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.........................................................
(Dollar amounts in thousands,
except per share amounts) 1988 1987 1986
......................................................................................................................................
Revenues
Membership and service fees $195,277 $138,149 $84,123
Other 3,180 3,610 3,342
CUC International




Total Revenues 198,457 141,759 87,465

Expenses
Operating 64,092 43,248 26,729
Marketing 68,937 56,496 35,042
General and administrative 31,729 23,342 14,572
Interest 2,259 2,663 1,507
Total Expenses 167,017 125,749 77,850

Operating Income 31,440 16,010 9,615
Acquisition costs 2,348
Income Before Income Taxes and Extraordinary
Credit 31,440 16,010 7,267
Provision for income taxes 14,017 7,350 4,435
Income Before Extraordinary Credit 17,423 8,660 2,832
Extraordinary credit-utilization of tax loss
carryforwards 1,041 3,589
Net Income $ 17,423 $ 9,701 $ 6,421

Income Per Common Share
Income before extraordinary credit $.90 $.49 $.18
Extraordinary credit .06 .23
Net Income Per Common Share $.90 $.55 $.41
......................................................................................................................................
678 Corporate Financing Policies




16-28
Corporate Financing Policies




CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended January 31
.....................................................

(Dollar amounts in thousands) 1988 1987 1986
.........................................................................................................................
Operating Activities
Net income $17,423 $ 9,701 $ 6,421
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of membership acquisition




CUC International
costs 44,641 35,501 20,237
Amortization of prepaid commissions 1,860 2,029 2,081
Amortization of contract rights and excess
cost 3,423 2,199
Deferred income taxes 11,712 5,553 442
Depreciation 2,506 2,582 1,969
Extraordinary credit and loss from
discontinued operations (1,475)
Change in operating assets and
liabilities, net of acquisitions:
Net (increase) decrease in receivables (8,049) (6,747) 3,795
Net increase (decrease) in members™
deposits, accounts payable and
accrued expenses and federal and
state income taxes 12,755 (3,649) (586)
Deferred membership income 9,629 14,366 9,052
Membership acquisition costs (63,236) (43,720) (42,564)
Prepaid solicitation costs (12,174) (4,915)
Prepaid commissions (409)
Other, net 2,576 (1,748) 39
Net cash from (used in) operating activities 23,066 11,152 (998)

Investing Activities
Acquisitions, net of cash acquired (4,625) (18,341)
Acquisitions of properties (7,586) (5,078) (4,345)
Proceeds from disposal of properties
net of $3.2 million note receivable 783
Disposals of marketable securities 1,933 2,724
Other, net 240
Net cash from (used in) investing activities (12,211) (20,703) (1,381)
Financing Activities
Issuance of Common Stock 5,326 6,220 613
679
Corporate Financing Policies




16-29 Part 3 Business Analysis and Valuation Applications




CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

Year Ended January 31
.....................................................

(Dollar amounts in thousands) 1988 1987 1986
.........................................................................................................................
Issuance of convertible subordinated
debentures 15,000
Purchase of treasury stock (2,377)
Repayments of long-term obligations (4,960) (2,955) (795)
Other, net (78)
CUC International




Net cash from ¬nancing activities 288 888 14,818

Net Increase (Decrease) in Cash and
Cash Equivalents 11,143 (8,663) 12,439
Cash and cash equivalents at beginning of
year 14,810 23,473 11,034
Cash and cash equivalents at end of year $25,953 $14,810 $23,473
.........................................................................................................................



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Signi¬cant Accounting Policies

Principles of Consolidation: The consolidated ¬nancial statements include the accounts of
CUC International Inc. (formerly Comp-U-Card International Incorporated) and its
wholly-owned subsidiaries. The Company operates in one business segment, providing a
variety of services through individual, ¬nancial institution, credit union and group mem-
berships. All signi¬cant intercompany transactions have been eliminated in consolidation.

Deferred Membership Charges, Net: Deferred membership charges is comprised of (in
thousands):

January 31, 1988 1987
Deferred membership income $(52,834) $(43,205)
Unamortized membership acquisition costs 74,912 56,317
Deferred membership charges, net $(22,078 $(13,112

The related membership fees and membership acquisition costs have been between $30
and $39 per individual member during the years ended January 31, 1988 and 1987. In
addition, the annual renewal costs have remained between ten and twenty percent of
annual membership fees for the same period.
680 Corporate Financing Policies




16-30
Corporate Financing Policies




Renewal costs consist principally of charges from sponsoring institutions and are amor-
tized over the renewal period. Individual memberships are principally for a one-year
period. These membership fees are recorded, as deferred membership income, upon
acceptance of membership, net of estimated cancellations, and pro-rated over the mem-
bership period. The related initial membership acquisition costs are recorded as incurred
and charged to operations as membership fees are recognized, allowing for renewals,
over a three-year period. Such costs are amortized commencing with the beginning of the
membership period, at the annual rate of 40%, 30% and 30%, respectively. Membership
renewal rates are dependent upon the nature of the bene¬ts and services provided by the
Company in its various membership programs. Through January 31, 1988, membership
renewal rates have been suf¬cient to generate future revenue in excess of deferred mem-




CUC International
bership acquisition costs over the remaining amortization period.
Amortization of membership acquisition costs, including deferred renewal costs,
amounted to $44.6 million, $35.5 million and $20.2 million for the years ended January
31, 1988, 1987, and 1986, respectively.

Prepaid Solicitation Costs: Prepaid solicitation costs consist of initial membership acquisi-
tion 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.

Prepaid Commissions: Prepaid commissions consist of the amount to be paid in con-
nection with the termination of contracts with the Company™s ¬eld sales force ($4.9 mil-
lion and $5.8 million at January 31, 1988 and 1987, respectively) and the termination of
special compensation agreements with an of¬cer and former of¬cer ($1.3 million and
$1.6 million at January 31, 1988 and 1987, respectively). The amount relating to the ter-
mination of the ¬eld sales force is being amortized, using the straight-line method, over
eight years and the amount relating to the termination of the special compensation
agreement is being amortized ratably over ten years.

Contract Renewal Rights: Contract renewal rights represent the value assigned to con-
tracts acquired in acquisitions and are being amortized over 9 to 16 years using the
straight-line method.

Excess of Cost Over Net Assets Acquired: The excess of cost over net assets acquired is
being amortized over 15 to 25 years using the straight-line method.

Earnings Per Share: Amounts per share have been computed using the weighted average
number of common and common equivalent shares outstanding. The weighted average
number of common and common equivalent shares outstanding was 19.4 million,
17.8 million and 15.8 million for the years ended January 31, 1988, 1987, and 1986,
respectively. Fully diluted earnings per share did not differ signi¬cantly from primary earn-
ings per share in any year.
Statement of Cash Flows: The Company adopted Financial Accounting Standards
Board (FASB) “Statement of Cash Flows” in its ¬scal 1988 ¬nancial statements and
restated previously reported statements of changes in ¬nancial position for ¬scal years
1987 and 1986. For purposes of the consolidated statement of cash ¬‚ows, the Company
considers all investments with a maturity of three months or less to be cash equivalents.
681
Corporate Financing Policies




16-31 Part 3 Business Analysis and Valuation Applications




FINANCIAL HIGHLIGHTS

(In thousands, except per share amounts)

1988 1987 1986 1985
Year Ended January 31 1984
Total Revenues $198,457 $141,759 $87,465 $65,947 $45,468
Net Income 17,423 9,701 6,421 4,214 3,184
Per Common Share:
Net Income $ .90 $ .55 $ .41 $ .28 $ .23
Book Value 5.83 4.14 2.33 1.94 1.70
CUC International




Shareholders™ Equity $112,361 $ 72,202 $34,859 $28,673 $24,806
Number of Active Members 10,000 8,400 4,700 1,200 450



REPORT OF INDEPENDENT AUDITORS

Ernst & Whinney Six Landmark Square, Suite 500
Stamford, Connecticut 06901

Board of Directors and Shareholders
CUC International Inc.
Stamford, Connecticut

We have examined the consolidated balance sheet of CUC International Inc. as of Jan-
uary 31, 1988 and 1987, and the related consolidated statements of income, sharehold-
ers™ equity and cash ¬‚ows for each of the three years in the period ended January 31,
1988. Our examinations were made in accordance with generally accepted auditing
standards and, accordingly, included such tests of the accounting records and such other
auditing procedures as we considered necessary in the circumstances.
In our opinion, the consolidated ¬nancial statements referred to above present fairly
the consolidated ¬nancial position of CUC International Inc. at January 31, 1988 and
1987, and the consolidated results of operations and cash ¬‚ows for each of the three

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