months ended December 31, 1994 and the years ended October 31,
1994 and 1993, respectively. In June 1993, SafeCard was notified by CLC that the
CreditLine Agreement would not be renewed effective November 1, 1993.
Notwithstanding its termination, the CreditLine Agreement gives SafeCard the
perpetual right to continue to service existing CreditLine subscribers and to
participate in the resulting income. In addition, an amendment to the CreditLine
Agreement provides that SafeCard has the perpetual right to market CreditLine,
and participate in the resulting income, through all of its existing card issuer
clients with which it either had a CreditLine marketing agreement on November 1,
1993 or entered into such a marketing agreement within the following three
years. The CreditLine Agreement is the subject of litigation as described in
Note 16 Commitments and Contingencies.
In 1995, CreditLine and certain services marketed in conjunction with CreditLine
accounted for approximately $14,506,000 or 7.7% of the Company's subscription
revenue and generated approximately $4,728,000 of pre-tax income. During the
Transition Period, CreditLine and related services accounted for approximately
$1,913,000 or 6.3% of the Company's subscription revenue and generated
approximately $702,000 of pre-tax income. In 1994, such services accounted for
approximately $9,100,000 or 5.3% of the Company's subscription revenue and
approximately $2,800,000 or 11.6% of the Company's pre-tax income. In 1993, such
services accounted for approximately $6,500,000 or 4.2% and $1,900,000 or 4.5%
of the Company's subscription revenue and pre-tax income, respectively.
The CreditLine Agreement provides for the creation of an escrow in the case of
certain disputes between the parties. Effective September 1993, SafeCard began
depositing CLC's share of CreditLine profits into escrow. Through December 31,
1995, SafeCard has also deposited approximately $4,265,000 of its share of the
CreditLine profits in an escrow account. The Company's cash and cash equivalents
include only SafeCard's share of the escrowed amounts.
SafeCard made payments under the Ft. Lauderdale Lease to a partnership
consisting of Peter Halmos and Steven J. Halmos (the "Halmos Partnership").
Payments made to the Halmos Partnership for the year ended October 31, 1993 for
the land and building, were approximately $700,000. No payments were made to the
Halmos Partnership in 1994 or 1995. SafeCard no longer occupies the operations
center and is no longer making payments on the Ft. Lauderdale Lease which is now
the subject of litigation (see Note 16 Commitments and Contingencies).
In October 1993, the Company renewed a consulting agreement with the
Dilenschneider Group, Inc. ("DGI") to provide public relations counsel and
advice to the Company in 1994 for an annual retainer of $180,000. A director of
the Company is the majority owner and chief executive officer of DGI. In October
1994, the Company entered into an agreement with DGI for public affairs and
public relations assistance during 1995 for an annual retainer of $100,000.
These consulting arrangements have not been renewed for 1996.
During 1994, DGI consulted on and assisted with investor relations for a monthly
fee of $12,500. In addition, another director of the Company provided investor
relations consulting services to the Company during 1994 for a monthly retainer
of $4,167. These consulting arrangements were terminated effective October 31,
1994.
In September 1994, the Company acquired Wright Express. The Company's former
Chairman and Chief Executive Officer, Paul G. Kahn, was a director of Wright
Express prior to the acquisition. During negotiations between the Company and
Wright Express, Mr. Kahn did not attend any meetings or participate in any
discussions of the Board of Directors of Wright Express and abstained from
voting on the acquisition by the Company's Board of Directors.
15. Employee Benefit Plans
In June 1993, the Company implemented a 401(k) and Profit-Sharing Plan for its
employees who are at least 20 years of age, have worked at least 1,000 hours in
the past year and have completed one year of service. The Company matches 50% of
each employee's contribution, up to a maximum of 6% of each employee's salary.
Company contributions vest at a rate of 20% per year after one year of service
while participating in the plan. Continuation of, and contributions to, the
401(k) and Profit-Sharing Plan are voluntary, at the discretion of the Company
and are paid to each eligible employee's account. The total expense recorded
under the plan in 1995, the Transition Period, 1994 and 1993 was approximately
$686,000, $16,000, $385,000 and $240,000, respectively.
Wright Express maintains a separate 401(k) and Profit-Sharing Plan that has been
modified to mirror the benefits and conditions of the Company's plan. The total
expense recorded under the plan in 1995 and the Transition Period was
approximately $5,000 and $1,000, respectively.
National Leisure Group maintains a separate 401(k) and Profit-Sharing Plan for
its employees who are considered full-time and have completed six months of
service. National Leisure Group matches 25% of the each employee's contribution,
up to a maximum of 4% of each employee's salary. Continuation of, and
contributions to, the plan are voluntary, at the discretion of management and
are paid to each eligible employee's account. The total expense recorded under
the plan in 1995 was approximately $30,000.
16. Commitments and Contingencies
Contracts
The Company has written agreements with certain large credit card issuers which
account for a large percentage of its subscription revenue. Termination of any
of these contracts would adversely affect the Company. Contracts with Citibank
(South Dakota), N.A. and related entities contributed 22%, 24%, 26% and 30% of
the Company's consolidated revenue in 1995, the Transition Period, 1994 and
1993, respectively. Citibank contributed 30%, 30%, 32% and 36% of the Company's
consolidated membership and subscription revenue during the same periods. The
principal Citibank contract, as amended, expires December 31, 2000. Citibank has
a right to terminate the contract in the event of the sale of a majority of the
shares of the Company to specified credit card issuers, to banks and their
corporate affiliates and to entities that do not have equity of at least
$25,000,000.
Contracts with Sears, Roebuck and Co. contributed approximately 10% to the
Company's consolidated revenue in 1995, the Transition Period, 1994 and 1993.
Sears contributed 13%, 12%, 13% and 12% of the Company's consolidated membership
and subscription revenue during the same periods. SafeCard has signed a letter
of intent for a new five-year cooperative business relationship with Sears.
The new contract will be effective on January 1, 1996 and is expected to be
executed shortly.
Leases
The Company has entered into several operating leases for certain computer and
telephone equipment and facilities in the normal course of business. Rent
expense for 1995, the Transition Period and 1994 was $5,535,000, $452,000 and
$283,000, respectively. There was no material rental expense for 1993. The
following is a schedule of future minimum rental payments required under
operating leases having initial or remaining non-cancelable lease terms in
excess of one year at December 31, 1995:
1996 $ 4,523,000
1997 4,329,000
1998 2,848,000
1999 1,448,000
2000 784,000
Thereafter 2,241,000
--------------
$ 16,173,000
==============
Legal Matters
The Company is defending or prosecuting claims in thirteen complex lawsuits,
twelve of which involve Peter Halmos, former Chairman of the Board and Executive
Management Consultant to SafeCard, and various parties related to him as
adversaries. Peter Halmos is also a plaintiff in three other lawsuits, one
against a former officer, one against a director of the Company and one against
SafeCard's outside counsel, in which neither SafeCard nor the Company have been
named as defendant. The thirteen cases in which the Company or its subsidiaries
is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court in
Illinois against SafeCard and one of the Company's directors, purporting to
state claims aggregating in excess of $100 million, principally relating to
alleged rights to "incentive compensation," stock options or their
equivalent, indemnification, wrongful termination and defamation. SafeCard
and the director moved to dismiss this lawsuit. In November 1993, the court
granted the motions to dismiss all parts of the complaint, but gave the
plaintiffs leave to replead, which they did. Again in March 1994, the court
granted the motions to dismiss all of the complaints but permitted the
plaintiffs to replead which they did in June 1994. On February 7, 1995, the
court dismissed with prejudice Peter Halmos' claims regarding alleged
rights to "incentive compensation," stock options or their equivalent,
wrongful termination and defamation. Mr. Halmos has appealed this ruling;
the initial brief, the answer brief and the reply brief have been filed. No
date for oral argument has been set. SafeCard has filed an answer to the
remaining indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions.
A suit by Peter Halmos, purportedly in the name of Halmos Trading &
Investment Company, seeking monetary damages and specific performance
against SafeCard, one of its former officers and one of the Company's
directors in Circuit Court in Broward County, Florida, making a variety of
claims related to the contested lease of SafeCard's former Ft. Lauderdale
headquarters. SafeCard has vacated the building, ceased making payments
related to the Ft. Lauderdale lease and has filed counterclaims. In May
1994, the court dismissed Peter Halmos' amended counterclaim for breach of
contract for indemnity and intentional infliction of emotional distress but
gave leave to amend. In June 1994, Peter Halmos filed a second amended
counterclaim purporting to state claims for intentional infliction of
emotional distress, fraud and negligent misrepresentation and declaratory
judgment based on alleged breach of contract for indemnity or, in the
alternative, promissory estoppel, related to indemnification of legal
expenses in this lawsuit. In January 1995, Peter Halmos filed a third
amended counterclaim which was identical in all material respects to the
second amended counterclaim. On January 17, 1995, SafeCard filed its answer
to the third amended counterclaim. On October 30, 1995, the court dismissed
Peter Halmos' claims against the Company for fraudulent misrepresentation
and specific performance and dismissed all claims against the Company's
director. Halmos also dismissed without prejudice his emotional distress
claim, severed his indemnification claims and dismissed with predjudice his
claim against the former officer. Trial of the lawsuit began February 26,
1996.
A suit which seeks monetary damages and certain equitable relief filed by
SafeCard in August 1993 in Laramie County Circuit Court in Wyoming against
Peter Halmos and related entities alleging that Peter Halmos dominated and
controlled SafeCard, breached his fiduciary duties to SafeCard, and
misappropriated material non-public information to make $48 million in
profits on sales of SafeCard stock. In March 1994, Mr. Halmos and related
entities filed a counterclaim in which claims were made of conspiracy in
restraint of trade, monopolization and attempted monopolization, unfair
competition and restraint of trade, breach of contract for indemnity and
intentional infliction of emotional distress. SafeCard's motion to sever
the conspiracy, monopolization and restraint of trade claims was granted in
May 1994. The claims for the conspiracy, monopolization, restraint of trade
and unfair competition were dismissed without prejudice in June 1994. On
April 12, 1995, the trial court granted the motion of Mr. Halmos and
certain related entities to amend their counterclaims. The amended
counterclaims include claims for indemnification for legal expenses
incurred in the action and a claim that SafeCard's contract with CreditLine
should be rescinded. On April 19, 1995, the trial court granted Mr. Halmos'
motion for summary judgment that certain of SafeCard's claims against him
were barred by the statute of limitations. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations.
A suit seeking monetary damages by Peter Halmos, purportedly in his name
and in the name of CreditLine Corporation and Continuity Marketing
Corporation against SafeCard, one of its officers and three of the
Company's directors in United States District Court in the Southern
District of Florida, in September 1994 purporting to state various tort
claims, state and federal antitrust claims and claims of copyright
infringement. The claims principally relate to the allegation by Peter
Halmos and his companies that SafeCard has taken action to prevent him from
being a successful competitor. On December 9, 1994, SafeCard, its officer
and the Company's directors moved to dismiss the lawsuit. On March 8, 1995,
the court granted Mr. Halmos' motion to file a second amended complaint. On
March 28, 1995, SafeCard, its officer and the Company's directors again
moved to dismiss the lawsuit. All discovery in the case has been stayed
pending a ruling on the motion to dismiss. On August 16, 1995, the United
States Magistrate Judge filed a Report and Recommendation that the case be
dismissed. The parties have filed various briefs and memoranda in response
to this Report. On January 4, 1996, the Magistrate recommended ruling that
the statute of limitations was tolled during pendency of the case in
federal court and the plaintiffs' state law claims were thus not
time-barred. Defendants have filed an objection to this recommendation.
A suit seeking monetary damages by Peter Halmos, as trustee for the Peter
A. Halmos revocable trust dated January 24, 1990 and the Halmos Foundation,
Inc., individually and James L. Binder as custodian for Elizabeth Binder;
Edward Dubois; Sheila Ann Dubois, as personal representative of the Estate
of Winifred Dubois; G. Neal Goolsby, John E. Masters, individually and as
custodian for Gregory Halmos and Nicholas Halmos; and J.B. McKinney on
behalf of themselves and all others similarly situated against SafeCard,
one of its officers, one of its former officers and three of the Company's
directors in the United States District Court for the Southern District of
Florida in December 1994. This litigation involves claims by a putative
class of sellers of SafeCard stock for the period January 11, 1993 through
December 8, 1994 for alleged violations of the federal and states
securities laws in connection with alleged improprieties in SafeCard's
investor relations program. The complaint also includes individual claims
made by Peter Halmos in connection with the sale of stock by the two trusts
controlled by him. The Complaint was amended on September 13, 1995 to join
James L. Binder individually and as custodian for the James L. Binder,
D.D.S., P.C. Profit Sharing Trust II. SafeCard and the individual
defendants have filed a motion to dismiss. There has been limited discovery
on class certification and identification of "John Doe" defendant issues.
The Company filed its opposition to the pending motion for class
certification on December 11, 1995. Plaintiffs' reply is due March 19,
1996.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos,
in the State Circuit Court in Palm Beach County, Florida in April 1995
against the Company, Family Protection Network, Inc., SafeCard, one of the
Company's directors and the Company's Chief Executive Officer purporting to
state various statutory and tort claims. The claims principally relate to
the allegation by these companies that SafeCard's Early Warning Service and
Family Protection Network were conceived and commercialized by, among
others, Peter Halmos and have been improperly copied. An amended complaint
filed on June 14, 1995 seeking monetary damages adds to the prior claims
certain claims by Nicholas Rubino that principally relate to the allegation
that SafeCard's Pet Registration Product was conceived by Mr. Rubino and
has been improperly copied. The Company and the individual defendants filed
a motion to dismiss the amended complaint. A hearing was held on the motion
to dismiss on October 13, 1995. On November 27, 1995, the Court entered an
Order denying the Company's motion to dismiss. On December 12, 1995 the
defendants filed their Answer and Affirmative Defenses to the Amended
Complaint. Preliminary discovery is proceeding.
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos Revocable Trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of
himself and all others similarly situated against the Company, SafeCard,
each of the members of the Company's Board of Directors, three non-board
member officers of the Company, the Company's outside auditor and one of
the Company's outside counsel in the United States District Court for the
Southern District of Florida in June 1995. The litigation involves claims
by a putative class of purchasers of the Company stock between December 14,
1994 and May 25, 1995 and on behalf of a separate class of all record
holders of SafeCard stock as of April 27, 1995. The putative class claims
are for alleged violations of the federal securities laws, for alleged
breach of fiduciary duty and alleged negligence in connection with certain
matters voted on at the Annual Meeting of SafeCard stockholders held on
April 27, 1995. The Company and the individual defendants have filed a
motion to dismiss these claims. There has been limited discovery on class
certification issues. The Company filed its opposition to the pending
motion for class certification on December 11, 1995. Plaintiffs' reply is
due March 19, 1996.
A purported shareholder derivative action initiated by Michael P. Pisano,
on behalf of himself and other stockholders of SafeCard and Ideon Group,
Inc. against SafeCard, Ideon Group Inc., two of their officers, and the
Company's directors in United States District Court, Southern District of
Florida. This litigation involves claims that the officers and directors of
SafeCard have improperly refused to accede Peter Halmos' litigation and
indemnification demands against the Company. The Company and the individual
defendants have filed motions to dismiss the first amended complaint. On
September 29, 1995, Pisano filed a second amended complaint which made
additional allegations of waste and mismanagement against the Company's
officers and directors in connection with the Family Protection Network and
PGA Tour Partners products. On December 26, 1995, the Company filed motions
to dismiss the Second Amended Complaint for: (i) failure to join an
indispensable party (Halmos) and failure to allege demand on the Board of
Directors with particularity; and (ii) the failure of Pisano to comply with
the fairness and adequacy requirements of Federal Rule of Civil Procedure
23.1. On January 25, 1996, the plaintiff filed a memorandum in opposition
to motion to dismiss. The Company filed its reply to the memorandum in
opposition on February 23, 1996.
A suit seeking monetary damages filed by Peter Halmos against SafeCard, one
of its directors, its former general counsel, and its legal counsel in the
Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach County,
Florida on August 10, 1995. This litigation involves claims by Peter Halmos
for breach of fiduciary duty and constructive fraud, fraud, and negligent
misrepresentation and is based on allegations arising out of the resolution
of a shareholder class action lawsuit in 1991 and SafeCard's subsequent
filing of an action against Halmos and his related companies in Wyoming in
1993. Safe-Card has filed a motion to dismiss which has been set for
hearing on March 29, 1996.
A suit by Lois Hekker on behalf of herself and all others similarly
situated seeking monetary damages against the Company and its former Chief
Executive Officer in the United States District Court for the Middle
District of Florida on July 28, 1995. The litigation involves claims by a
putative class of purchasers of the Company's stock for the period April
25, 1995 through May 25, 1995 for alleged violation of the federal
securities laws in connection with statements made about the Company's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for
class certification.
A declaratory judgment action by the Company and its directors against
Peter Halmos in Delaware Chancery Court, New Castle County. This action
seeks a declaration regarding the Company's advance indemnification
obligations, if any, to Peter Halmos who has made numerous advance
indemnification demands on the Company in connection with his many
lawsuits. Halmos filed a motion to dismiss on jurisdictional grounds on
November 17, 1995. The Company filed a brief in opposition and an amended
complaint on February 14, 1996. Defendant's response is due March 21, 1996.
A suit by High Plains Capital Corporation against the Company, SafeCard,
two of its directors and The Dilenschneider Group, Inc. in Circuit Court in
Palm Beach County, Florida. This litigation involves claims by High Plains
Capital Corporation, a corporation with which Peter Halmos is affiliated,
for certain incentive compensation arising out of Halmos' affiliation with
SafeCard. The Complaint includes claims for breach of written agreements
regarding additional services and expenses, an alternative claim for
quantum meruit based on written agreement and a count for tortious
interference with advantageous business relationship. The Complaint appears
to attempt to revive the incentive compensation claims which have been
dismissed with prejudice in Illinois. On November 30, 1995, the Company
filed a motion to strike, motion to dismiss and motion to transfer.
Hearings have been set on the motion to dismiss on March 29, 1996, and on
the motion to strike on April 4, 1996.
A suit filed by High Plains Capital Corporation against the Company and
SafeCard in Circuit Court in Broward County, Florida. This litigation
involves claims by High Plains Capital Corporation, a corporation with
which Peter Halmos is affiliated, for alleged breach of oral contract,
alleged violation of Florida's Uniform Trade Secrets Act, alleged
misappropriation of trade secrets and for declaration that certain alleged
trade secrets are the property of High Plains Capital Corporation. The
Company filed motions to dismiss and to transfer on December 15, 1995.
The Company is involved in certain other claims and litigation, including
various employment related claims, arising from the ordinary course of business
and which are not considered material to the operations of the Company.
The Company believes that it has proper and meritorious claims and defenses in
these lawsuits which it intends to vigorously pursue. Resolution of any or all
of these litigation matters could have a material impact (either favorable or
unfavorable depending on the outcome) upon the Company's operations, liquidity
and financial condition.
17. Statement Of Cash Flows
The following is a reconciliation of net income (loss) to net cash provided by
(used in) operating activities:
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1995 1994 1994 1993
---- ---- ---- ----
Net (loss) income $ (49,441,000) $ (49,944,000) $ 20,021,000 $ 31,477,000
Adjustments to reconcile net
(loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 6,157,000 723,000 1,349,000 864,000
Cumulative effect of change
in accounting for income taxes (2,000,000)
Amortization of investment
premiums/discounts, net 1,701,000 802,000 5,281,000 5,233,000
Realized (gain) loss on sales of
securities available for sale (1,094,000) 97,000 (593,000) (1,277,000)
Unrealized loss on marketable
securities 1,943,000
Loss on impairment of assets 7,569,000
Income tax (benefit) provision (27,801,000) (26,075,000) 6,178,000 10,968,000
Income tax (refunds) payments, net 11,047,000 (7,000) 3,237,000 (16,161,000)
Billings to subscribers, net 185,297,000 43,886,000 189,925,000 173,769,000
Amortization of subscribers' advance
payments to revenue (187,758,000) (30,375,000) (173,434,000) (156,600,000)
Effect of change in amortization
periods for deferred subscriber
acquisition costs 65,500,000
Expenditures for subscriber
acquisition costs (68,948,000) (8,792,000) (68,029,000) (63,717,000)
Payment of commissions, net (51,566,000) (11,794,000) (52,412,000) (49,511,000)
Amortization of subscriber
acquisition costs 67,799,000 10,001,000 56,236,000 51,075,000
Amortization of commissions 53,079,000 8,565,000 49,745,000 44,173,000
Increase (decrease) in allowance
for cancellations 351,000 1,541,000 (1,237,000) 1,306,000
Changes in assets and liabilities, net
of effects of business acquisitions:
Receivables, net (12,321,000) (15,888,000) 4,070,000 (877,000)
Other current assets 117,000
Other assets (6,076,000) (3,020,000) (1,137,000) 582,000
Accounts payable and
accrued expenses (4,427,000) 8,085,000 9,846,000 (2,459,000)
Product abandonment and related
liabilities 20,796,000
---------------- ----------------- ----------------- ----------------
Net cash (used in) provided by
operating activities $ (55,519,000) $ (4,752,000) $ 47,046,000 $ 28,845,000
================ ================= ================= ================
18. Unaudited Quarterly Financial Data
Quarters Ended
-------------------------------------------------------------------------
1995 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
Operating revenue $ 59,728,000 $ 57,732,000 $ 57,543,000 $ 58,965,000
Operating income (loss) 429,000 (72,881,000) (12,152,000) 7,362,000
Net income (loss) (A) 301,000 (46,670,000) (7,778,000) 4,706,000
Net income (loss) per share (A) $ .01 $ (1.62) $ (.28) $ .17
Weighted average number of common
and common equivalent shares 29,870,000 28,860,000 28,222,000 27,986,000
Subscribers at period end 13,024,000 13,139,000 13,174,000 13,172,000
Two Months
Ended
Transition Period - 1994 December 31
- ------------------------ -----------
Operating revenue $ 34,698,000
Operating income (loss) (76,019,000)
Net income (loss) (B) (49,944,000)
Net income (loss) per share (B) $ (1.70)
Weighted average number of common
and common equivalent shares 29,297,000
Subscribers at period end 13,046,000
Quarters Ended
-------------------------------------------------------------------------
1994 January 31 April 30 July 31 October 31
- ---- ---------- -------- ------- ----------
Operating revenue $ 43,694,000 $ 49,313,000 $ 46,415,000 $ 49,664,000
Operating income (loss) 9,153,000 5,260,000 8,278,000 1,508,000
Net income (loss) (C) 8,444,000 3,804,000 6,635,000 1,138,000
Income (loss) per share before
cumulative effect of change
in accounting for income taxes $ .24 $ .14 $ .23 $ .04
Net income (loss) per share (C) $ .31 $ .14 $ .23 $ .04
Weighted average number of common
and common equivalent shares 27,608,000 27,761,000 28,768,000 29,229,000
Subscribers at period end 12,229,000 12,635,000 12,876,000 13,105,000
(A) During the second and third quarters of 1995, the Company recorded pre-tax
product abandonment and restructuring charges of $34,156,000 and
$10,861,000, respectively, related to the abandonment of certain new
product developmental efforts and the related impairment of certain assets
and the restructuring of SafeCard and the corporate infrastructure. During
the fourth quarter of 1995, the Company recovered $1,200,000 relating to a
deposit previously written off in connection with the second quarter
product abandonment.
(B) During the Transition Period, the Company recorded a pre-tax charge of
$65,500,000 related to the change in the amortization periods for
subscriber acquisition costs.
(C) The first quarter of 1994 includes a $2,000,000 ($.07 per share) positive
effect on net earnings from a change in the Company's method of accounting
for income taxes.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CUC INTERNATIONAL INC.
(Company)
Date: September 16, 1996 By: /s/ Cosmo Corigliano
______________________ ________________________
Name: Cosmo Corigliano
---------------------
Title: Senior Vice President
---------------------
and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
99.1 Supplemental Consolidated Financial
Statements of CUC International Inc. for
the fiscal year ended January 31, 1996
(as restated to reflect the acquisitions
of Sierra On-Line, Inc. on July 24, 1996,
Davidson & Associates Inc. on July 24,
1996 and Ideon Group, Inc. on August 7,
1996).
99.2 Supplemental Interim Consolidated
Financial Statements of CUC International
Inc. for the three month period ended
April 30, 1996 and for the six month
period ended July 31, 1996 (as restated
to reflect the acquisitions of
Sierra On-Line, Inc. on July 24, 1996,
Davidson & Associates, Inc. on July 24,
1996 and Ideon Group Inc. on August 7,
1996).
99.3 Selected Supplemental Consolidated
Financial Data of CUC International Inc.
(as restated to reflect the acquisitions
of Sierra On-Line Inc. on July 24, 1996,
Davidson & Associates, Inc. on July 24,
1996 and Ideon Group, Inc. on August 7,
1996).
99.4 Supplemental Management's Discussion and
Analysis of Financial Condition and
Results of Operations of CUC
International Inc. (as restated to
reflect the acquisitions of
Sierra On-Line, Inc. on July 24, 1996,
Davidson & Associates, Inc. on July 24,
1996 and Ideon Group, Inc. on August 7,
1996).
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8s: Numbers 33-17247, 33-17248, 33-17249, 33-26875, 33-75682, 33-93322,
33-41823, 33-48175, 33-58896, 33-91656, 333-03241, 33-74068, 33-74066, 33-91658,
333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633, 333-09637, and
333-09655) pertaining to the CUC International Inc. 1985 Non-Qualified Stock
Option Plan, the CUC International Inc. 1985 Incentive Stock Option Plan, the
CUC International Inc. 1987 Performance Share Stock Option Plan, the CUC
International Inc. 1987 Stock Option Plan, the CUC International Inc. 1987 Stock
Option Plan as amended, the CUC International Inc. 1987 Stock Option Plan as
amended, the CUC International Inc. 1990 Directors' Stock Option Plan, the
Entertainment Publications Inc. 1988 Non-Qualified Stock Option Plan, the CUC
International Inc. 1992 Bonus and Salary Replacement Stock Option Plan, the CUC
International Inc. 1992 Bonus and Salary Replacement Stock Option Plan as
amended, the CUC International Inc. 1992 Bonus and Salary Replacement Stock
Option Plan as amended, the CUC International Inc. 1992 Directors Stock Option
Plan, the CUC International Inc. 1992 Employee Stock Option Plan, the CUC
International Inc. 1992 Employee Stock Option Plan as amended, the CUC
International Inc. 1992 Employee Stock Option Plan as amended, the CUC
International Inc. 1994 Employee Stock Purchase Plan, the CUC International Inc.
1994 Employee Stock Purchase Plan as amended, the CUC International Inc. Savings
Incentive Plan, the CUC International Inc. 1994 Directors Stock Option Plan, the
Sierra On-Line, Inc. 1987 Stock Option Plan, the Sierra On-Line, Inc. 1995 Stock
Option and Award Plan, and the Papyrus Design Group Inc. 1992 Stock Option Plan,
respectively, and in the Registration Statements (Form S-3s: Numbers 33-30306,
33-47271, 33-58598, 33-63237 and 33-95126) and in the Registration Statements
(Form S-4s: Numbers 33-64801, 333-06627, 333-06559 and 333-07171) and in the
related Prospectuses of our report dated September 12, 1996, with respect to the
supplemental consolidated financial statements of CUC International Inc.
included in its Current Report on Form 8-K dated July 24, 1996 filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Stamford, Connecticut
September 12, 1996
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
- -------------------------------------------------------------------------------
We consent to the incorporation by reference in Registration Statements
Nos. 33-17247, 33-17248, 33-17249, 33-26875, 33-75682, 33-93322, 33-41823,
33-48175, 33-58896, 33-91656, 333-03241, 33-74068, 33-74066, 33-91658,
333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633, 333-09637, and
333-09655 of CUC International Inc. on Forms S-8 and in Registration Statements
Nos. 33-30306, 33-47271, 33-58598, 33-63237, and 33-95126 of CUC International
Inc. of Forms S-3 and in Registration Statements Nos. 33-64801, 333-06627,
333-06559, and 333-07171 of CUC International Inc. on Forms S-4 of our report
dated June 24, 1996 on the consolidated financial statements of Sierra On-Line,
Inc. and subsidiaries for the year ended March 31, 1996 appearing in this
Current Report on Form 8-K of CUC International Inc. (filed with the Securities
and Exchange Commission on or about September 12, 1996).
DELOITTE & TOUCHE LLP
Seattle, Washington
September 12, 1996
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-17247, 33-17248, 33-17249, 33-26875, 33-75682, 33-93322, 33-41823,
33-48175, 33-58896, 33-91656, 333-03241, 33-74068, 33-74066, 33-91658,
333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633, 333-09637, and
333-09655 of CUC International Inc. on Form S-8 and in Registration Statements
Nos. 33-30306, 33-47271, 33-58598, 33-63237, 33-95126 of CUC International Inc.
on Form S-3 of CUC International Inc. and in Registration Statements Nos.
33-64801, 333-06627, 333-06559, and 333-07171 of CUC International Inc. on Form
S-4 of our report dated March 13, 1995 (relating to the financial statements of
Advance Ross Corporation as of December 31, 1994 and for the years ended
December 31, 1994 and 1993, not presented separately herein) appearing in this
Current Report on Form 8-K of CUC International Inc. (filed with the Securities
and Exchange Commission on or about September 12, 1996).
DELOITTE & TOUCHE LLP
Chicago, Illinois
September 11, 1996
Exhibit 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements (Form S-8s: Numbers 33-17247, 33-17248, 33-17249, 33-26875,
33-75682, 33-93322, 33-41823, 33-48175, 33-58896, 33-91656, 333-03241,
33-74068, 33-74066, 33-91658, 333-00475, 333-03237, 33-75684, 33-80834,
33-93372, 333-09633, 333-09637, and 333-09655) pertaining to the CUC
International Inc. 1985 Non-Qualified Stock Option Plan, the CUC International
Inc. 1985 Incentive Stock Option Plan, the CUC International Inc. 1987
Performance Share Stock Option Plan, the CUC International Inc. 1987 Stock
Option Plan, the CUC International Inc. 1987 Stock Option Plan as amended, the
CUC International Inc. 1987 Stock Option Plan as amended, the CUC International
Inc. 1990 Directors' Stock Option Plan, the Entertainment Publications Inc.
1988 Non-Qualified Stock Option Plan, the CUC International Inc. 1992 Bonus and
Salary Replacement Stock Option Plan, the CUC International Inc. 1992 Bonus
and Salary Replacement Stock Option Plan as amended, the CUC International Inc.
1992 Bonus and Salary Replacement Stock Option Plan as amended, the CUC
International Inc. 1992 Directors Stock Option Plan, the CUC International Inc.
1992 Employee Stock Option Plan, the CUC International Inc. 1992 Employee Stock
Option Plan as amended, the CUC International Inc. 1992 Employee Stock Option
Plan as amended, the CUC International Inc. 1994 Employee Stock Purchase Plan,
the CUC International Inc. Employee Stock Purchase Plan as amended, the CUC
International Inc. Savings Incentive Plan, the CUC International Inc. 1994
Directors Stock Option Plan, the Sierra On-Line, Inc. 1987 Stock Option Plan,
the Sierra On-Line, Inc. 1995 Stock Option and Award Plan and the Papyrus
Design Group Inc. 1992 Stock Option Plan, respectively, and in the Registration
Statements (Form S-3s: Numbers 33-30306, 33-47271, 33-58598, 33-63237 and
33-95126) and in the Registration Statements (Form S-4s: Numbers 33-64801,
333-06627, 333-06559, and 333-07171) of our reports dated February 2, 1996 and
December 5, 1994 related to the consolidated financial statements of Ideon
Group, Inc. which appears in the Current Report on Form 8-K of CUC
International Inc. filed with the Securities and Exchange Commission on or
about September 12, 1996.
PRICE WATERHOUSE LLP
Tampa, Florida
September 12, 1996
Exhibit 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8s: Numbers 33-17247, 33-17248, 33-17249, 33-26875, 33-75682, 33-93322,
33-41823, 33-48175, 33-58896, 33-91656, 33-03241, 33-74068, 33-74066, 33-91658,
333-00475, 333-03237, 33-75684, 33-80834, 33-93372, 333-09633, 333-09637, and
333-09655) pertaining to the CUC International Inc. Employee Stock Purchase
Plan, the CUC International Inc. 1985 Non-Qualified Stock Option Plan, the
CUC International Inc. 1985 Incentive Stock Option Plan, the CUC International
Inc. 1987 Performance Share Stock Option Plan, the CUC International Inc. 1987
Stock Option Plan, the CUC International Inc. 1987 Stock Option Plan as amended,
the CUC International Inc. 1990 Directors' Stock Option Plan, the Entertainment
Publications Inc. 1988 Non-Qualified Stock Option Plan, the CUC International
Inc. 1992 Bonus and Salary Replacement Stock Option Plan, the CUC International
Inc. 1992 Bonus and Salary Replacement Stock Option Plan as amended, the CUC
International Inc. 1992 Bonus and Salary Replacement Stock Option Plan as
amended, the CUC International Inc. 1992 Directors Stock Option Plan, the CUC
International Inc. 1992 Employee Stock Option Plan, the CUC International Inc.
1992 Employee Stock Option Plan as amended, the CUC International Inc. 1992
Employee Stock Option Plan as amended, the CUC International Inc. 1994 Employee
Stock Purchase Plan, the CUC International Inc. Employee Stock Purchase Plan as
amended, the CUC International Inc. Savings Incentive Plan, the CUC
International Inc. 1994 Directors Stock Option Plan, the Sierra On-Line, Inc.
1987 Stock Option Plan, the Sierra On-Line, Inc. 1995 Stock Option and Award
Plan and the Papyrus Design Group, Inc. 1992 Stock Option Plan, respectively,
and in the Registration Statements (Form S-3s: Numbers 33-30306, 33-47271,
33-58598, 33-63237 and 33-95126) and in the Registration Statements (Form S-4s:
Numbers 33-64801, 333-06627, 333-06559 and 333-07171) and in the related
Prospectuses of our report dated February 21, 1996, with respect to the
consolidated balance sheets of Davidson & Associates, Inc., and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995, which report appears in the Form 8-K
of CUC International Inc. dated July 24, 1996 filed with the
Securities and Exchange Commission.
KPMG PEAT MARWICK LLP
Long Beach, California
September 12, 1996
5
0000723612
CUC INTERNATIONAL INC.
1,000
YEAR
JAN-31-1996
JAN-31-1996
333,036
97,164
502,543
39,051
0
1,091,276
218,587
105,234
2,068,196
332,005
37,799
0
0
2,572
999,951
2,068,196
1,935,232
1,935,232
0
1,612,576
97,026
0
(9,685)
235,312
90,337
144,975
0
0
0
144,975
.55
.55
Exhibit 99.1
CUC International Inc. and Subsidiaries
Exhibit 99.1--Supplemental Consolidated Financial Statements
January 31, 1996 and 1995
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying supplemental consolidated balance sheets of
CUC International Inc. ("CUC") as of January 31, 1996 and 1995, and the
related supplemental consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended January 31, 1996.
The supplemental consolidated financial statements give retroactive effect to
the mergers of CUC and Davidson & Associates, Inc. ("Davidson") on July 24,
1996, CUC and Sierra On-Line, Inc. ("Sierra") on July 24, 1996 and CUC and
Ideon Group, Inc. ("Ideon") on August 7, 1996, which have been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of CUC. Our responsibility
is to express an opinion on these supplemental financial statements based on
our audits. We did not audit the financial statements of Advance Ross
Corporation ("Advance Ross"), a wholly-owned subsidiary, as of December 31, 1994
and for the years ended December 31, 1994 and 1993, Davidson as of December 31,
1995 and 1994 and for each of the three years in the period ended in December
31, 1995, Sierra as of March 31, 1996 and 1995 and for each of the three years
in the period ended March 31, 1996 and Ideon as of December 31, 1995 and
October 31, 1994, and for the year ended December 31, 1995 and for the years
ended October 31, 1994 and 1993. Effective January 1, 1995, Ideon changed its
fiscal year end from October 31 to December 31 (the "Ideon Transition
Period"). We also did not audit the statement of operations for the Ideon
Transition Period which includes a loss of $49.9 million included as a charge
to retained earnings in 1996 supplemental consolidated financial statements.
These financial statements reflect total assets constituting 31.5% for 1996 and
41.9% for 1995 of the related supplemental consolidated financial statements
totals and reflect total revenues constituting 27.6%, 28.2% and 26.9% of the
related supplemental consolidated financial statements totals for the years
ended January 31, 1996, 1995 and 1994, respectively, and were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to Advance Ross, Davidson, Sierra and Ideon for the periods
indicated above, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors
referred to above, the supplemental financial statements referred to above
present fairly, in all material resects, the consolidated financial position
of CUC at January 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1996 after giving retroactive effect to the mergers of Davidson,
Sierra, and Ideon, as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Stamford, Connecticut
September 12, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advance Ross Corporation
Chicago, Illinois
We have audited the consolidated balance sheet of Advance Ross Corporation and
subsidiaries as of December 31, 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1994 and 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Advance Ross Corporation and
subsidiaries at December 31, 1994, and the results of their operations and their
cash flows for the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 13, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of SafeCard Services, Inc.
In our opinion, the consolidated balance sheet (not included herein) presents
fairly, in all material respects, the financial position of SafeCard Services,
Inc. and its subsidiaries at October 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 14 to the consolidated financial statements, the Company's
former Executive Management Consultant has asserted certain claims against the
Company. The ultimate outcome of these claims cannot presently be determined.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in November 1993.
PRICE WATERHOUSE LLP
Tampa, Florida
December 5, 1994
CUC International Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
(Dollar amounts in thousands)
January 31
1996 1995
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 333,036 $ 281,019
Marketable securities 97,164 101,108
Receivables, less allowances of $39,051 and $23,964 463,492 306,908
Prepaid membership materials 39,061 33,268
Prepaid expenses, deferred income taxes, and other 158,523 94,716
----------------------------------
Total current assets 1,091,276 817,019
Marketable securities 13,328 127,363
Membership solicitations in process 60,713 45,636
Deferred membership acquisition costs 404,655 411,113
Contract renewal rights, net 38,845 45,207
Excess of cost over net assets acquired, net 293,961 204,484
Properties, net 113,353 75,364
Deferred income taxes and other 52,065 45,936
----------------------------------
Total assets $2,068,196 $1,772,122
==================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 296,048 $ 244,809
Federal and state income taxes 35,957 48,214
----------------------------------
Total current liabilities 332,005 293,023
Deferred membership income 682,823 584,155
Convertible debt (net of unamortized original issue discount of $586 and $1,066) 23,389 34,634
Zero coupon convertible notes (net of unamortized original issue discount of $588 and
$2,507) 14,410 15,046
Other 13,046 19,181
Commitments and contingencies (Note I)
Shareholders' equity:
Common stock--par value $.01 per share; authorized 400 million shares; issued 257,207,225
shares and 249,348,821 shares 2,572 2,493
Additional paid-in capital 429,934 318,764
Retained earnings 602,678 520,934
Treasury stock, at cost, 3,410,631 shares and 2,757,894 shares (30,998) (10,505)
Unearned ESOP - (1,758)
Unrealized gain (loss) on marketable securities 593 (748)
Foreign currency translation adjustment (2,256) (3,097)
----------------------------------
Total shareholders' equity 1,002,523 826,083
----------------------------------
Total liabilities and shareholders' equity $2,068,196 $1,772,122
==================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Income
(Dollar amounts in thousands, except per common share amounts)
Year ended January 31,
1996 1995 1994
------------------------------------------------
Revenues
Membership, service fees and other $1,629,829 $1,363,561 $1,143,191
Software 305,403 191,050 135,473
------------------------------------------------
Total revenue 1,935,232 1,554,611 1,278,664
Expenses
Operating 593,508 474,126 368,825
Marketing 737,440 618,330 514,634
General and administrative 281,628 223,010 195,041
Costs related to products abandoned and restructuring 97,029 7,900 -
Gain on sale of ImagiNation Network - (19,739) -
Equity in loss from ImagiNation Network - 1,990 5,066
Interest income, net (9,685) (7,937) (3,221)
------------------------------------------------
Total expenses 1,699,920 1,297,680 1,080,345
------------------------------------------------
Income before income taxes 235,312 256,931 198,319
Provision for income taxes 90,337 94,874 73,614
------------------------------------------------
Income before cumulative effect of accounting change for income taxes 144,975 162,057 124,705
Cumulative effect of change in accounting for income taxes - 2,000 -
------------------------------------------------
Net income $ 144,975 $ 164,057 $ 124,705
================================================
Income before cumulative effect of accounting change $ .55 $ .64 $ .51
Cumulative effect of accounting change .01
------------------------------------------------
Net income per common share $ .55 $ .65 $ .51
================================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Shareholders' Equity
(Dollar amounts in thousands, except per common share amounts)
Common Stock
------------------------ Additional
Shares Par Paid-in Retained Treasury Unearned
Issued Value Capital Earnings Stock ESOP
---------------------------------------------------------------------------
Balance at January 31, 1993 154,939,880 $1,549 $152,893 $260,316 $ (9,745) $(11,667)
Three-for-two stock split 77,469,448 775 (775)
---------------------------------------------------------------------------
As restated 232,409,328 2,324 152,893 259,541 (9,745) (11,667)
Exercise of stock options ($.36 to
$32.96) 2,911,124 29 14,976
Issuance of stock under stock purchase
plan ($12.67 to $17.92) 71,031 1 1,363
Cancellation of stock under restricted
stock plan (113,063) (1) (240)
Stock issued in conversion of notes 3,897,290 39 18,316
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 23,342
Amortization of restricted stock 871
Amortization of ESOP obligation 4,507
Equity distributions 1,943
Cash dividends (7,586)
ImagiNation Network liquidation
preference 3,977
Proceeds from issuance of common stock 3,723,000 37 25,545
Purchase of treasury stock (1,368,513) (14) (41,685)
Foreign currency translation adjustment
Net income 124,705
---------------------------------------------------------------------------
Balance at January 31, 1994 241,530,197 2,415 199,358 378,603 (9,745) (7,160)
Exercise of stock options ($.36 to
$32.96) 4,222,946 42 47,352 (10,140)
Exercise of stock options ($1.52 to
$8.11) by payment of cash and common
stock (37,500 shares) 187,500 2 1,165 (760)
Issuance of stock under stock purchase
plan ($17.40 to $21.07) 48,984 1,011
Stock issued in conversion of notes 2,989,104 30 22,665
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 42,216
Stock issued in connection with
acquisition 379,851 4 5,134
Amortization of restricted stock 303
Amortization of ESOP obligation 2,331
Cash dividends (7,519)
Charge to reflect change in Getko and
NAOG fiscal years (4,067) 3,071
Net unrealized loss on marketable
securities
Purchase of treasury stock (9,761) (440)
Foreign currency translation adjustment
Net income 164,057
---------------------------------------------------------------------------
Balance at January 31, 1995 249,348,821 2,493 318,764 520,934 (10,505) (1,758)
Exercise of stock options ($0.01 to
$52.61) 4,630,254 46 34,486
Exercise of stock options ($1.52 to
$18.00) by payment of cash and
common stock (445,899 shares) 1,658,334 17 13,076 (13,090)
Payment of withholding taxes on options
by payment of common stock (206,838
shares) (7,403)
Issuance of stock under stock purchase
plan ($23.31 to $32.63) 63,647 1 1,789
Stock issued in conversion of notes 1,413,817 14 13,648
Stock issued for bonuses and incentives 223,299 2 4,105
Tax benefit arising from exercise of
stock options 51,357
Stock issued in connection with
acquisition 264,084 3 1,089
Amortization of ESOP obligation 1,242 1,758
Equity distributions 175 (5,033)
Cash dividends (8,159)
Charge to reflect change in Advance
Ross and Ideon fiscal years (50,039)
Net unrealized gain on marketable
securities
Purchase of treasury stock (395,031) (4) (9,797)
Foreign currency translation adjustment
Net income 144,975
---------------------------------------------------------------------------
Balance at January 31, 1996 257,207,225 $2,572 $429,934 $602,678 $(30,998) $ 0
===========================================================================
Net
Unrealized
Gain Foreign
(Loss) on Currency Total
Marketable Translation Shareholders'
Securities Adjustment Equity
---------------------------------------
Balance at January 31, 1993 $(3,885) $ 389,461
Three-for-two stock split
---------------------------------------
As restated (3,885) 389,461
Exercise of stock options ($.36 to
$32.96) 15,005
Issuance of stock under stock purchase
plan ($12.67 to $17.92) 1,364
Cancellation of stock under restricted
stock plan (241)
Stock issued in conversion of notes 18,355
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 23,342
Amortization of restricted stock plan 871
Amortization of ESOP obligation 4,507
Equity distributions 1,943
Cash dividends (7,586)
ImagiNation Network liquidation
preference 3,977
Proceeds from issuance of common stock 25,582
Purchase of treasury stock (41,699)
Foreign currency translation adjustment (1,405) (1,405)
Net income 124,705
---------------------------------------
Balance at January 31, 1994 (5,290) 558,181
Exercise of stock options ($.36 to
$32.96) 37,254
Exercise of stock options ($1.52 to
$8.11) by payment of cash and common
stock (37,500 shares) 407
Issuance of stock under stock purchase
plan ($17.40 to $21.07) 1,011
Stock issued in conversion of notes 22,695
Tax benefit arising from exercise of
stock options and vesting of
restricted stock 42,216
Stock issued in connection with
acquisition 5,138
Amortization of restricted stock plan 303
Amortization of ESOP obligation 2,331
Cash dividends (7,519)
Charge to reflect change in Getko and
NAOG fiscal years (996)
Net unrealized loss on marketable
securities $(748) (748)
Purchase of treasury stock (440)
Foreign currency translation adjustment 2,193 2,193
Net income 164,057
---------------------------------------
Balance at January 31, 1995 (748) (3,097) 826,083
Exercise of stock options ($0.01 to
$52.61) 34,532
Exercise of stock options ($1.52 to
$18.00) by payment of cash and
common stock (445,899 shares) 3
Payment of withholding taxes on options
by payment of common stock (206,838
shares) (7,403)
Issuance of stock under stock purchase
plan ($23.31 to $32.63) 1,790
Stock issued in conversion of notes 13,662
Stock issued for bonuses and incentives 4,107
Tax benefit arising from exercise of
stock options 51,357
Stock issued in connection with
acquisition 1,092
Amortization of ESOP obligation 3,000
Equity distributions (4,858)
Cash dividends (8,159)
Charge to reflect change in Advance
Ross and Ideon fiscal years (50,039)
Net unrealized gain on marketable
securities 1,341 1,341
Purchase of treasury stock (9,801)
Foreign currency translation adjustment 841 841
Net income 144,975
---------------------------------------
Balance at January 31, 1996 $ 593 $(2,256) $1,002,523
=======================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year ended January 31,
1996 1995 1994
---------------------------------------------
Operating activities
Net income $ 144,975 $ 164,057 $ 124,705
Adjustments to reconcile net income to net cash provided by operating
activities:
Membership acquisition costs (605,058) (508,807) (457,252)
Amortization of membership acquisition costs 556,548 467,019 409,455
Deferred membership income 76,285 61,941 71,242
Membership solicitations in process (15,077) (2,693) (2,889)
Amortization of prepaid commissions - - 472
Amortization of contract renewal rights and excess cost 24,349 27,058 25,354
Gain on sale of The ImagiNation Network - (19,739) -
Equity loss from The ImagiNation Network - 1,990 5,066
Write-off of purchased in-process research and development - 3,587 -
Cumulative effect of change in accounting for income taxes - (2,000) -
Deferred income taxes (32,068) 12,487 (9,337)
Amortization of original issue discount on convertible notes and
restricted stock 1,646 1,965 3,854
Loss on impairment of assets 7,569 - -
Depreciation 25,387 16,405 14,957
Effect of change in amortization periods for Ideon membership
acquisition costs 65,500 - -
Net loss during change in Ideon fiscal year-end (49,944) - -
Change in working capital items, net of acquisitions:
Increase in receivables (152,392) (51,638) (35,560)
Increase in prepaid membership materials (5,562) (5,844) (6,350)
Increase in prepaid expenses and other current assets (36,130) (20,755) (13,595)
Net increase in accounts payable and accrued expenses and federal and
state income taxes payable 57,891 40,245 43,296
Increase in product abandonment and related liabilities 20,796 - -
Other, net (30,499) (8,512) (8,644)
---------------------------------------------
Net cash provided by operating activities 54,216 176,766 164,774
---------------------------------------------
Investing activities
Proceeds from sale of The ImagiNation Network - 19,739 -
(Loan to) repayments from The ImagiNation Network, net - (2,895) 1,646
Proceeds from sales of marketable securities 255,916 136,977 138,195
Purchases of marketable securities (138,198) (161,585) (140,487)
Acquisitions, net of cash acquired (75,142) (63,437) (17,526)
Acquisitions of properties (63,148) (39,561) (14,329)
---------------------------------------------
Net cash used in investing activities (20,572) (110,762) (32,501)
---------------------------------------------
Financing activities
Issuance of common stock 35,269 40,321 41,467
Proceeds from convertible debt offering, net - 48,250 -
Payments for purchase of treasury shares (9,801) (483) (41,699)
Payment of dividend notes to shareholders - - (10,458)
Borrowings (repayments) of long-term obligations, net 1,064 (16,416) (25,766)
Dividends paid (8,159) (7,519) (7,586)
---------------------------------------------
Net cash provided by (used in) financing activities 18,373 64,153 (44,042)
---------------------------------------------
Net increase in cash and cash equivalents 52,017 130,157 88,231
Cash and cash equivalents at beginning of period 281,019 150,862 62,631
---------------------------------------------
Cash and cash equivalents at end of period $ 333,036 $ 281,019 $ 150,862
=============================================
See accompanying notes.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
Note A--Summary of Significant Accounting Policies
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of CUC
International Inc., its wholly-owned subsidiaries and its joint ventures
(collectively, the "Company"). The Company operates in two business segments:
membership services and software. Membership services are distributed to
consumers through various channels which include financial institutions,
credit unions, charities, other cardholder based organizations and retail
establishments. The software segment develops, publishes and distributes
educational and entertainment software for home and school use. These
supplemental consolidated financial statements give retroactive effect to the
mergers of Davidson & Associates, Inc. ("Davidson") (on July 24, 1996),
Sierra On-Line, Inc. ("Sierra") (on July 24, 1996) and Ideon Group, Inc.
("Ideon") (on August 7, 1996) with wholly-owned subsidiaries of the Company,
which have been accounted for using the pooling-of-interests method. These
supplemental consolidated financial statements will become the Company's
primary historical financial statements upon issuance of financial statements
that include the date of consummation of all of the above-described mergers.
All significant intercompany transactions have been eliminated in
consolidation. All periods presented reflect the Company's reclassifications
of deferred membership acquisition costs (previously classified as an offset
to deferred membership income) and membership solicitations in process
(previously classified as a current asset) to noncurrent assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the supplemental financial statements and
accompanying notes. Actual results could differ from those estimates.
The software segment of the Company is subject to certain business risks which
could effect future operations and financial performance. The risks include
changing computer environments, rapid technological change, development of new
products, concentrations in manufacturing facilities, competitive pricing and
reliance on distribution channels.
Cash and Cash Equivalents
The Company considers highly liquid investment instruments with terms of three
months or less at the time of acquisition to be cash equivalents.
Marketable Securities
Marketable securities consist principally of corporate bonds, tax-free municipal
obligations, U.S. Treasury notes and commercial paper. All securities are
classified as available-for-sale and are reported at fair value with net
unrealized holding gains and losses, net of tax effect, reported in
stockholders' equity until realized. Marketable securities (see Note C) are
valued based upon quoted market prices or investment adviser estimates and
those securities not maturing within one year are classified as non-current
assets. Declines in the market value of available-for-sale securities deemed
to be other than temporary result in charges to current earnings and
establishment of a new cost basis.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Concentration of Credit Risks
The estimated fair value of amounts reported in the consolidated financial
statements has been determined by using available market information and
appropriate valuation methodologies. All current assets (with the exception
of marketable securities) and current liabilities are carried at cost, which
approximates fair value, because of their short-term nature. The fair values
of the convertible debt and zero coupon convertible notes at January 31, 1996
were $42.6 million and $84 million, respectively, based on the quoted market
prices.
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable. This risk is limited in
the membership services segment due to the large number of entities representing
the Company's membership base. These entities include major banks, financial
institutions and large oil companies and retailers which are primarily located
throughout the United States. Software accounts receivable include amounts
principally from geographically dispersed dealers, distributors, retail chains
and superstores in the software industry, as well as schools and school
districts. The Company performs periodic credit evaluations of its software
customers and maintains reserves which estimate the potential for future product
returns. Such reserves have been included in allowances for accounts receivable.
Software Research and Development Costs and Costs of Software Revenue
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. Costs meeting this criteria are insignificant and,
therefore, research and development costs related to designing, developing and
testing new software products are charged to operating expenses as incurred.
Purchased in-process research and development costs are charged to expense on
the date acquired if it has no alternative future use and technological
feasibility is not established. Software research and development costs
aggregated $55.6 million, $36.3 million and $22.3 million for the years ended
January 31, 1996, 1995 and 1994, respectively. Costs of software revenue
include material costs, manufacturing labor and overhead and royalties paid
to developers and affiliated label publishers. Costs of software revenue are
included in operating expenses and aggregated $117.1 million, $73.3 million
and $53.4 million for the years ended January 31, 1996, 1995 and 1994,
respectively.
Membership Acquisition Costs and Deferred Membership Income
In accordance with the provisions of Statement of Position 93-7, "Reporting on
Advertising Costs," membership acquisition costs are deferred and charged to
operations as membership fees are recognized. These costs, which relate directly
to membership solicitations (direct response advertising costs), principally
include: postage, printing, kits, mailings, publications (including coupon
books) and telemarketing costs. Substantially all of these costs are incurred
for services performed by outside sources. Such costs are amortized on a
straight-line basis as revenues are realized over the average membership period.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member. However, if membership acquisition costs were to exceed
the membership fee, an appropriate adjustment would be made for any significant
impairment.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Amortization of membership acquisition costs, including deferred renewal costs,
which consist principally of charges from sponsoring institutions and
publications, amounted to $556.5 million, $467 million and $409.5 million for
the years ended January 31, 1996, 1995 and 1994, respectively. All advertising
costs other than direct response advertising costs are expensed in the period
incurred. Such amounts were $172.3 million, $133.8 million and $92 million for
the years ended January 31, 1996, 1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and other
cardholder based institutions and are recorded as deferred membership income
upon acceptance of membership, net of estimated cancellations, and pro-rated
over the membership period.
Deferred membership income is classified as non-current in the supplemental
consolidated balance sheet items since working capital will not be required as
the deferred income is recognized over future periods.
Provisions for membership cancellations were $37 million and $36.6 million at
January 31, 1996 and 1995, respectively. Such amounts are included in accrued
expenses. In addition, accrued expenses include commissions payable of $21.6
million and $23.2 million at January 31, 1996 and 1995, respectively.
Membership Solicitations In Process
These costs consist of initial membership acquisition costs pertaining to
membership solicitation programs that were in process at year-end. Accordingly,
no membership fees had been received or recognized at year-end. The costs are
generally accumulated over a two or three month solicitation period and are
transferred to membership acquisition costs when the membership begins.
Software Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement of
Position No. 91-1, "Software Revenue Recognition." Revenue from software sales
is recognized upon shipment, provided no significant vendor obligations remain
and collection of the resulting receivable is deemed probable. Other
insignificant vendor obligations consisting primarily of costs associated with
telephone support to customers after delivery of software are accrued. The
Company's agreements with certain distributors and retailers permit them to
exchange products or provide price protection under certain circumstances. The
Company provides an allowance for estimated exchanges and price protection.
Contract Renewal Rights
Contract renewal rights represent the value assigned to acquired contracts and
are being amortized over 2 to 16 years using the straight-line method. As of
January 31, 1996 and 1995, accumulated amortization amounted to $51.5 million
and $45.9 million, respectively.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note A--Summary of Significant Accounting Policies (continued)
Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired is being amortized over 5 to 30
years using the straight-line method. As of January 31, 1996 and 1995,
accumulated amortization amounted to $49.1 million and $33.2 million,
respectively. The carrying value of the excess of cost over net assets acquired
will be reviewed by management if the facts and circumstances suggest that the
value may be impaired. If this review indicates that the carrying amounts will
not be recoverable, as determined based on the undiscounted cash flows of the
entities acquired over the remaining amortization period, management will reduce
the carrying amount by the estimated shortfall of cash flows.
Net Income Per Common Share
Net income per common share of the Company's common stock, par value $.01 per
share ("Common Stock"), has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding (after giving effect to
the acquisitions of Getko Group Inc. ("Getko"), North American Outdoor Group,
Inc. ("NAOG"), Advance Ross Corporation ("Advance Ross"), Davidson, Sierra and
Ideon (see Note B)). The weighted average number of common and dilutive common
equivalent shares was 261.5 million, 252.8 million and 243.9 million for the
years ended January 31, 1996, 1995 and 1994, respectively. Fully diluted
earnings per share did not differ significantly from primary earnings per share
in any year.
Impairment of Long-Lived Assets
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company will adopt SFAS No. 121 in fiscal
1997, and the impact, if any, is not expected to be material.
Stock Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted. In fiscal 1997, the Company intends to
adopt the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Note B--Mergers and Acquisitions
Pooling-of-Interests Business Combinations
During July 1996 the Company acquired all of the outstanding capital stock of
Davidson for a purchase price of approximately $1 billion, which was satisfied
by the issuance of approximately 30.1 million shares of Common Stock. Also
during July 1996 the Company acquired all of the outstanding capital stock of
Sierra for a purchase price of approximately $858 million, which was satisfied
by the issuance of approximately 25.6 million shares of Common Stock. Davidson
and Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996 the Company acquired all of
the outstanding capital stock of Ideon, principally a provider of credit card
enhancement services, for a purchase price of approximately $393 million, which
was satisfied by the issuance of approximately 11 million shares of Common
Stock.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
The mergers with Davidson, Sierra, and Ideon (the "Fiscal 1997 Pooled Entities")
have been accounted for in accordance with the pooling-of-interests method of
accounting and, accordingly, the accompanying supplemental consolidated
financial statements have been retroactively adjusted as if the Fiscal 1997
Pooled Entities and the Company had operated as one since inception. These
supplemental consolidated financial statements will become the primary
historical consolidated financial statements upon issuance of financial
statements that include the dates of consummation of all of the mergers with the
Fiscal 1997 Pooled Entities.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities prior to restatement.
Year ended January 31,
1996 1995 1994
----------------------------------------------
Revenues:
The Company $1,401,551 $1,182,896 $ 984,801
Fiscal 1997 Pooled Entities 533,681 371,715 293,863
----------------------------------------------
$1,935,232 $1,554,611 $1,278,664
==============================================
Net Income (Loss):
The Company $ 164,669 $ 124,566 $ 94,151
Fiscal 1997 Pooled Entities (19,694) 39,491 30,554
----------------------------------------------
$ 144,975 $ 164,057 $ 124,705
==============================================
Davidson, Sierra and Ideon previously used the fiscal years ended December 31,
March 31 and December 31, respectively for their financial reporting. The Fiscal
1997 Pooled Entities will be conformed to the Company's January 31 fiscal
year-end in fiscal 1997. Effective January 1, 1995, Ideon changed its fiscal
year end from October 31 to December 31 (the "Ideon Transition Period"). The
Ideon Transition Period has been excluded from the accompanying supplemental
consolidated statements of income. Ideon's revenues and net loss for the Ideon
Transition Period were $34.7 million and $(49.9) million, respectively. This
excluded period has been adjusted by a $49.9 million charge to retained earnings
at January 31, 1996. The net loss for the Ideon Transition Period was
principally the result of a $65.5 million one-time, non-cash, pretax charge
recorded in connection with a change in accounting for deferred membership
acquisition costs. Prior to the change, membership acquisition costs were
generally amortized up to ten years for single year membership periods and up to
twelve years for multi-year membership periods. These amortization periods
represented the estimated life of the member. At December 31, 1994, the
amortization periods were shortened to one year and three years for single and
multi-year membership periods, respectively (initial membership period without
regard for anticipated renewals).
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's financial statements but will be reflected in
the consolidated statements of income during the periods the respective mergers
are completed. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs and are expected to approximate $28.6 million ($25.1 million
or $.10 per common share after-tax effect) in the aggregate. Such costs
associated with the Company's merger with Ideon (the "Ideon Merger") include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Note I) giving consideration to the
Company's intended approach to these matters, which are estimated by the
Company's management to approximate $125.0 million ($80.0 million after tax
effect). Most of the reserve is related to these outstanding litigation matters.
In determining such portion, the Company estimated the cost of settling these
litigation matters. In estimating such cost, the Company considered potential
liabilities related to these matters and the estimated cost of prosecuting and
defending them (including out-of-pocket costs, such as attorneys' fees, and the
cost to the Company of having its management involved in numerous complex
litigation matters). The Company is unable at this time to determine the
estimated timing of the future cash outflows with respect to this liability.
Although the Company has attempted to estimate the amounts that will be required
to settle these litigation matters, there can be no assurance that the actual
aggregate amount of such settlements will not exceed the amount of the reserve
to be accrued. The reserve for these matters will be expensed in the
consolidated statement of income subsequent to the closing of the Ideon Merger,
and any subsequent payments related to these matters will reduce the amount of
the reserve. The Company considered litigation-related costs and liabilities,
as well as integration and transaction costs, in determining the agreed upon
exchange ratio in respect of the Ideon Merger.
In determining the amount of the reserve related to the Company's proposed
integration and consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger and
costs relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party and
which are neither terminable at will nor automatically terminated upon a
change-in-control of Ideon. The Company expects to incur significant integration
costs because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and enhancement
services. All of the business activities related to the operations performed by
Ideon's Jacksonville, Florida office were transferred to the Company's
Comp-U-Card Division in Stamford, Connecticut upon the consummation of the
Ideon Merger. The Company also expects that there will be additional
consolidation affecting other parts of Ideon's business that are substantially
the same as the Company's existing businesses. The Company does not expect any
loss in revenue as a result of these integration and consolidation efforts.
During June 1995, the Company acquired all of the outstanding capital stock of
Getko for a purchase price of approximately $100 million, which was satisfied by
the issuance of approximately 3.7 million shares of Common Stock. Getko
distributes complimentary welcoming packages to new homeowners throughout the
United States and Canada.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During September 1995, the Company acquired all of the outstanding capital stock
of NAOG for a purchase price of approximately $52 million, which was satisfied
by the issuance of approximately 1.5 million shares of Common Stock. NAOG owns
one of the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns a handyman membership
organization.
During January 1996, the Company acquired all of the outstanding capital stock
of Advance Ross for a purchase price of approximately $183 million, which was
satisfied by the issuance of 5.9 million shares of Common Stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
The acquisitions of Getko, NAOG and Advance Ross (collectively, the "Fiscal 1996
Pooled Entities") were accounted for in accordance with the pooling-of-interests
method of accounting. Therefore, the Company's financial statements have been
restated for all prior periods to include these entities. Further, all common
share and per common share data have been restated for prior periods and certain
reclassifications have been made to the historical financial statements to
conform to the Company's presentation.
The following represents revenues and net income of the Company and the Fiscal
1996 Pooled Entities for the two years and the last complete interim periods
preceding the mergers, not giving effect to the Fiscal 1997 Pooled Entities.
Nine Months Ended Year ended January 31,
October 31, 1995 1995 1994
----------------- ----------------------------
(Unaudited)
Revenues:
The Company $ 949,886 $1,044,669 $879,324
Fiscal 1996 Pooled Entities 87,130 138,227 105,477
----------------- ----------------------------
$1,037,016 $1,182,896 $984,801
================= ============================
Net Income:
The Company $ 113,656 $ 117,591 $ 87,371
Fiscal 1996 Pooled Entities 7,103 6,975 6,780
----------------- ----------------------------
$ 120,759 $ 124,566 $ 94,151
================= ============================
Getko, NAOG and Advance Ross previously used the fiscal years ended November 30,
December 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year end, Getko's operating results
for December 1993 and January 1994 and NAOG's operating results for January 1994
have been excluded from the year ended January 31, 1995 operating results in the
accompanying financial statements. The excluded periods have been adjusted by a
$4.1 million charge to retained earnings at January 31, 1995. In addition,
Advance Ross' operating results for January 1995 have been excluded from the
year ended January 31, 1996 operating results in the accompanying financial
statements. This excluded period has been adjusted by a $95,000 charge to
retained earnings at January 31, 1996.
In connection with the Advance Ross acquisition, the Company charged $5.2
million ($4.2 million or $.02 per common share after-tax effect) to fiscal 1996
operations for merger costs. These costs are nonrecurring and are comprised
primarily of transaction costs and other professional fees. Costs incurred in
connection with the acquisitions of Getko and NAOG were not significant to the
Company's results of operations.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During fiscal 1996, Davidson acquired all of the outstanding capital stock of
Maverick Software, Inc. ("Maverick") and The Cute Company, which subsequently
changed its name to FUNNYBONE Interactive ("FUNNYBONE"), by issuing an aggregate
of .6 million shares of Davidson's common stock (.5 million equivalent shares of
Common Stock). During fiscal 1995, Davidson acquired all of the outstanding
shares of Chaos Studios, Inc., which subsequently changed its name to Blizzard
Entertainment ("Blizzard"), by issuing .6 million shares of Davidson's common
stock (.5 million equivalent shares of Common Stock).
During fiscal 1996, Sierra acquired all of the outstanding capital stock of The
Pixellite Group ("Pixellite"), Software Inspiration Limited ("Inspiration") and
Papyrus Design Group, Inc. ("Papyrus") by issuing an aggregate of 2.1 million
shares of Sierra's common stock (2.6 million equivalent shares of Common Stock).
The acquisitions of Maverick, FUNNYBONE, Blizzard, Pixellite, Inspiration and
Payrus were accounted for in accordance with the pooling-of-interests method of
accounting. Therefore, the Company's financial statements, including all common
and per common share data, have been restated to include these entities.
During fiscal 1996, Sierra acquired all of the outstanding capital stock of
Arion Software, Inc. ("Arion") and Green Thumb Software, Inc. ("Green Thumb") by
issuing an aggregate of 147,958 shares of Sierra's common stock (181,249
equivalent shares of Common Stock). The acquisitions of Arion and Green Thumb
were accounted for in accordance with the pooling-of-interests method of
accounting. However, the Company's financial statements have not been restated
for the Arion and Green Thumb mergers as these companies did not significantly
impact the Company's operations.
Purchase Business Combinations
During February 1995, the Company acquired all of the outstanding capital stock
of Welcome Wagon International, Inc. ("Welcome Wagon") and substantially all of
the assets of a related entity, Gifts International, Inc., for $19.5 million in
cash. Welcome Wagon provides discounts for local merchants through direct visits
by its representatives to households. In connection with this acquisition, the
Company received current assets of $4.8 million and noncurrent assets of $3.6
million and assumed current liabilities of $4.7 million. The excess of cost over
the fair value of net assets acquired ($15.8 million) is included in the excess
of cost over net assets acquired.
During March 1995, the Company acquired all of the outstanding capital stock of
the parent of its European licensee, CUC Europe Limited, for $13 million. The
purchase price was satisfied by the payment of $12 million in cash and the
issuance of 42,147 shares of Common Stock. In connection with this acquisition,
the Company received current assets of $4.5 million and noncurrent assets of
$9.6 million and assumed current liabilities of $6.2 million and noncurrent
liabilities of $3.3 million. The excess of cost over the fair value of net
assets acquired ($8.4 million) is included in the excess of cost over net assets
acquired. In addition, during March 1995, the Company paid $2.4 million in cash
to acquire its European license. This amount has been included in the excess of
cost over net assets acquired.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During March 1995, the Company acquired all of the outstanding capital stock of
Credit Card Sentinel (U.K.) Limited ("CCS") for $22.5 million in cash. CCS is a
leading provider of credit card enhancement services, which are generally
marketed through European financial institutions. In connection with this
acquisition, the Company received current assets of $7.5 million and noncurrent
assets of $2.3 million and assumed current liabilities of $6.6 million and
noncurrent liabilities of $10.5 million. The excess of cost over the fair value
of net assets acquired ($29.8 million) is included in the excess of cost over
net assets acquired.
During fiscal 1996, the Company acquired several small privately-held discount
coupon book publishing companies, certain assets from insurance marketers and
franchisees and certain marketing and future renewal rights for an aggregate
cost of $4.2 million. The cost of these acquisitions has been included in the
excess of cost over net assets acquired ($3.7 million) and contract renewal
rights ($.5 million). In addition, during fiscal 1996 the Company acquired
certain assets from three timeshare-related businesses for an aggregate cost of
$5.2 million and paid $3.7 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
During fiscal 1996, Ideon acquired substantially all of the assets and
liabilities of National Leisure Group, Inc., a provider of vacation travel
packages to credit card companies, retailers and wholesale clubs in the United
States, for $15 million in cash and an agreement to issue shares of common stock
with a value of $1.4 million on the third anniversary of the acquisition. In
connection with this acquisition, Ideon received assets of $5.6 million and
assumed liabilities of $7.2 million. The excess of cost over the fair value of
net assets acquired of $18.3 million is included in the excess of cost over net
assets acquired.
Also during fiscal 1995, Ideon acquired all of the outstanding capital stock of
Wright Express Corporation ("Wright Express"), a provider of transaction and
information processing services, for $35.5 million in cash. The excess of cost
over the fair value of net assets acquired of $28.9 million is included in the
excess of cost over net assets acquired.
During January 1995, the Company acquired all of the outstanding capital stock
of Essex Corporation and subsidiaries ("Essex") for $27.5 million. The purchase
price was satisfied by the payment of $25.9 million in cash and the issuance of
75,000 shares of Common Stock. The former shareholders of Essex may receive
additional payments over the next two years, not to exceed $57.5 million in the
aggregate, based on the achievement of certain objectives. The Company's
management believes that payments to such shareholders aggregating in excess of
$30 million would be extremely remote. Essex is a third-party marketer of
financial products for banks, primarily marketing annuities through financial
institutions. In connection with this acquisition, the Company received current
assets of $8.1 million and noncurrent assets of $1.4 million and assumed current
liabilities of $7 million. The excess of cost over the fair value of net assets
acquired ($25 million) was included in the excess of cost over net assets
acquired.
During fiscal 1995, the Company acquired certain assets from three insurance
marketers for an aggregate cost of $4.1 million. The cost of these acquisitions
has been included in the excess of cost over net assets acquired ($3.9 million)
and contract renewal rights ($.2 million). In addition, during fiscal 1995 the
Company acquired a privately-held discount coupon book publishing company for $1
million and paid $.9 million to satisfy contingent payment requirements in
connection with previous acquisitions. These amounts have been included in the
excess of cost over net assets acquired.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note B--Mergers and Acquisitions (continued)
During fiscal 1995, Davidson acquired all of the outstanding capital stock of
Learningways, Inc. ("Learningways") for $4.2 million. The purchase price was
satisfied by the payment of $.7 million in cash and the issuance of 358,648
shares of Davidson's common stock (304,851 equivalent shares of Common Stock).
In connection with the acquisition, certain in-process research and development
costs for technology in process of approximately $3.9 million were expensed in
fiscal 1995. The excess of cost over the fair value of net assets acquired is
included in the excess of cost over net assets acquired.
During fiscal 1994, the Company acquired a privately owned insurance marketer
for $6 million. The cost of this acquisition has been included in contract
renewal rights. In addition, during fiscal 1994 the Company acquired a marketer
of accidental death and dismemberment insurance and a company which markets
other insurance products for an aggregate cost of approximately $2.6 million.
The cost of these acquisitions has been included in the excess of cost over net
assets acquired ($1.4 million) and contract renewal rights ($1.2 million),
respectively. During fiscal 1994, an additional $5.8 million was paid to satisfy
contingent payment requirements in connection with previous acquisitions. This
amount was included in the excess of cost over net assets acquired.
During fiscal 1994, Sierra acquired all of the outstanding capital stock of
Coktel Vision S.A. ("Coktel"), a French software company, for $5.3 million in
cash. In connection with this acquisition, $1.1 million was attributed to
in-process research and development and accordingly was charged to expense at
the date of acquisition. Amounts allocated to software development costs and the
excess of cost over net assets acquired were $1.4 million and $2.4 million,
respectively. Former Coktel shareholders earned contingent purchase payments of
$1.6 million and $1.3 million for the years ended January 31, 1995 and 1994,
respectively. During fiscal 1996, Sierra amended the Coktel agreement whereby it
issued 150,000 shares of Sierra's common stock (183,750 equivalent shares of
Common Stock) in satisfaction of any further incentive payments. As a result of
this amendment, an additional $4.1 million has been included in the excess of
cost over net assets acquired.
The preceding acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, the results of operations have been
included in the consolidated results of operations from the respective dates of
acquisition. The results of operations for the periods prior to the respective
dates of acquisition were not significant to the Company's operations.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note C--Marketable Securities
The Company's marketable securities, including aggregate fair value and cost
were as follows as of January 31 (in thousands):
Fair Value Cost
--------------------------------
1996:
U.S. Government obligations $ 22,886 $ 22,896
Corporate debt securities 27,438 27,521
Tax-exempt municipal bonds 54,081 53,724
Commercial paper 5,832 5,832
Other 255 255
--------------------------------
$110,492 $110,228
================================
1995:
U.S. Government obligations $ 10,394 $ 10,357
Corporate debt securities 23,050 22,996
Tax-exempt municipal bonds 177,898 178,747
Commercial paper 17,129 17,067
--------------------------------
$228,471 $229,167
================================
Maturities of the Company's investment portfolio as of January 31, 1996 were as
follows:
Fair
Value Cost
--------------------------------
Within one year $ 97,164 $ 97,003
One to five years 9,282 9,187
More than five years 4,046 4,038
--------------------------------
$110,492 $110,228
================================
Note D--Properties
Property acquired is recorded at cost. Depreciation of properties is provided
for using the straight-line method over the estimated useful lives of the
assets. The following is a summary of properties as of January 31 (in
thousands):
1996 1995
---------------------------------
Computer equipment $ 70,077 $ 50,500
Telephone equipment 34,113 22,274
Furniture and other equipment 74,290 52,771
Buildings 23,309 11,197
Leasehold improvements 16,798 13,606
Less accumulated depreciation (105,234) (74,984)
---------------------------------
Properties, net $ 113,353 $ 75,364
=================================
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note E-- Credit Facilities and Convertible Notes
During the second quarter of fiscal 1995, the Company renegotiated its revolving
credit facility provided by General Electric Capital Corporation ("GECC"). The
Amended and Restated Credit Agreement, which was entered into as of June 30,
1994 (the "GECC Credit Agreement"), amended and restated an agreement that the
Company and GECC initially entered into in 1989 and which was scheduled to
expire June 1, 1997. The GECC Credit Agreement provided for a $100 million
revolving credit facility with interest at LIBOR plus 2 1/4% (7 11/16% at
January 31, 1996) on that portion of the outstanding balance which was less
than or equal to $50 million and LIBOR plus 2 1/2% (7 15/16% at January 31,
1996) on the remaining outstanding balance. In addition, the GECC Credit
Agreement required the Company to maintain certain financial ratios and
other restrictive covenants, including restrictions that preclude the payment
of cash dividends on shares of Common Stock. The Company has terminated the
GECC Credit Agreement effective March 19, 1996 and entered into a credit
agreement during March 1996 with certain banks signatory thereto; The Chase
Manhattan Bank, N.A., Bank of Montreal, Morgan Guaranty Trust Company of
New York and The Sakura Bank, Limited, as Co-Agents; nd The Chase Manhattan
Bank, N.A. as Administrative Agent (the "New Credit Agreement").
The New Credit Agreement provides for a $500 million revolving credit facility
with a variety of different types of loans available thereunder. Interest is
payable, depending on the type of loan utilized by the Company, at a variety of
rates based on the federal funds rate, LIBOR, the prime rate or rates quoted by
participating banks based on an auction process provided for in the New Credit
Agreement. In addition, the New Credit Agreement requires the Company to
maintain certain financial ratios and contains other restrictive covenants
including, without limitation, financial covenants and restrictions on certain
corporate transactions, and also contains various events of default provisions
including, without limitation, defaults arising from certain changes in control
of the Company.
The zero coupon convertible notes issued in connection with the Company's fiscal
1990 recapitalization were recorded at their fair value on the date of issuance
and were issued in $100 principal amounts and multiples thereof. Each $100
principal amount is convertible into 15.1875 shares of Common Stock. These zero
coupon convertible notes are redeemable at any time at the option of the
Company, in whole or in part, at 90.6% of principal amount, increasing ratably
to 100% on June 6, 1996, the maturity date of such notes. Virtually all of the
zero coupon convertible notes were converted into Common Stock by June 6, 1996.
Cash payments for interest made by the Company to all its obligations amounted
to $5.1 million, $4.6 million and $.3 million for the years
ended January 31, 1996, 1995 and 1994, respectively.
Ideon
In 1994, Ideon assumed a revolving loan agreement in connection with its
acquisition of Wright Express. The agreement, as originally structured,
provided for maximum borrowings equal to the lesser of $17.5 million or an
amount based on a percentage of eligible accounts receivable as defined
therein. In November 1994, the revolving credit agreement was amended
increasing the available line to $27.5 million and Ideon was added as a
guarantor under the amended agreement. Interest on the outstanding borrowings
was, at Wright Express' option, either the bank's prime rate minus 0.5% or LIBOR
plus 0.625%. Borrowings are secured by substantially all assets of Wright
Express. At January 31, 1996, Ideon had $15.4 million outstanding under the
revolving line of credit with interest rates ranging from 6.31% to 7.25%. Such
amount is included in other current liabilities.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note E--Revolving Credit Facilities and Convertible Notes (continued)
Sierra
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. Any
borrowings under this line of credit would be collateralized by substantially
all of Sierra's assets and incur interest at either the bank's prime rate or
IBOR plus 150 basis points, at Sierra's choice. The line contains covenants
requiring Sierra to maintain certain financial ratios and minimum balances in
cash and cash equivalents. Sierra is in compliance with all covenants under this
line of credit as of January 31, 1996. There have been no borrowing by Sierra
under this line of credit to date. This line of credit expired August 31, 1996.
On April 12, 1994, Sierra issued $50 million in principal amount of 6 1/2%
convertible subordinated notes due April 1, 2001 (the "Notes"). Interest on the
Notes is payable semi-annually on April 1 and October 1 of each year. Each
$11.43 principal amount is convertible into one share of Common Stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of the Company, at specified redemption prices. The Notes
will be subordinated to all existing and future Senior Indebtedness (as defined
in the Indenture governing the Notes) of the Company. Issuance costs have been
netted against the principal convertible debt balance are being amortized on a
straight-line basis over seven years. During fiscal 1996 and 1995, Sierra paid
$0.9 million and $1.0 million, included in interest expense, to induce
conversion of $11.7 million and $14.3 million of Notes into 837,500 shares and
1,021,421 shares of Sierra common stock (1,025,938 equivalent shares and
1,251,241 equivalent shares of Common Stock), respectively.
Note F--Shareholders' Equity
During fiscal 1990, the Company made an administrative change to its incentive
stock option plans which had the effect of converting all options granted under
such plans to nonqualified options. Under these plans, options to purchase up to
11,029,922 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
The Company also has nonqualified option plans for certain employees. Under
these plans, including options to purchase 8,250,000 shares of Common Stock
added to these plans during fiscal 1996, nonqualified options to purchase up to
29,495,177 shares of Common Stock may be granted at not less than the fair
market value on the date of grant. Options granted under these plans are
generally exercisable at 20% to 25% per year commencing one year from the date
of grant.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
During October 1987, the Board of Directors adopted a plan ("1987 Plan") which,
as amended by votes of the Company's shareholders, authorizes the issuance of
options for upock. The 1987 Plan grants the Board of Directors the discretion to
designate these options as incentive stock options or nonqualified stock
options. Options granted under the 1987 Plan are generally exercisable at 20% to
25% per year commencing one year from the date of grant. During fiscal 1996, the
Company's shareholders approved an amendment of the 1987 Plan to increase the
number of shares of Common Stock authorized for issuance under the 1987 Plan to
23,718,750 shares of Common Stock.
During June 1991, the Company's shareholders approved the 1990 Directors Stock
Option Plan authorizing the issuance of options to the Company's non-employee
directors to purchase up to 759,375 shares of Common Stock at not less than the
fair market value on the date of grant. In addition, during June 1993, the
Company's shareholders approved the 1992 Directors Stock Option Plan, which
provides that options to acquire an aggregate of up to 450,000 shares of
Common Stock may be granted to non-employee Directors. As of January 31, 1996,
nonqualified options to purchase 669,375 shares of Common Stock have been
granted under these two plans. Options granted under these plans are generally
exercisable at 20% to 25% per year commencing one year from the date of grant.
In addition, during fiscal 1996, the Company's shareholders approved the 1994
Directors Stock Option Plan ("the 1994 Directors Plan"). The 1994 Directors Plan
provides that options to acquire an aggregate of up to 225,000 shares of Common
Stock may be granted to non-employee directors of the Company in office on each
of November 23, 1994, 1995, 1996 and 1997. Options granted under the 1994
Directors Plan are generally exercisable in full on the date of grant. As of
January 31, 1996, options to purchase 97,500 shares of Common Stock have been
granted under the plan.
The Company had reserved an aggregate of 2,550,000 shares of Common Stock for
issuance under three Davidson stock option plans: Davidson & Associates, Inc.
1992 Incentive Stock Option Plan, Davidson & Associates, Inc. 1992 Nonstatutory
Stock Option Plan and Davidson & Associates, Inc. 1992 Stock Purchase Plan
(collectively, the "Davidson Plans"). The Davidson Plans provided for the grant
of options to purchase Common Stock to officers, directors and consultants or
independent contractors of Davidson, or of any subsidiary of Davidson. Only
Davidson employees may be granted options under the Davidson & Associates, Inc.
1992 Incentive Stock Option Plan. The exercise price of the Davidson incentive
stock options was not less than the fair market value of Common Stock on
the date of grant. The exercise price of the options under the other two
Davidson plans were at the discretion of Davidson's Board of Directors.
These plans provided that the options were exercisable based upon vesting
schedules, as determined by Davidson's Board of Directors and were
exercisable no later than nine years from the date of grant. Options issued
under the plans generally vest ratably over a five-year period. The Davidson
Plans were terminated in connection with the Davidson merger and the options
outstanding under the Davidson Plans were assumed under existing plans of
the Company.
The Company has reserved 7,558,250 shares of Common Stock for issuance under
Sierra's 1995 Stock Option and Award Plan and Sierra's 1987 Stock Option Plan
for officers, employees, directors, vendors, consultants and independent
contractors of Sierra. Options granted under these plans may be either incentive
stock options or nonqualified stock options and are granted at the fair market
value of Common Stock at the date of grant. Options vest and expire under the
terms established at the date of grant. The Company also has 267,731 shares of
Common Stock reserved for issuance under an option plan acquired through
Sierra's merger with Papyrus.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
The Company had reserved 1,212,517 shares of Common Stock for issuance under
six Ideon stock option arrangements: Outside Directors' Options, 1991
Employee Stock Option Plan, 1992 Employee Stock Option Plan, 1994 Long-Term
Stock-Based Incentive Plan, Employee Stock Option Plan and Directors Stock
Plan (collectively, the "Ideon Plans") for officers, employees and directors
of Ideon. The stock option exercise prices of the Ideon Plans were generally
based on the fair market price of Common Stock on the date of grant. The Ideon
Plans provided that the options were exercisable upon vesting schedules from
one to four years and certain portions vest based on certain stock price
hurdles. The Ideon Plans and the options outstanding thereunder were either
terminated or assumed under existing plans of the Company.
As of January 31, 1996 and 1995, options to purchase 8,128,710 and 7,073,693
shares of Common Stock, respectively, were exercisable.
Changes in outstanding options were as follows:
Outstanding January 31, 1994 26,938,598
Options granted 10,101,612
Options exercised (4,410,446)
Options cancelled (670,319)
-------------
Outstanding January 31, 1995 31,959,445
Options granted 4,795,912
Options exercised (6,288,588)
Options cancelled (1,222,722)
-------------
Outstanding January 31, 1996 29,244,047
=============
Outstanding options at January 31, 1996 have exercise prices ranging from $.07
to $52.61.
The Company has an employee stock purchase plan for which 750,000 shares of
Common Stock are authorized. This plan enables employees to purchase the
Company's Common Stock at 90% of the fair market value on the fifteenth day
following the last day of each calendar quarter. The remaining 10% is charged
to compensation expense. Employees may not purchase in excess of 25% of their
year-to-date earnings.
The following summarizes shares of Common Stock reserved for issuance as of
January 31, 1996:
Convertible debt 2,097,813
Zero coupon convertible notes 2,278,088
Restricted stock plan 913,832
Stock options granted 29,244,047
Options not yet granted 15,848,835
Stock purchase plan 647,192
-------------
51,029,807
=============
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note F--Shareholders' Equity (continued)
In July 1989, Getko established an Employee Stock Ownership Plan ("ESOP") for
substantially all of its employees by purchasing 40,300 shares of its
convertible preferred stock which was financed by a $15 million bank loan
guaranteed by Getko. Compensation expense resulting from the ESOP amounted to
$1.8 million, $5.4 million and $4.5 million for the years ended January 31,
1996, 1995 and 1994, respectively. During fiscal 1996, the remaining loan amount
was repaid with the proceeds from the sale of unallocated ESOP shares and the
remaining ESOP shares were distributed to participants.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases.
During each of the years ended January 31, 1996, 1995 and 1994, cash dividends
per common share paid to Ideon's common stockholders were $.02 per share of
Common Stock.
The Company's authorized capital stock also includes one million shares of
preferred stock, $.01 par value. No shares of preferred stock have been issued.
Note G--Income Taxes
The components of income before income taxes for the years ended January 31 are
as follows (in thousands):
1996 1995 1994
----------------------------------------------------
Domestic $210,211 $238,219 $187,413
Foreign 25,101 18,712 10,906
----------------------------------------------------
$235,312 $256,931 $198,319
====================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of January 31 are as
follows (in thousands):
1996 1995
---------------------------
Deferred tax assets:
Deferred membership income
and acquisition costs, net $18,421 $ (3,156)
Other accrued liabilities 10,836 (532)
Recapitalization expenses 1,181 862
Compensatory stock options 972 2,456
Net operating loss carryforwards 1,347 7,883
Relocation expenses 3,439 3,749
Valuation allowance - 3,230
All other 9,060 7,740
---------------------------
Total deferred tax assets 45,256 22,232
Deferred tax liabilities:
Insurance retention refund 19,546 13,229
Depreciation 7,195 2,015
All other 6,569 5,093
---------------------------
Total deferred tax liabilities 33,310 20,337
---------------------------
Net deferred tax assets $11,946 $ 1,895
===========================
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note G--Income Taxes (continued)
The provision (benefit) for income taxes consists of the following for the years
ended January 31 (in thousands):
1996 1995 1994
-------------------------------------
Current:
Federal $72,665 $83,333 $72,408
State 9,820 10,351 7,399
Foreign 7,606 5,178 2,691
-------------------------------------
90,091 98,862 82,498
Deferred:
Federal 493 (5,544) (6,888)
State (447) 791 (1,980)
Foreign 200 765 (16)
-------------------------------------
246 (3,988) (8,884)
-------------------------------------
Total provision $90,337 $94,874 $73,614
=====================================
A reconciliation of the provision for income taxes at the Federal statutory rate
to the Company's consolidated tax provision follows for the years ended January
31 (in thousands):
1996 1995 1994
---------------------------------------
Income tax at statutory rate (35%) $81,778 $89,926 $69,215
State income taxes,
net of Federal benefit 7,334 6,769 5,248
Foreign taxes differential 825 1,352 (363)
Tax exempt interest - (2,613) (3,061)
Amortization of excess costs 4,627 2,237 2,327
Technology under development - 1,381 -
Nonconsolidated losses - (849) 1,565
Change in valuation allowance (1,215) - -
Other, net (3,012) (3,329) (1,317)
---------------------------------------
$90,337 $94,874 $73,614
=======================================
Income tax payments amounted to $56.3 million, $55.3 million and $49.7 million
for the years ended January 31, 1996, 1995 and 1994, respectively.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note H--Transactions with Related Parties
Ideon
Until his resignation as Chief Executive Office and a director of SafeCard
Services, Incorporated ("SafeCard"), a subsidiary of Ideon, on December 19,
1992, Steven J. Halmos, SafeCard's co-founder, provided his services to SafeCard
through High Plains Capital Corporation ("HPCC"), a company owned by himself and
his brother, Peter Halmos, SafeCard's other co-founder. After that date, Steven
J. Halmos, acting in the capacity of an Advisor on Marketing and Operational
Strategy, provided services directly to SafeCard pursuant to a written agreement
(as amended and restated as of April 1, 1993, the "Steven J. Halmos Agreement").
On May 26, 1994, SafeCard reached a settlement with Steven J. Halmos to
terminate the Steven J. Halmos Agreement and various other agreements between
SafeCard and Mr. Halmos that provided for payments to Mr. Halmos of $2 million a
year through March 31, 1998. The settlement, which arose in connection with
Ideon's management restructuring in April 1994 and a resulting decision to cease
using Mr. Halmos' services, resulted in a $4.4 million cash payment to Mr.
Halmos and charge to fiscal 1995 earnings. Subsequent to his termination Mr.
Halmos exercised options to purchase 3.9 million shares of Ideon's common stock
(approximately 1.5 million equivalent shares of Common Stock). Shareholders'
equity increased $37.8 million resulting from the exercise of such options and
the related tax benefit.
In September 1994, Ideon acquired Wright Express. Ideon's former Chairman
and Chief Executive Officer, Paul G. Kahn, was a director of Wright Express
prior to its acquisition by Ideon. During negotiations between Ideon and Wright
Express, Mr. Kahn did not attend any meetings or participate in any discussions
of the Board of Directors of Wright Express and abstained from voting on the
acquisition by Ideon's Board of Directors.
SafeCard markets its CreditLine product pursuant to an agreement (as amended,
the "CreditLine Agreement") with CreditLine Corporation ("CLC"), a corporation
owned by Steven J. Halmos and Peter Halmos, and their families. The CreditLine
Agreement grants SafeCard an exclusive license to market CreditLine through
certain credit card issuers (including all issuers with which SafeCard has
contractual relationships) and provides that profits and losses, if any, are
shared equally between CLC and SafeCard. The CreditLine Agreement is the subject
of litigation as described in Note I.
Sierra
In July 1996, the Company acquired Sierra. The Company's Chairman and Chief
Executive Officer, Walter A. Forbes, was a director of Sierra prior to its
acquisition by the Company (the "Sierra Merger"). During negotiations between
the Company and Sierra, Mr. Forbes did not participate in any meetings or
deliberations of Sierra's Board of Directors with respect to the Sierra Merger
and abstained from the vote of the Board of Directors of the Company to approve
the Sierra Merger agreement.
Note I--Commitments and Contingencies
Rental expense under operating leases amounted to $37.6 million, $27.7 million
and $24 million for the years ended January 31, 1996, 1995 and 1994,
respectively. These leases provide for normal escalation charges in addition to
the base rental. At January 31, 1996, the minimum rental commitments under
non-cancelable operating leases with initial or remaining terms of more than one
year aggregated $153.8 million ($33.9 million for 1997, $29.7 million for 1998,
$24.1 million for 1999, $19 million for 2000, $15.2 million for 2001 and $31.9
million thereafter).
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
The Company has a Savings Incentive Plan ("Savings Plan") for all eligible
employees which qualifies as a 401(k) plan. Effective July 1, 1994,
Entertainment's Employee Stock Ownership Plan was merged into the Savings Plan.
The Savings Plan provides that a participant may contribute up to 15% of his or
her annual salary, subject to limitations, while the Company will contribute up
to $61 per pay period for the first $92 contributed by a participant. Davidson's
401(k) plan covers eligible employees who elect to participate and Davidson has
the discretion to make contributions to this plan, which vest based on length of
service. The Company's contributions to the Savings Plan and Davidson's
contributions to its 401(k) plan for fiscal 1996, 1995 and 1994 aggregated $4.1
million, $3.2 million and $2.2 million, respectively.
Ideon
At January 31, 1996, Ideon was defending or prosecuting claims in thirteen
complex lawsuits, twelve of which involved Peter Halmos, former Chairman of the
Board and Executive Management Consultant to SafeCard, and various parties
related to him as adversaries. Peter Halmos is also a plaintiff in three other
lawsuits, one against a former officer, one against a director of Ideon and one
against SafeCard's outside counsel, in which neither SafeCard nor Ideon have
been named as defendant. The thirteen cases in which Ideon or its subsidiaries
is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former
lawyer for SafeCard) in April 1993 in Cook County Circuit Court in Illinois
against SafeCard and one of Ideon's directors, purporting to state claims
aggregating in excess of $100 million, principally relating to alleged rights to
"incentive compensation," stock options or their equivalent, indemnification,
wrongful termination and defamation. On February 7, 1995, the court dismissed
with prejudice Peter Halmos' claims regarding alleged rights to "incentive
compensation," stock options or their equivalent, wrongful termination and
defamation. Mr. Halmos has appealed this ruling. SafeCard has filed an answer to
the remaining indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declatory judgment action filed by Ideon in Delaware Chancery
Court.
A suit which seeks monetary damages and certain equitable relief filed by
SafeCard in August 1993 in Laramie County Circuit Court in Wyoming against Peter
Halmos and related entities alleging that Peter Halmos dominated and controlled
SafeCard, breached his fiduciary duties to SafeCard, and misappropriated
material non-public information to make $48 million in profits on sales of
SafeCard stock. In March 1994, Mr. Halmos and related entities filed a
counterclaim in which claims were made of conspiracy in restraint to trade,
monopolization and attempted monopolization, unfair competition and restraint of
trade, breach of contract for indemnity and intentional infliction of emotional
distress. SafeCard's motion to sever the conspiracy, monopolization and
restraint of trade claims was granted in May 1994. The claims for the
conspiracy, monopolization, restraint of trade and unfair competition were
dismissed without prejudice in June 1994. On April 12, 1995, the trial court
granted the motion of Mr. Halmos and certain related entities to amend their
counterclaims. The amended counterclaims include claims for indemnification for
legal expenses incurred in the action and a claim that SafeCard's contract with
CreditLine should be rescinded. On April 19, 1995, the trial court granted Mr.
Halmos' motion for summary judgment that certain of SafeCard's claims against
him were barred by the statute of limitation. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations. Pursuant to the Court's
order of July 31, 1996, the action has been abated to permit the parties to
engage in settlement negotiations.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit seeking monetary damages by Peter Halmos, purportedly in his name and in
the name of CreditLine Corporation and Continuity Marketing Corporation against
SafeCard, one of its officers and three of Ideon's directors in United States
District Court in the Southern District of Florida, in September 1994 purporting
to state various tort claims, state and federal antitrust claims and claims of
copyright infringement. The claims principally relate to the allegation by Peter
Halmos and his companies that SafeCard has taken action to prevent him from
being a successful competitor. All discovery in the case has been stayed pending
a ruling on a motion to dismiss filed by SafeCard, its officer and Ideon's
directors. On August 16, 1995, the United States Magistrate Judge filed a Report
and Recommendation that the case be dismissed. The parties have filed various
beliefs and memoranda in response to this Report. On January 4, 1996, the
Magistrate recommended ruling that the statute of limitations was tolled during
pendency of the case in federal court and the plaintiffs' state law claims were
thus not time-barred. Defendants have filed an objection to this recommendation.
A suit seeking monetary damages by Peter Halmos, as trustee for the Peter A.
Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc.
individually and certain other named parties on behalf of themselves and all
others similarly situated against SafeCard, one of its officers, one of its
former officers and three of Ideon's directors in the United States District
Court for the Southern District of Florida in December 1994. This litigation
involves claims by a putative class of sellers of SafeCard Stock for the period
January 11, 1993 through December 8, 1994 for alleged violations of the federal
and states securities laws in connection with alleged improprieties in
SafeCards' investor relations program. The complaint also includes individual
claims made by Peter Halmos in connection with the sale of stock by two trusts
controlled by him. SafeCard and the individual defendants have filed a motion to
dismiss. There has been limited discovery on class certification and
identification of "John Doe" defendant issues. Ideon filed its opposition to the
pending motion for class certification on December 11, 1995. Plaintiffs' reply
was filed March 19, 1996. On September 9, 1996, the Court entered an order
abating the action until December 9, 1996 to permit the parties to engage in
settlement negotiations.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos, in the
State Circuit Court in Palm Beach County, Florida in April 1995 against Ideon,
Family Protection Network, Inc., SafeCard, one of Ideon's directors and Ideon's
Chief Executive Officer purporting to state various statutory and tort claims.
The claims principally relate to the allegation by these companies that
SafeCard's Early Warnings Service and Family Protection Network were conceived
and commercialized by, among others, Peter Halmos and have been improperly
copied. An amended complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answser.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of himself
and all others similarly situated against Ideon, SafeCard, each of the members
of Ideon's Board of Directors, three non-board member officers of Ideon, Ideon's
previous outside auditor and one of Ideon's outside counsel in the United States
District Court for the Southern District of Florida in June 1995. The litigation
involves claims by a putative class of purchasers of Ideon stock between
December 14, 1994 and May 25, 1995 and on behalf of a separate class of all
record holders of SafeCard stock as of April 27, 1995. The putative class claims
are for alleged violations of the federal securities laws, for alleged breach of
fiduciary duty and alleged negligence in connection with certain matters voted
on at the Annual Meeting of SafeCard stockholders held on April 27, 1995.
Ideon and the individual defendants have filed a motion to dismiss these claims.
There has been limited discovery on class certification issues. Ideon filed its
opposition to the pending motion for class certification on December 11, 1995.
Plaintiffs' reply was filed March 19, 1996. On September 9, 1996, the Court
entered an order abating the action until December 9, 1996 to permit the
parties to engage in settlement negotiations.
A purported shareholder derivative action initiated by Michael P. Pisano, on
behalf of himself and other stockholders of SafeCard and Ideon against SafeCard,
Ideon, two of their officers, and Ideon's directors in United States District
Court, Southern District of Florida. This litigation involves claims that the
officers and directors of SafeCard have improperly refused to accede Peter
Halmos' litigation and indemnification demands against Ideon. Ideon and the
individual defendants have filed motions to dismiss the first amended complaint.
On September 29, 1995, Pisano filed a second amended complaint which made
additional allegations of waste and mismanagement against Ideon's officers and
directors in connection with the Family Protection Network and PGA Tour Partner
products. On December 26, 1995, Ideon filed motions to dismiss the Second
Amended Complaint. On June 4 and June 19, 1996, orders were entered
dismissing plaintiff's claims with prejudice for failure to join an
indispensable party, Peter Halmos. On June 27, 1996, plaintiff filed a
notice of appeal.
A suit seeking monetary damages filed by Peter Halmos against SafeCard, one of
its directors, its former general counsel, and its legal counsel in the Circuit
Court, Fifteenth Judicial Circuit, in and for Palm Beach County, Florida on
August 10, 1995. This litigation involves claims by Peter Halmos for breach of
fiduciary duty and constructive fraud, fraud, and negligent misrepresentation
and is based on allegations arising out of the resolution of a shareholder class
action lawsuit in 1991 and SafeCard's subsequent filing of an action against
Halmos and his related companies in Wyoming in 1993. Plaintiff filed an
amended complaint on June 26, 1996 and on July 11, 1996 the Company moved to
dismiss plaintiff's amended complaint or in the alternative to stay the action.
A declaratory judgment action by Ideon and its directors against Peter Halmos in
Delaware Chancery Court, New Castle County. This action seeks a declaration
regarding Ideon's advance indemnification obligations, if any, to Peter Halmos
in connection with his many lawsuits. Halmos filed a motion to dismiss on
jurisdictional grounds on November 17, 1995. Ideon filed a brief in opposition
and an amended complaint on February 14, 1996. On April 22, 1996, Halmos filed
an answer and amended counterclaims in which High Plains Capital Corporation
("High Plains") and Halmos Trading & Investment Company ("Halmos Trading") were
added as additional parties. The amended counterclaims seek advancement and/or
indemnification for Halmos, High Plains and Halmos Trading for certain
litigations and an IRS investigation. The amended counterclaims also seek
recovery against individual defendant directors based on allegations they
willfully and unjustly denied Halmos indemnification and/or advancement.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note I--Commitments and Contingencies (continued)
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum meruit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling
on this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company's answer is currently scheduled to be filed on September
23, 1996.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court for
the Southern District of New York. The litigation involves claims against
Ideon, its former CEO and its Vice President of Investor Relations for alleged
material misrepresentations and omissions in connection with announcements
relating to Ideon's expected earnings per share in 1995 and its new product
sales, which included the PGA Tour Card Program, Family Protection Network and
Collections of the Vatican Museums. On July 15, 1996, Ideon filed a motion to
dismiss.
As noted in Note B, the Company will establish a reserve upon the Ideon merger
related, in part, to these litigation matters. The Company is also involved
in certain other claims and litigation arising from the ordinary course of
business, which are not considered material to the operations of the Company.
Note J--Cost Related to Products Abandoned and Restructuring - Ideon
Included in costs related to products abandoned and restructuring in the
Supplemental Consolidated Statement of Income for the year ended January 31,
1996, are special charges totaling $43.8 million, net of recoveries, related to
the abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure as discussed below. The original
charge of $45 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995 Ideon recovered $1.2 million
of a $3.9 million deposit included in the above charges. Also included in costs
related to products abandoned and restructuring are marketing and operational
costs incurred for products abandoned of $53.2 million.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note J--Cost Related to Products Abandoned and Restructuring - Ideon
The components of the product abandonment and related liabilities as of January
31, 1996 are as follows (in thousands):
Fiscal 1996 Balance at
Provisions Activity 1/31/96
------------------------------------------
Severance and other employee costs $14,960 $ 8,950 $ 6,010
Costs to terminate equipment
and facilities leases 9,593 2,656 6,937
Liability for contract impairments 8,400 1,000 7,400
Other costs 3,295 2,846 449
------------------------------------------
$36,248 $15,452 $20,796
==========================================
The balance of the product abandonment and related liabilities at January 31,
1996 is included in accrued expenses and represents Ideon's best estimate of the
amounts expected to be incurred with respect to its product abandonment and
restructuring efforts. The amounts that will ultimately be paid could differ
from the amounts included in the product abandonment and related liabilities
estimate. Ideon anticipates completion of the majority of the actions related to
the product abandonment and restructuring during fiscal 1997.
During fiscal 1996, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA TOUR
Partners program that provided various benefits to members. Consumer response
rates after the launch were significantly less than Ideon management's
expectations, the product as configured was deemed not economically viable and a
charge of $18 million was incurred associated with the abandonment of the
product marketing including employee severance payments (approximately 130
employees), costs to terminate equipment and facilities leases, costs for
contract impairments and write-downs taken for asset impairments. In September
1995, after a period of product redesign and test marketing, Ideon discontinued
its PGA TOUR Partners credit card servicing role and recorded a charge of $3.6
million for costs associated with the abandonment of this role, including
employee severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments. In
April 1995, Ideon launched a nationwide child registration and missing child
search program. Consumer response rates after the launch were significantly less
than Ideon management's expectations and a charge of $9 million was incurred to
cover severance payments (approximately 100 employees), costs to terminate
equipment and facilities leases and write-down taken for asset impairments. As a
result of the discontinuance of these products, Ideon undertook an overall
restructuring of its operations and incurred charges of $7.2 million to
terminate operating leases and write-down assets to realizable value,
$3 million for restructuring its SafeCard division and $4.2 million for
restructuring its corporate infrastructure.
During fiscal 1995, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior management
team, resulting in $7.9 million of charges for various severance agreements and
a lease termination.
Note K--Sale of The ImagiNation Network - Sierra
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993,
Sierra sold 42% of INN's voting stock and reduced its ownership interest to 58%
and reduced its voting control such that Sierra recorded its liquidation
preference in excess of recorded book value as shareholders' equity.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note K--Sale of The ImagiNation Network - Sierra (continued)
In December 1994, Sierra sold its remaining equity interest in INN to AT&T and
recorded a gain of $19.7 million. Sierra also entered into a multi-year
publishing agreement with AT&T for Sierra to provide content for INN.
The publishing agreement provides for AT&T to fund up to $4 million of
Sierra's development expenditures under an existing publishing agreement and
up to $23 million of Sierra's development expenditures, subject to certain
limitations, through non-refundable royalty advances. The non-refundable
royalty advances are reflected net of research and development expense.
Non-refundable royalty advances from AT&T for the years ended January 31,
1996 and 1995 were $3.8 million and $1.6 million, respectively.
Note L--Business Segments
Business segment data consists of the following at or for the years ended
January 31 (in thousands):
1996 1995 1994
----------------------------------------------
Revenues:
Membership services $1,629,829 $1,363,561 $1,143,191
Software 305,403 191,050 135,473
----------------------------------------------
$1,935,232 $1,554,611 $1,278,664
==============================================
Operating Profit:
Membership services $ 184,699 $ 218,145 $ 194,002
Software 40,928 30,849 1,096
----------------------------------------------
$ 225,627 $ 248,994 $ 195,098
==============================================
Identifiable Assets:
Membership services $1,803,577 $1,566,186 $1,274,693
Software 264,619 205,936 113,500
----------------------------------------------
$2,068,196 $1,772,122 $1,388,193
==============================================
Capital Expenditures:
Membership services $ 53,048 $ 29,809 $ 9,631
Software 10,100 9,752 4,698
----------------------------------------------
$ 63,148 $ 39,561 $ 14,329
==============================================
Depreciation and Amortization:
Membership services $ 40,358 $ 27,683 $ 26,901
Software 9,378 15,780 13,410
----------------------------------------------
$ 49,736 $ 43,463 $ 40,311
==============================================
Note M--Subsequent Events
During February 1996, Ideon acquired all of the outstanding capital stock of
United Bank Services ("UBS") for $18.3 million. UBS is a provider of value-added
products and services through a diverse group of financial institutions. In
connection with this acquisition, Ideon recorded $14.7 million in the excess of
cost over net assets acquired and $4.4 million in contract renewal rights. The
UBS purchase agreement provides that the former shareholders of UBS are
eligible to receive additional payments over the next three years, not to exceed
$22 million in the aggregate, based on the achievement of certain objectives.
This acquisition was accounted for in accordance with the purchase method of
accounting and, accordingly, its results of operations will be included in the
consolidated results of operations from the date of acquisition.
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note M--Subsequent Events (continued)
During March 1996, Davidson acquired all of the outstanding capital stock of
Condor, Inc. (subsequently renamed "Blizzard North"), a developer of
entertainment software. This acquisition was accounted for in accordance with
the pooling-of-interests method of accounting. However, the Company's financial
statements have not been restated for the Blizzard North merger as it did not
impact the Company's operations significantly.
In February 1996, Wright Express entered into a new revolving credit facility
agreement replacing its previous revolving line of credit. The new credit
facility has an available line of $75 million of which $50 million may be used
to finance working capital requirements and for general corporate purposes and
$25 million may be used for acquisition financing. The new credit facility
expires December 1, 1998. Interest on the outstanding borrowings is computed, at
the option of Wright Express, under various methods including the bank's prime
rate or LIBOR plus 0.75%. Borrowings are secured by substantially all assets of
Wright Express.
The Company's fiscal 1990 recapitalization included establishment of a
restricted stock plan designed to compensate and retain key employees of the
Company. During July 1996, 910,000 restricted shares of Common Stock were
granted with a fair value on the date of grant of $30.5 million, which amount
was deducted from shareholders'equity and is being amortized over the vesting
period.
Note N--Quarterly Results of Operations (unaudited)
(Dollar amounts in thousands, except per common share amounts)
The quarterly results of operations have been restated to reflect the
poolings-of-interests transactions with the Fiscal 1997 Pooled Entities
discussed in Note B.
First Second Third Fourth
Restated: Quarter Quarter Quarter Quarter
- --------- ----------------------------------------------
Fiscal 1996
Total revenues $430,659 $466,048 $492,556 $545,969
Income (loss) before
income taxes 62,270 (1,756) 71,989 102,809
Net income (loss) 38,304 (2,368) 43,399 65,640
Net income (loss)
per common share .15 (.01) .16 .25
Fiscal 1995
Total revenues $340,230 $375,305 $413,228 $425,848
Income before income taxes 51,303 51,440 91,988 62,200
Net income 33,191 30,122 61,389 39,355
Net income per common share .13 .12 .24 .15
CUC International Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (Continued)
Note N--Quarterly Results of Operations (unaudited) (continued)
The fourth quarter of fiscal 1996 includes $5.2 million ($4.2 million or $.02
per common share after-tax effect) of merger costs incurred in connection with
the acquisition of Advance Ross. The first, second, third and fourth quarters of
fiscal 1996 include $8.1 million, $73.1 million, $16.4 million and ($.6
million), respectively, of Ideon's costs related to products abandoned and
restructuring.
First Second Third Fourth
Prior to restatement: Quarter Quarter Quarter Quarter
- --------------------- -----------------------------------------------
Fiscal 1996
Total revenues $325,114 $347,759 $364,143 $377,948
Income before income taxes 59,047 67,029 71,821 68,446
Net income 36,046 41,692 43,021 42,615
Net income per common share .19 .21 .22 .22
Fiscal 1995
Total revenues $270,303 $288,143 $304,249 $320,201
Income before income taxes 45,876 48,922 53,342 53,645
Net income 27,969 29,948 33,211 33,438
Net income per common share .15 .16 .17 .18
Exhibit 99.2
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
April 30, January 31,
1996 1996
- --------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $349,563 $333,036
Marketable securities 77,022 97,164
Receivables 460,176 463,492
Prepaid membership materials 42,302 39,061
Prepaid expenses, deferred taxes and other 149,583 158,523
-----------------------------
Total Current Assets 1,078,646 1,091,276
Membership solicitations in process 61,663 60,713
Deferred membership acquisition costs 408,630 404,655
Contract renewal rights and intangible assets
- net of accumulated amortization
of $106,262 and $100,578 355,917 332,806
Properties, at cost, less accumulated
depreciation of $111,996 and $105,235 122,378 113,353
Deferred income taxes and other 71,562 65,393
-----------------------------
$2,098,796 $2,068,196
=============================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable, accrued expenses
and other accrued liabilities $252,746 $296,048
Federal and state income taxes payable 13,119 35,957
-----------------------------
Total Current Liabilities 265,865 332,005
Deferred membership income 696,240 682,823
Convertible debt - net of unamortized
original issue discount of $576 and $586 23,399 23,389
Zero coupon convertible notes - net of
unamortized original issue discount
of $178 and $588 14,709 14,410
Other 11,372 13,046
Contingencies (Note 5)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 400 million shares; issued
260,501,524 shares and 257,207,225 shares 2,605 2,572
Additional paid-in capital 484,277 429,934
Retained earnings 650,720 602,678
Treasury stock, at cost, 3,868,011
shares and 3,410,631 shares (48,161) (30,998)
Unrealized gain on marketable securities 593
Foreign currency translation (2,230) (2,256)
-----------------------------
Total Shareholders' Equity 1,087,211 1,002,523
-----------------------------
$2,098,796 $2,068,196
=============================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
===============================================================================
Three Months Ended
April 30,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
REVENUES
Membership and service fees $455,006 $382,957
Software 60,473 47,702
-----------------------------------
Total Revenues 515,479 430,659
EXPENSES
Operating 158,327 129,946
Marketing 205,202 171,148
General and administrative 70,066 62,276
Costs related to products abandoned
and restructuring 8,061
Interest income, net (2,240) (3,042)
-----------------------------------
Total Expenses 431,355 368,389
-----------------------------------
INCOME BEFORE INCOME TAXES 84,124 62,270
Provision for income taxes 32,003 23,966
-----------------------------------
NET INCOME $52,121 $38,304
===================================
Net Income Per Common Share $0.20 $0.15
===================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 264,443 258,084
===================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
APRIL 30,
- ------------------------------------------------------------------------------
THREE MONTHS ENDED 1996 1995
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $52,121 $38,304
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Membership acquisition costs (164,341) (134,434)
Amortization of membership
acquisition costs 160,366 144,678
Deferred membership income 13,179 2,869
Membership solicitations in process (950) (4,659)
Amortization of contract renewal
rights and excess cost 5,684 4,913
Deferred income taxes (2,508) (20,670)
Amortization of original issue
discount on convertible notes 739 426
Depreciation 6,925 5,946
Effect of change in amortization periods
for Ideon membership acquisition costs 65,500
Net loss during change
in fiscal year-ends (4,268) (49,944)
Changes in working capital items,
net of acquisitions:
Decrease (increase) in receivables 3,316 (17,685)
(Increase) decrease in prepaid
membership materials (3,241) 2,130
Decrease (increase) in prepaid expenses
and other current assets 9,534 (9,557)
Net decrease in accounts payable,
accrued expenses, other accrued
liabilities and federal
& state income taxes payable (36,114) (26,150)
Decrease in product abandonment and
and related liabilities (7,410)
Other, net (4,309) (6,845)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 28,723 (5,178)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 46,922 108,862
Purchases of marketable securities (28,832) (44,113)
Acquisitions, net of cash acquired (28,932) (64,149)
Acquisitions of properties (15,575) (27,206)
- ------------------------------------------------------------------------------
Net cash used in investing activities (26,417) (26,606)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of Common Stock 12,984 10,567
Repayments of long-term obligations 1,237 2,624
Dividends paid (2,956)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 14,221 10,235
- ------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 16,527 (21,549)
Cash and cash equivalents
at beginning of period 333,036 281,019
--------------------------
Cash and cash equivalents at end of period $349,563 $259,470
==========================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The supplemental consolidated financial statements include the accounts of CUC
International Inc., its wholly-owned subsidiaries and its joint ventures
(collectively, the "Company"). The Company operates in two business segments:
membership services and software. Membership services are distributed to
consumers through various channels which include financial institutions, credit
unions, charities, other cardholder based organizations and retail
establishments. The software segment develops, publishes and distributes
educational and entertainment software for home and school use. These
supplemental consolidated financial statements give retroactive effect to the
mergers of Davidson & Associates, Inc. ("Davidson") (on July 24, 1996),
Sierra On-Line, Inc. ("Sierra") (on July 24, 1996) and Ideon Group, Inc.
("Ideon") (on August 7, 1996) with wholly-owned subsidiaries of the Company,
which have been accounted for using the pooling-of-interests method. These
supplemental consolidated financial statements will become the Company's
primary historical financial statements upon issuance of financial statements
that include the date of consummation of all of the above-described mergers.
All significant intercompany transactions have been eliminated in consolidation.
All periods presented reflect the Company's reclassifications of deferred
membership acquisition costs (previously classified as an offset to deferred
membership income) and membership solicitations in process (previously
classified as a current asset) to noncurrent assets.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended April 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending January 31, 1997. For further information, refer to the supplemental
financial statements and footnotes thereto included in this 8-K.
NOTE 2 -- MERGERS AND ACQUISITIONS
During July 1996 the Company acquired all of the outstanding capital stock of
Davidson for a purchase price of approximately $1 billion, which was satisfied
by the issuance of approximately 30.1 million shares of Common Stock. Also
during July 1996 the Company acquired all of the outstanding capital stock of
Sierra for a purchase price of approximately $858 million, which was satisfied
by the issuance of approximately 25.6 million shares of Common Stock. Davidson
and Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996 the Company acquired all of
the outstanding capital stock of Ideon, principally a provider of credit card
enhancement services, for a purchase price of approximately $393 million, which
was satisfied by the issuance of approximately 11 million shares of Common
Stock. The mergers with Davidson, Sierra and Ideon (the "Fiscal 1997 Pooled
Entities") have been accounted for in accordance with the pooling-of-interests
method of accounting and, accordingly, the accompanying supplemental interim
consolidated financial statements have been retroactively adjusted as if the
Fiscal 1997 Pooled Entities and the Company had operated as one since
inception.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities for the three months ended April 30, 1995 and the last
complete interim period preceding the mergers (unaudited, in thousands).
Three months
ended April 30, Three months ended
1996 April 30, 1995
------------------------------------------------
Revnues:
The Company $390,026 $325,114
Fiscal 1997 Pooled Entities 125,453 105,545
-------- --------
$515,479 $430,659
======== ========
Net Income:
The Company $48,250 $36,046
Fiscal 1997 Pooled Entities 3,871 2,258
-------- --------
$52,121 $38,304
======== ========
Davidson, Sierra and Ideon previously used the fiscal year-ends December 31,
March 31 and December 31, respectively, for their financial reporting. To
conform to the Company's January 31 fiscal year-end, Davidson's and Ideon's
operating results for January 1996 have been excluded from the three months
ended April 30, 1996 operating results in the accompanying supplemental
financial statements. In addition, Sierra's operating results for February
and March 1996 have been included in the operating results for the three months
ended April 30, 1996 in the accompanying supplemental financial statements and
for the year ended January 31, 1996. The above-mentioned excluded and
duplicated periods have been adjusted by a $4.3 million charge to retained
earnings at April 30, 1996. Effective January 1, 1995, Ideon changed its
fiscal year end from October 31 to December 31 (the "Ideon Transition
Period"). The Ideon Transition Period has been excluded from the Company's
historical consolidated statements of income. Ideon's revenues and net loss
for the Ideon Transition Period were $34.7 million and $(49.9) million,
respectively. This excluded period has been adjusted by a $49.9 million
charge to retained earnings at January 31, 1996. The net loss for the Ideon
Transition Period was principally the result of a $65.5 million one-time,
non-cash, pretax charge recorded in connection with a change in accounting
for deferred membership acquisition costs.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's supplemental financial statements but will be
reflected in the consolidated statements of income during the periods the
respective mergers are completed. Such costs are non-recurring and those
associated with the Company's mergers with Davidson and Sierra are comprised
primarily of merger and integration costs and are expected to approximate
$28.6 million ($25.1 million or $.10 per common share after-tax effect) in
the aggregate. Such costs associated with the Company's merger with Ideon
(the "Ideon Merger") include integration and transaction costs as well as
costs relating to certain outstanding litigation matters (see Note 6) giving
consideration to the Company's intended approach to these matters, which are
estimated by the Company's management to approximate $125.0 million ($80.0
million after tax effect). Most of the reserve is related to these outstanding
litigation matters. In determining such portion, the Company estimated the cost
of settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the estimated
cost of prosecuting and defending them (including out-of-pocket costs, such as
attorneys' fees, and the cost to the Company of having its management involved
in numerous complex litigation matters). The Company is unable at this time to
determine the estimated timing of the future cash outflows with respect to this
liability. Although the Company has attempted to estimate the amounts that will
be required to settle these litigation matters, there can be no assurance that
the actual aggregate amount of such settlements will not exceed the amount of
the reserve to be accrued. The reserve for these matters will be expensed in
the consolidated statement of income subsequent to the closing of the Ideon
Merger, and any subsequent payments related to these matters will reduce the
amount of the reserve. The Company considered all of these litigation-related
costs and liabilities, as well as integration and transaction costs, in
determining the agreed upon exchange ratio in respect of the Ideon Merger.
In determining the amount of the reserve related to the Company's proposed
integration and consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger and
costs relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party and
which are neither terminable at will nor automatically terminated upon a
change-in-control of Ideon. The Company expects to incur significant integration
costs because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and enhancement
services. All of the business activities related to the operations performed by
Ideon's Jacksonville, Florida office were transferred to the Company's
Comp-U-Card Division in Stamford, Connecticut upon the consummation of the Ideon
Merger. The Company also expects that there will be additional consolidation
affecting other parts of Ideon's business that are substantially the same as the
Company's existing businesses. The Company does not expect any loss in revenue
as a result of these integration and consolidation efforts.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- SHAREHOLDERS' EQUITY
Net income per share, assuming the conversions of the zero coupon convertible
notes during the three months ended April 30, 1996 occurred at the beginning of
such period, would not differ significantly from the Company's actual earnings
per share for such period.
NOTE 4 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses and
aggregated $14.9 million and $10.8 million for the three months ended April 30,
1996 and 1995, respectively. Costs of software revenue are included in operating
expenses and aggregated $24.8 million and $19.6 million for the three months
ended April 30, 1996 and 1995, respectively.
NOTE 5 -- INCOME TAXES
The Company's effective tax rate differs from the Federal statutory rate
principally because of state income taxes and non-deductible amortization of the
excess of cost over net assets acquired.
NOTE 6 -- CONTINGENCIES - IDEON
At April 30, 1996, Ideon was defending or prosecuting claims in thirteen
complex lawsuits, twelve of which involved Peter Halmos, former Chairman of the
Board and Executive Management Consultant to SafeCard, and various parties
related to him as adversaries. Peter Halmos is also a plaintiff in three other
lawsuits, one against a former officer, one against a director of Ideon and one
against SafeCard's outside counsel, in which neither SafeCard nor Ideon have
been named as defendant. The thirteen cases in which Ideon or its subsidiaries
is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former
lawyer for SafeCard) in April 1993 in Cook County Circuit Court in Illinois
against SafeCard and one of Ideon's directors, purporting to state claims
aggregating in excess of $100 million, principally relating to alleged rights to
"incentive compensation," stock options or their equivalent, indemnification,
wrongful termination and defamation. On February 7, 1995, the court dismissed
with prejudice Peter Halmos' claims regarding alleged rights to "incentive
compensation," stock options or their equivalent, wrongful termination and
defamation. Mr. Halmos has appealed this ruling. SafeCard has filed an answer to
the remaining indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a decalatory judgment action filed by Ideon in Delaware Chancery
Court.
A suit which seeks monetary damages and certain equitable relief filed by
SafeCard in August 1993 in Laramie County Circuit Court in Wyoming against Peter
Halmos and related entities alleging that Peter Halmos dominated and controlled
SafeCard, breached his fiduciary duties to SafeCard, and misappropriated
material non-public information to make $48 million in profits on sales of
SafeCard stock. In March 1994, Mr. Halmos and related entities filed a
counterclaim in which claims were made of conspiracy in restraint to trade,
monopolization and attempted monopolization, unfair competition and restraint of
trade, breach of contract for indemnity and intentional infliction of emotional
distress. SafeCard's motion to sever the conspiracy, monopolization and
restraint of trade claims was granted in May 1994. The claims for the
conspiracy, monopolization, restraint of trade and unfair competition were
dismissed without prejudice in June 1994. On April 12, 1995, the trial court
granted the motion of Mr. Halmos and certain related entities to amend their
counterclaims. The amended counterclaims include claims for indemnification for
legal expenses incurred in the action and a claim that SafeCard's contract with
CreditLine should be rescinded. On April 19, 1995, the trial court granted Mr.
Halmos' motion for summary judgment that certain of SafeCard's claims against
him were barred by the statute of limitation. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations. Pursuant to the Court's
order of July 31, 1996, the action has been abated to permit the parties to
engage in settlement negotiations.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit seeking monetary damages by Peter Halmos, purportedly in his name and in
the name of CreditLine Corporation and Continuity Marketing Corporation against
SafeCard, one of its officers and three of Ideon's directors in United States
District Court in the Southern District of Florida, in September 1994 purporting
to state various tort claims, state and federal antitrust claims and claims of
copyright infringement. The claims principally relate to the allegation by Peter
Halmos and his companies that SafeCard has taken action to prevent him from
being a successful competitor. All discovery in the case has been stayed pending
a ruling on a motion to dismiss filed by SafeCard, its officer and Ideon's
directors. On August 16, 1995, the United States Magistrate Judge filed a Report
and Recommendation that the case be dismissed. The parties have filed various
beliefs and memoranda in response to this Report. On January 4, 1996, the
Magistrate recommended ruling that the statute of limitations was tolled during
pendency of the case in federal court and the plaintiffs' state law claims were
thus not time-barred. Defendants have filed an objection to this recommendation.
A suit seeking monetary damages by Peter Halmos, as trustee for the Peter A.
Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc.
individually and certain other named parties on behalf of themselves and all
others similarly situated against SafeCard, one of its officers, one of its
former officers and three of Ideon's directors in the United States District
Court for the Southern District of Florida in December 1994. This litigation
involves claims by a putative class of sellers of SafeCard Stock for the period
January 11, 1993 through December 8, 1994 for alleged violations of the federal
and states securities laws in connection with alleged improprieties in
SafeCards' investor relations program. The complaint also includes individual
claims made by Peter Halmos in connection with the sale of stock by two trusts
controlled by him. SafeCard and the individual defendants have filed a motion to
dismiss. There has been limited discovery on class certification and
identification of "John Doe" defendant issues. Ideon filed its opposition to the
pending motion for class certification on December 11, 1995. Plaintiffs' reply
was filed March 19, 1996. On September 9, 1996, the Court entered an order
abating the action until December 9, 1996 to permit the parties to engage in
settlement negotiations.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos, in the
State Circuit Court in Palm Beach County, Florida in April 1995 against Ideon,
Family Protection Network, Inc., SafeCard, one of Ideon's directors and Ideon's
Chief Executive Officer purporting to state various statutory and tort claims.
The claims principally relate to the allegation by these companies that
SafeCard's Early Warnings Service and Family Protection Network were conceived
and commercialized by, among others, Peter Halmos and have been improperly
copied. An amendment complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answer.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of himself
and all others similarly situated against Ideon, SafeCard, each of the members
of Ideon's Board of Directors, three non-board member officers of Ideon, Ideon's
previous outside auditor and one of Ideon's outside counsel in the United States
District Court for the Southern District of Florida in June 1995. The
litigation involves claims by a putative class of purchasers of Ideon stock
between December 14, 1994 and May 25, 1995 and on behalf of a separate class
of all record holders of SafeCard stock as of April 27, 1995. The putative
class claims are for alleged violations of the federal securities laws, for
alleged breach of fiduciary duty and alleged negligence in connection with
certain matters voted on at the Annual Meeting of SafeCard stockholders held
on April 27, 1995. Ideon and the individual defendants have filed a motion to
dismiss these claims. There has been limited discovery on class certification
issues. Ideon filed its opposition to the pending motion for class certification
on December 11, 1995. Plaintiffs' reply was filed March 19, 1996. On September
9, 1996, the Court entered an order abating the action until December 9, 1996
to permit the parties to engage in settlement negotiations.
A purported shareholder derivative action initiated by Michael P. Pisano, on
behalf of himself and other stockholders of SafeCard and Ideon against SafeCard,
Ideon, two of their officers, and Ideon's directors in United States District
Court, Southern District of Florida. This litigation involves claims that the
officers and directors of SafeCard have improperly refused to accede Peter
Halmos' litigation and indemnification demands against Ideon. Ideon and the
individual defendants have filed motions to dismiss the first amended complaint.
On September 29, 1995, Pisano filed a second amended complaint which made
additional allegations of waste and mismanagement against Ideon's officers and
directors in connection with the Family Protection Network and PGA Tour Partner
products. On December 26, 1995, Ideon filed motions to dismiss the Second
Amended Complaint. On June 4 and June 19, 1996, orders were entered dismissing
plaintiff's claims with prejudice for failure to join an indispensable party,
Peter Halmos. On June 27, 1996, plaintiff filed a notice of appeal.
A suit seeking monetary damages filed by Peter Halmos against SafeCard, one of
its directors, its former general counsel, and its legal counsel in the Circuit
Court, Fifteenth Judicial Circuit, in and for Palm Beach County, Florida on
August 10, 1995. This litigation involves claims by Peter Halmos for breach of
fiduciary duty and constructive fraud, fraud, and negligent misrepresentation
and is based on allegations arising out of the resolution of a shareholder class
action lawsuit in 1991 and SafeCard's subsequent filing of an action against
Halmos and his related companies in Wyoming in 1993. Plaintiff filed an
amended complaint on June 26, 1996 and on July 11, 1996 Ideon moved to
dismiss plaintiff's amended complaint or in the alternative to stay the action.
A declaratory judgment action by Ideon and its directors against Peter Halmos in
Delaware Chancery Court, New Castle County. This action seeks a declaration
regarding Ideon's advance indemnification obligations, if any, to Peter Halmos
in connection with his many lawsuits. Halmos filed a motion to dismiss on
jurisdictional grounds on November 17, 1995. Ideon filed a brief in opposition
and an amended complaint on February 14, 1996. On April 22, 1996, Halmos filed
an answer and amended counterclaims in which High Plains Capital Corporation
("High Plains") and Halmos Trading & Investment Company ("Halmos Trading") were
added as additional parties. The amended counterclaims seek advancement and/or
indemnification for Halmos, High Plains and Halmos Trading for certain
litigations and an IRS investigation. The amended counterclaims also seek
recovery against individual defendant directors based on allegations they
willfully and unjustly denied Halmos indemnification and/or advancement.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 6 -- CONTINGENCIES - IDEON (continued)
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum meruit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling
on this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company's answer is currently scheduled to be filed on September
23, 1996.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court
for the Southern District of New York. The litigation involves claims against
Ideon, its former CEO and its Vice President of Investor Relations for
alleged material misrepresentations and omissions in connection with
announcements relating to Ideon's expected earnings per share in 1995 and its
new product sales, which included the PGA Tour Card Program, Family Protection
Network and Collections of the Vatican Museums. On July 15, 1996, Ideon filed
a motion to dismiss.
As noted in Note 2, the Company will establish a reserve upon the Ideon merger
related, in part, to the litigation matters. The Company is also involved in
certain other claims and litigation arising from the ordinary course of
business, which are not considered material to the operations of the Company.
Note 7 -- SUBSEQUENT EVENT
The Company's fiscal 1990 recapitalization included establishment of a
restricted stock plan designed to compensate and retain key employees of the
Company. During July 1996, 910,000 restricted shares of Common Stock were
granted with a fair value on the date of grant of $30.5 million, which amount
was deducted from shareholders' equity and is being amortized over the vesting
period.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended April 30, 1996 vs.
Three Months Ended April 30, 1995
The Company's overall membership base continues to grow at a rapid rate (from
49.9 million members at April 30, 1995 to 60.9 million members at April 30,
1996), which is the largest contributing factor to the 19% increase in
membership revenues (from $383 million for the quarter ended April 30, 1995 to
$455 million for the quarter ended April 30, 1996). While the overall
membership base increased by approximately 1.2 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by 1%. The Company divides its memberships into three categories:
individual, wholesale and discount program memberships. Individual memberships
consist of members that pay directly for the services and the Company pays for
the marketing costs to solicit the member primarily using direct marketing
techniques. Wholesale memberships include members that pay directly for the
services to their sponsor and the Company does not pay for the marketing costs
to solicit the members. Discount program memberships are generally marketed
through a direct sales force, participating merchants or general advertising and
the related fees are either paid directly by the member or the local retailer.
All of these categories share various aspects of the Company's marketing and
operating resources.
Compared to the previous year's first quarter, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the quarter ended April 30, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 27% from $47.7 million for the quarter ended April
30, 1995 to $60.5 million for the quarter ended April 30, 1996. Contributing to
the strong software growth in fiscal 1997 is the availability of a larger number
of titles as well as the significant increase in the installed base of CD-ROM
personal computers.
As the Company's services continue to mature, a greater percentage of the total
individual membership base is in its renewal years. This results in increased
profit margins for the Company due to the significant decrease in certain
marketing costs incurred on renewing members. Improved response rates for new
members also favorably impact profit margins. As a result, operating income
before interest, costs related to products abandoned and restructuring and taxes
("EBIT") increased from $67.3 million to $81.9 million, and EBIT margins
improved from 15.6% to 15.9%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended April 30, 1996 vs.
Three Months Ended April 30, 1995
Operating costs increased 22% (from $129.9 million to $158.3 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing and participant insurance premiums (the cost of
obtaining insurance coverage for members). The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (40%). This
is primarily due to maintained per member acquisition costs and an increase
in renewing members. Membership acquisition costs incurred increased
22% (from $134.4 million to $164.3 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 11%
(from $144.7 million to $160.4 million). Other marketing costs increased by 69%
(from $26.5 million to $44.8 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs remained constant as a percentage of revenue
(14%). This is the result of the Company's ongoing ability to control overhead.
Interest income, net, decreased from $3 million to $2.2 million primarily due to
cash used to fund acquisitions during fiscal 1996 and the first quarter of
fiscal 1997.
Costs related to products abandoned and restructuring for the three months ended
April 30, 1995 represent marketing and operational costs incurred for Ideon
products abandoned.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Membership Information
The following chart sets forth the approximate number of members and net
additions for the respective periods.
Net New Member
Number of Additions
Period Members for the Period
- --------------------------------------------------------------------------------
Quarter Ended April 30, 1996 60,875,000 1,225,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Quarter Ended April 30, 1995 49,875,000 2,975,000**
Year Ended January 31, 1995 46,900,000 3,820,000
*Includes approximately 8 million Acquired Members.
**Includes approximately 1.7 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Membership cancellations processed by certain of the Company's clients report
membership information only on a net basis. Accordingly, the Company does not
receive actual numbers of gross additions and gross cancellations for certain
types of memberships. In calculating the number of members, the Company has
deducted its best estimate of cancellations which may occur during the trial
membership periods offered in its marketing programs. Typically these periods
range from one to three months.
Liquidity And Capital Resources; Inflation; Seasonality
Funds for the Company's operations and acquisitions have been provided through
cash flow from operations. The Company also has a credit agreement, dated March
26, 1996, with certain banks signatory thereto; The Chase Manhattan Bank, N.A.,
Bank of Montreal, Morgan Guaranty Trust Company of New York and The Sakura Bank,
Limited, as Co-Agents; and The Chase Manhattan Bank, N.A., as Administrative
Agent (the "Credit Agreement"). The Credit Agreement provides for a $500 million
revolving credit facility with a variety of different types of loans available
thereunder. The Credit Agreement contains certain customary restrictive
covenants including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contains various event of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company. The amount of borrowings available to the Company
under the Credit Agreement was $500 million at April 30, 1996, as there were no
borrowings under the Credit Agreement at that date. The Credit Agreement is
scheduled to expired March 26, 2001.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity And Capital Resources; Inflation; Seasonality (continued)
In February 1996, Wright Express entered into a revolving credit facility
agreement which has an available line of $75 million of which $50 million may
be used to finance working capital requirements and for general corporate
purposes and $25 million may be used for acquisition financing. This facility
expires December 1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's financial statements but will be reflected in
the consolidated statements of income during the periods the respective mergers
are completed. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs and are expected to approximate $28.6 million ($25.1 million
or $.10 per common share after-tax effect) in the aggregate. Such costs
associated with the Company's merger with Ideon (the "Ideon Merger") include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Note 6 to the Supplemental Condensed
Consolidated Financial Statements) giving consideration to the Company's
intended approach to these matters, which are estimated by the Company's
management to approximate $125.0 million ($80.0 million after tax effect).
Most of the reserve is related to these outstanding litigation matters.
The Company is unable at this time to determine the estimated timing of the
future cash outflows with respect to this liability. Although the Company has
attempted to estimate the amounts that will be required to settle these
litigation matters, there can be no assurance that the actual aggregate amount
of such settlements will not exceed the amount of the reserve to be accrued.
The Company invested approximately $29 million in acquisitions, net of cash
acquired, during the three months ended April 30, 1996. These acquisitions have
been fully integrated into the Company's operations. The Company is not aware of
any trends, demands or uncertainties that will have a material effect on the
Company's liquidity. The Company anticipates that cash flow from operations and
the Credit Agreement will be sufficient to achieve its current long-term
objectives.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $16 million for the three months ended
April 30, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
paid for in cash will initially be financed through excess cash flow from
operations and the Credit Agreement. However, depending on the financing
necessary to complete an acquisition, additional funding may be required.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts from
these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday season.
For the three months ended April 30, 1996, the Company's international
businesses represented less than 5% of EBIT. Operating in international markets
involves dealing with sometimes volatile movements in currency exchange rates.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because the Company operates in a mix of membership
services and numerous countries, management believes currency exposures are
fairly well diversified. To date, currency exposure has not been a significant
competitive factor at the local market operating level. As international
operations continue to expand and the number of cross-border transactions
increases, the Company intends to continue monitoring its currency exposures
closely and take prudent actions as appropriate.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
- -------------------------------------------------------------------------------
July 31, January 31,
1996 1996
- -------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $336,842 $333,036
Marketable securities 99,079 97,164
Receivables 505,774 463,492
Prepaid membership materials 47,021 39,061
Prepaid expenses, deferred taxes and other 143,929 158,523
-------------------------------
Total Current Assets 1,132,645 1,091,276
Membership solicitations in process 61,881 60,713
Deferred membership acquisition costs 406,794 404,655
Contract renewal rights and intangible assets
- net of accumulated amortization
of $112,808 and $100,578 352,861 332,806
Properties, at cost, less accumulated
depreciation of $116,402 and $105,235 123,899 113,353
Deferred income taxes and other 59,372 65,393
-------------------------------
$2,137,452 $2,068,196
===============================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable, accrued expenses
and other accrued liabilities $250,224 $296,048
Federal and state income taxes payable 14,054 35,957
-------------------------------
Total Current Liabilities 264,278 332,005
Deferred membership income 679,961 682,823
Convertible debt - net of unamortized
original issue discount of $576 and $586 23,428 23,389
Zero coupon convertible notes - net of
unamortized original issue discount
of $588 14,410
Other 11,287 13,046
Contingencies (Note 6)
Shareholders' Equity
Common stock-par value $.01 per share;
authorized 600 million shares; issued
265,284,487 shares and 257,207,225 shares 2,653 2,572
Additional paid-in capital 552,956 429,934
Retained earnings 688,384 602,678
Treasury stock, at cost, 3,979,095
shares and 3,410,631 shares (52,291) (30,998)
Deferred compensation (30,485)
Unrealized (loss) gain on marketable securities (41) 593
Foreign currency translation (2,678) (2,256)
-------------------------------
Total Shareholders' Equity 1,158,498 1,002,523
-------------------------------
$2,137,452 $2,068,196
===============================
See notes to condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
================================================================================
Three Months Ended
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
REVENUES
Membership and service fees $487,164 $403,788
Software 68,580 62,260
--------------------------------
Total Revenues 555,744 466,048
EXPENSES
Operating 168,014 147,700
Marketing 209,503 178,822
General and administrative 74,210 70,956
Costs related to products abandoned
and restructuring 73,091
Merger costs 28,635
Interest income, net (1,835) (2,765)
--------------------------------
Total Expenses 478,527 467,804
INCOME (LOSS) BEFORE INCOME TAXES 77,217 (1,756)
Provision for income taxes 36,756 612
--------------------------------
NET INCOME (LOSS) $40,461 $(2,368)
================================
Net Income (Loss) Per Common Share $0.15 $(0.01)
================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 267,912 260,147
================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
================================================================================
Six Months Ended
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
REVENUES
Membership and service fees $942,170 $786,745
Software 129,053 109,962
---------------------------------
Total Revenues 1,071,223 896,707
EXPENSES
Operating 326,341 277,646
Marketing 414,705 349,970
General and administrative 144,276 133,232
Costs related to products abandoned
and restructuring 81,152
Merger costs 28,635
Interest income, net (4,075) (5,807)
---------------------------------
Total Expenses 909,882 836,193
INCOME BEFORE INCOME TAXES 161,341 60,514
Provision for income taxes 68,759 24,578
---------------------------------
NET INCOME $92,582 $35,936
=================================
Net Income Per Common Share $0.35 $0.14
=================================
Weighted Average Number of
Common and Dilutive Common
Equivalent Shares Outstanding 266,178 259,116
=================================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
JULY 31,
- --------------------------------------------------------------------------------
SIX MONTHS ENDED 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $92,582 $35,936
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Membership acquisition costs (310,392) (263,049)
Amortization of membership acquisition costs 319,514 272,386
Deferred membership income (14,361) (13,847)
Membership solicitations in process (1,168) (6,184)
Amortization of contract renewal rights
and excess cost 12,780 11,452
Deferred income taxes 11,359 (38,181)
Loss on impairment of property and equipment 4,117
Amortization of original issue discount
on convertible notes 1,291 832
Depreciation 13,367 11,275
Effect of change in amortization periods for
Ideon membership acquisition costs 65,500
Net loss during change in
fiscal year-ends (4,268) (49,944)
Changes in working capital items,
net of acquisitions:
Increase in receivables (42,282) (54,514)
Increase in prepaid membership materials (7,960) (7,938)
(Increase) decrease in prepaid expenses
and other current assets 2,830 (9,204)
Net decrease in accounts payable,
accrued expenses, other accrued
liabilities and federal & state
income taxes payable (21,210) (17,482)
(Decrease) increase in product abandonment
and related liabilities (10,700) 25,587
Other, net (7,350) (12,324)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 34,032 (45,582)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from matured marketable securities 75,460 169,916
Purchases of marketable securities (66,947) (71,209)
Acquisitions, net of cash acquired (32,964) (72,233)
Acquisitions of properties (23,546) (42,081)
- --------------------------------------------------------------------------------
Net cash used in investing activities (47,997) (15,607)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of Common Stock 18,582 15,233
Repayments of long-term obligations 1,987 4,859
Payments for purchase of treasury shares (4,576)
Dividends paid (2,798) (4,404)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 17,771 11,112
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,806 (50,077)
Cash and cash equivalents
at beginning of period 333,036 281,019
----------------------------
Cash and cash equivalents at end of period $336,842 $230,942
============================
See notes to supplemental condensed consolidated financial statements.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The supplemental consolidated financial statements include the accounts of CUC
International Inc., its wholly-owned subsidiaries and its joint ventures
(collectively, the "Company"). The Company operates in two business segments:
membership services and software. Membership services are distributed to
consumers through various channels which include financial institutions, credit
unions, charities, other cardholder based organizations and retail
establishments. The software segment develops, publishes and distributes
educational and entertainment software for home and school use. These
supplemental consolidated financial statements give retroactive effect to the
mergers of Davidson & Associates, Inc. ("Davidson") (on July 24, 1996), Sierra
On-Line, Inc. ("Sierra") (on July 24, 1996) and Ideon Group, Inc. ("Ideon") (on
August 7, 1996) with wholly-owned subsidiaries of the Company, which have been
accounted for using the pooling-of-interests method. These supplemental
consolidated financial statements will become the Company's primary historical
financial statements upon issuance of financial statements that include the
date of consummation of all of the above-described mergers. All significant
intercompany transactions have been eliminated in consolidation. All periods
presented reflect the Company's reclassifications of deferred membership
acquisition costs (previously classified as an offset to deferred membership
income) and membership solicitations in process (previously classified as a
current asset) to noncurrent assets.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended July 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 1997. For further information, refer to the supplemental financial
statements and footnotes thereto included in this Form 8-K.
NOTE 2 -- MERGERS AND ACQUISITIONS
During July 1996 the Company acquired all of the outstanding capital stock of
Davidson for a purchase price of approximately $1 billion, which was satisfied
by the issuance of approximately 30.1 million shares of Common Stock. Also
during July 1996 the Company acquired all of the outstanding capital stock of
Sierra for a purchase price of approximately $858 million, which was satisfied
by the issuance of approximately 25.6 million shares of Common Stock. Davidson
and Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996 the Company acquired all of
the outstanding capital stock of Ideon, principally a provider of credit card
enhancement services, for a purchase price of approximately $393 million, which
was satisfied by the issuance of approximately 11 million shares of Common
Stock. The mergers with Davidson, Sierra and Ideon (the "Fiscal 1997 Pooled
Entities") have been accounted for in accordance with the pooling-of-interests
method of accounting and, accordingly, the accompanying supplemental interim
consolidated financial statements have been retroactively adjusted as if the
Fiscal 1997 Pooled Entities and the Company had operated as one since inception.
The following represents revenues and net income of the Company and the Fiscal
1997 Pooled Entities for the six months ended July 31, 1995 and the last
complete interim period preceding the mergers (unaudited, in thousands).
Three months
ended April 30, Six months ended
1996 July 31, 1995
------------------------------------------------
Revnues:
The Company $390,026 $672,873
Fiscal 1997 Pooled Entities 125,453 223,834
-------- --------
$515,479 $896,707
======== ========
Net Income:
The Company $48,250 $77,738
Fiscal 1997 Pooled Entities 3,871 (41,802)
-------- --------
$52,121 $35,936
======== ========
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- MERGERS AND ACQUISITIONS (continued)
Davidson, Sierra and Ideon previously used the fiscal year-ends December 31,
March 31 and December 31, respectively for their financial reporting. To
conform to the Company's January 31 fiscal year-end, Davidson's and Ideon's
operating results for January 1996 have been excluded from the six months ended
July 31, 1996 operating results in the accompanying supplemental financial
statements. In addition, Sierra's operating results for February and March 1996
have been included in the operating results for the six months ended July 31,
1996 in the accompanying supplemental financial statements and for the year
ended January 31, 1996. The above-mentioned excluded and duplicated periods
have been adjusted by a $4.3 million charge to retained earnings at July 31,
1996.
Effective January 1, 1995, Ideon changed its fiscal year end from October 31
to December 31 (the "Ideon Transition Period"). The Ideon Transition Period
has been excluded from the Company's historical consolidated statements
of income. Ideon's revenues and net loss for the Ideon Transition Period were
$34.7 million and $(49.9) million, respectively. This excluded period has been
adjusted by a $49.9 million charge to retained earnings at January 31, 1996.
The net loss for the Ideon Transition Period was principally the result of a
$65.5 million one-time, non-cash, pretax charge recorded in connection with a
change in accounting for deferred membership acquisition costs.
In connection with the Davidson and Sierra mergers with the Company, the
Company charged $28.6 million ($25.1 million or $.10 per common share after-tax
effect) to operations in the three months ended July 31, 1996 for merger costs.
Such costs are non-recurring and are comprised primarily of transaction costs,
other professional fees and integration costs. Such costs associated with the
Company's merger with Ideon (the "Ideon Merger") have not been reflected in the
Company's supplemental financial statements but will be reflected in the
consolidated statement of income during the period the merger is completed.
Such costs are non-recurring and include integration and transaction costs as
well as costs relating to certain outstanding litigation matters (see Note 6)
giving consideration to the Company's intended approach to these matters, which
are estimated by the Company's management to approximate $125.0 million ($80.0
million after tax effect). Most of the reserve is related to these outstanding
litigation matters. In determining such portion, the Company estimated the cost
of settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the estimated
cost of prosecuting and defending them (including out-of-pocket costs, such as
attorneys' fees, and the cost to the Company of having its management involved
in numerous complex litigation matters). The Company is unable at this time to
determine the estimated timing of the future cash outflows with respect to this
liability. Although the Company has attempted to estimate the amounts that will
be required to settle these litigation matters, there can be no assurance that
the actual aggregate amount of such settlements will not exceed the amount of
the reserve to be accrued. The reserve for these matters will be expensed in
the consolidated statement of income subsequent to the closing of the Ideon
Merger, and any subsequent payments related to these matters will reduce the
amount of the reserve. The Company considered litigation-related costs and
liabilities, as well as integration and transaction costs, in determining the
agreed upon exchange ratio in respect of the Ideon Merger.
In determining the amount of the reserve related to the Company's proposed
integration and consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger and
costs relating to the expected obligations for certain third-party contracts
(e.g., existing leases and vendor agreements) to which Ideon is a party and
which are neither terminable at will nor automatically terminated upon a
change-in-control of Ideon. The Company expects to incur significant integration
costs because Ideon's credit card registration and enhancement services are
substantially similar to the Company's credit card registration and enhancement
services. All of the business activities related to the operations performed by
Ideon's Jacksonville, Florida office were transferred to the Company's
Comp-U-Card Division in Stamford, Connecticut upon the consummation of the Ideon
Merger. The Company also expects that there will be additional consolidation
affecting other parts of Ideon's business that are substantially the same as the
Company's existing businesses. The Company does not expect any loss in revenue
as a result of these integration and consolidation efforts.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- SHAREHOLDERS' EQUITY
For the three and six months ended July 31, 1996, $14.7 million and $14.9
million principal of zero coupon convertible notes were converted into 2.2
million shares and 2.3 million shares of Common Stock, respectively, and the
related unamortized original issue discount ($64,000 and $68,000, respectively)
was charged against additional paid-in capital. The balance of the change in
additional paid-in capital and treasury stock principally relates to stock
option activity.
The Company's fiscal 1990 recapitalization included establishment of a
restricted stock plan designed to compensate and retain key employees of the
Company. During July 1996, 910,000 restricted shares of Common Stock were
granted with a fair value on the date of grant of $30.5 million, which amount
was deducted from shareholders' equity and is being amortized over the vesting
period.
Net income per share, assuming the conversions of the zero coupon convertible
notes during the six months ended July 31, 1996 occurred at the beginning of
such period, would not differ significantly from the Company's actual earnings
per share for such period.
NOTE 4 -- SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE
Software research and development costs are included in operating expenses and
aggregated $15.3 million and $13.5 million for the three months ended July 31,
1996 and 1995, respectively, and $30.2 million and $24.3 million for the six
months ended July 31, 1996 and 1995, respectively. Costs of software revenue
are included in operating expenses and aggregated $21.1 million and
$28.4 million for the three months ended July 31, 1996 and 1995, respectively,
and $45.9 million and $47.9 million for the six months ended July 31, 1996 and
1995, respectively.
NOTE 5 -- INCOME TAXES
The Company's effective tax rate differs from the Federal statutory rate
principally because of state income taxes and non-deductible amortization of the
excess of cost over net assets acquired.
NOTE 6 -- CONTINGENCIES - IDEON
At July 31, 1996, Ideon was defending or prosecuting claims in thirteen
complex lawsuits, twelve of which involved Peter Halmos, former Chairman of the
Board and Executive Management Consultant to SafeCard, and various parties
related to him as adversaries. Peter Halmos is also a plaintiff in three other
lawsuits, one against a former officer, one against a director of Ideon and one
against SafeCard's outside counsel, in which neither SafeCard nor Ideon have
been named as defendant. The thirteen cases in which Ideon or its subsidiaries
is a party are as follows:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a former
lawyer for SafeCard) in April 1993 in Cook County Circuit Court in Illinois
against SafeCard and one of Ideon's directors, purporting to state claims
aggregating in excess of $100 million, principally relating to alleged rights to
"incentive compensation," stock options or their equivalent, indemnification,
wrongful termination and defamation. On February 7, 1995, the court dismissed
with prejudice Peter Halmos' claims regarding alleged rights to "incentive
compensation," stock options or their equivalent, wrongful termination and
defamation. Mr. Halmos has appealed this ruling. SafeCard has filed an answer to
the remaining indemnification claims. Its obligation to file an answer to the
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a decalatory judgment action filed by Ideon in Delaware Chancery
Court.
A suit which seeks monetary damages and certain equitable relief filed by
SafeCard in August 1993 in Laramie County Circuit Court in Wyoming against Peter
Halmos and related entities alleging that Peter Halmos dominated and controlled
SafeCard, breached his fiduciary duties to SafeCard, and misappropriated
material non-public information to make $48 million in profits on sales of
SafeCard stock. In March 1994, Mr. Halmos and related entities filed a
counterclaim in which claims were made of conspiracy in restraint to trade,
monopolization and attempted monopolization, unfair competition and restraint of
trade, breach of contract for indemnity and intentional infliction of emotional
distress. SafeCard's motion to sever the conspiracy, monopolization and
restraint of trade claims was granted in May 1994. The claims for the
conspiracy, monopolization, restraint of trade and unfair competition were
dismissed without prejudice in June 1994. On April 12, 1995, the trial court
granted the motion of Mr. Halmos and certain related entities to amend their
counterclaims. The amended counterclaims include claims for indemnification for
legal expenses incurred in the action and a claim that SafeCard's contract with
CreditLine should be rescinded. On April 19, 1995, the trial court granted Mr.
Halmos' motion for summary judgment that certain of SafeCard's claims against
him were barred by the statute of limitation. On March 14, 1996, the Wyoming
Supreme Court reversed the trial court's ruling that certain of SafeCard's
claims were barred by the statute of limitations. Pursuant to the Court's
order of July 31, 1996, the action has been abated to permit the parties to
engage in settlement negotiations.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit seeking monetary damages by Peter Halmos, purportedly in his name and in
the name of CreditLine Corporation and Continuity Marketing Corporation against
SafeCard, one of its officers and three of Ideon's directors in United States
District Court in the Southern District of Florida, in September 1994 purporting
to state various tort claims, state and federal antitrust claims and claims of
copyright infringement. The claims principally relate to the allegation by Peter
Halmos and his companies that SafeCard has taken action to prevent him from
being a successful competitor. All discovery in the case has been stayed pending
a ruling on a motion to dismiss filed by SafeCard, its officer and Ideon's
directors. On August 16, 1995, the United States Magistrate Judge filed a Report
and Recommendation that the case be dismissed. The parties have filed various
beliefs and memoranda in response to this Report. On January 4, 1996, the
Magistrate recommended ruling that the statute of limitations was tolled during
pendency of the case in federal court and the plaintiffs' state law claims were
thus not time-barred. Defendants have filed an objection to this recommendation.
A suit seeking monetary damages by Peter Halmos, as trustee for the Peter A.
Halmos revocable trust dated January 24, 1990 and the Halmos Foundation, Inc.
individually and certain other named parties on behalf of themselves and all
others similarly situated against SafeCard, one of its officers, one of its
former officers and three of Ideon's directors in the United States District
Court for the Southern District of Florida in December 1994. This litigation
involves claims by a putative class of sellers of SafeCard Stock for the period
January 11, 1993 through December 8, 1994 for alleged violations of the federal
and states securities laws in connection with alleged improprieties in
SafeCards' investor relations program. The complaint also includes individual
claims made by Peter Halmos in connection with the sale of stock by two trusts
controlled by him. SafeCard and the individual defendants have filed a motion to
dismiss. There has been limited discovery on class certification and
identification of "John Doe" defendant issues. Ideon filed its opposition to the
pending motion for class certification on December 11, 1995. Plaintiffs' reply
was filed March 19, 1996. On September 9, 1996, the Court entered an order
abating the action until December 9, 1996 to permit the parties to engage
in settlement negotiations.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos, in the
State Circuit Court in Palm Beach County, Florida in April 1995 against Ideon,
Family Protection Network, Inc., SafeCard, one of Ideon's directors and Ideon's
Chief Executive Officer purporting to state various statutory and tort claims.
The claims principally relate to the allegation by these companies that
SafeCard's Early Warnings Service and Family Protection Network were conceived
and commercialized by, among others, Peter Halmos and have been improperly
copied. An amendment complaint filed on June 14, 1995 seeking monetary damages
adds to the prior claims certain claims by Nicholas Rubino that principally
relate to the allegation that SafeCard's Pet Registration Product was conceived
by Mr. Rubino and has been improperly copied. The Company has filed an
appropriate answer.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit seeking monetary damages and declaratory relief by Peter Halmos,
individually and as trustee for the Peter A. Halmos revocable trust dated
January 24, 1990 and by James B. Chambers, individually and on behalf of himself
and all others similarly situated against Ideon, SafeCard, each of the members
of Ideon's Board of Directors, three non-board member officers of Ideon, Ideon's
previous outside auditor and one of Ideon's outside counsel in the United States
District Court for the Southern District of Florida in June 1995. The
litigation involves claims by a putative class of purchasers of Ideon stock
between December 14, 1994 and May 25, 1995 and on behalf of a separate class
of all record holders of SafeCard stock as of April 27, 1995. The putative class
claims are for alleged violations of the federal securities laws, for alleged
breach of fiduciary duty and alleged negligence in connection with certain
matters voted on at the Annual Meeting of SafeCard stockholders held on April
27, 1995. Ideon and the individual defendants have filed a motion to dismiss
these claims. There has been limited discovery on class certification issues.
Ideon filed its opposition to the pending motion for class certification on
December 11, 1995. Plaintiffs' reply was filed March 19, 1996. On September
9, 1996, the Court entered an order abating the action until December 9,
1996 to permit the parties to engage in settlement negotiations.
A purported shareholder derivative action initiated by Michael P. Pisano, on
behalf of himself and other stockholders of SafeCard and Ideon against SafeCard,
Ideon, two of their officers, and Ideon's directors in United States District
Court, Southern District of Florida. This litigation involves claims that the
officers and directors of SafeCard have improperly refused to accede Peter
Halmos' litigation and indemnification demands against Ideon. Ideon and the
individual defendants have filed motions to dismiss the first amended complaint.
On September 29, 1995, Pisano filed a second amended complaint which made
additional allegations of waste and mismanagement against Ideon's officers and
directors in connection with the Family Protection Network and PGA Tour Partner
products. On December 26, 1995, Ideon filed motions to dismiss the Second
Amended Complaint. On June 4 and June 19, 1996, orders were entered dismissing
plaintiff's claims with prejudice for failure to join an indispensable party,
Peter Halmos. On June 27, 1996, plaintiff filed a notice of appeal.
A suit seeking monetary damages filed by Peter Halmos against SafeCard, one of
its directors, its former general counsel, and its legal counsel in the Circuit
Court, Fifteenth Judicial Circuit, in and for Palm Beach County, Florida on
August 10, 1995. This litigation involves claims by Peter Halmos for breach of
fiduciary duty and constructive fraud, fraud, and negligent misrepresentation
and is based on allegations arising out of the resolution of a shareholder class
action lawsuit in 1991 and SafeCard's subsequent filing of an action against
Halmos and his related companies in Wyoming in 1993. Plaintiff filed an
amended complaint on June 26, 1996 and on July 11, 1996 Ideon moved
to dismiss plaintiff's amended complaint or in the alternative to stay the
action.
A declaratory judgment action by Ideon and its directors against Peter Halmos in
Delaware Chancery Court, New Castle County. This action seeks a declaration
regarding Ideon's advance indemnification obligations, if any, to Peter Halmos
in connection with his many lawsuits. Halmos filed a motion to dismiss on
jurisdictional grounds on November 17, 1995. Ideon filed a brief in opposition
and an amended complaint on February 14, 1996. On April 22, 1996, Halmos filed
an answer and amended counterclaims in which High Plains Capital Corporation
("High Plains") and Halmos Trading & Investment Company ("Halmos Trading") were
added as additional parties. The amended counterclaims seek advancement and/or
indemnification for Halmos, High Plains and Halmos Trading for certain
litigations and an IRS investigation. The amended counterclaims also seek
recovery against individual defendant directors based on allegations they
willfully and unjustly denied Halmos indemnification and/or advancement.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 6 -- CONTINGENCIES - IDEON (continued)
A suit by High Plains against Ideon, SafeCard, two of its directors and The
Dilenschneider Group, Inc. in Circuit Court in Palm Beach County, Florida. This
litigation involves claims by High Plains for certain incentive compensation
arising out of Halmos' affiliation with SafeCard. The complaint includes claims
for breach of written agreements regarding additional services and expenses, an
alternative claim for quantum meruit based on written agreement and a count for
tortious interference with advantageous business relationship. Ideon filed a
motion for final summary judgment. Discovery has been stayed pending a ruling
on this motion.
A suit filed by High Plains against Ideon and SafeCard in Circuit Court in
Broward County, Florida. This litigation involves claims by High Plains for
alleged breach of oral contract, alleged violation of Florida's Uniform Trade
Secrets Act, alleged misappropriation of trade secrets and for declaration that
certain alleged trade secrets are property of High Plains. Ideon filed motions
to dismiss and to transfer on December 15, 1995.
A suit by Peter Halmos, purportedly in the name of Halmos Trading, seeking
monetary damages and specific performance against SafeCard, one of its former
officers and one of Ideon's directors in Circuit Court in Broward County,
Florida, making a variety of claims related to the contested lease of SafeCard's
former Ft. Lauderdale headquarters. SafeCard had vacated the building, ceased
making payments related to such lease and had filed counterclaims. On March 25,
1996, the parties entered into a Settlement Agreement under which Ideon made a
payment of $3.8 million to settle all claims currently pending or previously
brought in this lawsuit.
A suit by Lois Hekker on behalf of herself and all others similarly situated
seeking monetary damages against Ideon and its former Chief Executive Officer in
the United States District Court for the Middle District of Florida on July 28,
1995. The litigation involves claims by a putative class of purchasers of Ideon
stock for the period April 25, 1995 through May 25, 1995 for alleged violation
of the federal securities laws in connection with statements made about Ideon's
business and financial performance. Defendants filed a motion to dismiss on
October 2, 1995. On January 3, 1996, the court stayed all merits discovery
pending rulings on the motion to dismiss and on the plaintiff's motion for class
certification. On August 19, 1996, the court denied the Company's motion to
dismiss. The Company's answer is currently scheduled to be filed on September
23, 1996.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F. Elcan
against Ideon and two of its employees in the United States District Court
for the Southern District of New York. The litigation involves claims
against Ideon, its former CEO and its Vice President of Investor
Relations for alleged material misrepresentations and omissions in connection
with announcements relating to Ideon's expected earnings per share in
1995 and its new product sales, which included the PGA Tour Card Program,
Family Protection Network and Collections of the Vatican Museums. On July 15,
1996, Ideon filed a motion to dismiss.
As noted in Note 2, the Company will establish a reserve upon the Ideon merger
related, in part, to these litigation matters. The Company is also involved in
certain other claims and litigation arising from the ordinary course of
business, which are not considered material to the operations of the Company.
ITEM 2. CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended July 31, 1996 vs.
Three Months Ended July 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
51.2 million members at July 31, 1995 to 62.3 million members at July 31, 1996),
which is the largest contributing factor to the 21% increase in membership
revenues (from $403.8 million for the quarter ended July 31, 1995 to $487.2
million for the quarter ended July 31, 1996). While the overall membership base
increased by approximately 1.4 million members during the quarter, the average
annual fee collected for the Company's membership services increased by 1%. The
Company divides its memberships into three categories: individual, wholesale and
discount program memberships. Individual memberships consist of members that pay
directly for the services and the Company pays for the marketing costs to
solicit the member primarily using direct marketing techniques. Wholesale
memberships include members that pay directly for the services to their sponsor
and the Company does not pay for the marketing costs to solicit the members.
Discount program memberships are generally marketed through a direct sales
force, participating merchant or general advertising and the related fees are
either paid directly by the member or the local retailer. All of these
categories share various aspects of the Company's marketing and operating
resources.
Compared to the previous year's second quarter, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the quarter ended July 31, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 10% from $62.3 million for the quarter ended July
31, 1995 to $68.6 million for the quarter ended July 31, 1996. Distribution
revenue, which typically has low operating margins, was down from $28.6 million
to $12.6 million. The Company's software operations continue to focus on the
growth of selling titles through retailers. Excluding distribution revenue,
core software revenue grew by 66%. Contributing to the strong software revenue
growth in fiscal 1997 is the availability of a larger number of titles as well
as the significant increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage
of the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, operating
income before interest, costs related to products abandoned and restructuring,
merger costs and taxes ("EBIT") increased from $68.6 million to $104 million,
and EBIT margins improved from 14.7% to 18.7%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended July 31, 1996 vs.
Three Months Ended July 31, 1995
Operating costs increased 14% (from $147.7 million to $168 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). The major components of
the Company's software operating costs are material costs, manufacturing labor
and overhead, royalties paid to developers and affiliated label publishers and
research and development costs related to designing, developing and testing new
software products. The increase in overall operating costs is due principally to
the variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (38%). This
is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
14% (from $128.6 million to $146.1 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 25%
(from $127.7 million to $159.1 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. Other marketing costs
decreased by 1% (from $51.1 million to $50.4 million). The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue (from 15%
to 13%). This is a result of the Company's ongoing ability to control overhead.
Interest income, net, decreased from $2.8 million to $1.8 million primarily due
to cash used to fund acquisitions during fiscal 1996 and the first quarter of
fiscal 1997.
Included in costs related to products abandoned and restructuring for the three
months ended July 31, 1995, are special charges totaling $34.2 million related
to the abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure. The charge of $34.2 million was
composed of accrued liabilities of $25.6 million and asset impairments of $8.6
million. Also included in costs related to products abandoned and restructuring
are marketing and operational costs incurred for Ideon products abandoned of
$38.9 million.
Merger costs are non-recurring and are comprised primarily of transaction costs,
professional fees and integration costs associated with the mergers of the
Company with Davidson and Sierra.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Ended July 31, 1996 vs.
Six Months Ended July 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from
51.2 million members at July 31, 1995 to 62.3 million members at July 31, 1996),
which is the largest contributing factor to the 20% increase in membership
revenues (from $786.7 million for the six months ended July 31, 1995 to $942.2
million for the six months ended July 31, 1996). While the overall membership
base increased by approximately 2.7 million members during the six months ended
July 31, 1996, the average annual fee collected for the Company's membership
services increased by 1%. The Company divides its memberships into three
categories: individual, wholesale and discount program memberships. Individual
memberships consist of members that pay directly for the services and the
Company pays for the marketing costs to solicit the member primarily using
direct marketing techniques. Wholesale memberships include members that pay
directly for the services to their sponsor and the Company does not pay for the
marketing costs to solicit the members. Discount program memberships are
generally marketed through a direct sales force, participating merchant or
general advertising and the related fees are either paid directly by the member
or the local retailer. All of these categories share various aspects of the
Company's marketing and operating resources.
Compared to the previous year's first six months, individual, wholesale and
discount program memberships grew by 9%, 20% and 61%, respectively, including
members which came from acquisitions completed during fiscal 1996 (members
resulting from acquisitions being "Acquired Members"). Discount program
memberships have incurred the largest increase from Acquired Members,
principally from Advance Ross Corporation, acquired in fiscal 1996, which
provides local discounts to consumers. For the six months ended July 31, 1996,
individual, wholesale and discount coupon program memberships represented 68%,
12% and 20% of membership revenues, respectively. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base.
Software revenues increased 17% from $110 million for the six months ended July
31, 1995 to $129.1 million for the six months ended July 31, 1996. Distribution
revenue, which typically has low operating margins, was down from $41.7 million
to $25.7 million. The Company's software operations continue to focus on the
growth of selling titles through retailers. Excluding distribution revenue,
core software revenue grew by 57%. Contributing to the strong software revenue
growth in fiscal 1997 is the availability of a larger number of titles as well
as the significant increase in the installed base of CD-ROM personal computers.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, EBIT
increased from $135.9 million to $185.9 million, and EBIT margins improved from
15.2% to 17.4%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. The Company records its deferred revenue net
of estimated cancellations which are anticipated in the Company's marketing
programs.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Six Months Ended July 31, 1996 vs.
Six Months Ended July 31, 1995
Operating costs increased 18% (from $277.6 million to $326.3 million). The
major components of the Company's membership operating costs continue to be
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). The major components of
the Company's software operating costs are material costs, manufacturing labor
and overhead, royalties paid to developers and affiliated label publishers and
research and development costs related to designing, developing and testing new
software products. The increase in overall operating costs is due principally to
the variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (39%). This
is primarily due to maintained per member acquisition costs and an increase
in renewing members. Membership acquisition costs incurred increased
18% (from $263 million to $310.4 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 17%
(from $272.4 million to $319.5 million). Other marketing costs increased by 23%
(from $77.6 million to $95.2 million). These increases resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's consumer services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by service.
The Company routinely reviews all renewal rates and has not seen any material
change over the last year in the average renewal rate. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue (from 15%
to 13%). This is the result of the Company's ongoing ability to control
overhead. Interest income, net, decreased from $5.8 million to $4.1 million
primarily due to cash used to fund acquisitions during fiscal 1996 and the first
six months of fiscal 1997.
Included in costs related to products abandoned and restructuring for the six
months ended July 31, 1995, are special charges totaling $34.2 million, related
to the abandonment of certain new product developmental efforts and the related
impairment of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure. The charge of $34.2 million was
composed of accrued liabilities of $25.6 million and asset impairments of $8.6
million. Also included in costs related to products abandoned and
restructuring are marketing and operational costs incurred for Ideon products
abandoned of $47 million.
Merger costs are non-recurring and are comprised primarily of transaction costs,
professional fees and integration costs associated with the mergers of the
Company with Davidson and Sierra.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Membership Information
The following chart sets forth the approximate number of members and net
additions for the respective periods.
Net New Member
Number of Additions
Period Members for the Period
- --------------------------------------------------------------------------------
Six Months Ended July 31, 1996 62,315,000 2,665,000
Year Ended January 31, 1996 59,650,000 12,750,000*
Six Months Ended July 31, 1995 51,165,000 4,265,000**
Year Ended January 31, 1995 46,900,000 3,820,000
Quarter Ended July 31, 1996 62,315,000 1,440,000
Quarter Ended July 31, 1995 51,165,000 1,290,000
*Includes approximately 8 million Acquired Members.
**Includes approximately 2.1 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximate the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Membership cancellations processed by certain of the Company's clients report
membership information only on a net basis. Accordingly, the Company does not
receive actual numbers of gross additions and gross cancellations for certain
types of memberships. In calculating the number of members, the Company has
deducted its best estimate of cancellations which may occur during the trial
membership periods offered in its marketing programs. Typically these periods
range from one to three months.
Liquidity And Capital Resources; Inflation; Seasonality
Funds for the Company's operations and acquisitions have been provided through
cash flow from operations. The Company also has a credit agreement, dated March
26, 1996, with certain banks signatory thereto; The Chase Manhattan Bank, N.A.,
Bank of Montreal, Morgan Guaranty Trust Company of New York and The Sakura Bank,
Limited, as Co-Agents; and The Chase Manhattan Bank, N.A., as Administrative
Agent (the "Credit Agreement"). The Credit Agreement provides for a $500 million
revolving credit facility with a variety of different types of loans available
thereunder. The Credit Agreement contains certain customary restrictive
covenants including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contains various event of default
provisions including, without limitation, defaults arising from certain changes
in control of the Company. The amount of borrowings available to the Company
under the Credit Agreement was $500 million at July 31, 1996, as there were no
borrowings under the Credit Agreement at that date. The Credit Agreement is
scheduled to expired March 26, 2001.
In February 1996, Wright Express entered into a revolving credit facility
agreement which has an avalaible line of $75 million of which $50 million may be
used to finance working capital requirements and for general corporate and $25
million may be used for acquisition financing. This facility expires December
1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the Ideon Merger have not been reflected in the Company's
supplemental financial statements but will be reflected in the consolidated
statement of income during the period the merger is completed. Such costs are
non-recurring and include integration and transaction costs as well as costs
relating to certain outstanding litigation matters, (see Note 6 to the
Supplemental Condensed Consolidated Financial Statements) giving consideration
to the Company's intended approach to these matters, which are estimated by the
Company's management to approximate $125.0 million ($80.0 million after tax
effect). Most of the reserve is related to these outstanding litigation
matters. In determining such portion, the Company estimated the cost of
settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the estimated
cost of prosecuting and defending them (including out-of-pocket costs, such as
attorneys' fees, and the cost to the Company of having its management involved
in numerous complex litigation matters). The Company is unable at this time to
determine the estimated timing of the future cash outflows with respect to this
liability. Although the Company has attempted to estimate the amounts that
will be required to settle these litigation matters, there can be no assurance
that the actual aggregate amount of such settlements will not exceed the amount
of the reserve to be accrued.
CUC INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity And Capital Resources; Inflation; Seasonality (continued)
The Company invested approximately $33 million in acquisitions, net of cash
acquired, during the six months ended July 31, 1996. These acquisitions have
been fully integrated into the Company's operations. The Company is not aware of
any trends, demands or uncertainties that will have a material effect on the
Company's liquidity. The Company anticipates that cash flow from operations and
the Credit Agreement will be sufficient to achieve its current long-term
objectives.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $24 million for the six months ended July
31, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
paid for in cash will initially be financed through excess cash flow from
operations and the Credit Agreement. However, depending on the financing
necessary to complete an acquisition, additional funding may be required.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts
from these coupon book memberships are received in the fourth quarter and, to
a lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday season.
For the six months ended July 31, 1996, the Company's international businesses
represented less than 5% of EBIT. Operating in international markets involves
dealing with sometimes volatile movements in currency exchange rates. The
economic impact of currency exchange rate movements on the Company is complex
because it is linked to variability in real growth, inflation, interest rates
and other factors. Because the Company operates in a mix of membership services
and numerous countries, management believes currency exposures are fairly well
diversified. To date, currency exposure has not been a significant competitive
factor at the local market operating level. As international operations continue
to expand and the number of cross-border transactions increases, the Company
intends to continue monitoring its currency exposures closely and take prudent
actions as appropriate.
Exhibit 99.3
CUC International Inc. and Subsidiaries
Exhibit 99.3--Selected Supplemental Consolidated Financial Data
(In thousands, except for per common share data)
Year Ended January 31,
--------------------------------------------------------------------------------------
1996 (b) 1995 (b) 1994 1993 (b) 1992
--------------------------------------------------------------------------------------
Income Statement Data (a)
Total revenues $ 1,935,232 $ 1,554,611 $ 1,278,664 $ 1,043,311 $904,052
Income from continuing operations before
income taxes 235,312 (c) 256,931 (f) 198,319 117,434 100,896 (g)
Income from continuing operations 144,975 (c) 162,057 (f) 124,705 80,239 70,479 (g)
Income per common share from continuing
operations (d) $ .55 (c) $ .64 (f) $ .51 $ .35 $ .37 (g)
Cash dividends per common share (i) $ .02 $ .02 $ .02 $ .02 $ .02
======================================================================================
Weighted average number of common and
dilutive common equivalent shares
outstanding (d) 261,472 252,842 243,943 227,141 192,108
======================================================================================
======================================================================================
Balance Sheet Data (a)
Total assets (e) $2,068,196 $1,772,122 $1,199,805 $1,032,269 $814,961
Long-term obligations (h) 6,481 22,872 24,235 30,091 16,336
Zero coupon convertible notes 14,410 15,046 22,176 37,295 69,228
Convertible debt 23,389 34,634 - - -
Stockholders' equity 1,002,523 (j) 826,083 558,181 389,461 235,675
Working capital (e) 759,271 523,996 298,230 147,475 167,394
(a) Includes acquisitions accounted for in accordance with the
pooling-of-interests method of accounting (see Note B to Supplemental
Consolidated Financial Statements).
(b) Includes acquisitions accounted for in accordance with the purchase method
of accounting (see Note B to the Supplemental Consolidated Financial
Statements).
(c) Includes provision for costs incurred in connection with the acquisition of
Advance Ross Corporation ("Advance Ross"). The charge aggregated $5.2
million ($4.2 million or $.02 per common share after-tax effect). Also
during fiscal 1996, Ideon Group, Inc. ("Ideon") recorded pre-tax charges of
$43.8 million related to the abandonment of certain new product development
efforts and the restructuring of its SafeCard division and its corporate
infrastructure.
(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) All periods presented reflect the Company's reclassifications of deferred
membership acquisition costs (previously classified as an offset to
deferred membership income) and membership solicitations in process
(previously classified as a current asset) to noncurrent assets.
(f) During fiscal 1995, Ideon recorded a pre-tax charge of $7.9 million for
various severance agreements and a lease termination in connection with a
reorganization of its operations and senior management team.
(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). In addition, includes a pre-tax
charge of $17.5 million in connection with Ideon's relocation of an
operations center.
(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 $15.4 million, $11.8 million,
$5.5 million, $23.2 million and $26.7 million of amounts due under
revolving credit facilities at January 31, 1996, 1995, 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 Gift Wrap, LP.
(i) Represents cash dividends paid to Ideon common stockholders. 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.
(j) Effective January 1, 1995, Ideon changed its fiscal year end from October
31 to December 31 (the "Ideon Transition Period"). The Ideon Transition
Period has been excluded from the accompanying supplemental consolidated
statement of income. Ideon's revenues and net loss for the Ideon Transition
Period were $34.7 million and $(49.9) million, respectively. The net loss
for the Ideon Transition Period was principally the result of a $65.5
million one-time, non-cash, pretax charge recorded in connection with a
change in accounting for deferred membership acquisition costs.
Exhibit 99.4
CUC International Inc. and Subsidiaries
Exhibit 99.4--Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations
Year Ended January 31, 1996 vs. Year Ended January 31, 1995
The Company's overall membership base continues to grow at a rapid rate (from 47
million members at January 31, 1995 to 59.7 million members at January 31,
1996), which is the largest contributing factor to the 20% increase in
membership revenues (from $1,363.6 million in fiscal 1995 to $1,629.8 million in
fiscal 1996). While the overall membership base increased by 12.7 million
members, or 27%, during the year (of which approximately 8 million members came
from acquisitions completed during the year (members resulting from acquisitions
being "Acquired Members")), the average annual fee charged for the Company's
membership services increased by 3%. The Company divides its memberships into
three categories: individual, wholesale and discount program memberships.
Individual memberships consist of members that pay directly for the services and
the Company pays for the marketing costs to solicit the member primarily using
direct marketing techniques. Wholesale memberships include members that pay
directly for the services to their sponsor and the Company does not pay for the
marketing costs to solicit the members. Discount program memberships are
generally marketed through a direct sales force, participating merchants or
general advertising and the related fees are either paid directly by the member
or the local retailer. All of these categories share various aspects of the
Company's marketing and operating resources.
In the 1996 fiscal year, individual, wholesale and discount program memberships
grew by 8%, 19% and 11%, respectively, in addition to the increase due to
Acquired Members. For the year ended January 31, 1996, individual, wholesale and
discount program memberships represented 68%, 12% and 20% of membership
revenues, respectively. Discount program memberships have incurred the largest
increase from Acquired Members. Welcome Wagon, Getko and Advance Ross, all
acquired in fiscal 1996, are classified in this membership category as their
businesses provide local discounts to consumers. The Company maintains a
flexible marketing plan so that it is not dependent on any one service for the
future growth of the total membership base. The Company completed a number of
acquisitions accounted for under the purchase method of accounting during fiscal
1996. The total revenues contributed by these acquisitions are not material to
the Company's total reported revenues (see Note B to the Supplemental
Consolidated Financial Statements).
Software revenues increased 60% to $305.4 million in fiscal 1996 from $191.1
million in fiscal 1995. Contributing to the strong software growth in fiscal
1996 was the release of 63 new titles and an additional 18 titles which
were acquired compared to 34 new products released in fiscal 1995. Also
contributing to the software revenue growth is the significant increase in
the installed base of CD-ROM personal computers as well as increases in
affiliated label and distribution revenues.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. Improved response rates
for new members also favorably impact profit margins. As a result, operating
income before interest, amortization of restricted stock compensation, costs
related to products abandoned and restructuring, gain on sale of and equity in
loss from ImagiNation Network and income taxes ("EBIT") increased from $239.1
million to $322.7 million and EBIT margins improved from 15.4% to 16.7%.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $376
million, $354 million and $319 million, respectively, for the fiscal years ended
January 31, 1996, 1995 and 1994. This represents 19%, 21% and 22%, respectively,
of the gross membership revenues accrued for all services. The Company records
its deferred revenue net of estimated cancellations which are anticipated in the
Company's marketing programs. The number of cancellations has increased due to
the increased level of marketing efforts, but has decreased as a percentage of
the total number of members.
Operating costs increased 25% (from $474.1 million to $593.5 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing and participant insurance premiums (the cost of
obtaining insurance coverage for members). The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs decreased as a percentage of revenues, from 40% to 38%. This
decrease is primarily due to improved per member acquisition costs and an
increase in renewing members. Membership acquisition costs incurred increased
19% (from $508.8 million to $605.1 million) as a result of the increased
marketing effort which resulted in an increased number of new members acquired.
Marketing costs include the amortization of membership acquisition costs and
other marketing costs, which primarily consist of membership communications and
sales expenses. Amortization of membership acquisition costs increased by 19%
(from $467 million to $556.5 million). Other marketing costs increased by 20%
(from $151.3 million to $180.9 million). This increase resulted primarily from
the costs of servicing a larger membership base and expenses incurred when
selling and marketing a larger number of software titles. The marketing
functions for the Company's membership services are combined for its various
services and, accordingly, there are no significant changes in marketing costs
by membership service.
The Company routinely reviews all membership renewal rates and has not seen
any material change over the last year in the average renewal rate. Renewal
rates are calculated by dividing the total number of renewing members not
requesting a refund during their renewal year by the total members up for
renewal.
General and administrative costs increased as a percentage of revenues, from 14%
to 15%. This is principally due to acquisitions completed during fiscal 1996.
Interest income, net, increased from $7.9 million to $9.7 million due to the
reduced level of amortization associated with the Company's restricted stock and
zero coupon convertible notes and the net interest income from the increased
level of cash generated by the Company for investment.
Included in costs related to products abandoned and restructuring for the year
ended January 31, 1996, are special charges totaling $43.8 million, net of
recoveries, related to the abandonment of certain new product developmental
efforts and the related impairment of certain assets and the restructuring of
the SafeCard division of Ideon and the Ideon corporate infrastructure.
The original charge of $45 million was composed of accrued liabilities of
$36.2 million and asset impairments of $8.8 million. Also included in costs
related to products abandoned and restructuring are marketing and operational
costs incurred for Ideon products abandoned of $53.2 million.
Year Ended January 31, 1995 vs. Year Ended January 31, 1994
The Company's overall membership base continues to grow at a rapid rate (from
42.9 million members at January 31, 1994 to 47 million members at January 31,
1995), which is the largest contributing factor to the 19% increase in
membership revenues (from $1,143.2 million in fiscal 1994 to $1,363.6 million in
fiscal 1995). While the overall membership base increased by 4.1 million members
before adjustment for Acquired Members resulting from the fiscal 1996
pooling-of-interests transactions, or 10%, during the past year, the average
annual fee charged for the Company's membership services increased by 3%. The
Company divides its memberships into three categories: individual, wholesale and
discount program memberships. All of these categories share various aspects of
the Company's marketing and operating resources. In the 1995 fiscal year,
individual, wholesale and discount program memberships grew by 11%, 6% and 11%,
respectively. For the year ended January 31, 1995, individual, wholesale and
discount program memberships represented 70%, 11% and 19% of membership
revenues, respectively. The Company maintains a flexible marketing plan so that
it is not dependent on any one service for the future growth of the total
membership base. The Company completed an acquisition of Essex, a privately
owned third-party marketer of financial products for banks, and certain other
entities, during fiscal 1995. The total revenues contributed by this acquisition
are not material to the Company's total reported revenues. This acquisition was
accounted for in accordance with the purchase method of accounting and,
accordingly, the results of operations have been included in the consolidated
results of operations from the date of acquisition (see Note B to the
Consolidated Financial Statements).
Software revenues increased 41% to $191.1 million in fiscal 1995 from $135.5
million in fiscal 1994. Contributing to the strong software growth in fiscal
1995 was the release of 34 new titles. Also contributing to the software growth
is the expansion in the installed base of personal computers as well as an
increase in affiliated label revenues.
As the Company's membership services continue to mature, a greater percentage of
the total individual membership base is in its renewal years. This results in
increased profit margins for the Company due to the significant decrease in
certain marketing costs incurred on renewing members. As a result, EBIT
increased from $200.2 million to $239.1 million, however EBIT margins decreased
slightly from 15.7% to 15.4%, due principally to increased software research and
development.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rate. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $354
million, $319 million and $292 million, respectively, for the fiscal years ended
January 31, 1995, 1994 and 1993. This represents approximately 21%, 22% and 24%
of the gross membership revenues accrued for all services. The Company records
its deferred revenue net of estimated cancellations which are anticipated in the
Company's marketing programs. The number of cancellations has increased due to
the increased level of marketing efforts, but has decreased as a percentage of
the total number of members.
Operating costs increased 29% (from $368.8 million to $474.1 million). The major
components of the Company's membership operating costs continue to be personnel,
telephone, computer processing, participant insurance premiums (the cost of
obtaining insurance coverage for members). The major components of the Company's
software operating costs are material costs, manufacturing labor and overhead,
royalties paid to developers and affiliated label publishers and research and
development costs related to designing, developing and testing new software
products. The increase in overall operating costs is due principally to the
variable nature of many of these costs and, therefore, the additional costs
incurred to support the growth in the membership base and software sales.
Historically, the Company has seen a direct correlation between providing a high
level of service to its members and improved retention.
Marketing costs remained constant as a percentage of revenue (40%). This is
primarily due to improved per member acquisition costs and an increase in
renewing members. Membership acquisition costs incurred increased 11% (from
$457.3 million to $508.8 million). Marketing costs include the amortization of
membership acquisition costs and other marketing costs, which primarily consist
of membership communications and sales expenses.
Amortization of membership acquisition costs increased by 14% (from $409.5
million to $467 million). Other marketing costs increased by 44% (from $105.1
million to $151.3 million). This increase resulted primarily from the costs of
servicing a larger membership base, costs to establish the American Airlines
AAdvantage Dining program and expenses incurred when selling and marketing a
larger number of software titles. The marketing functions for the Company's
membership services are combined for its various services and, accordingly,
there are no significant changes in marketing costs by membership service.
The Company routinely reviews all membership renewal rates and has not
seen any material change over the last year in the average renewal rate.
Based on current information, the Company does not anticipate that the
average renewal rate will change significantly. Renewal rates are calculated
by dividing the total number of renewing members not requesting a refund
during their renewal year by the total members up for renewal.
General and administrative costs decreased as a percentage of revenue, from 15%
to 14%. This is the result of the Company's ongoing ability to control overhead.
Interest income, net, increased from $3.2 million to $7.9 million primarily due
to the reduction of the Company's average outstanding loan balance and the net
interest income from the increased level of cash generated by the Company for
investment.
Membership Information
The following chart sets forth the approximate number of members and net
additions for the last three fiscal years:
Net New Member Additions
Year Ended Number of Members for the Period
- --------------------------------------------------------------------------------
January 31, 1996 59,650,000 12,700,000*
January 31, 1995 46,950,000 4,050,000
January 31, 1994 42,900,000 3,820,000
*Includes approximately 8 million Acquired Members.
The membership acquisition costs incurred applicable to obtaining a new member,
for memberships other than coupon book memberships, generally approximates the
initial membership fee. Initial membership fees for coupon book memberships
generally exceed the membership acquisition costs incurred applicable to
obtaining a new member.
Cancellations for memberships processed by the Company for the years ended
January 31, 1996, 1995 and 1994 were $376 million, $353 million and $321
million, respectively. This cancellation data does not reflect cancellations
processed by certain of the Company's clients which report membership
information only on a net basis. Accordingly, the Company does not receive
actual numbers of gross additions and gross cancellations for certain types of
memberships. In calculating the number of members, the Company has deducted its
best estimate of cancellations which may occur during the trial membership
periods offered in its marketing programs. Typically, these periods range from
one to three months.
Liquidity and Capital Resources; Inflation; Seasonality
Funds for the Company's operations have been provided principally through cash
flow from operations and credit facilities, while acquisitions have also been
funded through the issuance of Common Stock. The Company terminated the GECC
Credit Agreement effective March 19, 1996 and entered into the New Credit
Agreement during March 1996 as defined and described in Note E to the
Supplemental Consolidated Financial Statements. The New Credit Agreement
provides for a $500 million revolving credit facility with a variety of
different types of loans available thereunder. The New Credit Agreement contains
certain customary restrictive covenants including, without limitation, financial
covenants and restrictions on certain corporate transactions, and also contains
various events of default provisions including, without limitation, defaults
arising from certain changes in control of the Company.
In 1994, Ideon assumed a revolving loan agreement in connection with its
acquisition of Wright Express Corporation ("Wright Express"). The agreement, as
originally structured, provided for maximum borrowings equal to the lesser of
$17.5 million or an amount based on a percentage of eligible accounts receivable
as defined therein. In November 1994, the revolving credit agreement was amended
increasing the available line to $27.5 million. At January 31, 1996, Ideon had
$15.4 million outstanding under the revolving line of credit. In February 1996,
Wright Express entered into a new revolving credit facility agreement replacing
the previous revolving line of credit. The new credit facility has an available
line of $75 million of which $50 million may be used to finance working capital
requirements and for general corporate purposes and $25 million may be used for
acquisition financing. The new credit facility expires December 1, 1998.
In fiscal 1996, Sierra entered into an unsecured bank line of credit that
provides for borrowing of up to $10 million, expiring August 31, 1996. The line
contains covenants requiring Sierra to maintain certain financial ratios and
minimum balances in cash and cash equivalents. There have been no borrowings by
Sierra under this line of credit to date. This line of credit expired August 31,
1996.
All costs related to the mergers with the Fiscal 1997 Pooled Entities have not
been reflected in the Company's financial statements but will be reflected in
the consolidated statements of income during the periods the respective mergers
are completed. Such costs are non-recurring and those associated with the
Company's mergers with Davidson and Sierra are comprised primarily of merger and
integration costs and are expected to approximate $28.6 million ($25.1 million
or $.10 per common share after-tax effect) in the aggregate. Such costs
associated with the Company's merger with Ideon (the "Ideon Merger") include
integration and transaction costs as well as costs relating to certain
outstanding litigation matters (see Note 5) giving consideration to the
Company's intended approach to these matters, which are estimated by the
Company's management to approximate $125.0 million ($80.0 million after tax
effect). Most of the reserve is related to these outstanding litigation matters.
The Company is unable at this time to determine the estimated timing of the
future cash outflows with respect to this liability. Although the Company has
attempted to estimate the amounts that will be required to settle these
litigation matters, there can be no assurance that the actual aggregate amount
of such settlements will not exceed the amount of the reserve to be accrued.
The Company invested approximately $75 million in acquisitions, net of cash
acquired, during fiscal 1996. These acquisitions have been fully integrated into
the Company's operations. The Company is not aware of any trends, demands or
uncertainties that will have a material effect on the Company's liquidity other
than those relating to the above-mentioned litigation matters. The Company
anticipates that cash flow from operations and its credit facilities will be
sufficient to achieve its current long-term objectives.
During fiscal 1991, the Board of Directors authorized the repurchase of up to
10.125 million shares of Common Stock and during fiscal 1995 the Board of
Directors reauthorized such repurchase. As of January 31, 1996, 2,475,552 shares
of Common Stock had been repurchased at an aggregate cost of $8.7 million, of
which $8.6 million relates to fiscal 1991 repurchases. Future repurchases will
be based upon market conditions and cannot be currently ascertained.
Repurchases, if any, would be funded through the Company's available cash or
availability under its credit agreement and would thus reduce liquidity.
The Company does not anticipate any material capital expenditures for the next
year. Total capital expenditures were $63 million for the year ended January
31, 1996.
The Company intends to continue to review potential acquisitions that it
believes would enhance the Company's growth and profitability. Any acquisitions
will initially be financed through excess cash flow from operations and the
Company's credit agreement. However, depending on the financing necessary to
complete an acquisition, additional funding may be required.
The Accounting Standards Executive Committee's Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs," requires that all advertising
expenditures that are not for direct response advertising, be expensed as
incurred or the first time the advertising takes place. The Company adopted the
new method of accounting for advertising costs in the first quarter of fiscal
1996. The impact of adopting the new method did not have a significant effect on
the Company's financial statements.
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's current plans, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted. In fiscal
1997, the Company intends to adopt the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company will adopt SFAS No. 121 in fiscal 1997, and the
impact, if any, is not expected to be material.
To date, the overall impact of inflation on the Company has not been material.
Except for the cash receipts from the sale of coupon book memberships, the
Company's membership business is generally not seasonal. Most cash receipts from
these coupon book memberships are received in the fourth quarter and, to a
lesser extent, in the first and the third quarters of each fiscal year. As is
typical in the consumer software industry, the Company's software business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the Company's
software products during the year-end holiday selling season.
In fiscal 1996, the Company's international businesses represented less than 10%
of EBIT. Operating in international markets involves dealing with sometimes
volatile movements in currency exchange rates. The economic impact of currency
exchange rate movements on the Company is complex because it is linked to
variability in real growth, inflation, interest rates and other factors. Because
the Company operates in a mix of membership services and numerous countries,
management believes currency exposures are fairly well diversified. To date,
currency exposure has not been a significant competitive factor at the local
market operating level. As international operations continue to expand and the
number of cross-border transactions increases, the Company intends to continue
monitoring its currency exposures closely and take prudent actions as
appropriate.
