95
EXHIBIT 99.3
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
On December 17, 1997 CUC International Inc. ("CUC" or the "Company")
merged with HFS Incorporated ("HFS") and was renamed Cendant Corporation in a
transaction which has been accounted for as a pooling of interests.
Accordingly, financial statements have been restated for all periods presented
as if CUC and HFS had operated as one entity since inception. The Company is a
leading global provider of services to businesses serving consumer industries.
The Company provides fee-based services to consumers within the
Membership, Travel and Real Estate business segments. The Company generally
does not own the assets or share the risks associated with the underlying
businesses of its customers. In the Membership Services segment, the Company is
a technology-driven leading provider of membership-based consumer services. In
the Travel segment, the Company is the world's largest franchisor of lodging
facilities and rental car agencies, the leading provider of vacation timeshare
exchange services and a leading provider of international fleet management
services. In the Real Estate segment, the Company is the world's largest
franchisor of residential real estate brokerage offices, the world's largest
provider of corporate relocation services and operates a leading mortgage
lending business in the United States. The combination of CUC and HFS provides
the Company's membership businesses access to HFS's more than 100 million
consumer contacts, while providing HFS businesses with the technology-driven,
direct marketing expertise necessary to successfully cross-market within its
existing business units.
SEGMENT DISCUSSION
Certain of the underlying business segments are comprised of businesses
acquired which were accounted for as poolings of interest (See "Liquidity and
Capital Resources - 1997 Poolings, 1996 Poolings and 1995 Poolings").
Accordingly, all financial information has been restated as if all of the
pooled companies operated as one entity since inception. Certain of the
underlying segments are comprised of businesses which were acquired in 1996 and
1995 and accounted for by the purchase method of accounting. (See " Liquidity
and Capital Resources - 1996 Purchase Acquisitions and 1995 Purchase
Acquisitions"). Accordingly, the results of operations of such acquired
companies were included in the consolidated operating results of the Company
from the respective dates of acquisition. In the underlying results of
operations discussions, operating expenses include total expenses excluding
interest expense and income taxes.
RESULTS OF OPERATIONS DISCUSSION
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
Net income increased $120.8 million (40%) despite non-recurring merger and
related charges approximating $179.9 million ($118.7 million, after tax) (the
"Davidson, Sierra and Ideon Merger Charge") in 1996 in connection with the
mergers with Davidson & Associates, Inc. ("Davidson"), Sierra On-Line, Inc.
("Sierra") and Ideon Group, Inc. ("Ideon"). In connection with such charge,
$131.3 million was allocated to the operations of the "Membership" segment.
97
The increase in net income primarily resulted from a $222.5 million (43%)
increase in operating income.
The financial summary of the Company for the years ended December 31, 1996
and 1995 is as follows ($000's):
1996 1995 VARIANCE
------------- -------------- ---------
Net revenue $ 3,908,780 $ 2,992,122 31%
Operating expenses 3,169,665 2,475,526 28%
------------- --------------
Operating income $ 739,115 $ 516,596 43%
============= ==============
Net income $ 423,611 $ 302,825 40%
============= ==============
MEMBERSHIP SEGMENT
The Company provides its consumers, representing approximately 73 million
memberships at September 30, 1997, access to a variety of goods and services
including 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 and distributes welcoming packages which provide new
homeowners with discounts for local merchants. Revenue is derived from
membership fees which vary depending on the particular membership program. The
Company provides individual, wholesale and discount program membership services
to consumers, which are distributed through various channels including
financial institutions, credit unions, charities, other cardholder-based
organizations and retail establishments. Individual memberships consist of
members that pay directly for the services and the Company pays for the
marketing costs to solicit the members primarily using direct marketing
techniques. Wholesale memberships include members that pay directly for the
services to their sponsor and the Company does not pay for the marketing costs
to solicit the members. Discount program memberships are generally marketed
through a direct sales force, participating merchants or general advertising
and the related fees are either paid directly by the member or the local
retailer. All of these categories share various aspects of the Company's
marketing and operating resources. The Company maintains a flexible marketing
plan so that it is not dependent on any one service for the future growth of
the total membership base.
YEAR ENDED DECEMBER 31,
---------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ------------- ------------- --------
Net revenue $ 2,097,098 $ 1,643,242 28%
Operating expenses 1,830,784 1,458,543 26%
------------- -------------
Operating income $ 266,314 $ 184,699 44%
============= =============
Operating income increased $81.6 million (44%) despite $34.3 million of
incremental non-recurring merger and related costs and other unusual charges in
1996 compared to 1995. Operating income increased $115.9 million (41%)
excluding such charges.
The Company's overall membership base continues to grow at a rapid rate
(from 59.7 million members at December 31, 1995 to 66.3 million members at
December 31, 1996), which is the largest contributing factor to the 28%
increase in membership revenues (from $1.6 billion in 1995 to $2.1 billion in
1996). While the
98
overall membership base increased by 6.6 million members, or 11% during the
year, the average annual fee charged for the Company's membership services
increased by approximately 4%.
In 1996, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 23% and 12%,
respectively. Wholesale memberships have grown in part due to the success of
the Company's international business in Europe. For the year ended December 31,
1996, individual, wholesale and discount program memberships represented 68%,
13% and 19% of membership revenues, respectively. The Company completed a
number of acquisitions accounted for under the purchase method of accounting
during 1996. Total revenue contributed by these acquisitions is not material to
the Company's total reported membership revenue.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impact profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $401
million in 1996, compared to $376 million in 1995. This represents 17% and 19%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs continue
to be personnel, telephone, computer processing and participant insurance
premiums (the cost of obtaining insurance coverage for members). Historically,
the Company has seen a direct correlation between providing a high level of
service to its members and improved retention. Marketing costs remained
constant as a percentage of revenues, which is primarily due to maintained per
member acquisitions costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995. Renewal rates are
calculated by dividing the total number of renewing members not requesting a
refund during their renewal year by the total members eligible for renewal.
TRAVEL SEGMENT
LODGING
The Company operates eight nationally recognized brands with approximately
5,700 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and national
marketing programs, which are completely funded by its franchisees from a
designated portion of the franchise fees. The Company charges royalty fees
based on a percentage of franchisee gross room sales to fund all expenses not
covered by marketing and reservation fees, such as quality inspections and
franchise sales and service functions. The significant revenue drivers of the
Company are the number of royalty-paying franchise units and the average rate
at which they pay. Other relevant drivers are the average daily rates and
occupancy percentages of the underlying lodging properties.
99
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 385,920 $ 335,402 15%
Operating expenses 240,122 214,796 12%
----------- -----------
Operating income $ 145,798 $ 120,606 21%
=========== ===========
Operating income increased 21% and net revenue increased 15% as a result
of a 13% increase in royalty fees and a 41% increase in revenue from preferred
alliances seeking access to the Company's franchisees and their underlying
consumer base. Results for 1996 demonstrated that room growth is the most
significant outcome driver for franchisee royalty, as the Company added 55,253
net rooms in 1996, representing a 133% increase from 1995 results. The Company
added 94,506 rooms in 1996 (including 30,274 rooms added by the acquisition of
Travelodge franchise contracts) and terminated 39,253 rooms in 1996 (including
6,053 Park Inn International rooms, comprising the franchise system sold in
September 1996 for $2.2 million). In 1995, the Company added 63,280 rooms
(including 9,780 rooms added by the acquisition of Knights Inn franchise
contracts) and terminated 39,603 rooms (including 22,151 related to a special
year-end removal of properties as a result of the repositioning and tightening
of quality standards of the Company's brands). Total U.S. system revenue per
available room ("REVPAR") increased 1.3% primarily due to a 1.9% increase in
the average daily rates ("ADR") charged at franchised lodging facilities,
however, REVPAR for comparable properties in 1996 and 1995 ("same store basis")
increased 3.3% as a result of increases in ADR. The 12% ($25.3 million)
increase in operating expenses included an 18% increase ($4.7 million) in
depreciation and amortization, primarily related to the excess of cost over net
assets acquired ("goodwill") associated with the acquisitions of the Travelodge
and Knights Inn franchise systems in January 1996 and August 1995,
respectively. In addition, operating expenses increased as a result of a 13%
($17.8 million) increase in marketing and reservation expenses associated with
funds administered by the Company on a pass-through basis (corresponding
franchisee contribution included in revenue).
CAR RENTAL
HFS acquired HFS Car Rental, Inc. (formerly Avis, Inc.) in October 1996.
In September 1997, Avis Rent A Car, Inc. ("ARAC") then a subsidiary of HFS Car
Rental Inc., which operated the rental car operations of HFS Car Rental Inc.,
completed an initial public offering ("IPO") which diluted HFS's equity
interest in ARAC from 100% to 27.5%. HFS retained the assets that are
consistent with its service provider business profile, including the
trademarks, franchise agreements, reservation system and information technology
system assets. 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.
FOR THE PERIOD
OCTOBER 17, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- -------------------
Net revenue $ 10,014
Operating expenses 9,477
-----------
Operating income $ 537
===========
100
Net revenue consisted primarily of fees for information technology
services provided to ARAC from the October 17, 1996 acquisition date. Operating
expenses consisted of $3.4 million of depreciation and amortization expenses
primarily associated with the Avis trademark and goodwill and $6.0 million of
technology related expenses for services provided to ARAC and other rental car
companies.
TIMESHARE
HFS acquired Resort Condominiums International ("RCI") in November 1996
for $487.1 million plus up to $200 million of contingent consideration. RCI
sells subscription memberships to owners of vacation timeshare resorts which
allow members to exchange their timeshare accommodations for timeshare
accommodations owned by other members at participating affiliated resorts
worldwide. In addition to membership fees, RCI earns fees for exchanges
processed by its call center. The key timeshare revenue drivers include the
number of fee paying members and exchanges as well as each corresponding
average fee.
FOR THE PERIOD
NOVEMBER 12, 1996 TO
OPERATING INCOME ($000'S) DECEMBER 31, 1996
------------------------- --------------------
Net revenue $ 30,723
Operating expenses 27,404
-----------
Operating income $ 3,319
===========
Net revenue primarily consisted of $11.3 million of member fees and $12.1
million of exchange fees. Operating expenses consisted primarily of $17.9
million of staff and communication costs associated with member services (call
centers). Assuming Company ownership of RCI since January 1, 1995, pro forma
annual membership and exchange fee revenue increased 12% to $102.0 million and
$11% to $157.6 million, respectively and total members and exchanges for
calendar year 1996 increased 8% to 2.2 million and 9% to 1.7 million,
respectively compared to 1995.
101
FLEET MANAGEMENT SERVICES
Fleet management services are offered to corporate clients and government
agencies to assist them in effectively managing their vehicle fleet costs,
reducing in-house administrative costs and enhancing driver productivity.
Services consist of leasing (which generally requires an investment by the
Company in the vehicle and includes new vehicle purchasing, open and closed-end
operating leasing, direct finance leasing and used vehicle marketing) as well
as a variety of fee-based services including fuel purchasing, maintenance
management programs, expense reporting, fuel management programs, accident and
safety programs and other driver services for managing clients' vehicle fleets.
The Company has experienced minimal losses associated with its investment in
vehicles due to the overall creditworthiness of its corporate clients.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- ---------
Net revenue $ 255,866 $ 258,877 (1%)
Operating expenses 179,648 201,959 (11%)
----------- -----------
Operating income $ 76,218 $ 56,918 34%
=========== ===========
Operating income increased $19.3 million (34%) to $76.2 million, primarily
as a result of an increase in fee-based services and an $11.7 million gain on
the sale of the Company's truck fuel management business ("NTS") which was sold
in January 1996. The net revenue generated in 1996 included the increase in
fee- based services but was offset by the absence of approximately $21.8
million of revenue from the sold NTS business. The $22.3 million (11%) decrease
in operating expenses was primarily associated with $19.1 million of expenses
associated with the sold NTS business.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21(R)
franchise system, in August 1995, the ERA(R) franchise system in February 1996
and the Coldwell Banker(R)franchise system in May 1996. The most significant
revenue driver for real estate franchise is the number of transactions for
which the broker receives commission revenue. Royalties are calculated based on
a percentage of such franchisee commission revenue. Marketing fees are
collected by the Company and are used to fund national advertising expenditures
and other marketing activities.
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- -----------
Net revenue $ 233,469 $ 47,965 387%
Operating expenses 122,934 28,688 329%
----------- -----------
Operating income $ 110,535 $ 19,277 473%
=========== ===========
The increases in net revenue and operating income are due to the CENTURY
21 franchise system's first full year contribution to operating results and
partial year contributions from the acquired Coldwell Banker and ERA franchise
systems. These franchises systems licensed their trademarks to approximately
184,000 sales associates at December 31, 1996. The royalty portion of revenue
increased $162.8 million (361%) and revenue from preferred affiliates grew from
$0.2 million to $13.4 million, net of the Company's $11.0 million
102
fourth quarter 1996 write-off of revenue associated with the license of the
CENTURY 21 trademark to Amre, Inc., which filed for bankruptcy protection in
February 1997.
Operating expenses increased 329% ($94.2 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with the
second quarter 1996 contribution of Coldwell Banker's former owned brokerage
business to National Realty Trust (the "Trust"), an independent entity governed
by independent trustees.
RELOCATION
Relocation primarily consist 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 homes of client employees, the client
corporations reimburse 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. Operating expenses primarily consist of staffing
and related costs for sales and service functions. Operating results include
contributions from PHH Relocation for all periods shown, from Coldwell Banker
Relocation Services, Inc. ("CBRS") since the May 31, 1996 acquisition date and
from Worldwide Relocation Management, Inc. ("WRM") since the August 1, 1995
acquisition date.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 344,865 $ 301,667 14%
Operating expenses 290,563 259,949 12%
----------- -----------
Operating income $ 54,302 $ 41,718 30%
=========== ===========
Acquired CBRS and WRM operations generated $19.2 million of operating
income and PHH Relocation operating income decreased $6.6 million (18%). PHH
Relocation net revenue increased $23.7 million due to an expansion of services
provided to corporate clients while revenue from home sale assistance was flat
compared to 1995. The revenue increase was offset by $30.3 million of increased
expenses associated with the development of the expanded full service
infrastructure.
MORTGAGE SERVICES
Mortgage services primarily consist of the origination, sale and servicing
of residential first mortgage loans. The Company packages its originated loans
for sale in secondary markets, generally within 45 days of origination, and
retains servicing rights. The Company markets a variety of first mortgage
products to consumers through relationships with corporations, affinity groups,
government agencies, financial institutions, real estate brokerage firms and
mortgage banks by a combination of retail teleservices delivery and wholesale
correspondent lending arrangements.
YEAR ENDED DECEMBER 31,
--------------------------------
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 127,729 $ 93,251 37%
Operating expenses 86,427 51,507 68%
----------- ------------
Operating income $ 41,302 $ 41,744 (1%)
=========== ============
103
The increase in net revenue resulted from a 149% increase in loan
origination revenue offset by a 28% decrease in loan servicing fees. The volume
of loan closings increased 33% from $6.3 billion to $8.4 billion and the
average fee increased from 54 to 100 basis points. Whereas the portfolio of
loans serviced increased 16% from $19.4 billion to $22.5 billion, the average
fee decreased 38% from 30.8 to 19.2 basis points. The increase in origination
fees and decrease in servicing fees results from the implementation of
Statement of Financial Accounting Standards ("SFAS") No. 122 "Accounting for
Mortgage Servicing Rights" in 1995, which had the effect of reallocating
revenue from servicing fees to origination fees. A reduction in gains recorded
from the sale of a portion of the loan servicing portfolio also contributed to
the decrease in service fees. The gain on the sale of servicing amounted to
$17.4 million in 1995 compared to $1.5 million in 1996. Operating expenses
increased as a result of higher closing volume experienced in expanded retail
teleservices delivery arrangements in 1996.
OTHER SEGMENT
Other business operations primarily consist of the development and sale of
high-quality educational, entertainment and personal productivity interactive
multimedia products for home and school use ("Software"), casino credit
information and marketing services, the equity in earnings from the Company's
investment in ARAC (net of information technology fees charged to ARAC) and
other operations or transactions which are not included in the Company's
primary business segments.
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1996 1995 VARIANCE
------------------------- ----------- ------------ --------
Net revenue $ 423,096 $ 311,718 36%
Operating expenses 382,306 260,084 47%
----------- ------------
Operating income $ 40,790 $ 51,634 (21%)
=========== ============
Operating income decreased $10.9 million (21%) as a result of $48.6
million of incremental merger and related charges associated with the
acquisitions of Davidson and Sierra. Excluding such merger and related charges,
operating income increased $37.8 million (73%) primarily as a result of a $27.1
million increase from Software operations and $9.5 million in consideration
received for the termination of a corporate services agreement with Chartwell
Leisure Inc. Software revenue increased 28% to $375.2 million in 1996 and
excluding the merger and related costs, software profit margins increased from
14% in 1995 to 19% in 1996. Distribution revenue, which consists principally of
third-party software and typically has low operating margins, was down from
$64.8 million in 1995 to $46.9 million in 1996. The Company's Software
operations continue to grow by focusing on selling titles through retailers.
Excluding distribution revenue, core software revenue grew by 44%. Contributing
to the Software revenue growth in 1996 is the availability of a larger number
of titles as well as a significant increase in the installed base of CD-ROM
personal computers.
104
YEAR ENDED DECEMBER 31, 1995 VS YEAR ENDED DECEMBER 31, 1994
Net income increased $41.7 million (9%) despite $89.1 million of incremental
non-recurring merger charges and costs associated with Ideon products
abandoned. Net income excluding such charges increased $72.1 million (25%). The
increase in net income was a result of a $41.7 million increase in operating
income partially offset by a $2.7 million increase in net interest expense
associated with financing the CENTURY 21 acquisition, and a general rise in
interest rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.
The financial summary of the Company for the years ended December 31, 1995 and
1994 is as follows ($000's):
1995 1994 VARIANCE
------------- ------------- ---------
Net revenue $ 2,992,122 $ 2,446,731 22%
Operating expenses 2,475,526 1,971,846 26%
------------- -------------
Operating income $ 516,596 $ 474,885 9%
============= =============
Net income $ 302,825 $ 286,590 6%
============= =============
MEMBERSHIP SEGMENT
YEAR ENDED DECEMBER 31,
-------------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ------------- ------------- --------
Net revenue $ 1,643,242 $ 1,363,561 21%
Operating expenses 1,458,543 1,145,416 27%
------------- -------------
Operating income $ 184,699 $ 218,145 (15%)
============= =============
Operating income decreased $33.4 million (15%) as a result of $89.1
million of incremental non-recurring merger charges and costs related to Ideon
products abandoned. Excluding such costs, operating income increased $55.7
million (26%) in 1995 compared to 1994.
The Company's overall membership base grew at a rapid rate (from 46.9
million members at December 31, 1994 to 59.7 million members at December 31,
1995), which is the largest contributing factor to the 21% increase in
membership revenues (from $1.4 billion in 1994 to $1.6 billion in 1995). While
the overall membership base increased by 12.8 million members, or 27%, (of
which approximately 8.0 million members came from acquisitions during the year
("Acquired Members")), the average annual fee charged for the Company's
membership services increased by 3%.
In 1995, individual (before giving effect to Ideon acquired members),
wholesale and discount program memberships grew by 14%, 19% and 11%,
respectively, in addition to the increase due to Acquired Members. For the year
ended December 31, 1995, individual, wholesale and discount program memberships
represented 68%, 12% and 20% of membership revenues, respectively. Discount
program memberships incurred the largest increase from Acquired Members.
Welcome Wagon International, Inc., Getko Group Inc. and Advance Ross
Corporation, all acquired in 1995, are classified in this membership category
as their businesses provide local discounts to consumers. The Company maintains
a flexible marketing plan so that it is not dependent on any one service for
the future growth of the total membership base. The Company completed
105
a number of acquisitions during 1995 which were accounted for under the
purchase method of accounting. The total revenues contributed by these
acquisitions are not material to the Company's total reported revenues.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Actual membership cancellations were $376
million in 1995 compared to $354 million in 1994. This represents 19% and 21%,
respectively, of the gross membership revenues accrued for all services. The
Company records its deferred revenue net of estimated cancellations which are
anticipated in the Company's marketing programs. The number of cancellations
has increased due to the increased level of marketing efforts, but has
decreased as a percentage of the total number of members.
The major components of the Company's membership operating costs are
personnel, telephone, computer processing and participant insurance premiums
(the cost of obtaining insurance coverage for members). Marketing costs
decreased as a percentage of revenues which is primarily due to improved per
member acquisition costs and an increase in renewing members. The Company
routinely reviews all membership renewal rates and has not seen any material
change in the average renewal rate in 1996 compared to 1995.
TRAVEL SEGMENT
LODGING
YEAR ENDED DECEMBER 31,
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 335,402 $ 300,694 12%
Operating expenses 214,796 198,207 8%
----------- -----------
Operating income $ 120,606 $ 102,487 18%
=========== ===========
Net revenue increased 12% as a result of a $20.7 million (16%) increase in
royalty fees and a $6.8 million (49%) increase in revenue from preferred
alliances seeking access to franchisees and their customers. Room growth
represented the most significant revenue outcome driver contributing to the
revenue increase. The Company added 63,280 rooms during 1995, representing an
18.8% increase, but also terminated 39,603 rooms including 22,151 rooms in a
special year-end removal of properties as a result of the repositioning and
tightening of quality standards of the Company's brands. Total REVPAR increased
3.0% primarily due to a 2.6% increase in the average daily rates charged at
franchisee hotels and a 1.8% increase in average royalty rates.
Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $18.1 million (18%) while operating expenses
increased only $16.6 million (8%). The increase in operating expenses included
$4.6 million of franchise sales and bad debt expenses associated with system
growth as well as $1.5 million of scheduled Ramada license fee increases.
Depreciation expense also increased $4.1 million in part from a full year's
expense in 1995 related to the newly developed reservation system for Days Inn
which was implemented in October 1994. The increase was also attributable to
goodwill amortization associated with the issuance of Company common stock in
December 1994 and September 1995, pursuant to an earnout agreement entered into
with Bryanston Group, Inc., an affiliate of the sellers of the Days Inn
franchise system.
106
FLEET MANAGEMENT SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 258,877 $ 249,571 4%
Operating expenses 201,959 197,248 2%
----------- -----------
Operating income $ 56,918 $ 52,323 9%
=========== ===========
The revenue increase primarily resulted from an increase in service fees
generated by growth in fuel and maintenance management programs. Such growth
reflects increased market penetration in the United States and United Kingdom.
Operating expenses increased only 2% reflecting a cost reduction program
implemented in 1995 net of certain expenses that vary with revenue growth.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
The CENTURY 21 franchise system contributed $48.0 million of net revenue
and $19.3 million of operating income for the five months following HFS's
August 1, 1995 acquisition. Franchise fees paid by the approximately 6,000
CENTURY 21 franchised brokerage offices approximated $42.1 million and
accounted for the significant portion of real estate franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.
RELOCATION
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 301,667 $ 255,974 18%
Operating expenses 259,949 221,440 17%
----------- -----------
Operating income $ 41,718 $ 34,534 21%
=========== ===========
The 18% increase in net revenue resulted primarily from an expansion of
full service products offered to corporate clients and a 7% ($7.8 million)
increase in home sale assistance fees. 1995 also included revenue and expense
contributions from WRM which was acquired on August 1, 1995 in connection with
the acquisition of CENTURY 21. The operating expense increase resulted from
growth in the infrastructure necessary to match competition for fee-based
services other than home sale assistance and system related expenses associated
with U.S. and Canadian asset management businesses.
MORTGAGE SERVICES
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 93,251 $ 74,494 25%
Operating expenses 51,507 44,322 16%
----------- -----------
Operating income $ 41,744 $ 30,172 38%
=========== ===========
107
The increase in net revenue was primarily a result of the capitalization
of $55.6 million of net revenue associated with the capitalization of
originated mortgage servicing rights partially offset by a $10.7 million
reduction in the gain on sale of servicing rights and a 32% increase in total
loan closings from 1994 to 1995. In addition, operating expenses increased as
the Company responded to the increase in loan production volume and the
increased servicing portfolio.
Mortgage loan closings increased from $3.4 billion in 1994 to $6.3 billion
in 1995. These increases resulted from increased consumer demand and the
Company's increased market share due primarily to expanded relationships with
affinity groups which represented 29% of the total increase, and with financial
institutions which represented 24% of the total increase. Servicing net revenue
increased 13% as a result of an increase in the average servicing portfolio
partially offset by increased amortization of servicing rights.
The Company adopted SFAS No. 122, effective May 1, 1995. This statement
requires that originated mortgage servicing rights be recognized as income when
the loan is sold and servicing is retained. The effect of this change in
accounting was partially offset by a decrease in margins realized on loans
sold. This decline in margins reflects the price competition in the industry
intended to capture market share during a period of low demand for mortgages
which was created by changes in interest rates during 1995.
OTHER SEGMENT
YEAR ENDED DECEMBER 31,
-----------------------------
OPERATING INCOME ($000'S) 1995 1994 VARIANCE
------------------------- ----------- ----------- --------
Net revenue $ 311,718 $ 202,437 54%
Operating expenses 260,084 165,213 57%
----------- -----------
Operating income $ 51,634 $ 37,224 39%
=========== ===========
Operating income increased $14.4 million (39%) as a result of $27.8
million from software operations and incremental profits from Central Credit
Inc., which conducts a casino credit information business and was acquired in
May 1995. Operating income in 1994 included a $19.7 million gain on the sale of
the ImagiNation Network.
Software revenues increased 53% ($100.9 million) to $292.0 million in
1995. Contributing to the strong Software growth in 1995 was the release of 63
new titles and an additional 18 titles which were acquired, as compared to 34
new products released in 1994. Also contributing to the Software revenue growth
is the significant increase in the installed base of CD-ROM personal computers
as well as increases in affiliated label and distribution revenues.
108
THREE MONTHS ENDED MARCH 31, 1997 VS THREE MONTHS ENDED MARCH 31, 1996
Consolidated revenue increased 42% ($342.7 million) to $1.2 billion and
consolidated net income increased 73% ($69.9 million) to $165.9 million in 1997
while fully diluted earnings per share ("EPS") increased 46% ($.06) to $.19.
Operating income (revenue less expenses excluding interest and income taxes)
increased 79% ($131.4 million) to $297.2 million.
Net interest expense increased 154% ($11.6 million) primarily resulting from
borrowings under revolving credit facilities which financed the RCI acquisition
and 1997 treasury stock purchases, while the weighted average effective
interest rate decreased from 6.83% to 6.39% as a result of increased fixed rate
borrowings at lower interest rates.
Operating expenses consist of total expenses excluding interest expense and
income taxes. Results for the Company's segments are as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 1,164,106 $ 821,411 42%
Operating expenses 866,922 655,609 32%
------------- ------------
Operating income $ 297,184 $ 165,802 79%
============= ============
MEMBERSHIP SEGMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 544,080 $ 483,211 13%
Operating expenses 426,804 393,066 9%
------------- ------------
Operating income $ 117,276 $ 90,145 30%
============= ============
The Company's overall membership base continues to grow at a rapid rate
(from 60.9 million members at March 31, 1996 to 68.6 million members at March
31, 1997), which is the largest contributing factor to the 13% increase in
membership revenues (from $483.2 million for the quarter ended March 31, 1996
to $544.1 million for the quarter ended March 31, 1997). While the overall
membership base increased by approximately 2.2 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by approximately 3%.
Compared to the previous year's first quarter, individual, wholesale and
discount program memberships grew by 10%, 24% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended March 31, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for
109
new members also favorably impacts profit margins. Individual membership usage
continues to increase, which contributes to additional service fees and
indirectly contributes to the Company's strong renewal rates. Historically, an
increase in overall membership usage has had a favorable impact on renewal
rates. Included in net revenue for the quarter ended March 31, 1997, are
revenues resulting from acquisitions which were completed during the quarter.
However, net revenue contributed from these acquisitions is not material to the
Company's total reported net revenue. The Company routinely reviews all
membership renewal rates and has not seen any material change over the last
year in the average renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 89,843 $ 81,290 11%
Operating expenses 53,843 53,341 1%
----------- -----------
Operating income $ 36,000 $ 27,949 29%
=========== ===========
Operating income increased 29% as a result of a 11% increase in net revenue.
The net revenue increase resulted from a 7% increase in royalty fees and an 83%
increase in revenue from preferred alliances seeking access to the Company's
franchisees and their underlying consumer base. Total royalty paying rooms grew
7% from the same period in 1996 and total system REVPAR increased 2% primarily
due to a 3% increase in the ADR charged at franchised lodging facilities.
CAR RENTAL
THREE MONTHS
ENDED MARCH 31,
OPERATING INCOME ($000'S) 1997
------------------------- --------------
Net revenue $ 58,834
Operating expenses 38,624
--------------
Operating income $ 20,210
==============
The Company acquired HFS Car Rental Inc. in October 1996. Assuming Company
ownership since January 1, 1996, total net revenue increased $10.1 million
(20%) to $58.8 million compared to pro forma 1996 net revenue. The increase
resulted from a $2.0 million (11%) increase in royalty fees (including a $1.2
million increase in fees from ARAC) and a $6.1 million (34%) increase in
information technology fees earned primarily from customers other than ARAC.
Operating expenses increased $5.7 million (17%) compared to 1996 pro forma
operating expenses. Operating expenses consisted primarily of $11.0 million and
$15.2 million of reservation and information technology expenses as well as
$9.3 million of depreciation and amortization expenses associated with the Avis
trademark and goodwill.
TIMESHARE
THREE MONTHS ENDED
OPERATING INCOME ($000'S) MARCH 31, 1997
------------------------- ------------------
Net revenue $ 100,925
Operating expenses 80,199
-------------
Operating income $ 20,726
=============
110
Net revenue primarily consists of $30.8 million of membership fees and $49.9
million of exchange fees. The Company acquired RCI in November, 1996. Assuming
Company ownership of timeshare operations since January 1, 1996, pro forma
first quarter membership and exchange fee revenue increased 27% and 4%,
respectively. Total members and exchanges increased 8% to 2.0 million and 3% to
0.5 million compared to 1996, respectively.
FLEET MANAGEMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 80,795 $ 70,948 14%
Operating expenses 48,631 44,749 9%
------------- -----------
Operating income $ 32,164 $ 26,199 23%
============= ===========
Operating income increased 23% ($6.0 million) to $32.2 million, primarily as
a result of a $6.4 million (23%) increase in fee-based services. The $3.9
million (9%) increase in operating expenses was primarily attributable to
expenses associated with a truck fuel management business which was sold in
January 1996.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 55,397 $ 26,492 109%
Operating expenses 35,701 18,128 97%
------------- -----------
Operating income $ 19,696 $ 8,364 135%
============= ===========
The Company acquired the CENTURY 21 franchise system in August 1995, the
ERA franchise system in February 1996 and Coldwell Banker franchise system in
May 1996. The royalty portion of revenue increased $28.5 million (144%) to
$48.3 million primarily attributable to acquired Coldwell Banker franchise
system operations. Pro forma royalty revenue, which gives effect to the
acquisitions of Coldwell Banker Corporation ("Coldwell Banker") and ERA as if
these acquisitions were consummated on January 1, 1996, increased $2.3 million
(5%) on the strength of a 2% increase in sales transactions and a 4% increase
in the average price of homes sold. The percentage increase in sales
transactions outperformed comparative industry results for the first quarter of
1997. Operating expenses increased as a result of incremental expenses
associated with acquired franchise systems.
MORTGAGE SERVICES
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 33,632 $ 19,885 69%
Operating expenses 20,840 17,456 19%
------------- -----------
Operating income $ 12,792 $ 2,429 427%
============= ===========
The increase in net revenue resulted from a 44% increase in loan origination
revenue offset by a 16% decrease in loan servicing fees. The volume of loan
closings increased 9% from $2.3 billion to $2.5 billion
111
and the average origination fee increased from 91 to 124 basis points. The
increase in the average fee was due to an increase in profitability achieved in
the sale of loans in the secondary market and an increase in volume from retail
teleservices delivery. The portfolio of loans serviced increased 16% from $22.0
billion to $25.6 billion, the average servicing fee decreased 28% from 6.4 to
4.6 basis points. The decrease in the average fee earned is due to the impact
of SFAS No. 122 which became effective in 1995. Operating expenses increased as
a result of the larger servicing portfolio and increased recruiting and staff
training expenses.
RELOCATION
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 85,245 $ 67,374 27%
Operating expenses 71,283 60,014 19%
------------ -----------
Operating income $ 13,962 $ 7,360 90%
============ ===========
The $6.6 million (90%) increase in operating income is primarily
attributable to acquired CBRS operations.
OTHER SEGMENT
THREE MONTHS ENDED MARCH 31,
-------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenues $ 115,355 $ 72,211 60%
Operating expenses 90,997 68,855 32%
------------ ------------
Operating income $ 24,358 $ 3,356 626%
============ ============
The increase in net revenues is in large part attributable to the continued
focus on selling software titles through retailers and the availability of a
larger number of titles as well as the significant increase in the installed
base of CD-ROM personal computers. Operating income increased $21.0 million
primarily as a result of $12.5 million from Software operations and a $5.8
million gain on the sale of an investment. As a result of the Company
recalendarizing only its 1997 results, software operations for calendar 1997
are compared against the fiscal period ended April 30, 1996. Assuming a
comparable quarter, software operating income increased $3.2 million from 1996
to 1997.
112
THREE MONTHS ENDED JUNE 30, 1997 VS THREE MONTHS ENDED JUNE 30, 1996
HFS recorded an anticipated $303.0 million one-time merger and related
charge ($227.0 million, after tax) (the "PHH Merger Charge") during the second
quarter of 1997 in connection with the merger of PHH Corporation ("PHH") with
and into HFS (the "HFS/PHH Merger"). In connection with such charge, $40.4
million and $50.4 million of costs were allocated to the operations of the
fleet management and relocation business segments, respectively. The remaining
merger and related costs did not directly apply to the Company's operating
segments and were therefore included as operating expenses within the Company's
"Other" segment.
The Company recorded a $28.6 million merger and related charge ($25.1
million after tax) (the "Second Quarter 1996 Davidson and Sierra Merger
Charge") in connection with the Davidson and Sierra Mergers. Such charge
pertained to the Company's software operations which is included in the
Company's "Other" segment.
The financial summary for the three months ended June 30, 1997 and 1996,
INCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
THREE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996 VARIANCE
------------ ----------- --------
Net revenue $ 1,300,513 $ 935,639 39%
Operating expenses 1,229,703 748,950 64%
------------ -----------
Operating income $ 70,810 $ 186,689 (62%)
============ ===========
Net income (loss) $ (13,437) $ 101,064 (113%)
============ ===========
Net income (loss) per share
(fully diluted) $ (0.02) $ 0.13 (115%)
============ ===========
The financial summary for the three months ended June 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
THREE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996 VARIANCE
------------ ----------- --------
Net revenue $ 1,300,513 $ 935,639 39%
Operating expenses 926,703 720,315 29%
------------ -----------
Operating income $ 373,810 $ 215,324 74%
============ ===========
Net income $ 213,563 $ 126,164 69%
============ ===========
Net income per share
(fully diluted) $ 0.25 $ 0.16 56%
============ ===========
Net interest expense increased $8.7 million primarily resulting from
borrowings under revolving credit facilities which financed 1997 treasury stock
purchases, merger expenditures, the acquisition of RCI and other acquisition
related expenditures. The weighted average effective interest rate decreased
from 7.20% to 5.80% as a result of increased fixed rate borrowings at lower
interest rates.
113
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON
AND SIERRA MERGER CHARGE.
MEMBERSHIP SEGMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 641,047 $ 521,742 23%
Operating expenses 483,413 418,928 15%
-------------- -----------
Operating income $ 157,634 $ 102,814 53%
============== ===========
The Company's overall membership base continues to grow at a rapid rate
(from 62.3 million members at June 30, 1996 to 70.7 million members at June 30,
1997), which is the largest contributing factor to the 23% increase in
membership revenues (from $521.7 million for the quarter ended June 30, 1996 to
$641.0 million for the quarter ended June 30, 1997). While the overall
membership base increased by approximately 2.1 million members during the
quarter, the average annual fee collected for the Company's membership services
increased by approximately 1%.
Compared to the previous year's second quarter, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended June 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenue for the quarter
ended June 30, 1997, are revenues resulting from acquisitions which were
completed during the six months ended June 30, 1997. However, net revenue
contributed from these acquisition is not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 108,111 $ 98,933 9%
Operating expenses 63,910 61,683 4%
----------- -----------
Operating income $ 44,201 $ 37,250 19%
=========== ===========
The net revenue increase resulted from a 6% increase in royalty fees and a
55% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. Total royalty paying
rooms grew 5% from the same period in 1996 and total system REVPAR increased 2%
114
primarily due to a 2% increase in ADR charged at franchised lodging facilities.
The 4% increase in operating expenses resulted primarily from an increase in
marketing and reservation expenses.
CAR RENTAL
THREE MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ---------------
Net revenue $ 60,036
Operating expenses 37,669
-------------
Operating income $ 22,367
=============
The Company acquired HFS Car Rental Inc. in October 1996. Net revenue
consisted primarily of $46.9 million of franchise fees and $11.6 million of
information technology fees from third party clients. Operating expenses
consisted primarily of $11.5 million and $15.1 million of reservation and
information technology expenses as well as $9.2 million of depreciation and
amortization expenses associated with the Avis trademark and goodwill.
TIMESHARE
THREE MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ------------------
Net revenue $ 89,261
Operating expenses 70,416
Operating income $ 18,845
The Company acquired RCI in November 1996. Net revenue primarily consists of
$30.8 million of member fees and $43.0 million of exchange fees. Assuming
Company ownership of timeshare operations since January 1, 1996, pro forma
member and exchange fee revenue increased 20% and 16%, respectively. Total
members and exchanges increased 8% to 2.0 million and 11% to 0.4 million
compared to 1996, respectively.
FLEET MANAGEMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 65,786 $ 62,822 5%
Operating expenses 40,756 46,150 (12%)
----------- -----------
Operating income $ 25,030 $ 16,672 50%
=========== ===========
Operating income increased $8.4 million (50%) to $25.0 million, primarily as
a result of a $6.4 million (23%) increase in fee-based services. The $5.4
million (12%) decrease in operating expenses was primarily attributable to
expenses associated with a truck fuel management business which was sold in
January 1996 and operational efficiencies realized as part of the second
quarter 1997 restructuring of certain fleet management operations.
115
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 83,671 $ 56,575 48%
Operating expenses 36,190 33,124 9%
----------- -----------
Operating income $ 47,481 $ 23,451 102%
=========== ===========
The Company acquired the ERA franchise system in February 1996 and the
Coldwell Banker franchise system in May 1996. The royalty portion of revenue
increased $23.9 million (47%) to $74.6 million, primarily attributable to
acquired Coldwell Banker franchise system operations. Pro forma royalty
revenue, which gives effect to the acquisitions of the Coldwell Banker and ERA
franchise systems as if these acquisitions were consummated on January 1, 1996,
would have increased $4.4 million (6%) on the strength of a 10% increase in the
average price of homes sold. Operating expenses increased 9% as a result of
incremental expenses associated with acquired franchise systems net of a $5.0
million charge associated with the second quarter 1996 contribution of Coldwell
Banker's former owned brokerage business to the Trust.
MORTGAGE SERVICES
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 42,497 $ 35,269 20%
Operating expenses 23,829 21,631 10%
----------- -----------
Operating income $ 18,668 $ 13,638 37%
=========== ===========
The increase in net revenue resulted from a 44% increase in loan origination
revenue offset by a 16% decrease in loan servicing fees. The volume of loan
closings increased 9% from $2.3 billion to $2.5 billion and the average
origination fee increased from 91 to 124 basis points. The increase in the
average fee was due to an increase in profitability achieved in the sale of
loans in the secondary market and an increase in volume from retail
teleservices delivery. The portfolio of loans serviced increased 16% from $22.0
billion to $25.6 billion, the average servicing fee decreased 28% from 6.4 to
4.6 basis points. The decrease in the average fee earned is due to the impact
of SFAS No. 122 which became effective in 1995. Operating expenses increased as
a result of the larger servicing portfolio and increased recruiting and staff
training expenses.
RELOCATION
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 103,448 $ 83,741 24%
Operating expenses 78,158 72,871 7%
----------- -----------
Operating income $ 25,290 $ 10,870 133%
=========== ===========
The increase in net revenue was primarily attributable to $8.3 million of
incremental revenue generated by acquired CBRS operations. The $5.3 million
increase in operating expenses included expenses associated with the acquired
operations net of $2.4 million of restructuring related savings in 1997.
Assuming company
116
ownership of CBRS since January 1, 1996, pro forma revenue increased $6.1
million (6%) from 1996 primarily as a result of an increase in referral fees.
OTHER SEGMENT
THREE MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 106,656 $ 76,557 39%
Operating expenses 92,362 65,928 40%
----------- -----------
Operating income $ 14,294 $ 10,629 34%
=========== ===========
Operating income increased $3.7 million (34%) primarily as a result of
$20.8 million of equity in earnings in ARAC, partially offset by a decrease of
$12.0 million from Software operations and the absence of fees associated with
the license of the Century 21 trademark to Amre Inc. As a result of the Company
only recalendarizing its 1997 results, software operations for calendar 1997
are compared against the fiscal period ended July 31, 1996. Assuming a
comparable quarter, software operating income decreased $2.2 million from 1996
to 1997.
SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
The financial summary for the six months ended June 30, 1997 and 1996,
INCLUDING THE PHH MERGER CHARGE OF $303.0 MILLION ($227.0 MILLION, AFTER TAX)
AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA MERGER CHARGE OF $28.6 MILLION
($25.1 MILLION, AFTER TAX) IS AS FOLLOWS ($000'S):
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $2,458,711 $ 1,757,050 40%
Operating expenses 2,097,381 1,404,559 49%
------------- ------------
Operating income $ 361,330 $ 352,491 3%
============= ============
Net income $ 152,432 $ 197,038 (23%)
============== ============
Net income per share $ 0.18 $ 0.25 (28%)
============== ============
The financial summary for the six months ended June 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON AND SIERRA
MERGER CHARGE IS AS FOLLOWS ($000'S):
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 2,458,711 $1,757,050 40%
Operating expenses 1,794,381 1,375,924 30%
----------- ------------
Operating income $ 664,330 $ 381,126 74%
=========== ============
Net income $ 379,432 $ 222,138 71%
============ ============
Net income per share $ 0.44 $ 0.28 57%
============ ============
Net interest expense increased 92% ($13.6 million) primarily resulting
from borrowings under revolving credit arrangements which financed 1997
treasury stock purchases, restructuring expenditures, the RCI
117
acquisition and other acquisition related expenditures, while the weighted
average effective interest rate decreased 7.26% to 6.10 % as a result of
increased fixed rate borrowings at lower interest rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE PHH MERGER CHARGE AND THE SECOND QUARTER 1996 DAVIDSON
AND SIERRA MERGER CHARGE.
MEMBERSHIP SEGMENT
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 1,185,127 $ 1,004,953 18%
Operating expenses 914,415 811,994 13%
------------- -------------
Operating income $ 270,712 $ 192,959 40%
============= =============
The Company's overall membership base continues to grow at a rapid rate
(from 62.3 million members at June 30, 1996 to 70.7 million members at June 30,
1997), which is the largest contributing factor to the 18% increase in
membership revenues (from $1.0 billion for the six months ended June 30, 1996
to $1.2 billion for the six months ended June 30, 1997). While the overall
membership base increased by approximately 4.4 million members during the six
months ended June 30, 1997, the average annual fee collected for the Company's
membership services increased by approximately 3%.
Compared to the previous year's first six months, individual, wholesale and
discount program memberships grew by 11%, 22% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the six months ended June 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenues for the six months
ended June 30, 1997, are revenues resulting from acquisitions which were
completed during the six months ended June 30, 1997. However, net revenue
contributed from these acquisitions are not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
118
TRAVEL SEGMENT
LODGING
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 197,954 $ 180,223 10%
Operating expenses 117,753 115,024 2%
----------- -----------
Operating income $ 80,201 $ 65,199 23%
=========== ===========
The net revenue increase resulted from a 6% increase in royalty fees and a
70% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. Total royalty paying
rooms grew 3% from the same period in 1996 and total REVPAR increased 2%
primarily due to a 3% increase in ADR charged at franchised lodging facilities.
The 2% increase in operating expenses resulted primarily from an increase in
marketing and reservation expenses.
CAR RENTAL
SIX MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ----------------
Net revenue $ 118,870
Operating expenses 76,293
------------
Operating income $ 42,577
============
The car rental segment generated $42.6 million of operating income in the
six months ended June 30, 1997. Net revenue consisted primarily of $86.9
million of franchise fees and $21.6 million of information technology fees from
third party clients. Operating expenses consisted primarily of $22.4 million
and $30.3 million of reservation and information technology expenses as well as
$18.5 million of depreciation and amortization expenses associated with the
Avis trademark and goodwill.
TIMESHARE
SIX MONTHS ENDED
OPERATING INCOME ($000'S) JUNE 30, 1997
------------------------- ----------------
Net revenue $ 187,710
Operating expenses 148,139
-----------
Operating income $ 39,571
===========
Net revenue primarily consists of $61.6 million of member fees and $92.8
million of exchange fees. Assuming Company ownership of timeshare operations
since January 1, 1996, pro forma first quarter membership revenue and exchange
fee revenue would have increased 23% and 10% respectively. Total members and
exchanges increased 8% to 2.0 million and 6% to 0.9 million compared to 1996,
respectively.
119
FLEET MANAGEMENT SERVICES
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 146,581 $ 133,770 10%
Operating expenses 89,387 90,899 (2%)
----------- -----------
Operating income $ 57,194 $ 42,871 33%
=========== ===========
Operating income increased $14.3 million (33%) to $57.2 million, primarily
as a result of a $9.4 million (14%) increase in fee-based services. The $1.5
million (2%) decrease in operating expenses was primarily associated with
expenses associated with a truck fuel management business which was sold in
January 1996 and operational efficiencies realized as part of the second
quarter 1997 restructuring of certain fleet management operations.
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 139,068 $ 87,192 59%
Operating expenses 71,891 55,377 30%
----------- -----------
Operating income $ 67,177 $ 31,815 111%
=========== ===========
The royalty portion of revenue increased $52.4 million (74%) to $123.0
million primarily attributable to acquired Coldwell Banker franchise system
operations. Pro forma royalty revenue, which gives effect to the acquisitions
of Coldwell Banker and ERA franchise systems as if these acquisitions were
consummated on January 1, 1996, would have increased $6.8 million (6%) on the
strength of an 8% increase in the average price of homes sold. Operating
expenses increased as a result of incremental expenses associated with the
acquired franchise systems.
MORTGAGE SERVICES
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 76,129 $ 55,154 38%
Operating expenses 44,669 39,087 14%
----------- -----------
Operating income $ 31,460 $ 16,067 96%
=========== ===========
The increase in net revenue resulted from a 63% increase revenue from new
production and a 7% increase in revenue from the servicing portfolio. The
volume of new loan production decreased 5% from $4.5 billion to $4.3 billion as
a result of a 37% decrease in refinancing volume which was offset by a 21%
increase in purchase mortgage volume. The average fee earned in new production
increased from 68 basis points to 117 basis points as a result of improved
profitability achieved in the sale of loans in the secondary market. Operating
expenses increased 14% due to the larger servicing portfolio as well as
increased recruiting, training and systems development costs.
120
RELOCATION
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenue $ 188,693 $ 151,115 25%
Operating expenses 149,441 132,885 12%
----------- -----------
Operating income $ 39,252 $ 18,230 115%
=========== ===========
The $21.0 million (115%) increase in operating income is attributable to
approximately $14.3 million of operating income from relocation businesses
owned for the entire six month periods of 1997 and 1996 and the balance was
generated from acquired CBRS operations.
OTHER SEGMENT
SIX MONTHS ENDED JUNE 30,
------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- -------------- ------------ --------
Net revenues $ 218,579 $ 144,643 51%
Operating expenses 182,393 130,658 40%
----------- -----------
Operating income (loss) $ 36,186 $ 13,985 159%
=========== ===========
Operating income increased $22.2 million which primarily reflects $24.3
million of the equity in earnings of ARAC during 1997. The increase in net
revenues is in large part attributable to the continued focus on selling
software titles through retailers and the availability of a larger number of
titles as well as the significant increase in the installed base of CD-ROM
personal computers.
121
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS THREE MONTHS ENDED SEPTEMBER 30,
1996
The Company recorded a merger and related charge of $147.2 million ($89.6
million, after tax) (the "Third Quarter 1996 Davidson, Sierra and Ideon Merger
Charge") during the third quarter of 1996 in connection with the 1996 mergers
of the Company with Davidson, Sierra and Ideon. In connection with such charge
$127.2 million was allocated to the operations of the "Membership" segment, and
the remaining $20.0 million of the charge pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary of the Company for the three months ended September
30, 1997 and 1996, INCLUDING AND EXCLUDING THE DAVIDSON, SIERRA AND IDEON
MERGER CHARGE, IS AS FOLLOWS ($000'S):
1996 VARIANCE
---------------------------- --------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING
1997 CHARGE CHARGE CHARGE CHARGE
-------------- ------------- ------------- ----------- ----------
Net revenue $ 1,431,304 $ 1,042,901 $ 1,042,901 37% 37%
Operating expenses 1,001,482 927,869 780,669 8% 28%
-------------- ------------- -------------
Operating income $ 429,822 $ 115,032 $ 262,232 274% 64%
============== ============= =============
Net income $ 248,264 $ 68,466 $ 158,066 263% 57%
============== ============= =============
Net income per share
(fully diluted) $ 0.28 $ 0.08 $ 0.19 250% 47%
============== ============= =============
Net interest expense increased $13.1 million in 1997 primarily resulting
from borrowings under revolving credit arrangements which financed 1997
treasury stock purchases, restructuring expenditures and acquisition related
expenditures. The weighted average effective interest rate decreased from 7.84%
to 5.30% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND
DISCUSSIONS EXCLUDE THE THIRD QUARTER 1996 DAVIDSON, SIERRA AND IDEON MERGER
CHARGE.
MEMBERSHIP SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenues $ 690,220 $ 534,718 29%
Operating expenses 544,414 438,793 24%
----------- -------------
Operating income $ 145,806 $ 95,925 52%
=========== =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 29%
increase in membership revenues (from $534.7 million for the quarter ended
September 30, 1996 to $690.2 million for the quarter ended September 30, 1997).
While the overall membership base increased by approximately 2.2 million
members during the quarter, the average annual fee collected for the Company's
membership services increased by approximately 1%.
122
Compared to the previous year's third quarter, individual, wholesale and
discount program memberships grew by 13%, 21% and 13%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had a
favorable impact on renewal rates. Included in net revenue for the quarter
ended September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, net revenue
contributed from these acquisitions are not material to the Company's total
reported net revenue. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 124,473 $ 115,670 8%
Operating expenses 73,487 71,530 3%
----------- ------------
Operating income $ 50,986 $ 44,140 16%
=========== ============
The net revenue increase resulted from an 8% increase in royalty fees and a
41% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 5% growth in franchised rooms from the
same period in 1996. The 3% increase in operating expenses represents increased
marketing expenses associated with funds administered by the Company on behalf
of franchisees on a pass-through basis (corresponding franchisee contribution
included in revenue).
CAR RENTAL
In September 1997, the IPO of ARAC, then a subsidiary that operated the car
rental operations of HFS Car Rental Inc., was completed, which diluted HFS's
equity interest in such subsidiary from 100% to 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
which the Company charges ARAC at cost.
123
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 62,787 $ 59,315 6%
Operating expenses 37,596 38,334 (2%)
------------- --------------
Operating income $ 25,191 $ 20,981 20%
============= ==============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased $4.2 million (20%) from 1996 to 1997 as a result of $1.3
million (7%) increase in royalty fees and $2.2 million of preferred alliance
and other revenue. A 6% increase in franchisee car rental price per day
contributed to the royalty increase.
TIMESHARE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
OPERATING INCOME ($000'S) 1997 (PRO FORMA) VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 86,860 $ 78,164 11%
Operating expenses 64,392 66,649 (3%)
------------ -------------
Operating income $ 22,468 $ 11,515 95%
============ =============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $11.0 million (95%) from 1996 to 1997 as a
result of expense reductions realized following the November 1996 acquisition
of RCI. Pro forma revenue increased 11% as a result of a 9% increase in
exchange revenue and a 24% increase in subscription revenue, resulting from
member fee and price increases.
FLEET MANAGEMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 59,810 $ 59,062 1%
Operating expenses 41,104 44,156 (7%)
------------ --------------
Operating income $ 18,706 $ 14,906 25%
============ ==============
Net revenue increased only $.7 million (1%) as a result of the Company's
January 1997 sale of certain credit card operations. The Company currently
participates in such credit card operations as a joint venture partner and
accordingly, records revenue based on its equity in earnings on the joint
venture. As a result, revenue in 1997 includes revenue, net of expenses from
the joint venture, compared to gross revenue received from corresponding,
wholly-owned credit card operations in 1996. Assuming the joint venture
commenced January 1, 1996, pro forma net revenue increased 12% primarily as a
result of $3.6 million of increased fuel card revenue in the United Kingdom and
a $1.6 million increase in the United States fleet card operations. Operating
income increased 25% as a result of savings generated from the restructuring of
operations subsequent to the HFS/PHH Merger.
124
REAL ESTATE SEGMENT
REAL ESTATE FRANCHISE
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 98,344 $ 79,426 24%
Operating expenses 36,574 36,187 1%
----------- -------------
Operating income $ 61,770 $ 43,239 43%
=========== =============
The royalty portion of revenue increased $13.0 million (18%) to $85.8
million. Increased royalty revenue reflects higher broker sales volume
primarily resulting from a 5 % increase in real estate transactions and a 12%
increase in the average price of homes sold. The net revenue increase also
reflects a 75% increase in revenue from preferred alliance programs to $8.3
million in 1997. The Company limited operating expenses to a $0.4 million (1%)
increase as a result of the post-acquisition realization of cost savings
associated with the consolidation of operating functions of its franchise
systems.
RELOCATION
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 112,034 $ 101,958 10%
Operating expenses 76,907 80,804 (5%)
------------- -------------
Operating income $ 35,127 $ 21,154 66%
============= =============
The increase in net revenue was primarily attributable to an increase in
referral fees from home sale transactions. The $3.9 million reduction in
operating expenses primarily reflects savings associated with the restructuring
of relocation operations following the HFS/PHH Merger.
MORTGAGE SERVICES
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 51,602 $ 40,513 27%
Operating expenses 32,161 26,533 21%
----------- -------------
Operating income $ 19,441 $ 13,980 39%
=========== =============
The increase in net revenue resulted primarily from a $6.2 million (22%)
increase in loan origination revenue due to an increase in loan closings ($3.5
billion for third quarter ) and a $4.9 million (41%) increase in loan servicing
fees. Operating expenses increased $5.6 million (21%), reflecting the increase
in current loan origination volume, and the anticipation of future volume
increases.
125
OTHER SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 145,174 $ 111,554 30%
Operating expenses 94,847 82,666 15%
----------- -------------
Operating income $ 50,327 $ 28,888 74%
=========== =============
Operating income increased $21.4 million (74%) primarily as a result of a
$26.9 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $6.0 million gain on the sale of an investment partially offset
by a decrease of $22.4 million from Software operations. As a result of the
Company recalendarizing only its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable quarter, software operating income remained relatively constant from
1996 to 1997. The increase in net revenues is also attributable to the
continued focus on selling software titles through retailers and the
availability of a large number of titles as well as the significant increase in
the installed base of CD-ROM personal computers.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company incurred an anticipated $303.0 million one-time merger and
restructuring charge ($227.0 million, after tax) during the nine months ended
September 30, 1997 in connection with the HFS/PHH Merger. In connection with
such charge, $40.4 million and $50.4 million of costs were allocated to the
operations of the fleet management and relocation business segments,
respectively. The remaining merger and related costs did not directly apply to
the Company's operating segments and were therefore included as operating
expenses in the Company's "Other" segment.
During the nine months ended September 30, 1996, the Company incurred a
merger and related charge of $175.8 million ($114.7 million after tax) in
connection with the mergers with Davidson, Sierra and Ideon. In connection with
such charge, $127.2 million was allocated to the operations of the membership
segment and the remaining $48.6 million pertained to the Company's software
operations, which is included in the Company's "Other" segment.
The financial summary for the nine months ended September 30, 1997 and 1996
INCLUDING THE PHH MERGER CHARGE OF $303.0 MILLION ($227.0 MILLION AFTER TAX)
AND THE MERGER AND RELATED CHARGES ASSOCIATED WITH THE MERGERS WITH DAVIDSON,
SIERRA AND IDEON OF $175.8 MILLION $114.6 MILLION AFTER TAX) IS AS FOLLOWS
($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 3,098,865 2,332,428 33%
------------- ------------
Operating income $ 791,150 $ 467,523 69%
============= ============
Net income $ 400,694 $ 265,504 51%
============= ============
Net income per share
(fully diluted) $ .47 $ .33 42%
============= ============
126
The financial summary for the nine months ended September 30, 1997 and 1996,
EXCLUDING THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON IS AS FOLLOWS ($000's):
1997 1996 VARIANCE
------------- ------------ --------
Net revenue $ 3,890,015 $ 2,799,951 39%
Operating expenses 2,795,865 2,156,593 30%
------------- ------------
Operating income $ 1,094,150 $ 643,358 70%
============= ============
Net income $ 627,694 $ 380,104 65%
============= ============
Net income per share
(fully diluted) $ .73 $ .48 52%
============= ============
Net interest expense increased 155% ($26.7 million) primarily resulting from
borrowings under revolving credit arrangements which financed 1997 treasury
stock purchases, restructuring expenditures and acquisition related
expenditures, while the weighted average effective interest rate decreased from
7.53% to 6.09% as a result of increased fixed rate borrowings at lower interest
rates.
FOR COMPARATIVE PURPOSES, THE FOLLOWING SEGMENT INFORMATION AND DISCUSSIONS
EXCLUDE THE PHH MERGER CHARGE AND THE MERGER AND RELATED CHARGES ASSOCIATED
WITH THE MERGERS WITH DAVIDSON, SIERRA AND IDEON.
MEMBERSHIP SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ----------- ------------- ----------
Net revenue $ 1,875,347 $ 1,539,240 22%
Operating expenses 1,458,829 1,250,785 17%
------------- -------------
Operating income $ 416,518 $ 288,455 44%
============= =============
The Company's overall membership base continues to grow at a rapid rate
(from 63.8 million members at September 30, 1996 to 72.9 million members at
September 30, 1997), which is the largest contributing factor to the 22%
increase in membership revenues (from $1.5 billion for the nine months ended
September 30, 1996 to $1.9 billion for the nine months ended September 30,
1997). While the overall membership base increased by approximately 6.6 million
members during the nine months ended September 30, 1997, the average annual fee
collected for the Company's membership services increased by approximately 3%.
Compared to the previous year's first nine months, individual, wholesale and
discount program memberships grew by 10%, 23% and 12%, respectively. Wholesale
memberships have grown in part due to the success of the Company's
international business in Europe. For the quarter ended September 30, 1997,
individual, wholesale and discount program memberships represented 67%, 14% and
19% of membership revenues, respectively.
As the Company's membership services continue to mature, a greater
percentage of the total individual membership base is in its renewal years.
This results in increased profit margins for the Company due to the significant
decrease in certain marketing costs incurred on renewing members. Improved
response rates for new members also favorably impacted profit margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates.
127
Historically, an increase in overall membership usage has had a favorable
impact on renewal rates. Included in total revenues for the quarter ended
September 30, 1997, are revenues resulting from acquisitions which were
completed during the nine months ended September 30, 1997. However, total
revenues contributed from these acquisitions are not material to the Company's
total reported revenues. The Company routinely reviews all membership renewal
rates and has not seen any material change over the last year in the average
renewal rate.
TRAVEL SEGMENT
LODGING
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 322,427 $ 295,892 9%
Operating expenses 191,240 186,555 3%
------------- ------------
Operating income $ 131,187 $ 109,337 20%
============= ============
The net revenue increase resulted from a 7% increase in royalty fees and a
62% increase in revenue from preferred alliances seeking access to the
Company's franchisees and their underlying consumer base. The increase in
royalty fees resulted primarily from a 4% growth in franchised rooms from the
same period in 1996. The 3% ($4.7 million) increase in operating expenses
resulted from a 10% ($12.2 million) increase in marketing and reservation
expenses which are funded by the Company's franchisees partially offset by the
absorption of corporate overhead expenses by several other operating segments
acquired in 1996.
CAR RENTAL
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 181,657 $ 165,112 10%
Operating expenses 113,889 109,561 4%
------------- ------------
Operating income $ 67,768 $ 55,551 22%
============= ============
Assuming the ARAC IPO occurred on January 1, 1996, pro forma operating
income increased 22% primarily as a result of a $3.3 million ( 5%) increase in
royalty fees and $5.2 million of preferred alliance and other revenue. The
increase in royalty fees was primarily attributable to a 5% increase in ARAC's
car rental price per day.
TIMESHARE
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 274,570 $ 236,675 16%
Operating expenses 212,531 207,397 2%
------------- ------------
Operating income $ 62,039 $ 29,278 112%
============= ============
Assuming Company ownership of timeshare operations since January 1, 1996,
pro forma operating income increased $32.8 million (112%) from 1996 to 1997 as
a result of a $37.9 million (16%) increase in net revenue and only a $5.1
million (2%) increase in operating expenses. Pro forma revenue increased 16% as
a result
128
of an $11.6 million (9%) increase in exchange revenue and an $18.0 million
(24%) increase in subscription revenue due to both membership and price
increases. The pro forma operating expense increase of only 2% is a result of
expense reductions realized following the November 1996 acquisition of RCI.
FLEET MANAGEMENT
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------- ----------
Net revenue $ 206,391 $ 192,832 7%
Operating expenses 130,491 135,055 (3%)
------------- ------------
Operating income $ 75,900 $ 57,777 31%
============= ============
Operating income increased $18.1 million (31%) to $75.9 million, primarily
as a result of a $13.6 million (7%) increase in net revenue and a $4.6 million
(3%) decrease in operating expenses resulting from operational efficiencies
realized from the second quarter 1997 restructuring of certain fleet management
operations. The increase in net revenue is comprised of a 10% increase in
fee-based revenue and a 4% increase in asset-based fees.
REAL ESTATE INDUSTRY
REAL ESTATE FRANCHISE
NINE MONTHS
ENDED
SEPTEMBER 30,
NINE MONTHS ENDED SEPTEMBER 30, 1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ------------- -------------- ----------- ------------- ---------
Net revenue $ 237,412 $ 159,951 48% $ 203,519 17%
Operating expenses 108,465 84,897 28% 113,264 (4%)
------------- -------------- -------------
Operating income $ 128,947 $ 75,054 72% $ 90,255 43%
============= ============== =============
Operating income increased 72% as a result of a $77.5 million (48%) increase
in net revenue and only a $23.6 million (28%) increase in operating expenses.
The royalty portion of revenue increased $65.5 million (46%) to $208.8 million
which is primarily attributable to the Coldwell Banker franchise system
operations which were acquired in May 1996. Operating expenses increased as a
result of incremental expenses associated with the acquired franchise systems.
Pro forma operating income which gives effect to the acquisitions of the
Coldwell Banker and ERA franchise systems as if these acquisitions were
consummated on January 1, 1996, increased $38.7 million (43%) from 1996 to 1997
as a result of a $33.9 million (17%) increase in net revenue and a $4.8 million
(4%) reduction in operating expenses. Pro forma net revenue increased primarily
as a result of a 10% increase in royalty fees principally due to increases in
homes sold and the average price of homes sold. The pro forma reduction in
operating expenses reflects cost savings realized from the restructuring of
real estate businesses acquired.
129
RELOCATION
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1996
OPERATING INCOME ($000'S) 1997 1996 VARIANCE (PRO FORMA) VARIANCE
------------------------- ----------- ----------- --------- ------------ ---------
Net revenue $ 300,727 $ 253,073 19% $ 287,951 4%
Operating expenses 226,348 213,689 6% 241,859 (6%)
----------- ----------- -----------
Operating income $ 74,379 $ 39,384 89% $ 46,092 61%
=========== =========== ===========
The $35.0 million (89%) increase in operating income is primarily
attributable to operating income from the Coldwell Banker relocation business
acquired in May 1996. Pro forma operating income increased $28.3 million (61%)
from 1996 to 1997 as a result of a $12.8 million (4%) increase in net revenue
and a $15.5 million (6%) reduction in operating expenses. Pro forma net revenue
increased primarily as a result of an increase in referral fees from home sale
transactions. The pro forma reduction in operating expenses reflects savings
associated with the restructuring of relocation operations following the
HFS/PHH Merger.
MORTGAGE SERVICES
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 127,731 $ 95,667 34%
Operating expenses 76,832 65,620 17%
------------- ------------
Operating income $ 50,899 $ 30,047 69%
============= ============
Operating income increased 69% as a result of a 34% increase in net revenue,
net of a 17% increase in operating expenses. Loan origination revenue increased
$25.5 million (43%) as a result of a 19% increase in loan closings and a 20%
price increase. Servicing revenue increased $4.3 million (20%) as a result of
an 18% increase in revenue from the servicing portfolio. Operating expenses
increased 17% due to increases in loan origination volume as well as increased
recruiting, training and systems development costs associated with the
anticipation of increased volume, primarily from the retail teleservice
delivery systems.
OTHER SEGMENT
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
OPERATING INCOME ($000'S) 1997 1996 VARIANCE
------------------------- ------------- ------------ --------
Net revenue $ 363,753 $ 263,296 38%
Operating expenses 277,240 219,992 26%
------------- ------------
Operating income $ 86,513 $ 43,304 100%
============= ============
Operating income increased $43.2 million (100%) primarily as a result of a
$51.2 million increase in the equity in earnings of ARAC (recorded in net
revenue) and a $16.7 million gain on the sale of investments, partially offset
by a decrease of $22.3 million from software operations. As a result of the
Company recalendarizing its 1997 results, software operations for calendar
1997 are compared against the fiscal period ended October 31, 1996. Assuming a
comparable nine month period, software operating income remained relatively
constant from 1996 to 1997.
The increase in net revenues is in large part attributable to the continued
focus on selling software titles through retailers and the availability of a
large number of titles as well as the significant increase in the installed
base of CD-ROM personal computers.
130
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITION OVERVIEW
The Company continues to seek to expand and strengthen its leadership
position in its membership, travel and real estate industry segments with
strategic acquisitions. The Company's acquired businesses share similar
characteristics, foremost of which is that each was immediately accretive to
Company cash flow and earnings. Revenue is substantially generated from service
fees and is not dependent on tangible assets or the need for capital
expenditures other than technology investments. These service businesses each
generate significant cash flow which is enhanced by the Company's operating
leverage that supports acquired revenue streams without corresponding increases
in operating infrastructure expenses.
1997 POOLINGS
CENDANT - The Cendant Merger was completed on December 17, 1997 pursuant to
which the Company issued 440.0 million shares of its common stock for all of
the outstanding common stock of HFS. Pursuant to the agreement and plan of
merger, HFS stockholders received 2.4031 shares of Company common stock for
each share of HFS common stock. The Company anticipates that it will incur
merger and related charges approximating $825 million associated with fourth
quarter 1997 mergers.
As directed by the Federal Trade Commission ("FTC") as a condition of
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 million, subject
to certain adjustments. The agreement contemplates that the Company will
continue to provide certain existing services to Interval's developers and
members.
HEBDO MAG - On October 3, 1997, the Company acquired all of the outstanding
capital stock of Hebdo Mag for approximately $440 million, which was satisfied
by the issuance of approximately 14.2 million shares of Company common stock.
Hebdo Mag is a leading publisher and distributor of international classified
advertising information.
PHH - On April 30, 1997, HFS acquired PHH by 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 and fleet
management services. HFS recorded a one-time merger and related charge of
approximately $303.0 million in the second quarter of 1997 upon consummation of
the HFS/PHH Merger.
1996 POOLINGS
DAVIDSON AND SIERRA - During July 1996, the Company acquired all of the
outstanding capital stock of Davidson for a purchase price of approximately $1
billion, which was satisfied by the issuance of approximately 45.1 million
shares of Company common stock. Also during July 1996, the Company acquired all
of the outstanding capital stock of Sierra for a purchase price of
approximately $858 million, which was satisfied by the issuance of
approximately 38.4 million shares of the 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, principally a
131
provider of credit card enhancement services, for a purchase price of
approximately $393 million, which was satisfied by the issuance of 16.6 million
shares of Company common stock.
In connection with the Davidson, Sierra and Ideon mergers, the Company recorded
a charge approximating $179.9 million in the year ended December 31, 1996. Such
costs are non-recurring and those associated with the Ideon Merger include a
provision relating to certain litigation matters giving consideration to the
Company's intended approach to these 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 the remaining litigation matters, there can be no
assurance that the actual aggregate amount of such settlements will not exceed
the amount accrued.
1995 POOLINGS
GETKO, NAOG AND ADVANCE ROSS - During June 1995, the Company acquired all of
the outstanding capital stock of Getko Group, Inc. ("Getko") for a purchase
price of approximately $100 million, which was satisfied by the issuance of
approximately 5.6 million shares of Company common stock. Getko distributes
complimentary welcoming packages to new homeowners throughout the 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 approximately $52 million, which was satisfied by the issuance of
approximately 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 approximately $183 million, which was satisfied by the issuance of
approximately 8.9 million shares of Company common stock. Advance Ross
processes value-added tax refunds to travelers in over 20 European countries.
1997 PURCHASE ACQUISITIONS
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 of
American Bankers' common stock at a price of $58 per share in cash, which
together with shares the Company owns on the announcement date approximating
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 conditions and there can be no assurance that the
Company will be successful in its proposal to acquire American Bankers. The
Company has received a commitment from a bank to provide funds necessary to
finance the proposed acquisition.
132
HARPUR - On January 20, 1998, the Company completed its acquisition of The
Harpur Group Ltd., a leading fuel card and vehicle management company in the
United Kingdom, from privately held H-G Holdings, Inc., for approximately $186
million in cash plus future contingent payments of up to $20 million over the
next two years.
JACKSON HEWITT - On January 7, 1998, the Company completed the acquisition of
Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480 million in cash
or $68 per share of common stock of Jackson Hewitt. Jackson Hewitt is the
second largest tax preparation service franchise system in the United States
with locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation of
federal and state individual income tax returns.
PROVIDIAN - 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 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.
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
acquisition of Coldwell Banker. NRT is the largest residential brokerage firm
in the United States.
1996 PURCHASE ACQUISITIONS
RCI - In November 1996, HFS completed the acquisition of all the outstanding
common stock of RCI for approximately $487 million comprised of $412 million in
cash and $75 million of HFS common stock plus future contingent payments of up
to $200 million over the next five years. The cash portion of the purchase
price was funded with borrowings under a revolving credit facility, acquired
RCI cash and excess proceeds from a second quarter public offering of
approximately 46.6 million equivalent shares of Company common stock (the
"Offering") which generated $1.2 billion of proceeds.
RCI is the world's largest provider of timeshare exchange programs and is also
engaged in publishing related to the timeshare industry and provides other
travel-related services, integrated software systems and resort management and
consulting services.
AVIS - In October 1996, HFS completed the acquisition of all of the outstanding
capital stock of HFS Car Rental Inc., formerly Avis Inc. ("Avis"), including
payments under certain employee stock plans of Avis and the redemption of
certain series of preferred stock of Avis for $806.5 million. The purchase
price was comprised of approximately $367.2 million in cash, $100.9 million in
indebtedness and $338.4 million
133
(approximately 11.1 million equivalent shares) in Company common stock. The
cash portion of the purchase price was funded with excess proceeds from the
Offering.
Prior to the consummation of the acquisition, HFS announced its strategy to
dilute its interest in the Avis car rental operations while retaining assets
that are consistent with its service provider business profile, including the
trademark, franchise agreements, reservation system and information technology
system assets. In September 1997, ARAC (the company which operated the rental
car operations of HFS Car Rental, Inc.) completed an IPO resulting in a 72.5%
dilution of HFS's equity interest in ARAC.
COLDWELL BANKER - In May 1996, HFS acquired by merger Coldwell Banker, the
largest gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. 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 generating
$1.2 billion of proceeds pursuant to a public offering. Immediately following
the closing of the Coldwell Banker acquisition, HFS conveyed Coldwell Banker's
318 owned real estate brokerage offices to National Realty Trust, an
independent trust in which HFS has no beneficial interest and recorded a $5.0
million pre-tax charge in connection with such contribution.
OTHER - During 1996, HFS acquired certain other entities for an aggregate
purchase price of $286.2 million comprised of $210.4 million in cash, $70.8
million of common stock (2.5 million equivalent Company shares) and $5.0
million of notes.
1995 PURCHASE ACQUISITIONS
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 prior to the acquisition
(subsequently redeemed in February 1996) and a $30.0 million contingent payment
made in February 1996. Consideration paid in 1996 financed these payments with
proceeds from the February 1996 issuance of $240 million of unsecured 4-3/4%
Convertible Senior Notes (the "4-3/4% Notes").
Effective October 29, 1996 (the "Effective Date"), HFS amended the Subscription
and Stockholders' Agreement dated as of August 1, 1995 among Holding, HFS and a
group of former executives of Century 21 Real Estate Corporation ("the Former
Management") pursuant to which the Company owned 87.5% of Holding and the
Former Management owned 12.5% of Holding. Such amendment provided for the
acceleration of HFS's option to purchase the 12.5% ownership from the Former
Management at fair market value, determined as of the Effective Date. The
Company completed such purchase in the second quarter of 1997 for $52.8
million.
OTHER - During 1995, the Company and HFS collectively acquired certain entities
for an aggregate purchase price of $163.3 million, comprised of $122.5 million
in cash and $40.8 million of common stock (6.0 million equivalent Company
shares).
TREASURY PURCHASES
134
In January 1997, HFS's Board of Directors authorized the purchase of 6.2
million equivalent shares of Company common stock to satisfy stock option
exercises and conversions of convertible debt securities and to fund future
acquisitions. HFS acquired approximately 6.2 million equivalent treasury shares
of Company common stock in the first quarter of 1997 for $179.4 million with
revolving credit borrowings.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
POST CENDANT MERGER
The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. The Company has also demonstrated its
ability to access equity and public debt markets and financial institutions to
generate capital for strategic acquisitions. Indicative of the Company's
creditworthiness, as of the consummation of the Cendant Merger, Standard and
Poors Corporation ("S&P") and Duff and Phelps ("Duff") affirmed A ratings to
the Company's debt and Moody's Investor Service ("Moody's") upgraded the
Company's senior unsecured debt rating to A3. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time by S&P, Duff and Moody's.
As of the Cendant Merger consummation date, the Company terminated its
existing credit facility and amended the HFS revolving credit facilities to
provide aggregate commitments of $2.0 billion consisting of (i) a $1.25
billion, 364-day revolving credit facility (the "364 Day Revolving Credit
Facility") and (ii) a $750.0 million, five year revolving credit facility (the
"Five Year Revolving Credit Facility" and collectively with the 364 Day
Revolving Credit Facility, (the "Revolving Credit Facilities"). 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 up to a maximum aggregate term of
five years 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 the 364 Day Revolving Credit Facility,
respectively. The interest rates and facility fees are subject to change based
upon credit ratings assigned to 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.
The Company intends to file a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to an aggregate $3
billion of debt and equity securities. These securities may be offered from
time to time based on terms to be determined at the time of sale. The proceeds
would be used for general corporate purposes, which may include future
acquisitions.
PRE CENDANT MERGER
Prior to the Cendant Merger, 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. No borrowings under this facility
were outstanding at December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997. The CUC Credit Facility required the Company to maintain
certain financial ratios and contained other restrictive covenants including,
without limitation, financial covenants and restrictions
135
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.
Prior to Cendant Merger, HFS maintained up to $1.5 billion in revolving
credit facilities pursuant to the same terms and conditions under the Company's
Revolving Credit Facilities post the Cendant Merger. Outstanding borrowings
under HFS's revolving credit facilities at December 31, 1996, March 31, 1997,
June 30, 1997 and September 30, 1997 aggregated $205.0 million, $430.0 million,
$615.0 million and $1.1 billion, respectively. At December 31, 1996, March 31,
1997, June 30, 1997 and September 30, 1997 available borrowings under HFS's
revolving credit facilities were $795.0 million, $570.0 million, $885.0 million
and $400.0 million respectively.
In connection with the acquisition of Hebdo Mag, the Company assumed a
$115.2 million revolving credit facility and other long-term debt of $110.5
million, consisting of senior and subordinated notes and other miscellaneous
loans. The revolving credit facility 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. This
facility expires on February 15, 1998 but may be renewed on an annual basis for
successive periods of one year upon receiving lender approval. Outstanding
borrowings under this facility at December 31, 1996, March 31, 1997, June 30,
1997 and September 30, 1997 aggregated $93.8 million, $89.3 million, $77.6
million and $82.9 million, respectively.
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.
In January 1997, Wright Express Corporation, a wholly-owned subsidiary,
entered into a new revolving credit facility agreement replacing its previous
revolving line of credit. The new credit facility has an available line of $60
million. At December 31, 1996 and September 30, 1997, Wright Express had $31.4
million and $36.2 million, respectively outstanding under the new credit
facility. The new credit facility expires February 8, 1999.
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
36.028 equivalent shares of Company common stock per $1,000 principal amount of
the 4-3/4% Notes, representing a conversion price of $27.756 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.
136
In October 1994, HFS completed a public offering of $150 million unsecured
4-1/2% Convertible Senior Notes (the "4-1/2% Notes") due 1999, which were
convertible at the 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
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.
In connection with the Company's 1996 acquisition of Sierra, the Company
assumed $50 million in principal amount of 6-1/2% convertible subordinated
notes due April 1, 2001 (the "Notes"). Interest on the Notes is payable
semi-annually on April 1 and October 1 of each year. Each $7.62 principal
amount of Notes is convertible into one share of Company common stock, subject
to adjustment under certain conditions. The Notes are redeemable after April 2,
1997, at the option of Sierra, at specified redemption prices. At December 31,
1996 and September 30, 1997, Sierra had $23.5 million and $20.3 million,
respectively, outstanding on the Notes.
Long-term debt increased $1.4 billion to $2.4 billion at September 30, 1997
when compared to amounts outstanding at December 31, 1996, primarily as a
result of the $550 million issuance of 3% Notes, and approximately $900 million
of incremental borrowings under HFS's revolving credit facilities, which was
principally used to fund $171.3 million of treasury share purchases, $137.0
million of the PHH Merger Charge and $680.0 million of the Company's investment
in NRT and certain intangible assets associated with NRT's acquisitions during
the third quarter of 1997 and other acquisition related payments. Long-term
debt at September 30, 1997 primarily consisted of $1.1 billion of fixed rate
publicly issued debt and $1.2 billion of borrowings under the Company's
revolving credit facilities.
Long-term debt increased $646.0 million from $354.0 million at December 31,
1995 to $1.0 billion at December 31, 1996, primarily due to the issuance of the
$240 million 4-3/4% Notes and $189.6 million of incremental borrowings under
HFS's revolving credit facilities which partially financed the November
acquisition of RCI. In addition, the Company assumed $204.3 million of debt in
connection with the merger of Hebdo Mag, which consisted of revolving credit
facility borrowings, senior and subordinated notes and other miscellaneous
loans.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates mortgage services, fleet management and relocation businesses
as a separate public reporting entity and supports purchases of leased vehicles
and originated mortgages primarily by issuing commercial paper and medium term
notes. Such borrowings are not classified based on contractual maturities, but
rather are included in liabilities under management and mortgage programs
rather than long-term debt since such debt corresponds directly with high
quality related assets. Although PHH's debt to equity ratio approximates 6 to
1, such debt corresponds directly with net investments in high quality related
assets. Accordingly, following the announcement of the HFS/PHH Merger, S&P,
Moody's and Fitch Investor Service affirmed investment grade ratings of A+, A2
and A+, respectively to PHH debt and A1 and F1, respectively to PHH commercial
paper. A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time.
137
PHH debt is issued without recourse to the Company. The Company expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public
and private debt markets to issue unsecured senior corporate debt. Augmenting
these sources, PHH will continue to manage outstanding debt with the potential
sale or transfer of managed assets to third parties while retaining fee-related
servicing responsibility.
PHH's aggregate outstanding borrowings at the underlying balance sheet dates
were as follows ($ billions):
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
-------------- ------------- ------------- -------------
Commercial paper $ 3.1 $ 3.5 $ 3.1 $ 2.5
Medium-term notes 1.7 1.2 1.5 2.3
Other 0.4 0.3 0.2 0.2
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. PHH maintains a $2.5 billion
syndicated unsecured credit facility which is backed by domestic and foreign
banks and is comprised of $1.25 billion of lines of credit maturing in 364 days
and $1.25 billion maturing in five years. In addition, PHH has approximately
$300 million of uncommitted lines of credit with various financial
institutions. Management closely evaluates not only the credit of the banks but
the terms of the various agreements to ensure ongoing availability. The full
amount of PHH's committed facilities in 1997 to date are undrawn and available.
Management believes that its current policy provides adequate protection should
volatility in the financial markets limit PHH's access to commercial paper or
medium-term notes funding.
PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities.
The Company and PHH currently operate under policies limiting (a) the
payment of dividends on PHH's capital stock to 40% of net income of PHH on an
annual basis, less the outstanding principal balance of loans from PHH to the
Company as of the date of the proposed dividend payment, and (b) the
outstanding principal balance of loans from PHH to the Company to 40% of net
income of PHH on an annual basis, less payment of dividends on PHH's capital
stock during such year.
CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 VS YEAR ENDED DECEMBER 31, 1995
The Company generated $1.6 billion of cash flows from operations in 1996
representing a $464.3 million increase from 1995. This increase primarily
reflects improved net income net of non-cash charges.
In 1996, cash flows from operating activities of $1.6 billion and $1.8
billion of cash flows from financing activities, principally consisting of net
debt financing of $733 million and $1.2 billion of proceeds from the
138
issuance of common stock were used principally to fund $1.7 million of Company
acquisitions and the Company's net investment in assets under management
mortgage programs of $1.3 billion and core service fee based operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company generated $1.3 billion of cash flows from operations in 1997
representing a $452.4 million increase from 1996. This increase primarily
reflects improved net income net of non cash charges. In 1997, cash flows from
operating activities of $1.3 billion and net debt borrowings of $1.1 billion,
including the February 1997 issuance of $550 million 3% convertible
subordinated Notes were used principally to fund the Company's net investment
in assets under mangement and mortgage programs of $893.5 million, $748.6
million of Company acquisitions, treasury stock purchases of $171.3 million,
and core service fee based operations.
CAPITAL EXPENDITURES
The Company anticipates investing approximately $200 million during
calendar year 1998 in capital expenditures. Such capital expenditures are
primarily associated with the consolidation of internationally based call
centers and information technology systems to support expected volume increases
in the Company's mortgage services business and improve operational
efficiencies in the delivery of relocation services.
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a material impact on Company operations.
The third quarter represented 29% of annual pro forma net income as a result of
peak leisure travel and real estate sales in summer months. Fourth quarter
respresented 27% of pro forma net income due to holiday season demand for
software products.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company is currently assessing these statements, which are effective for
fiscal years beginning after December 15, 1997 and establish standards for the
reporting and display of comprehensive income and disclosure regarding related
segments.
In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS No. 128 supersedes APB 15 and replaces the presentations of primary
EPS with a presentation of Basic EPS. It also requires presentation of Basic
and Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS No. 128 was applicable for 1996, the Company would
have reported the following net income (loss) per share amounts:
139
BASIC DILUTED
-------- ------------
YEAR ENDED DECEMBER 31,
-----------------------
1996 .56 .52
1995 .45 .42
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 .21 .19
1996 .14 .12
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 (.02) (.02)
1996 .14 .13
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 .19 .18
1996 .27 .25
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 .31 .29
1996 .89 .84
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 .50 .47
1996 .36 .34
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and, among other things, also requires that
previously recognized servicing receivables that exceed contractually specified
servicing fees be reclassified as interest-only strips receivable, and
subsequently measured under the provisions of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The Company adopted the
provisions of SFAS No. 125 on January 1, 1997 and has reclassified a portion of
its excess servicing fees to interest-only strips. The effect of adopting SFAS
No. 125 was not material to the Company's operations or financial condition.
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forwarding-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forwarding-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance, or achievements expressed or implied by such
forwarding-looking statements. These forwarding-looking statements were based
on various factors and were derived utilizing numerous important assumptions
and other important factors that could cause actual results to differ
materially from those in the forwarding-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forwarding-looking statements, include, but are
not limited to: uncertainty as to the Company's future profitability, the
Company's ability to develop and implement operational and financial systems to
manage rapidly growing operations; competition in the Company's existing and
potential future lines of business; the Company's ability to integrate and
operate
140
successfully acquired and merged businesses and the risks associated with such
businesses, including the Company's ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; uncertainty as to the
future profitability of acquired businesses, and other factors. Other factors
and assumptions not identified above were also involved in the derivation of
these forwarding-looking statements, and the failure of such other assumptions
to be realized as well as other factors may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
these forwarding-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forwarding-looking
statements.
141