EXHIBIT 99.2
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
We are one of the foremost providers of real estate related and travel
related services 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 businesses.
Our operations consist of four principal divisions:
o travel related services,
o real estate related services,
o direct marketing services and
o diversified services.
Our businesses provide a wide range of complementary consumer and business
services, which together represent seven business segments.
Following is a brief description of each division and its related services.
o The travel related services businesses facilitate vacation
timeshare exchanges and franchise car rental and hotel businesses;
o The real estate related services businesses franchise real estate
brokerage businesses, provide home buyers with mortgages, assist
in employee relocations and provide consumers with relocation,
real estate and home-related products and services through our
move.com network of Web sites;
o The direct marketing services businesses provide an array of value
driven products and services; and
o The diversified services businesses include our tax preparation
services franchise, information technology services, car parks in
the United Kingdom 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 Inc.
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 Global
Refund Group, the fleet business segment, Central Credit, Inc., Spark
Services, Inc., National Leisure Group ("NLG"), National Library of Poetry
("NLP"), Essex Corporation ("Essex"), Cendant Software Corporation, Hebdo Mag
International, Inc., the Green Flag Group ("Green Flag") and Entertainment
Publications, Inc. ("EPub"). 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 (see Note 3 --
Dispositions and Acquisitions of Businesses). In addition, in October 2000,
we committed to a plan to spin-off our individual membership segment which
represented a majority of CUC revenues.
1
On March 21, 2000, our shareholders approved a proposal authorizing a new
series of Cendant common stock to track the performance of the Move.com
Group, an operator of a popular network of Web sites, which offer a wide
selection of quality relocation, real estate and home-related products and
services. The Move.com Group will integrate and enhance the online efforts of
our residential real estate brands and those of our other real estate
business units based upon our RentNet, Inc. ("RentNet") online apartment
guide model. The Move.com Group commenced operations in the third quarter of
1999 with the move.com Internet site, our flagship site, becoming functional
during January 2000. Prior to the formation of the Move.com Group, RentNet's
historical financial information was included in our discontinued individual
membership segment.
The Move.com Group currently generates the following types of revenue:
subscriptions, sponsorships, e-commerce and other revenue. E-commerce revenue
primarily includes mortgage referral and marketing fees. In addition to the
move.com site itself, the assets attributed to Move.com Group include
RentNet, our online apartment rental business acquired in January 1996 and
previously included in our discontinued individual membership segment,
National Home Connections, LLC, a facilitator of connecting and disconnecting
utilities, processor of address changes and provider of moving related
services and products, which was acquired in May 1999, and the assets of
MetroRent, an online provider of fee-based apartment vacancy reports, which
was acquired in December 1999.
On October 27, 2000, we announced that we entered into a definitive agreement
to sell certain businesses within our Move.com Group segment, as well as
certain other businesses (see Disposition within Note 27 -- Subsequent
Events).
The following discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto (particularly, Note 27 -- Subsequent Events) included elsewhere
herein.
CONSOLIDATED OPERATIONS -- 1999 vs. 1998
REVENUES
Revenues increased $56 million (1%) in 1999 over 1998, which reflected growth
in a majority of our reportable operating segments despite the effects of
dispositions of non-strategic businesses. Significant contributing factors
which gave rise to such revenue growth included an increase in the amount of
royalty fees received from our franchised brands within both our travel and
real estate franchise segments and an increase in loan servicing revenues
within our mortgage segment. Revenues in 1999 included the full year
operating results of our car park subsidiary, which was acquired in April
1998, compared to the post acquisition period in 1998. A detailed discussion
of revenue trends from 1998 to 1999 is included in the section entitled
"Results of Reportable Operating Segments -- 1999 vs. 1998."
OTHER CHARGES
LITIGATION SETTLEMENTS. On December 7, 1999, we reached a preliminary
agreement to settle the principal securities class actions pending against
us, other than certain claims relating to FELINE PRIDES securities discussed
below. As a result of the settlement, we recorded a pre-tax charge of
approximately $2.89 billion. This settlement is subject to final
documentation and court approval (see Note 17 -- Commitments and
Contingencies).
During 1998, we reached a final agreement to settle a class action lawsuit
that was brought on behalf of the holders of the FELINE PRIDES. As a result
of the settlement, we recorded a pre-tax charge of $351 million (see PRIDES
Litigation Settlement within Note 27 -- Subsequent Events).
TERMINATION OF PROPOSED ACQUISITIONS. During 1999, we announced our intention
not to proceed with the acquisition of RAC Motoring Services and recorded a
$7 million charge in connection with the write-off of acquisition costs.
During 1998, we recorded a $433 million charge in connection with the
termination of the proposed acquisitions of American Bankers Insurance Group,
Inc. and Providian Auto and Home Insurance Company.
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INVESTIGATION-RELATED COSTS. During 1999 and 1998, we incurred
investigation-related costs of $21 million and $33 million, respectively, in
connection with our discovery and announcement of accounting irregularities
on April 15, 1998.
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS). During 1999 and
1998, we recorded merger-related costs and other unusual charges (credits) of
$25 million and ($67) million, respectively (see "Merger-Related Costs and
Other Unusual Charges (Credits)").
OTHER CHARGES. During 1998, we incurred other charges of $53 million and $35
million in connection with the termination of certain of our former
executives and investigation-related financing costs, respectively.
For a detailed discussion regarding Other Charges, see Note 5 to the
Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $44 million (15%) in 1999
over 1998 as a result of incremental amortization of goodwill and other
intangible assets from 1998 acquisitions and capital spending primarily to
support growth and enhance marketing opportunities in our businesses,
partially offset by the impact of the disposal of non-strategic businesses.
INTEREST EXPENSE AND MINORITY INTEREST
Interest expense, net increased $84 million (75%) in 1999 over 1998 primarily
as a result of an increase in the average debt balances outstanding and a
nominal increase in the cost of funds. In addition, the composition of
average debt balances during 1999 included longer term fixed rate debt
carrying higher interest rates as compared to 1998. The weighted average
interest rate on long-term debt increased to 6.4% in 1999 from 6.2% in 1998.
Minority interest, net of tax increased $10 million (20%). Minority interest,
net of tax is primarily related to distributions payable in cash on our
FELINE PRIDES and the trust preferred securities issued in February 1998.
NET GAIN ON DISPOSITIONS OF BUSINESSES
During 1999, we recorded a net gain of $967 million in connection with the
disposition of certain non-strategic businesses. For a detailed discussion
regarding such dispositions, see Note 3 -- Dispositions and Acquisitions of
Businesses.
PROVISION (BENEFIT) FOR INCOME TAXES
Our effective tax rate increased to a benefit of 63.2% in 1999 from an
expense of 34.3% in 1998 primarily due to the impact of the disposition of
our fleet businesses that was accounted for as a tax-free merger.
Accordingly, nominal income taxes were provided on the net gain realized upon
such disposition.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income (loss) from continuing operations for 1999 decreased $541 million from
1998 primarily as a result of other charges in 1999 and 1998 of $2.95 billion
and $838 million, respectively, and the 1999 net gain on dispositions of
businesses of $967 million. Such decrease was partially offset by growth in
our continuing businesses, see "Results of Reportable Operating Segments."
RESULTS OF REPORTABLE OPERATING SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization, and minority interest, adjusted
to exclude net gains on dispositions of businesses and certain 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
3
of how management evaluates performance. However, our presentation of
Adjusted EBITDA may not be comparable with similar measures used by other
companies. For additional information, including a description of the
services provided in each of our reportable operating segments, see Note 24
to the Consolidated Financial Statements.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, our subsidiary which facilitates travel arrangements for our
travel-related and membership businesses, were included within the
discontinued individual membership segment. Beginning the third quarter of
2000, the operations of Cendant Travel were managed as a component of the
travel segment. Accordingly, the operating results of Cendant Travel are
reflected in the travel segment for all periods presented.
Included in the Move.com Group are RentNet, Inc., ("RentNet"), acquired
during January 1996, National Home Connections, LLC, acquired in May 1999,
and the assets of MetroRent, acquired in December 1999. Prior to the
formation of the Move.com Group, RentNet's historical financial information
was included in our discontinued individual membership segment. We
reclassified the financial results of RentNet for the years ended December
31, 1998 and 1997.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
ADJUSTED
EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------------------------------------ --------------
1999 1998 % CHANGE 1999 (1) 1998 (2) % CHANGE 1999 1998
-------- -------- ---------- -------- -------- ---------- ------ ------
(DOLLARS IN MILLIONS)
Travel $1,239 $1,163 7% $ 593 $ 552 7% 48% 47%
Insurance/Wholesale 575 544 6% 180 138 30% 31% 25%
Real Estate Franchise 571 456 25% 424 349 21% 74% 77%
Relocation 415 444 (7%) 122 125 (2%) 29% 28%
Mortgage 397 353 12% 182 188 (3%) 46% 53%
Move.com Group 18 10 80% (22) 1 * * 10%
Diversified Services 1,099 1,108 (1%) 223 120 86% 20% 11%
Fleet 207 387 * 81 174 * 39% 45%
-------- -------- -------- --------
Total $4,521 $4,465 $1,783 $1,647
======== ======== ======== ========
- ------------
* Not meaningful.
(1) Excludes (i) a charge of $2.9 billion associated with the preliminary
agreement to settle the principal shareholder securities class action
suit, (ii) a charge of $7 million in connection with the termination of
the proposed acquisition of RAC Motoring Services, (iii) a charge of
$21 million of investigation-related costs, (iv) $23 million of
additional charges to fund an irrevocable contribution to an
independent technology trust responsible for completing the transition
of our lodging franchisees to a property management system sponsored by
us, (v) $2 million of costs primarily resulting from the consolidation
of European call centers in Cork, Ireland and (vi) a credit of $967
million for the net gain on the dispositions of businesses.
(2) Excludes (i) a charge of $351 million associated with the agreement to
settle the PRIDES securities class action suit, (ii) charges of $433
million for the costs of terminating the proposed acquisitions of
American Bankers Insurance Group, Inc. and Providian Auto and Home
Insurance Company, (iii) charges of $121 million for
investigation-related costs, including incremental financing costs and
executive terminations and (iv) a net credit of $67 million associated
with changes to the estimate of previously recorded merger-related
costs and other unusual charges.
TRAVEL
Revenues and Adjusted EBITDA increased $76 million (7%) and $41 million (7%),
respectively, in 1999 compared to 1998. Franchise fees increased $39 million
(7%) in 1999, consisting of increases in lodging and car rental franchise
fees of $26 million (7%) and $13 million (8%), respectively. Our franchise
businesses experienced growth in 1999 compared to 1998 primarily due to
increases in the amount of weighted average available rooms (24,000
incremental rooms domestically) and car rental days. Timeshare subscriptions
and exchange revenues increased $18 million (5%), primarily as a result of
increased volume. Also contributing to the revenue and Adjusted EBITDA
increases was an $11 million bulk timeshare exchange transaction in 1999,
largely offset by a $7 million decrease in gains from the sale of portions of
our equity investment in Avis Rent A Car, Inc. ("ARAC," subsequently renamed
Avis Group
4
Holdings, Inc.). The Adjusted EBITDA margin increased to 48% in 1999 from 47%
in 1998. Total expenses increased $35 million (6%), primarily due to
increased volume; however, such increase included a $14 million increase in
marketing and reservation fund expenses associated with our lodging franchise
business unit that was offset by increased marketing and reservation revenues
received from franchisees.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $31 million (6%) and $42 million
(30%), respectively, in 1999 compared to 1998 primarily due to customer
growth, which resulted from increases in affiliations with financial
institutions. The increase in affiliations with financial institutions was
attributable principally to international expansion, while the Adjusted
EBITDA increase was due to improved profitability in international markets as
well as a $25 million expense decrease related to longer amortization periods
for certain customer acquisition costs as a result of a change in accounting
estimate. International revenues and Adjusted EBITDA increased $28 million
(23%) and $15 million (164%), respectively, primarily due to a 37% increase
in customers. The Adjusted EBITDA margin increased to 31% in 1999 from 25% in
1998. The Adjusted EBITDA margin for domestic operations was 37% in 1999,
versus 31% in 1998. The Adjusted EBITDA margin for international operations
was 16% for 1999, versus 7% in 1998. Domestic operations, which represented
74% of segment revenues in 1999, generated higher Adjusted EBITDA margins
than international operations as a result of continued expansion costs
incurred internationally to penetrate new markets. International operations,
however, have become increasingly profitable as they have expanded over the
last two years.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $115 million (25%) and $75 million
(21%), respectively, in 1999 compared to 1998. Royalty fees for the CENTURY
21(Registered Trademark), COLDWELL BANKER(Registered Trademark) and
ERA(Registered Trademark) franchise brands collectively increased by $67
million (17%) primarily as a result of a 5% increase in home sale
transactions by franchisees and an 8% increase in the average price of homes
sold. Home sales by franchisees benefited from strong existing domestic home
sales for the majority of 1999, as well as from expansion of our franchise
system. Existing domestic home sales are expected to decline compared to 1999
as a result of increases in interest rates. Declining home sales will impact
royalty income since royalty income is based on gross commission income
earned by agents and brokers on the sale of homes. These declines are
expected to be partially offset by increases in other areas of our business,
such as real estate franchise sales and higher home resale prices. Beginning
in the second quarter of 1999, the financial results of the advertising funds
for the COLDWELL BANKER and ERA brands were consolidated into the results of
the real estate franchise segment, increasing revenues by $31 million and
expenses by a like amount, with no impact on Adjusted EBITDA. Revenues in
1999 benefited from $20 million generated from the sale of portions of our
preferred stock investment in NRT Incorporated ("NRT"), the independent
company we helped form in 1997 to serve as a consolidator of residential real
estate brokerages. Since most costs associated with the real estate franchise
business do not vary significantly with revenues, the increases in revenues,
exclusive of the aforementioned consolidation of the advertising funds,
contributed to an improvement of the Adjusted EBITDA margin to 79% in 1999
from 77% in 1998.
RELOCATION
Revenues and Adjusted EBITDA decreased $29 million (7%) and $3 million (2%),
respectively, in 1999 compared with 1998 and the Adjusted EBITDA margin
increased to 29% in 1999 from 28% in 1998. Operating results in 1999
benefited from a $13 million increase in referral fees and international
relocation service revenue, offset by a comparable decline in home sales
revenue. Total expenses decreased $26 million (8%), which included $15
million in cost savings from regional operations, technology and
telecommunications, and $11 million in reduced expenses resulting from
reduced government home sales and the sale of an asset management company in
the third quarter of 1998. The asset management company contributed 1998
revenues and Adjusted EBITDA of $21 million and $16 million, respectively. In
1999, revenues and Adjusted EBITDA benefited from the sale of a minority
interest in an insurance subsidiary, which resulted in $7 million of
additional revenue and Adjusted EBITDA. In 1998, revenues and Adjusted EBITDA
also benefited from an improvement in receivable collections, which permitted
an $8 million reduction in billing reserve requirements.
5
MORTGAGE
Revenues increased $44 million (12%) and Adjusted EBITDA decreased $6 million
(3%), respectively, in 1999 compared with 1998. The increase in revenues
resulted from a $32 million increase in loan servicing revenues and a $12
million increase in loan closing revenues. The average servicing portfolio
increased $10 billion (29%), with the average servicing fee increasing
approximately seven basis points because of a reduction in the rate of
amortization on servicing assets. The reduced rate of amortization was caused
by higher mortgage interest rates in 1999. Total mortgage closing volume in
1999 was $25.6 billion, a decline of $400 million from 1998. However,
purchase mortgage volume (mortgages for home buyers) increased $3.7 billion
(24%) to $19.1 billion, offset by a $4.2 billion decline in mortgage
refinancing volume. Moreover, purchase mortgage volume from the teleservices
business (Phone In -- Move In) and Internet business (Log In -- Move In)
increased $4.7 billion (63%), primarily because of increased purchase volume
from our real estate franchisees. Industry origination volume is expected to
be lower in 2000 compared to 1999 as a result of recent increases in interest
rates and reduced refinancing volume. We expect to offset lower refinancing
volume with increased purchase mortgage volume in 2000. The Adjusted EBITDA
margin decreased from 53% in 1998 to 46% in 1999. Adjusted EBITDA decreased
in 1999 because of a $17 million increase in expenses incurred within
servicing operations for the larger of the increase in the average servicing
portfolio and other expense increases for technology, infrastructure and
teleservices to support capacity for volume anticipated in future periods. We
anticipate that increased costs to support future volume will negatively
impact Adjusted EBITDA through the first six months of 2000.
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate, and
home-related products and services through its flagship portal site,
move.com, and the move.com network. Revenues increased $8 million (80%) to
$18 million, while Adjusted EBITDA decreased $23 million to a loss of $22
million in 1999 compared to 1998. These results reflect our increased
investment in marketing and development of the portal and retention bonuses
paid to Move.com Group employees.
DIVERSIFIED SERVICES
Revenues decreased $9 million (1%) and Adjusted EBITDA increased $103 million
(86%), in 1999 compared to 1998. The April 1998 acquisition of National Car
Park ("NCP"), contributed incremental revenues and Adjusted EBITDA of $103
million and $48 million, respectively, in 1999 over 1998. Also contributing
to an increase in revenues and Adjusted EBITDA in 1999 was $39 million of
incremental income from investments and $13 million of revenues recognized in
connection with a litigation settlement. The aforementioned revenue increases
were partially offset by the impact of disposed operations, including Essex
in January 1999, NLG and NLP in May 1999, Spark Services, Inc. and Global
Refund Group in August 1999, Central Credit, Inc. in September 1999 and EPub
and Green Flag in November 1999. The operating results of disposed businesses
were included through their respective disposition dates in 1999 versus being
included for the full year in 1998, except for Green Flag which was acquired
in April 1998. Accordingly, revenues from divested businesses were
incrementally less in 1999 by $138 million while Adjusted EBITDA improved $15
million. The increase in Adjusted EBITDA in 1999 over 1998 also reflects
offsetting reductions in preferred alliance revenues and corporate expenses.
FLEET
On June 30, 1999, we completed the disposition of our fleet business segment
(see Note 3 -- Dispositions and Acquisitions of Businesses). Revenues and
Adjusted EBITDA were $207 million and $81 million, respectively, in the first
six months of 1999 and $387 million and $174 million, respectively, for the
full year in 1998.
CONSOLIDATED OPERATIONS -- 1998 VS. 1997
REVENUES
Revenues increased $912 million (26%) in 1998 over 1997, which reflected
growth in substantially all of our reportable operating segments. Significant
contributing factors which gave rise to such increases
6
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.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $81 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.
OTHER CHARGES
We recorded a $351 million charge in connection with an agreement to settle a
class action lawsuit that was brought on behalf of the holders of our Income
and Growth FELINE PRIDES securities who purchased their securities on or
prior to April 15, 1998. In addition, we recorded a $433 million charge
related to the termination of proposed acquisitions, a $53 million charge
related to the termination of certain of our former executives, and charges
of $33 million and $35 million, respectively, of investigation-related costs
and investigation-related financing costs. In addition, we recorded
merger-related and other unusual charges (credits) of ($67) million and $701
million during 1998 and 1997, respectively. For a more detailed discussion of
such charges (credits) see "Merger-Related Costs and Other Unusual Charges
(Credits) -- 1997" and Note 5 to the Consolidated Financial Statements.
INTEREST EXPENSE AND MINORITY INTEREST
Interest expense, net increased $61 million (120%) 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 $2.8
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 $51 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.
PROVISION FOR INCOME TAXES
Our effective tax rate was reduced to 34.3% in 1998 from 71.6% in 1997 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
28.3%. Excluding unusual charges, the effective income tax rate on income
from continuing operations in 1997 was 41.0%.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for 1998 increased $126 million from 1997
primarily as a result of growth in our continuing businesses, see "Results of
Reportable Operating Segments."
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In August 1998, we changed our accounting policy with respect to revenue and
expense recognition for our membership businesses, effective January 1, 1997,
and recorded a non-cash after-tax charge of $283 million to account for the
cumulative effect of an accounting change.
RESULTS OF REPORTABLE OPERATING SEGMENTS
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation and amortization, and minority interest, adjusted
to exclude net gains on dispositions of businesses and certain other charges
which are of a non-recurring or unusual nature and are not included in
assessing segment performance or
7
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. For additional information, including a
description of the services provided in each of our reportable operating
segments, see Note 24 to the Consolidated Financial Statements.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, our subsidiary which facilitates travel arrangements for our
travel and membership businesses, were included within the discontinued
individual membership segment. Beginning the third quarter of 2000, the
operations of Cendant Travel were managed as a component of the travel
segment. Accordingly, the operating results of Cendant Travel are reflected
in the travel segment for all periods presented.
Included in the Move.com Group are RentNet, Inc., ("RentNet"), acquired
during January 1996, National Home Connections, LLC, acquired in May 1999,
and the assets of MetroRent, acquired in December 1999. Prior to the
formation of the Move.com Group, RentNets historical financial information
was included in our discontinued individual membership segment. We
reclassified the financial results of RentNet for the years ended December
31, 1998 and 1997.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------------------------------------ ---------------
1998 1997 % CHANGE 1998 (1) 1997 (2) % CHANGE 1998 1997
-------- -------- ---------- -------- -------- ---------- ------ -------
(DOLLARS IN MILLIONS)
Travel $1,163 $1,057 10% $ 552 $ 485 14% 47% 46%
Insurance/Wholesale 544 483 13% 138 111 24% 25% 23%
Real Estate Franchise 456 335 36% 349 227 54% 77% 68%
Relocation 444 402 10% 125 93 34% 28% 23%
Mortgage 353 179 97% 188 75 151% 53% 42%
Move.com Group 10 6 67% 1 (1) * 10% (17%)
Diversified Services 1,108 767 44% 120 152 (21%) 11% 20%
Fleet 387 324 19% 174 121 44% 45% 37%
-------- -------- -------- --------
Total $4,465 $3,553 $1,647 $1,263
======== ======== ======== ========
- ------------
* Not meaningful.
(1) Excludes (i) a charge of $351 million associated with the agreement to
settle the PRIDES securities class action suit, (ii) charges of $433
million for the costs of terminating the proposed acquisitions of
American Bankers Insurance Group, Inc. and Providian Auto and Home
Insurance Company, (iii) charges of $121 million for
investigation-related costs, including incremental financing costs, and
executive terminations and (iv) a net credit of $67 million associated
with changes to the estimate of previously recorded merger-related
costs and other unusual charges.
(2) Excludes unusual charges of $701 million primarily associated with the
Cendant Merger and the PHH Merger.
TRAVEL
Revenues and Adjusted EBITDA increased $106 million (10%) and $67 million
(14%), respectively, in 1998 over 1997. Contributing to the revenue and
Adjusted EBITDA increase was a $35 million (7%) increase in franchise fees,
consisting of increases of $23 million (6%) and $12 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 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 million of
incremental fees received from preferred alliance partners seeking access to
our franchisees and their customers, $13 million of fees generated from the
execution of international master license agreements and an $18 million gain
on our sale of one million shares of ARAC common stock in 1998. The
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aforementioned drivers supporting increases in revenues and Adjusted EBITDA
were partially offset by a $37 million reduction in the equity in earnings of
our investment in the car rental operations of ARAC as a result of reductions
in our ownership percentage in such investment during 1997 and 1998. Total
expenses increased $39 million (7%), however the Adjusted EBITDA margin
improved from 46% in 1997 to 47% in 1998. The improvement in the Adjusted
EBITDA margin reflects operating leverage within our franchise operations and
a leveraging of our corporate infrastructure among more businesses in 1998
compared to 1997.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $61 million (13%) and $27 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.
Domestic revenues and Adjusted EBITDA increased $25 million (6%) and $24
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 $36 million (41%) and $3
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 million (36%) and $122 million
(54%), respectively, in 1998 over 1997. Royalty fees collectively increased
for our CENTURY 21, COLDWELL BANKER and ERA franchise brands by $102 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 5
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 77%.
RELOCATION
Revenues and Adjusted EBITDA increased $42 million (10%) and $32 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 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
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 the Adjusted EBITDA margin.
MORTGAGE
Revenues and Adjusted EBITDA increased $174 million (97%) and $113 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 million increase in origination revenues.
Although the servicing portfolio grew $9.6
9
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 million, partially offset by a $6 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.
MOVE.COM GROUP
Revenues and Adjusted EBITDA increased $4 million (67%) and $2 million,
respectively, in 1998 compared to 1997, primarily due to increases in
listings, prices and the addition of new sponsors on the RentNet site.
Offsetting the increase in revenue were increases in expenses primarily
related to selling and marketing, product development and personnel costs.
The revenues and expenses include only the operations of RentNet, which has
been attributed to the Move.com Group. RentNet was previously included in our
individual membership segment.
DIVERSIFIED SERVICES
Revenues increased $341 million (44%), while Adjusted EBITDA decreased $32
million (21%). Revenues increased primarily from acquired NCP, Green Flag and
Jackson Hewitt Inc. operations, which contributed $410 million and $54
million to 1998 revenues and Adjusted EBITDA, respectively. The revenue
increase attributable to 1998 acquisitions was partially offset by a $140
million reduction in revenues associated with the operations of certain of
our ancillary businesses which were sold during 1997, including Interval
International, Inc. ("Interval"), which contributed $121 million to 1997
revenues.
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 million of incremental operating costs
associated with establishing a consolidated worldwide data center. We
wrote-off $37 million of impaired goodwill associated with NLP, and $13
million of certain of our equity investments in interactive membership
businesses. Adjusted EBITDA in 1997 associated with aforementioned disposed
ancillary operations included $27 million from Interval and $18 million
related to services formerly provided to the casino industry. Our NCP, Green
Flag and Jackson Hewitt Inc. subsidiaries contributed $93 million and $27
million to 1998 Adjusted EBITDA, respectively.
FLEET
On June 30, 1999, we completed the disposition of our fleet business segment
for aggregate consideration of $1.8 billion (see Note 3 -- Dispositions and
Acquisitions of Businesses). Fleet business segment revenues and Adjusted
EBITDA increased $63 million (19%) and $53 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 fuel card
and vehicle management company in the United Kingdom, on January 20, 1998.
Harpur contributed incremental revenues and Adjusted EBITDA in 1998 of $32
million and $21 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.
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
1999. We incurred $23 million of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for completing
the transition of our lodging franchisees to a property management system
sponsored by us and $2 million of costs (included as a component of the table
below) primarily resulting from further consolidation of European call
centers in Cork, Ireland.
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1997. We incurred merger-related costs and other unusual charges ("Unusual
Charges") in 1997 related to continuing operations of $701 million primarily
associated with the Cendant Merger ("the Fourth Quarter 1997 Charge") and the
merger with PHH Corporation ("PHH") in April 1997 (the "PHH Merger" or the
"Second Quarter 1997 Charge").
ACTIVITY
UNUSUAL --------------------------- DECEMBER 31,
CHARGES 1997 1998 1999 1999
--------- -------- -------- ------- --------------
(IN MILLIONS)
Fourth Quarter 1997 Charge $455 $(258) $(130) $ (6) $61
Second Quarter 1997 Charge 283 (207) (60) (5) 11
--------- -------- -------- ------- --------------
Total 738 (465) (190) (11) 72
Reclassification for discontinued
operations (37) 37 -- -- --
--------- -------- -------- ------- --------------
Total Unusual Charges related to
continuing operations $701 $(428) $(190) $(11) $72
========= ======== ======== ======= ==============
Fourth Quarter 1997 Charge. We incurred Unusual Charges in the fourth
quarter of 1997 totaling $455 million substantially associated with the
Cendant Merger and our merger in October 1997 with Hebdo Mag International,
Inc., 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 million of professional fees, primarily
consisting of investment banking, legal, and accounting fees incurred in
connection with the mergers. Personnel related costs of $171 million included
$73 million of retirement and employee benefit plan costs, $24 million of
restricted stock compensation, $61 million of severance resulting from
consolidations of European call centers and certain corporate functions and
$13 million of other personnel related costs. We provided for 474 employees
to be terminated, the majority of which were severed. Business termination
costs of $78 million consisted of a $48 million impairment write down of
hotel franchise agreement assets associated with a quality upgrade program
and $30 million of costs incurred to terminate a contract which may have
restricted us from maximizing opportunities afforded by the Cendant Merger.
Facility related and other unusual charges of $113 million included $70
million of irrevocable contributions to independent technology trusts for the
direct benefit of lodging and real estate franchisees, $16 million of
building lease termination costs and a $22 million reduction in intangible
assets associated with our wholesale annuity business for which impairment
was determined in 1997. During 1999 and 1998, we recorded a net adjustment of
$2 million and ($27) million, respectively, to Unusual Charges with a
corresponding increase (decrease) in liabilities primarily as a result of a
change in the original estimate of costs to be incurred. We made cash
payments of $8 million, $103 million and $152 million during 1999, 1998 and
1997, respectively, related to the Fourth Quarter 1997 Charge. Liabilities of
$61 million remained at December 31, 1999, which were primarily attributable
to future severance costs and executive termination benefits, which we
anticipate that such liabilities will be settled upon resolution of related
contingencies.
Second Quarter 1997 Charge. We incurred $295 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 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
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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.
Unusual charges included $30 million of professional fees, primarily
comprised of investment banking, accounting and legal fees incurred in
connection with the PHH Merger. Personnel related costs of $154 million were
associated with employee reductions necessitated by the planned and announced
consolidation of our 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. Business termination charges of
$56 million, which were comprised of $39 million of costs to exit certain
activities primarily within our fleet management business (including $36
million of asset write-offs associated with exiting certain activities), a $7
million termination fee associated with a joint venture that competed with
the PHH Mortgage Services business (presently Cendant Mortgage Corporation)
and $10 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 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.
During the year ended December 31, 1998, we recorded a net credit of $40
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 $5 million, $28 million and $150 million
during 1999, 1998 and 1997, respectively, related to the Second Quarter 1997
Charge. Liabilities of $11 million remained at December 31, 1999, which are
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.
RESULTS OF DISCONTINUED OPERATIONS -- 1999 VS. 1998
INDIVIDUAL MEMBERSHIP
On October 25, 2000, our Board of Directors committed to a plan to complete a
tax-free spin-off of our individual membership segment (consisting of Cendant
Membership Services, Inc., a wholly-owned subsidiary) and loyalty business
(consisting of Cendant Incentives, formerly National Card Control Inc., a
wholly-owned subsidiary included within our insurance/wholesale segment)
through a special dividend to CD common stockholders. In connection with the
planned spin-off, the account balances and activities of the individual
membership segment were segregated and reported as a discontinued operation
for all periods presented. The final transaction is expected to be completed
by mid-2001.
Income (loss) from our discontinued individual membership segment was income
of $104 million, net of tax, in 1999 and a loss of $48 million, net of tax,
in 1998. The operating results of such discontinued operations in 1999
includes gains on the disposition of businesses of $142 million ($86 million,
after tax) and an unusual charge of $85 million ($48 million, after tax) in
connection with a development advance we made to Netmarket Group, Inc.
("NGI"). Excluding the aforementioned non-recurring items during 1999 income
from operations was $66 million, net of tax, in 1999 versus a loss of $48
million, net of tax, in 1998. Revenues and Adjusted EBITDA from our
discontinued individual membership segment increased $59 million (7%) and
$192 million, respectively, in 1999 compared to 1998 and Adjusted EBITDA
margin improved to positive 15% from negative 7% for the same periods. The
revenue growth was principally due to a greater number of members added year
over year and increases in the average price of a membership. The increase in
the Adjusted EBITDA margin was primarily due to the revenue increases, since
many of the infrastructure costs associated with providing services to
members are not dependent on revenue volume, and a reduction in solicitation
spending, as we further refined the targeted audiences for our direct
marketing efforts and achieved greater efficiencies in reaching potential new
members.
Beginning September 15, 1999 through December 31, 1999, certain of individual
membership's online businesses were not consolidated into our discontinued
individual membership segment operations as a
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result of our donation of NGI outstanding common stock to a charitable trust.
In October 1999, we completed the divestiture of our North American Outdoor
Group ("NAOG") business unit. The operating results of our former online
membership businesses and NAOG were included in the operations of the
individual membership segment through their respective disposition dates in
1999 versus being included for the full year in 1998. The divested businesses
accounted for the net increase in revenues and Adjusted EBITDA of $10 million
and $23 million, respectively in 1999 versus 1998. Excluding the operating
results of our former online businesses and NAOG, revenues and Adjusted
EBITDA increased $49 million and $169 million, respectively, in 1999 over
1998 and the Adjusted EBITDA margin increased to positive 21% from negative
3%. Additionally, revenues and Adjusted EBITDA in 1999 were incrementally
benefited $13 million and $5 million, respectively, from the April 1998
acquisition of a company that, among other services, provides members with
access to their personal credit information.
CONSUMER SOFTWARE AND CLASSIFIED ADVERTISING
Pursuant to our program to divest non-strategic businesses and assets, we
disposed of our consumer software and classified advertising businesses in
January 1999 and December 1998, respectively. During 1998, we recorded a $405
million gain, net of tax, on the disposal of discontinued operations, which
included our classified advertising and consumer software businesses. During
1999, we recorded an additional $174 million gain, net of tax, on the sale of
discontinued operations, related to the disposition of our consumer software
business, coincident with the closing of the transaction and in connection
with certain post-closing adjustments. Losses from discontinued operations,
net of tax, were $25 million in 1998, which included our classified
advertising and consumer software businesses. For a detailed discussion
regarding discontinued operations, see Note 4 -- Discontinued Operations.
RESULTS OF DISCONTINUED OPERATIONS -- 1998 VS. 1997
INDIVIDUAL MEMBERSHIP
Loss from our discontinued individual membership segment in 1998 and 1997 was
$48 million, net of tax, and $16 million, net of tax, respectively. Revenues
increased $134 million (19%) in 1998 over 1997 while Adjusted EBITDA and
Adjusted EBITDA margin decreased $44 million and 5 percentage points,
respectively, for the same period. The revenue growth was primarily
attributable to an incremental $28 million associated with an increase in the
average price of a membership, $26 million of increased billings as a result
of incremental marketing arrangements, primarily with telephone and mortgage
companies, and $36 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 the Adjusted EBITDA margin is a direct
result of $104 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
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 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.
CONSUMER SOFTWARE AND CLASSIFIED ADVERTISING
During 1998, we recorded a $405 million gain, net of tax on the disposition
of our consumer software and classified advertising businesses in 1998.
Losses from such discontinued operations, net of tax, were $25 million in
1998 compared to $26 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
AUTHORIZATION OF TRACKING STOCK
On March 21, 2000, our shareholders approved a proposal authorizing a new
series of common stock to track the performance of the Move.com Group. Our
existing common stock was reclassified as CD
13
common stock, which reflects the performance of our other businesses and also
a retained interest in the Move.com Group (collectively referred to as the
"Cendant Group"). In addition, our charter was amended and restated to
increase the number of authorized shares of common stock from 2.0 billion to
approximately 2.5 billion, comprised of 2.0 billion shares of CD common stock
and 500 million shares of Move.com common stock. Although the issuance of
Move.com common stock is intended to track the performance of the Move.com
Group, holders are subject to all of the risks associated with an investment
in all of our businesses, assets and liabilities.
PENDING ACQUISITIONS
Avis Group Holdings, Inc. On November 13, 2000, we announced that we entered
into a definitive agreement to acquire all of the outstanding shares of Avis
Group Holdings, Inc. ("Avis," formerly Avis Rent A Car, Inc.) that are not
currently owned by us at a price of $33.00 per share in cash. Approximately
26 million outstanding shares of Avis common stock and options to purchase
7.9 million additional shares are not currently owned by us. Accordingly, the
transaction is valued at approximately $937 million, inclusive of the net
cash obligation related to Avis stock options expected to be cancelled prior
to consummation.
The acquisition will be made by PHH. PHH will distribute the consumer car
rental business to a subsidiary not within PHH's ownership structure. After
the acquisition and the distribution of the consumer car rental business, PHH
will own and operate the Avis fleet management business, as well as the
Wright Express fuel card business. The merger is conditioned upon, among
other things, approval of a majority of the votes cast by Avis shareholders
who are unaffiliated with us and also customary regulatory approvals.
Although no assurances can be given, we expect the transaction to close in
the first quarter of 2001.
Fairfield Communities, Inc. On November 2, 2000, we announced that we had
entered into a definitive agreement with Fairfield Communities, Inc.
("Fairfield") to acquire all of its outstanding common stock at $15 per
share, or approximately $635 million in aggregate. The final acquisition
price may increase to a maximum of $16 per share depending upon a formula
based on the average trading price of CD common stock over a twenty trading
day period prior to the date on which Fairfield shareholders meet to approve
the transaction. The consideration is payable in cash or CD common stock, or
a combination of cash and CD common stock, at the holder's election. We are
not required, however, to pay more than 50% of the consideration in cash and
have the right to substitute cash for any shares of Fairfield common stock
instead of issuing CD common stock. Consummation of the transaction is
subject to customary regulatory approvals. Although no assurances can be
given, we expect to complete the acquisition in early 2001.
PENDING DISPOSITION
On October 27, 2000, we announced that we had entered into a definitive
agreement (the "Homestore Transaction") with Homestore.com, Inc.
("Homestore") to sell our Internet real estate portal, move.com, certain
other businesses within our Move.com Group segment and Welcome Wagon
International, Inc. ("Welcome Wagon") (a wholly-owned subsidiary included
within the diversified services segment) in exchange for approximately 26
million shares of Homestore common stock valued at approximately $761
million. We intend on allocating a portion of the Homestore common stock
shares received to existing Move.com common shareholders and option holders.
After such allocation, we expect to retain approximately 19 or 20 million
shares of Homestore common stock. Consummation of the transaction is subject
to certain customary closing conditions, including Hart Scott Rodino
anti-trust approval. Although no assurances can be given, we expect to
complete the transaction during the first quarter of 2001.
DIVESTITURE PROGRAM
In 1999, we completed our program to divest non-strategic businesses and
assets, which began in the third quarter of 1998. Proceeds have been
primarily used to repurchase CD common stock and reduce our indebtedness.
14
Entertainment Publications, Inc. On November 30, 1999, we completed the sale
of approximately 85% of our EPub unit for $281 million in cash. We retained
approximately 15% of EPub's common equity in connection with the transaction.
In addition, we have a designee on EPub's Board of Directors. We account for
our investment in EPub using the equity method. We realized a net gain of
approximately $156 million ($78 million, after tax).
Green Flag. On November 26, 1999, we completed the sale of Green Flag for
approximately $401 million in cash, including dividends of $37 million. We
realized a net gain of approximately $27 million ($8 million, after tax).
Fleet. On June 30, 1999, we completed the disposition of our fleet business
segment ("fleet segment") pursuant to the agreement between PHH, our
wholly-owned subsidiary, and Avis Rent A Car, Inc. ("ARAC," subsequently
renamed Avis Group Holdings, Inc.). Pursuant to the agreement, ARAC acquired
the net assets of the fleet segment 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 ("Avis Fleet"), a wholly-owned subsidiary of ARAC. Coincident
with the closing of the transaction, ARAC refinanced the assumed debt under
management programs which was payable to us. Accordingly, we received
additional consideration from ARAC comprised of $3.0 billion of cash proceeds
and a $30 million receivable. We realized a net gain on the disposition of
the fleet segment of $881 million ($866 million, after tax) of which $715
million ($702 million, after tax) was recognized at the time of closing and
$166 million ($164 million, after tax) was deferred at the date of
disposition.
The fleet segment disposition was structured as a tax-free reorganization
and, accordingly, no tax provision has been recorded on a majority of the
gain. However, pursuant to a recent interpretive ruling, the Internal Revenue
Service ("IRS") has taken the position that similarly structured transactions
do not qualify as tax-free reorganizations under Internal Revenue Code
Section 368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between $10
million and $170 million depending upon certain factors including utilization
of tax attributes and contractual indemnification provisions. Notwithstanding
the IRS interpretive ruling, we believe that, based upon analysis of current
tax law, our position would prevail, if challenged.
Other Businesses. During 1999, we completed the dispositions of certain
businesses, including Central Credit, Inc., Global Refund Group, Spark
Services, Inc., National Leisure Group and National Library of Poetry.
Aggregate consideration received on such dispositions was comprised of
approximately $265 million in cash, including dividends of $21 million. We
realized a net gain of $60 million ($5 million net loss, after tax) on the
dispositions of these businesses.
COMMON STOCK TRANSACTIONS
Liberty Media Corporation. On December 15, 1999, we entered into a strategic
alliance with Liberty Media Corporation ("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 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 an equity 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.
On February 7, 2000, Liberty Media invested $400 million in cash to purchase
18 million shares of CD common stock and a two-year warrant to purchase
approximately 29 million shares of CD common stock at an exercise price of
$23.00 per share. In addition, in March 2000, Liberty Media's Chairman, John
C. Malone, Ph.D., purchased one million shares of CD common stock for
approximately $17 million in cash.
On November 16, 2000, Liberty Media purchased 4.1 million additional shares
of CD common stock for consideration consisting of $12.34 per share, or $50
million in aggregate, in cash and 2.3 million shares of CD common stock for
consideration consisting of a warrant to purchase approximately 29 million
shares of CD common stock.
15
Common Share Repurchases. During 1999, our Board of Directors authorized an
additional $1.8 billion of CD common stock to be repurchased under our common
share repurchase program, increasing the total authorized amount that can be
repurchased under the program to $2.8 billion. As of December 31, 1999, we
repurchased a total of $2.0 billion (104 million shares) of CD common stock
under the program. Subsequent to December 31, 1999, we repurchased an
additional $306 million (18 million shares) of CD common stock under the
repurchase program as of December 31, 2000. In July 1999, pursuant to a Dutch
Auction self-tender offer to CD shareholders, we purchased 50 million shares
of our common stock at a price of $22.25 per share.
NRT Incorporated. On April 14, 2000, NRT Incorporated ("NRT") purchased
319,591 shares of Move.com common stock for $31.29 per share or approximately
$10 million in cash. We own $179 million of NRT convertible preferred stock,
of which $21 million will be convertible, at our option upon occurrence of
certain events, into no more than 50% of NRT's common stock.
Chatham Street Holdings, LLC. In September 1999, we entered into an agreement
with Chatham Street Holdings, LLC ("Chatham") pursuant to which Chatham was
granted the right, until September 30, 2001, to purchase up to 1,561,000
shares of Move.com common stock for $16.02 per share. In addition, for every
two shares of Move.com Group stock purchased by Chatham pursuant to the
agreement, Chatham will be entitled to receive a warrant to purchase one
share of Move.com Group stock at a price equal to $64.08 per share and a
warrant to purchase one share of Move.com Group stock at a price equal to
$128.16 per share. On March 31, 2000, Chatham exercised its contractual right
to purchase 1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash and received a warrant to purchase 780,500
shares of Move.com common stock at $64.08 per share and 780,500 shares of
Move.com common stock at $128.16 per share. Also during March 2000, we
invested $25 million in convertible preferred stock of WMC Finance Co.
("WMC"), an online provider of sub-prime mortgages and an affiliate of
Chatham (which is convertible into 2,541,946 shares or approximately 12% of
WMC's common stock at September 30, 2000), and were granted an option to
purchase approximately 5 million shares of WMC common stock.
On November 24, 2000, we entered into an agreement with Chatham whereby
Chatham sold to us (i) 2.6 million shares of Series E cumulative preferred
stock of WMC, (ii) 1,561,000 shares of Move.com common stock and (ii)
warrants to purchase 1,561,000 shares of Move.com common stock in exchange
for (i) $75.1 million in cash and (ii) 2.6 million shares of Class A common
stock of WMC. In consideration for such securities, we also agreed to pay
Chatham an additional $15 million within 90 days after consummation of the
Homestore Transaction.
The shareholders of Chatham are also shareholders of NRT. See Note 21 to the
Consolidated Financial Statements for a detailed discussion of NRT.
Liberty Digital, Inc. On March 31, 2000, Liberty Digital, Inc. ("Liberty
Digital") purchased 1,598,030 shares of Move.com common stock for $31.29 per
share in exchange for consideration consisting of $10 million in cash and
813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. In the event Move.com common stock is not publicly
traded by June 30, 2001, we will be required to exchange such shares for CD
common stock.
LITIGATION
Class Action Litigation and Government Investigations. Since the April 15,
1998 announcement of the discovery of accounting irregularities in the former
business units of CUC, approximately 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 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 Securities and Exchange Commission ("SEC") and the United States Attorney
for the District of New Jersey are also conducting investigations relating to
the matters referenced above. As a result of the findings from our internal
investigations, we made all adjustments considered necessary, which are
reflected in our previously filed restated financial statements for the years
ended December 31, 1997, 1996
16
and 1995 and for the six months ended June 30, 1998. On June 14, 2000,
pursuant to an offer of settlement made by us, the SEC issued an Order
Instituting Public Administrative Proceedings Pursuant to Section 21C of the
Securities and Exchange Act of 1934, Making Findings and Imposing a Cease and
Desist Order. In such Order, the SEC found that we had violated certain
financial reporting provisions of the Securities and Exchange Act of 1934 and
ordered us to cease and desist from committing any future violations of such
provisions. No financial penalties were imposed against us.
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 (the "Settlement Agreement") brought on
behalf of purchasers of all Cendant and CUC publicly traded securities, other
than PRIDES, between May 1995 and August 1998. Under the Settlement
Agreement, we would pay the class members approximately $2.85 billion in
cash. The definitive settlement document was approved by the U.S. District
Court by order dated August 14, 2000. Certain parties in the class action
have appealed the District Court's orders approving the plan of allocation of
the settlement fund and awarding of attorneys' fees and expenses to counsel
for the lead plaintiffs. No appeals challenging the fairness of the $2.85
billion settlement amount were filed. The U.S. Court of Appeals for the Third
Circuit has issued a briefing schedule for the appeals pursuant to which a
briefing will be concluded in the middle of February 2001. No date for oral
argument has been set. Accordingly, we will not be required to fund the
settlement amount of $2.85 billion for some time. However, the Settlement
Agreement required us to post collateral in the form of credit facilities
and/or surety bonds by November 13, 2000. See Note 27 -- Subsequent Events.
The settlement does not encompass all litigation asserting claims associated
with the accounting irregularities. We do not believe that it is feasible to
predict or determine the final outcome or resolution of these unresolved
proceedings. An adverse outcome from such unresolved proceedings could be
material with respect to earnings in any given reporting period. However, we
do not believe that the impact of such unresolved proceedings should result
in a material liability to our consolidated financial position or liquidity.
Other Securities Litigation. During the third quarter of 2000, we incurred
charges of $20 million in connection with litigation asserting claims
associated with accounting irregularities in the former business units of CUC
and outside of the principal common shareholder class action lawsuit.
PRIDES Litigation Settlement. On March 14, 2000, pursuant to a court order
approving the previously disclosed PRIDES settlement, we issued approximately
25 million Rights with a calculated value of $11.71 per Right. Right holders
may sell or exercise the Rights by delivering us three Rights together with
two PRIDES in exchange for two new PRIDES (the "New PRIDES") for a period
beginning upon distribution of the Rights and concluding upon expiration of
the Rights (February 2001). The terms of the New PRIDES are the same as the
original PRIDES, except that the conversion rate was revised and fixed so
that, at the time of the issuance of the Rights, the New PRIDES had a value
equal to $17.57 more than the original PRIDES.
In connection with the issuance of the Rights, we recorded a non-cash credit
of $41 million to litigation settlement and related costs during the first
quarter of 2000, with a corresponding decrease to additional paid-in capital.
The credit represented an adjustment related to the number of Rights to be
issued, which was decreased by approximately 3 million, as such Rights were
unclaimed and uncontested.
On May 3, 2000, pursuant to the PRIDES settlement, we issued approximately 4
million additional PRIDES (the "Additional PRIDES"), with a face value of $50
per Additional PRIDES, and received approximately $91 million in cash
proceeds related to the issuance of such securities. Only Additional Income
PRIDES (having identical terms to the originally issued Income PRIDES) were
issued, of which 3,619,374 were immediately converted into 3,619,374 New
Income PRIDES and 380,626 remained Additional Income PRIDES. No Additional
Growth PRIDES were issued in the offering. Upon the issuance of the
Additional Income PRIDES, we recorded a reduction to shareholders' equity of
$108 million equal to the value of the total future contract adjustment
payments to be made.
Other Pending Litigation. We 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 our consolidated financial position,
results of operations or cash flows.
17
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
We have sufficient liquidity and access to liquidity through various sources,
including our ability to access public equity, debt markets and financial
institutions. As of December 31, 1999, we had a $750 million term loan
facility with a syndicate of financial institutions and committed back-up
facilities totaling $1.8 billion, which were undrawn and available, with the
exception of $5 million of letters of credit. During August 2000, we replaced
our existing $1.0 billion, 364-day revolving credit facility with a $1.75
billion, three-year competitive advance and revolving credit agreement
maturing on August 29, 2003. On November 13, 2000, we posted letters of
credit of $1.71 billion from this agreement as collateral required under the
Settlement Agreement. In addition, we obtained and posted $790 million of
surety bonds as collateral required under the Settlement Agreement in
November 2000.
Furthermore, we also had $2.55 billion of availability under existing shelf
registration statements at December 31, 1999, which was subsequently reduced
by $400 million in connection with the Liberty Media transaction.
Our long-term debt, including current portion, was $2.8 billion at December
31, 1999 and consisted of (i) approximately $2.1 billion of publicly issued
fixed rate debt comprising $400 million of 7 1/2% senior notes, $1,148
million of 7 3/4% senior notes and $547 million of 3% convertible
subordinated notes and (ii) $750 million of borrowings under a term loan
facility. On January 21, 2000, we redeemed all outstanding 7 1/2% senior
notes at a redemption price of 100.695% of par, plus accrued interest, using
available cash. During March and November of 2000, we made principal payments
totaling $500 million to reduce our outstanding borrowings under our existing
term loan facility.
Our credit facilities contain certain restrictive covenants, including
restrictions on indebtedness of material subsidiaries, mergers, limitations
on liens, liquidations and sale and leaseback transactions, and require the
maintenance of certain financial ratios. Our long-term debt credit ratings
are BBB with Standard & Poor's Corporations ("Standard & Poor's"), Baa1 with
Moody's Investors Service Inc. ("Moody's"), and BBB+ with Fitch IBCA. Our
short-term debt ratings are P2 with Moody's, and F2 with Fitch IBCA. (A
security rating is not a recommendation to buy, sell or hold securities and
is subject to revision or withdrawal at any time.).
FINANCING RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage and relocation services businesses
as a separate public reporting entity and supports the origination of
mortgages and advances under relocation contracts primarily by issuing
commercial paper and medium term notes and maintaining secured obligations.
Such financing is not classified based on contractual maturities, but rather
is included in liabilities under management and mortgage programs as
long-term debt since such debt corresponds directly with high quality related
assets. PHH continues to pursue opportunities to reduce its borrowing
requirements by securitizing some of these high quality assets. PHH maintains
a revolving sales agreement under which an unaffiliated bankruptcy remote
buyer, Bishops Gate Residential Mortgage Trust (the "Buyer"), a special
purpose entity, committed to purchase, at PHH's option, mortgage loans
originated by PHH on a daily basis, up to the Buyer's asset limit of $2.1
billion. Under the terms of this sales agreement, PHH retains the servicing
rights on the mortgage loans sold to the Buyer and arranges for the sale or
securitization of the mortgage loans into the secondary market. The Buyer
retains the right to select alternative sale or securitization arrangements.
At December 31, 1999 and 1998, PHH was servicing approximately $813 million
and $2.0 billion, respectively, of mortgage loans owned by the Buyer. At
September 30, 2000, PHH was servicing approximately $980 million of mortgage
loans owned by the Buyer. During the second and third quarters of 2000, we
entered into three separate financing agreements with Apple Ridge Funding LLC
("Apple Ridge"), a bankruptcy remote, special purpose entity. Under the terms
of these agreements, certain relocation receivables will be transferred for
cash, on a revolving basis, to Apple Ridge until March 31, 2007. PHH retains
a subordinated residual interest and the related servicing rights and
obligations in the relocation receivables. At September 30, 2000, PHH was
servicing approximately $703 million of receivables under these agreements.
18
PHH debt is issued without recourse to the parent company. PHH expects to
continue to maximize its access to global capital markets by maintaining the
quality of its assets under management. This is achieved by maintaining
credit standards to minimize credit risk and the potential for losses. PHH
manages its exposure to interest rate and liquidity risk by matching floating
and fixed interest rate and maturity characteristics of funding to related
assets, varying short and long-term domestic and international funding
sources, and securing available credit under committed banking facilities.
Depending upon asset growth and financial market conditions, PHH utilizes the
United States commercial paper markets, public and private debt markets, as
well as other cost-effective short-term instruments. Augmenting these
sources, PHH will continue to manage outstanding debt with the potential sale
or transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At December 31, 1999, aggregate borrowings
comprised commercial paper, medium-term notes, secured obligations and other
borrowings of $0.6 billion, $1.3 billion, $0.3 billion, and $0.1 billion,
respectively.
In December 1999, PHH renewed its 364-day financing agreement to sell GNMA
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
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, 1999 and 1998 totaled $345 million and
$378 million, respectively.
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, 1999, PHH had approximately $375 million of availability remaining 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. During September 2000, PHH filed a shelf registration
statement registering an additional $2.625 billion of debt securities. Under
this shelf registration, PHH established a new covenant which restricts
dividends to us. The senior indenture dated November 6, 2000 prevents PHH from
paying dividends and/or making intercompany loans to us if after giving effect
to those dividends or intercompany loans, PHH's debt to equity ratio exceeds 6.5
to 1. Furthermore, under the senior indenture, PHH's ratio of debt to tangible
net worth must be maintained at or less than 10 to 1. PHH currently has $3.0
billion available for issuing medium-term notes under its existing shelf
registration statement.
To provide additional financial flexibility, PHH's current policy is to
ensure that committed facilities aggregate 100 percent of the average amount
of outstanding commercial paper. As of December 31, 1999, PHH maintained $2.5
billion of unsecured committed credit facilities, which were provided by
domestic and foreign banks. On February 28, 2000, PHH reduced these
facilities to $1.5 billion to reflect reduced borrowing needs of PHH after
the disposition of its fleet businesses. The facilities consist of a $750
million revolving credit maturing in February 2001, which we intend to renew
at its maturity for another 364 days, and a $750 million revolving credit
maturing in February 2005. 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,
1999 was undrawn and available. Management believes that our current policy
provides adequate protection should volatility in the financial markets limit
PHH's access to commercial paper or medium-term notes funding. PHH
continuously seeks additional sources of liquidity to accommodate PHH asset
growth and to provide further protection from volatility in the financial
markets.
During September and November of 2000, PHH obtained additional lines of
credit of $125 million and $150 million maturing in September 2001 and
November 2001, respectively.
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 revolving credit facilities.
On July 10, 1998, PHH entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with a bank, 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. The final maturity of debt issued under this indenture is March 4,
2002.
19
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 Standard & Poor's affirmed PHH's
long-term and short-term debt ratings at A-/A2. 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.).
MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIDARY
In March 2000, we formed a limited liability corporation ("LLC"), which
issued a mandatorily redeemable preferred interest ("Senior Preferred
Interest") in exchange for $375 million in cash. The Senior Preferred
Interest is mandatorily redeemable 15 years from the date of issuance and may
be redeemed after 5 years, or earlier in certain circumstances. Distributions
on the Senior Preferred Interest are based on the three-month LIBOR plus an
applicable margin (1.77%). Simultaneously with the issuance of the Senior
Preferred Interest, we transferred certain assets to the LLC. After the sale
of the Senior Preferred Interest, we owned 100% of both the common interest
and the junior preferred interest in the LLC. In the event of default,
holders of the Senior Preferred Interest have certain liquidation
preferences.
OTHER INITIATIVES
During the first quarter of 2000, our management, with the appropriate level
of authority, formally committed to various strategic initiatives. As a
result of such initiatives, we incurred restructuring and unusual charges of
$106 million during the first quarter of 2000, of which $20 million was
reclassified as discontinued operations during the third quarter of 2000. The
charges of $106 million included $60 million of restructuring charges and $46
million of unusual charges.
The restructuring initiatives were aimed at improving the overall level of
organizational efficiency, consolidating and rationalizing existing
processes, reducing cost structures in our underlying businesses and other
related efforts. These initiatives primarily affected our travel and
insurance/wholesale segments and our discontinued individual membership
segment. The initiatives are expected to be substantially completed by the
end of the first quarter of 2001. The restructuring charges included (i) $25
million of personnel related costs primarily for severance resulting from the
consolidation of business operations and certain corporate functions, (ii) $26
million of asset impairments primarily related to the planned exit of a
timeshare software development business and (iii) $9 million of facility related
costs for facility closures and lease obligations resulting from the
consolidation and relocation of business operations.
The unusual charges of $46 million included (i) $21 million to fund an
irrevocable contribution to an independent technology trust responsible for
the installation of a properly management system, sponsored by us, (ii) $11
million associated with executive terminations, (iii) $7 million principally
related to the abandonment of certain computer system applications, (iv) $3
million related to stock option contract modifications and (v) $4 million of
other related costs.
We continue to explore ways to increase efficiencies and productivity and to
reduce the cost structures of our respective businesses. Such actions could
include downsizing, consolidating, restructuring or other related efforts,
which we anticipate would be funded through current operations. No assurances
may be given that any plan of action will be undertaken or completed.
CASH FLOWS (1999 VS. 1998)
We generated $3.2 billion of cash flows from operating activities from
continuing operations in 1999 representing a $2.5 billion increase from 1998.
The increase in cash flows from operating activities was primarily due to a
$2.1 billion net reduction in mortgage loans held for sale, which reflects
larger loan sales to the secondary markets in proportion to loan originations
and a decrease in working capital.
Cash flows from investing activities from continuing operations resulted in
an inflow of $1.7 billion in 1999 compared to an outflow of $4.2 billion in
1998 primarily due to a $3.1 billion increase in net proceeds from
20
the sale of subsidiaries, primarily related to the fleet businesses, and a
$2.5 billion decrease in cash used in acquisition-related activity
(acquisitions in 1998 included NCP, Green Flag and Jackson Hewitt).
Additionally, we invested $277 million less cash in management and mortgage
programs primarily due to the disposition of the fleet businesses.
Cash flows from financing activities from continuing operations resulted in
an outflow of $4.8 billion in 1999 compared to an inflow of $4.7 billion in
1998 partially due to a $2.6 billion increase in repurchases of CD common
stock in 1999, a $3.1 billion decrease in proceeds from borrowings in 1999
over 1998 and an increase of $2.7 billion in net cash used in management and
mortgage programs primarily related to repayments of borrowings.
Additionally, we issued the FELINE PRIDES in 1998 for proceeds of
approximately $1.5 billion.
CAPITAL EXPENDITURES
In 1999, $254 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 1999 included the development of integrated business
systems and other investments in information systems within several of our
segments as well as additions to car park properties for NCP.
YEAR 2000
The following disclosure is a Year 2000 readiness disclosure statement
pursuant to the Year 2000 Readiness and Disclosure Act:
In order to minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer systems, applications and software necessary
to achieve Year 2000 compliance. Our computer systems and equipment
successfully transitioned to the Year 2000 with no significant issues. We
continue to keep our Year 2000 project management in place to monitor latent
problems that could surface at key dates or events in the future. We do not
anticipate any significant problems related to these events. The total cost
of our Year 2000 compliance plan was approximately $46 million. We expensed
and capitalized the costs to complete the compliance plan in accordance with
appropriate accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 was previously amended by SFAS No. 137 "Accounting For
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which deferred the effective date of SFAS
No. 133 to fiscal years commencing after June 15, 2000. We appointed a team
to implement these standards on an enterprise-wide basis. We identified
certain contracts, which contain embedded derivatives, and additional
freestanding derivatives as defined by SFAS No. 133. Completion of our
implementation plan and determination of the impact of adopting these
standards is expected by the end of the fourth quarter of 2000. Since the
impact is dependent upon market fluctuations and the notional value of such
contracts at the time of adoption, the impact of adopting these standards is
not fully determinable. However, we currently do not anticipate material
changes to any of our existing hedging strategies as a result of such
adoption. We will adopt SFAS No. 138 concurrently with SFAS No. 133 on
January 1, 2001, as required.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125." SFAS No. 140 revises criteria for
accounting for securitizations, other financial-asset transfers, and
collateral and introduces new disclosures, but otherwise carries forward most
of the provisions of SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" without amendment. We
will adopt SFAS No. 140 on December 31, 2000, as required.
21
In December 1999, the Securities and Exchange Commission ("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. In accordance with SAB No. 101, we will
revise certain revenue recognition policies regarding the recognition of
non-refundable one-time fees and the recognition of pro rata refundable
subscription revenues. We currently recognize non-refundable one-time fees at
the time of contract execution and cash receipt. This policy will be changed
to the recognition of non-refundable one-time fees on a straight line basis
over the life of the underlying contract. We currently recognize revenue
equal to procurement cost upon initiation of a subscription. Additionally, we
currently recognize pro rata refundable subscription revenue, equal to
procurement costs upon initiation of a subscription. Additionally, the amount
in excess of procurement costs is recognized over the subscription period.
This policy will be changed to recognition of the pro rata refundable
subscription revenue on a straight line basis over the subscription period.
Procurement costs will continue to be expensed as incurred. The percentage of
annual revenues earned from non-refundable one-time fees and from refundable
subscription revenues is not material to consolidated net revenues. We will
adopt SAB No. 101 on January 1, 2000, and will record a non-cash charge of
approximately $89 million ($56 million, after tax) to account for the
cumulative effect of the accounting change.
FORWARD LOOKING STATEMENTS
Certain statements in this Exhibit constitute "forward looking statements"
within the meaning of the Private Litigation Reform Act of 1995. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance, or achievements to
be materially different from any future results, performance, or achievements
expressed or implied by such forward looking statements. These forward
looking statements were based on various factors and were derived utilizing
numerous important assumptions and other important factors that could cause
actual results to differ materially from those in the forward looking
statements. Important assumptions and other important factors that could
cause actual results to differ materially from those in the forward looking
statements, include, but are not limited to: the resolution or outcome of the
unresolved pending litigation relating to the previously announced accounting
irregularities and other related litigation; uncertainly as to our future
profitability; our ability to develop and implement operational and financial
systems to manage rapidly growing operations; competition in our existing and
potential future lines of business; our ability to integrate and operate
successfully acquired and merged businesses and the risks associated with
such businesses, including the pending acquisitions of Avis Group Holdings,
Inc. and Fairfield Communities, Inc.; uncertainty relating to the timing and
impact of the pending dispositions of certain businesses within the Move.com
Group and Welcome Wagon International, Inc. and the spin-off of our
individual membership segment and loyalty business; 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 the
effect of changes in current interest rates, particularly in our mortgage and
real estate franchise segments. Other factors and assumptions not identified
above were also involved in the derivation of these forward looking
statements, and the failure of such other assumptions to be realized as well
as other factors may also cause actual results to differ materially from
those projected. 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.
22
EXHIBIT 99.3
INDEX TO RESTATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998
and 1997 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the accompanying consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 1999 and 1998 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of recognizing revenue and
membership solicitation costs for its individual membership business.
As discussed in Notes 1 and 4, the accompanying consolidated financial
statements have been restated to reflect the discontinuance of the Company's
individual membership segment on October 25, 2000 (the "Measurement Date").
The results prior to the Measurement Date are included in income (loss) from
discontinued operations in the accompanying consolidated financial
statements.
/s/ Deloitte & Touche LLP
New York, New York
November 24, 2000
F-2
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- ---------
REVENUES
Service fees, net $4,302 $4,262 $3,396
Fleet leasing (net of depreciation and interest costs of $670,
$1,279 and $1,205) 30 89 60
Other 189 114 97
--------- -------- ---------
Net revenues 4,521 4,465 3,553
--------- -------- ---------
EXPENSES
Operating 1,605 1,652 1,130
Marketing and reservation 596 622 623
General and administrative 537 544 537
Depreciation and amortization 347 303 222
Other charges:
Litigation settlement and related costs 2,894 351 --
Termination of proposed acquisitions 7 433 --
Executive terminations -- 53 --
Investigation-related costs 21 33 --
Merger-related costs and other unusual charges (credits) 25 (67) 701
Investigation-related financing costs -- 35 --
Interest, net 196 112 51
--------- -------- ---------
Total expenses 6,228 4,071 3,264
--------- -------- ---------
Net gain on dispositions of businesses 967 -- --
--------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (740) 394 289
Provision (benefit) for income taxes (468) 135 207
Minority interest, net of tax 61 51 --
--------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (333) 208 82
Discontinued operations:
Income (loss) from discontinued operations, net of tax 104 (73) (42)
Gain on sale of discontinued operations, net of tax 174 405 --
--------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (55) 540 40
Extraordinary gain, net of tax -- -- 26
--------- -------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (55) 540 66
Cumulative effect of accounting change, net of tax -- -- (283)
--------- -------- ---------
NET INCOME (LOSS) $ (55) $ 540 $ (217)
========= ======== =========
INCOME (LOSS) PER SHARE
BASIC
Income (loss) from continuing operations $(0.44) $ 0.25 $ 0.10
Income (loss) from discontinued operations 0.14 (0.09) (0.05)
Gain on sale of discontinued operations 0.23 0.48 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
--------- -------- ---------
NET INCOME (LOSS) $(0.07) $ 0.64 $(0.27)
========= ======== =========
DILUTED
Income (loss) from continuing operations $(0.44) $ 0.24 $ 0.10
Income (loss) from discontinued operations 0.14 (0.09) (0.05)
Gain on sale of discontinued operations 0.23 0.46 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
--------- -------- ---------
NET INCOME (LOSS) $(0.07) $ 0.61 $(0.27)
========= ======== =========
See Notes to Consolidated Financial Statements.
F-3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1999 1998
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 1,168 $ 1,002
Receivables (net of allowance for doubtful accounts of $68 and $99) 991 1,485
Deferred income taxes 1,305 319
Other current assets 771 854
Net assets of discontinued operations -- 374
--------- ---------
Total current assets 4,235 4,034
--------- ---------
Property and equipment (net of accumulated depreciation of $325 and
$426) 1,279 1,378
Franchise agreements (net of accumulated amortization of $216 and $169) 1,410 1,363
Goodwill (net of accumulated amortization of $286 and $230) 3,106 3,744
Other intangibles (net of accumulated amortization of $113 and $91) 655 742
Other assets 1,120 648
--------- ---------
Total assets exclusive of assets under programs 11,805 11,909
--------- ---------
Assets under management and mortgage programs
Relocation receivables 530 659
Mortgage loans held for sale 1,112 2,416
Mortgage servicing rights 1,084 636
Net investment in leases and leased vehicles -- 3,801
--------- ---------
2,726 7,512
--------- ---------
TOTAL ASSETS $14,531 $19,421
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,152 $ 1,369
Current portion of debt 400 --
Shareholder litigation settlement and related costs 2,892 --
Deferred income 228 368
Net liabilities of discontinued operations 241 318
--------- ---------
Total current liabilities 4,913 2,055
--------- ---------
Deferred income 413 222
Long-term debt 2,445 3,363
Other noncurrent liabilities 452 235
--------- ---------
Total liabilities exclusive of liabilities under programs 8,223 5,875
--------- ---------
Liabilities under management and mortgage programs
Debt 2,314 6,897
Deferred income taxes 310 341
--------- ---------
2,624 7,238
--------- ---------
Mandatorily redeemable preferred securities issued by subsidiary
holding solely senior debentures issued by the Company 1,478 1,472
--------- ---------
Commitments and contingencies (Note 17)
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
870,399,635 and 860,551,783 shares 9 9
Additional paid-in capital 4,102 3,863
Retained earnings 1,425 1,480
Accumulated other comprehensive loss (42) (49)
Treasury stock, at cost, 163,818,148 and 27,270,708 shares (3,288) (467)
--------- ---------
Total shareholders' equity 2,206 4,836
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,531 $19,421
========= =========
See Notes to Consolidated Financial Statements.
F-4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ (55) $ 540 $ (217)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities from continuing operations:
(Income) loss from discontinued operations, net of tax (104) 73 42
Gain on sale of discontinued operations, net of tax (174) (405) --
Extraordinary gain, net of tax -- -- (26)
Cumulative effect of accounting change, net of tax -- -- 283
Asset impairments and termination benefits -- 63 --
Net gain on dispositions of businesses (967) -- --
Litigation settlement and related costs 2,894 351 --
Merger-related costs and other unusual charges (credits) 25 (67) 701
Payments of merger-related costs and other unusual charges (49) (149) (301)
Depreciation and amortization 347 303 222
Proceeds from sales of trading securities 180 136 --
Purchases of trading securities (147) (182) --
Deferred income taxes 289 (254) (35)
Net change in assets and liabilities from continuing
operations:
Receivables (184) (129) (99)
Deferred membership commission costs -- (87) --
Income taxes receivable (133) (98) (84)
Accounts payable and other current liabilities (478) 111 78
Deferred income 39 5 (347)
Other, net (312) 16 (153)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,171 227 64
---------- ---------- ----------
Management and mortgage programs:
Depreciation and amortization 698 1,260 1,122
Origination of mortgage loans (25,025) (26,572) (12,217)
Proceeds on sale and payments from mortgage loans
held for sale 26,328 25,792 11,829
---------- ---------- ----------
2,001 480 734
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS 3,172 707 798
---------- ---------- ----------
INVESTING ACTIVITIES
Property and equipment additions (254) (331) (153)
Proceeds from sales of marketable securities 741 -- 506
Purchases of marketable securities (672) -- (458)
Investments (18) (24) (273)
Net assets acquired (net of cash acquired) and
acquisition-related payments (205) (2,731) (567)
Net proceeds from dispositions of businesses 3,365 314 224
Other, net 53 113 (109)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS 3,010 (2,659) (830)
---------- ---------- ----------
F-5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Management and mortgage programs:
Investment in leases and leased vehicles $(2,378) $(2,447) $(2,069)
Payments received on investment in leases and leased
vehicles 1,529 987 589
Proceeds from sales and transfers of leases and leased
vehicles to third parties 75 183 186
Equity advances on homes under management (7,608) (6,484) (6,845)
Repayment on advances on homes under management 7,688 6,624 6,863
Additions to mortgage servicing rights (727) (524) (270)
Proceeds from sales of mortgage servicing rights 156 119 49
---------- ---------- ----------
(1,265) (1,542) (1,497)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
FROM CONTINUING OPERATIONS 1,745 (4,201) (2,327)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings 1,719 4,809 67
Principal payments on borrowings (2,213) (2,596) (174)
Issuance of convertible debt -- -- 544
Issuance of common stock 127 171 132
Repurchases of common stock (2,863) (258) (171)
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary holding solely senior
debentures issued by the Company -- 1,447 --
Other, net -- -- (7)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
FROM CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS (3,230) 3,573 391
---------- ---------- ----------
Management and mortgage programs:
Proceeds received for debt repayment in connection
with disposal of fleet segment 3,017 -- --
Proceeds from debt issuance or borrowings 5,263 4,300 2,816
Principal payments on borrowings (7,838) (3,090) (1,693)
Net change in short-term borrowings (2,000) (93) (613)
---------- ---------- ----------
(1,558) 1,117 510
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
FROM CONTINUING OPERATIONS (4,788) 4,690 901
---------- ---------- ----------
Effect of changes in exchange rates on cash and cash
equivalents 51 (16) 15
---------- ---------- ----------
Net cash provided by (used in) discontinued operations (14) (266) 563
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 166 914 (50)
Cash and cash equivalents, beginning of period 1,002 88 138
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,168 $ 1,002 $ 88
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 447 $ 540 $ 375
========== ========== ==========
Income tax payments (refunds), net $ (46) $ (23) $ 265
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON STOCK
------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT JANUARY 1, 1997 808 $ 8 $2,843 $1,186 $ (6) $ (75) $3,956
COMPREHENSIVE LOSS:
Net loss -- -- -- (217) -- --
Currency translation adjustment -- -- -- -- (28) --
Unrealized loss on marketable
securities,
net of tax of $2 -- -- -- -- (4) --
TOTAL COMPREHENSIVE LOSS (249)
Issuance of common stock 6 -- 46 -- -- -- 46
Exercise of stock options 11 -- 133 -- -- (18) 115
Tax benefit from exercise of
stock options -- -- 94 -- -- -- 94
Amortization of restricted stock -- -- 28 -- -- -- 28
Cash dividends declared -- -- -- (7) -- -- (7)
Adjustment to reflect change in
fiscal year from Cendant Merger -- -- -- (22) -- -- (22)
Conversion of convertible notes 20 -- 151 -- -- -- 151
Repurchase of common stock -- -- -- -- -- (171) (171)
Retirement of treasury stock (7) -- (190) -- -- 190 --
Other -- -- (20) -- -- -- (20)
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1997 838 8 3,085 940 (38) (74) 3,921
COMPREHENSIVE INCOME:
Net income -- -- -- 540 -- --
Currency translation adjustment -- -- -- -- (11) --
TOTAL COMPREHENSIVE INCOME 529
Exercise of stock options 17 1 168 -- -- -- 169
Tax benefit from exercise of
stock options -- -- 147 -- -- -- 147
Conversion of convertible notes 6 -- 114 -- -- -- 114
Repurchase of common stock -- -- -- -- -- (258) (258)
Mandatorily redeemable
preferred securities
issued by subsidiary
holding solely senior
debentures issued by the
Company -- -- (66) -- -- -- (66)
Common stock received as
consideration in sale of
discontinued operations -- -- -- -- -- (135) (135)
Rights issuable -- -- 350 -- -- -- 350
Other -- -- 65 -- -- -- 65
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $(49) $(467) $4,836
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 DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $(49) $ (467) $ 4,836
COMPREHENSIVE LOSS:
Net loss -- -- -- (55) -- --
Currency translation
adjustment -- -- -- -- (69) --
Unrealized gain on
marketable securities,
net of tax of $22 -- -- -- -- 37 --
Reclassification
adjustments, net of tax of
$13 -- -- -- -- 39 --
TOTAL COMPREHENSIVE LOSS (48)
Exercise of stock options 9 -- 81 -- -- 42 123
Tax benefit from exercise of
stock options -- -- 52 -- -- -- 52
Repurchase of common stock -- -- -- -- -- (2,863) (2,863)
Modifications of stock option
plans due to dispositions of
businesses -- -- 83 -- -- -- 83
Rights issuable -- -- 22 -- -- -- 22
Other -- -- 1 -- -- -- 1
-------- -------- ------------ ---------- --------------- ---------- ---------------
BALANCE AT DECEMBER 31, 1999 870 $ 9 $4,102 $1,425 $(42) $(3,288) $ 2,206
======== ======== ============ ========== =============== ========== ===============
See Notes to Consolidated Financial Statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cendant Corporation is a global provider of a wide range of complementary
consumer and business services. The Consolidated Financial Statements
include the accounts of Cendant Corporation and its wholly-owned
subsidiaries (collectively, "the Company" or "Cendant"). In presenting the
Consolidated Financial Statements, management makes estimates and
assumptions that affect reported amounts and related disclosures.
Estimates, by their nature, are based on judgement and available
information. As such, actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation. Unless otherwise noted, all dollar
amounts presented are in millions, except per share amounts.
On October 25, 2000, the Company's Board of Directors committed to a plan
to complete a tax-free spin-off of the Company's individual membership
segment (consisting of Cendant Membership Services, Inc. ("CMS"), a
wholly-owned subsidiary) and loyalty business (consisting of Cendant
Incentives, formerly National Card Control Inc., a wholly-owned subsidiary
within the insurance/ wholesale segment) through a special dividend to CD
common stockholders. In connection with the planned spin-off, the account
balances and activities of the Company's individual membership segment
were segregated and reported as a discontinued operation for all periods
presented (see Note 4 -- Discontinued Operations).
INVESTMENTS IN AFFILIATES
Investments in affiliates over which the Company has significant influence
but not a controlling interest are carried on the equity basis of
accounting.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Property and equipment is depreciated based upon a straight-line method
over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed utilizing the straight-line method over
the estimated useful lives of the related assets or the lease term, if
shorter.
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are amortized on a straight-line basis over
the estimated periods to be benefited, ranging from 12 to 40 years.
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
periods to be benefited, substantially ranging from 25 to 40 years.
Other intangibles are amortized on a straight-line method over the
estimated periods to be benefited.
ASSET IMPAIRMENT
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 during 1998, the Company
determined that $37 million of goodwill associated
F-9
with a Company subsidiary, National Library of Poetry, was permanently
impaired. In addition, the Company had equity investments in various
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 million of such investments in 1998. The
aforementioned impairments impacted the Company's diversified 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. Annual rebates given to
certain franchisees on royalty fees are recorded as a reduction to
revenues and are accrued in direct proportion to the recognition of the
underlying gross franchise revenue. Franchise revenue also includes
initial franchise fees, which are recognized as revenue when all material
services or conditions relating to the sale have been substantially
performed, which is generally when a franchised unit is opened.
Timeshare. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscribing members.
Subscription revenue represents the fees from subscribing members. There
is no separate fee charged for the participation in the timeshare exchange
network. 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 million for each of the years ended
December 31, 1999 and 1998 and $27 million for the year ended December 31,
1997.
Insurance/Wholesale. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a share of the excess
of premiums paid to insurance carriers less claims experience to date,
claims incurred but not reported and carrier management expenses. Such
profit commissions are accrued based on claims experience to date,
including an estimate of claims incurred but not reported.
During 1999, the Company changed the amortization period for customer
acquisition costs related to accidental death and dismemberment insurance
products, which resulted in a reduction in expenses of $16 million ($10
million, after tax or $0.01 per diluted share). The change was based upon
new information becoming available to determine customer retention rates.
Relocation. 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 the home based on their ownership equity of the
appraised home value. The mortgage is generally retired concurrently with
the advance of the equity and the purchase of the home. Based on its
client agreements, the Company is given parameters under which it
negotiates for 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. 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 generally advances funds to cover a
portion of such carrying costs.
Revenues and related costs associated with the purchase and resale of a
transferee's residence are recognized as services are provided. Relocation
services revenue is generally recorded net of costs
F-10
reimbursed by client corporations and interest expense incurred to fund
the purchase of a transferee's residence. Revenue for other fee-based
programs, such as home marketing assistance, household goods moves, and
destination services are recognized over the periods in which the services
are provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection with
the sale of loans, and certain direct loan origination costs associated
with loans are deferred until such loans are sold. Mortgage loans are
recorded at the lower of cost or market value on an aggregate basis. Sales
of mortgage loans are generally recorded on the date a loan is delivered
to an investor. Gains or losses on sales of mortgage loans are recognized
based upon the difference between the selling price and the carrying value
of the related mortgage loans sold. See Note 9 -- Mortgage Loans Held For
Sale.
Fees received for servicing loans owned by investors are credited to
income when earned. Costs associated with loan servicing are charged to
expense as incurred.
Mortgage servicing rights ("MSRs") are amortized over the estimated life
of the related loan portfolio in proportion to projected net servicing
revenues. Such amortization is recorded as a reduction of net servicing
revenue in the Consolidated Statements of Operations. The Company
estimates future prepayment rates based on current interest rate levels,
other economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification, and recent prepayment experience. Gains or losses on
the sale of MSRs are recognized when title and all risks and rewards have
irrevocably passed to the buyer and there are no significant unresolved
contingencies. See Note 10 -- Mortgage Servicing Rights.
Fleet. The Company primarily leased its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). Each lease was either
classified as an operating lease or a direct financing lease, as defined.
Lease revenues were recognized based on rentals. Revenues from fleet
management services other than leasing were recognized over the period in
which services were provided and the related expenses were incurred. See
Note 3 -- Dispositions and Acquisitions of Businesses.
ADVERTISING EXPENSES
Advertising costs are generally expensed in the period incurred.
Advertising expenses for the years ended December 31, 1999, 1998 and 1997
were $175 million, $151 million and $167 million, respectively.
CHANGE IN ACCOUNTING POLICY
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).
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 policy effective January 1, 1997 and accordingly, recorded a
non-cash charge of $450 million ($283 million, after tax) on such date to
account for the cumulative effect of the accounting change, which related
primarily to its discontinued membership business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial
F-11
Accounting Standards ("SFAS") No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 was previously amended by SFAS No. 137 " Accounting For Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date of SFAS No. 133
to fiscal years commencing after June 15, 2000. The Company has appointed
a team to implement these standards on an enterprise-wide basis. The
Company has identified certain contracts, which contain embedded
derivatives, and additional freestanding derivatives as defined by SFAS
No. 133. Completion of the Company's implementation plan and determination
of the impact of adopting these standards is expected by the end of the
fourth quarter of 2000. Since the impact is dependent upon market
fluctuations and the notional value of such contracts at the time of
adoption, the impact of adopting these standards is not fully
determinable. However, the Company currently does not anticipate material
changes to any of its existing hedging strategies as a result of such
adoption. The Company will adopt SFAS No. 138 concurrently with SFAS No.
133 on January 1, 2001, as required.
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125." SFAS No. 140 revises criteria for
accounting for securitizations, other financial-asset transfers, and
collateral and introduces new disclosures, but otherwise carries forward
most of the provisions of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" without
amendment. The Company will adopt SFAS No. 140 on December 31, 2000, as
required.
In December 1999, the Securities and Exchange Commission ("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. In accordance with SAB No.
101, the Company will revise certain revenue recognition policies
regarding the recognition of non-refundable one-time fees and the
recognition of pro rata refundable subscription revenues. The Company
currently recognizes non-refundable one-time fees at the time of contract
execution and cash receipt. This policy will be changed to the recognition
of non-refundable one-time fees on a straight line basis over the life of
the underlying contract. The Company currently recognizes revenue equal to
procurement cost upon initiation of a subscription. Additionally, the
Company currently recognizes pro rata refundable subscription revenue,
equal to procurement costs upon initiation of a subscription.
Additionally, the amount in excess of procurement costs is recognized over
the subscription period. This policy will be changed to recognition of the
pro rata refundable subscription revenue on a straight line basis over the
subscription period. Procurement costs will continue to be expensed as
incurred. The percentage of annual revenues earned from non-refundable
one-time fees and from refundable subscription revenues is not material to
consolidated net revenues. The Company will adopt SAB No. 101 on January
1, 2000, and will record a non-cash charge of approximately $89 million
($56 million, after tax) to account for the cumulative effect of the
accounting change.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
further reflects all potential dilution of common stock, including the
assumed exercise of stock options and warrants using the treasury method,
and convertible debt. At December 31, 1999, 183 million stock options
(with a weighted average exercise price of $15.24 per option) and 2
million stock warrants (with a weighted average exercise price of $16.77
per warrant) were outstanding and antidilutive. At December 31, 1998 and
1997, 38 million stock options (with a weighted average exercise price of
$29.58 per option) and 54 million stock options (with a weighted average
exercise price of $31.16 per option), respectively, were outstanding and
antidilutive. Therefore, such options and warrants were excluded from the
computation of diluted EPS. In addition, the Company's 3% convertible
subordinated notes
F-12
convertible into 18 million shares of Company common stock were
antidultive; therefore, such notes were excluded from the computation of
diluted EPS at December 31, 1999, 1998 and 1997. Diluted weighted average
shares were calculated as follows:
YEAR ENDED DECEMBER 31,
-------------------------
(IN MILLIONS) 1999 1998 1997
------ ------ ------
Weighted average shares for basic EPS 751 848 811
Stock options -- 32 41
------ ------ ------
Weighted average shares for diluted EPS 751 880 852
====== ====== ======
3. DISPOSITIONS AND ACQUISITIONS OF BUSINESSES
DISPOSITIONS
Entertainment Publications, Inc. On November 30, 1999, the Company
completed the sale of approximately 85% of its Entertainment Publications,
Inc. ("EPub") business unit for $281 million in cash. The Company retained
approximately 15% of EPub's common equity in connection with the
transaction. In addition, the Company has a designee on EPub's Board of
Directors. The Company accounts for its investment in EPub using the
equity method. The Company realized a net gain of approximately $156
million ($78 million, after tax). 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.
Green Flag. On November 26, 1999, the Company completed the sale of its
Green Flag business unit for approximately $401 million in cash, including
dividends of $37 million. The Company realized a net gain of approximately
$27 million ($8 million, after tax). Green Flag is a roadside assistance
organization based in the UK, which provides a wide range of emergency
support and rescue services.
Fleet. On June 30, 1999, the Company completed the disposition of the
fleet business segment ("fleet segment" or "fleet businesses") pursuant to
an agreement between PHH Corporation ("PHH"), a wholly-owned subsidiary of
the Company, and Avis Rent A Car, Inc. ("ARAC," subsequently renamed Avis
Group Holdings, Inc.) Pursuant to the agreement, ARAC acquired the 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 ("Avis Fleet"), a wholly-owned subsidiary of ARAC.
Coincident with the closing of the transaction, ARAC refinanced the
assumed debt under management programs which was payable to the Company.
Accordingly, the Company received additional consideration from ARAC
comprised of $3.0 billion of cash proceeds and a $30 million receivable.
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, income 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.
The Company realized a net gain on the disposition of the fleet business
segment of $881 million ($866 million, after tax) of which $715 million
($702 million, after tax) was recognized at the time of closing and $166
million ($164 million, after tax) was deferred at the date of disposition.
The realized gain is net of approximately $90 million of transaction
costs. The Company deferred the portion of the realized net gain, which
was equivalent to its common equity ownership percentage in ARAC at the
time of closing. The deferred gain is being recognized into income over
forty years, which is consistent with the period ARAC is amortizing the
goodwill generated from the transaction and is included within other
revenue in the Consolidated Statements of Operations ($2 million in 1999).
During 1999, the Company recognized $9 million of the deferred portion of
the realized net gain due to the sale of a portion of the Company's
ownership of ARAC. The deferred net gain is included in deferred income as
presented in the Consolidated Balance Sheet at December 31, 1999. The
fleet segment disposition
F-13
was structured as a tax-free reorganization and, accordingly, no tax
provision has been recorded on a majority of the gain. However, pursuant
to a recent interpretive ruling, the Internal Revenue Service ("IRS") has
taken the position that similarly structured transactions do not qualify
as tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between
$10 million and $170 million depending upon certain factors including
utilization of tax attributes and contractual indemnification provisions.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
Other 1999 Dispositions. The Company completed the dispositions of certain
businesses, including Central Credit, Inc., Global Refund Group, Spark
Services, Inc., National Leisure Group and National Library of Poetry.
Aggregate consideration received on such dispositions was comprised of
approximately $265 million in cash, including dividends of $21 million in
marketable securities. The Company realized a net gain of $60 million ($5
million loss, after tax) on the dispositions of these businesses.
Interval International Inc. On December 17, 1997, as directed by the
Federal Trade Commission in connection with a merger, the Company sold all
of the outstanding shares of its timeshare exchange businesses, Interval
International Inc., for net proceeds of $240 million less transaction
related costs amortized as services were provided. The Company recognized
a gain on the sale of Interval of $77 million ($26 million, after tax),
which was reflected as an extraordinary gain in the Consolidated
Statements of Operations.
ACQUISITIONS
During 1998, the Company completed the acquisitions of National Parking
Corporation Limited ("NPC"), The Harpur Group Ltd. ("Harpur"), Jackson
Hewitt Inc. ("Jackson Hewitt") and certain other entities, which were
accounted for using the purchase method of accounting. Accordingly, assets
acquired and liabilities assumed were recorded at their fair values. The
excess of purchase price over the fair value of the underlying net assets
acquired was allocated to goodwill. During 1999 and 1998, the Company
recorded additional goodwill of $50 million and $100 million,
respectively, in satisfaction of a contingent purchase liability to the
seller of Resort Condominiums International, Inc., a company acquired in
1996. The operating results of such acquired entities are included in the
Company's Consolidated Statements of Operations since the respective dates
of acquisition. The following table presents information about the
acquisitions.
JACKSON
NPC HARPUR HEWITT OTHER
-------- -------- --------- ---------
Cash paid $1,638 $206 $476 $564
Fair value of identifiable net assets
acquired (1) 590 51 99 218
-------- -------- --------- ---------
Goodwill $1,048 $155 $377 $346
======== ======== ========= =========
Goodwill benefit period (years) 40 40 40 25 to 40
======== ======== ========= =========
(1) Cash acquired in connection with these acquisitions was $58 million.
4. DISCONTINUED OPERATIONS
On October 25, 2000, the Company's Board of Directors committed to a plan
to complete a tax-free spin-off of the Company's individual membership
segment and loyalty business through a special dividend to CD common
stockholders. The final transaction is expected to be completed by
mid-2001. See Note 1 -- Summary of Significant Accounting Policies.
On January 12, 1999, the Company completed the sale of Cendant Software
Corporation ("CDS"), a developer, publisher and distributor of educational
and entertainment software, for net cash proceeds of $770 million. The
Company realized a net gain of $323 million ($372 million, after tax)
F-14
on the disposition of CDS, of which $299 million ($174 million, after
tax) was recognized during 1999 and $24 million ($198 million, after tax)
was recognized during 1998, substantially in the form of a tax benefit and
corresponding deferred tax asset.
On December 15, 1998, the Company completed the sale of Hebdo Mag
International, Inc. ("Hebdo Mag"), a publisher and distributor of
classified advertising information. The Company received $315 million in
cash and 7 million shares of Company common stock valued at $135 million
(approximately $19 per share market value) on the date of sale. The
Company recognized a net gain of $155 million ($207 million, after tax) on
the sale of Hebdo Mag partially in the form of a tax benefit.
Summarized financial data of discontinued operations for the years ended
December 31, consisted of:
STATEMENT OF OPERATIONS DATA:
CMS CDS HEBDO MAG
--------------------------------------- --------------
1999 1998 1997 1998 1997 1998 1997
------ ------- ------- ------- ------ ------ ------
Net revenues $895 $836 $702 $346 $434 $202 $209
------ ------- ------- ------- ------ ------ ------
Income (loss) before income taxes $166 $(79) $(32) $(57) $ (6) $ 17 $ (4)
Provision (benefit) for income taxes 62 (31) (16) (23) 2 8 (1)
Extraordinary loss from early
extinguishment of debt, net of $5
million tax benefit -- -- -- -- -- -- (15)
------ ------- ------- ------- ------ ------ ------
Net income (loss) $104 $(48) $(16) $(34) $ (8) $ 9 $(18)
====== ======= ======= ======= ====== ====== ======
BALANCE SHEET DATA:
CMS CDS
---------------------------- ---------
1999 1998 1998
---- ---- ----
Current assets $ 357 $ 513 $ 285
Goodwill 164 179 106
Other assets 96 103 88
Total liabilities (858) (1,113) (105)
----- ------- -----
Net assets (liabilities) of
discontinued operations $(241) $ (318) $ 374
===== ======= =====
5. OTHER CHARGES
LITIGATION SETTLEMENTS
Common Stock Litigation Settlement. On December 7, 1999, the Company
reached a preliminary agreement to settle the principal securities class
action pending against the Company, other than certain claims relating to
FELINE PRIDES securities discussed below. This settlement is subject to
final documentation and court approval. See Note 17 -- Commitments and
Contingencies.
FELINE PRIDES Litigation Settlement. On March 17, 1999, the Company
reached a final agreement (the "FELINE PRIDES settlement") 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. See Note 13 -- Mandatorily
Redeemable Trust Preferred Securities Issued by Subsidiary Holding Solely
Senior Debentures Issued by the Company.
TERMINATION OF PROPOSED ACQUISITIONS
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 not to be commercially feasible and therefore
unacceptable. In connection with such termination, the Company wrote off
$7 million of deferred acquisition costs.
F-15
On October 13, 1998, the Company and American Bankers Insurance Group,
Inc. ("American Bankers") terminated an agreement which provided for the
Company's acquisition of American Bankers. In connection with this
agreement, the Company made a $400 million cash payment to American
Bankers and wrote off $32 million of costs, primarily professional fees,
resulting in a total charge of $432 million.
On October 5, 1998, the Company announced the termination of an agreement
to acquire Providian Auto and Home Insurance Company. In connection with
the termination of this agreement, the Company wrote off $1 million of
costs.
EXECUTIVE TERMINATIONS
The Company incurred $53 million of costs on July 28, 1998 related to the
termination of certain former executives, principally Walter A. Forbes,
who resigned as Chairman and as a member of the Board of Directors.
Aggregate benefits given to Mr. Forbes resulted in a charge of $51
million, comprised of $38 million in cash payments and approximately one
million Company stock options, with a fair value of $13 million, as
calculated by the Black-Scholes model. 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 governance
issues that existed at the time between the members of the Board of
Directors formerly associated with CUC International, Inc. ("CUC") and the
members of the Board of Directors formerly associated with HFS
Incorporated ("HFS").
INVESTIGATION-RELATED COSTS
The Company incurred professional fees, public relations costs and other
miscellaneous expenses of $21 million and $33 million during 1999 and
1998, respectively, in connection with accounting irregularities and
resulting investigations into such matters.
INVESTIGATION-RELATED 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 $28 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"). 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 resulting in the Company redeeming such
notes at a premium. Accordingly, the Company recorded a $7 million loss on
such redemption.
1999 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
During 1999, the Company incurred $23 million of additional charges to
fund an irrevocable contribution to the independent technology trust
responsible for completing the transition of the Company's lodging
franchisees to a Company sponsored property management system and $2
million of costs primarily resulting from further consolidation of
European call centers in Cork, Ireland which are included below as a
component of the 1999 adjustment activity for the Fourth Quarter 1997
Charge.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
Fourth Quarter 1997 Charge. The Company incurred unusual charges ("Unusual
Charges") in the fourth quarter of 1997 totaling $455 million
substantially associated with the merger of HFS and CUC (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. 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 as follows:
F-16
1999 ACTIVITY
1997 BALANCE AT ----------------------- BALANCE AT
UNUSUAL 1997 1998 1998 DECEMBER 31, CASH DECEMBER 31,
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS 1998 PAYMENTS ADJUSTMENTS 1999
--------- ------------------------ --------------------------- ----------------------- --------------
Professional fees $ 93 $ (43) $ (38) $(10) $ 2 $(1) $-- $ 1
Personnel related 171 (45) (61) (4) 61 (5) 3 59
Business terminations 78 (78) 1 (1) -- -- -- --
Facility related and
other 113 (92) (5) (12) 4 (2) (1) 1
--------- ------------------------ --------------------------- ----------------------- --------------
Total Unusual Charges 455 (258) (103) (27) 67 (8) 2 61
Reclassification for
discontinued
operations (21) 21 -- -- -- -- -- --
--------- ------------------------ --------------------------- ----------------------- --------------
Total Unusual Charges
related to
continuing
operations $434 $(237) $(103) $(27) $67 $(8) $ 2 $61
========= ======================== =========================== ======================= ==============
Professional fees primarily consisted of investment banking, legal and
accounting fees incurred in connection with the mergers. Personnel related
costs included $73 million of retirement and employee benefit plan costs,
$24 million of restricted stock compensation, $61 million of severance
resulting from consolidations of European call centers and certain
corporate functions and $13 million of other personnel related costs. The
Company provided for 474 employees to be terminated, substantially all of
which have been severed. Business termination costs consisted of a $48
million impairment write-down of hotel franchise agreement assets
associated with a quality upgrade program and $30 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 included $70 million of irrevocable
contributions to independent technology trusts for the direct benefit of
lodging and real estate franchisees, $16 million of building lease
termination costs, and a $22 million reduction in intangible assets
associated with the Company's wholesale annuity business for which
impairment was determined in 1997. During 1999 and 1998, the Company
recorded a net adjustment of $2 million and ($27) million, respectively,
to Unusual Charges with a corresponding increase (decrease) 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 $61 million remained at December
31, 1999, 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 related contingencies.
Second Quarter 1997 Charge. The Company incurred $295 million of Unusual
Charges in the second quarter of 1997 primarily associated with the merger
of HFS with PHH in April 1997 (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 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
headquarter 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. The reduction of liabilities from inception is summarized by
category of expenditure as follows:
F-17
1999 ACTIVITY
1997 BALANCE AT --------------- BALANCE AT
UNUSUAL 1997 1998 1998 DECEMBER 31, CASH DECEMBER 31,
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS 1998 PAYMENTS 1999
--------- ------------ ------------ ------------- -------------- --------------- --------------
Professional fees $ 30 $ (29) $ -- $ (1) $-- $-- $--
Personnel related 154 (112) (13) (19) 10 (2) 8
Business terminations 56 (52) 3 (6) 1 (1) --
Facility related and
other 43 (14) (10) (14) 5 (2) 3
--------- ------------ ------------ ------------- -------------- --------------- --------------
Total Unusual Charges 283 (207) (20) (40) 16 (5) 11
Reclassification for
discontinued
operations (16) 16 -- -- -- -- --
--------- ------------ ------------ ------------- -------------- --------------- --------------
Total Unusual Charges
related to
continuing
operations $267 $(191) $(20) $(40) $16 $(5) $11
========= ============ ============ ============= ============== =============== ==============
Professional fees were primarily comprised of investment banking,
accounting, and legal fees incurred in connection with the PHH Merger.
Personnel related costs were 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. Business terminations were
comprised of $39 million of costs to exit certain activities primarily
within the Company's fleet management business (including $36 million of
asset write-offs associated with exiting certain activities), a $7 million
termination fee associated with a joint venture that competed with the PHH
Mortgage Services business (now Cendant Mortgage Corporation) and $10
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 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 second quarter
1997 restructuring activities at December 31, 1998. During the year ended
December 31, 1998, the Company recorded a net adjustment of $40 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 $11 million remained at December 31, 1999,
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.
6. PROPERTY AND EQUIPMENT -- NET
Property and equipment -net consisted of:
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------
IN YEARS 1999 1998
-------------- -------- --------
Land -- $ 145 $ 153
Building and leasehold improvements 5-50 674 721
Furniture, fixtures and equipment 3-10 785 930
-------- -------
1,604 1,804
Less accumulated depreciation and amortization 325 426
-------- -------
$1,279 $1,378
======== =======
F-18
7. OTHER INTANGIBLES -- NET
Other intangibles -net consisted of:
ESTIMATED DECEMBER 31,
BENEFIT PERIODS --------------
IN YEARS 1999 1998
--------------- ------ ------
Avis trademark 40 $402 $402
Other trademarks 40 161 171
Customer lists 3 -10 140 153
Other 3 -25 65 107
------ ------
768 833
Less accumulated amortization 113 91
------ ------
$655 $742
====== ======
8. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
DECEMBER 31,
-----------------
1999 1998
-------- -------
Accounts payable $ 314 $ 445
Merger and acquisition obligations 93 109
Accrued payroll and related 228 178
Advances from relocation clients 80 60
Other 437 577
-------- -------
$1,152 $1,369
======== =======
9. 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. At December 31, 1999 and 1998, mortgage loans
sold with recourse amounted to approximately $52 million and $58 million,
respectively. The Company believes adequate allowances are maintained to
cover any potential losses.
The Company has a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust, a special purpose entity
(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 $2.1 billion. Under the terms of this sale agreement, the Company
retains the servicing rights on the mortgage loans sold to the Buyer and
arranges for the sale or securitization of the mortgage loans into the
secondary market. The Buyer retains the right to select alternative sale
or securitization arrangements. At December 31, 1999 and 1998, the Company
was servicing approximately $813 million and $2.0 billion, respectively,
of mortgage loans owned by the Buyer.
F-19
10. MORTGAGE SERVICING RIGHTS
Capitalized MSRs consisted of:
MSRS ALLOWANCE TOTAL
-------- ----------- -------
BALANCE, JANUARY 1, 1997 $ 290 $(1) $ 289
Additions to MSRs 252 -- 252
Amortization (96) -- (96)
Write-down/provision -- (4) (4)
Sales (33) -- (33)
Deferred hedge, net 19 -- 19
Reclassification of mortgage-related securities (54) -- (54)
-------- ----------- -------
BALANCE, DECEMBER 31, 1997 378 (5) 373
Additions to MSRs 475 -- 475
Additions to hedge 49 -- 49
Amortization (82) -- (82)
Write-down/recovery -- 5 5
Sales (99) -- (99)
Deferred hedge, net (85) -- (85)
-------- ----------- -------
BALANCE, DECEMBER 31, 1998 636 -- 636
Additions to MSRs 698 (5) 693
Additions to hedge 23 -- 23
Amortization (118) -- (118)
Write-down/recovery -- 5 5
Sales (161) -- (161)
Deferred hedge, net 6 -- 6
-------- ----------- -------
BALANCE, DECEMBER 31, 1999 $1,084 $-- $1,084
======== =========== =======
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. The Company uses 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 derivative
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
reflected in the Consolidated Statement of Operations 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 revenue. Temporary impairment is recorded through
a valuation allowance in the period of occurrence.
F-20
11. LONG-TERM DEBT
Long-term debt consisted of:
DECEMBER 31,
------------------
1999 1998
-------- --------
Term Loan Facilities $ 750 $1,250
7 1/2% Senior Notes 400 400
7 3/4% Senior Notes 1,148 1,148
3% Convertible Subordinated Notes 547 545
Other -- 20
-------- --------
2,845 3,363
Less current portion 400 --
-------- --------
$2,445 $3,363
======== ========
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
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 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
two year term loan facility (the "New Facility") which provided for
borrowings of $1.25 billion with a syndicate of financial institutions.
The Company used $1.25 billion of the proceeds from the New Facility to
refinance the outstanding borrowings under the Term Loan Facility. At
December 31, 1999, outstanding borrowings under the New Facility were
$750 million. The New Facility bears interest at a rate of LIBOR plus a
margin of 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 discussed below. The
weighted average interest rate on the New Facility was 6.2% at December
31, 1999.
7 1/2% AND 7 3/4% SENIOR NOTES
In November 1998, the Company issued $1.55 billion of Senior Notes (the
"Notes") in two tranches consisting of $400 million principal amount of 7
1/2% Senior Notes due December 1, 2000 (see Note 27 -- Subsequent Events
-- Debt Redemption) and $1.15 billion principal amount of 7 3/4% Senior
Notes due December 1, 2003. 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 as defined in the indenture.
3% CONVERTIBLE SUBORDINATED NOTES
During 1997, the Company completed a public offering of $550 million
principal amount of 3% Convertible Subordinated Notes (the "3% Notes")
due 2002. Each $1,000 principal amount of 3% Notes is convertible into
32.65 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.
F-21
CREDIT FACILITIES
The Company's credit facilities consist of (i) a $750 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 17, 2000, 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 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 $5 million were
outstanding under the Five Year Revolving Credit Facility at December 31,
1999. 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 require the maintenance of certain financial
ratios. There were no outstanding borrowings related to the
above-mentioned credit facilities at December 31, 1999 and 1998.
DEBT MATURITIES
The aggregate maturities of debt are as follows: 2000, $400 million;
2001, $750 million; 2002, $547 million; and 2003, $1,148 million.
12. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs, which
are not classified based on contractual maturities since such debt
corresponds directly with assets under management and mortgage programs,
consisted of:
DECEMBER 31,
------------------
1999 1998
-------- --------
Commercial paper $ 619 $2,484
Medium-term notes 1,248 2,338
Secured obligations 345 1,902
Other 102 173
-------- --------
$2,314 $6,897
======== ========
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 6.7% and 6.1% at December 31, 1999 and 1998, respectively.
MEDIUM-TERM NOTES
Medium-term notes primarily represent unsecured loans, which mature through
2002. The weighted average interest rates on such medium-term notes were
6.4% and 5.6% at December 31, 1999 and 1998, respectively.
SECURED OBLIGATIONS
The Company maintains separate financing facilities, the outstanding
borrowings under which are secured by corresponding assets under management
and mortgage programs. The collective weighted average interest rates on
such facilities were 7.0% and 5.8% at December 31, 1999 and 1998,
respectively. Such secured obligations are described below.
Mortgage Facility. In December 1999, the Company renewed its 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
such mortgages. This agreement is collateralized by the underlying mortgage
loans held in safekeeping by the custodian to the
F-22
agreement. The total commitment under this agreement is $500 million and is
renewable on an annual basis at the discretion of the lender. Mortgage
loans financed under this agreement at December 31, 1999 and 1998 totaled
$345 million and $378 million, respectively, and are included in mortgage
loans held for sale in the Consolidated Balance Sheets.
Relocation Facilities. The Company entered into a 364 day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provided for funding up to a limit of $325 million and
was renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Under the terms of this
agreement, the Company retained the servicing rights related to the
relocation receivables. This facility matured and $248 million was repaid
on December 22, 1999. At December 31, 1998, the Company was servicing $248
million of assets, which were funded under this agreement.
The Company also maintained an asset securitization agreement with a
separate unaffiliated buyer, which had a purchase commitment up to a limit
of $350 million. The terms of this agreement were similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment. This facility matured and $85 million was repaid on
October 5, 1999. At December 31, 1998, the Company was servicing $171
million of assets eligible for purchase under this agreement.
Fleet Facilities. In December 1998, the Company entered into two secured
financing transactions each expiring five years from the effective
agreement date. Loans were funded by commercial paper conduits in the
amounts of $500 million and $604 million and were secured by leased assets
(specified beneficial interests in a trust which owned the leased vehicles
and the leases) totaling $600 million and $725 million. In connection with
the disposition of the fleet segment, all secured financing arrangements
were repaid.
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 mature in 2000. The weighted
average interest rates on such debt were 6.8% and 5.5% at December 31, 1999
and 1998, respectively.
Interest incurred on borrowings used to finance fleet leasing activities
was $89 million for the year ended December 31, 1999 and $177 million for
each of the years ended December 31, 1998 and 1997 and is included net
within fleet leasing revenues in the Consolidated Statements of Operations.
Interest related to equity advances on homes was $24 million, $27 million
and $32 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Interest related to origination and mortgage servicing
activities was $109 million, $139 million and $78 million for the years
ended December 31, 1999, 1998 and 1997, 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.
As of December 31, 1999, the Company, through its PHH subsidiary,
maintained $2.5 billion in committed and unsecured credit facilities, which
were backed by domestic and foreign banks. The facilities were 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 2002. Under such
credit facilities, the Company paid annual commitment fees of $4 million
for the year ended December 31, 1999 and $2 million for each of the years
ended December 31, 1998 and 1997. The full amount of the Company's
committed facility was undrawn and available at December 31, 1999 and 1998.
13. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
HOLDING SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
On March 2, 1998, Cendant Capital I (the "Trust"), a wholly-owned
consolidated subsidiary of the Company, issued 30 million FELINE PRIDES and
2 million trust preferred securities and received approximately $1.5
billion in gross proceeds in connection with such issuance. The Trust then
F-23
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 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 28 million Income PRIDES and 2 million
Growth PRIDES (Income PRIDES and Growth PRIDES hereinafter referred to as
"PRIDES"), each with a face amount of $50 per PRIDES. 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 of $96 million ($60
million, after tax) and $80 million ($49 million, after tax) for the years
ended December 31, 1999 and 1998, respectively, 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 1.04 shares
and a maximum of 1.35 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.
Under the terms of the FELINE PRIDES settlement discussed in Note 5, 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 million.
Accordingly, the Company recorded a non-cash charge of $351 million in the
fourth quarter of 1998 with an increase in additional paid-in capital and
accrued liabilities of $350 million and $1 million, respectively, based on
the prospective issuance of the Rights.
The FELINE PRIDES settlement also requires the Company to offer to sell 4
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 6
million Rights from circulation via exchanges associated with the offering
and to enhance the open market liquidity of New PRIDES by creating 4
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
F-24
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 $17.78 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 February 18,
2000), the effect of the issuance of the New PRIDES will be to distribute
approximately 18 million more shares of Company common stock when the
mandatory purchase of Company common stock associated with the PRIDES
occurs in February 2001.
14. SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The after-tax components of accumulated other comprehensive income
(loss) are as follows:
UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME/(LOSS)
------------- --------------- ---------------
Balance, January 1, 1997 $(10) $ 4 $ (6)
Current-period change (28) (4) (32)
------------- --------------- ---------------
Balance, December 31, 1997 (38) -- (38)
Current-period change (11) -- (11)
------------- --------------- ---------------
Balance, December 31, 1998 (49) -- (49)
Current-period change (9) 16 7
------------- --------------- ---------------
Balance, December 31, 1999 $(58) $16 $(42)
============= =============== ===============
The currency translation adjustments are not currently adjusted for income
taxes since they relate to indefinite investments in foreign subsidiaries.
SHARE REPURCHASES
During 1999, the Company's Board of Directors authorized an additional $1.8
billion of Company common stock to be repurchased under a common share
repurchase program, increasing the total authorized amount to be
repurchased under the program to $2.8 billion. The Company executed this
program through open market purchases or privately negotiated transactions,
subject to bank credit facility covenants and certain rating agency
constraints. As of December 31, 1999, the Company repurchased approximately
$2.0 billion (104 million shares) of Company common stock under the
program.
In July 1999, pursuant to a Dutch Auction self-tender offer to the
Company's shareholders, the Company purchased 50 million shares of its
common stock at a price of $22.25 per share.
1998 EMPLOYEE STOCK PURCHASE PLAN
On December 1, 1998, the Company's Board of Directors amended and restated
the 1998 Employee Stock Purchase Plan (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
Company reserved 2.5 million shares of Company common stock in connection
with the Plan.
PENDING ISSUANCE OF TRACKING STOCK
The shareholders of Cendant voted on March 21, 2000 for a proposal (the
"Tracking Stock Proposal") to authorize the issuance of a new series of
Cendant common stock ("tracking stock"). The tracking stock is intended to
reflect the performance of the Move.com Group, a group of businesses owned
by the Company offering a wide selection of quality relocation, real estate
and home-related products and services through a network of Web sites.
Before the tracking stock is first issued, the Company's existing common
stock will be re-designated as CD common stock and that stock will be
intended to reflect the performance of the Company's other businesses (the
"Cendant Group"). The Tracking Stock Proposal allowed the Company to amend
and restate its charter to increase the number of authorized shares of
common stock from 2.0 billion to 2.5 billion initially
F-25
comprised of 2.0 billion shares of CD common stock and 500 million shares
of the Move.com common stock. In connection with the announcement of the
Tracking Stock Proposal, the Move.com Group results are reported as a
separate business segment. See Note 24--Segment Information for a
description of the services provided by the Move.com Group. Although the
issuance of the Move.com common stock is intended to track the performance
of the Move.com Group, holders, if any, will still be subject to all the
risks associated with an investment in the Company and all of its
businesses, assets and liabilities. See Note 27 -- Subsequent Events.
OTHER
In connection with the recapitalization of NRT Incorporated ("NRT") in
September 1999, the Company entered into an agreement with Chatham Street
Holdings, LLC ("Chatham") as consideration for certain amendments made with
respect to the NRT franchise agreements, which amendments provided for
additional payments of certain royalties to the Company. Pursuant to the
agreement, Chatham was granted the right, until September 30, 2001, to
purchase up to approximately 1.6 million shares of Move.com common stock
for approximately $16.02 per share. In addition, for every two shares of
Move.com common stock purchased by Chatham pursuant to the agreement,
Chatham will be entitled to receive a warrant to purchase one share of
Move.com common stock at a price equal to $64.08 per share and a warrant to
purchase one share of Move.com common stock at a price equal to $128.16 per
share. The shareholders of Chatham are also shareholders of NRT. See Note
21 -- Related Party Transactions for a detailed discussion of NRT.
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, anticipated mortgage loan closings arising
from commitments issued and changes in value of MSRs. 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 anticipate non-performance by any of the
counterparties and no material loss would be expected from such
non-performance.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements 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 as an adjustment to interest
expense in the Consolidated Statements of Operations. The Company's hedging
activities had an immaterial effect on interest expense and the Company's
weighted average borrowing rate for the year ended December 31, 1999. For
the years ended December 31, 1998 and 1997, the Company's hedging
activities increased interest expense by $2 million and $4 million,
respectively, but had an immaterial effect on its weighted average
borrowing rate. The following table summarizes the maturity and weighted
average rates of the Company's interest rate swaps relating to liabilities
under management and mortgage programs at December 31:
F-26
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
AMOUNT RECEIVE RATE PAY RATE MATURITIES (1)
---------- ---------------- ---------------- --------------
1999
Medium-term notes $ 610 5.57% 6.29% 2000
==========
1998
Commercial paper $ 355 4.92% 5.84% 1999-2006
Medium-term notes 931 5.27% 5.04% 1999-2000
Canada commercial paper 90 5.52% 5.27% 1999-2002
Sterling liabilities 662 6.26% 6.62% 1999-2002
Deutsche mark liabilities 32 3.24% 4.28% 1999-2001
----------
$2,070
==========
---------------
(1) Interest rate swaps held during 1998, with maturities ranging from 1999
through 2006, were assumed by ARAC in 1999 in connection with the
disposition of the Company's fleet segment.
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates, the Company enters into foreign exchange contracts on a
selective basis. Such contracts are primarily utilized to hedge
intercompany loans to foreign subsidiaries and certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. The
Company also hedges certain anticipated transactions denominated in foreign
currencies. The principal currency hedged by the Company is the British
pound sterling. Gains and losses on foreign currency hedges related to
intercompany loans are deferred and recognized upon maturity of the
underlying loan in the Consolidated Statements of Operations. Gains and
losses on foreign currency hedges of anticipated transactions are
recognized in the Consolidated Statements of Operations, on a
mark-to-market basis, as exchange rates change.
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 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 at December 31, 1999 and 1998 was $286 million and $267 million,
respectively, and is based upon quoted market prices or investment advisor
estimates and approximates carrying value. Realized gains or losses on
marketable securities are calculated on a specific identification basis.
The Company reported realized gains in other revenues in the Consolidated
Statements of Operations of $65 million, $27 million and $18 million for
the years ended December 31, 1999, 1998 and 1997, respectively (which
included the change in net unrealized holding gains on trading securities
of $8 million and $16 million in 1999 and 1998, respectively).
RELOCATION RECEIVABLES
Fair value approximates carrying value due to the short-term nature of the
relocation receivables.
F-27
PREFERRED STOCK INVESTMENTS
Fair value approximates carrying value of the preferred stock investments.
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.
DEBT
Fair value of the Company's Senior Notes, Convertible Subordinated Notes
and medium-term notes are estimated based on quoted market prices or market
comparables.
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY
HOLDING SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
Fair value is estimated based on quoted market prices and incorporates the
settlement of the FELINE PRIDES litigation and the resulting modification
of terms (see Note 5 -- Other Charges).
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, AND OTHER FINANCIAL
INSTRUMENTS
Fair value is 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-28
The carrying amounts and fair values of material financial instruments at
December 31 are as follows:
1999 1998
------------------------------------------------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- ----------- ----------- ---------- -----------
ASSETS UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Mortgage loans held for sale -- 1,112 1,124 -- 2,416 2,463
Mortgage servicing rights -- 1,084 1,202 -- 636 788
- ------------------------------------------------------------------------------------------------------------------
DEBT
Current portion of debt -- 400 402 -- -- --
Long-term debt -- 2,445 2,443 -- 3,363 3,351
- ----------------------------------------- ----------- ---------- ----------- ----------- ---------- -----------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LONG-TERM DEBT
Foreign exchange forwards -- -- -- 1 -- --
OTHER OFF BALANCE SHEET DERIVATIVES
Foreign exchange forwards 173 -- (1) 48 -- --
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Debt -- 2,314 2,314 -- 6,897 6,895
- ------------------------------------------------------------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED
SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE
COMPANY -- 1,478 1,113 -- 1,472 1,333
- ------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Interest rate swaps
in a gain position 161 -- -- 696 -- 8
in a loss position 449 -- 1 1,374 -- (12)
Foreign exchange forwards 21 -- -- 349 -- --
- ------------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED POSITIONS
Forward delivery commitments (1) 2,434 6 20 5,057 3 (4)
Option contracts to sell (1) 440 2 3 701 9 4
Option contracts to buy (1) 418 1 -- 948 5 1
Commitments to fund mortgages 1,283 -- 1 3,155 -- 35
Commitments to complete securitizations
(1) 813 -- (2) 2,031 -- 14
Constant maturity treasury floors (2) 4,420 57 13 3,670 44 84
Interest rate swaps (2)
in a gain position 100 -- -- 575 -- 35
in a loss position 250 -- (26) 200 -- (1)
Treasury futures (2) 152 -- (5) 151 -- (1)
Principal only swaps (2) 324 -- (15) 66 -- 3
- ------------
(1) 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 commitments to
complete securitizations on loans held by an unaffiliated buyer as
described in Note 9 -- Mortgage Loans Held for Sale.
(2) Carrying amounts and gains (losses) 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.
F-29
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which primarily expire through the year 2005. Rental expense
for the years ended December 31, 1999, 1998 and 1997 was $189 million, $165
million and $83 million, respectively. The Company incurred contingent
rental expenses in 1999 and 1998 of $49 million and $44 million,
respectively, which is included in total rental expense, principally based
on rental volume or profitability at certain parking facilities. The
Company has been granted rent abatements for varying periods on certain
facilities. Deferred rent relating to those abatements is amortized on a
straight-line basis over the applicable lease terms. Commitments under
capital leases are not significant.
In 1998, the Company entered into an agreement with an independent third
party to sell and leaseback vehicles subject to operating leases. Pursuant
to the agreement, the net carrying value of the vehicles sold was $101
million. Since the net carrying value of these vehicles was equal to their
sales price, no gain or loss was recognized on the sale. The lease
agreement was for a minimum lease term of 12 months with three one-year
renewal options. For the years ended December 31, 1999 and 1998, the total
rental expense incurred by the Company under this lease was $13 million and
$18 million, respectively. In connection with the disposition of the fleet
businesses, the Company elected not to execute its renewal option thereby
terminating the lease agreement.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1999 are as follows:
YEAR AMOUNT
---- ------
2000 $ 89
2001 79
2002 69
2003 59
2004 53
Thereafter 108
--------
$457
========
LITIGATION
Class Action Litigation and Government Investigations. Since the April 15,
1998 announcement of the discovery of accounting irregularities in the
former business units of CUC, approximately 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 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 SEC and the United States Attorney for the District of New Jersey are
also conducting investigations relating to the matters referenced above. As
a result of the findings from the Company's internal investigations, the
Company made all adjustments considered necessary by the Company, which are
reflected in its previously filed restated financial statements for the
years ended December 31, 1997, 1996 and 1995 and for the six months ended
June 30, 1998. On June 14, 2000, pursuant to an offer of settlement made by
the Company, the SEC issued an Order Instituting Public Administrative
Proceedings Pursuant to Section 21C of the Securities and Exchange Act of
1934, Making Findings and Imposing a Cease and Desist Order. In such Order,
the SEC found that the Company had violated certain financial reporting
provisions of the Securities and Exchange Act of 1934 and ordered the
Company to cease and desist from committing any future violations of such
provisions. No financial penalties were imposed against the Company.
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,
F-30
New Jersey (the "Settlement Agreement") brought on behalf of purchasers of
all Cendant and CUC publicly traded securities, other than PRIDES, between
May 1995 and August 1998. Under the Settlement Agreement, the Company would
pay the class members approximately $2.85 billion in cash. The definitive
settlement document was approved by the U.S. District Court by order dated
August 14, 2000. Certain parties in the class action have appealed the
District Court's orders approving the plan of allocation of the settlement
fund and awarding of attorneys' fees and expenses to counsel for the lead
plaintiffs. No appeals challenging the fairness of the $2.85 billion
settlement amount were filed. The U.S. Court of Appeals for the Third
Circuit has issued a briefing schedule for the appeals pursuant to which a
briefing will be concluded in the middle of February 2001. No date for oral
argument has been set. Accordingly, the Company will not be required to
fund the settlement amount of $2.85 billion for some time. However, the
Settlement Agreement required the Company to post collateral in the form of
credit facilities and/or surety bonds by November 13, 2000. See Note 27 --
Subsequent Events.
The settlement does not encompass all litigation asserting claims
associated with the accounting irregularities. The Company does not believe
that it is feasible to predict or determine the final outcome or resolution
of these unresolved proceedings. An adverse outcome from such unresolved
proceedings could be material with respect to earnings in any given
reporting period. However, the Company does not believe that the impact of
such unresolved proceedings should result in a material liability to the
Company in relation to its consolidated financial position or liquidity.
Other pending litigation. The Company is involved in pending litigation in
the usual course of business. In the opinion of management, such other
litigation will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
F-31
18. INCOME TAXES
The income tax provision (benefit) consists of:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
-------- ------- ------
Current
Federal $ 229 $(28) $175
State 3 18 31
Foreign 44 56 29
-------- ------- ------
276 46 235
-------- ------- ------
Deferred
Federal (728) 71 (27)
State (23) 17 (4)
Foreign 7 1 3
-------- ------- ------
(744) 89 (28)
-------- ------- ------
Provision (benefit) for income taxes $(468) $135 $207
======== ======= ======
Pre-tax income (loss) for domestic and foreign operations consisted of the
following:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
-------- ------ ------
Domestic $(959) $157 $216
Foreign 219 237 73
-------- ------ ------
Pre-tax income
(loss) $(740) $394 $289
======== ====== ======
Deferred income tax assets and liabilities are comprised of:
DECEMBER 31,
----------------
1999 1998
-------- ------
CURRENT DEFERRED INCOME TAX ASSETS
Merger and acquisition-related liabilities $ 17 $ 53
Accrued liabilities and deferred income 169 97
Excess tax basis on assets held for sale -- 190
Provision for doubtful accounts 18 5
Deferred membership acquisition costs -- 3
Shareholder litigation settlement and related
costs 1,058 --
Net operating loss carryforward 75 --
-------- ------
Current deferred income tax assets 1,337 348
-------- ------
CURRENT DEFERRED INCOME TAX LIABILITIES
Insurance retention refund (18) (21)
Franchise acquisition costs (10) (7)
Other (4) (1)
-------- ------
Current deferred income tax liabilities (32) (29)
-------- ------
CURRENT NET DEFERRED INCOME TAX ASSET $1,305 $319
======== ======
F-32
DECEMBER 31,
-----------------
1999 1998
-------- -------
NONCURRENT DEFERRED INCOME TAX ASSETS
Deductible goodwill--taxable poolings $ -- $ 49
Merger and acquisition-related liabilities 29 26
Accrued liabilities and deferred income 29 64
Net operating loss carryforward 84 84
State net operating loss carryforward 151 44
Foreign tax credit carryforward 10 --
Other (17) --
Valuation allowance (161) (44)
-------- -------
Noncurrent deferred income tax assets 125 223
-------- -------
NONCURRENT DEFERRED INCOME TAX LIABILITIES
Depreciation and amortization (511) (333)
Other -- 1
-------- -------
Noncurrent deferred income tax liabilities (511) (332)
-------- -------
NONCURRENT NET DEFERRED INCOME TAX
LIABILITY $(386) $(109)
======== =======
DECEMBER 31,
----------------
1999 1998
-------- -------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX ASSETS
Depreciation $ 7 $ --
Accrued liabilities 11 26
Alternative minimum tax carryforwards -- 2
-------- -------
Management and mortgage program deferred income tax assets 18 28
-------- -------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX
LIABILITIES
Depreciation -- (121)
Unamortized mortgage servicing rights (328) (248)
-------- -------
Management and mortgage program deferred income tax
liabilities (328) (369)
-------- -------
Net deferred income tax liability under management and
mortgage programs $(310) $(341)
======== =======
Net operating loss carryforwards at December 31, 1999 expire as follows:
2001, $8 million; 2002, $90 million; 2005, $7 million; 2009, $18 million;
2010, $116 million; and 2018, $215 million. The Company also has
alternative minimum tax credit carryforwards of $28 million.
The valuation allowance at December 31, 1999 relates to deferred tax assets
for state net operating loss carryforwards of $151 million and foreign tax
credit carryforwards of $10 million. The valuation allowance will be
reduced when and if the Company determines that the deferred income tax
assets are likely to be realized.
No provision has been made for U.S. federal deferred income taxes on
approximately $225 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 1999 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. In addition, the determination of the amount of
unrecognized U.S. federal deferred income tax liability for unremitted
earnings is not practicable.
F-33
The Company's effective income tax rate for continuing operations differs
from the U.S. federal statutory rate as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
--------- -------- -------
Federal statutory rate (35.0%) 35.0% 35.0%
State and local income taxes, net of federal tax
benefits (1.8%) 5.9% 6.2%
Non-deductible merger-related costs -- -- 25.9%
Amortization of non-deductible goodwill 1.9% 4.5% 3.8%
Taxes on foreign operations at rates different than
statutory U.S. federal rate (4.1%) (6.4%) 0.2%
Nontaxable gain on disposal (24.0%) -- --
Recognition of excess tax basis on assets held for sale -- (2.2%) --
Other (0.2%) (2.5%) 0.5%
--------- -------- -------
(63.2%) 34.3% 71.6%
========= ======== =======
19. STOCK PLANS
CENDANT PLANS
The 1999 Broad-Based Employee Stock Option Plan (the "Broad-Based Plan"),
as amended, authorizes the granting of up to 60 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). Employees (other than executive officers)
and independent contractors of the Company and its affiliates are eligible
to receive awards under the Broad-Based Plan. Options granted under the
plan generally have a ten year term and have vesting periods ranging from
20% to 33% per year.
The 1997 Stock 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 or are immediately vested. The Company also maintains two
other stock plans adopted in 1997: 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 have vesting periods
ranging from 20% to 33% per year.
The Company also grants options to employees pursuant to two additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 80 million shares of Company common stock. Annual
vesting periods under these plans are 20% commencing one year from the
respective grant dates.
At December 31, 1999 there were 56 million shares available for grant under
the Company's stock option plans discussed above.
On September 23, 1998, the Compensation Committee of the Board of Directors
approved a program to effectively reprice certain Company stock options
granted to middle management during
F-34
December 1997 and the first quarter of 1998. Such options, with exercise
prices ranging from $31.38 to $37.50, were effectively repriced on October
14, 1998 at $9.81 per share (the "New Price"), which was the fair market
value (as defined in the option plans) on the date of such repricing. 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 13 million existing options.
Additionally, a management equity ownership program was adopted requiring
these executive officers and senior managers to acquire Company 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 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 options
replacing options that were fully vested provide for vesting ratably over
four years beginning January 1, 1999.
MOVE.COM GROUP PLAN
On October 29, 1999, the Board of Directors of Move.com, Inc. (a company
included within the Move.com Group) adopted the Move.com, Inc. 1999 Stock
Option Plan (the "Move.com Plan"), as amended January 13, 2000, which
authorizes the granting of up to 6 million shares of Move.com, Inc. common
stock. All active employees of Move.com Group and its affiliates are
eligible to be granted options under the Move.com Plan. Options under the
Move.com Plan generally have a 10 year term and are exercisable at 33% per
year commencing one year from the grant date. On October 29, 1999,
approximately 2.5 million options to purchase shares of Move.com, Inc.
common stock were granted to employees of Move.com, Inc. under the Move.com
Plan (the "Existing Grants") at a weighted average exercise price of
$11.59. Such options were all outstanding and not vested at December 31,
1999. The fair value of Move.com, Inc. common stock on October 29, 1999 was
$13.16. Subject to the approval of the shareholders of the Company (i) the
Move.com Plan and Existing Grants will be ratified and assumed by the
Company, (ii) all Existing Grants will be equitably adjusted to become
options of Move.com common stock (see Note 14 -- Shareholders' Equity
--Pending Issuance of Tracking Stock for a description of the Move.com
common stock proposal) and (iii) the remaining shares available to be
issued in connection with the grant of options under the Move.com Plan will
be equitably adjusted to become shares of Move.com common stock.
The annual activity of Cendant's stock option plans consisted of:
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. EXERCISE AVG. EXERCISE AVG. EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------------- --------- --------------- --------- ---------------
(Shares in millions)
Balance at beginning of year 178 $14.64 172 $18.66 118 $11.68
Granted
Equal to fair market value 30 18.09 84 19.16 78 27.94
Greater than fair market
value 1 16.04 21 17.13 -- --
Canceled (13) 19.91 (82) 29.36 (6) 27.29
Exercised (13) 9.30 (17) 10.01 (14) 7.20
PHH Conversion (1) -- -- -- (4) --
--------- --------- ---------
Balance at end of year 183 $15.24 178 $14.64 172 $18.66
========= ========= =========
- ------------
(1) In connection with the PHH Merger, all unexercised PHH stock options were
canceled and converted into 2 million shares of Company common stock.
F-35
The Company utilizes the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies Accounting Principles
Board ("APB") Opinion No. 25 and related interpretations in accounting for
its stock option plans to employees. Under APB No. 25, compensation expense
is recognized when the exercise prices of the Company's employee stock
options are less than the market prices of the underlying Company stock on
the date of grant. Although the Company generally grants employee stock
options at fair value, certain options were granted below fair value during
1999. As such, compensation expense is being recognized over the applicable
vesting period.
Had the Company elected to recognize and measure compensation expense for
its stock option plans to employees based on the calculated fair value at
the grant dates for awards under such plans, consistent with the method
prescribed by SFAS No. 123, net income (loss) and per share data would have
been as follows:
1999 1998 1997
----------------------- ----------------------- -------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED(1) PRO FORMA(1)
---------- ----------- ---------- ----------- ----------- ------------
Net income (loss) $ (55) $ (213) $ 540 $ 393 $ (217) $ (664)
Basic income (loss) per share (0.07) (0.28) 0.64 0.46 (0.27) (0.82)
Diluted income (loss) per share (0.07) (0.28) 0.61 0.46 (0.27) (0.82)
- ------------
(1) Includes incremental compensation expense of $335 million ($205
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 1999, 1998 and 1997:
CENDANT MOVE.COM GROUP
-------------------------------------------------------------------------
1999 1998 1997 1999
----------------- ----------------- ----------------- ------------------
Dividend yield -- -- -- --
Expected volatility 60.0% 55.0% 32.5% 60.0%
Risk-free interest rate 6.4% 4.9% 5.6% 6.4%
Expected holding period 6.2 years 6.3 years 7.8 years 6.2 years
The weighted average grant date fair value of Company and Move.com stock
options granted during the year ended December 31, 1999 were $11.36 and
$7.28, respectively. The weighted average grant date fair value 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 repricing, were $19.69 and $18.10, respectively. The
weighted average grant date fair value of the stock options granted during
the year ended December 31, 1998 which were not repriced was $10.16. The
weighted average grant date fair value of Company stock options granted
during the year ended December 31, 1997 was $13.71.
F-36
The table below summarizes information regarding Company stock options
outstanding and exercisable as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
(SHARES IN MILLIONS) CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ -------- --------------- ---------- -------- ----------
$.01 to $10.00 79 5.9 $ 7.36 53 $ 6.20
$10.01 to $20.00 60 8.0 16.83 21 15.89
$20.01 to $30.00 23 7.2 22.93 19 23.14
$30.01 to $40.00 21 7.8 32.00 16 31.88
-------- --------
183 7.0 $15.24 109 $14.77
======== ========
20. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution pension plans that
provide certain eligible employees of the Company an opportunity to
accumulate funds for their retirement. The Company matches the
contributions of participating employees on the basis specified in the
plans. The Company's cost for contributions to these plans was $30 million,
$22 million and $15 million for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company's PHH subsidiary maintains a domestic non-contributory defined
benefit pension plan covering eligible employees of PHH and its
subsidiaries employed prior to July 1, 1997. Additionally, the Company
sponsors contributory defined benefit pension plans in certain United
Kingdom subsidiaries with participation in the plans at the employees'
option. Under both the domestic and foreign plans, benefits are based on an
employee's years of credited service and a percentage of final average
compensation.
The Company's policy for all plans is to contribute amounts sufficient to
meet the minimum requirements plus other amounts as deemed appropriate. The
projected benefit obligations of the plans were $145 million and $196
million and plan assets, at fair value, were $147 million and $162 million
at December 31, 1999 and 1998, respectively. The net pension cost and
recorded liability were not material to the accompanying Consolidated
Financial Statements.
During 1999, the Company recognized a net curtailment gain of $10 million
as a result of the disposition of its fleet business segment and the
freezing of pension benefits related to the Company's PHH subsidiary
defined benefit pension plan.
21. RELATED PARTY TRANSACTIONS
NRT INCORPORATED
The Company maintains a relationship with NRT, a corporation created to
acquire residential real estate brokerage firms. 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. NRT is party to other agreements
and arrangements with the Company and its subsidiaries. Under these
agreements, the Company acquired $182 million of NRT preferred stock, of
which $24 million will be convertible, at the Company's option, upon the
occurrence of certain events, into no more than 50% of NRT's common stock.
Certain officers of the Company serve on the Board of Directors of NRT. The
Company recognized preferred dividend income of $16 million, $15 million
and $5 million during the years ended December 31, 1999, 1998 and 1997,
respectively, which are included in other revenue in the Consolidated
Statements of Operations. During 1999, approximately $8 million of the
preferred dividend income increased the basis of the underlying preferred
stock investment. Additionally, the Company sold preferred shares and
recognized a gain of $20 million during 1999, which is also included in
other revenue in the Consolidated Statements of Operations. During 1999,
1998 and 1997, total franchise royalties earned by the Company from NRT and
its predecessors were $172 million, $122 million and $61 million,
respectively.
F-37
The Company, at its election, may participate in NRT's acquisitions by
acquiring up to an aggregate $946 million (plus an additional $500 million
if certain conditions are met) of intangible assets, and in some cases
mortgage operations of real estate brokerage firms acquired by NRT. As of
December 31, 1999, the Company acquired $537 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 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 RENT A CAR, INC.
The Company continues to maintain an equity interest in ARAC. During 1999
and 1998, the Company sold approximately two million and one million
shares, respectively, of Avis Rent A Car, Inc. common stock and recognized
a pre-tax gain of approximately $11 million and $18 million, respectively,
which is included in other revenue in the Consolidated Statements of
Operations. The Company accounts for its investment in ARAC common stock
using the equity method. The Company recorded its equity in the earnings of
ARAC, which amounted to $18 million, $14 million and $51 million for the
years ended December 31, 1999, 1998 and 1997, respectively, as a component
of other revenue in the Consolidated Statements of Operations. On June 30,
1999, in connection with the Company's disposition of its fleet segment,
the Company received, as part of the total consideration, $360 million of
non-voting convertible preferred stock in a subsidiary of ARAC and
additional consideration of a $30 million receivable (see Note 3
--Dispositions and Acquisitions of Businesses). The Company accounts for
its convertible preferred stock investment using the cost method.
Conversion of the convertible preferred stock is at the Company's option
subject to earnings and stock price thresholds with specified intervals of
time. As of December 31, 1999, the conversion conditions have not been
satisfied. The Company received dividends of $9 million, which increased
the basis of the underlying convertible preferred stock investment. Such
amount is included as a component of other revenue in the Consolidated
Statements of Operations. At December 31, 1999, the Company's common equity
interest in ARAC was approximately 18% (see Note 27 -- Subsequent Events).
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
1999, 1998 and 1997, total franchise royalties earned by the Company from
ARAC were $102 million, $92 million and $82 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. As of December 31, 1999 and 1998, the Company had accounts
receivable of $34 million and $26 million, respectively, due from ARAC.
Certain officers of the Company serve on the Board of Directors of ARAC.
22. 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.
Franchised outlet revenues are as follows:
YEAR ENDED DECEMBER
31,
----------------------
1999 1998 1997
------ ------ ------
Royalty revenues $839 $703 $574
Initial franchise fees 37 45 26
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
F-38
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. Service fees, net included marketing and reservation
fees of $280 million, $228 million and $215 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Additionally, rebates are
given to franchisees that meet certain levels of annual gross revenue as
defined by the respective franchise agreements. Membership and service fee
revenues are net of annual rebates of $43 million, $35 million, and $26
million for the years ended December 31, 1999, 1998, and 1997,
respectively.
Franchised outlet information is as follows:
DECEMBER 31,
----------------------------
1999 1998 (1) 1997
-------- -------- --------
Franchised units in operation 22,719 22,471 18,876
Backlog (franchised units sold but not yet
opened) 1,478 2,063 1,547
- ------------
(1) Approximately 2,000 franchised units were acquired in connection
with the acquisition of Jackson Hewitt Inc.
23. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles were disposed of during 1999
in connection with the disposition of the Company's fleet business segment
(see Note 3 -- Dispositions and Acquisitions of Businesses). In 1998,
vehicles were 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 were amortized using the
straight-line method over the expected lease term. The Company's experience
indicated that the full term of the leases varied considerably due to
extensions beyond the minimum lease term.
The Company had two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease was
generally for the account of the lessee except for a minimum residual value
which the Company had guaranteed. The Company's experience had been that
vehicles under this type of lease agreement were sold for amounts exceeding
the residual value guarantees. Maintenance and repairs of vehicles under
these agreements were 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.
Under the second type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease was for the account of
the Company. The lessee generally paid for or provided maintenance, vehicle
licenses and servicing. The original cost and accumulated depreciation of
vehicles under these agreements were $1.0 billion and $191 million,
respectively, at December 31, 1998. The Company, based on historical
experience and an assessment of the used vehicle market, established an
allowance in the amount of $14 million for potential losses on residual
values on vehicles under these leases at December 31, 1998.
Under the direct financing lease agreements, the minimum lease term was 12
months with a month-to-month renewal option thereafter. In addition, resale
of the vehicles upon termination of the lease was for the account of the
lessee. Maintenance and repairs of these vehicles were the responsibility
of the lessee.
F-39
Open-end operating leases and direct financing leases generally had a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically had a longer term, usually 24 months
or more, but were cancelable under certain conditions.
Gross leasing revenues, which were included in fleet leasing revenues in
the Consolidated Statements of Operations, consisted of:
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ -------- --------
Operating leases $683 $1,330 $1,223
Direct financing leases, primarily interest 17 38 42
------ -------- --------
$700 $1,368 $1,265
====== ======== ========
Net investment in leases and leased vehicles consisted of:
DECEMBER 31,
1998
--------------
Vehicles under open-end operating leases $2,726
Vehicles under closed-end operating leases 822
Direct financing leases 252
Accrued interest on leases 1
--------------
$3,801
==============
24. SEGMENT INFORMATION
Management evaluates each segment's performance based upon a modified
earnings before interest, income taxes, depreciation and amortization and
minority interest calculation. For this purpose, Adjusted EBITDA is defined
as earnings before non-operating interest, income taxes, depreciation and
amortization and minority interest, adjusted to exclude certain items,
which are of a non-recurring or unusual nature and are not measured in
assessing segment performance or are not segment specific. The Company
determined its operating segments based primarily on the types of services
it provides, the consumer base to which marketing efforts are directed and
the methods used to sell services.
Prior to the third quarter of 2000, the historical operating results of
Cendant Travel, a subsidiary which facilitates travel arrangements for the
Company's travel-related and membership businesses, were included within
the discontinued individual membership segment. Beginning the third quarter
of 2000, the operations of Cendant Travel began being managed as a
component of the travel segment. Accordingly, the operating results of
Cendant Travel are reflected in the Travel segment for all periods
presented.
In connection with the individual membership segment being reported as
discontinued operations, general corporate overhead previously allocated to
the individual membership segment has been reclassified to the diversified
services segment for all periods presented.
The Company disposed of its fleet segment on June 30, 1999, and the Company
added Move.com Group as a reportable operating segment, thereby maintaining
the seven reportable operating segments which collectively comprise the
Company's continuing operations. Included in the Move.com Group are
RentNet, Inc., ("RentNet"), acquired during January 1996, National Home
Connections, LLC, acquired in May 1999, and the assets of MetroRent,
acquired in December 1999. Prior to the formation of the Move.com Group,
RentNet's historical financial information was included in the Company's
discontinued individual membership segment. The Company reclassified the
financial results of RentNet for the years ended December 31, 1998 and
1997. Inter-segment net revenues were not significant to the net revenues
of any one segment. A description of the services provided within each of
the Company's reportable operating segments is as follows:
F-40
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.
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.
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.
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.
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 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.
Mortgage services 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.
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate,
and home-related products and services through its flagship portal site,
move.com, and the move.com network. The Move.com Group integrates and
enhances the online efforts of the Company's residential real estate brand
names and those of the Company's other real estate business units.
F-41
DIVERSIFIED 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,
welcoming packages to new homeowners, and other consumer-related services.
FLEET
The fleet segment provided fleet and fuel card related products and
services to corporate clients and government agencies. These services
included management and leasing of vehicles, fuel card payment and
reporting and other fee-based services for clients' vehicle fleets. The
Company leased vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
-------- ---------- ------------ -------------
Net revenues $ 4,521 $1,239 $575 $ 571
Adjusted EBITDA 1,783 593 180 424
Depreciation and
amortization 347 99 19 59
Segment assets 14,531 3,204 393 2,102
Capital expenditures 254 55 19 --
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES (2) FLEET
------------ ---------- ---------- ------------- -------
Net revenues $ 415 $ 397 $ 18 $1,099 $207
Adjusted EBITDA 122 182 (22) 223 81
Depreciation and
amortization 17 19 2 117 15
Segment assets 1,033 2,817 22 4,960 --
Capital expenditures 21 48 2 86 23
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
-------- ---------- ------------ -------------
Net revenues $ 4,465 $1,163 $544 $ 456
Adjusted EBITDA 1,647 552 138 349
Depreciation and
amortization 303 90 14 53
Segment assets 19,047 2,789 372 2,014
Capital expenditures 331 81 17 6
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------- -------
Net revenues $ 444 $ 353 $10 $1,108 $ 387
Adjusted EBITDA 125 188 1 120 174
Depreciation and
amortization 17 9 2 96 22
Segment assets 1,130 3,504 9 4,532 4,697
Capital expenditures 70 36 1 62 58
-----------------------------------------------------------------------------------------------
F-42
YEAR ENDED DECEMBER 31, 1997
INSURANCE/ REAL ESTATE
TOTAL TRAVEL (1) WHOLESALE FRANCHISE
-------- ---------- ------------ -------------
Net revenues $ 3,553 $1,057 $483 $ 335
Adjusted EBITDA 1,263 485 111 227
Depreciation and
amortization 222 83 11 44
Segment assets 13,179 2,618 357 1,827
Capital expenditures 153 46 6 13
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------- -------
Net revenues $ 402 $ 179 $ 6 $ 767 $ 324
Adjusted EBITDA 93 75 (1) 152 121
Depreciation and
amortization 8 5 1 54 16
Segment assets 1,009 2,233 7 1,002 4,126
Capital expenditures 23 16 1 24 24
- ------------
(1) Net revenues and Adjusted EBITDA include the equity in earnings
from the Company's investment in ARAC of $18 million, $14 million
and $51 million in 1999, 1998 and 1997, respectively. Net revenues
and Adjusted EBITDA for 1999 and 1998 include a pre-tax gain of
$11 million and $18 million, respectively, as a result of the 1999
and 1998 sale of a portion of the Company's equity interest.
Segment assets include such equity method investment in the amount
of $118 million, $139 million and $124 million at December 31,
1999, 1998 and 1997, respectively.
(2) Net revenues include a $23 million gain on the sales of car park
facilities. Segment assets include the Company's equity investment
of $17 million in EPub.
Provided below is a reconciliation of Adjusted EBITDA and total assets for
reportable segments to the consolidated amounts.
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
--------- -------- --------
Adjusted EBITDA for reportable segments $ 1,783 $1,647 $1,263
Other charges:
Litigation settlement and related costs (2,894) (351) --
Termination of proposed acquisitions (7) (433) --
Executive terminations -- (53) --
Investigation-related costs (21) (33) --
Merger-related costs and other unusual charges
(credits) (25) 67 (701)
Investigation-related financing costs -- (35) --
Depreciation and amortization (347) (303) (222)
Interest, net (196) (112) (51)
Net gain on dispositions of businesses 967 -- --
--------- -------- --------
Consolidated income (loss) before income taxes and
minority interest $ (740) $ 394 $ 289
========= ======== ========
F-43
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
-------- -------- --------- -----------
1999
Net revenues $ 4,521 $ 3,482 $ 748 $291
Assets 14,531 11,104 3,215 212
Long-lived
assets 1,279 522 723 34
1998
Net revenues $ 4,465 $ 3,458 $ 696 $311
Assets 19,047 15,081 3,707 259
Long-lived
assets 1,378 591 768(1) 19
1997
Net revenues $ 3,553 $ 2,982 $ 232 $339
Assets 13,179 11,855 1,015 309
Long-lived
assets 504 437 49 18
- ------------
(1) Includes $691 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.
25. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1999
and 1998. The underlying per share information is calculated from the
weighted average shares outstanding during each quarter, which may
fluctuate based on quarterly income levels, market prices, and share
repurchases. Therefore, the sum of the quarters per share information may
not equal the total year amounts.
1999
---------------------------------------------
FIRST (2) SECOND (3) THIRD (4) FOURTH (5)
--------- ---------- --------- ----------
Net revenues $1,102 $1,171 $1,154 $ 1,094
--------- ---------- --------- ----------
Income (loss) from continuing operations (1) 167 846 233 (1,579)
Income (loss) from discontinued operations,
net of tax 2 28 (24) 98
Gain (loss) on sale of discontinued
operations, net of tax (6) 193 (12) (7) --
--------- ---------- --------- ----------
Net income (loss) $ 362 $ 862 $ 202 $(1,481)
========= ========== ========= ==========
Per share information:
Basic
Income (loss) from continuing operations $ 0.21 $ 1.10 $ 0.32 $ (2.22)
Net income (loss) $ 0.45 $ 1.12 $ 0.28 $ (2.08)
Weighted average shares (in millions) 800 770 726 711
Diluted
Income (loss) from continuing operations $ 0.20 $ 1.03 $ 0.30 $ (2.22)
Net income (loss) $ 0.43 $ 1.05 $ 0.26 $ (2.08)
Weighted average shares (in millions) 854 824 780 711
Common Stock Market Prices:
High $22 7/16 $20 3/4 $22 5/8 $26 9/16
Low $15 5/16 $15 1/2 $17 $14 9/16
F-44
1998
--------------------------------------------
FIRST (7) SECOND (8) THIRD (9) FOURTH (10)
--------- ---------- --------- -----------
Net revenues $ 957 $1,094 $1,245 $1,169
--------- ---------- --------- -----------
Income (loss) from continuing operations 199 183 132 (306)
Income (loss) from discontinued
operations, net of tax (26) (30) (21) 4
Gain on sale of discontinued operations,
net of tax (6) -- -- -- 405
--------- ---------- --------- -----------
Net income $ 173 $ 153 $ 111 $ 103
========= ========== ========= ===========
Per share information:
Basic
Income (loss) from continuing
operations $0.24 $ 0.22 $ 0.15 $(0.36)
Net income $0.21 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 839 851 852 850
Diluted
Income (loss) from continuing
operations $0.22 $ 0.21 $ 0.15 $(0.36)
Net income $0.20 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 917 901 861 850
Common Stock Market Prices:
High $41 $41 3/8 $22 7/16 $20 5/8
Low $32 7/16 $18 9/16 $10 7/16 $7 1/2
- ------------
(1) Includes net gains associated with the dispositions of businesses
of $716 million, $83 million and $168 million for the second,
third, and fourth quarters, respectively (see Note 3 --
Dispositions and Acquisitions of Businesses).
(2) Includes charges of $7 million ($4 million, after tax or $0.01 per
diluted share) in connection with the termination of the proposed
acquisition of RACMS, $2 million ($1 million, after tax) for
investigation -related costs and a $1 million gain on the sale
of a company subsidiary.
(3) Includes charges of $23 million ($15 million, after tax or $0.02
per diluted share) of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for
completing the transition of the Company's lodging franchisees to
a Company sponsored property management system and $6 million ($4
million, after tax) for investigation-related costs.
(4) Includes charges of $5 million ($3 million, after tax) for
investigation-related costs and $5 million ($3 million, after tax)
principally related to the consolidation of European call centers
in Cork, Ireland.
(5) Includes charges of $2,894 million ($1,839 million, after tax or
$2.59 per diluted share) associated with the preliminary agreement
to settle the principal shareholder securities class action suit
and $8 million ($5 million, after tax or $0.01 per diluted share)
of investigation-related costs. Such charges were partially offset
by a $2 million ($1 million, after tax) credit associated with
changes to the estimate of previously recorded merger-related
costs and other unusual charges.
(6) Represents gains associated with the sales of Hebdo Mag and CDS
(see Note 4 -- Discontinued Operations).
(7) Includes a charge of $3 million ($2 million, after tax) for
investigation-related costs, including incremental financing
costs, and executive terminations.
(8) Includes a charge of $32 million ($20 million, after tax or $0.02
per diluted share) for investigation-related costs, including
incremental financing costs, and executive terminations. Such
charge was partially offset by a credit of $27 million ($19
million, after tax or $0.02 per diluted share) associated with
changes to the estimate of previously recorded merger-related
costs and other unusual charges.
(9) Includes a charge of $76 million ($49 million, after tax or $0.06
per share) for investigation-related costs, including incremental
financing costs, and executive terminations.
(10) Includes charges of (i) $433 million ($282 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian, (ii) $351 million
($228 million, after tax or $0.27 per diluted share) associated
with the agreement to settle the PRIDES securities class action
suit and (iii) $13 million ($10 million, after tax or $0.01 per
diluted share) for investigation-related costs, including
incremental financing costs, and executive terminations. Such
charges were partially offset by a credit of $43 million ($27
million, after tax or $0.03 per diluted share) associated with
changes to the estimate of previously recorded merger-related
costs and other unusual charges.
F-45
26. CONSOLIDATING CONDENSED INFORMATION
In connection with the pending issuance of the tracking stock described in
Note 14 -- Shareholder's Equity, the Company intends to disclose
separately, for financial reporting purposes, financial information for the
Cendant Group and the Move.com Group. Cendant Group provides various
services to and receives various services from the Move.com Group.
Inter-group revenues and expenses have been broken out separately and
self-eliminate in consolidation.
ALLOCATION POLICIES
Treasury Activities. The Company manages most treasury activities on a
centralized, consolidated basis. These activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and
long-term debt and the issuance and repurchase of common stock and
preferred stock. Each Group generally remits its cash receipts (other than
receipts of foreign operations or operations that are not wholly owned) to
the Company, and the Company generally funds each Group's cash
disbursements (other than disbursements of foreign operations or operations
that are not wholly owned) on a daily basis.
In the consolidating condensed financial information presented herein, (1)
all external debt and equity transactions (and the proceeds thereof) are
attributed to Cendant Group, (2) whenever Move.com Group holds cash, that
cash is transferred to Cendant Group and accounted for as a return of
capital (i.e., as a reduction in Move.com Group's division equity and
Cendant Group's retained interest in Move.com Group) and (3) whenever
Move.com Group has a cash need, that cash need is funded by Cendant Group
and accounted for as a capital contribution (i.e., as an increase in
Move.com Group's division equity and Cendant Group's retained interest in
Move.com Group). The Company intends to continue these practices until
Move.com common stock is issued pursuant to its public offering. Currently,
the operations of Move.com Group have been funded from available cash, and
we have not incurred any indebtedness to finance the operations of Move.com
Group. Accordingly, no interest expense has been or will be reflected in
the financial statements of Move.com Group for any period prior to the date
on which Move.com common stock is first issued.
After the date on which Move.com common stock is first issued:
The Company will account for all cash transfers from one Group to or for
the account of the other Group (other than transfers in return for assets
or services rendered or transfers in respect of Cendant Group's retained
interest that correspond to dividends paid on Move.com common stock), as
inter-Group revolving credit advances unless:
- the Company's board of directors determines that a given transfer (or
type of transfer) should be accounted for as a long-term loan; the
Company's board of directors determines that a given transfer (or type
of transfer) should be accounted for as a capital contribution
increasing Cendant Group's retained interest in Move.com Group; or
- the Company's board of directors determines that a given transfer (or
type of transfer) should be accounted for as a return of capital
reducing Cendant Group's retained interest in Move.com Group.
There are no specific criteria to determine when the Company will account
for a cash transfer as a long-term loan, a capital contribution or a return
of capital rather than an inter-Group revolving credit advance.
The Company's board of directors would make such a determination in the
exercise of its business judgment at the time of such transfer, or the
first of such type of transfer, based upon all relevant circumstances.
Any cash transfer accounted for as an inter-Group revolving credit advance
may bear interest at the rate at which the Company's board of directors, in
its sole discretion, determines the Company could borrow such funds on a
revolving credit basis. Although the Company currently does not intend to
charge interest on inter-Group revolving credit advances, if the Company's
board of directors
F-46
determines to charge interest, the consolidating condensed financial
information presented herein will not be comparable for periods prior to
and after charging interest on such credit advances. If interest is charged
on inter-Group revolving credit advances, it will be at a rate which the
Company is required to pay to borrow funds at that time. Any cash transfer
accounted for as a long-term loan will have interest rate, amortization,
maturity, redemption and other terms that generally reflect the then
prevailing terms on which the the Company board of directors, in its sole
discretion, determines the Company could borrow such funds.
Any cash transfer from Cendant Group to Move.com Group, or for Move.com
Group's account, accounted for as a capital contribution, will
correspondingly increase Move.com Group's division equity and Cendant
Group's retained interest in Move.com Group. As a result, the number of
shares of Move.com common stock that the Company may issue for the account
of Cendant Group in respect of its retained interest in Move.com Group
which the Company calls the number of shares issuable with respect to
Cendant Group's retained interest in Move.com Group, will increase by the
amount of such capital contribution divided by the market value of Move.com
Group on the date of transfer.
Any cash transfer from Move.com Group to Cendant Group, or for Cendant
Group's account, accounted for as a return of capital, will correspondingly
reduce Move.com Group's division equity and Cendant Group's retained
interest in Move.com Group. As a result, the number of shares issuable with
respect to Cendant Group's retained interest in Move.com Group will
decrease by the amount of such return of capital divided by the market
value of Move.com common stock on the date of transfer.
Revenues. Revenue allocations are supported by signed agreements between
the Cendant Group and the Move.com Group and are intended to approximate
the fair value of services provided.
Expenses. Cendant Group allocates the cost of its corporate overhead
services to the Move.com Group generally based on utilization. Where
determinations based on utilization are impracticable, the Cendant Group
uses percentages of revenues or other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of costs
attributable to the Move.com Group. The allocations of corporate overhead
to the Move.com Group are consistent with the allocations made to
subsidiaries within the Cendant Group. Corporate overhead includes charges
for legal, accounting (tax and financial), information and
telecommunications services, marketing, intellectual property, public
relations, corporate offices and travel.
Expenses, other than corporate overhead allocations, are allocated based
upon utilization and usage volume.
Income Taxes. Move.com Group is included in the consolidated federal income
tax return of Cendant Group. In addition, Move.com Group files unitary and
combined state income tax returns with Cendant Group in jurisdictions where
required. As such, income tax expense is allocated to Move.com Group in
accordance with Cendant Group's tax allocation policy.
ALLOCATIONS
The allocations from the Cendant Group to the Move.com Group are comprised
as follows: (a) revenues for selling advertising space and links on the
Cendant Group real estate franchise systems Web sites, (b) revenues for Web
site management associated with the Cendant Group's real estate franchise
systems, (c) revenues associated with the Web site development of the
Cendant Group's Welcome Wagon subsidiary, (d) expenses for overhead
charges, (e) expenses associated with an Internet engineering services
agreement and (f) expenses associated with the Web site development of
Cendant Group's Welcome Wagon subsidiary. Additionally, portions of the
benefit for income taxes and balance sheet accounts of Move.com Group are
based on allocations from the Cendant Group.
F-47
The consolidating condensed financial information, which includes certain
allocations between the Cendant Group and the Move.com Group, is presented
as follows.
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
Net Revenues
External revenues $4,504 $ 17 $4,521
Inter-group agreements (1) 1 --
--------- ---------- --------------
Net revenues 4,503 18 4,521
Expenses:
Operating:
External expenses 1,570 35 1,605
Inter-group allocated expenses (3) 3 --
Marketing and reservation 596 -- 596
General and administrative 535 2 537
Depreciation and amortization 345 2 347
Other charges 2,947 -- 2,947
Interest, net 196 -- 196
--------- ---------- --------------
Total expenses 6,186 42 6,228
Net gain on dispositions of businesses 967 -- 967
--------- ---------- --------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (716) (24) (740)
Benefit for income taxes (458) (10) (468)
Minority interest, net of tax 61 -- 61
--------- ---------- --------------
LOSS FROM CONTINUING OPERATIONS (319) (14) (333)
Discontinued operations:
Income from discontinued operations, net of tax 104 -- 104
Gain on sale of discontinued operations, net of
tax 174 -- 174
--------- ---------- --------------
NET LOSS $ (41) $(14) $ (55)
========= ========== ==============
F-48
YEAR ENDED DECEMBER 31, 1998
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
Net revenues $4,455 $10 $4,465
--------- ---------- --------------
Expenses:
Operating:
External expenses 1,651 1 1,652
Inter-group allocated expenses -- -- --
Marketing and reservation 619 3 622
General and administrative 539 5 544
Depreciation and amortization 301 2 303
Other charges 838 -- 838
Interest, net 112 -- 112
--------- ---------- --------------
Total expenses 4,060 11 4,071
--------- ---------- --------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST 395 (1) 394
Provision for income taxes 135 -- 135
Minority interest, net of tax 51 -- 51
--------- ---------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 209 (1) 208
Discontinued operations:
Loss from discontinued operations, net of tax (73) -- (73)
Gain on sale of discontinued operations, net of
tax 405 -- 405
--------- ---------- --------------
NET INCOME (LOSS) $ 541 $(1) $ 540
========= ========== ==============
F-49
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
Net revenues $3,547 $ 6 $3,553
--------- ---------- --------------
Expenses:
Operating:
External expenses 1,129 1 1,130
Inter-group allocated expenses -- -- --
Marketing and reservation 621 2 623
General and administrative 533 4 537
Depreciation and amortization 221 1 222
Other charges 701 -- 701
Interest, net 51 -- 51
--------- ---------- --------------
Total expenses 3,256 8 3,264
--------- ---------- --------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST 291 (2) 289
Provision (benefit) for income taxes 208 (1) 207
--------- ---------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 83 (1) 82
Loss from discontinued operations, net of tax (42) -- (42)
--------- ---------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 41 (1) 40
Extraordinary gain, net of tax 26 -- 26
--------- ---------- --------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 67 (1) 66
Cumulative effect of accounting change, net of tax (283) -- (283)
--------- ---------- --------------
NET LOSS $ (216) $(1) $ (217)
========= ========== ==============
F-50
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 1999
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
ASSETS
Cash and cash equivalents $ 1,167 $ 1 $ 1,168
Receivables 983 8 991
Deferred income taxes 1,305 -- 1,305
Other current assets 768 3 771
Property and equipment 1,276 3 1,279
Goodwill 3,101 5 3,106
Other noncurrent assets 3,183 2 3,185
Assets under management and mortgage programs 2,726 -- 2,726
--------- ---------- --------------
TOTAL ASSETS $14,509 $ 22 $14,531
========= ========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 4,892 $ 21 $ 4,913
Noncurrent liabilities 3,310 -- 3,310
Liabilities under management and mortgage programs 2,624 -- 2,624
Mandatorily redeemable preferred securities issued
by subsidary holding senior debentures issued by
the Company 1,478 -- 1,478
Shareholders' equity
Common stock 9 -- 9
Additional paid-in-capital 4,083 19 4,102
Retained earnings (accumulated deficit) 1,443 (18) 1,425
Accumulated other comprehensive loss (42) -- (42)
Treasury stock, at cost (3,288) -- (3,288)
--------- ---------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,509 $ 22 $14,531
========= ========== ==============
F-51
DECEMBER 31, 1998
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
ASSETS
Cash and cash equivalents $ 1,002 $-- $ 1,002
Receivables 1,482 3 1,485
Deferred income taxes 319 -- 319
Other current assets 1,228 -- 1,228
Property and equipment 1,376 2 1,378
Goodwill 3,741 3 3,744
Other noncurrent assets 2,752 1 2,753
Assets under management and mortgage programs 7,512 -- 7,512
--------- ---------- --------------
TOTAL ASSETS $19,412 $ 9 $19,421
========= ========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 2,050 $ 5 $ 2,055
Noncurrent liabilities 3,820 -- 3,820
Liabilities under management and mortgage programs 7,238 -- 7,238
Mandatorily redeemable preferred securities issued
by subsidiary holding senior debentures issued by
the Company 1,472 -- 1,472
Shareholders' equity
Common stock 9 -- 9
Additional paid-in-capital 3,855 8 3,863
Retained earnings (accumulated deficit) 1,484 (4) 1,480
Accumulated other comprehensive loss (49) -- (49)
Treasury stock, at cost (467) -- (467)
--------- ---------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,412 $ 9 $19,421
========= ========== ==============
F-52
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
OPERATING ACTIVITIES:
Net loss $ (41) $(14) $ (55)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities from
continuing operations:
Income from discontinued operations (104) -- (104)
Gain on sale of discontinued operations, net of tax (174) -- (174)
Depreciation and amortization 345 2 347
Other charges 2,919 -- 2,919
Net gain on dispositions of businesses (967) -- (967)
Management and mortgage programs 2,001 -- 2,001
Other, net (803) 8 (795)
--------- ---------- --------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES FROM CONTINUING OPERATIONS 3,176 (4) 3,172
--------- ---------- --------------
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 3,365 -- 3,365
Net assets acquired (net of cash acquired) and
acquisition related payments (202) (3) (205)
Management and mortgage programs (1,265) -- (1,265)
Other, net (148) (2) (150)
--------- ---------- --------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES FROM CONTINUING OPERATIONS 1,750 (5) 1,745
--------- ---------- --------------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,719 -- 1,719
Principal payments on borrowings (2,213) -- (2,213)
Issuance of common stock 127 -- 127
Repurchases of common stock (2,863) -- (2,863)
Management and mortgage programs (1,558) -- (1,558)
Inter-group funding (10) 10 --
--------- ---------- --------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES
FROM CONTINUING OPERATIONS (4,798) 10 (4,788)
--------- ---------- --------------
Effect of changes in exchange rates on cash and cash
equivalents 51 -- 51
--------- ---------- --------------
Net cash used in discontinued operations (14) -- (14)
--------- ---------- --------------
Net increase in cash and cash equivalents 165 1 166
Cash and cash equivalents, beginning of period 1,002 -- 1,002
--------- ---------- --------------
Cash and cash equivalents, end of period $ 1,167 $ 1 $ 1,168
========= ========== ==============
F-53
YEAR ENDED DECEMBER 31, 1998
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 541 $(1) $ 540
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Loss from discontinued operations, net of tax 73 -- 73
Gain on sale of discontinued operations, net of tax (405) -- (405)
Depreciation and amortization 301 2 303
Other charges 347 -- 347
Management and mortgage programs 480 -- 480
Other, net (631) -- (631)
--------- ---------- --------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS 706 1 707
--------- ---------- --------------
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 314 -- 314
Net assets acquired (net of cash acquired) and
acquisition related payments (2,731) -- (2,731)
Management and mortgage programs (1,542) -- (1,542)
Other, net (241) (1) (242)
--------- ---------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (4,200) (1) (4,201)
--------- ---------- --------------
FINANCING ACTIVITIES:
Proceeds from borrowings 4,809 -- 4,809
Principal payments on borrowings (2,596) -- (2,596)
Issuance of common stock 171 -- 171
Repurchases of common stock (258) -- (258)
Management and mortgage programs 1,117 -- 1,117
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary holding solely
senior debentures issued by the Company 1,447 -- 1,447
--------- ---------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS 4,690 -- 4,690
--------- ---------- --------------
Effect of changes in exchange rates on cash and cash
equivalents (16) -- (16)
--------- ---------- --------------
Net cash used in discontinued operations (266) -- (266)
--------- ---------- --------------
Net increase in cash and cash equivalents 914 -- 914
Cash and cash equivalents, beginning of period 88 -- 88
--------- ---------- --------------
Cash and cash equivalents, end of period $ 1,002 $-- $ 1,002
========= ========== ==============
F-54
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
CENDANT MOVE.COM CENDANT
GROUP GROUP CONSOLIDATED
--------- ---------- --------------
OPERATING ACTIVITIES:
Net loss $ (216) $(1) (217)
Adjustments to reconcile net loss to net cash
provided by operating activities from continuing
operations:
Loss from discontinued operations, net of tax 42 -- 42
Extraordinary gain, net of tax (26) -- (26)
Cumulative effect of accounting change, net of tax 283 -- 283
Depreciation and amortization 221 1 222
Other charges 701 -- 701
Management and mortgage programs 734 -- 734
Other, net (942) 1 (941)
--------- ---------- --------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS 797 1 798
--------- ---------- --------------
INVESTING ACTIVITIES:
Net proceeds from dispositions of businesses 224 -- 224
Net assets acquired (net of cash acquired) and
acquisition related payments (564) (3) (567)
Management and mortgage programs (1,497) -- (1,497)
Other, net (486) (1) (487)
--------- ---------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS (2,323) (4) (2,327)
--------- ---------- --------------
FINANCING ACTIVITIES:
Proceeds from borrowings 67 -- 67
Principal payments on borrowings (174) -- (174)
Issuance of convertible debt 544 -- 544
Issuance of common stock 132 -- 132
Repurchases of common stock (171) -- (171)
Management and mortgage programs 510 -- 510
Other, net (7) -- (7)
Inter-group funding (3) 3 --
--------- ---------- --------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS 898 3 901
--------- ---------- --------------
Effect of changes in exchange rates on cash and cash
equivalents 15 -- 15
--------- ---------- --------------
Net cash used in discontinued operations 563 -- 563
--------- ---------- --------------
Net decrease in cash and cash equivalents (50) -- (50)
Cash and cash equivalents, beginning of period 138 -- 138
--------- ---------- --------------
Cash and cash equivalents, end of period $ 88 $-- $ 88
========= ========== ==============
27. SUBSEQUENT EVENTS
PENDING ACQUISITIONS
Avis Group Holdings, Inc. On November 13, 2000, the Company announced that
they entered into a definitive agreement to acquire all of the outstanding
shares of Avis Group Holdings, Inc. ("Avis," formerly Avis Rent A Car,
Inc.) that are not currently owned by the Company at a price of $33.00 per
F-55
share in cash. Approximately 26 million outstanding shares of Avis common
stock and options to purchase 7.9 million additional shares are not
currently owned by the Company. Accordingly, the transaction is valued at
approximately $937 million, inclusive of the net cash obligation related to
Avis stock options expected to be cancelled prior to consummation.
The acquisition will be made by PHH. PHH will distribute the consumer car
rental business to a Company subsidiary not within PHH's ownership
structure. After the acquisition and the distribution of the consumer car
rental business, PHH will own and operate the Avis fleet business, as well
as the Wright Express fuel card business. The merger is conditioned upon,
among other things, approval of a majority of the votes cast by Avis
stockholders who are unaffiliated with the Company and also customary
regulatory approvals. Although no assurances can be given, the Company
expects the transaction to close in the first quarter of 2001.
Fairfield Communities, Inc. On November 2, 2000, the Company announced that
it had entered into a definitive agreement with Fairfield Communities, Inc.
("Fairfield") to acquire all of its outstanding common stock at $15 per
share, or approximately $635 million in aggregate. The final acquisition
price may increase to a maximum of $16 per share depending upon a formula
based on the average trading price of CD common stock over a twenty trading
day period prior to the date on which Fairfield stockholders meet to
approve the transaction. The consideration is payable in cash and the
balance will either be in cash or CD common stock, or a combination of cash
and CD common stock, at the holder's election. We are not required,
however, to pay more than 50% of the consideration in cash and have the
right to substitute cash for any shares of Fairfield common stock instead
of issuing CD common stock. Consummation of the transaction is subject to
customary regulatory approvals. Although no assurances can be given, the
Company expects to complete the acquisition in early 2001.
PENDING DISPOSITION
On October 27, 2000, the Company announced that it had entered into a
definitive agreement (the "Homestore Transaction") with Homestore.com, Inc.
("Homestore") to sell its Internet real estate portal, move.com, certain
other businesses within its Move.com Group segment and Welcome Wagon
International, Inc. ("Welcome Wagon") (a wholly-owned subsidiary included
with the diversified services segment) in exchange for approximately 26
million shares of Homestore common stock valued at approximately $761
million. The Company intends on allocating a portion of the Homestore
common stock shares received to existing Move.com common stockholders and
option holders. After such allocation, the Company expects to retain
approximately 19 or 20 million shares of Homestore common stock.
Consummation of the transaction is subject to certain customary closing
conditions, including Hart Scott Rodino anti-trust approval. Although no
assurances can be given, the Company expects to complete the transaction
during the first quarter of 2001.
FUNDING OF THE CLASS ACTION LITIGATION
Under the Settlement Agreement, the Company had the option of forming a
trust established for the benefit of the plaintiffs in lieu of posting
collateral. On November 13, 2000, the Company funded such trust with a cash
deposit of approximately $350 million. Such deposit will serve to reduce
the collateral required to be posted under the Settlement Agreement.
CREDIT FACILITIES
During August 2000, the Company replaced its existing $1.0 billion, 364-day
revolving credit facility with a $1.75 billion, three-year competitive
advance and revolving credit agreement maturing on August 29, 2003. On
November 13, 2000, the Company posted letters of credit of $1.71 billion
from this agreement as collateral required under the Settlement Agreement.
During November 2000, the Company obtained $790 million in commitments for
surety bonds and posted this entire amount as collateral required under the
Settlement Agreement on November 13, 2000.
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During February 2000, PHH reduced the availability of its unsecured
committed credit facilities from $2.5 billion to $1.5 billion to reflect
the reduced borrowing needs of PHH as a result of the disposition of its
fleet businesses.
During September and November of 2000, PHH obtained lines of credit of $125
million and $150 million maturing in September 2001 and November 2001,
respectively.
PHH SHELF REGISTRATION
On September 22, 2000, PHH filed a shelf registration statement registering
an additional $2.625 billion of debt securities. PHH currently has $3.0
billion available for issuing medium-term notes under its existing shelf
registration statement.
SECURITIZATIONS
During the second and third quarters of 2000, the Company entered into
three separate financing agreements with Apple Ridge Funding LLC ("Apple
Ridge"), a bankruptcy remote, special purpose entity. Under the terms of
these agreements, certain relocation receivables will be transferred for
cash, on a revolving basis, to Apple Ridge until March 31, 2007. The
Company retains a subordinated residual interest and the related servicing
rights and obligations in the relocation receivables.
DEBT REDEMPTION
On January 21, 2000, the Company redeemed all outstanding 7 1/2% senior
notes at a redemption price of 100.695% of par plus accrued interest. In
connection with the redemption, the Company recorded an extraordinary loss
of $4 million ($2 million after tax) in the first quarter of 2000.
During March and November of 2000, the Company made principal payments
totaling $500 million to reduce its outstanding borrowings under its
existing term loan facility.
MANDATORILY REDEEMABLE PREFERRED INTEREST IN A SUBSIDIARY
In March 2000, a Company-formed limited liability corporation ("LLC")
issued a mandatorily redeemable preferred interest ("Senior Preferred
Interest") in exchange for $375 million in cash. The Senior Preferred
Interest is mandatorily redeemable 15 years from the date of issuance and
may be redeemed after 5 years, or earlier in certain circumstances.
Distributions on the Senior Preferred Interest are based on the three-month
LIBOR plus an applicable margin (1.77%). Simultaneously with the issuance
of the Senior Preferred Interest, the Company transferred certain assets to
the LLC. After the sale of the Senior Preferred Interest, the Company owned
100% of both the common interest and the junior preferred interest in the
LLC. In the event of default, holders of the Senior Preferred Interest have
certain liquidation preferences.
SHARE REPURCHASES
Subsequent to December 31, 1999, the Company repurchased an additional $306
million (approximately 18 million shares) of its common stock under its
repurchase program as of September 30, 2000.
STRATEGIC ALLIANCE
In February 2000, pursuant to a previously announced strategic alliance,
Liberty Media Corporation ("Liberty Media") invested $400 million in cash
to purchase 18 million shares of CD common stock and a two-year warrant to
purchase approximately 29 million shares of CD common stock at an exercise
price of $23.00 per share. In addition, in March 2000, Liberty Media's
Chairman, John C. Malone, Ph.D., purchased one million shares of CD common
stock for approximately $17 million in cash.
On November 16, 2000, Liberty Media purchased approximately 4.1 million
additional shares of CD common stock for consideration consisting of $12.34
per share, or $50 million in aggregate, in cash and approximately 2.3
million shares of CD common stock for consideration consisting of a warrant
to purchase up to approximately 29 million shares of CD common stock.
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MOVE.COM COMMON STOCK
Authorization of Tracking Stock. On March 21, 2000, the Company's
shareholders approved a proposal authorizing a new series of common stock
to track the performance of the Move.com Group. The Company's existing
common stock was reclassified as CD common stock, as described in Note 14
-- Shareholder's Equity. In addition, the Company's charter was amended and
restated to increase the number of authorized shares of common stock from
2.0 billion to approximately 2.5 billion, comprised of 2.0 billion shares
of CD common stock and 500 million shares of Move.com common stock.
The Company issued shares of Move.com common stock in several private
financings, including the following transactions:
NRT Incorporated Investment. On April 14, 2000, NRT purchased 319,591
shares of Move.com common stock for $31.29 per share or approximately $10
million in cash. The Company owns $179 million of NRT convertible preferred
stock, of which $21 million will be convertible, at the Company's option
upon occurrence of certain events, into no more than 50% of NRT's common
stock.
Chatham Street Holdings, LLC Investment. On March 31, 2000, Chatham Street
Holdings, LLC ("Chatham") exercised a contractual right to purchase
1,561,000 shares of Move.com common stock for $16.02 per share or
approximately $25 million in cash. In connection with such exercise, for
every two shares of Move.com common stock purchased, Chatham received a
warrant to purchase one share of Move.com common stock at a price equal to
$64.08 per share and a warrant to purchase one share of Move.com common
stock at a price equal to $128.16 per share. Also during March 2000, the
Company invested $25 million in convertible preferred stock of WMC Finance
Co. ("WMC"), an online provider of sub-prime mortgages and an affiliate of
Chatham (which is convertible into 2,541,946 shares or approximately 12% of
WMC's common stock at September 30, 2000), and was granted an option to
purchase approximately 5 million shares of WMC common stock.
On November 24, 2000 the Company and Chatham entered into an agreement
whereby Chatham sold to the Company (i) 2.6 million shares of Series E
cumulative preferred stock of WMC, (ii) 1,561,000 shares of Move.com common
stock and, (iii) warrants to purchase 1,561,000 shares of Move.com common
stock in exchange for $75.1 million in cash and 2.6 million shares of Class
A common stock of WMC. In consideration for such securities, the Company
also agreed to pay Chatham an additional $15 million within 90 days after
consummation of the Homestore Transaction.
Liberty Digital, Inc. Investment. On March 31, 2000, Liberty Digital, Inc.
("Liberty Digital") purchased 1,598,030 shares of Move.com common stock for
$31.29 per share in exchange for consideration consisting of $10 million in
cash and 813,215 shares of Liberty Digital Class A common stock valued at
approximately $40 million. In the event Move.com common stock is not
publicly traded by June 30, 2001, the Company will be required to exchange
such shares for CD common stock.
RESTRUCTURING COSTS AND UNUSUAL CHARGES
During the first quarter of 2000, the Company's management, with the
appropriate level of authority, formally committed to various strategic
initiatives. As a result of such initiatives, the Company incurred
restructuring and unusual charges of $106 million during the first quarter
of 2000, of which $20 million was reclassified as discontinued operations
during the third quarter of 2000. The charges of $106 million included $60
million of restructuring charges and $46 million of unusual charges.
The restructuring initiatives were aimed at improving the overall level of
organizational efficiency, consolidating and rationalizing existing
processes, reducing cost structures in our underlying businesses and other
related efforts. These initiatives primarily affected the Company's travel
and insurance/wholesale segments and its discontinued individual membership
segment. The initiatives are expected to be substantially completed by the
end of the first quarter of 2001. The restructuring charges included (i)
$25 million of personnel related costs primarily for severance resulting
from the consolidation of business operations and certain corporate
functions, (ii) $26 million of asset impairments primarily related to the
planned exit of a timeshare software development
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business and (iii) $9 million of facility related costs for facility
closures and lease obligations resulting from the consolidation and
relocation of business operations.
The unusual charges of $46 million included (i) $21 million to fund an
irrevocable contribution to an independent technology trust responsible for
the installation of a property management system, sponsored by us, (ii) $11
million associated with executive terminations, (iii) $7 million
principally related to the abandonment of certain computer system
applications, (iv) $3 million related to stock option contract
modifications and (v) $4 million of other related costs.
PRIDES LITIGATION SETTLEMENT
On March 14, 2000, pursuant to a court order approving the previously
disclosed PRIDES settlement, the Company issued approximately 25 million
Rights with a calculated value of $11.71 per Right. Right holders may sell
or exercise the Rights by delivering the Company three Rights together with
two PRIDES in exchange for two new PRIDES (the "New PRIDES") for a period
beginning upon distribution of the Rights and concluding upon expiration of
the Rights (February 2001). The terms of the New PRIDES are the same as the
original PRIDES, except that the conversion rate was revised and fixed so
that, at the time of the issuance of the Rights, the New PRIDES had a value
equal to $17.57 more than the original PRIDES.
In connection with the issuance of the Rights, the Company recorded a
non-cash credit of $41 million to litigation settlement and related costs
during the first quarter of 2000, with a corresponding decrease to
additional paid-in capital. The credit represented an adjustment related to
the number of Rights to be issued, which was decreased by approximately 3
million, as such Rights were unclaimed and uncontested.
On May 3, 2000, pursuant to the PRIDES settlement, the Company issued
approximately 4 million additional PRIDES (the "Additional PRIDES"), with a
face value of $50 per Additional PRIDES, and received approximately $91
million in cash proceeds related to the issuance of such securities. Only
Additional Income PRIDES (having identical terms to the originally issued
Income PRIDES) were issued, of which 3,619,374 were immediately converted
into 3,619,374 New Income PRIDES and 380,626 remained Additional Income
PRIDES. No Additional Growth PRIDES were issued in the offering. Upon the
issuance of the Additional Income PRIDES, the Company recorded a reduction
to stockholders' equity of $108 million equal to the value of the total
future contract adjustment payments to be made.
OTHER LITIGATION
During the third quarter of 2000, the Company incurred charges of $20
million in connection with litigation asserting claims associated with
accounting irregularities in the former business units of CUC and outside
of the principal common shareholder class action lawsuit.
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