-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9urUktxvoDqSx8YcyIMeaXZAy247ZmZr0KHh0ZfFjwh/J9/bbUOCkaFS/qpjtR+ CYAlwTcAn/10lfM6YPGuRw== 0000723612-95-000013.txt : 19951212 0000723612-95-000013.hdr.sgml : 19951212 ACCESSION NUMBER: 0000723612-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19951211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUC INTERNATIONAL INC /DE/ CENTRAL INDEX KEY: 0000723612 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 060918165 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10308 FILM NUMBER: 95600794 BUSINESS ADDRESS: STREET 1: 707 SUMMER ST CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033249261 MAIL ADDRESS: STREET 1: 707 SUMMER ST CITY: STAMFORD STATE: CT ZIP: 06901 FORMER COMPANY: FORMER CONFORMED NAME: COMP U CARD INTERNATIONAL INC DATE OF NAME CHANGE: 19870914 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 31, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-10308 CUC International Inc. (Exact name of registrant as specified in its charter) Delaware 06-0918165 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 707 Summer Street Stamford, Connecticut 06901 (Address of principal executive offices) (Zip Code) (203) 324-9261 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value - 182,294,108 shares as of November 30, 1995 INDEX CUC INTERNATIONAL INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - October 31, 1995 and January 31, 1995. 3 Condensed Consolidated Statements of Income - Three and Nine months ended October 31, 1995 and 1994. 4 Condensed Consolidated Statements of Cash Flows - Nine months ended October 31, 1995 and 1994. 5 Notes to Condensed Consolidated Financial Statements. 6 Independent Accountants' Review Report. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 18 INDEX TO EXHIBITS 19 PART I. FINANCIAL INFORMATION CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Oct. 31, Jan. 31, 1995 1995 (Unaudited) Assets Current Assets Cash and cash equivalents $160,261 $180,648 Receivables 255,303 188,185 Membership solicitations in process 57,203 45,636 Prepaid membership materials 44,830 26,503 Ppd expenses, deferred taxes & other 88,859 62,929 Total Current Assets 606,456 503,901 Contract renewal rights & intangible assets - net of accumulated amortization of $85,541 and $71,646 262,973 195,688 Properties, at cost, less accumulated depreciation of $66,187 and $48,918 55,027 35,089 Deferred income taxes 5,106 16,778 Other 28,061 16,696 $957,623 $768,152 Liabilities and Shareholders' Equity Current Liabilities Accounts payable & accrued expenses & federal & state income taxes payable $102,942 $109,489 Total Current Liabilities 102,942 109,489 Deferred membership income, net 211,024 197,010 Zero coupon convertible notes - net of unamortized original issue discount of $1,022 and $2,507 14,347 15,046 Other 3,833 3,285 Shareholders' Equity Common stock-par value $.01 per share; authorized 400 million shares and 200 million shares; issued 184,782,714 shares and 174,538,445 shares 1,848 1,745 Additional paid-in capital 304,549 216,286 Retained earnings 344,242 235,796 Treasury stock, at cost, 3,250,036 shares and 2,757,894 shares (25,162) (10,505) Total Shareholders' Equity 625,477 443,322 $957,623 $768,152 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 October 31, 1995 1994 REVENUES Membership & service fees & other $341,406 $263,735 Total Revenues 341,406 263,735 EXPENSES Operating 90,784 70,694 Marketing 134,631 106,363 General and administrative 50,049 37,329 Interest (income) expense, net, and amort. of restricted stock comp. (643) 211 Total Expenses 274,821 214,597 INCOME BEFORE INCOME TAXES 66,585 49,138 Provision for income taxes 25,831 18,893 NET INCOME $40,754 $30,245 Net Income Per Common Share $0.22 $0.17 Weighted Average Number of Common and Dilutive Common Equivalent Shares Outstanding 188,734 177,428 See notes to condensed consolidated financial statements. CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts) Nine Months Ended October 31, 1995 1994 REVENUES Membership & service fees & other $979,886 $762,940 Total Revenues 979,886 762,940 EXPENSES Operating 263,404 206,868 Marketing 385,684 307,771 General and administrative 145,345 109,390 Interest (income) expense, net, and amort. of restricted stock comp. (838) 1,123 Total Expenses 793,595 625,152 INCOME BEFORE INCOME TAXES 186,291 137,788 Provision for income taxes 70,884 52,979 NET INCOME $115,407 $84,809 Net Income Per Common Share $0.62 $0.48 Weighted Average Number of Common and Dilutive Common Equivalent Shares Outstanding 186,873 176,400 See notes to condensed consolidated financial statements. CUC INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) OCTOBER 31, NINE MONTHS ENDED 1995 1994 OPERATING ACTIVITIES: Net income $115,407 $84,809 Adjustments to reconcile net income to net cash provided by operating activities: Membership acquisition costs (330,357)(262,626) Amort of membership acquisition costs 305,472 261,335 Deferred membership income 10,960 (7,004) Amort of contract renewal rights & rights and excess cost 13,793 10,652 Deferred income taxes 13,986 11,402 Amortization of original issue discount on convertible notes 1,236 1,094 Amort of restricted stock compensation 303 Depreciation 9,850 6,336 Changes in working capital items, net of acquisitions: Increase in receivables (48,530) (29,539) Increase in membership solicitations in process (11,567) (3,349) Incr in ppd membership mat'ls (12,439) (15,654) Increase in prepaid expenses (21,349) (19,409) Net (decrease) increase in accounts payable & accrued expenses and federal and state income taxes payable (17,776) 12,114 Other, net (12,781) (2,387) Net cash provided by operating activities 15,905 48,077 INVESTING ACTIVITIES: Acquisitions, net of cash acquired (42,352) (5,045) Acquisitions of properties (20,272) (10,375) Net cash used in investing activities (62,624) (15,420) FINANCING ACTIVITIES: Issuance of Common Stock 26,332 9,084 Net cash provided by financing activities 26,332 9,084 Net (decr) incr in cash & cash equivalents (20,387) 41,741 Cash & cash equiv at beginning of period 180,648 116,937 Cash & cash equivalents at end of period $160,261 $158,678 See notes to condensed consolidated financial statements. CUC INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION 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 nine months ended October 31, 1995 are not necessarily indicative of the results that may be expected for the year ending January 31, 1996. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-K filing for the year ended January 31, 1995. The condensed consolidated financial statements at October 31, 1995 and for the three and nine months ended October 31, 1995 and 1994 are unaudited, but have been reviewed by independent accountants and their report is included herein. NOTE 2 -- DEFERRED MEMBERSHIP INCOME, NET Deferred membership income, net, included in the condensed consolidated balance sheets is comprised of the following (in thousands): October 31, January 31, 1995 1995 Deferred membership income $462,745 $408,426 Less unamortized membership acquisition costs (251,721) (211,416) Deferred membership income, net $211,024 $197,010 NOTE 3 -- MERGERS AND ACQUISITIONS During February 1995, the Company acquired all of the outstanding capital stock of Welcome Wagon International, Inc. ("Welcome Wagon") and substantially all of the assets of a related entity, Gifts International, Inc., for $19.5 million in cash. Welcome Wagon provides merchant advertising through direct visits by its representatives to consumer households. 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 the Company's common stock, par value $.01 per share ("Common Stock"). 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. CUC INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) NOTE 3 -- MERGERS AND ACQUISITIONS (continued) These acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, their results of operations have been included in the consolidated results of operations from the respective dates of acquisition. The results of these entities' operations for the periods prior to their acquisition were not significant to the Company's operations. During June 1995, the Company acquired all of the outstanding capital stock of Getko Group Inc. ("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. The acquisition was accounted for as a pooling-of-interests; however, financial statements for periods prior to February 1, 1995 have not been restated due to immateriality. During September 1995, the Company acquired all of the outstanding capital stock of North American Outdoor Group, Inc. ("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 private, for- profit hunting and general interest fishing membership organizations in the United States, and also owns a handyman membership organization. The acquisition was accounted for as a pooling-of-interests; however, financial statements for periods prior to February 1, 1995 have not been restated due to immateriality. During October 1995, the Company and one of its wholly owned subsidiaries ("Merger Sub") entered into an Agreement and Plan of Merger with Advance Ross Corporation ("Advance Ross") pursuant to which the Company, Merger Sub and Advance Ross plan to consummate a merger (the "Merger") in which Merger Sub will be merged with and into Advance Ross. In the Merger, each share of common stock, par value $.01 per share, of Advance Ross issued and outstanding immediately prior to the effective time of the Merger will be converted into five-sixths (5/6) of one share of Common Stock, subject to certain adjustments. In addition, all shares of 5% Cumulative Preferred Stock, $25 par value, of Advance Ross issued and outstanding immediately prior to the effective time of the Merger will be converted in the Merger into shares of Common Stock having a value equal to the liquidation preference of such shares, subject to the obligation of Advance Ross to redeem such shares under certain circumstances in lieu of such conversion. The consummation of the Merger is subject to certain customary closing conditions, including the approval of the holders of Advance Ross common stock. This transaction will be accounted for under the pooling-of-interests method of accounting and is expected to be completed during January 1996. CUC INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) NOTE 4 -- SHAREHOLDERS' EQUITY On June 7, 1995, the Company's Board of Directors declared a three-for-two split of the Common Stock, in the nature of a stock dividend, effective June 30, 1995, payable to shareholders of record on June 19, 1995. Accordingly, the financial statements and all common share and per common share data have been retroactively adjusted to reflect the stock split. The par value of the additional shares of Common Stock issued in connection with the stock split was credited to Common Stock and charged to retained earnings. For the three and nine months ended October 31, 1995, $95,100 and $2.2 million principal of zero coupon convertible notes were converted into 14,432 shares and 331,471 shares of Common Stock, respectively, and the related unamortized original issue discount ($87,000 and $1.9 million, respectively) was charged against additional paid-in capital. The balance of the change in additional paid-in capital and treasury stock relates to stock option activity. Net income per share, assuming the conversions of the zero coupon convertible notes occurred at the beginning of the periods, would not differ significantly from the Company's actual earnings per share for the three and nine month periods ended October 31, 1995. 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. Independent Accountants' Review Report Shareholders and Board of Directors CUC International Inc. We have reviewed the accompanying condensed consolidated balance sheet of CUC International Inc. as of October 31, 1995, and the related condensed consolidated statements of income for the three- month and nine-month periods ended October 31, 1995 and 1994, and the condensed consolidated statements of cash flows for the nine- month periods ended October 31, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of CUC International Inc. as of January 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended, not presented herein, and in our report dated March 21, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP Stamford, Connecticut November 29, 1995 CUC INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended October 31, 1995 vs. Three Months Ended October 31, 1994 The Company's overall membership base continues to grow at a rapid rate (from 32.9 million members at October 31, 1994 to 40 million members at October 31, 1995), which is the largest contributing factor to the 29% increase in revenues (from $263.7 million for the quarter ended October 31, 1994 to $341.4 million for the quarter ended October 31, 1995). While the overall membership base increased by approximately 2 million members during the quarter (of which approximately 1 million members came from an acquisition completed during the quarter (members resulting from acquisitions being "Acquired Members")), the average annual fee collected for the Company's membership services increased by less than 1%. The change in the average annual fee is principally due to the addition of Acquired Members at a lower average annual fee. The Company divides its memberships into three categories: individual, wholesale and discount coupon program memberships. All of these categories share various aspects of the Company's marketing and operating resources. Compared to the previous year's third quarter, individual, wholesale and discount coupon program memberships grew by 29%, 10% and 19%, respectively. For the quarter ended October 31, 1995, individual, wholesale and discount coupon program memberships represented 70%, 13% and 17% of revenues, respectively. The Company maintains a flexible marketing plan so that it is not dependent on any one service for the future growth of the total membership base. As the Company's services continue to mature, a greater percentage of the total individual membership base is in its renewal years. This results in increased profit margins for the Company due to the significant decrease in certain marketing costs incurred on renewing members. As a result, operating income before interest, amortization of restricted stock compensation, and taxes ("EBIT") increased from $49.3 million to $65.9 million, and EBIT margins improved from 18.7% to 19.3%. The Company has not experienced any difficulty in acquiring or renewing members in the current economic climate. 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. Operating costs increased 28% (from $70.7 million to $90.8 million). The major components of the Company's operating costs continue to be personnel, telephone, computer processing, participant insurance premiums (the cost of obtaining insurance coverage for members) and travel cash awards. Travel members are entitled to receive cash awards based on travel booked with the Company. For the quarter ended October 31, 1995, these awards represent less than 5% of total operating costs. The increase in overall operating costs is due principally to the variable nature of many of these costs and, therefore, the additional costs incurred to support the growth in the membership base. Historically, the Company has seen a direct correlation between providing a high level of service to its members and improved retention. CUC INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Three Months Ended October 31, 1995 vs. Three Months Ended October 31, 1994 Marketing costs decreased as a percentage of revenue (from 40% to 39%). This is primarily due to improved per member acquisition costs and an increase in renewing members. Membership acquisition costs incurred increased 40% (from $103 million to $144.3 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 22% (from $90.1 million to $110.3 million). Other marketing costs increased by 49% (from $16.3 million to $24.3 million). These increases resulted primarily from the costs of servicing a larger membership base. The marketing functions for the Company's various consumer services are combined. The Company routinely reviews all renewal rates and has not seen any material change over the last year in the average renewal rate. Based on current information, the Company does not anticipate that the average renewal rate will change significantly. Renewal rates are calculated by dividing the total number of renewing members not requesting a refund during their renewal year by the total number of members up for renewal. General and administrative costs increased as a percentage of revenue (from 14% to 15%). This is principally due to the acquisitions completed during the nine months ended October 31, 1995. Interest (income) expense, net, decreased from $.2 million to ($.6 million) primarily due to the reduced level of amortization associated with the Company's zero coupon convertible notes and the net interest income from the increased level of cash generated by the Company for investment. During the first nine months of fiscal 1996, the Company completed several acquisitions (the "Acquisitions") (see Note 3 in Notes to Condensed Consolidated Financial Statements). The operating activity of the companies acquired in the Acquisitions is included in both revenues and pre-tax profits for the third quarter; however, the operating activity resulting from the Acquisitions is not included in the prior year's third quarter. The Acquisitions were not significant to the Company's results of operations. CUC INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended October 31, 1995 vs. Nine Months Ended October 31, 1994 The Company's overall membership base continues to grow at a rapid rate (from 32.9 million members at October 31, 1994 to 40 million members at October 31, 1995), which is the largest contributing factor to the 28% increase in revenues (from $762.9 million for the nine months ended October 31, 1994 to $979.9 million for the nine months ended October 31, 1995). While the overall membership base increased by approximately 6.1 million members during the nine months (of which approximately 3.1 million were Acquired Members), the average annual fee collected for the Company's membership services increased by 1%. The change in the average annual fee is principally due to the addition of Acquired Members at a lower average annual fee. The Company divides its memberships into three categories: individual, wholesale and discount coupon program memberships. All of these categories share various aspects of the Company's marketing and operating resources. Compared to the previous year's first nine months, individual, wholesale and discount coupon program memberships grew by 21%, 9% and 15%, respectively. For the nine months ended October 31, 1995, individual, wholesale and discount coupon program memberships represented 70%, 13% and 17% of revenues, respectively. The Company maintains a flexible marketing plan so that it is not dependent on any one service for the future growth of the total membership base. As the Company's services continue to mature, a greater percentage of the total individual membership base is in its renewal years. This results in increased profit margins for the Company due to the significant decrease in certain marketing costs incurred on renewing members. As a result, EBIT increased from $138.9 million to $185.5 million, and EBIT margins improved from 18.2% to 18.9%. The Company has not experienced any difficulty in acquiring or renewing members in the current economic climate. 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. Operating costs increased 27% (from $206.9 million to $263.4 million). The major components of the Company's operating costs continue to be personnel, telephone, computer processing, participant insurance premiums (the cost of obtaining insurance coverage for members) and travel cash awards. Travel members are entitled to receive cash awards based on travel booked with the Company. For the nine months ended October 31, 1995, these awards represent less than 5% of total operating costs. The increase in overall operating costs is due principally to the variable nature of many of these costs and, therefore, the additional costs incurred to support the growth in the membership base. Historically, the Company has seen a direct correlation between providing a high level of service to its members and improved retention. CUC INTERNATIONAL INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Nine Months Ended October 31, 1995 vs. Nine Months Ended October 31, 1994 Marketing costs decreased as a percentage of revenue (from 40% to 39%). This is primarily due to improved per member acquisition costs and an increase in renewing members. Membership acquisition costs incurred increased 26% (from $262.6 million to $330.4 million). Marketing costs include the amortization of membership acquisition costs and other marketing costs, which primarily consist of membership communications and sales expenses. Amortization of membership acquisition costs increased by 17% (from $261.3 million to $305.5 million). Other marketing costs increased by 72% (from $46.5 million to $80.2 million). These increases resulted primarily from the costs of servicing a larger membership base. The marketing functions for the Company's various consumer services are combined. The Company routinely reviews all renewal rates and has not seen any material change over the last year in the average renewal rate. Based on current information, the Company does not anticipate that the average renewal rate will change significantly. Renewal rates are calculated by dividing the total number of renewing members not requesting a refund during their renewal year by the total number of members up for renewal. General and administrative costs increased as a percentage of revenue (from 14% to 15%). This is principally due to the acquisitions completed during the nine months ended October 31, 1995. Interest (income) expense, net, and amortization of restricted stock compensation decreased from $1.1 million to ($.8 million) primarily 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. During the first nine months of fiscal 1996, the Company completed the Acquisitions (see Note 3 in Notes to Condensed Consolidated Financial Statements). The operating activity of the companies acquired in the Acquisitions is included in both revenues and pre-tax profits for the nine months ended October 31, 1995; however, the operating activity resulting from the Acquisitions is not included in the prior year's first nine months. The Acquisitions were not significant to the Company's results of operations. 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 Nine Months Ended October 31, 1995 39,985,000 6,135,000* Year Ended January 31, 1995 33,850,000 3,000,000 Nine Months Ended October 31, 1994 32,925,000 2,075,000 Year Ended January 31, 1994 30,850,000 3,250,000 Quarter Ended October 31, 1995 39,985,000 1,960,000** Quarter Ended October 31, 1994 32,925,000 600,000 *Includes approximately 3.1 million Acquired Members. **Includes approximately 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 with General Electric Capital Corporation that currently provides for a $100 million revolving credit facility (the "Credit Agreement"). The amount of borrowings available to the Company under the Credit Agreement was $100 million at October 31, 1995, as there were no borrowings under the Credit Agreement at that date. The Credit Agreement is scheduled to expire June 1, 1997. The Company invested approximately $42.4 million in acquisitions, net of cash acquired, during the nine months ended October 31, 1995. 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 is not aware of any trends, demands or uncertainties that will have a material effect on the Company's liquidity other than those relating to accounts receivable. The Company anticipates that cash flow from operations and the Credit Agreement will be sufficient to achieve its current long-term objectives. All of the assets of the Company and many of its subsidiaries, and all of the stock of many of the Company's subsidiaries, have been pledged to secure the Credit Agreement. Obligations under the Credit Agreement are guaranteed by certain of the Company's subsidiaries. The Credit Agreement contains certain customary restrictive covenants including, without limitation, financial covenants, as well as restrictions that preclude the payment of cash dividends on shares of Common Stock. The Credit Agreement also contains various event of default provisions including, without limitation, defaults arising from certain changes in corporate structure. The Company does not anticipate any material capital expenditures for the next year. Total capital expenditures were $20.3 million for the nine months ended October 31, 1995. The Company intends to continue to review potential acquisitions that it believes would enhance the Company's growth and profitability. Any acquisitions paid 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 discount coupon memberships, the Company's business is not seasonal. Most cash receipts from these memberships are received in the fourth quarter and, to a lesser extent, in the first and the third quarters of each fiscal year. For the nine months ended October 31, 1995, the Company's international businesses represented less than 1% of EBIT. 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. Description 3.1 Restated Certificate of Incorporation of the Company, as filed November 21, 1991, as amended June 25, 1992, and as amended June 7, 1995 (filed as Exhibit 3.1 to Company's Annual Report on Form 10-Q for the period ended April 30, 1995).* 10. Management Contracts, Compensatory Plans and Arrangements 10.1 Form of Employment Contract with E. Kirk Shelton and Christopher K. McLeod, dated February 1, 1987, as amended November 1, 1991 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year end January 31, 1994).* 10.2 Employment Contract with Walter A. Forbes, dated January 1, 1987, as amended January 1, 1991, January 1, 1993 and October 1, 1993 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994) (the "Forbes Employment Agreement").* 10.3 Fourth Amendment to Forbes Employment Agreement, dated as of June 1, 1994 (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended July 31, 1994).* 10.4 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.5 Agreement with Amy N. Lipton, dated April 1, 1987, as amended April 21, 1993 and March 2, 1994 (filed as Exhibit 10.7 to the Company's Annual Report on Form 10- K for the fiscal year ended January 31, 1995).* 10.6 Form of Employee Stock Option under the 1987 Stock Option Plan (filed as Exhibit 10.6 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.7 Form of Director Stock Option for 1990 and 1992 Directors Stock Options Plans (filed as Exhibit 10.4 to the Company's Annual Report for the fiscal year ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).* 10.8 Form of Director Stock Option for 1994 Directors Stock Option Plan (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.9 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.10 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.10. to the Company's Form 10-Q for the period ended April 30, 1995).* PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued) 10.11 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.11 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.12 1994 Directors Stock Option Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10- K for the fiscal year ended January 31, 1995).* 10.13 Restricted Stock Plan and Form of Restricted Stock Plan Agreement (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).* 10.14 Amended and Restated Credit Agreement between the Company and General Electric Capital Corporation dated June 30, 1994 (filed as Exhibit 10.12 to the Company's Form 10-Q for the period ended July 31, 1994).* 10.15 Agreement and Plan of Merger, dated October 17, 1995, among CUC International Inc., Retreat Acquisition Corporation and Advance Ross Corporation (filed as Exhibit 2 to the Company's Registration Statement on Form S-4, Registration No. 33-64801, filed on December 7, 1995).* 11. Statement re: Computation of Per Share Earnings (Unaudited) 15. Letter re: Unaudited Interim Financial Information (b) During the quarter ended October 31, 1995, the Company filed the following Current Reports on Form 8-K: (1) Current Report on Form 8-K, filed on September 5, 1995, reporting an Item 5 ("Other Events") event. (2) Current Report on Form 8-K, filed on October 18, 1995, reporting an Item 5 ("Other Events") event. (3) Current Report on Form 8-K, filed on October 20, 1995, reporting an Item 5 ("Other Events") event. *Incorporated by reference SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUC INTERNATIONAL INC. (Registrant) Date: December 11, 1995 By: WALTER A. FORBES Walter A. Forbes - Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: December 11, 1995 By: COSMO CORIGLIANO Cosmo Corigliano - Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) INDEX TO EXHIBITS Exhibit No. Description Page 3.1 Restated Certificate of Incorporation of the Company, as filed November 21, 1991, as amended June 25, 1992, and as amended June 7, 1995 (filed as Exhibit 3.1 to the Company's Form 10-Q for the period ended April 30, 1995).* 10. Management Contracts, Compensatory Plans and Arrangements 10.1 Form of Employment Contract with E. Kirk Shelton and Christopher K. McLeod, dated February 1, 1987, as amended November 1, 1991 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994).* 10.2 Employment Contract with Walter A. Forbes, dated January 1, 1987, as amended January 1, 1991, January 1, 1993 and October 1, 1993 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994) (the "Forbes Employment Agreement").* 10.3 Fourth Amendment to Forbes Employment Agreement, dated as of June 1, 1994 (filed as Exhibit 10.3 to the Company's Form 10-Q for the period ended July 31, 1994).* 10.4 Agreement with Cosmo Corigliano, dated February 1, 1994 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.5 Agreement with Amy N. Lipton, dated April 1, 1987, as amended April 21, 1993 and March 2, 1994 (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.6 Form of Employee Stock Option under the 1987 Stock Option Plan (filed as Exhibit 10.6 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.7 Form of Director Stock Option for 1990 and 1992 Directors Stock Option Plans (filed as Exhibit 10.4 to the Company's Annual Report for the fiscal year ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).* 10.8 Form of Director Stock Option for 1994 Directors Stock Option Plan (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.9 1987 Stock Option Plan, as amended (filed as Exhibit 10.9 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.10 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.10 to the Company's Form 10-Q for the period ended April 30, 1995).* INDEX TO EXHIBITS (continued) Exhibit No. Description Page 10.11 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.11 to the Company's Form 10-Q for the period ended April 30, 1995).* 10.12 1994 Directors Stock Option Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995).* 10.13 Restricted Stock Plan and Form of Restricted Stock Plan Agreement (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991, as amended December 12, 1991 and December 19, 1991).* 10.14 Amended and Restated Credit Agreement between the Company and General Electric Capital Corporation dated June 30, 1994 (filed as Exhibit 10.12 to the Company's Form 10-Q for the period ended July 31, 1994).* 10.15 Agreement and Plan of Merger, dated October 17, 1995, among CUC International Inc., Retreat Acquisition Corporation and Advance Ross Corporation (filed as Exhibit 2 to the Company's Registration Statement on Form S-4, Registration No. 33-64801, filed on December 7, 1995).* 11. Statement re: Computation of Per Share Earnings (Unaudited) 15. Letter re: Unaudited Interim Financial Information *Incorporated by reference EX-11 2 CUC INTERNATIONAL INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (In thousands, except per share amounts) Three Months Ended October 31, 1995 1994 PRIMARY ------------------ Average shares outstanding 175,051 166,959 Net effect of dilutive stock options - based on the treasury stock method using average market price 13,683 10,469 -------- -------- Total 188,734 177,428 ===== ===== Net Income $40,754 $30,245 ===== ===== Net income per common share $0.216 $0.170 ===== ===== FULLY DILUTED Average shares outstanding 175,051 166,959 Net effect of dilutive stock options - based on the treasury stock method using the period - end market price, if higher than the average market price 13,975 10,469 Net effect of zero coupon convertible notes - based on the if converted method 2,342 2,709 ------- -------- Total 191,368 180,137 ===== ===== Net Income $40,754 $30,245 Zero Coupon Convertible Notes 250 171 -------- -------- $41,004 $30,416 ===== ===== Net income per common share $0.214 $0.169 ===== ===== CUC INTERNATIONAL INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (In thousands, except per share amounts) Nine Months Ended October 31, 1995 1994 PRIMARY ------------------ Average shares outstanding 174,368 166,226 Net effect of dilutive stock options - based on the treasury stock method using average market price 12,505 10,174 -------- -------- Total 186,873 176,400 ===== ===== Net Income $115,407 $84,809 ===== ===== Net income per common share $0.618 $0.481 ===== ===== FULLY DILUTED Average shares outstanding 174,368 166,226 Net effect of dilutive stock options - based on the treasury stock method using the period - end market price, if higher than the average market price 13,238 10,371 Net effect of zero coupon convertible notes - based on the if converted method 2,485 2,814 -------- -------- Total 190,091 179,411 ===== ===== Net Income $115,407 $84,809 Zero Coupon Convertible Notes 766 673 -------- -------- $116,173 $85,482 ===== ===== Net income per common share $0.611 $0.476 ===== ===== EX-15 3 CUC INTERNATIONAL INC. AND SUBSIDIARIES EXHIBIT 15 - LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION December 8, 1995 Shareholders and Board of Directors CUC International Inc. We are aware of the incorporation by reference in the Registration Statements (Form S-8s: Numbers 2-91291, 33-17247, 33- 17248, 33-17249, 33-26875, 33-75682, 33-93322, 33-41823, 3348175, 33-58896, 33-91656, 33-74068, 33-74066, 33-91658, 33-75684, 33- 80834 and 33-93372) of CUC International Inc. for 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. 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 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. 1994 Employee Stock Purchase Plan, the CUC International Inc. Savings Incentive Plan, and the CUC International Inc. 1994 Directors Stock Option Plan, respectively and in the Registration Statements (Form S-3s: Numbers 33-30306, 33-47271, 33-58598 and 33-63237) of CUC International Inc. for the registration of 738,057 shares, 3,450,000 shares, 331,797 shares and 1,498,888 shares, respectively, of its common stock, and in the Registration Statement (Form S-4: Number 33-64801) of CUC International Inc., of our report dated November 29, 1995 relating to the unaudited condensed consolidated interim financial statements of CUC International Inc. which are included in its Form 10-Q for the quarter ended October 31, 1995. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. ERNST & YOUNG LLP Stamford, Connecticut EX-27 4
5 In thousands, except per share data. 0000723612 CUC INTERNATIONAL INC. 9-MOS JAN-31-1995 OCT-31-1995 160,261 0 255,303 0 0 606,456 121,214 66,187 957,623 102,942 14,347 1,848 0 0 623,629 957,623 979,886 979,886 0 794,433 0 0 (838) 186,291 70,884 115,407 0 0 0 115,407 .618 .611
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