- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 1-10308
------------------------
CENDANT CORPORATION
(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 Number)
9 WEST 57TH STREET
NEW YORK, NY 10019
(Address of principal executive office) (Zip Code)
212-413-1800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------- ------------------------------------
CD Common Stock, Par Value $.01 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7 3/4% Notes due 2003
3% Convertible Subordinated Notes due 2002
Zero Coupon Senior Convertible Contingent Debt Securities due 2021
------------------------
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock issued and outstanding and held
by nonaffiliates of the Registrant, based upon the closing price for the Common
Stock on the New York Stock Exchange on March 15, 2001 was 12,008,130,000. All
executive officers and directors of the registrant have been deemed, solely for
the purpose of the foregoing calculation, to be "affiliates" of the registrant.
The number of shares outstanding of each of the Registrant's classes of common
stock was 844,796,413 as of March 15, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with our annual stockholders meeting to be held on
May 22, 2001 (the "Annual Proxy Statement") are incorporated by reference into
Part III hereof.
DOCUMENT CONSTITUTING PART OF SECTION 10(A) PROSPECTUS
FOR FORM S-8 REGISTRATION STATEMENTS
This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933.
2
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
- ---- ----------- --------
PART I
1 Business 4
2 Properties 38
3 Legal Proceedings 39
4 Submission of Matters to a Vote of Security Holders 46
PART II
5 Market for the Registrant's Common Equity and Related
Stockholder Matters 46
6 Selected Financial Data 47
7 Management's Discussion and Analysis of Financial Condition
and Results of
Operations 48
7a Quantitative and Qualitative Disclosures about Market Risk 63
8 Financial Statements and Supplementary Data 64
9 Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure 64
PART III
10 Directors and Executive Officers of the Registrant 65
11 Executive Compensation 65
12 Security Ownership of Certain Beneficial Owners and
Management 65
13 Certain Relationships and Related Transactions 65
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form
8-K 65
Signatures 66
3
PART I
ITEM 1. BUSINESS
EXCEPT AS EXPRESSLY INDICATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
"COMPANY", "CENDANT", "WE", "OUR" OR "US" MEANS CENDANT CORPORATION, A DELAWARE
CORPORATION, AND ITS SUBSIDIARIES.
GENERAL
We are one of the foremost providers of travel and real estate services in the
world. We were created through the merger of HFS Incorporated into CUC
International, Inc. in December 1997 with the resultant corporation being
renamed Cendant Corporation.
We operate in three principal divisions--travel, real estate, and diversified
services. Our businesses provide a wide range of complementary consumer and
business services, which together represent seven business segments at
December 31, 2000. Our businesses are intended to complement one another and
create cross-marketing opportunities both within each division and between
divisions. Our travel division franchises hotel businesses, franchises and
operates car rental businesses, facilitates vacation timeshare exchanges and
provides fleet management services to corporate clients and government agencies;
our real estate division franchises real estate brokerage businesses, provides
home buyers with mortgages and assists in employee relocations; and our
diversified services division provides marketing strategies primarily to
financial institutions through offering an array of financial and
insurance-based products to consumers, franchises tax preparation service
businesses, operates parking facilities in the United Kingdom and provides
information technology services.
As a franchisor of hotels, residential and commercial real estate brokerage
offices, car rental operations and tax preparation services, we license the
owners and operators of independent businesses the right to use our brand names.
We do not own or operate hotels, real estate brokerage offices or tax
preparation offices. Instead, we provide our franchisee customers with services
designed to increase their revenue and profitability.
TRAVEL DIVISION
Our travel division contains our Travel segment, which consists of the lodging
franchise, car rental franchise and timeshare businesses. With the acquisition
of Avis Group Holdings, Inc. on March 1, 2001, the travel division now includes
the car rental operations and fleet management services. In our lodging
franchise business, we franchise hotels primarily in the mid-priced and economy
markets. We are the world's largest hotel franchisor, operating the Days
Inn-Registered Trademark-, Ramada-Registered Trademark- (in the United States),
Super 8-Registered Trademark-, Howard Johnson-Registered Trademark-, Wingate
Inn-Registered Trademark-, Knights Inn-Registered Trademark-,
Travelodge-Registered Trademark- (in North America),
Villager-Registered Trademark- and AmeriHost Inn-Registered Trademark- lodging
franchise systems. In our car rental business, we own the
Avis-Registered Trademark- worldwide vehicle rental franchise system, which is
the second largest car rental system in the world (based on total revenues and
volume of rental transactions). We completed the purchase of the largest Avis
franchisee, Avis Group Holdings, Inc., on March 1, 2001. See "Recent
Developments--Acquisitions--Avis Group Holdings". In our timeshare business, we
own Resort Condominiums International, LLC, the world's leading timeshare
exchange company. On November 2, 2000, we entered into an agreement to acquire
Fairfield Communities, Inc., one of the largest vacation ownership companies in
the United States. We expect to complete this transaction in early April 2001.
See "Recent Developments--Acquisitions--Fairfield Communities".
REAL ESTATE DIVISION
Our real estate division consists of the Real Estate Franchise, Relocation,
Mortgage and Move.com Group segments (see "Recent Developments--Divestiture of
Move.com and Welcome Wagon International"). We are the world's largest real
estate brokerage franchisor. In our Real Estate Franchise segment, we franchise
real estate brokerage offices under the CENTURY 21-Registered Trademark-,
Coldwell Banker-Registered Trademark- and ERA-Registered Trademark- real estate
brokerage franchise systems. In our Relocation segment, our Cendant Mobility
Services Corporation subsidiary is a leading provider of corporate relocation
services in the world. We offer relocation clients a
4
variety of services in connection with the transfer of a client's employees and
offer similar services to affinity groups and their members. In our Mortgage
segment, our Cendant Mortgage Corporation subsidiary originates, sells and
services residential mortgage loans in the United States, marketing such
services to consumers through relationships with corporations, financial
institutions, real estate brokerage firms and mortgage banks.
DIVERSIFIED SERVICES DIVISION
Our diversified services division consists of our Insurance/Wholesale segment
and our Diversified Services segment, which includes our tax preparation
services franchise, our parking operations and our information technology
services. Our Insurance/Wholesale segment markets and administers insurance
products, primarily accidental death and dismemberment insurance and term life
insurance, and also provides marketing strategies primarily to financial
institutions through an offering of checking account enhancement packages for
the benefit of their customers. The insurance/wholesale business is conducted
through FISI*Madison LLC ("FISI"), Benefit Consultants, Inc. ("BCI"), Long Term
Preferred Care, Inc. ("LTPC") and Cims Ltd. ("Cims"), which are all wholly-owned
subsidiaries. Our Jackson Hewitt Inc. subsidiary operates the second largest tax
preparation service system in the United States with locations in 48 states and
franchises a system of approximately 3,300 offices that specialize in
computerized preparation of federal and state individual income tax returns. Our
National Car Parks Limited subsidiary operates parking facilities in the United
Kingdom. Our WizCom International, Ltd. subsidiary provides electronic
reservation processing, connectivity and information management systems for the
travel industry.
RECENT DEVELOPMENTS
ACQUISITIONS
We continually explore and conduct discussions with regards to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses. In addition to transactions previously
announced, as part of our regular on-going evaluation of acquisition
opportunities, we currently are engaged in a number of separate, unrelated
preliminary discussions concerning possible acquisitions. The purchase price for
the possible acquisitions may be paid in cash, through the issuance of CD common
stock or our other securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our due diligence investigations, negotiate
the financial and other terms (including price) and conditions of such
acquisitions, obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals, and, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant. The
following text provides descriptions of recently announced transactions.
AVIS GROUP HOLDINGS. On March 1, 2001, we purchased the 82% of Avis Group
Holdings, Inc. that we did not already own at a price of $33.00 per share in
cash, or approximately $937 million. Our car rental business is now comprised of
the Avis franchise system and the car rental operations of Avis Group, formerly
our largest Avis franchisee. In addition, through the acquisition of Avis Group,
we also acquired PHH Arval, a leader in the fleet management services business,
which offers fleet leasing, fleet management, other management services to
corporate clients and government agencies, and Wright Express Corporation, the
leading fuel card service provider in the United States, which offers fuel and
vehicle expense management programs to corporations and government agencies for
the effective management and control of vehicle travel expenses.
In an effort to effectively integrate the operations of Avis Group with our
operations, we implemented an internal reorganization on March 1, 2001. Pursuant
to this reorganization, the car rental operations of Avis Group became a part of
our subsidiary, Cendant Car Holdings, LLC, and the worldwide fleet management
operations of Avis Group became a part of our subsidiary, PHH Corporation.
5
FAIRFIELD COMMUNITIES. On November 2, 2000, we announced that we had entered
into an agreement to acquire all of the outstanding common stock of Fairfield
Communities, Inc. at $15 per share, or approximately $635 million in aggregate.
At least 50% of the consideration will be in cash; the balance will either be in
cash or CD common stock, at our election. The final acquisition price may
increase to a maximum of $16 per share depending on a formula based on the
average trading price of our stock over a 20-day trading period prior to the
closing of the transaction. Fairfield, with more than 324,000 vacation-owning
households, is a leading vacation ownership company in the United States,
marketing and managing resort properties at 35 locations in 12 states and the
Bahamas. Fairfield operates over 32 dedicated sales centers and manages over 110
timeshare and whole ownership resort associations. Although no assurances can be
given, we expect to complete the acquisition in early April 2001.
HOLIDAY COTTAGES GROUP. On January 17, 2001, we acquired Holiday Cottages
Group Ltd. ("HCG"). HCG is a leading provider of holiday cottage rentals in
Europe. HCG markets eight brands and processed reservations for cottage rentals
comprising approximately 184,000 rental weeks for 2000.
RCI SOUTHERN AFRICA AND RCI PACIFIC. On February 28, 2001, RCI Europe, our
wholly owned subsidiary, acquired Vacation Exchanges International (Pty) Ltd.,
which does business as RCI Southern Africa Ltd. This acquisition also included
our acquisition of the remaining 50 percent of RCI Pacific (Pty) Ltd. that we
did not already own. RCI Southern Africa Ltd. operates in the timeshare exchange
industry in southern Africa, Australia, New Zealand and Fiji.
AMERIHOST INN. On October 2, 2000, we completed the acquisition of the
AmeriHost Inn and AmeriHost Inn & Suites-SM- brand names and franchising rights.
AmeriHost Inn and AmeriHost Inn & Suites are new construction, limited service,
mid-priced hotels. We and Amerihost Properties, Inc. ("API") intend to grow the
AmeriHost hotel system through continued property development by API and our
active franchise sales to API and third parties. Additionally, we have entered
into an agreement with API to share royalties on AmeriHost hotels for a period
of 25 years.
BRADFORD & BINGLEY RELOCATION SERVICES. On September 7, 2000, we acquired
Bradford & Bingley Relocation Services, Ltd. ("BBRS"), a leading corporate
relocation services provider in the United Kingdom. BBRS operations were merged
with our Cendant Relocation (UK) Limited operations immediately after the
acquisition.
HAMILTON WATTS INTERNATIONAL. On July 20, 2000, we acquired Hamilton Watts
International, a leading provider of expatriate and corporate relocation
management services in Australia and across Southeast Asia.
MARKETTRUST. On January 8, 2001, our FISI subsidiary acquired certain assets of
MarketTrust, Inc., including its agreements to provide checking account
enhancement packages to over 320 financial institutions located across the
United States.
INTERNET DEVELOPMENTS
We are currently developing an online travel portal due to launch in late 2001.
We hope to maximize growth opportunities of our existing travel businesses and
take advantage of our experience with the move.com portal. The travel portal
will leverage new technology coupled with access to our lodging, timeshare, car
rental and travel agency services to address the full range of consumer travel
needs. The travel portal will deliver a consumer friendly experience with
products and services from a wide variety of travel providers.
OTHER
SECURITIES OFFERINGS. On February 13, 2001, we issued $1.2 billion principal
amount at maturity of zero-coupon senior convertible contingent notes due 2021
in a private offering. The notes were offered at an initial offering price of
$608.41 per $1,000 principal amount at maturity, with gross proceeds of
approximately $750 million. On March 9, 2001, Lehman Brothers Inc. exercised its
option to purchase an
6
additional $246 million principal amount at maturity of notes. Each $1,000
principal amount at maturity note will be convertible into 33.4 shares of CD
common stock if the closing price of CD common stock on the New York Stock
Exchange exceeds specified levels or in the event our credit rating falls below
investment grade or if we call the notes for redemption or engage in certain
corporate transactions. The notes will not be redeemable by the Company prior to
February 13, 2004 but we may be required to repurchase notes at the accreted
value thereof, at the option of the holders, on February 13, 2004, 2009, or
2014. We may choose to pay the purchase price for the foregoing repurchases in
cash or shares of CD common stock.
Simultaneously with the notes offering, we issued 40 million shares of our CD
common stock to Lehman at $13.20 per share, resulting in net proceeds of
approximately $528 million. On March 9, 2001, Lehman exercised its option to
purchase an additional six million shares of CD common stock to cover
over-allotments which provided $79.2 million in net proceeds. We used a portion
of the proceeds from the offerings to fund the acquisition of Avis Group. The
remaining proceeds will be used to reduce outstanding debt and for general
corporate purposes.
DIVESTITURE OF MOVE.COM AND WELCOME WAGON INTERNATIONAL. On February 16, 2001,
we completed the sale to Homestore.com of certain businesses within our Move.com
Group segment, and our Welcome Wagon International business, which was part of
our Diversified Services segment. The transaction combines two leading Web sites
in the home and real estate category under the
Homestore.com-Registered Trademark- brand. The transaction also provides
Homestore.com's Web site REALTOR.com-Registered Trademark- with an exclusive
40-year license to the aggregated listings of our CENTURY 21, Coldwell Banker
and ERA national real estate franchises. Homestore.com acquired the Move.com and
Welcome Wagon businesses in an all-stock transaction totaling approximately
26.3 million shares of Homestore common stock valued over $700 million. As a
result of the transaction, we own approximately 21.5 million shares of
Homestore.com common stock, representing approximately 20% of the current
outstanding shares of Homestore.com. See "Divested Businesses and Discontinued
Operations--Move.com and Welcome Wagon".
SPIN-OFF OF INDIVIDUAL MEMBERSHIP BUSINESSES. On October 25, 2000, we announced
our intention to distribute 100% of the stock of a new company incorporating our
individual membership and loyalty businesses to our stockholders in a tax-free
distribution. We expect the process, which includes the formation of the new
company, registration of its shares and distribution of the shares to
stockholders, to be completed in mid-2001. The principal operating units of the
new company will be Cendant Membership Services Inc., currently headquartered in
Stamford, Connecticut, and Cendant Incentives Incorporated, headquartered in
Richmond, Virginia. The spin-off does not include the direct marketing
businesses of FISI, BCI, LTPC and Cims. See "Divested Businesses and
Discontinued Operations--Individual Membership".
PRINCIPAL CLASS ACTION LITIGATION SETTLEMENT AND GOVERNMENT INVESTIGATION
FINDINGS
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC International, Inc. business units,
approximately 70 lawsuits claiming to be class actions, three lawsuits claiming
to be brought derivatively on our behalf and several individual lawsuits and
arbitration proceedings have been filed against us and, among others, our
predecessor, HFS Incorporated, and several current and former officers and
directors of Cendant and HFS. These lawsuits assert, among other things, various
claims under the federal securities laws including claims under sections 11, 12
and 15 of the Securities Act of 1933 and sections 10(b), 14(a) and 20(a) of and
Rules 10b-5 and 14a-9 under the Securities Exchange Act of 1934 and state,
statutory and common laws, including claims that financial statements previously
issued by us allegedly were false and misleading and that these statements
allegedly caused the price of our securities to be artificially inflated. See
"Item 3. Legal Proceedings".
In addition, the staff of the Securities and Exchange Commission (the "SEC") and
the United States Attorney for the District of New Jersey have conducted
investigations relating to the accounting irregularities. On June 14, 2000, the
SEC concluded its investigation when we consented to entry of an Order
Instituting Public Administration Proceedings in which the SEC found that we had
violated certain record-
7
keeping provisions of the federal securities laws, Sections 13(a) and 13(b) of
the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and ordered us to
cease and desist from committing or causing any violation and any future
violation of those provisions.
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the principal Securities Action pending against us in the U.S. District
Court in Newark, New Jersey relating to the aforementioned class action
lawsuits. In the definitive written settlement agreement executed March 17,
2000, the Company agreed to pay the class members approximately $2.85 billion in
cash. The District Court approved the settlement in orders dated August 15,
2000. Certain parties who objected to the settlement have appealed the District
Court's orders approving the settlement, the plan of allocation of the
settlement fund and awarding attorneys fees and expenses to counsel for the lead
plaintiffs. We currently plan to fund the settlement through the use of
available cash, the use of existing credit facilities, the issuance of debt
securities, and/or the issuance of equity securities. We intend to finance the
cost of the settlement so as to maintain our investment grade ratings.
The settlements do not encompass all litigation asserting claims associated with
the accounting irregularities. We do not believe that it is feasible to predict
or determine the final outcome or resolution of these unresolved proceedings. An
adverse outcome from such unresolved proceedings could be material with respect
to earnings in any given reporting period. However, the Company does not believe
that the impact of such unresolved proceedings should result in a material
liability to the Company in relation to its consolidated financial position or
liquidity.
* * *
Financial information about our business segments may be found in Note 25 to our
Consolidated Financial Statements presented in Item 8 of this Annual Report on
Form 10-K and incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Annual Report on Form 10-K are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:
- the effect of economic conditions and interest rate changes on the economy
on a national, regional or international basis and the impact thereof on
our businesses;
- the effects of changes in current interest rates, particularly on our Real
Estate Franchise and Mortgage segments;
- the resolution or outcome of our unresolved pending litigation relating to
the previously announced accounting irregularities and other related
litigation;
- our ability to develop and implement operational and financial systems to
manage growing operations and to achieve enhanced earnings or effect cost
savings;
8
- competition in our existing and potential future lines of business and the
financial resources of, and products available to, competitors;
- our ability to integrate and operate successfully acquired and merged
businesses and risks associated with such businesses, including the
acquisition of Avis Group and the pending acquisition of Fairfield, the
compatibility of the operating systems of the combining companies, and the
degree to which our existing administrative and back-office functions and
costs and those of the acquired companies are complementary or redundant;
- uncertainty relating to the proposed spin-off of our discontinued
Individual Membership segment;
- our ability to obtain financing on acceptable terms to finance our growth
strategy and to operate within the limitations imposed by financing
arrangements and rating agencies;
- competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry;
- changes in the vehicle manufacturer repurchase arrangements between
vehicle manufacturers and Avis Group in the event that used vehicle values
decrease; and
- changes in laws and regulations, including changes in accounting standards
and privacy policy regulation.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
PRINCIPAL EXECUTIVE OFFICE
Our principal executive office is located at 9 West 57th Street, New York, New
York 10019 (telephone number: (212) 413-1800).
TRAVEL DIVISION
The Travel division contains our Travel segment, which consists of our lodging
franchise services, timeshare exchange, car rental franchise and operations
businesses and our fleet management services business and represented
approximately 32%, 32% and 35% of our revenue for 2000, 1999 and 1998,
respectively (not including the Avis car rental operations and fleet management
business which were acquired on March 1, 2001).
TRAVEL SEGMENT
LODGING FRANCHISE BUSINESS
GENERAL. The lodging industry can be divided into four broad sectors based on
price and services: upper upscale, which typically charge room rates above $110
per night; upscale, which typically charge room rates between $81 and $110 per
night; middle market, with room rates generally between $55 and $80 per night;
and economy, where room rates generally are less than $55 per night. Of our
franchised brands, Ramada, Howard Johnson, Wingate Inn and AmeriHost Inn compete
principally in the middle market sector and Days Inn, Knights Inn, Super 8,
Travelodge and Villager compete primarily in the economy sector.
9
As a franchisor of lodging brands, we provide a number of services designed to
directly or indirectly increase hotel occupancy rates, revenue and
profitability, the most important of which is a centralized brand-specific
reservation system. Similarly, brand awareness, derived from nationally
recognized brand names supported by national advertising and marketing
campaigns, can increase the desirability of a hotel property to prospective
guests. We believe that, in general, national franchise brands with a greater
number of hotels enjoy greater brand awareness among potential hotel guests, and
thus, are perceived as more valuable by existing and prospective franchisees
than brands with fewer properties. Franchise brands can also increase franchisee
property occupancy through national direct sales programs to businesses,
associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital expenditures
and operating costs required to meet a brand's quality, technology and operating
standards, plus the ongoing payment of franchise royalties and assessments for
the reservation system and marketing programs) with the increase in gross room
revenue and decrease in certain expenses anticipated to be derived from brand
membership. Other benefits to brand affiliation include group purchasing
services, training programs, design and construction advice, and other
franchisee support services, all of which provide the benefits of a national
lodging services organization to operators of independently-owned hotels. We
believe that, in general, franchise affiliations are viewed as enhancing the
value of a hotel property by providing economic benefits to the property.
The fee and cost structure of our lodging business provides significant
opportunities for us to increase earnings by increasing the number of franchised
properties. Hotel franchisors derive substantially all of their revenue from
continuing franchise fees. Continuing franchise fees are comprised of two
components, a royalty portion and a marketing/reservation portion, both of which
are normally charged by the franchisor as a percentage of the franchisee's gross
room revenue. The royalty portion of the franchise fee is intended to cover the
operating expenses of the franchisor, such as expenses incurred in quality
assurance, administrative support and other franchise services and to provide
the franchisor with operating profits. The marketing/reservation portion of the
franchise fee is intended to reimburse the franchisor for the expenses
associated with providing such franchise services as a central reservation
system, national advertising and marketing programs and certain training
programs.
Our franchisees are dispersed geographically, which minimizes the exposure to
any one hotel owner or geographic region. Of the more than 6,400 properties and
4,900 franchisees in our systems, no individual hotel owner accounts for more
than 2% of our lodging franchisee properties.
FRANCHISE SYSTEMS. The following is a summary description of our lodging
franchise systems. Information reflects properties that are open and operating
and is presented as of December 31, 2000.
PRIMARY
DOMESTIC AVG. ROOMS # OF # OF
BRAND MARKET SERVED PER PROPERTY PROPERTIES ROOMS LOCATION*
- ----- -------------------- ------------ ---------- -------- -------------
AmeriHost Inn Middle Market 63 81 5,141 Domestic
Days Inn Upper Economy 85 1,912 162,129 International(1)
Howard Johnson Middle Market 100 508 50,938 International(2)
Knights Inn Lower Economy 79 230 18,194 International(3)
Ramada Middle Market 123 988 121,431 Domestic
Super 8 Economy 61 1,969 119,266 International(3)
Travelodge Upper Economy 81 564 45,699 International(4)
Villager Lower Economy 89 110 9,770 International(4)
Wingate Inn Upper Middle Market 94 93 8,745 Domestic
----- -------
Total 6,455 541,313
===== =======
- ------------------------
* Description of rights owned or licensed.
(1) Includes properties in Canada, China, Colombia, Czech Republic, Hungary,
India, Jordan, Mexico, Philippines, South Africa, United Kingdom, and
Uruguay.
10
(2) Includes properties in Argentina, Canada, Colombia, Dominican Republic,
Ecuador, Israel, Jordan, Lebanon, Malta, Mexico, Oman, Venezuela, United
Arab Emirates, and United Kingdom.
(3) Includes properties in Canada.
(4) Includes properties in Canada and Mexico.
FRANCHISE GROWTH. Growth of the franchise systems through the sale of long-term
franchise agreements to operators of existing and newly constructed hotels is
the leading source of revenue and earnings growth in our lodging franchise
business. We also continue to seek opportunities to acquire or license
additional hotel franchise systems, including established brands in the upper
upscale and upscale sectors of the market, where we are not currently
represented.
We market franchises principally to independent hotel and motel owners, as well
as to owners who have the right to terminate franchise affiliations of their
properties with other hotel brands. We believe that our existing franchisees
also represent a significant potential market because many own, or may own in
the future, other hotels, which can be converted to our brand names.
Accordingly, a significant factor in our sales strategy is maintaining the
satisfaction of our existing franchisees by providing quality services.
We employ a national franchise sales force consisting of approximately 94 sales
personnel, which is divided into several brand specific sales groups, with
regional offices around the country. The sales force is compensated primarily
through commissions. In order to provide broad marketing of our brands, sales
referrals are made among the sales groups and a referring salesperson is
entitled to a commission for a referral which results in a franchise sale.
We seek to expand our franchise systems and provide marketing and other
franchise services to franchisees on an international basis through a series of
master license agreements with master developers and franchisors based outside
the United States. As of December 31, 2000, our franchising subsidiaries (other
than Ramada and AmeriHost) have entered into international master licensing
agreements for part or all of approximately 66 countries on five continents.
These agreements typically include minimum development requirements and require
payment of an initial development fee in connection with the execution of the
license agreement as well as recurring franchise fees.
OPERATIONS. Our organization is designed to provide a high level of service to
our franchisees while maintaining a controlled level of overhead expense. In the
lodging business, expenses related to marketing and reservations services are
budgeted to match anticipated marketing and reservation fees each year.
CENTRAL RESERVATION SYSTEMS. Unlike many other franchise businesses (such as
restaurants), the lodging business is characterized by remote purchasing through
travel agencies and through use by consumers of toll-free telephone numbers and
the Internet. Each of our reservation systems is independently operated,
focusing on its specific brand and franchise system, and is comprised of: one or
more nationally advertised toll-free telephone numbers; reservation agents who
accept inbound calls; a computer operation that processes reservations; and
automated links which accept reservations from travel agents and other travel
providers, such as airlines, and which report reservations made through the
system to each franchisee property. Each reservation agent handles reservation
requests and inquiries for only one of our franchise systems and there is no
"cross selling" of franchise systems to consumers. We maintain six reservation
centers that are located in: Knoxville and Elizabethton, Tennessee; Phoenix,
Arizona; Winner and Aberdeen, South Dakota; and Saint John, New Brunswick,
Canada.
Each brand maintains an Internet Web site to acquaint viewers with the brand and
its properties. Each property has its own series of information pages. Each
brand also accepts reservations over the Internet from the brand's own Web site
and other Internet Web sites equipped with compatible booking devices. In 2000,
the brand Web sites had 139 million page views and booked an aggregate of
1,337,015 roomnights from Internet booking sources, compared with 64.7 million
page views and 649,253 roomnights booked in 1999, increases of 115% and 106%,
respectively.
FRANCHISE AGREEMENTS. Our franchise agreements grant the right to utilize one
of the brand names associated with our lodging franchise systems to lodging
facility owners or operators under long-term
11
franchise agreements. An annual average of 1.8% of our existing franchise
agreements are scheduled to expire from January 1, 2001 through December 31,
2006, with no more than 2.4% scheduled to expire in any one of those years.
The current standard agreements generally are for 15-year terms for converted
properties and 20-year terms for newly constructed properties and generally
require, among other obligations, franchisees to pay a minimum initial fee
generally based on property size and type, as well as continuing franchise fees
comprised of royalty fees and marketing/reservation fees based on gross room
revenues.
Under the terms of the standard franchise agreements in effect at December 31,
2000, franchisees are typically required to pay recurring fees comprised of a
royalty portion and a marketing/reservation portion, generally calculated as a
percentage of annual gross room revenue ranging from 7.0% to 8.8%. Under certain
circumstances we discount fees from the standard rates.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain quality standards, to pay franchise fees or other
charges or to meet other specified obligations. In the event of such
termination, we are typically entitled to be compensated for lost revenue in an
amount equal to the franchise fees accrued during periods specified in the
respective franchise agreements which are generally between one and five years.
The lodging franchise agreements are terminable by the franchisee under certain
limited circumstances. The franchisee may terminate under certain procedures if
the hotel suffers a substantial casualty or condemnation. Some franchisees and
our brands have negotiated certain mutual termination rights, which usually may
be exercised only on specific anniversary dates of the hotel's opening, and only
if certain conditions precedent are met. The lodging franchise business also has
a policy that allows a franchisee to terminate the franchise if its hotel fails
to achieve 50% annual occupancy after certain conditions and waiting periods are
satisfied.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY. The service marks "Days Inn,"
"Ramada," "Howard Johnson," "Super 8," "Travelodge," "Wingate Inn," "Villager,"
"Knights Inn," and "AmeriHost Inn" and related logos are material to our
business. We, through our franchisees, actively use these marks. All of the
material marks in each franchise system are registered (or have applications
pending for registration) with the United States Patent and Trademark Office as
well as major countries worldwide where the brands are franchised. We own the
marks relating to following systems: Days Inn; Howard Johnson; Super 8;
Travelodge (in North America); Wingate Inn; Villager; Knights Inn; and AmeriHost
Inn.
12
We franchise the service mark "Ramada" and related marks and Ramada brands and
logos (the "Ramada Marks") to lodging facility owners in the United States
pursuant to two license agreements (the "Ramada License Agreements") between an
indirect subsidiary of Marriott Corporation ("Licensor") and Ramada Franchise
Systems, Inc. ("RFS"), our wholly-owned subsidiary.
The Ramada License Agreements limit RFS' use of the Ramada Marks to the U.S.
market. The Ramada License Agreements have initial terms terminating on
March 31, 2024. At the end of the initial terms, RFS has the right either
(i) to extend the Ramada License Agreements, (ii) to purchase the Ramada Marks
for their fair market value at the date of purchase, subject to certain minimums
after the initial terms, or (iii) to terminate the Ramada License Agreements.
The Ramada License Agreements require that RFS pay license fees to the Licensor
calculated on the basis of percentages of annual gross room sales, subject to
certain minimums and maximums as specified in each Ramada License Agreement.
During 2000, RFS received approximately $49 million in royalties from its Ramada
franchisees and paid the Licensor approximately $25 million in license fees.
The Ramada License Agreements are subject to certain termination events relating
to, among other things, (i) the failure to maintain aggregate annual gross room
sales minimum amounts stated in the Ramada License Agreements, (ii) the
maintenance by us of a minimum net worth of $50 million (however, this minimum
net worth requirement may be satisfied by a guaranty of an affiliate of ours
with a net worth of at least $50 million or by an irrevocable letter of credit
(or similar form of third-party credit support)), (iii) non-payment of
royalties, (iv) failure to maintain registrations on the Ramada Marks and to
take reasonable actions to stop infringements, (v) failure to pay certain
liabilities specified by the Restructuring Agreement, dated July 15, 1991, by
and among New World Development Co., Ltd. (a predecessor to Licensor), Ramada
International Hotels and Resorts, Inc., Ramada Inc., Franchise System
Holdings, Inc., the Company and RFS, and (vi) failure to maintain appropriate
hotel standards of service and quality. A termination of the Ramada License
Agreements would result in the loss of the income stream from franchising the
Ramada brand names and could result in the payment by us of liquidated damages
equal to three years of license fees. We do not believe that we will have
difficulty complying with all of the material terms of the Ramada License
Agreements.
COMPETITION. Competition among the national lodging brand franchisors to grow
their franchise systems is intense. Our primary national lodging brand
competitors are the Holiday Inn-Registered Trademark- and Best
Western-Registered Trademark- brands and Choice Hotels, which franchises seven
brands, including the Comfort Inn-Registered Trademark-, Quality
Inn-Registered Trademark- and Econo Lodge-Registered Trademark- brands. Our Days
Inn, Travelodge and Super 8 properties principally compete with Comfort Inn, Red
Roof Inn-Registered Trademark- and Econo Lodge in the economy sector. The chief
competitors of our Ramada, Howard Johnson, Wingate Inn and AmeriHost Inn
properties, which compete in the middle market sector of the hotel industry, are
Holiday Inn-Registered Trademark- and Hampton Inn-Registered Trademark-. Our
Knights Inn and Travelodge brands compete with Motel 6-Registered Trademark-
properties. In addition, a lodging facility owner may choose not to affiliate
with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the lodging industry
is based principally upon the perceived value and quality of the brand and
services offered to franchisees, as well as the nature of those services. We
believe that prospective franchisees value a franchise based upon their view of
the relationship of conversion costs and future charges to the potential for
increased revenue and profitability. The reputation of the franchisor among
existing franchisees is also a factor, which may lead a property owner to select
a particular affiliation. We also believe that the perceived value of its brand
names to prospective franchisees is, to some extent, a function of the success
of its existing franchisees.
The ability of our lodging franchisees to compete in the lodging industry is
important to our prospects for growth, although, because franchise fees are
based on franchisee gross room revenue, our revenue is not directly dependent on
franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
13
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchised properties.
SEASONALITY. Our principal source of lodging revenue is based upon the annual
gross room revenue of franchised properties. As a result, our lodging franchise
business experiences seasonal revenue patterns similar to those of the hotel
industry where higher revenues are generated during the summer months than
during other periods of the year because of increased leisure travel. Therefore,
any occurrence that disrupts travel patterns during the summer period could have
a material adverse effect on our franchisee's annual performance and our annual
performance.
TIMESHARE BUSINESS
GENERAL. Our Resort Condominiums International ("RCI") subsidiary is the
world's largest provider of timeshare vacation exchange opportunities and
services for more than 2.8 million timeshare members from approximately 200
nations and more than 3,700 resorts in more than 100 countries around the world.
Our RCI-Registered Trademark- business consists primarily of the operation of an
exchange program for owners of condominium timeshares or whole units at
affiliated resorts, the publication of magazines and other periodicals related
to the vacation and timeshare industry, travel-related services, resort
management and consulting services. RCI has significant operations in North
America, Europe, the Middle East, Latin America, Africa, Australia and the
Pacific Rim and has more than 3,900 employees worldwide.
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments and
timeshare resorts. Commercial lodging consists principally of: (i) hotels and
motels in which a room is rented on a nightly, weekly or monthly basis for the
duration of the visit; and (ii) rentals of privately-owned condominium units or
homes. Generally, the commercial lodging industry is designed to serve both the
leisure and business traveler. Timeshare resorts present an economical and
reliable alternative to commercial lodging for many vacationers who want to
experience the added benefits associated with ownership. Timeshare resorts are
purposely designed and operated for the needs and enjoyment of the leisure
traveler.
Resort timesharing--also referred to as vacation ownership--is the shared
ownership and/or periodic use of property by a number of users or owners for a
defined period of years or in perpetuity. An example of a simple form of
timeshare is a condominium unit that is owned by fifty-one persons, with each
person having the right to use the unit for one week of every year and with one
week set aside for maintenance. In the United States, industry sources estimate
that the average price of such a timeshare is about $11,000, plus a yearly
maintenance fee of approximately $350 per interval owned. Based upon information
published about the industry, we believe that during 2000, sales of timeshares
exceeded $7.5 billion worldwide. Two principal sectors make up the timeshare
exchange industry: owners of timeshare interest (consumers) and resort
properties (developers/operators). Trade industry sources have estimated that
the total number of timeshare owners is more than five million worldwide, while
the total number of timeshare resorts worldwide has been estimated to be nearly
5,500. The timeshare exchange industry derives revenue from annual subscribing
membership fees paid by owners of timeshare interests, fees paid by such owners
for each exchange and fees paid by members and resort affiliates for various
other products and services.
The RCI-Registered Trademark- Weeks Exchange Program ("RCI Weeks") provides RCI
members who own timeshares at RCI-affiliated resorts the ability to exchange
their timeshare vacation accommodations in any given year for comparable value
accommodations at other RCI-affiliated resorts. Approximately 1.3 million
members of RCI Weeks, representing approximately 50% of the total members of RCI
Weeks, reside outside of the United States.
We provide members of RCI Weeks with access to both domestic and international
timeshare resorts, publications regarding timeshare exchange opportunities and
other travel-related services, including discounted purchasing programs. During
2000, we arranged more than 2.1 million exchanges. Our RCI members paid an
average annual subscribing membership fee of $57, as well as an average exchange
fee of approximately $140 for every exchange arranged by us, resulting in
membership and exchange fees totaling approximately $360 million during 2000.
14
Developers of resorts affiliated with RCI Weeks typically pay the first year
subscribing membership fee for new owner/members upon the sale of the timeshare
interest.
GROWTH. The timeshare exchange industry has experienced significant growth over
the past decade. We believe that the factors driving this growth include the
demographic trend toward older, more affluent Americans who travel more
frequently; the entrance of major hospitality and entertainment companies into
timeshare development; a worldwide acceptance of the timeshare concept; and an
increasing focus on leisure activities, family travel and a desire for value,
variety and flexibility in a vacation experience. We believe that future growth
of the timeshare exchange industry will be determined by general economic
conditions both in the United States and worldwide, the public image of the
industry, improved approaches to marketing and sales, a greater variety of
products and price points, the broadening of the timeshare market and a variety
of other factors. Accordingly, we cannot predict if future growth trends will
continue at rates comparable to those of the recent past.
One of the key innovations that we introduced to the vacation timeshare industry
was the RCI Points Exchange Program, formally known as the Global Points
Network(SM). RCI Points members are assigned points, which represent the
comparable value of their timeshare interests. These points can then be used for
stays at RCI resorts, airfare, car rentals, hotel stays, cruises and more,
providing enormous flexibility for RCI Points members. RCI Points is a creative
way to enhance the attractiveness of RCI membership by adapting to changes in
consumer vacation habits that have trended toward shorter, but more frequent
vacations. Initial reaction to RCI Points has been positive and the program will
continue to expand in 2001.
On November 2, 2000, we announced that we had signed a definitive agreement to
acquire Fairfield Communities Inc., one of the largest vacation ownership
companies in the United States. Fairfield develops timeshare resorts, markets
vacation ownership products and manages resort properties under the
Fairfield-Registered Trademark- name at 35 locations in 12 states and the
Bahamas. Fairfield's primary business is the sale of timeshare interests and it
operates more than 32 sales centers throughout the United States. It also
manages more than 110 property owners associations. In 2000, over 625,000
families visited resorts owned or managed by Fairfield. The acquisition of
Fairfield will enable us to expand our timeshare product offerings to include
timeshare financing, unit interval sales and marketing, property management,
club management and timeshare exchange programs. Immediately prior to the
closing of the Fairfield acquisition, Fairfield will transfer its real estate
development assets to a third party. Fairfield and the third party will enter
into agreements governing the relationship of such parties following the closing
of the Fairfield acquisition. On January 8, 2001, Fairfield announced the
acquisition of Dolphin's Cove Resort in Anaheim, California from Dolphin's Cove
Resort, Ltd. This acquisition increases Fairfield's membership base to more than
340,000 and includes option rights to develop an oceanfront vacation ownership
resort in southern California. The Fairfield acquisition is expected to be
completed in early April 2001.
RCI AFFILIATES. Most RCI members are acquired through developers; only a small
percentage of members are acquired through our direct solicitation activities.
As a result, the growth of the timeshare exchange business is dependent on the
sale of timeshare units by affiliated resorts such as Fairfield. RCI affiliates
consist of international brand names and independent developers, owners'
associations and vacation clubs. We enter into resort affiliation agreements
with timeshare resort developers and allow these developers to offer
participation in the RCI exchange programs to individual purchasers of timeshare
interests. See "Property Affiliation Agreements" below. We believe that national
lodging and hospitality companies are attracted to the timeshare concept because
of the industry's relatively low product cost and high profit margins, and the
recognition that timeshare resorts provide an attractive alternative to the
traditional hotel-based vacation and allow the hotel companies to leverage their
brands into additional resort markets where demand exists for accommodations
beyond traditional rental-based lodging operations. Today, seven of every ten
timeshare resorts worldwide are affiliated with RCI. We also believe that RCI's
existing affiliates represent a significant potential market because a portion
of their existing properties are not sold. In addition, many developers and
resort managers may become involved in additional resorts in the future which
can be affiliated with RCI. Accordingly, a significant factor in our growth
strategy is maintaining the satisfaction of our existing affiliates by providing
quality support services.
15
INTERNATIONAL EXCHANGE SYSTEM. Members are served through a network of call
centers located in countries throughout the world. These call centers are
staffed by approximately 2,200 people. Major regional call and information
support centers are located in Indianapolis, Saint John (Canada), Kettering
(England), Cork (Ireland), Mexico City and Singapore. All members receive a
directory that lists resorts available through the exchange system, a periodic
magazine and other information related to the exchange system and available
travel services. These materials are published in various languages.
TRAVEL SERVICES. In addition to exchange services, our call centers also engage
in telemarketing and cross selling of other ancillary travel and hospitality
services. These services are offered to a majority of members depending on their
location. We provide travel services to our U.S. members through our affiliate,
RCI Travel, Inc. ("RCIT"). On a global basis, we provide travel services through
entities operating in local jurisdictions (hereinafter, RCIT and its local
entities are referred to as "RCI Travel Agencies"). RCI Travel Agencies provide
airline reservations and ticket sales to members in conjunction with the
arrangement of their timeshare exchanges, as well as providing other types of
travel services, including hotel accommodations, car rentals, cruises and tours.
RCI Travel Agencies also offer travel packages utilizing resort developers'
unsold inventory to generate both revenue and prospective timeshare purchasers
through affiliated resorts.
CONSULTING. We provide worldwide timeshare consulting services through our
indirect subsidiary, RCI Consulting, Inc. These services include comprehensive
market research, site selection, strategic planning, community economic impact
studies, resort concept evaluation, financial feasibility assessments, on-site
studies of existing resort developments and tailored sales and marketing plans.
PROPERTY MANAGEMENT. We provide resort property management services through our
indirect subsidiary, RCI Management, Inc. ("RCIM"). RCIM is a single source for
any and all resort management services and offers a menu including hospitality
services, a centralized reservation service center, advanced reservations
technology, human resources expertise and owners' association administration.
PROPERTY AFFILIATION AGREEMENTS. We are affiliated with more than 3,700
timeshare resorts, of which approximately 1,400 resorts are located in the
United States and Canada, more than 1,300 in Europe and Africa, more than 550 in
Mexico and Latin America and more than 350 in the Asia-Pacific region. The terms
of our affiliation agreement with our affiliates generally require that the
developer enroll each new timeshare purchaser at the resort as a subscribing
member of RCI, license the affiliated resort to use the RCI name and trademarks
for certain purposes, set forth the materials and services RCI will provide to
the affiliate, and generally describe RCI's expectations of the resort's
management. The affiliation agreement also includes stipulations for
representation of the exchange program, minimum enrollment requirements and
treatment of exchange guests. Affiliation agreements are typically for a term of
five years and automatically renew thereafter for terms of one to five years
unless either party takes affirmative action to terminate the relationship. We
make available a wide variety of goods and services to its affiliated
developers, including publications, advertising, sales and marketing materials,
timeshare consulting services, resort management software, travel packaging and
property management services.
TRADEMARKS AND INTELLECTUAL PROPERTY. The service marks "RCI", "Resort
Condominiums International-Registered Trademark-" and related trademarks and
logos are material to RCI's business. RCI and its subsidiaries actively use the
marks. "RCI" and "Resort Condominiums International" are registered with the
United States Patent and Trademark Office as well as major countries worldwide
where RCI or its subsidiaries have significant operations. We own the marks used
in RCI's business.
COMPETITION. The global timeshare exchange industry is comprised of a number of
entities, including resort developers and owners. RCI's largest competitor is
Interval International Inc. ("Interval"), formerly our wholly owned subsidiary.
Based upon industry sources, we believe that approximately 98% of the nearly
5,500 timeshare resorts in the world are affiliated with either RCI or Interval.
Based upon 1999 audited statistics (which are the most recent available), RCI
had over 2.6 million members, while Interval had approximately 968,000 members.
In 1999, RCI confirmed more than two million exchange transactions, while
Interval confirmed approximately 585,000 transactions.
16
SEASONALITY. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year, revenues are generally
slightly higher in the first quarter in comparison to other quarters of the
year. We cannot predict whether this trend will continue in the future as the
timeshare business expands outside of the United States and Europe, and as
global travel patterns shift with the aging of the world population.
CAR RENTAL BUSINESS
GENERAL. We operate the Avis car rental franchise system (the "Avis System").
On March 1, 2001, we purchased the approximately 82% of Avis Group, the largest
Avis System franchisee, that we did not already own at a price of $33.00 per
share in cash, or approximately $937 million. See "Recent
Developments--Acquisitions--Avis Group Holdings" above. Our car rental business
is now comprised of the Avis System and the car rental operations of Avis Group.
As a result, we operate the second largest general use car rental business in
the world, based on total revenue and volume of rental transactions.
The Avis System is comprised of approximately 4,700 rental locations, including
locations at the largest airports and cities in the United States and
approximately 172 other countries and territories, and a fleet of approximately
265,000 vehicles during the peak season. Approximately 93% of the Avis System
rental revenues in the United States are received from locations operated by us
as a result of the acquisition of Avis Group either directly or under agency
arrangements, with the remainder being received from locations operated by
independent licensees. The Avis System in Europe, Africa, part of Asia and the
Middle East is operated under franchise by Avis Europe Ltd, an unaffiliated
third party.
The car rental industry provides vehicle rentals to business and individual
customers worldwide. The industry is composed of two principal sectors: general
use (mainly at airport and downtown locations) and local use (mainly at downtown
and suburban locations). The car rental industry rents primarily from
on-airport, near-airport, downtown and suburban locations. In addition to
revenue from vehicle rentals, the industry derives significant revenue from the
sale of rental related products such as insurance, refueling services and loss
damage waivers (a waiver of the rental company's right to make a renter pay for
damage to the rented car).
Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the travelers'
employers, (ii) business travelers who do not rent under negotiated contractual
arrangements but who may receive discounts through travel, professional or other
organizations, (iii) leisure travelers and (iv) renters who have lost the use of
their own vehicles through accident, theft or breakdown. Contractual
arrangements for business travelers normally are the result of negotiations
between rental companies and large corporations, based upon rates, billing and
service arrangements and influenced by reliability and renter convenience.
Business travelers, who are not parties to negotiated contractual arrangements,
and leisure travelers generally are influenced by advertising, renter
convenience and access to special rates because of membership in travel,
professional and other organizations.
THE AVIS SYSTEM. The Avis System provides franchisees access to the benefits of
a variety of services, including: (i) comprehensive safety initiatives,
including the "Avis Cares-Registered Trademark-" Safe Driving Program, which
offers vehicle safety information, directional assistance such as satellite
guidance, regional maps, weather reports and specialized equipment for travelers
with disabilities; (ii) a standardized system identity for rental location
presentation and uniforms; (iii) a training program and business policies,
quality of service standards and data designed to monitor service commitment
levels; (iv) marketing/advertising/public relations support for national
consumer promotions including Frequent Flyer/Frequent Stay programs and the Avis
System Internet Web site; and (v) brand awareness of the Avis System through the
familiar "We Try Harder-Registered Trademark-" service announcements.
Avis System franchisees are also provided with access to the
Wizard-Registered Trademark- System, a reservations, data processing and
information management system for the vehicle rental business. The Wizard System
is linked to all major travel networks on six continents through telephone lines
and satellite communications.
17
Direct access with other computerized reservations systems allows real-time
processing for travel agents and corporate travel departments. Among the
principal features of the Wizard System are:
- an advanced graphical interface reservation system;
- "Roving Rapid Return(SM)," which permits customers who are returning
vehicles to obtain completed charge records from radio-connected "Roving
Rapid Return" agents who complete and deliver the charge record at the
vehicle as it is being returned;
- "Preferred-Registered Trademark- Service," an expedited rental service
that provides customers with a preferred service rental record printed
prior to arrival, a pre-assigned vehicle and fast convenient check out;
- "Wizard on Wheels-Registered Trademark-," which enables the Avis System
locations to assign vehicles and complete rental agreements while
customers are being transported to the vehicle;
- "Flight Arrival Notification," a flight arrival notification system that
alerts the rental location when flights have arrived so that vehicles can
be assigned and paperwork prepared automatically;
- "Avis Link-Registered Trademark-," which automatically identifies the fact
that a user of a major credit card is entitled to special rental rates and
conditions, and therefore sharply reduces the number of instances in which
a franchisee inadvertently fails to give renters the benefits of
negotiated rate arrangements to which they are entitled;
- interactive interfaces through third-party computerized reservation
systems; and
- sophisticated automated ready-line programs that, among other things,
enable rental agents to ensure that a customer who rents a particular type
of vehicle will receive the available vehicle of that type which has the
lowest mileage.
The Wizard System processes incoming customer calls during which customers may
inquire about locations, rates and availability and place or modify
reservations. In addition, millions of inquiries and reservations come to
franchisees through travel agents and travel industry partners, such as
airlines. Regardless of where in the world a customer may be located, the Wizard
System is designed to ensure that availability of vehicles, rates and personal
profile information is accurately delivered at the proper time to the customer's
rental destination.
LICENSEES AND LICENSE AGREEMENTS. We have 62 independent licensees that operate
locations in the United States. Our largest licensee, Avis Group (owned by us as
of March 1, 2001), accounted for approximately 93% of all United States
licensees' rental revenues during 2000. Other than Avis Group, certain licensees
in the United States pay us a fee equal to 5.2% of their total time and mileage
charges, less all customer discounts, of which we are required to pay 38.5% for
corporate licensee-related programs, while seven licensees pay 8% of their gross
revenue. Licensees outside the United States normally pay higher fees. Other
than Avis Group, our United States licensees currently pay 58.5 cents per rental
agreement for use of certain portions of the Wizard System, and they are charged
for use of other aspects of the Wizard System.
In 1997, Avis Europe's previously paid-up license for Europe, the Middle East
and Africa was modified to provide for a paid-up license only as to Europe and
the Middle East. Avis Europe will pay us annual royalties for Africa and certain
portions of Asia, excluding Australia, New Zealand and Papua New Guinea. The
Avis Europe license expires on November 30, 2036, unless earlier termination is
effected in accordance with the license terms. Avis Europe also entered into a
Preferred Alliance Agreement with us under which Avis Europe became a preferred
alliance provider for car rentals to RCI customers in Europe, Asia and Africa.
UNITED STATES VEHICLE RENTAL OPERATIONS. Effective with the acquisition of Avis
Group on March 1, 2001, we operated approximately 602 vehicle rental facilities
at airport, near-airport and downtown locations throughout the United States.
During 2000, approximately 82% of our Avis Group's U.S. rental car operations
revenue was generated at 209 airports in the United States with the balance
generated at our 393 non-airport locations. Our emphasis on airport traffic has
resulted in a particular strong rental revenue market position at the major U.S.
airports.
18
At most airports, we are one of five to seven vehicle rental concessionaires. In
general, concession fees for airport locations are based on a percentage of
total concessionable revenues (as determined by each airport location), subject
to minimum guaranteed amounts. Concessions are typically awarded by airport
authorities every three to five years based upon competitive bids. As a result
of airport authority requirements as to the size of the minimum guaranteed fee,
smaller vehicle rental companies generally are not located at airports. Our
concession arrangements with the various airport authorities generally include
minimum requirements for vehicle age, operating hours and employee conduct, and
provide for relocation in the event of future construction and abatement of fees
in the event of extended low passenger volume.
INTERNATIONAL VEHICLE RENTAL OPERATIONS. Avis car rental operations operate in
Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia and New
Zealand. Its operations in Canada and Australia were the principal contributors
of revenue, accounting for 80% of international vehicle rental operations
revenue in 2000. Revenue from international vehicle rental operations in 2000
was approximately $257 million.
VEHICLE PURCHASING. We participate in a variety of vehicle purchase programs
with major domestic and foreign manufacturers, principally General Motors,
although actual purchases are made directly through franchised dealers. We
acquire vehicles primarily through vehicle repurchase programs whereby the
manufacturers repurchase the vehicles at prices based on either (i) a specified
percentage of original vehicle cost determined by the month the vehicle is
returned to the manufacturer, or (ii) the original capitalization cost less a
set daily depreciation amount (the "Repurchase Programs"). The average price for
automobiles we purchased in 2000 for the U.S. rental fleet was approximately
$19,400. For the 2000 model year, approximately 79% of new vehicle purchases
were GM vehicles, 8% Chrysler vehicles and 13% Toyota, Nissan, Hyundai, Ford,
Isuzu, Mitsubishi and Suzuki vehicles. In model year 2001, approximately 69% of
our fleet in the United States will consist of GM vehicles, approximately 9%
will be Chrysler vehicles and the balance will be provided by other
manufacturers. Manufacturers' vehicle purchase programs sometimes provide us
with sales incentives for the purchase of certain models, and most of these
programs allow us to serve as a drop-ship location for vehicles, thus enabling
us to receive a fee from the manufacturers for preparing newly purchased
vehicles for use. There can be no assurance that we will continue to benefit
from sales incentives in the future. For our international operations, vehicles
are acquired by way of negotiated arrangements with local manufacturers and
dealers using operating leases or Repurchase Programs.
Under the terms of our agreement with GM, which expires at the end of GM's model
year 2004, we are required to purchase at least 147,900 GM vehicles for model
year 2001 and maintain at least 51% GM vehicles in our U.S. fleet at all times.
The GM Repurchase Program is available for all vehicles purchased pursuant to
the agreement.
VEHICLE RENTAL DISPOSITION. Our current strategy is to hold rental vehicles for
not more than 12 months with the average fleet age being approximately six
months. Approximately 99% of the vehicles purchased for our domestic fleet under
the model year 2000, including all GM vehicles, were eligible for Repurchase
Programs. These programs impose certain return conditions, including those
related to mileage and repair condition over specified allowances. Less than 3%
of the Repurchase Program vehicles purchased by us and returned in 2000 were
ineligible for return. Upon return of a Repurchase Program vehicle, we receive a
price guaranteed at the time of purchase and are thus protected from a decrease
in prevailing used car prices in the wholesale market. We dispose of our used
vehicles that are not repurchased by the manufacturers to dealers in the United
States through informal arrangements or at auctions. The future percentage of
Repurchase Program vehicles in our fleet will depend on the availability of
Repurchase Programs, over which we have no control.
UNITED STATES VEHICLE RENTAL MARKETING. In the United States, approximately 76%
of Avis Group's 2000 car rental operations transactions were generated by
travelers who used the Avis System under contracts between the Company and their
employers or organizations of which they were members. Our corporate sales
organization is the principal source of contracts with corporate accounts.
Unaffiliated business travelers are solicited by direct mail, telesales and
advertising campaigns. Our telesales department consists of a centralized staff
that handles small corporate accounts, travel agencies, meetings and
19
conventions, tour operators and associations. Working with a state-of-the-art
system in Tulsa, Oklahoma, the telesales operation produced revenue for the Avis
System that exceeded $370 million in 2000. We solicit contractual arrangements
with corporate accounts by emphasizing the advantages of the Wizard System. It
plays a significant part in securing business of this type because the Wizard
System enables us to offer a wide variety of rental rate combinations, special
reports and tracking techniques tailored to the particular needs of each
account, access to a worldwide rental network and assurance of adherence to
agreed-upon rates.
Our presence in the leisure market is substantially less than our presence in
the business market. Leisure rental activity is important in enabling us to
balance the use of our fleet. Typically, business renters use vehicles from
Monday through Thursday, while in most areas of the United States leisure
renters use vehicles primarily over weekends. Our concentration on serving
business travelers has led to excess capacity from Friday through Sunday of most
weeks. We intend to increase our leisure market penetration by capitalizing on
our strength at airports and by increased focus of our marketing efforts toward
leisure travelers. An important part of our leisure marketing strategy is to
develop and maintain contractual arrangements with associations that provide
member benefits to their constituents. In addition to developing arrangements
with traditional organizations, we have created innovative programs such as the
Affinity Link Program that cross references bankcard members with Avis worldwide
identification numbers and provides discounts to the cardholders for
participating bankcard programs. We also use coupons in dine-out books and
provide discounts to members of shopping and travel clubs whose members
generated approximately $57 million of leisure business revenue in 2000.
Preferred supplier agreements with select travel agencies and contracts with
tour operators have also succeeded in generating leisure business for us.
Travel agents can make Avis System reservations through all four major
U.S.-based global distribution systems and several international-based systems.
Users of the U.S.-based global distribution systems can obtain access through
these systems to our rental location, vehicle availability and applicable rate
structures. An automated link between these systems and the Wizard System gives
them the ability to reserve and confirm rentals directly through these systems.
We also maintain strong links to the travel industry. We have arrangements with
frequent traveler programs of airlines such as Delta-Registered Trademark-,
American-Registered Trademark-, Continental-Registered Trademark-,
United-Registered Trademark- and TWA-Registered Trademark-, and of hotels
including the Hilton Corporation, Hyatt Corporation, Best Western, and Starwood
Hotels and Resorts. These arrangements provide various incentives to all program
participants and cooperative marketing opportunities for Avis and the partner.
We also have an arrangement with our lodging brands whereby lodging customers
who are making reservations by telephone will be transferred to us if they
desire to rent a vehicle.
AVIS ONLINE. Avis has a strong brand presence on the Internet through our Avis
Online web site, WWW.AVIS.COM. A steadily increasing number of Avis vehicle
rental customers obtain rate, location and fleet information and then reserve
their Avis rentals directly on the Avis Online web site. In addition, customers
electing to use other Internet services such as Expedia-Registered Trademark-,
Travelocity-Registered Trademark- and America Online-Registered Trademark- for
their travel plans also have access to Avis reservations. During 2000,
reservations through Internet sources increased to 7.4% of total reservations
from 3.7% in the prior year.
In addition to being able to determine rates and place reservations, Avis Online
users can find information about us, about other Avis programs and services,
special offers, point to point driving directions and maps as well as airport
maps.
INTERNATIONAL VEHICLE RENTAL. We utilize a multi-faceted approach to sales and
marketing throughout our global network. In our principal international rental
operations, we employ teams of trained and qualified account executives to
negotiate contracts with major corporate accounts and leisure and travel
industry partners. In addition, we utilize centralized telemarketing and direct
mail initiatives to broaden continuously our customer base. Sales efforts are
designed to secure customer commitment and support customer requirements for
both domestic and international car rental needs.
International sales and marketing activities promote our reputation for
delivering a high quality of service, contract rates, competitive pricing and
customer benefits from special services such as Preferred Service, Roving Rapid
Return and other benefits of the Wizard System.
20
Our international operations maintain close relationships with the travel
industry including participation in several airline frequent flyer programs,
such as those operated by Air Canada-Registered Trademark-, Ansett Australia
Airlines-Registered Trademark- and Varig-Registered Trademark- Brazilian
Airlines, as well as participation in Avis Europe programs with British
Airways-Registered Trademark-, Lufthansa-Registered Trademark- and other
carriers.
TRADEMARKS AND INTELLECTUAL PROPERTY. The service mark "Avis," related marks
incorporating the word "Avis", and related logos are material to our business.
Our subsidiaries, joint ventures and licensees, actively use these marks. All of
the material marks used in the Avis business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office as well as major countries worldwide where Avis franchises are
in operation. We own the marks used in the Avis business.
COMPETITION. The vehicle rental industry is characterized by intense price and
service competition. In any given location, we and our franchisees may encounter
competition from national, regional and local companies, many of which,
particularly those owned by the major automobile manufacturers, have greater
financial resources than the Avis System.
Our principal competitors for commercial accounts in the United States are The
Hertz Corporation and National Car Rental System, Inc. Principal competitors for
unaffiliated business and leisure travelers in the United States are Budget Rent
A Car Corporation, Hertz, National and Alamo Rent-A-Car Inc. In addition, we
compete with a variety of smaller vehicle rental companies throughout the
country.
Competition in the U.S. vehicle rental operations business is based primarily
upon price, reliability, ease of rental and return and other elements of
customer service. In addition, competition is influenced strongly by advertising
and marketing. In part, because of the Wizard System, we have been particularly
successful in competing for commercial accounts. There have been many occasions
during the history of the vehicle rental industry in which all of the major
vehicle rental companies have been adversely affected by severe industry-wide
rental rate cutting, and we have, on such occasions, lowered our rates in
response to such rate cutting. However, during the past two years, industry-wide
rates have increased, reflecting, in part, both increased costs of owning and
maintaining vehicles and the need to generate returns on invested capital.
SEASONALITY. The car rental franchise business is subject to seasonal
variations in customer demand, with the third quarter of the year, which covers
the summer vacation period, representing the peak season for vehicle rentals.
Therefore, any occurrence that disrupts travel patterns during the summer period
could have a material adverse effect on Avis' annual performance and affect our
annual financial performance. The fourth quarter is generally the weakest
financial quarter for the Avis System because there is limited leisure travel
and a greater potential for adverse weather conditions at such time. This
general seasonal variation in demand, along with more localized changes in
demand at each of our car rental operations, causes us to vary our fleet size
over the course of the year. In 2000, our average monthly rental fleet ranged
from a low of 200,441 vehicles in January to a high of 253,503 vehicles in July.
Rental utilization, which is based on the number of hours vehicles are rented
compared to the total number of hours vehicles are available for rental, ranged
from 65.3% in December to 80.5% in August and averaged 74.5% for all of 2000.
FLEET MANAGEMENT SERVICES BUSINESS
On March 1, 2001, through the acquisition of Avis Group, we acquired PHH Vehicle
Management Services LLC (d/b/a PHH Arval), a leader in the fleet management
services business, which offers fleet leasing, fleet management, other
management services to corporate clients and government agencies, and Wright
Express Corporation, the leading fuel card service provider in the United
States, which offers fuel and vehicle expense management programs to
corporations and government agencies for the effective management and control of
vehicle travel expenses. These services include vehicle leasing advisory
services and fleet management services for a broad range of vehicle fleets.
Advisory services include fleet policy analysis and recommendations,
benchmarking, and vehicle recommendations and specifications. In addition, we
provide managerial services which include ordering and purchasing vehicles,
arranging for their delivery through dealerships located throughout the United
States and Canada, administration of the title and registration process, as well
as tax and insurance requirements, pursuing warranty claims with vehicle
21
manufacturers and remarketing used vehicles. We also offer various leasing plans
for our vehicle leasing programs, financed primarily through the issuance of
commercial paper and medium-term notes and through unsecured borrowings under
revolving credit agreements, securitization financing arrangements and bank
lines of credit.
Through PHH Arval and Wright Express in the United States, we also offer fuel
and expense management programs to corporation and government agencies for the
effective management and control of automotive business travel expenses. By
utilizing our service cards issued under the fuel and expense management
programs, a client's representatives are able to purchase various products and
services such as gasoline, tires, batteries, glass and maintenance services at
numerous outlets.
PRODUCTS. Our fleet management services are divided into two principal
products: (i) asset based products, and (ii) fee based products.
Asset based products represents the services our clients require to lease a
vehicle which includes vehicle acquisition, vehicle remarketing, financing, and
fleet management consulting. We lease in excess of 287,000 units through both
open end lease structures and closed end structures. Open-end leases are the
prevalent structure in North America representing 96% of the total vehicles
financed in North America. The open-end leases can be structured on either a
fixed rate or floating rate basis (where the interest component of the lease
payment changes month to month based upon an index) depending upon client
preference. The open-end leases are typically structured with a 12-month minimum
lease term, with month-to-month renewals thereafter. The typical unit remains
under lease for approximately 34 months. A client receives a full range of
services in exchange for a monthly rental payment which includes a management
fee. The residual risk on the value of the vehicle at the end of the lease term
remains with the lessee under an open-end lease, except for a small amount which
is retained by the lessor.
Closed-end leases are structured with a fixed term with the lessor retaining the
vehicle residual risk. The most prevalent lease terms are 24 months, 36 months,
and 48 months. We utilize independent third-party valuations and internal
projections to set the residuals utilized for these leases.
The fee based products are designed to effectively manage costs and enhance
driver productivity. The three main fee based products are fuel services,
maintenance services and accident management. Fuel services represents the
utilization of our proprietary cards to access fuel through a network of
franchised and independent fuel stations. The cards operate as a universal card
with centralized billing designed to measure and manage costs. In the United
States, Wright Express is the leading fleet fuel card supplier with over 125,000
fuel facilities in its network and in excess of 3.2 million cards issued. Wright
Express distributes its fuel cards and related offerings through three primary
channels: (i) the Wright Express-Registered Trademark--branded universal card,
which is issued directly to fleets by Wright Express; (ii) the private label
card, under which Wright Express provides private label fuel cards and related
services to commercial fleet customers of major petroleum companies; and
(iii) co-branded marketing, under which Wright Express fuel cards are co-branded
and issued in conjunction with products and services of partners such as
commercial vehicle leasing companies.
We offer customer vehicle maintenance charge cards that are used to facilitate
repairs and maintenance payments. The vehicle maintenance cards provide
customers with benefits such as (i) negotiated discounts off full retail prices
through our convenient supplier network, (ii) access to our in-house team of
certified maintenance experts that monitor each card transaction for policy
compliance, reasonablity, and cost effectiveness, and (iii) inclusion of vehicle
maintenance card transactions in a consolidated information and billing database
that helps evaluate overall fleet performance and costs. We maintain an
extensive network of service providers in the United States and Canada to ensure
ease of use by the client's drivers.
We also provide our clients with comprehensive accident management services such
as (i) immediate assistance after receiving the initial accident report from the
driver (e.g., facilitating emergency towing services and car rental assistance,
etc.), (ii) organizing the entire vehicle appraisal and repair process through a
network of preferred repair and body shops, and (iii) coordinating and
negotiating potential accident claims. Customers receive significant benefits
from our accident management services such as (a) convenient coordinated 24-hour
assistance from our call center, (b) access to our leverage with the
22
repair and body shops included in our preferred supplier network (the largest in
the industry), which typically provides customers with extremely favorable
repair terms and (c) expertise of our damage specialists, who ensure that
vehicle appraisals and repairs are appropriate, cost-efficient, and in
accordance with each customer's specific repair policy.
COMPETITIVE CONDITIONS. The principal factors for competition in vehicle
management services are service quality and price. We are competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We rank second in the United States in the
number of vehicles under management and first in the number of proprietary fuel
and maintenance cards for fleet use in circulation. There are four other major
providers of fleet management services in the United States, hundreds of local
and regional competitors, and numerous niche competitors who focus on only one
or two products and do not offer the fully integrated range of products provided
by us. In the United States, it is estimated that only 45% of fleets are leased
by third-party providers. The unpenetrated market and the continued focus by
corporations on cost efficiency and outsourcing will provide the growth platform
in the future.
SEASONALITY. The fleet management services businesses are generally not
seasonal.
REAL ESTATE DIVISION
The Real Estate division consists of our Real Estate Franchise, Relocation,
Mortgage and Move.com Group segments (see "Divested Businesses--Move.com and
Welcome Wagon International"). The Real Estate division represented
approximately 39%, 31% and 28% of our revenue for 2000, 1999 and 1998,
respectively.
REAL ESTATE FRANCHISE SEGMENT
GENERAL. The Real Estate Franchise segment represented approximately 15%, 13%
and 10% of our revenue for 2000, 1999 and 1998, respectively. We own the
CENTURY 21 franchise system, the world's largest franchisor of residential real
estate brokerage offices with approximately 6,600 independently owned and
operated franchised offices with approximately 102,000 active sales agents
worldwide, the ERA franchise system, a leading residential real estate brokerage
franchise system with over 2,500 independently owned and operated franchised
offices and more than 28,000 sales agents worldwide and the Coldwell Banker
franchise system, the world's leading brand for the sale of million-dollar-plus
homes and now the third largest residential real estate brokerage franchise
system with approximately 3,000 independently owned and operated franchised
offices and approximately 76,000 sales agents worldwide.
23
We believe that application of our franchisee-focused management strategies and
techniques can significantly increase the revenues produced by our real estate
brokerage franchise systems while also increasing the quality and quantity of
services provided to franchisees. We believe that independent real estate
brokerage offices currently affiliate with national real estate franchisors
principally to gain the consumer recognition and credibility of a nationally
known and promoted brand name. Brand recognition is important to real estate
brokers since homebuyers are generally infrequent users of brokerage services
and upon arrival in an area are often unfamiliar with the local brokers.
Our preferred alliance program seeks to capitalize on the valuable access point
that CENTURY 21, Coldwell Banker and ERA brokerage offices provide for service
providers who wish to reach these home buyers and sellers as well as agents and
brokers. Preferred alliances include providers of property and casualty
insurance, moving and storage services, mortgage and title insurance, Internet
services, sellers of furniture, telecommunications and other household goods.
Our real estate brokerage franchisees are dispersed geographically, which
minimizes the exposure to any one broker or geographic region. During 1997, we
acquired a preferred equity interest in NRT Incorporated ("NRT"), a joint
venture between Apollo Management and the Company, which was created to acquire
residential real estate brokerage firms. In August, 1997, NRT acquired the
assets of National Realty Trust, the largest franchisee of the Coldwell Banker
system. NRT has also acquired other independent regional real estate brokerage
businesses which NRT has converted to Coldwell Banker, CENTURY 21 and ERA
franchises. NRT is the largest franchisee of our brokerage franchise systems
based on gross commissions, and represents 6% of the franchised offices. Of the
more than 12,000 franchised offices in our real estate brokerage franchise
systems, no individual broker, other than NRT, accounts for more than 1% of our
real estate brokerage revenues.
FRANCHISE SYSTEMS
CENTURY 21. Century 21 is the world's largest residential real estate brokerage
franchisor, with approximately 6,600 independently owned and operated franchise
offices with nearly 102,000 active sales agents located in 30 countries and
territories.
The primary component of Century 21's revenue is service fees on commissions
from real estate transactions. Service fees are 6% of gross closed commission
income. CENTURY 21 franchisees who meet certain levels of annual gross closed
commissions are eligible for the CENTURY 21 Incentive Bonus Program ("CIB"),
which results in a rebate payment to qualifying franchisees determined in
accordance with the applicable franchise agreement (up to 2% of gross commission
income in current agreements) of such annual gross closed commissions. During
2000, approximately 16% of CENTURY 21 franchisees qualified for CIB payments,
which aggregated to less than 1% of gross closed commissions.
In addition to service fees, CENTURY 21 franchisees generally contribute 2%
(subject to specified minimums and maximums) of their brokerage commissions each
year to the CENTURY 21 National Advertising Fund ("NAF"), which in turn uses
those proceeds for local, regional and national advertising, marketing and
public relations campaigns. In 2000, NAF spent approximately $46 million on
advertising and marketing campaigns.
COLDWELL BANKER. Coldwell Banker is the world's leading brand for the sale of
million-dollar-plus homes and the third largest residential real estate
brokerage franchisor, with approximately 3,000 independently owned and operated
franchise offices in the United States, Canada and 12 other countries, with
approximately 76,000 sales agents. Revenue from the Coldwell Banker system is
primarily derived from service and other fees paid by franchisees, including
initial franchise fees and fees paid for ongoing services. Coldwell Banker
franchisees pay us annual ongoing service fees equal to 6% of a franchisee's
annual gross revenue (subject to annual rebates to franchisees who achieve
certain threshold levels of gross revenue annually).
24
Coldwell Banker franchisees who meet certain levels of annual gross revenue are
eligible for the Performance Premium Award Program ("PPA"), which results in a
rebate payment to qualifying franchisees determined in accordance with the
applicable franchise agreement (up to 3% in current agreements) of such annual
gross revenue. During 2000, approximately 30% of Coldwell Banker franchisees
qualified for PPA payments.
Coldwell Banker Real Estate Corporation offers a commercial-only franchise,
licensing the Coldwell Banker Commercial-Registered Trademark- trademarks and
systems. Coldwell Banker Commercial franchisees pay annual fees consisting of
ongoing service and marketing fees, generally 6% and 1%, respectively, of their
annual gross revenue (subject to annual rebates to franchisees who achieve
certain revenue thresholds annually, and to minimums and maximums on the
marketing fees).
In addition to service and other fees, Coldwell Banker franchisees pay an annual
advertising fee equal to 2.5% of a franchisee's annual gross revenue (subject to
certain minimums and maximums) to the Coldwell Banker Advertising Fund ("CBAF").
Advertising fees collected from Coldwell Banker franchisees are generally
expended on local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. During 2000, CBAF expended approximately $23 million or
marketing campaigns.
ERA. The ERA franchise system is a leading residential real estate brokerage
franchise system, with more than 2,500 independently owned and operated
franchise offices, and more than 28,000 sales agents located in 24 countries.
Revenue from the ERA franchise system primarily results from (i) franchisees'
payments of monthly membership fees ranging from $230 to $905 per month, based
on volume, plus $208 per branch and a per transaction fee of approximately $128
and (ii) for franchise agreements entered into after July 1997, royalty fees
equal to 6% of the franchisees' gross revenue. For franchise agreements dated
after July 1997, ERA franchisees who met certain levels of annual gross revenue
are eligible for the Volume Incentive Program, which results in a rebate payment
to qualifying franchisees determined in accordance with the applicable franchise
agreement (up to 3% in current agreements) of such annual gross revenue.
In addition to membership and transaction fees, ERA franchisees pay (i) a fixed
amount per month, which ranges from $247 to $991, based on volume, plus an
additional $247 per month for each branch office into the ERA National Marketing
Fund ("ERA NMF"), and (ii) for franchise agreements entered into after
July 1997, a contribution to the ERA NMF equal to 2% of the franchisees' gross
revenues, subject to minimums and maximums. ERA NMF is utilized for local,
regional and national marketing activities, including media purchases and
production, direct mail and promotional activities and other marketing efforts.
During 2000, ERA NMF spent approximately $6 million on marketing campaigns.
BROKERAGE FRANCHISE GROWTH. We market real estate brokerage franchises
primarily to independent, unaffiliated owners of real estate brokerage companies
as well as individuals who are interested in establishing real estate brokerage
businesses. We believe that our existing franchisee base represents another
source of potential growth, as franchisees seek to expand their existing
business to additional markets. Therefore, our sales strategy focuses on
maintaining satisfaction and enhancing the value of the relationship between the
franchisor and the franchisee.
Our real estate brokerage franchise systems employ a national franchise sales
force consisting of approximately 125 sales personnel, which is divided into
separate sales organizations for the CENTURY 21, Coldwell Banker and ERA
systems. These sales organizations are compensated primarily through commissions
on sales concluded. Members of the sales forces are also encouraged to provide
referrals to the other sales forces when appropriate.
BROKERAGE OPERATIONS. Our brand name marketing programs for the real estate
brokerage business generally focus on increasing brand awareness in order to
increase the likelihood of potential homebuyers and home sellers engaging
franchise brokers' services. Each brand has a dedicated marketing staff in order
to develop the brand's marketing strategy while maintaining brand integrity. The
corporate marketing
25
services department provides services related to production and implementation
of the marketing strategy developed by the brand marketing staffs.
Each brand provides its franchisees and their sales associates with training
programs that have been developed by such brand. The training programs include
mandatory programs instructing the franchisee and/or the sales associate how to
best utilize the methods of the particular system and additional optional
training programs that expand upon such instruction. Each brand's training
department is staffed with instructors experienced in both real estate practice
and instruction. In addition, we have established regional support personnel who
provide consulting services to the franchisees in their respective regions.
Each system provides a series of awards to brokers and their sales associates
who are outstanding performers in each year. These awards signify the highest
levels of achievement within each system and provide a significant incentive for
franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential customers which
are developed from sources both within and outside of the system.
Through our Cendant Supplier Services operations, we provide our franchisees
with volume purchasing discounts for products, services, furnishings and
equipment used in real estate brokerage operations. In addition to the preferred
alliance programs described herein, Cendant Supplier Services establishes
relationships with vendors and negotiates discounts for purchases by its
customers. We do not maintain inventory, directly supply any of the products
and, generally, do not extend credit to franchisees for purchases.
BROKERAGE FRANCHISE AGREEMENTS. Our franchise agreements grant the right to
utilize one of the brand names associated with our franchise systems.
Our current form of franchise agreement for all real estate brokerage brands is
terminable by us in the event of the franchisee's failure to pay fees or other
charges or for other material defaults under the franchise agreement. In the
event of such termination, the CENTURY 21 and ERA agreements generally provide
that we are entitled to be compensated for lost revenues in an amount equal to
the average monthly franchise fees calculated for the remaining term of the
agreement. Pre-1996 agreements do not provide for liquidated damages of this
sort. See "CENTURY 21," "Coldwell Banker" and "ERA" above for more information
regarding the commissions and fees payable under our franchise agreements.
NRT is the largest franchisee of Coldwell Banker, CENTURY 21 and ERA brand names
based on gross commission income. NRT's status as a franchisee is governed by
franchise agreements with our brands, pursuant to which NRT has the
non-exclusive right to operate as part of the Coldwell Banker, ERA and CENTURY
21 real estate franchise systems at locations specified in those agreements. In
February 1999, NRT entered into new fifty-year franchise agreements with our
brands. These agreements require NRT to pay royalty and advertising fees of 6.0%
and 2.0% (2.5% for its Coldwell Banker offices) (subject to certain
limitations), respectively, on its annual gross revenues. Lower royalty and
advertising fees apply in certain circumstances. These agreements generally
provide restrictions on NRT's ability to close offices beyond certain limits.
INTERNET. Each of our brands has a consumer Web site that offers real estate
listing contacts and services. Century21.com, Coldwellbanker.com and Era.com are
the official Web sites for the CENTURY 21-Registered Trademark-, Coldwell
Banker-Registered Trademark- and ERA-Registered Trademark- real estate franchise
systems, respectively.
BROKERAGE TRADEMARKS AND INTELLECTUAL PROPERTY. The service marks
"CENTURY 21," "Coldwell Banker" and "ERA" and related logos are material to our
business. Through our franchisees, we actively use these marks. All of the
material marks in each franchise system are registered (or have applications
pending for registration) with the United States Patent and Trademark Office as
well as major countries worldwide where the brands are franchised. The marks
used in the real estate brokerage systems are owned by us through our
subsidiaries.
26
COMPETITION. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors to
our real estate brokerage franchise systems include the
Prudential-Registered Trademark-, GMAC Real Estate(SM) (also known as Better
Homes & Gardens-Registered Trademark-) and RE/MAX-Registered Trademark- real
estate brokerage brands. In addition, a real estate broker may choose to
affiliate with a regional chain or choose not to affiliate with a franchisor but
to remain independent.
We believe that competition for the sale of franchises in the real estate
brokerage industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. We also believe that the perceived value of our brand names to
prospective franchisees is, to some extent, a function of the success of our
existing franchisees.
The ability of our real estate brokerage franchisees to compete in the industry
is important to our prospects for growth, although, because franchise fees are
based on franchisee gross commissions or volume, our revenue is not directly
dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is reduced by virtue of the diverse geographical locations of our
franchisees. At December 31, 2000, the combined real estate franchise systems
had approximately 8,100 franchised brokerage offices in the United States and
more than 12,000 offices worldwide. The real estate franchise systems have
offices in 43 countries and territories in North and South America, Europe,
Asia, Africa and Australia.
SEASONALITY. The principal sources of revenue are based upon the timing of
residential real estate sales, which are generally lower in the first calendar
quarter each year, and relatively level the other three quarters of the year. As
a result, our revenue is generally lower in the first calendar quarter of each
year.
RELOCATION SEGMENT
GENERAL. Our Relocation segment represented approximately 11%, 9% and 10% of
our revenue for 2000, 1999 and 1998, respectively. Cendant Mobility(SM) is the
leading provider of employee relocation services in the world and assists more
than 128,000 affinity customers, transferring employees and global assignees
annually, including over 20,000 employees internationally each year in 111
countries. At December 31, 2000, we employed approximately 2,600 people in our
relocation business.
SERVICES. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers primarily include the evaluation, inspection, selling
or purchasing of a transferee's home, the issuance of equity advances (generally
guaranteed by the corporate client), certain home management services,
assistance in locating a new home at the transferee's destination and consulting
and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on equity advances and broker referral fees. Substantially
all costs associated with such services are reimbursed by the corporate client,
including, if necessary, repayment of equity advances and reimbursement of
losses on the sale of homes purchased in most cases (other than government
clients). As a result of the obligation of most corporate clients to reimburse
Cendant Mobility for losses on resale and guarantee repayment of equity
advances, our exposure on such items is limited to the credit risk of our
corporate clients and not on the potential changes in value of residential real
estate. We believe such risk is minimal due to the credit quality of our
corporate clients. In transactions where we assume the risk for losses on the
sale of homes, which comprise approximately 3% of net revenue, we control all
facets of the resale process, thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program provides employees guaranteed offers for
their homes and assists clients in the management of employees' productivity
during their relocation. Cendant Mobility allows clients to outsource their
relocation programs by providing clients with professional support for planning
and administration of all
27
elements of their relocation programs. The majority of new proposals involve
outsourcing, due to corporate downsizing, cost containment and increased need
for expense tracking.
Our relocation accounting services supports auditing, reporting and disbursement
of all relocation-related expense activity.
Our group move management service provides coordination for moves involving a
large number of employees over a short period of time. Services include
planning, communications, analysis, and assessment of the move. Policy
consulting provides customized consultation and policy review, as well as
industry data, comparisons and recommendations. Cendant Mobility also has
developed and/or customized numerous non-traditional services including
outsourcing of all elements of relocation programs, moving services and spouse
counseling.
Our moving service, with over 65,000 shipments annually, provides support for
all aspects of moving an employee's household goods. We also handle insurance
and claim assistance, invoice auditing and quality control of van line, driver,
and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists in
developing a custom marketing plan and monitors its implementation through the
broker. The Cendant Mobility professional assists the local broker by acting as
an advocate for our clients' employees in negotiating offers. This helps
clients' employees obtain the highest possible price for their homes and assists
clients to ensure compliance with their relocation programs and management of
their costs.
For clients' employees moving to or from the U.S. from a foreign country, within
a foreign country, or from one foreign country to another, our international
assignment service group provides a full spectrum of relocation services. This
group coordinates these relocation services and assists with immigration
support, candidate assessment, intercultural training, language training, and
repatriation coaching.
Our affinity services provide value-added real estate and relocation services to
organizations with established members and/or customers. Organizations, such as
insurance and airline companies that have established members, offer our
affinity services to their members at no cost. This service helps the
organizations attract new members and retain current members. Affinity services
provide home buying and selling assistance, as well as mortgage assistance and
moving services to members of applicable organizations. Personal assistance is
provided to over 44,000 individuals, with approximately 22,000 real estate
transactions annually.
VENDOR NETWORKS. Cendant Mobility provides relocation services through various
vendor networks that meet the superior service standards and quality deemed
necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 350 principal
brokers and 850 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive discounts, while maintaining control over
the quality of service provided to clients' transferees.
BUSINESS GROWTH. Our growth strategy is primarily driven by domestic and
international acquisitions and market expansion. On July 20, 2000, Cendant
Mobility acquired Hamilton Watts International, a leading provider of expatriate
relocation services in Australia and Southeast Asia. On September 7, 2000,
Cendant Mobility acquired Bradford & Bingley Relocation Services, Ltd. ("BBRS"),
a leading relocation management service in the United Kingdom. BBRS operations
were merged with our Cendant Relocation (UK) operations immediately after the
acquisition.
TRADEMARKS AND INTELLECTUAL PROPERTY. The service mark "Cendant Mobility" and
related trademarks and logos are material to our relocation business. Cendant
Mobility and its subsidiaries actively use the marks. All of the material marks
used in Cendant Mobility's business are registered (or have applications pending
for registration) with the United States Patent and Trademark Office as well as
major countries worldwide where Cendant Mobility or its subsidiaries have
significant operations. We own the marks used in Cendant Mobility's business.
28
COMPETITION. Competition is based on service, quality and price. In the United
States, there are three other major national providers of such services:
Associates Relocation Management, GMAC Relocation Services and Prudential
Relocation Management. We are the market leader in the United States, United
Kingdom, and Australia/Southeast Asia for outsourced relocations.
SEASONALITY. The principal sources of revenue are based upon the timing of
transferee moves, which are lower in the first and last quarter of each year,
and at the highest levels in the second and third quarters.
MORTGAGE SEGMENT
GENERAL. Our Mortgage segment represented approximately 11%, 9% and 8% of our
revenue for 2000, 1999 and 1998, respectively. We originate, sell and service
residential first mortgage loans in the United States. For 2000, Cendant
Mortgage(SM) was the fifth largest lender of retail originated residential
mortgages, and the ninth largest lender of residential mortgages in the US. On
December 18, 2000, we announced a new alliance with Merrill Lynch whereby
Merrill Lynch outsourced its mortgage origination and servicing operations to
us. Merrill Lynch closed approximately $5 billion in retail purchase mortgages
during 2000. Assuming Merrill Lynch's loan volume was part of our operating
results for the full year of 2000, we believe we would have ranked as the second
largest retail mortgage lender in 2000.
A full line of first mortgage products are marketed to consumers through
relationships with corporations, financial institutions, real estate brokerage
firms, including CENTURY 21, Coldwell Banker and ERA franchisees, and other
mortgage banks. Cendant Mortgage is a centralized mortgage lender conducting its
business in all 50 states. At December 31, 2000, Cendant Mortgage had
approximately 4,400 employees.
Cendant Mortgage customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual loans,
mortgage-backed securities or participation certificates issued or guaranteed by
Fannie Mae Corp., the Federal Home Loan Mortgage Corporation or the Government
National Mortgage Association. Cendant Mortgage also services mortgage loans and
earns revenue from the sale of the mortgage loans to investors, as well as on
the servicing of the loans for investors. Mortgage servicing consists of
collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage related expenses such as
taxes and insurance, and administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
- Teleservices. Mortgages are offered to consumers through an 800-number
teleservices operation based in Mt. Laurel, New Jersey under programs for
real estate organizations (Phone In, Move In-Registered Trademark-),
private label programs for financial institutions, and for relocation
clients in conjunction with the operations of Cendant Mobility. The
teleservices operation provides us with retail mortgage volume that
contributes to Cendant Mortgage ranking as the fifth largest retail
originator in 2000 according to INSIDE MORTGAGE FINANCE.
- Internet. Mortgage information is offered to consumers through a Web
interface that is owned by Cendant Mortgage. The Web interface contains
educational materials, rate quotes and a full mortgage application. This
content is made available to the customers of partner organizations.
Partners include Century 21, Coldwell Banker, ERA, Cendant Mobility,
Mellon Bank, United States Bank, GE Financial Network and Merrill Lynch
Credit Corporation. In addition, we developed and launched our own online
brand--InstaMortgage.com(SM) in 1999. Applications from online customers
are processed via our teleservices platform.
- Point of Sale. Mortgages are offered to consumers through field sales
professionals with all processing, underwriting and other origination
activities based in New Jersey. These field sales professionals generally
are located in real estate offices around the United States and are
equipped with software to obtain product information, quote interest rates
and prepare a mortgage application with the consumer.
29
- Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans. Financial
institutions include banks, thrifts and credit unions. Such institutions
are able to sell their closed loans to a large number of mortgage lenders
and generally base their decision to sell to Cendant Mortgage on price,
product menu and/or underwriting. We also have wholesale/correspondent
originations with mortgage banks affiliated with real estate brokerage
organizations.
BUSINESS GROWTH. Our strategy is to increase market share by expanding all of
our sources of business with emphasis on purchase mortgage volume through our
teleservices, Phone In, Move In and Internet (Log In, Move
In-Registered Trademark-) programs. The Phone In, Move In program was developed
for real estate firms in 1997 and has been established in over 6,000 real estate
offices.
We are well positioned to expand our financial institutions business channel by
working with financial institutions which desire to outsource their mortgage
originations operations to Cendant Mortgage. We also will expand our relocation
mortgage volume through increased linkage with Cendant Mobility. Each of these
market share growth opportunities is driven by our low cost teleservices
platform. The competitive advantage of using a centralized, efficient and high
quality teleservices platform allows us to capture a higher percentage of the
highly fragmented mortgage market more cost effectively.
In connection with our new alliance with Merrill Lynch, Merrill Lynch will
continue to market mortgages to its clients in partnership with their financial
consultants. In January 2001, Merrill Lynch began utilizing our services on a
private-label basis to process and service loans.
COMPETITION. Competition is based on service, quality, products and price.
There are an estimated 22,000 national, regional or local providers of mortgage
banking services across the United States. Cendant Mortgage has increased its
mortgage origination market share in the United States to 2.1% in 2000 from 1.8%
in 1999. According to INSIDE MORTGAGE FINANCE, the market share leader for 2000
reported a 7.1% market share in the United States. Competitive conditions can
also be impacted by shifts in consumer preference for variable rate mortgages
from fixed rate mortgages.
SEASONALITY. The principal sources of revenue are based on the timing of
mortgage origination activity, which is based upon the timing of residential
real estate sales. Real estate sales are generally lower in the first calendar
quarter each year and relatively level the other three quarters of the year. As
a result, our revenue is lower in the first calendar quarter of each year.
DIVERSIFIED SERVICES DIVISION
The Diversified Services division contains our Insurance/Wholesale and
Diversified Services segments, which consists of our tax preparation business,
parking operations and information technology services. The Diversified Services
division represented approximately 29%, 37% and 37% of our revenue for 2000,
1999 and 1998, respectively.
INSURANCE/WHOLESALE SEGMENT
GENERAL. Our Insurance/Wholesale segment represented approximately 15%, 13% and
12% of our revenue for 2000, 1999 and 1998, respectively. We have nearly
38 million customers and market and administer insurance products, primarily
accidental death and dismemberment insurance. We also provide products and
services such as checking account enhancement packages, financial products and
discount programs to customers of banks, credit card issuers, credit lenders and
mortgage companies. The direct marketing activities are conducted principally
through our wholly-owned subsidiaries, FISI, BCI, LTPC and Cims.
ENHANCEMENT PACKAGE SERVICE. We sell enhancement packages for financial
institution consumer and business checking and deposit account holders primarily
through our FISI subsidiary. FISI's financial institution clients select a
customized package of our products and services and then usually add their own
services (such as unlimited check writing privileges, personalized checks,
cashiers' or travelers' checks without issue charge, or discounts on safe
deposit box charges or installment loan interest rates). With our
30
marketing and promotional assistance, the financial institution then offers the
complete package of enhancements to its checking account holders as a special
program for a monthly fee. Most of these financial institutions choose a
standard enhancement package, which generally includes $10,000 of common carrier
insurance and travel discounts. Others may include our shopping and credit card
registration services, a travel newsletter or pharmacy, eyewear or entertainment
discounts as enhancements. The common carrier coverage is underwritten under
group insurance policies with two referral underwriters. We continuously seek to
develop new enhancement features, which may be added to any package at an
additional cost to the financial institution. We generally charge a financial
institution client an initial fee to implement this program and monthly fees
thereafter based on the number of customer accounts participating in that
financial institution's program. Our enhancement packages are designed to enable
a financial institution to generate additional fee income as the institution
should be able to charge participating accounts more than the combined costs of
the services it provides and the payments it makes to us.
AD&D INSURANCE. Through our FISI and BCI subsidiaries, we serve as an agent and
third-party administrator for marketing accidental death and dismemberment
insurance throughout the country to the customers of financial institutions.
These products are primarily marketed through direct mail solicitations, which
generally offer $1,000 of accidental death and dismemberment insurance at no
cost to the customers and the opportunity to choose additional coverage of up to
$250,000. The annual premium generally ranges from $10 to $250. BCI also acts as
an administrator for term life and hospital accident insurance. FISI's and BCI's
insurance products and other services are offered to customers of banks, credit
unions, credit card issuers and mortgage companies.
LONG TERM CARE INSURANCE. Through our LTPC subsidiary, we are one of the
largest independent marketers of long term care insurance products in the United
States representing five national underwriters. LTPC's sales efforts are
supported by over 300 captive agents and 1,500 brokers across the United States.
INTERNATIONAL OPERATIONS. Our Cims subsidiary has developed the international
distribution of loyalty package services and insurance products. As of
December 31, 2000, Cims has expanded its international membership and customer
base to approximately 13.7 million individuals. This base is driven by wholesale
membership through over 50 financial institutions throughout Europe, South
Africa and Asia, as well as through other distribution channels. We also have
exclusive licensing agreements covering the use of our merchandising systems in
Australia, Japan and certain other Asian countries under which licensees pay
initial license fees and agree to pay royalties to us based on membership fees,
access fees and merchandise service fees paid to them. Royalties from these
licenses were less than 1% of our revenues and profits within our
Insurance/Wholesale segment for 2000, 1999 and 1998, respectively.
The economic impact of currency exchange rate movements on our business is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because we operate in a mix of services and numerous
countries, management believes currency exposures are fairly well diversified.
See Item 7A: "Quantitative and Qualitative Disclosures About Market Risk".
DISTRIBUTION CHANNELS. We market our products through a variety of distribution
channels. The consumer is ultimately reached in the following ways: (i) at
financial institutions or other associations through direct marketing; (ii) at
financial institutions or other associations through a direct sales force,
participating merchants or general advertising; and (iii) through companies and
various other entities.
GROWTH. Primary growth drivers include expanding our customer base to include
larger financial institutions and expanding the array of products and services
sold through the direct marketing channels to existing clients. We offer a
service whereby we develop consumer and business-to-business portals for
financial institutions to expand direct marketing initiatives that will attract
and retain additional customers and provide new sources of revenue. Other
potential target market sectors include the emerging affluent and students. Cims
is expanding its customer base beyond financial institutions to utilities,
insurance, and telecom companies.
COMPETITION. Our checking account enhancement services compete with similar
services offered by other companies, including insurance companies and other
third-party marketers. In larger financial institutions,
31
we may also compete with a financial institution's own marketing staff.
Competition for the offering of our insurance products through financial
institutions is growing and intense. Our competitors include other third-party
marketers and large national insurance companies with established reputations
that offer products with rates, benefits and compensation similar to ours. The
long term care insurance industry is highly competitive. Our competition
primarily includes large national insurance companies, such as General Electric
Financial Assurance Company.
SEASONALITY
Our direct marketing businesses are generally not seasonal.
DIVERSIFIED SERVICES SEGMENT
TAX PREPARATION SERVICES
GENERAL. Our Jackson Hewitt Inc. subsidiary is the second largest tax
preparation service system in the United States. The Jackson
Hewitt-Registered Trademark- franchise system is comprised of a 48-state network
(and the District of Columbia) with approximately 3,300 offices operating under
the trade name and service mark "Jackson Hewitt Tax
Service-Registered Trademark-." Office locations range from stand-alone store
front offices to offices within Wal-Mart-Registered Trademark- and
Kmart-Registered Trademark- stores. Through the use of proprietary interactive
tax preparation software, we are engaged in the preparation and electronic
filing of federal and state individual income tax returns. During 2000, Jackson
Hewitt prepared over 1.8 million tax returns, which represented an increase of
33% from the approximately 1.38 million tax returns prepared during 1999. To
complement our tax preparation services, we also offer accelerated check refunds
and refund anticipation loans to our tax preparation customers through a
designated bank. We believe that the application of our focused management
strategies and techniques for franchise systems to the Jackson Hewitt network
can increase revenue produced by the Jackson Hewitt franchise system while also
increasing the quality and quantity of services provided to franchisees.
Tax preparation revenues are primarily comprised of tax return preparation fees
and incremental fees through customer tax refund payment options. During 2000,
approximately 60%, or 76 million, of the 128 million tax returns filed were
completed by paid preparers. H&R Block's recent shift to an owner/ operator
business model has resulted in Jackson Hewitt becoming the leading franchisor of
tax preparation services.
GROWTH. We believe revenue and market share growth in the tax preparation
industry will come primarily from selling new franchises, the application of
proven management techniques for existing franchise systems, and new product and
service offerings. During 1999, Jackson Hewitt, in conjunction with two of its
largest franchisees, created an independent joint venture, Tax Services of
America, Inc. ("TSA"), to maximize Jackson Hewitt's ability to add independent
tax preparation firms to its franchise system. Cendant initially invested
$5 million in TSA, which was contributed to Jackson Hewitt. Jackson Hewitt
initially invested approximately 80 company-owned stores and currently has an
approximately 80% interest in the form of convertible preferred stock. TSA
currently has over 350 offices and is expected to prepare over 300,000 tax
returns during the 2001 filing season. TSA's primary objective is to grow by
acquiring independent tax preparation firms in areas where TSA is licensed to
operate and convert them to the Jackson Hewitt system.
32
FRANCHISE AGREEMENTS. Our tax preparation services franchise agreements grant
the right to utilize the Jackson Hewitt brand name to independent owners and
operators under long-term franchise agreements. An annual average of 1% of our
existing franchise agreements are scheduled to expire from January 1, 2001
through December 31, 2006, with no more than 2% (in 2003) scheduled to expire in
any one of those years.
The current standard agreements generally are for ten-year terms and generally
require, among other obligations, franchisees to pay a minimum initial fee, as
well as continuing franchise fees comprised of royalty fees and marketing fees.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain performance standards, to pay franchise fees or
other charges or to meet other specified obligations. The franchise agreements
are terminable by the franchisee under certain limited circumstances.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY. The trademark "Jackson Hewitt" and
related logo are material to Jackson Hewitt's business. We, through our
franchisees, actively use these marks. The trademark and logo are registered (or
have applications pending for registration) with the United States Patent and
Trademark Office
COMPETITION. Tax preparation businesses are highly competitive. There are a
substantial number of tax preparation firms and accounting firms that offer tax
preparation services. Commercial tax preparers are highly competitive with
regard to price, service and reputation for quality. Our largest competitor, H&R
Block, recently shifted to an owner/operator business model, which resulted in
our becoming the leading franchisor of tax preparation services.
SEASONALITY. Since most of our franchisees' customers file their tax returns
during the period from January through April of each year, substantially all
franchise royalties are received during the first and second quarters of each
year. As a result, Jackson Hewitt operates at a loss for the remainder of the
year. Historically, such losses primarily reflect payroll of year-round
personnel, the update of tax software and other costs and expenses relating to
preparation for the following tax season.
NATIONAL CAR PARKS
GENERAL. Our National Car Parks subsidiary operates off-street commercial
parking facilities and on-street parking in the United Kingdom, with over
60 years' experience of owning and/or managing a portfolio of nearly 500 car
parks, mostly located in city and town centers and at airports.
NCP has approximately 2,500 full and part-time employees. NCP provides a
high-quality, professional service, developing a total solution for its
customers and for organizations such as town and city administrations that wish
to develop modern and professionally managed parking and traffic management
facilities, tailored towards local business.
NCP owns and operates parking facilities in over 100 city and town centers
throughout the United Kingdom, most of which are regularly patrolled and many of
which have closed-circuit television surveillance. NCP is the only parking
facilities manager that can provide the motorist with such a comprehensive
geographical coverage and such levels of investment in secured facilities. In
addition, NCP is a leader in on-airport parking facilities at United Kingdom
airports, with over 31,000 car parking spaces in facilities close to passenger
terminals at ten airports across the United Kingdom. Booking facilities are
available through NCP's telesales service for convenient car parking reservation
at these airports, with free courtesy coach transfers to and from airport
terminals at most locations.
REGULATIONS. There is increasing government regulation over all aspects of
transport within the United Kingdom. Therefore, an objective of NCP is to work
together with its customers, local and national government and other service
organizations in order to maintain the mutually beneficial partnership between
motorists and city center environment.
33
TRADEMARKS AND INTELLECTUAL PROPERTY. The service mark
NCP-Registered Trademark- and related logos are registered (or have applications
pending for registration) in the UK Patent Office and throughout the European
Community.
COMPETITION. NCP's main competition is from non-commercial, local government
authorities who usually choose to operate their own car parking facilities in
their respective cities and towns.
SEASONALITY. NCP's business has a distinct seasonal trend with revenue from
parking in city and town centers being closely associated with levels of retail
business. Therefore, peaks in revenue are experienced particularly around the
Christmas period. In respect of the airport parking side of the business,
seasonal peaks are experienced in line with summer vacations.
INFORMATION TECHNOLOGY SERVICES
GENERAL. Our WizCom International, Ltd. subsidiary is a global provider of
electronic reservations processing, connectivity and information management
systems for the travel industry, including the Wizard System more fully
described under "TRAVEL DIVISION--Car Rental Business--Avis System and Wizard
System Services" above. WizCom provides its hotel, car rental and tour/leisure
travel customers with electronic distribution and e-commerce solutions to the
Global Distribution Systems (GDSs), Internet and/or other travel reservations
systems. WizCom's product suite links customers to all the major travel networks
on six continents through telephone lines and satellite communications. Direct
access with other computerized reservations systems allows real-time processing
for travel agents, corporate travel departments and consumers. In addition,
through WizCom's EasyAccess Plus-SM- information management system or Central
Reservation Systems, customers can maintain current information on property,
vehicle or tour package information (such as rental rates or room amenity
descriptions) In 1995, Budget Rent A Car Corporation entered into a computer
services agreement with WizCom to provide reservation system computer services
that are substantially similar to those computer services provided to the Avis
System. WizCom has also entered into agreements with hotel and other car rental
companies, as well as Internet travel companies, to provide travel related
reservation and distribution system services. Revenues are primarily comprised
of up front implementation fees and ongoing transaction and support fees.
INDUSTRY AND COMPETITION. Increased demand for WizCom's products has largely
been driven both by the growth of the Internet and online travel, as well as the
demand for real-time data processing and connectivity for reservations in the
travel sector. Total industry hotel bookings through the GDSs continued to show
growth of 12% in 1999 and 10% in 2000. For hotel switch processing business,
WizCom's primary competitor is Pegasus Solution's Electronic Distribution. There
are several competitors for the hotel central reservations product. WizCom is
the only company providing switching services for the car rental market, and
there is little competition for the car rental central reservations product.
BUSINESS & GROWTH STRATEGY. Multiple sectors of the travel industry are seeking
to make reservations processing and connectivity more time and cost-efficient
for their operations. Travel companies continue to seek opportunities to lower
costs per travel booking and introduce real-time, current information management
systems. Online travel growth for both corporate and leisure travel bookings
continues to expand. WizCom has positioned itself as one-easy-connection for
companies to make their inventory available for distribution through Internet,
corporate intranet or traditional GDS channels.
DIVESTED BUSINESSES
MOVE.COM AND WELCOME WAGON INTERNATIONAL. On February 16, 2001, we completed
the sale to Homestore.com of certain businesses within our Move.com Group
segment and our Welcome Wagon International business, which was part of our
Diversified Services segment. As a result of the transaction we own
approximately 21.5 million shares of Homestore.com, representing approximately a
20% stake in Homestore.com. In addition, we will have a designee on the
Homestore.com Board of Directors. See "Recent Developments--Other--Divestiture
of Move.com. Group and Welcome Wagon International".
Through Move.com, we operated a network of Web sites, which offered a wide
selection of quality relocation, real estate and home-related products and
services. We sought to provide a one-source,
34
"friend-in-need" solution before, during and after the move. We also provided a
multi-channel distribution platform for our business partners, who were trying
to reach a highly targeted and valued group of consumers at the most opportune
times. The move.com network generated the following types of revenue from its
business partners: listing subscription fees, advertising and sponsorship fees,
e-commerce transaction fees and Web site management fees. During 2000, the
move.com network represented an immaterial part of our business operations.
The move.com network was comprised of the following Web sites that offered
relocation, real estate and home-related content and services:
(i) move.com-SM-, the Internet portal and flagship site, combining home and
rental housing listings, mortgage services and numerous moving and home-related
services; (ii) Rent.net-Registered Trademark-, a leading online rental and
relocation guide and advertising source for the apartment industry, representing
properties and relocation services in more than 3,000 cities across North
America; (iii) Seniorhousing.net-Registered Trademark-, which provides the
move.com network with a directory of over 750 retirement communities, assisted
living facilities and nursing homes containing detailed property descriptions,
photographs, floor plans, 360- virtual tours and direct communication links to
onsite managers; (iv) Corporatehousing.net(SM), the leading online directory and
advertising source for the temporary/ corporate housing industry, with over 400
local and national listing providers across the United States and Canada;
(v) Selfstorage.net-Registered Trademark-, a leading online directory and
advertising source for the self storage industry, with over 3,000 storage
facilities across the United States and Canada and (vi) Welcomewagon.com, the
official Web site of Welcome Wagon/Getko, which provides the move.com network
with local community information.
Through Welcome Wagon, we distributed complimentary welcoming packages which
provide new homeowners and other consumers throughout the United States and
Canada with discounts for local merchants. These activities were conducted
through our Welcome Wagon International Inc. and Getko Group, Inc. subsidiaries.
INDIVIDUAL MEMBERSHIP. On October 25, 2000, we announced our intention to
spin-off our individual membership and loyalty businesses that are the primary
remaining businesses inherited from the merger with CUC in 1997. The currently
contemplated transaction will be a tax-free distribution to CD stockholders and
is expected to close by mid-2001. See "Recent Developments--Other--Spin-off of
Individual Membership Businesses".
Through our individual membership business, with approximately 24.3 million
memberships, we provide customers with access to a variety of discounted
products and services in such areas as retail shopping, travel, personal finance
and auto and home improvement. We affiliate with business partners such as
leading financial institutions, retailers, and oil companies to offer membership
as an enhancement to their credit card, charge card or other customers.
Participating institutions generally receive commissions on initial and renewal
memberships, based on a percentage of the net membership fees. Individual
membership programs offer consumers discounts on over 31,500 brand categories by
providing shop at home convenience in areas such as retail shopping, travel,
automotive, dining and home improvement. A brief description of the different
types of membership programs is as follows:
Shoppers Advantage-Registered Trademark- ("SA") is a discount shopping program
that provides product price information and home shopping services to its
members. SA's merchandise database contains information on over 80,000 brand
name products, including a written description of the product, the
manufacturer's suggested retail price, the vendor's price, features and
availability. SA acts as a conduit between its members and the vendors;
accordingly, it does not maintain an inventory of products.
Travelers Advantage-Registered Trademark- is a discount travel service program
whereby our Cendant Travel, Inc. subsidiary (one of the ten largest full service
travel agencies in the U.S.), obtains information on schedules and rates for
major scheduled airlines, hotel chains and car rental agencies from the American
Airlines Sabre-Registered Trademark- Reservation System. In addition, the
Travelers Advantage division maintains its own database containing information
on tours, travel packages and short notice travel arrangements. Members book
their reservations through Cendant Travel, which earn commissions (ranging from
5%-25%) on all travel sales from the providers of the travel services.
35
The AutoVantage-Registered Trademark- Service offers members comprehensive new
car summaries and preferred prices on new domestic and foreign cars purchased
through an independent dealer network (which includes over 1,800 dealer
franchises) and discounts on maintenance, tires and parts at more than 25,000
locations. AutoVantage Gold-Registered Trademark- is a premium version of the
AutoVantage-Registered Trademark- Service, providing, among other things, road
and tow services to its members.
Credit Card Guardian-Registered Trademark- and "Hot-Line" services enable
consumers, among other things, to register their credit and debit cards with us
so that the account numbers of these cards may be kept securely in one place.
The PrivacyGuard-Registered Trademark- and Credentials-Registered Trademark-
services provide members with a comprehensive and understandable means of
monitoring key personal information. The service offers a member access to
information in certain key areas including: credit history and monitoring,
driving records maintained by state motor vehicle authorities and medical files
maintained by third parties.
The Buyers Advantage-Registered Trademark- services extend the manufacturer's
warranty on products purchased by the member. This service also rebates 20% of
repair costs and offers members price protection by refunding any difference
between the price the member paid for an item and its reduced price should the
item be sold at a lower price within sixty days after purchase.
The CompleteHome-Registered Trademark- service is designed to save members time
and money in maintaining and improving their homes. Members can order
do-it-yourself "How-To Guides" or call the service for a tradesperson referral.
The Family FunSaver Club-Registered Trademark- provides its members with a
variety of benefits, including the opportunity to inquire about and purchase
family travel services and family related products, the opportunity to buy new
cars at a discount, a discounted family dining program and a Family Values Guide
offering coupon savings on family related products such as movie tickets, casual
restaurants and theme parks.
The HealthSaver(SM) membership provides discounts ranging from 10% to 50% off
retail prices on prescription drugs, eyewear, eye care, dental care, selected
health-related services and fitness equipment, including sporting goods.
REGULATION
MARKETING REGULATION. Primarily through our Insurance/Wholesale and our
individual membership businesses, we market our products and services via a
number of distribution channels, including direct mail, telemarketing and
online. These channels are regulated on the state and federal levels and we
believe that these activities will increasingly be subject to such regulation.
Such regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members. In addition to direct marketing,
our Insurance/Wholesale and individual membership products and services are
subject to various state and local regulations including, as applicable, those
of state insurance departments. While we have not been adversely affected by
existing regulations, we cannot predict the effect of any future federal, state
or local legislation or regulation.
In November 1999, the Federal Gramm-Leach-Bliley Act became law. This Act and
its implementing regulations modernized the regulatory structure affecting the
delivery of financial services to consumers and provided for new requirements
and limitations relating to direct marketing by financial institutions to their
customers. Such additional requirements and limitations became effective in
November 2000, but mandatory compliance is not required until July 1, 2001. We
have taken various steps to address the requirements of the Act; however, since
certain specific aspects of the implementing regulations related to this Act
have not yet been clarified, it remains unclear what effect, if any, those
regulations might have on our businesses.
We are also aware of, and are actively monitoring the status of, certain
proposed privacy-related state legislation that might be enacted in the future;
it is unclear at this point what effect, if any, such state legislation might
have on our businesses.
36
FRANCHISE REGULATION. The sale of franchises is regulated by various state
laws, as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but does
not require registration. Although no assurance can be given, proposed changes
in the FTC's franchise rule should have no adverse impact on our franchised
businesses. A number of states require registration or disclosure in connection
with franchise offers and sales. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of the
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While our franchising operations have
not been materially adversely affected by such existing regulation, we cannot
predict the effect of any future federal or state legislation or regulation.
REAL ESTATE REGULATION. The federal Real Estate Settlement Procedures Act
(RESPA) and state real estate brokerage laws restrict payments which real estate
and mortgage brokers and other parties may receive or pay in connection with the
sales of residences and referral of settlement services (e.g., mortgages,
homeowners insurance, title insurance). Such laws may to some extent restrict
preferred alliance arrangements involving our real estate brokerage franchisees,
mortgage business and relocation business. Our mortgage business is also subject
to numerous federal, state and local laws and regulations, including those
relating to real estate settlement procedures, fair lending, fair credit
reporting, truth in lending, federal and state disclosure and licensing.
Currently, there are local efforts in certain states which could limit referral
fees to our relocation business.
It is a common practice for online mortgage and real estate related companies to
enter into advertising, marketing and distribution arrangements with other
Internet companies and Web sites, whereby the mortgage and real estate related
companies pay fees for advertising, marketing and distribution services and
other goods and facilities. The applicability of RESPA's referral fee
prohibitions to the compensation provisions of these arrangements is unclear and
the Department of Housing and Urban Development has provided no guidance to date
on the subject.
TIMESHARE EXCHANGE REGULATION. Our timeshare exchange business is subject to
foreign, federal, state and local laws and regulations including those relating
to taxes, consumer credit, environmental protection and labor matters. In
addition, we are subject to state statutes in those states regulating timeshare
exchange services, and must prepare and file annually certain disclosure guides
with regulators in states where required. We are not subject to those state
statutes governing the development of timeshare condominium units and the sale
of timeshare interests, but such statutes directly affect the members and
resorts that participate in the RCI exchange programs. Therefore, the statutes
indirectly impact our timeshare exchange business.
INTERNET REGULATION. Although our business units' operations on the Internet
are not currently regulated by any government agency in the United States beyond
regulations discussed above and applicable to businesses generally, it is likely
that a number of laws and regulations may be adopted governing the Internet. In
addition, existing laws may be interpreted to apply to the Internet in ways not
currently applied. Regulatory and legal requirements are subject to change and
may become more restrictive, making our business units' compliance more
difficult or expensive or otherwise restricting their ability to conduct their
businesses as they are now conducted.
VEHICLE RENTAL AND FLEET LEASING REGULATION. We are subject to federal, state
and local laws and regulations including those relating to taxing and licensing
of vehicles, franchising, consumer credit, environmental protection, retail
vehicle sales and labor matters. The principal environmental regulatory
requirements applicable to our vehicle and fleet management operations relate to
the ownership or use of tanks for the storage of petroleum products, such as
gasoline, diesel fuel and waste oils; the treatment or discharge of waste
waters; and the generation, storage, transportation and off-site treatment or
disposal of solid or liquid wastes. We operate 287 locations at which petroleum
products are stored in underground or aboveground tanks. We have instituted an
environmental compliance program designed to ensure that these tanks are in
compliance with applicable technical and operational requirements, including the
replacement and upgrade of underground tanks to comply with the December 1998
EPA upgrade mandate
37
and periodic testing and leak monitoring of underground storage tanks. We
believe that the locations where we currently operate are in compliance, in all
material respects, with such regulatory requirements.
We may also be subject to requirements related to the remediation of, or the
liability for remediation of, substances that have been released to the
environment at properties owned or operated by us or at properties to which we
send substances for treatment or disposal. Such remediation requirements may be
imposed without regard to fault and liability for environmental remediation can
be substantial.
We may be eligible for reimbursement or payment of remediation costs associated
with future releases from its regulated underground storage tanks have
established funds to assist in the payment of remediation costs for releases
from certain registered underground tanks. Subject to certain deductibles, the
availability of funds, compliance status of the tanks and the nature of the
release, these tank funds may be available to us for use in remediating future
releases from its tank systems.
A traditional revenue source for the vehicle rental industry has been the sale
of loss damage waivers, by which rental companies agree to relieve a customer
from financial responsibility arising from vehicle damage incurred during the
rental period. Approximately 3.4% of our vehicle operations revenue during 2000
was generated by the sale of loss damage waivers. The U.S. House of
Representatives has from time to time considered legislation that would regulate
the conditions under which loss damage waivers may be sold by vehicle rental
companies. Approximately 40 states have considered legislation affecting the
loss damage waivers. To date, 24 states have enacted legislation which requires
disclosure to each customer at the time of rental that damage to the rented
vehicle may be covered by the customer's personal automobile insurance and that
loss damage waivers may not be necessary. In addition, in the late 1980's, New
York enacted legislation which eliminated our right to offer loss damage waivers
for sale and limited potential customer liability to $100. Moreover, California
and Nevada have capped rates that may be charged for loss damage waivers to
$9.00 and $10.00 per day, respectively.
We are also subject to regulation under the insurance statutes, including
insurance holding company statutes, of the jurisdictions in which its insurance
company subsidiaries are domiciled. These regulations vary from state to state,
but generally require insurance holding companies and insurers that are
subsidiaries of insurance holding companies to register and file certain reports
including information concerning their capital structure, ownership, financial
condition and general business operations with the state regulatory authority,
and require prior regulatory agency approval of changes in control of an insurer
and intercorporate transfers of assets within the holding company structure.
The payment of dividends to us by our insurance company subsidiaries,
Pathfinder, Global Excess and Constellation, is restricted by government
regulations in Colorado, Bermuda and Barbados affecting insurance companies
domiciled in those jurisdictions.
EMPLOYEES
As of December 31, 2000, we employed approximately 28,000 persons fulltime.
Management considers our employee relations to be satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space at 9 West 57th
Street, New York, NY 10019 with a lease term expiring in 2013. Many of our
general corporate functions are conducted at a building owned by us and located
at 6 Sylvan Way, Parsippany, New Jersey 07054 and at buildings leased by us and
located at 1 Sylvan Way and 10 Sylvan Way, Parsippany, New Jersey 07054 and
Landmark House, Hammersmith Bridge Road, London, England W69EJ. We have recently
entered into a 12-year lease for 377,000 square feet at One Campus Drive,
Parsippany, NJ 07054, where we plan to consolidate many of our corporate
functions.
Our Travel segment has three properties which we own, a 166,000 square foot
facility in Virginia Beach, Virginia, which serves as a satellite administrative
and reservations facility for WizCom and Avis rental car operations, a 200,000
square foot facility in Carmel, Indiana, which serves as an administrative
office for RCI and a property located in Kettering, UK which is the European
office for RCI. Our Travel segment
38
also leases space for its reservations centers and data warehouse in Winner and
Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and Elizabethton, Tennessee;
Tulsa and Drumright, Oklahoma; St. John and Fredericton, New Brunswick, Canada
pursuant to leases that expire in 2000, 2004, 2007, 2004, 2002, 2001, 2000, 2009
and 2009, respectively. The Tulsa and Drumright, Oklahoma and St. John and
Fredericton, New Brunswick, Canada locations serve as Avis car rental
reservation centers. In addition, our Travel segment has approximately 14 leased
offices spaces located within the United States and approximately 37 additional
leased spaces in various countries outside the United States.
Our Real Estate Franchise segment leases approximately seven properties in
various locations that function as sales offices, three of which are shared with
our Travel segment.
Our Relocation segment has its main corporate operations located in three leased
buildings in Danbury, Connecticut, with lease terms expiring in 2004, 2005 and
2008. There are also five regional offices located in Mission Viejo and Walnut
Creek, California; Oak Brook and Chicago, Illinois; and Irving, Texas, which
provide operation support services. We own the office in Mission Viejo and the
others we operate pursuant to leases that expire in 2004, 2003, 2004 and 2003,
respectively. International offices are located in: Hammersmith and Swindon,
United Kingdom; Melbourne, Australia; and Singapore pursuant to leases that
expire in 2012, 2013, 2005 and 2002, respectively.
Our Mortgage segment has centralized its operations to one main area occupying
various leased offices in Mt. Laurel, New Jersey for a total of approximately
940,000 square feet. The lease terms expire over the next four years. Regional
sales offices are located in Englewood, Colorado and Santa Monica, California,
pursuant to leases that expire in 2002 and 2005, respectively.
Our Insurance/Wholesale segment leases domestic space in Brentwood and Franklin,
Tennessee; San Carlos, California; and Richmond, Virginia with lease terms
ending in 2002, 2003, 2001 and 2007, respectively. In addition, there are ten
leased locations internationally that function as sales and administrative
offices for Cims with the main office located in Portsmouth, UK.
We also lease space in Garden City, New York and Parsippany, New Jersey that
supports the Diversified Services segment as well as our car rental business.
The Garden City location is the main operation and administrative centers for
WizCom and Avis. In addition, there are approximately 19 leased office locations
in the United States. Internationally, we lease office space in the United
Kingdom and own one building in Birmingham, UK to support National Car Parks.
We lease or have vehicle rental concessions relating to space at 591 locations
in the United States and 202 locations outside the United States utilized in
connection with its vehicle rental operation. Of those locations, 212 in the
United States and 74 outside the United States are at airports. Typically, an
airport receives a percentage of vehicle rental revenues, with a guaranteed
minimum. Because there is a limited to the number of vehicle rental locations in
an airport, vehicle rental companies frequently bid for the available locations,
usually on the basis of the size of the guaranteed minimums. We and other
vehicle lease firms also lease parking space at or near airports and at their
other vehicle rental locations.
PHH Arval leases office space and marketing centers in eight locations in the
United States and Canada, with approximately 280,000 square feet in the
aggregate. In addition, Wright Express leases approximately 133,000 square feet
of office space in two domestic locations.
PHH Arval maintains a regional/processing office in Hunt Valley, Maryland.
We believe that such properties are sufficient to meet our present needs and we
do not anticipate any difficulty in securing additional space, as needed, on
acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
A. CLASS ACTION AND OTHER LITIGATION AND GOVERNMENT INVESTIGATIONS
Since the April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K, approximately 70 lawsuits claiming to be class
actions, three lawsuits claiming to be brought derivatively on our behalf and
several
39
other lawsuits and arbitration proceedings have been filed in various courts
against us and other defendants.
In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW) (D.N.J.)
(the "Securities Action"), is a consolidated action consisting of over sixty
constituent class action lawsuits that were originally filed in the United
States District Courts for the District of New Jersey, the District of
Connecticut, and the Eastern District of Pennsylvania. The Securities Action is
brought on behalf of all persons who acquired securities of the Company and CUC,
except our PRIDES securities, between May 31, 1995 and August 28, 1998. The
Court granted the lead plaintiffs' unopposed motion for class certification on
January 27, 1999. Named as defendants are the Company; twenty-eight current and
former officers and directors of the Company, CUC and HFS; and Ernst & Young
LLP, CUC's former independent accounting firm.
The Amended and Consolidated Class Action Complaint in the Securities Action
alleges that, among other things, the lead plaintiffs and members of the class
were damaged when they acquired securities of the Company and CUC because, as a
result of accounting irregularities, the Company's and CUC's previously issued
financial statements were materially false and misleading, and the allegedly
false and misleading financial statements caused the prices of the Company's and
CUC's securities to be inflated artificially. The Amended and Consolidated
Complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 (the "Securities Act") and Sections 10(b), 14(a), 20(a), and 20A of
the Securities Exchange Act of 1934 (the "Exchange Act"). Lead plaintiffs in the
Securities Action seek damages for themselves in unspecified amounts.
On January 25, 1999, the Company answered the Amended Consolidated Complaint and
asserted Cross-Claims against Ernst & Young. The Company's Cross-Claims allege
that Ernst & Young failed to follow professional standards to discover, and
recklessly disregarded, the accounting irregularities, and is therefore liable
to the Company for damages in unspecified amounts. The Cross-Claims assert
claims for breaches of Ernst & Young's audit agreements with the Company,
negligence, breaches of fiduciary duty, fraud, and contribution.
On March 26, 1999, Ernst & Young filed Cross-Claims against the Company and
certain of the Company's present and former officers and directors, alleging
that any failure to discover the accounting irregularities was caused by
misrepresentations and omissions made to Ernst & Young in the course of its
audits and other reviews of the Company's financial statements. Ernst & Young's
Cross-Claims assert claims for breach of contract, fraud, fraudulent inducement,
negligent misrepresentation and contribution. Damages in unspecified amounts are
sought for the costs to Ernst & Young associated with defending the various
shareholder lawsuits and for harm to Ernst & Young's reputation.
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the Securities Action. (See "Litigation Settlements" below and Note 13 to
the Consolidated Financial Statements).
Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the "PRIDES
Action") is a class action filed on June 15, 1998 and brought on behalf of
purchasers of the Company's PRIDES securities between February 24 and
August 28, 1998. The PRIDES Action is a consolidation of Welch & Forbes, Inc. v.
Cendant Corp., et. al. with seven other class action lawsuits filed on behalf of
purchasers of PRIDES. Named as defendants are the Company; Cendant Capital I, a
statutory business trust formed by the Company to participate in the offering of
PRIDES securities; seventeen current and former officers and directors of the
Company, CUC and HFS; Ernst & Young; and the underwriters for the PRIDES
offering, Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith
Incorporated; and Chase Securities Inc.
The allegations in the Amended Consolidated Complaint in the PRIDES Action are
substantially similar to those in the Securities Action, and violations of
Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a)
of the Exchange Act are asserted. Damages in unspecified amounts are sought.
40
On November 11, 1998, the plaintiffs in the PRIDES Action brought motions for
(i) certification of a proposed class of PRIDES purchasers; (ii) summary
judgment against the Company on liability under Section 11 of the Securities
Act; and (iii) an injunction requiring the Company to place $300 million in a
trust account for the benefit of the PRIDES investors pending final resolution
of their claims. These motions were withdrawn in connection with a partial
settlement of the PRIDES Action (see Litigation Settlements below and Note 17 to
the Consolidated Financial Statements).
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D.N.J.) and P.
Schoenfield Asset Management LLC v. Cendant Corp., et al., (Civ. Action
No. 98-4734) (D.N.J.) (the "ABI Actions") were initially commenced in October
and November of 1998, respectively, on behalf of a putative class of persons who
purchased securities of American Bankers Insurance Group, Inc. ("ABI") between
January 27, 1998 and October 13, 1998. Named as defendants are the Company, four
former CUC officers and directors, and Ernst & Young. The complaints in the ABI
actions, as amended on February 8, 1999, assert violations of Sections 10(b),
14(e) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
Plaintiffs allege that they purchased shares of ABI common stock at artificially
inflated prices due to the accounting irregularities after we announced a cash
tender offer for 51% of ABI's outstanding shares of common stock in
January 1998. Plaintiffs also allege that after the disclosure of the accounting
irregularities, we misstated our intention to complete the tender offer and a
second step merger pursuant to which the remaining shares of ABI stock were to
be acquired by us. Plaintiffs seek, among other things, unspecified compensatory
damages. The Company and the other defendants filed motions to dismiss the ABI
Actions on March 10, 1999. The United States District Court for the District of
New Jersey found that the complaints failed to state a claim upon which relief
could be granted and, accordingly, dismissed the complaints by order dated
April 30, 1999. In an opinion dated August 10, 2000, the United States Court of
Appeals for the Third Circuit vacated the District Court's judgment and remanded
the ABI Actions for further proceedings. Cendant, on December 15, 2000, filed a
motion to dismiss those claims based on ABI purchases after April 15, 1998. This
motion has been fully briefed and is currently pending before the District
Court.
B. OTHER LITIGATION
Prior to April 15, 1999, actions making substantially similar allegations to the
allegations in the Securities Action were filed by various plaintiffs on their
own behalf in the United States District Courts for the District of New Jersey,
the Eastern and Central Districts of California, the Southern District of
Florida, the Eastern District of Louisiana, the District of Connecticut and the
Eastern District of Wisconsin. The Company filed motions before the Judicial
Panel on Multidistrict Litigation (the "JPML") to transfer to the District of
New Jersey, for consolidation with the Securities Action, the actions filed in
judicial districts other than the District of New Jersey. The motions to
transfer were granted in August and September, 1999. The District of New Jersey
has granted the Company's motion to dismiss two of these transferred actions:
Stewart v. Cendant Corp., originally filed in the District of Connecticut, and
Wyatt v. Cendant Corp., originally filed in the Southern District of Florida.
The Company has filed Cross-Claims against Ernst & Young in two of the remaining
transferred actions: McLaughlin v. Cendant Corp., originally filed in the
District of New Jersey; and Alexander v. Cendant Corp., originally filed in the
Central District of California. Ernst & Young has filed counterclaims and
Cross-Claims against the Company in each of these actions.
Among the actions transferred is Reliant Trading and Shepherd Trading Ltd. v.
Cendant Corp., originally filed in the Eastern District of Wisconsin. The
plaintiffs in Reliant allegedly purchased certain 4 3/4% Senior Notes originally
issued by HFS and claim to have converted these notes to shares of Cendant
common stock in April 1998, before our April 15, 1998 announcement concerning
the accounting irregularities. Plaintiffs seek, among other things, rescission
of the conversion of the notes, unspecified compensatory damages resulting form
the conversion, and additional unspecified damages resulting from the original
purchase of the notes at allegedly artificially inflated prices.
41
On November 2, 1999, the Company moved for judgment on the pleadings dismissing
the Securities Act claims asserted against it. On December 10, 1999, the parties
filed a stipulation dismissing with prejudice claims of violations of Sections
11, 12 and 15 of the Securities Act against all defendants and claims of
violations of Sections 10(b) and 20 of the Exchange Act against certain present
and former Cendant directors. On December 14, 1999, plaintiffs filed a first
Amended Complaint alleging violations of Section 10(b) of the Exchange Act and
breach of contract against the Company and violations of Sections 10(b) and 20
of the Exchange Act against certain former and present officers and directors of
The Company. On January 14, 2000, the Company filed an answer denying all
material allegations in the First Amended Complaint. Additionally, various
counterclaims, cross-claims and third-party claims exist between Ernst & Young
and the Company and certain of its present and former officers and directors.
Kennilworth Partners, L.P. et al., v. Cendant Corp., et al., 98 Civ. 8939 (DC)
(the "Kennilworth Action") was filed on December 18, 1998 on behalf of three
investment companies. Named as defendants are the Company; thirty of its present
and former officers and directors; HFS; and Ernst & Young. The complaint in the
Kennilworth Action, as amended on January 26, 1999, alleges that the plaintiffs
purchased convertible notes issued by HFS pursuant to an indenture dated
February 28, 1996 and were damaged when they converted their notes into shares
of common stock in the Company shortly prior to the Company's April 15, 1998
announcement. The amended complaint asserts violations of Sections 11, 12 and 15
of the Securities Act and Sections 10(b) and 20 of the Exchange Act; a
common-law breach of contract claim is also asserted. Damages are sought in an
amount estimated to be in excess of $13.6 million. On April 29, 1999, the
Company moved to dismiss the Securities Act claims brought against it. On
August 10, 1999, the District Court dismissed plaintiffs' claims under Sections
11 and 12(2) of the Securities Act against us and all of the other defendants
and dismissed the claims under Section 10(b) of the Exchange Act against the
individual officers and directors and Ernst & Young. On August 23, 1999, the
Company filed an Answer and Affirmative Defenses, in which it denied all
material allegations in the amended complaint. In January 2000, plaintiffs filed
a Second Amended Complaint, asserting claims against Cendant under
Section 10(b) of the Exchange Act and for breach of contract. The Company
answered the Second Amended Complaint on April 3, 2000, and the Company has
filed Cross-Claims against Ernst & Young.
Kevlin, et al v. Cendant Corp., No. C-98-12602-B (the "Kevlin Action"), was
commenced in December 1998 in the County Court of Dallas County, Texas.
According to the complaint, plaintiffs are former shareholders of an entity
known as Kevlin Services, Inc. In 1996, a subsidiary of Cendant acquired all of
the assets of Kevlin Services, Inc. in exchange for approximately 1,155,733
shares of common stock of CUC International Inc. According to the complaint,
plaintiffs were to receive CUC shares worth $26,370,000 and instead received
shares worth substantially less than that amount due to the impact of the
accounting irregularities on the market price for CUC common stock. Plaintiffs
have asserted claims against Cendant, its subsidiary and Ernst & Young for
fraud, negligent misrepresentation, breach of duty of good faith and fair
dealing, breach of contract, conspiracy, negligence and gross negligence.
Plaintiffs seek compensatory and exemplary damages in unspecified amounts.
Cendant and its subsidiary have filed a general denial to the allegations in the
complaint. The parties have commenced discovery in this case.
Raymond H. Stanton II and Raymond H. Stanton III v. Cendant Corp. is an
arbitration proceeding filed by Raymond H. Stanton II and Raymond H. Stanton
III, former owners of Dine-A-Mate, Inc. The Demand for Arbitration alleges that
the Stantons sold Dine-A-Mate stock to CUC in September 1996 in exchange for
929,930 shares of CUC common stock. The Demand alleges that due to the
accounting irregularities the price of CUC stock was artificially inflated at
the time and asserts claims for fraud, fraudulent inducement, breach of
warranty, and violation of Sections 18(a) and 10(b) of the Exchange Act. The
Stantons seek, among other things, damages equal to the differences between
$33,314,736 (the alleged value of the transaction) and the actual value of the
CUC stock they received in the sale, and punitive damages on their claims for
fraud and fraudulent inducement. The arbitration concluded on February 13, 2001
with an award to the Stantons.
Janice G. Davidson and Robert M. Davidson v. Cendant Corp. (JAMS/Endispute--Los
Angeles No. 122002145) is an arbitration proceeding filed on December 17, 1998,
by Janice G. and Robert M.
42
Davidson, former majority shareholders of a California-based computer software
firm acquired by the Company in a July 1996 stock merger (the "Davidson
Merger"). The Davidsons' Demand for Arbitration purported to assert claims
against Cendant in connection with the Davidson Merger and a May 1997 settlement
agreement settling all disputes arising out of the Davidson Merger (the
"Davidson Settlement"). The Demand asserts claims for: (i) securities fraud
under federal, state and common law theories relating to the Davidson Merger,
through which the Davidsons received approximately 21,670,000 common shares of
CUC stock and options on CUC stock in exchange for all of their Davidson &
Associates, Inc. common shares, based upon CUC's accounting irregularities and
alleged misrepresentations concerning the Davidsons' employment as CUC
executives; (ii) wrongful taking of trust property based on fraud in connection
with the Davidson Merger; (iii) unjust enrichment, in connection with the
Davidson Merger; (iv) rescission of the Davidson Settlement for fraud under the
federal securities laws, California Corporations Code, and common law, and on
grounds of unilateral mistake, failure of consideration, and prejudice to the
public interest; and (v) damages under the Settlement Agreement for fraud in
connection with the grant of CUC stock options to the Davidsons under that
Agreement. The Demand seeks unspecified compensatory and punitive damages and a
declaratory judgment that the Davidsons are entitled to rescind the Davidson
Settlement and that the claims in the Demand are arbitrable.
Cendant answered the Demand on January 12, 1999, denying all of the material
allegations in the Demand, and also filed a Complaint for Injunctive and
Declaratory Relief against the Davidsons in the United States District Court for
the Central District of California (the "Cendant Complaint"), seeking to enjoin
the arbitration on the grounds that the parties to the Davidson Settlement
agreed therein not to arbitrate ten of the eleven claims contained in the
Demand, and that the arbitration clauses under which the Davidsons bring their
claims are inapplicable to the dispute. In February 1999, Cendant filed a Motion
for Preliminary Injunction seeking to enjoin the arbitration proceedings pending
the court's final resolution of the dispute on the merits. The Davidsons filed a
motion to dismiss the Cendant Complaint or for summary judgment. On April 14,
1999, the court entered an order granting summary judgment in favor of the
Davidsons, denying Cendant's Motion for Preliminary Injunction and dismissing
the Cendant Complaint. The Company's appeal from this order is pending before
the United States Court of Appeals for the Ninth Circuit. The arbitration has
been stayed by agreement of the parties until the Ninth Circuit issues a mandate
on the appeal, except discovery is proceeding on whether the Davidson Settlement
should be rescinded. On April 14, 1999, the Davidsons filed a complaint in the
United States District Court for the Central District of California against
Cendant alleging essentially the same claims asserted in the Demand. The
complaint seeks unspecified compensatory and punitive damages, and was filed
purportedly to toll the statute of limitations pending arbitration of the claims
in the Demand. Cendant's motion to transfer this case to the District Court of
New Jersey was granted by the JPML on August 12, 1999.
In April 2000, the Davidsons filed a motion in the United States District Court
for the District of New Jersey seeking an Order (i) confirming that they are not
members of the Class in the Securities Action and therefore are not bound by the
settlement of that action; and (ii) alternatively, extending the time within
which the Davidsons can exclude themselves from the Class. On May 15, 2000,
Cendant filed papers in opposition to the motion and in support of its
cross-motion seeking to enjoin the Davidsons from proceeding with the
arbitration referred to above insofar as their claims in the arbitration are
premised on their acquisition of shares of CUC common stock. On June 20, 2000,
the District Court issued an order denying the Davidsons' motion and granting
Cendant's cross-motion. Specifically, the District Court (i) ruled that the
Davidsons fell within the Securities Action class definition of persons who
purchased or otherwise acquired publicly traded securities of CUC or Cendant
securities during the class period, (ii) denied the Davidsons' motion to extend
time to opt out of the class, and (iii) granted Cendant's cross-motion to enjoin
the Davidsons' continued prosecution of claims arising out of their acquisition
of publicly-traded CUC or Cendant securities. The Davidsons appealed the Order
to the United States Court of Appeals for the Third Circuit and oral argument
was held on November 16, 2000.
Deutch v. Silverman, et al., No. 98-1998 (WHW) (the "Deutch Action"), is a
shareholder derivative action, purportedly filed on behalf of, and for the
benefit of the Company. The Deutch Action was commenced on April 27, 1998 in the
District of New Jersey against certain of the Company's current and former
directors
43
and officers; and, as a nominal party, the Company. The complaint in the Deutch
Action alleges that individual officers and directors of the Company breached
their fiduciary duties by selling shares of the Company's stock while in
possession of non-public material information concerning the accounting
irregularities, and by, among other things, causing and/or allowing the Company
to make a series of false and misleading statements regarding the Company's
financial condition, earnings and growth; entering into an agreement to acquire
ABI and later paying $400 million to ABI in connection with termination of that
agreement; re-pricing certain stock options previously granted to certain
Company executives; and entering into certain severance and other agreements
with Walter Forbes, the Company's former Chairman, under which Mr. Forbes
received approximately $51 million from the Company pursuant to an employment
agreement we had entered into with him in connection with the Cendant Merger.
Damages are sought on behalf of Cendant in unspecified amounts.
Corwin v. Silverman et al., No. 16347-NC (the "Corwin Action"), was filed on
April 28, 1998 in the Court of Chancery for the State of Delaware. The Corwin
Action is purportedly brought derivatively, on behalf of the Company, and as a
class action, on behalf of all shareholders of HFS who exchanged their HFS
shares for CUC shares in connection with the Merger. The Corwin Action names as
defendants HFS and twenty-eight individuals who are or were directors of the
Company and HFS. The complaint in the Corwin Action, as amended on July 28,
1998, alleges that HFS and its directors breached their fiduciary duties of
loyalty, good faith, care and candor in connection with the Cendant Merger, in
that they failed to properly investigate the operations and financial statements
of CUC before approving the Merger at an allegedly inadequate price. The amended
complaint also alleges that the Company's directors breached their fiduciary
duties by entering into an employment agreement with our former Chairman, Walter
A. Forbes, in connection with the Merger that purportedly amounted to corporate
waste. The Corwin Action seeks, among other things, rescission of the Merger and
compensation for all losses and damages allegedly suffered in connection
therewith. On October 7, 1998, Cendant filed a motion to dismiss the Corwin
Action or, in the alternative, for a stay of the Corwin Action pending
determination of the Deutch Action. On June 30, 1999, the Court of Chancery for
the State of Delaware stayed the Corwin Action pending a determination of the
Deutch Action.
Resnik v. Silverman, et. al., No. 18329 (NC) (Del. Ch.) (the "Resnik Action"),
is a purported derivative action filed in the Court of Chancery for the State of
Delaware on or about September 19, 2000. The Complaint names as defendants those
current and former members of Cendant's Board of Directors (the "Director
Defendants") who were both named as defendants in, and approved the settlement
of, the Securities Action (the "Settlement"). The Complaint alleges that the
decision of the Director Defendants to approve the Settlement constituted a
breach of their fiduciary duties of loyalty and good faith, and seeks a monetary
judgment in an unspecified amount in favor of nominal defendant Cendant. On or
about November 16, 2000, Cendant moved to dismiss the Resnik Action on the
grounds that any challenge to the Director Defendants' decision to approve the
Settlement is not ripe because Cendant has not yet incurred any liability under
the Settlement, and may never do so if the District Court's approval of the
Settlement is not affirmed on appeal. Also on or about November 16, 2000, the
Director Defendants moved to stay the Resnik Action pending resolution of the
Deutch Action. The plaintiff in the Resnik Action has not yet responded to
either of these motions.
The SEC and the United States Attorney for the District of New Jersey conducted
investigations relating to accounting irregularities. As a result of the
findings from our internal investigations, we made all adjustments considered
necessary which are reflected in previously filed financial statements. The
investigation of the SEC as to Cendant concluded on June 14, 2000 when Cendant
consented to an entry of an Order Instituting Public Administration Proceedings
in which the SEC found that Cendant had violated certain record-keeping
provisions of the federal securities laws, Sections 13(a) and 13(b) of the
Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and ordered Cendant to
cease and desist from committing or causing any violation and any future
violation of those provisions.
44
C. LITIGATION SETTLEMENTS.
Settlement of Common Stock Class Action Litigation
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the Securities Action pending against the Company in the
U.S. District Court in Newark, New Jersey. In a settlement agreement executed
March 17, 2000, the Company agreed to pay the class members approximately
$2.85 billion in cash. The District Court approved the settlement in orders
dated August 15, 2000. Certain parties who objected to the settlement have
appealed the District Court's orders approving the plan of allocation of the
settlement fund and awarding attorney's fees and expenses to counsel for the
lead plaintiffs to the United States Court of Appeals for the Third Circuit.
Briefing of the appeals is nearly complete, but no argument date has been set by
the Third Circuit. We currently plan to fund the settlement through the use of
available cash, the use of existing credit facilities, the issuance of debt
securities and/or the issuance of equity securities. We intend to finance the
cost of the settlement so as to maintain our investment grade ratings. Please
see the Company's Form 8-K, dated December 7, 1999, for a description of the
agreement to settle the common stock class action litigation.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we entered into a stipulation of settlement with counsel
representing the class of holders of our PRIDES securities who purchased their
securities on or prior to April 15, 1998 ("eligible persons") to settle their
class action lawsuit against us. Under the settlement, each eligible person was
entitled to receive a new security--a Right--for each PRIDES held on April 15,
1998. The settlement did not resolve claims based upon purchases of PRIDES after
April 16, 1998. On June 15, 1999, the United States District Court for the
District of New Jersey issued an order approving the settlement and awarding
fees to class counsel. One objector, who objected to a portion of the settlement
concerning fees to class counsel, filed an appeal to the United States Court of
Appeals to the Third Circuit, which was argued on December 15, 2000 and is
currently pending before the appeals court. We believe this appeal is without
merit.
In April 2000, The Chase Manhattan Bank ("Chase"), acting as custodian of three
mutual funds that sought a total of 2,020,000 Rights, filed a motion seeking
relief from an order of the District Court that rejected the claims filed by
Chase on behalf of the mutual funds. On June 7, 2000, the District Court denied
Chase's motion, but on December 1, 2000 the Third Circuit vacated that order and
remanded the case to the District Court for further proceedings, which are
ongoing. As the Rights expired on February 14, 2001, if Chase's claim is
successful it will be satisfied with our CD Common Stock.
Pursuant to the settlement, we distributed 24,107,038 Rights to eligible
persons. The Rights provided that we issue two New PRIDES to every person who
delivered to us by February 14, 2001 three rights and two original PRIDES. The
terms of the New PRIDES were the same as the original PRIDES, except that the
conversion rate was revised so that, at the time the Rights were distributed,
each of the New PRIDES had a value equal to $17.57 more than each original
PRIDES, based upon a generally accepted valuation model. We issued approximately
15,485,000 New PRIDES upon exercise of Rights. Under the terms of the New
PRIDES, each holder of a New PRIDES was required to purchase 2.3036 shares of
our Common Stock on February 16, 2001. In connection with this mandatory
purchase, we distributed approximately 14,745,000 more shares of our Common
Stock on February 16, 2001 than we otherwise would have under the terms of the
original PRIDES.
In connection with the settlement, we recorded a charge of approximately $351
million ($228 million, after tax) in the fourth quarter of 1998. Such charge was
reduced by $41 million ($26 million, after tax) during 2000, resulting from an
adjustment to the original estimate of the number of rights to be issued.
Furthermore, in February 2001, we will record an additional reduction of
approximately $10 million ($6.5 million, after tax), resulting from the number
of rights that expired unexercised on February 16, 2001.
The settlements do not encompass all litigation asserting claims associated with
the accounting irregularities. We do not believe that it is feasible to predict
or determine the final outcome or resolution of these unresolved proceedings. An
adverse outcome from such unresolved proceedings could be material with
45
respect to earnings in any given reporting period. However, the Company does not
believe that the impact of such unresolved proceedings should result in a
material liability to the Company in relation to its consolidated financial
position or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE ON COMMON STOCK
Our common stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "CD". At March 15, 2001 the number of stockholders of record was
approximately 9,171. The following table sets forth the quarterly high and low
sales prices per share of CD common stock as reported by the NYSE for 2000 and
1999.
2000 HIGH LOW
- ---- -------- --------
First Quarter $24.3125 $16.1875
Second Quarter 18.75 12.1563
Third Quarter 14.875 10.625
Fourth Quarter 12.5625 8.5
1999 HIGH LOW
- ---- ------------ ------------
First Quarter $22 7/16 $15 5/16
Second Quarter 20 3/4 15 1/2
Third Quarter 22 5/8 17
Fourth Quarter 26 9/16 14 9/16
On March 15, 2001, the last sale price of our CD common stock on the NYSE was
$14.36 per share.
DIVIDEND POLICY
We expect to retain our earnings for the development and expansion of our
businesses and the repayment of indebtedness and do not anticipate paying
dividends on common stock in the foreseeable future.
46
ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Net revenues $ 3,930 $ 4,521 $ 4,465 $ 3,553 $ 2,559
======= ======= ======= ======= =======
Income (loss) from continuing operations $ 576 $ (333) $ 208 $ 82 $ 366
Income (loss) from discontinued operations,
net of tax 84 278 332 (42) (36)
Extraordinary gain (loss), net of tax (2) -- -- 26 --
Cumulative effect of accounting change, net of
tax (56) -- -- (283) --
------- ------- ------- ------- -------
Net income (loss) $ 602 $ (55) $ 540 $ (217) $ 330
======= ======= ======= ======= =======
PER SHARE DATA
CD COMMON STOCK
Income (loss) from continuing operations:
Basic $ 0.80 $ (0.44) $ 0.25 $ 0.10 $ 0.48
Diluted 0.78 (0.44) 0.24 0.10 0.45
Cumulative effect of accounting change:
Basic $ (0.08) $ -- $ -- $ (0.35) $ --
Diluted (0.08) -- -- (0.35) --
Net income (loss):
Basic $ 0.84 $ (0.07) $ 0.64 $ (0.27) $ 0.44
Diluted 0.81 (0.07) 0.61 (0.27) 0.41
MOVE.COM COMMON STOCK
Loss from continuing operations:
Basic and diluted $ (1.76) $ -- $ -- $ -- $ --
FINANCIAL POSITION
Total assets $14,516 $14,531 $19,421 $13,453 $12,152
Long-term debt 1,948 2,445 3,363 1,246 780
Assets under management and mortgage programs 2,861 2,726 7,512 6,444 5,729
Debt under management and mortgage programs 2,040 2,314 6,897 5,603 5,090
Mandatorily redeemable preferred interest in a
subsidiary 375 -- -- -- --
Mandatorily redeemable preferred securities
issued by subsidiary holding solely senior
debentures issued by the Company 1,683 1,478 1,472 -- --
Stockholders' equity 2,774 2,206 4,836 3,921 3,956
- --------------------------
See Note 3--Acquisitions and Dispositions of Businesses and Note 6--Other
Charges to the Consolidated Financial Statements for a detailed discussion of
net gains (losses) on dispositions of businesses and non-recurring or unusual
charges (credits) recorded for the years ended December 31, 2000, 1999, and
1998.
During 1997, restructuring and other unusual charges of $701 million ($503
million, after tax or $0.59 per diluted share) were recorded primarily
associated with the merger of HFS Incorporated and CUC International Inc. and
the merger with PHH Corporation in April 1997.
Income (loss) from discontinued operations, net of tax includes the after tax
results of discontinued operations and the gain on disposal of discontinued
operations.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto included elsewhere herein. Unless otherwise noted, all dollar amounts
are in millions.
RESULTS OF CONSOLIDATED OPERATIONS -- 2000 VS. 1999
Our revenues decreased $591 million, or 13%, primarily as a result of businesses
disposed of during 1999. Excluding the operating results of these disposed
businesses, our revenues increased $118 million, or 3%, which primarily
reflected growth attributable to higher service based fees in our Relocation
segment, increased mortgage production and loan servicing revenues in our
Mortgage segment and greater royalty fees generated from our franchised brands
in our Real Estate Franchise segment. A detailed discussion of revenue trends is
included in "Reportable Operating Segments."
Our expenses decreased $3.3 billion, or 53%, primarily due to a $2.9 billion
charge recorded during 1999 for the settlement of the principal common
stockholder class action lawsuit and also the impact from businesses disposed of
during 1999. During 2000, we also recorded a non-cash credit of $41 million in
connection with an adjustment to the number of Rights to be issued under the
settlement of the class action lawsuit that was brought on behalf of PRIDES
holders in 1998, which was partially offset by a charge of $20 million recorded
in connection with litigation asserting claims associated with accounting
irregularities in the former business units of CUC and outside of the principal
common stockholder class action lawsuit.
Expenses were also impacted by an increase in restructuring and other unusual
charges and a decrease in interest expense, as discussed below.
During 2000, our management, with the appropriate level of authority, formally
committed to various strategic initiatives, which were generally aimed at
improving the overall level of organizational efficiency, consolidating and
rationalizing existing processes and reducing cost structures in our underlying
businesses. Accordingly, we incurred a restructuring charge of $60 million, of
which $57 million impacted continuing operations. These initiatives primarily
affected our Travel and Insurance/Wholesale segments and are expected to be
completed by the end of the first quarter of 2001. Cash payments of
approximately $20 million, funded from operations, were made during 2000. We do
not anticipate additional significant cash requirements other than those already
made during 2000. The initiatives are anticipated to increase pre-tax income by
approximately $20 million to $25 million annually, commencing in 2001. The
initial recognition of the charge and the corresponding utilization from
inception is summarized by category as follows:
2000 BALANCE AT
RESTRUCTURING CASH OTHER DECEMBER 31,
CHARGE PAYMENTS REDUCTIONS 2000
------------- -------- ---------- -------------
Personnel related $ 25 $ 18 $ 1 $ 6
Asset impairments and contract terminations 26 1 25 --
Facility related 9 2 1 6
---------- ------- ------- ----------
Total 60 21 27 12
Reclassification for discontinued operations (3) (1) -- (2)
---------- ------- ------- ----------
Total related to continuing operations $ 57 $ 20 $ 27 $ 10
========== ======= ======= ==========
Personnel related costs primarily included severance resulting from the
consolidation of business operations and certain corporate functions. Asset
impairments and contract termination costs were incurred in connection with a
change in our strategic focus to an online business model and primarily
consisted of $25 million associated with the exit of our timeshare software
development business. Facility related costs consisted of facility closures and
lease obligations also resulting from the consolidation of business operations.
48
During 2000 and 1999, we also incurred unusual charges of $32 million and
$25 million, respectively, primarily representing irrevocable contributions to
an independent technology trust responsible for completing the transition of our
lodging franchisees to a company sponsored property management system.
Additionally, we incurred investigation-related costs of $23 million and
$21 million during 2000 and 1999, respectively, which were primarily associated
with professional fees and public relations costs incurred in connection with
accounting irregularities in the former business units of CUC and resulting
investigations into such matters. Also during 1999, we incurred $7 million of
charges primarily in connection with the termination of the proposed acquisition
of RAC Motoring Services.
Our net interest expense decreased $51 million, or 26%, primarily as a result of
a decrease in our average debt balance outstanding, partially offset by interest
expense accrued on our stockholder litigation settlement liability during 2000.
During 2000 and 1999, we recorded a net loss of $43 million and a net gain of
$967 million, respectively, in connection with the dispositions of certain
non-strategic businesses. Also during 2000, we recorded a gain of $35 million in
connection with the recognition of a portion of our deferred gain on the 1999
sale of Avis Group due to the disposition of VMS Europe by Avis Group in 2000.
Our provision (benefit) for income taxes consisted of a tax provision of
$309 million in 2000, or an effective tax rate of 31.9%, compared to a tax
benefit of $468 million in 1999, or an effective tax rate of 63.2%. The
effective tax rate variance represents the impact of the disposition of our
Fleet segment in 1999, which was accounted for as a tax-free merger.
As a result of the above-mentioned items, income from continuing operations
increased $909 million.
REPORTABLE OPERATING SEGMENTS -- 2000 VS. 1999
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization and minority interest, adjusted to
exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. Our
management believes such discussions are the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies.
As of January 1, 2000, we refined our corporate overhead allocation method.
Expenses that were previously allocated among segments based upon a percentage
of revenue are now recorded by each specific segment if the expense is primarily
associated with that segment. We determined this refinement to be appropriate
subsequent to the completion of our divestiture plan and based upon the
composition of our business units in 2000.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
ADJUSTED
REVENUES ADJUSTED EBITDA EBITDA
------------------------------ ------------------------------ MARGIN
% % -------------------
2000 1999 CHANGE 2000 (A) 1999 CHANGE 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
Travel (b) $ 1,243 $ 1,239 --% $ 564 $ 593 (5)% 45% 48%
Real Estate Franchise 593 571 4 430 424 1 73 74
Insurance/Wholesale (c) 574 575 -- 177 180 (2) 31 31
Relocation 448 415 8 142 122 16 32 29
Mortgage 423 397 7 180 182 (1) 43 46
Move.com Group 59 18 * (94) (22) * * *
Diversified Services (d)(e) 590 1,099 (46) 144 223 (35) 24 20
Fleet -- 207 * -- 81 * * 39
------- ------- ------- -------
Total $ 3,930 $ 4,521 $ 1,543 $ 1,783
======= ======= ======= =======
- ------------------------------
* Not meaningful.
49
(a) Adjusted EBITDA excludes $89 million of restructuring and other unusual
charges ($63 million, $1 million, $1 million, $9 million, $4 million and
$11 million of charges were recorded within the Travel, Relocation,
Mortgage, Insurance/Wholesale, Move.com Group and Diversified Services
segments, respectively).
(b) Adjusted EBITDA excludes $12 million of losses in 2000 related to the
dispositions of businesses and a charge of $23 million in 1999 associated
with an irrevocable contribution to an independent technology trust
responsible for completing the transition of our lodging franchisees to a
company sponsored property management system.
(c) Adjusted EBITDA excludes $11 million of losses in 1999 related to the
dispositions of businesses.
(d) Adjusted EBITDA for 2000 excludes (i) a non-cash credit of $41 million in
connection with an adjustment to the number of Rights to be issued under
the PRIDES settlement and (ii) a gain of $35 million, which represents the
recognition of a portion of our previously recorded deferred gain from the
1999 sale of our former Fleet segment to Avis Group due to the disposition
of VMS Europe by Avis Group in 2000; partially offset by (i) $31 million of
losses related to the dispositions of businesses, (ii) $23 million of
investigation-related costs and (iii) $20 million in connection with
litigation asserting claims associated with accounting irregularities in
the former business units of CUC and outside of the principal common
stockholder class action lawsuit.
(e) Adjusted EBITDA for 1999 excludes charges of (i) $2,894 million
associated with the settlement of the principal common stockholder class
action lawsuit, (ii) $21 million for investigation related costs,
(iii) $7 million related to the termination of a proposed acquisition and
(iv) $2 million principally related to the consolidation of European call
centers in Ireland. Such charges were partially offset by a net gain of
$978 million related to the dispositions of businesses.
TRAVEL
Revenues increased $4 million while Adjusted EBITDA decreased $29 million, or
5%, however, the primary drivers impacting our franchise and timeshare business
operations reflected growth year-over-year. Royalties from our franchise
business increased $12 million, or 4%, principally due to a 3% increase in
available rooms within our lodging business and a 4% increase in the volume of
car rental transactions at Avis Group. Timeshare exchange revenues grew
$12 million, or 6%, primarily due to a 6% growth in memberships and a 6%
increase in the average exchange fee. Timeshare subscription revenues remained
constant, despite the membership growth, due to the impact of the January 1,
2000 implementation of Staff Accounting Bulletin ("SAB") No. 101, which modified
and extended the timing of revenue recognition for subscriptions and certain
other fees. Accounting under SAB No. 101 resulted in non-cash reductions in
timeshare subscription revenues and preferred alliance revenues of $11 million
and $6 million, respectively. Also during 2000, Adjusted EBITDA declined in part
due to $24 million of incremental overhead allocations from refined allocation
methods, which was partially offset by an increase of $10 million in revenues
and Adjusted EBITDA due to incremental dividend income recognized on our
preferred stock investment in Avis Group. During 1999, revenues and Adjusted
EBITDA benefited by $11 million from the execution of a bulk timeshare exchange
transaction and also by $6 million from the generation of a master license
agreement and joint venture. Additionally during 1999, revenues and Adjusted
EBITDA included $11 million of gains recognized on the sale of a portion of our
common equity interest in Avis Group.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $22 million, or 4%, and $6 million, or
1%, respectively. Such increases primarily represent higher royalty fees of
$31 million, or 7%, generated from our real estate franchise brands, which
principally resulted from an 11% increase in the average price of homes sold
(net of a 3% reduction in the volume of homes sold). Industry statistics
provided by the National Association of Realtors for the year ended
December 31, 2000 indicated that the volume of existing home sales industry-
wide declined by 3% and the average price of homes sold increased by 5%. Based
on these statistics, we out-performed the industry-wide growth in the dollar
volume of homes sold. Increases in royalties and franchise fees are recognized
with minimal corresponding increases in expenses due to the significant
operating leverage within our franchise operations. Such increases were
partially offset by a year-over-year reduction of $10 million in gains
recognized from the sale of portions of our preferred stock investments in NRT
Incorporated. The increase in Adjusted EBITDA was further offset by an
$11 million increase in corporate overhead allocations due to refined allocation
methods. Excluding the reduction of $10 million in gains and the increase of
$11 million in corporate overhead allocations, revenues and Adjusted EBITDA
increased $32 million, or 6%, and $27 million, or 7%, respectively.
50
We also continued to add new franchise brokerages to our franchise system in
2000. The gross commissions added by our core franchise sales (exclusive of
sales by NRT, our largest franchisee) were 14% higher. Revenue growth has been
moderated by modestly declining volume and significantly reduced acquisition
activity at NRT for the majority of the year. However, in December 2000, NRT
acquired the largest independent real estate brokerage in California.
Additionally, the pipeline of potential acquistions by NRT has grown
significantly.
We believe that the combination of NRT acquisition opportunities and additional
franchise sales should mitigate the currently anticipated industry-wide decline
in existing home sales.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA decreased $1 million and $3 million, respectively.
Domestic revenues and Adjusted EBITDA decreased $4 million and $7 million,
respectively, and the Adjusted EBITDA margin was 35%, down 2% from 1999.
Contributing to this decline were reduced billings and collections of insurance
premiums. Additionally, we incurred costs of approximately $9 million during
2000 to consolidate our domestic operations in Tennessee. The majority of such
costs were offset by economies and related cost savings realized from such
consolidation. International revenues and Adjusted EBITDA increased $3 million
and $4 million, respectively, primarily due to a 17% increase in international
memberships. The Adjusted EBITDA margin internationally increased 2% to 18% in
2000. We project that improved market conditions, increased volume of direct
mail insurance solicitations and the continued cost saving benefits of the
consolidation of domestic operations will improve operating results throughout
2001.
RELOCATION
Revenues and Adjusted EBITDA increased $33 million, or 8%, and $20 million, or
16%, respectively, reflecting a continuing trend in our business operations from
asset based to service based. Higher service based fees include increases of:
(i) $14 million of referral fees, reflecting increased penetration in both
destination and departure markets; (ii) $8 million of outsourcing fees resulting
from expanded services; (iii) $10 million of international revenues resulting
from increased marketing and sales efforts and (iv) $5 million of other
ancillary service fees. Also contributing to the increase in revenues and
Adjusted EBITDA was improved interest income of $13 million resulting from
maintaining lower debt levels principally due to operating benefits realized
from our investment in technology. Partially offsetting the increase in service
fee revenues was a $14 million decline in corporate and government home sale
revenues, principally due to a reduced volume of closings. Partially offsetting
the increase in Adjusted EBITDA is a $7 million gain recognized in 1999 on the
sale of a minority interest in an insurance subsidiary. Excluding such gain,
revenues and Adjusted EBITDA increased $40 million, or 10%, and $27 million, or
23%, respectively.
In September 2000, we acquired Bradford & Bingley Relocation Services, a leading
provider of global relocation management services in the United Kingdom. Such
acquisition contributed $3 million to revenues and had no impact on Adjusted
EBITDA.
MORTGAGE
Revenues increased $26 million, or 7%, while Adjusted EBITDA decreased
$2 million, or 1%. Revenues from mortgage loans closed increased $16 million due
to favorable production margins, partially offset by a reduction in mortgage
loan closings. The average production fee increased 25 basis points, or 21%, due
to a reduction in the direct costs per loan. Mortgage loan closings declined
$3.4 billion, or 13%, to $22.1 billion, consisting of $20.2 billion in purchase
mortgages and $1.9 billion in refinancing mortgages. The decline in loan
closings was primarily the result of a $4.2 billion reduction in mortgage
refinancing volume. This reduction was due to 1999's unprecedented industry-wide
refinancing activity. Purchase mortgage closings in our retail lending business
(where we interact directly with the consumer) increased $1.0 billion to
$16.6 billion. Retail mortgage lending has been our primary focus and accounted
for more than 80% of loan volume in 2000. We ranked as the fifth-largest retail
mortgage lender by the National Mortgage News-Registered Trademark- for 2000.
51
During the fourth quarter of 2000, we entered into an expanded agreement with
Merrill Lynch, under which Merrill Lynch has outsourced its mortgage origination
and servicing operations to us, beginning January 1, 2001. Merrill Lynch closed
approximately $5 billion in retail purchase mortgages during 2000. Assuming
Merrill Lynch's loan volume was part of our operating results for the full year
of 2000, we believe we would have ranked as the second largest retail mortgage
lender in 2000.
Loan servicing revenues in 1999 included an $8 million gain on the sale of
servicing rights. Excluding such gain, recurring loan servicing revenue
increased $19 million, or 20%. The increase in loan servicing revenues was
principally attributable to a corresponding increase in the average servicing
portfolio, which grew approximately $14.3 billion, or 31%. The Adjusted EBITDA
margin decreased principally because of lower loan origination volume during the
first half of 2000.
As we anticipated, market conditions improved in the second half of 2000,
producing more positive margin comparisons. We continue to expect improvement in
our operating results during the first half of 2001.
MOVE.COM GROUP
Revenues increased $41 million, while Adjusted EBITDA decreased $72 million to a
loss of $94 million. The increase in revenues principally reflects a significant
increase in sponsorship revenues made possible by the launch of the move.com
portal. The decline in Adjusted EBITDA primarily reflects our increased
investment in marketing and development of the move.com network.
DIVERSIFIED SERVICES
Revenues and Adjusted EBITDA decreased $509 million, or 46%, and $79 million, or
35%, respectively. Revenues decreased primarily as a result of the 1999
dispositions of several businesses, the operating results of which were included
through their respective disposition dates in 1999. The absence of such divested
businesses from 2000 operations resulted in a reduction in revenues and Adjusted
EBITDA of $502 million and $78 million, respectively. Excluding the impact of
divested businesses on 1999 operating results, revenues and Adjusted EBITDA
decreased $7 million and $1 million, respectively, in 2000. Jackson Hewitt, our
tax preparation franchise business, and National Car Parks, our subsidiary in
the United Kingdom that provides car parking services, contributed increases in
revenues of $16 million and $18 million, respectively and increases in Adjusted
EBITDA of $19 million each. Jackson Hewitt experienced a 33% increase in tax
return volume and a 10% increase in the average price of a return. The favorable
results of our operating subsidiaries were offset by $30 million of lower
investment income in 2000 and $19 million of costs incurred to pursue Internet
initiatives through our Cendant Internet Group.
INDIVIDUAL MEMBERSHIP (DISCONTINUED OPERATIONS)
Revenues decreased $152 million, or 17%, while Adjusted EBITDA increased
$47 million, or 35%. During 1999, we disposed of four businesses which were
included within our discontinued Individual Membership segment. Excluding the
operating results of these businesses, revenues and Adjusted EBITDA increased
$22 million, or 3%, and $31 million, or 21%, respectively. During 2000, our
strategy was to focus on profitability by targeting our marketing efforts and
reducing expenses incurred to reach potential new members. Accordingly, a
favorable mix of products and programs with marketing partners in 2000
positively impacted revenues and Adjusted EBITDA. Additionally, we integrated
Netmarket Group, an online membership business, in the fourth quarter of 2000,
which contributed $12 million to revenues but also decreased Adjusted EBITDA by
$7 million. Such increases were partially offset by a decrease in membership
expirations during 2000 (revenue is generally recognized upon expiration of the
membership), which was partially mitigated by a reduction in operating and
marketing expenses, including commissions, which directly related to servicing
fewer members.
RESULTS OF CONSOLIDATED OPERATIONS -- 1999 VS. 1998
Our revenues increased $56 million, or 1%, which reflected growth in a majority
of our reportable operating segments despite the effects of dispositions of
non-strategic businesses. Significant contributing factors which gave rise to
such revenue growth included an increase in the amount of royalty fees received
from our franchised brands within both our Travel and Real Estate Franchise
segments and an increase in
52
loan servicing revenues within our Mortgage segment. A detailed discussion of
revenue trends is included in "Reportable Operating Segments."
Our expenses increased $2.2 billion, or 53%, primarily as a result of the
$2.9 billion charge recorded during 1999 for the settlement of the principal
common stockholder class action lawsuit, partially offset by 1998 charges of
$351 million recorded in connection with the PRIDES settlement and $433 million
primarily recorded in connection with the termination of the proposed
acquisition of American Bankers Insurance Group.
Expenses were also impacted by an increase in restructuring and other unusual
charges and an increase in interest expense, as discussed below.
During 1999, we recorded (i) an unusual charge of $25 million, primarily
representing an irrevocable contribution to an independent technology trust
responsible for completing the transition of our lodging franchisees to a
company sponsored property management system and (ii) investigation-related
costs of $21 million, primarily associated with professional fees and public
relations costs incurred in connection with accounting irregularities in the
former business units of CUC and resulting investigations into such matters.
During 1998, we recorded a charge of $53 million associated with the termination
of certain former executives as well as investigation-related costs of
$33 million, primarily associated with professional fees and public relations
costs incurred in connection with accounting irregularities in the former
business units of CUC and resulting investigations into such matters. Also due
to such accounting irregularities, we were temporarily prohibited from accessing
public debt markets in 1998. Accordingly, we recorded a charge of $35 million
primarily in connection with fees associated with waivers and various financing
arrangements. Such charges were partially offset by a non-cash credit of
$67 million resulting from changes to the original estimate of restructuring
costs recorded during 1997.
Our net interest expense increased $84 million, or 75%, primarily as a result of
an increase in our average debt balance outstanding and a nominal increase in
our cost of funds. In addition, the composition of our average debt outstanding
during 1999 included longer term fixed rate debt carrying higher interest rates.
The weighted average interest rate on long-term debt increased to 6.4% from
6.2%.
During 1999, we also recorded a net gain of $967 million in connection with the
disposition of certain non-strategic businesses.
Our provision (benefit) for income taxes consisted of a tax benefit of
$468 million in 1999, or an effective tax rate of 63.2%, compared to a provision
of $135 million in 1998, or an effective tax rate of 34.3%. The effective tax
rate variance represents the impact of the disposition of our Fleet segment in
1999, which was accounted for as a tax-free merger.
As a result of the above-mentioned items, income from continuing operations
decreased $541 million.
REPORTABLE OPERATING SEGMENTS -- 1999 VS. 1998
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization and minority interest, adjusted to
exclude certain items, which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. Our
management believes such discussion is the most informative representation of
how management evaluates performance.
53
However, our presentation of Adjusted EBITDA may not be comparable with similar
measures used by other companies.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
ADJUSTED
EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------- ------------------------------- -------------------
1999 1998 % CHANGE 1999 1998 (D) % CHANGE 1999 1998
-------- -------- --------- -------- -------- --------- -------- --------
Travel (a) $ 1,239 $ 1,163 7% $ 593 $ 552 7% 48% 47%
Real Estate Franchise 571 456 25 424 349 21 74 77
Insurance/Wholesale (b) 575 544 6 180 138 30 31 25
Relocation 415 444 (7) 122 125 (2) 29 28
Mortgage 397 353 12 182 188 (3) 46 53
Move.com Group 18 10 80 (22) 1 * * 10
Diversified Services (c)(e) 1,099 1,108 (1) 223 120 86 20 11
Fleet 207 387 * 81 174 * 39 45
------- ------- ------- -------
Total $ 4,521 $ 4,465 $ 1,783 $ 1,647
======= ======= ======= =======
- ------------------------------
* Not meaningful.
(a) Adjusted EBITDA excludes a charge of $23 million in 1999 associated with
an irrevocable contribution to an independent technology trust
responsible for completing the transition of our lodging franchisees to a
company sponsored property management system.
(b) Adjusted EBITDA excludes $11 million of losses in 1999 related to the
dispositions of businesses.
(c) Adjusted EBITDA excludes charges in 1999 of (i) $2,894 million associated
with the settlement of the principal common stockholder class action
lawsuit, (ii) $21 million for investigation related costs,
(iii) $7 million related to the termination of a proposed acquisition and
(iv) $2 million principally related to the consolidation of European call
centers in Ireland. Such charges were partially offset by a net gain of
$978 million related to the dispositions of businesses.
(d) Adjusted EBITDA excludes a net credit of $67 million associated with
changes to the estimate of previously recorded restructuring costs
(comprised of $6 million, $1 million, $16 million, $47 million and
$1 million of credits within our Travel, Real Estate Franchise,
Relocation, Diversified Services and Fleet segments respectively) and
$4 million of charges incurred within our Mortgage segment.
(e) Adjusted EBITDA excludes charges in 1998 of (i) $433 million primarily
for the termination of the proposed acquisition of American Bankers
Insurance Group, (ii) $351 million in connection with PRIDES settlement
and (iii) $121 million of investigation related costs, including
incremental financing costs and executive terminations.
TRAVEL
Revenues and Adjusted EBITDA increased $76 million, or 7%, and $41 million, or
7%, respectively. Franchise fees increased $39 million, or 7%, consisting of
increases in lodging and car rental franchise fees of $26 million, or 7%, and
$13 million, or 8%, respectively. Our franchise businesses experienced growth
primarily due to increases in the amount of weighted average available rooms
(24,000 incremental rooms domestically) and car rental days. Timeshare
subscriptions and exchange revenues increased $18 million, or 5%, primarily as a
result of increased volume. Also contributing to the revenue and Adjusted EBITDA
increases was an $11 million bulk timeshare exchange transaction largely offset
by a $7 million decrease in gains from the sale of portions of our equity
investment in Avis Group. Total expenses increased $35 million, or 6%, primarily
due to increased volume; however, such increase included a $14 million increase
in marketing and reservation fund expenses associated with our lodging franchise
business unit that was offset by increased marketing and reservation revenue
received from franchisees.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $115 million, or 25%, and $75 million, or
21%, respectively. Royalty fees for the CENTURY 21-Registered Trademark-,
Coldwell Banker-Registered Trademark- and ERA-Registered Trademark- franchise
brands collectively increased by $67 million, or 17%, primarily as a result of a
5% increase in home sale transactions by franchisees and an 8% increase in the
average price of homes sold. Home sales by franchisees benefited from strong
existing domestic home sales for the majority of 1999, as well as from expansion
of our franchise system. Beginning in the second quarter of 1999, the financial
results of the advertising funds for the Coldwell Banker and ERA brands were
consolidated into the results of our Real Estate Franchise segment,
54
increasing revenues by $31 million and expenses by a like amount, with no impact
on Adjusted EBITDA. Revenues in 1999 benefited from $20 million generated from
the sale of portions of our preferred stock investment in NRT, the independent
company we helped form in 1997 to serve as a consolidator of residential real
estate brokerages. Since most costs associated with the real estate franchise
business do not vary significantly with revenues, the increases in revenues,
exclusive of the aforementioned consolidation of the advertising funds,
contributed to an improvement of the Adjusted EBITDA margin to 79% in 1999 from
77% in 1998.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $31 million, or 6%, and $42 million, or
30%, respectively, primarily due to customer growth, which resulted from
increases in affiliations with financial institutions. The increase in
affiliations with financial institutions was attributable principally to
international expansion, while the Adjusted EBITDA increase was due to improved
profitability in international markets as well as a $25 million expense decrease
related to longer amortization periods for certain customer acquisition costs as
a result of a change in accounting estimate. International revenues and Adjusted
EBITDA increased $28 million, or 23%, and $15 million, respectively, primarily
due to a 37% increase in customers. The Adjusted EBITDA margin for domestic
operations was 37% versus 31%. The Adjusted EBITDA margin for international
operations was 16% versus 7%. Domestic operations, which represented 74% of
segment revenues in 1999, generated higher Adjusted EBITDA margins than
international operations as a result of continued expansion costs incurred
internationally to penetrate new markets. International operations, however,
have become increasingly profitable as they have expanded over the last two
years.
RELOCATION
Revenues and Adjusted EBITDA decreased $29 million, or 7%, and $3 million, or
2%, respectively. Operating results in 1999 benefited from a $13 million
increase in referral fees and international relocation service revenue, offset
by a comparable decline in home sales revenue. Total expenses decreased
$26 million, or 8%, which included $15 million in cost savings from regional
operations, technology and telecommunications, and $11 million in reduced
expenses resulting from reduced government home sales and the sale of an asset
management company in the third quarter of 1998. The asset management company
contributed 1998 revenues and Adjusted EBITDA of $21 million and $16 million,
respectively. In 1999, revenues and Adjusted EBITDA benefited from the sale of a
minority interest in an insurance subsidiary, which resulted in $7 million of
additional revenue and Adjusted EBITDA. In 1998, revenues and Adjusted EBITDA
also benefited from an improvement in receivable collections, which permitted an
$8 million reduction in billing reserve requirements.
MORTGAGE
Revenues increased $44 million, or 12%, and Adjusted EBITDA decreased
$6 million, or 3%. The increase in revenues resulted from a $32 million increase
in loan servicing revenues and a $12 million increase in loan closing revenues.
The average servicing portfolio increased $10 billion, or 29%, with the average
servicing fee increasing approximately seven basis points because of a reduction
in the rate of amortization on servicing assets. The reduced rate of
amortization was caused by higher mortgage interest rates in 1999. Total
mortgage closing volume in 1999 was $25.6 billion, a decline of $400 million
from 1998. However, purchase mortgage volume (mortgages for home buyers)
increased $3.7 billion, or 24%, to $19.1 billion, offset by a $4.2 billion
decline in mortgage refinancing volume. Moreover, purchase mortgage volume from
the teleservices business (Phone In--Move In) and Internet business (Log
In--Move In) increased $4.7 billion, or 63%, primarily because of increased
purchase volume from our real estate franchisees. The Adjusted EBITDA margin
decreased from 53% in 1998 to 46% in 1999. Adjusted EBITDA decreased because of
a $17 million increase in expenses incurred within servicing operations for the
larger of the increase in the average servicing portfolio and other expense
increases for technology, infrastructure and teleservices to support capacity
for volume anticipated in future periods.
55
MOVE.COM GROUP
Revenues increased $8 million, or 80%, to $18 million, while Adjusted EBITDA
decreased $23 million to a loss of $22 million. These results reflect our
increased investment in marketing and development of the portal and retention
bonuses paid to Move.com Group employees.
DIVERSIFIED SERVICES
Revenues decreased $9 million, or 1%, and Adjusted EBITDA increased
$103 million, or 86%. The April 1998 acquisition of National Car Park
contributed incremental revenues and Adjusted EBITDA of $103 million and
$48 million, respectively. Also contributing to an increase in revenues and
Adjusted EBITDA was $39 million of incremental income from investments and
$13 million of revenues recognized in connection with a litigation settlement.
The aforementioned revenue increases were partially offset by the impact of
disposed operations, including Essex Corporation in January 1999, National
Leisure Group and National Library of Poetry in May 1999, Spark Services and
Global Refund Group in August 1999, Central Credit in September 1999 and
Entertainment Publications and Green Flag Group in November 1999. The operating
results of disposed businesses were included through their respective
disposition dates in 1999 versus being included for the full year in 1998,
except for Green Flag which was acquired in April 1998. Accordingly, revenues
from divested businesses were incrementally less in 1999 by $138 million while
Adjusted EBITDA improved $15 million. The increase in Adjusted EBITDA also
reflects offsetting reductions in preferred alliance revenues and corporate
expenses.
FLEET
On June 30, 1999, we completed the disposition of our Fleet business. Revenues
and Adjusted EBITDA were $207 million and $81 million, respectively, in the
first six months of 1999 and $387 million and $174 million, respectively, for
the full year in 1998.
INDIVIDUAL MEMBERSHIP (DISCONTINUED OPERATIONS)
Revenues and Adjusted EBITDA increased $59 million, or 7%, and $192 million,
respectively, and Adjusted EBITDA margin improved to positive 15% from negative
7%. The revenue growth was principally due to a greater number of members and
increases in the average price of a membership. The increase in the Adjusted
EBITDA margin was primarily due to the revenue increases, since many of the
infrastructure costs associated with providing services to members are not
dependent on revenue volume, and a reduction in solicitation spending, as we
further refined the targeted audiences for our direct marketing efforts and
achieved greater efficiencies in reaching potential new members.
In October 1999, we completed the divestiture of our North American Outdoor
Group business unit, which was included in our operating results for the entire
year of 1998 and through October 1999. Also, beginning September 15, 1999,
certain online businesses were not consolidated into our discontinued Individual
Membership segment operations as a result of our donation of Netmarket
outstanding common stock to a charitable trust. However, Netmarket still
accounted for a net increase in revenues and Adjusted EBITDA of $10 million and
$23 million, respectively, due to growth in the business unit prior to the
donation to the trust. Excluding the operating results of such businesses,
revenues and Adjusted EBITDA increased $49 million and $169 million,
respectively, and the Adjusted EBITDA margin increased to positive 21% from
negative 3%. Additionally, revenues and Adjusted EBITDA in 1999 were
incrementally benefited by $13 million and $5 million, respectively, from the
April 1998 acquisition of a company that, among other services, provides members
with access to their personal credit information.
LIQUIDITY AND CAPITAL RESOURCES
Based upon cash flows provided by our operations and access to liquidity through
various other sources, including public debt and equity markets and financial
institutions, we have sufficient liquidity to fund our current business plans
and obligations.
56
CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 CHANGE
-------- -------- --------
Cash provided by (used in) continuing operations:
Operating activities $1,385 $3,172 $(1,787)
Investing activities (1,172) 1,745 (2,917)
Financing activities (483) (4,788) 4,305
Effects of exchange rate changes on cash and cash
equivalents 18 51 (33)
Net cash provided by (used in) discontinued operations 51 (14) 65
------ ------ -------
Net change in cash and cash equivalents $ (201) $ 166 $ (367)
====== ====== =======
Cash flows from operating activities decreased primarily due to a reduction of
$1.1 billion in net proceeds received from the origination and sale of mortgage
loans and also due to the absence in 2000 of operating results generated from
businesses which were disposed of in 1999.
Cash flows from investing activities resulted in an outflow of $1.2 billion in
2000 compared to an inflow of $1.7 billion in 1999, primarily due to the absence
in 2000 of $3.4 billion of net cash proceeds received from the disposition of
businesses in 1999 and the funding in 2000 of $350 million to the stockholder
litigation settlement trust. Such amounts were partially offset by the absence
in 2000 of a $774 million cash use in 1999 related to our former Fleet segment
and a net inflow of funds generated from advances on homes under management in
2000.
Cash flows used in financing activities decreased primarily due to a decrease of
$2.6 billion in the repurchases of CD common stock and a decrease of
$4.3 billion primarily due to a reduction in net borrowing requirements to fund
our investment in assets under management and mortgage programs, partially
offset by the absence in 2000 of $3.0 billion in proceeds received for debt
repayment in connection with the disposal of our former Fleet segment.
CAPITAL EXPENDITURES
Capital expenditures during 2000 amounted to $217 million and were utilized to
support operational growth, enhance marketing opportunities and develop
operating efficiencies through technological improvements. We anticipate a
capital expenditure investment during 2001 ranging from $275 million to
$325 million primarily due to the acquisition of Avis Group and the pending
acquisition of Fairfield.
STOCKHOLDER LITIGATION SETTLEMENT
On August 14, 2000, the U.S. District Court approved our agreement (the
"Settlement Agreement") to settle the principal securities class action pending
against us, which was brought on behalf of purchasers of all Cendant and CUC
publicly traded securities, other than PRIDES, between May 1995 and
August 1998. Under the Settlement Agreement, we will pay the class members
approximately $2.85 billion in cash. Certain parties in the class action have
appealed the District Court's orders approving the plan of allocation of the
settlement fund and awarding of attorneys' fees and expenses to counsel for the
lead plaintiffs. None of the appeals challenged the fairness of the
$2.85 billion settlement amount. The U.S. Court of Appeals for the Third Circuit
has issued a briefing schedule for the appeals which is nearly complete. No date
for oral argument has been set. We intend to finance the $2.85 billion
settlement amount with cash generated from our operations, borrowings under our
existing credit facilities and new borrowings.
The Settlement Agreement required us to post collateral in the form of credit
facilities and/or surety bonds by November 13, 2000. We also had the option of
forming a trust established for the benefit of the plaintiffs in lieu of posting
collateral. On November 13, 2000, we posted collateral in the form of letters of
credit and surety bonds in the amounts of $1.71 billion and $790 million,
respectively. We also made a cash deposit of approximately $350 million to the
trust. The credit facilities under which we posted the collateral also required
us to make minimum deposits to this trust through 2003 as discussed under debt
financing.
57
DEBT FINANCING
Activities of our management and mortgage programs are autonomous and distinct
from our other activities. Therefore, management believes it is more useful to
review the debt financing of management and mortgage programs separately from
the debt financing of our other activities.
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS
Our total long-term debt decreased approximately $900 million to $1.9 billion at
December 31, 2000. Such decrease was attributable to principal payments totaling
$500 million to reduce outstanding borrowings under our term loan facility and
also the redemption of $400 million principal amount of 7 1/2% senior notes. At
December 31, 2000, our long-term debt was principally comprised of $1.1 billion
of 7 3/4% senior notes maturing in December 2003, $548 million of 3% convertible
subordinated notes maturing in February 2002 and $250 million outstanding under
our term loan facility.
We have a $1.75 billion three-year competitive advance and revolving credit
facility maturing in August 2003 and a $750 million five-year revolving credit
facility maturing in October 2001. The three-year facility contains the
committed capacity to issue up to $1.75 billion in letters of credit, of which
$1.71 billion was utilized as part of the collateral arrangements under the
Settlement Agreement. Borrowings under these credit facilities bear interest at
LIBOR, plus a margin of approximately 60 basis points. We are required to pay a
per annum facility fee of .15% and .175% under the three-year facility and
five-year facility, respectively. We are also required to pay a per annum
utilization fee of .125% on the three-year facility if usage under the facility
exceeds 33% of aggregate commitments. The interest rates and facility fees are
subject to change based upon credit ratings assigned by nationally recognized
debt rating agencies on our 7 3/4% senior notes. At December 31, 2000, we had
approximately $800 million of availability under these facilities.
In connection with the $1.71 billion in letters of credit posted as collateral,
we are required to make additional minimum deposits of $600 million,
$800 million and $800 million during 2001, 2002 and 2003, respectively, to a
trust established for the benefit of the plaintiffs in our principal common
stockholder class action lawsuit. The escrow deposits will serve to reduce the
amount of collateral previously posted by us, as required by the Settlement
Agreement.
In February and March 2001, we issued $1.2 billion and $246 million,
respectively, aggregate principal amount at maturity of zero coupon convertible
senior notes to qualified institutional buyers in a private offering for
aggregate gross proceeds of approximately $900 million. We used $250 million of
such proceeds to extinguish outstanding borrowings under our term loan facility.
The remaining proceeds are expected to be utilized to reduce other borrowings
and for general corporate purposes. The notes mature in 2021 and bear interest
at 2.5%. We will not make periodic payments of interest on the notes, but may be
required to make nominal cash payments in specified circumstances. Each $1,000
principal amount at maturity will be convertible, subject to satisfaction of
specific contingencies, into 33.4 shares of our CD common stock. The notes will
not be redeemable by us prior to February 13, 2004, but will be redeemable
thereafter at the issue price of $608.41 per note plus accrued discount through
the redemption date. In addition, holders of the notes may require us to
repurchase the notes on February 13, 2004, 2009 or 2014. In such circumstance,
we may pay the purchase price in cash, shares of our CD common stock, or any
combination thereof.
In February 2001, we entered into a $650 million term loan agreement with terms
similar to our other revolving credit facilities. This term loan amortizes in
three equal installments on August 22, 2002, May 22, 2003 and February 22, 2004.
Borrowings under this facility bear interest at LIBOR plus a margin of 125 basis
points. A portion of this term loan was used to finance the acquisition of Avis
Group on March 1, 2001.
Our credit facilities contain certain restrictive covenants, including
restrictions on indebtedness of material subsidiaries, mergers, limitations on
liens, liquidations and sale and leaseback transactions, and also require the
maintenance of certain financial ratios. At December 31, 2000, we had complied
with all the restrictive covenants. Our long-term debt credit ratings are BBB
with Standard & Poor's, Baa1 with Moody's and BBB+ with Fitch IBCA. Our
short-term debt ratings are P2 with Moody's and F2 with Fitch
58
IBCA. (A security rating is not a recommendation to buy, sell or hold securities
and is subject to revision or withdrawal at any time.)
RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage and relocation services businesses as a
separate public reporting entity and supports the origination of mortgages and
advances under relocation contracts primarily by issuing commercial paper and
medium-term notes and by maintaining secured obligations, depending upon asset
growth and financial market conditions. PHH debt is issued without recourse to
us. PHH debt is not classified based on contractual maturities, but rather is
included in liabilities under management and mortgage programs since the debt
corresponds directly with the high quality related assets. PHH expects to
continue to maximize its access to global capital markets by maintaining the
quality of its assets under management. This is achieved by maintaining credit
standards to minimize credit risk and the potential for losses.
PHH's debt decreased approximately $300 million to $2.0 billion at December 31,
2000. Such decrease was primarily attributable to a decrease in medium-term
notes, partially offset by an increase in commercial paper. At December 31,
2000, PHH's outstanding debt was comprised of $1.6 billion of commercial paper,
$292 million of secured obligations (with a total commitment of $500 million and
renewable on an annual basis), $117 million of medium-term notes maturing
through 2002 and $75 million of unsecured borrowings maturing in 2001.
During 2000, PHH filed a shelf registration statement registering an additional
$2.625 billion of debt securities, which increased the amount available for
issuing medium-term notes to approximately $3.0 billion at December 31, 2000.
PHH issued $650 million of medium-term notes under this shelf registration in
January 2001, bearing interest at a rate of 8 1/8% per annum and maturing in
February 2003. The senior indenture under which the medium-term notes were
issued prevents PHH from paying dividends and/or making intercompany loans to us
if, after giving effect to those dividends or intercompany loans, PHH's debt to
equity ratio exceeds 6.5 to 1. Furthermore, under the senior indenture, PHH's
ratio of debt to tangible net worth must be maintained at or less than 10 to 1.
A portion of the proceeds from this offering were used to finance the
acquisition of Avis Group on March 1, 2001. Proceeds from future offerings will
be used to finance assets under management and for general corporate purposes.
PHH manages its exposure to interest rate and liquidity risk by matching
floating and fixed interest rate and maturity characteristics of funding to
related assets, varying short and long-term domestic and international funding
sources and securing available credit under committed banking facilities. To
provide additional financial flexibility, PHH's current policy is to ensure that
committed facilities aggregate 100 percent of the average amount of outstanding
commercial paper.
As of December 31, 2000, PHH maintained $1.775 billion of committed and
unsecured revolving credit facilities. These facilities comprise a $750 million
syndicated revolving credit facility maturing in 2001, a $750 million syndicated
revolving credit facility maturing in 2005 and $275 million of other revolving
credit facilities maturing in 2001. Borrowings under these facilities bear
interest at a rate of LIBOR, plus a margin of approximately 40 basis points. PHH
is required to pay a per annum facility fee of approximately .125% under the
facilities. The full amount of these facilities was undrawn and available to
support the average outstanding commercial paper balance at December 31, 2000.
On February 22, 2001, PHH renewed its $750 million syndicated revolving credit
facility, which was due in 2001. The new facility bears interest at LIBOR plus
an applicable margin, as defined in the agreement, and terminates on February
21, 2002. PHH is required to pay a per annum utilization fee of .25% if usage
under the facility exceeds 25% of aggregate commitments. Under the new facility,
any loans outstanding as of February 21, 2002 may be converted into a term loan
with a final maturity of February 21, 2003. The facilities contain certain
restrictive covenants, including restrictions on indebtedness of material
subsidiaries, mergers, limitations on liens, liquidations and sale and leaseback
transactions, and also require the maintenance of certain financial ratios. At
December 31, 2000, PHH had complied with all the restrictive covenants. PHH's
long-term credit ratings are A with Fitch IBCA, A- with Standard & Poor's and
Baa1 with Moody's. PHH's short-term ratings are F1 with Fitch IBCA, A2 with
Standard & Poor's and P2 with Moody's. (A
59
security rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time.)
In addition to the above-mentioned sources of financing, PHH will continue to
manage outstanding debt with the potential sale or transfer of managed assets to
third parties while retaining fee-related servicing responsibility. At
December 31, 2000, PHH maintained the following agreements whereby managed
assets were sold or transferred to third parties:
BISHOPS GATE RESIDENTIAL MORTGAGE TRUST. Under this revolving sales agreement,
an unaffiliated bankruptcy remote special purpose entity, Bishops Gate,
committed to purchase for cash, at PHH's option, mortgage loans originated by
PHH on a daily basis, up to Bishops Gate's asset limit of $2.1 billion, until
May 2001. PHH retains the servicing rights on the mortgage loans sold to Bishops
Gate and arranges for the sale or securitization of the mortgage loans into the
secondary market. Bishops Gate retains the right to select alternative sale or
securitization arrangements. At December 31, 2000 and 1999, PHH was servicing
approximately $1.0 billion and $813 million, respectively, of mortgage loans
owned by Bishops Gate.
APPLE RIDGE FUNDING. Under these revolving sales agreements, certain relocation
receivables are transferred for cash, on a revolving basis, to an unaffiliated
bankruptcy remote special purpose entity, Apple Ridge, until March 31, 2007. PHH
retains a subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At December 31, 2000, PHH was
servicing approximately $591 million of receivables under these agreements. At
December 31, 1999, PHH had not transferred any assets to Apple Ridge.
We closely evaluate not only the credit of the banks providing PHH's sources of
financing, but also the terms of the various agreements to ensure on-going
availability. We believe that our current policy provides adequate protection
should volatility in the financial markets limit PHH's access to commercial
paper or medium-term notes funding. PHH continuously seeks additional sources of
liquidity to accommodate its asset growth and to provide further protection from
volatility in the financial markets. In the event that the public debt market is
unable to meet PHH's funding needs, we believe that PHH has appropriate
alternative sources to provide adequate liquidity, including current and
potential future securitizations and its revolving credit facilities.
OTHER LIQUIDITY
During 2000, we received $375 million in cash in connection with the issuance of
a mandatorily redeemable preferred interest, which is mandatorily redeemable
15 years from the date of issuance and may be redeemed by us after 5 years, or
earlier in certain circumstances. Also during 2000, Liberty Media Corporation
invested a total of $450 million in cash to purchase 24.4 million shares of CD
common stock. Additionally, Liberty Media's Chairman, John C. Malone Ph.D,
purchased one million shares of CD common stock for approximately $17 million in
cash.
In February and March 2001, we issued 40 million and 6 million shares of our CD
common stock, respectively, at $13.20 per share for aggregate proceeds of
approximately $607 million, which reduced our availability under existing shelf
registration statements to $1.6 billion. A portion of these proceeds were used
to fund the acquisition of Avis Group on March 1, 2001. We anticipate utilizing
any remaining proceeds to fund the pending acquisition of Fairfield.
On February 16, 2001, approximately 61 million shares of CD common stock were
issued pursuant to the purchase contract underlying the PRIDES. See
Note 17-Mandatorily Redeemable Trust Preferred Securities Issued by a Subsidiary
Holding Solely Senior Debentures Issued by the Company for a detailed discussion
regarding the issuances of PRIDES and the related settlement provisions.
Under our common share repurchase program, we have approximately $488 million
remaining availability. We do not anticipate utilizing any of this availability
during 2001.
60
STRATEGIC BUSINESS INITIATIVES
On March 1, 2001, we acquired all of the outstanding shares of Avis Group that
were not currently owned by us at a price of $33.00 per share in cash, or
approximately $967 million, including $30 million of transaction costs and
expenses.
On November 2, 2000, we announced that we had entered into a definitive
agreement to acquire all of the outstanding common stock of Fairfield
Communities, one of the largest vacation ownership companies in the United
States, at $15 per share, or approximately $635 million in the aggregate. The
final acquisition price may increase to a maximum of $16 per share depending
upon a formula based on the average trading price of CD common stock over a
20-day trading period prior to the date on which Fairfield stockholders meet to
approve the transaction. The consideration is payable in cash or CD common
stock, or a combination thereof, at the holder's election. We are not required,
however, to pay more than 50% of the consideration in cash and have the right to
substitute cash for any shares of Fairfield common stock instead of issuing CD
common stock. Although no assurances can be given, we expect the transaction to
close in early April 2001.
On February 16, 2001, we consummated the sale of certain businesses within our
Move.com Group segment, including our Internet real estate portal, and also our
Welcome Wagon International business included within our Diversified Services
segment, to Homestore.com in exchange for approximately 21 million shares of
Homestore common stock valued over $700 million. After the sale, our common
equity ownership interest in Homestore was approximately 20%.
We continually explore and conduct discussions with regard to acquisitions and
other strategic corporate transactions in our industries and in other franchise,
franchisable or service businesses in addition to transactions previously
announced. As part of our regular on-going evaluation of acquisition
opportunities, we currently are engaged in a number of separate, unrelated
preliminary discussions concerning possible acquisitions. The purchase price for
the possible acquisitions may be paid in cash, through the issuance of CD common
stock or other of our securities, borrowings, or a combination thereof. Prior to
consummating any such possible acquisition, we will need to, among other things,
initiate and complete satisfactorily our due diligence investigations; negotiate
the financial and other terms (including price) and conditions of such
acquisitions; obtain appropriate Board of Directors, regulatory and other
necessary consents and approvals; and, if necessary, secure financing. No
assurance can be given with respect to the timing, likelihood or business effect
of any possible transaction. In the past, we have been involved in both
relatively small acquisitions and acquisitions which have been significant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 1999, the Emerging Issues Task Force released Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Interests in Securitized Financial Assets." EITF Issue No. 99-20 modifies the
accounting for interest income and impairment of beneficial interests in
securitization transactions for quarters beginning after March 15, 2001, whereby
beneficial interests determined to have an other-than-temporary impairment are
required to be written down to fair value. We plan to adopt EITF Issue No. 99-20
on January 1, 2001, which would result in a non-cash charge of $46 million
($27 million, after tax) to account for the cumulative effect of the accounting
change in the first quarter of 2001.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated in a fair-value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated in a cash-flow hedge, the changes in the fair value of the
derivative will be recorded in other comprehensive income and will be recognized
in the income statement when the hedged item affects earnings. SFAS No. 133
defines new requirements for designation
61
and documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, the changes in fair value will be recognized in earnings.
As of January 1, 2001, we will record a $16 million ($11 million, after tax)
non-cash charge as a cumulative transition adjustment to earnings relating to
derivatives not designated as hedges prior to adopting SFAS No. 133 and to
derivatives designated in fair-value-type hedges. The outcome of pending issues
at the FASB and the Derivatives Implementation Group could impact the amount of
the cumulative transition adjustment presented herein. The cumulative effect is
based on management's interpretation of the accounting literature as of March
2001.
As provided for in SFAS No. 133, we will also reclassify certain investment
securities as trading securities at January 1, 2001. This reclassification will
result in a pre-tax benefit of approximately $10 million, which will be recorded
in the first quarter of 2001.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a replacement
of FASB Statement No. 125." SFAS No. 140 revises criteria for accounting for
securitizations, other financial-asset transfers and collateral and introduces
new disclosures, but otherwise carries forward most of the provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" without amendment. We adopted the disclosure
requirements of SFAS No. 140 on December 31, 2000, as required. All other
provisions of SFAS No. 140 will be adopted after March 31, 2001, as required by
the standard. The impact of adopting the remaining provisions of this standard
is not yet fully determinable.
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Annual Report on Form 10-K are subject to
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.
Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future or
conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical acts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:
- the effect of economic conditions and interest rate changes on the economy
on a national, regional or international basis and the impact thereof on
our businesses;
- the effects of changes in current interest rates, particularly on our Real
Estate Franchise and Mortgage segments;
- the resolution or outcome of our unresolved pending litigation relating to
the previously announced accounting irregularities and other related
litigation;
- our ability to develop and implement operational and financial systems to
manage growing operations and to achieve enhanced earnings or effect cost
savings;
- competition in our existing and potential future lines of business and the
financial resources of, and products available to, competitors;
- our ability to integrate and operate successfully acquired and merged
businesses and risks associated with such businesses, including the
acquisition of Avis Group and the pending acquisition of Fairfield, the
compatibility of the operating systems of the combining companies, and the
degree to
62
which our existing administrative and back-office functions and costs and
those of the acquired companies are complementary or redundant;
- uncertainty relating to the proposed spin-off of our discontinued
Individual Membership segment;
- our ability to obtain financing on acceptable terms to finance our growth
strategy and to operate within the limitations imposed by financing
arrangements and rating agencies;
- competitive and pricing pressures in the vacation ownership and travel
industries, including the car rental industry;
- changes in the vehicle manufacturer repurchase arrangements between
vehicle manufacturers and Avis in the event that used vehicle values
decrease; and
- changes in laws and regulations, including changes in accounting standards
and privacy policy regulation.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. Most of these factors are
difficult to predict accurately and are generally beyond our control.
You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us. Except for our ongoing
obligations to disclose material information under the federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use various financial instruments, particularly interest rate swaps, forward
delivery commitments and futures and options contracts to manage and reduce the
interest rate risk related specifically to our committed mortgage pipeline,
mortgage loan inventory, mortgage servicing rights, mortgage-backed securities,
debt and certain other interest bearing liabilities. Foreign currency forwards
are also used to manage and reduce the foreign currency exchange rate risk
related to our foreign currency denominated translational and transactional
exposures.
We are exclusively an end user of these instruments, which are commonly referred
to as derivatives. We do not engage in trading, market-making, or other
speculative activities in the derivatives markets. Our derivative financial
instruments are designated as hedges of underlying exposures, as those
instruments demonstrate high correlation in relation to the asset or transaction
being hedged. More detailed information about these financial instruments is
provided in Note 22--Financial Instruments to our Consolidated Financial
Statements.
Our principal market exposures are interest and foreign currency rate risks.
- Interest rate movements in one country as well as relative interest rate
movements between countries can materially impact our profitability. Our
primary interest rate exposure is to interest rate fluctuations in the
United States, specifically long-term U.S. Treasury and mortgage interest
rates due to their impact on mortgage prepayments, mortgage loans held for
sale, and anticipated mortgage production arising from commitments issued
and also LIBOR and commercial paper interest rates due to their impact on
variable rate borrowings and other interest rate sensitive liabilities. We
anticipate that such interest rates will remain a primary market exposure
for the foreseeable future.
- Our primary foreign currency rate exposure is to exchange rate
fluctuations in the British pound sterling. We anticipate that such
foreign currency exchange rate risk will remain a primary market exposure
for the foreseeable future.
63
We assess our market risk based on changes in interest and foreign currency
exchange rates utilizing a sensitivity analysis. The sensitivity analysis
measures the potential loss in earnings, fair values and cash flows based on a
hypothetical 10% change (increase and decrease) in interest and currency rates.
We use a discounted cash flow model in determining the fair value of relocation
receivables, equity advances on homes, mortgage loans, commitments to fund
mortgages, mortgage servicing rights and mortgage-backed securities. The primary
assumptions used in these models are prepayment speeds and discount rates. In
determining the fair value of mortgage servicing rights and mortgage-backed
securities, the models also utilize credit losses and mortgage servicing
revenues and expenses as primary assumptions. In addition, for commitments to
fund mortgages, the borrower's propensity to close their mortgage loan under the
commitment is used as a primary assumption. For mortgage loans and commitments
to fund mortgages forward delivery contracts and options, we use an
option-adjusted spread ("OAS") model in determining the impact of interest rate
shifts. We also utilize the OAS model to determine the impact of interest rate
shifts on mortgage servicing rights and mortgage-backed securities. The primary
assumption in an OAS model is the implied market volatility of interest rates
and prepayment speeds and the same primary assumptions used in determining fair
value.
We use a duration-based model in determining the impact of interest rate shifts
on our debt portfolio, certain other interest bearing liabilities and interest
rate derivatives portfolios. The primary assumption used in these models is that
a 10% increase or decrease in the benchmark interest rate produces a parallel
shift in the yield curve across all maturities.
We use a current market pricing model to assess the changes in the value of the
U.S. dollar on foreign currency denominated monetary assets and liabilities and
derivatives. The primary assumption used in these models is a hypothetical 10%
weakening or strengthening of the U.S. dollar against all our currency exposures
at December 31, 2000.
Our total market risk is influenced by a wide variety of factors including the
volatility present within the markets and the liquidity of the markets. There
are certain limitations inherent in the sensitivity analyses presented. While
probably the most meaningful analysis permitted, these "shock tests" are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and the inability to include the complex market
reactions that normally would arise from the market shifts modeled.
We used December 31, 2000 and 1999 market rates on our instruments to perform
the sensitivity analyses separately for each of our market risk
exposures--interest and currency rate instruments. The estimates are based on
the market risk sensitive portfolios described in the preceding paragraphs and
assume instantaneous, parallel shifts in interest rate yield curves and exchange
rates.
We have determined that the impact of a 10% change in interest and foreign
currency exchange rates and prices on our earnings, fair values and cash flows
would not be material.
While these results may be used as benchmarks, they should not be viewed as
forecasts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Index commencing on page F-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Annual Proxy Statement under the
sections titled "Executive Officers", "Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act" are
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Annual Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Annual Proxy Statement under the
section titled "Security Ownership of Certain Beneficial Owners and Management"
is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's Annual Proxy Statement under the
section titled "Certain Relationships and Related Transactions" is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) FINANCIAL STATEMENTS
See Financial Statements and Financial Statements Index commencing on page F-1
hereof.
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page G-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 23, 2000, we filed a current report on Form 8-K to report under Item
5 third quarter 2000 financial results.
On October 26, 2000, we filed a current report on Form 8-K to report under Item
5 the reclassification of our Individual Membership segment as a discontinued
operation and selected financial information thereof.
On November 3, 2000, we filed a current report on Form 8-K to report under Item
5 our agreement with Homestore.com, Inc. to sell certain businesses within our
Move.com Group segment and Welcome Wagon International, Inc. and our agreement
to acquire Fairfield Communities, Inc.
On November 20, 2000, we filed a current report on Form 8-K to report under Item
5 our agreement to acquire Avis Group Holdings, Inc.
On November 29, 2000, we filed a current report on Form 8-K to report under Item
5 the restatement of our consolidated financial statements at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
to reflect the reclassification of our Individual Membership segment as a
discontinued operation.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENDANT CORPORATION
By: /s/ JAMES E. BUCKMAN
-----------------------------------------
James E. Buckman
VICE CHAIRMAN AND GENERAL COUNSEL
Date: March 29, 2001
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
/s/ HENRY R. SILVERMAN President, Chief
------------------------------------------- Executive Officer and March 29, 2001
(Henry R. Silverman) Director
/s/ JAMES E. BUCKMAN
------------------------------------------- Vice Chairman, General March 29, 2001
(James E. Buckman) Counsel and Director
/s/ STEPHEN P. HOLMES
------------------------------------------- Vice Chairman and Director March 29, 2001
(Stephen P. Holmes)
/s/ KEVIN M. SHEEHAN Senior Executive Vice
------------------------------------------- President and Chief March 29, 2001
(Kevin M. Sheehan) Financial Officer
/s/ JOHN. T. MCCLAIN Senior Vice President and
------------------------------------------- Controller (Principal March 29, 2001
(John T. McClain) Accounting Officer)
/s/ MYRA J. BIBLOWIT
------------------------------------------- Director March 29, 2001
(Myra J. Biblowit)
/s/ THE HONORABLE WILLIAM S. COHEN
------------------------------------------- Director March 29, 2001
(The Honorable William S. Cohen)
/s/ LEONARD S. COLEMAN
------------------------------------------- Director March 29, 2001
(Leonard S. Coleman)
/s/ MARTIN L. EDELMAN
------------------------------------------- Director March 29, 2001
(Martin L. Edelman)
66
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DR. JOHN C. MALONE
------------------------------------------- Director March 29, 2001
(Dr. John C. Malone)
/s/ CHERYL D. MILLS
------------------------------------------- Director March 29, 2001
(Cheryl D. Mills)
/s/ THE RT. HON. BRIAN MULRONEY
------------------------------------------- Director March 29, 2001
(The Rt. Hon. Brian Mulroney, P.C., L.L.D)
/s/ ROBERT E. NEDERLANDER
------------------------------------------- Director March 29, 2001
(Robert E. Nederlander)
/s/ ROBERT W. PITTMAN
------------------------------------------- Director March 29, 2001
(Robert W. Pittman)
/s/ SHELI Z. ROSENBERG
------------------------------------------- Director March 29, 2001
(Sheli Z. Rosenberg)
------------------------------------------- Director March 29, 2001
(Robert F. Smith)
67
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999
and 1998 F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999
and 1998 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000,
1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cendant Corporation
We have audited the accompanying consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 2000 and
1999 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial
position of the Company at December 31, 2000 and 1999 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2000, the Company revised certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and pro rata
refundable subscription revenue.
/s/ Deloitte & Touche LLP
New York, New York
March 12, 2001
F-2
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
REVENUES
Service fees, net $ 3,783 $ 4,302 $ 4,262
Fleet leasing (net of depreciation and interest costs of
$0, $670 and $1,279) -- 30 89
Other 147 189 114
------- ------- -------
Net revenues 3,930 4,521 4,465
------- ------- -------
EXPENSES
Operating 1,314 1,605 1,652
Marketing and reservation 589 596 622
General and administrative 484 537 544
Depreciation and amortization 330 347 303
Other charges (credits):
Restructuring and other unusual charges 89 25 (67)
Investigation-related costs 23 21 33
Litigation settlement and related costs (21) 2,894 351
Termination of proposed acquisitions -- 7 433
Executive terminations -- -- 53
Investigation-related financing costs -- -- 35
Interest, net 145 196 112
------- ------- -------
Total expenses 2,953 6,228 4,071
------- ------- -------
Net gain (loss) on dispositions of businesses (8) 967 --
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 969 (740) 394
Provision (benefit) for income taxes 309 (468) 135
Minority interest, net of tax 84 61 51
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS 576 (333) 208
Discontinued operations:
Income (loss) from discontinued operations, net of tax 68 104 (73)
Gain on disposal of discontinued operations, net of tax 16 174 405
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 660 (55) 540
Extraordinary loss, net of tax (2) -- --
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 658 (55) 540
Cumulative effect of accounting change, net of tax (56) -- --
------- ------- -------
NET INCOME (LOSS) $ 602 $ (55) $ 540
======= ======= =======
CD COMMON STOCK INCOME (LOSS) PER SHARE
BASIC
Income (loss) from continuing operations $ 0.80 $ (0.44) $ 0.25
Net income (loss) $ 0.84 $ (0.07) $ 0.64
DILUTED
Income (loss) from continuing operations $ 0.78 $ (0.44) $ 0.24
Net income (loss) $ 0.81 $ (0.07) $ 0.61
MOVE.COM COMMON STOCK LOSS PER SHARE
BASIC
Loss from continuing operations $ (1.76)
Net loss $ (1.76)
DILUTED
Loss from continuing operations $ (1.76)
Net loss $ (1.76)
See Notes to Consolidated Financial Statements.
F-3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 967 $ 1,168
Receivables (net of allowance for doubtful accounts of $56
and $68) 740 991
Deferred income taxes 53 1,305
Other current assets 624 771
------- -------
Total current assets 2,384 4,235
Property and equipment (net of accumulated depreciation of
$471 and $325) 1,273 1,279
Stockholder litigation settlement trust 350 --
Deferred income taxes 1,060 --
Franchise agreements (net of accumulated amortization of
$264 and $216) 1,462 1,410
Goodwill (net of accumulated amortization of $371 and $286) 3,012 3,106
Other intangibles (net of accumulated amortization of $141
and $113) 643 655
Other assets 1,471 1,120
------- -------
Total assets exclusive of assets under programs 11,655 11,805
------- -------
Assets under management and mortgage programs
Relocation receivables 329 530
Mortgage loans held for sale 879 1,112
Mortgage servicing rights 1,653 1,084
------- -------
2,861 2,726
------- -------
TOTAL ASSETS $14,516 $14,531
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,302 $ 1,192
Current portion of long-term debt -- 400
Stockholder litigation settlement -- 2,852
Deferred income 301 228
Net liabilities of discontinued operations 308 241
------- -------
Total current liabilities 1,911 4,913
Long-term debt 1,948 2,445
Stockholder litigation settlement 2,850 --
Deferred income 411 413
Deferred income taxes -- 386
Other noncurrent liabilities 48 66
------- -------
Total liabilities exclusive of liabilities under programs 7,168 8,223
------- -------
Liabilities under management and mortgage programs
Debt 2,040 2,314
Deferred income taxes 476 310
------- -------
2,516 2,624
------- -------
Mandatorily redeemable preferred interest in a subsidiary 375 --
------- -------
Mandatorily redeemable preferred securities issued by
subsidiary holding solely senior
debentures issued by the Company 1,683 1,478
------- -------
Commitments and contingencies (Note 18)
Stockholders' equity
Preferred stock, $.01 par value--authorized 10 million
shares; none issued and outstanding -- --
CD common stock, $.01 par value--authorized 2 billion
shares; issued 914,655,918 and
870,399,635 shares 9 9
Move.com common stock, $.01 par value--authorized 500
million shares and none; issued
and outstanding 2,181,586 shares and none; notional
issued shares with respect to Cendant Group's retained
interest 22,500,000 and none -- --
Additional paid-in capital 4,540 4,102
Retained earnings 2,027 1,425
Accumulated other comprehensive loss (234) (42)
CD treasury stock, at cost, 178,949,432 and 163,818,148
shares (3,568) (3,288)
------- -------
Total stockholders' equity 2,774 2,206
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,516 $14,531
======= =======
See Notes to Consolidated Financial Statements.
F-4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 602 $ (55) $ 540
Adjustments to arrive at income (loss) from continuing
operations (26) (278) (332)
-------- -------- --------
Income (loss) from continuing operations 576 (333) 208
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities
from continuing operations:
Depreciation and amortization 330 347 303
Non-cash portion of other charges, net 22 2,870 135
Net (gain) loss on dispositions of businesses 8 (967) --
Deferred income taxes (33) 289 (254)
Net change in assets and liabilities:
Receivables 161 (184) (129)
Income taxes 233 (133) (98)
Accounts payable and other current liabilities (86) (478) 111
Deferred income 15 39 5
Other, net (226) (279) (54)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,000 1,171 227
-------- -------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Depreciation and amortization 153 698 1,260
Origination of mortgage loans (24,196) (25,025) (26,572)
Proceeds on sale of and payments from mortgage loans held
for sale 24,428 26,328 25,792
-------- -------- --------
385 2,001 480
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS 1,385 3,172 707
-------- -------- --------
INVESTING ACTIVITIES
Property and equipment additions (217) (254) (331)
Funding of stockholder litigation settlement trust (350) -- --
Proceeds from sales of marketable securities 379 741 --
Purchases of marketable securities (441) (672) --
Purchases of investments (90) (18) (24)
Net assets acquired (net of cash acquired) and
acquisition-related payments (136) (205) (2,731)
Net proceeds from dispositions of businesses 4 3,365 314
Other, net 1 53 113
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS (850) 3,010 (2,659)
-------- -------- --------
F-5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Equity advances on homes under management $ (2,505) $ (7,608) $ (6,484)
Repayment on advances on homes under management 2,877 7,688 6,624
Additions to mortgage servicing rights (778) (727) (524)
Proceeds from sales of mortgage servicing rights 84 156 119
Investment in leases and leased vehicles -- (2,378) (2,447)
Payments received on investment in leases and leased
vehicles -- 1,529 987
Proceeds from sales and transfers of leases and leased
vehicles to third parties -- 75 183
-------- -------- --------
(322) (1,265) (1,542)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (1,172) 1,745 (4,201)
-------- -------- --------
FINANCING ACTIVITIES
Principal payments on borrowings (897) (2,213) (2,596)
Proceeds from borrowings -- 1,719 4,809
Proceeds from mandatorily redeemable preferred interest in a
subsidiary 375 -- --
Proceeds from mandatorily redeemable preferred securities
issued by subsidiary holding solely senior debentures
issued by the Company 91 -- 1,447
Issuances of CD common stock 554 127 171
Issuances of Move.com common stock 49 -- --
Repurchases of CD common stock (306) (2,863) (258)
Repurchases of Move.com common stock (75) -- --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS (209) (3,230) 3,573
-------- -------- --------
MANAGEMENT AND MORTGAGE PROGRAMS:
Proceeds from borrowings 4,208 5,263 4,300
Principal payments on borrowings (5,420) (7,838) (3,090)
Net change in short-term borrowings 938 (2,000) (93)
Proceeds received for debt repayment in connection with
disposal of Fleet segment -- 3,017 --
-------- -------- --------
(274) (1,558) 1,117
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS (483) (4,788) 4,690
-------- -------- --------
Effect of changes in exchange rates on cash and cash
equivalents 18 51 (16)
-------- -------- --------
Net cash provided by (used in) discontinued operations 51 (14) (266)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (201) 166 914
Cash and cash equivalents, beginning of period 1,168 1,002 88
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 967 $ 1,168 $ 1,002
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 283 $ 447 $ 540
======== ======== ========
Income tax refunds, net $ (67) $ (46) $ (23)
======== ======== ========
See Notes to Consolidated Financial Statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
-------- -------- ---------- -------- ------------- -------- -------------
BALANCE AT JANUARY 1, 1998 838 $ 8 $ 3,085 $ 940 $ (38) $ (74) $ 3,921
COMPREHENSIVE INCOME:
Net income -- -- -- 540 -- --
Currency translation
adjustment -- -- -- -- (11) --
TOTAL COMPREHENSIVE INCOME 529
Exercise of stock options 17 1 168 -- -- -- 169
Tax benefit from exercise
of stock options -- -- 147 -- -- -- 147
Conversion of convertible
notes 6 -- 114 -- -- -- 114
Repurchases of CD common
stock -- -- -- -- -- (258) (258)
Mandatorily redeemable
preferred securities
issued by subsidiary
holding solely senior
debentures issued by the
Company -- -- (66) -- -- -- (66)
Common stock received as
consideration in sale of
discontinued operations -- -- -- -- -- (135) (135)
Rights issuable -- -- 350 -- -- -- 350
Other -- -- 65 -- -- -- 65
------ -------- --------- -------- ------------ -------- -----------
BALANCE AT DECEMBER 31,
1998 861 9 3,863 1,480 (49) (467) 4,836
COMPREHENSIVE LOSS:
Net loss -- -- -- (55) -- --
Currency translation
adjustment -- -- -- -- (69) --
Unrealized gain on
marketable securities,
net of tax of $22 -- -- -- -- 37 --
Reclassification
adjustments, net of tax
of $13 -- -- -- -- 39 --
TOTAL COMPREHENSIVE LOSS (48)
Exercise of stock options 9 -- 81 -- -- 42 123
Tax benefit from exercise
of stock options -- -- 52 -- -- -- 52
Repurchases of CD common
stock -- -- -- -- -- (2,863) (2,863)
Modifications of stock
option plans due to
dispositions of businesses -- -- 83 -- -- -- 83
Rights issuable -- -- 22 -- -- -- 22
Other -- -- 1 -- -- -- 1
------ -------- --------- -------- ------------ -------- -----------
BALANCE AT DECEMBER 31,
1999 870 9 4,102 1,425 (42) (3,288) 2,206
------ -------- --------- -------- ------------ -------- -----------
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
-------- -------- ---------- -------- ------------- -------- -------------
BALANCE AT DECEMBER 31,
1999 870 $ 9 $ 4,102 $ 1,425 $ (42) $ (3,288) $ 2,206
COMPREHENSIVE INCOME:
Net income -- -- -- 602 -- --
Currency translation
adjustment -- -- -- -- (107) --
Unrealized loss on
marketable securities,
net of tax of ($40) -- -- -- -- (65) --
Reclassification
adjustments, net of tax
of ($12) -- -- -- -- (20) --
TOTAL COMPREHENSIVE INCOME 410
Issuances of CD common
stock 28 -- 476 -- -- -- 476
Issuances of Move.com
common stock 4 -- 93 -- -- -- 93
Exercise of stock options 17 -- 56 -- -- 26 82
Tax benefit from exercise
of stock options -- -- 66 -- -- -- 66
Repurchases of CD common
stock -- -- -- -- -- (306) (306)
Repurchases of Move.com
common stock (2) -- (100) -- -- -- (100)
Mandatorily redeemable
preferred securities
issued by subsidiary
holding solely senior
debentures issued by the
Company -- -- (108) -- -- -- (108)
Rights issuable -- -- (41) -- -- -- (41)
Other -- -- (4) -- -- -- (4)
------ -------- --------- -------- ------------ -------- -----------
BALANCE AT DECEMBER 31,
2000 917 $ 9 $ 4,540 $ 2,027 $ (234) $ (3,568) $ 2,774
====== ======== ========= ======== ============ ======== ===========
See Notes to Consolidated Financial Statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cendant Corporation is a global provider of a wide range of complementary
consumer and business services. The Consolidated Financial Statements
include the accounts of Cendant Corporation and its subsidiaries
(collectively, "the Company"). In presenting the Consolidated Financial
Statements, management makes estimates and assumptions that affect the
amounts reported and related disclosures. Estimates, by their nature, are
based on judgement and available information. Accordingly, actual results
could differ from those estimates. Certain reclassifications have been made
to prior year amounts to conform to the current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVESTMENTS IN AFFILIATES
Investments in affiliates over which the Company has significant influence
but not a controlling interest are carried on the equity method of
accounting.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation is computed
utilizing the straight-line method over the estimated useful lives of the
related assets. Useful lives range from 5 to 60 years for buildings and
improvements and 3 to 10 years for furniture, fixtures and equipment.
Amortization of leasehold improvements is computed utilizing the
straight-line method over the estimated benefit period of the related assets
or the lease term, if shorter, ranging from 2 to 15 years.
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are amortized on a straight-line basis over the
estimated periods to be benefited, ranging from 12 to 40 years. Other
intangibles are amortized on a straight-line basis over the estimated
periods to be benefited, ranging from 3 to 40 years.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired in purchase business combinations, is amortized on a straight-line
basis over the estimated periods to be benefited, substantially ranging from
25 to 40 years.
ASSET IMPAIRMENTS
The Company periodically evaluates the recoverability of its long-lived
assets, identifiable intangibles and goodwill, comparing the respective
carrying values to the current and expected future cash flows, on an
undiscounted basis, to be generated from such assets. Property and equipment
is evaluated separately within each business. The recoverability of goodwill
and franchise agreements is evaluated on a separate basis for each
acquisition and franchise brand, respectively. Any enterprise goodwill and
franchise agreements are also evaluated using the undiscounted cash flow
method.
Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes during 1998, the Company determined
that $37 million of goodwill associated with a Company subsidiary, National
Library of Poetry, was permanently impaired. This impairment
F-9
impacted the Company's Diversified Services segment and is classified as an
operating expense in the Consolidated Statements of Operations.
DERIVATIVE INSTRUMENTS
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with fluctuations
in interest rates, foreign currency exchange rates, prices of mortgage loans
held for sale, anticipated mortgage loan closings arising from commitments
issued and changes in the value of mortgage servicing rights. As a matter of
policy, the Company does not use derivatives for trading or speculative
purposes.
- The differential to be paid or received on interest rate swaps hedging
interest sensitive liabilities is accrued and recognized as an
adjustment to interest expense in the Consolidated Statements of
Operations.
- Gains and losses on foreign currency forwards that are effective as
hedges of net assets in foreign subsidiaries are offset against
currency translation adjustments as accumulated other comprehensive
income (loss).
- Gains and losses on foreign currency hedges of anticipated
transactions, forecasted earnings of foreign subsidiaries and hedges of
certain monetary assets and liabilities are recognized in other
revenues in the Consolidated Statements of Operations, on a
mark-to-market basis, as exchange rates change.
- Gains and losses on forward delivery contracts and options used to
reduce the risk of adverse price fluctuations affecting the Company's
mortgage loans held for sale and anticipated mortgage production
arising from commitments issued are deferred and included in the
Company's lower of cost or market valuation of the hedged items.
- Gains and losses on derivative instruments used to manage the financial
impact of interest rate movements associated with the Company's
mortgage servicing portfolio are deferred and recorded as adjustments
to the basis of the hedged item. Premiums paid/received on the hedged
instruments are capitalized and amortized over the life of the
contracts.
Although these contracts are effective economic hedges, many will not qualify
for hedge accounting treatment upon the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 133.
REVENUE RECOGNITION
FRANCHISING. Franchise revenue principally consists of royalties, as well
as marketing and reservation fees, which are primarily based on a percentage
of franchisee revenue. Royalty, marketing and reservation fees are accrued
as the underlying franchisee revenue is earned. Annual rebates given to
certain franchisees on royalty fees are recorded as a reduction to revenues
and are accrued in direct proportion to the recognition of the underlying
gross franchise revenue. Franchise revenue also includes initial franchise
fees, which are recognized as revenue when all material services or
conditions relating to the sale have been substantially performed, which is
generally when a franchised unit is opened.
TIMESHARE. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscribing members. Subscription
revenue represents the fees from subscribing members. There is no separate
fee charged for the participation in the timeshare exchange network.
Beginning on January 1, 2000, subscription revenue is recognized as revenue
on a straight line basis over the subscription period during which delivery
of publications and other services are provided to the subscribing members.
Prior to 2000, the Company recognized subscription revenue as discussed in
"Changes in Accounting Policy." Subscriptions are cancelable and refundable
on a pro rata basis. Subscription
F-10
procurement costs are expensed as incurred. Such costs were $32 million,
$31 million and $31 million for 2000, 1999 and 1998.
INSURANCE/WHOLESALE. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a share of the excess of
premiums paid to insurance carriers less claims experience to date, claims
incurred but not reported and carrier management expenses. The Company's
share of this excess is accrued based on claims experience to date,
including an estimate of claims incurred but not reported.
During 1999, the Company changed the amortization period for customer
acquisition costs related to accidental death and dismemberment insurance
products, which resulted in a reduction in expenses of $16 million ($10
million, after tax or $0.01 per diluted share). The change was based upon
new information becoming available to determine customer retention rates.
RELOCATION. Revenues and related costs associated with the purchase and
resale of a transferee's residence are recognized as services are provided.
Relocation services revenue is generally recorded net of costs reimbursed by
client corporations and interest expense incurred to fund the purchase of a
transferee's residence. Revenue for other fee-based programs, such as home
marketing assistance, household goods moves and destination services, are
recognized over the periods in which the services are provided and the
related expenses are incurred.
MORTGAGE. Loan origination fees, commitment fees paid in connection with
the sale of loans and certain direct loan origination costs associated with
loans are deferred until such loans are sold. Mortgage loans are recorded at
the lower of cost or market value on an aggregate basis. Sales of mortgage
loans are generally recorded on the date a loan is delivered to an investor.
Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold.
Fees received for servicing loans owned by investors are credited to income
when earned. Costs associated with loan servicing are charged to expense as
incurred.
Mortgage servicing rights ("MSRs") are amortized over the estimated life of
the related loan portfolio in proportion to projected net servicing
revenues. Such amortization is recorded as a reduction of net servicing
revenue in the Consolidated Statements of Operations. The Company estimates
future prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification and recent prepayment experience. Gains or losses on the
sale of MSRs are recognized when title and all risks and rewards have
irrevocably passed to the buyer and there are no significant unresolved
contingencies. For purposes of performing its impairment evaluation, the
Company stratifies its portfolio on the basis of interest rates of the
underlying mortgage loans. The Company measures impairment for each stratum
by comparing estimated fair value to the recorded book value. Temporary
impairment is recorded through a valuation allowance in the period of
occurrence.
FLEET. The Company primarily leased its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). Each lease was either
classified as an operating lease or a direct financing lease, as
appropriate. Lease revenues were recognized based on rentals. Revenues from
fleet management services other than leasing were recognized over the period
in which services were provided and the related expenses were incurred.
ADVERTISING EXPENSES
Advertising costs are generally expensed in the period incurred. Advertising
expenses in 2000, 1999 and 1998 were $211 million, $175 million, and
$151 million, respectively.
F-11
STOCK-BASED COMPENSATION
The Company utilizes the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and applies Accounting Principles
Board ("APB") Opinion No. 25 and related interpretations in accounting for
its stock option plans to employees. Under APB No. 25, compensation expense
is recognized when the exercise prices of the Company's employee stock
options are less than the market prices of the underlying Company stock on
the date of grant.
CHANGE IN ACCOUNTING POLICY
On January 1, 2000, the Company revised certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and the
recognition of pro rata refundable subscription revenue as a result of the
adoption of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements." The Company previously recognized non-refundable
one-time fees at the time of contract execution and cash receipt. This
policy was changed to the recognition of non-refundable one-time fees on a
straight line basis over the life of the underlying contract. The Company
previously recognized pro rata refundable subscription revenue equal to
procurement costs upon initiation of a subscription. Additionally, the
amount in excess of procurement costs was recognized over the subscription
period. This policy was changed to the recognition of pro rata refundable
subscription revenue on a straight line basis over the subscription period.
Procurement costs will continue to be expensed as incurred. The percentage
of annual revenues that were earned from non-refundable one-time fees and
from pro rata refundable subscription revenue was not material to the
Company's consolidated net revenues or to its consolidated income from
continuing operations. The adoption of SAB No. 101 also resulted in a
non-cash charge of approximately $89 million ($56 million, after tax) on
January 1, 2000 to account for the cumulative effect of the accounting
change.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 1999, the Emerging Issues Task Force ("EITF") released Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Interests in Securitized Financial Assets." EITF Issue No. 99-20
modifies the accounting for interest income and impairment of beneficial
interests in securitization transactions for quarters beginning after
March 15, 2001, whereby beneficial interests determined to have an
other-than-temporary impairment are required to be written down to fair
value. The Company plans to adopt EITF Issue No. 99-20 on January 1, 2001,
which would result in a non-cash charge of $46 million ($27 million, after
tax) to account for the cumulative effect of the accounting change in the
first quarter of 2001.
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, will be required to be recorded on the
balance sheet at fair value. If the derivative is designated in a fair-value
hedge, the changes in the fair value of the derivative and the hedged item
will be recognized in earnings. If the derivative is designated in a
cash-flow hedge, the changes in the fair value of the derivative will be
recorded in other comprehensive income (loss) and will be recognized in the
income statement when the hedged item affects earnings. SFAS No. 133 defines
new requirements for designation and documentation of hedging relationships
as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, the changes
in fair value will be recognized in earnings.
The Company will record a non-cash charge of $16 million ($11 million, after
tax) to account for the cumulative effect of the accounting change as of
January 1, 2001 relating to derivatives not designated as hedges prior to
adopting SFAS No. 133 and to derivatives designated in fair value-type
hedges. The outcome of pending issues at the FASB and the Derivatives
Implementation Group could impact the amount of the cumulative transition
adjustment presented herein. The cumulative effect is based on the Company's
interpretation of the accounting literature as of March 2001.
F-12
As provided for in SFAS No. 133, the Company will also reclassify certain
financial investments as trading securities at January 1, 2001. This
reclassification will result in a pre-tax benefit of approximately
$10 million, which will be recorded in the first quarter of 2001.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125." SFAS No. 140 revises criteria for
accounting for securitizations, other financial-asset transfers and
collateral and introduces new disclosures, but otherwise carries forward
most of the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" without
amendment. The Company adopted the disclosure requirements of SFAS No. 140
on December 31, 2000, as required. All other provisions of SFAS No. 140 will
be adopted after March 31, 2001, as required by the standard. The impact of
adopting the remaining provisions of this standard is not yet fully
determinable.
2. EARNINGS PER SHARE
On March 21, 2000, the Company's stockholders approved a proposal
authorizing a new series of common stock to track the performance of its
Move.com Group segment. The Company's existing common stock was reclassified
as CD common stock, which reflects the performance of the Company's other
businesses and also a retained interest in the Move.com Group (collectively
referred to as the "Cendant Group").
Earnings per share ("EPS") for periods after March 31, 2000, the date of the
original issuance of Move.com common stock, has been calculated using the
two-class method. The two-class method is an earnings allocation formula
that determines EPS for each class of common stock according to the related
earnings participation rights. Under the two-class method, basic EPS for
Move.com common stock is calculated by dividing (a) the product of the
earnings applicable to Move.com Group multiplied by the outstanding Move.com
"fraction" by (b) the weighted average number of shares outstanding during
the period. The Move.com "fraction" is a fraction, the numerator of which is
the number of shares of Move.com common stock outstanding and the
denominator of which is the number of shares that, if issued, would
represent 100% of the equity (and would include the 22,500,000 notional
shares of Move.com common stock representing Cendant Group's retained
interest in Move.com Group) in the earnings or losses of Move.com Group.
The following table summarizes the Company's outstanding common stock
equivalents which were antidilutive and therefore excluded from the
computation of diluted EPS:
DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
CD COMMON STOCK
Options(a) 110 183 38
Warrants(b) 2 2 --
Convertible debt -- 18 18
FELINE PRIDES 63 41 --
MOVE.COM COMMON STOCK
Options(c) 6
-----------------------------------
(a) The weighted average exercise prices for antidilutive options at
December 31, 2000, 1999 and 1998 were $22.27, $15.24 and $29.58,
respectively.
(b) The weighted average exercise prices for antidilutive warrants at
December 31, 2000 and 1999 were $21.31 and $16.77, respectively.
(c) The weighted average exercise price for antidilutive options at
December 31, 2000 was $18.60.
F-13
Income (loss) per common share from continuing operations for each class of
common stock was computed as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
CD COMMON STOCK
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Cendant Group $ 638 $ (319) $ 209
Cendant Group's retained interest in Move.com Group (56) (14) (1)
------ ------ ------
Income (loss) from continuing operations for basic EPS 582 (333) 208
Convertible debt interest, net of tax 11 -- --
------ ------ ------
Income (loss) from continuing operations for diluted EPS $ 593 $ (333) $ 208
====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 724 751 848
Stock options, warrants and non-vested shares 20 -- 32
Convertible debt 18 -- --
------ ------ ------
Diluted 762 751 880
====== ====== ======
YEAR ENDED
DECEMBER 31,
2000
-------------
MOVE.COM COMMON STOCK
LOSS FROM CONTINUING OPERATIONS:
Move.com Group $ (62)
Less: Cendant Group's retained interest in Move.com Group (56)
----------
Loss from continuing operations for basic and diluted EPS $ (6)
==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 3
==========
Income (loss) per share of CD common stock from discontinued operations is
summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Basic $ 0.10 $ 0.14 $ (0.09)
Diluted 0.09 0.14 (0.09)
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS:
Basic $ 0.02 $ 0.23 $ 0.48
Diluted 0.02 0.23 0.46
Basic and diluted loss per share of CD common stock from the cumulative
effect of an accounting change was $0.08 for the year ended December 31,
2000.
3. ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
AVIS GROUP HOLDINGS, INC. On November 13, 2000, the Company announced that
it entered into a definitive agreement to acquire all of the outstanding
shares of Avis Group Holdings, Inc. ("Avis Group") that are not currently
owned by the Company. On March 1, 2001, the Company consummated the
acquisition for $33.00 per share in cash, or approximately $967 million,
including $30 million of transaction costs and expenses.
F-14
FAIRFIELD COMMUNITIES, INC. On November 2, 2000, the Company announced that
it had entered into a definitive agreement to acquire all of the outstanding
common stock of Fairfield Communities, Inc. ("Fairfield") at $15 per share,
or approximately $635 million in aggregate. The final acquisition price may
increase to a maximum of $16 per share depending upon a formula based on the
average trading price of CD common stock over a 20-day trading period prior
to the date on which Fairfield stockholders meet to approve the transaction.
The consideration is payable in cash or CD common stock or a combination
thereof, at the holder's election. The Company is not required, however, to
pay more than 50% of the consideration in cash and has the right to
substitute cash for any shares of Fairfield common stock instead of issuing
CD common stock. Although no assurances can be given, the Company expects
the transaction to close in early April 2001.
DISPOSITIONS
2000. During 2000, the Company entered into a definitive agreement (the
"Homestore Transaction") with Homestore.com, Inc. ("Homestore") to sell
certain businesses within its Move.com Group segment, including the Internet
real estate portal, and its Welcome Wagon International, Inc. business
included within the Diversified Services segment. On February 16, 2001, the
Company consummated the sale in exchange for approximately 21 million shares
of Homestore common stock valued over $700 million. The Company will account
for its 20% investment in Homestore using the equity method of accounting.
During 2000, the Company recorded a net loss of $43 million in connection
with the dispositions of certain non-strategic businesses.
1999. During 1999, the Company completed the sale of its Green Flag
business unit and approximately 85% of its Entertainment Publications, Inc.
business unit for cash of $401 million (including $37 million of dividends)
and $281 million, respectively. The Company realized a net gain of
approximately $27 million and $156 million ($8 million and $78 million,
after tax), respectively.
During 1999, the Company also completed the disposition of its Fleet
segment, whereby Avis Group acquired the net assets of the Fleet segment
through the assumption of and subsequent repayment of $1.44 billion of
intercompany debt and the issuance to the Company of $360 million of
non-voting convertible preferred stock of Avis Fleet Leasing and Management
Corporation, a wholly-owned subsidiary of Avis Group. Coincident with the
closing of the transaction, Avis Group refinanced the assumed debt which was
payable to the Company. Accordingly, the Company received additional
consideration of $3.0 billion of cash and a $30 million receivable from Avis
Group.
The Company realized a net gain on the disposal of its Fleet segment of
$881 million ($866 million, after tax), of which $715 million
($702 million, after tax) was recognized at the time of closing and
$166 million ($164 million, after tax) was deferred at the date of
disposition. The realized gain is net of approximately $90 million of
transaction costs. The Company deferred the portion of the realized net gain
equivalent to its common equity ownership percentage in Avis Group at the
time of closing. The deferred net gain is included in deferred income in the
Consolidated Balance Sheets at December 31, 2000 and 1999. The deferred gain
is being recognized into income over forty years, which is consistent with
the period Avis Group is amortizing the goodwill generated from the
transaction. During 2000, the Company also recognized $35 million of the
deferred gain due to the sale of VMS Europe by Avis Group in 2000. During
1999, the Company recognized $9 million of the deferred gain due to the sale
of a portion of the Company's equity ownership in Avis Group in 1999.
The Company completed the dispositions of certain other businesses,
including Central Credit, Inc., Global Refund Group, Spark Services, Inc.,
National Leisure Group and National Library of Poetry. Aggregate
consideration received on such dispositions was comprised of approximately
$265 million in cash, including $21 million of dividends. The Company
realized a net gain of $60 million ($5 million loss, after tax) on the
dispositions of these businesses.
F-15
4. DISCONTINUED OPERATIONS
On October 25, 2000, the Company announced its decision to spin-off to its
CD common stockholders its Individual Membership segment, Cendant Membership
Services, Inc. ("CMS"), by mid-2001. CMS provides customers with access to a
variety of discounted products and services.
During 1999, the Company completed the sale of Cendant Software Corporation
("CDS"), which was classified as a discontinued operation for the year ended
December 31, 1998, for net cash proceeds of $770 million.
During 1998, the Company completed the sale of Hebdo Mag
International, Inc. ("Hebdo Mag"), which was classified as a discontinued
operation for the year ended December 31, 1998. The Company received
$315 million in cash and 7 million shares of CD common stock valued at
$135 million (approximately $19 per share market value) on the date of sale.
Summarized financial data of discontinued operations for the years ended
December 31, consisted of:
STATEMENT OF OPERATIONS DATA:
HEBDO
CMS CDS MAG
------------------------------ ------------------- --------
2000 1999 1998 1999 1998 1998
-------- -------- -------- -------- -------- --------
Net revenues $743 $895 $836 $ -- $ 346 $202
==== ==== ==== ==== ===== ====
Income (loss) before income taxes $111 $166 $(79) $ -- $ (57) $ 17
Provision (benefit) for income taxes 43 62 (31) -- (23) 8
---- ---- ---- ---- ----- ----
Income (loss) from discontinued operations,
net of tax 68 104 (48) -- (34) 9
---- ---- ---- ---- ----- ----
Gain on disposal of discontinued operations 26 -- -- 299 24 155
Provision (benefit) for income taxes 10 -- -- 125 (174) (52)
---- ---- ---- ---- ----- ----
Gain on disposal of discontinued operations,
net of tax 16 -- -- 174 198 207
---- ---- ---- ---- ----- ----
$ 84 $104 $(48) $174 $ 164 $216
==== ==== ==== ==== ===== ====
BALANCE SHEET DATA:
CMS
-------------------
2000 1999
-------- --------
Current assets $ 344 $ 357
Goodwill 164 164
Other assets 148 96
Total liabilities (964) (858)
------ ------
Net liabilities of discontinued operations $ (308) $ (241)
====== ======
5. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Franchising revenues received from lodging properties, car rental locations,
tax preparation offices and real estate brokerage offices were $857 million,
$839 million and $703 million for 2000, 1999 and 1998, respectively. The
Company also receives marketing and reservation fees from several of its
lodging and real estate franchisees, which are calculated based on a
specified percentage of gross room revenues or based on a specified
percentage of gross closed commissions earned on the sale of real estate. As
provided in the franchise agreements and generally at the Company's
discretion, all of these fees are to be expended for marketing purposes and
the operation of a centralized brand-specific reservation system for the
respective franchisees and are controlled by the Company until disbursement.
Marketing and reservation fees, included within service fee revenues, of
$290 million, $280 million and $228 million were recorded during 2000, 1999
and 1998, respectively, and are net of annual rebates of $45 million,
$43 million and $35 million, respectively.
F-16
6. OTHER CHARGES
RESTRUCTURING AND OTHER UNUSUAL CHARGES
2000 RESTRUCTURING CHARGE. During the first quarter of 2000, the Company's
management, with the appropriate level of authority, formally committed to
various strategic initiatives. As a result, the Company incurred a
restructuring charge of $60 million, of which $3 million is included in
income (loss) from discontinued operations in the Consolidated Statements of
Operations. The restructuring initiatives were aimed at improving the
overall level of organizational efficiency, consolidating and rationalizing
existing processes, reducing cost structures in the Company's underlying
businesses and other related efforts. These initiatives primarily affected
the Company's Travel and Insurance/ Wholesale segments. The initiatives are
expected to be completed by the end of the first quarter of 2001.
Liabilities associated with these initiatives are classified as a component
of accounts payable and other current liabilities. The initial recognition
of the charge and the corresponding utilization from inception is summarized
by category as follows:
2000 BALANCE AT
RESTRUCTURING CASH OTHER DECEMBER 31,
CHARGE PAYMENTS REDUCTIONS 2000
------------- --------- ---------- -------------
Personnel related $ 25 $ 18 $ 1 $ 6
Asset impairments and contract terminations 26 1 25 --
Facility related 9 2 1 6
------------- --------- ---------- ------------
Total 60 21 27 12
Reclassification for discontinued operations (3) (1) -- (2)
------------- --------- ---------- ------------
Total related to continuing operations $ 57 $ 20 $ 27 $ 10
============= ========= ========== ============
Personnel related costs primarily include severance resulting from the
consolidation of business operations and certain corporate functions. The
Company formally communicated to 971 employees, representing a wide range of
employee groups, as to their separation from the Company. As of
December 31, 2000, approximately 855 employees were terminated. Asset
impairments and contract terminations were incurred in connection with a
change in the Company's strategic focus to an online business model and
consisted of $25 million of asset impairments primarily associated with the
exit of a timeshare software development business and $1 million of contract
termination costs. Facility related costs consist of facility closures and
lease obligations resulting from the consolidation of business operations.
2000 UNUSUAL CHARGES. During 2000, the Company also incurred unusual
charges totaling $32 million. Such charges included $21 million of costs to
fund an irrevocable contribution to an independent technology trust
responsible for completing the transition of the Company's lodging
franchisees to a Company sponsored property management system, $4 million of
executive termination costs, $3 million of costs for the postponement of the
initial public offering of Move.com common stock and $4 million of other
costs.
1999 UNUSUAL CHARGE. During 1999, the Company incurred an unusual charge of
$23 million to fund an irrevocable contribution to an independent technology
trust responsible for completing the transition of the Company's lodging
franchisees to a Company sponsored property management system.
1997 RESTRUCTURING CHARGES. During 1997, the Company incurred restructuring
charges totaling $455 million substantially associated with the merger of
HFS Incorporated ("HFS") and CUC International Inc. ("CUC") and the merger
in October 1997 with Hebdo Mag. Cash outlays of $2 million, $8 million and
$103 million were applied against this restructuring liability during 2000,
1999 and 1998, respectively. Additionally, the Company recorded a net
increase of $2 million and a net decrease of $27 million to these charges
during 1999 and 1998, respectively, primarily as a result of changes to the
original estimate of costs to be incurred. Such adjustments were recorded in
the periods in which events occurred or information became available
requiring accounting recognition.
F-17
Liabilities of $59 million remained at December 31, 2000 and were primarily
attributable to executive termination benefits, which the Company
anticipates will be settled upon resolution of related contingencies.
During 1997, the Company also incurred restructuring charges of
$283 million primarily associated with the merger in April 1997 of HFS and
PHH Corporation ("PHH"). Cash outlays of $1 million, $5 million and
$20 million were applied against this restructuring liability during 2000,
1999 and 1998, respectively. Additionally, the Company recorded a net
decrease of $40 million to these charges during 1998 primarily as a result
of a change in the original estimate of costs to be incurred. Such
adjustment was recorded in the period in which events occurred or
information became available requiring accounting recognition. Liabilities
of $10 million remained at December 31, 2000 and were primarily attributable
to executive termination benefits, which the Company anticipates will be
settled upon resolution of related contingencies.
INVESTIGATION-RELATED COSTS
During 2000, 1999 and 1998, the Company incurred charges of $23 million,
$21 million and $33 million, respectively, primarily for professional fees
and public relations costs incurred in connection with accounting
irregularities in the former business units of CUC and resulting
investigations into such matters.
LITIGATION SETTLEMENTS AND RELATED COSTS
During 2000, the Company incurred charges of $20 million in connection with
litigation asserting claims associated with accounting irregularities in the
former business units of CUC and outside of its principal common stockholder
class action lawsuit. During 1999, the Company incurred charges of
approximately $2.89 billion in connection with the agreement to settle its
principal common stockholder class action lawsuit. See Note 13--Stockholder
Litigation Settlement for a detailed discussion regarding this settlement.
In connection with the settlement of the Company's class action lawsuit that
was brought on behalf of the PRIDES holders who purchased their securities
on or prior to April 15, 1998, holders were eligible to receive a "Right"
for each PRIDES security held. Accordingly, the Company recorded a non-cash
charge of $351 million during 1998. During 2000, the Company recorded a
non-cash credit of $41 million, which represented an adjustment to the
number of Rights to be issued. See Note 17--Mandatorily Redeemable Trust
Preferred Securities Issued by Subsidiary Holding Solely Senior Debentures
Issued by the Company for a detailed discussion regarding this settlement.
TERMINATION OF PROPOSED ACQUISITIONS
During 1999 and 1998, the Company incurred charges of $7 million and
$433 million, respectively, primarily in connection with the termination of
the proposed acquisition of RAC Motoring Services in 1999 and the proposed
acquisition of American Bankers Insurance Group in 1998.
EXECUTIVE TERMINATIONS
During 1998, the Company incurred charges of $53 million related to the
termination of certain former executives, primarily Walter A. Forbes, who
resigned as Chairman and member of the Company's Board of Directors.
INVESTIGATION-RELATED FINANCING COSTS
In connection with the accounting irregularities in the former business
units of CUC, the Company was temporarily prohibited from accessing public
debt markets in 1998. As a result, the Company recorded a charge of
$35 million primarily in connection with fees associated with waivers and
various financing arrangements.
F-18
7. INCOME TAXES
The income tax provision (benefit) consists of:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
CURRENT
Federal $ 60 $ 229 $ (28)
State 19 3 18
Foreign 52 44 56
-------- -------- --------
131 276 46
-------- -------- --------
DEFERRED
Federal 193 (728) 71
State (14) (23) 17
Foreign (1) 7 1
-------- -------- --------
178 (744) 89
-------- -------- --------
PROVISION (BENEFIT) FOR INCOME TAXES $ 309 $ (468) $ 135
======== ======== ========
Pre-tax income (loss) for domestic and foreign operations consisted of the
following:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Domestic $ 759 $ (959) $ 157
Foreign 210 219 237
-------- -------- --------
Pre-tax income (loss) $ 969 $ (740) $ 394
======== ======== ========
Deferred income tax assets and liabilities are comprised of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
CURRENT DEFERRED INCOME TAX ASSETS
Stockholder litigation settlement $ -- $ 1,058
Unrealized loss on marketable securities 46 --
Accrued liabilities and deferred income 24 169
Provision for doubtful accounts 22 18
Restructuring liabilities 11 17
Net operating loss carryforwards -- 75
-------- --------
Current deferred income tax assets 103 1,337
-------- --------
CURRENT DEFERRED INCOME TAX LIABILITIES
Insurance retention refund 20 18
Franchise acquisition costs 12 10
Other 18 4
-------- --------
Current deferred income tax liabilities 50 32
-------- --------
CURRENT NET DEFERRED INCOME TAX ASSET $ 53 $ 1,305
======== ========
F-19
DECEMBER 31,
-------------------
2000 1999
-------- --------
NONCURRENT DEFERRED INCOME TAX ASSETS
Stockholder litigation settlement $ 922 $ --
Net operating loss carryforwards 616 84
State net operating loss carryforwards 193 151
Restructuring liabilities 19 29
Accrued liabilities and deferred income 19 29
Foreign tax credit carryforward 10 10
Valuation allowance (a) (161) (161)
-------- --------
Noncurrent deferred income tax assets 1,618 142
-------- --------
NONCURRENT DEFERRED INCOME TAX LIABILITIES
Depreciation and amortization 539 511
Other 19 17
-------- --------
Noncurrent deferred income tax liabilities 558 528
-------- --------
NONCURRENT NET DEFERRED INCOME TAX ASSET (LIABILITY) $ 1,060 $ (386)
======== ========
-----------------------------------
(a) The valuation allowance at both December 31, 2000 and 1999 relates to
deferred tax assets for state net operating loss carryforwards and
foreign tax credit carryforwards of $151 million and $10 million,
respectively. The valuation allowance will be reduced when and if the
Company determines that the deferred income tax assets are likely to be
realized.
DECEMBER 31,
-------------------
2000 1999
-------- --------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX ASSETS
Depreciation $ 13 $ 7
Accrued liabilities -- 11
Other 4 --
-------- --------
Management and mortgage program deferred income tax assets 17 18
-------- --------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX
LIABILITIES
Unamortized mortgage servicing rights 473 328
Accrued liabilities 20 --
-------- --------
Management and mortgage program deferred income tax
liabilities 493 328
-------- --------
NET DEFERRED INCOME TAX LIABILITY UNDER MANAGEMENT AND
MORTGAGE PROGRAMS $ 476 $ 310
======== ========
Net operating loss carryforwards at December 31, 2000 expire as follows:
2008, $4 million; 2009, $5 million; 2010, $8 million; 2018, $808 million and
2019, $935 million. The Company also has alternative minimum tax credit
carryforwards of $16 million.
No provision has been made for U.S. federal deferred income taxes on
approximately $302 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 2000 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in foreign
operations. In addition, the determination of the amount of unrecognized
U.S. federal deferred income tax liability for unremitted earnings is not
practicable.
F-20
The Company's effective income tax rate for continuing operations differs
from the U.S. federal statutory rate as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory rate 35.0% (35.0)% 35.0%
State and local income taxes, net of federal tax
benefits 0.3 (1.8) 5.9
Amortization of non-deductible goodwill 1.6 1.9 4.5
Taxes on foreign operations at rates different than U.S.
federal statutory rate (1.5) (4.1) (6.4)
Nontaxable gain on disposal (1.5) (24.0) --
Recognition of excess tax basis on assets held for sale -- -- (2.2)
Other (2.0) (0.2) (2.5)
----- ----- -----
31.9% (63.2)% 34.3%
===== ===== =====
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Land $ 391 $ 402
Building and leasehold improvements 421 417
Furniture, fixtures and equipment 932 785
------- -------
1,744 1,604
Less: accumulated depreciation and amortization 471 325
------- -------
$ 1,273 $ 1,279
======= =======
9. OTHER INTANGIBLES, NET
Other intangibles, net consisted of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Avis trademark $ 402 $ 402
Other trademarks 162 161
Customer lists 159 140
Other 61 65
------- -------
784 768
Less: accumulated amortization 141 113
------- -------
$ 643 $ 655
======= =======
10. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
mortgage loans insured or guaranteed by various government sponsored
entities and private insurance agencies. The insurance or guaranty is
provided primarily on a non-recourse basis to the Company, except where
limited by the Federal Housing Administration and Veterans Administration
and their respective loan programs. At December 31, 2000 and 1999, mortgage
loans sold with recourse amounted to approximately $138 million and
$52 million, respectively. The Company believes adequate allowances are
maintained to cover any potential losses.
F-21
11. MORTGAGE SERVICING RIGHTS
Capitalized MSRs consisted of:
AMOUNT
----------
BALANCE, JANUARY 1, 1998 $ 373
Additions to MSRs 475
Additions to hedge 49
Amortization (82)
Write-down/recovery 5
Sales (99)
Deferred hedge, net (85)
----------
BALANCE, DECEMBER 31, 1998 636
Additions to MSRs 693
Additions to hedge 23
Amortization (118)
Write-down/recovery 5
Sales (161)
Deferred hedge, net 6
----------
BALANCE, DECEMBER 31, 1999 1,084
Additions to MSRs 765
Additions to hedge 213
Amortization (153)
Write-down/recovery 2
Sales (127)
Deferred hedge, net (131)
----------
BALANCE, DECEMBER 31, 2000 $ 1,653
==========
12. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Accounts payable $ 229 $ 314
Restructuring and other unusual 100 93
Accrued payroll and related 262 228
Income taxes payable 158 --
Advances from relocation clients -- 80
Other 553 477
-------- --------
$ 1,302 $ 1,192
======== ========
13. STOCKHOLDER LITIGATION SETTLEMENT
On August 14, 2000, the U.S. District Court approved the Company's agreement
(the "Settlement Agreement") to settle the principal securities class action
pending against the Company, which was brought on behalf of purchasers of
all Cendant and CUC publicly traded securities, other than PRIDES, between
May 1995 and August 1998. Under the Settlement Agreement, the Company will
pay the class members approximately $2.85 billion in cash. Certain parties
in the class action have appealed the District Court's orders approving the
plan of allocation of the settlement fund and awarding of attorneys' fees
and expenses to counsel for the lead plaintiffs. None of the appeals
challenged the fairness of the $2.85 billion settlement amount. The U.S.
Court of Appeals for the
F-22
Third Circuit has issued a briefing schedule for the appeals which is nearly
complete. No date for oral argument has been set.
The Settlement Agreement required the Company to post collateral in the form
of credit facilities and/or surety bonds by November 13, 2000. The Company
also had the option of forming a trust established for the benefit of the
plaintiffs in lieu of posting collateral. On November 13, 2000, the Company
posted collateral in the form of letters of credit and surety bonds in the
amounts of $1.71 billion and $790 million, respectively. The Company also
made a cash deposit of approximately $350 million to the trust, which is
classified as a noncurrent asset on the Consolidated Balance Sheet at
December 31, 2000. The credit facilities under which the Company posted
collateral also require the Company to make minimum deposits of
$600 million, $800 million and $800 million to this trust during 2001, 2002
and 2003, respectively. Such deposits will serve to reduce the amount of
collateral required to be posted under the Settlement Agreement.
At December 31, 2000, the Company reclassified the $2.85 billion settlement
amount to noncurrent liabilities. Such amount is classified as noncurrent
based upon the Company's current expectation of the timing of when the
appeals process will be resolved and its ability to finance the
$600 million minimum deposit due in 2001 with borrowings available under its
$1.75 billion three-year competitive advance and revolving credit facility.
14. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consisted of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
7 3/4% senior notes $ 1,149 $ 1,148
3% convertible subordinated notes 548 547
Term loan facility 250 750
7 1/2% senior notes -- 400
Other 1 --
-------- --------
1,948 2,845
Less: current portion -- 400
-------- --------
$ 1,948 $ 2,445
======== ========
7 3/4% SENIOR NOTES
During 1998, the Company issued $1.15 billion of senior notes due December
2003. Such notes may be redeemed, in whole or in part, at any time at the
option of the Company, at a redemption price plus accrued interest through
the date of redemption. The redemption price will be equal to the greater of
(i) 100% of the principal amount of the notes being redeemed or (ii) the sum
of the present values of the remaining scheduled payments of principal and
interest (calculated at the interest rate on the notes on the date of
issuance, regardless of any interest rate adjustment at any time) discounted
at the treasury rate plus 50 basis points, plus accrued interest through the
date of redemption.
3% CONVERTIBLE SUBORDINATED NOTES
During 1997, the Company completed a public offering of $550 million of 3%
convertible subordinated notes due in February 2002. Each $1,000 principal
amount of these notes is convertible into 32.65 shares of CD common stock
subject to adjustment in certain events. The notes may be redeemed at the
option of the Company at any time, in whole or in part, at the appropriate
redemption prices, as defined in the applicable indenture, plus accrued
interest through the redemption date. The notes will be subordinated in
right of payment to all existing and future senior debt as defined in the
applicable indenture of the Company.
F-23
TERM LOAN FACILITY
During 1999, the Company replaced its $3.25 billion 364-day term loan
facility with a $1.25 billion two-year term loan facility. The new facility
bears interest at a rate of LIBOR plus a margin of 100 basis points and is
payable in quarterly installments through the first quarter of 2001. The
weighted average interest rates on the facility were 7.4% and 6.2% at
December 31, 2000 and 1999, respectively. The facility contains certain
restrictive covenants, including restrictions on indebtedness of material
subsidiaries, mergers, limitations on liens, liquidations and sale and
leaseback transactions, and requires the maintenance of certain financial
ratios.
During 2000 and 1999, the Company made principal payments of $500 million in
each year to reduce its outstanding borrowings under its two-year term loan
facility.
During February 2001, the Company issued debt securities, maturing in 2021,
in part to refinance outstanding borrowings under the two-year term loan
facility at December 31, 2000 on a long-term basis. Accordingly, such amount
remained classified as long-term debt at December 31, 2000. See
Note 27--Subsequent Events for a detailed discussion regarding these debt
securities.
7 1/2% SENIOR NOTES
During 1998, the Company issued $400 million of senior notes, which were due
December 1, 2000. During the first quarter of 2000, the Company redeemed
these notes at 100.695% of par plus accrued interest. In connection with the
redemption, the Company recorded an extraordinary loss of $4 million ($2
million, after tax) in 2000.
DEBT MATURITIES
As of December 31, 2000, aggregate maturities of debt are as follows:
YEAR AMOUNT
---- --------
2001 $ --
2002 549
2003 1,149
2004 --
2005 --
Thereafter 250
------
$1,948
======
OTHER CREDIT FACILITIES
The Company's other credit facilities consist of a $1.75 billion three-year
competitive advance and revolving credit facility (the "Three-Year
Facility") maturing in August 2003 and a $750 million five-year revolving
credit facility (the "Five-Year Facility") maturing in October 2001. The
Three-Year Facility contains the committed capacity to issue up to
$1.75 billion in letters of credit, which can be used as part of the
collateral required to be posted under the Settlement Agreement. Letters of
credit of $1.71 billion were utilized for this purpose and were outstanding
at December 31, 2000. As previously discussed, in connection with the
$1.71 billion of collateral posted from this facility, the Company is
required to make minimum deposits throughout 2003 to a trust established for
the benefit of the plaintiffs in the Company's principal common stockholder
class action lawsuit.
Borrowings under these credit facilities bear interest at LIBOR, plus a
margin of approximately 60 basis points. The Company is required to pay a
per annum facility fee of .15% and .175% under the Three-Year Facility and
Five-Year Facility, respectively. The Company is also required to pay a per
annum utilization fee of .125% on the Three-Year Facility if usage under the
facility exceeds 33% of aggregate commitments. The interest rates and
facility fees are subject to change based upon credit
F-24
ratings assigned by nationally recognized debt rating agencies on the
Company's 7 3/4% senior notes and its two-year term loan facility.
There were no outstanding borrowings under these credit facilities at
December 31, 2000 and 1999.
The facilities contain certain restrictive covenants, including restrictions
on indebtedness of material subsidiaries, mergers, limitations on liens,
liquidations and sale and leaseback transactions, and also require the
maintenance of certain financial ratios.
15. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS AND BORROWING
ARRANGEMENTS
Borrowings to fund assets under management and mortgage programs, which are
not classified based on contractual maturities since such debt corresponds
directly with assets under management and mortgage programs, consisted of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Commercial paper $ 1,556 $ 619
Secured obligations 292 345
Medium-term notes 117 1,248
Other 75 102
-------- --------
$ 2,040 $ 2,314
======== ========
COMMERCIAL PAPER
Commercial paper matures within 180 days and is supported by committed
revolving credit agreements described below and short-term lines of credit.
The weighted average interest rate on the Company's outstanding commercial
paper at December 31, 2000 and 1999 was 6.7%.
SECURED OBLIGATIONS
Secured obligations are collateralized by underlying mortgage loans held in
safekeeping by the custodian to the agreement. The total commitment under
this agreement is $500 million and is renewable on an annual basis at the
discretion of the lender. The weighted average interest rates on such
obligations were 6.1% and 6.0% at December 31, 2000 and 1999, respectively.
Mortgage loans financed under this agreement at December 31, 2000 and 1999
totaled $292 million and $345 million, respectively, and are included in
mortgage loans held for sale in the Consolidated Balance Sheets.
MEDIUM-TERM NOTES
Medium-term notes primarily represent unsecured loans which mature through
2002. The weighted average interest rates on such medium-term notes were
6.8% and 6.4% at December 31, 2000 and 1999, respectively.
OTHER
Other liabilities under management and mortgage programs are comprised of an
unsecured borrowing maturing in 2001.
CREDIT FACILITIES
As of December 31, 2000, the Company, through its PHH subsidiary, maintained
$1.775 billion of committed and unsecured credit facilities. The facilities
comprise a $750 million syndicated revolving credit facility maturing in
2001, a $750 million syndicated revolving credit facility maturing in 2005
and $275 million of other revolving credit facilities maturing in 2001.
Borrowings under these facilities bear interest at a rate of LIBOR, plus a
margin of approximately 40 basis points. The Company is
F-25
required to pay a per annum facility fee of approximately .125% under the
facilities. There were no outstanding borrowings under these credit
facilities at December 31, 2000 and 1999.
The facilities contain certain restrictive covenants, including restrictions
on dividends paid to the Company and indebtedness of material subsidiaries,
mergers, limitations on liens, liquidations, and sale and leaseback
transactions, and also require the maintenance of certain financial ratios.
SECURITIZATION AGREEMENTS
During 2000 and 1999, the Company maintained revolving sales agreements
under which certain managed assets were transferred to third parties.
MORTGAGE. Under this revolving sales agreement, an unaffiliated bankruptcy
remote special purpose entity, Bishops Gate Residential Mortgage Trust (the
"Buyer"), committed to purchase for cash, at the Company's option, mortgage
loans originated by the Company on a daily basis, up to the Buyer's asset
limit of $2.1 billion, until May 2001. The Company retains the servicing
rights on the mortgage loans sold to the Buyer and arranges for the sale or
securitization of the mortgage loans into the secondary market. The Buyer
retains the right to select alternative sale or securitization arrangements.
At December 31, 2000 and 1999, the Company was servicing approximately
$1.0 billion and $813 million, respectively, of mortgage loans owned by the
Buyer.
RELOCATION. Under these revolving sales agreements, certain relocation
receivables are transferred for cash, on a revolving basis, to an
unaffiliated bankruptcy remote special purpose entity, Apple Ridge Funding
LLC ("Apple Ridge"), until March 31, 2007. The Company retains a
subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At December 31, 2000, the Company
was servicing approximately $591 million of receivables under these
agreements. As of December 31, 1999, the Company had not transferred any
assets to Apple Ridge.
16. MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
During 2000, a Company-formed limited liability corporation ("LLC") issued a
mandatorily redeemable preferred interest ("Senior Preferred Interest") in
exchange for $375 million in cash. The Senior Preferred Interest is
classified as a mandatorily redeemable preferred interest in a subsidiary in
the Consolidated Balance Sheet. The Senior Preferred Interest is mandatorily
redeemable 15 years from the date of issuance and may be redeemed by the
Company after 5 years, or earlier in certain circumstances. Distributions on
the Senior Preferred Interest are based on the three-month LIBOR plus an
applicable margin (1.77%) and are reflected as minority interest in the
Consolidated Statement of Operations. Simultaneous with the issuance of the
Senior Preferred Interest, the Company transferred certain assets to the
LLC. After the sale of the Senior Preferred Interest, the Company owned 100%
of both the common interest and the junior preferred interest in the LLC. In
the event of default, holders of the Senior Preferred Interest have certain
liquidation preferences.
17. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
HOLDING SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
During 1998, Cendant Capital I (the "Trust"), a wholly-owned subsidiary of
the Company, issued 30 million PRIDES and 2 million trust preferred
securities in exchange for gross proceeds of approximately $1.5 billion. The
Trust invested these proceeds in 6.45% Senior Debentures issued by the
Company and due in 2003 (the "Debentures"). The Debentures are the sole
asset of the Trust. The obligations of the Trust related to the PRIDES and
trust preferred securities are unconditionally guaranteed by the Company to
the extent the Company makes payments pursuant to the Debentures. Upon the
issuance of the PRIDES and the trust preferred securities, the Company
recorded a liability of $43 million with a corresponding reduction to
stockholders' equity, representing the present value of the total future
contract adjustment payments to be made under the PRIDES. The PRIDES, upon
issuance, consisted of 28 million Income PRIDES and 2 million Growth PRIDES,
both with a face amount of $50 per PRIDES.
F-26
The Income PRIDES consist of trust preferred securities and forward purchase
contracts under which the holders are required to purchase CD common stock
from the Company in February 2001. The Growth PRIDES consist of zero coupon
U.S. Treasury securities and forward purchase contracts under which the
holders are also required to purchase CD common stock from the Company in
February 2001. The stand-alone trust preferred securities and the trust
preferred securities forming a part of the Income PRIDES bear interest, in
the form of preferred stock dividends, at the annual rate of 6.45% payable
in cash. Payments under the forward purchase contract forming a part of the
Income PRIDES will be made by the Company in the form of a contract
adjustment payment at an annual rate of 1.05%. Payments under the forward
purchase contract forming a part of the Growth PRIDES will be made by the
Company in the form of a contract adjustment payment at an annual rate of
1.30%.
In connection with the accounting irregularities in the former business
units of CUC, the Company reached an agreement to settle the class action
lawsuit brought on behalf of purchasers of PRIDES securities on or prior to
April 15, 1998. Under the PRIDES settlement, each holder was eligible to
receive a "Right" with a calculated value of $11.71 per Right. Right holders
may sell or exercise the Rights by delivering to the Company three Rights
together with two PRIDES in exchange for two new PRIDES (the "New PRIDES")
for a period beginning upon distribution of the Rights and concluding upon
expiration of the Rights (February 2001). The terms of the New PRIDES are
the same as the original PRIDES, except that the conversion rate was revised
and fixed so that, at the time of the issuance of the Rights, the New PRIDES
had a value equal to $17.57 more than the original PRIDES. Only holders who
owned PRIDES at the close of business on April 15, 1998 were eligible to
receive a new additional Right for each PRIDES security held.
During 2000, the Company also issued 4 million additional PRIDES (the
"Additional PRIDES") with a face value of $50 per Additional PRIDES in
exchange for approximately $91 million in cash proceeds. Only Additional
Income PRIDES (having identical terms to the originally issued Income
PRIDES) were issued. Of the Additional Income PRIDES, 3,619,374 were coupled
with 5,429,061 Rights and immediately converted into 3,619,374 New Income
PRIDES and 380,626 Additional Income PRIDES remained unexercised. Upon the
issuance of the Additional Income PRIDES, the Company recorded a reduction
to stockholders' equity of $108 million, representing the total future
contract adjustment payments to be made.
Preferred stock dividends of $106 million ($66 million, after tax),
$96 million ($60 million, after tax) and $80 million ($49 million, after
tax) were recorded during 2000, 1999 and 1998, respectively, and are
presented as minority interest, net of tax, in the Consolidated Statements
of Operations.
Also pursuant to the PRIDES settlement, the Company agreed to offer up to an
additional 15 million special PRIDES (the "Special PRIDES"), which could be
issued by the Company at any time for cash. The Company offered the Special
PRIDES at a price in cash equal to 105% of their theoretical value, or
$20.56 per Special PRIDES, during the last 30 days prior to the expiration
of the Rights in February 2001. The Special PRIDES have the same terms as
the currently outstanding PRIDES and could be used to exercise Rights.
Pursuant to such offer, the Company issued 104,890 Special PRIDES, for
proceeds of approximately $2 million, which were immediately converted into
241,624 shares of CD common stock.
See Note 27--Subsequent Events for a detailed discussion regarding the
satisfaction of the Company's obligation under the PRIDES.
F-27
18. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases covering various facilities
and equipment. Future minimum lease payments required under noncancelable
operating leases as of December 31, 2000 are as follows:
YEAR AMOUNT
---- --------
2001 $ 88
2002 82
2003 70
2004 62
2005 50
Thereafter 156
------
$ 508
======
Rental expense during 2000, 1999 and 1998 was $170 million, $189 million and
$165 million, respectively. The Company incurred contingent rental expenses
in 2000, 1999 and 1998 of $45 million, $49 million and $44 million,
respectively, which is included in total rental expense, principally based
on rental volume or profitability at certain parking facilities. The Company
has been granted rent abatements for varying periods on certain facilities.
Deferred rent relating to those abatements is amortized on a straight-line
basis over the applicable lease terms. Commitments under capital leases are
not significant.
The Company's Fleet segment disposition in June 1999 was structured as a
tax-free reorganization and, accordingly, no tax provision was recorded on a
majority of the gain. However, pursuant to a recent interpretive ruling, the
Internal Revenue Service ("IRS") has taken the position that similarly
structured transactions do not qualify as tax-free reorganizations under the
Internal Revenue Code Section 368(a)(1)(A). If the transaction is not
considered a tax-free reorganization, the resultant incremental liability
could range between $10 million and $170 million depending upon certain
factors, including utilization of tax attributes and contractual
indemnification provisions. Notwithstanding the IRS interpretive ruling, the
Company believes that, based upon analysis of current tax law, its position
would prevail, if challenged.
The Company is involved in litigation asserting claims associated with the
accounting irregularities discovered in former CUC business units outside of
the principal common stockholder class action litigation (see
Note 13--Stockholder Litigation Settlement). The Company does not believe
that it is feasible to predict or determine the final outcome or resolution
of these unresolved proceedings. An adverse outcome from such unresolved
proceedings could be material with respect to earnings in any given
reporting period. However, the Company does not believe that the impact of
such unresolved proceedings should result in a material liability to the
Company in relation to its consolidated financial position or liquidity.
The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
F-28
19. STOCKHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE LOSS
The after-tax components of accumulated other comprehensive loss are as
follows:
UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES LOSS
----------- -------------- -------------
Balance, January 1, 1998 $ (38) $ -- $ (38)
Current-period change (11) -- (11)
--------- ----------- -----------
Balance, December 31, 1998 (49) -- (49)
Current-period change (9) 16 7
--------- ----------- -----------
Balance, December 31, 1999 (58) 16 (42)
Current-period change (107) (85) (192)
--------- ----------- -----------
Balance, December 31, 2000 $ (165) $ (69) $ (234)
========= =========== ===========
The currency translation adjustments exclude income taxes since they relate
to indefinite investments in foreign subsidiaries.
CD COMMON STOCK TRANSACTIONS
During 2000, Liberty Media Corporation ("Liberty Media") invested a total of
$450 million in cash to purchase 24.4 million shares of CD common stock.
Additionally, Liberty Media's Chairman, John C. Malone, Ph.D., purchased one
million shares of CD common stock for approximately $17 million in cash.
The Company is authorized to repurchase $2.8 billion under its common share
repurchase program. During 2000, 1999 and 1998, the Company repurchased
$306 million (17.5 million shares), $1.75 billion (90.4 million shares) and
$258 million (13.4 million shares), respectively, of CD common stock under
the program. The Company currently has approximately $488 million remaining
availability for repurchases under this common share repurchase program.
During 1999, pursuant to a Dutch Auction self-tender offer to the Company's
CD common stockholders, the Company repurchased 50 million shares of its CD
common stock at a price of $22.25 per share.
MOVE.COM COMMON STOCK TRANSACTIONS
The Company issued shares of Move.com common stock in several private
financings, including:
NRT INCORPORATED INVESTMENT. During 2000, NRT Incorporated ("NRT")
purchased 319,591 shares of Move.com common stock for $31.29 per share or
approximately $10 million in cash. During February 2001, the Company
repurchased these shares from NRT for approximately $10 million in cash.
CHATHAM STREET HOLDINGS, LLC INVESTMENT. In connection with the
recapitalization of NRT, the Company entered into an agreement with Chatham
Street Holdings, LLC ("Chatham") during 1999 as consideration for certain
amendments made with respect to the NRT franchise agreements, which
amendments provided for additional payments of certain royalties to the
Company. Pursuant to this agreement, Chatham was granted the right, until
September 2001, to purchase 1,561,000 shares of Move.com common stock.
During 2000, Chatham exercised this contractual right and purchased
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, Chatham
received warrants to purchase 780,500 shares of
F-29
Move.com common stock at $64.08 per share and 780,500 shares of Move.com
common stock at $128.16 per share. Also during 2000, the Company invested
$25 million in convertible preferred stock of WMC Finance Co. ("WMC"), an
online provider of sub-prime mortgages and an affiliate of Chatham, and was
granted an option to purchase approximately 5 million shares of WMC common
stock.
During December 2000, Chatham sold these shares and warrants back to the
Company in exchange for consideration consisting of $75 million in cash and
the investment the Company held in WMC preferred stock valued at
$25 million. The Company also agreed to pay Chatham an additional $15
million within 90 days after consummation of the Homestore Transaction.
LIBERTY DIGITAL, INC. INVESTMENT. During 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock for
$31.29 per share in exchange for consideration consisting of $10 million in
cash and 813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. In the event Move.com common stock is not
publicly traded by June 30, 2001, the Company will be required to exchange
such shares for CD common stock. The Company is currently discussing
repurchasing the Move.com common stock owned by Liberty Digital. However, an
agreement has not yet been executed.
20. STOCK PLANS
Under its existing stock plans, the Company may grant stock options, stock
appreciation rights and restricted shares to its employees, including
directors and officers of the Company and its affiliates. Options granted
under these plans generally have a ten-year term and have vesting periods
ranging from 20% to 33% per year. The Company is authorized to grant up to
246 million shares of its common stock under these plans. At December 31,
2000 and 1999, approximately 53 million and 56 million shares, respectively,
were available for future grants under the terms of these plans.
The annual activity of the Company's stock option plans consisted of:
CD COMMON STOCK
------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- --------- -------- ---------
Balance at beginning of year 183 $ 15.24 178 $ 14.64 172 $ 18.66
Granted
Equal to fair market value 37 19.33 30 18.09 84 19.16
Greater than fair market
value -- -- 1 16.04 21 17.13
Canceled (14) 18.93 (13) 19.91 (82) 29.36
Exercised (19) 4.26 (13) 9.30 (17) 10.01
------- ------- -------
Balance at end of year 187 $ 16.90 183 $ 15.24 178 $ 14.64
======= ======= =======
MOVE.COM COMMON STOCK
-------------------------------------------
2000 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- ---------
Balance at beginning of year 2 $ 11.59 -- $ --
Granted
Less than fair market value 1 15.40 1 10.00
Equal to fair market value 3 24.21 1 13.16
------- -------
Balance at end of year(a) 6 $ 18.59 2 $ 11.59
======= =======
- -------------------
(a) In connection with the Homestore Transaction, holders of options
outstanding at December 31, 2000 will receive either cash or stock
options of Homestore.
F-30
The table below summarizes information regarding the Company's stock options
outstanding and exercisable as of December 31, 2000:
CD COMMON STOCK
-------------------------------------------------------
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
--------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
----------------- -------- ----------- -------- -------- --------
$0.01 to $10.00 60 4.7 $ 8.43 46 $ 8.05
$10.01 to $20.00 65 6.7 16.57 32 16.60
$20.01 to $30.00 42 6.9 22.46 22 22.81
$30.01 to $40.00 20 6.1 31.98 17 31.91
-------- --------
187 6.0 $ 16.90 117 $ 16.60
======== ========
MOVE.COM COMMON STOCK
-------------------------------------------------------
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
--------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OF CONTRACTUAL EXERCISE OF EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
----------------- -------- ----------- -------- -------- --------
$0.01 to $10.00 1 8.8 $ 10.00 1 $ 10.00
$10.01 to $20.00 2 8.9 13.29 1 13.16
$20.01 to $30.00 3 9.2 23.97 -- 24.40
$30.01 to $40.00 -- -- -- -- --
-------- --------
6 9.0 $ 18.59 2 $ 13.29
======== ========
The weighted-average grant-date fair value of CD common stock options
granted during 2000 and 1999 were $9.99 and $11.36, respectively. The
weighted-average grant-date fair value of Move.com common stock options
granted during 2000 and 1999 were $24.37 and $7.28, respectively. The
weighted-average grant-date fair value of CD common stock options granted
during 1998, which were repriced with exercise prices equal to and higher
than the underlying stock price at the date of repricing, were $19.69 and
$18.10, respectively. The weighted-average grant-date fair value of CD
common stock options granted during 1998, which were not repriced, was
$10.16.
Had the Company elected to recognize and measure compensation expense for
its stock option plans to employees based on the calculated fair value at
the grant dates for awards under such plans, consistent with the method
prescribed by SFAS No. 123, net income (loss) and per share data would have
been as follows:
2000 1999 1998
------------------- ------------------- -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- --------
Net income (loss) $ 602 $ 502 $ (55) $ (213) $ 540 $ 393
Basic income (loss) per share 0.84 0.70 (0.07) (0.28) 0.64 0.46
Diluted income (loss) per share 0.81 0.68 (0.07) (0.28) 0.61 0.46
The fair values of the Company's stock options are estimated on the dates of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for stock options granted in 2000, 1999 and
1998:
CD MOVE.COM GROUP
--------------------------------- ---------------------
2000 1999 1998 2000 1999
--------- --------- --------- --------- ---------
Dividend yield -- -- -- -- --
Expected volatility 55.0% 60.0% 55.0% -- --
Risk-free interest rate 5.0% 6.4% 4.9% 5.2% 6.4%
Expected holding period (years) 4.7 6.2 6.3 8.5 6.2
Although the Company generally grants employee stock options at fair value,
certain options were granted below fair value during 2000 and 1999. As such,
compensation expense is being recognized over the applicable vesting period.
The compensation expense recognized during 2000 and 1999 was not material.
Also during 2000, the Company issued 2 million restricted shares to certain
of its employees, with a weighted-average grant-date fair value of $11.95.
Deferred compensation of approximately $18 million was recorded, of which
approximately $5 million was recognized as compensation expense during 2000.
21. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution pension plans that provide
certain eligible employees of the Company an opportunity to accumulate funds
for retirement. The Company matches the contributions of participating
employees on the basis specified in the plans. The
F-31
Company's cost for contributions to these plans was $27 million,
$30 million and $22 million during 2000, 1999 and 1998, respectively.
The Company maintains a domestic non-contributory defined benefit pension
plan covering certain eligible employees employed prior to July 1, 1997.
Additionally, the Company sponsors contributory defined benefit pension
plans in certain United Kingdom subsidiaries with participation in the plans
at the employees' option. Under both the domestic and foreign plans,
benefits are based on an employee's years of credited service and a
percentage of final average compensation. The Company's policy for all plans
is to contribute amounts sufficient to meet the minimum requirements plus
other amounts as deemed appropriate. The projected benefit obligations of
the plans were $149 million and $145 million at December 31, 2000 and 1999,
respectively. The fair value of the plan assets was $146 million and $147
million at December 31, 2000 and 1999, respectively. The net pension cost
and recorded liability were not material to the accompanying Consolidated
Financial Statements.
During 1999, the Company recognized a net curtailment gain of $10 million as
a result of the disposition of its Fleet segment and the freezing of pension
benefits related to the Company's PHH subsidiary defined benefit pension
plan.
22. FINANCIAL INSTRUMENTS
DERIVATIVES
The Company performs analyses on an on-going basis to determine that a high
correlation exists between the characteristics of derivative instruments and
the assets or transactions being hedged.
The Company enters into interest rate swap agreements to manage the
contractual costs of debt financing and certain other interest bearing
liabilities, resulting from interest rate movements. The terms of the swap
agreements correlate with the maturity and rollover of the hedged items by
effectively matching a fixed or floating interest rate with the stipulated
interest stream generated from the hedged items.
At December 31, 1999, the Company had $610 million aggregate notional amount
of interest rate swaps outstanding relating to liabilities under management
and mortgage programs with weighted average receive and pay rates of 5.57%
and 6.29%, respectively. The Company had no outstanding interest rate swaps
at December 31, 2000.
In order to manage its exposure to fluctuations in foreign currency exchange
rates, the Company enters into foreign exchange contracts on a selective
basis. Such contracts are primarily utilized to hedge intercompany loans to
foreign subsidiaries and certain monetary assets and liabilities denominated
in currencies other than the U.S. dollar. The Company also hedges certain
anticipated transactions denominated in foreign currencies and forecasted
earnings of foreign subsidiaries. The principal currency hedged by the
Company is the British pound sterling.
The Company enters into options and futures contracts on U.S. Treasury
instruments and mortgage-backed securities to reduce the risk of adverse
price fluctuations and interest rate risk associated with its mortgage loans
held for sale and anticipated mortgage production arising from commitments
issued. The Company is not required to satisfy margin or collateral
requirements for any of these financial instruments.
The Company uses U.S. Treasury instruments, constant maturity treasury
floors, LIBOR swaps, interest rate swaps and other derivative instruments to
manage the financial impact of potential prepayment activity resulting from
interest rate movements and associated with its mortgage servicing rights.
The Company is required to deposit cash into margin accounts maintained by
counterparties for unrealized losses on futures contracts.
FAIR VALUE
The carrying amounts of cash, cash equivalents, accounts receivable,
relocation receivables, accounts payable and accrued liabilities approximate
fair value due to the short-term maturities of these assets and liabilities.
The fair value of financial instruments is generally determined by reference
to market values resulting from trading on a national securities exchange or
in an over-the-counter market. In cases where
F-32
quoted market prices are not available, fair value is based on estimates
using present value or other valuation techniques, as appropriate.
The carrying amounts and estimated fair values of financial instruments,
including derivative financial instruments at December 31, are as follows:
2000 1999
-------------------------------- --------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
--------- -------- --------- --------- -------- ---------
ASSETS
Cash and cash equivalents $ -- $ 967 $ 967 $ -- $1,168 $1,168
Marketable securities (a) -- 272 272 -- 286 286
Preferred stock
investments (b) -- 388 388 -- 369 369
ASSETS UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Mortgage loans held for sale -- 879 909 -- 1,112 1,124
Mortgage servicing rights -- 1,653 1,724 -- 1,084 1,202
DEBT
Current portion of debt -- -- -- -- 400 402
Long-term debt -- 1,948 1,883 -- 2,445 2,443
LIABILITIES UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Debt -- 2,040 2,040 -- 2,314 2,314
MANDATORILY REDEEMABLE
PREFERRED INTEREST IN A
SUBSIDIARY -- 375 375 -- -- --
MANDATORILY REDEEMABLE
PREFERRED SECURITIES ISSUED
BY SUBSIDIARY HOLDING SOLELY
SENIOR DEBENTURES ISSUED BY
THE COMPANY -- 1,683 623 -- 1,478 1,113
OFF BALANCE SHEET DERIVATIVES
Foreign exchange forwards 91 1 1 173 (1) (1)
OFF BALANCE SHEET DERIVATIVES
RELATING TO MANAGEMENT AND
MORTGAGE PROGRAMS
ASSETS
Commitments to fund
mortgages 1,940 -- 24 1,283 -- 1
Forward delivery
commitments (c) 2,776 (6) (29) 2,434 6 20
Commitments to complete
securitizations (c) 1,017 (2) 17 813 -- (2)
Option contracts 1,468 4 4 858 3 3
Treasury futures (d) -- -- -- 152 -- (5)
Constant maturity treasury
floors (d) 6,105 18 177 4,420 57 13
Interest rate swaps (d) 1,105 -- 6 350 -- (26)
Principal only swaps (d) 656 -- 9 324 -- (15)
Swaptions 2,083 69 123 -- -- --
LIABILITIES
Interest rate swaps -- -- -- 610 -- 1
Foreign exchange forwards 161 (1) (1) 21 -- --
- ------------------------------
(a) Realized gains or losses on marketable securities, which the Company
classified as available-for-sale, are calculated on a specific
identification basis. The Company reported realized gains in other
revenues in the Consolidated Statements of Operations of $32
million, $65 million and $27 million in 2000, 1999 and 1998,
respectively (which included the change in net unrealized holding
gains on trading securities of $8 million and $16 million in 1999
and 1998, respectively).
(b) It is not practicable to estimate the fair value of the Company's
preferred stock investments (with carrying amounts aggregating
$718 million), other than its investment in Avis Group, because of
the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs. Accordingly, amounts
represent solely the Company's preferred stock investment in Avis
Group.
(c) Carrying amounts and gains (losses) on mortgage-related positions
are already included in the determination of respective carrying
amounts and fair values of mortgage loans held for sale. Forward
delivery commitments are used to manage price risk on sale of all
mortgage loans to end investors, including commitments to complete
securitizations on loans held by an unaffiliated buyer.
(d) Carrying amounts and gains (losses) on mortgage servicing right
hedge positions are capitalized and recorded as a component of MSRs.
Gains (losses) on such positions are included in the determination
of the respective carrying amounts and fair value of MSRs.
F-33
CREDIT RISK AND EXPOSURE
The Company is exposed to risk in the event of nonperformance by
counterparties. The Company manages such risk by periodically evaluating the
financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not anticipate
nonperformance by any of the counterparties and no material loss would be
expected from such nonperformance. However, in the event of nonperformance,
changes in fair value of the hedge instruments would be reflected in the
Consolidated Statements of Operations during the period the nonperformance
occurred. There were no significant concentrations of credit risk with any
individual counterparties or groups of counterparties at December 31, 2000
and 1999.
23. TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Company sells receivables in securitizations of its residential mortgage
loans and its relocation receivables and may retain the following interests
in the securitized receivables: interest-only strips, principal-only strips,
one or more subordinated tranches, and servicing rights. Gains or losses on
the sale of these securitized receivables depend, in part, on the carrying
amount of the financial assets transferred. Gains or losses relating to
residential mortgages are allocated between the assets sold and the retained
interests based on their relative fair values at the date of transfer. Gains
or losses relating to relocation receivables are based on the value of the
assets sold. The Company generally estimates fair value based upon the
present value of expected future cash flows. During 2000, the Company
recognized pre-tax gains of $252 million and $1 million on the
securitizations of residential mortgage loans and relocation receivables,
respectively.
The Company receives annual servicing fees on residential mortgage loans of
approximately 46 basis points of the outstanding balance arising after the
investors have received the return for which they contracted. The Company
receives servicing fees of approximately 75 basis points of the outstanding
balance relating to the relocation receivables. The investors have no
recourse to the Company's other assets for failure of debtors to pay when
due. In certain cases, the Company's retained interests are subordinate to
the investors' interests. The value of these retained interests is subject
to the prepayment and interest rate risks of the transferred financial
assets.
Key economic assumptions used during 2000 to measure the fair value of the
Company's retained interests at the time of securitization were as follows:
RESIDENTIAL MORTGAGE LOANS
------------------------------
MORTGAGE-BACKED RELOCATION
SECURITIES MSRS RECEIVABLES
--------------- --------- -----------
Weighted-average life (in years) 7.7 - 9.1 1.7 - 9.8 .1 - .3
Prepayment speed (annual rate) 9 - 11% 7 - 27% --%
Discount rate (annual rate) 6 - 16% 7 - 14% 8%
F-34
Key economic assumptions used in subsequently measuring the fair value of
the Company's retained interests at December 31, 2000 and the effect on the
fair value of those interests from adverse changes in those assumptions are
as follows:
RESIDENTIAL MORTGAGE
LOANS
-------------------------
MORTGAGE-
BACKED RELOCATION
SECURITIES MSRS(A) RECEIVABLES
---------- --------- -----------
Fair value of retained interests $ 138 $ 1,409 $ 131
Weighted-average life (in years) 5.9 6.4 0.2
PREPAYMENT SPEED (ANNUAL RATE) 6 - 27% 15 - 39% --%
Impact of 10% adverse change $ (7) $ (51) $ --
Impact of 20% adverse change (11) (97) --
DISCOUNT RATE (ANNUAL RATE) 6 - 15% 8.2% 8 - 9%
Impact of 10% adverse change $ (5) $ (46) $ --
Impact of 20% adverse change (9) (87) (1)
WEIGHTED AVERAGE YIELD TO MATURITY
Impact of 10% adverse change $ -- $ -- $ (1)
Impact of 20% adverse change -- -- (2)
----------------------------
(a) Excludes fair value of MSR hedge position of $315 million.
These sensitivities are hypothetical and presented for illustrative purposes
only. Changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect
of a variation in a particular assumption is calculated without changing any
other assumption; in reality, changes in one assumption may result in
changes in another, which may magnify or counteract the sensitivities.
The following table summarizes cash flow activity between securitization
trusts and the Company during 2000:
RESIDENTIAL RELOCATION
MORTGAGE LOANS RECEIVABLES
--------------- -----------
Proceeds from new securitizations $ 21,937 $ 1,420
Proceeds from collections reinvested in securitization -- 2,322
Servicing fees received 228 4
Other cash flows received on retained interests(a) 22 131
Purchases of delinquent or forecasted loans (95) --
Servicing advances (352) --
Repayment of servicing advances 331 --
Cash received upon release of reserve account -- 2
----------------------------
(a) Represents cash flows received on retained interests other than
servicing fees.
F-35
The following table presents information about delinquencies and components
of securitized and other managed assets for 2000:
PRINCIPAL AMOUNT
TOTAL PRINCIPAL 60 DAYS OR MORE
AMOUNT PAST DUE(A)
--------------- ----------------
Residential mortgage loans $ 82,187 $ 773
Relocation receivables 879 20
-------------- ----------------
Total securitized and other managed assets $ 83,066 $ 793
============== ================
Comprised of:
Assets securitized(b) $ 81,868
Assets held for sale or securitization 811
Assets held in portfolio 387
----------------------------
(a) Amounts are based on total securitized and other managed assets at
December 31, 2000.
(b) Represents the principal amounts of the assets. All retained
interests in securitized assets have been excluded from the table.
24. RELATED PARTY TRANSACTIONS
NRT INCORPORATED
The Company maintains a relationship with NRT, a corporation created to
acquire residential real estate brokerage firms. During 1999, the Company
executed new agreements with NRT, which among other things, increased the
term of each of the three franchise agreements under which NRT operates from
40 years to 50 years. NRT is party to other agreements and arrangements with
the Company. Under these agreements, the Company acquired $182 million of
NRT preferred stock, of which $24 million will be convertible, at the
Company's option, upon the occurrence of certain events, into no more than
50% of NRT's common stock. The Company also acquired an additional
$50 million of NRT preferred stock in 2000. During 2000 and 1999,
approximately $21 million and $8 million of the preferred dividend income
increased the basis of the underlying preferred stock investment.
Additionally, the Company sold $1 million and $2 million of its convertible
preferred interest and recognized a gain of $10 million and $20 million
during 2000 and 1999, respectively, which is also included in other revenue
in the Consolidated Statements of Operations. Accordingly, at December 31,
2000, the Company owned $258 million of NRT preferred stock. The Company
recognized preferred dividend income of $17 million, $16 million and
$15 million during 2000, 1999 and 1998, respectively, which is included in
other revenue in the Consolidated Statements of Operations. The Company
accounts for this preferred stock investment using the cost method. During
2000, 1999 and 1998, total franchise royalties earned by the Company from
NRT and its predecessors were $198 million, $172 million and $122 million,
respectively. Certain officers of the Company serve on the Board of
Directors of NRT.
The Company, at its election, will participate in NRT's acquisitions by
acquiring up to an aggregate $946 million (plus an additional $500 million
if certain conditions are met) of intangible assets, and in some cases
mortgage operations of real estate brokerage firms acquired by NRT. As of
December 31, 2000, the Company acquired $607 million of such mortgage
operations and intangible assets, primarily franchise agreements associated
with real estate brokerage companies acquired by NRT, which brokerage
companies will become subject to the NRT 50-year franchise agreements. In
February 1999, NRT and the Company entered into an agreement under which the
Company has made upfront payments of $35 million to NRT for services to be
provided by NRT to the Company related to the identification of potential
acquisition candidates, the negotiation of agreements and other services in
connection with future brokerage acquisitions by NRT. Such fee is refundable
in the event the services are not provided.
The Company has the option to purchase from an investor group in NRT
6.6 million shares of NRT common stock for $20 million. The option is
exercisable from August 11, 2002 to December 5, 2005 and conditional upon
the investor group receiving an aggregate payment of $166 million from NRT
on August 11, 2002. To exercise the option prior to August 11, 2002, the
Company would be required to
F-36
satisfy NRT's obligation to pay this distribution. In addition, if NRT is
unable to make the distribution to the investor group on August 11, 2002,
the Company would be required to make the payment to the investor group on
behalf of NRT and would receive additional preferred stock securities in
NRT.
AVIS GROUP HOLDINGS, INC.
The Company continues to maintain a common equity interest in Avis Group.
During 1999 and 1998, the Company sold approximately 2 million and
1 million shares, respectively, of Avis Group common stock and recognized a
pre-tax gain of approximately $11 million and $18 million, respectively,
which is included in other revenue in the Consolidated Statements of
Operations. During 2000, 1999 and 1998, the Company recorded its equity in
the earnings of Avis Group of $17 million, $18 million and $14 million,
respectively, as a component of other revenue in the Consolidated Statements
of Operations. At December 31, 2000, the Company's common equity interest in
Avis Group was approximately 18%.
In connection with the Company's disposition of its Fleet segment during
1999, the Company received as part of the total consideration, $360 million
of non-voting convertible preferred stock in a subsidiary of Avis Group.
During 2000 and 1999, the Company received dividends of $19 million and
$9 million, respectively, which increased the basis of the underlying
preferred stock investment. Such amount is included as a component of other
revenue in the Consolidated Statements of Operations. At December 31, 2000,
the Company accounts for its convertible preferred stock investment as an
available for sale security. Conversion of the convertible preferred stock
is at the Company's option subject to earnings and stock price thresholds
with specified intervals of time. As of December 31, 2000, the conversion
conditions have not been satisfied.
The Company licenses its Avis trademark to Avis Group pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of Avis
Group revenue, escalating to 4.5% of Avis Group revenue over a 5-year
period. During 2000, 1999 and 1998, total franchise royalties earned by the
Company from Avis Group were $103 million, $102 million and $92 million,
respectively. In addition, the Company operates the telecommunications and
computer processing system, which services Avis Group for reservations,
rental agreement processing, accounting and fleet control, for which the
Company charges Avis Group at cost. As of December 31, 2000 and 1999, the
Company had accounts receivable of $49 million and $34 million,
respectively, due from Avis Group. Certain officers of the Company serve on
the Board of Directors of Avis Group.
Summarized historical financial information for Avis Group is presented as
follows:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
Revenues $4,244 $3,333
Vehicle depreciation and lease charges, net 1,695 1,175
Other expenses 2,333 1,992
------ ------
Income before provision for income taxes 216 166
Provision for income taxes 95 73
------ ------
Net income $ 121 $ 93
====== ======
DECEMBER 31,
-------------------
2000 1999
-------- --------
Vehicles, net $6,967 $6,501
Other assets 3,447 4,577
Vehicle related debt and preferred membership interest 7,122 7,069
Other liabilities 2,147 2,977
25. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose,
F-37
Adjusted EBITDA is defined as earnings before non-operating interest, income
taxes, depreciation and amortization and minority interest, adjusted to
exclude certain items which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific.
The Company determined its operating segments based primarily on the types
of services it provides, the consumer base to which marketing efforts are
directed and the methods used to sell services.
As of January 1, 2000, the Company refined its corporate overhead allocation
method. Expenses that were previously allocated among segments based upon a
percentage of revenue are now recorded by each specific segment if the
expense is primarily associated with that segment. The Company determined
this refinement to be appropriate subsequent to the completion of the
Company's divestiture plan and based upon the composition of its business
units in 2000.
A description of the services provided within each of the Company's
reportable operating segments is as follows:
TRAVEL
Travel services include the franchising of lodging properties and car rental
locations, as well as vacation and timeshare exchange services. As a
franchiser of guest lodging facilities and car rental agency locations, the
Company licenses the independent owners and operators of hotels and car
rental agencies to use its brand names. Operation and administrative
services are provided to franchisees, which include access to a national
reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. As a provider of
vacation and timeshare exchange services, the Company enters into
affiliation agreements with resort property owners/developers to allow
owners of weekly timeshare intervals to trade their owned weeks with other
subscribers. In addition, the Company provides publications and other
travel-related services to both developers and subscribers.
REAL ESTATE FRANCHISE
The Company licenses the owners and operators of independent real estate
brokerage businesses to use its brand names. Operational and administrative
services are provided to franchisees, which are designed to increase
franchisee revenue and profitability. Such services include advertising and
promotions, referrals, training and volume purchasing discounts.
INSURANCE/WHOLESALE
Insurance/Wholesale markets and administers competitively priced insurance
products, primarily accidental death and dismemberment insurance and term
life insurance. The Company also provides services, such as checking account
enhancement packages, various financial products and discount programs to
financial institutions, which, in turn, provide these services to their
customers. The Company affiliates with financial institutions, including
credit unions and banks, to offer their respective customer bases such
products and services.
RELOCATION
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes, providing equity advances to transferees (generally
guaranteed by the corporate customer), purchasing of a transferee's home
which is sold within a specified time period for a price that is at least
equivalent to the appraised value, certain home management services,
assistance in locating a new home for the transferee at the transferee's
destination, consulting services and other related services.
The transferee's home is purchased under a contract of sale and the Company
obtains a deed to the property; however, it does not generally record the
deed or transfer title. Transferring employees are provided equity advances
on the home based on their ownership equity of the appraised home value. The
mortgage is generally retired concurrently with the advance of the equity
and the purchase of the home. Based on its client agreements, the Company is
given parameters under which it negotiates for
F-38
the ultimate sale of the home. The gain or loss on resale is generally borne
by the client corporation. In certain transactions, the Company will assume
the risk of loss on the sale of homes; however, in such transactions, the
Company will control all facets of the resale process, thereby, limiting its
exposure.
MORTGAGE
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. The Company markets a variety of mortgage
products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other
mortgage banks. Mortgage services customarily sell all mortgages it
originates to investors (which include a variety of institutional investors)
either as individual loans, as mortgage-backed securities or as
participation certificates issued or guaranteed by Fannie Mae, the Federal
Home Loan Mortgage Corporation or the Government National Mortgage
Association while generally retaining mortgage servicing rights. Mortgage
servicing consists of collecting loan payments, remitting principal and
interest payments to investors, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, and otherwise
administering the Company's mortgage loan servicing portfolio.
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate,
and home-related products and services through its flagship portal site,
move.com, and the move.com network. The Move.com Group integrates and
enhances the online efforts of the Company's residential real estate brand
names and those of the Company's other real estate business units.
DIVERSIFIED SERVICES
The Company also derives revenues from providing a variety of other consumer
and business products and services which include the Company's tax
preparation services franchise, information technology services, car parking
services, welcoming packages to new homeowners, and other consumer-related
services.
FLEET
The Fleet segment provided fleet and fuel card related products and services
to corporate clients and government agencies. These services included
management and leasing of vehicles, fuel card payment and reporting and
other fee-based services for clients' vehicle fleets. The Company leased
vehicles primarily to corporate fleet users under operating and direct
financing lease arrangements.
YEAR ENDED DECEMBER 31, 2000
REAL ESTATE INSURANCE/
TRAVEL(A) FRANCHISE WHOLESALE RELOCATION
----------------- ----------- ---------- ----------
Net revenues(d) $ 1,243 $ 593 $ 574 $ 448
Adjusted EBITDA 564 430 177 142
Depreciation and amortization 103 59 23 20
Segment assets 3,221 2,235 454 583
Capital expenditures 39 5 31 12
MOVE.COM DIVERSIFIED
MORTGAGE GROUP SERVICES(B)(C) TOTAL
-------- -------- -------------- --------
Net revenues(d) $ 423 $ 59 $ 590 $ 3,930
Adjusted EBITDA 180 (94) 144 1,543
Depreciation and amortization 23 6 96 330
Segment assets 3,304 74 4,645 14,516
Capital expenditures 21 18 91 217
F-39
YEAR ENDED DECEMBER 31, 1999
REAL ESTATE INSURANCE/
TRAVEL(A) FRANCHISE WHOLESALE RELOCATION
--------- ----------- ---------- ----------
Net revenues(d) $ 1,239 $ 571 $ 575 $ 415
Adjusted EBITDA 593 424 180 122
Depreciation and amortization 99 59 19 17
Segment assets 3,204 2,102 393 1,033
Capital expenditures 55 -- 19 21
MOVE.COM DIVERSIFIED
MORTGAGE GROUP SERVICES(B)(C) FLEET TOTAL
-------- -------- -------------- -------- ----------
Net revenues(d) $ 397 $ 18 $ 1,099 $ 207 $ 4,521
Adjusted EBITDA 182 (22) 223 81 1,783
Depreciation and amortization 19 2 117 15 347
Segment assets 2,817 22 4,960 -- 14,531
Capital expenditures 48 2 86 23 254
YEAR ENDED DECEMBER 31, 1998
REAL ESTATE INSURANCE/
TRAVEL(A) FRANCHISE WHOLESALE RELOCATION
--------- ----------- ---------- ----------
Net revenues(d) $ 1,163 $ 456 $ 544 $ 444
Adjusted EBITDA 552 349 138 125
Depreciation and amortization 90 53 14 17
Segment assets 2,789 2,014 372 1,130
Capital expenditures 81 6 17 70
MOVE.COM DIVERSIFIED
MORTGAGE GROUP SERVICES FLEET TOTAL
-------- -------- ----------- -------- ----------
Net revenues(d) $ 353 $ 10 $ 1,108 $ 387 $ 4,465
Adjusted EBITDA 188 1 120 174 1,647
Depreciation and amortization 9 2 96 22 303
Segment assets 3,504 9 4,532 4,697 19,047
Capital expenditures 36 1 62 58 331
----------------------------
(a) Net revenues and Adjusted EBITDA include the equity in earnings from
the Company's investment in Avis Group of $17 million, $18 million
and $14 million in 2000, 1999 and 1998, respectively. Net revenues
and Adjusted EBITDA for 1999 and 1998 include a pre-tax gain of
$11 million and $18 million, respectively, as a result of the sale of
a portion of the Company's equity interest. Segment assets include
such equity method investment in the amount of $132 million,
$118 million and $139 million at December 31, 2000, 1999 and 1998,
respectively.
(b) Segment assets include the Company's equity investment of $1 million
and $17 million in Entertainment Publication, Inc. at December 31,
2000 and 1999, respectively.
(c) Net revenues include gains of $33 million and $23 million during 2000
and 1999, respectively, on the sales of car parking facilities.
(d) Inter-segment net revenues were not significant to the net revenues
of any one segment.
F-40
Provided below is a reconciliation of Adjusted EBITDA to income (loss)
before income taxes and minority interest.
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Adjusted EBITDA $ 1,543 $ 1,783 $ 1,647
Depreciation and amortization (330) (347) (303)
Other (charges) credits:
Restructuring and other unusual charges (89) (25) 67
Investigation-related costs (23) (21) (33)
Litigation settlement and related costs 21 (2,894) (351)
Termination of proposed acquisitions -- (7) (433)
Executive terminations -- -- (53)
Investigation-related financing costs -- -- (35)
Interest, net (145) (196) (112)
Net gain (loss) on dispositions of businesses (8) 967 --
-------- -------- --------
Income (loss) before income taxes and minority interest $ 969 $ (740) $ 394
======== ======== ========
The geographic segment information provided below is classified based on the
geographic location of the Company's subsidiaries.
UNITED UNITED ALL OTHER
STATES KINGDOM COUNTRIES TOTAL
-------- -------- --------- --------
2000
Net revenues $ 3,226 $ 500 $ 204 $ 3,930
Assets 12,470 1,924 122 14,516
Net property and equipment 600 637 36 1,273
1999
Net revenues $ 3,482 $ 748 $ 291 $ 4,521
Assets 11,104 3,215 212 14,531
Net property and equipment 522 723 34 1,279
1998
Net revenues $ 3,458 $ 696 $ 311 $ 4,465
Assets 15,081 3,707 259 19,047
Net property and equipment 591 768 19 1,378
26. SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 2000
and 1999. The underlying diluted per share information is calculated from
the weighted average common and common stock equivalents outstanding during
each quarter, which may fluctuate based on quarterly income levels,
F-41
market prices, and share repurchases. Therefore, the sum of the quarters per
share information may not equal the total year amounts presented on the
Consolidated Statements of Operations.
2000
---------------------------------------
FIRST(A) SECOND THIRD(B) FOURTH
-------- ------ -------- --------
Net revenues $ 945 $ 973 $ 1,044 $ 968
-------- ------ -------- --------
Income from continuing operations $ 111 $ 151 $ 188 $ 126
Income (loss) from discontinued operations, net of
tax(g) 16 24 26 18
Extraordinary loss, net of tax (2) -- -- --
Cumulative effect of accounting change, net of tax (56) -- -- --
-------- ------ -------- --------
Net income $ 69 $ 175 $ 214 $ 144
======== ====== ======== ========
CD common stock per share information:
Basic
Income from continuing operations $ 0.15 $ 0.21 $ 0.26 $ 0.17
Net income $ 0.10 $ 0.25 $ 0.30 $ 0.20
Weighted average shares 717 722 725 731
Diluted
Income from continuing operations $ 0.15 $ 0.21 $ 0.25 $ 0.17
Net income $ 0.09 $ 0.24 $ 0.29 $ 0.20
Weighted average shares 751 762 759 757
Move.com common stock per share information:
Basic and Diluted
Loss from continuing operations $(0.67) $ (0.55) $ (0.54)
Net loss $(0.67) $ (0.55) $ (0.54)
Weighted average shares 4 4 3
CD common stock market prices:
High $24 5/16 $18 3/4 $ 14 7/8 $12 9/16
Low $16 3/16 $12 5/3 $ 10 5/8 $ 8 1/2
1999
-------------------------------------------
FIRST(C) SECOND(D) THIRD(E) FOURTH(F)
-------- --------- -------- ---------
Net revenues $1,102 $ 1,171 $ 1,154 $ 1,094
------ --------- -------- --------
Income (loss) from continuing operations $ 167 $ 846 $ 233 $ (1,579)
Income (loss) from discontinued operations, net of
tax(g) 195 16 (31) 98
------ --------- -------- --------
Net income (loss) $ 362 $ 862 $ 202 $ (1,481)
====== ========= ======== ========
CD common stock per share information:
Basic
Income (loss) from continuing operations $ 0.21 $ 1.10 $ 0.32 $ (2.22)
Net income (loss) $ 0.45 $ 1.12 $ 0.28 $ (2.08)
Weighted average shares 800 770 726 711
Diluted
Income (loss) from continuing operations $ 0.20 $ 1.03 $ 0.30 $ (2.22)
Net income (loss) $ 0.43 $ 1.05 $ 0.26 $ (2.08)
Weighted average shares 854 824 780 711
CD common stock market prices:
High 2$2 7/16 $ 20 3/4 $ 22 5/8 $26 9/16
Low 1$5 5/16 $ 15 1/2 $ 17 $14 9/16
F-42
- -------------------------------
(a) Includes (i) a restructuring charge of $57 million ($38 million, after
tax or $0.05 per diluted share) in connection with various strategic
initiatives and (ii) a non-cash credit of $41 million ($26 million, after
tax or $0.03 per diluted share) in connection with an adjustment to the
PRIDES settlement.
(b) Includes (i) a gain of $35 million ($35 million, after tax or $0.05 per
diluted share) resulting from the recognition of a portion of the
Company's previously recorded deferred gain from the sale of its fleet
businesses, (ii) a charge of $20 million ($12 million, after tax or $0.02
per diluted share) in connection with litigation asserting claims
associated with accounting irregularities in the former business units of
CUC and outside of the principal common stockholder class action lawsuit
and (iii) $3 million ($2 million, after tax) of losses in connection with
the postponement of the initial public offering of Move.com common stock.
(c) Includes (i) a charge of $7 million ($4 million, after tax or $0.01 per
diluted share) in connection with the termination of a proposed
acquisition and (ii) a $1 million ($1 million, after tax) gain on the
sale of a Company subsidiary.
(d) Includes (i) a net gain of $716 million ($688 million, after tax or $0.83
per diluted share) related to the dispositions of businesses and (ii) a
charge of $23 million ($15 million, after tax or $0.02 per diluted share)
in the connection with the transition of the Company's lodging
franchisees to a Company sponsored property management system.
(e) Includes (i) a net gain of $83 million ($32 million after tax, or $0.04
per diluted share) related to the dispositions of businesses and (ii) a
charge of $5 million ($3 million, after tax) principally related to the
consolidation of European call centers in Ireland.
(f) Includes (i) a charge of $2,894 million ($1,839 million, after tax or
$2.59 per diluted share) associated with the agreement to settle the
principal common stockholder class action lawsuit, (ii) a net gain of
$168 million ($72 million, after tax or $0.10 per diluted share) related
to the dispositions of businesses and (iii) a $2 million ($1 million,
after tax) credit associated with changes to the estimate of a
previously recorded restructuring charge.
(g) Includes the after tax results of discontinued operations and the gain
(loss) on disposal of discontinued operations.
27. SUBSEQUENT EVENTS
DEBT ISSUANCES
CONVERTIBLE SENIOR NOTES. During February and March 2001, the Company
issued $1.2 billion and $246 million, respectively, aggregate principal
amount at maturity of zero coupon convertible senior notes to qualified
institutional buyers in a private offering for aggregate gross proceeds of
approximately $900 million. The notes mature in 2021 and bear interest at
2.5%. The Company will not make periodic payments of interest on the notes,
but may be required to make nominal cash payments in specified
circumstances. Each $1,000 principal amount at maturity will be convertible,
subject to satisfaction of specific contingencies, into 33.4 shares of CD
common stock.
MEDIUM-TERM NOTES. During January 2001, PHH issued $650 million of
medium-term notes under its existing shelf registration statement. These
notes bear interest at a rate of 8 1/8% per annum and mature in
February 2003.
DEBT REDEMPTION
During February 2001, the Company made a principal payment of $250 million
to extinguish its outstanding borrowings under its existing term loan
facility.
CREDIT FACILITIES
On February 22, 2001, the Company, through its PHH subsidiary, renewed its
$750 million syndicated revolving credit facility, which was due in 2001.
The new facility bears interest at LIBOR plus an applicable margin, as
defined in the agreement, and terminates on February 21, 2002. The Company
is required to pay a per annum utilization fee of .25% if usage under the
facility exceeds 25% of aggregate committments. Under the new facility, any
loans outstanding as of February 21, 2002 may be converted into a term loan
with a final maturity of February 21, 2003.
On February 22, 2001, the Company entered into a $650 million term loan
agreement with terms similar to its other revolving credit facilities. This
term loan amortizes in three equal installments on August 22, 2002, May 22,
2003 and February 22, 2004. Borrowings under this facility bear interest at
LIBOR plus a margin of 125 basis points.
F-43
PRIDES
On February 16, 2001, the purchase contracts underlying all PRIDES settled.
Pursuant to the settlement, the Company agreed to issue approximately
61 million shares of its CD common stock in satisfaction of its obligation
to deliver common stock to beneficial owners of the PRIDES.
CD COMMON STOCK
During February and March 2001, the Company issued 40 million and 6 million
shares of its CD common stock, respectively, at $13.20 per share for
aggregate proceeds of approximately $607 million.
------------------------
F-44
EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 4.1 to the
Company's Post Effective Amendment No. 2 on Form S-8
dated December 17, 1997 to the Registration Statement on
Form S-4, Registration No. 333-34517, dated August 28,
1997)
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K dated August 4, 1998)
4.1 Form of Stock Certificate
4.2 Indenture dated as of February 11, 1997, between CUC
International Inc. and Marine Midland Bank, as trustee
(Incorporated by reference to Exhibit 4(a) to the
Company's Current Report on Form 8-K dated February 13,
1997)
4.3(a) Indenture dated February 24, 1998 between the Company and
The Bank of Nova Scotia Trust Company of New York, as
Trustee (Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3, Registration
No. 333-45227, dated January 29, 1998)
4.3(b) Global Note (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated December 4,
1998)
4.4(a) Indenture dated November 6, 2000 between PHH Corporation and
Bank One Trust Company, N.A., as Trustee (Incorporated by
reference to Exhibit 4.0 to PHH Corporation's Current
Report on Form 8-K dated December 12, 2000)
4.4(b) Supplemental Indenture No. 1 dated November 6, 2000 between
PHH Corporation and Bank One Trust Company, N.A., as
Trustee (Incorporated by reference to Exhibit 4.1 to PHH
Corporation's Current Report on Form 8-K dated
December 12, 2000)
4.4(c) Supplemental Indenture No. 2 dated January 30, 2001 between
PHH Corporation and Bank One Trust Company, N.A., as
Trustee (Incorporated by reference to Exhibit 4.1 to PHH
Corporation's Current Report on Form 8-K dated
February 8, 2001)
4.5 Indenture dated February 13, 2001 between the Company and
The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report
on Form 8-K dated February 20, 2001)
4.6 Purchase Agreement (including as Exhibit A the form of the
Warrant for the Purchase of Shares of Common Stock), dated
December 15, 1999, between Cendant Corporation and Liberty
Media Corporation (Incorporated by reference to
Exhibit 4.11 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999)
4.7 Resale Registration Rights Agreement dated as of
February 13, 2001 between the Company and Lehman Brothers
Inc.
10.1(a) Agreement with Henry R. Silverman, dated June 30, 1996 and
as amended through December 17, 1997 (Incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-4, Registration No. 333-34517 dated
August 28, 1997)
10.1(b) Amendment to Agreement with Henry R. Silverman, dated
December 31, 1998 (Incorporated by reference to
Exhibit 10.1(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998)
10.1(c) Amendment to Agreement with Henry R. Silverman, dated August
2, 1999 (Incorporated by reference to Exhibit 10.1(c) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)
G-1
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1(d) Amendment to Agreement with Henry R. Silverman, dated May
15, 2000 (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2000)
10.2(a) Agreement with Stephen P. Holmes, dated September 12, 1997
(Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-4, Registration
No. 333-34517 dated August 28, 1997)
10.2(b) Amendment to Agreement with Stephen P. Holmes, dated January
11, 1999 (Incorporated by reference to Exhibit 10.2(b) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998)
10.3(a) Agreement with James E. Buckman, dated September 12, 1997
(Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-4, Registration
No. 333-34517 dated August 28, 1997)
10.3(b) Amendment to Agreement with James E. Buckman, dated January
11, 1999 (Incorporated by reference to Exhibit 10.4(b) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998)
10.4 Agreement with Richard A. Smith, dated September 3, 1998
10.5 Agreement with John W. Chidsey, amended and restated March
8, 2000
10.6 Agreement with Samuel L. Katz, amended and restated June 5,
2000
10.7(a) 1987 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.16 to the Company's Form 10-Q for
the period ended October 31, 1996)
10.7(b) Amendment to 1987 Stock Option Plan dated January 3, 2001
10.8 1990 Directors Stock Option Plan, as amended (Incorporated
by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the period ended October 31, 1996)
10.9 1992 Directors Stock Option Plan, as amended (Incorporated
by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the period ended October 31, 1996)
10.10 1994 Directors Stock Option Plan, as amended (Incorporated
by reference to Exhibit 10.19 to the Company's Quarterly
Report on Form 10-Q for the period ended October 31, 1996)
10.11(a) 1997 Stock Option Plan (Incorporated by reference to Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for
the period ended April 30, 1997)
10.11(b) Amendment to 1997 Stock Option Plan dated January 3, 2001
10.12(a) 1997 Stock Incentive Plan (Incorporated by reference to
Appendix E to the Joint Proxy Statement/ Prospectus
included as part of the Company's Registration Statement
on Form S-4, Registration No. 333-34517 dated August 28,
1997)
10.12(b) Amendment to 1997 Stock Incentive Plan dated March 27, 2000
10.12(c) Amendment to 1997 Stock Incentive Plan dated March 28, 2000
10.12(d) Amendment to 1997 Stock Incentive Plan dated January 3, 2001
10.13(a) HFS Incorporated's Amended and Restated 1993 Stock Option
Plan (Incorporated by reference to Exhibit 4.1 to HFS
Incorporated's Registration Statement on Form S-8,
Registration No. 33-83956)
10.13(b) First Amendment to the Amended and Restated 1993 Stock
Option Plan dated May 5, 1995 (Incorporated by reference
to Exhibit 4.1 to HFS Incorporated's Registration
Statement on Form S-8, Registration No. 33-094756)
10.13(c) Second Amendment to the Amended and Restated 1993 Stock
Option Plan dated January 22, 1996 (Incorporated by
reference to Exhibit 10.21(b) to HFS Incorporated's Annual
Report on Form 10-K for the year ended December 31, 1995)
G-2
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.13(d) Third Amendment to the Amended and Restated 1993 Stock
Option Plan dated January 22, 1996 (Incorporated by
reference to Exhibit 10.21(c) to HFS Incorporated's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.13(e) Fourth Amendment to the Amended and Restated 1993 Stock
Option Plan dated May 20, 1996 (Incorporated by reference
to Exhibit 4.5 to HFS Incorporated's Registration
Statement on Form S-8, Registration No. 333-06733)
10.13(f) Fifth Amendment to the Amended and Restated 1993 Stock
Option Plan dated July 24, 1996 (Incorporated by reference
to Exhibit 10.21(e) to HFS Incorporated's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.13(g) Sixth Amendment to the Amended and Restated 1993 Stock
Option Plan dated September 24, 1996 (Incorporated by
reference to Exhibit 10.21(e) to HFS Incorporated's Annual
Report on Form 10-K for the year ended December 31, 1995)
10.13(h) Seventh Amendment to the Amended and Restated 1993 Stock
Option Plan dated as of April 30, 1997 (Incorporated by
reference to Exhibit 10.17(g) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.13(i) Eighth Amendment to the Amended and Restated 1993 Stock
Option Plan dated as of May 27, 1997 (Incorporated by
reference to Exhibit 10.17(h) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997)
10.14 HFS Incorporated's 1992 Incentive Stock Option Plan and Form
of Stock Option Agreement (Incorporated by reference to
Exhibit 10.6 to HFS Incorporated's Registration Statement
on Form S-1, Registration No. 33-51422)
10.15 1992 Employee Stock Plan (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on
Form S-8, Registration No. 333-45183, dated January 29,
1998)
10.16 Deferred Compensation Plan (Incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998)
10.17 Cendant Corporation Move.com Group 1999 Stock Option Plan
10.18 Agreement and Plan of Merger, by and among HFS Incorporated,
HJ Acquisition Corp. and Jackson Hewitt, Inc., dated as of
November 19, 1997. (Incorporated by reference to Exhibit
10.1 to HFS Incorporated's Current Report on Form 8-K
dated August 14, 1997)
10.19 Form of Underwriting Agreement for Debt Securities
(Incorporated by reference to Exhibit 1.1 to the Company's
Registration Statement on Form S-3, Registration
No. 333-45227, dated January 29, 1998)
10.20 Registration Rights Agreement dated as of February 11, 1997,
between CUC International Inc. and Goldman, Sachs & Co.
(for itself and on behalf of the other purchasers party
thereto) (Incorporated by reference to Exhibit 4(b) to the
Company's Current Report on Form 8-K dated February 13,
1997)
10.21 Agreement and Plan of Merger between CUC International Inc.
and HFS Incorporated, dated as of May 27, 1997
(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated May 29, 1997)
10.22(a) Five Year Competitive Advance and Revolving Credit Facility
Agreement, dated as of October 2, 1996, among the Company,
the several banks and other financial institutions from
time to time parties thereto and The Chase Manhattan Bank,
as Administrative Agent (Incorporated by reference to
Exhibit (b)(1) to the Company's Schedule 14-D1 dated
January 27, 1998)
G-3
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.22(b) Amendment, dated as of October 30, 1998, to the Five Year
Competitive Advance and Revolving Credit Agreement, dated
as of October 2, 1998, among the Company, the financial
institutions parties thereto and The Chase Manhattan Bank,
as Administrative Agent (Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated November 5, 1998)
10.22(c) Amendment, dated as of February 4, 1999, to the Five Year
Competitive Advance and Revolving Credit Agreement and the
364-Day Competitive Advance and Revolving Credit Agreement
among the Company, the lenders therein and The Chase
Manhattan Bank, as Administrative Agent (Incorporated by
reference to Exhibit 99.2 to the Company's Current Report
on Form 8-K dated February 16, 1999)
10.22(d) Amendment to the Five Year Competitive Advance and Revolving
Credit Agreement dated as of February 22, 2001, among the
Company, the financial institutions parties thereto and
The Chase Manhattan Bank, as Administrative Agent
10.23(a) Three Year Competitive Advance and Revolving Credit
Agreement dated as of August 29, 2000 among the Company,
the lenders parties thereto, and The Chase Manhattan Bank,
as Administrative Agent
10.23(b) Amendment to the Three Year Competitive Advance and
Revolving Credit Agreement, dated as of February 22, 2001,
among the Company, the lenders parties thereto and The
Chase Manhattan Bank, as Administrative Agent
10.24 $650,000,000 Term Loan Agreement dated as of February 22,
2001, among the Company, the lenders therein and The Chase
Manhattan Bank, as Administrative Agent.
10.25(a) 364-Day Competitive Advance and Revolving Credit Agreement
dated March 4, 1997, as amended and restated through
February 22, 2001, among PHH Corporation, the lenders
thereto, and The Chase Manhattan Bank, as Administrative
Agent
10.25(b) Five-year Credit Agreement ("PHH Five-year Credit
Agreement") dated February 28, 2000, among PHH
Corporation, the Lenders, and The Chase Manhattan Bank, as
Administrative Agent (Incorporated by reference to
Exhibit 10.24(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)
10.25(c) Amendment to the Five Year Competitive Advance and Revolving
Credit Agreement, dated as of February 22, 2001, among PHH
Corporation, the financial institutions parties thereto
and The Chase Manhattan Bank, as Administrative Agent
10.26 Agreement and Plan of Merger by and among Cendant
Corporation, PHH Corporation, Avis Acquisition Corp. and
Avis Group Holdings, Inc., dated as of November 11, 2000
(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated November 17, 2000)
10.27 Distribution Agreement between the Company and CS First
Boston Corporation; Goldman, Sachs & Co.; Merrill Lynch &
Co.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated;
and J.P. Morgan Securities, Inc. dated November 9, 1995
(Incorporated by reference to Exhibit 1 to Registration
Statement, Registration No. 33-63627)
10.28 Distribution Agreement between the Company and Credit
Suisse; First Boston Corporation; Goldman Sachs & Co. and
Merrill Lynch & Co., dated June 5, 1997 (Incorporated by
reference to Exhibit 1 to Registration Statement,
Registration No. 333-27715)
10.29 Distribution Agreement, dated March 2, 1998, among PHH
Corporation, Credit Suisse First Boston Corporation,
Goldman Sachs & Co., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated and J.P. Morgan
Securities, Inc. (Incorporated by reference to Exhibit 1
to the Company's Current Report on Form 8-K dated March 3,
1998)
G-4
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.30 License Agreement dated as of September 18, 1989 amended and
restated as of July 15, 1991 between Franchise System
Holdings, Inc. and Ramada Franchise Systems, Inc.
(Incorporated by reference to Exhibit 10.2 to HFS
Incorporated's Registration Statement on Form S-1,
Registration No. 33-51422)
10.31 Restructuring Agreement dated as of July 15, 1991 by and
among New World Development Co., Ltd., Ramada
International Hotels & Resorts, Inc. Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and
Ramada Franchise Systems, Inc. (Incorporated by reference
to Exhibit 10.3 to HFS Incorporated's Registration
Statement on Form S-1, Registration No. 33-51422)
10.32 License Agreement dated as of November 1, 1991 between
Franchise Systems Holdings, Inc. and Ramada Franchise
Systems, Inc. (Incorporated by reference to Exhibit 10.4
to HFS Incorporated's Registration Statement on Form S-1,
Registration No. 33-51422)
10.33 Amendment to License Agreement, Restructuring Agreement and
Certain Other Restructuring Documents dated as of November
1, 1991 by and among New World Development Co., Ltd.,
Ramada International Hotels & Resorts, Inc., Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and
Ramada Franchise Systems, Inc. (Incorporated by reference
to Exhibit 10.5 to HFS Incorporated's Registration
Statement on Form S-1, Registration No. 33-51422)
10.34 The Company's 1999 Non-Employee Directors Deferred
Compensation Plan (Incorporated by reference to
Exhibit 10.44 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999)
12 Statement Re: Computation of Ratio of Earnings to Fixed
Charges
21 Subsidiaries of Registrant
23 Consent of Deloitte & Touche LLP
G-5