INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the supplemental consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related supplemental consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the supplemental consolidated
financial statements based on our audits. The supplemental consolidated
financial statements give retroactive effect to the merger of CUC International
Inc. with HFS Incorporated to form Cendant Corporation, which has been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. We did not audit the balance
sheets of CUC International Inc. as of January 31, 1997 and 1996, or the
related statements of income, shareholders' equity, and cash flows of CUC
International Inc. for the years ended January 31, 1997, 1996 and 1995, which
statements reflect total assets of approximately $2.5 billion and $2.1 billion
as of January 31, 1997 and 1996, respectively, and net income of approximately
$164.1 million, $145.0 million and $164.1 million for the years ended
January 31, 1997, 1996 and 1995, respectively. Nor did we audit the balance
sheets of PHH Corporation (a consolidated subsidiary of HFS Incorporated) as
of December 31, 1996 and January 31, 1996, or the related statements of income,
shareholders' equity, and cash flows of PHH Corporation for the years ended
December 31, 1996, January 31, 1996 and 1995, which statements reflect total
assets of approximately $6.6 billion and $5.8 billion as of December 31, 1996
and January 31, 1996, respectively, and net income of approximately $87.6
million, $78.1 million and $69.0 million for the years ended December 31, 1996,
January 31, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for CUC International Inc. and PHH
Corporation for such periods, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cendant Corporation
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in the notes to the supplemental consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights", in the year
ended December 31, 1995.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
December 17, 1997
1
Report of Independent Auditors
Board of Directors and Shareholders
CUC International Inc.
We have audited the accompanying consolidated balance sheets of CUC
International Inc. ("CUC") as of January 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended January 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of the following
wholly-owned subsidiaires: Davidson & Associates, Inc. ("Davidson") as of
December 31, 1995 and for the years ended December 31, 1995 and 1994, Sierra
On-Line, Inc. ("Sierra") as of March 31, 1996 and for the years ended March 31,
1996 and 1995 and Ideon Group, Inc. ("Ideon") as of December 31, 1995 and for
the year ended December 31, 1995 and the year ended October 31, 1994. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to
December 31 (the "Ideon Transition Period"). We also did not audit the
statement of operations for the Ideon Transition Period which includes a loss
of $49.9 million included as a charge to retained earnings in the 1996
consolidated financial statements. These financial statements reflect, as of
January 31, 1996, total assets constituting 31.5% of the consolidated finanical
statements total and reflect total revenues constituting 27.6% and 28.2% of the
consolidated financial statements totals for the years ended January 31, 1996
and 1995, respectively, and were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to Davidson,
Sierra and Ideon for the periods indicated above, is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall finanical
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CUC at January 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended January 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 10, 1997
2
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PHH Corporation
We have audited the consolidated balance sheets of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended December 31, 1996 and each of the years in the two-year period ended
January 31, 1996, not presented separately herein. These consolidated statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PHH Corporation and
subsidiaries as of December 31, 1996 and January 31, 1996, and the results of
their operations and their cash flows for the year ended December 31, 1996 and
for each of the years in the two-year period ended January 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", in the year ended January 31, 1996.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
3
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the consolidated balance sheet of Sierra On-Line Inc. and
subsidiaries (the "Company") as of March 31, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 1996, not presented separately herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
fairly, in all material respects, the financial position of the Company as of
March 31, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
June 24, 1996
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Davidson & Associates, Inc.
We have audited the consolidated balance sheet of Davidson & Associates, Inc.
and subsidiaries as of December 31, 1995 and the related consolidated
statements of earnings, shareholders' equity and cash flows and related
financial statement schedule for each of the years in the two-year period
ended December 31, 1995, not presented separately herein. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Davidson & Associates, Inc. and subsidiaries as of December 31, 1995
and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated financial statements of Ideon Group, Inc.
(formerly known as SafeCard Services, Incorporated), and its subsidiaries
(not presented separately herein), present fairly, in all material respects,
the financial position of Ideon Group, Inc. and its subsidiaries at
December 31, 1995, and the results of their operations and their cash flows
for the year ended December 31, 1995, the two months ended December 31, 1994,
and the year ended October 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Ideon Group, Inc. for any
period subsequent to December 31, 1995.
As discussed in Note 1, the Company changed the amortization periods for
deferred subscriber acquisition costs effective December 31, 1994.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Tampa, Florida
February 2, 1996
6
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
ASSETS 1996 1995
----------- -----------
Current assets
Cash and cash equivalents $ 633,903 $ 355,959
Marketable securities 94,200 97,164
Receivables, net of allowance for doubtful accounts
of $85,640 and $66,059 1,290,625 1,028,976
Deferred income taxes 141,251 50,563
Other current assets 369,614 271,483
----------- -----------
Total current assets 2,529,593 1,804,145
----------- -----------
Deferred membership acquisition costs 401,564 404,655
Franchise agreements - net 995,947 517,218
Goodwill - net 2,302,226 700,375
Other intangibles - net 636,230 38,845
Other assets 993,574 573,537
----------- -----------
Total assets exclusive of assets under programs 7,859,134 4,038,775
----------- -----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,418,666 3,243,236
Relocation receivables 773,326 736,038
Mortgage loans held for sale 1,248,299 784,901
Mortgage servicing rights and fees 288,943 191,434
----------- -----------
5,729,234 4,955,609
----------- -----------
TOTAL ASSETS $13,588,368 $ 8,994,384
=========== ===========
See accompanying notes to supplemental consolidated financial statements.
7
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
------------ ------------
Deferred income 1,099,393 747,414
Long-term debt 1,004,584 353,977
Deferred income taxes 46,770 59,899
Other noncurrent liabilities 78,115 102,601
------------ ------------
Total liabilities exclusive of liabilities under programs 3,893,808 2,182,948
------------ ------------
Liabilities under management and mortgage programs
Debt 5,089,943 4,427,872
Deferred income taxes 281,948 234,918
------------ ------------
5,371,891 4,662,790
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value - authorized
10 million shares; none issued and outstanding -- --
Common stock, $.01 par value - authorized
2 billion shares; issued 804,655,850
and 700,361,629 shares 8,047 7,004
Additional paid-in capital 2,870,422 994,814
Retained earnings 1,556,300 1,202,589
Net unrealized gain on marketable securities 4,334 593
Currency translation adjustment (12,452) (25,356)
Restricted stock, deferred compensation (28,212) --
Treasury stock, at cost, 6,911,757 and 5,115,947 shares (75,770) (30,998)
------------ ------------
Total shareholders' equity 4,322,669 2,148,646
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,588,368 $ 8,994,384
============ ============
See accompanying notes to supplemental consolidated financial statements.
8
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
REVENUES
Membership and service fees - net $ 3,433,917 $ 2,606,196 $ 2,178,984
Fleet leasing (net of depreciation and
interest costs of $1,132,408, $1,088,993
and $976,244, respectively) 56,660 52,079 47,860
Other 418,203 333,847 219,887
----------- ----------- -----------
Net revenues 3,908,780 2,992,122 2,446,731
----------- ----------- -----------
EXPENSES
Operating 1,392,788 1,110,928 921,832
Marketing and reservation 1,089,482 875,155 742,933
General and administrative 339,543 279,500 221,745
Depreciation and amortization 167,907 112,914 97,175
Interest - net 25,445 13,264 10,553
Merger and related costs and other unusual charges 179,945 97,029 7,900
Gain on sale of the ImagiNation Network -- -- (19,739)
----------- ----------- -----------
Total expenses 3,195,110 2,488,790 1,982,399
----------- ----------- -----------
Income before income taxes 713,670 503,332 464,332
Provision for income taxes 290,059 200,507 179,742
----------- ----------- -----------
Net income before cumulative effect of
accounting change for income taxes 423,611 302,825 284,590
Cumulative effect of accounting change for
income taxes -- -- 2,000
----------- ----------- -----------
Net income $ 423,611 $ 302,825 $ 286,590
=========== =========== ===========
PER SHARE INFORMATION
Net income per share
Primary $ 0.53 $ 0.42 $ 0.42
Fully diluted $ 0.52 $ 0.41 $ 0.41
Weighted average shares
Primary 814,292 734,624 690,547
Fully diluted 820,586 748,704 702,209
See accompanying notes to supplemental consolidated financial statements.
9
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance, January 1, 1994 643,258 $ 6,433 $ 533,807 $ 822,399 $ -- $ (26,481) $ -- $(7,160) $(9,745)
Issuance of common stock 10,592 106 62,043 -- -- -- -- -- --
Exercise of stock options
by payment of cash and
common stock 7,732 76 53,649 (10,140) -- -- -- -- (760)
Tax benefit from exercise
of stock options and
vesting of restricted
stock -- -- 44,151 -- -- -- -- -- --
Amortization of
restricted stock -- -- 303 -- -- -- -- -- --
Amortization of ESOP
obligation -- -- -- -- -- -- -- 2,331 --
Adjustment to reflect
change in GETKO and
NAOG fiscal years -- -- -- (4,067) -- -- -- 3,071 --
Cash dividends declared -- -- -- (29,199) -- -- -- -- --
Conversion of convertible
notes 4,484 45 22,650 -- -- -- -- -- --
Net unrealized loss on
marketable securities -- -- -- -- (748) -- -- -- --
Purchase of common stock -- -- -- -- -- -- -- -- (25,885)
Retirement of treasury
stock (2,832) (28) (25,873) -- -- -- -- -- 25,885
Currency translation
adjustment -- -- -- -- -- 4,529 -- -- --
Distribution of Chartwell
Leisure Inc. -- -- (18,445) (79,775) -- -- -- -- --
Net income -- -- -- 286,590 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance, December 31, 1994 663,234 6,632 672,285 985,808 (748) (21,952) -- (1,758) (10,505)
See accompanying notes to supplemental consolidated financial statements.
10
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
January 1, 1995 663,234 $6,632 $672,285 $985,808 $ (748) $(21,952) $ -- $(1,758) $(10,505)
Issuance of common
stock 20,810 208 183,384 -- -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 12,435 124 64,421 -- -- -- -- -- (20,493)
Tax benefit from
exercise of
stock options -- -- 54,842 -- -- -- -- -- --
Amortization of
ESOP obligation -- -- 1,242 -- -- -- -- 1,758 --
Exercise of stock
warrants 2,381 24 14,872 -- -- -- -- -- --
Cash dividends
declared and
other equity
distributions -- -- 175 (36,005) -- -- -- -- --
Adjustment to
reflect change
in Advance Ross
and Ideon fiscal
years -- -- -- (50,039) -- -- -- -- --
Conversion of
convertible notes 2,126 21 13,670 -- -- -- -- -- --
Net unrealized gain
on marketable
securities -- -- -- -- 1,341 -- -- -- --
Purchase of common
stock -- -- -- -- -- -- -- -- (10,083)
Retirement of
treasury stock (624) (5) (10,077) -- -- -- -- -- 10,083
Currency
translation
adjustment -- -- -- -- -- (3,404) -- -- --
Net income -- -- -- 302,825 -- -- -- -- --
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
December 31, 1995 700,362 7,004 994,814 1,202,589 593 (25,356) -- -- (30,998)
See accompanying notes to supplemental consolidated financial statements.
11
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
NET UNREALIZED RESTRICTED
ADDITIONAL GAIN (LOSS) ON CURRENCY STOCK,
COMMON STOCK PAID-IN RETAINED MARKETABLE TRANSLATION DEFERRED UNEARNED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION ESOP STOCK
------- ------- --------- --------- ----------- ---------- ------------ -------- --------
Balance,
January 1, 1996 700,362 $7,004 $ 994,814 $1,202,589 $ 593 $(25,356) $ -- $ -- $(30,998)
Hebdo Mag
adjustment 14,203 142 16,705 718 -- 1,612 -- -- --
Issuance of common
stock 70,961 710 1,654,009 (34,137) -- -- -- -- --
Exercise of stock
options by
payment of cash
and common stock 14,010 140 78,161 -- -- -- -- -- (25,620)
Restricted stock
issuance 1,365 13 30,472 -- -- -- (30,485) -- --
Amortization of
restricted stock -- -- -- -- -- -- 2,273 -- --
Tax benefit from
exercise of
stock options -- -- 78,844 -- -- -- -- -- --
Cash dividends
declared -- -- -- (29,402) -- -- -- -- --
Adjustment to
reflect change
in Davidson,
Sierra & Ideon
fiscal years -- -- -- (4,674) -- -- -- -- --
Adjustment to
reflect change
in PHH fiscal
year (67) (1) (634) (2,405) -- 2,380 -- -- --
Conversion of
convertible
notes 3,822 39 18,051 -- -- -- -- -- --
Net unrealized
gain on
marketable
securities -- -- -- -- 3,741 -- -- -- --
Purchase of
common stock -- -- -- -- -- -- -- -- (19,152)
Currency
translation
adjustment -- -- -- -- -- 8,912 -- -- --
Net income -- -- -- 423,611 -- -- -- -- --
------- ------ ---------- ---------- ------ -------- -------- ------- --------
Balance,
December 31, 1996 804,656 $8,047 $2,870,422 $1,556,300 $4,334 $(12,452) $(28,212) $ -- $(75,770)
See accompanying notes to supplemental consolidated financial statements.
12
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
OPERATING ACTIVITIES 1996 1995 1994
----------- ----------- -----------
Net income $ 423,611 $ 302,825 $ 286,590
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 177,725 117,031 103,667
Membership acquisition costs (638,182) (605,058) (508,807)
Amortization of membership costs 641,272 556,548 467,019
Gain on sales of mortgage servicing rights (5,194) (17,400) (28,076)
Deferred income taxes 56,523 22,632 58,387
Increase (decrease) from changes in:
Receivables (162,566) (184,801) (103,688)
Accounts payable, accrued expenses and other current liabilities 149,387 136,595 (33,804)
Deferred income 23,386 83,533 60,220
Other 28,127 (55,027) (100,004)
----------- ----------- -----------
694,089 356,878 201,504
----------- ----------- -----------
Increase (decrease) from changes in assets
under management and mortgage programs:
Depreciation and amortization under management and
mortgage programs 1,021,761 960,913 869,807
Mortgage loans held for sale (73,308) (139,520) 42,562
----------- ----------- -----------
948,453 821,393 912,369
----------- ----------- -----------
Net cash provided by operating activities 1,642,542 1,178,271 1,113,873
----------- ----------- -----------
INVESTING ACTIVITIES
Assets under management and mortgage programs:
Investment in leases and leased vehicles (1,738,426) (2,008,559) (1,703,690)
Payments received on investment in leases and leased vehicles 595,852 576,670 593,155
Proceeds from sales and transfers of leases and
leased vehicles to third parties -- 109,859 105,087
Additions to originated mortgage servicing rights (164,393) (130,135) (41,920)
Proceeds from sales of mortgage servicing rights 7,113 21,742 36,836
Repayment of advances on homes under management 4,348,857 6,070,490 5,059,017
Equity advances on homes under management (4,307,978) (6,238,538) (4,989,953)
----------- ----------- -----------
(1,258,975) (1,598,471) (941,468)
Property and equipment additions (140,626) (108,702) (73,804)
Proceeds from sales of marketable securities 137,277 255,916 136,977
Purchases of marketable securities (125,551) (138,198) (161,585)
Loans and investments (12,721) (33,783) (42,524)
Net assets acquired, exclusive of cash acquired (1,688,294) (145,789) (63,437)
Funding of grantor trusts (89,849) -- --
Other 33,634 (23,821) 27,355
----------- ----------- -----------
Net cash used in investing activities (3,145,105) (1,792,848) (1,118,486)
----------- ----------- -----------
See accompanying notes to supplemental consolidated financial statements.
13
CENDANT CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings $ 2,150,404 $ 1,858,826 $ 1,413,699
Principal payments on borrowings (1,649,040) (1,282,911) (1,252,979)
Net change in short term borrowings under
management and mortgage programs 231,819 17,419 27,852
Issuance of common stock 1,222,199 100,806 46,401
Purchases of common stock (19,152) (10,083) (25,885)
Redemption of warrants -- 14,877 --
Payment of dividends of pooled entities (27,782) (30,971) (29,199)
Other (81,620) -- (50,043)
----------- ----------- -----------
Net cash provided by financing activities 1,826,828 667,963 129,846
----------- ----------- -----------
Effect of changes in exchange rates
on cash and cash equivalents (46,321) 6,545 2,665
----------- ----------- -----------
Net increase in cash and cash equivalents 277,944 59,931 127,898
Cash and cash equivalents, beginning of period 355,959 296,028 168,130
----------- ----------- -----------
Cash and cash equivalents, end of period $ 633,903 $ 355,959 $ 296,028
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 307,600 $ 285,400 $ 207,900
=========== =========== ===========
Taxes $ 89,400 $ 90,700 $ 87,600
=========== =========== ===========
See accompanying notes to supplemental consolidated financial statements.
14
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Cendant Corporation (formerly CUC International
Inc. ("CUC")), together with its subsidiaries and its joint ventures (the
"Company") is a leading global provider of services to businesses serving
consumer industries. On December 17, 1997, the Company merged with HFS
Incorporated ("HFS"), which has been accounted for as a pooling of
interests. The Company primarily engages in three business segments:
membership services, travel and real estate.
MEMBERSHIP SERVICES SEGMENT BUSINESSES:
o Membership. The Company provides individual, wholesale and discount
program membership services to consumers which are distributed through
various channels, including through financial institutions, credit
unions, charities, other cardholder-based organizations and retail
establishments. These memberships include such components as shopping,
travel, auto, dining, home improvement, lifestyle, credit card and
checking account enhancement packages, financial products and discount
programs. The Company also administers insurance package programs
which are generally combined with discount shopping and travel for
credit union members, distributes welcoming packages which provide new
homeowners with discounts from local merchants, and provides travelers
with value-added tax refunds.
TRAVEL SEGMENT BUSINESSES:
o Lodging franchise. The Company franchises guest lodging facilities and
provides operational and administrative services to its franchisees.
As franchisor, the Company licenses the owners and operators of
independent hotels to use the Company's brand names. Services include
access to a national reservation system, national advertising and
promotional campaigns, co-marketing programs and volume purchasing
discounts.
o Car rental. The Company licenses the Avis trademark to Avis
Rent A Car, Inc. ("ARAC"). 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. The Company also
provides similar franchise services to licensees other than ARAC.
o Timeshare. The Company is a provider of timeshare exchange programs,
publications and other travel related services to the timeshare
industry.
o Fleet management. The Company provides services which primarily
consist of the management, purchasing, leasing, and resale of vehicles
for corporate clients and government agencies. These services also
include fuel, maintenance, safety and accident management programs and
other fee-based services for clients' vehicle fleets.
15
REAL ESTATE SEGMENT BUSINESSES:
o Real estate franchise. The Company franchises residential real estate
brokerage offices and provides operational and administrative services
to its franchisees. As franchisor, the Company licenses the owners and
operators of independent real estate brokerage offices to use the
Company's brand names. The Company provides services designed to
increase franchisee revenue and profitability including national
advertising and promotions, referrals, training and volume purchasing
discounts.
o Relocation. The Company provides relocation services to client
corporations which include the responsibility of selling transferee
residences, providing equity advances on transferee residences for the
purchase of new homes and certain home management services. The
Company also offers fee-based programs such as home marketing
assistance, household goods moves, destination services and property
dispositions for financial institutions and government agencies.
o Mortgage services. The Company provides services which primarily
include the origination, sale and servicing of residential first
mortgage loans. The Company markets a variety of first mortgage
products to consumers through relationships with corporations,
affinity groups, financial institutions, real estate brokerage firms
and other mortgage banks.
OTHER SEGMENT BUSINESSES: The Company develops, publishes and distributes
educational and entertainment software for home and school use and provides
marketing and other services to casino gaming facilities. Also included in
other segment businesses is the equity in the earnings from its investment
in ARAC.
PRINCIPLES OF CONSOLIDATION: The accompanying supplemental consolidated
financial statements include the accounts and transactions of the Company
together with its joint ventures and its wholly owned and majority owned
subsidiaries except for the Company's ownership of ARAC, which is accounted
for under the equity method. The accompanying supplemental consolidated
financial statements have been restated for the business combinations
accounted for as poolings of interests (as discussed in Note 2) as if such
combined companies had operated as one entity since inception. All material
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
FRANCHISE AGREEMENTS: Franchise agreements are recorded at their estimated
fair values upon acquisition and amortized on a straight-line basis over
the estimated period to be benefited, ranging from 12 to 40 years. At
December 31, 1996 and 1995, accumulated amortization amounted to $87.9
million and $65.9 million, respectively.
GOODWILL: Goodwill, which represents the excess of cost over fair value of
net assets acquired is being amortized on a straight-line basis over the
estimated useful lives, ranging from 5 to 40 years. At December
16
31, 1996 and 1995, accumulated amortization amounted to $168.6 million and
$74.1 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective carrying
values to the current and expected future cash flows to be generated from
such assets. Property and equipment is evaluated separately within each
business segment. The recoverability of franchise agreements and goodwill
are evaluated on a separate basis for each acquisition and each respective
franchise brand.
MEMBERSHIP ACQUISITION COSTS: Membership acquisition costs are deferred and
charged to operations as membership fees are recognized. These costs, which
relate directly to membership solicitations (direct response advertising
costs), principally include: postage, printing, kits, mailings,
publications (including coupon books) and telemarketing costs.
Substantially all of these costs are incurred for services performed by
outside sources. Such costs are amortized on a straight-line basis as
revenues are realized over the average membership period (generally one to
three years). The membership acquisition costs incurred, applicable to
obtaining a new member, for memberships other than coupon book memberships,
generally approximate the initial membership fee. Initial membership fees
for coupon book memberships generally exceed the membership acquisition
costs incurred applicable to obtaining a new member. However, if membership
acquisitions costs were to exceed the membership fee, an appropriate
adjustment would be made for any significant impairment.
Amortization of membership acquisition costs, including deferred renewal
costs, which consist principally of charges from sponsoring institutions
and publications, amounted to $641.3 million, $556.5 million and $467.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
All advertising costs other than direct response advertising costs are
expensed in the period incurred. Such amounts, exclusive of amounts
recorded as part of marketing and reservation expense, were $273.9 million,
$172.3 million and $133.8 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Membership fees are generally billed through financial institutions and
other cardholder based institutions and are recorded as deferred membership
income upon acceptance of membership, net of estimated cancellations, and
pro-rated over the membership period.
SOFTWARE RESEARCH AND DEVELOPMENT COSTS AND COSTS OF SOFTWARE REVENUE:
Capitalization of software development costs begins upon the establishment
of technological feasibility of the product. Costs meeting this criteria
are insignificant and, therefore, most costs related to designing,
development and testing new software products are charged to operating
expenses as incurred. Software research and development costs aggregated
$66.2 million, $52.9 million and $36.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. Software net revenue included in
other was $375.2 million, $291.9 million and $191.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Costs of software
revenue include material costs, manufacturing labor and overhead and
royalties paid to developers and affiliated label publishers. Costs of
software revenue are included in operating expenses and aggregated $109.6
million, $115.3 million and $73.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has a history of working closely with all of its distributors
and retailers with respect to selling consumer software. As a result, the
Company monitors the sales of its consumer software at all of its
significant points of sale on a regular basis. Therefore, the Company has
extensive data on returns by product on an on-going basis and does not have
any significant obligations for future performance. Accordingly, the
Company has the ability to estimate the amount of future returns and
accurately determine the amount of revenue that should be recognized in
accordance with Statement of Position 91-1 "Software Revenue Recognition"
at any point in time.
REVENUE RECOGNITION: Revenue primarily consists of fees for providing
services to businesses in consumer industries.
Membership revenue: Membership fees are generally billed through financial
institutions and other cardholder based institutions and are recorded as
deferred membership income upon acceptance of membership, net of estimated
cancellations. Membership fees are recognized over the average membership
period, generally one to three years. Deferred membership income is
classified as non-current in the supplemental consolidated balance sheet
since working capital will not be required as the deferred income is
recognized over future periods.
Franchise revenue: Franchise revenue principally consists of royalty,
marketing and reservation fees which are based on a percentage of
franchised lodging properties' gross room sales and franchised real estate
17
brokerage offices' gross commissions earned on sales of residential real
estate properties. Royalty, marketing and reservation fees are accrued as
the underlying franchisee revenue is earned. Franchise revenue also
includes initial franchise fees which are recorded as revenue when the
lodging property, car rental location or real estate brokerage office
opens as a franchised unit.
Relocation revenue: Relocation revenue primarily consists of the purchase,
management and resale of homes and fee based home related services for
transferred employees of corporate clients, members of affinity group
clients and government agencies. Although the Company acquires the home of
client employees, the client corporation reimburses the Company for
carrying costs until the home is sold and for home sale losses.
Accordingly, the Company earns a fee for services with minimal real estate
risk. Revenues associated with the resale of a residence are recognized
when services are performed.
Timeshare revenue: Timeshare exchange fees are recognized as revenue when
the exchange request has been confirmed to the subscriber. Timeshare
subscription revenue is deferred upon receipt and recorded as revenue as
the contractual services (delivery of publications) are provided to
subscribers.
Fleet management revenue: Revenues from fleet management services other
than leasing are recognized over the period in which services are provided
and the related expenses are incurred. The Company records the cost of
leased vehicles as "net investment in leases and leased vehicles". Amounts
charged to lessees for interest on the unrecovered investment are credited
to income on a level yield method which approximates the contractual
terms.
Mortgage services revenue: Loan origination fees and direct loan
origination costs are deferred until the loan is sold. Servicing fees are
credited to income when received. Sales of mortgage loans are generally
recorded on the date a loan is delivered to an investor. Sales of mortgage
securities are recorded on the settlement date.
The Company records mortgage servicing rights at the time a loan is sold
by allocating cost based on the relative fair value of assets acquired, as
long as the recorded amount is less than the servicing rights' fair value.
The carrying value of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing income.
Gains or losses on the sale of mortgage servicing rights are recognized
when title and all risks and rewards have irrevocably passed to the buyer
and there are no significant unresolved contingencies.
The Company reviews the recoverability of mortgage servicing rights based
on their fair value, and records impairment to individual strata. For
measuring impairment, the interest rate bands of the underlying loans are
the risk characteristic used to stratify the capitalized servicing
portfolio. To determine the fair value of mortgage servicing rights, the
Company uses market prices for comparable mortgage servicing, when
available, or alternatively uses a valuation model that calculates a
present value for mortgage servicing rights with assumptions that market
participants would use in estimating future net servicing income.
INCOME TAXES: The Company uses the liability method of recording deferred
income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of
assets acquired in business combinations accounted for as purchases and
their respective tax bases. The Company and its subsidiaries file a
consolidated federal income tax return for periods subsequent to each
acquisition.
18
NET INCOME PER SHARE: Net income per share has been computed based upon
the weighted average number of common and common equivalent shares
outstanding during the respective periods after giving effect to the
mergers and acquisitions accounted for in accordance with the pooling of
interests method of accounting (See Note 2) and stock splits (See Note
15). The $240 million 4-3/4% Convertible Senior Notes issued in February
1996 are antidilutive for all respective periods and, accordingly, are not
included in the computations of earnings per share. In addition, the $150
million 4-1/2% Convertible Senior Notes issued in October 1994 are
antidilutive for the year ended December 31, 1994 and, accordingly, are
not included in the computation of earnings per share for 1994.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION: The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" and applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its stock option plans. Under APB No. 25, because the exercise prices of
the Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized (See Note 16).
DERIVATIVE FINANCIAL INSTRUMENTS: As a matter of policy, the Company does
not engage in derivatives trading or market-making activities. Rather,
derivative financial instruments including interest rate swaps and forward
exchange contracts are used by the Company principally in the management
of its interest rate exposures and foreign currency exposures on
intercompany borrowings. Additionally, the Company enters into forward
delivery contracts, financial futures programs and options to reduce the
risks of adverse price fluctuation with respect to both mortgage loans
held for sale and anticipated mortgage loan closings arising from
commitments issued.
Amounts to be paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized over the life of the
swap agreements as an adjustment to interest expense. The fair values of
the swap agreements are not recognized in the consolidated financial
statements since they are accounted for as hedges. Market value gains and
losses on the Company's foreign currency transaction hedges are recognized
in income and substantially offset by the related foreign exchange
transaction gains and losses. Market value gains and losses on positions
used as hedges in the mortgage banking services operations are deferred
and considered in the valuation of lower of cost or market value of
mortgage loans held for sale.
TRANSLATION OF FOREIGN CURRENCIES: Assets and liabilities of foreign
subsidiaries are translated at the exchange rates as of the balance sheet
dates, equity accounts are translated at historical exchange rates and
revenues, expenses and cash flows are translated at the average exchange
rates for the periods presented. Translation gains and losses are included
in shareholders' equity. Gains and losses resulting from the change in
exchange rates realized upon settlement of foreign currency transactions
are substantially offset by gains and losses realized upon settlement of
forward exchange contracts. Therefore, the resulting net income effect of
transaction gains and losses in the years ended December 31, 1996, 1995
and 1994, was not significant.
RECLASSIFICATIONS: Certain reclassifications have been made to the
historical financial statements of the Company and HFS to conform to the
restated presentation.
19
2. BUSINESS COMBINATIONS
In connection with the underlying pooling of interests business
combinations, the accompanying supplemental consolidated financial
statements have been prepared as if the Company and all such pooled
companies had operated as one entity since inception.
1997 POOLINGS
On December 17, 1997, the Company completed a merger with HFS (the
"Cendant Merger") by issuing 440.0 million shares of its common stock in
exchange for all of the outstanding common stock of HFS. Pursuant to the
terms of the agreement and plan of merger, HFS stockholders received
2.4031 shares of Company common stock for each share of HFS common stock.
Upon consummation of the Cendant Merger, the Company changed its name from
CUC International Inc. to Cendant Corporation. In connection with the
Cendant Merger, the Company changed its fiscal year end from January 31 to
December 31. HFS had a calendar year end and, accordingly, the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994
have been combined with the Company's statements of income for the fiscal
years ended January 31, 1997, 1996 and 1995, respectively.
On October 3, 1997, the Company, through a wholly-owned subsidiary
("Acquisition Sub"), acquired all of the outstanding capital stock of
Hebdo Mag International Inc. ("Hebdo Mag") pursuant to the terms of a
share purchase agreement dated August 13, 1997 among the Company,
Acquisition Sub, Hebdo Mag and other parties thereto. The purchase price
of approximately $440.0 million was satisfied by the issuance of 14.2
million shares of Company common stock. Hebdo Mag is a leading publisher
and distributor of classified advertising information. In connection with
the merger, Hebdo Mag's statement of income for the twelve month period
ended December 31, 1996 has been combined with the Company's statement of
income for the fiscal year ended January 31, 1997.
On April 30, 1997, prior to being merged with and into the Company, HFS
acquired PHH Corporation ("PHH") by merger (the "HFS/PHH Merger") which
was satisfied by the issuance of 72.8 million equivalent shares of Company
common stock in exchange for all of the outstanding common stock of PHH.
PHH is the world's largest provider of corporate relocation services and
also provides mortgage services and fleet management services. Prior to
the HFS/PHH Merger, PHH had an April 30 fiscal year end. In connection
with the HFS/PHH Merger, PHH prepared financial statements for the twelve
month periods ended December 31, 1996, January 31, 1996 and January 31,
1995. To conform to a calendar year end, the PHH statements of income for
the aforementioned twelve month periods have been combined with the HFS
statements of income for the years ended December 31, 1996, 1995 and 1994,
respectively. In combining PHH's twelve month periods to the HFS calendar
years, the supplemental consolidated statement of income for the year
ended December 31, 1996 included one month (January 1996) of PHH's
operating results which was also included in the supplemental consolidated
statement of income for the year ended December 31, 1995. Accordingly, an
adjustment has been made to 1996 retained earnings for the duplication of
net income of $8.3 million and cash dividends declared of $5.9 million for
such one month period.
During February 1997, the Company acquired substantially all of the assets
and assumed specific liabilities of Numa Corporation ("Numa") for $73.5
million. The purchase price was satisfied by the issuance of 3.4 million
shares of Company common stock. Numa publishes personalized heritage
publications and markets
20
and sells personalized merchandise.
1996 POOLINGS
During July 1996, the Company acquired all of the outstanding capital
stock of Davidson & Associates, Inc. ("Davidson") for a purchase price of
approximately $1 billion, which was satisfied by the issuance of 45.1
million shares of Company common stock. Also during July 1996, the Company
acquired all of the outstanding capital stock of Sierra On-Line, Inc.
("Sierra") for a purchase price of $858.0 million, which was satisfied by
the issuance of 38.4 million shares of Company common stock. Davidson and
Sierra develop, publish and distribute educational and entertainment
software for home and school use. During August 1996, the Company acquired
all of the outstanding capital stock of Ideon Group, Inc. ("Ideon"),
principally a provider of credit card enhancement services, for a purchase
price of $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
During 1995, prior to being merged into the Company, Davidson and Sierra
acquired all of the outstanding capital stock of various companies by
issuing an aggregate of .8 million and 3.9 million equivalent shares of
Company common stock, respectively. During 1994, Davidson acquired all of
the outstanding shares of a company by issuing .8 million equivalent
shares of Company common stock.
Davidson, Sierra and Ideon previously used the fiscal years ended December
31, March 31 and December 31, respectively, for their financial reporting.
To conform to the Company's January 31 former fiscal year end, Davidson's
and Ideon's operating results for January 1996 have been excluded from,
and Sierra's operating results for February and March 1996 have been
duplicated in the Company's year ended January 31, 1997 operating results.
The excluded and duplicated periods have been adjusted by a net $4.7
million charge to retained earnings at December 31, 1996. Effective
January 1, 1995, Ideon changed its fiscal year end from October 31 to
December 31 (the "Ideon Transition Period"). The Ideon Transition Period
has been excluded from the accompanying supplemental consolidated
statements of income. Ideon's revenues and net loss for the Ideon
Transition Period were $34.7 million and $49.9 million, respectively. This
excluded period has been adjusted by a $49.9 million charge to retained
earnings at December 31, 1995. The net loss for the Ideon Transition
Period was principally the result of a $65.5 million one-time, non-cash,
pre-tax charge recorded in connection with a change in amortization
periods for deferred membership acquisition costs. Prior to the change,
membership acquisition costs were generally amortized up to ten years for
single year membership periods and up to twelve years for multi-year
membership periods. These amortization periods represented the estimated
life of the member. At December 31, 1994, the amortization periods were
shortened to one year and three years for single and multi-year membership
periods, respectively (initial membership period without regard for
anticipated renewals).
In 1996, the Company acquired outstanding stock or substantially all of
the assets and liabilities of certain other entities for an aggregate
purchase price of $202.1 million, consisting of 8.3 million shares of
Company common stock.
1995 POOLINGS
During June 1995, the Company acquired all of the outstanding capital
stock of Getko Group, Inc. ("Getko") for a purchase price of $100.0
million, which was satisfied by the issuance of 5.6 million shares of
Company common stock. Getko distributes complimentary welcoming packages
to new homeowners throughout the
21
United States and Canada. During September 1995, the Company acquired all
of the outstanding capital stock of North American Outdoor Group, Inc.
("NAOG") for a purchase price of $52.0 million, which was satisfied by the
issuance of 2.3 million shares of Company common stock. NAOG owns one of
the largest for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other membership
organizations. During January 1996, the Company acquired all of the
outstanding capital stock of Advance Ross Corporation ("Advance Ross") for
a purchase price of $183.0 million, which was satisfied by the issuance of
8.9 million shares of Company common stock. Advance Ross processes
value-added tax refunds for travelers in over 20 European countries.
Getko, NAOG, and Advance Ross previously used the fiscal years ended
November 30, December 31 and December 31, respectively for their financial
reporting. To conform to the Company's January 31 former fiscal year end,
Getko's operating results for December 1993 and January 1994 and NAOG's
operating results for January 1994 have been excluded from the Company's
year ended January 31, 1995 operating results in the supplemental
consolidated financial statements. The excluded periods have been adjusted
by a net $4.1 million charge to retained earnings at December 31, 1994. In
addition, Advance Ross' operating results for January 1995 have been
excluded from the year ended January 31, 1996 operating results in the
supplemental consolidated financial statements. This excluded period has
been adjusted by a $0.1 million charge to retained earnings at December
31, 1995.
The following table presents the historical results of the Company and the
pooled entities for the last complete periods prior to their respective
mergers ($000's):
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
-------------------- ------------- ------------- -------------
Net revenues
The Company $ 2,002,597 $ 2,347,655 $ 1,401,551 $ 1,044,669
HFS (inclusive of PHH) 1,749,477 1,436,457 1,056,890 892,120
Hebdo Mag 137,941 124,668 - -
1996 Pooled Entities - - 533,681 371,715
1995 Pooled Entities - - - 138,227
------------ ------------- ------------- -------------
$ 3,890,015 $ 3,908,780 $ 2,992,122 $ 2,446,731
============ ============= ============= =============
Net income
The Company $ 252,082 $ 164,099 $ 164,669 $ 117,591
HFS (inclusive of PHH) 142,057 257,241 157,850 122,533
Hebdo Mag 6,555 2,271 - -
1996 Pooled Entities - - (19,694) 39,491
1995 Pooled Entities - - - 6,975
------------ ------------- ------------- -------------
$ 400,694 $ 423,611 $ 302,825 $ 286,590
============ ============= ============= =============
22
The following table shows the historical results of HFS and PHH for the
periods prior to the HFS/PHH Merger ($000's):
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ------------------------------------------------
1997 (UNAUDITED) 1996 1995 1994
------------------ ------------- ------------- -------------
Net revenues
HFS $ 347,962 $ 785,980 $ 411,299 $ 312,081
PHH 178,635 650,477 645,591 580,039
------------ ------------- ------------- -------------
Total $ 526,597 $ 1,436,457 $ 1,056,890 $ 892,120
============ ============= ============= =============
Net income
HFS $ 58,940 $ 169,584 $ 79,730 $ 53,489
PHH 32,164 87,657 78,120 69,044
------------ ------------- ------------- -------------
Total $ 91,104 $ 257,241 $ 157,850 $ 122,533
============ ============= ============= =============
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting; accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The operating results of
such acquired companies are reflected in the Company's supplemental
consolidated statements of income since the respective dates of
acquisition.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the acquisitions described below.
(IN MILLIONS) ACQUIRED IN 1996
-----------------------------------------------------
COLDWELL
RCI AVIS BANKER OTHER
--------- -------- ----------- -----------
Cash paid $ 412.1 $ 367.2 $ 747.8 $ 210.4
Common stock issued 75.0 338.4 - 70.8
Notes issued - 100.9 - 5.0
--------- -------- ----------- -----------
Total consideration 487.1 806.5 747.8 286.2
--------- -------- ----------- -----------
Assets acquired 439.1 783.9 541.7 94.8
Liabilities assumed 429.7 311.4 148.5 50.9
--------- -------- ----------- -----------
Fair value of net assets acquired 9.4 472.5 393.2 43.9
--------- -------- ----------- -----------
Goodwill $ 477.7 $ 334.0 $ 354.6 $ 242.3
========= ======== =========== ===========
Shares issued 2.4 11.1 46.6 2.5
========= ======== =========== ===========
23
(IN MILLIONS) ACQUIRED IN 1995
-------------------------------
CENTURY 21 OTHER
----------- ------------
Cash paid $ 100.2 $ 122.5
Common stock issued 64.8 40.8
Preferred stock issued 80.0 -
----------- ------------
Total consideration 245.0 163.3
----------- ------------
Assets acquired 120.6 67.2
Liabilities assumed 75.3 56.2
----------- ------------
Fair value of net assets acquired 45.3 11.0
----------- ------------
Goodwill $ 199.7 $ 152.3
=========== ============
Shares issued 9.6 6.0
=========== ============
RESORT CONDOMINIUMS INTERNATIONAL, INC.: In November 1996, HFS completed
the acquisition of all the outstanding capital stock of Resort
Condominiums International, Inc. and its affiliates ("RCI") for $487.1
million. The purchase agreement provides for contingent payments of up to
$200.0 million over the next five years which are based on components
which measure RCI's future performance, including EBITDA, net revenues and
number of members, as defined. Any contingent payments made will be
accounted for as additional goodwill.
AVIS: In October 1996, HFS completed the acquisition of all of the
outstanding capital stock of ARAC, initially including payments under
certain employee stock plans of Avis and the redemption of certain series
of preferred stock of Avis for an aggregate $806.5 million. Subsequently,
HFS made contingent cash payments of: (a) during the first quarter of
1997, $17.6 million to General Motors Corporation ("GM"), representing the
amount by which the value attributable under the stock purchase agreement
to HFS common stock received by GM in the Avis acquisition exceeded the
proceeds realized upon the subsequent sale of such Company common stock;
and (b) during the fourth quarter of 1996, $26.0 million of credit
facility termination fees which were not at HFS's discretion since the
facility termination resulted from change of control provisions and the
elimination of the Avis Employee Stock Ownership Plan in connection with
the Avis acquisition.
In September 1997, ARAC completed an IPO resulting in a 72.5% dilution of
HFS's investment in ARAC, the Company that operated the car rental
operations of HFS Car Rental, Inc. Net proceeds approximating $359.3
million retained by ARAC were used to fund its August 20, 1997 acquisition
of The First Gray Line Corporation and repay ARAC indebtedness. See Note
23 for a discussion of HFS's executed business plan and related accounting
treatment regarding Avis.
COLDWELL BANKER CORPORATION: In May 1996, HFS acquired by merger Coldwell
Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. HFS paid $640.0 million in cash
for all of the outstanding capital stock of Coldwell Banker and repaid
$105.0 million of Coldwell Banker indebtedness. The aggregate purchase
price for the transaction was financed through the May 1996 sale of an
aggregate 46.6 million equivalent shares of Company common stock pursuant
to a public offering. Subsequent to the acquisition of Coldwell Banker,
HFS acquired for $2.8 million a relocation consulting firm which was
merged into the Coldwell Banker relocation business.
24
Immediately following the closing of the Coldwell Banker acquisition, HFS
conveyed Coldwell Banker's 318 owned real estate brokerage offices (the
"Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which HFS has no beneficial interest. HFS recorded a
$5.0 million charge ($3.1 million, net of tax) in the second quarter of
1996 representing the fair value of operations contributed to the Trust.
The charge represents the fair value of the Owned Brokerage Business based
upon a valuation which considered earnings, cash flow, assets and business
prospects to the contributed business.
OTHER: During 1996, the Company and HFS acquired certain entities for an
aggregate purchase price of $286.2 million.
CENTURY 21: In August 1995, a majority owned subsidiary of HFS, C21
Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest residential real estate brokerage
franchisor. Aggregate consideration for the acquisition consisted of
$245.0 million plus expenses, including an initial cash payment of $70.2
million, 9.6 million equivalent shares of Company common stock valued at
$64.8 million, the assumption of $80.0 million of Century 21 redeemable
preferred stock issued prior to the acquisition (subsequently redeemed in
February 1996) and a $30.0 million contingent payment made in February
1996.
HFS and certain stockholders sold approximately 15.4 million equivalent
shares of Company common stock pursuant to a public offering in September
1995 (the "C21 Offering"). Included in the C21 Offering were 9.6 million
equivalent Company shares issued as partial consideration for the
acquisition of Century 21. In accordance with Century 21 acquisition
agreements, HFS received $28.9 million representing proceeds from the sale
of such shares in excess of $7.28 per equivalent Company share, net of
certain expenses of the C21 Offering. In connection with the C21 Offering,
HFS also received $20.1 million of proceeds, net of certain expenses from
the sale of shares issued upon the exercise of an underwriter
over-allotment option. Net proceeds from the C21 Offering received by HFS
resulted in corresponding increases in stockholders' equity.
In connection with the acquisition, HFS executed an agreement (the
"Subscription and Stockholders' Agreement"), with a management group
pursuant to which the ownership of Century 21 Holding Corp. common stock
would be divided 87.5% to HFS and 12.5% to the management group. In
addition, the management group executives entered into renewable
employment agreements with HFS with initial terms that commenced on
November 1, 1995 and would expire on December 31, 1997. HFS had a call
option to purchase Holding common stock owned by the management group and
the management group had a put option to require HFS to purchase all their
Holding common stock after January 1, 1998 at fair market value. Effective
October 29, 1996 (the "Effective Date"), HFS amended the Subscription and
Stockholders' Agreement to provide that HFS's call option to purchase
Holding common stock at fair value from the management group would be
accelerated to the Effective Date with the fair value determined as of the
Effective Date. Pursuant to such amendment, the employment agreements were
terminated in October 1996 and the put and call options have been
exercised. The 12.5% interest was acquired by HFS for $52.8 million in the
second quarter of 1997.
OTHER: During 1995, the Company and HFS collectively acquired certain
entities for an aggregate purchase price of $163.3 million.
PRO FORMA INFORMATION (UNAUDITED): The following information reflects pro
forma statements of income data for the years ended December 31, 1996 and
1995 assuming the aforementioned completed acquisitions were consummated
on January 1, 1995.
25
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values with appropriate recognition given
to the effect of current interest rates and income taxes. Management does
not expect that the final allocation of the purchase prices for the above
acquisitions will differ materially from the preliminary allocations. The
pro forma results are not necessarily indicative of the operating results
that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future. The underlying pro forma information includes the amortization
expense associated with the assets acquired, the reflection of the
Company's and HFS's financing arrangements, the elimination of redundant
costs and the related income tax effects.
($000's, except per share amounts) YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
------------- ------------
Net revenue $ 4,475,262 $ 3,809,181
Income before income taxes 797,042 634,898
Net income 473,359 378,577
Net income per share:
Primary $ .57 .48
Fully diluted $ .56 .47
Weighted average shares outstanding:
Primary 844,798 803,548
Fully diluted 851,091 817,628
3. MERGER AND RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLINGS (UNAUDITED)
The Company expects to incur merger and related costs and other unusual
charges in connection with the fourth quarter 1997 mergers with HFS and
Hebdo Mag approximating $825.0 million ($560.0 million, after tax).
HFS recorded a one-time merger and related charge (the "PHH Merger
Charge") of $303.0 million ($227.0 million, after tax) during the second
quarter of 1997 in connection with the HFS/PHH Merger. The PHH Merger
Charge is summarized by type as follows (in millions):
Personnel related $ 142.4
Professional fees 36.8
Business terminations 44.7
Facility related 57.1
Other costs 22.0
-------------
Total $ 303.0
=============
Personnel related charges are comprised of costs incurred in connection
with employee reductions associated with the combination of HFS's
relocation services business and the consolidation of corporate
activities. Personnel related charges include termination benefits such as
severance, medical and other benefits. Also included in personnel related
charges are supplemental retirement benefits resulting from the change of
control. Several grantor trusts were established and funded by HFS to pay
such benefits in accordance with the terms of the PHH merger agreement.
Full implementation of the restructuring plan will result in the
termination of
26
approximately 500 employees, substantially all of whom are located in
North America, of which 369 employees were terminated as of September 30,
1997. Professional fees are primarily comprised of investment banking,
accounting and legal fees incurred in connection with the HFS/PHH Merger.
Business termination charges relate to the exit from certain activities
associated with fleet management, mortgage services and ancillary
operations in accordance with HFS's revised strategic plan. Facility
related expenses include costs associated with contract and lease
terminations, asset disposal and other charges incurred in connection with
the consolidation and closure of excess space.
The Company anticipates that approximately $236.0 million will be paid in
cash in connection with the PHH Merger Charge of which $137.0 million was
paid through September 30, 1997. The remaining cash portion of the PHH
Merger Charge will be financed through cash generated from operations and
borrowings under the Company's revolving credit facilities. Revenue and
operating results from activities that will not be continued are not
material to the results of operations of the Company.
1996 POOLINGS
Principally in connection with the Davidson, Sierra and Ideon mergers, the
Company recorded a charge to operations of approximately $179.9 million
($118.7 million, after-tax) for the year ended December 31, 1996.
The charge is summarized by type, as follows ($000's):
Personnel related $ 18.6
Professional fees and litigation 95.3
Facility related 66.0
---------
$ 179.9
=========
Such costs in connection with the Davidson & Sierra mergers with the
Company (approximately $48.6 million) are non-recurring and are comprised
primarily of transaction costs, other professional fees and exit costs.
Such costs associated with the Company's merger with Ideon (the "Ideon
Merger") (approximately $131.3 million) are non-recurring and include
transaction and exit costs as well as a provision relating to certain
litigation matters giving consideration to the Company's intended approach
to these matters. In determining the amount of the provision related to
these outstanding litigation matters, the Company estimated the cost of
settling these litigation matters. In estimating such cost, the Company
considered potential liabilities related to these matters and the
estimated cost of prosecuting and defending them (including out-of-pocket
costs, such as attorneys' fees, and the cost to the Company of having its
management involved in numerous complex litigation matters). The Company
has since settled certain of these litigation matters while certain of
these matters remain outstanding. Although the Company has attempted to
estimate the amounts that will be required to settle remaining litigation
matters, there can be no assurance that the actual aggregate amount of
such settlements will not exceed the (See Note 13). As of September 30,
1997, such charges amounted to $155.7 million. The Company considered
litigation-related costs and liabilities, as well as exit and transaction
costs, in determining the agreed upon exchange ratio in respect to the
Ideon Merger.
In determining the amount of the provision related to the Company's
proposed consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger
and costs relating to the expected obligations for certain third-party
contracts (e.g., existing leases and vendor agreements) to which Ideon is
a party and which are neither terminable at will nor automatically
terminate upon a change-in-control of Ideon. As a result of the Ideon
Merger, 120 employees were terminated. The Company
27
incurred significant exit costs because Ideon's credit card registration
and enhancement services are substantially similar to the Company's credit
card registration and enhancement services. All of the business activities
related to the operations performed by Ideon's Jacksonville, Florida
office were transferred to the Company's Comp-U- Card Division in
Stamford, Connecticut upon the consummation of the Ideon Merger. The
Company does not expect any loss in revenue as a result of these
consolidation efforts.
COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of
certain assets and the restructuring of the SafeCard division of Ideon and
the Ideon corporate infrastructure as discussed below. The original charge
of $45.0 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995, Ideon recovered $1.2
million of costs in the above charges. Also included in costs related to
the Ideon merger and products abandoned are marketing and operational
costs incurred for products abandoned of $53.2 million. During the year
ended December 31, 1996, all remaining amounts that had been previously
accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA
TOUR Partners program that provided various benefits to members and
consumer response rates after the launch were significantly less than
Ideon management's expectations. The product as configured was deemed not
economically viable and a charge of $18 million was incurred. Costs
associated with the abandonment of the product marketing included employee
severance payments (approximately 130 employees), costs to terminate
equipment and facilities leases, costs for contract impairments and
write-downs taken for asset impairments. In September 1995, after a period
of product redesign and test marketing, Ideon discontinued its PGA TOUR
Partners credit card servicing role and recorded a charge of $3.6 million
for costs associated with the abandonment of this role, including employee
severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain
commitments. In April 1995, Ideon launched a nationwide child registration
and missing child search program. Consumer response rates after the launch
were significantly less than Ideon management's expectations and a charge
of $9 million was incurred to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and
write-down taken for asset impairments. As a result of the discontinuance
of these products, Ideon undertook an overall restructuring of its
operations and incurred charges of $7.2 million to terminate operating
leases and write-down assets to realizable value, $3.0 million for
restructuring its SafeCard division and $4.2 million for restructuring its
corporate infrastructure.
During 1994, costs related to products abandoned and restructuring were
incurred when Ideon reorganized its operations and named a new senior
management team, resulting in $7.9 million of charges for various
severance agreements and a lease termination.
PURCHASE BUSINESS COMBINATION LIABILITIES
In connection with the acquisitions of Century 21, Coldwell Banker, RCI
and certain other acquisitions related business plans were developed to
restructure each of the respective companies. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These liabilities include costs associated
with restructuring activities such as planned involuntary termination and
relocation of employees, the consolidation and closing of certain
facilities and the elimination of duplicative
28
operating and overhead activities. Accrued acquisition obligations related
to each acquired entity are summarized by type as follows ($000's):
COLDWELL
CENTURY 21 BANKER RCI OTHER
---------- ----------- ----------- ----------
Personnel related $ 12,647 $ 4,237 $ 9,845 $ 5,542
Facility related 16,511 5,491 6,929 3,851
Other costs 990 211 7,025 880
---------- ----------- ----------- ----------
Total $ 30,148 $ 9,939 $ 23,799 $ 10,273
========== =========== =========== ==========
Terminated employees 319 87 252 275
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs
include contract and lease terminations, temporary storage and relocation
costs associated with assets to be disposed of, and other charges incurred
in the consolidation and closure of excess space.
During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $3.9 million, $0.5
million and $7.7 million was paid and charged against the acquisition
liabilities for restructuring charges related to the Century 21, Coldwell
Banker, RCI and certain other acquisitions, respectively. Additional
restructuring charges were accrued during 1996 for Century 21 of $6.1
million. The adjustment to the restructuring liability represented revised
cost estimates for activities contemplated in management's original
restructuring plans.
The business plans to restructure Century 21, Coldwell Banker, RCI and
certain other acquisitions have been fully executed. Remaining accrued
acquisition obligations related to the restructuring of such acquired
companies pertain primarily to future lease commitments and other
contractual obligations that existed at the respective acquisition dates.
4. OTHER INTANGIBLES - NET
Other intangibles - net consisted of ($000's):
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS ------------------------------
IN YEARS 1996 1995
------------- ------------- -------------
Avis trademark 40 $ 400,000 $ --
Customer lists 6.5 - 10 113,976 --
Reservation system 10 95,000 --
Contract renewal rights 2 - 16 90,695 90,345
------------- -------------
699,671 90,345
Less accumulated amortization 63,441 51,500
------------- -------------
Other intangibles - net $ 636,230 $ 38,845
============= =============
Other intangibles are recorded at their estimated fair values at the dates
acquired and are amortized on a straight-line basis over the periods to be
benefited.
29
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities consisted
of ($000's):
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
Accounts payable $ 535,978 $ 407,437
Short-term debt 250,930 --
Merger and acquisition obligations 167,238 13,227
Accrued payroll and related 157,032 88,364
Advances from relocation clients 78,761 95,869
Other 475,007 314,160
------------- -----------
Accounts payable, accrued expenses and other
current liabilities $ 1,664,946 $ 919,057
============= ===========
Short-term debt at December 31, 1996 consisted of $150 million of acquired
Avis fleet financing, borrowed on behalf of ARAC, which was repaid upon
settlement of the corresponding intercompany loan due from ARAC prior to
the IPO and a $100.9 million note payable issued to ARAC as partial
consideration for ARAC in connection with the Company's acquisition of
ARAC. The outstanding short-term debt as of December 31, 1996 had a
weighted average interest rate of 6.85%.
6. NET INVESTMENT IN LEASES AND LEASED VEHICLES
The net investment in leases and leased vehicles consisted of ($000's):
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
Vehicles under open-end operating leases $ 2,617,263 $ 2,585,953
Vehicles under closed-end operating leases 443,853 320,894
Direct financing leases 356,699 335,498
Accrued interest on leases 851 891
------------- -------------
Net investments in leases and leased vehicles $ 3,418,666 $ 3,243,236
============= =============
The Company leases vehicles for initial periods of twelve months or more
under either operating or direct financing lease agreements. The Company's
experience indicates that the full term of the leases may vary
considerably due to extensions beyond the minimum lease term. Lessee
repayments of investments in leases and leased vehicles for 1996 and 1995
were $1.6 billion and $1.5 billion, respectively, and the ratio of such
repayments to the average net investment in leases and leased vehicles was
47.19% and 47.96%, respectively.
Vehicles under operating leases are amortized using the straight-line
method over the expected lease term. The Company has two types of
operating leases. Under one type, open-end operating leases, resale of the
vehicles upon termination of the lease is generally for the account of the
lessee except for a minimum residual value which the Company has
guaranteed. The Company's experience has been that vehicles under this
type of lease agreement have consistently been sold for amounts exceeding
the residual value guarantees. Maintenance and repairs of vehicles under
these agreements are the responsibility of the lessee. The original cost
and accumulated depreciation of vehicles under this type of operating
lease was $4.6 billion and $2.0 billion, respectively, at December 31,
1996 and $4.4 billion and $1.8 billion, respectively, at December 31,
1995.
30
Under the other type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of
the Company. The lessee generally pays for or provides maintenance,
vehicle licenses and servicing. The original cost and accumulated
depreciation of vehicles under these agreements was $600.6 million and
$156.7 million, respectively at December 31, 1996 and $482.9 million and
$162.0 million, respectively, at December 31, 1995. The Company believes
adequate reserves are maintained in the event of loss on vehicle
disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Leasing revenues, which are reflected in fleet leasing on the supplemental
consolidated statements of income consist of ($000's):
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
Operating leases $ 1,145,745 $ 1,098,697 $ 982,416
Direct financing leases, primarily interest 43,323 42,375 41,688
------------- ------------- -------------
$ 1,189,068 $ 1,141,072 $ 1,024,104
============= ============= =============
Other managed vehicles are subject to leases serviced by the Company for
others, and neither the vehicles nor the leases are included as assets of
the Company. The Company receives a fee under such agreements which covers
or exceeds its cost of servicing.
The Company has transferred existing managed vehicles and related leases
to unrelated investors and has retained servicing responsibility. Credit
risk for such agreements is retained by the Company to a maximum extent in
one of two forms: excess assets transferred, which were $7.1 million and
$5.9 million at December 31, 1996 and 1995, respectively; or guarantees to
a maximum extent of $0 and $263,000 at December 31, 1996 and 1995,
respectively. All such credit risk has been included in the Company's
consideration of related reserves. The outstanding balances under such
agreements aggregated $158.5 million and $98.4 million at December 31,
1996 and 1995, respectively.
Other managed vehicles with balances aggregating $93.9 million and $114.9
million at December 31, 1996 and 1995, respectively, are included in a
special purpose entity which is not owned by the Company. This entity does
not require consolidation as it is not controlled by the Company and all
risks and rewards rest with the owners. Additionally, managed vehicles
totaling approximately $47.4 million and $48.5 million at December 31,
1996 and 1995, respectively, are owned by special purpose entities which
are owned by the Company. However, such assets and related liabilities
have been netted in the balance sheet since there is a two-party agreement
with determinable accounts, a legal right of setoff exists and the Company
exercises its right of setoff in settlement with client corporations.
7. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are recorded at the lower of cost or market
value on the aggregate loan basis. The Company issues mortgage-backed
certificates insured or guaranteed by various government sponsored
entities and private insurance agencies. Primarily, the insurance or
guaranty is provided on a non-recourse basis to the Company, except where
limited by the Federal Housing Administration and Veterans Administration
and their respective loan program. The valuation reserve was approximately
$10.1 million and $1.9 million at December
31
31, 1996 and 1995, respectively. As of December 31, 1996, mortgage loans
sold with recourse amounted to approximately $83.0 million.
8. MORTGAGE SERVICING RIGHTS AND FEES
Mortgage servicing rights and fees activity was as follows ($000's):
EXCESS PURCHASED ORIGINATED
SERVICING SERVICING SERVICING IMPAIRMENT
FEES RIGHTS RIGHTS ALLOWANCE TOTAL
----------- ----------- ----------- ----------- -----------
Balance, January 1, 1994 $ 75,529 $ 8,808 $ - $ - $ 84,337
Additions 24,679 17,241 - - 41,920
Amortization (13,512) (6,772) - - (20,284)
Sales (8,729) (31) - - (8,760)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 77,967 19,246 - - 97,213
Additions 51,191 17,849 61,095 - 130,135
Amortization (18,609) (5,858) (4,089) - (28,556)
Write-down/provision (1,630) - - (1,386) (3,016)
Sales (1,080) (3,262) - - (4,342)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 107,839 27,975 57,006 (1,386) 191,434
Less: PHH activity for January
1996 to reflect change in
PHH fiscal year (3,623) (170) (10,227) 183 (13,837)
Additions 66,825 - 97,568 - 164,393
Amortization (31,235) (4,763) (15,752) - (51,750)
Write-down/provision - - - 622 622
Sales (1,291) (628) - - (1,919)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 138,515 $ 22,414 $ 128,595 $ (581) $ 288,943
========== ========== ========== =========== ===========
Excess servicing fees represent the present value of the differential
between the actual servicing fees and normal servicing fees which are
capitalized at the time loans are sold with servicing rights retained.
Purchased servicing rights represent the cost of acquiring the rights to
service mortgage loans for others. Originated servicing rights represents
the present value of normal servicing fees which are capitalized at the
time loans are sold with servicing rights retained.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122). This
Statement requires that mortgage servicing rights be recognized when a
mortgage loan is sold and servicing rights are retained. The Company
adopted SFAS No. 122 effective May 1, 1995 and, accordingly, capitalized
originated servicing rights, net of amortization and valuation allowances
of approximately $82.4 million and $55.6 million in the years ended
December 31, 1996 and 1995, respectively.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on the fair value
of the servicing rights' relative to the loan as a whole. To determine the
fair value of mortgage servicing rights, the Company uses market prices
for comparable mortgage servicing, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income using assumptions that market participants would use in estimating
future net servicing income.
32
SFAS No. 122 also requires the impairment of originated and purchased
servicing rights to be measured based on the difference between the
carrying amount and current fair value of the servicing rights. In
determining impairment, the Company aggregates all mortgage servicing
rights, excluding those capitalized prior to the adoption of SFAS No. 122,
and stratifies them based on the predominant risk characteristic of
interest rate band. For each risk stratification, a valuation allowance is
maintained for any excess of amortized book value over the current fair
value by a charge or credit to income.
Prior to the adoption of SFAS No. 122, the Company reviewed the
recoverability of purchased servicing rights by discounting anticipated
future cash flows at appropriate discount rates, utilizing externally
published prepayment rates. If the recorded balance exceeded the
discounted anticipated future cash flows, the amortization of the
purchased servicing rights was accelerated on a prospective basis.
9. MARKETING AND RESERVATION ACTIVITIES
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees
related to the Company's lodging brands' franchisees are calculated based
on a specified percentage of gross room sales. Marketing and reservation
fees received from the Company's real estate brands' franchisees are based
on a specified percentage of gross closed commissions earned on the sale
of real estate. As provided in the franchise agreements, at the Company's
discretion, all of these fees are to be expended for marketing purposes
and the operation of a centralized brand-specific reservation system for
the respective franchisees and are controlled by the Company until
disbursement. Membership and service fee revenues included marketing and
reservation fees of $157.6 million, $140.1 million, $130.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Advertising
expenses included in marketing and reservation expense are $55.2 million,
$48.0 million and $43.6 million for the years ended December 31, 1996,
1995 and 1994, respectively.
10. LONG-TERM DEBT
Long-term debt consists of ($000's):
DECEMBER 31,
-----------------------------
1996 1995
------------ -------------
Revolving Credit Facilities $ 330,205 $ 15,400
5-7/8% Senior Notes 149,811 149,715
4-1/2% Convertible Senior Notes 146,678 149,971
4-3/4% Convertible Senior Notes 240,000 --
Other loans and capital lease obligations 148,925 41,140
------------ -------------
1,015,619 356,226
Less current portion 11,035 2,249
------------ -------------
Long-term debt $ 1,004,584 $ 353,977
============ =============
REVOLVING CREDIT FACILITIES: At December 31, 1996, the Company had a
$500.0 million revolving credit facility (the "CUC Credit Facility") with
a variety of different types of loans available thereunder. Interest was
payable, depending on the type of loan utilized by the Company, at a
variety of rates based on the federal funds rate, LIBOR, the prime rate or
rates quoted by participating banks based on an auction process for the
CUC Credit Facility. At December 31, 1996, no borrowings under this
facility were outstanding. The CUC Credit Facility required the Company to
maintain certain financial ratios and contained other restrictive
covenants
33
including, without limitation, financial covenants and restrictions on
certain corporate transactions, and also contained various events of
default provisions including, without limitation, defaults arising from
certain changes in control of the Company.
At December 31, 1996, HFS had $1 billion in revolving credit facilities
consisting of (i) a $500.0 million, five year revolving credit facility
(the "Five Year Revolving Credit Facility") and (ii) a $500.0 million, 364
day revolving credit facility (the "364 Day Revolving Credit Facility" and
collectively with the Five Year Revolving Credit Facility, the "Revolving
Credit Facilities"). At December 31, 1996, there was $205.0 million
outstanding under the Revolving Credit Facilities and there were no
borrowings under such facility at December 31, 1995.
Upon consummation of the Cendant Merger, the CUC Credit Facility was
terminated and the Revolving Credit Facilities were maintained with
commitments aggregating $1.25 billion and $750.0 million under the 364 Day
Revolving Credit Facility and Five Year Revolving Credit Facility,
respectively. The 364 Day Revolving Credit Facility will mature on
September 30, 1998 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. 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 22 basis points. The Company is required to pay a
per annum facility fee of .08% and .06% of the average daily availability
of the Five Year Revolving Credit Facility and 364 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 statistical rating companies. The
Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness, mergers, liquidations and sale and
leaseback transactions and requires the maintenance of certain financial
ratios, including a 3:1 minimum interest average ratio and a 3.5:1 maximum
coverage ratio, as defined.
During the year ended December 31, 1996, Wright Express Corporation, a
wholly-owned subsidiary of the Company, entered into a new revolving
credit facility agreement replacing its previous revolving line of credit.
This facility has an available line of $60 million and expires February 8,
1999. Interest on the outstanding borrowings is computed, at the option of
Wright Express Corporation, under various methods. At December 31, 1996,
$31.4 million was outstanding under this facility with an interest rate of
6.04%. Borrowings under the previous arrangement at December 31, 1995
aggregated $15.4 million with interest rates ranging from 6.31% to 7.25%.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility which bears interest at varying
rates ranging from the prime rate plus .25% to 1.5% or LIBOR plus 1.0% to
2.25%, depending upon Hebdo Mag's ratio of total debt to pro forma cash
flow, as defined. At December 31, 1996, $93.8 million was outstanding
under this facility. This facility expires on March 15, 1998 but may be
renewed on an annual basis for successive periods of one year upon
receiving lender approval.
Amounts outstanding under all revolving credit facilities as of December
31, 1996 and 1995 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
SENIOR NOTES: In December 1993, HFS completed a public offering of $150.0
million, unsecured 5-7/8% Senior Notes due December 15, 1998 (the "Senior
Notes"). Interest is payable semi-annually.
4-1/2% CONVERTIBLE SENIOR NOTES: In October 1994, HFS completed a public
offering of $150.0 million unsecured 4-1/2% Convertible Senior Notes (the
"4-1/2% Notes") due 1999, which were convertible at the
34
option of the holders at any time prior to maturity into 132.425
equivalent shares of Company common stock per $1,000 principal amount of
the 4-1/2% Notes, representing a conversion price of $7.55 per share.
Interest was payable semi-annually commencing April 1995.
On September 22, 1997, HFS exercised its option to redeem the outstanding
4-1/2% Notes effective on October 15, 1997 in accordance with the
provisions of the indenture under which the 4-1/2% Notes were issued.
Prior to the redemption date, all of the outstanding 4-1/2% Notes were
converted. Accordingly, 19.7 million equivalent shares of Company common
stock were issued as a result of the conversion of such notes.
4-3/4% CONVERTIBLE SENIOR NOTES: On February 22, 1996, HFS completed a
public offering of $240 million unsecured 4-3/4% Convertible Senior Notes
(the "4-3/4% Notes") due 2003, which are convertible at the option of the
holder at any time prior to maturity into 36.030 equivalent shares of
Company common stock per $1,000 principal amount of the 4-3/4% Notes,
representing a conversion price of $27.76 per share. The 4- 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time
on or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However,
on or after March 3, 1998 and prior to March 3, 2000, the 4-3/4% Notes
will not be redeemable at the option of the Company unless the closing
price of the Company's common stock shall have exceeded $38.86 per share
(subject to adjustment upon the occurrence of certain events) for 20
trading days within a period of 30 consecutive trading days ending within
five days prior to redemption. Interest on the 4- 3/4% Notes is payable
semi-annually commencing September 1, 1996.
OTHER LOANS AND CAPITAL LEASES OBLIGATIONS
Zero Coupon Convertible Notes: The Zero Coupon Convertible Notes issued
in connection with the Company's fiscal 1990 recapitalization were
recorded at their fair value on the date of issuance and were issued in
$100 principal amounts and multiples thereof. Each $100 principal amount
was convertible into 22.78 shares of Company common stock. Virtually all
of the Zero Coupon Convertible Notes were converted into Company common
stock by the maturity date of June 6, 1996. The principal balance
outstanding at December 31, 1995 was $14.4 million.
6-1/2% Convertible Subordinated Notes: On April 12, 1994, Sierra issued
$50.0 million in principal amount of 6-1/2% Convertible Subordinated Notes
due April 1, 2001 (the "6-1/2% Notes"). Interest on the 6-1/2% Notes is
payable semi-annually on April 1 and October 1 of each year. Each $7.62
principal amount of 6-1/2% Notes is convertible into one share of Company
common stock, subject to adjustment under certain conditions. The 6-1/2%
Notes are redeemable after April 2, 1997, at the option of the Company, at
specified redemption prices. The 6-1/2% Notes are subordinated to all
existing and future Senior Indebtedness (as defined in the indenture
governing the 6-1/2% Notes) of Sierra. Issuance costs have been netted
against the principal convertible debt balance and are being amortized on
a straight-line basis over seven years. The principal convertible debt
balance outstanding at December 31, 1996 and 1995 was $23.5 million and
$23.4 million, respectively.
Other: In connection with the acquisition of Hebdo Mag, the Company
assumed long-term debt of $110.5 million consisting of senior and
subordinated notes and other miscellaneous loans which is reflected in the
long-term debt balance at December 31, 1996.
35
Long-term debt payments including obligations under capital leases at
December 31, 1996 are due as follows ($000's):
YEAR AMOUNT
----------- -------------
1997 $ 11,035
1998 167,797
1999 175,447
2000 34,900
2001 261,286
Thereafter 365,154
-------------
Total $ 1,015,619
=============
11. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs,
classified as "Liabilities under management and mortgage programs-debt"
consisted of ($000's):
DECEMBER 31,
------------------------------
1996 1995
------------- -------------
Commercial paper $ 3,090,843 $ 2,348,732
Medium-term notes 1,662,200 2,031,200
Other 336,900 47,940
------------- -------------
Liabilities under management and
mortgage programs - debt $ 5,089,943 $ 4,427,872
============= =============
Commercial paper, all of which matures within 90 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 was 5.4% and 5.8% at December 31, 1996 and
1995, respectively
Medium-term notes of $1.6 billion represent unsecured loans which mature
in 1997. The weighted average interest rates on such medium-term notes was
5.7% and 5.8% at December 31, 1996 and 1995, respectively. The remaining
$0.1 billion of medium-term notes represents an unsecured obligation
having a fixed interest rate of 6.5% with interest payable semi-annually
and a term of seven years payable in full in 2000.
Other liabilities under management and mortgage programs is principally
comprised of unsecured debt, all of which matures in 1997, which includes
borrowings under short-term lines of credit and other bank facilities. The
weighted average interest rate on unsecured debt was 5.8% and 6.9% at
December 31, 1996 and 1995, respectively.
Interest expense is incurred on indebtedness which is used to finance
vehicle leasing activities, mobility services, and mortgage servicing
activities. Interest incurred on borrowings used to finance vehicle
leasing activities of $161.8 million, $159.7 million and $126.7 million
for the years ended December 31, 1996, 1995, and 1994 respectively, is
included net within fleet leasing revenues in the supplemental
consolidated statements of income. Interest on borrowings used to finance
both equity advances on homes and mortgage servicing activities are
recorded net within service fee revenues in the supplemental consolidated
statements of income. Interest related to equity advances on homes was
$35.0 million, $26.0 million and $20.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Interest related to
mortgage servicing activities was $63.4 million, $49.9 million and $32.8
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
36
The Company has a $2.5 billion syndicated unsecured credit facility backed
by a consortium of domestic and foreign banks. The facility is comprised
of $1.25 billion of lines maturing in 364 days and $1.25 billion maturing
in five years. Under the credit facilities, the Company is obligated to
pay annual commitment fees which were $2.4 million and $2.3 million for
the years ended December 31, 1996 and 1995, respectively. The Company had
other unused lines of credit of $301.5 million and $327.9 million at
December 31, 1996 and 1995, respectively with various banks.
Although the period of service for a vehicle is at the lessee's option,
and the period a home is held for resale varies, management estimates, by
using historical information, the rate at which vehicles will be disposed
and the rate at which homes will be resold. Projections of estimated
liquidations of assets under management and mortgage programs and the
related estimated repayment of liabilities under management and mortgage
programs as of December 31, 1996, as set forth in the table below,
indicate that the actual repayments of liabilities under management and
mortgage programs will be different than required by contractual
maturities. ($000's):
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS
----- ------------------------ ---------------------
1997 $ 2,961,264 $ 2,608,179
1998 1,539,172 1,471,407
1999 673,535 671,623
2000 318,643 217,143
2001 53,843 71,061
2002-2006 182,777 50,530
------------- -------------
$ 5,729,234 $ 5,089,943
============= =============
12. 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: Marketable securities primarily consist of
corporate bonds, tax-free municipal obligations, U.S. Treasury notes,
commercial paper and equity securities. The Company determines the
appropriate classification of marketable securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
All securities at December 31, 1996 and 1995 were classified as
available-for-sale and were reported at fair value with the net unrealized
holding gains and losses, net of tax, reported as a component of
shareholders' equity until realized. Fair value was based upon quoted
market prices or investment adviser estimates. Securities not maturing
within one year are classified as non-current assets. Declines in the
market value of available-for-sale securities deemed to be other than
temporary result in charges to current earnings and the establishment of a
new cost basis. The majority of debt securities had contractual maturities
of less than one year with $4.0 million and $28.7 million having
maturities of greater than one year at December 31, 1996 and 1995,
respectively. Gross unrealized gains and losses of such securities were
not material.
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. These loans are priced to be sold
with servicing rights retained. Gains (losses) on mortgage-related
positions, used to reduce the risk of adverse price
37
fluctuations, for both mortgage loans held for sale and anticipated
mortgage loan closings arising from commitments issued, are included in
the carrying amount of mortgage loans held for sale.
Mortgage servicing rights and fees: Fair value is estimated by discounting
the expected net cash flow of servicing rights and fees using discount
rates that approximate market rates and externally published prepayment
rates, adjusted, if appropriate, for individual portfolio characteristics.
Long-term debt: The fair values of the Company's Senior Notes, Convertible
Notes and Medium-term Notes are estimated based on quoted market prices or
market comparables.
Interest rate swaps, foreign exchange contracts, forward delivery
commitments, futures contracts and options: The fair value of interest
rate swaps, foreign exchange contracts, forward delivery commitments,
futures contracts and options 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.
38
The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows ($000's):
1996 1995
------------------------------------ -------------------------------------
ESTIMATED ESTIMATED
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ----------- ---------- ------------ ----------- ----------
Assets
Cash and cash equivalents $ - $ 633,903 $ 633,903 $ - $ 355,959 $ 355,959
Marketable securities:
Debt securities - 75,673 75,673 - 110,492 110,492
Equity securities - 22,500 22,500 - 15,353 19,200
Assets under management
and mortgage programs:
Receivables - 1,290,625 1,290,625 - 1,028,976 1,028,976
Relocation receivables - 773,326 773,326 - 736,038 736,038
Mortgage loans held for sale - 1,248,299 1,248,299 - 784,901 784,901
Excess mortgage servicing fees - 138,515 155,033 - 107,839 107,966
Originated mortgage servicing
rights - 128,014 139,776 - 55,620 58,764
Purchased mortgage servicing
rights - 22,414 29,326 - 27,975 33,268
Liabilities
Long-term debt - 1,004,584 1,484,277 - 353,977 543,092
Liabilities under management
and mortgage programs:
Debt - 5,089,943 5,089,943 - 4,427,872 4,427,872
Off balance sheet
Interest rate swaps 1,670,155 - - 2,630,567 - -
In a gain position - - 2,457 - - 4,969
In a loss position - - (10,704) - - (13,828)
Foreign exchange forwards 329,088 - 10,010 118,069 - 6,413
Mortgage-related positions:(a)
Forward delivery commitments 1,703,495 11,425 7,448 1,323,285 5,407 (6,997)
Option contracts to sell 265,000 952 746 330,000 839 69
Option contracts to buy 350,000 1,346 (463) 485,000 3,388 528
Treasury options used to hedge
servicing rights 313,900 1,327 278 - - -
- ---------
(a) Gains (losses) on mortgage-related positions are already included in the
determination of market value of mortgage loans held for sale.
39
13. COMMITMENTS AND CONTINGENCIES
LEASES: The Company has noncancelable operating leases covering various
equipment and facilities, which expire through 2004. Rental expense for
the years ended December 31, 1996, 1995 and 1994 was $84.4 million, $66.9
million and $54.5 million respectively, excluding real estate taxes and
other fees that are also the responsibility of the Company.
Operating lease commitments over the next five years and thereafter are as
follows ($000's):
FOR THE YEAR ENDING DECEMBER 31,
1997 $ 90,066
1998 77,543
1999 58,727
2000 45,335
2001 33,067
Thereafter 76,430
-------------
Total minimum lease payments $ 381,168
=============
The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.
IDEON: On June 13, 1997, the Company entered into an agreement (the
"Agreement") with Peter Halmos, the co-founder of SafeCard Services,
Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon. The
Company acquired Ideon in August 1996. The Agreement provides for the
settlement of all of the outstanding litigation matters involving Peter
Halmos, SafeCard and Ideon as set forth below. The Agreement became
effective in July 1997. The Agreement calls for the dismissal with
prejudice of these outstanding litigation matters and the payment to Peter
Halmos, over a six-year period, of $70.5 million. Specifically, the
Agreement requires that the Company pay Peter Halmos one up-front payment
of $13.5 million and six subsequent annual payments of $9.5 million each.
The Agreement also calls for the transfer to the Company of assets related
to SafeCard's CreditLine business, including the transfer by CreditLine
Corporation to the Company of all of the CreditLine Corporation's rights
under a marketing agreement between it and SafeCard dated November 1,
1988.
The following Halmos related cases have been dismissed pursuant to the
Agreement:
1. Halmos Trading & Investing Company v. SafeCard Services, Inc. and
Gerald Cahill v. Peter A. Halmos and Steven J. Halmos and Halmos
Trading & Investment Co., Case No. 93-04354 (06) in the Circuit Court
for the 17th Judicial Circuit in and for Broward County, Florida.
2. SafeCard Services, Inc. v. Peter Halmos, a Florida resident; High
Plains Capital Corporation, a Wyoming Corporation; and CreditLine
Corporation, a Wyoming corporation which is pending in the District
Court, First Judicial District of Laramie County, Wyoming; Case No.
Doc. 134, No. 192.
3. Peter Halmos, CreditLine Corporation and Continuity Marketing
Corporation v. Paul G. Kahn, William T. Bacon, Robert L.
Dilenschneider, Eugene Miller and SafeCard Services, Inc., in the
United States District Court, Southern District of Florida, Case No.
94-6920 CG-NESBITT.
40
4. Peter Halmos v SafeCard Services, Inc., William T. Bacon, Jr., Barry
I. Tillis and Barry Natter, Case No. 95-6325 (AJ) filed in the
Circuit Court, Fifteenth Judicial Circuit, in and for Palm Beach
County Florida.
5. High Plains Capital Corporation f/k/a Halmos & Company, Inc v. Ideon
Group, Inc., SafeCard Services, Inc., Eugene Miller, Robert L.
Dilenschneider, and the Dilenschneider Group, Inc., Palm Beach
County, Florida, Civil Action No. CL 95 8313 AE (Hon. Walter
Colbath).
6. High Plains Capital Corporation v. Ideon Group, Inc., and SafeCard
Services, Inc., Civil Action No. 95 015024, Seventeenth Judicial
Circuit, Broward County, Florida.
The following Halmos related case will also be dismissed pursuant to the
Agreement:
7. Ideon Group, Inc., SafeCard Services, Inc., Paul G. Kahn, William T.
Bacon, Jr., Marshall L. Burman, John Ellis (Jeb) Bush, Robert L.
Dilenschneider, Adam W. Herbert, Eugene Miller, and Thomas F. Petway,
III v. Peter Halmos, Civil Action No. 14600, filed in the Court of
Chancery of New Castle County, Delaware.
On October 22, 1997, the plaintiffs, the Company and all of the Company's
indemnitees, entered into a Memorandum of Understanding and thereafter
filed final settlement agreements in James B. Chambers and Peter A. Halmos
v. SafeCard Services, Inc; Ideon Group, Inc.; Paul G. Kahn; William T.
Bacon, Jr.,; Robert L. Dilenschneider; The Dilenschneider Group; Eugene
Miller; G. Thomas Frankland; Francis J. Marino; John R. Birk; Marshall
Burman; Thomas F. Petway III; John Ellis Bush; Adam W. Herbert, Jr.; Price
Waterhouse LLP; Mahoney Adams & Criser, P.A. and John Does 1 through 25,
United States District Court, Southern District of Florida, Case No.
95-1298-CIV-NESBITT ("Chambers"); Lois Hekker v. Ideon Group, Inc. and
Paul G. Kahn, United States District Court, Middle District of Florida,
Jacksonville Division, Case No. 95-681-CIV-J ("Hekker"); and James L.
Binder, individually, as custodian for Elizabeth Binder, and as custodian
for the James L. Binder, D.D.S., P.C. Profit Sharing Trust; Edward Dubois;
Sheila Ann Dubois, as Personal Representative for The Estate of Winifred
Dubois; G. Neal Goolsby; John E. Masters, individually and as custodian
for Gregory Halmos and Nicholas Halmos; J.B. McKinney; on behalf of
themselves and all others similarly situated, and Peter A. Halmos, as
Trustee for the Peter A. Halmos Revocable Trust Dated January 24, 1990,
and The Halmos Foundation, Inc., individually, v. SafeCard Services, Inc.,
a Delaware corporation; Paul G. Kahn; William T. Bacon, Jr.; Robert L.
Dilenschneider; The Dilenschneider Group, a Delaware corporation; Eugene
Miller; Gerald R. Cahill; Oppenheimer & Co., Inc., a Delaware corporation;
and John Does 1 through 100, inclusive. United States District Court for
the Southern District of Florida, (Miami Division) Case No.
94-2604-CIV-MOORE ("Binder"). The above referenced settlement in the
Chambers and Hekker matters was for payment by the Company to class
members of $15.0 million. The settlement in the Binder litigation calls
for the payment by the Company to class members of $3.0 million. These
settlements must be approved by the court at hearings anticipated during
the first quarter of 1998.
The following actions remain pending, in whole or in part, as described
below:
A suit initiated by Peter Halmos, related entities, and Myron Cherry (a
former lawyer for SafeCard) in April 1993 in Cook County Circuit Court in
Illinois against SafeCard and one of Ideon's directors, purporting to
state claims aggregating in excess of $100.0 million, principally relating
to alleged rights to "incentive compensation," stock options or their
equivalent, indemnification, wrongful termination and defamation. On
February 7, 1995, the court dismissed with prejudice Peter Halmos' claims
regarding alleged rights to "incentive compensation," stock options or
their equivalent, wrongful termination and defamation. Mr. Halmos has
appealed this ruling. SafeCard has filed an answer to the remaining
indemnification claims. Its obligation to file an answer to the
41
claims of Myron Cherry have been stayed pending settlement discussions. On
December 28, 1995, the court stayed Halmos' indemnification claims pending
resolution of a declaratory judgment action filed by Ideon in Delaware
Chancery Court. As a result of the Halmos settlement described above, only
the claims of Myron Cherry remain pending.
A suit seeking monetary damages and injunctive relief by LifeFax, Inc. and
Continuity Marketing Corporation, companies affiliated with Peter Halmos,
in the State Circuit Court in Palm Beach County, Florida in April 1995
against Ideon, Family Protection Network, Inc., SafeCard, one of Ideon's
directors and Ideon's Chief Executive Officer purporting to state various
statutory and tort claims. The claims principally relate to the allegation
by these companies that SafeCard's Early Warnings Service and Family
Protection Network were conceived and commercialized by, among others,
Peter Halmos and have been improperly copied. An amended complaint filed
on June 14, 1995 seeking monetary damages adds to the prior claims certain
claims by Nicholas Rubino that principally relate to the allegation that
SafeCard's Pet Registration Product was conceived by Mr. Rubino and has
been improperly copied. The company has filed an appropriate answer. As a
result of the Halmos settlement, all claims of Continuity Marketing
Corporation will be dismissed, leaving pending only the claims related to
Family Protection Network and the Pet Registration Program.
A suit by First Capital Partners, Thomas F. Frist III and Patricia F.
Elcan against Ideon and two of its employees in the United States District
Court for the Southern District of New York. The litigation involves
claims against Ideon, its former CEO and its Vice President of Investor
Relations for alleged material misrepresentations and omissions in
connection with announcements relating to Ideon's expected earnings per
share in 1995 and its new product sales, which included the PGA Tour Card
Program, Family Protection Network and Collections of the Vatican Museums.
On July 15, 1996, Ideon filed a motion to dismiss. The company withdrew
its motion to dismiss and answered the complaint on December 5, 1996.
The Company established a reserve upon the consummation of the merger with
Ideon during the third quarter of 1996 related, in part, to these
litigation matters. Although not anticipated, in the event the foregoing
class action settlements are not approved by the Court, the outcome of the
class action matters described above as well as the other pending Ideon
matters could also exceed the amount accrued. The Company is also involved
in certain other claims and litigation arising in the ordinary course of
business, which are not considered material to the financial position,
operations or cash flows of the Company.
42
14. INCOME TAXES
The income tax provision (benefit) consists of ($000's):
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ------------- -------------
Current
Federal $ 149,290 $ 108,767 $ 106,831
State 19,561 22,050 19,738
Foreign 21,254 14,744 11,261
------------- ------------- -------------
190,105 145,561 137,830
------------- ------------- -------------
Deferred
Federal $ 83,308 $ 52,447 $ 36,687
State 15,462 1,299 5,460
Foreign 1,184 1,200 (235)
------------- ------------- -------------
99,954 54,946 41,912
------------- ------------- ------------
Provision for income taxes $ 290,059 $ 200,507 $ 179,742
============= ============= ============
Net deferred income tax assets and liabilities are comprised of the
following ($000's):
DECEMBER 31,
-------------------------
1996 1995
--------- ----------
Provision for doubtful accounts $ 8,100 $ 7,600
Deferred income 46,400 7,800
Acquisition and litigation related reserves 62,700 14,446
Franchise acquisition costs (2,600) (2,400)
Insurance retention refund (11,306) (9,773)
Accrued liabilities and deferred income 37,591 29,915
Other 366 2,975
---------- ----------
Current net deferred tax asset $ 141,251 $ 50,563
========== ==========
Depreciation and amortization $ (173,597) $ (78,742)
Accrued liabilities and deferred income 65,165 22,239
Acquired net operating loss carryforward 85,900 --
Insurance retention refund (11,306) (9,773)
Acquisition and litigation related reserves -- 8,175
Other (12,932) (1,798)
------------ -----------
Noncurrent net deferred tax liability $ (46,770) $ (59,899)
============ ===========
43
DECEMBER 31,
------------------------
1996 1995
---------- ----------
Depreciation $ (245,146) $ (223,337)
Unamortized mortgage servicing rights (51,239) (23,489)
Accrued liabilities and deferred income 1,359 2,101
Alternative minimum tax and net operating loss
carryforwards 13,078 9,807
----------- ----------
Net deferred tax liabilities under management
and mortgage programs $ (281,948) $ (234,918)
=========== ===========
Net operating loss carryforwards at December 31, 1996 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2001,
$14.8 million; 2002, $89.6 million; 2005, $7.2 million; 2009, $17.7
million; and 2010, $116.0 million.
The Company's effective income tax rate differs from the statutory federal
rate as follows:
FOR THE YEARS ENDING DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 3.0% 3.6% 3.4%
Amortization of non-deductible goodwill 1.2% 1.4% 1.2%
Foreign taxes differential 0.3% 0.1% 0.3%
Tax exempt interest (0.2%) -- (0.6%)
Technology under development -- -- 0.3%
Non consolidated losses -- -- (0.2%)
Merger costs 1.4% -- --
Other (0.1%) (0.3%) (0.7%)
--------- -------- -------
Effective tax rate 40.6% 39.8% 38.7%
========= ======== =======
15. SHAREHOLDERS' EQUITY
A. STOCK SPLITS: On September 26, 1996, the Company's Board of Directors
declared a three-for-two split of the Company's common stock which was
effected in the form of a stock dividend in October 1996. In each of
November 1995 and February 1994, HFS's Board of Directors authorized a
two-for-one split of HFS's common stock which was effected in the form of
a 100% stock dividend in February 1996 and April 1994, respectively. All
equivalent share, per share, stock price and stock award plan information
presented herein has been retroactively adjusted to reflect the stock
splits.
B. AUTHORIZED SHARES: In conjunction with the Cendant Merger effective on
December 17, 1997, the Company's shareholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock and preferred stock to 2 billion shares
and 10 million shares, respectively. The Company has never issued any
shares of preferred stock.
16. STOCK OPTION PLANS
In connection with the Cendant Merger, the Company adopted its 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of stock options (which may include incentive stock options and/or
nonqualified stock options), stock
44
appreciation rights and shares of restricted Company common stock. All
directors, officers and employees of the Company and its affiliates are
eligible to receive awards under the Incentive Plan. Options granted under
the Incentive Plan generally have a ten year term and are exercisable at
20% per year commencing one year from the date of grant. During 1997, the
Company also adopted two other stock plans: the 1997 Employee Stock Plan
(the "1997 Employee Plan") and the 1997 Stock Option Plan (the "1997
SOP"). The 1997 Employee Plan authorizes the granting of up to 25 million
shares of Company common stock through awards of nonqualified stock
options, stock appreciation rights and shares of restricted Company common
stock to employees of the Company and its affiliates. The 1997 SOP
provides for the granting of up to 10 million shares of Company common
stock to key employees (including employees who are directors and
officers) of the Company and its subsidiaries through awards of incentive
and/or nonqualified stock options. Options granted under the 1997 Employee
Plan and the 1997 SOP generally have ten year terms and are exercisable
at 20% per year commencing one year from the date of grant.
The Company also grants options to employees pursuant to three additional
stock option plans: the 1992 Employee Stock Option Plan (the "1992 Plan"),
the 1992 Bonus and Salary Replacement Stock Option Plan (the "Replacement
Plan") and the 1987 Stock Option Plan (the "1987 Plan"). Under these
plans, the Company may grant options to purchase in the aggregate up to
90.8 million shares of Company common stock. At December 31, 1996, there
were outstanding in the aggregate options to purchase 35.5 million shares
of Company common stock pursuant to the 1992 Plan, the Replacement Plan
and the 1987 Plan. Options granted under the 1992 Plan generally are
exercisable at 20% per year commencing one year from the date of grant.
Options granted under the Replacement Plan generally are exercisable at
33% per year commencing one year from the date of grant. Options granted
under the 1987 Plan generally are exercisable at 25% per year commencing
one year from the date of grant. Options granted under these stock option
plans generally have 10-year terms. All options outstanding under these
plans are non-qualified stock options. These stock option plans include
options acquired by the Company in connection with its various
acquisitions accounted for in accordance with the pooling of interests
method of accounting (See Note 2).
The Company has granted options to its non-employee directors pursuant to
its 1994 Directors Stock Option Plan (the "1994 Directors Plan"). The 1994
Directors Plan provides that options to acquire an aggregate of up to .3
million shares of Company common stock shall be granted to non-employee
directors of the Company in office on each of November 23, 1994, 1995,
1996 and 1997. Options under the 1994 Directors Plan are exercisable in
full on the date of grant. At January 31, 1997, there also were
outstanding grants made to non-employee directors of the Company under the
Company's 1990 Directors Stock Option Plan (the "1990 Directors Plan") and
1992 Directors Stock Option Plan (the "1992 Directors Plan"), under which
the Company is no longer granting options.
The Company has certain other stock option plans pursuant to which it no
longer makes any new option grants, but pursuant to which there continues
to exist outstanding options to purchase shares of Company common stock.
These options generally expire ten years after their grant dates. Under
these plans, there are outstanding both non-qualified stock options and
incentive stock options to purchase 3.8 million shares of Company common
stock in the aggregate at January 31, 1997. These stock option plans
include plans assumed by the Company in connection with its acquisitions
of Sierra and Knowledge Adventure, Inc. during fiscal 1997.
Prior to the Cendant Merger, HFS had two stock option plans: the 1992
Stock Option Plan and the Amended and Restated 1993 Stock Option Plan.
These plans provided for the granting of options to certain directors,
officers, employees and independent contractors of HFS's common stock at
prices not less than the fair market values at the date of grant.
Generally, such stock options have a ten-year term and vest within five
years from the date
45
of grant On December 17, 1997, in connection with the Cendant Merger, all
obligations under HFS's stock option plans were assumed by the Company.
Following the Cendant Merger, no further grants will be made under these
plans.
Prior to the HFS/PHH Merger, PHH had stock option plans for its key
employees and outside directors. The plans allowed for the purchase of
common stock at prices not less than fair market value on the date of
grant. Either incentive stock options or non-statutory stock options were
granted under the plans. Options became exercisable after one year from
date of grant on a vesting schedule provided by the plans and expired ten
years after the date of the grant. On April 30, 1997, in connection with
the HFS/PHH Merger, all unexercised PHH stock options were canceled and
converted to 1,770,852 equivalent shares of Company common stock. The
table below summarizes the annual activity of the Company's pooled stock
option plans (shares in 000's):
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
----------- ---------
BALANCE AT JANUARY 1, 1994 77,579 $ 4.86
Granted 23,878 9.90
Canceled (2,079) 6.36
Exercised (7,731) 3.93
Distribution of Chartwell Leisure Inc. 1,091 4.44
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 92,738 $ 6.20
Granted 21,098 10.74
Canceled (2,726) 8.48
Exercised (12,434) 5.39
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 98,676 $ 7.21
Granted 36,116 22.14
Canceled (2,838) 18.48
Exercised (14,010) 5.77
Less: PHH activity for January 1996
to reflect change in PHH fiscal year 48 8.78
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 117,992 $ 11.68
----------------------------------------------------------------------
46
The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its
stock option plans. Had the Company elected to recognize compensation cost
for its stock option plans based on the calculated fair value at the grant
dates for awards under such plans, consistent with the method prescribed
by SFAS No. 123, net income per share would have reflected the pro forma
amounts indicated below ($000's, except per share data):
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995
------------- -------------
Net income:
as reported $ 423,611 $ 302,825
pro forma 338,769 297,547
-------------------------------------------------------------------
Net income per share:
Primary as reported $ 0.53 $ 0.42
pro forma 0.43 0.41
Fully diluted as reported 0.52 0.41
pro forma 0.43 0.41
-------------------------------------------------------------------
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 1996 and 1995:
THE COMPANY PLANS HFS PLANS PHH PLANS
--------------------- ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
-------- -------- --------- -------- --------- ----------
Dividend yield 0% 0% 0% 0% 2.8% 3.5%
Expected volatility 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 5 years 5 years 9.1 years 9.1 years 7.5 years 7.5 years
The weighted average fair values of stock options granted during the years
ended December 31, 1996 and 1995 were $7.51 and $6.69, respectively for
the Company plans. The weighted average fair values of stock options
granted during the years ended December 31, 1996 and 1995 for the HFS
plans (inclusive of PHH Plans) were $10.96 and $4.79, respectively.
The effect of applying SFAS No. 123 on the pro forma net income per share
disclosures is not indicative of future amounts because it does not take
into consideration option grants made prior to 1995 or in future years.
47
The tables below summarize information regarding pooled stock options
outstanding and exercisable of the Company as of December 31, 1996 (shares
in 000's):
THE COMPANY/HFS OPTIONS OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ---------------------------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
---------------------- --------- --------------- ----------- ----------- -------------
$ .01 to $ 10.00 56,548 6.3 $ 4.19 43,460 $ 3.71
$ 10.01 to $ 20.00 31,597 8.2 14.50 8,781 15.04
$ 20.01 to $ 30.00 16,809 9.4 23.97 1,055 25.77
$ 30.01 to $ 40.00 6,331 9.6 31.78 226 31.37
--------- -----------
Total 111,285 7.5 11.67 53,522 6.12
========= ===========
PHH OPTIONS
Less than $6.87 3,489 4.5 $ 5.74 3,489 $ 5.74
Greater than $6.87 3,218 8.7 8.82 1,055 6.90
--------- -----------
Total 6,707 6.5 7.22 4,544 6.01
========= ===========
Shares exercisable and available for grant were as follows (000's):
THE COMPANY OPTIONS HFS OPTIONS PHH OPTIONS
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
--------------------- -------------------- ---------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- ------- ------
Shares exercisable 11,819 12,193 41,703 17,012 4,544 5,890
Shares available for grant 8,358 10,013 3,958 84 1,182 3,316
The Company has reserved 11,390,625 shares of Company common stock for
issuance in connection with its 1989 Restricted Stock Plan. As of December
31, 1996, 10,494,423 shares of restricted common stock had been granted
under this plan. During fiscal 1997, 720,000 shares of restricted common
stock were granted under the plan and 645,000 shares of restricted common
stock were granted other than under the plan. The aggregate fair value on
the date of grant of such restricted common stock was $30.5 million, which
amount was deducted from shareholders' equity and is being amortized over
the vesting period of 10 years.
The Company has reserved 1,125,000 shares of Company common stock in
connection with its 1994 Employee Stock Purchase Plan, which enables
employees to purchase shares of common stock from the Company at 90% of
the fair market value on the fifteenth day following the last day of each
calendar quarter, in an amount up to 25% of the employees' year-to-date
earnings.
17. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans. During 1996, a Deferred Compensation Plan (the "Plan") was
implemented providing senior executives with the opportunity to
participate in a funded, deferred compensation program. The assets of the
Plan are held in an irrevocable rabbi
48
trust. Under the Plan, participants may defer up to 80% of their base
compensation and up to 98% of bonuses earned. The Company contributes
$0.50 for each $1.00 contributed by a participant, regardless of length of
service, up to a maximum of six percent of the employee's compensation.
The Plan is not qualified under Section 401 of the Internal Revenue Code.
The Company's matching contributions relating to the above plans were not
material to the supplemental consolidated financial statements for all
periods presented.
PENSION AND SUPPLEMENTAL RETIREMENT PLANS
The Company's PHH subsidiary has a non-contributory defined benefit
pension plan covering substantially all US employees of PHH and its
subsidiaries. PHH's subsidiary located in the UK has a contributory
defined benefit pension plan, with participation at the employee's option.
Under both the US and UK plans, benefits are based on an employee's years
of credited service and a percentage of final average compensation. The
policy for both plans is to contribute amounts sufficient to meet the
minimum requirements plus other amounts as the Company deems appropriate
from time to time. The projected benefit obligations of the funded plans
were $97.1 million and 85.6 million and funded assets, at fair value
(primarily common stock and bond mutual funds) were $88.4 million and
$74.3 million at December 31, 1996 and 1995, respectively. The net pension
cost and the recorded liability were not material to the accompanying
supplemental consolidated financial statements.
The Company also sponsors two unfunded supplemental retirement plans to
provide certain key executives with benefits in excess of limits under the
federal tax law and to include annual incentive payments in benefit
calculations. The projected benefit obligation, net pension cost and
recorded liability related to the unfunded plans were not material to the
accompanying supplemental consolidated financial statements for all
periods presented.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. The net
periodic postretirement benefit costs and the recorded liability were not
material to the accompanying supplemental consolidated financial
statements for all periods presented.
18. SALE OF THE IMAGINATION NETWORK - SIERRA
The operating activities of The ImagiNation Network, Inc. ("INN") were
consolidated with those of Sierra through July 26, 1993. On July 27, 1993
Sierra sold 42% of INN's voting stock and reduced its ownership interest
to 58% and reduced its voting control such that Sierra recorded its
liquidation preference in excess of recorded book value as shareholders'
equity.
In December 1994, Sierra sold its remaining equity interest in INN to AT&T
and recorded a gain of $19.7 million for the year ended December 31, 1994.
Sierra also entered into a multi-year publishing agreement with AT&T to
provide content for INN. The publishing agreement provides for AT&T to
fund up to $4.0 million of Sierra's development expenditures under an
existing publishing agreement and up to $23.0 million of Sierra's
development expenditures, subject to certain limitations, through
non-refundable royalty advances. The non-refundable royalty advances are
reflected net of research and development expense.
19. FRANCHISING ACTIVITIES
49
Revenue from franchising activities includes initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property
and estimated real estate brokerage offices gross closed commissions.
Initial franchise fees amounted to $24.2 million, $15.7 million and $13.8
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Franchising activity for the years ended December 31, 1996, 1995 and 1994
is as follows:
LODGING REAL ESTATE
----------------------------------- ---------------------------
1996 1995 1994 1996 1995
---------- --------- ---------- ---------- ----------
FRANCHISES IN OPERATION
Units at end of year 5,397 4,603 4,229 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired 24 31 - 110 104
New agreements 1,142 983 870 829 248
Backlog, end of year 786 682 594 275 176
20. DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs interest rate swap agreements to match effectively the
fixed or floating rate nature of liabilities to the assets funded. A key
assumption in the following information is that rates remain constant at
December 31, 1996 levels. To the extent that rates change, both the
maturity and variable interest rate information will change. However, the
net rate the Company pays remains matched with the assets funded.
50
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps employed at December 31, 1996. These
characteristics are effectively offset within the portfolio of assets
funded by the Company ($000's):
MATURITIES
---------------------------------------------------------------
TOTAL 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------- ---------
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $427,181 $199,528 $136,176 $ 59,346 $ 20,531 $ 4,625 $ 6,975
Weighted average receive rate 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Weighted average pay rate 6.21% 6.33% 6.47% 6.37% 6.51% 6.60%
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 336,000 250,000 86,000
Weighted average receive rate 6.59% 6.50%
Weighted average pay rate 5.95% 5.86%
Pay floating/receive floating:
Notional value 357,200 357,200
Weighted average receive rate 5.51%
Weighted average pay rate 5.90%
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 68,255 32,631 22,849 10,585 2,190
Weighted average receive rate 3.11% 3.11% 3.11% 3.11%
Weighted average pay rate 6.25% 5.89% 5.63% 4.58%
Pay floating/receive floating:
Notional value 52,730 28,010 14,961 4,342 2,853 2,564
Weighted average receive rate 7.21% 7.09% 6.93% 7.61% 7.61%
Weighted average pay rate 3.38% 3.38% 3.38% 3.38% 3.38%
Pay floating/receive fixed:
Notional value 36,481 36,481
Weighted average receive rate 4.92%
Weighted average pay rate 3.07%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 379,308 37,708 93,070 138,834 109,696
Weighted average receive rate 6.56% 6.56% 6.56% 6.56%
Weighted average pay rate 6.17% 7.85% 6.96% 7.10%
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 13,000 1,950 2,925 (6,825) 3,575 11,375
Weighted average receive rate 3.25% 3.25% 3.25% 3.25% 3.25%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34% 5.34%
--------- -------- -------- -------- -------- ---------
Total $1,670,155 $943,508 $269,981 $292,282 $138,845 $ 18,564 $ 6,975
========== ======== ======== ======== ======== ========= =========
51
For the years ended December 31, 1996 and 1995, the Company's hedging
activities increased interest expense $4.1 million and $2.0 million,
respectively, and had no effect on its weighted average borrowing rate.
For the same period in the year ended December 31, 1994, hedging
activities increased interest expense $8.4 million and increased the
weighted average borrowing rate 0.2%.
The Company enters into foreign exchange contracts as hedges against
currency fluctuations on certain intercompany loans. Such contracts
effectively offset the currency risk applicable to approximately $329.1
million and $118.1 million of obligations at December 31, 1996 and 1995,
respectively.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to certain derivative financial
instruments. The Company manages such risk by periodically evaluating the
financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not expect
non-performance by any of the counterparties.
52
21. INDUSTRY SEGMENT INFORMATION
The Company is principally in the business of providing services to
businesses that serve consumer industry customers. The Company's major
business segments are reflective of the industries in which it serves. See
Note 1 for a more detailed description of each of the Company's industry
segments. Operating profit consists of revenues less operating expenses
excluding interest income, net and includes merger and related charges of
$131.3 million and $48.6 million allocated to the membership and other
segments respectively, for the year ended December 31, 1996 (See Note 3).
Membership services operating profit for the year ended December 31, 1995
includes $97.0 million of costs related to Ideon products abandoned and
restructuring. Membership Services operating profit for the year ended
December 31, 1994 includes $7.9 million of costs related to Ideon products
abandoned and restructuring and a $17.7 million net gain on the sale of
INN. The following table presents industry segment data of the Company for
the years ended December 31, 1996, 1995 and 1994.
53
Operations by segment ($000's):
Year Ended December 31, 1996
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
Net revenues $ 3,908,780 $ 2,097,098 $ 233,469 $ 344,865 $ 127,729
Operating income 739,115 266,314 110,535 54,302 41,302
Identifiable assets 13,588,368 2,517,600 1,295,501 1,086,374 1,742,409
Depreciation and amortization 167,907 60,888 27,317 11,168 4,442
Capital expenditures 140,626 48,678 9,932 9,112 9,859
TRAVEL
-----------------------------------------------------------
CAR
LODGING RENTAL TIMESHARE FLEET OTHER
----------- ----------- ----------- ------------- -----------
Net revenues $ 385,920 $ 10,014 $ 30,723 $ 255,866 $ 423,096
Operating income 145,798 537 3,319 76,218 40,790
Identifiable assets 954,649 882,397 772,585 3,868,472 468,381
Depreciation and amortization 30,852 3,439 2,559 13,214 14,028
Capital expenditures 19,302 -- 1,473 9,999 32,271
Year Ended December 31, 1995
REAL ESTATE
------------------------------------------
REAL ESTATE MORTGAGE
CONSOLIDATED MEMBERSHIP FRANCHISE RELOCATION SERVICES
------------- ----------- ----------- ------------- -----------
Net revenues $ 2,992,122 $ 1,643,242 $ 47,965 $ 301,667 $ 93,251
Operating income 516,596 184,699 19,277 41,718 41,744
Identifiable assets 8,994,384 1,800,952 195,157 1,023,860 1,142,272
Depreciation and amortization 112,914 40,358 2,997 10,385 3,099
Capital expenditures 108,702 53,048 2,034 8,678 2,987
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 335,402 $ 258,877 $ 311,718
Operating income 120,606 56,918 51,634
Identifiable assets 724,673 3,649,654 457,816
Depreciation and amortization 26,058 18,837 11,180
Capital expenditures 5,059 9,872 27,024
54
Year Ended December 31, 1994
REAL ESTATE
----------------------------
MORTGAGE
CONSOLIDATED MEMBERSHIP RELOCATION SERVICES
------------ ----------- ----------- -------------
Net revenues $ 2,446,731 $ 1,363,561 $ 255,974 $ 74,494
Operating income 474,885 218,145 34,534 30,172
Identifiable assets 7,437,042 1,566,186 794,372 849,131
Depreciation and amortization 97,175 27,683 9,280 2,944
Capital expenditures 73,804 29,809 11,541 2,471
TRAVEL
------------------------------------------
LODGING FLEET OTHER
----------- ----------- -----------
Net revenues $ 300,694 $ 249,571 $ 202,437
Operating income 102,487 52,323 37,224
Identifiable assets 738,543 3,247,320 241,490
Depreciation and amortization 21,921 17,765 17,582
Capital expenditures 9,378 8,854 11,751
The Company's operations outside of North America principally include
fleet management and relocation segment operations in Europe. Geographic
operations of the Company are as follows ($000's):
NORTH EUROPE
YEAR ENDED DECEMBER 31, 1996 AMERICA & OTHER CONSOLIDATED
---------------------------- -------------- ----------- -------------
Net revenues $ 3,529,563 $ 379,217 $ 3,908,780
Income before income taxes 650,030 63,640 713,670
Identifiable assets 12,519,616 1,068,752 13,588,368
YEAR ENDED DECEMBER 31, 1995
Net revenues 2,774,201 217,921 2,992,122
Income before income taxes 464,393 38,939 503,332
Identifiable assets 8,230,792 763,592 8,994,384
YEAR ENDED DECEMBER 31, 1994
Net revenues $ 2,296,067 $ 150,664 $ 2,446,731
Income before income taxes 439,390 24,942 464,332
Identifiable assets 6,857,565 579,477 7,437,042
55
22. SELECTED QUARTERLY FINANCIAL DATA - (UNAUDITED)
($000's, except per share data)
1996 FIRST SECOND (1) THIRD (2) FOURTH (3) TOTAL YEAR
---- ----------- ----------- ----------- ----------- -----------
Net revenues $ 821,411 $ 935,639 $ 1,042,901 $ 1,108,829 $ 3,908,780
Income before income taxes 158,300 179,430 112,569 263,371 713,670
Net income 95,974 101,064 68,466 158,107 423,611
Net income per share:
Primary $ .13 $ .13 $ .08 $ .20 $ .53
Fully diluted $ .13 $ .13 $ .08 $ .19 $ .52
1995 FIRST (4) SECOND (4) THIRD (4) FOURTH (4, 5) TOTAL YEAR
---- ----------- ----------- ----------- ------------- -------------
Net revenues $ 661,280 $ 722,571 $ 787,150 $ 821,121 $ 2,992,122
Income before income taxes 117,865 64,211 151,646 169,610 503,332
Net income 71,139 36,116 90,082 105,488 302,825
Net income per share:
Primary $ .10 $ .05 $ .12 $ .14 $ .42
Fully diluted $ .10 $ .05 $ .12 $ .14 $ .41
(1) Includes merger cost of $28.6 million ($25.1 million, after tax or
$0.03 per share) recorded in connection with the mergers of Davidson
& Associates, Inc. and Sierra On-Line, Inc.
(2) Includes merger costs of $147.2 million ($89.6 million, after tax or
$0.11 per share) principally related to the completion of the Ideon
Group, Inc. acquisition.
(3) Includes costs of $4.1 million principally related to investment
banking fees incurred in connection with other Company acquisitions.
(4) The first, second, third and fourth quarters include $8.1 million
($5.2 million, net of tax or $.01 per share), $73.1 million ($46.8
million net of tax or $.07 per share), $16.4 million ($10.5 million
net of tax or $.01 per share) and ($.6 million), respectively of
Ideon's costs related to products abandoned and restructuring.
(5) Includes merger costs of $5.2 million ($4.2 million, net of tax or
$.06 per share) related to the acquisition of Advance Ross.
23. INVESTMENT IN ARAC
Upon entering into a definitive merger agreement to acquire Avis, Inc. in
July 1996, HFS announced its strategy to dilute its interest in ARAC's car
rental operations while retaining assets associated with the franchise
business, including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since HFS's control was planned
to be temporary, HFS accounted for its 100% investment in ARAC under the
equity method. In September 1997, ARAC completed the IPO, which diluted
HFS's equity interest to approximately 27.5%.
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. 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. Summarized financial information of ARAC is as follows
($000's):
56
AVIS RENT A CAR, INC.
SEPTEMBER 30,
1997 DECEMBER 31,
Balance sheet data: (UNAUDITED) 1996
----------------- --------------
Vehicles $ 3,364,660 $ 2,243,492
Total assets 4,717,107 3,131,357
Debt 3,285,548 2,295,474
Total liabilities 4,263,001 3,054,817
Shareholders' equity 454,106 76,540
NINE MONTHS ENDED OCTOBER 17, 1996
SEPTEMBER 30, 1997 (DATE OF ACQUISITION)
(UNAUDITED) TO DECEMBER 31, 1996
------------------ --------------------
Statement of income data:
Revenues $ 1,525,696 $ 362,844
Income before provision
for income taxes 49,313 2,261
Net income 26,974 1,221
24. SUBSEQUENT EVENTS - (PRIOR TO THE CENDANT MERGER DATE OF DECEMBER 17, 1997)
PROVIDIAN ACQUISITION
On December 9, 1997, HFS executed a definitive agreement to acquire
Providian Auto and Home Insurance Company and its subsidiaries from an
AEGON N.V. subsidiary for approximately $219.0 million in cash. Closing is
subject to receipt of required regulatory approval and other customary
conditions and is anticipated in the spring of 1998. Providian sells
automobile insurance to consumers through direct response marketing in 45
states and the District of Columbia.
DIVESTITURE
As directed by the Federal Trade Commission ("FTC") as a condition
terminating the waiting period under the Hart Scott Rodino Antitrust
Improvements Act in connection with the Cendant Merger, on December 17,
1997, the Company sold its wholly-owned subsidiary, Interval International
Inc. and certain related entities ("Interval"), for approximately $200.0
million, subject to certain adjustments. The agreement contemplates that
the Company will continue to provide certain existing services to
Interval's developers and members.
INVESTMENT IN NRT
During the third quarter of 1997, HFS acquired $182.0 million of preferred
stock of NRT Incorporated ("NRT"), a newly formed corporation created to
acquire residential real estate brokerage firms. HFS acquired $216.1
million of certain intangible assets including trademarks associated with
real estate brokerage firms acquired by NRT in 1997. The Company, at its
discretion, may acquire up to $81.3 million of additional NRT preferred
stock and may also purchase up to $229.9 million of certain intangible
assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of the Trust, and two other regional real estate brokerage
businesses. The Trust is an independent trust to which HFS contributed the
brokerage offices formerly owned by Coldwell Banker in connection with
HFS's acquisitions of Coldwell Banker. NRT is the largest residential
brokerage firm in the United States.
ISSUANCE OF 3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company issued $550 million in principal amount
of 3% Convertible Subordinated Notes (the "3% Notes") due February 15,
2002. Interest on the 3% Notes is payable semi-annually. Each $1,000
principal amount of 3% Notes is convertible into 32.6531 shares of Company
common stock subject to adjustment in certain events. The 3% Notes may be
redeemed at the option of the Company at any time on or after February 15,
2000, in whole or in part, at the appropriate redemption prices (as
defined in the indenture governing the 3% Notes) plus accrued interest to
the redemption date. The 3% Notes will be subordinated in right of payment
to all existing and future Senior Debt (as defined in the indenture
governing the 3% Notes) of the Company. Issuance costs are being amortized
on a straight-line basis over five years.
57
- -------------------------------------------------------------------------------
SUBSEQUENT EVENTS - (POST CENDANT MERGER DATE OF DECEMBER 17, 1997) -
UNAUDITED
PROPOSED ACQUISITION
On January 27, 1998, the Company proposed to acquire American Bankers
Insurance Group Inc. ("American Bankers") for $58 per share in cash and
stock, for an aggregate purchase price approximating $2.7 billion. On
January 28, 1998, the Company commenced a tender offer to purchase
approximately 23.5 million shares of American Bankers' common stock at a
price of $58 per share in cash, which together with shares owned by the
Company on the announcement date, approximate 51% of the fully diluted
shares of American Bankers. The Company proposed to exchange, on a tax
free basis, shares of its common stock with a fixed value of $58 per share
for the balance of American Bankers' common stock. The tender offer is
subject to certain customary conditions and there can be no assurance that
the Company will be successful in its proposal to acquire American
Bankers. The Company received a commitment from a bank to provide funds
necessary to finance the proposed acquisition.
HARPUR GROUP LTD. ACQUISITION
On January 20, 1998, the Company completed its acquisition of The Harpur
Group Ltd. ("Harpur"), a leading fuel card and vehicle management company
in the United Kingdom, from privately held H-G Holdings, Inc. for
approximately $186.0 million in cash plus future contingent payments of up
to $20.0 million over the next two years.
JACKSON HEWITT INC. MERGER
On January 7, 1998, the Company completed the acquisition of Jackson
Hewitt Inc. (" Jackson Hewitt"), for approximately $480.0 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service system in the United States with
locations in 41 states.
Jackson Hewitt franchises a system of approximately 2,050 offices that
specialize in computerized prepartion of federal and state individual
income tax returns.
58