SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
COMMISSION FILE NO. 1-10308
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of 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
- -------------------------------- ---------------------------
Common Stock, Par Value $.01 New York Stock Exchange
Income PRIDES(SM) New York Stock Exchange
Growth PRIDES(SM) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
6.45% Trust Originated Preferred Securities
7 1/2% Notes due 2000
7 3/4% Notes due 2003
3% Convertible Subordinated Notes Due 2002
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/A or any
amendment to this Form 10-K/A. [ ]
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 September 30, 1999 was
$12,592,847,053. 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 711,025,187 shares of Common Stock outstanding as of
October 26, 1999.
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 real estate related, travel
related and direct marketing consumer and business services in the world. We
were created through the merger (the "Merger") of HFS Incorporated ("HFS")
into CUC International, Inc. ("CUC") in December 1997 with the resultant
corporation being renamed Cendant Corporation.
We operate in four principal divisions--travel related services, real
estate related services, direct marketing services (formerly known as the
alliance marketing division) and other consumer and business services. Our
businesses provide a wide range of complementary consumer and business
services, which together represent eight business segments. The travel
related services businesses facilitate vacation timeshare exchanges, manage
corporate and government vehicle fleets and franchise car rental and hotel
businesses; the real estate related services businesses franchise real estate
brokerage businesses, provide home buyers with mortgages and assist in
employee relocation; and the direct marketing services businesses provide an
array of value driven products and services. Our other consumer and business
services include our tax preparation services franchise, information
technology services, car parks and vehicle emergency support and rescue
services in the United Kingdom, discount coupon books, credit information
services, financial products and other consumer-related services.
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, we license the owners and
operators of independent businesses to use our brand names. We do not own or
operate hotels, real estate brokerage offices, car rental operations or tax
preparation offices. Instead, we provide our franchisee customers with
services designed to increase their revenue and profitability.
Travel Related Services
The travel division is comprised of the travel and fleet segments. In our
travel segment, 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), Howard Johnson(Registered Trademark), Super 8(Registered Trademark),
Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn(Registered Trademark) lodging franchise systems. We own the
Avis(Registered Trademark) worldwide vehicle rental franchise system which,
operated by its franchisees, is the second largest car rental system in the
world (based on total revenues and volume of rental transactions). We
currently own approximately 18% of the capital stock of the largest Avis
franchisee, Avis Rent A Car, Inc. ("ARAC"). We also own Resort Condominiums
International, LLC ("RCI"), the world's leading timeshare exchange
organization.
Our fleet segment operations were conducted primarily by our PHH Vehicle
Management Services Corporation subsidiary which operated the second largest
fleet leasing company in North America and our former PHH Vehicle Management
Services PLC subsidiary which provided fuel and fleet management services in
the United Kingdom. We disposed of our fleet segment on June 30, 1999. See
"Recent Developments -- Strategic Developments"
Real Estate Related Services
Our real estate division consists of the real estate franchise, relocation
and mortgage segments. In the 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 and are the world's largest real estate
brokerage franchisor. In the relocation segment, our Cendant Mobility
Services Corporation subsidiary is the largest provider of corporate
relocation services in the world, offering relocation clients a variety of
services in connection with the transfer of a client's employees. In the
mortgage segment, our
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Cendant Mortgage Corporation ("Cendant Mortgage") subsidiary originates,
sells and services residential mortgage loans in the United States, marketing
such services to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and mortgage
banks.
Direct Marketing Services
Our direct marketing division is divided into two segments: individual
membership and insurance/ wholesale. The individual membership segment, with
approximately 32 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto, dining, and home improvement. The insurance/wholesale segment,
with nearly 31 million customers, markets and administers insurance products,
primarily accidental death and dismemberment insurance and term life
insurance, and also provides products and services such as checking account
enhancement packages, financial products and discount programs to customers
of various financial institutions. Our direct marketing activities are
conducted principally through our Cendant Membership Services, Inc.
subsidiary and certain of the Company's other wholly-owned subsidiaries,
including FISI*Madison Financial Corporation ("FISI") and Benefit
Consultants, Inc. ("BCI").
Other Consumer and Business Services
We also provide a variety of other consumer and business services. Our
Jackson Hewitt Inc. ("Jackson Hewitt") subsidiary operates the second largest
tax preparation service system in the United States with locations in 43
states and franchises a system of approximately 3,000 offices that specialize
in computerized preparation of federal and state individual income tax
returns. Our National Parking Corporation Limited ("NPC") subsidiary operates
car parks throughout the United Kingdom. We also provide information
technology services, credit information services, financial services and
other consumer services.
Our former Global Refund subsidiary, which was sold in August 1999,
operated value-added tax refund service for travelers. Our Entertainment
Publications, Inc. ("EPub") subsidiary, which was sold in November 1999,
provided customers with unique products and services that are designed to
enhance a customer's purchasing power.
RECENT DEVELOPMENTS
Strategic Developments
General. In connection with our previously announced plan to focus on
maximizing the opportunities and growth potential of our existing businesses,
we have divested certain non-strategic businesses and assets and have
completed or commenced certain other strategic initiatives related to the
internet as stated below. The divestiture program has resulted in the
disposition of 18 business units and, generated approximately $4.5 billion in
proceeds. Proceeds have been partially utilized to repurchase our common
stock and reduce our indebtedness.
Strategic Alliance
On December 15, 1999, we entered into a strategic alliance with Liberty
Media Corporation ("Liberty Media"). Specifically, we have agreed to work
together with Liberty Media to develop Internet and related opportunities
associated with our travel, mortgage, real estate and direct marketing
businesses. Such efforts may include the creation of joint ventures between
Liberty Media and Cendant as well as additional equity investments in each
others' businesses. However, we can make no assurances that any alliances or
additional equity investments will be made or the timing thereof.
We will also assist Liberty Media in creating, and will receive a
participation in, a new venture that will seek to provide broadband video,
voice and data content to our hotels and their guests on a worldwide basis.
We will also pursue opportunities within the cable industry with Liberty
Media to leverage our direct marketing resources and capabilities.
In addition, Liberty Media has agreed to invest $400 million in cash to
purchase 18 million shares of our common stock and a two-year warrant to
purchase approximately 29 million shares of our common stock at an exercise
price of $23.00 per share. The common stock, together with the common stock
underlying the warrant, represents approximately 6.3% of our outstanding
shares. The transaction is subject to customary conditions, and is expected
to close early in January 2000. We also announced that Liberty Media
Chairman, Dr. John C. Malone, Ph.D., will join our board of directors.
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Disposition of Businesses
In connection with the aforementioned program, we have completed the
following dispositions:
Green Flag. On November 26, 1999, we completed the disposition of Green
Flag business unit for approximately $400 million. Green Flag is a roadside
assistance organization based in the United Kingdom, which provides a wide
range of emergency support and rescue services.
Entertainment Publications, Inc. On November 30, 1999, we completed the
disposition of 85% of our Entertainment Publications, Inc. ("EPub") business
unit for approximately $281 million in cash, inclusive of certain
adjustments. We retained approximately 15% of EPub's equity in connection
with the transaction. In addition, we will have a designee on the EPub Board
of Directors.
We account for our investment in EPub using the equity method of
accounting because, in accordance with Accounting Principles Board Opinions
No. 18, we believe that our ownership interest combined with our
representation on the Board of Directors of EPub gives us the ability to
exercise significant influence on EPub. Under the equity accounting method,
our investments will be increased or reduced to reflect our share of EPub's
income or losses. In addition, our earlier classification of EPub as a
discontinued operation was reversed in accordance with generally accepted
accounting principles.
North American Outdoor Group. On October 8, 1999, we completed the
disposition of 94% of our North American Outdoor Group ("NAOG") business unit
for approximately $140 million in cash and will retain approximately 6% of
NAOG's equity in connection with the transaction. We will account for this
investment in NAOG using the cost method of accounting.
Global Refund Group. On August 24, 1999, we completed the sale of our
Global Refund Group subsidiary ("Global Refund") for approximately $160
million in cash. Global Refund, formerly known as Europe Tax Free Shopping,
was a value-added tax refund services company.
Fleet. On June 30, 1999, we completed the disposition of the fleet
business segment ("fleet segment" or "fleet businesses"), which included PHH
Vehicle Management Services Corporation, Wright Express Corporation, The
Harpur Group, Ltd., and other subsidiaries pursuant to an agreement between
our PHH Corporation ("PHH") subsidiary and Avis Rent A Car, Inc. ("ARAC").
Pursuant to the agreement, ARAC acquired net assets of the fleet businesses
through the assumption and subsequent repayment of $1.44 billion of
intercompany debt and the issuance of $360 million of convertible preferred
stock of Avis Fleet Leasing and Management Corporation, a wholly-owned
subsidiary of ARAC. We will account for the convertible preferred stock using
the cost method of accounting.
Cendant Software Corporation. On January 12, 1999, we completed the sale
of our consumer software division, Cendant Software Corporation ("Software")
and its subsidiaries, to Paris-based Havas SA, a subsidiary of Vivendi SA,
for approximately $800 million in cash.
Other Businesses. During 1999, we completed the dispositions of certain
other businesses, including Central Credit, Inc., Spark Services, Inc.,
Match.com, National Leisure Group, National Library of Poetry and Essex
Corporation. Aggregate consideration received on the dispositions of such
businesses was comprised of $110.3 million in cash and 1,924,777 shares of
common stock of Ticketmaster On-line -City Search, Inc., which we received in
the sale of Match.com.
Hebdo Mag International, Inc. On December 15, 1998, we completed the sale
of our Hebdo Mag International subsidiary ("Hebdo Mag") to a company
organized by Hebdo Mag management, Tivana Holding B.V. and its affiliates,
for approximately $450 million, including approximately $315 million in cash
and 7.1 million shares of our common stock owned by Hebdo Mag management.
Management believes that the terms of the sale of Hebdo Mag to Hebdo Mag
management were made on an arms' length basis and were as favorable to us as
could be obtained from an unrelated third party.
Internet Developments
As part of our focus on maximizing the opportunities and growth potential
of our existing businesses, we have completed or have pending the following
internet initiatives:
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New Real Estate Portal -- Move.com Group. On September 30, 1999, we
announced that our Board of Directors approved a plan to create a new class
of common stock to track the performance of the Move.com Group, our new
internet service portal. The plan to create a tracking stock, which is
subject to shareholder approval, anticipates the initial public offering of
the Move.com Group in the second quarter of 2000. The Move.com Group will
encompass all aspects of the home experience including finding a home, buying
or renting a home, moving and post closing home improvements. Move.com
Group's business consists of three primary sources of revenue: rental
directory services, e-commerce/ advertising and real estate related products
including mortgage brokerage. The Move.com Group will integrate and enhance
the on-line efforts of our residential real estate brands (Century
21(Registered Trademark), Coldwell Banker(Registered Trademark) and
ERA(Registered Trademark)) and those of our other real estate business units
(Cendant Mobility and Cendant Mortgage) drawing on the success of our RentNet
on-line apartment guide business model, an on-line residential real estate
rental locator service.
Formation of Netmarket, Inc. On September 15, 1999, Netmarket Group, Inc.
("NGI") began operations as an independent company that will pursue the
development of the interactive businesses formerly within our direct
marketing division. NGI will own, operate, develop and expand the on-line
membership businesses, which collectively have 1.3 million on-line members.
Prior to September 15, 1999, our ownership of NGI was restructured into
common stock and preferred stock interests. On September 15, 1999, we donated
NGI's outstanding common stock to a charitable trust, and NGI issued
additional shares of its common stock to certain of its marketing partners.
Accordingly, as a result of the change in ownership of NGI's common stock
from us to independent third parties, NGI's operating results will no longer
be included in our consolidated financial statements. We retained the
opportunity to participate in NGI's value through the ownership of a
convertible preferred stock of NGI, which is ultimately exchangeable, at our
option, after September 14, 2001, into 78% of NGI's fully diluted common
shares which has a $5 million annual preferred dividend. The convertible
preferred stock will be accounted for using the cost method of accounting.
The preferred stock dividend will be recorded in income if and when it
becomes realizable.
Termination of American Bankers Acquisition and Settlement Agreement
On March 23, 1998, we announced that we had entered into a definitive
agreement (the "ABI Merger Agreement") to acquire American Bankers Insurance
Group Inc. ("American Bankers") for $67 per share in cash and stock, for an
aggregate consideration of approximately $3.1 billion. Because of
uncertainties concerning the eventual completion of this acquisition relating
to conditions to the consummation of the tender offer imposed by insurance
regulators, on October 13, 1998, we and American Bankers entered into a
settlement agreement pursuant to which we and American Bankers terminated the
ABI Merger Agreement and our then pending tender offer for American Bankers
shares. Pursuant to the settlement agreement:
o we and American Bankers released each other from any claims
relating to the proposed acquisition of American Bankers;
o we paid $400 million, pre-tax, in cash to American Bankers;
o we agreed to withdraw any applications we had pending with
insurance regulatory authorities in order to obtain control of
American Bankers and to withdraw from any proceedings or hearings
in connection with these applications; and
o we agreed not to take any actions or make any statements intended
to frustrate or delay any business combination between American
Bankers and any other party.
In connection with the termination of the American Bankers transaction, we
recorded a $281 million after-tax charge in the fourth quarter of 1998 in
connection with our payment to American Bankers and transaction-related
expenses.
Termination of Providian Acquisition
On December 10, 1997, we announced that we had entered into a definitive
agreement to acquire Providian Auto and Home Insurance Company and its
subsidiaries ("Providian") from a subsidiary of
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Aegon N.V. for approximately $219 million in cash. On October 5, 1998, we
announced that we terminated the agreement to acquire Providian because the
acquisition agreement provided that the closing had to occur on or before
September 30, 1998, and certain representations, covenants and conditions of
closing in the acquisition agreement had not been fulfilled by that date. We
did not pursue an extension of the termination date of the agreement because
Providian no longer met our acquisition criteria.
National Parking Corporation Acquisition
On April 27, 1998, we acquired NPC for $1.6 billion in cash, which
included our repayment of approximately $227 million of outstanding NPC debt.
NPC is the largest private (non-municipally owned) car park operator in the
United Kingdom, with a portfolio of approximately 500 owned, leased and
managed car parks in over 100 towns and city centers and major airport
locations. NPC has also developed a broad-based breakdown assistance group
under the brand name of Green Flag. Green Flag offers a wide range of
emergency support and rescue services to approximately 3.5 million members in
the United Kingdom.
Termination of RAC Motoring Services Acquisition
On May 21, 1998, we announced that we reached definitive agreements with
the Board of Directors of Royal Automobile Club ("RAC") to purchase RAC
Motoring Services ("RACMS") for total consideration of pound sterling 450
million, or approximately $735 million in cash. On February 4, 1999, the U.K.
Secretary of State for Trade and Industry cleared our proposed acquisition of
RACMS on the condition that we divest our Green Flag breakdown assistance
business. We did not regard this proposed condition as reasonably acceptable
or commercially feasible and therefore we have determined not to proceed with
the acquisition of RACMS.
The commercial infeasibility to divest Green Flag was determined in the
context of Cendant's proposed purchase of the Royal Automobile Club's RAC
Motor Services ("RAC"). One of the main purposes of acquiring the RAC was to
achieve the synergies associated with operating two large motor vehicle
roadside assistance companies in the United Kingdom. We did not regard the
U.K. Monopolies and Mergers Commission's condition to sell Green Flag
commercially feasible because without the benefit of both companies we could
not achieve the synergies we considered necessary to make the transaction
acceptable. Once the RAC transaction was terminated, we reexamined the
strategic significance of Green Flag without the synergies associated with
RAC and determined to divest Green Flag as part of our program to divest
non-core businesses and assets.
MATTERS RELATING TO THE ACCOUNTING IRREGULARITIES AND ACCOUNTING POLICY
CHANGE
Accounting Irregularities
On April 15, 1998, we announced that in the course of transferring
responsibility for our accounting functions from Cendant personnel associated
with CUC prior to the Merger to Cendant personnel associated with HFS before
the Merger and preparing for the reporting of first quarter 1998 financial
results, we discovered accounting irregularities in certain CUC business
units. As a result, we, together with our counsel and assisted by auditors,
immediately began an intensive investigation (the "Company Investigation").
In addition, our Audit Committee engaged Willkie Farr & Gallagher ("Willkie
Farr") as special legal counsel and Willkie Farr engaged Arthur Andersen LLP
to perform an independent investigation into these accounting irregularities
(the "Audit Committee Investigation," and together with the Company
Investigation, the "Investigations").
On July 14, 1998, we announced that the accounting irregularities were
greater than those initially discovered in April and that the irregularities
affected the accounting records of the majority of the CUC business units. On
August 13, 1998, we announced that the Company Investigation was complete. On
August 27, 1998, we announced that our Audit Committee had submitted its
report (the "Report") to the Board of Directors on the Audit Committee
Investigation into the accounting irregularities and its conclusions
regarding responsibility for those actions. A copy of the Report has been
filed as an exhibit to the Company's Current Report on Form 8-K dated August
28, 1998.
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As a result of the findings of the Investigations, we restated our
previously reported financial results for 1997, 1996 and 1995 and the six
months ended June 30, 1998 and 1997. The 1997 restated amounts also included
certain adjustments related to the former HFS businesses which are
substantially comprised of $47.8 million in reductions to merger-related
costs and other unusual charges ("Unusual Charges") and a $14.5 million
decrease in pre-tax income excluding Unusual Charges, which on a net basis
increased 1997 net income from continuing operations. The restatement to
originally reported Unusual Charges, which resulted from our re-evaluation of
accounting positions and supporting documentation, were made to ensure
consistency with applicable accounting literature. The reductions primarily
included costs associated with an anticipated termination of a contract with
a competitor which was not formally committed to at the time it was
originally accrued and costs representing the write-off of equipment which
was reinstated and depreciated over a shortened useful life. The 1997 annual
and six months results have also been restated for a change in accounting,
effective January 1, 1997, related to revenue and expense recognition for
memberships with a full refund offer (see Notes 2 and 18 to the Consolidated
Financial Statements).
Class Action Litigation and Government Investigation
Since our 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/A, 70 lawsuits claiming to be class actions,
two 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, 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 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 are
conducting investigations relating to the accounting irregularities. The SEC
staff has advised us that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred.
As a result of the findings from the investigations, we made all adjustments
considered necessary which are reflected in our restated financial
statements. Although we can provide no assurances that additional adjustments
will not be necessary as a result of these government investigations, we do
not expect that additional adjustments will be necessary.
On December 7, 1999, we announced that we reached a preliminary agreement
to settle the principal securities class action pending against us in the
U.S. District Court in Newark, New Jersey relating to the aforementioned
class action lawsuits. Under the agreement, we would pay the class members
$2.83 billion in cash. The settlement remains subject to execution of a
definitive settlement agreement and approval by the U.S. District Court. If
the preliminary settlement is not approved by the U.S. District Court, we can
make no assurances that the final outcome or settlement of such proceedings
will not be for an amount greater than that set forth in the preliminary
agreement. We currently plan to fund the settlement through the use of
available cash, 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 our Form 8-K, dated December 7,
1999, for a description of the preliminary 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 in the
PRIDES action and the court subsequently granted the settlement its approval.
Under the settlement stipulation, in return for the release of all claims
arising from any purchase of current FELINE PRIDES on or before April 15,
1998, we are obligated to issue up to 29,161,474 Rights with a stated
theoretical value of $11.71 each. Each class member who does not opt out and
who submits a timely and valid proof of claim will be entitled to one Right
for each current FELINE PRIDES held at the close of business on April 15,
1998. For example, if a person owned 100 FELINE PRIDES on April 15, 1998,
such person would be entitled to 100 rights.
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Under the settlement stipulation, until February 14, 2001 we will issue two
new FELINE PRIDES to every person who delivers to us three Rights and two
current FELINE PRIDES. For example, if a holder of rights exchanges three
rights together with two current Income PRIDES, they will receive two new
Income PRIDES. If a holder of rights exchanges three rights together with two
Growth PRIDES, they will receive two New Growth PRIDES. The terms of the new
FELINE PRIDES will be the same as the currently outstanding PRIDES, except
that the conversion rate will be revised so that, at the time the Rights are
distributed, each of the new PRIDES will have a value equal to $17.57 more
than each original PRIDES, based upon a generally accepted valuation model.
The settlement does not resolve claims based upon purchases of current FELINE
PRIDES after April 16, 1998.
Based on the settlement, we recorded an after tax charge of approximately
$228 million, or $0.26 per diluted share, which is $351 million pre-tax, in
the fourth quarter of 1998. We recorded an increase in additional paid-in
capital of $350 million offset by a decrease in retained earnings of $228
million, resulting in a net increase in stockholders' equity of $122 million
as a result of the prospective issuance of the common stock. As a result, the
settlement should not reduce net book value. In addition, the settlement is
not expected to reduce 1999 earnings per share unless our common stock price
materially appreciates. SEE "ITEM 3. LEGAL PROCEEDINGS" for a more detailed
description of the settlement.
Management and Corporate Governance Changes
On July 28, 1998, Walter A. Forbes resigned as Chairman of the Company and
as a member of the Board of Directors. Henry R. Silverman, Chief Executive
Officer of the Company, was unanimously elected by the Board of Directors to
be Chairman and continues to serve as our Chief Executive Officer and
President. Since July 28, 1998, the following members of the Board formerly
associated with CUC also resigned: Christopher K. McLeod, E. Kirk Skelton,
Robert T. Tucker, Bartlett Burnap, T. Barnes Donnelly, Frederick Green,
Stephen Greyser, Burton Perfit, Anthony G. Petrello, Stanley Rumbough, Jr.,
Robert P. Rittereiser and Craig R. Stapleton.
On July 28, 1998, the Board also approved the adoption of Amended and
Restated By-Laws of the Company and voted to eliminate the governance plan
adopted as part of the Merger, resulting in the elimination of the 80%
super-majority vote requirement provisions of our By-Laws relating to the
composition of the Board and the limitations on the removal of the Chairman
and the Chief Executive Officer.
* * *
FINANCIAL INFORMATION
Financial information about our business segments may be found in Note 26
to our consolidated financial statements presented in Item 8 of this Annual
Report on Form 10-K/A and incorporated herein by reference.
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report on Form
10-K/A that may constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
based on our current expectations and the current economic environment. We
caution you that these statements are not guarantees of future performance.
They involve a number of risks and uncertainties that are difficult to
predict. Our actual results could differ materially from those expressed or
implied in the forward-looking statements. Important assumptions and other
important factors that could cause our actual results to differ materially
from those in the forward-looking statements, include, but are not limited
to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to
integrate and operate successfully acquired businesses and the
risks associated with such businesses, including the merger that
created Cendant and the NPC acquisition;
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o our ability to successfully divest the remaining non-core
businesses and assets and implement our plan to create a tracking
stock for our new real estate portal (described in "Businesses and
Recent Developments");
o our ability to develop and implement operational and financial
systems to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and for us to operate within the limitations
imposed by financing arrangements; and
o our ability and our vendors', franchisees' and customers' ability
to complete the necessary actions to achieve a year 2000 conversion
for computer systems and applications.
We derived the forward-looking statements in this Annual Report on Form
10-K/A (including the documents incorporated by reference in this Annual
Report on Form 10-K/A) from the foregoing factors and from other factors and
assumptions, and the failure of such assumptions to be realized as well as
other factors may also cause actual results to differ materially from those
projected. We assume no obligation to publicly correct or update these
forward-looking statements to reflect actual results, changes in assumptions
or changes in other factors affecting such forward-looking statements or if
we later become aware that they are not likely to be achieved.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 9 West 57th Street, New
York, New York 10019 (telephone number: (212) 413-1800).
TRAVEL DIVISION
TRAVEL SEGMENT
The Travel Segment consists of our lodging franchise services, timeshare
exchange, and Avis car rental franchise businesses and represented
approximately 20.1%, 22.9% and 13.2% of our revenues for the year ended
December 31, 1998, 1997 and 1996, respectively.
LODGING FRANCHISE BUSINESS
GENERAL. The lodging industry can be divided into three broad segments
based on price and services: luxury or upscale, which typically charge room
rates above $82 per night; middle market, with room rates generally between
$55 and $81 per night; and economy, where room rates generally are less than
$54 per night. Of our franchised brand names, Ramada, Howard Johnson and
Wingate Inn compete principally in the middle market segment and Days Inn,
Knights Inn, Super 8, Travelodge and Villager Lodge ("Villager") compete
primarily in the economy segment, which is currently the fastest growing
segment of the industry.
As franchisor of lodging facilities, we provide a number of services
designed to directly or indirectly increase hotel occupancy rates, revenues
and profitability, the most important of which is a centralized
brand-specific national reservations 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 a lesser
number of 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 and
operating standards, plus the ongoing payment of franchise royalties and
assessments for the reservations system and marketing programs) with the
increase in gross room revenue anticipated to be derived from
9
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.
We entered the lodging franchise business in July 1990 with the
acquisition of the Howard Johnson franchise system and the rights to operate
the U.S. Ramada franchise system. We acquired the Days Inn franchise system
in January 1992, the Super 8 franchise system in April 1993, the Villager
Lodge franchise system in November 1994, the Knights Inn franchise system in
August 1995 and the Travelodge franchise system in January 1996. Each of
these acquisitions has increased our earnings per share. We continue to seek
opportunities to acquire or license additional hotel franchise systems,
including established brands in the upper end of the market, where we are not
currently represented. See "Lodging Franchise Growth" below.
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, such as our Company, derive
substantially all of their revenue from continuing franchise fees. Continuing
franchise fees are comprised of two components, a royalty portion and a
marketing and reservations 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/reservations portion of the
franchise fee is intended to reimburse the franchisor for the expenses
associated with providing such franchise services as a national reservations
system, national media advertising 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 6,000
properties and 4,000 franchisees in our systems, no individual hotel owner
accounts for more than 2% of our lodging revenue.
LODGING 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. Franchises are terminated primarily for not
paying the required franchise fees and/or not maintaining compliance with
brand quality assurance standards required pursuant to the applicable
franchise agreement.
LODGING FRANCHISE SALES. We market franchises principally to independent
hotel and motel owners, as well as to owners whose property affiliation with
other hotel brands can be terminated. 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 80
salespeople and sales management 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 internationally based developers and
franchisors. As of December 31, 1998, our franchising subsidiaries (other
than Ramada) have entered into international master licensing agreements for
part or all of 46 countries on six continents. The 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.
LODGING 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, 1998.
10
PRIMARY AVG. ROOMS # OF # OF DOMESTIC
BRAND MARKET SERVED PER PROPERTY PROPERTIES ROOMS INTERNATIONAL*
- ------------- ---------------- -------------- ------------ --------- ----------------
Days Inn Lower Economy 90 1,830 163,999 International(1)
Howard
Johnson Mid-market 106 489 51,807 International(2)
Knights Inn Lower Economy 82 222 18,196 International
Ramada Mid-market 131 1004 131,591 Domestic
Super 8 Economy 61 1759 108,111 International(3)
Travelodge Upper Economy 82 521 42,857 Domestic(1)(5)
Villager
Lodge Lower Economy 74 99 7,284 International(4)
Wingate Upper Mid-market 94 54 5,051 International(4)
- ------------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, China, South Africa, India,
Uruguay and the Philippines.
(2) Includes Mexico, Canada, Colombia, Israel, Venezuela, Malta, U.A.E. and
the Dominican Republic.
(3) Includes properties in Canada and Singapore.
(4) No international properties currently open and operating.
(5) Rights include all of North America.
OPERATIONS -- LODGING. 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 segment, expenses related to marketing and
reservations services are budgeted to match marketing and reservation fees
each year.
NATIONAL RESERVATIONS 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. 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 seven reservations centers that are located in Knoxville and
Elizabethton, Tennessee; Phoenix, Arizona; Winner and Aberdeen, South Dakota;
Orangeburg, South Carolina and Saint John, New Brunswick, Canada.
LODGING FRANCHISE AGREEMENTS. Our lodging franchise agreements grant the
right to utilize one of the brand names associated our lodging franchise
systems to lodging facility owners or operators under long-term franchise
agreements. An annual average of 2.1% of our existing franchise agreements
are scheduled to expire from January 1, 1999 through December 31, 2006, with
no more than 2.8% (in 2002) 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 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, 1998, franchisees are typically required to pay recurring fees comprised
of a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. We
discount fees from the standard rates from time to time and under certain
circumstances.
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
11
event of such termination, we are typically entitled to be compensated for
lost revenues 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 the franchisors 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 Hotel Division 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.
LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY. The service marks
"Days Inn," "Ramada," "Howard Johnson," "Super 8," "Travelodge" 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. We own the marks relating to the Days Inn
system, the Howard Johnson system, the Knights Inn system, the Super 8
system, the Travelodge system (in North America), the Villager Lodge system
and the Wingate Inn system through our subsidiaries.
We franchise the service mark "Ramada" and related marks, 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's 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. RFS received approximately $46 million in royalties from
its Ramada franchisees in 1998 and paid the Licensor approximately $23
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 it will have difficulty
complying with all of the material terms of the Ramada License Agreements.
LODGING 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. Days
Inn, Travelodge and Super 8 properties principally compete with Comfort Inn,
Red Roof Inn(Registered Trademark), and Econo Lodge in the limited service
economy sector of the market. The chief competitor of Ramada, Howard Johnson
and Wingate Inn properties, which compete in the middle market segment of the
hotel industry, is 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.
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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 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 franchises.
LODGING SEASONALITY. The principal source of lodging revenue for us is
based upon the annual gross room revenue of franchised properties. As a
result, our revenue from the lodging franchise business experiences seasonal
lodging revenue patterns similar to those of the hotel industry wherein the
summer months, because of increases in leisure travel, produce higher
revenues than other periods during the year. Therefore, any occurrence that
disrupts travel patterns during the summer period could have a material
adverse effort on the franchisee's annual performance and effect our annual
performance.
TIMESHARE EXCHANGE BUSINESS
GENERAL. We acquired Resort Condominiums International, Inc. (now Resort
Condominiums International, LLC), on November 12, 1996. Our RCI subsidiary is
the world's largest provider of timeshare vacation exchange opportunities and
timeshare services for more than 2.5 million timeshare households from more
than 200 nations and more than 3,400 resorts in more than 90 countries around
the world. RCI's 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,
integrated software systems and service and consulting services. RCI has
significant operations in North America, Europe, the Middle East, Latin
America, Africa, Australia, and the Pacific Rim. RCI 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: a) hotels
and motels in which a room is rented on a nightly, weekly or monthly basis
for the duration of the visit and b) rentals of privately-owned condominium
units or homes. Oftentimes, this segment 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 $10,000,
plus a yearly maintenance fee of approximately $350 per interval owned. Based
upon information published about the industry, we believe that 1998 sales of
timeshares exceeded $6 billion worldwide. Two principal segments make up the
timeshare exchange industry: owners of timeshare interest (consumers) and
resort properties (developers/operators). Industry sources have estimated
that the total number of owner households of timeshare interests is nearly
4.5 million worldwide, while the
13
total number of timeshare resorts worldwide has been estimated to be nearly
5,000. 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 Network" provides RCI members who own timeshares at
RCI-affiliated resorts the capability to exchange their timeshare vacation
accommodations in any given year for comparable value accommodations at other
RCI-affiliated resorts. Approximately 1.2 million members of the RCI Network,
representing approximately 50% of the total members of the RCI Network reside
outside of the United States. RCI's membership volume has grown at a compound
annual rate for the last five years of approximately 8%, while exchange
volumes have grown at a compound annual rate of approximately 8% for the same
time period.
RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted
purchasing programs. In 1998, members in the United States paid an average
annual subscribing membership fee of $66 as well as an average exchange fee
of $120 for every exchange arranged by RCI. In 1998, membership and exchange
fees totaled approximately $330 million and RCI arranged more than 1.8
million exchanges.
Developers of resorts affiliated with the RCI Network typically pay the
first year subscribing membership fee for new owner/members upon the sale of
the timeshare interest.
TIMESHARE EXCHANGE BUSINESS 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 U.S. 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.
OPERATIONS. Our timeshare exchange business is designed to provide high
quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most
members are acquired from timeshare developers who purchase an initial RCI
subscribing membership for each buyer at the time the timeshare interval is
sold. A small percentage of members are acquired through direct solicitation
activities of RCI.
MEMBER SERVICES. International Exchange System. Members are served through
a network of call centers located in more than 20 countries throughout the
world. These call centers are staffed by approximately 1,900 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, RCI's 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. RCI provides travel services to U.S. members of
the RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global
basis, RCI provides travel services through entities operating in local
jurisdictions (hereinafter, RCIT and its local entities are referred to as
"Travel Agencies"). Travel Agencies provide airline reservations and airline
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. Travel
Agencies also from time to time offer travel packages utilizing resort
developers' unsold inventory to generate both revenue and prospective
timeshare purchasers to affiliated resorts.
14
RESORT SERVICES. Growth of the timeshare business is dependent on the sale
of timeshare units by affiliated resorts. RCI affiliates international brand
names and independent developers, owners' associations and vacation clubs. 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, 7 of every 10 timeshare resorts worldwide are affiliated
with RCI. We also believe that RCI's existing affiliates represent a
significant potential market because 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 RCI's growth strategy is
maintaining the satisfaction of its existing affiliates by providing quality
support services.
TIMESHARE CONSULTING. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). 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.
RESORT MANAGEMENT SOFTWARE. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions
such as sales, accounting, inventory, maintenance, dues and reservations.
Management believes that our RCC Premier information software is the only
commercially available technology that can fully support timeshare club
operations and points based reservation systems.
PROPERTY MANAGEMENT. RCI provides resort property management services
through its affiliate, 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 reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.
TIMESHARE PROPERTY AFFILIATION AGREEMENTS. More than 3,400 timeshare
resorts are affiliated with the RCI Network, of which more than 1,400 resorts
are located in the United States and Canada, more than 1,260 in Europe and
Africa, more than 475 in Mexico and Latin America, and more than 320 in the
Asia-Pacific region. The terms of RCI's affiliation agreement with its
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. RCI makes
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.
RCI LICENSED MARKS AND INTELLECTUAL PROPERTY. The service marks "RCI",
"Resort Condominiums International" and related trademarks and logos are
material to RCI's business. RCI and its subsidiaries actively use the marks.
All of the material marks used in RCI'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 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, and a few other smaller firms. Based upon industry sources,
we believe that 98% of the nearly 5,000 timeshare resorts in the world are
affiliated with either RCI or Interval. Based upon 1997 published statistics
and our information, RCI had over 2.5 million timeshare households that are
members, while Interval had approximately 850,000 timeshare households that
are
15
members. Also, in 1997, RCI confirmed more than 1.8 million exchange
transactions while Interval confirmed approximately 480,000 transactions. As
a result, based on 1997 business volume, RCI services approximately 73% of
members and approximately 79% of exchange transactions. RCI is bound by the
terms of a Consent Order issued by the Federal Trade Commission which
restricts the right of RCI to solicit, induce, or attempt to induce clients
of Interval International Inc. to either terminate or not to renew their
existing Interval contracts. The proposed Consent Order contains certain
other restrictions. The restrictions generally expire on or before December
17, 1999.
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. The Company 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.
AVIS CAR RENTAL FRANCHISE BUSINESS
GENERAL. On October 17, 1996, we completed the acquisition of all of the
outstanding capital stock of Avis, Inc. which together with its subsidiaries,
licensees and affiliates, operated the Avis Worldwide Vehicle System (the
"Avis System"). As part of its previously announced plan, on September 24,
1997, we completed the initial public offering ("IPO") of our subsidiary,
Avis Rent A Car, Inc. ("ARAC"), which owned and operated the company-owned
Avis car rental operations. We currently own approximately 18% of the
outstanding Common Stock of ARAC. We no longer own or operate any car rental
locations but own the Avis brand name and the Avis System, which we license
to our franchisees, including ARAC, the largest Avis System franchisee.
The Avis System is comprised of approximately 4,200 rental locations,
including locations at the largest airports and cities in the United States
and approximately 160 other countries and territories and a fleet of
approximately 404,000 vehicles during the peak season, all of which are
operated by franchisees. Approximately 90% of the Avis System rental revenues
in the United States are received from locations operated by ARAC 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.
("Avis Europe").
INDUSTRY. The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two
principal segments: general use (mainly at airport and downtown locations)
and local (mainly at downtown and suburban locations). The car rental
industry rents primarily from on-airport, near-airport, downtown and suburban
locations to business and leisure travelers and to individuals who have lost
the use of their vehicles through accident, theft or breakdown. 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 franchisee'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 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.
AVIS SYSTEM AND WIZARD SYSTEM SERVICES. The Avis System provides Avis
System franchisees access to the benefits of a variety of services, including
(i) comprehensive safety initiatives, including the "Avis Cares" Safe Driving
Program, which offers vehicle safety information, directional assistance such
as satellite guidance, regional maps, weather reports and specialized
equipment for travelers with
16
disabilities; (ii) standardized system identity for rental location presentation
and uniforms; (iii) 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" service announcements.
Avis System franchisees are also provided with access to the Wizard
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. 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:
o an advanced graphical interface reservation system;
o "Roving Rapid Return," 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;
o "Preferred 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;
o "Wizard on Wheels," which enables the Avis System locations to
assign vehicles and complete rental agreements while customers are
being transported to the vehicle;
o "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;
o "Avis Link," 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 the Company inadvertently fails to give renters the
benefits of negotiated rate arrangements to which they are
entitled;
o interactive interfaces through third-party computerized reservation
systems; and
o 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 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.
AVIS LICENSED MARKS 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 Avis's business are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office. We own the marks used in Avis's business. The purposes
for which we are authorized to use the marks include use in connection with
businesses in addition to car rental and related businesses, including, but
not limited to, equipment rental and leasing, hotels, insurance and
information services.
LICENSEES AND LICENSE AGREEMENTS. We have 68 independent licensees that
operate locations in the United States. The largest licensee, ARAC, accounts
for approximately 89% of all United States licensees' rentals. Other than
ARAC, certain licensees in the United States pay us a fee equal to 5% of
their total time and mileage charges, less all customer discounts, of which
we are required to pay 40% for corporate licensee-related programs, while 6
licensees pay 8% of their gross revenue. Licensees outside the United States
normally pay higher fees. Other than ARAC, our United States licensees
currently pay .54 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.
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ARAC has entered into a Master License Agreement with the Company, which
grants ARAC the right to operate the Avis vehicle rental business in certain
specified territories. Pursuant to the Master License Agreement, ARAC has
agreed to pay us a monthly base royalty of 3.0% of ARAC's gross revenue. In
addition, ARAC has agreed to pay a supplemental royalty of 1.1 % of gross
revenue payable quarterly in arrears which will increase 0.1% per year in
each of the following three years thereafter to a maximum of 1.5% (the
"Supplemental Fee"). These fees have been paid by ARAC since January 1, 1997.
Until the fifth anniversary of the effective date of the Master License
Agreement, the Supplemental Fee or a portion thereof may be deferred by ARAC
if ARAC does not attain certain financial targets.
In 1997, Avis Europe's previously paidup 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 a defined portion of Asia which covers the area between 60E
longitude and 150E longitude, 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, and for car rentals to PHH customers needing
replacement vehicles for fleets managed by PHH in Europe, Asia and Africa.
COMPETITION. The vehicle rental industry is characterized by intense price
and service competition. In any given location, 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 Avis and us. However, because the Company's royalty
fees are based upon the gross revenue of Avis and the other Avis System
franchisees, our revenue is not directly dependent on franchisee
profitability.
The franchisees' principal competitors for commercial accounts in the
United States are the Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Principal competitors for unaffiliated business
and leisure travelers in the United States are Budget Rent A Car Corporation,
Hertz and National, and, particularly with regard to leisure travelers, Alamo
Rent-A-Car Inc. In addition, the franchisees compete with a variety of
smaller vehicle rental companies throughout the country.
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 the franchisee's 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.
FLEET SEGMENT
Pursuant to our program to divest non-strategic businesses and assets, on
June 30, 1999, we completed the disposition of our Fleet Segment for
aggregate consideration of $1.8 billion (see "Recent Developments --
Strategic Developments"). The following is a description of the Fleet Segment
businesses for the year ended December 31, 1998:
GENERAL. Through our PHH Vehicle Management Services Corporation and PHH
Management Services PLC subsidiaries, we offered a full range of fully
integrated fleet management services to corporate clients and government
agencies comprising over 780,000 vehicles under management on a worldwide
basis. These services included vehicle leasing, advisory services and fleet
management services for a broad range of vehicle fleets. Advisory services
included fleet policy analysis and recommendations, benchmarking, and vehicle
recommendations and specifications. In addition, we provided managerial
services which included ordering and purchasing vehicles, arranging for their
delivery through dealerships located throughout the United States, Canada,
the United Kingdom, Germany and the Republic of Ireland, as well as
capabilities throughout Europe, administration of the title and registration
process, as well as tax and insurance requirements, pursuing warranty claims
with vehicle manufacturers and re-marketing used vehicles. We also offered
various leasing plans for our vehicle leasing programs,
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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 our PHH Vehicle Management Services and Wright Express
subsidiaries in the United States and our Harper Group Limited subsidiary in
the U.K., we also offered fuel and expense management programs to
corporations 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
were able to purchase various products and services such as gasoline, tires,
batteries, glass and maintenance services at numerous outlets.
We also provided fuel and expense management programs and a centralized
billing service for companies operating truck fleets in each of the United
Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks were
furnished with courtesy cards together with a directory listing the names of
strategically located truck stops and service stations, which participated in
this program. Service fees were earned for billing, collection and record
keeping services and for assuming credit risk. These fees were paid by the
truck stop or service stations and/or the fleet operator and were based upon
the total dollar amount of fuel purchased or the number of transactions
processed.
PRODUCTS. Our fleet management services were divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represented the services our clients require to lease
a vehicle that included vehicle acquisition, vehicle re-marketing, financing,
and fleet management consulting. We leased in excess of 350,000 units on a
worldwide basis through both open-end lease structures and closed end
structures. Open-end leases were the prevalent structure in North America
representing 96% of the total vehicles financed in North America and 86% of
the total vehicles financed worldwide. The open-end leases were 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 were typically structured with a
12-month minimum lease term, with month to month renewals thereafter. The
typical unit remained under lease for approximately 34 months. A client
received a full range of services in exchange for a monthly rental payment
that included a management fee. The residual risk on the value of the vehicle
at the end of the lease term remained with the lessee under an open-end
lease, except for a small amount that was retained by the lessor.
Closed-end leases were structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms were 24
months, 36 months, and 48 months. The closed end structure was preferred in
Europe due to certain accounting regulations. The closed-end lease structure
was utilized by approximately 71% of the vehicles leased in Europe, but only
14% of the vehicles leased on a worldwide basis. We utilized independent
third party valuations and internal projections to set the residuals utilized
for these leases.
The Fee Based Products were designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products were Fuel
Services, Maintenance Services and Accident Management. Fuel Services
represented the utilization of our proprietary cards to access fuel through a
network of franchised and independent fuel stations. The cards operated as a
universal card with centralized billing designed to measure and manage costs.
In the United States, Wright Express was the leading fleet fuel cards
supplier with over 125,000 fuel facilities in its network and in excess of
1.6 million cards issued. Wright Express distributed its fuel cards and
related offerings through three primary channels: (1) the WEX-branded
Universal Card, which was issued directly to fleets by Wright Express, (2)
the Private Label Card, under which Wright Express provided private label
fuel cards and related services to commercial fleet customers of major
petroleum companies, and (3) Co-Branded Marketing, under which Wright Express
fuel cards were co-branded and issued in conjunction with products and
services of partners such as commercial vehicle leasing companies. In the UK,
our Harper Group Limited and Cendant Business Answers PLC subsidiaries,
utilizing the All Star and Dial brands, maintained the largest independent
fueling network with more than 12,000 fueling sites and more than 1.2 million
cards in circulation.
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We offered customer vehicle maintenance charge cards that were used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provided customers with benefits such as (1) negotiated discounts off full
retail prices through our convenient supplier network, (2) access to our
in-house team of certified maintenance experts that monitor each card
transaction for policy compliance, reasonability, and cost effectiveness, and
(3) inclusion of vehicle maintenance card transactions in a consolidated
information and billing database that helps evaluate overall fleet
performance and costs. We maintained an extensive network of service
providers in the United States, Canada, and the United Kingdom to ensure ease
of use by the client's drivers.
We also provided our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the
initial accident report from the driver (i.e. facilitating emergency towing
services and car rental assistance, etc.) (2) organizing the entire vehicle
appraisal and repair process through a network of preferred repair and body
shops, and (3) coordinating and negotiating potential accident claims.
Customers received significant benefits from our accident management services
such as (1) convenient coordinated 24-hour assistance from our call center,
(2) access to our leverage with the repair and body shops included in our
preferred supplier network (the largest in the industry), which typically
provided customers with extremely favorable repair terms and (3) expertise of
our damage specialists, who ensured that vehicle appraisals and repairs were
appropriate, cost-efficient, and in accordance with each customer's specific
repair policy.
COMPETITIVE CONDITIONS. The principal factors for competition in vehicle
management services were service, quality and price. We were competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We ranked 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
were four other major providers of fleet management service in the United
States, hundreds of local and regional competitors, and numerous niche
competitors who focused on only one or two products and did 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.
In the UK, we ranked first in both vehicles under management and
proprietary fuel and maintenance cards. We competed against numerous local
and regional competitors. The UK operation had been able to differentiate
itself through its breadth of product offerings.
REAL ESTATE DIVISION
REAL ESTATE FRANCHISE SEGMENT
GENERAL. Our Real Estate Franchise Segment represented approximately 8.6%,
7.9% and 7.3% of our revenue for the year ended December 31, 1998, 1997 and
1996, respectively. In August 1995, we acquired Century 21 Real Estate
Corporation ("CENTURY 21"). Century 21 is the world's largest franchisor of
residential real estate brokerage offices with approximately 6,300
independently owned and operated franchised offices with approximately
102,000 active sales agents worldwide. In February 1996, we acquired the ERA
franchise system. The ERA system is a leading residential real estate
brokerage franchise system with over 2,600 independently owned and operated
franchised offices and more than 29,000 sales agents worldwide. In May 1996,
we acquired Coldwell Banker Corporation ("COLDWELL BANKER"), the owner of the
world's premier 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 72,000 sales agents worldwide.
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 especially
important to real estate brokers since homebuyers are generally infrequent
users of brokerage services and have often recently arrived in an area,
resulting in little ability to benefit from word-of-mouth recommendations.
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During 1996, we implemented a preferred alliance program which seeks to
capitalize on the dollar volume of home sales brokered by CENTURY 21,
COLDWELL BANKER and ERA agents and the valuable access point these brokerage
offices provide for service providers who wish to reach these home buyers and
sellers. Preferred alliance marketers include providers of property and
casualty insurance, moving and storage services, mortgage and title
insurance, environmental testing services, and sellers of furniture, fixtures
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 newly
formed corporation created to acquire residential real estate brokerage
firms. NRT acquired the assets of National Realty Trust, the largest
franchisee of the COLDWELL BANKER system, in August 1997. NRT has also
acquired other independent regional real estate brokerage businesses during
1998 and 1997 which NRT has converted to COLDWELL BANKER, CENTURY 21 and ERA
franchises. As a result, NRT is the largest franchisee of our franchise
systems, based on gross commissions, and represents 6% of the franchised
offices. Of the nearly 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.
REAL ESTATE FRANCHISE SYSTEMS
CENTURY 21. CENTURY 21 is the world's largest residential real estate
brokerage franchisor, with approximately 6,300 independently owned and
operated franchise offices with more than 102,000 active sales agents located
in 25 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
commission income. CENTURY 21 franchisees who meet certain levels of annual
gross revenue (as defined in the franchise agreements) are eligible for the
CENTURY 21 Incentive Bonus ("CIB") Program, 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 revenue. For 1998, approximately 15% of
CENTURY 21 franchisees qualified for CIB payments and such payments
aggregated less than 1% of gross commissions.
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 (the "NAF") which in turn disburses them
for local, regional and national advertising, marketing and public relations
campaigns. In 1998, the NAF spent approximately $45 million on advertising
and marketing campaigns.
COLDWELL BANKER. COLDWELL BANKER is the world's premier 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 the Caribbean,
with approximately 72,000 sales agents. The primary revenue from the COLDWELL
BANKER system is derived from service and other fees paid by franchisees,
including initial franchise fees and ongoing services. COLDWELL BANKER
franchisees pay us annual fees consisting of ongoing service and advertising
fees, which are generally 6.0% and 2.5%, respectively, of a franchisee's
annual gross revenues (subject to annual rebates to franchisees who achieve
certain threshold levels of gross commission income annually, and to minimums
and maximums on advertising fees).
COLDWELL BANKER franchisees who meet certain levels of annual gross
revenue (as defined in the franchise agreements) are eligible for the
Performance Premium Award ("PPA") 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. For 1998, approximately 28% of COLDWELL BANKER franchisees qualified
for PPA payments and such payments aggregated approximately less than 1% of
gross commissions.
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. In 1998, the COLDWELL BANKER National Advertising
Fund expended approximately $21 million for such purposes.
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ERA. The ERA franchise system is a leading residential real estate
brokerage franchise system, with more than 2,600 independently owned and
operated franchise offices, and more than 29,000 sales agents located in 20
countries. The primary revenue from the ERA franchise system results from (i)
franchisees' payments of monthly membership fees ranging from $216 to $852
per month, based on volume, plus $196 per branch and a per transaction fee of
approximately $121, and (ii) for franchise agreements entered into after July
1997, royalty fees equal to 6% of the franchisees' gross revenues (5.0% until
December 31, 1999). For franchise agreements dated after January 1, 1998, the
Volume Incentive Program may result in a rebate payment to qualifying
franchisees determined in accordance with the applicable franchise agreement.
In addition to membership fees and transaction fees, franchisees of the
ERA system pay (i) a fixed amount per month, which ranges from $233 to $933,
based on volume, plus an additional $233 per month for each branch office,
into the ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise
agreements entered into after July 1997, an NMF equal to 2% of the
franchisees' gross revenues, subject to minimums and maximums. The funds in
the ERA NMF are utilized for local, regional and national marketing
activities, including media purchases and production, direct mail and
promotional activities and other marketing efforts. In 1998, the ERA NMF
spent approximately $10 million on marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES. 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 salespersons and sales management
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.
OPERATIONS -- REAL ESTATE BROKERAGE. Our brand name marketing programs for
the real estate brokerage business focus on increasing brand awareness
generally, 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 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 on 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 referrals 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 hereinafter, 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 or, generally, extend credit to
franchisees for purchases. See "COMBINED OPERATIONS -- Preferred Alliance and
CoMarketing Arrangements" below.
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REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS. Our real estate brokerage
franchise agreements grant the franchises the right to utilize one of the
brand names associated with our real estate brokerage franchise systems to
real estate brokers under franchise agreements.
Our current form of franchise agreement for all real estate brokerage
brands is terminable by us for the franchisee's failure to pay fees
thereunder or other charges or for other material default 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, based on gross commission income, for our
real estate franchise systems. NRT's status as a franchisee is governed by
franchise agreements (the "Franchise Agreements") with our wholly owned
subsidiaries (the "Real Estate Franchisors") 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 the
Franchise Agreements. In February 1999, NRT entered into new fifty year
franchise agreements with the Real Estate Franchisors. These agreements
require NRT to pay royalty fees and advertising fees of 6.0% and 2.0% (2.5%
for its COLDWELL BANKER offices), respectively, on its annual gross revenues.
Lower royalty fees apply in certain circumstances. The Franchise Agreements
generally provide restrictions on NRT's ability to close offices beyond
certain limits.
REAL ESTATE BROKERAGE SERVICE MARKS. 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. The
marks used in the real estate brokerage systems are owned by us through our
subsidiaries.
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 are the Prudential, Better
Homes & Gardens and RE/MAX real estate brokerage brands. In addition, a real
estate broker may choose to affiliate with a regional chain or 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 its brand names
to prospective franchisees is, to some extent, a function of the success of
its 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 substantially reduced by virtue of the diverse
geographical locations of our franchises. At December 31, 1998, the combined
real estate franchise systems had approximately 8,400 franchised brokerage
offices in the United States and approximately 12,000 offices worldwide. The
real estate franchise systems have offices in 31 countries and territories in
North America, Europe, Asia, Africa and Australia.
SEASONALITY. The principal sources of our real estate segment revenue are
based upon the timing of residential real estate sales, which are lower in
the first calendar quarter each year, and relatively level the other three
quarters of the year. As a result, our revenue from the real estate brokerage
segment of its business is less in the first calendar quarter of each year.
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RELOCATION SEGMENT
GENERAL. Our Relocation Segment represented approximately 8.4%, 9.5% and
10.7% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Our Cendant Mobility Services Corporation ("Cendant Mobility")
subsidiary is the largest provider of employee relocation services in the
world. Our Cendant Mobility subsidiary assists more than 100,000 transferring
employees annually, including approximately 15,000 employees internationally
each year in 92 countries and 300 destination cities. At December 31, 1998,
we employed approximately 2,400 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 include primarily evaluation, inspection
and selling of transferees' homes or purchasing a transferee's home which is
not sold for at least a price determined on the estimated value within a
specified time period, equity advances (generally guaranteed by the corporate
customer), certain home management services, assistance in locating a new
home at the transferee's destination, consulting services and other related
services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on the equity advances. 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 and one corporate client). As a result of the obligations of most
corporate clients to pay the losses and guarantee repayment of equity
advances, our exposure on such items is limited to the credit risk of the
corporate clients of our relocation businesses and not on the potential
changes in value of residential real estate. We believe such risk is minimal,
due to the credit quality of the corporate clients of our relocation
subsidiaries. In transactions with government clients and one corporate
client, which comprise approximately 5% of net revenue, we assume the risk
for losses on the sale of homes, but 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 gives 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 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 services provides coordination for moves
involving a number of employees. 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 nearly 70,000 shipments annually, provides
support for all aspects of moving an employee's household goods. We also
handle insurance and claim assistance, invoice auditing, and control the
quality 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 contact also acts as an advocate, with the
local broker, for employees in negotiating offers which helps clients'
employees benefit from the highest possible price for their homes.
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
24
established members offer our affinity services' to their members at no cost.
This service helps the organizations attract new members and to 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 40,000
individuals with approximately 17,500 real estate transactions annually.
Our international assignment service provides a full spectrum of services
for international assignees. This group coordinates the services previously
discussed; however, they also assist with immigration support, candidate
assessment, intercultural training, language training, and repatriation
coaching.
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 340
principal brokers and 420 associate brokers. Our van line, insurance,
appraisal and closing networks allow us to receive deep discounts while
maintaining control over the quality of service provided to clients'
transferees.
COMPETITIVE CONDITIONS. The principal methods of competition within
relocation services are service, quality and price. In the United States,
there are two major national providers of such services. We are the market
leader in the United States and third in the United Kingdom.
SEASONALITY. Our principal sources of relocation service revenue are based
upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second quarter.
MORTGAGE SEGMENT
GENERAL. Our Mortgage Segment represented approximately 6.7%, 4.2% and
3.9% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Through our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary, we are the sixth largest originator of residential first mortgage
loans in the United States, and, on a retail basis, we are the sixth largest
originator in 1998. We offer services consisting of the origination, sale and
servicing of residential first mortgage loans. A full line of first mortgage
products are marketed to consumers through relationships with corporations,
affinity groups, 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, 1998, Cendant Mortgage had
approximately 4,000 employees.
Cendant Mortgage customarily sells 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 Corp., the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association. Cendant
Mortgage also services mortgage loans. We earn revenue from the sale of the
mortgage loans to investors, as well as from fees earned 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 otherwise administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an 800 number
teleservices operation based in New Jersey under programs including
Phone In-Move In(Registered Trademark) for real estate organizations,
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 sixth largest retail
originator (Inside Mortgage Finance) in 1998.
o Point of Sale. Mortgages are offered to consumers through 175 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 and are
equipped with software to obtain
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product information, quote interest rates and prepare a mortgage
application with the consumer. Originations from these point of sale
offices are generally more costly than teleservices originations.
o 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. Originations from our
wholesale/correspondent platform are more costly than point of sale or
teleservices originations.
STRATEGY. Our strategy is to increase market share by expanding all of our
sources of business with emphasis on the Phone In-Move In(Registered
Trademark) program. Phone In-Move In(Registered Trademark) was developed for
real estate firms approximately 21 months ago and is currently established in
over 4,000 real estate offices at December 31, 1998. We are well positioned
to expand our relocation and financial institutions business channels as it
increases our linkage to Cendant Mobility clients and works with financial
institutions which desire to outsource their mortgage originations operations
to Cendant Mortgage. Each of these market share growth opportunities is
driven by our low cost teleservices platform, which is centralized in Mt.
Laurel, New Jersey. The competitive advantages 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.
COMPETITIVE CONDITIONS. The principal methods of competition in mortgage
banking services are service, quality and price. There are an estimated
20,000 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 1.8% in 1998 from 0.9% in
1996. The market share leader reported a 7.7% market share in the United
States according to Insider Mortgage Finance for 1998.
SEASONALITY. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity, which
is based upon the timing of residential real estate sales. Real estate sales
are lower in the first calendar quarter each year and relatively level the
other three quarters of the year. As a result, our revenue from the mortgage
services business is less in the first calendar quarter of each year.
DIRECT MARKETING DIVISION
Our direct marketing division is divided into two segments: individual
membership and insurance/ wholesale. The individual membership segment, with
approximately 32 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto and home improvement. The individual membership products and
services are designed to enhance customer loyalty by delivering value to the
customer. The insurance/wholesale segment, with nearly 31 million customers,
markets and administers insurance products, primarily accidental death
insurance, and also provides products and services such as checking account
enhancement packages, financial products and discount programs to customers
of various financial institutions. The direct marketing activities are
conducted principally through our Cendant Membership Services, Inc.
subsidiary and certain of our other wholly owned subsidiaries, including FISI
and BCI.
We derive our direct marketing revenue principally from membership service
fees, insurance premiums and product sales. We solicit members and customers
for many of our programs by direct marketing and by using a direct sales
force to call on financial institutions, schools, community groups, companies
and associations. Some of the our individual memberships are available
on-line to interactive computer users via major on-line services and the
Internet's World Wide Web. See "--Distribution Channels".
INDIVIDUAL MEMBERSHIP SEGMENT
Our Individual Membership segment represented approximately 17.6%, 18.4%
and 23% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with business
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partners such as leading financial institutions, retailers, and oil companies
to offer membership as an enhancement to their credit card customers.
Participating institutions generally receive commissions on initial and
renewal memberships, based on a percentage of the net membership fees.
Individual memberships are marketed, primarily using direct marketing
techniques, through participating institutions with the Company generally
paying for the marketing costs to solicit the prospective members. The member
pays our business partners directly for the service and, in most instances,
is billed via a credit card. Membership fees vary depending upon the
particular membership program, and annual fees generally range from $49 to
$79 per year. Most of our memberships are for one-year renewable terms, and
members are generally entitled to unlimited use during the membership period
of the service for which the members have subscribed. Members generally may
cancel their memberships and obtain a full refund at any point during the
membership term. As of November 1998, all new on-line individual memberships
are refundable on a pro-rata basis over the term of the membership. The
services may be accessed either through the Internet (on-line) or through the
mail or by telephone (off-line).
OFF-LINE PRODUCTS
Individual membership programs offer consumers discounts on over 500,000
products and services by providing shop at home convenience in areas such as
retail shopping, travel, automotive, dining and home improvement. Membership
programs include among others Shoppers Advantage(Registered Trademark),
Travelers Advantage(Registered Trademark), AutoVantage(Registered Trademark),
Credit Card Guardian(Registered Trademark), and PrivacyGuard(Registered
Trademark), and other membership programs. A brief description of the
different types of membership programs is as follows:
Shopping. Shoppers Advantage(Registered Trademark) is a discount shopping
program whereby we provide product price information and home shopping
services to our members. Our merchandise database contains information on
over 100,000 brand name products, including a written description of the
product, the manufacturer's suggested retail price, the vendor's price,
features and availability. All of these products may be purchased through our
independent vendor network. Vendors include manufacturers, distributors and
retailers nationwide. Individual members are entitled to an unlimited number
of toll free calls seven days a week to our shopping consultants, who access
the merchandise database to obtain the lowest available fully delivered cost
from participating vendors for the product requested and accept any orders
that the member may place. We inform the vendor providing the lowest price of
the member's order and that vendor then delivers the requested product
directly to the member. We act as a conduit between our members and the
vendors; accordingly, we do not maintain an inventory of products.
As part of our individual member Shoppers Advantage(Registered Trademark)
program, we distribute catalogs four to ten times per year to certain
members. In addition, we automatically extend the manufacturer's warranty on
all products purchased through the Shoppers Advantage(Registered Trademark)
program and offer a low price guarantee. Generally, the length of time in
which a particular membership service extends the manufacturer's warranty on
products purchased is for a period of up to two years (i.e., the length of
the existing manufacturer's warranty is extended, if it in fact covers less
than 2 years, so that it covers a total period of 2 years from the original
date of purchase). For instance, with the Shoppers Advantage(Registered
Trademark) membership program, there is a product feature whereby a member
receives an automatic 2-year extended warranty protection on any product
purchased through the Shoppers Advantage(Registered Trademark) service (which
means that this membership service will automatically extend the
manufacturer's U.S. warranty to 2 years from the date of purchase of the
particular product in question). There is an identical feature for the
CompleteHome(Registered Trademark) membership service (now being renamed as
the Homeowner Savings Network) and for members of the Family Funsaver
Club(Registered Trademark).
Travel. Travelers Advantage(Registered Trademark) is a discount travel
service program whereby our Cendant Travel, Inc. ("Cendant Travel")
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, we maintain our
own database containing information on tours, travel packages and short
notice travel arrangements. Members book their reservations through Cendant
Travel, which earns commissions (ranging from 5%-25%) on all travel sales
from the providers of the travel services. Certain Travelers
Advantage(Registered Trademark) members can earn cash awards from the Company
equal to a specified percentage (generally 5%) of the price of travel
arrangements
27
purchased by the member through Cendant Travel. Travel members may book their
reservations by making toll-free telephone calls seven days a week, generally
twenty-four hours a day to agents at Cendant Travel. Cendant Travel provides
its members with special negotiated rates on many air, car and hotel
bookings. Cendant Travel's agents reserve the lowest air, hotel and car
rental fares available for the members' travel requests and offer a low price
guarantee on such fares.
Auto. Our auto service, AutoVantage(Registered Trademark), offers members
comprehensive new car summaries and preferred prices on new domestic and
foreign cars purchased through our independent dealer network (which includes
over 1,800 dealer franchises); discounts on maintenance, tires and parts at
more than 25,000 locations, including over 35 chains, including nationally
known names, such as Goodyear"and Firestone(Registered Trademark), plus
regional chains and independent locations; and used car valuations.
AutoVantage Gold(Registered Trademark) offers members additional services
including road and tow emergency assistance 24 hours a day in the United
States and trip routing.
Credit Card Registration. Our Credit Card Guardian(Registered Trademark)
and "Hot-Line" services enable consumers to register their credit and debit
cards with us so that the account numbers of these cards may be kept securely
in one place. If the member notifies us that any of these credit or debit
cards are lost or stolen, we will notify the issuers of these cards, arrange
for them to be replaced and reimburse the member for any amount for which the
card issuer may hold the member liable.
PrivacyGuard Service. 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. This service is designed to assist members in obtaining and
monitoring information concerning themselves that is used by third parties in
making decisions such as granting or denying credit or setting insurance
rates.
Buyers Advantage. The Buyers Advantage(Registered Trademark) service
extends the manufacturer's warranty on products purchased by the member. This
service also rebates 20% of repair costs and offers members price protection
by refunding any difference between the price the member paid for an item and
its reduced price, should the item be sold at a lower price within sixty days
after purchase. In addition, the service offers return guarantee protection
by refunding the purchase price of an item that the member wishes to return.
CompleteHome. 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. Tradespersons are available in all 50 states through a
toll-free phone line. Members also receive discounts ranging from 10% to 50%
off on a full range of home-related products and services.
Family FunSaver Club. 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 Family Software Club. The Family Software Club (Service Mark) has no
membership fee and offers members a way to purchase educational and
entertainment CD-ROM titles, often at an introductory price with a small
commitment to buy titles at regular club prices over a specified time period.
Approximately every six to eight weeks, members receive information on CD-ROM
titles and other related products and have the opportunity to purchase their
featured selection, alternate titles or no selections at that time. The club
also provides its members with special offers and discounts on software and
other related products from time to time.
Health Services. The HealthSaver (Service Mark) membership provides
discounts ranging from 10% to 60% off retail prices on prescription drugs,
eyewear, eye care, dental care, selected health-related services and fitness
equipment, including sporting goods. Members may also purchase prescription
and over-the-counter drugs through the mail.
28
Other Clubs. Our North American Outdoor Group, Inc. subsidiary ("NAOG")
owns and operates the North American Hunting Club(Registered Trademark), the
North American Fishing Club(Registered Trademark), the Handyman Club of
America(Registered Trademark), the National Home Gardening Club(Registered
Trademark) and the PGA Tour Partners Club(Registered Trademark), among
others. Members of these clubs receive fulfillment kits, discounts on related
goods and services, magazines and other benefits. In September 1999, we
entered into a definitive agreement to sell 94% of NAOG for approximately
$140 million. In connection with the transaction, we will retain an equity
interest in NAOG of approximately 6%. (see "Recent Developments").
ON-LINE PRODUCTS
We operate Netmarket (www.netmarket.com), our flagship on-line,
membership-based, value-oriented consumer site which offers discounts on over
800,000 products and services. Netmarket offers discounted shopping and other
benefits to both members and non-members, with members receiving preferred
pricing, access to specials, cash back benefits, low price guarantees and
extended warranties on certain items. In addition, we also offer the
following on-line products and services: AutoVantage(Registered Trademark),
Travelers Advantage(Registered Trademark) and PrivacyGuard(Registered
Trademark) membership programs and Haggle Zone(Trademark) and Fair
Agent(Registered Trademark) consumer services. As part of our internet
strategy, on September 15, 1999, we donated Netmarket, Inc.'s (the owner of
our on-line membership businesses) outstanding common stock to a charitable
trust, and Netmarket issued additional shares of its common stock to certain
of its marketing partners. Accordingly, as a result of the change in
ownership Netmarket common stock from us to an independent third party,
Netmarket's operating results will no longer be included in our consolidated
financial statements. We retained the opportunity to participate in
Netmarket's value through the ownership of the convertible preferred stock of
Netmarket, which is ultimately exchangeable, at our option, into 78% of
Netmarket's diluted common shares. (See "Recent Developments -- Internet
Developments").
We also currently operate other on-line consumer offerings such as
Books.com (www.books.com), one of the largest on-line booksellers in the
world with more than four million titles available in its database with
discounts of up to 20 to 40 percent below retail prices; Musicspot
(www.musicspot.com) an on-line music store with more than 145,000 titles
discounted up to 20 percent below retail prices; and GoodMovies
(www.goodmovies.com) an on-line movie store offering more than 30,000 movie
titles up to 20 to 40 percent below retail cost. Prior to its sale in 1999,
we operated Match.com, Inc. ("Match"), the leading matchmaking service on the
Internet, servicing over 100,000 consumers. Subscriptions to the Match
service range from approximately $10 per month to just under $60 for one
year.
Through our Rent Net operation (www.rent.net) subsidiary, we are the
leading apartment information and rental service on the Internet, with
listings in more than 2,000 North American cities. Rent Net's clients include
many of the top 50 property management companies across North America, and
its apartment and relocation information has been seen by more than one
million users monthly. The RentNet operation principally derives revenues
from advertising or listing fees of products and service providers.
As part of our internet strategy, on September 30, 1999, we announced that
our board of directors approved a plan to create a new class of common stock
to track the performance of our new real estate portal to be named Move.com,
which will include the operations of RentNet. Move.com will integrate and
enhance the on-line efforts of our residential real estate brands (CENTURY
21(Registered Trademark), COLDWELL BANKER(Registered Trademark), and
ERA(Registered Trademark)) and those of its real-estate business units
(Cendant Mobility and Cendant Mortgage), drawing on the success of the
RentNet on-line apartment guide business model. RentNet's operations are
currently being expanded as the technology fulcrum for Move.com. See "Recent
Developments -- Strategic Developments".
INSURANCE/WHOLESALE SEGMENT
Our Insurance/Wholesale segment represented approximately 10.3%, 11.4% and
13.8% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with financial institutions, including credit
unions and banks, to offer their respective customer base competitively
priced insurance products, primarily accidental death and dismemberment
insurance and term life insurance, as well as an array of services associated
with the Individual Membership division segment.
29
ENHANCEMENT PACKAGE SERVICE. Primarily through our FISI subsidiary, we
sell enhancement packages for financial institution consumer and business
checking and deposit account holders. FISI's financial institution clients
select a customized package of our products and services and then usually
adds its own services (such as unlimited check writing privileges,
personalized checks, cashiers' or travelers' checks without issue charge, or
discounts on safe deposit box charges or installment loan interest rates).
With our marketing and promotional assistance, the financial institution then
offers the complete package of account enhancements to its checking account
holders as a special program for a monthly fee. Most of these financial
institutions choose a standard enhancement package, which generally includes
$10,000 of accidental death insurance, travel discounts and a nationwide
check cashing service. Others may our shopping and credit card registration
services, a financial newsletter or pharmacy, eyewear or entertainment
discounts as enhancements. The accidental death coverage is underwritten
under group insurance policies with independent insurers. 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, because the institution should be able to charge
participating accounts more than the combined costs of the services it
provides and the payments it makes to us.
Primarily through our National Card Control Inc. ("NCCI") subsidiary, we
also sell enhancement services to credit card issuers who make these services
available to their credit card holders to foster increased product usage and
loyalty. NCCI's clients create a customized package of our products and
services. These enhancements include loyalty products, such as frequent
flyer/buyer programs, as well as shopping, travel, concierge, insurance and
credit card registration services. Like FISI, NCCI generally charges its
credit card issuer clients an initial fee to implement the program and
monthly fees thereafter, based on the number of accounts participating in
that institution's program.
INSURANCE PRODUCTS. Through our BCI subsidiary, we serve as a third party
administrator for marketing accidental death insurance throughout the country
to the customers of BCI's financial institution clients. This accidental
death insurance is often combined with our other services to enhance their
value. These products are generally marketed through direct mail
solicitations, which generally offer $1,000 of accidental death insurance at
no cost to the customers and the opportunity to choose additional coverage of
up to $300,000. The annual premium generally ranges from $10 to $250. BCI
also acts as an administrator for term life, graded term life and hospital
accident insurance. BCI's insurance products and other services are offered
through banks and credit unions to their account holders.
DIRECT MARKETING DISTRIBUTION CHANNELS
We market our Individual Membership and Insurance/Wholesale products
through a variety of distribution channels. The consumer is ultimately
reached in the following ways: 1) at financial institutions or other
associations through direct marketing; 2) at financial institutions or other
associations through a direct sales force, participating merchants or general
advertising; and 3) through schools, community groups and companies. Some of
our individual memberships, such as shopping, travel, privacy guard and auto
services, are available to computer users via on-line services and the
Internet's World Wide Web. These users are solicited primarily through major
on-line services such as America Online, traditional off-line direct
marketing channels, major destination sites on the World Wide Web, such as
portals, and through our affinity partners. We believe that our interactive
members account for approximately 4% of our total Individual Membership
Segment members. Strategic alliances have been formed with on-line services
and various other companies, including the major Internet portals.
DIRECT MARKETING INTERNATIONAL OPERATIONS
Individual Membership and Insurance/Wholesale. Our Cendant International
Membership Services subsidiary has developed the international distribution
of Enhancement Package Service and Insurance Products together with certain
Individual Memberships including Shopping, Auto and Payment Card Protection.
30
As of December 31, 1998, Cendant International Membership Services had
expanded its international membership and customer base to almost four
million individuals. This base is driven by retail and wholesale membership
through over 35 major banks in Europe and Asia, as well as through other
distribution channels. We also have exclusive licensing agreements covering
the use of our merchandising systems in Canada, Australia, Japan and certain
other Asian countries under which licensees paid initial license fees and
agree to pay royalties to us on membership fees, access fees and merchandise
service fees paid to them. Royalties to us from these licenses were less than
1% of our direct marketing revenues and profits in the years ended December
31, 1998, 1997 and 1996, respectively.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation,
interest rates and other factors. Because we operate in a mix of services and
numerous countries, management believes currency exposures are fairly well
diversified. See Item 7A: "Quantitative and Qualitative Disclosure About
Market Risk".
DIRECT MARKETING SEASONALITY
Our direct marketing businesses are not seasonal.
DIRECT MARKETING COMPETITION
Individual Membership. We believe that there are competitors, which offer
membership programs similar to ours, and some of these entities, which
include large retailers, travel agencies, insurance companies and financial
service institutions, have financial resources, product availability,
technological capabilities or customer bases greater than ours. To date, we
have been able to compete effectively with such competitors. However, there
can be no assurances that we will continue to be able to do so. In addition,
we compete with traditional methods of merchandising that enjoy widespread
consumer acceptance, such as catalog and in-store retail shopping and
shopping clubs (with respect to its discount shopping service), and travel
agents (with respect to its discount travel service). Our systems are, for
the most part, not protected by patent.
Insurance/Wholesale. Each of our account enhancement services competes
with similar services offered by other companies, including insurance
companies. Many of the competitors are large and more established, with
greater resources and financial capabilities than ours. Finally, in
attempting to attract any relatively large financial institution as a client,
we also compete with that institution's in-house marketing staff and the
institution's perception that it could establish programs with comparable
features and customer appeal without paying for the services of an outside
provider.
OTHER CONSUMER AND BUSINESS SERVICES DIVISION
Our Other Consumer and Business Services Division represented
approximately 20.9%, 18.1% and 18.9% of our revenues for the year ended
December 31, 1998, 1997 and 1996, respectively.
TAX PREPARATION BUSINESS. In January 1998, we acquired Jackson Hewitt,
the second largest tax preparation service in the United States. The Jackson
Hewitt franchise system is comprised of a 43-state network (plus the District
of Columbia) with approximately 3,000 offices operating under the trade name
"Jackson Hewitt Tax Service". We believe that the application of our focused
management strategies and techniques for franchise systems to the Jackson
Hewitt network can significantly increase revenues produced by the Jackson
Hewitt franchise system while also increasing the quality and quantity of
services provided to franchisees.
Office locations range from stand-alone store front offices to offices
within Wal-Mart Stores, Inc. and Montgomery Ward & Co., Inc. locations.
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 (collectively referred to as "tax returns").
During 1998, Jackson Hewitt prepared approximately 1.2 million tax returns,
which represented an increase of 37% from the approximately 875,000 tax
returns it prepared during 1997. To complement our tax preparation services,
we also offer accelerated check refunds and refund anticipation loans to our
tax preparation customers.
31
NATIONAL CAR PARKS. Our National Car Parks ("NCP") subsidiary operates
commercial car parks in the UK and Europe, 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 owns or operates nearly 500 car parks across the UK and has
approximately 2,800 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 car parks in over 100 city and town centers
throughout the UK, most of which are regularly patrolled and many of which
have closed-circuit television surveillance. NCP is the only car park manager
that can provide the motorist with such a comprehensive geographical coverage
and such levels of investment in security facilities. In addition, NCP is a
leader in on-airport car parking at UK airports, with over 35,000 car parking
spaces in facilities close to passenger terminals at ten airports across the
UK. 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.
The brand names of NCP and Flightpath (NCP's airport brand) are registered
in the UK as trademarks. Furthermore, the NCP trademark is in the process of
being registered in the rest of the European Community.
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.
NCP's main competition is from non-commercial, local government
authorities who usually choose to operate car parking facilities themselves
in their respective cities and towns.
There is increasing government regulation over all aspects of transport
within the UK. 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.
ENTERTAINMENT PUBLICATIONS BUSINESS. In November 1999, we completed the
disposition of approximately 85% of EPub for approximately $281 million in
cash, inclusive of certain adjustments. In connection with the transaction,
we will retain an equity interest in EPub of approximately 15% (see "Recent
Developments"). In addition, we will have a designee on the EPub Board of
Directors.
Through our EPub subsidiary, we offered discount programs in specific
markets throughout North America and certain international markets and
enhance other of our Individual and Insurance/Wholesale segment products. We
believe that EPub is the largest marketer of discount program books of this
type in the United States. EPub has a sales force of approximately 1,100
people with approximately 800 people soliciting schools and approximately 300
people soliciting merchants.
EPub solicits restaurants, hotels, theaters, sporting events, retailers
and other businesses which agree to offer services and/or merchandise at
discount prices (primarily on a two-for-the-price-of-one or 50% discount
basis). EPub sells discount programs under its Entertainment(Registered
Trademark), Entertainment(Registered Trademark) Values, Gold C(Registered
Trademark) and other trademarks, which typically provide discount offers to
individuals in the form of local discount coupon books. These books typically
contain coupons and/or a card entitling individuals to hundreds of discount
offers from participating establishments. Targeting middle to upper income
consumers, many of EPub's products also contain selected discount travel
offers, including offers for hotels, car rentals, airfare, cruises and
tourist attractions. More than 70,000 merchants with over 275,000 locations
participate in these programs. EPub also uses this national base of merchants
to develop other products, most notably, customized discount programs for
major corporations. These programs also may contain additional discount
offers, specifically designed for customized discount programs.
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EPub's discount coupon books are sold annually by geographic area.
Customers are solicited primarily through schools and community groups that
distribute the discount coupon books and retain a portion of the proceeds for
their nonprofit causes. To a lesser extent, distribution occurs through
corporations as an employee benefit or customer incentive, as well as through
retailers and directly to the public. The discount coupon books are generally
provided to schools and community groups on a consignment basis. Customized
discount programs are distributed primarily by major corporations as loyalty
incentives for their current customers and/or as premiums to attract new
customers.
While prices of local discount coupon books vary, the customary price for
Entertainment(Registered Trademark), Entertainment(Registered Trademark)
Values and Gold C(Registered Trademark) coupon books range between $10 and
$45. Customized discount programs are generally sold at significantly lower
prices. In 1998, over nine million for Entertainment(Registered Trademark),
Entertainment(Registered Trademark) Values and Gold C(Registered Trademark)
and other trademarked local coupon books were published in North America.
Sally Foster, Inc., a subsidiary of EPub, provides elementary and middle
schools and selected youth community groups with gift-wrap and other seasonal
products for sale in their fund-raising efforts. EPub uses the same sales
force that sells the discount coupon books to schools, attempting to combine
the sale of gift-wrap and the sale of discount coupon books. In addition,
EPub has a specialized Sally Foster sales force.
GREEN FLAG. In November 1999, we completed the disposition of our Green
Flag business unit for approximately $410 million in cash.
Green Flag is an assistance group in the UK providing a wide range of
emergency, support and rescue services to millions of drivers and home owners
in the UK through its Green Flag Motor, Green Flag Truck and Green Flag Home
services. Green Flag has approximately 900 full and part-time employees.
Using a well established network of 6,000 mechanics and 1,500 fully
equipped garages, Green Flag Motor provides roadside recovery and assistance
services to over 3.5 million members who can choose from five levels of
cover. A distinctive feature of the Green Flag Motor service is its
partnership with independent operators who provide emergency assistance to
motorists throughout the UK and Europe. Using a network of specialists allows
Green Flag to offer its customers a fast service in emergency situations.
Through regular inspections and strictly enforced performance measures, Green
Flag's teams of operators are able to delivery reassurance to the customer,
as well as a highly reliable service.
In the truck assistance sector, the Green Flag Truck service has developed
to include pay-on-use services in the UK and Europe and a service in the UK
suited to operators who run local delivery businesses. Service is provided
using the same network of independent operators that provide fast and
efficient expertise for businesses who cannot afford to be off the road.
A network of specialists is also available to provide Green Flag's
Emergency Home Assistance and Property Repair Services. Reassurance is key
for homeowners who take an insured assistance service or choose a pay-on-use
option. Two levels of coverage are available to insure against a wide range
of problems, including central heating, roofing, gas and electrical
appliances. Through its specially selected network of operators, 75% of Green
Flag's calls for assistance are completed within one hour, 90% within two
hours.
Green Flag operates in a number of principal markets. Direct services to
the consumer is one route to market, but also through insurance companies,
car manufacturers and dealers and a large number of businesses that sell on
Green Flag assistance services as an optional or a mandatory product linked
to their own service, i.e. with car insurance or via a bank or building
society account.
The brand name of 'Green Flag' (together with the LOGO) is registered in
the United Kingdom. There is also a pending registration for a European Union
Community Mark. In addition, we have registered or pending marks for other
key brands used within the business. These include names such as:
Fleetcall/Truckcall/Dialassist/React/ Locator/Home-call and Home Assistance
Services. Also registered is the CHEQUERED SIDE STRIPE used in connection
with the MOTOR Roadside Assistance and Recovery service. (This is a safety
device for use on vehicles, which attend at the roadside.)
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Green Flag's operations are seasonally influenced in that the purchase of
motoring assistance follows holiday patterns and used car purchase, as well
as by weather conditions. This has a great impact on call volumes especially
in the winter.
INFORMATION TECHNOLOGY SERVICES. Our WizCom International, Ltd.
("WizCom") subsidiary owns and operates the Wizard System more fully
described under "TRAVEL SERVICES -- Avis Car Rental Franchise Business --
Avis System and Wizard System" above. In 1995, Budget Rent A Car Corporation
("Budget") entered into a computer services agreement with WizCom that
provides Budget with certain reservation system computer services that are
substantially similar to computer services provided to the Avis System.
WizCom has also entered into agreements with hotel and other rental car
companies to provide travel related reservation and distribution system
services.
CREDIT INFORMATION BUSINESS. Our former Central Credit Inc. ("CCI")
subsidiary (sold in August 1999) was a gambling patron credit information
business. CCI maintained a database of information provided by casinos
regarding the credit records of casino gaming patrons, and provided, for a
fee, such information and related services to its customers, which primarily
consisted of casinos. See "Recent Developments".
FINANCIAL PRODUCTS. Our former Essex Corporation ("Essex") subsidiary
(sold in January 1999) was a third-party marketer of financial products for
banks, primarily marketing annuities, mutual funds and insurance products
through financial institutions. Essex generally marketed annuities issued by
insurance companies or their affiliates, mutual funds issued by mutual fund
companies or their affiliates, and proprietary mutual funds of banks. Essex's
contracts with the insurance companies whose financial products it
distributed generally entitled Essex to a commission of slightly less than 1%
on the premiums generated through Essex's sale of annuities for these
insurance companies. See "Recent Developments".
MUTUAL FUNDS. In August 1997, we formed an alliance with Frederick R.
Kobrick, a longtime mutual fund manager, to form a mutual fund company known
as Kobrick-Cendant Funds, Inc. (Kobrick which was subsequently renamed the
Kobrick Funds). Kobrick currently offers three no-load funds, Kobrick Capital
Fund, Kobrick Emerging Growth Fund and Kobrick Growth Fund. Our interest in
Kobrick was sold to ARAC in connection with the disposition of the fleet
segment.
TAX REFUND BUSINESS. Through our former Global Refund subsidiary (sold in
August 1999), we assisted travelers to receive valued added tax ("VAT")
refunds in 22 European countries, Canada and Singapore. Global Refund was the
world's leading VAT refund service, with over 125,000 affiliated retailers
and seven million transactions per year. Global Refund operated over 400 cash
refund offices at international airports and other major points of departure
and arrival worldwide. See "Recent Developments".
OTHER SERVICES. Our former Spark Services, Inc. ("Spark") subsidiary (sold
in August 1999) provided database-driven dating services to over 300 radio
stations throughout the United States and Canada. Spark was the leading
provider of dating and personals services to the radio industry. Spark had
also begun to test television distribution of its services through
infomercials, as well as through short form advertising and affiliation deals
with various programs. Consumers paid for Spark's services on a per minute of
usage transaction basis. See "Recent Developments".
Our Numa Corporation ("NUMA") subsidiary publishes personalized heritage
publications, including publications under the Halbert's name, and markets
and sells personalized merchandise. We terminated the operations of NUMA
effective September 30, 1999.
Operating under the trade name "Welcome Wagon", we distribute
complimentary welcoming packages which provide new homeowners and other
consumers throughout the United States and Canada with discounts for local
merchants. These activities are conducted through our Welcome Wagon
International Inc. and Getko Group, Inc. subsidiaries. We are exploring
opportunities to leverage the assets and the distribution channels of such
subsidiaries.
COMBINED OPERATIONS
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS. We believe that there
are significant opportunities to capitalize on the significant and increasing
amount of aggregate purchasing power and
34
marketing outlets represented by the businesses in our business units. We
initially tapped the potential of these synergies within the lodging
franchise systems in 1993 when we launched our Preferred Alliance Program,
under which hotel industry vendors provide significant discounts, commissions
and co-marketing revenue to hotel franchisees plus preferred alliance fees to
us in exchange for being designated as the preferred provider of goods or
services to the owners of our franchised hotels or the preferred marketer of
goods and services to the millions of hotel guests who stay in the hotels and
customers of our real estate brokerage franchisees each year.
We currently participate in preferred alliance relationships with more
than 95 companies, including some of the largest corporations in the United
States. The operating profit generated by most new preferred alliance
arrangements closely approximates the incremental revenue produced by such
arrangements since the costs of the existing infrastructure required to
negotiate and operate these programs are largely fixed.
DISCONTINUED OPERATIONS
On August 12, 1998, we announced that our Executive Committee of the Board
of Directors committed to discontinue our consumer software and classified
advertising businesses by disposing of our wholly owned subsidiaries Cendant
Software and Hebdo Mag, respectively. On December 15, 1998, we completed the
sale of Hebdo Mag to a company organized by Hebdo Mag management for
approximately $450 million, including approximately $315 million in cash and
7.1 million shares of our common stock. On January 12, 1999, we completed the
sale of Software to Paris based Havas SA, a subsidiary of Vivendi SA, for
$800 million in cash plus future potential cash payments.
SOFTWARE. Our Software subsidiary offered consumer software in various
multimedia forms, predominately on CD-ROM for personal computers. The
Software unit was one of the largest personal computer consumer software
groups in the world, and a leader in entertainment, educational and personal
productivity software. It included Sierra On-Line, Inc., Blizzard
Entertainment and Knowledge Adventure, Inc., and offered such titles as
Diablo, Starcraft, You Don't Know Jack, King's Quest, JumpStart, Math
Blaster, Reading Blaster and many others. These products were offered through
a variety of distribution channels, including specialty retailers, mass
merchandisers, discounters and schools.
The entertainment, education and productivity software industry is
competitive. Software competed primarily with other developers of multimedia
PC based software. Products in the market compete primarily on the basis of
subjective factors such as entertainment value and objective factors such as
price, graphics and sound quality. Large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment and education
software market, which will result in greater competition.
The software segment had seasonal elements. Revenues were typically
highest during the third and fourth quarters and lowest during the first and
second quarters. This seasonal pattern was due primarily to the increased
demand for software products during the holiday season.
CLASSIFIED ADVERTISING. Hebdo Mag was our international publisher of over
180 titles and distributor of classified advertising information with
operations in fifteen countries including Canada, France, Sweden, Hungary,
Taiwan, the United States, Italy, Russia, the Netherlands, Australia,
Argentina and Spain. Hebdo Mag was involved in the publication, printing and
distribution, via print and electronic media, of branded classified
advertising information products. Hebdo Mag had also expanded into other
related business activities, including the distribution of third-party
services and classified advertising web sites.
Hebdo Mag published over 11 million advertisements per year in over 180
publications. With a total annual circulation of over 85 million, management
estimated Hebdo Mag publications were read by over 200 million people. Unlike
newspapers, which contain significant editorial content, Hebdo Mag
publications contained primarily classified and display advertisements. These
advertisements targeted buyers and sellers of goods and services in the
markets for used and new cars, trucks, boats, real estate, computers,
second-hand general merchandise and employment as well as personals.
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Hebdo Mag owned leading local classified advertising publishing franchises
in most of the regional markets where it had a presence. In addition to its
print titles, Hebdo Mag generated revenues by distributing third-party
services related to its classified business such as vehicle financing,
vehicle and life insurance and warranty protection.
The classified advertising information industry is highly fragmented, with
a large number of small, independent companies publishing local or regional
titles. Hebdo Mag was the only major company focused exclusively on this
industry on an international basis. In most of its major markets, Hebdo Mag
owned leading classified advertising franchises that have long standing,
recognized reputations with readers and advertisers. Among Hebdo Mag's
leading titles, many of which have been in existence for over 15 years, were:
La Centrale des Particuliers (France), Expressz (Hungary), The Trader
(Indianapolis), Traders Post (Nashville), Car News (Taiwan), Secondamano
(Italy), Auto Trader, Renters News, The Computer Paper (Canada), Iz Ruk v
Ruki (Russia), Gula Tidningen (Sweden), Segundamano (Argentina) and The
Melbourne Trading Post (Australia).
REGULATION
DIRECT MARKETING REGULATION. We market our products and services through a
number of distribution channels including telemarketing, direct mail and
on-line. These channels are regulated on the state and federal level and 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.
A number of our products and services (such as Travelers
Advantage(Registered Trademark) and certain insurance products) are also
subject to state and local regulations. We believe that such regulations do
not have a material impact on our business or revenues.
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. 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 legislation or regulation.
REAL ESTATE REGULATION. The federal Real Estate Settlement Procedures Act
and state real estate brokerage laws restrict payments which real estate
brokers 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 banking services 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.
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,
with regulators in states that require it, the "RCI Disclosure Guide to
Vacation Exchange". 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 Network. Therefore, the statutes indirectly impact our
timeshare exchange business.
EMPLOYEES
As of December 31, 1998, we employed approximately 35,000 persons
fulltime. Management considers our employee relations to be satisfactory.
36
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space and located at
9 West 57th Street, New York, NY 10019. 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 a building leased by us and located
at 1 Sylvan Way, Parsippany, New Jersey 07054 with a lease term expiring in
2008.
Our Travel Division has two 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 ARAC, and a property
located in Kettering, UK which is the European office for RCI. The Travel
Division also leases space for its reservations centers and data warehouse in
Winner and Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and
Elizabethtown, Tennessee; Tulsa and Drumright, Oklahoma; Indianapolis,
Indiana; Orangeburg, South Carolina and St. John, New Brunswick, Canada
pursuant to leases that expire in 2000, 2003, 2007, 2004, 1999, 2001, 2000,
2001, 2008, 2001 and 2008, respectively. The Tulsa and Drumright, Oklahoma
location serves as an Avis car rental reservations center. In addition, the
Travel Division has 18 leased offices spaces located within the United States
and an additional 30 leased spaces in various countries outside the United
States.
The Real Estate Division shares approximately six leases with the Travel
Division in various locations that function as sales offices.
The Individual Membership Segment has its principal offices located in
Stamford and Trumbull, Connecticut. The Individual Membership Segment leases
space for several of its call centers in Aurora, Colorado; Westerville, Ohio;
Brentwood, Tennessee; Houston and Arlington, Texas; Woburn, Massachusetts and
Great Falls, Montana pursuant to leases that expire in 2000, 2005, 2002,
2000, 2000, 2001 and 1999, respectively. We also own one building located in
Cheyenne, Wyoming which serves as a call center. In addition, the Individual
Membership Segment has leased smaller space in various locations for business
unit and ancillary needs. Internationally, the Individual Membership Segment
has approximately seven leased offices spaces located in various countries.
The Relocation Segment has their main corporate operations located in a
leased building in Danbury, Connecticut with a lease term expiring in 2008.
There are also five regional offices located in Walnut Creek, California;
Oakbrook and Schaumburg, Illinois; Irving, Texas and Mission Viejo,
California which provide operation support services for the region pursuant
to leases that expire in 2004, 2003, 2001 and 2003, respectively. We own the
office in Mission Viejo.
The Mortgage Segment has centralized its operations to one main area
occupying various leased offices in Mt. Laurel, New Jersey for a total of
approximately 600,000 square feet. The lease terms expire over the next ten
years.
The Insurance/Wholesale Segment leases domestic space in Nashville,
Tennessee; San Carlos, California; and Crozier, Virginia with lease terms
ending in 2002, 2003 and 1999, respectively. In addition, there are 11 leased
locations internationally that function as sales and administrative offices
for international membership with the main office located in Portsmouth, UK.
We own properties in Virginia Beach, Virginia and Westbury, New York and
lease space in Garden City, New York and Troy, Michigan that supports the
Other Consumer and Business Services Segment. The Garden City and Troy
locations are the main operation and administrative centers for Wizcom and
EPub, respectively. In addition, there are approximately six leased office
locations in the United States. Internationally, we lease office space in
London, UK (18,000 square feet) and own two buildings in Leeds, UK (86,000
square feet) and one building in Bradford, England (25,000 square feet) to
support this segment.
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.
37
ITEM 3. LEGAL PROCEEDINGS
A. CLASS ACTION AND OTHER LITIGATION AND GOVERNMENT INVESTIGATIONS
Since our 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/A, 70 lawsuits claiming to be class actions,
two lawsuits claiming to be brought derivatively on our behalf and several
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 Court 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 December 14, 1998, the lead plaintiffs in the Securities Action moved
for partial summary judgment, on liability only, against the Company on the
claims under Section 11 of the Securities Act. The lead plaintiffs adjourned
this motion, however, without prejudice to their right to re-notice the
motion at a subsequent time.
On January 25, 1999, the Company answered the Amended Consolidated
Complaint and asserted Cross-Claims against Ernst & Young LLP ("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.
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 July 15, 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.
38
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.
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 Settlement below and
Note 6).
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D.N.J.) and
P. Schoenfield Asset ManagementLLC 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 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. Plaintiffs' appeal from the District Court's decision is pending before
the United States Court of Appeals for the Third Circuit.
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 Company has filed Cross-Claims against Ernst & Young in two of
these transferred actions, Yeager v. Cendant Corp., originally filed on the
Central District of California, and Wyatt v. Cendant Corp., originally filed
in the Southern District of Florida.
Among the actions transferred is Reliant Trading and Shepherd Trading Lmt.
v. Cendant Corp., originally filed in the Eastern District of Wisconsin. The
plaintiffs in Reliant allegedly purchased certain 43/4% 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.
Another action transferred to the District of New Jersey is Daystar
Special Situations Fund, L.P. and Dayster LLC v. Cendant Corp., originally
filed in the Southern District of New York in July 1999 to the District of
New Jersey. Plaintiffs, in Daystar, allege that after disclosure of the
accounting irregularities by us in April 1998, Cendant's Chief Executive
Officer, and another Cendant director, made material
39
misstatements in face-to-face meetings with plant representation of
plaintiffs regarding the full extent of the accounting irregularities.
Plaintiffs allege that they relied on such statements in purchasing over 3
million shares of Cendant stock in April, May and June 1998. Plaintiffs seek,
among other things, damages in excess of $35 million.
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.
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.
Raymond H. Stanton II and Raymond H. Stanton III v. Cendant Corp. is in
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.
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. 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,
40
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 Davisdons 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 statue 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 JPML on August 12, 1999.
Deutch v. Silverman, et al., No. 98-1998 (WHW) (the "Deutch Action"), is a
purported 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 and officers; The Bear Stearns Companies, Inc.; Bear
Stearns & Co., Inc.; and, as a nominal party, the Company. The complaint in
the Deutch Action, as amended on December 7, 1998, alleges that certain
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. The
complaint also alleges that the individual officers and directors breached
their fiduciary duties and committed acts of gross negligence 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, last summer under which Mr. Forbes received
approximately $47.5 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. The Company
and the other defendants each moved to dismiss the Deutch Action. On August
8, 1999, the Court dismissed certain claims against some of the individual
officers and directors and all claims against the Bear Stearns defendants.
The Court denied the Company's motion to dismiss. On August 23, 1999, the
Company filed its Answer and Affirmative Defenses to the Complaint, in which
it denied all of the material allegations in the Complaint.
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
41
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.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to accounting irregularities. The SEC
staff has advised us that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred.
As a result of the findings from the investigations, we made all adjustments
considered necessary which are reflected in our restated financial
statements. Although we can provide no assurances that additional adjustments
will not be necessary as a result of these government investigations, we do
not expect that additional adjustments will be necessary.
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 principal securities class action pending against the
Company in the U.S. District Court in Newark, New Jersey relating to the
aforementioned class action lawsuits. Under the agreement, the Company would
pay the class members $2.83 billion in cash. The settlement remains subject
to execution of a definitive settlement agreement and approval by the U.S.
District Court. If the preliminary settlement is not approved by the U.S.
District Court, the Company can make no assurances that the final outcome or
settlement of such proceedings will not be for an amount greater than that
set forth in the preliminary agreement. We currently plan to fund the
settlement through the use of available cash, 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
preliminary 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 the
plaintiff's 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 stipulation of settlement, eligible persons will receive a new security
- -a Right -for each PRIDES security held on April 15, 1998. For example,
if a person held 100 PRIDES on April 15, 1998, they would receive 100 Rights.
Current holders of PRIDES will not receive any Rights (unless they also held
PRIDES on April 15, 1998). We had originally announced a preliminary
agreement in principle to settle such lawsuit on January 7, 1999. The final
agreement maintained the basic structure and accounting treatment as the
preliminary agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per share ($351 million pre-tax), in the
fourth quarter of 1998 associated with the settlement agreement in principle
to settle the PRIDES securities class action. We recorded an increase in
additional paid-in capital of $350 million offset by a decrease in retained
earnings of $228 million resulting in a net increase in stockholders' equity
of $122 million as a result of the prospective issuance of the Rights. As a
result, the settlement should not reduce net book value. In addition the
settlement is not expected to reduce 1999 earnings per share unless our
common stock price materially appreciates.
At any time during the life of the Rights, holders of Rights may (a) sell
them or (b) exercise them by delivering to us three Rights together with two
PRIDES in exchange for two new PRIDES (the "New
42
PRIDES"). For example, if a holder of Rights exchanges three rights together
with two current Income PRIDES, they will receive two New Income PRIDES. If a
holder of Rights exchanges three Rights together with two Growth PRDIDES,
they will receive two New Growth PRIDES. The terms of the New PRIDES will be
the same as the currently outstanding PRIDES, except that the conversion rate
will be revised so that, at the time the Rights are distributed, each of the
New PRIDES will have a value equal to $17.57 more than each original PRIDES,
based upon a generally accepted valuation model. Based upon the closing price
per share of $17.53 of our Common Stock on September 30, 1999, the effect of
the issuance of the New PRIDES will be to distribute approximately 19 million
more shares of our common stock when the mandatory purchase of our common
stock associated with the PRIDES occurs in February of 2001. This represents
approximately 2% more shares of common stock than are currently outstanding.
The settlement agreement also requires us to offer to sell 4 million
additional PRIDES (having identical terms to currently outstanding PRIDES)
(the "Additional PRIDES") at "theoretical value" to holders of Rights for
cash. Theoretical value will be based on the same valuation model utilized to
set the conversion rate of the New PRIDES. The offering of Additional PRIDES
will be made only pursuant to a prospectus filed with the SEC. We currently
expect to use the proceeds of such an offering to repurchase our common stock
and for other general corporate purposes. The arrangement to offer Additional
PRIDES is designed to enhance the trading value of the Rights by removing up
to 6 million Rights from circulation via exchanges associated with the
offering. If holders of Rights do not acquire all such PRIDES, they will be
offered to the public.
Under the settlement agreement, we have also agreed to file a shelf
registration statement for an additional 15 million PRIDES, which could be
issued by us at any time for cash. However, during the last 30 days prior to
the expiration of the Rights in February 2001, we will be required to make
these additional PRIDES available to holders of Rights at a price in cash
equal to 105% of the theoretical value of the additional PRIDES as of a
specified date. The PRIDES, if issued, would have the same terms as the
currently outstanding PRIDES and could be used to exercise Rights.
On June 15, 1999, the United States District Court for the District of New
Jersey entered an order and judgment approving the settlement and awarding
fees to counsel to the class. Cendant presently intends to distribute the
Rights in or about October 1999.
One objector, who objected to a portion of the settlement notice
concerning fees to be sought by counsel to the class, and the amount of fees
sought by counsel to the class, has filed an appeal to the U.S. Court of
Appeals for the Third Circuit from the order and judgement approving the
settlement. Cendant believes this appeal is without merit. Counsel for the
plaintiff class has moved to dismiss this appeal. This motion is pending
before the Third Circuit.
On September 7, 1999, Cendant moved the District Court for an order
disallowing claims by purported class members seeking a total of
approximately 4 million Rights pursuant to the settlement, on the grounds
that such claims were filed untimely and/or not supported by appropriate
documentation. On October 6, 1999, the District Court of New Jersey heard
oral argument on the Company's motion. A definitive written decision is
expected shortly.
43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual meeting of our shareholders on October 30, 1998,
pursuant to a Notice of Annual Meeting and Proxy Statement dated September
28, 1998, a copy of which has been filed previously with the Securities and
Exchange Commission, at which our shareholders considered and approved the
election of six directors for a term of three years, the Company's 1998
Employee Stock Purchase Plan, and ratification of Deloitte & Touche LLP as
auditors. The results of such matters are as follows:
Proposal 1: To elect six directors for a three-year term and until their
successors are duly elected and qualified.
Results: For Withheld
------------- ------------
729,374,048 21,047,428
Proposal 2: To approve the Company's 1998 Employee Stock Purchase Plan
Results: For Against Abstain
------------- ------------ ----------
714,345,354 33,516,760 1,938,144
Proposal 3: To ratify and approve the appointment of Deloitte & Touche LLP
as the Company's Independent Auditors for the year ending
December 31, 1998.
Results: For Against Abstain
------------- ----------- ---------
744,191,719 5,471,312 758,445
44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
MARKET PRICE ON COMMON STOCK
Our Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "CD". At March 22, 1999 the number of stockholders of record was
approximately 10,841. The following table sets forth the quarterly high and
low sales prices per share as reported by the NYSE for 1998 and 1997 based on
a year ended December 31.
1997 HIGH LOW
- ----------------------------- ----------- -----------
First Quarter 26 7/8 22 1/2
Second Quarter 26 3/4 20
Third Quarter 31 3/4 23 11/16
Fourth Quarter 31 3/8 26 15/16
1998 High Low
- ----------------------------- ----------- -----------
First Quarter 41 32 7/16
Second Quarter 41 3/8 18 9/16
Third Quarter 22 7/16 10 7/16
Fourth Quarter 20 5/8 7 1/2
On March 22, 1999, the last sale price of our Common Stock on the NYSE was
$16 5/16 per share.
All stock price information has been restated to reflect a three-for-two
stock split effected in the form of a dividend to stockholders of record on
October 7, 1996, payable on October 21, 1996.
DIVIDEND POLICY
We expect to retain our earnings for the development and expansion of its
business and the repayment of indebtedness and do not anticipate paying
dividends on Common Stock in the foreseeable future.
45
ITEM 6. SELECTED FINANCIAL DATA (1) (2)
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995
------------ ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATIONS
NET REVENUES .................................. $ 5,283.8 $ 4,240.0 $ 3,237.7 $ 2,616.1
------------ ----------- ----------- -----------
Operating expense ............................. 1,869.1(3) 1,322.3 1,183.2 1,024.9
Marketing and reservation expense.............. 1,158.5 1,031.8 910.8 743.6
General and administrative expense ............ 666.3 636.2 341.0 283.3
Depreciation and amortization expense ........ 322.7 237.7 145.5 100.4
Other charges ................................. 838.3(4) 704.1(5) 109.4(6) 97.0(7)
Interest expense, net ......................... 113.9 50.6 14.3 16.6
Provision for income taxes .................... 104.5 191.0 220.2 143.2
Minority interest, net ........................ 50.6 -- -- --
------------ ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ............. $ 159.9 $ 66.3 $ 313.3 $ 207.1
------------ ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS PER SHARE:
Basic ......................................... $ 0.19 $ 0.08 $ 0.41 $ 0.30
Diluted ....................................... 0.18 0.08 0.39 0.28
FINANCIAL POSITION
Total assets .................................. $ 20,216.5 $14,073.4 $12,762.5 $ 8,519.5
Long-term debt ................................ 3,362.9 1,246.0 780.8 336.0
Assets under management and mortgage programs 7,511.9 6,443.7 5,729.2 4,955.6
Debt under management and mortgage programs .. 6,896.8 5,602.6 5,089.9 4,427.9
Mandatorily redeemable securities issued by
subsidiary ................................... 1,472.1 -- -- --
Shareholders' equity .......................... 4,835.6 3,921.4 3,955.7 1,898.2
OTHER INFORMATION (8)
Cash flows provided by (used in):
Operating activities .......................... 808.0 1,213.0 1,493.4 1,144.3
Investing activities .......................... (4,351.8) (2,328.6) (3,090.8) (1,789.0)
Financing activities .......................... 4,689.6 900.1 1,780.8 661.2
- ------------
(1) Selected financial data is presented for four years. Financial data
subsequent to December 31, 1994 had been restated as a result of
findings from investigations into accounting irregularities discovered
at the former business units of CUC International, Inc. ("CUC").
Financial data for periods prior to December 31, 1994 was not restated
and therefore should not be relied on (see Note 18 to the consolidated
financial statements).
(2) Selected financial data includes the operating results of acquisitions
accounted for under the purchase method of accounting since the
respective dates of acquisition, including: (i) National Parking
Corporation in April 1998; (ii) Harpur Group in January 1998; (iii)
Jackson Hewitt, Inc. in January 1998; (iv) Resort Condominiums
International, Inc. in November 1996; (v) Avis, Inc. in October 1996;
(vi) Coldwell Banker Corporation in May 1996; and (vii) Century 21 Real
Estate Corporation in August 1995.
(3) Includes a non-cash charge of $50.0 million ($32.2 million, after tax
or $0.04 per diluted share) related to the write off of certain equity
investments in interactive membership businesses and impaired goodwill
associated with the National Library of Poetry, a Company subsidiary.
(4) Represents charges of: (i) $433.5 million ($281.7 million, after tax or
$0.32 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers Insurance Group, Inc. and Providian
Auto and Home Insurance Company; (ii) $351.0 million ($228.2 million,
after tax or $0.26 per diluted share) associated with the final
agreement to settle the PRIDES securities class action suit; and (iii)
$121.0 million ($78.7 million, after tax or $0.09 per diluted share)
comprised of the costs of the investigations into previously discovered
accounting irregularities at the former CUC business units, including
incremental financing costs and separation payments, principally to the
Company's former chairman. The aforementioned charges were partially
offset by a credit of $67.2 million ($43.7 million, after tax or $0.05
per diluted share) associated with changes in the original estimate of
1997 merger-related costs and other unusual charges.
46
(5) Represents merger-related costs and other unusual charges related to
continuing operations of $704.1 million ($504.7 million, after tax or
$0.58 per diluted share) primarily associated with the Cendant merger
in December 1997 and merger with PHH Corporation ("PHH") in April 1997.
(6) Represents merger-related costs and other unusual charges related to
continuing operations of $109.4 million ($70.0 million, after tax or
$0.09 per diluted share) substantially related to the Company's August
1996 merger with Ideon Group, Inc. ("Ideon").
(7) Represents a provision for costs related to the abandonment of certain
Ideon development efforts and the restructuring of certain Ideon
operations. The charges aggregated $97.0 million ($62.1 million, after
tax or $0.08 per diluted share).
(8) There were no dividends declared during the periods presented above
except for PHH and Ideon, which declared and paid dividends to their
shareholders prior to their respective mergers with the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are one of the foremost providers of real estate related, travel
related and direct marketing consumer and business services companies in the
world. We were created through the December 1997 merger (the "Cendant
Merger") of HFS Incorporated ("HFS") and CUC International Inc. ("CUC"). We
provide business services to our customers, many of which are consumer
services companies, and also provide fee-based services directly to
consumers, generally without owning the assets or sharing the risks
associated with the underlying businesses of our customers or collaborative
partners.
We operate in four principal divisions -travel related services, real
estate related services, direct marketing services and other consumer and
business services. Our businesses provide a wide range of complementary
consumer and business services, which together represent eight business
segments. The travel related services businesses facilitate vacation
timeshare exchanges, manage corporate and government vehicle fleets and
franchise car rental and hotel businesses; the real estate related services
businesses franchise real estate brokerage businesses, provide home buyers
with mortgages and assist in employee relocation; and the direct marketing
services businesses, provide an array of value driven products and services.
Our other consumer and business services include our tax preparation services
franchise, information technology services, car parking facility services,
vehicle emergency support and rescue services, credit information services,
financial products and other consumer-related services.
As a franchisor of hotels, real estate brokerage offices, car rental
operations and tax preparation services, we license the owners and operators
of independent businesses to use our brand names. We do not own or operate
hotels, real estate brokerage offices, car rental operations or tax
preparation offices (except for certain company-owned Jackson Hewitt offices,
which we intend to franchise). Instead, we provide our franchisee customers
with services designed to increase their revenue and profitability.
In connection with our previously announced program to focus on maximizing
the opportunities and growth potential of our existing businesses, we
divested several non-strategic businesses and assets and have completed or
commenced certain other strategic initiatives related to our internet
businesses. Pursuant to such program, we completed the dispositions of North
American Outdoor Group, Global Refund Group, the Fleet businesses, Central
Credit, Inc., Spark Services, Inc., Match.com, National Leisure Group,
National Library of Poetry, Essex Corporation, Cendant Software Corporation,
Hebdo Mag International, Inc., the Green Flag Group ("Green Flag") and
Entertainment Publications, Inc. ("EPub"). The divestiture program generated
approximately $4.5 billion in proceeds. (see "Liquidity and Capital Resources
- -- Divestitures"). As a result of the divestitures program, we divested
former CUC businesses representing approximately 45% of CUC's revenues in
1997, the year in which CUC merged with HFS.
In addition to the above mentioned divestitures, we have recently
initiated certain internet strategies outlined below.
On September 30, 1999, we anounced that our Board of Directors approved a
new series of Cendant common stock to track the performance of the Move.com
Group, a group of businesses owned by us which will be engaged in providing a
broad range of home-related services through a new internet services
47
portal. The Move.com Group commenced operations in the third quarter of 1999
with the internet site scheduled to become functional during January 2000.
The Board of Directors approved the creation of the Move.com Group and the
tracking stock without reviewing financial information related thereto since
this was a new venture based upon an existing business, RentNet, Inc.
("RentNet"). Prior to the formation of the Move.com Group, RentNet's
historical financial information was included in our Individual Membership
segment. Beginning in the third quarter of 1999, coincident with our Board of
Directors approval to create a new class of common stock, we have provided
separate footnote disclosure of the Move.com Group's separate financial
information within our consolidated financial statements. We have filed a
proxy with the Securities and Exchange Commission, which contains financial
details as well as more specific plans concerning the transaction. If we
obtain shareholder approval for the tracking stock, we currently intend to
issue such tracking stock in a public offering in the second quarter of 2000.
The Move.com Group will integrate and enhance the on-line efforts of our
residential real estate brands and those of our other real estate business
units drawing on the success of our RentNet on-line apartment guide business
model. The Move.com Group encompasses all aspects of the home experience
including finding a home, buying or renting a home, moving and after close
home improvements.
The Move.com Group's business consists of three primary sources of
revenue: rental directory services, e-commerce/advertising and real estate
related products including mortgage brokerage. In addition to the Move.com
site itself, the Move.com Group assets include RentNet, a company we
orginally acquired during January 1996, National Home Connections LLC, a
company we acquired in May 1999, and the assets of MetroRent which we
acquired in the fourth quarter of 1999.
On September 15, 1999, we donated Netmarket, Inc., ("NGI") outstanding
common stock to a charitable trust (the "Trust") and NGI began operations as
an independent company that will pursue the development of the interactive
on-line businesses formerly within our direct marketing division. The
structure would allow NGI to use its equity to attract, retain and incent
employees, permit NGI to pursue strategic alliances and acquisitions and to
make operational and strategic decisions without the need to consider the
impact of those decisions on us. In addition, the contribution would
establish a charitable foundation that would enhance our image in the
marketplace. Although no assurances can be given, we believe the donation of
NGI to a separate autonomous entity will increase the likelihood that NGI
will be successful and increase in value thereby increasing the value of our
investment. Our shareholders should benefit from the potential increased
value. The beneficiaries of the Trust include The Inner City Games
Foundation, the Susan G. Komen Breast Cancer Foundation, Inc. and Community
Funds, Inc. The fair market value of NGI common stock on the date of
contribution was estimated to be approximately $20 million. NGI will own,
operate, develop and expand the on-line membership businesses. We donated
NGI's outstanding common stock to the Trust and retained an ownership of a
convertible preferred stock of NGI, which is ultimately exchangeable, at our
option, until after September 14, 2001, into 78% of NGI's diluted common
shares which has a $5 million annual preferred dividend. Accordingly, as a
result of the change in ownership, NGI's operating results will no longer be
included in our consolidated financial statements. The convertible preferred
stock will be accounted for using the cost method of accounting. The
preferred stock dividend will be recorded in income if and when it becomes
realizable.
Prior to the Cendant Merger, both HFS and CUC had grown significantly
through mergers and acquisitions accounted for under both the pooling of
interests method, the most significant being the merger of HFS with PHH
Corporation ("PHH") in April 1997 (the "PHH Merger"), and purchase method of
accounting. The underlying Results of Operations discussions are presented as
if all businesses acquired in mergers and acquisitions accounted for as
poolings of interests have operated as one entity since inception.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto included elsewhere herein.
Our operating results and the operating results of certain of our
underlying business segments are comprised of business combinations accounted
for under the purchase method of accounting.
48
Accordingly, the results of operations of such acquired companies have been
included in our consolidated operating results and our applicable business
segments from the respective dates of acquisition. See "Liquidity and Capital
Resources" for a discussion of our purchase method acquisitions.
CONSOLIDATED RESULTS -- 1998 VS. 1997
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 % CHANGE
----------- ----------- ----------
(DOLLARS IN MILLIONS)
Net revenues .............................................. $5,283.8 $4,240.0 25%
----------- ----------- ----------
Expenses
Operating ................................................ 1,869.1 1,322.3 41%
Marketing and reservation ................................ 1,158.5 1,031.8 12%
General and administrative ............................... 666.3 636.2 5%
----------- ----------- ----------
3,693.9 2,990.3 24%
----------- ----------- ----------
Depreciation and amortization expense ..................... 322.7 237.7 36%
Other charges
Litigation settlement ..................................... 351.0 -- *
Termination of proposed acquisitions ...................... 433.5 -- *
Executive terminations .................................... 52.5 -- *
Investigation-related costs ............................... 33.4 -- *
Merger-related costs and other unusual charges (credits) . (67.2) 704.1 *
Financing costs ........................................... 35.1 -- *
Interest expense, net ..................................... 113.9 50.6 125%
----------- ----------- ----------
Pre-tax income from continuing operations before minority
interest, extraordinary gain and cumulative effect of
accounting change ........................................ 315.0 257.3 22%
Provision for income taxes ................................ 104.5 191.0 (45%)
Minority interest, net of tax ............................. 50.6 -- *
----------- ----------- ----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change ......... 159.9 66.3 141%
Loss from discontinued operations, net of tax ............. (25.0) (26.8) *
Gain on sale of discontinued operations, net of tax ...... 404.7 -- *
Extraordinary gain, net of tax ............................ -- 26.4 *
Cumulative effect of accounting change, net of tax ....... -- (283.1) *
----------- ----------- ----------
Net income (loss) ......................................... $ 539.6 $ (217.2) *
=========== =========== ==========
- ------------
* Not meaningful.
REVENUES
Revenues increased $1.0 billion (25%) in 1998 over 1997, which reflected
growth in substantially all of our reportable operating segments. Significant
contributing factors which gave rise to such increases included substantial
growth in the volume of mortgage services provided and an increase in the
amount of royalty fees received from our franchised brands, principally
within the real estate franchise segment. In addition, revenues in 1998
included the operating results of 1998 acquisitions, including National
Parking Corporation Limited ("NPC") and Jackson Hewitt Inc. ("Jackson
Hewitt"). A detailed discussion of revenues trends from 1997 to 1998 is
included in the section entitled "Results of Reportable Operating Segments --
1998 vs. 1997."
49
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $85.0 million (36%) in
1998 over 1997 as a result of incremental amortization of goodwill and other
intangible assets from 1998 acquisitions and increased capital spending
primarily to accommodate growth in our businesses.
1998 OTHER CHARGES
LITIGATION SETTLEMENT. We recorded a non-cash charge of $351.0 million in
the fourth quarter of 1998 in connection with an agreement to settle a class
action lawsuit that was brought on behalf of the holders of our Income or
Growth FELINE PRIDES securities who purchased their securities on or prior to
April 15, 1998, the date on which we announced the discovery of accounting
irregularities in the former business units of CUC (see "Liquidity and
Capital Resources --FELINE PRIDES and Trust Preferred Securities").
TERMINATION OF PROPOSED ACQUISITIONS. We incurred $433.5 million of costs,
which included a $400.0 million cash payment to American Bankers Insurance
Group, Inc. ("American Bankers"), in connection with terminating the proposed
acquisitions of American Bankers and Providian Auto and Home Insurance
Company ("Providian") (see "Liquidity and Capital Resources -- Termination of
Proposed Acquisitions").
EXECUTIVE TERMINATIONS. We incurred $52.5 million of costs in 1998 related
to the termination of certain of our former executives, principally Walter A.
Forbes, who resigned as our Chairman and as a member of our Board of
Directors on July 28, 1998. The severance agreement reached with Mr. Forbes
entitled him to the benefits required by his employment contract relating to
a termination of Mr. Forbes' employment with us for reasons other than for
cause. Aggregate benefits given to Mr. Forbes resulted in a charge of $50.9
million comprised of $38.4 million in cash payments and 1.3 million of
immediately vested Company stock options, with a Black-Scholes value of $12.5
million. The main benefit to us from Mr. Forbes' termination was the
resolution of the division of the governance issues that existed at that time
between the members of the Board of Directors formerly associated with CUC
and the members of the Board formerly associated with HFS.
INVESTIGATION-RELATED COSTS. We incurred $33.4 million of professional
fees, public relations costs and other miscellaneous expenses in connection
with our discovery of accounting irregularities in the former business units
of CUC and the resulting investigations into such matters.
FINANCING COSTS. In connection with our discovery and announcement of
accounting irregularities and the corresponding lack of audited financial
statements, we were temporarily disrupted in accessing public debt markets.
As a result, we paid $27.9 million in fees associated with waivers and
various financing arrangements. Additionally, during 1998, we exercised our
option to redeem our 4 3/4% Convertible Senior Notes (the "4 3/4% Notes"). At
such time, we anticipated that all holders of the 4 3/4% Notes would elect to
convert the 4 3/4% Notes to our common stock. However, at the time of
redemption, holders of the 4 3/4% Notes elected not to convert the 4 3/4%
Notes to our common stock and as a result, we redeemed such notes at a
premium. Accordingly, we recorded a $7.2 million loss on early extinguishment
of debt.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
We incurred merger-related costs and other unusual charges ("Unusual
Charges") in 1997 related to continuing operations of $704.1 million
primarily associated with the Cendant Merger (the "Fourth Quarter 1997
Charge") and the PHH Merger (the "Second Quarter 1997 Charge").
50
NET BALANCE AT
UNUSUAL REDUCTIONS DECEMBER 31,
CHARGES 1997 1998 1998
--------- ---------- ---------- --------------
(INMILLIONS)
Fourth Quarter 1997 Charge ............................. $454.9 $(257.5) $(130.2) $67.2
Second Quarter 1997 Charge ............................. 283.1 (207.0) (59.7) 16.4
--------- ---------- ---------- --------------
Total .................................................. 738.0 (464.5) (189.9) 83.6
Reclassification for discontinued operations .......... (33.9) 33.9 -- --
--------- ---------- ---------- --------------
Total Unusual Charges related to continuing operations $704.1 $(430.6) $(189.9) $83.6
========= ========== ========== ==============
FOURTH QUARTER 1997 CHARGE. We incurred Unusual Charges in the fourth
quarter of 1997 totaling $454.9 million substantially associated with the
Cendant Merger and our merger in October 1997 with Hebdo Mag International,
Inc. ("Hebdo Mag"), a classified advertising business. Reorganization plans
were formulated prior to and implemented as a result of the mergers. We
determined to streamline our corporate organization functions and eliminate
several office locations in overlapping markets. Our management's plan
included the consolidation of European call centers in Cork, Ireland and
terminations of franchised hotel properties.
Unusual Charges included $93.0 million of professional fees primarily
consisting of investment banking, legal and accounting fees incurred in
connection with the aforementioned mergers. We also incurred $170.7 million
of personnel-related costs including $73.3 million of retirement and employee
benefit plan costs, $23.7 million of restricted stock compensation, $61.4
million of severance resulting from consolidations of European call centers
and certain corporate functions and $12.3 million of other personnel-related
costs. Unusual Charges included $78.3 million of business termination costs
which consisted of a $48.3 million non-cash impairment write-down of hotel
franchise agreement assets associated with a quality upgrade program and
$30.0 million of costs incurred to terminate a contract which may have
restricted us from maximizing opportunities afforded by the Cendant Merger.
We also provided for facility-related and other costs of $112.9 million
including $70.0 million of irrevocable contributions made to independent
technology trusts for the direct benefit of lodging and real estate
franchisees, $16.4 million of building lease termination costs and a $22.0
million reduction in intangible assets associated with our wholesale annuity
business for which impairment was determined in 1997. During the year ended
December 31, 1998, we recorded a net credit of $28.1 million to Unusual
Charges with a corresponding reduction to liabilities primarily as a result
of a change in the original estimate of costs to be incurred. We made cash
payments of $102.6 million and $152.2 million during 1998 and 1997,
respectively, related to the Fourth Quarter 1997 Charge. Liabilities of $67.2
million remained at December 31, 1998 which were primarily attributable to
future severance costs and executive termination benefits, which we
anticipate that such liabilities will be settled upon resolution of the
related contingencies.
SECOND QUARTER 1997 CHARGE. We incurred $295.4 million of Unusual Charges
in the second quarter of 1997 primarily associated with the PHH Merger.
During the fourth quarter of 1997, as a result of changes in estimate, we
adjusted certain merger-related liabilities, which resulted in a $12.3
million credit to Unusual Charges. Reorganization plans were formulated in
connection with the PHH Merger and were implemented upon consummation. The
PHH Merger afforded us, at such time, an opportunity to rationalize our
combined corporate, real estate and travel-related businesses, and enabled
our corresponding support and service functions to gain organizational
efficiencies and maximize profits. We initiated a plan just prior to the PHH
Merger to close hotel reservation call centers, combine travel agency
operations and continue the downsizing of fleet operations by reducing
headcount and eliminating unprofitable products. In addition, we initiated
plans to integrate our relocation, real estate franchise and mortgage
origination businesses to capture additional revenues through the referral of
one business unit's customers to another. We also formalized a plan to
centralize the management and headquarters functions of our corporate
relocation business unit subsidiaries. Such initiatives resulted in
write-offs of abandoned systems and leasehold assets commencing in the second
quarter of 1997. The aforementioned reorganization plans included the
elimination of PHH corporate functions and facilities in Hunt Valley,
Maryland.
51
Unusual Charges included $154.1 million of personnel-related costs
associated with employee reductions necessitated by the planned and announced
consolidation of our corporate relocation service businesses worldwide as
well as the consolidation of our corporate activities. Personnel-related
charges also included termination benefits such as severance, medical and
other benefits and provided for retirement benefits pursuant to pre-existing
contracts resulting from a change in control. Unusual Charges also included
professional fees of $30.3 million, primarily comprised of investment
banking, accounting and legal fees incurred in connection with the PHH
Merger. We incurred business termination charges of $55.6 million, which were
comprised of $38.8 million of costs to exit certain activities primarily
within our fleet business (including $35.7 million of asset write-offs
associated with discontinued activities), a $7.3 million termination fee
associated with a joint venture that competed with our PHH Mortgage Services
business (now known as Cendant Mortgage Corporation) and $9.6 million of
costs to terminate a marketing agreement with a third party in order to
replace the function with internal resources. We also incurred
facility-related and other charges totaling $43.1 million including costs
associated with contract and lease terminations, asset disposals and other
expenses related to the consolidation and closure of excess office space.
During the year ended December 31, 1998, we recorded a net credit of $39.6
million to Unusual Charges with a corresponding reduction to liabilities
primarily as a result of a change in the original estimate of costs to be
incurred. We made cash payments of $27.8 million and $150.2 million during
1998 and 1997, respectively, related to the Second Quarter 1997 Charge.
Liabilities of $16.4 million remained at December 31, 1998, which were
attributable to future severance and lease termination payments. We
anticipate that severance will be paid in installments through April 2003 and
lease terminations will be paid in installments through August 2002.
INTEREST EXPENSE AND MINORITY INTEREST, NET
Interest expense, net, increased $63.3 million (125%) in 1998 over 1997
primarily as a result of incremental average borrowings during 1998 and a
nominal increase in the cost of funds. We primarily used debt to finance $2.9
billion of acquisitions and investments during 1998, which resulted in an
increase in the average debt balance outstanding as compared to 1997. The
weighted average interest rate on long-term debt increased from 6.0% in 1997
to 6.2% in 1998. In addition to interest expense on long-term debt, we also
incurred $50.6 million of minority interest, net of tax, primarily related to
the preferred dividends payable in cash on our FELINE PRIDES and trust
preferred securities issued in March 1998 (see "Liquidity and Capital
Resources -- Financing Exclusive of Management and Mortgage Financing --
FELINE PRIDES and Trust Preferred Securities").
PROVISION FOR INCOME TAXES
Our effective tax rate was reduced from 74.3% in 1997 to 33.2% in 1998 due
to the non-deductibility of a significant amount of Unusual Charges recorded
during 1997 and the favorable impact in 1998 of reduced rates in
international tax jurisdictions in which we commenced business operations
during 1998. The 1997 effective income tax rate included a tax benefit on
1997 Unusual Charges, which were deductible at an effective rate of only
29.1%. Excluding Unusual Charges, the effective income tax rate on income
from continuing operations in 1997 was 40.6%.
DISCONTINUED OPERATIONS
Pursuant to our program to divest non-strategic businesses and assets, we
committed to discontinue our consumer software and classified advertising
businesses in August 1998 (the "Measurement Date") and subsequently sold such
businesses in January 1999 and December 1998, respectively. We recorded a
$404.7 million gain, net of tax, on the sale of discontinued operations in
1998, related to the dispositions of our classified advertising and consumer
software businesses.
Loss from discontinued operations, net of tax, was $25.0 million in 1998
compared to $26.8 million in 1997. Loss from discontinued operations in 1998
includes the operating results of our former classified advertising and
consumer software businesses through the Measurement Date. The operating
results of discontinued operations in 1997 included $24.4 million of Unusual
Charges, net of tax and a $15.2 million extraordinary loss, net of tax.
Unusual Charges, net of tax, in 1997 primarily consisted of $19.4 million of
52
severance associated with terminated consumer software company executives and
$5.0 million of compensation related to a stock appreciation rights plan
which was paid in connection with our merger with Hebdo Mag in October 1997.
Such merger also resulted in a $15.2 million extraordinary loss, net of tax,
associated with the early extinguishment of debt.
EXTRAORDINARY GAIN, NET
In 1997, we recorded a $26.4 million extraordinary gain, after tax, on the
sale of Interval International, Inc. ("Interval") in December 1997. The
Federal Trade Commission requested that we sell Interval in connection with
the Cendant Merger as a result of their anti-trust concerns within the
timeshare industry.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET
In 1997, we recorded a non-cash after-tax charge of $283.1 million to
account for the cumulative effect of an accounting change. In August 1998, we
changed our accounting policies with respect to revenue and expense
recognition for our membership businesses, effective January 1, 1997.
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1998 VS. 1997
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, adjusted for other charges,
which are of a non-recurring or unusual nature and are not included in
assessing segment performance or are not segment-specific. Our management
believes such discussion is 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.
We have determined that we have eight reportable operating segments based
primarily on the types of services we provide, the consumer base to which
marketing efforts are directed and the methods we use to sell services. For
additional information, including a description of the services provided in
each of our reportable operating segments, see Note 26 to the Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
-------------------------------------------------------------------- ----------------------
1998 1997 % CHANGE 1998(1) 1997(2) % CHANGE 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN MILLIONS)
Travel ................ $1,063.3 $ 971.6 9% $ 542.5 $ 467.3 16% 51% 48%
Individual Membership 929.1 778.7 19% (57.8) 5.3 * (6%) 1%
Insurance/Wholesale .. 544.0 482.7 13% 137.8 111.0 24% 25% 23%
Real Estate Franchise 455.8 334.6 36% 348.6 226.9 54% 76% 68%
Relocation ............ 444.0 401.6 11% 124.5 92.6 34% 28% 23%
Fleet ................. 387.4 324.1 20% 173.8 120.5 44% 45% 37%
Mortgage .............. 353.4 179.2 97% 187.6 74.8 151% 53% 42%
Other ................. 1,106.8 767.5 44% 132.9(3) 151.3 (12%) 12% 20%
---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Total ................. $5,283.8 $4,240.0 25% $1,589.9 $1,249.7 27% 30% 29%
========== ========== ========== ========== ========== ========== =========== ===========
- ------------
(1) Excludes the following Other charges or credits: (i) $433.5 million for
the costs of terminating the proposed acquisitions of American Bankers
and Providian; (ii) $351.0 million of costs associated with an
agreement to settle the PRIDES securities class action suit; (iii)
$121.0 million comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs and separation
payments, principally to our former chairman; and (iv) $67.2 million of
net adjustments associated with changes to the original estimate of
costs to be incurred as follows: $28.1 million of adjustments reversing
liabilities established in connection with the Fourth Quarter 1997
Charge
53
primarily consisting of lease termination and professional fees and
$39.1 million of adjustments reversing liabilities established in
connection with the Second Quarter 1997 Charge primarily consisting of
severance payments and lease terminations. Such adjustments to original
estimates were recorded in the periods in which events occurred or
information became available requiring accounting recognition.
(2) Excludes Unusual Charges of $704.1 million primarily associated with
the Cendant Merger and the PHH Merger.
(3) Includes a $50.0 million non-cash write-off of certain equity
investments in interactive membership businesses and impaired goodwill
associated with our National Library of Poetry subsidiary.
* Not meaningful.
TRAVEL
Revenues and Adjusted EBITDA increased $91.7 million (9%) and $75.2
million (16%), respectively, in 1998 over 1997. Contributing to the revenue
and Adjusted EBITDA increase was a $35.4 million (7%) increase in franchise
fees, consisting of increases of $23.5 million (6%) and $11.9 million (8%) in
lodging and car rental franchise fees, respectively. Our franchise businesses
experienced increases during 1998 in worldwide available rooms (29,800
incremental rooms, domestically), revenue per available room, car rental days
and average car rental rates per day. Timeshare subscription and exchange
revenue increased $27.1 million (9%) as a result of a 7% increase in average
membership volume and a 4% increase in the number of exchanges. Also
contributing to the revenue and Adjusted EBITDA increase was $16.4 million of
incremental fees received from preferred alliance partners seeking access to
our franchisees and their customers, $12.7 million of fees generated from the
execution of international master license agreements and a $17.7 million gain
on our sale of one million shares of Avis common stock in 1998. The
aforementioned drivers supporting increases in revenues and Adjusted EBITDA
were partially offset by a $37.8 million reduction in the equity in earnings
of our investment in the car rental operations of Avis, Inc. ("ARAC") as a
result of reductions in our ownership percentage in such investment during
1997 and 1998 (see "Liquidity and Capital Resources -- 1996 Purchase
Acquisitions and Investments -- Avis"). A $16.7 million (7%) increase in
marketing and reservation costs resulted in a $16.5 million increase in total
expenses while other operating expenses were relatively flat due to
leveraging our corporate infrastructure among more businesses, which
contributed to an improvement in the Adjusted EBITDA margin from 48% in 1997
to 51% in 1998.
INDIVIDUAL MEMBERSHIP
Revenues increased $150.4 million (19%) in 1998 over 1997 while Adjusted
EBITDA and Adjusted EBITDA margin decreased $63.1 million and 7 percentage
points, respectively, for the same period. The revenue growth was primarily
attributable to an incremental $27.9 million associated with an increase in
the average price of a membership, $25.8 million of increased billings as a
result of incremental marketing arrangements, primarily with telephone and
mortgage companies, and $35.9 million from the acquisition of a company in
April 1998 that, among other services, provides members access to their
personal credit information. Also contributing to the revenue growth are
increased product sales and service fees, which are offered and provided to
individual members. The reduction in Adjusted EBITDA and Adjusted EBITDA
margin is a direct result of a $104.3 million (25%) increase in membership
solicitation costs. We increased our marketing efforts during 1998 to solicit
new members and as a result increased our gross average annual membership
base by approximately 3.3 million members (11%) at December 31, 1998,
compared to the prior year. The growth in members during 1998 resulted in
increased servicing costs during 1998 of approximately $33.2 million (13%).
While the costs of soliciting and acquiring new members were expensed in
1998, the revenue associated with these new members will not begin to be
recognized until 1999, upon expiration of the membership period.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $61.3 million (13%) and $26.8
million (24%), respectively, in 1998 over 1997, primarily due to customer
growth. This growth generally resulted from increases in affiliations with
financial institutions. Domestic operations, which comprised 77% of segment
revenues in 1998, generated higher Adjusted EBITDA margins than the
international businesses as a result of continued expansion costs incurred
internationally to penetrate new markets.
54
Domestic revenues and Adjusted EBITDA increased $25.4 million (6%) and
$23.6 million (22%), respectively. Revenue growth, which resulted from an
increase in customers, also contributed to an improvement in the overall
Adjusted EBITDA margin from 23% in 1997 to 25% in 1998, as a result of the
absorption of such increased volume by the existing domestic infrastructure.
International revenues and Adjusted EBITDA increased $35.9 million (41%) and
$3.2 million (54%), respectively, due primarily to a 42% increase in
customers while the Adjusted EBITDA margin remained relatively flat at 7%.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $121.2 million (36%) and $121.7
million (54%), respectively, in 1998 over 1997. Royalty fees collectively
increased for our CENTURY 21, COLDWELL BANKER and ERA franchise brands by
$102.0 million (35%) as a result of a 20% increase in home sales by
franchisees and a 13% increase in the average price of homes sold. Home sales
by franchisees benefited from existing home sales in the United States
reaching a record 4.8 million units in 1998, according to data from the
National Association of Realtors, as well as from expansion of our franchise
systems. Because many costs associated with the real estate franchise
business, such as franchise support and information technology, do not vary
directly with home sales volumes or royalty revenues, the increase in royalty
revenues contributed to an improvement in the Adjusted EBITDA margin from 68%
to 76%.
RELOCATION
Revenues and Adjusted EBITDA increased $42.4 million (11%) and $31.9
million (34%), respectively, in 1998 over 1997. The Adjusted EBITDA margin
improved from 23% to 28%. The primary source of revenue growth was a $29.3
million increase in revenues from the relocation of government employees. We
also experienced growth in the number of relocation-related services provided
to client corporations and in the number of household goods moves handled,
partially offset by lower home sale volumes. The divestiture of certain
niche-market property management operations accounted for other revenue of
$8.2 million. Expenses associated with government relocations increased in
conjunction with the volume and revenue growth, but economies of scale and a
reduction in overhead and administrative expenses permitted the reported
improvement in Adjusted EBITDA margin.
FLEET
On June 30, 1999, we completed the disposition of our Fleet Segment for
aggregate consideration of $1.8 billion (see "Liquidity and Capital Resources
- -- Divestitures --Fleet"). Fleet Segment revenues and Adjusted EBITDA
increased $63.3 million (20%) and $53.3 million (44%), respectively, in 1998
over 1997, contributing to an improvement in the Adjusted EBITDA margin from
37% to 45%. We acquired The Harpur Group Ltd. ("Harpur"), a leading fuel card
and vehicle management company in the United Kingdom ("UK"), on January 20,
1998. Harpur contributed incremental revenues and Adjusted EBITDA in 1998 of
$31.8 million and $20.8 million, respectively. The revenue increase is
further attributable to a 12% increase in fleet leasing fees and a 31%
increase in service fee revenue. The fleet leasing revenue increase is due to
a 5% increase in pricing and a 7% increase in the number of vehicles leased,
while the service fee revenue increase is the result of a 40% increase in
number of fuel cards and vehicle maintenance cards partially offset by a 7%
decline in pricing. The Adjusted EBITDA margin improvement reflects
streamlining of costs at newly acquired Harpur and a leveraging of our
corporate infrastructure among more businesses.
MORTGAGE
Revenues and Adjusted EBITDA increased $174.2 million (97%) and $112.8
million (151%), respectively, in 1998 over 1997, primarily due to strong
mortgage origination growth and average fee improvement. The Adjusted EBITDA
margin improved from 42% to 53%. Mortgage origination grew across all lines
of business, including increased refinancing activity and a shift to more
profitable sale and processing channels and was responsible for substantially
all of the segment's revenue growth. Mortgage closings increased $14.3
billion (122%) to $26.0 billion and average origination fees increased 12
basis points, resulting in a $180.3 million increase in origination revenues.
Although the servicing portfolio grew
55
$9.6 billion (36%), net servicing revenue was negatively impacted by average
servicing fees declining 7 basis points due to the increased refinancing
levels in the 1998 mortgage market, which shortened the servicing asset life
and increased amortization charges. Consequently, net servicing revenues
decreased $9.1 million, partially offset by a $5.7 million increase in the
sale of servicing rights. Operating expenses increased in all areas,
reflecting increased hiring and expansion of capacity in order to support
continued growth; however, revenue growth marginally exceeded such
infrastructure enhancements.
OTHER SERVICES
Revenues increased $339.3 million (44%), while Adjusted EBITDA decreased
$18.4 million (12%). Revenues increased primarily from acquired NPC and
Jackson Hewitt operations, which contributed $409.8 million and $53.7 million
to 1998 revenues, respectively. The revenue increase attributable to 1998
acquisitions was partially offset by a $140.0 million reduction in revenues
associated with the operations of certain of our ancillary businesses which
were sold during 1997, including Interval, which contributed $121.0 million
to 1997 revenues. We sold Interval in December 1997 coincident to the
proposed Cendant Merger, in consideration of Federal Trade Commission
anti-trust concerns within the timeshare industry.
The revenue increase did not translate into increases in Adjusted EBITDA
primarily due to asset write-offs, dispositions of certain ancillary business
operations and approximately $8.0 million of incremental operating costs
associated with establishing a consolidated worldwide data center. We
wrote-off $37.0 million of impaired goodwill associated with our National
Library of Poetry subsidiary, and $13.0 million of certain of our equity
investments in interactive membership businesses. Adjusted EBITDA in 1997
associated with aforementioned disposed ancillary operations included $27.2
million from Interval and $18.0 million related to services formerly provided
to the casino industry. Our NPC and Jackson Hewitt subsidiaries contributed
$92.7 million and $27.0 million to 1998 Adjusted EBITDA, respectively.
CONSOLIDATED RESULTS -- 1997 VS. 1996
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 % CHANGE
----------- ----------- ----------
(DOLLARS IN MILLIONS)
Net revenues ................................................. $4,240.0 $3,237.7 31%
----------- ----------- ----------
Expenses
Operating ................................................... 1,322.3 1,183.2 12%
Marketing and reservation ................................... 1,031.8 910.8 13%
General and administrative .................................. 636.2 341.0 87%
----------- ----------- ----------
2,990.3 2,435.0 23%
----------- ----------- ----------
Depreciation and amortization expense ........................ 237.7 145.5 63%
Merger-related costs and other unusual charges ............... 704.1 109.4 *
Interest expense, net ........................................ 0.6 14.3 254%
----------- ----------- ----------
Pre-tax income from continuing operations before
extraordinary gain and cumulative effect of accounting
change ...................................................... 257.3 533.5 (52%)
Provision for income taxes ................................... 191.0 220.2 (13%)
----------- ----------- ----------
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change .................. 66.3 313.3 (79%)
Income (loss) from discontinued operations, net of tax ...... (26.8) 16.7 *
Extraordinary gain, net of tax ............................... 26.4 -- *
Cumulative effect of accounting change, net of tax .......... (283.1) -- *
----------- ----------- ----------
Net income (loss) ............................................ $ (217.2) $ 330.0 *
=========== =========== ==========
- ------------
* Not meaningful.
56
REVENUES
Revenues increased $1.0 billion (31%) in 1997 over 1996, and were
supported by growth in substantially all of our reportable operating
segments. Revenues in 1997 included a full year of operations from companies
acquired during 1996, including Coldwell Banker Corporation ("Coldwell
Banker") in May 1996, Avis, Inc. ("Avis") in October 1996 and Resort
Condominiums International, Inc. ("RCI") in November 1996 (see "Liquidity and
Capital Resources -- 1996 Purchase Acquisitions and Investments"). A detailed
discussion of fluctuations in revenues from 1996 to 1997 is included in the
section entitled "Results of Reportable Operating Segments -- 1997 vs. 1996."
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $92.2 million (63%) in
1997 over 1996, primarily as a result of incremental amortization of goodwill
and other intangible assets from 1996 acquisitions and increased capital
spending.
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
1997. We incurred merger-related costs and other unusual charges ("Unusual
Charges") in 1997 related to continuing operations of $704.1 million
primarily associated with the Cendant Merger and the PHH Merger. See "Results
of Operations -- Consolidated Results 1998 vs. 1997 -- Merger-Related Costs
and Other Unusual Charges" for a detailed discussion of such charges.
1996. We incurred Unusual Charges in 1996 related to continuing operations
of $109.4 million substantially related to our merger with Ideon Group, Inc.
("Ideon"). Unusual Charges primarily included $80.4 million of
litigation-related liabilities associated with our determination to settle
acquired Ideon litigation, which existed at the August 1996 merger date. We
have since settled all outstanding litigation matters pursuant to which the
primary resulting obligation consisted of a settlement made in June 1997 with
the cofounder of SafeCard Services, Inc. which was acquired by Ideon in 1995.
The settlement required us to make $70.5 million of payments in annual
installments through 2003. We made cash payments of $27.8 million and $56.3
million in 1998 and 1997, respectively, associated with 1996 Unusual Charges.
INTEREST EXPENSE, NET
Interest expense, net, increased $36.3 million in 1997 over 1996 primarily
as a result of the February 1997 issuance of $550.0 million 3% Convertible
Subordinated Notes and interest income earned in 1996 on approximately $420.0
million of excess proceeds generated from the $1.2 billion public offering of
46.6 million shares of our common stock in May 1996. The increase in
interest, net, was partially offset by a reduction in the weighted average
interest rate from 7.5% in 1996 to 6.0% in 1997 as a result of a greater
proportion of fixed rate debt, carrying lower interest rates, to total debt.
PROVISION FOR INCOME TAXES
Our effective tax rate increased from 41.2% in 1996 to 74.3% in 1997. The
1997 effective income tax rate included a 29.1% effective tax rate on the tax
benefit related to Unusual Charges due to the significant non-deductibility
of such costs. The effective income tax rate on 1997 income from continuing
operations excluding Unusual Charges was 40.6%.
DISCONTINUED OPERATIONS
We recorded a $26.8 million net loss from discontinued operations in 1997
compared to net income of $16.7 million in 1996. The operating results of
discontinued operations included a $15.2 million extraordinary loss, net of
tax, in 1997 and $24.4 million and $24.9 million of Unusual Charges, net of
tax, in 1997 and 1996, respectively. The extraordinary loss and Unusual
Charges incurred in 1997 have been previously discussed in the section
entitled "Results of Operations --Consolidated Results -- 1998 vs. 1997."
Unusual Charges in 1996 consisted primarily of professional fees incurred in
connection with our
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mergers with certain software businesses acquired in 1996. Excluding Unusual
Charges and extraordinary items, income from discontinued operations
decreased $28.8 million (69%) from $41.6 million in 1996 to $12.8 million in
1997. Net income from the classified advertising business remained relatively
unchanged from 1996 while net income from the consumer software businesses
decreased $28.5 million (72%) to $11.1 million in 1997. In 1997 revenues
increased $49.2 million (13%) which were offset by increased operating
expenses of $93.2 million (29%). The disproportionate increase in operating
expenses resulted from accelerating development and marketing costs incurred
on titles without a corresponding revenue increase because titles were not
released to the marketplace as planned in December 1997.
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1997 VS. 1996
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
ADJUSTED
EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------------------------------------------ -------------
1997 1996 % CHANGE 1997(1) 1996(2) % CHANGE 1997 996
---------- ---------- ---------- ---------- -------- ---------- ------ -----
Travel ................ $ 971.6 $ 429.2 126% $ 467.3 $189.5 147% 48% 44%
Individual Membership 778.7 745.9 4% 5.3 43.2 (88%) 1% 6%
Insurance/Wholesale .. 482.7 448.0 8% 111.0 99.0 12% 23% 22%
Real Estate Franchise 334.6 236.3 42% 226.9 137.8 65% 68% 58%
Relocation ............ 401.6 344.9 16% 92.6 65.5 41% 23% 19%
Fleet ................. 324.1 293.5 10% 120.5 99.0 22% 37% 34%
Mortgage .............. 179.2 127.7 40% 74.8 45.7 64% 42% 36%
Other ................. 767.5 612.2 25% 151.3 123.0 23% 20% 20%
---------- ---------- ---------- ---------- -------- ---------- ------ -----
Total ................. $4,240.0 $3,237.7 31% $1,249.7 $802.7 56% 29% 25%
========== ========== ========== ========== ======== ========== ====== =====
- ------------
(1) Excludes Unusual Charges of $704.1 million primarily associated with
the Cendant Merger and the PHH Merger.
(2) Excludes Unusual Charges of $109.4 million incurred in connection with
the Ideon merger.
TRAVEL
Revenues and Adjusted EBITDA increased $542.4 million (126%) and $277.8
million (147%), respectively, while the Adjusted EBITDA margin improved from
44% to 48%. The acquisitions of Avis and RCI in October 1996 and November
1996, respectively, contributed incremental revenues and Adjusted EBITDA of
$503.9 million and $248.2 million, respectively. Excluding the 1996
acquisitions, revenues and Adjusted EBITDA increased $38.5 million (9%) and
$29.6 million (16%), respectively, primarily as a result of an increase in
lodging franchise fees which was driven by a 4% increase in franchised rooms
and a 2% increase in revenue per available room. Expense increases were
minimized due to the significant operating leverage associated with mature
franchise operations and a leveraging of the corporate infrastructure among
more businesses.
INDIVIDUAL MEMBERSHIP
Revenues increased $32.8 million (4%) while Adjusted EBITDA and Adjusted
EBITDA margin decreased $37.9 million (88%) and 5 percentage points,
respectively. The revenue increase in 1997 was primarily due to $25.4 million
of increased product sales and service fees, which are offered and provided
to individual members. The increase in revenues also included $7.1 million of
incremental monthly billings from new marketing arrangements made during 1996
with telephone and mortgage companies. The reduction in Adjusted EBITDA and
Adjusted EBITDA margin from 1996 to 1997 was principally due to increased
membership solicitation costs incurred during 1997, higher call center and
servicing expenses and start-up costs incurred to introduce new membership
clubs. The accounting policies for membership revenue and expense recognition
were changed effective January 1, 1997. Therefore, results of operations for
1997 and 1996 were accounted for using different accounting policies. The pro
forma effect of the accounting change, as if such a change had been applied
retroactively to 1996, would have resulted in a reduction in 1996 revenues
and Adjusted EBITDA of $16.6 million and $11.3 million, respectively.
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INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $34.7 million (8%) and $12.0
million (12%), respectively, primarily due to an overall growth in customer
base during 1997. Domestic operations, which comprised 82% and 84% of segment
revenues in 1997 and 1996, respectively, generated higher Adjusted EBITDA
margins than the international businesses as a result of expansion costs
incurred internationally to penetrate new markets. Domestic revenues and
Adjusted EBITDA increased $18.7 million (5%) and $10.2 million (11%),
respectively, in 1997 over 1996 while international revenues and Adjusted
EBITDA increased $16.0 million (22%) and $1.8 million (45%), respectively,
for the comparable periods.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $98.3 million (42%) and $89.1
million (65%), respectively, in 1997 over 1996 while the Adjusted EBITDA
margin improved from 58% to 68%. The acquisitions of ERA and Coldwell Banker
franchised brands in February 1996 and May 1996, respectively, contributed
incremental revenues and Adjusted EBITDA of $73.8 million and $74.6 million,
respectively, in 1997. Excluding the 1996 acquisitions, revenues and Adjusted
EBITDA increased $24.5 million (17%) and $14.5 million (17%) which was
principally driven by increased royalty fees generated from the Century 21
franchised brand. Royalty fees from Century 21 franchisees increased as a
result of a 5% increase in home sales by franchisees and an 11% increase in
the average price of homes sold. Existing home sales in the United States
increased 3% from 1996 to 1997 according to data from the National
Association of Realtors. Operating expenses, which did not change
proportionately with home sale volume, increased a minimal $9.3 million (9%)
to support the significant growth of the business. In addition, the corporate
infrastructure was leveraged among more businesses.
RELOCATION
Revenues and Adjusted EBITDA increased $56.7 million (16%) and $27.1
million (41%), respectively, primarily as a result of the acquisition of
Coldwell Banker in May 1996. Coldwell Banker was a leading provider of
corporate relocation services and contributed incremental revenues and
Adjusted EBITDA of $47.2 million and $18.6 million, respectively. The
Adjusted EBITDA margin improved from 19% to 23% as a result of economic
efficiencies realized from the consolidation of our relocation businesses.
FLEET
Revenues and Adjusted EBITDA increased $30.6 million (10%) and $21.5
million (22%), respectively, in 1997 over 1996. The Adjusted EBITDA margin
improved from 34% to 37%. Revenue and Adjusted EBITDA growth in 1997 was
primarily attributable to a 24% increase in service fee revenues, supported
by a 20% increase in number of cards and an 8% increase in fleet leasing
revenues, principally resulting from a 5% increase in pricing. The Adjusted
EBITDA margin improvement reflected a leveraging of the corporate
infrastructure among more businesses.
MORTGAGE
Revenues and Adjusted EBITDA increased $51.5 million (40%) and $29.1
million (64%), respectively, which was primarily driven by mortgage
origination growth and gain on sale of servicing rights. The Adjusted EBITDA
margin improved from 36% to 42%. Mortgage originations increased 40% to $11.7
billion contributing $35.3 million additional revenue while servicing revenue
was relatively flat. The loan servicing portfolio grew 18% to $26.7 billion
while gain on sale of servicing rights increased $12.6 million to $14.1
million. Operating expenses increased to support volume growth and to prepare
for continued expansion as the annual loan origination run rate approached
$18.0 billion. However, revenue growth marginally exceeded increases in
operating expenses.
OTHER SERVICES
Revenues and Adjusted EBITDA increased $155.3 million (25%) and $28.3
million (23%), respectively, in 1997 over 1996. Such increases were primarily
supported by the operating results of an
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information technology business ("WizCom") which was acquired in October 1996
as part of the Avis acquisition. Our WizCom subsidiary operates the
telecommunications and computer system that facilitates reservations and
agreement processing for lodging and car rental operations. The acquisition
of WizCom accounted for incremental revenues and Adjusted EBITDA in 1997 of
$90.3 million and $30.6 million, respectively.
Our other ancillary businesses collectively contributed to the additional
revenue growth, although Adjusted EBITDA margins declined, primarily within
certain business units, which were sold during 1997.
LIQUIDITY AND CAPITAL RESOURCES
STRATEGIC ALLIANCE
On December 15, 1999, we entered into a strategic alliance with Liberty
Media Corporation ("Liberty Media"). Specifically, we have agreed to work
with Liberty Media to develop internet and related opportunities associated
with our travel, mortgage, real estate and membership businesses. Such
efforts may include the creation of joint ventures with Liberty Media and
others as well as additional equity investments in each others' businesses.
We will also assist Liberty Media in creating, and will receive a
participation in, a new venture that will seek to provide broadband video,
voice and data content to our hotels and their guests on a worldwide basis.
We will also pursue opportunities within the cable industry with Liberty
Media to leverage our direct marketing resources and capabilities.
In addition, Liberty Media has agreed to invest $400 million in cash to
purchase 18 million shares of our common stock and two-year warrants to
purchase approximately 29 million shares of our common stock at an exercise
price of $23.00 per share. The transaction is subject to customary
conditions, and is expected to close in January of 2000. We also announced
that Liberty Media Chairman, Dr. John C. Malone, Ph.D., will join our board
of directors.
DIVESTITURES
During 1998, we implemented a program to divest non-strategic businesses
and assets in order to focus on our core businesses, repay debt and
repurchase our common stock (see "Overview"). Pursuant to such program, we
have completed or have pending the following dispositions through December,
1999:
Green Flag. On November 26, 1999, we completed the disposition of our
Green Flag business unit for approximately $400 million. Green Flag is a
roadside assistance organization based in the UK, which provides a wide range
of emergency support and rescue services.
Entertainment Publications, Inc. On November 30, 1999, we completed the
disposition of 85% of our EPub business unit for approximately $281.0 million
in cash, inclusive of certain adjustments. We retained approximately 15% of
EPub's equity in connection with the transaction. In addition, we will have a
designee on the EPub's Board of Directors. We have determined that the size
and nature of our retained equity stake in EPub, including the retention of
board representation, will require us to account for our ongoing investment
in EPub using the equity method of accounting. EPub is a marketer and
publisher of coupon books and discount programs which provides customers with
unique products and services that are designed to enhance a customer's
purchasing power.
North American Outdoor Group. On October 8, 1999, we disposed of 94% of
our NAOG business unit for approximately $140.0 million in cash and we will
retain approximately 6% of NAOG's equity in connection with the transaction.
NAOG is the world's largest lifestyle affinity membership organization.
Global Refund Group. On August 24, 1999, we completed the sale of our
Global Refund Group subsidiary ("Global Refund") for approximately $160.0
million in cash. Global Refund, formerly known as Europe Tax Free Shopping,
is the world's largest value-added tax refund services company.
Fleet Segment. On June 30, 1999, we completed the disposition of our fleet
business segment ("fleet segment" or "fleet businesses"), which included PHH
Vehicle Management Services Corporation, Wright
60
Express Corporation, The Harpur Group, Ltd., and other subsidiaries pursuant
to an agreement between PHH Corporation ("PHH"), our wholly-owned subsidiary,
and Avis Rent A Car, Inc. ("ARAC"). Pursuant to the agreement, ARAC acquired
the net assets of our fleet businesses through the assumption and subsequent
repayment of $1.44 billion of intercompany debt and the issuance of $360.0
million of convertible preferred stock of Avis Fleet Leasing and Management
Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC. The
transaction followed a competitive bidding process. Coincident to the closing
of the transaction, ARAC refinanced the assumed debt under management
programs which was payable to us. Accordingly, on June 30, 1999, we received
additional consideration from ARAC of $3,047.5 million comprised of $3,016.9
million of cash proceeds and a $30.6 million note receivable. On such date,
we used proceeds of $1,809.4 million to repay outstanding fleet segment
financing arrangements. Additionally, in July 1999, we utilized cash proceeds
from the transaction of $1,033.0 million (received in the form of a dividend
payment from PHH) to substantially execute the "Dutch Auction" tender offer
by us to purchase 50 million shares of our common stock (See "Common Share
Repurchases"). The remaining proceeds from the transaction were used to repay
outstanding corporate debt as it matured (the borrowings of which had been
loaned to the fleet segment to finance the purchases of leased vehicles) and
to finance other assets under management and mortgage programs.
The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at our option upon the satisfaction of certain conditions,
including the per share price of ARAC Class A common stock equaling or
exceeding $50 per share and the fleet segment attaining certain EBITDA
(earnings before interest, taxes, depreciation and amortization) thresholds,
as defined. There are additional circumstances upon which the shares of Avis
Fleet convertible preferred stock are automatically or mandatorily
convertible into ARAC common stock. At June 30, 1999, we beneficially owned
approximately 19% of the outstanding Class A common stock of ARAC. If all of
the Avis Fleet convertible preferred stock was converted into common stock of
ARAC, as of the closing date, we would have owned approximately 34% of ARAC's
outstanding common equity (although the voting interest would be limited, in
most instances, to 20%). At October 31, 1999, our ownership percentage of
outstanding Class A common stock of ARAC was 18%.
We realized a net gain on disposition of $881.4 million ($865.7 million,
after tax) of which $714.8 million ($702.1 million, after tax) was recognized
in the second quarter of 1999 and $166.6 million ($163.6 million, after tax)
was deferred at June 30, 1999. The realized gain is net of approximately
$90.0 million of transaction costs. We deferred the portion of the realized
net gain, which was equivalent to our common equity ownership percentage in
ARAC at the time of closing. The fleet segment disposition was structured to
be treated as a tax-free reorganization and, accordingly, no tax provision
has been recorded on a majority of the gain. However, based upon a recent
interpretive ruling, the Internal Revenue Service may challenge this
treatment. Should the transaction be deemed taxable, the resultant tax
liability could be material. Notwithstanding, we believe that based upon our
analysis of relevant tax law, our position would prevail.
Other Businesses. During 1999, we completed the dispositions of certain
businesses, including Central Credit, Inc., Spark Services, Inc., Match.com,
National Leisure Group, National Library of Poetry and Essex Corporation.
Aggregate consideration received on the dispositions of such businesses was
comprised of $110.3 million in cash and $43.3 million of common stock. We
realized a net gain of $47.5 million ($27.2 million, after tax) on the
dispositions of such businesses.
Discontinued Operations. On August 12, 1998, we announced that our Board
of Directors committed to discontinue our classified advertising and consumer
software businesses by disposing of Hebdo Mag and Cendant Software
Corporation ("CDS"), respectively. On December 15, 1998, we completed the
sale of Hebdo Mag to its former 50% owners for $449.7 million. We received
$314.8 million in cash and 7.1 million shares of our common stock valued at
$134.9 million (approximately $19.00 per share market value) on the date of
sale. We recognized a $206.9 million gain on the sale of Hebdo Mag, which
included a tax benefit of $52.1 million. On November 20, 1998, we announced
the execution of a definitive agreement to sell CDS for approximately $800.0
million in cash. The sale was completed on January 12, 1999. We realized a
gain of approximately $371.9 million in connection with the transaction. We
recognized $197.8 million of such gain in 1998 substantially in the form of a
tax benefit and corresponding deferred tax asset.
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INVESTMENT IN NETMARKET GROUP, INC.
On September 15, 1999, NGI began operations as an independent company that
will pursue the development of interactive businesses formerly within our
direct marketing division. NGI will own, operate, develop and expand the
on-line membership businesses, including Netmarket.com, Travelers Advantage,
Auto Vantage, Privacy Guard and Hagglezone.com, which collectively have 1.3
million on-line members (and are expected to produce approximately $70.0
million of revenues in 1999). Prior to September 15, 1999, our ownership of
NGI was restructured into common stock and preferred stock interests. On
September 15, 1999, we donated NGI's outstanding common stock to a charitable
trust, and NGI issued additional shares of its common stock to certain of its
marketing partners. The fair market value of the NGI common stock on the date
of donation was approximately $20 million. Accordingly, as a result of the
change in ownership of NGI's common stock from us to independent third
parties, NGI's operating results will no longer be included in our
consolidated financial statements. We retained the opportunity to participate
in NGI's value through the ownership of a convertible preferred stock of NGI,
which is ultimately exchangeable, at our option, after September 14, 2001,
into 78% of NGI's diluted common shares which has a $5 million annual
preferred dividend. The convertible preferred stock will be accounted for
using the cost method of accounting. The preferred stock dividend will be
recorded in income if and when it becomes realizable. Subsequent to our
contribution of NGI's common stock to the trust, we provided a development
advance of $77.0 million to NGI, which is contingently repayable to us if
certain financial targets related to NGI are achieved. The purpose of the
development advance was to provide NGI with the funds necessary to develop
internet related products and systems, that if successful, would
significantly increase the value of NGI. Without these funds, NGI would not
have sufficient funds for development activities contemplated in its business
plans. Repayment of the advance is therefore solely dependent on the success
of these development efforts. We recorded a charge, inclusive of transaction
costs, of $85.0 million ($48.0 million, after tax), during the third quarter
of 1999, in connection with the donation of NGI shares to the charitable
trust and the subsequent development advance.
TERMINATION OF PROPOSED ACQUISITIONS
RAC Motoring Services. On February 4, 1999, we announced our intention to
not proceed with the acquisition of RAC Motoring Services ("RACMS") due to
certain conditions imposed by the UK Secretary of State for Trade and
Industry that we determined to be not commercially feasible and, therefore,
unacceptable. We originally announced on May 21, 1998 a definitive agreement
with the Board of Directors of Royal Automobile Club Limited to acquire RACMS
for approximately $735.0 million in cash. We wrote-off $7.0 million of
deferred acquisition costs in the first quarter of 1999 in connection with
the termination of the proposed acquisition of RACMS.
American Bankers Insurance Group, Inc. On October 13, 1998, we and
American Bankers entered into a settlement agreement (the "ABI Settlement
Agreement"), pursuant to which we and American Bankers terminated a
definitive agreement dated March 23, 1998, which provided for our acquisition
of American Bankers for $3.1 billion. Accordingly, our pending tender offer
for American Bankers shares was also terminated. Pursuant to the ABI
Settlement Agreement and in connection with the termination of our proposed
acquisition of American Bankers, we made a $400.0 million cash payment to
American Bankers and wrote off $32.3 million of costs, primarily professional
fees. In addition, we terminated a bank commitment to provide a $650.0
million, 364-day revolving credit facility, which was made available to
partially fund the acquisition.
Providian Auto and Home Insurance Company. On October 5, 1998, we
announced the termination of an agreement to acquire Providian, for $219.0
million in cash. Certain representations and covenants in such agreement had
not been fulfilled and the conditions to closing had not been met. We did not
pursue an extension of the termination date of the agreement because
Providian no longer met our acquisition criteria. In connection with the
termination of our proposed acquisition of Providian, we wrote off $1.2
million of costs.
1998 PURCHASE ACQUISITIONS
National Parking Corporation. On April 27, 1998, we acquired NPC for $1.6
billion, substantially in cash, which included the repayment of approximately
$227.0 million of outstanding NPC debt. NPC was
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substantially comprised of two operating subsidiaries: National Car Parks and
Green Flag. National Car Parks operates car parks in the UK and Green Flag
operates a roadside assistance group in the UK and offers a wide-range of
emergency support and rescue services. We funded the NPC acquisition with
borrowings under our revolving credit facilities.
Harpur Group. On January 20, 1998, we completed the acquisition of Harpur,
a fuel card and vehicle management company in the UK, for $206.1 million in
cash plus contingent payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, we completed the acquisition of
Jackson Hewitt for approximately $476.3 million in cash. Jackson Hewitt
operates a tax preparation service franchise system in the United States. The
Jackson Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. We acquired
certain other entities for an aggregate purchase price of approximately
$463.9 million in cash during 1998. Additionally, we made a $100.0 million
cash payment to the seller of RCI in satisfaction of a contingent purchase
liability.
1997 PURCHASE ACQUISITIONS AND INVESTMENTS
Investment in NRT. In 1997, we executed agreements with NRT Incorporated
("NRT"), a corporation created to acquire residential real estate brokerage
firms. Under these agreements, we acquired $182.0 million of NRT preferred
stock (and may be required to acquire up to an additional $81.3 million of
NRT preferred stock). We received preferred dividend payments of $15.4
million and $5.2 million during the years ended 1998 and 1997, respectively.
On February 9, 1999, we 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.
In connection with the aforementioned agreements, at our election, we will
participate in NRT's acquisitions by acquiring up to an aggregate $946.3
million (plus an additional $500.0 million if certain conditions are met) of
intangible assets, and in some cases mortgage operations, of real estate
brokerage firms acquired by NRT. Through December 31, 1998, we acquired
$445.7 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 entered into an agreement
with us whereby we made an upfront payment of $30.0 million to NRT for
services to be provided by NRT to us 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.
Other. We acquired six entities in 1997 for an aggregate purchase price of
$289.5 million, comprised of $267.9 million in cash and $21.6 million in our
common stock (0.9 million shares).
1996 PURCHASE ACQUISITIONS AND INVESTMENTS
RCI. In November 1996, we completed the acquisition of all the outstanding
capital stock of RCI for $487.1 million comprised of $412.1 million in cash
and $75.0 million (approximately 2.4 million shares) in our common stock plus
contingent payments of up to $200.0 million over a five year period. (We made
a contingent payment of $100.0 million during the first quarter of 1998). RCI
is the world's largest provider of timeshare exchange.
Avis. In October 1996, we completed the acquisition of all of the
outstanding capital stock of Avis, including payments under certain employee
stock plans of Avis and the redemption of a certain series of preferred stock
of Avis for $806.5 million. The purchase price was comprised of approximately
$367.2 million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 11.1 million shares) in our common stock. Subsequently, we
made contingent cash payments of $26.0 million in 1996 and $60.8 million in
1997. The contingent payments made in 1997 represented the incremental amount
of value attributable to our common stock as of the stock purchase agreement
date in excess of the proceeds realized upon subsequent sale of our common
stock.
63
Upon entering into a definitive merger agreement to acquire Avis, we
announced our strategy to dilute our interest in the Avis car rental
operations while retaining assets associated with the franchise, including
trademarks, reservation system assets and franchise agreements with ARAC and
other licensees. In September 1997, ARAC (the company which operated the
rental car operations of Avis) completed an initial public offering ("IPO")
which resulted in a 72.5% dilution of our equity interest in ARAC. Net
proceeds from the IPO of $359.3 million were retained by ARAC. In March 1998,
we sold one million shares of Avis common stock and recognized a pre-tax gain
of approximately $17.7 million. At December 31, 1998, our interest in ARAC
was approximately 22.6%. In January 1999, our equity interest was further
diluted to 19.4% as a result of our sale of an additional 1.3 million shares
of Avis common stock.
Coldwell Banker. In May 1996, we acquired by merger Coldwell Banker, the
largest gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. We paid
$640.0 million in cash for all of the outstanding capital stock of Coldwell
Banker and repaid $105.0 million of Coldwell Banker indebtedness. The
aggregate purchase price for the transaction was financed through the May
1996 sale of an aggregate 46.6 million shares of our common stock generating
$1.2 billion of proceeds pursuant to a public offering.
Other. During 1996, we acquired fifteen other entities for an aggregate
purchase price of $281.5 million comprised of $224.0 million in cash, $52.5
million of our common stock (2.5 million shares) and $5.0 million of notes.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
We believe that we have sufficient liquidity and access to liquidity
through various sources, including our ability to access public equity and
debt markets and financial institutions. We currently have a $1.25 billion
term loan facility in place as well as committed back-up facilities totaling
$1.75 billion, substantially all of which is currently undrawn and available
and $2.45 billion of availability under existing shelf registration
statements. Long-term debt increased $2.1 billion to $3.4 billion at December
31, 1998 when compared to amounts outstanding at December 31, 1997, primarily
as a result of borrowings in 1998 to finance acquisitions and the repurchase
of our common stock under a share repurchase program. Our long-term debt,
including current portion, at December 31, 1998, substantially consisted of
$2.1 billion of publicly issued fixed rate debt and $1.25 billion of
borrowings under a term facility. In addition, we had $1.5 billion of
equity-linked FELINE PRIDES securities outstanding at December 31, 1998.
TERM LOAN FACILITIES
On May 29, 1998, we entered into a 364 day term loan agreement with a
syndicate of financial institutions which provided for borrowings of $3.25
billion (the "Term Loan Facility"). The Term Loan Facility, as amended,
incurred interest based on the London Interbank Offered Rate ("LIBOR") plus a
margin of approximately 87.5 basis points. At December 31, 1998, borrowings
under the Term Loan Facility of $1.25 billion were classified as long-term
based on our proven intent and ability to refinance such borrowings on a
long-term basis.
On February 9, 1999, we replaced the Term Loan Facility with a new two
year term loan facility (the "New Facility") which provides for borrowings of
$1.25 billion. The New Facility bears interest at LIBOR plus a margin of
approximately 100 basis points and is payable in five consecutive quarterly
installments beginning on the first anniversary of the closing date. The New
Facility contains certain restrictive covenants, which are substantially
similar to and consistent with the covenants in effect for our existing
revolving credit agreements. We used $1.25 billion of the proceeds from the
New Facility to refinance the majority of the outstanding borrowings under
the Term Loan Facility.
CREDIT FACILITIES
Our primary credit facility, as amended, consists of (i) a $750.0 million,
five year revolving credit facility (the "Five Year Revolving Credit
Facility") and (ii) a $1.0 billion, 364 day revolving credit facility (the
"364 Day Revolving Credit Facility") (collectively the "Revolving Credit
Facilities"). The 364-Day
64
Revolving Credit Facility will mature on October 29, 1999 but may be renewed
on an annual basis for an additional 364 days upon receiving lender approval.
The Five Year Revolving Credit Facility will mature on October 1, 2001.
Borrowings under the Revolving Credit Facilities, at our option, bear
interest based on competitive bids of lenders participating in the
facilities, at prime rates or at LIBOR, plus a margin of approximately 75
basis points. We are required to pay a per annum facility fee of .175% and
.15% of the average daily unused commitments under the Five Year Revolving
Credit Facility and 364 Day Revolving Credit Facility, respectively. The
interest rates and facility fees are subject to change based upon credit
ratings on our senior unsecured long-term debt by nationally recognized debt
rating agencies. The Revolving Credit Facilities contain 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,
including a 3:1 minimum interest coverage ratio (14:1 as of September 30,
1999) and a maximum debt-to-capitalization ratio of 0.5:1 (0.4:1 as of
September 30, 1999). At December 31, 1998, we had no outstanding borrowings
under the Revolving Credit Facilities.
7 1/2% AND 7 3/4% SENIOR NOTES
We filed a shelf registration statement with the SEC, effective November
1998, which provided for the aggregate issuance of up to $3.0 billion of debt
and equity securities. Pursuant to such registration statement, we issued
$1.55 billion of Senior Notes (the "Notes") in two traunches, consisting of
$400.0 million principal amount of 7 1/2% Senior Notes due December 1, 2000
and $1.15 billion principal amount of 7 3/4% Senior Notes due December 1,
2003. Interest on the Notes is payable on June 1 and December 1 of each year,
beginning on June 1, 1999. The Notes may be redeemed, in whole or in part, at
any time, at our option at a redemption price plus accrued interest to the
date of redemption. The redemption price is equal to the greater of (i) the
face value of the Notes or (ii) the sum of the present values of the
remaining scheduled payments discounted at the treasury rate plus a spread as
defined in the indenture. The offering was a component of a plan designed to
refinance an aggregate of $3.25 billion of borrowings under our former Term
Loan Facility, based on provisions contained in the indenture. Net proceeds
from the offering were used to repay $1.3 billion of borrowings under the
Term Loan Facility and for general corporate purposes, which included the
purchase of our common stock.
On December 10, 1999, the Board of Directors approved the redemption of
all outstanding $400 million 7 1/2% Senior Notes on January 21, 2000. The
redemption price is the greater of par or the make whole call option plus 50
basis points.
FELINE PRIDES AND TRUST PREFERRED SECURITIES
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business
Trust formed under the laws of the State of Delaware and our wholly-owned
consolidated subsidiary, issued 29.9 million FELINE PRIDES and 2.3 million
trust preferred securities and received approximately $1.5 billion in gross
proceeds therefrom. The Trust invested the proceeds in our 6.45% Senior
Debentures due 2003 (the "Debentures), which represents the sole asset of the
Trust. The obligations of the Trust related to the FELINE PRIDES and trust
preferred securities are unconditionally guaranteed by us to the extent we
make payments pursuant to the Debentures. The issuance of the FELINE PRIDES
and trust preferred securities, resulted in the utilization of approximately
$3.0 billion of availability under a $4.0 billion shelf registration
statement. Upon issuance, the FELINE PRIDES consisted of 27.6 million Income
PRIDES and 2.3 million Growth PRIDES (Income PRIDES and Growth PRIDES
hereinafter referred to as "PRIDES"), each with a face amount of $50 per
PRIDE. The Income PRIDES consist of trust preferred securities and forward
purchase contracts under which the holders are required to purchase our
common stock in February 2001. The Growth PRIDES consist of zero coupon U.S.
Treasury securities and forward purchase contracts under which the holders
are required to purchase our common stock in February 2001. The stand-alone
trust preferred securities and the trust preferred securities forming a part
of the Income PRIDES, each with a face amount of $50, 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 us 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
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made by us in the form of a contract adjustment payment at an annual rate of
1.30%. The forward purchase contracts require the holder to purchase a
minimum of 1.0395 shares and a maximum of 1.3514 shares of our common stock
per PRIDES security, depending upon the average of the closing price per
share of our common stock for a 20 consecutive day period ending in
mid-February of 2001. We have the right to defer the contract adjustment
payments and the payment of interest on its Debentures to the Trust. Such
election will subject us to certain restrictions, including restrictions on
making dividend payments on our common stock until all such payments in
arrears are settled.
On March 17, 1999, we reached a final agreement to settle a class action
lawsuit that was brought on behalf of the holders of PRIDES securities who
purchased their securities on or prior to April 15, 1998. Under the terms of
the final agreement, only holders who owned PRIDES at the close of business
on April 15, 1998 will be eligible to receive a new additional "Right" for
each PRIDES security held. For example, if a person owned 100 FELINE PRIDES
on April 15, 1998, such person would be entitled to 100 Rights. At any time
during the life of the Rights (expires February 2001), holders may (i) sell
them or (ii) exercise them by delivering to us three Rights together with two
PRIDES in exchange for two new PRIDES (the "New PRIDES"). For example, if a
holder of Rights exchanges three Rights together with two current Income
PRIDES, they will receive two new Income PRIDES. If a holder of Rights
exchanges three Rights together with two Growth PRIDES, they will receive two
New Growth PRIDES. The terms of the New PRIDES will be the same as the
original PRIDES except that the conversion rate will be revised so that, at
the time the Rights are distributed, each New PRIDES will have a value equal
to $17.57 more than each original PRIDES, or, in the aggregate, approximately
$351.0 million. The settlement resulted in a net increase to shareholders'
equity of $121.8 million. The final agreement also requires us to offer to
sell four million additional PRIDES (having identical terms to currently
outstanding PRIDES) ("Additional PRIDES") to holders of Rights for cash, at a
value which will be based on the valuation model that was utilized to set the
conversion rate of the New PRIDES. The offering of Additional PRIDES will be
made only pursuant to a prospectus filed with the SEC. We currently expect to
use the proceeds of such an offering for general corporate purposes. The
arrangement to offer Additional PRIDES is designed to enhance the trading
value of the Rights by removing up to six million Rights from circulation via
exchanges associated with the offering and to enhance the open market
liquidity of New PRIDES by creating four million New PRIDES via exchanges
associated with the offering. If holders of Rights do not acquire all such
PRIDES, they will be offered to the public. Under the settlement agreement,
we also agreed to file a shelf registration statement for an additional 15
million special PRIDES, which could be issued by us at any time for cash.
However, during the last 30 days prior to the expiration of the Rights in
February 2001, we will be required to make these additional PRIDES available
to holders of Rights at a price in cash equal to 105% of their theoretical
value. The special PRIDES, if issued, would have the same terms as the
currently outstanding PRIDES and could be used to exercise Rights. Based on
an average market price of $17.53 per share of our common stock (calculated
based on the average closing price per share of our common stock for a
consecutive five-day period ended September 30, 1999), the effect of the
issuance of the New PRIDES will be to distribute approximately 19 million
more shares of our common stock when the mandatory purchase of our common
stock associated with the PRIDES occurs in February 2001. This represents
approximately 2% more shares of our common stock than are currently
outstanding.
On June 15, 1999, the United States District Court for the District of New
Jersey entered an order and judgment approving the settlement described above
and awarding fees to counsel to the class. One objector, who objected to a
portion of the settlement notice concerning fees to be sought by counsel to
the class has filed an appeal to the U.S. Court of Appeals for the Third
Circuit from the District Court order approving the settlement and awarding
fees to counsel to the class. Although under the settlement the Rights are
required to be distributed following the conclusion of court proceedings,
including appeals, we believe that the appeal is without merit. As a result,
we presently intend to distribute the Rights in October 1999 after the
effectiveness of the registration statement filed with the SEC covering the
New PRIDES, Additional PRIDES and Special PRIDES.
DEBT RETIREMENTS
On December 15, 1998, we repaid the $150.0 million principal amount of our
5 7/8% Senior Notes outstanding in accordance with the provisions of the
indenture agreement.
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On May 4, 1998, we redeemed all of our outstanding ($144.5 million
principal amount) 4 3/4% Convertible Senior Notes due 2003 at a price of
103.393% of the principal amount, together with interest accrued to the
redemption date. Prior to the redemption date, during 1998, $95.5 million of
such notes were exchanged for 3.4 million shares of our common stock.
On April 8, 1998, we exercised our option to call our 6 1/2% Convertible
Subordinated Notes (the "6 1/2% Notes") for redemption on May 11, 1998, in
accordance with the provisions of the indenture relating to the 6 1/2% Notes.
Prior to the redemption date, during 1998, all of the outstanding 6 1/2%
Notes were converted into 2.1 million shares of our common stock.
FINANCING RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage, fleet and relocation services
businesses as a separate public reporting entity and supports purchases of
leased vehicles, originated mortgages and advances under relocation contracts
primarily by issuing commercial paper and medium term notes and maintaining
securitized obligations. Such financing is not classified based on
contractual maturities, but rather is included in liabilities under
management and mortgage programs rather than long-term debt since such debt
corresponds directly with high quality related assets. Upon the disposition
of our fleet segment on June 30, 1999, we received cash proceeds equivalent
to the outstanding debt applicable to our fleet segment (see "Liquidity and
Capital Resources -- Divestitures -- Fleet Segment"). PHH continues to pursue
opportunities to reduce its borrowing requirements by securitizing increasing
amounts of its high quality assets. Additionally, we entered into a three
year agreement effective May 1998 and expanded in December 1998 under which
an unaffiliated Buyer (the "Buyer") committed to purchase, at our option,
mortgage loans originated by us on a daily basis, up to the Buyer's asset
limit of $2.4 billion. Under the terms of this sale agreement, we retain the
servicing rights on the mortgage loans sold to the Buyer and provide the
Buyer with options to sell or securitize the mortgage loans into the
secondary market. At December 31, 1998, we were servicing approximately $2.0
billion of mortgage loans owned by the Buyer.
PHH debt is issued without recourse to the parent company. PHH subsidiary
expects to continue to maximize its access to global capital markets by
maintaining the quality of its assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. PHH minimizes its exposure to interest rate and liquidity risk by
effectively 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. Depending upon asset growth and financial
market conditions, our PHH subsidiary utilizes the United States, European
and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, our PHH subsidiary will continue to
utilize the public and private debt markets as sources of financing.
Augmenting these sources, our PHH subsidiary will continue to manage
outstanding debt with the potential sale or transfer of managed assets to
third parties while retaining fee-related servicing responsibility. PHH's
aggregate borrowings at December 31, 1998 and 1997 were as follows:
(IN BILLIONS) 1998 1997
------ ------
Commercial paper........ $2.5 $2.6
Medium-term notes....... 2.3 2.7
Securitized
obligations............ 1.9 --
Other................... 0.2 0.3
------ ------
$6.9 $5.6
====== ======
PHH filed a shelf registration statement with the SEC, effective March 2,
1998, for the aggregate issuance of up to $3.0 billion of medium-term note
debt securities. These securities may be offered from time to time, together
or separately, based on terms to be determined at the time of sale. As of
December 31, 1998, PHH had approximately $1.6 billion of medium-term notes
outstanding under this shelf registration statement. Proceeds from future
offerings will continue to be used to finance assets PHH manages for its
clients and for general corporate purposes.
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SECURITIZED OBLIGATIONS
Our PHH subsidiary maintains four separate financing facilities, the
outstanding borrowings of which are securitized by corresponding assets under
management and mortgage programs. The collective weighted average interest
rate on such facilities was 5.8% at December 31, 1998. Such securitized
obligations are described below.
Mortgage Facility. In December 1998, our PHH subsidiary entered into a 364
day financing agreement to sell mortgage loans under an agreement to
repurchase such mortgages. The agreement is collateralized by the underlying
mortgage loans held in safekeeping by the custodian to the agreement. The
total commitment under this agreement is $500.0 million and is renewable on
an annual basis at the discretion of the lender in accordance with the
securitization agreement. Mortgage loans financed under this agreement at
December 31, 1998 totaled $378.0 million.
Relocation Facilities. Our PHH subsidiary entered into a 364-day asset
securitization agreement effective December 1998 under which an unaffiliated
buyer has committed to purchase an interest in the rights to payment related
to certain relocation receivables of PHH. The revolving purchase commitment
provides for funding up to a limit of $325.0 million and is renewable on an
annual basis at the discretion of the lender in accordance with the
securitization agreement. Under the terms of this agreement, our PHH
subsidiary retains the servicing rights related to the relocation
receivables. At December 31, 1998, our PHH subsidiary was servicing $248.0
million of assets which were funded under this agreement.
Our PHH subsidiary also maintains an asset securitization agreement, with
a separate unaffiliated buyer, which has a purchase commitment up to a limit
of $350.0 million. The terms of this agreement are similar to the
aforementioned facility, with PHH retaining the servicing rights on the right
of payment related to certain relocation receivables of PHH. At December 31,
1998, our PHH subsidiary was servicing $171.0 million of assets eligible for
purchase under this agreement. This facility matured and approximately $85.0
million was repaid on October 5, 1999.
We are currently in the process of creating a new securitization facility
to purchase interests in the rights to payment related to our relocation
receivables, which will replace the existing securitizations. Although no
assurances can be given, we expect that such facility will be in place prior
to December 31, 1999.
Fleet Facilities. In December 1998, our PHH subsidiary entered into two
secured financing transactions through its two wholly-owned subsidiaries,
TRAC Funding and TRAC Funding II. Secured leased assets (specified beneficial
interests in a trust which owns the leased vehicles and the leases) totaling
$600.0 million and $725.3 million, respectively, were contributed to the
subsidiaries by PHH. Loans to TRAC Funding and TRAC Funding II, were funded
by commercial paper conduits in the amounts of $500.0 million and $604.0
million, respectively, and were secured by the specified beneficial
interests. At June 30, 1999, the outstanding balances under the securitized
fleet financing facilities were repaid and such securitized facilities were
retired coincident with the fleet segment disposition.
OTHER
To provide additional financial flexibility, PHH's current policy is to
ensure that minimum committed facilities aggregate 100 percent of the average
amount of outstanding commercial paper. This policy will continue to be
maintained subsequent to the divestiture of the fleet businesses. PHH
maintains $2.65 billion of unsecured committed credit facilities, which are
backed by domestic and foreign banks. The facilities are comprised of $1.25
billion of syndicated lines of credit maturing in March 2000 and $1.25
billion of syndicated lines of credit maturing in the year 2002. In addition,
PHH has a $150.0 million revolving credit facility, which matures in December
1999, and other uncommitted lines of credit with various financial
institutions, which were unused at December 31, 1998. Our management closely
evaluates not only the credit of the banks but also the terms of the various
agreements to ensure ongoing availability. The full amount of PHH's committed
facilities at December 31, 1998 was undrawn and available. Our management
believes that our current policy provides adequate protection should
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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 PHH 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 securitized
obligations and its $2.65 billion of revolving credit facilities.
On July 10, 1998, PHH entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as
trustee, under the Senior Indenture dated as of June 5, 1997, which
formalizes PHH's policy of limiting the payment of dividends and the
outstanding principal balance of loans to us to 40% of consolidated net
income (as defined in the Supplemental Indenture) for each fiscal year. The
Supplemental Indenture prohibits PHH from paying dividends or making loans to
us if upon giving effect to such dividends and/or loan, PHH's debt to equity
ratio exceeds 8 to 1, at the time of the dividend or loan, as the case may
be.
COMMON STOCK LITIGATION
Since the April 15, 1998 announcement of the discovery of accounting
irregularities in the former business units of CUC and prior to the date of
the Annual Report on Form 10-K/A, 70 lawsuits claiming to be class actions,
two lawsuits claiming to be brought derivatively on our behalf and several
individual lawsuits and arbitration proceedings have been commenced in
various courts and other forums against us and other defendants by or on
behalf of persons claiming to have purchased or otherwise acquired securities
or options issued by CUC or us between May 1995 and August 1998. The Court
has ordered consolidation of many of the actions.
As previously disclosed, we reached an agreement with plaintiffs' counsel
representing the class of holders of our PRIDES securities who purchased
their securities on or prior to April 15, 1998 to settle their class action
lawsuit against us through the issuance of a new "Right" for each PRIDES
security held. See "Liquidity and Capital Resources -- FELINE PRIDES and
Trust Preferred Securities" for a more detailed description of the
settlement.
In addition, in October 1998, an action claiming to be a class action was
filed against us and four of our former officers and directors by persons
claiming to have purchased American Bankers' stock between January and
October 1998. The complaint claimed that we made false and misleading public
announcements and filings with the SEC in connection with our proposed
acquisition of American Bankers allegedly in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, and that the
plaintiff and the alleged class members purchased American Bankers'
securities in reliance on these public announcements and filings at inflated
prices. On April 30, 1999, the United States District Court for New Jersey
found that the class action failed to state a claim upon which relief could
be granted and, accordingly, dismissed the complaint. The plaintiff has
appealed the District Court's findings to the U.S. Court of Appeals for the
Third Circuit as such appeal is pending.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised us that its inquiry should not be construed as an indication by the
SEC or its staff that any violations of law have occurred. As a result of the
findings from the investigations, we made all adjustments considered
necessary by us, which are reflected in our restated financial statements.
Although we can provide no assurances that additional adjustments will not be
necessary as a result of these government investigations, we do not expect
that additional adjustments will be necessary.
On December 7, 1999, we announced that we reached a preliminary agreement
to settle the principal securities class action pending against us in the
U.S. District Court in Newark, New Jersey relating to the common stock class
action lawsuits. Under the agreement, we would pay the class members $2.83
billion in cash. The settlement remains subject to execution of a definitive
settlement agreement and approval by the U.S. District Court. If the
preliminary settlement is not approved by the U.S. District Court, we can
69
make no assurances that the final outcome or settlement of such proceedings
will not be for an amount greater than that set forth in the preliminary
agreement. Please see our Form 8-K, dated December 7, 1999, for a description
of the preliminary agreement to settle the common stock class action
litigation.
Our plan to finance the settlement reflects the existence of a range of
financing alternatives which we have considered to be potentially available
to us. At a minimum, these alternatives entail using various combinations of
(i) available cash, (ii) debt securities and/or (iii) equity securities. The
choice among alternatives will depend on numerous factors, including the
timing of the actual settlement payment, the relative costs of various
securities, our cash balance, our projected post-settlement cash flows and
market conditions.
CREDIT RATINGS
In October 1998, Duff & Phelps Credit Rating Co. ("DCR"), Standard &
Poor's Corporation ("S&P"), and Moody's Investors Service Inc. ("Moody's")
reduced our long-term debt credit rating to A-from A, BBB from A, and Baa1
from A3, respectively.
Following the execution of our agreement to dispose of our fleet segment,
Fitch IBCA lowered PHH's long-term debt rating from A+ to A and affirmed
PHH's short-term debt rating at F1, and S&P affirmed PHH's long-term and
short-term debt ratings at A-/A2. Also, in connection with the closing of the
transaction, DCR lowered PHH's long-term debt rating from A+ to A and PHH's
short-term debt rating was reaffirmed at D1. Moody's lowered PHH's long-term
debt rating from A3 to Baa1 and affirmed PHH's short-term debt rating at P2.
(A security rating is not a recommendation to buy, sell or hold securities
and is subject to revision or withdrawal at any time.)
REPRICING OF STOCK OPTIONS
On September 23, 1998, the Compensation Committee of our Board of
Directors approved a program to effectively reprice certain Company stock
options granted to our middle management during December 1997 and the first
quarter of 1998. Such existing options, with exercise prices ranging from
$31.38 to $37.50, were effectively repriced on October 14, 1998 at $9.8125
per share (the "New Price"), which was the fair market value (as defined in
the option plans) on the date of such repricing. On September 23, 1998, the
Compensation Committee also modified the terms of certain options held by
certain of our executive officers and senior managers subject to certain
conditions including a revocation of 12.6 million existing options.
Additionally, a management equity ownership program was adopted that requires
these executive officers and senior managers to acquire our common stock at
various levels commensurate with their respective compensation levels. The
option modifications were accomplished by canceling existing options with
exercise prices ranging from $16.78 to $34.31 and issuing a lesser amount of
new options at the New Price and, with respect to certain options of
executive officers and senior managers, at prices above the New Price,
specifically $12.27 and $20.00. Additionally, certain new options replacing
options that were fully vested, provide for vesting ratably over four years
beginning January 1, 1999.
COMMON SHARE REPURCHASES
Our Board of Directors authorized a common share repurchase program
pursuant to which the aggregate authorized amount that can be repurchased
under the program has been incrementally increased to $2.8 billion. We have
executed this program through open-market purchases or privately negotiated
transactions. As of January 7, 2000, we repurchased approximately $2.0
billion (105.2 million shares) of our common stock under the program. Subject
to bank credit facility covenants, certain rating agency constraints and
authorization from our Board of Directors, we anticipate expanding the
program, although we can give no assurance with respect to the timing,
likelihood or amount of future repurchases under the program.
In July 1999, pursuant to a Dutch Auction self-tender offer to our
shareholders, we purchased 50 million shares of our common stock through our
wholly-owned subsidiary Cendant Stock Corporation at a price of $22.25 per
share. Under the terms of the offer, which commenced June 16, 1999 and
expired
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July 15, 1999, we had invited shareholders to tender their shares of our
common stock at prices between $19.75 and $22.50 per share. We financed the
purchase of shares costing $1.11 billion with proceeds received from our June
30, 1999 disposition of our fleet segment.
CASH FLOWS (1998 VS. 1997)
We generated $808.0 million of cash flows from operations in 1998
representing a $405.0 million decrease from 1997. The decrease in cash flows
from operations was primarily due to a $391.7 million net increase in
mortgage loans held for sale due to increased mortgage loan origination
volume.
We used $4.4 billion of cash flows for investing activities in 1998,
principally consisting of a $1.5 billion net investment in assets under
management and mortgage programs and $2.9 billion of acquisitions and
acquisition related payments, which included the acquisitions of NPC and
Jackson Hewitt. In 1997, we used $2.3 billion for investing activities
including a $1.5 billion net investment in assets under management and
mortgage programs and $568.2 million of acquisitions and acquisition related
payments. In 1998, cash flows from financing activities of approximately $4.7
billion included $1.55 billion of proceeds from public offerings of senior
debt, $3.25 billion of term loan borrowings and $1.4 billion of proceeds from
the issuance of FELINE PRIDES and Trust Preferred Securities. Gross cash
flows from financing activities were partially offset by $2.0 billion of term
loan repayments, $257.7 million of our common stock purchases, and principal
repayments of $150.0 million and $144.5 million pertaining to the outstanding
5 7/8 Senior Notes and the 4 3/4% Notes, respectively. Additionally, in 1998
management and mortgage program financing consisted of $1.1 billion of net
borrowings which funded our investments in assets under management and
mortgage programs. In 1997, cash flows from financing activities of $900.1
million primarily consisted of net borrowings totaling $435.9 million
including net proceeds of $543.2 million from the issuance of the 3%
Convertible Subordinated Notes in February 1997 and $509.9 million of net
borrowings which funded purchases of assets under management and mortgage
programs.
CAPITAL EXPENDITURES
In 1998, $355.2 million was invested in property and equipment to support
operational growth and enhance marketing opportunities. In addition,
technological improvements were made to improve operating efficiencies.
Capital spending in 1998 included the development of integrated business
systems within the Relocation segment as well as investments in systems and
office expansion to support growth in the Mortgage segment. We expect to
reduce our level of capital spending by approximately 25% in 1999.
YEAR 2000 COMPLIANCE
The following disclosure also constitutes a Year 2000 readiness disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after
January 1, 2000. To minimize or eliminate the effect of the Year 2000 risk on
our business systems and applications, we are continually identifying,
evaluating, implementing and testing changes to our computer systems,
applications and software necessary to achieve Year 2000 compliance. We
implemented a Year 2000 initiative in March 1996 that has now been adopted by
all of our business units. As part of such initiative, we have selected a
team of managers to identify, evaluate and implement a plan to bring all of
our critical business systems and applications into Year 2000 compliance
prior to December 31, 1999. The Year 2000 initiative consists of four phases:
(i) identification of all critical business systems subject to Year 2000 risk
(the "Identification Phase"); (ii) assessment of such business systems and
applications to determine the method of correcting any Year 2000 problems
(the "Assessment Phase"); (iii) implementing the corrective measures (the
"Implementation Phase"); and (iv) testing and maintaining system compliance
(the "Testing Phase"). We have substantially completed the Identification and
Assessment Phases and have identified and assessed five areas of risk: (i)
internally developed business applications; (ii) third party vendor software,
such as business applications, operating systems and special function
software; (iii) computer hardware components; (iv) electronic data transfer
systems between us and our customers; and (v) embedded systems,
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such as phone switches, check writers and alarm systems. Although no
assurances can be made, we believe that we have identified substantially all
of our systems, applications and related software that are subject to Year
2000 compliance risk and have either implemented or initiated the
implementation of a plan to correct such systems that are not Year 2000
compliant. In addition, as part of our assessment process we are developing
contingency plans as necessary. Substantially all of our mission critical
systems have been remediated during 1998. However, we cannot directly control
the timing of certain Year 2000 compliant vendor products and in certain
situations, exceptions to the December 1998 date have been authorized. We are
closely monitoring those situations and intend to complete testing efforts
and any contingency implementation efforts prior to December 31, 1999.
Although we have begun the Testing Phase, we do not anticipate completion of
the Testing Phase until sometime prior to December 1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded
and other systems and other key services. Interruption of those services due
to Year 2000 issues could have a material adverse impact on our operations.
We have initiated an evaluation of the status of such third party service
providers' efforts to determine alternative and contingency requirements.
While approaches to reducing risks of interruption of business operations
vary by business unit, options include identification of alternative service
providers available to provide such services if a service provider fails to
become Year 2000 compliant within an acceptable timeframe prior to December
31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $55.0
million. Approximately $30.0 million of these costs had been incurred through
December 31, 1998, and we expect to incur the balance of such costs to
complete the compliance plan. We have been expensing and capitalizing the
costs to complete the compliance plan in accordance with appropriate
accounting policies. Variations from anticipated expenditures and the effect
on our future results of operations are not anticipated to be material in any
given year. However, if Year 2000 modifications and conversions are not made
including modifications by our third party service providers, or are not
completed in time, the Year 2000 problem could have a material impact on our
operations, cash flows and financial condition. At this time we believe the
most likely "worst case" scenario involves potential disruptions in our
operations as a result of the failure of services provided by third parties.
The estimates and conclusions herein are forward-looking statements and
are based on our best estimates of future events. Risks of completing the
plan include the availability of resources, the ability to discover and
correct the potential Year 2000 sensitive problems which could have a serious
impact on certain operations and the ability of our service providers to
bring their systems into Year 2000 compliance.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires us to
record all derivatives in the consolidated balance sheet as either assets or
liabilities measured at fair value. If the derivative does not qualify as a
hedging instrument, the change in the derivative fair values will be
immediately recognized as gain or loss in earnings. If the derivative does
qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets
to the changes in the fair value of the related item being hedged or (ii) be
deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged
transactions occur. We have not yet determined what impact the adoption of
SFAS No. 133 will have on our financial statements. Implementation of this
standard has recently been delayed by the FASB for a 12-month period. We will
now adopt SFAS No. 133 as required for our first quarterly filing of fiscal
year 2001.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise", effective for the
first fiscal quarter after December 15, 1998. We adopted SFAS No. 134
effective January 1, 1999. SFAS No. 134 requires that after the
securitization of mortgage loans, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
interests based on
72
its ability and intent to sell or hold those investments. On the date SFAS
No. 134 was initially applied, we reclassified mortgage-backed securities and
other interests retained after the securitization of mortgage loans from the
trading to the available for sale category. Subsequent accounting that
results from implementing SFAS No. 134 shall be accounted for in accordance
with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities".
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve
a number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed our implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to integrate
and operate successfully acquired businesses and the risks associated
with such businesses, including the merger that created Cendant and the
National Parking Corporation acquisition;
o our ability to successfully divest our remaining non-core businesses
and assets and implement our plan to create a tracking stock for our
new real estate portal;
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and for us to operate within the limitations imposed by
financing arrangements; and
o our ability and our vendors; franchisees' and customers' ability to
complete the necessary actions to achieve a Year 2000 conversion for
computer systems and applications.
We derived the forward-looking statements in this Annual Report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause
actual results to differ materially from those projected. We assume no
obligation to publicly correct or update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements or if we later become aware that
they are not likely to be achieved.
73
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses various financial instruments, particularly interest rate
and currency swaps, forward delivery commitments, futures and options
contracts and currency forwards, to manage and reduce the interest rate risk
related specifically to its committed mortgage pipeline, mortgage loan
inventory, mortgage servicing rights, mortgage-backed securities, and debt.
Such financial instruments are also used to manage and reduce the foreign
currency exchange rate risk related to its foreign currency denominated
translational and transactional exposures. The Company is exclusively an end
user of these instruments, which are commonly referred to as derivatives. The
Company does not engage in trading, market-making, or other speculative
activities in the derivatives markets. The Company's 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 Notes 15 and 16 to the Consolidated Financial
Statements.
Interest and currency rate risks are the principal market exposures of the
Company.
o Interest rate movements in one country as well as relative interest
rate movements between countries can materially impact the Company's
profitability. The Company's 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
mortgagor prepayments, mortgage loans held for sale, and anticipated
mortgage production arising from commitments issued and LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings. The Company anticipates that such interest rates will
remain a primary market exposure of the Company for the foreseeable
future.
o The Company's primary foreign currency rate exposure is to exchange
rate fluctuations of the British pound sterling. The Company
anticipates that such foreign currency exchange rate will remain a
primary market exposure of the Company for the foreseeable future.
The Company assesses its 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.
The Company uses a discounted cash flow model in determining the fair
market value of investment in leases and leased vehicles, relocation
receivables, equity advances on homes, mortgages, 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 market 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 borrowers propensity to close their
mortgage loan under the commitment is used as a primary assumption. For
mortgages and commitments to fund mortgages forward delivery contracts and
options, the Company uses an option-adjusted spread ("OAS") model in
determining the impact of interest rate shifts. The Company also utilizes 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 market
value.
The Company uses a duration-based model in determining the impact of
interest rate shifts on its debt portfolio 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.
The Company uses a current market pricing model to assess the changes in
the value of the U.S. dollar on foreign currency denominated derivatives and
monetary assets and liabilities. The primary assumption used in these models
is a hypothetical 10% weakening or strengthening of the U.S. dollar against
all currency exposures of the Company at December 31, 1998.
The Company's 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
74
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.
The Company used December 31, 1998 market rates on its instruments to
perform the sensitivity analyses separately for each of the Company's 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.
The Company has determined that the impact of a 10% change in interest and
foreign currency exchange rates and prices on its 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 Schedule Index commencing
on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required herein has been previously reported on our Form
10-K/A for the year ended December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the
sections titled "Proposal 1: Election of Directors" and "Executive Officers"
is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item, except that the information
contained in the Proxy Statement under the sub-headings "Pre-Merger
Compensation Committee Report on Executive Compensation" and "Performance
Graph" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Proxy Statement under the
section titled "Security Ownership of 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 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.
75
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 5, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of our agreement to purchase Providian Auto and Home
Insurance Company.
On October 14, 1998, we filed a current report on Form 8-K to report under
Item 5 its intention to file financial statements of NPC.
On October 14, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of its agreement to purchase American Bankers
Insurance Group, Inc. and its intention to repurchase up to $1 billion of
common stock.
On October 21, 1998, we filed a current report on Form 8-K to report under
Item 5 the filing of financial schedules summarizing restated revenue and
EDITDA by business segment for all four quarters of 1997 and the first and
second quarters of 1998.
On November 4, 1998, we filed a current report on Form 8-K to report the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and for the six
months ended June 30, 1998. We also filed the consolidated financial
statements of NPC for the 52-week period ended March 27, 1998.
On November 6, 1998, we filed a current report on Form 8-K to report its
third quarter results for the quarter ending September 30, 1998. The Company
also reported the execution of certain amendments to its credit facilities.
On November 16, 1998, we filed a current report on Form 8-K to file the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and the nine months
ended September 30, 1998.
On November 24, 1998, we filed a current report on Form 8-K announcing the
execution of a definitive agreement to sell the Company's consumer software
division for $800 million in cash plus potential future cash payments of up
to approximately $200 million.
On December 4, 1998, we filed a current report on Form 8-K to file certain
required opinions and consents in connection with the sale of the Company's 7
1/2% Notes due 2000 and its 7 3/4% Notes due 2003.
76
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: February 4, 2000
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
- --------------------------------- --------------------------------------------- --------------------
/s/ Henry R. Silverman Chairman of the Board, President, Chief February 4, 2000
- ---------------------------------- Executive Officer and Director
(Henry R. Silverman)
/s/ James E. Buckman Vice Chairman, General Counsel and Director February 4, 2000
- ----------------------------------
(James E. Buckman)
/s/ Stephen P. Holmes Vice Chairman and Director February 4, 2000
- ----------------------------------
(Stephen P. Holmes)
/s/ Michael P. Monaco Vice Chairman and Director February 4, 2000
- ----------------------------------
(Michael P. Monaco)
/s/ David M. Johnson Senior Executive Vice President and Chief February 4, 2000
- ---------------------------------- Financial Officer (Principal Financial
(David M. Johnson) Officer)
/s/ Jon F. Danski Executive Vice President and Chief February 4, 2000
- ---------------------------------- Accounting Officer (Principal
(Jon F. Danski) Accounting Officer)
/s/ Robert D. Kunisch Director February 4, 2000
- ----------------------------------
(Robert D. Kunisch)
/s/ John D. Snodgrass Director February 4, 2000
- ----------------------------------
(John D. Snodgrass)
/s/ Leonard S. Coleman Director February 4, 2000
- ----------------------------------
(Leonard S. Coleman)
Director February 4, 2000
- ----------------------------------
(Martin L. Edelman)
77
SIGNATURE TITLE DATE
- ------------------------------------------- --------------------------------------------- --------------------
/s/ Carole G. Hankin Director February 4, 2000
- -------------------------------------------
(Dr. Carole G. Hankin)
/s/ The Rt. Hon. Brian Mulroney, P.C., LL.D Director February 4, 2000
- -------------------------------------------
(The Rt. Hon. Brian Mulroney, P.C., LL.D)
/s/ Robert W. Pittman Director February 4, 2000
- -------------------------------------------
(Robert W. Pittman)
/s/ Leonard Schutzman Director February 4, 2000
- -------------------------------------------
(Leonard Schutzman)
- ------------------------------------------- Director February 4, 2000
(Robert F. Smith)
/s/ Robert E. Nederlander Director February 4, 2000
- -------------------------------------------
(Robert E. Nederlander)
78
EXHIBITS:
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated March 23, 1998 among the Company, Season
Acquisition Corp. and American Bankers Insurance Group, Inc. (incorporated by
reference to Exhibit C2 to the Schedule 14D-1 (Amendment 31), dated March 23,
1998, filed by the Company and Season Acquisition Corp.)*
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 to the Registration Statement on Form S-4, No.
333-34517, dated December 17, 1997)*
3.2 Amended and Restated ByLaws 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 (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 33-44453, on Form S-4 dated December 19, 1991)*
4.2 Indenture dated as of February 11, 1997, between CUC International Inc. and
Marine Midland Bank, as trustee (filed as Exhibit 4(a) to the Company's
Report on Form 8-K filed February 13, 1997)*
4.3 Indenture between HFS Incorporated and Continental Bank, National
Association, as trustee (Incorporated by reference to HFS Incorporated's
Registration Statement on Form S-1 (Registration No. 33-71736), Exhibit No.
4.1)*
4.4 Indenture dated as of February 28, 1996 between HFS Incorporated and First
Trust of Illinois, National Association, as trustee (Incorporated by
reference to HFS Incorporated's Current Report on Form 8-K dated March 8,
1996, Exhibit 4.01)*
4.5 Supplemental Indenture No. 1 dated as of February 28, 1996 between HFS
Incorporated and First Trust of Illinois, National Association, as trustee
(Incorporated by reference to HFS Incorporated's Current Report on Form 8-K
dated March 8, 1996, Exhibit 4.02)*
4.6 Indenture, dated as of February 24, 1998, between the Company and The Bank of
Nova Scotia Trust Company of New York, as Trustee (Incorporated by reference
to Exhibit 4.4 to the Company's Current Report on Form 8-K dated March 6,
1998)*
4.7 First Supplemental 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 4.5 to the Company's Current Report on Form 8-K,
dated March 6, 1998)*
4.8 Amended and Restated Declaration of Trust of Cendant Capital I. (Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
March 6, 1998)*
4.9 Preferred Securities Guarantee Agreement dated March 2, 1998, between by
Cendant Corporation and Wilmington Trust Company. (Incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K dated March 6,
1998)*
4.10 Purchase Contract Agreement (including as Exhibit A the form of the Income
PRIDES and as Exhibit B the form of the Growth PRIDES), dated March 2, 1998,
between Cendant Corporation and The First National Bank of Chicago
(Incorporated by reference to Exhibit 4.3 to the Company's Current Report on
Form 8-K dated March 6, 1998)*
4.11 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.
79
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
10.1-10.38 Material Contracts, Management Contracts, Compensatory Plans and Arrangements
**
10.1(a) Agreement with Henry R. Silverman, dated June 30, 1996 and as amended through
December 17, 1997 (filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-4, Registration No. 333-34571)*
10.1(b) Amendment to Agreement with Henry R. Silverman, dated December 31, 1998. **
10.2(a) Agreement with Stephen P. Holmes, dated September 12, 1997 (filed as Exhibit
10.7 to the Company's Registration Statement on Form S-4, Registration No.
333-34571)*
10.2(b) Amendment to Agreement with Stephen P. Holmes, dated January 11, 1999. **
10.3(a) Agreement with Michael P. Monaco, dated September 12, 1997 (filed as Exhibit
10.8 to the Company's Registration Statement on Form S-4, Registration No.
333-34571)*
10.3(b) Amendment to Agreement with Michael Monaco, dated December 23, 1998. **
10.4(a) Agreement with James E. Buckman, dated September 12, 1997 (filed as Exhibit
10.9 to the Company's Registration Statement on Form S-4, Registration No.
333-34571)*
10.4(b) Amendment to Agreement with James E. Buckman, dated January 11, 1999. **
10.5 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.6 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.17 to the
Company's Form 10-Q for the period ended October 31, 1996)*
10.7 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.18 to the
Company's Form 10-Q for the period ended October 31, 1996)*
10.8 1994 Directors Stock Option Plan, as amended (filed as Exhibit 10.19 to the
Company's Form 10-Q for the period ended October 31, 1996)*
10.9 1997 Stock Option Plan (filed as Exhibit 10.23 to the Company's Form 10-Q for
the period ended April 30, 1997)*
10.10 1997 Stock Incentive Plan (filed as Appendix E to the Joint Proxy Statement/
Prospectus included as part of the Company's Registration Statement, No.
333-34517, on Form S-4 dated August 28, 1997)*
10.11 HFS Incorporated's Amended and Restated 1993 Stock Option Plan (Incorporated
by reference to HFS Incorporated's Registration Statement on Form S-8
(Registration No. 33-83956), Exhibit 4.1)*
10.12(a) First Amendment to the Amended and Restated 1993 Stock Option Plan dated May
5, 1995. (Incorporated by reference to HFS Incorporated's Registration
Statement on Form S-8 (Registration No. 33-094756), Exhibit 4.1)*
10.12(b) Second Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual
Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit
10.21(b))*
10.12(c) Third Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual
Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit
10.21(c))*
10.12(d) Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated May
20, 1996. (Incorporated by reference to HFS Incorporated's Registration
Statement on Form S-8 (Registration No. 333-06733), Exhibit 4.5)*
80
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
10.12(e) Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated July
24, 1996 (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(f) Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated
September 24, 1996 (Incorporated by reference to the HFS Incorporated's
Annual Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit
10.21(e))*
10.12(g) Seventh Amendment to the Amended and Restated 1993 Stock Option Plan dated as
of April 30, 1997 (Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, Exhibit 10.17(g))*
10.12(h) Eighth Amendment to the Amended and Restated 1993 Stock Option Plan dated as
of May 27, 1997 (Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, Exhibit 10.17(h))*
10.13 HFS Incorporated's 1992 Incentive Stock Option Plan and Form of Stock Option
Agreement. (Incorporated by reference to HFS Incorporated's Registration
Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.6)*
10.14 Cendant Corporation 1992 Employee Stock Plan (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-8 dated January
29, 1998 (Registration No. 333-45183))*
10.15 Cendant Corporation Deferred Compensation Plan **
10.16 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, File No. 111402)*
10.17 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)*
10.18 Underwriting Agreement dated February 24, 1998 among the Company, Cendant
Capital I, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Chase Securities Inc. (Incorporated by reference to the
Company's Form 8-K dated March 6, 1998, Exhibit 1.1)*
10.19 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)(filed as Exhibit 4(b) to the Company's Report
on Form 8-K filed February 13, 1997)*
10.20 Agreement and Plan of Merger between CUC International Inc. and HFS
Incorporated, dated as of May 27, 1997 (filed as Exhibit 2.1 to the Company's
Report on Form 8-K filed on May 29, 1997)*
10.21(a) $750,000,000 Five Year Revolving Credit and Competitive Advance 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 and CAF Agent (Incorporated by
reference to Exhibit (b)(1) to the Schedule 14-D1 filed by the Company on
January 27, 1998, File No. 531838)*
81
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
10.21(b) Amendment, dated as of October 30, 1998, to the Five Year Competitive Advance
and Revolving Credit Agreement, dated as of October 2, 1998, by and among the
Company, the general institutions, parties thereto and The Chase Manhattan
Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K dated February 10, 1999)*
10.22(a) $1,250,000 364-Day Revolving Credit and Competitive Advance Facility
Agreement, dated October 2, 1996, as amended and restated through October 30,
1998, among the Company, the several banks and other financial institutions
from time to time parties thereto, and The Chase Manhattan Bank, as
Administrative Agent and as Lead Manager (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K dated November 5, 1998). *
10.22(b) 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 Form 8-K dated February 16, 1999)*.
10.23 Distribution Agreement, dated March 5, 1998, among the Company, Bear, Stearns
& Co., Inc., Chase Securities Inc., Lehman Brothers and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference
to the Company's Current Report on Form 8-K, dated March 10, 1998)*
10.24(a) 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle Management
Services, Inc., the Lenders, the Chase Manhattan Bank, as Administrative
Agent and the Chase Manhattan Bank of Canada, as Canadian Agent, Dated March
5, 1999. **
10.24(b) Five-year Credit Agreement ("PHH Five-year Credit Agreement") among PHH
Corporation, the Lenders, and Chase Manhattan Bank, as Administrative Agent,
dated March 4, 1997 (Incorporated by reference from Exhibit 10.2 to
Registration Statement 333-27715)*
10.24(c) Second Amendment to PHH Credit Agreements (Incorporated by reference to PHH
Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, Exhibit 10.1)*
10.24(d) Third Amendment to PHH Credit Agreements (Incorporated by reference to PHH
Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, Exhibit 10.1)*
10.24(e) Fourth Amendment dated as of November 2, 1998, to PHH Five-Year Credit
Agreement. **
10.25 Indenture between the Company and Bank of New York, Trustee, dated as of May
1, 1992 (Incorporated by reference from Exhibit 4(a)(iii) to Registration
Statement 33-48125)*
10.26 Indenture between the Company and First National Bank of Chicago, Trustee,
dated as of March 1, 1993 (Incorporated by reference from Exhibit 4(a)(i) to
Registration Statement 33-59376)*
10.27 Indenture between the Company and First National Bank of Chicago, Trustee,
dated as of June 5, 1997 (Incorporated by reference from Exhibit 4(a) to
Registration Statement 333-27715)*
10.28 Indenture between the Company and Bank of New York, Trustee dated as of June
5, 1997 (Incorporated by reference from Exhibit 4(a)(11) to Registration
Statement 333-27715)*
82
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
10.29 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 from Exhibit 1 to Registration Statement
33-63627)*
10.30 Distribution Agreement between the Company and Credit Suisse; First Boston
Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated June 5, 1997
filed as Exhibit 1 to Registration Statement 333-27715*
10.31 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., filed as Exhibit 1 to Form 8-K dated March 3, 1998, File
No. 107797*
10.32 Registration Rights Agreement, dated as of November 12, 1996, by and between
HFS Incorporated and Ms. Christel DeHaan (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-3 (Registration No.
333-17371), Exhibit 2.2)*
10.33 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 HFS Incorporated's Registration
Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.2)*
10.34 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 HFS Incorporated's Registration
Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.3)*
10.35 License Agreement dated as of November 1, 1991 between Franchise Systems
Holdings, Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference
to HFS Incorporated's Registration Statement on Form S-1 (Registration No.
33-51422), Exhibit No. 10.4)*
10.36 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 HFS Incorporated's Registration
Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.5)*
10.37 Master License Agreement dated July 30, 1997, among HFS Car Rental, Inc.,
Avis Rent A Car System, Inc. and Wizard Co. (Incorporated by reference to HFS
Incorporated Form 10-Q for the quarter ended June 30, 1997, Exhibit 10.1)*
10.38 Term Loan Agreement, dated as of February 9, 1999, among Cendant Corporation,
as Borrower, the Lenders referred therein, Bank of America NT & SA, as
Syndication Agent, Barclays Bank, PLC, The Bank of Nova Scotia, Credit
Lyonnais New York Branch, as CoDocumentation Agents, First Union National
Bank, and The Industrial Bank of Japan, Limited, New York Branch, as Managing
Agents, Credit Suisse First Boston, The Sumitomo Bank, Limited, New York
Branch, Banque Paribas, as CoAgents and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference to Cendant Corporation's Form
8-K dated February 16, 1999 (File No. 110308)). *
10.39 Internet Cooperation Agreement (including as Exhibit A the Third
Party/Industry Advertising Restrictions), dated October 1, 1999, between
CompleteHome Operations, Inc. and Century 21 Real Estate Corporation.
83
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------
10.40 Internet Cooperation Agreement (including as Exhibit A the Third
Party/Industry Advertising Restrictions), dated October 1, 1999, between
CompleteHome Operations, Inc. and Coldwell Banker Real Estate Corporation.
10.41 Internet Cooperation Agreement (including as Exhibit A the Third
Party/Industry Advertising Restrictions), dated October 1, 1999, between
CompleteHome Operations, Inc. and ERA Franchise Systems, Inc.
10.42 Internet Cooperation Agreement dated September 30, 1999 between
CompleteHome.com, Inc. and Getko Group, Inc.
12 Statement Re: Computation of Consolidated Ratio to Earnings to Combined Fixed
Charges and Preferred Stock Dividends
16.1 Letter re: change in certifying accountant (Incorporated by reference to the
Company's Form 8-K dated January 27, 1998)*
16.2 Letter re: change in certifying accountant of a significant subsidiary
(Incorporated by reference to the Company's Form 8-K dated May 18, 1998)*
21 Subsidiaries of Registrant **
23.1 Consent of Deloitte & Touche LLP related to the financial statements of
Cendant Corporation
23.2 Consent of KPMG LLP relating to the financial statements of PHH Corporation
27 Financial data schedule
99.1 RCI Compound Annual Growth Rate
- ------------
* Incorporated by reference
** Previously included in the Annual Report on Form 10-K/A of Cendant
Corporation for the year ended December 31, 1998, filed with the
Securities and Exchange Commission October 12, 1999.
84
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Reports........................................................ F-2
Consolidated Statements of Operations for the years ended December 31, 1998, 1997
and 1996............................................................................ F-4
Consolidated Balance Sheets as of December 31, 1998 and 1997......................... F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996................................................................. F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996............................................................................ F-10
Notes to Consolidated Financial Statements........................................... F-12
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the consolidated balance sheets of Cendant Corporation and
subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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 did not audit the statements of
income, shareholders' equity, and cash flows of PHH Corporation (a
consolidated subsidiary of Cendant Corporation) for the year ended December
31, 1996 which statements reflect net income of $87.7 million. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for PHH
Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Cendant Corporation and
subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Notes 18 and 27 to the consolidated financial statements,
the Company reached a preliminary agreement to settle the principal
securities class action related to the discovery of accounting irregularities
in certain former CUC International Inc. business units. Additionally, as
discussed in Note 2, effective January 1, 1997 the Company changed its method
of recognizing revenue and membership solicitation costs for its individual
membership business.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
January 7, 2000
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated statement of income, shareholder's equity
and cash flows of PHH Corporation and subsidiaries (the "Company") for the
year ended December 31, 1996, before the restatement related to the merger of
Cendant Corporation's relocation business with the Company and
reclassifications to conform to the presentation used by Cendant Corporation,
not presented separately herein. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements (before restatement
and reclassifications) referred to above present fairly, in all material
respects, the results of operations of PHH Corporation and subsidiaries and
their cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Baltimore, Maryland
April 30, 1997
F-3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
REVENUES
Membership and service fees, net................................... $5,080.7 $4,083.4 $3,147.0
Fleet leasing (net of depreciation and interest costs of $1,279.4,
$1,205.2 and $1,132.4)............................................ 88.7 59.5 56.7
Other.............................................................. 114.4 97.1 34.0
---------- ---------- ----------
Net revenues........................................................ 5,283.8 4,240.0 3,237.7
---------- ---------- ----------
EXPENSES
Operating.......................................................... 1,869.1 1,322.3 1,183.2
Marketing and reservation.......................................... 1,158.5 1,031.8 910.8
General and administrative......................................... 666.3 636.2 341.0
Depreciation and amortization...................................... 322.7 237.7 145.5
Other charges
Litigation settlement............................................. 351.0 -- --
Termination of proposed acquisitions.............................. 433.5 -- --
Executive terminations............................................ 52.5 -- --
Investigation-related costs....................................... 33.4 -- --
Merger-related costs and other unusual charges (credits) ......... (67.2) 704.1 109.4
Financing costs................................................... 35.1 -- --
Interest, net...................................................... 113.9 50.6 14.3
---------- ---------- ----------
Total expenses...................................................... 4,968.8 3,982.7 2,704.2
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE ............................................................ 315.0 257.3 533.5
Provision for income taxes.......................................... 104.5 191.0 220.2
Minority interest, net of tax....................................... 50.6 -- --
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............................ 159.9 66.3 313.3
Income (loss) from discontinued operations, net of tax ............ (25.0) (26.8) 16.7
Gain on sale of discontinued operations, net of tax ................ 404.7 -- --
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.................................................. 539.6 39.5 330.0
Extraordinary gain, net of tax ..................................... -- 26.4 --
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE................ 539.6 65.9 330.0
Cumulative effect of accounting change, net of tax ................. -- (283.1) --
---------- ---------- ----------
NET INCOME (LOSS) .................................................. $ 539.6 $ (217.2) $ 330.0
========== ========== ==========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before extraordinary gain and
cumulative effect of accounting change........................... $ 0.19 $ 0.08 $ 0.41
Income (loss) from discontinued operations........................ (0.03) (0.03) 0.03
Gain on sale of discontinued operations........................... 0.48 -- --
Extraordinary gain................................................ -- 0.03 --
Cumulative effect of accounting change............................ -- (0.35) --
---------- ---------- ----------
NET INCOME (LOSS)................................................. $ 0.64 $ (0.27) $ 0.44
========== ========== ==========
DILUTED
Income from continuing operations before extraordinary gain and
cumulative effect of accounting change........................... $ 0.18 $ 0.08 $ 0.39
Income (loss) from discontinued operations........................ (0.03) (0.03) 0.02
Gain on sale of discontinued operations........................... 0.46 -- --
Extraordinary gain................................................ -- 0.03 --
Cumulative effect of accounting change............................ -- (0.35) --
---------- ---------- ----------
NET INCOME (LOSS)................................................. $ 0.61 $ (0.27) $ 0.41
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
-----------------------
1998 1997
----------- ----------
ASSETS
Current assets
Cash and cash equivalents....................................... $ 1,008.7 $ 67.0
Receivables (net of allowance for doubtful accounts of $123.3
and $61.5)..................................................... 1,536.4 1,170.7
Deferred membership commission costs............................ 253.0 169.5
Deferred income taxes........................................... 466.6 311.9
Other current assets............................................ 908.6 641.2
Net assets of discontinued operations........................... 373.6 273.3
----------- ----------
Total current assets............................................. 4,546.9 2,633.6
----------- ----------
Property and equipment, net..................................... 1,432.8 544.7
Franchise agreements, net....................................... 1,363.2 1,079.6
Goodwill, net................................................... 3,923.1 2,148.2
Other intangibles, net.......................................... 757.1 624.3
Other assets.................................................... 681.5 599.3
----------- ----------
Total assets exclusive of assets under programs.................. 12,704.6 7,629.7
----------- ----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles.................... 3,801.1 3,659.1
Relocation receivables.......................................... 659.1 775.3
Mortgage loans held for sale.................................... 2,416.0 1,636.3
Mortgage servicing rights....................................... 635.7 373.0
----------- ----------
7,511.9 6,443.7
----------- ----------
TOTAL ASSETS..................................................... $20,216.5 $14,073.4
=========== ==========
See accompanying notes to consolidated financial statements.
F-5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1998 1997
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities......................... $ 1,517.5 $ 1,492.4
Deferred income........................................................ 1,354.2 1,042.0
----------- ----------
Total current liabilities............................................... 2,871.7 2,534.4
----------- ----------
Deferred income........................................................ 233.9 292.1
Long-term debt......................................................... 3,362.9 1,246.0
Deferred income taxes.................................................. 77.2 70.9
Other non-current liabilities.......................................... 125.3 110.3
----------- ----------
Total liabilities exclusive of liabilities under programs .............. 6,671.0 4,253.7
----------- ----------
Liabilities under management and mortgage programs
Debt................................................................... 6,896.8 5,602.6
----------- ----------
Deferred income taxes.................................................. 341.0 295.7
----------- ----------
Mandatorily redeemable preferred securities issued by subsidiary
holding solely senior debentures issued by the Company................. 1,472.1 --
Commitments and contingencies (Note 18)
Shareholders' equity
Preferred stock, $.01 par value -authorized 10 million shares; none
issued and outstanding................................................ -- --
Common stock, $.01 par value -authorized 2 billion shares; issued
860,551,783 and 838,333,800 shares.................................... 8.6 8.4
Additional paid-in capital............................................. 3,863.4 3,085.0
Retained earnings...................................................... 1,480.2 940.6
Accumulated other comprehensive loss................................... (49.4) (38.2)
Treasury stock, at cost, 27,270,708 and 6,545,362 shares .............. (467.2) (74.4)
----------- ----------
Total shareholders' equity.............................................. 4,835.6 3,921.4
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $20,216.5 $14,073.4
=========== ==========
See accompanying notes to consolidated financial statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT JANUARY 1, 1996......... 725.2 $7.3 $1,041.9 $ 905.1 $(25.1) $(31.0) $1,898.2
COMPREHENSIVE INCOME:
Net income........................ -- -- -- 330.0 -- --
Currency translation adjustment .. -- -- -- -- 12.2 --
Net unrealized gain on marketable
securities....................... -- -- -- -- 6.5 --
TOTAL COMPREHENSIVE INCOME......... -- -- -- -- -- -- 348.7
Issuance of common stock........... 63.3 .6 1,627.9 -- -- -- 1,628.5
Exercise of stock options by
payment of cash and common stock . 14.0 .1 74.6 -- -- (25.5) 49.2
Restricted stock issuance.......... 1.4 -- -- -- -- -- --
Amortization of restricted stock .. -- -- 2.3 -- -- -- 2.3
Tax benefit from exercise of stock
options........................... -- -- 78.9 -- -- -- 78.9
Cash dividends declared and other
equity distributions.............. -- -- -- (41.3) -- -- (41.3)
Adjustment to reflect change in
fiscal years of pooled entities .. -- -- (.6) (7.1) -- -- (7.7)
Conversion of convertible notes ... 3.8 .1 18.0 -- -- -- 18.1
Purchase of common stock........... -- -- -- -- -- (19.2) (19.2)
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1996 ...... 807.7 $8.1 $2,843.0 $1,186.7 $ (6.4) $(75.7) $3,955.7
See accompanying notes to consolidated financial statements.
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT JANUARY 1, 1997 ........ 807.7 $8.1 $2,843.0 $1,186.7 $ (6.4) $ (75.7) $3,955.7
COMPREHENSIVE LOSS:
Net loss ......................... -- -- -- (217.2) -- --
Currency translation adjustment . -- -- -- -- (27.6) --
Net unrealized loss on marketable
securities ...................... -- -- -- -- (4.2) --
TOTAL COMPREHENSIVE LOSS .......... -- -- -- -- -- -- (249.0)
Issuance of common stock .......... 6.2 -- 46.3 -- -- -- 46.3
Exercise of stock options by
payment of cash and common stock 11.4 .1 132.8 -- -- (17.8) 115.1
Restricted stock issuance ......... .2 -- -- -- -- -- --
Amortization of restricted stock .. -- -- 28.5 -- -- -- 28.5
Tax benefit from exercise of stock
options .......................... -- -- 93.5 -- -- -- 93.5
Cash dividends declared ........... -- -- -- (6.6) -- -- (6.6)
Adjustment to reflect change in
fiscal year from Cendant Merger . -- -- -- (22.3) -- -- (22.3)
Conversion of convertible notes ... 20.2 .2 150.9 -- -- -- 151.1
Purchase of common stock .......... -- -- -- -- -- (171.3) (171.3)
Retirement of treasury stock ..... (7.4) -- (190.4) -- -- 190.4 --
Other ............................. -- (19.6) -- -- -- (19.6)
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1997 ..... 838.3 $8.4 $3,085.0 $ 940.6 $(38.2) $ (74.4) $3,921.4
See accompanying notes to consolidated financial statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT JANUARY 1, 1998 ........ 838.3 $8.4 $3,085.0 $ 940.6 $(38.2) $ (74.4) $3,921.4
COMPREHENSIVE INCOME:
Net income ....................... -- -- -- 539.6 -- --
Currency translation adjustment . -- -- -- -- (11.2) --
TOTAL COMPREHENSIVE INCOME ........ -- -- -- -- -- -- 528.4
Exercise of stock options by
payment of cash and common stock 16.4 .1 168.4 -- -- (.2) 168.3
Amortization of restricted stock .. -- -- .7 -- -- -- .7
Tax benefit from exercise of stock
options .......................... -- -- 147.3 -- -- -- 147.3
Conversion of convertible notes ... 5.9 .1 113.7 -- -- -- 113.8
Purchase of common stock .......... -- -- -- -- -- (257.7) (257.7)
Mandatorily redeemable preferred
securities issued by subsidiary . -- -- (65.7) -- -- -- (65.7)
Common stock received
asconsideration in sale of
discontinued operations........... -- -- -- -- -- (134.9) (134.9)
Rights issuable ................... -- -- 350.0 -- -- -- 350.0
Other ............................. -- -- 64.0 -- -- -- 64.0
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1998 ..... 860.6 $8.6 $3,863.4 $1,480.2 $(49.4) $(467.2) $4,835.6
======== ======== ============ ========== =============== ========== ===============
See accompanying notes to consolidated financial statements.
F-9
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
OPERATING ACTIVITIES ...........................................
Net income (loss) .............................................. $ 539.6 $ (217.2) $ 330.0
Adjustments to reconcile net income (loss) to net cash provided
by operating activities from continuing operations:
(Income) loss from discontinued operations, net of tax ......... 25.0 26.8 (16.7)
Gain on sale of discontinued operations, net of tax ........... (404.7) -- --
Non cash charges:
Litigation settlement ......................................... 351.0 -- --
Extraordinary gain on sale of subsidiary, net of tax ......... -- (26.4) --
Cumulative effect of accounting change, net of tax ........... -- 283.1 --
Asset impairments and termination benefits .................... 62.5 -- --
Merger-related costs and other unusual charges (credits) ..... (67.2) 704.1 109.4
Payments of merger-related costs and other unusual charge
liabilities ................................................... (158.2) (317.7) (61.3)
Depreciation and amortization .................................. 322.7 237.7 145.5
Membership acquisition costs ................................... -- -- (512.1)
Amortization of membership costs ............................... -- -- 492.3
Proceeds from sales of trading securities ...................... 136.1 -- --
Purchases of trading securities ................................ (181.6) -- --
Deferred income taxes .......................................... (110.8) (23.8) 68.8
Net change in assets and liabilities from continuing
operations:
Receivables ................................................... (126.0) (95.6) (122.1)
Deferred membership commission costs .......................... (86.8) -- --
Income taxes receivable ....................................... (97.9) (84.0) (18.3)
Accounts payable and other current liabilities ................ 95.9 (87.0) 14.3
Deferred income ............................................... 82.3 134.0 43.9
Other, net .................................................... (54.1) (54.9) 71.2
------------ ------------ -----------
NET CASH PROVIDED BY CONTINUING OPERATIONS EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS .............................. 327.8 479.1 544.9
------------ ------------ -----------
Management and mortgage programs:
Depreciation and amortization ................................. 1,259.9 1,121.9 1,021.8
Origination of mortgage loans ................................. (26,571.6) (12,216.5) (8,292.6)
Proceeds on sale and payments from mortgage loans held for
sale ......................................................... 25,791.9 11,828.5 8,219.3
------------ ------------ -----------
480.2 733.9 948.5
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
OPERATIONS .................................................... 808.0 1,213.0 1,493.4
------------ ------------ -----------
INVESTING ACTIVITIES
Property and equipment additions ............................... (355.2) (154.5) (101.2)
Proceeds from sales of marketable securities ................... -- 506.1 72.4
Purchases of marketable securities ............................. -- (458.1) (125.6)
Investments .................................................... (24.4) (272.5) (12.7)
Net assets acquired (net of cash acquired) and
acquisition-related payments .................................. (2,852.0) (568.2) (1,608.6)
Net proceeds from sale of subsidiary ........................... 314.8 224.0 --
Other, net ..................................................... 106.5 (108.7) (56.2)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS ................. (2,810.3) (831.9) (1,831.9)
------------ ------------ -----------
See accompanying notes to consolidated financial statements.
F-10
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Management and mortgage programs:
Investment in leases and leased vehicles ............ $(2,446.6) $(2,068.8) $(1,901.2)
Payments received on investment in leases and leased
vehicles ........................................... 987.0 589.0 595.9
Proceeds from sales and transfers of leases and
leased vehicles to third parties ................... 182.7 186.4 162.8
Equity advances on homes under management .......... (6,484.1) (6,844.5) (4,308.0)
Repayment on advances on homes under management .... 6,624.9 6,862.6 4,348.9
Additions to mortgage servicing rights .............. (524.4) (270.4) (164.4)
Proceeds from sales of mortgage servicing rights ... 119.0 49.0 7.1
------------ ------------ ------------
(1,541.5) (1,496.7) (1,258.9)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS .......................................... (4,351.8) (2,328.6) (3,090.8)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from borrowings ............................. 4,808.3 66.7 459.1
Principal payments on borrowings ..................... (2,595.9) (174.0) (3.5)
Issuance of convertible debt ......................... -- 543.2 --
Issuance of common stock ............................. 171.0 132.2 1,223.8
Purchases of common stock ............................ (257.7) (171.3) (19.2)
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary, net ................ 1,446.7 -- --
Other, net ........................................... -- (6.6) (121.3)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS ................................... 3,572.4 390.2 1,538.9
------------ ------------ ------------
Management and mortgage programs:
Proceeds from debt issuance or borrowings .......... 4,300.0 2,816.3 1,656.0
Principal payments on borrowings .................... (3,089.7) (1,692.9) (1,645.9)
Net change in short-term borrowings ................. (93.1) (613.5) 231.8
------------ ------------ ------------
1,117.2 509.9 241.9
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS ............................... 4,689.6 900.1 1,780.8
------------ ------------ ------------
Effect of changes in exchange rates on cash and cash
equivalents ......................................... (16.4) 15.4 (46.2)
Cash provided by (used in) discontinued operations .. (187.7) (181.0) 85.8
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 941.7 (381.1) 223.0
Cash and cash equivalents, beginning of period ...... 67.0 448.1 225.1
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............. $ 1,008.7 $ 67.0 $ 448.1
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments ................................... $ 623.6 $ 374.9 $ 291.7
============ ============ ============
Income tax payments, net ............................ $ (23.0) $ 264.5 $ 89.4
============ ============ ============
See accompanying notes to consolidated financial statements.
F-11
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
Cendant Corporation, together with its subsidiaries (the "Company"), is
one of the foremost providers of real estate related, travel related and
membership-based consumer and business services in the world. The Company was
created through the merger (the "Cendant Merger") of HFS Incorporated ("HFS")
and CUC International Inc. ("CUC") in December 1997, which was accounted for
as a pooling of interests. Prior to the Cendant Merger, both HFS and CUC had
grown significantly through mergers and acquisitions accounted for under both
the pooling of interests method (the most significant being the merger of HFS
with PHH Corporation ("PHH") in April 1997 (the "PHH Merger")) and purchase
method of accounting (See Note 4). The accompanying consolidated financial
statements and notes hereto are presented as if all mergers and acquisitions
accounted for as poolings of interests have operated as one entity since
inception. The amended consolidated financial statements presented herein are
the Company's historical financial statements for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
and transactions of the Company together with its wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such determination as of
each balance sheet date. Marketable securities classified as available for
sale are carried at fair value with unrealized gains and losses included in
the determination of comprehensive income and reported as a component of
shareholders' equity. Marketable securities classified as trading securities
are reported at fair value with unrealized gains and losses recognized in
earnings. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. During
1998, unrealized holding gains on trading securities of approximately $16.0
million were included in other revenue in the consolidated statements of
operations. Marketable securities consist principally of mutual funds,
corporate bonds and other debt securities. The cost of marketable securities
sold is determined on the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is computed by the straight-line method over the estimated
useful lives of the related assets or the lease term, if shorter.
FRANCHISE AGREEMENTS
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are recorded at their acquired fair values and
are amortized on a straight-line basis over the estimated
F-12
periods to be benefited, ranging from 12 to 40 years. At December 31, 1998
and 1997, accumulated amortization amounted to $169.1 million and $126.4
million, respectively.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net
assets acquired, is amortized on a straight-line basis over the estimated
useful lives, substantially ranging from 25 to 40 years. At December 31, 1998
and 1997, accumulated amortization amounted to $248.3 million and $177.2
million, respectively.
ASSET IMPAIRMENTS
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, 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, the Company determined that $37.0
million of goodwill associated with a Company subsidiary, National Library of
Poetry, was permanently impaired. In addition, the Company had equity
investments in interactive businesses, which were generating negative cash
flows and were unable to access sufficient liquidity through equity or debt
offerings. As a result, the Company wrote off $13.0 million of such
investments. The aforementioned impairments impacted the Company's Other
services segment and are classified as operating expenses in the consolidated
statements of operations.
REVENUE RECOGNITION AND BUSINESS OPERATIONS
Franchising. Franchise revenue principally consists of royalties as well
as marketing and reservation fees, which are based on a percentage of
franchisee revenue. Royalty, marketing and reservation fees are accrued as
the underlying franchisee revenue is earned. 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 RCI exchange network. Subscription
revenue, net of related procurement costs, is deferred upon receipt and
recognized as revenue over the subscription period during which delivery of
publications and other services are provided to the subscribing members.
Subscriptions are cancelable and refundable on a prorata basis.
Subscription procurement costs are expensed as incurred. Such costs were
$31.3 million, $26.7 million and $1.0 million for the years ended December
31, 1998, 1997 and 1996, respectively.
Individual Membership. Membership revenue is generally recognized upon the
expiration of the membership period. Memberships are generally cancelable for
a full refund of the membership fee during the entire membership period,
generally one year.
In August 1998, the Company changed its accounting policy with respect to
revenue and expense recognition for its membership businesses, effective
January 1, 1997. Prior to such adoption, the Company recorded deferred
membership income, net of estimated cancellations, at the time members were
billed (upon expiration of the free trial period), which was recognized as
revenue ratably over the membership term and modified periodically based on
actual cancellation experience. In addition, membership acquisition and
renewal costs, which related primarily to membership solicitations were
capitalized as direct response advertising costs due to the Company's ability
to demonstrate that the direct response advertising resulted in future
economic benefits. Such costs were amortized on a straight-line basis as
revenues were recognized (over the average membership period).
F-13
The Company concluded that when membership fees are fully refundable
during the entire membership period, membership revenue should be recognized
at the end of the membership period upon the expiration of the refund offer.
The Company further concluded that non-refundable solicitation costs should
be expensed as incurred since such costs are not recoverable if membership
fees are refunded. The Company adopted such accounting policies effective
January 1, 1997 and accordingly, recorded a non-cash after-tax charge on such
date of $283.1 million to account for the cumulative effect of the accounting
change.
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 profit commission based
on premiums less claims and certain other expenses (including the above
commissions). Such profit commissions are accrued based on claims experience
to date, including an estimate of claims incurred but not reported.
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence, providing
equity advances on the transferee's residence and home management services.
The 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 their home
based on an appraised value generally determined by independent appraisers,
after deducting any outstanding mortgages. 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 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.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate based on various indices. Direct
costs of managing the home during the period the home is held for resale,
including property taxes and repairs and maintenance, are generally borne by
the client corporation. The client corporation normally advances funds to
cover a portion of such carrying costs. When the home is sold, a settlement
is made with the client corporation netting actual costs with any advanced
funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by client
corporations and interest expenses incurred to fund the purchase of a
transferee's residence. Under the terms of contracts with client
corporations, the Company is generally protected against losses from changes
in real estate market conditions. The Company also offers fee-based programs
such as home marketing assistance, household goods moves and destination
services. Revenues from these fee-based services are taken into income over
the periods in which the services are provided and the related expenses are
incurred.
Fleet. The Company primarily leases its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). See Note 10 -- Net
Investment in Leases and Leased Vehicles. Each lease is either classified as
an operating lease or direct financing lease, as defined. Lease revenues are
recognized based on rentals. Revenues from fleet management services other
than leasing are recognized over the period in which services are provided
and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and direct loan origination costs associated with loans is
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. See Note 11 -- Mortgage Loans Held For Sale.
Fees received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages and
the amount paid to the investor, or on a stipulated percentage of the
outstanding monthly principal balance on such loans. Servicing fees are
credited to income when received. Costs associated with loan servicing are
charged to expense as incurred.
F-14
The Company recognizes as separate assets the rights to service mortgage
loans for others by allocating total costs incurred between the loan and the
servicing rights retained based on their relative fair values. The carrying
value of mortgage servicing rights ("MSRs") is 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 loan servicing fees
in the consolidated statements of operations. Projected net servicing income
is in turn determined on the basis of the estimated future balance of the
underlying mortgage loan portfolio, which declines over time from prepayments
and scheduled loan amortization. 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. MSRs are periodically assessed for impairment, which
is recognized in the consolidated statements of operations during the period
in which impairment occurs as an adjustment to the corresponding valuation
allowance. 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. See Note 12 -- Mortgage Servicing
Rights.
ADVERTISING EXPENSES
Advertising costs, including direct response advertising (subsequent to
January 1, 1997), are generally expensed in the period incurred. Advertising
expenses for the years ended December 31, 1998, 1997 and 1996 were $684.7
million, $574.4 million and $503.8 million, respectively.
INCOME TAXES
The provision for income taxes includes deferred income taxes resulting
from items reported in different periods for income tax and financial
statement purposes. Deferred tax assets and liabilities represent the
expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effects of changes in tax rates on deferred tax
assets and liabilities are recognized in the period that includes the
enactment date. No provision has been made for U.S. income taxes on
approximately $312.3 million of cumulative undistributed earnings of foreign
subsidiaries at December 31, 1998 since it is the present intention of
management to reinvest the undistributed earnings indefinitely in foreign
operations. The determination of unrecognized deferred U.S. tax liability for
unremitted earnings is not practicable.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates in effect as of the balance sheet dates. Equity accounts are
translated at historical exchange rates and revenues, expenses and cash flows
are translated at the average exchange rates for the periods presented.
Translation gains and losses are included as a component of comprehensive
income (loss) in the consolidated statements of shareholders' equity.
NEW ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements". SAB No. 101 draws upon the
existing accounting rules and explains those rules, by analogy, to other
transactions that the existing rules do not specifically address. SAB No. 101
requires that revenue generally is realized or realizable when all of the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the seller's price to
the buyer is fixed or determinable and collectibility is reasonably assured.
The Company has not yet determined what impact the adoption of SAB No. 101
will have on its consolidated financial statements. The Company will adopt
SAB No. 101 as required for its first quarterly filing of fiscal 2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires the
Company to record all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. If the derivative does not
qualify as a hedging instrument, the change in the derivative fair values
will be immediately recognized as a gain or loss in earnings. If the
derivative does qualify as a hedging instrument, the gain or loss on the
change in the derivative fair values
F-15
will either be recognized (i) in earnings as offsets to the changes in the
fair value of the related item being hedged or (ii) be deferred and recorded
as a component of other comprehensive income and reclassified to earnings in
the same period during which the hedged transactions occur. The Company has
not yet determined what impact the adoption of SFAS No. 133 will have on its
financial statements. Implementation of this standard has recently been
delayed by the FASB for a 12-month period. The Company will now adopt SFAS
No. 133 as required for its first quarterly filing of fiscal year 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform to the presentation used in 1998.
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects all potential dilution of common stock, including the assumed
exercise of stock options using the treasury method and convertible debt. At
December 31, 1998, 38.0 million stock options outstanding with a weighted
average exercise price of $29.58 per option were excluded from the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the Company's common stock and therefore
would be antidilutive. In addition, at December 31, 1998, the Company's 3%
Convertible Subordinated Notes, convertible into 18.0 million shares of
Company common stock were antidilutive and, therefore, excluded from the
computation of diluted EPS. Basic and diluted EPS from continuing operations
is calculated as follows:
YEAR ENDED DECEMBER 31,
---------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
-------- ------- --------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change ...... $159.9 $ 66.3 $313.3
Convertible debt interest--net of tax.................. -- -- 5.8
-------- ------- --------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change, as
adjusted.............................................. $159.9 $ 66.3 $319.1
======== ======= ========
Weighted average shares
Basic................................................. 848.4 811.2 757.4
Potential dilution of common stock:
Stock options........................................ 32.0 40.5 40.1
Convertible debt..................................... -- -- 24.1
-------- ------- --------
Diluted............................................... 880.4 851.7 821.6
======== ======= ========
EPS--continuing operations before extraordinary gain
and cumulative effect of accounting change
Basic................................................. $ 0.19 $ 0.08 $ 0.41
======== ======= ========
Diluted............................................... $ 0.18 $ 0.08 $ 0.39
======== ======= ========
4. PURCHASE METHOD BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The excess of purchase price
over the fair value of the underlying net assets acquired is allocated to
goodwill. The operating results of such acquired companies are included in
the Company's consolidated statements of operations since the respective
dates of acquisition.
The following tables present information about the Company's acquisitions
consummated and other acquisition-related payments made during each of the
years in the three-year period ended December 31, 1998.
F-16
1998
-----------------------------------------
JACKSON
(IN MILLIONS) NPC HARPUR HEWITT OTHER
---------- -------- --------- ---------
Cash paid............................. $1,637.7 $206.1 $476.3 $563.9
Fair value of identifiable net assets
acquired (1)......................... 590.2 51.3 99.2 218.4
---------- -------- --------- ---------
Goodwill.............................. $1,047.5 $154.8 $377.1 $345.5
========== ======== ========= =========
Goodwill benefit period (years) ...... 40 40 40 25 to 40
========== ======== ========= =========
1996
-----------------------------------------
COLDWELL
(IN MILLIONS) 1997 RCI AVIS BANKER OTHER
---------- -------- -------- ---------- ----------
Cash paid............................. $267.9 $412.1 $367.2 $745.0 $224.0
Common stock issued................... 21.6 75.0 338.4 -- 52.5
Notes issued.......................... -- -- 100.9 -- 5.0
---------- -------- -------- ---------- ----------
Total consideration................... 289.5 487.1 806.5 745.0 281.5
Fair value of identifiable net assets
acquired (1)......................... 116.9 9.4 472.5 393.2 42.8
---------- -------- -------- ---------- ----------
Goodwill.............................. $172.6 $477.7 $334.0 $351.8 $238.7
========== ======== ======== ========== ==========
Goodwill benefit period (years) ..... 25 to 40 40 40 40 25 to 40
========== ======== ======== ========== ==========
Number of shares issued as
consideration........................ 0.9 2.4 11.1 -- 2.5
========== ======== ======== ========== ==========
- ------------
(1) Cash acquired in connection with acquisitions during 1998, 1997 and 1996
was $57.6 million, $2.6 million, and $135.0 million, respectively.
1998 ACQUISITIONS
National Parking Corporation. On April 27, 1998, the Company completed the
acquisition of National Parking Corporation Limited ("NPC") for $1.6 billion,
substantially in cash, which included the repayment of approximately $227.0
million of outstanding NPC debt. NPC was substantially comprised of two
operating subsidiaries: National Car Parks and Green Flag. National Car Parks
operates car parks in the United Kingdom ("UK") and Green Flag operates a
roadside assistance group in the UK and offers a wide-range of emergency
support and rescue services.
Harpur Group. On January 20, 1998, the Company completed the acquisition
of The Harpur Group Ltd. ("Harpur"), a fuel card and vehicle management
company in the UK, for approximately $206.1 million in cash plus contingent
payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $476.3 million
in cash. Jackson Hewitt operates a tax preparation service franchise system
in the United States. The Jackson Hewitt franchise system specializes in
computerized preparation of federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. The Company
acquired certain other entities for an aggregate purchase price of
approximately $463.9 million in cash during the year ended December 31, 1998.
Additionally, the Company made a $100.0 million cash payment to the seller of
Resort Condominiums International, Inc. ("RCI") in satisfaction of a
contingent purchase liability, which was accounted for as additional
goodwill.
PRO FORMA INFORMATION (UNAUDITED)
The following table reflects the operating results of the Company for the
years ended December 31, 1998 and 1997 on a pro forma basis, which gives
effect to the acquisition of NPC. The remaining
F-17
acquisitions completed during 1998 and 1997 are not significant on a pro
forma basis and are therefore not included. The pro forma results are not
necessarily indicative of the operating results that would have occurred had
the NPC acquisition been consummated on January 1, 1997, nor are they
intended to be indicative of results that may occur in the future. The
underlying pro forma information includes the amortization expense associated
with the assets acquired, the Company's financing arrangements, certain
purchase accounting adjustments and related income tax effects.
YEAR ENDED DECEMBER 31,
------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997
---------- ------------
Net revenues................................................... $5,485.3 $4,837.4
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change.................... 157.3 57.7
Net income (loss)(1)........................................... 537.0 (225.8)(2)
Per share information:
Basic
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................... $ 0.19 $ 0.07
Net income (loss)(1).......................................... $ 0.63 $ (0.28)
Weighted average shares....................................... 848.4 811.2
Diluted
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change................... $ 0.18 $ 0.07
Net income (loss)(1).......................................... $ 0.61 $ (0.28)
Weighted average shares....................................... 880.4 851.7
- ------------
(1) Includes gain on sale of discontinued operations, net of tax, of $404.7
million ($0.46 per diluted share) in 1998 and loss from discontinued
operations, net of tax, of $25.0 million ($0.03 diluted share) and $26.8
million ($0.03 per diluted share), in 1998 and 1997, respectively.
(2) Includes an extraordinary gain, net of tax, of $26.4 million ($0.03 per
diluted share) and the cumulative effect of a change in accounting, net
of tax, of $283.1 million ($0.35 per diluted share).
1996 ACQUISITIONS
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of RCI for
$487.1 million. The purchase agreement provides for contingent payments of up
to $200.0 million over a five year period which are based on components which
measure RCI's future performance, including EBITDA, net revenues and number
of members, as defined.
Avis, Inc. In October 1996, the Company completed the acquisition of all
of the outstanding capital stock of Avis, Inc. ("Avis"), including payments
under certain employee stock plans of Avis and the redemption of certain
series of preferred stock of Avis for an aggregate $806.5 million.
Subsequently, the Company made contingent cash payments of $26.0 million in
1996 and $60.8 million in 1997. The contingent payments made in 1997
represented the incremental amount of value attributable to Company common
stock as of the stock purchase agreement date in excess of the proceeds
realized upon the subsequent sale of such Company common stock. See Note
23-Related Party Transactions-Avis-for a discussion of the Company's executed
business plan regarding Avis.
Coldwell Banker Corporation. In May 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640.0 million in
cash for all of the outstanding capital stock of Coldwell Banker and repaid
$105.0 million of Coldwell Banker indebtedness. The aggregate purchase price
for the transaction was financed through the May 1996 sale of an aggregate
46.6 million shares of Company common stock pursuant to a public offering.
F-18
5. DISCONTINUED OPERATIONS
On August 12, 1998, the Company announced that the Executive Committee of
its Board of Directors committed to discontinue the Company's classified
advertising and consumer software businesses by disposing of Hebdo Mag
International, Inc. ("Hebdo Mag") and Cendant Software Corporation ("CDS"),
two wholly owned subsidiaries of the Company. Hebdo Mag is a publisher and
distributor of classified advertising information and CDS is a developer,
publisher and distributor of educational and entertainment software.
On December 15, 1998, the Company completed the sale of Hebdo Mag to its
former 50% owners for $449.7 million. The Company received $314.8 million in
cash and 7.1 million shares of Company common stock valued at $134.9 million
(approximately $19.00 per share market value) on the date of sale. The
Company recognized a gain on the sale of Hebdo Mag of $206.9 million,
including a tax benefit of $52.1 million, which is included in the gain on
sale of discontinued operations in the consolidated statements of operations.
On January 12, 1999, the Company completed the sale of CDS for
approximately $800.0 million in cash. The Company realized an after tax net
gain on sale of $371.9 million. The Company recognized $197.8 million of such
gain in 1998 substantially in the form of a tax benefit and corresponding
deferred tax asset. The Company recognized this deferred tax asset upon
executing the definitive agreement to sell CDS, which was when it became
apparent to the Company that the deferred tax asset would be realized. The
recognized gain is included in the gain on sale of discontinued operations in
the consolidated statements of operations.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
SOFTWARE
-----------------------------
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- --------- --------
Net revenues.................................................. $345.8 $433.7 $384.5
-------- --------- --------
Income (loss) before income taxes............................. (57.3) (5.9) 42.0
Provision for (benefit from) income taxes..................... (22.9) 2.4 27.3
-------- --------- --------
Net income (loss)............................................. $(34.4) $ (8.3) $ 14.7
======== ========= ========
CLASSIFIED ADVERTISING
-----------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- --------- --------
Net revenues.................................................. $202.4 $208.5 $126.4
-------- --------- --------
Income (loss) before income taxes and extraordinary loss ..... 16.9 (4.5) 3.7
Provision for (benefit from) income taxes..................... 7.5 (1.2) 1.7
Extraordinary loss from early extinguishment of debt, net of
a $4.9 million tax benefit................................... -- (15.2) --
-------- --------- --------
Net income (loss)............................................. $ 9.4 $(18.5) $ 2.0
======== ========= ========
The Company allocated $19.9 million and $5.0 million of interest expense
to discontinued operations for the years ended December 31, 1998 and 1997,
respectively. Such interest expense represents the cost of funds associated
with businesses acquired by the discontinued business segments at an interest
rate consistent with the Company's consolidated effective borrowing rate.
F-19
BALANCE SHEET DATA:
SOFTWARE CLASSIFIED ADVERTISING
-------------------- ----------------------
DECEMBER 31, DECEMBER 31,
(IN MILLIONS) 1998 1997 1997
--------- --------- ----------------------
Current assets........................ $ 284.9 $ 209.1 $ 58.6
Goodwill.............................. 105.7 42.2 181.5
Other assets.......................... 88.2 49.2 33.2
Total liabilities..................... (105.2) (127.0) (173.5)
--------- --------- ----------------------
Net assets of discontinued
operations........................... $ 373.6 $ 173.5 $ 99.8
========= ========= ======================
6. OTHER CHARGES
LITIGATION SETTLEMENT
On March 17, 1999, the Company reached a final agreement to settle the
class action lawsuit that was brought on behalf of the holders of Income or
Growth FELINE PRIDES ("PRIDES") securities who purchased their securities on
or prior to April 15, 1998, the date on which the Company announced the
discovery of accounting irregularities in the former business units of CUC
(see Note 17 -- Mandatorily Redeemable Trust Preferred Securities Issued by
Subsidiary). Under the terms of the agreement only holders who owned PRIDES
at the close of business on April 15, 1998 will be eligible to receive a new
additional "Right" for each PRIDES security held. Right holders may (i) sell
them or (ii) exercise them 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 will be the same as the original PRIDES except
that the conversion rate will be revised so that, at the time the Rights are
distributed, each New PRIDES will have a value equal to $17.57 more than each
original PRIDES, or, in the aggregate, approximately $351.0 million.
Accordingly, the Company recorded a non-cash charge of $351.0 million in the
fourth quarter of 1998 with an increase in additional paid-in capital and
accrued liabilities of $350.0 million and $1.0 million, respectively, based
on the prospective issuance of the Rights. The final agreement also requires
the Company to offer to sell four million additional PRIDES (having identical
terms to currently outstanding PRIDES) to holders of Rights for cash, at a
value which will be based on the valuation model that was utilized to set the
conversion rate of the New PRIDES. The offering of additional PRIDES will be
made only pursuant to a prospectus filed with the SEC. The arrangement to
offer additional PRIDES is designed to enhance the trading value of the
Rights by removing up to six million Rights from circulation via exchanges
associated with the offering and to enhance the open market liquidity of New
PRIDES by creating four million New PRIDES via exchanges associated with the
offering. If holders of Rights do not acquire all such PRIDES, they will be
offered to the public. Under the settlement agreement, the Company also
agreed to file a shelf registration statement for an additional 15 million
special PRIDES, which could be issued by the Company at any time for cash.
However, during the last 30 days prior to the expiration of the Rights in
February 2001, the Company will be required to make these additional PRIDES
available to holders of Rights at a price in cash equal to 105% of their
theoretical value. The special PRIDES, if issued, would have the same terms
as the currently outstanding PRIDES and could be used to exercise Rights.
Based on an average market price of $17.53 per share of Company common stock
(calculated based on the average closing price per share of Company common
stock for the consecutive five-day period ended September 30, 1999), the
effect of the issuance of the New PRIDES will be to distribute approximately
19 million more shares of Company common stock when the mandatory purchase of
Company common stock associated with the PRIDES occurs in February 2001.
On June 15, 1999, the United States District Court for the District of New
Jersey entered an order and judgment approving the settlement described above
and awarding fees to counsel to the class. One objector, who objected to a
portion of the settlement notice concerning fees to be sought by counsel to
the class has filed an appeal to the U.S. Court of Appeals for the Third
Circuit from the District Court order approving the settlement and awarding
fees to counsel to the class. Although under the settlement
F-20
the Rights are required to be distributed following the conclusion of court
proceedings, including appeals, the Company believes that the appeal is
without merit. As a result, the Company presently intends to distribute the
Rights in the first quarter of 2000, after the effectiveness of the
registration statement filed with the SEC covering the New PRIDES.
TERMINATION OF PROPOSED ACQUISITIONS
On October 13, 1998, the Company and American Bankers Insurance Group,
Inc. ("American Bankers") entered into a settlement agreement (the
"Settlement Agreement"), pursuant to which the Company and American Bankers
terminated a definitive agreement dated March 23, 1998 which provided for the
Company's acquisition of American Bankers for $3.1 billion. Accordingly, the
Company's pending tender offer for American Bankers shares was also
terminated. Pursuant to the Settlement Agreement and in connection with
termination of the Company's proposed acquisition of American Bankers, the
Company made a $400.0 million cash payment to American Bankers and wrote off
$32.3 million of costs, primarily professional fees.
On October 5, 1998, the Company announced the termination of an agreement
to acquire, for $219.0 million in cash, Providian Auto and Home Insurance
Company ("Providian"). Certain representations and covenants in such
agreement had not been fulfilled and the conditions to closing had not been
met. The Company did not pursue an extension of the termination date of the
agreement because Providian no longer met the Company's acquisition criteria.
In connection with the termination of the Company's proposed acquisition of
Providian, the Company wrote off $1.2 million of costs.
EXECUTIVE TERMINATIONS
The Company incurred $52.5 million of costs on July 28, 1998 related to
the termination of certain former executives of the Company, principally
Walter A. Forbes, who resigned as Chairman of the Company and as a member of
the Board of Directors. The severance agreement reached with Mr. Forbes
entitled him to the benefits required by his employment contract relating to
a termination of Mr. Forbes' employment with the Company for reasons other
than for cause. Aggregate benefits given to Mr. Forbes resulted in a charge
of $50.9 million comprised of $38.4 million in cash payments and 1.3 million
Company stock options, with a Black-Scholes value of $12.5 million. Such
options were immediately vested and expire on July 28, 2008. The main benefit
to the Company from Mr. Forbes' termination was the resolution of the
division of the governance issues that existed at the time between the
members of the Board of Directors formerly associated with CUC and the
members of the Board formerly associated with HFS.
INVESTIGATION-RELATED COSTS
The Company incurred $33.4 million of professional fees, public relations
costs and other miscellaneous expenses in connection with accounting
irregularities and resulting investigations into such matters.
FINANCING COSTS
In connection with the Company's discovery and announcement of accounting
irregularities on April 15, 1998 and the corresponding lack of audited
financial statements, the Company was temporarily prohibited from accessing
public debt markets. As a result, the Company paid $27.9 million in fees
associated with waivers and various financing arrangements. Additionally,
during 1998, the Company exercised its option to redeem its 4 3/4%
Convertible Senior Notes (the "4 3/4% Notes") (see Note 13 -- Long-Term Debt
- -- 4 3/4% Convertible Senior Notes). At such time, the Company anticipated
that all holders of the 4 3/4% Notes would elect to convert the 4 3/4% Notes
to Company common stock. However, at the time of redemption, holders of the 4
3/4% Notes elected not to convert the 4 3/4% Notes to Company common stock
and as a result, the Company redeemed such notes at a premium. Accordingly,
the Company recorded a $7.2 million loss on early extinguishment of debt.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 related to continuing operations of $704.1
million primarily associated with the Cendant Merger (the
F-21
"Fourth Quarter 1997 Charge") and the PHH Merger (the "Second Quarter 1997
Charge"). Liabilities associated with Unusual Charges are classified as a
component of accounts payable and other current liabilities. The reduction of
such liabilities from inception is summarized by category of expenditure and
by charge as follows:
1998 ACTIVITY
NET 1997 BALANCE AT --------------------------------- BALANCE AT
UNUSUAL 1997 DECEMBER 31, CASH NON DECEMBER 31,
(IN MILLIONS) CHARGES REDUCTIONS 1997 PAYMENTS CASH ADJUSTMENTS 1998
---------- ------------ -------------- ---------- ------ ------------- --------------
Professional fees.......... $123.3 $ (72.6) $ 50.7 $ (38.2) $ -- $(10.9) $ 1.6
Personnel related.......... 324.8 (156.3) 168.5 (75.3) -- (23.0) 70.2
Business terminations ..... 133.9 (130.0) 3.9 (1.2) 6.1 (7.1) 1.7
Facility related and
other..................... 156.0 (105.6) 50.4 (15.7) 2.1 (26.7) 10.1
---------- ------------ -------------- ---------- ------ ------------- --------------
Total Unusual Charges ..... $738.0 $(464.5) $273.5 $(130.4) $8.2 $(67.7) $83.6
Reclassification for
discontinued operations .. (33.9) 33.9 -- -- -- -- --
---------- ------------ -------------- ---------- ------ ------------- --------------
Total Unusual Charges
related to continuing
operations................ $704.1 $(430.6) $273.5 $(130.4) $8.2 $(67.7) $83.6
========== ============ ============== ========== ====== ============= ==============
1998 ACTIVITY
NET 1997 BALANCE AT --------------------------------- BALANCE AT
UNUSUAL 1997 DECEMBER 31, CASH NON DECEMBER 31,
(IN MILLIONS) CHARGES REDUCTIONS 1997 PAYMENTS CASH ADJUSTMENTS 1998
---------- ------------ -------------- ---------- ------ ------------- --------------
Fourth Quarter 1997
Charge.................... $454.9 $(257.5) $197.4 $(102.6) $0.5 $(28.1) $67.2
Second Quarter 1997
Charge.................... 283.1 (207.0) 76.1 (27.8) 7.7 (39.6) 16.4
---------- ------------ -------------- ---------- ------ ------------- --------------
Total Unusual Charges ..... $738.0 $(464.5) $273.5 $(130.4) $8.2 $(67.7) $83.6
Reclassification for
discontinued operations .. (33.9) 33.9 -- -- -- -- --
---------- ------------ -------------- ---------- ------ ------------- --------------
Total Unusual Charges
related to continuing
operations................ $704.1 $(430.6) $273.5 $(130.4) $8.2 $(67.7) $83.6
========== ============ ============== ========== ====== ============= ==============
Fourth Quarter 1997 Charge. The Company incurred Unusual Charges in the
fourth quarter of 1997 totaling $454.9 million substantially associated with
the Cendant Merger and the merger in October 1997 with Hebdo Mag.
Reorganization plans were formulated prior to and implemented as a result of
the mergers. The Company determined to streamline its corporate organization
functions and eliminate several office locations in overlapping markets.
Management's plan included the consolidation of European call centers in
Cork, Ireland and terminations of franchised hotel properties.
Unusual Charges included $93.0 million of professional fees primarily
consisting of investment banking, legal and accounting fees incurred in
connection with the mergers. The Company also incurred $170.7 million of
personnel-related costs including $73.3 million of retirement and employee
benefit plan costs, $23.7 million of restricted stock compensation, $61.4
million of severance resulting from consolidations of European call centers
and certain corporate functions and $12.3 million of other personnel-related
costs. The Company provided for 474 employees to be terminated, the majority
of which have been severed as of December 31, 1998. Unusual Charges included
$78.3 million of business termination costs which consisted of a $48.3
million impairment write down of hotel franchise agreement assets associated
with a quality upgrade program and $30.0 million of costs incurred to
terminate a contract which may have restricted the Company from maximizing
opportunities afforded by the Cendant Merger. Facility-related and other
unusual charges of $112.9 million included $70.0 million of irrevocable
contributions to independent technology trusts for the direct benefit of
lodging and real estate franchisees, $16.4 million of building lease
termination costs and a $22.0 million reduction in intangible assets
F-22
associated with the Company's wholesale annuity business for which impairment
was determined in 1997. During the year ended December 31, 1998, the Company
recorded a net adjustment of $28.1 million to Unusual Charges with a
corresponding reduction to liabilities primarily as a result of a change in
the original estimate of costs to be incurred. Such adjustments to original
estimates were recorded in the periods in which events occurred or
information became available requiring accounting recognition. Liabilities of
$67.2 million remained at December 31, 1998, which were primarily
attributable to future severance costs and executive termination benefits,
which the Company anticipates that such liabilities will be settled upon
resolution of the related contingencies.
Second Quarter 1997 Charge. The Company incurred $295.4 million of Unusual
Charges in the second quarter of 1997 primarily associated with the PHH
Merger. During the fourth quarter of 1997, as a result of changes in
estimates, the Company adjusted certain merger-related liabilities, which
resulted in a $12.3 million credit to Unusual Charges. Reorganization plans
were formulated in connection with the PHH Merger and were implemented upon
consummation. The PHH Merger afforded the combined company, at such time, an
opportunity to rationalize its combined corporate, real estate and travel
related businesses, and enabled the corresponding support and service
functions to gain organizational efficiencies and maximize profits.
Management initiated a plan just prior to the PHH Merger to close hotel
reservation call centers, combine travel agency operations and continue the
downsizing of fleet operations by reducing headcount and eliminating
unprofitable products. In addition, management initiated plans to integrate
its relocation, real estate franchise and mortgage origination businesses to
capture additional revenue through the referral of one business unit's
customers to another. Management also formalized a plan to centralize the
management and headquarters functions of the world's largest, second largest
and other company-owned corporate relocation business unit subsidiaries. Such
initiatives resulted in write-offs of abandoned systems and leasehold assets
commencing in the second quarter 1997. The aforementioned reorganization
plans provided for 560 job reductions, which included the elimination of PHH
Corporate functions and facilities in Hunt Valley, Maryland.
Unusual Charges included $154.1 million of personnel-related costs
associated with employee reductions necessitated by the planned and announced
consolidation of the Company's corporate relocation service businesses
worldwide as well as the consolidation of corporate activities.
Personnel-related charges also included termination benefits such as
severance, medical and other benefits and provided for retirement benefits
pursuant to pre-existing contracts resulting from a change in control.
Unusual Charges also included professional fees of $30.3 million, primarily
comprised of investment banking, accounting and legal fees incurred in
connection with the PHH Merger. The Company incurred business termination
charges of $55.6 million, which were comprised of $38.8 million of costs to
exit certain activities primarily within the Company's fleet management
business (including $35.7 million of asset write-offs associated with exiting
certain activities), a $7.3 million termination fee associated with a joint
venture that competed with the PHH Mortgage Services business (now Cendant
Mortgage Corporation) and $9.6 million of costs to terminate a marketing
agreement with a third party in order to replace the function with internal
resources. Facility-related and other charges totaling $43.1 million included
costs associated with contract and lease terminations, asset disposals and
other charges incurred in connection with the consolidation and closure of
excess office space.
The Company had substantially completed the aforementioned restructuring
activities at December 31, 1998. During the year ended December 31, 1998, the
Company recorded a net adjustment of $39.6 million to Unusual Charges with a
corresponding reduction to liabilities primarily as a result of a change in
the original estimate of costs to be incurred. Such adjustments to original
estimates were recorded in the periods in which events occurred or
information became available requiring accounting recognition. Liabilities of
$16.4 million remained at December 31, 1998, which were attributable to
future severance and lease termination payments. The Company anticipates that
severance will be paid in installments through April 2003 and the lease
terminations will be paid in installments through August 2002.
1996 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
In connection with and coincident to Company mergers accounted for as
poolings of interests during 1996, the Company incurred Unusual Charges of
approximately $134.3 million in 1996, of which
F-23
$109.4 million was related to continuing operations (substantially related to
the Company's merger with Ideon Group, Inc. ("Ideon")) and $24.9 million was
associated with consumer software businesses that are discontinued. The
collective Unusual Charges recorded during 1996 related to Company mergers
and the utilization of such liabilities is summarized below:
1996 BALANCE AT BALANCE AT
UNUSUAL 1997 DECEMBER 31, 1998 DECEMBER 31,
(IN MILLIONS) CHARGES REDUCTIONS 1997 REDUCTIONS 1998
--------- ------------ -------------- ----------- --------------
Professional fees................. $ 27.5 $(27.5) $ -- $ -- $ --
Personnel related................. 7.5 (7.5) -- -- --
Facility related.................. 12.4 (10.4) 2.0 (2.0) --
Litigation related................ 80.4 (14.4) 66.0 (25.0) 41.0
Other............................. 6.5 (6.2) .3 (0.3) --
--------- ------------ -------------- ----------- --------------
Total Unusual Charges............. 134.3 (66.0) 68.3 (27.3) 41.0
Reclassification for discontinued
operations....................... (24.9) 24.9 -- -- --
--------- ------------ -------------- ----------- --------------
Total Unusual Charges related to
continuing operations............ $109.4 $(41.1) $68.3 $(27.3) $41.0
========= ============ ============== =========== ==============
Costs associated with the discontinued operations were comprised primarily
of professional fees incurred in connection with the Company's mergers with
consumer software businesses. Costs associated with the Company's merger with
Ideon were non-recurring and included transaction and exit costs as well as a
provision relating to certain litigation matters giving consideration to the
Company's intended approach to these matters. The Company has since settled
all outstanding litigation matters. The remaining $41.0 million of
litigation-related liabilities at December 31, 1998 consists of the present
value of settlement payments to be made in annual installments to the
co-founder of SafeCard Services, Inc. 1998 reductions include $27.8 million
of cash payments and a $0.5 million charge to Unusual Charges as a result of
a change in the original estimate of costs to be incurred.
The 1996 Unusual Charges also provided for costs to be incurred in
connection with the Company's consolidation efforts, including severance
costs to be accrued resulting from the Ideon merger and costs relating to the
expected obligations for certain third-party contracts (existing leases and
vendor agreements) to which Ideon is a party and which are neither terminable
at will nor automatically terminate upon a change-in-control of Ideon. In
addition, the Company incurred certain exit costs in transferring and
consolidating Ideon's credit card registration and enhancement services into
the Company's credit card registration and enhancement services business. As
a result of the Ideon merger, 120 employees were terminated.
7. PROPERTY AND EQUIPMENT -- NET
Property and equipment -net consisted of:
ESTIMATED
(IN MILLIONS) USEFUL LIVES DECEMBER 31,
------------ ----------------------
IN YEARS 1998 1997
-------------- --------- ----------
Land............................................ -- $ 153.4 $ 8.4
Building and leasehold improvements............. 5-50 751.9 224.4
Furniture, fixtures and equipment............... 3-10 1,018.1 632.1
---------- -------
1,923.4 864.9
Less accumulated depreciation and amortization 490.6 320.2
---------- -------
$1,432.8 $544.7
========== =======
F-24
8. OTHER INTANGIBLES -- NET
Other intangibles -net consisted of:
ESTIMATED DECEMBER 31,
BENEFIT PERIODS ------------------
(IN MILLIONS) IN YEARS 1998 1997
- ----------------------------- --------------- -------- --------
Avis trademark 40 $402.0 $402.0
Other trademarks.............. 40 170.9 72.5
Customer lists................ 3-10 162.7 116.8
Other......................... 2-16 138.6 123.6
-------- --------
874.2 714.9
Less accumulated
amortization................. 117.1 90.6
-------- --------
$757.1 $624.3
======== ========
Other intangibles are recorded at their estimated fair values at the dates
acquired and are amortized on a straight-line basis over the periods to be
benefited.
9. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
DECEMBER 31,
---------------------
(IN MILLIONS) 1998 1997
---------- ---------
Accounts payable................... $ 456.0 $ 479.5
Merger and acquisition
obligations....................... 152.7 359.0
Accrued payroll and related........ 208.0 187.3
Advances from relocation clients .. 60.3 57.2
Other.............................. 640.5 409.4
---------- ---------
$1,517.5 $1,492.4
========== =========
10. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles consisted of:
DECEMBER 31,
----------------------
(IN MILLIONS) 1998 1997
---------- ----------
Vehicles under open-end operating leases .. $2,725.6 $2,640.1
Vehicles under closed-end operating
leases.................................... 822.1 577.2
Direct financing leases.................... 252.4 440.8
Accrued interest on leases................. 1.0 1.0
---------- ----------
$3,801.1 $3,659.1
========== ==========
The Company records the cost of leased vehicles as "net investment in
leases and leased vehicles." The vehicles are leased primarily to corporate
fleet users for initial periods of twelve months or more under either
operating or direct financing lease agreements. Vehicles under operating
leases are amortized using the straight-line method over the expected lease
term. The Company's experience indicates that the full term of the leases may
vary considerably due to extensions beyond the minimum lease term. Lessee
repayments of investment in leases and leased vehicles were $1.9 billion and
$1.6 billion in 1998 and 1997, respectively, and the ratio of such repayments
to the average net investment in leases and leased vehicles was 50.7% and
46.8% in 1998 and 1997, respectively.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
F-25
vehicles under this type of lease agreement have generally been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost and accumulated depreciation of vehicles under this type of
operating lease was $5.3 billion and $2.6 billion, respectively, at December
31, 1998 and $5.0 billion and $2.4 billion, respectively, at December 31,
1997.
Under the second type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of the
Company. The lessee generally pays for or provides maintenance, vehicle
licenses and servicing. The original cost and accumulated depreciation of
vehicles under these agreements were $1.0 billion and $190.5 million,
respectively, at December 31, 1998 and $754.4 million and $177.2 million,
respectively, at December 31, 1997. The Company, based on historical
experience and a current assessment of the used vehicle market, established
an allowance in the amount of $14.2 million and $11.7 million for potential
losses on residual values on vehicles under these leases at December 31, 1998
and 1997, respectively.
Under the direct financing lease agreements, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of the
vehicles upon termination of the lease is for the account for the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Open-end operating leases and direct financing leases generally have a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically have a longer term, usually 24 months
or more, but are cancelable under certain conditions.
Gross leasing revenues, which are included in fleet leasing in the
consolidated statements of operations, consist of:
YEAR ENDED DECEMBER 31,
----------------------------------
(IN MILLIONS) 1998 1997 1996
---------- ---------- ----------
Operating leases............................ $1,330.3 $1,222.9 $1,145.8
Direct financing leases, primarily
interest................................... 37.8 41.8 43.3
---------- ---------- ----------
$1,368.1 $1,264.7 $1,189.1
========== ========== ==========
In June 1998, the Company entered into an agreement with an independent
third party to sell and leaseback vehicles subject to operating leases. The
net carrying value of the vehicles sold was $100.6 million. Since the net
carrying value of these vehicles was equal to their sales price, there was no
gain or loss recognized on the sale. The lease agreement entered into between
the Company and the counterparty was for a minimum lease term of 12 months
with three one-year renewal options. For the year ended December 31, 1998,
the total rental expense incurred by the Company under this lease was $17.7
million.
The Company has transferred existing managed vehicles and related leases
to unrelated investors and has retained servicing responsibility. Credit risk
for such agreements is retained by the Company to a maximum extent in one of
two forms: excess assets transferred, which were $9.4 million and $7.6
million at December 31, 1998 and 1997, respectively; or guarantees to a
maximum extent. There were no guarantees to a maximum extent at December 31,
1998 or 1997. All such credit risk has been included in the Company's
consideration of related allowances. The outstanding balances under such
agreements aggregated $259.1 million and $224.6 million at December 31, 1998
and 1997, respectively.
Other managed vehicles with balances aggregating $221.8 million and $157.9
million at December 31, 1998 and 1997, respectively, are included in special
purpose entities which are not owned by the Company. These entities do not
require consolidation as they are not controlled by the Company and all risks
and rewards rest with the owners. Additionally, managed vehicles totaling
approximately $81.9 million and $69.6 million at December 31, 1998 and 1997,
respectively, are owned by special purpose entities which are owned by the
Company. However, such assets and related liabilities have been netted in the
consolidated balance sheet since there is a two-party agreement with
determinable accounts, a legal right of offset exists and the Company
exercises its right of offset in settlement with client corporations.
F-26
11. 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 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. As of December 31, 1998 and 1997, mortgage loans sold with recourse
amounted to approximately $58.3 million and $58.5 million, respectively. The
Company believes adequate allowances are maintained to cover any potential
losses.
The Company entered into a three year agreement effective May 1998 and
expanded in December 1998 under which an unaffiliated Buyer (the "Buyer")
committed to purchase, at the Company's option, mortgage loans originated by
the Company on a daily basis, up to the Buyer's asset limit of $2.4 billion.
Under the terms of this sale agreement, the Company retains the servicing
rights on the mortgage loans sold to the Buyer and provides the Buyer with
opportunities to sell or securitize the mortgage loans into the secondary
market. At December 31, 1998, the Company was servicing approximately $2.0
billion of mortgage loans owned by the Buyer.
12. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights ("MSRs") activity was as follows:
(IN MILLIONS) MSRS ALLOWANCE TOTAL
-------- ----------- --------
BALANCE, JANUARY 1, 1996................................ $192.8 $(1.4) $191.4
Less: PHH activity for January 1996 to reflect change
in PHH fiscal year..................................... (14.0) .2 (13.8)
Additions to MSRs....................................... 164.4 -- 164.4
Amortization............................................ (51.8) -- (51.8)
Write-down/provision.................................... -- .6 .6
Sales................................................... (1.9) -- (1.9)
-------- ----------- --------
BALANCE, DECEMBER 31, 1996.............................. 289.5 (.6) 288.9
Additions to MSRs....................................... 251.8 -- 251.8
Amortization............................................ (95.6) -- (95.6)
Write-down/provision.................................... -- (4.1) (4.1)
Sales................................................... (33.1) -- (33.1)
Deferred hedge, net..................................... 18.6 -- 18.6
Reclassification of mortgage-related securities ........ (53.5) -- (53.5)
-------- ----------- --------
BALANCE, DECEMBER 31, 1997.............................. 377.7 (4.7) 373.0
Additions to MSRs....................................... 475.2 -- 475.2
Additions to hedge...................................... 49.2 -- 49.2
Amortization............................................ (82.5) -- (82.5)
Write-down/provision.................................... -- 4.7 4.7
Sales................................................... (99.1) -- (99.1)
Deferred hedge, net..................................... (84.8) -- (84.8)
-------- ----------- --------
BALANCE, DECEMBER 31, 1998.............................. $635.7 $ -- $635.7
======== =========== ========
The value of the Company's MSRs is sensitive to changes in interest rates.
The Company uses a hedge program to manage the associated financial risks of
loan prepayments. Commencing in 1997, the Company used certain derivative
financial instruments, primarily interest rate floors, interest rate swaps,
principal only swaps, futures and options on futures to administer its hedge
program. Premiums paid/received on the acquired derivatives instruments are
capitalized and amortized over the life of the contracts. Gains and losses
associated with the hedge instruments are deferred and recorded as
adjustments to the basis of the MSRs. In the event the performance of the
hedge instruments do not meet the requirements of the hedge program, changes
in the fair value of the hedge instruments will be
F-27
reflected in the income statement in the current period. Deferrals under the
hedge programs are allocated to each applicable stratum of MSRs based upon
its original designation and included in the impairment measurement.
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. The Company records
amortization expense in proportion to and over the period of the projected
net servicing income. Temporary impairment is recorded through a valuation
allowance in the period of occurrence.
13. LONG-TERM DEBT
Long-term debt consisted of:
DECEMBER 31,
---------------------
(IN MILLIONS) 1998 1997
---------- ---------
Term Loan Facility................ $1,250.0 $ --
Revolving Credit Facilities ...... -- 276.0
7 1/2% Senior Notes............... 399.7 --
7 3/4% Senior Notes............... 1,148.0 --
3% Convertible Subordinated
Notes............................ 545.4 543.2
5 7/8% Senior Notes............... -- 149.9
4 3/4% Convertible Senior Notes .. -- 240.0
Other............................. 24.9 39.2
---------- ---------
3,368.0 1,248.3
Less current portion.............. 5.1 2.3
---------- ---------
$3,362.9 $1,246.0
========== =========
TERM LOAN FACILITIES
On May 29, 1998, the Company entered into a 364 day term loan agreement
with a syndicate of financial institutions which provided for borrowings of
$3.25 billion (the "Term Loan Facility"). The Term Loan Facility, as amended,
incurred interest based on the London Interbank Offered Rate ("LIBOR") a
margin of approximately 87.5 basis points. The weighted average interest rate
on the Term Loan Facility was 6.2% at December 31, 1998.
At December 31, 1998, borrowings under the Term Loan Facility of $1.25
billion were classified as long-term based on the Company's intent and
ability to refinance such borrowings on a long-term basis. On February 9,
1999, the Company replaced the Term Loan Facility with a new two year term
loan facility (the "New Facility") which provides for borrowings of $1.25
billion. The Company used $1.25 billion of the proceeds from the New Facility
to refinance the majority of the outstanding borrowings under the Term Loan
Facility. The New Facility bears interest at a rate of LIBOR plus a margin of
approximately 100 basis points and is payable in five consecutive quarterly
installments beginning on the first anniversary of the closing date. The New
Facility contains certain restrictive covenants, which are substantially
similar to and consistent with the covenants in effect for the Company's
existing revolving credit agreements.
CREDIT FACILITIES
The Company's primary credit facility, as amended, consists of (i) a
$750.0 million, five year revolving credit facility (the "Five Year Revolving
Credit Facility") and (ii) a $1.0 billion, 364 day revolving credit facility
(the "364 Day Revolving Credit Facility") (collectively the "Revolving Credit
Facilities"). The 364-Day Revolving Credit Facility will mature on October
29, 1999 but may be renewed on an annual basis for an additional 364 days
upon receiving lender approval. The Five Year Revolving Credit Facility will
mature on October 1, 2001. Borrowings under the Revolving Credit Facilities,
at the option of the Company, bear interest based on competitive bids of
lenders participating in the facilities, at prime rates or at LIBOR, plus a
margin of approximately 75 basis points. The Company is required to pay a per
annum facility fee of .175% and .15% of the average daily unused commitments
under the Five Year
F-28
Revolving Credit Facility and 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change
based upon credit ratings on the Company's senior unsecured long-term debt by
nationally recognized debt rating agencies. Letters of credit of $45.0
million were outstanding under the Five-Year Revolving Credit Facility at
December 31, 1998. The Revolving Credit Facilities contain certain
restrictive covenants including restrictions on indebtedness of material
subsidiaries, mergers, liquidations and sale and leaseback transactions and
requires the maintenance of certain financial ratios, including a 3:1 minimum
interest coverage ratio (14:1 as of September 30, 1999) and a 0.5:1 maximum
debt-to-capitalization ratio (0.4:1 as of September 30, 1999).
7 1/2% AND 7 3/4% SENIOR NOTES
The Company filed a shelf registration statement with the SEC, effective
November 1998, which provided for the aggregate issuance of up to $3.0
billion of debt and equity securities. Pursuant to such registration
statement, the Company issued $1.55 billion of Senior Notes (the "Notes") in
two traunches consisting of $400.0 million principal amount of 7 1/2% Senior
Notes due December 1, 2000 and $1.15 billion principal amount of 7 3/4%
Senior Notes due December 1, 2003. Interest on the Notes will be payable on
June 1 and December 1 each year, beginning on June 1, 1999. The 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 to the date of redemption. The
redemption price is equal to the greater of (i) the face value of the notes
or (ii) the sum of the present values of the remaining scheduled payments
discounted at the treasury rate plus a spread defined in the indenture. Net
proceeds from the offering were used to repay a portion of the Company's Term
Loan Facility and for general corporate purposes, which included the
repurchase of Company common stock.
3% CONVERTIBLE SUBORDINATED NOTES
In February 1997, the Company completed a public offering of $550.0
million 3% Convertible Subordinated Notes (the "3% Notes") due 2002. Each
$1,000 principal amount of 3% Notes is convertible into 32.6531 shares of
Company common stock subject to adjustment in certain events. The 3% Notes
may be redeemed at the option of the Company at any time on or after February
15, 2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to the
redemption date. The 3% Notes will be subordinated in right of payment to all
existing and future Senior Debt (as defined in the indenture governing the 3%
Notes) of the Company.
5 7/8% SENIOR NOTES
On December 15, 1998, the Company repaid the $150.0 million principal
amount of 5 7/8% Senior Notes outstanding in accordance with the provisions
of the indenture agreement.
4 3/4% CONVERTIBLE SENIOR NOTES
In February 1996, the Company completed a public offering of $240.0
million unsecured 4 3/4% Convertible Senior Notes due 2003, which were
convertible at the option of the holder at any time prior to maturity into
36.030 shares of Company common stock per $1,000 principal amount of the 4
3/4% Notes, representing a conversion price of $27.76 per share. On May 4,
1998, the Company redeemed all of the outstanding ($144.5 million principal
amount) 4 3/4% Notes at a price of 103.393% of the principal amount, together
with interest accrued to the redemption date (see Note 6 -- Other Charges --
Financing Costs). Prior to the redemption date, during 1998, holders of such
notes exchanged $95.5 million of the 4 3/4% Notes for 3.4 million shares of
Company common stock.
F-29
DEBT MATURITIES
Aggregate maturities of debt for each of the next five years commencing in
1999 are as follows:
(IN MILLIONS)
YEAR AMOUNT
- ------------- ---------
1999.......... $ 5.1
2000.......... 403.3
2001.......... 1,250.3
2002.......... 545.4
2003.......... 1,148.0
Thereafter.... 15.9
---------
$3,368.0
=========
14. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs consisted
of:
DECEMBER 31,
----------------------
(IN MILLIONS) 1998 1997
---------- ----------
Commercial paper........ $2,484.4 $2,577.5
Medium-term notes....... 2,337.9 2,747.8
Securitized
obligations............ 1,901.5 --
Other................... 173.0 277.3
---------- ----------
$6,896.8 $5,602.6
========== ==========
COMMERCIAL PAPER
Commercial paper, which matures within 180 days, is supported by committed
revolving credit agreements described below and short-term lines of credit.
The weighted average interest rates on the Company's outstanding commercial
paper were 6.1% and 5.9% at December 31, 1998 and 1997, respectively.
MEDIUM-TERM NOTES
Medium-term notes of $2.3 billion primarily represent unsecured loans,
which mature through 2002. The weighted average interest rates on such
medium-term notes were 5.6% and 5.9% at December 31, 1998 and 1997,
respectively.
SECURITIZED OBLIGATIONS
The Company maintains four separate financing facilities, the outstanding
borrowings under which are securitized by corresponding assets under
management and mortgage programs. The collective weighted average interest
rate on such facilities was 5.8% at December 31, 1998. Such securitized
obligations are described below.
Mortgage Facility. In December 1998, the Company entered into a 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
such mortgages (the "Agreement"). The Agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the
Agreement. The total commitment under this Agreement is $500.0 million and is
renewable on an annual basis at the discretion of the lender in accordance
with the securitization agreement. Mortgage loans financed under this
Agreement at December 31, 1998 totaled $378.0 million and are included in
mortgage loans held for sale on the consolidated balance sheet.
Relocation Facilities. The Company entered into a 364-day asset
securitization agreement effective December 1998 under which an unaffiliated
buyer has committed to purchase an interest in the right to payments related
to certain Company relocation receivables. The revolving purchase commitment
provides for funding up to a limit of $325.0 million and is renewable on an
annual basis at the discretion
F-30
of the lender in accordance with the securitization agreement. Under the
terms of this agreement, the Company retains the servicing rights related to
the relocation receivables. At December 31, 1998, the Company was servicing
$248.0 million of assets, which were funded under this agreement.
The Company also maintains an asset securitization agreement with a
separate unaffiliated buyer, which has a purchase commitment up to a limit of
$350.0 million. The terms of this agreement are similar to the aforementioned
facility with the Company retaining the servicing rights on the right of
payment. At December 31, 1998, the Company was servicing $171.0 million of
assets eligible for purchase under this agreement. This facility matured and
approximately $85.0 million was repaid on October 5, 1999.
Fleet Facilities. In December 1998, the Company entered into two secured
financing transactions each expiring five years from the effective agreement
date through its two wholly-owned subsidiaries, TRAC Funding and TRAC Funding
II. Secured leased assets (specified beneficial interests in a trust which
owns the leased vehicles and the leases) totaling $600.0 million and $725.3
million, respectively, were contributed to the subsidiaries by the Company.
Loans to TRAC Funding and TRAC Funding II were funded by commercial paper
conduits in the amounts of $500.0 million and $604.0 million, respectively,
and were secured by the specified beneficial interests. Monthly loan
repayments conform to the amortization of the leased vehicles with the
repayment of the outstanding loan balance required at time of disposition of
the vehicles. Interest on the loans is based upon the conduit commercial
paper issuance cost and committed bank lines priced on a LIBOR basis.
Repayments of loans are limited to the cash flows generated from the leases
represented by the specified beneficial interests.
Other. Other liabilities under management and mortgage programs are
principally comprised of unsecured borrowings under uncommitted short-term
lines of credit and other bank facilities, all of which matures in 1999. The
weighted average interest rate on such debt was 5.5% and 6.7% at December 31,
1998 and 1997, respectively.
Interest expense is incurred on indebtedness, which is used to finance
fleet leasing, relocation and mortgage servicing activities. Interest
incurred on borrowings used to finance fleet leasing activities was $177.3
million, $177.0 million and $161.8 million for the years ended December 31,
1998, 1997, and 1996, respectively, and is included net within fleet leasing
revenues in the consolidated statements of operations. Interest related to
equity advances on homes was $26.9 million, $32.0 million and $35.0 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Interest
related to origination and mortgage servicing activities was $138.9 million,
$77.6 million and $63.4 million for the years ended December 31, 1998, 1997
and 1996, respectively. Interest expense incurred on borrowings used to
finance both equity advances on homes and mortgage servicing activities are
recorded net within membership and service fee revenues in the consolidated
statements of operations.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 100 percent of the
average amount of outstanding commercial paper. As of December 31, 1998, the
Company maintained $2.75 billion in committed and unsecured credit
facilities, which were backed by a consortium of domestic and foreign banks.
The facilities were comprised of $1.25 billion in 364 day credit lines
maturing in March 1999, a $250.0 million (changed to $150.0 million in March
1999) revolving credit facility maturing December 1999 and a five year $1.25
billion credit line maturing in the year 2002. Under such credit facilities,
the Company paid annual commitment fees of $1.9 million, $1.7 million and
$2.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. In March 1999, the Company extended the $1.25 billion in 364
day credit lines to March 2000. In addition, the Company has other
uncommitted lines of credit with various banks of which $5.1 million was
unused at December 31, 1998. The full amount of the Company's committed
facility was undrawn and available at December 31, 1998 and 1997.
Although the period of service for a vehicle is at the lessee's option,
and the period a home is held for resale varies, management estimates, by
using historical information, the rate at which vehicles will be disposed and
the rate at which homes will be resold. Projections of estimated liquidations
of assets under management and mortgage programs and the related estimated
repayments of liabilities under management and mortgage programs as of
December 31, 1998, are set forth as follows:
F-31
(IN MILLIONS)
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS (1)
- ------------- ----------------------- ----------------------------
1999.......... $4,882.0 $4,451.7
2000.......... 1,355.9 1,342.2
2001.......... 668.6 659.0
2002.......... 289.0 263.1
2003.......... 168.3 142.0
2004-2008..... 148.1 38.8
----------------------- ----------------------------
$7,511.9 $6,896.8
======================= ============================
- ------------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
15. DERIVATIVE FINANCIAL 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 and anticipated mortgage loan closings arising from commitments
issued. 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. As a matter of
policy, the Company does not engage in derivative activities for trading or
speculative purposes. The Company is exposed to credit-related losses in the
event of non-performance by counterparties to certain derivative financial
instruments. 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 expect
non-performance by any of the counterparties.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements to match the
interest characteristics of the assets being funded and to modify the
contractual costs of debt financing. The swap agreements correlate the terms
of the assets to the maturity and rollover of the debt by effectively
matching a fixed or floating interest rate with the stipulated revenue stream
generated from the portfolio of assets being funded. Amounts to be paid or
received under interest rate swap agreements are accrued as interest rates
change and are recognized over the life of the swap agreements as an
adjustment to interest expense. For the years ended December 31, 1998, 1997
and 1996, the Company's hedging activities increased interest expense $2.1
million, $4.0 million and $4.1 million, respectively, and had no effect on
its weighted average borrowing rate. The fair value of the swap agreements is
not recognized in the consolidated financial statements since they are
accounted for as matched swaps.
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps.
1998
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
(DOLLARS IN MILLIONS) AMOUNT RECEIVE RATE PAY RATE MATURITIES
---------- ---------------- ---------------- ------------
Commercial paper.......... $ 355.2 4.92% 5.84% 1999-2006
Medium-term notes......... 931.0 5.27% 5.04% 1999-2000
Canada commercial paper .. 89.8 5.52% 5.27% 1999-2002
Sterling liabilities ..... 662.3 6.26% 6.62% 1999-2002
Deutsche mark
liabilities.............. 31.9 3.24% 4.28% 1999-2001
----------
$2,070.2
==========
F-32
1997
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
(DOLLARS IN MILLIONS) AMOUNT RECEIVE RATE PAY RATE MATURITIES
---------- ---------------- ---------------- ------------
Commercial paper.......... $ 355.7 5.68% 6.26% 1999-2004
Medium-term notes......... 1,551.0 5.93% 5.73% 1999-2000
Canada commercial paper .. 142.8 4.93% 4.95% 1999-2002
Sterling liabilities ..... 491.5 7.21% 7.69% 1999-2002
Deutsche mark
liabilities.............. 9.1 3.76% 5.34% 1999-2001
----------
$2,550.1
==========
- ------------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates, on a selective basis, the Company enters into foreign
exchange contracts. 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
may also hedge currency exposures that are directly related to anticipated,
but not yet committed transactions expected to be denominated in foreign
currencies. The principal currencies hedged are the British pound and the
German mark. Market value gains and losses on foreign currency hedges related
to intercompany loans are deferred and recognized upon maturity of the
underlying loan. Market value gains and losses on foreign currency hedges of
anticipated transactions are recognized in the statement of operations as
exchange rates change. However, fluctuations in exchange rates are generally
offset by the anticipated exposures being hedged. Historically, foreign
exchange contracts have been short-term in nature.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to the
risk of adverse price fluctuations primarily due to changes in interest
rates. The Company uses forward delivery contracts, financial futures and
option contracts to reduce such risk. Market value gains and losses on such
positions used as hedges are deferred and considered in the valuation of cost
or market value of mortgage loans held for sale.
With respect to the mortgage servicing portfolio, the Company acquired
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures to
manage the associated financial impact of interest rate movements.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments. The
fair values of the financial instruments presented may not be indicative of
their future values.
MARKETABLE SECURITIES
Fair value is based upon quoted market prices or investment advisor
estimates.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to purchase
loans net of mortgage-related positions. The value of embedded MSRs has been
considered in determining fair value.
MORTGAGE SERVICING RIGHTS
Fair value is estimated by discounting future net servicing cash flows
associated with the underlying securities using discount rates that
approximate current market rates and externally published prepayment rates,
adjusted, if appropriate, for individual portfolio characteristics.
F-33
DEBT
The fair values of the Company's Senior Notes, Convertible Notes and
Medium-term Notes are estimated based on quoted market prices or market
comparables.
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY
Fair value is estimated based on quoted market prices and incorporates the
settlement of litigation and the resulting modification of terms (see Note 6
- -- Other Charges -- Litigation Settlement).
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, OTHER MORTGAGE-RELATED
POSITIONS
The fair values of these instruments are estimated, using dealer quotes,
as the amount that the Company would receive or pay to execute a new
agreement with terms identical to those remaining on the current agreement,
considering interest rates at the reporting date.
F-34
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows:
1998 1997
------------------------------------------------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
(IN MILLIONS) AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- ----------- ----------- ---------- -----------
ASSETS
Marketable securities ................... $ -- $ 220.8 $ 220.8 $ -- $ 65.2 $ 65.2
Investment in mortgage securities ...... -- 46.2 46.2 -- 48.0 48.0
----------- ---------- ----------- ----------- ---------- -----------
ASSETS UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Relocation receivables .................. -- 659.1 659.1 -- 775.3 775.3
Mortgage loans held for sale............. -- 2,416.0 2,462.7 -- 1,636.3 1,668.1
Mortgage servicing rights................ -- 635.7 787.7 -- 373.0 394.6
----------- ---------- ----------- ----------- ---------- -----------
LONG-TERM DEBT ........................... -- 3,362.9 3,351.1 -- 1,246.0 1,468.3
----------- ---------- ----------- ----------- ---------- -----------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LONG-TERM DEBT
Foreign exchange forwards ............... 1.1 -- -- 5.5 -- --
OTHER OFF BALANCE SHEET DERIVATIVES
Foreign exchange forwards ............... 47.6 -- -- 102.7 -- --
----------- ---------- ----------- ----------- ---------- -----------
LIABILITIES UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Debt..................................... -- 6,896.8 6,895.0 -- 5,602.6 5,604.2
----------- ---------- ----------- ----------- ---------- -----------
MANDATORILY REDEEMABLE PREFERRED
SECURITIES ISSUED BY SUBSIDIARY.......... -- 1,472.1 1,333.2 -- -- --
----------- ---------- ----------- ----------- ---------- -----------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Interest rate swaps...................... 2,070.2 -- -- 2,550.1 -- --
in a gain position...................... -- -- 7.8 -- -- 5.6
in a loss position ..................... -- -- (11.5) -- -- (3.9)
Foreign exchange forwards................ 349.3 -- 0.1 409.8 -- 2.5
----------- ---------- ----------- ----------- ---------- -----------
MORTGAGE-RELATED POSITIONS
Forward delivery commitments (a) ........ 5,057.0 2.9 (3.5) 2,582.5 19.4 (16.2)
Option contracts to sell (a)............. 700.8 8.5 3.7 290.0 .5 --
Option contracts to buy (a).............. 948.0 5.0 1.0 705.0 1.1 4.4
Commitments to fund mortgages............ 3,154.6 -- 35.0 1,861.7 -- 19.7
Constant maturity treasury floors (b) ... 3,670.0 43.8 84.0 825.0 12.5 17.1
Interest rate swaps (b).................. 775.0 175.0
in a gain position...................... -- -- 34.6 -- -- 1.3
in a loss position...................... -- -- (1.2) -- -- --
Treasury futures (b)..................... 151.0 -- (0.7) 331.5 -- 4.8
Principal only swaps (b)................. 66.3 -- 3.1 -- -- --
- ------------
(a) Carrying amounts and gains (losses) on these 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 loans held by an
unaffiliated buyer as described in Note 11.
F-35
(b) Carrying amounts on these mortgage-related 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.
17. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business
Trust formed under the laws of the State of Delaware and a wholly-owned
consolidated subsidiary of the Company, issued 29.9 million FELINE PRIDES and
2.3 million trust preferred securities and received approximately $1.5
billion in gross proceeds therefrom. The Trust invested the proceeds in 6.45%
Senior Debentures due 2003 (the "Debentures") issued by the Company, which
represents the sole asset of the Trust. The obligations of the Trust related
to the FELINE 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 FELINE PRIDES and trust preferred
securities, the Company recorded a liability of $43.3 million with a
corresponding reduction to shareholders' equity equal to the present value of
the total future contract adjustment payments to be made under the FELINE
PRIDES. The FELINE PRIDES, upon issuance, consisted of 27.6 million Income
PRIDES and 2.3 million Growth PRIDES (Income PRIDES and Growth PRIDES
hereinafter referred to as "PRIDES"), each with a face amount of $50 per
PRIDE. The Income PRIDES consist of trust preferred securities and forward
purchase contracts under which the holders are required to purchase 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 required to purchase 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, each with a face
amount of $50, bear interest, in the form of preferred stock dividends, at
the annual rate of 6.45% payable in cash. Such preferred stock dividends are
presented as minority interest, net of tax in the consolidated statements of
operations. 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%. The forward purchase contracts require the holder to purchase a
minimum of 1.0395 shares and a maximum of 1.3514 shares of Company common
stock per PRIDES security depending upon the average of the closing price per
share of the Company's common stock for a 20 consecutive day period ending in
mid-February of 2001. The Company has the right to defer the contract
adjustment payments and the payment of interest on the Debentures to the
Trust. Such election will subject the Company to certain restrictions,
including restrictions on making dividend payments on its common stock until
all such payments in arrears are settled.
The Company has reached an agreement to settle a class action lawsuit that
was brought on behalf of holders of PRIDES securities who purchased their
securities on or prior to April 15, 1998 (see Note 6 -- Other Charges --
Litigation Settlement).
18. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which primarily expire through the year 2004. Rental expense
for the years ended December 31, 1998, 1997 and 1996 was $177.9 million,
$91.3 million and $75.3 million, respectively. The Company incurred
contingent rental expenses in 1998 of $44.1 million, which is included in
total rental expense, principally based on rental volume or profitability at
certain NPC parking facilities. The Company has been granted rent abatements
for varying periods on certain of its facilities. Deferred rent relating to
those abatements is being amortized on a straight-line basis over the
applicable lease terms. Commitments under capital leases are not significant.
F-36
Future minimum lease payments required under noncancelable operating
leases as of December 31, 1998 are as follows:
(IN MILLIONS)
YEAR AMOUNT
- ------------- --------
1999.......... $122.9
2000.......... 109.3
2001.......... 93.6
2002.......... 69.5
2003.......... 55.5
Thereafter.... 139.4
--------
$590.2
========
LITIGATION
Accounting Irregularities. On April 15, 1998, the Company publicly
announced that it discovered accounting irregularities in the former business
units of CUC. Such discovery prompted investigations into such matters by the
Company and the Audit Committee of the Company's Board of Directors. As a
result of the findings from the investigations, the Company restated its
previously reported financial results for 1997, 1996 and 1995. Since the
April 15, 1998 announcement, 70 lawsuits claiming to be class actions, two
lawsuits claiming to be brought derivatively on the Company's behalf and
several individual lawsuits and arbitration proceedings have been commenced
in various courts and other forums against the Company and other defendants
by or on behalf of persons claiming to have purchased or otherwise acquired
securities or options issued by CUC or the Company between May 1995 and
August 1998. The Court has ordered consolidation of many of the actions.
As previously disclosed, the Company reached a final agreement with
plaintiff's counsel representing the class of holders of its PRIDES
securities who purchased their securities on or prior to April 15, 1998 to
settle their class action lawsuit against the Company through the issuance of
a new "Right" for each PRIDES security held. (See Note 6 -- Other Charges for
a more detailed description of the settlement).
In addition, in October 1998, an action claiming to be a class action was
filed against the Company and four of the Company's former officers and
directors by persons claiming to have purchased American Bankers' stock
between January and October 1998. The complaint claimed that the Company made
false and misleading public announcements and filings with the Securities and
Exchange Commission ("SEC") in connection with the Company's proposed
acquisition of American Bankers allegedly in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, and that the
plaintiff and the alleged class members purchased American Bankers'
securities in reliance on these public announcements and filings at inflated
prices. On April 30, 1999, the United States District Court for New Jersey
found that the class action failed to state a claim upon which relief could
be granted and, accordingly, dismissed the complaint. The plaintiff has
appealed the District Court's findings to the U.S. Court of Appeals for the
Third Circuit as such appeal is pending.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Company that its inquiry should not be construed as an indication
by the SEC or its staff that any violations of law have occurred. As a result
of the findings from the investigations, the Company made all adjustments
considered necessary by the Company which are reflected in its restated
financial statements. Although the Company can provide no assurances that
additional adjustments will not be necessary as a result of these government
investigations, the Company does not expect that additional adjustments will
be necessary. (See Note 27-C. -- Common Stock Litigation Settlement -for a
description of the class action settlement.)
Other pending litigation. The Company and its subsidiaries are 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-37
19. INCOME TAXES
The income tax provision consists of:
YEAR ENDED DECEMBER 31,
------------------------------
(IN MILLIONS) 1998 1997 1996
---------- -------- --------
Current
Federal................... $(159.4) $155.1 $101.1
State..................... 0.7 24.4 13.3
Foreign................... 56.5 28.5 18.1
---------- -------- --------
(102.2) 208.0 132.5
---------- -------- --------
Deferred
Federal................... 176.1 (16.8) 70.4
State..................... 29.5 (3.4) 16.5
Foreign................... 1.1 3.2 0.8
---------- -------- --------
206.7 (17.0) 87.7
---------- -------- --------
Provision for income
taxes..................... $ 104.5 $191.0 $220.2
========== ======== ========
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
------------------
(IN MILLIONS) 1998 1997
-------- --------
CURRENT NET DEFERRED INCOME TAXES
Merger and acquisition-related
liabilities.............................. $ 52.8 $102.9
Accrued liabilities and deferred income .. 323.1 225.8
Excess tax basis on assets held for sale . 190.0 --
Insurance retention refund................ (21.2) (19.3)
Provision for doubtful accounts........... 13.8 4.0
Franchise acquisition costs............... (6.9) (2.6)
Deferred membership acquisition costs .... 2.6 8.6
Other..................................... (87.6) (7.5)
-------- --------
Current net deferred tax asset............. $466.6 $311.9
======== ========
DECEMBER 31,
----------------------
(IN MILLIONS) 1998 1997
---------- ----------
NON-CURRENT NET DEFERRED INCOME TAXES
Depreciation and amortization............. $(296.7) $(277.1)
Deductible goodwill -taxable poolings .... 49.3 44.2
Merger and acquisition-related
liabilities.............................. 25.8 35.0
Accrued liabilities and deferred income .. 63.9 66.9
Acquired net operating loss carryforward . 83.5 59.9
Other..................................... (3.0) 0.2
---------- ----------
Non-current net deferred tax liability .... $ (77.2) $ (70.9)
========== ==========
F-38
DECEMBER 31,
----------------------
(IN MILLIONS) 1998 1997
---------- ----------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAXES
Depreciation...................................................... $(121.3) $(233.1)
Unamortized mortgage servicing rights............................. (248.0) (74.6)
Accrued liabilities............................................... 25.8 9.5
Alternative minimum tax carryforwards............................. 2.5 2.5
---------- ----------
Net deferred tax liabilities under management and mortgage
programs......................................................... $(341.0) $(295.7)
========== ==========
Net operating loss carryforwards at December 31, 1998 acquired in
connection with the acquisition of Avis expire as follows: 2001, $8.2
million; 2002, $89.6 million; 2005, $7.2 million; 2009, $17.7 million; and
2010, $116.0 million. Certain state net operating loss carryforwards of $43.9
million are not expected to be realized; therefore, a valuation allowance of
$43.9 million was established in 1998.
The Company's effective income tax rate for continuing operations differs
from the federal statutory rate as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN MILLIONS) 1998 1997 1996
---------- --------- ---------
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State income taxes net of federal benefit .................. 6.2% 5.3% 3.6%
Non-deductible merger-related costs......................... -- 29.1% --
Amortization of non-deductible goodwill..................... 5.9% 4.3% 1.5%
Foreign taxes differential.................................. (8.0%) .3% .5%
Recognition of excess tax basis on assets held for sale .... (2.7%) -- --
Other....................................................... (3.2%) .3% .6%
---------- --------- ---------
33.2% 74.3% 41.2%
========== ========= =========
20. STOCK OPTION PLANS
On December 12, 1998, the Company adopted the 1999 Broad-Based Employee
Stock Option Plan (the "Broad-Based Plan"). The Broad-Based Plan authorizes
the granting of up to 16 million shares of Company common stock through
awards of nonqualified stock options (stock options which do not qualify as
incentive stock options as defined under the Internal Revenue Service Code).
Certain officers and all employees and independent contractors of the Company
are eligible to receive awards under the Broad-Based Plan. Options granted
under the plan generally have a ten year term and are exercisable at 20% per
year commencing one year from the date of grant.
In connection with the Cendant Merger, the Company adopted the 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through awards of
stock options (which may include incentive stock options and/or nonqualified
stock options), stock appreciation rights and shares of restricted Company
common stock. All directors, officers and employees of the Company and its
affiliates are eligible to receive awards under the Incentive Plan. Options
granted under the Incentive Plan generally have a ten year term and are
exercisable at 20% per year commencing one year from the date of grant.
During 1997, the Company also adopted two other stock plans: the 1997
Employee Stock Plan (the "1997 Employee Plan") and the 1997 Stock Option Plan
(the "1997 SOP"). The 1997 Employee Plan authorizes the granting of up to 25
million shares of Company common stock through awards of nonqualified stock
options, stock appreciation rights and shares of restricted Company common
stock to employees of the Company and its affiliates. The 1997 SOP provides
for the granting of up to 10 million shares of Company common stock to key
employees (including employees who are directors and officers) of the Company
and its subsidiaries through awards of incentive and/or nonqualified stock
options. Options granted under the 1997 Employee Plan and the 1997 SOP
generally have ten-year terms and are exercisable at 20% per year commencing
one year from the date of grant.
F-39
The Company also grants options to employees pursuant to three additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 70.8 million shares of Company common stock. Annual
vesting periods under these plans range from 20% to 33%, all commencing
one-year from the respective grant dates. At December 31, 1998 and 1997,
there were 38.6 million and 49.3 million shares available for grant under the
Company's stock option plans. On September 23, 1998, the Compensation
Committee of our Board of Directors approved a program to effectively reprice
certain Company stock options granted to our middle management during
December 1997 and the first quarter of 1998. Such existing options, with
exercise prices ranging from $31.38 to $37.50, were effectively repriced on
October 14, 1998 at $9.8125 per share (the "New Price"), which was the fair
market value (as defined in the option plans) on the date of such repricing.
On September 23, 1998, the Compensation Committee also modified the terms of
certain options held by certain of our executive officers and senior managers
subject to certain conditions including a revocation of 12.6 million existing
options. Additionally, a management equity ownership program was adopted that
requires these executive officers and senior managers to acquire our common
stock at various levels commensurate with their respective compensation
levels. The option modifications were accomplished by canceling existing
options with exercise prices ranging from $16.78 to $34.31 and issuing a
lesser amount of new options at the New Price and, with respect to certain
options of executive officers and senior managers, at prices above the New
Price, specifically $12.27 and $20.00. Additionally, certain new options
replacing options that were fully vested, provide for vesting ratably over
four years beginning January 1, 1999.
The table below summarizes the annual activity of the Company's stock
option plans:
WEIGHTED
OPTIONS AVG. EXERCISE
(SHARES IN MILLIONS) OUTSTANDING PRICE
------------- ---------------
BALANCE AT DECEMBER 31, 1995 .. 98.7 $ 7.21
Granted....................... 36.1 22.14
Canceled...................... (2.8) 18.48
Exercised..................... (14.0) 5.77
-------------
BALANCE AT DECEMBER 31, 1996 .. 118.0 11.68
Granted....................... 78.8 27.94
Canceled...................... (6.4) 27.29
Exercised..................... (14.0) 7.20
PHH conversion (1)............ (4.4) --
-------------
BALANCE AT DECEMBER 31, 1997 .. 172.0 18.66
Granted ......................
Equal to fair market value .. 83.8 19.16
Greater than fair market
value....................... 20.8 17.13
Canceled...................... (81.8) 29.36
Exercised..................... (17.0) 10.01
-------------
BALANCE AT DECEMBER 31, 1998 .. 177.8 14.64
=============
- ------------
(1) In connection with the PHH Merger, all unexercised PHH stock options
were canceled and converted into 1.8 million shares of Company common
stock.
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. Under APB No. 25, because the exercise prices of the
Company's employee stock options are equal to or greater than the market
prices of the underlying Company stock on the date of grant, no compensation
expense is recognized.
F-40
Had the Company elected to recognize compensation cost for its stock
option plans 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) per share would have reflected the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN MILLIONS, EXCEPT PER SHARE
DATA) 1998 1997 1996
-------- ------------ --------
Net income (loss)
as reported....................... $539.6 $(217.2) $330.0
pro forma......................... 392.9 (663.9)(2) 245.1
Net income (loss) per share:
Basic
as reported....................... $ .64 $ (.27) $ .44
pro forma (1)..................... .46 (.82)(2) .32
Diluted
as reported....................... .61 (.27) .41
pro forma (1)..................... .46 (.82)(2) .31
- ------------
(1) The effect of applying SFAS No. 123 on the pro forma net income per
share disclosures is not indicative of future amounts because it does
not take into consideration option grants made prior to 1995 or in
future years.
(2) Includes incremental compensation expense of $335.4 million ($204.9
million, after tax) or $.25 per basic and diluted share as a result
of the immediate vesting of HFS options upon consummation of the
Cendant Merger.
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1998, 1997 and 1996:
CUC HFS PHH
PLANS PLANS PLANS
------------- ------------- ------------
1998 1997 1996
------------- ------------- ------------------------------------------
Dividend yield.............. -- -- -- -- 2.8%
Expected volatility......... 55.0% 32.5% 28.0% 37.5% 21.5%
Risk-free interest rate .... 4.9% 5.6% 6.3% 6.4% 6.5%
Expected holding period .... 6.3 years 7.8 years 5.0 years 9.1 years 7.5 years
The weighted average fair values of Company stock options granted during
the year ended December 31, 1998, which were repriced with exercise prices
equal to and higher than the underlying stock price at the date of grant,
were 19.69 and 18.10, respectively. The weighted average fair value of the
stock options granted during the year ended December 31, 1998, which were not
repriced was $10.16. The weighted average fair value of stock options granted
during the year ended December 31, 1997 was $13.71. The weighted average fair
value of stock options granted under the former CUC plans (inclusive of plans
acquired) during the year ended December 31, 1996 was $7.51. The weighted
average fair value of stock options granted under the former HFS plans
(inclusive of the PHH plans) during the year ended December 31, 1996 was
$10.96.
F-41
The table below summarize information regarding Company stock options
outstanding and exercisable as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ -------- --------------- ---------- -------- ----------
$.01 to $10.00........... 89.6 6.8 $ 7.40 50.5 $ 5.56
$10.01 to $20.00......... 38.6 7.5 15.44 17.3 14.52
$20.01 to $30.00......... 27.3 7.9 23.02 20.8 23.09
$30.01 to $40.00......... 22.3 8.8 32.03 14.8 31.83
-------- --------
177.8 7.4 14.64 103.4 14.34
======== ========
21. SHAREHOLDERS' EQUITY
On December 1, 1998, the Company's Board of Directors amended and restated
the 1998 Employee Stock Purchase Plan (the "Plan"). The Company reserved 2.5
million shares of Company common stock in connection with the Plan, which
enables eligible employees to purchase shares of common stock from the
Company at 85% of the fair market value on the first business day of each
calendar quarter (the "Offering Date"). Eligible employees may authorize the
Company to withhold up to 10% of their compensation from each paycheck during
any calendar quarter, in an amount not to exceed a total of $25,000 of
Company common stock (at fair market value as of the Offering Date) during
any calendar year.
In November 1998, the Board of Directors authorized a $1.0 billion common
share repurchase program. As of December 31, 1998, the Company had
repurchased 13.4 million shares costing $257.7 million. The Company has
executed this program through open market purchases or privately negotiated
transactions, subject to bank credit facility covenants and certain rating
agency constraints. See Note 27 -- Subsequent Events -- Share Repurchases.
22. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate funds
for their retirement. The Company matches the contributions of participating
employees on the basis of the percentages specified in the plans. The
Company's cost for contributions to these plans was $23.6 million, $15.9
million and $10.3 million for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company's PHH subsidiary has a domestic non-contributory defined
benefit pension plan covering substantially all domestic employees of PHH and
its subsidiaries employed prior to July 1, 1997. Additionally, the Company
has 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 funded plans were $196.3 million and
$108.1 million and funded assets, at fair value, were $162.2 million and
$102.7 million at December 31, 1998 and 1997, respectively. The net pension
cost and the recorded liability were not material to the accompanying
consolidated financial statements.
23. RELATED PARTY TRANSACTIONS
NRT
During 1997, the Company executed agreements with NRT Incorporated
("NRT"), a corporation created to acquire residential real estate brokerage
firms. In 1997, NRT acquired the real estate brokerage
F-42
business and operations of National Realty Trust (the "Trust"). The Trust was
an independent trust to which the Company contributed the brokerage offices,
which were owned by Coldwell Banker at the time of the Company's acquisition
of Coldwell Banker in 1996. Since inception, NRT acquired other local and
regional real estate brokerage businesses. NRT is the largest residential
brokerage firm in the United States. Certain officers of the Company serve on
the Board of Directors of NRT. NRT is party to various agreements and
arrangements with the Company and its subsidiaries. Under these agreements,
the Company acquired $182.0 million of NRT preferred stock (and may be
required to acquire up to an additional $81.3 million of NRT preferred
stock). The Company received preferred dividend payments of $15.4 million and
$5.2 million during the years ended 1998 and 1997, respectively which are
included in other revenue in the consolidated statements of operations. NRT
is the largest franchisee, based on gross commission income, of the Company's
three real estate franchise systems. During 1998, 1997 and 1996, NRT and its
predecessors paid an aggregate $121.5 million, $60.5 million and $24.0
million, respectively, in franchise royalties to the Company. On February 9,
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.
In connection with the aforementioned agreements, the Company at its
election, will participate in NRT's acquisitions by acquiring up to an
aggregate $946.3 million (plus an additional $500.0 million if certain
conditions are met) of intangible assets, and in some cases mortgage
operations, of real estate brokerage firms acquired by NRT. Through December
31, 1998, the Company acquired $445.7 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 whereby the Company made an upfront
payment of $30.0 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.
AVIS, INC.
Upon entering into the definitive merger agreement to acquire Avis, the
Company announced its strategy to dilute its interest in the subsidiary of
Avis which controlled the car rental operations of Avis ("ARAC") while
retaining assets associated with the franchise business, including
trademarks, reservation system assets and franchise agreements with ARAC and
other licensees. Since the Company's control was planned to be temporary, the
Company accounted for its 100% investment in ARAC under the equity method.
The Company's equity interest was diluted to 27.5% pursuant to an Initial
Public Offering ("IPO") by ARAC in September 1997. Net proceeds from the IPO
of $359.3 million were retained by ARAC. In March 1998, the Company sold one
million shares of Avis common stock and recognized a pre-tax gain of
approximately $17.7 million, which is included in other revenue in the
consolidated statements of operations. At December 31, 1998, the Company's
interest in ARAC was approximately 22.6%. The Company recorded its equity in
the earnings of ARAC, which amounted to $13.5 million, $51.3 million and $1.2
million for the years ended December 31, 1998, 1997 and 1996, respectively,
as a component of other revenue in the consolidated statements of operations.
During 1999, the Company's equity interest was further diluted to 18% as a
result of the Company's sale of additional shares of Avis common stock.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. During 1998
and 1997, total franchise royalties paid to the Company from ARAC were $91.9
million and $81.7 million, respectively. In addition, the Company operates
the telecommunications and computer processing system, which services ARAC
for reservations, rental agreement processing, accounting and fleet control
for which the Company charges ARAC at cost. Certain officers of the Company
serve on the Board of Directors of ARAC.
24. DIVESTITURE
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Cendant Merger, CUC sold immediately preceding the
Cendant Merger all of the outstanding shares of its
F-43
timeshare exchange businesses, Interval International Inc. ("Interval"), for
net proceeds of $240.0 million less transaction related costs amortized as
services are provided. The Company recognized a gain on the sale of Interval
of $76.6 million ($26.4 million, after tax), which has been reflected as an
extraordinary gain in the consolidated statements of operations.
25. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenues from franchising activities include royalty revenues and initial
franchise fees charged to lodging properties, car rental locations, tax
preparation offices and real estate brokerage offices upon execution of a
franchise contract.
Franchised outlet revenues for the years ended December 31 are as follows:
1998 1997 1996
-------- -------- --------
Royalty revenues....... $703.1 $574.1 $377.6
Initial franchise
fees.................. 44.7 26.0 24.2
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are calculated based on a
specified percentage of gross room revenues. Marketing fees received from the
Company's real estate brands' franchisees are based on a specified percentage
of gross closed commissions earned on the sale of real estate. As provided in
the franchise agreements, 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. Membership and service fee
revenues included marketing and reservation fees of $228.1 million, $215.4
million and $157.6 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Franchised outlet information at December 31 is as follows:
1998(1) 1997 1996
-------- -------- --------
Franchised Units in Operation...................... 22,471 18,876 18,535
Backlog (Franchised units sold but not yet
opened)........................................... 2,063 1,547 1,061
- ------------
(1) 1,998 franchised units were acquired in connection with the
acquisition of Jackson Hewitt.
26. SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
provisions of SFAS No. 131 established revised standards for public companies
relating to reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports. It also established standards for
related disclosures about products and services, and geographic areas. The
adoption of SFAS No. 131 did not affect the Company's primary financial
statements, but did affect the disclosure of segment information. The segment
information for 1997 and 1996 has been restated from the prior years'
presentation in order to conform to the requirements of SFAS No. 131.
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, depreciation and
amortization, adjusted for other charges which are of a non-recurring or
unusual nature, which are not measured in assessing segment performance or
are not segment specific. The Company determined that it has eight reportable
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. Inter-segment net revenues were not significant to the net
revenues of any one segment or the consolidated net revenues of the Company.
A description of the services provided within each of the Company's
reportable operating segments is as follows:
F-44
TRAVEL
Travel services include the franchising of lodging properties and car
rental locations, as well as vacation/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 (the developers) to allow owners of weekly
timeshare intervals (the subscribers) to trade their owned weeks with other
subscribers. In addition, the Company provides publications and other
travel-related services to both developers and subscribers.
INDIVIDUAL MEMBERSHIP
Individual membership provides customers with access to a variety of
services and discounted products in such areas as retail shopping, travel,
auto, dining, home improvement, credit information and special interest
outdoor and gaming clubs. The Company affiliates with business partners such
as leading financial institutions and retailers to offer membership as an
enhancement to their credit card customers. Individual memberships are
marketed primarily using direct marketing techniques. Through the Company's
membership based on-line consumer sites, similar products and services are
offered over the internet.
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), purchase of a transferee's home which
is sold within a specified time period for a price which is at least
equivalent to the appraised value, certain home management services,
assistance in locating a new home at the transferee's destination, consulting
services and other related services.
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.
FLEET
Fleet services primarily consist of the management, purchasing, leasing,
and resale of vehicles for corporate clients and government agencies. These
services also include fuel, maintenance, safety and accident management
programs and other fee-based services for clients' vehicle fleets. The
Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
MORTGAGE
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the
F-45
servicing of loans for investors. 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.
The Company customarily sells 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.
OTHER SERVICES
In addition to the previously described business segments, 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 park facility services,
vehicle emergency support and rescue services, discount coupon books, credit
information services, financial products, published products, welcoming
packages to new homeowners, value added-tax refund services to travelers and
other consumer-related services.
F-46
SEGMENT INFORMATION (1)
(In millions)
YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ---------- ------------ -------------- ------------
Net revenues .................. $ 5,283.8 $1,063.3 $ 929.1 $ 544.0 $ 444.0
Adjusted EBITDA ............... 1,589.9 542.5 (57.8) 137.8 124.5
Depreciation and amortization 322.7 88.3 23.7 14.0 16.7
Segment assets ................ 19,842.9 2,761.6 839.0 371.5 1,130.3
Capital expenditures .......... 355.2 79.0 28.4 16.6 69.6
Real Estate
Franchise Fleet Mortgage Other Services
------------- ---------- ------------ --------------
Net revenues .................. $ 455.8 $ 387.4 $ 353.4 $1,106.8
Adjusted EBITDA ............... 348.6 173.8 187.6 132.9
Depreciation and amortization 53.2 22.2 8.8 95.8
Segment assets ................ 2,014.3 4,697.2 3,504.0 4,525.0
Capital expenditures .......... 5.8 57.7 36.4 61.7
- -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ---------- ------------ -------------- ------------
Net revenues .................. $ 4,240.0 $ 971.6 $ 778.7 $482.7 $ 401.6
Adjusted EBITDA ............... 1,249.7 467.3 5.3 111.0 92.6
Depreciation and amortization 237.7 81.9 17.8 11.0 8.1
Segment assets ................ 13,800.1 2,601.5 840.6 357.0 1,008.7
Capital expenditures .......... 154.5 36.5 12.1 5.6 23.0
Real Estate
Franchise Fleet Mortgage Other Services
------------- ---------- ------------ --------------
Net revenues .................. $ 334.6 $ 324.1 $ 179.2 $767.5
Adjusted EBITDA ............... 226.9 120.5 74.8 151.3
Depreciation and amortization 43.6 16.3 5.1 53.9
Segment assets ................ 1,827.1 4,125.8 2,233.3 806.1
Capital expenditures .......... 12.6 24.3 16.2 24.2
- -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ---------- ------------ -------------- ------------
Net revenues .................. $ 3,237.7 $ 429.2 $ 745.9 $448.0 $ 344.9
Adjusted EBITDA ............... 802.7 189.5 43.2 99.0 65.5
Depreciation and amortization 145.5 36.9 12.8 12.8 11.2
Segment assets ................ 12,642.4 2,686.2 882.7 297.1 1,086.4
Capital expenditures .......... 101.2 20.8 8.9 5.2 9.1
Real Estate
Franchise Fleet Mortgage Other Services
------------- ---------- ------------ --------------
Net revenues .................. $ 236.3 $ 293.5 $ 127.7 $612.2
Adjusted EBITDA ............... 137.8 99.0 45.7 123.0
Depreciation and amortization 27.3 17.6 4.4 22.5
Segment assets ................ 1,295.5 3,991.1 1,742.4 661.0
Capital expenditures .......... 9.9 15.3 9.9 22.1
F-47
- ------------
(1) Segment data includes the financial results associated with
acquisitions accounted for under the purchase method of accounting
since the respective dates of acquisition as follows:
ACQUISITION
SEGMENT ACQUISITION DATE
- ------------------------- ------------------- -----------------
Travel Avis October 1996
RCI November 1996
Real Estate franchise Coldwell Banker May 1996
Other NPC April 1998
Jackson Hewitt January 1998
(2) Net revenues and Adjusted EBITDA include the equity in earnings from
the Company's investment in ARAC of $13.5 million, $51.3 million and
$1.2 million in 1998, 1997 and 1996, respectively. 1998 net revenues
and Adjusted EBITDA include a pre-tax gain of $17.7 million as a
result of a 1998 sale of a portion of the Company's equity interest.
Total assets include such equity method investment in the amount of
$139.1 million, $123.8 million and $76.5 million at December 31,
1998, 1997 and 1996, respectively.
Provided below is a reconciliation of total Adjusted EBITDA and total
assets for reportable segments to the consolidated amounts.
YEAR ENDED DECEMBER 31,
--------------------------------------
(IN MILLIONS) 1998 1997 1996
----------- ------------ -----------
Adjusted EBITDA for reportable segments ................ $ 1,589.9 $ 1,249.7 $ 802.7
Other charges
Litigation settlement ................................. 351.0 -- --
Termination of proposed acquisitions .................. 433.5 -- --
Executive terminations ................................ 52.5 -- --
Merger-related costs and other unusual charges
(credits)............................................. (67.2) 704.1 109.4
Investigation-related costs ........................... 33.4 -- --
Financing costs ....................................... 35.1 -- --
Depreciation and amortization .......................... 322.7 237.7 145.5
Interest, net .......................................... 113.9 50.6 14.3
----------- ------------ -----------
Consolidated income from continuing operations before
income taxes, minority interest, extraordinary gain
and cumulative effect of accounting change ............ $ 315.0 $ 257.3 $ 533.5
=========== ============ ===========
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
Total assets for reportable segments ................... $19,842.9 $13,800.1 $12,642.4
Net assets of discontinued operations .................. 373.6 273.3 120.1
----------- ------------ -----------
Consolidated total assets .............................. $20,216.5 $14,073.4 $12,762.5
=========== ============ ===========
F-48
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
(IN MILLIONS) TOTAL STATES KINGDOM COUNTRIES
---------- ---------- ---------- -----------
1998
Net revenues ...... $ 5,283.8 $ 4,277.5 $ 695.5 $310.8
Assets ............ 20,216.5 16,251.0 3,706.5 259.0
Long-lived assets 1,432.8 645.9 767.8(1) 19.1
1997
Net revenues ...... $ 4,240.0 $ 3,669.1 $ 231.8 $339.1
Assets ............ 14,073.4 12,749.2 1,014.7 309.5
Long-lived assets 544.7 477.6 49.1 18.0
1996
Net revenues ...... $ 3,237.7 $ 2,947.3 $ 133.7 $156.7
Assets ............ 12,762.5 11,566.6 830.7 365.2
Long-lived assets 523.9 444.4 65.9 13.6
- ------------
(1) Includes $691.0 million of property and equipment acquired in
connection with the NPC acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property and
equipment.
27. SUBSEQUENT EVENTS
A. STRATEGIC ALLIANCE
On December 15, 1999, the Company entered into a strategic alliance with
Liberty Media Corporation ("Liberty Media"). Specifically, the Company has
agreed to work with Liberty Media to develop internet and related
opportunities associated with the Company's travel, mortgage, real estate and
membership businesses. Such efforts may include the creation of joint
ventures with Liberty Media and others as well as additional equity
investments in each others businesses.
The Company will also assist Liberty Media in creating, and will receive a
participation in, a new venture that will seek to provide broadband video,
voice and data content to the Company hotels and their guests on a worldwide
basis. The two companies will also pursue opportunities within the cable
industry with Liberty Media to leverage the Company's direct marketing
resources and capabilities.
In addition, Liberty Media has agreed to invest $400 million in cash to
purchase 18 million shares of Company common stock and two-year warrants to
purchase approximately 29 million shares of Company common stock at an
exercise price of $23.00 per share. The transaction is subject to customary
conditions, and is expected to close in January of 2000. The Company also
announced that Liberty Media Chairman, Dr. John C. Malone, Ph.D., will join
the Company's board of directors.
B. DEBT REDEMPTION
On December 10, 1999, the Company's Board of Directors approved the
redemption of all outstanding $400 million 7 1/2% Senior Notes on January 21,
2000. The redemption price is the greater of par or the make whole call
option plus 50 basis points.
C. COMMON STOCK LITIGATION SETTLEMENT
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the principal securities class action pending against the
Company in the U.S. District Court in Newark, New Jersey relating to the
common stock class action lawsuits. Under the agreement, the Company would
pay the class members $2.83 billion in cash. The settlement remains subject
to execution of a definitive settlement agreement and approval by the U.S.
District Court. If the preliminary settlement is not approved by the U.S.
District Court, the Company can make no assurances that the final outcome or
F-49
settlement of such proceedings will not be for an amount greater than that
set forth in the preliminary agreement. Please see the Company's Form 8-K,
dated December 7, 1999, for a description of the preliminary agreement to
settle the common stock class action litigation.
D. DISPOSITIONS OF BUSINESSES
Green Flag. On November 26, 1999, the Company completed the disposition of
its Green Flag business unit for approximately $400 million. Green Flag is a
roadside assistance organization based in the UK, which provides a wide range
of emergency support and rescue services.
North American Outdoor Group. On October 8, 1999, the Company completed
the disposition of 94% of its North American Outdoor Group ("NAOG") business
unit for approximately $140.0 million in cash and will retain approximately
6% of NAOG's equity in connection with the transaction. Subsequent to
consummation, the Company will account for its investment in NAOG using the
cost method.
Entertainment Publications, Inc. On November 30, 1999, the Company
completed the disposition of 85% of EPub for approximately $281.0 million in
cash, inclusive of certain adjustments. The Company will retain approximately
15% of EPub's equity in connection with the transaction. In addition, the
Company will have a designee on EPub's Board of Directors. The Company's
original intention was to dispose of 100% of EPub. Subsequent to the
consummation of the transaction, the Company will account for its investment
in EPub using the equity method.
Global Refund Group. On August 24, 1999, the Company completed the sale of
its Global Refund Group subsidiary ("Global Refund") for approximately $160.0
million in cash. Global Refund, formerly known as Europe Tax Free Shopping,
is a value-added tax refund services company.
Fleet. On June 30, 1999, the Company completed the disposition of its
fleet business segment ("fleet segment" or "fleet businesses"), which
included PHH Vehicle Management Services Corporation, Wright Express
Corporation, The Harpur Group, Ltd., and other subsidiaries pursuant to an
agreement between PHH Corporation ("PHH"), a wholly-owned subsidiary of the
Company, and Avis Rent A Car, Inc. ("ARAC"). Pursuant to the agreement, ARAC
acquired net assets of the fleet businesses through the assumption and
subsequent repayment of $1.44 billion of intercompany debt and the issuance
of $360.0 million of convertible preferred stock of Avis Fleet Leasing and
Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC. The
transaction followed a competitive bidding process. Coincident to the closing
of the transaction, ARAC refinanced the assumed debt under management
programs which was payable to the Company.
The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at the Company's option upon the satisfaction of certain
conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining certain
EBITDA (earnings before interest, taxes, depreciation and amortization)
thresholds, as defined. There are additional circumstances upon which the
shares of Avis Fleet convertible preferred stock are automatically or
mandatorily convertible into ARAC common stock. At June 30, 1999, the Company
beneficially owned approximately 19% of the outstanding Class A common stock
of ARAC. If all of the Avis Fleet convertible preferred stock was converted
into common stock of ARAC, as of the closing date, the Company would have
owned approximately 34% of ARAC's outstanding common equity (although the
voting interest would be limited, in most instances to 20%). At December 31,
1999, the Company's ownership percentage of outstanding Class A common stock
of ARAC was 18%.
The Company realized a net gain on the disposition of $881.4 million
($865.7 million, after tax. The realized gain is net of approximately $90.0
million of transaction costs. The Company deferred the portion of the
realized net gain which was equivalent to its common equity ownership
percentage in ARAC at the time of closing. The fleet segment disposition was
structured to be treated as a tax-free reorganization and, accordingly, no
tax provision has been recorded on a majority of the gain. However, based
upon a recent interpretive ruling, the Internal Revenue Service may challenge
this treatment. Should the transaction be deemed taxable, the resultant tax
liability could be material. Notwithstanding, the Company believes that based
upon analysis of relevant tax law, the Company's position would prevail.
F-50
Other Businesses. During 1999, the Company completed the dispositions of
certain other businesses, including Central Credit, Inc., Spark Services,
Inc., Match.com, National Leisure Group, National Library of Poetry and Essex
Corporation. Aggregate consideration received on the dispositions of such
businesses was comprised of $110.3 million in cash and $43.3 million of
common stock. The Company realized a net gain of $47.5 million ($27.2
million, after tax) on the dispositions of such businesses.
E. PENDING ISSUANCE OF TRACKING STOCK
On September 30, 1999, the Company's Board of Directors approved a new
series of Cendant common stock ("tracking stock") intended to reflect the
performance of the Move.com Group, a group of Company owned businesses which
will be engaged in providing a broad range of home-related services through a
new internet services portal. The tracking stock is subject to shareholder
approval. There is currently no tracking stock outstanding. The Company has
filed a proxy statement with the SEC, which contains detailed financial
information as well as more specific plans concerning the transaction.
Although the Move.com Group tracking stock is intended to track the
performance of the Move.com Group, holders, if any, will be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. The tracking stock offering, if approved
by the shareholders, will enable the Company to issue the tracking stock in
one or more private or public financings and perhaps creating a public
trading market for the tracking stock.
F. INVESTMENT IN NETMARKET GROUP, INC.
On September 15, 1999, Netmarket Group, Inc. ("NGI") began operations as
an independent company that will pursue the development of interactive
businesses formerly within the Company's direct marketing division. NGI will
own, operate, develop and expand the on-line membership businesses, which
collectively have 1.3 million on-line members. Prior to September 15, 1999,
the Company's ownership of NGI was restructured into common stock and
preferred stock interests. On September 15, 1999, the Company donated NGI's
outstanding common stock to a charitable trust, and NGI issued additional
shares of its common stock to certain of its marketing partners. The fair
market value of the NGI common stock on the date of donation was
approximately $20 million. Accordingly, as a result of the change in
ownership of NGI's common stock from the Company to independent third
parties, NGI's operating results will no longer be included in the Company's
consolidated financial statements. The Company retained an ownership of
convertible preferred stock of NGI, which is ultimately exchangeable, at the
Company's option, into 78% of NGI's diluted common shares which has a $5
million annual preferred dividend. The convertible preferred stock is not
convertible until after September 14, 2001. The convertible preferred stock
will be accounted for using the cost method of accounting. The preferred
stock dividend will be recorded in income if and when it becomes realizable.
Subsequent to the Company's contribution of NGI's common stock to the trust,
the Company provided a development advance of $77.0 million to NGI, which is
contingently repayable to the Company if certain financial targets related to
NGI are achieved. The purpose of the development advance was to provide NGI
with the funds necessary to develop internet related products and systems,
that if successful, would significantly increase the value of NGI. Without
these funds, NGI would not have sufficient funds for development activities
contemplated in its business plans. Repayment of the advance is therefore
solely dependent on the success of these development efforts. The Company
recorded a charge, inclusive of transaction costs, of $85.0 million ($48.0
million, after tax), during the third quarter of 1999, in connection with the
donation of NGI shares to the charitable trust and the subsequent development
advance.
G. COMMON SHARE REPURCHASES
During 1999, the Company's Board of Directors authorized an additional
$1.8 billion of Company common stock to be repurchased under the common share
repurchase program, increasing the total authorized amount to be repurchased
under the program to $2.8 billion. As of January 7, 2000, the Company
repurchased $2.0 billion (105.2 million shares) under the program.
Additionally, in July 1999 pursuant to a Dutch Auction self tender-offer to
its shareholders, the Company purchased 50 million shares of Company common
stock through its wholly-owned subsidiary Cendant Stock Corporation at a
price of $22.25 per share. Under the terms of the offer, which commenced June
16, 1999 and expired July 15, 1999, the Company had invited shareholders to
tender their shares at prices of Company common stock between $19.75 and
$22.50 per share.
F-51
H. TERMINATION OF PROPOSED ACQUISITION
On February 4, 1999, the Company announced its intention not to proceed
with the acquisition of RAC Motoring Services ("RACMS") due to certain
conditions imposed by the UK Secretary of State of Trade and Industry that
the Company determined to be not commercially feasible and therefore
unacceptable. The Company originally announced on May 21, 1998 its definitive
agreement with the Board of Directors of Royal Automobile Club Limited to
acquire RACMS for approximately $735.0 million in cash. The Company wrote-off
$7.0 million of deferred acquisition costs in the first quarter of 1999 in
connection with the termination of the proposed acquisition of RACMS.
28. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1998
and 1997. The underlying per share information is calculated from the
weighted average shares outstanding during each quarter, which may fluctuate
based on quarterly income levels. Therefore, the sum of the quarters may not
equal the total year amounts.
1998
-----------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) FIRST SECOND (1) THIRD (2) FOURTH (3) TOTAL YEAR
---------- ---------- ---------- ---------- ------------
Net revenues............................. $1,129.4 $1,277.9 $1,457.8 $1,418.7 $5,283.8
---------- ---------- ---------- ---------- ------------
Income (loss) from continuing
operations.............................. 183.9 154.9 123.1 (302.0) 159.9
Income (loss) from discontinued
operations, net of tax.................. (11.0) (1.9) (12.1) -- (25.0)
Gain on sale of discontinued operations,
net of tax.............................. -- -- -- 404.7(4) 404.7
---------- ---------- ---------- ---------- ------------
Net income............................... $ 172.9 $ 153.0 $ 111.0 $ 102.7 $ 539.6
========== ========== ========== ========== ============
Per share information:
Basic
Income (loss) from continuing
operations ........................ $ 0.22 $ 0.18 $ 0.14 $ (0.36) $ 0.19
Net income ........................... $ 0.21 $ 0.18 $ 0.13 $ 0.12 $ 0.64
Weighted average shares .............. 838.7 850.8 850.8 850.0 848.4
Diluted
Income (loss) from continuing
operations ........................ $ 0.21 $ 0.18 $ 0.14 $ (0.36) $ 0.18
Net income ........................... $ 0.20 $ 0.18 $ 0.13 $ 0.12 $ 0.61
Weighted average shares .............. 908.5 900.9 877.4 850.0 880.4
Common Stock Market Prices:
High.................................... 41 41 3/8 22 7/16 20 5/8
Low..................................... 32 7/16 18 9/16 10 7/19 7 1/2
F-52
1997
-------------------------------------------------------------
FIRST SECOND(5) THIRD FOURTH (6) TOTAL YEAR
------------ --------- ---------- ----------- ------------
Net revenues.................... $ 953.7 $999.6 $1,186.5 $1,100.2 $4,240.0
------------ --------- ---------- ----------- ------------
Income (loss) from continuing
operations
before extraordinary gain and
cumulative effect of
accounting
change......................... 113.8 (69.4) 203.0 (181.1) 66.3
Income (loss) from discontinued
operations, net of tax......... 2.8 (14.6) (0.4) (14.6) (26.8)
Extraordinary gain, net of tax . - - - 26.4(8) 26.4
Cumulative effect of accounting
change, net of tax............. (283.1)(7) - - - (283.1)
------------ --------- ---------- ----------- ------------
Net income (loss)............... $(166.5) $(84.0) $ 202.6 $ (169.3) $ (217.2)
============ ========= ========== =========== ============
Per share information:
Basic
Income (loss) from
continuing
operations before
extraordinary
gain and cumulative
effect of accounting change .. $ 0.14 $(0.09) $ 0.25 $ (0.22) $ 0.08
Net income (loss) ........... $ (0.21) $(0.11) $ 0.25 $ (0.20) $ (0.27)
Weighted average shares ..... 799.4 804.2 805.9 828.4 811.2
Diluted
Income (loss) from
continuing
operations before
extraordinary
gain and cumulative
effect of accounting change .. $ 0.13 $(0.09) $ 0.23 $ (0.22) $ 0.08
Net income (loss) ........... $ (0.19) $(0.11) $ 0.23 $ (0.20) $ (0.27)
Weighted average shares ..... 877.1 804.2 889.0 828.4 851.7
Common Stock Market Prices: ...
High........................... 26 7/8 26 3/4 31 3/4 31 3/8
Low............................ 22 1/2 20 23 11/16 26 15/16
- ------------
(1) Includes charges of $32.2 million ($20.4 million, after tax or $0.02
per diluted share) comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs. Such charges
were partially offset by a credit of $27.5 million ($18.6 million,
after tax of $0.02 per diluted share) associated with changes to the
original estimate of costs to be incurred in connection with the 1997
Unusual Charges.
(2) Includes charges of: (i) $76.4 million ($49.2 million, after tax or
$0.06 per share) comprised of costs associated with the
investigations into previously discovered accounting irregularities
at the former CUC business units, including incremental financing
costs and separation payments, principally to the Company's former
chairman; and (ii) a $50.0 million ($32.2 million, after-tax or $0.04
per diluted share) non-cash write off of certain equity investments
in interactive membership businesses and impaired goodwill associated
with the National Library of Poetry, a Company subsidiary.
(3) Includes charges of: (i) $433.5 million ($281.7 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian; (ii) $351.0 million
($228.2 million, after tax or $0.27 per diluted share) of costs
associated with an agreement to settle the PRIDES securities class
action suit, and (iii) $12.4 million (9.9 million, after tax or $0.01
per diluted share) comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs and separation
F-53
payments. Such charges were partially offset by a credit of $42.8
million ($27.5 million, after tax or $0.03 per diluted share)
associated with changes to the original estimate of costs to be
incurred in connection with the 1997 Unusual Charges.
(4) Represents gains associated with the sales of Hebdo Mag and CDS (see
Note 5 -Discontinued Operations).
(5) Includes Unusual Charges of $295.4 million primarily associated with
the PHH Merger. Unusual Charges of $278.9 million ($208.4 million,
after-tax or $.24 per diluted share) pertained to continuing
operations and $16.5 million were associated with discontinued
operations.
(6) Includes Unusual Charges in the net amount of $442.6 million
substantially associated with the Cendant Merger and Hebdo Mag
merger. Net Unusual Charges of $425.2 million ($296.3 million,
after-tax or $.34 per diluted share) pertained to continuing
operations and $17.4 million were associated with discontinued
operations.
(7) Represents a non-cash after-tax charge of $0.35 per diluted share to
account for the cumulative effect of a change in accounting,
effective January 1, 1997, related to revenue and expenses
recognition for memberships.
(8) Represents the gain on the sale of Interval, which was sold
coincident to the Cendant Merger in consideration of Federal Trade
Commission anti-trust concerns within the timeshare industry.
F-54