EXHIBIT 99.1
PRELIMINARY INFORMATION STATEMENT
[Cendant logo]
CENDANT CORPORATION
9 West 57th Street
New York, New York 10019
, 2001
Dear Fellow Stockholder:
I am pleased to report that the previously announced spin-off of
our individual membership business will become effective on , 2001. Cendant
Membership Services, Inc., a Delaware corporation, will own our individual
membership and loyalty businesses and will become an independent public
company as of the effective time of the spin-off. We intend to file an
application to list Cendant Membership Services, Inc.'s common stock on the
New York Stock Exchange.
Holders of record of Cendant common stock as of the close of
business on , 2001 will receive one share of Cendant Membership Services,
Inc.'s common stock for every shares of Cendant common stock held. No
action is required on your part to receive your Cendant Membership
Services, Inc. shares. You will not be required either to pay anything for
the new shares or to surrender any shares of Cendant common stock.
No fractional shares of Cendant Membership Services, Inc. common
stock will be issued. If you otherwise would be entitled to a fractional
share, you will receive a check for the cash value of that share, which may
be taxable to you. The distribution will otherwise be tax-free to you to
the extent you receive Cendant Membership Services, Inc. common stock. In
due course, we will provide you with information to enable you to compute
your tax bases in both Cendant and Cendant Membership Services, Inc. common
stock.
The enclosed information statement explains the distribution of
shares of Cendant Membership Services, Inc. common stock in detail and
contains important information about Cendant Membership Services, Inc.,
including financial statements. We urge you to read it carefully.
Very truly yours,
Henry R. Silverman
Chairman of the Board,
President and Chief Executive Officer
Cendant Corporation
[Cendant Membership Services, Inc. Logo]
CENDANT MEMBERSHIP SERVICES, INC.
100 Connecticut Avenue
Norwalk, Connecticut 06850-3561
, 2001
Dear Cendant Stockholder:
We are very pleased that you will soon be a stockholder of Cendant
Membership Services, Inc.
We are a membership-based, consumer services company, providing
our members with access to a variety of discounted products and services in
such areas as shopping, travel, privacy protection, credit card
registration, auto and home improvement. We believe that the separation of
our business from the businesses of our corporate parent, Cendant
Corporation, will enhance our ability to increase our penetration of the
markets we currently serve, attract new customers, increase investment in
our existing operations and pursue new business opportunities.
As an independent company, we can more effectively focus on our
growth objectives, invest in the capital needs of our company and target
potential investors. Following the distribution, we will be in a better
position to increase marketing investments, since as an independent
company, we will be better able to explain to the public markets our
financial results. Similarly, we will be able to increase our investments
in existing technology and systems and pursue strategic acquisitions that
Cendant may not have previously been willing to fund.
We intend to file an application to list the Cendant Membership
Services, Inc. shares you are receiving on the New York Stock Exchange.
This is a very exciting time, and we are enthusiastic about our
future as a new, independent public company. We look forward to your
support and participation in our success.
Congratulations on becoming one of our "founding" stockholders!
Very truly yours,
Scott W. Bernstein
President and Chief Executive Officer
PRELIMINARY AND SUBJECT TO COMPLETION, DATED MAY , 2001
INFORMATION STATEMENT
Cendant Membership Services, Inc.
Distribution of Approximately Shares of Common Stock
This information statement is being furnished in connection with
the distribution by Cendant Corporation to holders of its common stock of
all the outstanding shares of common stock of Cendant Membership Services,
Inc. Cendant has transferred or will transfer to us its individual
membership and loyalty businesses described in this information statement.
Shares of our common stock will be distributed to holders of Cendant
common stock of record as of the close of business on , 2001, which
will be the record date. Each Cendant stockholder will receive one share of
our common stock for every shares of Cendant held on the record date. The
distribution will be effective at 11:59 p.m. on , 2001. Stockholders will
receive cash in lieu of fractional shares. That nominal cash payment may be
taxable, but the transaction otherwise will be tax-free.
No stockholder approval of the distribution is required or sought.
Please do not send us a proxy. You will not be required to pay for the
shares of our common stock that you receive in the distribution, or
surrender or exchange shares of Cendant common stock in order to receive
our common stock, or take any other action in connection with the
distribution. There is no current trading market for our common stock. We
intend to file an application to list our common stock on the New York
Stock Exchange.
As you review this information statement, you should carefully
consider the matters described under the caption "Risk Factors" beginning
on page 15.
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or
determined if this information statement is truthful or complete. Any
representation to the contrary is a criminal offense.
-------------
This information statement does not constitute an offer to sell or
the solicitation of an offer to buy any securities.
-------------
Stockholders of Cendant with inquires related to the distribution
should contact Cendant's transfer agent, Mellon Investor Services, LLC,
P.O. Box 3315, South Hackensack, NJ 07606 or by telephone at
(800)-589-9469, or Cendant's Investor Relations Department at Cendant, 9
West 57th Street, New York, New York 10019 or by telephone at (212)
413-1800.
The date of this information statement is May , 2001.
INFORMATION STATEMENT
TABLE OF CONTENTS
SUMMARY......................................................................1
THE DISTRIBUTION.............................................................9
RISK FACTORS................................................................15
FORWARD-LOOKING STATEMENTS..................................................26
DIVIDEND POLICY.............................................................27
CAPITALIZATION..............................................................28
SELECTED FINANCIAL DATA.....................................................29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................31
BUSINESS....................................................................40
RELATIONSHIP BETWEEN CENDANT AND OUR COMPANY AFTER THE
DISTRIBUTION...............................................................50
MANAGEMENT..................................................................60
OWNERSHIP OF OUR COMMON STOCK...............................................70
DESCRIPTION OF OUR CAPITAL STOCK............................................73
INDEMNIFICATION OF DIRECTORS AND OFFICERS...................................80
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION.................................82
INDEX TO FINANCIAL STATEMENTS..............................................F-1
SUMMARY
The following summary highlights selected information contained in
this information statement relating to the distribution and the businesses
to be contributed to us by Cendant Corporation on or prior to the
distribution. Because this is a summary, it does not contain all the
details concerning the distribution and our business, including information
that may be important to you. We urge you to read the entire information
statement carefully, especially the risks relating to the distribution, our
business and our industry that are discussed under "Risk Factors" and our
financial statements.
Our Business
------------
Overview
We are a leading membership-based, consumer services company,
providing approximately 23.6 million members with access to a wide variety
of goods and services. Our membership programs provide consumers with
services and benefits in the areas of shopping, travel, privacy protection,
credit card registration, auto and home improvement. Our membership
programs include:
o Shoppers Advantage(R), a discount shopping program
offering product price information and home shopping
services;
o Travelers Advantage(R), a full-service discount travel
program providing information on schedules and rates, as
well as travel reservation services;
o PrivacyGuard(R), a privacy protection program providing
information on a member's credit history,
state-maintained driving records and third party medical
files;
o AutoVantage(R)and AutoVantage GoldSM, discount auto
services programs providing a variety of auto-related
services and benefits; and
o Buyers Advantage(R), a program that extends
manufacturers' warranties and provides low price
guarantees on products purchased by members.
These programs are offered as individual memberships and as components of
wholesale loyalty enhancement services and insurance products.
We derive our revenues principally from membership fees.
Membership fees vary depending upon the particular membership program and
generally range from $59.99 to $89.99 per year. Most of our memberships are
for one-year renewable terms and members are generally entitled to
unlimited use of the service during the membership period. For the year
ended December 31, 2000, our revenues were approximately $775 million and
for the quarter ended March 31, 2001, our revenues were approximately $195
million.
Our membership programs are marketed primarily through
arrangements with companies, such as banks and other financial
institutions, retailers, oil companies, on-line networks and other
organizations with large numbers of individual account holders and
customers. Participating marketing partners are generally paid commissions
on initial and renewal memberships. Commission amounts vary widely
depending on the marketing medium utilized and the amount of marketing
costs borne by the marketing partner. Commissions generally range from 10%
to 25%, unless the marketing partner assumes all or substantially all of
the marketing expenses, in which case the rates may be higher. We currently
market our membership products through relationships with 9 of the 10
largest credit card issuers in the United States.
We solicit members for our programs primarily through direct
marketing, including mail and inbound and outbound telemarketing. In
addition, our primary individual membership services are available on-line
through major on-line services.
We also offer wholesale loyalty enhancement services primarily to
credit card issuers who make services available to their credit card
holders to foster increased product usage and loyalty. We generally charge
credit card issuers an initial fee to implement a particular wholesale
loyalty program and monthly fees thereafter based on the number of accounts
participating in that institution's program.
Strategy
We intend to maintain our leadership position in the industry and,
as an independent company, we intend to continue to implement our new,
growth-oriented business plan aimed at increasing our membership revenues
and profitability over the long-term, through the following strategic
initiatives:
o increase the amount of our marketing expenditures devoted
to acquiring additional members;
o strengthen our marketing relationships with our existing
partners and broaden our partner base in other
industries;
o strengthen our existing membership services, develop new
membership services and broaden our product mix to
include non-membership products and services;
o develop new business opportunities outside of our
traditional membership business by leveraging our
existing core competencies in direct marketing, in
customer service and fulfillment and in developing
marketing alliances, and by pursuing long-term strategic
acquisitions and alliances; and
o continue our investment in new technology and systems
infrastructure, allowing us to provide better service to
our partners and members, as well as to lower the cost of
providing our services.
While our new business plan involves an increased level of
investment in marketing, infrastructure and other aspects of our business
which will result in a reduction in our anticipated profits for 2001 in
comparison to our 2000 results, we believe this approach will allow us to
achieve our objectives of creating a platform for sustainable growth in our
revenues and profits.
Our Relationship With Cendant
Following the distribution, we will be an independent public
company and Cendant will retain no stock ownership interest in us. Prior to
the distribution, we will enter into a distribution agreement and several
ancillary agreements with Cendant for the purpose of accomplishing the
contribution to us of Cendant's individual membership and loyalty
businesses, as well as the stock of certain subsidiaries engaged in those
businesses, and the distribution of our common stock to Cendant's
stockholders. These agreements will also govern our relationship with
Cendant after the distribution and provide for the allocation of employee
benefits, tax and other liabilities and obligations attributable to periods
prior to the distribution. In addition, we will have a continuing business
relationship with Cendant through a master license agreement under which we
will pay a royalty to Cendant for the use of trademarks and other
intellectual property associated with our membership programs, as well as
through marketing agreements and various service agreements that will
provide us with, among other things, certain rights to market our products
to Cendant's customers.
We describe in this information statement the business to be
contributed to us by Cendant immediately prior to the distribution as if it
was our business for all historical periods described. Accordingly, our
historical financial results as part of Cendant contained in this
information statement may not reflect our financial results in the future
as an independent company or our financial results had we been a
stand-alone company during the periods presented.
Summary Of The Distribution
Distributing Company........................ Cendant Corporation.
Distributed Company......................... Cendant Membership Services, Inc., or CMS, which will
own the individual membership and loyalty businesses
previously conducted by Cendant. Please see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" for
a description of these businesses.
Distribution Ratio......................... Each holder of Cendant common stock will receive a
distribution of one share of our common stock for every
shares of Cendant common stock held on the record
date.
Securities to be
Distributed................................. Based on shares of Cendant common stock
outstanding on , 2001 and assuming no exercise of
outstanding options, approximately shares of our
common stock will be distributed. The shares of our
common stock to be distributed will constitute all of
the outstanding shares of our common stock immediately
after the distribution. Cendant stockholders will not
be required to pay for the shares of our common stock to
be received by them in the distribution, to surrender or
exchange shares of Cendant common stock in order to
receive our common stock or to take any other action in
connection with the distribution.
Fractional Shares........................... Fractional shares of our common stock will not be
distributed. Fractional shares held by owners of record
will be aggregated and sold in the public market by the
distribution agent. The aggregate gross cash proceeds
of these sales minus brokerage fees will be distributed
ratably to those stockholders who would otherwise have
received fractional interests. These proceeds may be
taxable to those stockholders.
Distribution Agent, Transfer Agent,
and Registrar for Shares.................... Mellon Investor Services, LLC will be the distribution
agent, transfer agent and registrar for the shares of
our common stock.
Record Date................................. The record date is the close of business on , 2001.
Distribution Date........................... 11:59 p.m. on , 2001.
Certain U.S. Federal Income Tax Consequences
of the Distribution......................... Cendant expects to receive an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP substantially to the effect that
the distribution of CMS common stock to the holders of
Cendant common stock will qualify as a tax-free
distribution for U.S. federal income tax purposes. Please
see "Certain U.S. Federal Income Tax Consequences of the
Distribution."
Stock Exchange Listing...................... There is not currently a public market for our common
stock. We intend to file an application to have our
common stock listed on the New York Stock Exchange.
Credit Facility............................. We intend to obtain a commitment for an unsecured
revolving line of credit. This line of credit will be
used to fund our working capital and acquisition needs
after the distribution. This line of credit is expected
to have a variable interest rate based on market rates.
The credit agreement is expected to contain financial
and non-financial covenants customary for financings of
this nature. We expect that the facility will have a
year term.
Relationship between Cendant and
Us After the Distribution................... Following the distribution, we will be an independent
public company and Cendant will retain no stock
ownership interest in us. Prior to the distribution, we
will enter into a distribution agreement and several
ancillary agreements with Cendant and/or its affiliates
for the purpose of accomplishing the contribution to us
of the individual membership and loyalty businesses, as
well as the stock of subsidiaries engaged in such
business, and the distribution of our common stock to
Cendant's stockholders. These agreements also will
govern our relationship with Cendant after the
distribution and provide for the allocation of employee
benefits, tax and other liabilities and obligations
attributable to periods ending before or on the day of
the distribution. These agreements will also include
arrangements with respect to the payment of royalties,
commissions and other amounts related to intellectual
property, marketing and various interim services. The
distribution agreement will provide that we generally
will indemnify Cendant against liabilities arising out
of the individual membership business being transferred
to us and that Cendant generally will indemnify us
against liabilities arising out of the businesses
Cendant is retaining. In addition, the distribution
agreement will contain a non-competition clause
preventing competition between certain aspects of our
respective businesses. In connection with the
distribution, we have also assumed a $100 million
promissory note payable to Cendant with an annual
interest rate of 10% due September 30, 2003. On or
before the maturity date of this note, we expect to have
sufficient funds to pay off the note in full or to
refinance the note by obtaining a third party loan on
acceptable terms and conditions. Please see
"Relationship Between Cendant and Our Company After the
Distribution" for a more detailed description of these
agreements.
Post-Distribution Dividend Policy........... We do not anticipate paying any dividends on our common
stock in the foreseeable future. The declaration and
payment of dividends after the distribution, however,
will be at the discretion of our Board of Directors.
Certain Anti-Takeover Effects............... Certain provisions of our certificate of incorporation
and bylaws may have the effect of making the acquisition
of control of our company by a third-party in a
transaction not approved by our Board of Directors more
difficult. Moreover, certain provisions of the tax
sharing and indemnification agreement we will enter into
with Cendant could discourage or delay potential
acquisition proposals for a period of two years
following the separation.
Risk Factors................................ Stockholders should carefully consider the matters
discussed under "Risk Factors."
Our Principal Executive
Offices..................................... 100 Connecticut Avenue
Norwalk, CT 06850-3561
(203) 956-1000
Summary Historical Combined Financial Data
Our summary historical combined financial data set forth
below should be read in conjunction with the "Combined Financial Statements
of Cendant Membership Services, Inc.," including the notes to those
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Cendant Membership Services is a combined
reporting entity comprised of all assets, liabilities and transactions used
in managing and operating the individual membership and loyalty businesses of
Cendant Corporation
The historical statements of operations data for the years ended
December 31, 2000, 1999 and 1998 and the historical balance sheet data as
of December 31, 2000 and 1999 are derived from the combined statements of
operations included elsewhere in this information statement that have been
audited by Deloitte & Touche LLP, our independent auditors. The statement
of operations data for the three months ended March 31, 2001 and 2000 and
the historical balance sheet data as of December 31, 1998 and as of March
31, 2001 and 2000 have been prepared by management.
The historical financial information presented below is not
necessarily indicative of what our results of operations or financial
position would have been had we operated as an independent company during
the periods presented, nor is it necessarily indicative of our future
performance as an independent company.
At or For the At or For the
Three months ended March 31, Years Ended December 31,
---------------------------- ----------------------------
2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
Results of Operations
---------------------
Revenues.......................................... $ 194,912 $ 194,412 $ 775,463 $ 791,774 $ 719,600
Operating and selling expenses.................... 154,437 138,269 598,355 651,296 795,086
Intercompany royalty expense...................... 14,080 14,242 56,716 55,852 52,334
Depreciation and amortization..................... 6,746 5,531 23,946 22,723 19,713
Special charges................................. 1,909 18,052 25,975 89,750 -
---------- ---------- ---------- ---------- ----------
Operating income (loss)........................... 17,740 18,318 70,471 (27,847) (147,533)
Interest expense, net............................. 2,517 2,929 10,747 11,907 12,082
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes........................................... 15,223 15,389 59,724 (39,754) (159,615)
Provision for (benefit from) income taxes......... 6,013 6,101 23,679 (12,660) (60,497)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................. $ 9,210 $ 9,288 $ 36,045 $ (27,094) $ (99,118)
========== ========== ========== ========== ===========
Basic earnings (loss) per share (1)............... - - - - -
Financial Position
------------------
Current Assets.................................... $ 396,283 $ 423,892 $ 381,386 $442,085 $ 469,155
========== ========== ========== ========== ===========
Total assets...................................... $ 729,188 $ 739,498 $ 713,079 $761,072 $ 776,581
========== ========== ========== ========== ===========
Deferred revenue.................................. $ 689,073 $ 753,901 $ 700,909 $793,809 $ 893,731
Other current liabilities......................... 125,756 109,651 160,144 120,171 136,700
---------- ---------- ---------- ---------- ----------
Total current liabilities......................... 814,829 863,552 861,053 913,980 1,030,431
Long-term liabilities............................. 13,390 28,535 21,113 31,010 39,136
Long-term debt.................................... 117,877 27,724 118,361 26,945 34,839
Combined equity (deficit)......................... (216,908) (180,313) (287,448) (210,863) (327,825)
---------- ---------- ---------- ---------- ----------
Total liabilities and
combined deficit................................ $ 729,188 $ 739,498 $ 713,079 $761,072 $ 776,581
========== ========== ========== ========== ===========
- ----------
(1) Earnings per share is not presented because we are not a public
entity, as a result, the presentation of earnings per share is not
applicable.
THE DISTRIBUTION
General
On October 25, 2000, the Board of Directors of Cendant authorized
the spin-off of Cendant's individual membership and loyalty businesses, in
a tax-free distribution of shares to Cendant's stockholders. On , 2001, the
Board of Directors of Cendant declared a distribution to each holder of
record of Cendant's common stock at the close of business on , 2001 of one
share of our common stock for every shares of Cendant common stock held by
such holder.
Manner of Effecting the Distribution
The distribution is expected to be made on , 2001, the
distribution date, to stockholders of Cendant common stock on the record
date. On the distribution date, Cendant will deliver all of the outstanding
shares of our common stock to the distribution agent for allocation to the
holders of record of Cendant common stock as of the close of business on
the record date. In the distribution, each Cendant stockholder will receive
one share of our common stock for each shares of Cendant common stock.
Based on the number of shares of Cendant common stock outstanding as of ,
2001, approximately million shares of our common stock will be distributed
in the distribution.
For most Cendant stockholders who own Cendant common stock in
registered form on the record date, our distribution agent will
automatically mail to those stockholders a CMS common stock certificate.
For stockholders who own Cendant common stock through a broker or other
nominee, their receipt of our common stock certificates will depend on the
arrangements they have with the nominee holding their Cendant shares. As
further discussed below, fractional shares will not be distributed.
Cendant stockholders will not be required to pay for shares of our
common stock received in the distribution, to surrender or exchange shares
of Cendant common stock in order to receive our common stock or to take any
other action in connection with the distribution. No vote of Cendant
stockholders is required or sought in connection with the distribution and
Cendant stockholders have no dissenters' rights in connection with the
distribution.
Fractional shares of our common stock will not be issued to
Cendant stockholders as part of the distribution. In lieu of receiving
fractional shares, each holder of Cendant common stock who would otherwise
be entitled to receive a fractional share of our common stock will receive
cash for the fractional interest, which may be taxable to such holder. For
an explanation of the tax consequences of the distribution, please see
"--Certain U.S. Federal Income Tax Consequences of the Distribution." The
distribution agent will, as soon as practicable after the distribution
date, aggregate fractional shares into whole shares and sell them in the
open market at the prevailing market prices and distribute the aggregate
gross proceeds minus brokerage fees ratably to Cendant stockholders
otherwise entitled to fractional interests. The amount of this payment will
depend on the prices at which the aggregated fractional shares are sold by
the distribution agent in the open market shortly after the distribution
date. These brokerage fees are not expected to be material.
In order to be entitled to receive shares of our common stock in
the distribution, Cendant stockholders must be stockholders at the close of
business on the record date, , 2001.
Reasons for the Distribution
Cendant's Board of Directors believes that the distribution is in
the best interests of Cendant and its stockholders and that the separation
of our business from Cendant's other businesses will provide Cendant and
our company with greater managerial and operational flexibility to respond
to changing market conditions in our differing business environments,
and also will provide both companies with additional financial flexibility
to pursue growth opportunities. Cendant's management determined that a
tax-free spin-off of our business was the only viable transaction that
would achieve the separation of our businesses and be non-taxable,
practical and not unduly expensive. The tax considerations are more fully
discussed under "--Certain U.S. Federal Income Tax Consequences of the
Distribution."
The following discussion of the reasons for the distribution
includes forward-looking statements that are based upon numerous
assumptions with respect to the trading characteristics of our common
stock, the ability of our management to succeed in taking advantage of
growth opportunities and our ability to succeed as a stand-alone company.
Many of these factors are discussed below under the captions "Risk Factors"
and "Forward-Looking Statements."
Cendant's Board of Directors believes that the distribution will
accomplish a number of important business objectives and, by enabling
Cendant and us to develop our respective businesses separately, may better
position the two companies to produce greater total stockholder value over
the long term. These important business objectives include:
Increasing Our Ability to Invest in Marketing our Membership
Products and Develop our Systems, as well as to Pursue Strategic
Acquisitions. We recognize marketing costs when incurred but do not
recognize a significant portion of the revenues generated from such
increased marketing expenditures in the year in which they are generated.
As a result, Cendant has in the past been unwilling to take steps to
increase our membership revenues, since the recognition of increased
marketing costs required to generate those revenues may have had a negative
effect on Cendant's current consolidated financial results. Following the
distribution, we will be in a better position to increase marketing
investments, since as an independent company, we will be better able to
explain to the public markets our financial results. Similarly, we will be
able to increase our investments in existing technology and systems and
pursue strategic acquisitions that Cendant has not, to date, been willing
to fund.
Greater Strategic Focus. The distribution will separate our
individual membership and loyalty businesses from Cendant's remaining
businesses. Our and Cendant's respective businesses have distinct
financial, investment and operating characteristics, so that the spin-off
will allow Cendant and us to better adopt strategies and pursue objectives
appropriate to our respective businesses. The distribution will enhance the
ability of each company to prioritize the allocation of our respective
management and financial resources for achievement of our respective
corporate objectives. In particular, we and Cendant believe that the
distribution will enable our respective businesses to better utilize their
strengths and will result in greater flexibility to pursue business
opportunities, including acquisitions, joint ventures and other business
alliances and combinations.
Focused Incentives and Greater Accountability for Employees. We
expect the distribution to enable us to better attract, motivate and retain
key personnel by enabling us to provide more effective incentive
compensation programs comprised of "pure play" publicly-traded equity, the
value of which is based on the performance of the respective businesses in
which those individuals are employed without being influenced by the
results of the businesses in which they have no involvement.
Appropriate Market Recognition of Performance; Investor
Understanding. We expect the distribution to facilitate a more focused
evaluation of the unique investment opportunities and performance of our
businesses in light of the different market opportunities attributable to
each business line. Additionally, the distribution will enable stockholders
and potential investors to better evaluate the financial performance of
each of our businesses and its strategies.
Enhanced Ability to Pursue New Business Opportunities. We also
expect that the distribution will improve our ability to pursue new
business opportunities. For example, some of our potential clients might
view some of Cendant's business units, such as its mortgage or car rental
business, as competitors and, as a result, might be unwilling to do
business with us. As a result of the distribution, we will become
independent of Cendant and expect to be able to better pursue opportunities
to partner with these third parties.
Ability to Establish Independent Capital Structure. The
distribution will allow us to implement a capital structure more
appropriate to our business.
Results of the Distribution
After the distribution, we will be an independent public company
owning and operating the individual membership and loyalty businesses
previously owned and operated by Cendant. Immediately after the
distribution, we expect to have approximately holders of record of shares
and approximately shares outstanding, based on the number of record
stockholders and outstanding shares of Cendant common stock on , 2001,
assuming no exercise of outstanding options, and after giving effect to the
delivery to stockholders of cash in lieu of fractional shares of our common
stock. The actual total number of our shares of common stock to be
distributed will depend on the number of shares of Cendant common stock
outstanding on the record date.
For information regarding options to purchase our common stock
that will be outstanding after the distribution, see "Relationship Between
Cendant and Our Company After the Distribution--Employee Matters Agreement"
and "Management." Prior to the distribution, we will enter into several
agreements with Cendant in connection with, among other things,
intellectual property and various services. For a more detailed description
of these agreements, please see "Relationship Between Cendant and Our
Company After the Distribution."
The distribution will not affect the number of outstanding shares
of Cendant common stock or any rights of Cendant stockholders in their
Cendant shares.
Certain U.S. Federal Income Tax Consequences of the Distribution
The following is a discussion of certain U.S. federal income tax
consequences of the distribution. The discussion that follows is based on
the Internal Revenue Code, or Code, and Treasury regulations as well as
judicial and administrative interpretations of the Code, all as in effect
on the date of this information statement. The discussion is subject to any
changes in these or other laws, which may have retroactive effect. The
discussion is for general information only and does not address the effects
of any state, local or foreign tax laws on the distribution. The tax
treatment of a Cendant stockholder may vary depending upon that
stockholder's particular situation, and certain stockholders (including,
but not limited to, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, persons who do not hold the Cendant
common stock as capital assets, individuals who received Cendant common
stock upon the exercise of employee stock options or otherwise as
compensation, and non-U.S. persons) may be subject to special rules not
discussed below.
Each stockholder is urged to consult its tax advisor as to the
specific tax consequences of the distribution that apply to that
stockholder, including the applicability and effect of any state, local or
foreign tax laws, and of changes in applicable tax laws.
General. Cendant expects to receive an opinion from Skadden, Arps,
Slate, Meagher & Flom LLP, substantially to the effect that the
distribution will qualify as a tax-free distribution for U.S. federal
income tax purposes under Section 355 of the Code. The opinion of Skadden
Arps will be based on certain assumptions as well as on the accuracy of
certain factual representations and statements made by Cendant and Cendant
Membership Services, Inc. to Skadden Arps. In rendering its opinion,
Skadden Arps also will rely on certain covenants made by Cendant and
Cendant Membership Services, Inc., including the adherence by Cendant and
Cendant Membership Services, Inc. to certain restrictions on their future
actions.
If any of the representations or statements made by Cendant or
Cendant Membership Services, Inc. are inaccurate or incomplete, or any of
the covenants made by Cendant or Cendant Membership Services, Inc. are
breached, the distribution might not qualify as a tax-free transaction for
U.S. federal income tax purposes. You should note that Cendant does not
intend to seek a ruling from the Internal Revenue Service, or IRS, as to
the U.S. federal income tax treatment of the distribution, and it is
possible that Cendant would not receive such a ruling if it were to apply
for one. The opinion of Skadden Arps is not binding on the IRS or a court,
and there can be no assurance that the IRS will not challenge the validity
of the distribution as a tax-free distribution for U.S. federal income tax
purposes or that any such challenge ultimately would not prevail.
U.S. Federal Income Tax Consequences to Cendant Stockholders.
Assuming that the distribution qualifies as tax-free under Section 355 of
the Code for U.S. federal income tax purposes, the following describes
certain U.S. federal income tax consequences to Cendant stockholders as a
result of the distribution:
o no income, gain or loss will be recognized by a Cendant
stockholder as a result of the receipt of our common
stock pursuant to the distribution, except with respect
to any cash received in lieu of fractional shares of our
common stock;
o a Cendant stockholder's aggregate tax basis in such
stockholder's Cendant common stock and in our common
stock received in the distribution, including any
fractional share interest in our common stock for which
cash is received, will equal such stockholder's tax basis
in its Cendant common stock immediately before the
distribution, allocated between its Cendant common stock
and the CMS common stock received in the distribution
(including any fractional share interest of CMS common
stock) in proportion to the relative fair market values
of Cendant common stock and our common stock at the time
of the distribution;
o a Cendant stockholder's holding period for the shares of
our common stock received in the distribution, including
any fractional share interest of our common stock for
which cash is received, will include the period during
which the stockholder held Cendant common stock, provided
that the Cendant common stock was held as a capital
asset; and
o a Cendant stockholder who receives cash instead of a
fractional share interest of our common stock in the
distribution will be treated as having received that cash
in exchange for the fractional share interest and
therefore generally will recognize capital gain or loss
on the deemed exchange in an amount equal to the
difference between the amount of cash received and the
Cendant stockholder's adjusted tax basis in the
fractional share. That gain or loss generally will be
long-term capital gain or loss if the stockholder's
holding period for its Cendant common stock exceeds one
year.
U.S. Treasury regulations require each Cendant stockholder that
receives shares of our common stock in the distribution to attach to the
stockholder's U.S. federal income tax return for the year in which the
stock is received a detailed statement setting forth such data as may be
appropriate to demonstrate the applicability of Section 355 of the Code to
the distribution. Within a reasonable period of time after the
distribution, Cendant will provide to its stockholders that receive shares
of our common stock in the distribution the information necessary to comply
with such requirement.
If the distribution failed to qualify as tax-free for federal
income tax purposes, a Cendant stockholder who received shares of our
common stock in the spin-off would be treated as having received a
distribution equal to the fair market value on the distribution date of the
common stock received. That distribution would be taxable to the
stockholder as a dividend to the extent of Cendant's current and
accumulated earnings and profits. Any amount that exceeded the earnings and
profits first would be treated as a non-taxable reduction in the
stockholder's tax basis in its Cendant common stock and then as capital
gain from the sale or exchange of its Cendant common stock. Stockholders
may be subject to additional special rules governing taxable distributions,
such as those that relate to the dividends received deduction and
extraordinary dividends. If the distribution were taxable, a stockholder's
tax basis in our common stock received would equal the fair market value of
our common stock on the distribution date, and the holding period for that
stock would begin the day after the distribution date. The holding period
for the stockholder's Cendant common stock would not be affected by the
fact that the distribution was taxable.
The foregoing is a summary of certain U.S. federal income tax
consequences of the distribution to Cendant stockholders under current law
and is for general information only. The foregoing does not purport to
address all U.S. federal income tax consequences, or tax consequences that
may arise under the tax laws of other jurisdictions or that may apply to
particular categories of stockholders. Each Cendant stockholder should
consult its tax advisor as to the particular tax consequences of the
distribution to such stockholder, including the application of U.S.
federal, state, local and foreign tax laws, and the effect of possible
changes in tax laws that may affect the tax consequences described above.
U.S. Federal Income Tax Consequences to Cendant and to Us.
Assuming that the distribution qualifies as tax-free under Section 355 of
the Code for U.S. federal income tax purposes, neither we nor Cendant will
recognize gain or loss as a result of the distribution. However, if the
distribution were not to qualify for tax-free treatment under Section 355
of the Code, the U.S. consolidated income tax group of which Cendant is the
common parent would recognize gain for U.S. federal income tax purposes
equal to the excess of (i) the aggregate fair market value on the
distribution date of our common stock distributed in the distribution over
(ii) Cendant's tax basis in our common stock. In addition, Cendant (but not
Cendant's stockholders) would be subject to U.S. federal income taxation on
built-in gain with respect to our common stock under Section 355(e) of the
Code if the IRS determined that 50% or more of the shares of our or
Cendant's stock were acquired directly or indirectly (or deemed to be
acquired pursuant to certain transactions involving our or Cendant's stock
or assets) as part of a plan or series of related transactions that
includes the distribution. For these purposes, any acquisition of the
shares of our stock or the stock of Cendant within the period beginning two
years before and ending two years after the distribution date would be
presumed to be part of such plan or series of related transactions,
although we or Cendant, as the case may be, may be able to rebut such
presumption.
We and Cendant will enter into an agreement that will provide that
each company will be responsible for, and will indemnify the other company
from and against, any tax liability resulting from any action by such
company that may cause the distribution not to qualify as a tax-free
distribution under Section 355 of the Code. In addition, even if we are not
contractually required to indemnify Cendant for tax liabilities if the
distribution fails to be tax-free, we will still be liable for all of these
liabilities to the extent that Cendant fails to pay them. See "Relationship
Between Cendant and our Company after the Distribution -Tax Sharing and
Indemnification Agreement" for more information.
Listing and Trading of Our Common Stock
There is not currently a public market for our common stock. We
intend to file an application to list our common stock on the New York
Stock Exchange. After the distribution, Cendant common stock will continue
to be listed and traded on the New York Stock Exchange under the symbol
"CD."
We cannot assure you as to the price at which our common stock
will trade before, on, or after the distribution date. Until our common
stock is fully distributed and an orderly market develops in our common
stock, the price at which such stock trades may fluctuate significantly. In
addition, the combined trading prices of our common stock and Cendant
common stock held by stockholders after the distribution may be less than,
equal to, or greater than the trading price of Cendant common stock prior
to the distribution.
The shares distributed to Cendant stockholders will be freely
transferable, except for shares received by people who may have a special
relationship or affiliation with us. People who may be considered our
affiliates after the distribution generally include individuals or entities
that control, are controlled by, or are under common control with us. This
will include our directors and certain of our officers. Persons who are our
affiliates will be permitted to sell their shares only pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, or an exemption from the registration requirements of the
Securities Act, such as exemptions afforded by Section 4(2) of the
Securities Act or Rule 144 thereunder.
Reasons for Furnishing this Information Statement
This information statement is being furnished by Cendant solely to
provide information to stockholders of Cendant who will receive shares of
our common stock in the distribution. It is not, and is not to be construed
as, an inducement or encouragement to buy or sell any of our securities.
The information contained in this information statement is believed by us
to be accurate as of the date set forth on its cover. Changes may occur
after that date, and we will not update the information except in the
normal course of our respective public disclosure obligations and
practices.
RISK FACTORS
You should carefully consider each of the following risks and all
the other information contained in this information statement.
As part of the separation, we have assumed a significant amount
of debt, which will subject us to various restrictions and higher interest
costs, and we may substantially increase our debt in the future.
In connection with the distribution, we have assumed a $100
million promissory note payable to Cendant, which matures on September 30,
2003 and bears interest at 10% per year. Following the distribution, we may
incur additional debt under our anticipated new credit facility to fund our
working capital and capital expenditure requirements. We expect that the
terms of the debt we incur as part of our separation from Cendant and the
terms of any future indebtedness to third party lenders will impose various
restrictions and covenants on us that could limit our ability to respond to
market conditions, provide for unanticipated capital investments or take
advantage of new business opportunities.
We may substantially increase our level of debt in the future. We
are currently evaluating our capital structure and have not yet determined
the amount of financing we will have in the future. If our cash flow from
operations is less than we expect, we may require more financing. We may
from time to time incur additional debt, borrow funds under revolving
credit facilities or issue other debt securities.
Our historical financial information may not be entirely useful as
an indicator of our historical or future results.
Our historical financial information may not be representative of
our results as a separate company and, therefore, may not be entirely
useful as an indicator of our historical or future results. The historical
financial information we have included in this information statement may
not reflect our results of operations, financial position and cash flows as
they would have been had we been a stand-alone company during the periods
presented or our results of operations, financial position and cash flows
in the future.
Our current business plan calls for increased marketing
expenditures compared to 2000 levels, and we anticipate further increases
in such expenditures in the future in order to generate sustainable
membership revenue growth in the future. However, we will be unable to
recognize a significant portion of the revenues generated from such
increased marketing expenditures in the year in which they are generated.
Accordingly, while we believe that our expected increase in marketing costs
will generate profitable revenue growth, our profitability will decline in
the near term. In addition, under our current business plan, we anticipate
increasing our investments in existing technology and systems. While we
believe that such investment will benefit us in the future, it may
adversely impact our financial results in the near term. Finally, our
financial statements reflect allocations of costs for services provided to
us by Cendant that may not reflect the costs we will incur for similar
services as an independent company following the distribution. As a result,
our combined financial statements may not be indicative of our future
performance as an independent company.
We rely to a significant extent on our existing computer, billing,
communications and other systems. We are currently upgrading or replacing
some of our key systems. We will need to upgrade and replace other key
systems in the foreseeable future. If such systems fail or we fail to
adequately keep pace with future technological advances, our business will
suffer.
Our business is highly dependent on our existing computer,
billing, communication and other technological systems. We are currently
upgrading or replacing some of our key systems. We will need to upgrade and
replace other key systems in the foreseeable future. While our current
business plan anticipates an increase in capital investments in our
systems, there is no guarantee that we will be successful in implementing
currently planned system improvements. In addition, any temporary or
permanent loss of any of our systems, for whatever reason, could have a
negative effect on our business, financial condition and results of
operations. Further, the technologies on which we depend to compete
effectively and to meet our clients' and members' needs are rapidly
evolving and in many instances are characterized by short product life
cycles or rapid innovation. As a result, we are dependent on ongoing,
significant investment in advanced computer database and telecommunications
technology, among other systems, in addition to our currently planned
improvements. There can be no assurance that we will be successful in
anticipating or adapting to technological changes in the future or in
selecting and developing new and enhanced technology on a timely basis.
Our ability to create new business relationships with financial
institutions and other potential third party partners may be hindered by
our no longer being part of the Cendant family of companies.
We currently benefit from certain business relationships generated
from our close association with Cendant and its various businesses.
Following the distribution date, we may no longer be able to take advantage
of our relationship with Cendant and its various businesses when dealing
with potential business partners. In addition, the smaller size of our
business, in comparison to Cendant and its group of companies, may hinder
our credibility with potential business partners in the future and,
therefore, adversely impact our ability to generate new business
relationships after the distribution.
We could be responsible for significant income tax liability if the
distribution does not qualify for tax-free treatment.
Cendant and Cendant's stockholders could incur significant income
tax liability if the distribution does not qualify for tax-free treatment,
which could require us to pay Cendant a substantial amount of money. Should
this occur, we would be severally liable, and could be required to
indemnify and pay Cendant, for income taxes imposed upon Cendant or its
affiliates with respect to the distribution. Cendant intends that the
distribution will be treated as a tax-free distribution.
Although any income taxes imposed in connection with the
distribution would generally be imposed on Cendant or its affiliates and
its stockholders, we would be liable for all or a portion of such taxes in
the circumstances described below. First, as part of the distribution, we
will enter into a tax sharing and indemnification agreement with Cendant.
This agreement will generally allocate between Cendant and us the taxes and
liabilities relating to the failure of the distribution to be tax-free. For
a more complete discussion of the allocation of taxes and liabilities
between Cendant and us under the tax sharing and indemnification agreement,
please see "Relationship Between Cendant and Our Company After the
Distribution--Tax Sharing and Indemnification Agreement." Second, aside
from the tax sharing and indemnification agreement, under U.S. federal
income tax laws, we would be severally liable for Cendant's and its
affiliates' federal income taxes resulting from the distribution being
taxable. This liability means that even if we are not contractually
required to indemnify Cendant for tax liabilities if the distribution fails
to be tax-free, we will still be liable for all of these liabilities to the
extent that Cendant fails to pay them. Neither we nor Cendant will
indemnify any Cendant stockholder who receives shares of our stock in the
distribution for any tax liabilities.
Our marketing agreements with our marketing partners do not require that
any minimum amount of marketing volume or opportunities be allotted to us.
The termination or dormancy of any such marketing arrangements may result
in the loss of future revenue.
We arrange with marketing partners, such as financial
institutions, retailers, oil companies, on-line networks and others, to
market certain membership services to such marketing partners' individual
account holders and customers. Our marketing agreements with these partners
generally do not mandate any minimum levels of marketing. Instead, the
material terms of each marketing campaign in any given month, including
solicitation volume, generally must be mutually agreed upon by us and the
partner. The termination of a significant marketing partner relationship or
our failure to leverage that relationship into the amount of marketing
volume we have forecast in our business projections could have a material
adverse effect on our future revenues.
Our marketing efforts depend in part on customer information made available
to us or utilized by our marketing partners. We cannot assure that our
marketing partners will continue to provide us with use of customer
information, or that the future quality of such information will be
sufficient for us to generate new members on a profitable basis.
We market our services in large part based upon customer
information made available to us, or used internally, by our marketing
partners. We also market our services based upon tested marketing
solicitation materials. Marketing partners enable us to market our
individual membership programs to their customers through solicitations
that have been pre-approved by the partner. As a result, our ability to
market our programs to an existing new customer base is largely dependent
on first obtaining approval from our partner. There can be no assurance
that we will continue to obtain such cooperation or approvals. If our
marketing partners fail to provide us with access to customer information
and also limit the type or amount of information that they utilize
internally to enhance marketing results, including as a result of federal
or state privacy regulations, our marketing efforts would be adversely
affected. In addition, if the types of consumers that we are given an
opportunity to market to shift to groups of consumers who are less likely
to purchase our membership services, our ability to generate additional new
members on a profitable basis will be adversely affected.
Our profitability depends on membership renewals. Decreased retention rates
would impair our profitability.
We generally incur losses and negative cash flow during the
initial term of each member's enrollment in an individual membership
program, as compared to the initial term and the renewal term taken as a
whole, primarily because the costs associated with member acquisition and
servicing generally exceed the net membership fee amounts paid by such
acquired members for the initial term. In addition, members may cancel
their membership in our programs, generally for a full refund of the annual
membership fee. We experience a higher percentage of cancellations during
the initial annual membership period as compared to renewal periods.
Accordingly, the profitability of each of our programs and our business as
a whole depends on the continuation of our present trend of recurring
membership renewals and the absence of unanticipated material decreases in
member retention rates.
Our operating results may fluctuate.
Our operating results have varied significantly in the past and
may vary significantly both quarterly and annually in the future, thus,
limiting the usefulness of some period comparisons as an indication of
future results. Factors which could affect our financial results include:
o market acceptance of our membership programs generally;
o the willingness of our marketing partners to actively
market to their customers with a frequency, volume and
solicitation approach that is acceptable to us:
o the level of commission rates and other compensation
required by our marketing partners to actively market
with us;
o an unfavorable interpretation of our activities under the
Gramm-Leach-Bliley Act or enactment of other federal or
state laws that may be unfavorable to us;
o individual membership program retention rates;
o our ability to introduce new programs on a timely basis;
o the introduction of programs by our competitors;
o the timing of investments in program development;
o personnel changes;
o increased capital spending for technology improvements;
o the demand for membership programs generally;
o the mix of programs we offer;
o unanticipated service interruptions;
o unanticipated increases in member usage of our services;
o costs associated with expansion of operations;
o the availability of vendors to support offered programs;
o the level of demand for shopping, travel, privacy
protection, credit card registration, auto, home
improvement, loyalty programs and other elements
underlying our membership programs; and
o competitive pressures on selling prices.
Many of these factors are beyond our control, and, therefore, our ability
to generate predictable revenue and income growth may be adversely affected
by these factors.
We may not be able to adequately explain to the investing public our
policies regarding recognition of revenue. Investors may fail to understand
our operations and perceive successful marketing efforts negatively due to
a near term decline in profitability. This may have a material adverse
effect on our stock price and our ability to obtain additional financing.
Our primary source of revenue is the membership fees paid by our
individual membership programs members. Membership terms are generally one
year, although some memberships provide two or three year terms and others
are provided on a monthly basis. New members are generally given a free
trial period of one to three months. The majority of memberships are
cancelable for a full refund of the membership fee during the membership
period. However, some memberships are offered under a pro rata refund
policy in which the amount of the refund declines over the membership term.
Our policy is to recognize membership revenue when it is earned and is no
longer subject to refund. Accordingly, revenue for full refund memberships
is not recognized until the end of the membership term. Membership fees
subject to a pro rated refund are recognized ratably over the membership
term.
However, the marketing expenses that we incur to acquire new
members are recognized when incurred. As a result, the increased membership
revenue stream generally associated with increased marketing will not be
recognized for most annual memberships until the following year.
Accordingly, any favorable results from increased marketing may lag a year
behind the recognition of the outlays that led to those increased revenues.
This difference in timing of revenue and expense recognition
treatment means, among other things, that if we elect to significantly
increase marketing outlays in a given year, the associated increases in
membership fees paid to us will not be fully reflected in that year.
Accordingly, we may show decreased profitability even if marketing activity
would be expected to ultimately result in increased profitability.
We believe that a clear and thorough understanding of our revenue
and expense recognition policies represents an important part of
understanding our business and its prospects as well as our
marketing-related and general managerial decision-making. Difficulty or
disinterest among investors in understanding the impact of our accounting
policies on our reported financial results could cause a material adverse
impact on our share price and our ability to obtain equity or other
financing.
Cendant will retain ownership of certain support operations of our travel
membership business, which may adversely impact the financial results of
our travel membership business.
After the distribution, Cendant will retain ownership of certain
support operations of our travel membership business, including travel
reservation operations. As a result, we will have limited ability to
control the costs relating to these operations or to change the type of
services that are delivered by these business operations. In addition, any
interruption in the delivery of these services by Cendant may have an
adverse impact on the operations of our travel membership business.
We may be unable to compete with other companies in our industry that have
financial or other advantages.
We believe that the principal competitive factors of the
membership services industry include the ability to identify, develop and
offer innovative service programs, the quality and breadth of service
programs offered, price, marketing expertise and partner relationships. Our
competitors, including large retailers, travel agencies, insurance
companies and financial service institutions, some of which have
substantially larger customer bases and greater financial and other
resources than we do, offer membership programs which provide services
similar to, or which directly compete with, those provided by us. There can
be no assurance that:
o our competitors will not increase their emphasis on
programs similar to those we offer and compete more
directly with us;
o our competitors will not provide programs comparable or
superior to those we provide at lower membership prices;
o our competitors will not adapt more quickly than us to
evolving industry trends or changing market or
regulatory requirements;
o new competitors will not enter the market; or
o other businesses will not themselves introduce competing
programs.
Any increase in competition could result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and results of
operations. Additionally, because contracts between marketing partners and
program providers, either currently or in the future, may be exclusive with
respect to a particular service, potential marketing partners may be
prohibited from contracting with us to promote a program if the services we
provide are similar to, or merely overlap with, the services provided by an
existing program of a competitor.
Our ability to grow our business in the future may depend on new program
introductions. If we fail to introduce new programs that are popular, our
business may suffer.
Our ability to grow our business in the future may depend in large
part on our ability to develop and successfully introduce new programs
which generate consumer interest. Failure to introduce new programs in a
timely manner could result in our competitors acquiring additional market
share in a particular area of consumer interest. In addition, the
introduction or announcement of new programs by us or by others could
render existing programs uncompetitive or obsolete, or result in a delay or
decrease in orders for existing programs as customers evaluate new programs
or select the new programs as an alternative to existing programs.
Therefore, the introduction of new programs by us or others, or our failure
to introduce new programs which have broad consumer appeal, could have a
material adverse effect on our business, financial condition and results of
operations.
In certain of our marketing channels, we depend on various vendors to
market our programs. Any of these vendors may terminate its relationship
with us, and we cannot always control the level and the quality of service
provided by the vendor. Significant service interruptions or quality
problems could cause a material adverse effect on our business.
In certain of our marketing channels, we depend on independent
vendors, such as printers and telemarketers, to help us market our programs
to prospective members. Such vendors operate pursuant to agreements with us
that in some instances may be terminated by the vendor with limited prior
notice. There can be no assurance that, in the event a vendor ceases
operations, or terminates, breaches or chooses not to renew its agreement
with us, a comparable vendor could be substituted on a timely basis. In
addition, vendors are independent contractors and the level and quality of
services provided is not entirely within our control. Any service
interruptions, delays or quality problems could result in customer
dissatisfaction and membership cancellations, which could have a material
adverse effect on our business, financial condition and results of
operations.
Under the terms of our master license agreement with Cendant, we will
license all of our current trademarks, service marks and certain other
intellectual property. If Cendant were to terminate this agreement as a
result of a breach by us, it could have a significant adverse impact of our
ongoing operations.
Under the terms of our master license agreement, we will be
required to pay royalties to Cendant for use of trademarks and certain
other intellectual property. These royalties will be based upon our
revenue, not profits, which could result in increasing royalty payments
even during a period of declining profits. Cendant will have the right to
terminate the master license agreement upon the occurrence of various
bankruptcy or insolvency events or upon our failure to abide by certain
covenants. Any such termination would have a material adverse effect on our
business. Additionally, termination of the master license agreement would
result in a termination of our corporate services agreement with Cendant.
We market many of our programs through credit card issuers. A downturn in
that industry would adversely affect us.
Our future success is dependent in large part on continued demand
for our programs from businesses within the industries served by us. In
particular, programs marketed through our credit card issuer clients
accounted in 2000 for approximately 76% of our total revenues and
approximately 59% of new individual membership enrollments generated during
that period. A significant downturn in the credit and/or debit card
industry or a trend to reduce or eliminate use of membership programs in
that industry would have a material adverse effect on our business,
financial condition and results of operations.
Introducing new programs requires significant investments. We may not have
enough financial resources to meet all of our needs.
We typically incur high costs in the year a new program is
introduced. Principal elements of these costs relate to hiring personnel,
developing program content, contracting with vendors, drafting, testing and
refining marketing materials and creating membership fulfillment materials
for mailing to potential new program members. We must incur costs to market
programs to each potential member, regardless of whether that individual
actually becomes a paying member. However, there can be no assurance that
our cash resources will be able to sustain our business, particularly if we
experience a reduction in revenues for a prolonged period or if we face
substantial unexpected capital requirements. To the extent that such cash
resources are insufficient to fund our desired new marketing activities,
additional funds would be required for such activities to occur. There can
be no assurance that additional financing will be available on reasonable
terms or at all. If additional capital is raised through the sale of
additional equity or convertible debt securities, dilution to our
stockholders would occur.
We depend on key executive and marketing personnel. A loss of such
personnel would negatively impact our operations.
While we have entered into employment agreements with many of our
senior executives, we are dependent on the members of our management and
other key personnel, the loss of one or more of whom could have a material
adverse effect on us. In addition, we believe that our future success will
depend in large part upon our ability to attract and retain highly skilled
managerial and other personnel, particularly if we expand our activities.
We face significant competition for such personnel, and there can be no
assurance that we will be successful in hiring or retaining the personnel
we require for continued growth, if any. The failure to hire and retain
such personnel could have a material adverse effect on our business,
financial condition and results of operations.
We depend in part on the postal and telephone services we utilize to market
and service our products. An interruption of, or an increase in the billing
rate for, such services would adversely affect our business.
We market and service our programs by various means, including
through mail and telephonically, and, accordingly, our business is
dependent on the postal and telephone services provided by the U.S. Post
Office and various local and long distance telephone companies. Any
significant interruption in such services, or any limitations on the
ability of the U.S. Post Office or telephone companies to provide us with
increased capacity that may be required in the future, could adversely
affect our business, financial condition and results of operations. Rate
increases imposed by these services would increase our operating expenses
and could have a material adverse effect on our business, financial
condition and results of operations.
Our industry is increasingly subject to federal and state government
regulation. Such regulation could hinder our operations and increase our
operating costs.
We market our services primarily through direct mail, inbound
telemarketing, outbound telemarketing and the internet. Each of these
channels is regulated on the state and federal level, and we believe that
these activities will increasingly be subject to regulation. Such
regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members. Certain insurance products
are also subject to state and local regulations. We believe that such
regulations do not currently have a material impact on the financial
results of our business.
Our business is also significantly impacted by the expanding body
of law relating to consumer privacy and third party access to the
personally identifiable information of financial institution customers. The
most immediate and important example of these laws is the
Gramm-Leach-Bliley Act, which was enacted as federal law in November 1999.
This statute, among other things, modernized the regulatory structure
affecting the delivery of financial services to consumers and provided for
various new requirements and limitations relating to direct marketing by
financial institutions to their customers. Such additional requirements and
limitations became effective in November 2000, although compliance with the
act is not required until July 1, 2001, the effective date of the
applicable implementing regulations promulgated under the act. We do not
believe that the act and regulations promulgated to date will have a
material impact on our business. However, any additional burdens imposed by
subsequent amendments or clarifications of the act or regulations or by any
state law or regulation addressing the same or related matters could cause
a material adverse effect on our business.
Further, a significant body of state law and proposed state
legislation target or propose to target telemarketing and other direct
marketing practices, and there can be no assurance that any such laws, if
amended to become more restrictive, or such legislation, if enacted, will
not adversely affect or limit our future operations. Compliance with these
regulations is generally our responsibility, as opposed to merely the
responsibility of our marketing partners or vendors, and we are subject to
a variety of enforcement or private actions by either or both of the
Federal Trade Commission and various state attorneys general for failure to
comply.
Our provision of membership programs, particularly Travelers
Advantage(R) and Buyers Advantage(R), requires us to comply with certain
other state and local regulations, changes in which could materially
increase our operating costs associated with complying with such
regulations. Noncompliance by us with any rules and regulations enforced by
a federal or state consumer protection authority may subject us or our
management to fines or various forms of civil or criminal prosecution, any
of which could materially adversely affect our business, stock price,
financial condition and results of operations.
We also make use of the internet as a marketing and distribution
channel for our service programs. Currently, regulation of the internet is
growing steadily. Additionally, laws or regulations may be adopted with
respect to the internet relating to, among other things, liability for
information received from or transmitted over the internet, on-line content
regulation, user privacy, taxation and quality of products and services.
Moreover, the applicability to the internet of existing laws governing
issues such as intellectual property ownership and infringement, libel,
employment and personal privacy is uncertain and developing. Any new
legislation or regulation, or the application or interpretation of existing
laws, may decrease growth in the use of the internet, which could in turn
decrease the demand for our services, increase our cost of doing business
or otherwise have a material adverse effect on our business, results of
operations and financial condition.
We may attempt to grow through acquisitions. These acquisitions may not be
profitable.
We may pursue opportunities to acquire other businesses or
products, some of which may have a material financial effect on our overall
business. However, there can be no assurance that the acquisition of
additional businesses will ultimately increase, or not materially adversely
affect, our profitability. In addition, there can be no assurance that
future acquisitions, if any, will not have an adverse effect upon our
ability to run our existing business operations, particularly in the
financial periods immediately following consummation of those transactions,
during which time the operations of the acquired business are being
integrated into our operations. Moreover, certain provisions of the tax
sharing and indemnification agreement could discourage or delay our ability
to finance potential mergers through the issuance of our stock for a period
of two years following the separation.
The anti-takeover provisions in our certificate of incorporation and
certain agreements may prevent a transaction that is in the best interest
of the stockholders.
Our certificate of incorporation requires that any action
required or permitted to be taken by our stockholders must be effected at a
duly called annual or special meeting of stockholders and may not be
effected by any consent in writing, and requires reasonable advance notice
by a stockholder of a proposal or director nomination which such
stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by our
Chairman of the Board, our Chief Executive Officer or, if none, our
President or by our Board of Directors. Our certificate of incorporation
provides for a classified Board of Directors, and members of our Board of
Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of our capital stock entitled
to vote. In addition, shares of preferred stock may be issued in the future
without further stockholder approval and upon such terms and conditions,
and having such rights, privileges and preferences, as the Board of
Directors may determine. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of any holders of
preferred stock that may be issued in the future. We have no present plans
to issue any shares of preferred stock.
We have also adopted a rights plan that could be expected to make
it more difficult for our company to be acquired. In addition, the
acquisition of our company by a third party during the next two years could
cause the distribution of our common stock to become taxable, thereby
resulting in liability on our part for those taxes. This could serve as a
deterrent to a takeover of our company.
In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law which prohibits us from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is
approved in a prescribed manner. These provisions, and other provisions of
our certificate of incorporation, may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or our management,
including transactions in which stockholders might otherwise receive a
premium for their shares over then current market prices. In addition,
these provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
There has been no prior public market for our common stock and, therefore,
a liquid trading market in our common stock may not develop and the market
price may be volatile.
There has been no trading market for our common stock.
Accordingly, we cannot predict the extent to which investors' interest will
lead to a liquid trading market or whether the market price of our common
stock will be volatile. Because there has not been a public market for our
common stock, the market price of our common stock cannot be predicted, and
you may not be able to resell your shares at or above the initial market
price of our stock after the distribution. Some of Cendant's stockholders
who receive our shares may sell them immediately following the
distribution, which could delay the development of an orderly trading
market in our shares. Until an orderly market develops, the prices at which
our shares trade may fluctuate significantly. In addition, the price of our
shares may be depressed until investors have an opportunity to fully
familiarize themselves with our business and how it relates to and competes
within our industry.
Substantial sales of our common stock may occur after the distribution,
which could cause our stock price to decline.
Substantially all of the shares of our common stock distributed in
the distribution will be eligible for immediate resale in the public
market. In spin-off transactions similar to the distribution, it is not
unusual for a significant redistribution of shares to occur during the
first few weeks or even months following completion of the distribution.
Upon completion of the distribution, we will have outstanding an aggregate
of shares of common stock based upon the shares of Cendant common stock
outstanding on , 2001. All of these shares will be freely tradable without
restriction or further registration under the Securities Act, unless the
shares are owned by one of our "affiliates," as that term is defined in
Rule 405 under the Securities Act. We are unable to predict whether
substantial amounts of our common stock will be sold in the open market
following the distribution or what effect these sales may have on the
market price of our common stock. Any sales of substantial amounts of our
common stock in the public market, or the perception that any
redistribution has not been completed, could materially adversely affect
the market price of our common stock. We are also unable to predict whether
a sufficient number of buyers would be in the market at that time.
In addition, many of our employees have options to purchase
Cendant common stock that will convert into options to purchase our common
stock. As of , 2001, options to purchase approximately shares of
Cendant common stock were outstanding and held by Cendant employees who are
expected to become our employees as of the distribution. We estimate that,
as a result of the distribution, these options would represent options to
purchase approximately shares of our common stock, or approximately percent
of our outstanding stock. The actual amount, however, will not be
determined until after the distribution. This concentration of stock
options relative to the amount of our common stock outstanding will have a
dilutive effect on our earnings per share, which could adversely affect the
market price of our common stock. From time to time, we will issue
additional options to our employees under our employee stock option plan.
In addition, the exercise of substantial amounts of employee stock options
or the perception that such sales or exercises might occur, whether as a
result of the distribution or otherwise, may cause the market price of our
common stock to decline.
FORWARD-LOOKING STATEMENTS
This information statement contains forward-looking statements
that are based on current expectations, estimates, forecasts, and
projections about the industry in which we operate, and management's
beliefs and assumptions. Such statements include, in particular, statements
about our plans, strategies, and prospects under the headings "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words, and similar expressions are intended
to identify such forward-looking statements.
These forward-looking statements are not guarantees of future
performance and are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, many of which
are beyond our control, cannot be foreseen, and reflect future business
decisions that are subject to change. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. The factors that could affect our results
include the matters discussed under the heading "Risk Factors"; a change in
the growth rate of the overall U.S. economy, or the international economies
where we do business, such that consumer spending and related consumer debt
are impacted; a decline or change in the marketing techniques of credit
card issuers; unanticipated cancellation or termination of marketing
agreements and the extent to which we can continue successful development
and marketing of new products and services.
We caution that such factors are not exclusive. All of the
forward-looking statements made in this information statement are qualified
by these cautionary statements and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date of this information statement. Except as required under the federal
securities laws and the rules and regulations of the Securities and
Exchange Commission, we do not have any intention or obligation to update
publicly any forward-looking statements after we distribute this
information statement, whether as a result of new information, future
events or otherwise.
DIVIDEND POLICY
We do not anticipate paying any dividends on our common stock in
the foreseeable future because we expect to retain our future earnings for
use in the operation and expansion of our business. The declaration and
payment of dividends after the distribution, however, will be at the
discretion of our board, and will depend, among other things, upon our
investment policy and opportunities, results of operations, financial
condition, cash requirements, future prospects, and other factors that may
be considered relevant by our Board of Directors, including restrictions on
our ability to declare and pay dividends and distributions on our shares of
common stock.
Delaware law prohibits us from paying dividends or otherwise
distributing funds to our stockholders, except out of legally available
funds. Accordingly, we cannot pay dividends if as a result, we would be
unable to pay our debts as they become due in the usual course of business,
or our total assets would be less than the sum of our total liabilities
plus the amount that would be needed, if we were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon
dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
CAPITALIZATION
The following table sets forth our combined capitalization as of
March 31, 2001, on a historical and pro forma basis, to give effect to the
distribution as if it had occurred on March 31, 2001. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our combined financial statements,
including the notes to those statements, included elsewhere in this
information statement. The pro forma information may not necessarily
reflect the debt and capitalization of our business in the future or as it
would have been had we been a separate, independent company at March 31,
2001, or had the distribution actually been effected on that date.
March 31, 2001
----------------------------
Historical Pro Forma(1)
(unaudited) (unaudited)
------------- ------------
(dollars in thousands)
Debt................................................ $ 127,578 $ 127,578
Stockholders' Deficit: ------------ ------------
Combined deficit................................. $ (216,908) --
Common stock, $.01 par value, shares
authorized, issued and outstanding
(actual) and issued and outstanding
(pro forma)......................................
Preferred stock, $.01 par value, shares
authorized, issued and outstanding
(actual) and issued and outstanding
(pro forma)......................................
Paid-in capital (deficit)........................... -- (216,908)
Total Stockholders' Deficit......................... $ (216,908) $ (216,908)
Stockholders' Deficit: ------------ ------------
Total Capitalization................................ $ (89,330) $ (89,330)
============= ==============
- ---------------
(1) Pro forma combined debt and stockholders' deficit at March 31, 2001
presents our financial condition as if the distribution had occurred
on March 31, 2001.
SELECTED FINANCIAL DATA
Our selected historical combined financial data set forth below
should be read in conjunction with the "Combined Financial Statements of
Cendant Membership Services," including the notes to those statements,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this information statement. Cendant
Membership Services is a combined reporting entity comprised of all assets,
liabilities and transactions used in managing and operating the individual
membership and loyalty businesses of Cendant Corporation.
The historical statement of operations data for the years ended
December 31, 2000, 1999 and 1998 and the historical balance sheet data as
of December 31, 2000 and 1999 are derived from the combined financial
statements included elsewhere in this information statement that have been
audited by Deloitte & Touche LLP, our independent auditors. The historical
statement of operations data for the years ended December 31, 1997 and 1996
and the three months ended March 31, 2001 and 2000 and the historical
balance sheet data as of December 31, 1998, 1997 and 1996 and as of March
31, 2001 and 2000 have been prepared by management.
The historical financial information presented below is not
necessarily indicative of what our results of operations or financial
position would have been had we operated as an independent company during
the periods presented, nor is it necessarily indicative of our future
performance as an independent company.
At of For the
Three months ended At or For the
March 31, Year Ended December 31,
-------------------- -----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
(dollars in thousands, except per share data)
Results of Operations
Revenues.......................... $ 194,912 $ 194,412 $ 775,463 $ 791,774 $ 719,600 $ 622,954 $ 631,394
Operating and selling
expenses.......................... 154,437 138,269 598,355 651,296 795,086 600,107 613,902
Intercompany royalty expense...... 14,080 14,242 56,716 55,852 52,334 46,721 49,931
Depreciation and amortization..... 6,746 5,531 23,946 22,723 19,713 14,661 11,310
Special charges................... 1,909 18,052 25,975 89,750 - - -
---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating income (loss)........... 17,740 18,318 70,471 (27,847) (147,533) (38,535) (43,749)
Interest expense, net............. 2,517 2,929 10,747 11,907 12,082 10,136 12,244
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................... 15,223 15,389 59,724 (39,754) (159,615) (48,671) (55,993)
Provision for (benefit from)
income taxes.................. 6,013 6,101 23,679 (12,660) (60,497) (20,489) (23,535)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of
accounting changes............. 9,210 9,288 36,045 (27,094) (99,118) (28,182) (32,458)
Cumulative effect of
accounting change net of
tax (1)........................ - - - - - (267,221) -
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net income (loss)................. $ 9,210 $ 9,288 $ 36,045 $ (27,094) $ (99,118) $ (295,403) $ (32,458)
========== ========== ========== =========== =========== =========== ===========
Basic earnings (loss) per
share (2)..................... - - - - - - -
Financial Position
Current assets.................... $ 396,283 $ 423,892 $ 381,386 $ 442,085 $ 469,155 $ 457,778 $ 247,964
========== ========== ========== =========== =========== =========== ===========
Total assets...................... $ 729,188 $ 739,498 $ 713,079 $ 761,072 $ 776,581 $ 553,930 $ 589,399
========== ========== ========== =========== =========== =========== ===========
Deferred revenue.................. $ 689,073 $ 753,901 $ 700,909 $ 793,809 $ 893,731 $ 745,448 $ 343,809
Other current liabilities......... 125,756 109,651 160,144 120,171 136,700 132,795 226,791
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total current liabilities......... 814,829 863,552 861,053 913,980 1,030,431 878,243 570,600
Long-term liabilities............. 13,390 28,535 21,113 31,010 39,136 48,746 -
Long-term debt.................... 117,877 27,724 118,361 26,945 34,839 39,069 1,608
Combined equity (deficit)......... (216,908) (180,313) (287,448) (210,863) (327,825) (412,128) 17,191
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total liabilities and
combined deficit.................. $ 729,188 $ 739,498 $ 713,079 $ 761,072 $ 776,581 $ 553,930 $ 589,399
========== ========== ========== =========== =========== =========== ===========
- ----------
(1) In August 1998, we changed our accounting policy with respect to the
recognition of revenue and membership solicitation costs. The change
was effective January 1, 1997. Prior to the change, membership revenue
was recognized ratably over the membership period, regardless of the
refund terms and membership solicitation costs were deferred and
expensed over the average membership period.
(2) Earnings per share is not presented because we are not a public
entity, as a result, the presentation of earnings per share is not
applicable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
combined financial statements and accompanying notes thereto, and the other
financial information included elsewhere in this information statement.
This discussion contains forward-looking statements. Please see
"Forward-Looking Statements" and "Risk Factors" for a discussion of the
uncertainties, risks and assumptions associated with these statements.
Separation from Cendant Corporation
On October 25, 2000, the Board of Directors of Cendant authorized
the spin-off of Cendant's individual membership and loyalty businesses in a
tax-free distribution of shares to Cendant's common stockholders. On ,
2001, the Board of Directors of Cendant declared a dividend payable to each
holder of record of Cendant 's common stock at the close of business on ,
2001, which will be the record date, of one share of our common stock for
every shares of Cendant common stock held by such holder on the record
date.
Cendant's Board of Directors believes that the distribution is in
the best interests of Cendant and its stockholders and that the separation
of our business from Cendant's other businesses will provide Cendant and
our company with greater managerial and operational flexibility to respond
to changing market conditions in our differing business environments,
and also will provide both companies with additional financial flexibility
to pursue growth opportunities. See "The Distribution - Reasons for the
Distribution".
We believe that the separation of our business from the businesses
of our corporate parent, Cendant, will enhance our ability to increase our
penetration of the markets we currently serve, attract new customers,
increase investment in our existing operations and pursue new business
opportunities. As an independent company, we can more effectively focus on
our growth objectives, invest in the capital needs of our company and
target potential investors. Following the distribution, we will be in a
better position to increase marketing investments, since as an independent
company, we will be better able to explain to the public markets our
financial results. Similarly, we will be able to increase our investments
in existing technology and systems and pursue strategic acquisitions that
Cendant has not, to date, been willing to fund.
Overview
We derive our revenues principally from membership fees.
Membership fees vary depending upon the particular membership program and
generally range from $59.99 to $89.99 per year. Most of our memberships are
for one-year renewable terms and members are generally entitled to
unlimited use of the service during the membership period.
Our membership programs are marketed primarily through
arrangements with companies, such as banks and other financial
institutions, retailers, oil companies, on-line networks and other
organizations with large numbers of individual account holders and
customers. Participating marketing partners are generally paid commissions
on initial and renewal memberships. Commission amounts vary widely
depending on the marketing medium utilized and the amount of marketing
costs borne by the marketing partner. Commissions generally range from 10%
to 25%, unless the marketing partner assumes all or substantially all of
the marketing expenses, in which case the rates may be higher. We currently
market our membership products through relationships with 9 of the 10
largest credit card issuers in the United States.
Prior to April 2001, we paid a royalty to Cendant equal to
approximately 7.5% of revenues generated by the use of certain intellectual
property related to our membership programs. In April 2001, it was
determined that the intellectual property used in the membership business
would be retained by Cendant and we entered into a license agreement
providing for the payment of a 3% royalty to Cendant. In connection with
the distribution, we will enter into a new master license agreement with
Cendant that will grant us the exclusive right to use this intellectual
property for a period of 50 years in the conduct of the membership business
worldwide, subject to limited exceptions outside the United States and
Canada. Cendant will retain title to all of the licensed intellectual
property. Pursuant to the new agreement, we will continue to pay Cendant a
monthly royalty equal to 3% of the gross revenues we generate through the
use of the licensed intellectual property. Accordingly, we expect our
future royalty costs to be significantly lower than our historical royalty
fees.
Business Acquisitions and Disposition
During April 1998, we acquired Credentials Services, Inc., or
Credentials, for $122.7 million. Credentials' primary product is credit
monitoring memberships similar to our PrivacyGuard(R), product. At the time
of the acquisition, Credentials had approximately 1.6 million active
members.
On September 15, 1999, we donated the outstanding common stock of
our wholly owned subsidiary, Netmarket Group Inc., or Netmarket, to an
independent charitable trust. The fair market value of the Netmarket common
stock on the donation date was approximately $20 million. Accordingly,
Netmarket's operating results were no longer included in our combined
financial statements from the donation date through October 1, 2000. We
retained an ownership interest in the convertible preferred stock of
Netmarket, which was convertible subject to certain conditions. On October
1, 2000, we purchased the remaining common shares from the charitable trust
for $1.5 million and exercised our option to convert the Netmarket
preferred interest into common shares. The operations of Netmarket are
included in the accompanying combined financial statements since October 1,
2000, the date of acquisition.
Results Of Operations
The underlying discussions focus on adjusted EBITDA, which is
defined as earnings before interest, income taxes and depreciation and
amortization, adjusted to exclude intercompany royalties and special
charges which are not measured in assessing the performance of our
business. We believe that adjusted EBITDA provides the most informative
representation of how we evaluate performance. However, our presentation of
adjusted EBITDA may not be comparable with similar measures used by other
companies.
Three months ended Years Ended
March 31, December 31,
-----------------------------------------------------------------------
(in millions)
-----------------------------------------------------------------------
2001 2000 2000 1999 1998
------------ ------------ ------------ ------------ -------------
Membership revenues
Initial term - full refund $ 46.1 $ 71.5 $ 237.5 $ 301.2 $ 270.8
Initial term - prorated refund 22.0 10.6 64.3 38.8 11.3
Renewal term - full refund 88.8 83.2 357.4 336.2 321.7
Renewal term - prorated refund 8.9 4.7 17.3 18.5 12.9
Wholesale, monthly and other memberships 24.6 15.5 71.2 64.8 72.2
------------ ------------ ------------ ------------ -------------
190.4 185.5 747.7 759.5 688.9
Merchandise and other revenue 4.5 8.9 27.8 32.3 30.7
------------ ------------ ------------ ------------ -------------
Total Revenues $ 194.9 $ 194.4 $ 775.5 $ 791.8 $ 719.6
============ ============ ============ ============ =============
Adjusted EBITDA(a) $ 40.5 $ 56.1 $ 177.1 $ 140.5 $ (75.5)
============ ============ ============ ============ =============
Active members (b) 23.6 24.5 24.3 25.0 29.6
============ ============ ============ ============ =============
New member joins (c) 2.5 2.5 9.8 11.4 16.2
============ ============ ============ ============ =============
(a) Adjusted EBITDA is defined as earnings before interest, income taxes
and depreciation and amortization, adjusted to exclude intercompany
royalties and special charges which are not measured in assessing
the performance of our business.
(b) Excludes 1.4 million Netmarket active members as of March 31, 2000
and December 31, 1999.
(c) Excludes Netmarket new member joins of 0.3 million in the quarter
ended March 31, 2000, 0.8 million member joins for the year ended
December 31, 2000 and 0.4 million member joins for the year ended
December 31, 1999.
Member retention rates in the individual membership industry are
typically less than 50% in the first year of membership, and there is
additional turnover in subsequent membership renewal periods. Accordingly,
to maintain or grow the membership base, significant resources must be
expended each year to solicit new members. Prior to 1999, our focus was on
growing the membership base, and we incurred significant marketing
expenses. Such marketing costs, along with the costs incurred to service
our membership base, were expensed as incurred. However, the corresponding
revenue was generally not recognized until later periods. Consequently, we
incurred significant operating losses in 1998 and 1997. In 1999, we shifted
our focus towards improving earnings and reducing marketing expenditures,
with an emphasis on acquiring more profitable members. As a result,
adjusted EBITDA increased $216.0 million in 1999 and $36.6 million in 2000.
However, our membership base decreased from 29.6 million members at
December 31, 1998 to 23.6 million members as of March 31, 2001.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
In the fourth quarter of 2000, we adopted a growth-oriented
business plan and began to increase our investment in new member
acquisitions. Total revenues of $194.9 million in the first quarter of 2001
were relatively flat compared to the same period in 2000. However, adjusted
EBITDA declined $15.6 million, or 28%, due to a significant increase in
marketing investment compared to the same period in 2000. Membership
revenues increased $4.9 million, or 3%, reflecting the inclusion of
Netmarket members in 2001. Merchandise and other revenue declined $4.4
million, or 49%, as increased merchandise sales from Netmarket members were
more than offset by lower merchandise sales from the Family Software Club
product line, which ceased sales in 2000.
Operating expenses in the first quarter of 2001 increased $2.5
million, or 5%, compared to the same period in 2000, reflecting the
addition of Netmarket members and their related expenses, which was
partially offset by reduced expenses associated with a lower membership
base.
During first quarter 2001, marketing expenses increased $11.1
million, or 35%, compared to the same period in 2000, reflecting our new
growth-oriented business plan and the corresponding increase in our
investment in new member acquisitions.
Commission expenses in first quarter 2001 increased $4.1 million,
or 9%, compared to the same period in 2000. Commissions as a percentage of
membership revenue increased to 25.5% from 23.9% in 2000. This increased
commission rate reflects our strategy of focusing our marketing on more
profitable media channels, in which our partners often assume more of the
marketing costs, which generally warrant higher commission rates.
During first quarter 2001, we recorded a $1.9 million special
charge to write-off certain non-productive assets and to provide for
severance and lease termination costs incurred in closing our Great Falls,
Montana and Cambridge, Massachusetts facilities. During first quarter 2000
we incurred special charges of $18.1 million associated with abandonment of
certain computer system applications, executive severance, business
consolidation and other costs.
Operating income in first quarter 2001 declined $0.6 million
compared to the same period in 2000, as increased marketing spending of
$11.1 million, higher commission expenses of $4.1 million and increased
operating expenses of $2.5 million more than offset the $16.1 million
decline in special charges and slightly higher revenues of $0.5 million.
Interest expense, net in first quarter 2001 declined $0.4 million
from the same period in 2000 due to increased investment interest income.
Our provision for income taxes was $6.0 million in 2001, an
effective tax rate of 39.5%, compared to a tax provision of $6.1 million in
2000 or an effective tax rate of 39.6%.
Net income for first quarter 2001 declined $0.1 million as lower
operating income of $0.6 million was partially offset by higher investment
interest income and lower income taxes.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
During 2000, our strategy was to focus on profitability by
targeting our marketing efforts and reducing expenses incurred to reach
potential new members. In 2000, total revenues decreased $16.3 million, or
2%, compared to 1999. However, our adjusted EBITDA in 2000 increased $36.6
million compared to 1999.
Revenues from new members in 2000 decreased $38.2 million, or 11%,
compared to 1999, reflecting a lower level of marketing conducted in 1999
compared to 1998. New revenue from prorated refund memberships increased to
21% of new revenue in 2000, up from 11% in 1999, reflecting our continuing
strategy of selling more prorated refund memberships. Revenues from renewal
members increased $20 million as members acquired during the higher
marketing spending levels of 1998 and 1997 have transitioned into their
renewal membership terms.
Operating expenses in 2000 decreased $51.1 million, or 20%,
compared to 1999 due to the reduced number of active members, lower
transaction volume in the shopping programs, and efficiencies realized at
our call center operations. Lower operating expenses also reflect the
inclusion of Netmarket for only three months in 2000 as compared to eight
and one half months in 1999. Additional operating cost savings were
realized in 2000 through a risk sharing arrangement with a major marketing
partner under which the partner shares in the solicitation and membership
service costs in return for a higher commission.
Marketing expenses in 2000 declined $33.2 million, or 18%,
compared to 1999, reflecting the exclusion of Netmarket during most of 2000
as well as costs savings realized from the risk sharing arrangement noted
above.
Commission expenses in 2000 increased $17.3 million, or 11%,
compared to 1999, despite a $11.8 million decline in membership revenue.
Commissions as a percentage of membership revenue increased to 24.1% from
21.4% in 1999. This increased commission rate reflects our continued
strategy of focusing our marketing on more profitable media channels, which
generally warrant higher commission rates. Commission rates were also
impacted by the risk sharing arrangement noted above.
General and administrative expenses in 2000 increased $14.0
million, or 27%, compared to 1999 as a result of provisions recorded for
the settlement of certain legal actions, costs incurred associated with the
relocation of our corporate headquarters as well as professional fees
incurred in anticipation of the distribution.
Operating income in 2000 increased $98.3 million, compared to
1999, as lower revenues of $16.3 million and higher general and
administrative expenses of $14.0 million were more than offset by lower
special charges of $63.8 million and reduced marketing and operating
expenses of $33.2 million and $51.1 million, respectively.
Interest expense, net in 2000 decreased $1.2 million, compared to
1999, reflecting higher interest income earned from investments and
receivables from Netmarket.
In 2000 and 1999, we recorded special charges of $26.0 million and
$89.8 million, respectively. Special charges in 2000 were associated with
abandonment of certain computer system applications, executive severance,
business consolidation and other costs. Special charges recorded in 1999
were for a development advance to Netmarket of $77.0 million subsequent to
our contribution of Netmarket's common stock to an independent charitable
trust and $12.8 million for other transaction costs associated with
Netmarket. Repayment of the advance was predicated on achievement of
certain financial targets and, therefore was solely dependent on the
success of the developmental efforts of Netmarket. Given the uncertainty of
its overall recovery, the advance was expensed.
Our provision (benefit) for income taxes consisted of a tax
provision of $23.7 million in 2000, an effective tax rate of 39.6%,
compared to a tax benefit of $12.7 million in 1999, or an effective tax
rate of 31.8%. The change in the effective tax rate primarily reflects the
relative impact of non-deductible goodwill amortization in relation to the
pretax income (loss).
Net income in 2000 increased $63.1 million primarily reflecting
the operating income improvement of $98.3 million partially offset by
higher income taxes of $36.3 million.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenues increased $72.2 million, or 10%, in 1999, while
adjusted EBITDA improved to $140.5 million in 1999 compared to an adjusted
EBITDA loss of $75.5 million in 1998.
The revenue growth was due to a greater number of members
resulting from higher marketing levels in 1998 and increases in the average
price of a membership. The increase in adjusted EBITDA reflects the revenue
growth, as well as operating and marketing cost reductions.
Netmarket accounted for a net increase in revenues and adjusted
EBITDA of $10 million and $23 million, respectively, due to growth in the
business unit prior to the donation on September 15, 1999. Additionally,
revenues and adjusted EBITDA in 1999 were incrementally benefited by $13
million and $5 million, respectively, from the April 1998 acquisition of
Credentials.
Operating costs in 1999 decreased $17.8 million, or 7%, compared
to 1998, reflecting a decline in our membership base and the exclusion of
Netmarket operating costs for a portion of 1999.
Marketing costs in 1999 decreased $165.2 million, or 47%, compared
to 1998. The decrease was the result of a shift in our marketing efforts to
target smaller populations with a higher probability of response. It also
reflects a shift in marketing efforts to lower cost marketing media
channels.
Commission expenses in 1999 increased $27.5 million, or 20%,
compared to 1998, primarily due to the $70.6 million increase in membership
revenues.
General and administrative expenses in 1999 increased $11.6
million compared to 1998, reflecting increased levels of infrastructure
development and increased employee costs.
Special charges recorded in 1999 were for a development advance to
Netmarket of $77.0 million subsequent to our contribution of Netmarket's
common stock to an independent charitable trust and $12.8 million for other
transaction costs associated with Netmarket.
The 1999 operating loss of $27.8 million improved $119.7 million
from 1998 due to reduced marketing costs of $165.2 million and higher
revenues of $72.2 million. This improvement was partially offset by the
special charges related to the donation of Netmarket and higher commission
and general and administrative expenses of $27.5 million and $11.6 million,
respectively.
Our income tax benefit was $12.7 million in 1999, an effective tax
rate of 31.8%, compared to a tax benefit of $60.5 million in 1998, an
effective tax rate of 37.9%. The change in the effective tax rate primarily
reflects the relative impact of non-deductible goodwill amortization in
relation to the pretax loss.
Net income in 1999 increased $72.0 million from 1998 primarily
reflecting the operating income improvement of $119.7 million, partially
offset by reduced tax benefits of $47.8 million.
Liquidity and Capital Resources
Our capital investments and working capital needs have been
financed by cash flow from funding from Cendant. Under Cendant's
centralized cash management system, Cendant deposits sufficient cash into
our bank accounts to meet our daily obligations and withdraws excess funds
from those accounts. These transactions are included in Funding from
Cendant Corporation on the Statements of Combined Cash Flows.
On October 25, 2000, concurrent with Cendant's announcement of its
plan to spin-off its individual membership and loyalty businesses, we
agreed with Cendant to convert $100 million of intercompany indebtedness to
an unsecured promissory note. The principal on this note is repayable to
Cendant on September 30, 2003. We are required to make semi-annual interest
payments on the unpaid principal at 10% per year on January 15th and July
15th of each year, commencing on July 15, 2001.
In connection with our 1996 acquisition of Ideon Group, Inc., we
recorded a non-interest bearing note to a former shareholder of Ideon. The
terms of the note require us to make six annual payments of approximately
$9.5 million commencing in July 1998. We are obligated to hold the final
two payments in escrow. Such funds are held in escrow and included in
investments on the combined balance sheets.
Our debt level prior to the distribution is not indicative of the
level of debt we anticipate to incur upon or shortly after becoming an
independent public company. We intend to obtain a commitment for an
unsecured revolving credit facility. The credit agreement will contain
financial and non-financial covenants customary for financings of this
nature.
The terms of the debt we assume or incur as part of our separation
from Cendant and of future indebtedness may impose various restrictions and
financial and non-financial covenants on us that could limit our ability to
respond to market conditions, provide for unanticipated capital investments
or take advantage of new business opportunities.
As of March 31, 2001, we had a combined deficit of $216.9
million. The combined deficit represents the net amount of all funding
received from or provided to Cendant, and our accumulated net losses, which
were adversely impacted by the adoption of our revenue recognition policies
in 1998 (effective January 1, 1997). Our business is not asset intensive
and, as noted above, all of our excess cash is withdrawn by Cendant. Given
our large deferred revenue liability for membership billings received, but
not yet recognized as revenue in accordance with our revenue recognition
policies adopted in 1998, our liabilities exceed our assets. We do not
believe that such deficit is indicative of our financial strength, and do
not believe that it will hinder our ability to conduct our operations,
raise capital in the public sector or finance our business growth.
We believe that funding available under future credit facilities
along with cash from operations will be sufficient to fund our working
capital and capital investment requirements after the distribution.
We do not anticipate paying any dividends on our common stock in
the foreseeable future. The declaration and payment of dividends after the
distribution, however, will be at the discretion of our Board of Directors.
Cash Flows
Three Months Ended Years ended
March 31, December 31,
---------------------- ------------------------------
2001 2000 2000 1999 1998
---------------------- ------------------------------
Cash flows provided by (used in):
Operating activities $(51.8) $(13.8) $ 4.9 $ (98.3) $ (17.6)
Investing activities (8.4) (8.9) 12.1 (26.0) (145.8)
Financing activities 60.8 21.1 (22.3) 108.3 175.6
---------------------- ------------------------------
Net change in cash
and cash equivalents $ 0.6 $ (1.6) $(5.3) $ (16.0) $12.2
====================== ==============================
Cash used in operating activities increased during the first
quarter of 2001 due to the payment of commission advances to certain
marketing partners as well as reduced member billings due to lower
membership levels. Cash used in operations was negatively impacted in 1999
by the development advance and other transaction costs incurred associated
with Netmarket totaling $89.7 million. Excluding the Netmarket transaction,
cash flow from operations improved $13.5 million in 2000 reflecting
spending reductions and favorable working capital changes, which more than
offset reduced member billings. In 1999, excluding the Netmarket
transaction, operating cash flows improved $9.0 million due to significant
reductions in marketing expenditures, partially offset by lower membership
billings.
Cash provided by investing activities increased in 2000 due to the
net cash received in connection with the acquisition of Netmarket, offset
in part by an increase in capital expenditures on information systems in
2000. In 1998, approximately $116 million was used to acquire Credentials.
In each of the periods presented, changes in cash provided by
(used in) financing activities is driven primarily by borrowing and
repayment activity with Cendant for intercompany activity.
Our capital expenditures were $8.4 million and $8.9 million for
the three months ended March 31, 2001 and 2000, respectively, and $30.9
million, $21.0 million and $29.9 million for the years ended 2000, 1999 and
1998, respectively. These expenditures were primarily for information
systems and systems infrastructure, where we believe our business required
significant upgrades. We anticipate capital expenditures of approximately
$40 million in 2001 to be utilized on the further enhancement of our
information systems and systems infrastructure, as well as for capital
projects related to the relocation of our corporate headquarters to
Norwalk, Connecticut and the relocation of our call center in Houston,
Texas.
Effects of Inflation
The relatively moderate inflation rate over the last three years has not
had a material impact on our results of operations. However, inflation
could adversely impact us if inflation results in increased wages and
higher costs for telecommunications, postage and printing.
Quantitative and Qualitative Disclosures about Market Risk
We hold various financial instruments which are sensitive to interest rate
risk. As of March 31, 2001 such financial instruments consisted of US
treasury notes and municipal bonds, corporate bonds and money market funds.
Our liabilities subject to interest rate risk consisted of a note payable
to Cendant, an acquisition note payable and capital lease obligations. We
assess our market risk based on changes in interest rates utilizing a
sensitivity analysis that measures the potential loss in earnings, fair
values and cash flows based upon a 10% hypothetical change in market
interest rates, all other factors constant. Using this sensitivity
analysis, we have determined that the impact of a 10% change in interest
rates on our earnings, fair values and cash flows would not be material.
BUSINESS
Overview
We are a leading membership-based, consumer services company,
providing approximately 23.6 million members with access to a wide variety
of goods and services. Our membership programs provide consumers with
services and benefits in the areas of shopping, travel, privacy protection,
credit card registration, auto and home improvement. We are the leading
provider in terms of revenues, active members and profitability of
membership-based consumer services of these types in the United States.
Our membership programs operate under brand names that include
Shoppers Advantage(R), Travelers Advantage(R), PrivacyGuard(R),
AutoVantage(R) and AutoVantage GoldSM, Buyers Advantage(R),
CompleteHome(R), Just for MeSM, Great FunSM and other membership services.
These programs are offered as individual memberships and as components of
wholesale membership enhancement packages and insurance products.
We derive our revenues principally from membership fees.
Membership fees vary depending upon the particular membership program and
generally range from $59.99 to $89.99 per year. Most of our memberships are
for one-year renewable terms and members are generally entitled to
unlimited use of the service during the membership period. For the year
ended December 31, 2000, our revenues were approximately $775 million and
for the quarter ended March 31, 2001, our revenues were approximately $195
million.
Our membership programs are marketed primarily through
arrangements with companies, such as banks and other financial
institutions, retailers, oil companies, on-line networks and other
organizations with large numbers of individual account holders and
customers. Participating marketing partners are generally paid commissions
on initial and renewal memberships. Commission amounts vary widely
depending on the marketing medium utilized and the amount of marketing
costs borne by the marketing partner. Commissions generally range from 10%
to 25%, unless the marketing partner assumes all or substantially all of
the marketing expenses, in which case the rates may be higher. We currently
market our membership products through relationships with 9 of the 10
largest credit card issuers in the United States.
We solicit members for our programs primarily through direct
marketing, including mail and inbound and outbound telemarketing. In
addition, our primary individual membership services are available on-line
through major on-line services.
We also offer wholesale loyalty enhancement services primarily to
credit card issuers who make services available to their credit card
holders to foster increased product usage and loyalty. We generally charge
credit card issuers an initial fee to implement a particular wholesale
loyalty program and monthly fees thereafter based on the number of accounts
participating in that institution's program.
Strategy
The businesses constituting Cendant Membership Services, Inc.
following the distribution became a part of Cendant at the end of 1997.
Over the last few years, our business strategy was affected by the adoption
of revenue recognition policies whereby the revenue resulting from our
marketing efforts is recorded as many as 15 months subsequent to our
acquisition of the member, while the expense of such marketing efforts is
recorded when incurred. As a result, Cendant required us to limit our
marketing, systems and other expenditures to minimize our risk and maximize
our returns.
We intend to maintain our leadership position in the industry and,
as an independent company, to implement our new, growth-oriented business
plan aimed at increasing our membership revenues and profitability over the
long-term, through the following strategic initiatives:
o increase the amount of our marketing expenditures devoted
to acquiring new members;
o strengthen our marketing relationships with our existing
financial services partners and broaden our partner base
in other industries;
o strengthen our existing membership services, develop new
membership services and broaden our product mix to
include non-membership products and services;
o develop new business opportunities outside of our
traditional membership business by leveraging our
existing core competencies in direct marketing and
customer service, by developing fulfillment and marketing
alliances and by pursuing long-term strategic
acquisitions and alliances; and
o continue our investment in new technology and systems
infrastructure, allowing us to provide better service to
our partners and members, as well as to lower the cost of
providing our services.
While our new business plan involves an increased level of
investment in marketing, infrastructure and other aspects of our business
which will result in a reduction in our anticipated profits for 2001 in
comparison to our 2000 results, we believe this approach will allow us to
achieve our objectives of creating a platform for sustainable growth in our
revenues and profits.
Marketing Partners
We affiliate with marketing partners such as financial
institutions, retailers and other consumer-oriented companies to offer
individual membership programs to their customers in connection with, or as
an enhancement to, their use of their credit and/or debit cards, checking
accounts, mortgage loans or other financial payment vehicles. Participating
marketing partners generally receive commissions on initial and renewal
memberships, based on a percentage of the net membership fees.
We have active members from over 140 partners in a wide variety of
industries and deliver to the partners loyalty building and fee-producing
benefits and products. Our key customers include:
o financial institutions, such as American Express, Capital
One Bank, Chase Manhattan, Bank One/First USA, Citibank
and MBNA;
o retail marketers, such as the Home Shopping Network,
Sears and Ticketmaster;
o car rental agencies, such as Alamo, Avis, Budget and
Thrifty;
o institutions that offer mortgage services, such as Bank
of America, First Nationwide and First Union;
o hotel chains, such as Choice Hotels, Days Inn, Ramada and
Super 8;
o internet service providers, such as America Online and
Yahoo; and
o others, such as AT&T, Intuit and NextCard.
Our top 10 partners, on the basis of revenue received by our
business in 2000 are Citibank, Capital One, AOL, Sears, Bank One/First USA,
Chase, Bank of America, MBNA, Associates First Capital (a wholly owned
subsidiary of Citibank) and Household Bank. During 2000, Citibank and
Capital One Bank each represented more than 10% of our total revenues.
Types of Memberships
Our membership programs include Shoppers Advantage(R), Travelers
Advantage(R), PrivacyGuard(R), AutoVantage(R) and AutoVantage GoldSM,
Buyers Advantage(R), CompleteHome(R), Just for MeSM, Great FunSM and other
membership services. These programs are offered as individual memberships
and as components of wholesale loyalty membership enhancement services and
insurance products. The following is a brief description of the different
types of memberships we generally provide.
Individual Memberships. We generally classify memberships as
individual memberships if:
o the member pays directly for the services;
o we generally pay most or all of the marketing costs to
solicit the member and primarily market these services
directly using marketing techniques, such as direct mail
and billing statement inserts, inbound telemarketing and
outbound telemarketing;
o the membership is sold at full price; and
o the initial membership fulfillment materials consist of a
variety of information such as a membership card,
information describing the service and discount coupons
applicable to the service.
Examples of these memberships include Shoppers Advantage(R),
Travelers Advantage(R), PrivacyGuard(R) and AutoVantage(R) and insurance
and warranty products such as Buyers Advantage(R), which are sold at prices
generally between $59.99 and $89.99 per year.
Wholesale Memberships. We generally classify memberships as wholesale
memberships if:
o we do not pay the marketing costs to solicit the member;
o the initial membership fulfillment materials consist of a
variety of information such as a membership card and
information describing the service;
o the memberships may be sold at full or discounted group
prices; and
o the member pays for, or the member pays the sponsor for,
the membership.
Examples of these memberships include enhancement services, such
as loyalty programs that are offered as an enhancement to customer accounts
and sold through financial institutions for which we act as a third party
administrator.
Membership Services
Our membership programs include the following services:
Shopping. Shoppers Advantage(R) and Netmarket(R) are discount
shopping programs providing product price information and home shopping
services to members. As part of the Shoppers Advantage(R) and Netmarket(R)
programs, we distribute catalogs up to ten times per year to certain
members. In addition, we provide active members with automatic two year
product warranties on all products purchased through the Shoppers
Advantage(R) and Netmarket(R) programs, as well as a 200% low price
guarantee, which provides members with a refund equal to double the price
difference on a product they find at a lower price.
Our merchandise database contains information on approximately
80,000 brand name products, including a written description of the product,
the manufacturer's suggested retail price, the vendor's price, features and
availability. All of these products may be purchased through our
independent vendor network and members can shop twenty-four hours a day,
seven days a week by calling our toll free number or via the internet.
Vendors include manufacturers, distributors and retailers nationwide.
Individual members are entitled to an unlimited number of toll-free calls
seven days a week to our shopping consultants, who access the merchandise
database to obtain our lowest available fully-delivered cost from
participating vendors for the product requested. We inform the vendor
offering the lowest price of the member's order and that vendor then
delivers the requested product directly to the member. We act as a conduit
between members and the vendors, and accordingly, do not maintain an
inventory of products.
Travel. Travelers Advantage(R) is a full-service discount travel
service program under which we provide members with information on
schedules and rates and book travel arrangements with major scheduled
airlines, hotel chains, car rental agencies, cruise lines and vacation
package wholesalers through Cendant Travel Inc., which is one of the twenty
largest full-service travel agencies in the United States. Certain
Travelers Advantage(R) members can earn cash rebates equal to a specified
percentage, generally 5%, of the price of travel arrangements purchased by
the member through Cendant Travel and/or on the internet via one of Cendant
Travel's booking systems. Travel members may book their reservations by
making toll-free telephone calls seven days a week, twenty-four hours a day
to agents at Cendant Travel. Cendant Travel's agents reserve the lowest
air, hotel and car rental fares available for the members' travel requests.
After the distribution, Cendant Travel will remain a wholly-owned
subsidiary of Cendant Corporation and will continue to provide us with all
of the services it previously provided us pursuant to a travel services
agreement. In addition, we maintain our own database containing information
on tours, cruises, travel packages and short-notice travel arrangements.
PrivacyGuard Service. The PrivacyGuard(R) service, which includes
Credentials(R) and CreditLineSM, provides members with a personalized
triple merged credit report, ongoing credit monitoring and the means to
receive, comprehend and monitor key personal information. The service
enables members to access information in three key areas: credit history,
state-maintained driving records and medical files maintained by third
parties. This information is designed to assist members in updating and
correcting information concerning themselves that is used by third parties
in making decisions, such as granting or denying credit and settling auto
and life insurance rates.
Auto Services. Our auto services, AutoVantage(R)and AutoVantage
GoldSM, offer members a variety of auto and auto-related services and benefits.
The AutoVantage(R)service offers:
o new car buying summaries;
o used car valuations;
o car buying service with over 1,800 participating dealers;
o discounts on maintenance, service and repairs at more
than 40 chains with more than 25,000 locations
nationwide, including such well-known chains as Goodyear,
Jiffy Lube and Firestone;
o car and truck rental discounts and hotel savings.
AutoVantage GoldSM provides:
o all of the AutoVantage(R)benefits and services;
o Emergency Roadside Assistance 24 hours a day, 7 days a
week in the United States;
o locksmith services for car and home;
o customized trip routing; and
o bail bond and legal defense reimbursement services.
Credit Card Registration. Our Hotline(R) service, also known as
Credit Card Guardian(R), enables consumers to register their credit and
debit cards so that account numbers may be kept securely in one place. If
the member notifies us that any of these credit or debit cards are lost or
stolen, we will notify the issuers of these cards, arrange for them to be
replaced and reimburse the member for any amount for which the card issuer
may hold the member liable. The service also provides travel related
protection services including a message relay service, emergency cash and
emergency airline tickets.
Buyers Advantage. The Buyers Advantage(R) service extends the
manufacturer's warranty on products purchased by the member. This service
also rebates 20% of repair costs and offers members price protection by
refunding any difference between the price the member paid for an item and
its reduced price, should the item be sold at a lower price within sixty
days after purchase. In addition, the service offers return guarantee
protection by refunding the purchase price of an item that the member
wishes to return.
Home-Related Services. The CompleteHome(R) service is a
broad-based resource for reliable information to help members maintain and
improve their homes cost-efficiently. CompleteHome(R) offers discounts on a
broad range of home products and services at store and service locations
nationwide. The service offers a discount shopping database with savings of
up to 50% off thousands of brand-name products with a 200% low-price
guarantee, which provides members with a refund equal to double the price
difference on a product they find at a lower price, an automatic two year
product warranty and a 60-day return policy. The service also provides
access to a pre-screened, pre-qualified contractor and tradesperson
matching service with over 30,000 contractors, architects and designers who
help guide members on most home repairs or remodeling projects.
CompleteHome(R) offers 160 free How-to-Guides and a real estate and moving
benefit offering, among other things, cash back or a commission credit when
buying or selling a home. In addition, members get a 15% discount on
purchases made at decoratetoday.com for various home decorating products.
Great Fun Club. The Great FunSM service provides members with a
variety of benefits, including the opportunity to inquire about vacation
packages, book hotel rooms and car rentals, the ability to purchase
merchandise, a discounted dining program and a National Values Guide
offering coupon savings on movie tickets, casual restaurants, theme parks,
attractions and retailers. Great Fun OnlineSM offers specialized shopping,
weekend getaways and special offers on select software segmented for kids
and adults, including games and education.
Health Services. The HealthSaverSM service provides discounts on
prescription drugs, eyewear, eye care, dental care, selected health-related
services and fitness equipment, including sporting goods. Members may also
purchase prescription and over-the-counter drugs through the mail.
Just For Me. The Just For MeSM service focuses on female consumers
and offers shopping discounts, sales price protection, spa discounts, a
full-service travel agency, personal assistant service, a free magazine
subscription, a surprise gift every few months, newsletters and rebated
internet access.
Small Business Program. The Small Business ProgramSM service is
marketed under a license held by FISI Madison, LLC, a wholly owned
subsidiary of Cendant Corporation. The program offers discounts on business
to business services including overnight delivery, long distance telephone
service, car rental, office supplies, off-site human resource management
and computer products. The Small Business ProgramSM provides supplemental
financial products including small ticket leasing, cash sweep accounts and
insurance services. In addition, the Small Business ProgramSM offers
resources for business owners, including telephone shopping, an auto buying
service, travel discounts, a concierge service and a quarterly business
management publication.
Loyalty Business Program. We offer more than 50 wholesale loyalty
enhancement services and loyalty solutions in the business-to-business
marketplace. Our client base is primarily comprised of large credit and
debt card issuers that make these services available to their card holders
to foster increased product usage and loyalty. We offer turn-key solutions
for our client base including program design, promotional planning, systems
development and on-going contact center support. We normally collect a
per-member fee to cover all costs associated with managing the delivery of
the product enhancement. In fiscal year 2000, we handled over 1.4 million
calls and processed over 200,000 redemption requests related to our
products.
Operational Abilities
Unlike many of our competitors and many other direct marketing
organizations, we possess the operational capabilities and expertise to
conduct most significant aspects of our business with minimal reliance upon
third party outsourcing. For example, our employees create most of our
advertising, creative materials and fulfillment packages, conduct most of
our solicitations, post our billings and answer most of our member phone
calls at our own call centers. We believe this in-house, hands-on approach
enables us to market our products more efficiently and to provide better
customer service. These operational capabilities also enable us to be more
in control and more knowledgeable in the core areas of our business, engage
in a more informed and rapid internal dialogue at the executive management
level and to better access market feedback and thereby accelerate our
reaction time to changing market conditions and trends.
Distribution Channels
We market our individual and wholesale memberships through a
variety of distribution channels. We generally reach consumers by direct
mail, including solo mailings and billing statement inserts, inbound
telemarketing, including automated voice response units, live call transfer
solicitations, outbound telemarketing and the internet.
All of our main individual memberships are available on-line to
interactive computer users through on-line services and the internet. These
users are solicited primarily through direct mail, inserts in
newly-purchased computer equipment containers and interactive
communications networks, such as America Online, the CompuServe Information
Service and Prodigy. Our interactive users account for approximately 6% of
our total members. We have formed strategic alliances with major
telecommunications providers and on-line services to market our products.
Competition
Individual Memberships. Our primary competitors include
Memberworks Incorporated, Provelle, Inc., BrandDirect Marketing Inc. and
Signature Financial/Marketing, Inc., each of which offers individual
membership programs similar to ours. To date, we have effectively competed
with such competitors. However, there can be no assurances that we will
continue to be able to do so. In addition, we compete with traditional
methods of merchandising that enjoy widespread consumer acceptance, such as
catalog and in-store retail shopping and shopping clubs with respect to our
discount shopping service, and travel agents with respect to our discount
travel service. Our products, services, marketing materials and business
methods are generally not protected by patent.
Wholesale Memberships. Each of our account enhancement membership
and loyalty services competes with similar services offered by other
companies, including, with respect to wholesale memberships, the four
individual membership competitors listed immediately above, and, with
respect to the loyalty business, Carlson Companies, Inc., Enhancement
Services Corporation, BI Performance Services, Inc., Maritz, Inc.,
Netcentives, Inc. and various financial institutions. Several of our
competitors in the loyalty business are larger and more established than
our company, with greater resources and financial capabilities than we
have. In addition, in attempting to attract any relatively large financial
institution as a partner, we also compete with that institution's in-house
marketing staff and with that institution's potential ability to itself
establish programs with comparable features and customer appeal without
paying for the services of an outside provider.
Employees
As of March 31, 2001, we had approximately 3,200 employees. None
of our employees are represented by a labor union. We have never
experienced a strike or work stoppage and we believe our relations with our
employees are good.
Properties
Our principal executive offices are located in Norwalk,
Connecticut. We own an office building in Cheyenne, Wyoming. We also lease
office space in Westerville, Ohio; Dublin, Ohio; Houston, Texas; Virginia
Beach, Virginia; Richmond, Virginia; Great Falls, Montana (scheduled to be
closed by June 2001); and Trumbull, Connecticut.
We expect that, in the normal course of business, most of our
leases will be renewed or replaced by other leases upon expiration. We
believe that our properties are suitable to our business and have adequate
capacities for our currently foreseeable needs.
Information Technology
Our current computer systems include: DEC/Compaq VAX and Alpha
systems, SUN and HP Unix systems and NT servers. An IBM mainframe used for
list processing, modeling and a small credit card protection application is
currently supported by Cendant's data center in Garden City, New York.
Cendant assesses $3.2 million annually for those services. A second IBM
mainframe environment, located in the our data center in Cheyenne, Wyoming,
is used for the servicing of our credit card registration program.
We maintain several fully integrated internet businesses including
Netmarket.com, PrivacyGuard.com, AutoVantage.com, TravelersAdvantage.com,
ShoppersAdvantage.com and CompleteHome.com. We work closely with a number
of interactive partners and have co-branded versions of our sites for these
marketing partners. Approximately 6% of our total membership base has been
derived from these interactive partnerships.
Government Regulation
We market our services primarily through direct mail, inbound
telemarketing, outbound telemarketing and the internet. Each of these
channels is regulated on the state and federal level, and we believe that
these activities will increasingly be subject to regulation. Such
regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members. Certain insurance products
are also subject to state and local regulations. We believe that such
regulations do not currently have a material impact on the financial
results of our business.
Our business is also significantly impacted by the expanding body of
law relating to consumer privacy and third party access to the personally
identifiable information of financial institution customers. The most
immediate and important example of these laws is the Gramm-Leach-Bliley
Act, which was enacted as federal law in November 1999. This statute, among
other things, modernized the regulatory structure affecting the delivery of
financial services to consumers and provided for various new requirements
and limitations relating to direct marketing by financial institutions to
their customers. Such additional requirements and limitations became
effective in November 2000, although compliance with the act is not
required until July 1, 2001, the effective date of the applicable
implementing regulations promulgated under the act. We do not believe that
the act and regulations promulgated to date will have a material impact on
our business. However, any additional burdens imposed by subsequent
amendments or clarifications of the act or regulations or by any state law
or regulation addressing the same or related matters could cause a material
adverse effect on our business.
Further, a significant body of state law and proposed state
legislation target or propose to target telemarketing and other direct
marketing practices, and there can be no assurance that any such laws, if
amended to become more restrictive, or such legislation, if enacted, will
not adversely affect or limit our future operations. Compliance with these
regulations is generally our responsibility, as opposed to merely the
responsibility of our marketing partners or vendors, and we are subject to
a variety of enforcement or private actions by either or both of the
Federal Trade Commission and various state attorneys general for failure to
comply.
Our provision of membership programs, particularly Travelers
Advantage(R) and Buyers Advantage(R), requires us to comply with certain
other state and local regulations, changes in which could materially
increase our operating costs associated with complying with such
regulations. Noncompliance by us with any rules and regulations enforced by
a federal or state consumer protection authority may subject us or our
management to fines or various forms of civil or criminal prosecution, any
of which could materially adversely affect our business, stock price,
financial condition and results of operations.
We also make use of the internet as a marketing and distribution
channel for our service programs. Currently, regulation of the internet is
growing steadily. Additionally, laws or regulations may be adopted with
respect to the internet relating to, among other things, liability for
information received from or transmitted over the internet, on-line content
regulation, user privacy, taxation and quality of products and services.
Moreover, the applicability to the internet of existing laws governing
issues such as intellectual property ownership and infringement, libel,
employment and personal privacy is uncertain and developing. Any new
legislation or regulation, or the application or interpretation of existing
laws, may decrease growth in the use of the internet, which could in turn
decrease the demand for our services, increase our cost of doing business
or otherwise have a material adverse effect on our business, results of
operations and financial condition.
Legal Proceedings
We are party to a number of routine claims and lawsuits incidental
to our business. We believe that there is no litigation, other than
described below, pending against us that could, individually or in the
aggregate, have a material adverse effect on our business. Following the
distribution, we will not be subject to any continuing accounting-related
litigation pending against Cendant.
On August 14, 2000, the U.S. District Court approved Cendant's
agreement to settle the principal securities class action pending against
Cendant, which was brought on behalf of purchasers of the majority of
Cendant and CUC International, Inc.'s publicly traded securities, between
May 1995 and August 1998. Under the settlement agreement, Cendant will pay
the class members approximately $2.85 billion in cash. However, any and all
liabilities with respect to this matter shall remain with Cendant
Corporation. We have not assumed, and shall not assume, any liability of
any kind with respect to the CUC settlement nor with respect to any matters
relating to Cendant's other securities.
On July 10, 2000, the Minnesota State Attorney General sent
Cendant a civil investigative demand seeking certain documents from
Cendant. The investigation relates to whether our sales practices are fully
in compliance with Minnesota law and regulation. Cendant responded to that
demand and several follow-up requests. The matter is still under
investigation and no damage amounts have been asserted.
On August 29, 2000, the Connecticut State Attorney General, on
behalf of its sister agency, the Connecticut Consumer Protection Agency,
sent a civil investigative demand seeking certain documents from Cendant.
The investigation relates to whether certain of our telemarketing
activities and relationships with financial institutions constitute unfair
or deceptive acts or practices under Connecticut law. Cendant has responded
to information requests. The matter is still under investigation and no
damage amounts have been asserted.
On April 3, 2001, the Florida State Attorney General sent a
subpoena seeking certain documents from us in connection with its
investigation of whether our sales practices are fully in compliance with
Florida law and regulation. We are in the process of responding to
information requests. The matter is still under investigation and no damage
amounts have been asserted.
In 1999, Cendant served a complaint on certain former employees of
our business, alleging, among other things, breaches of existing
non-competition agreements by such employees. The defendants have asserted
various counterclaims that seek, among other things the value of certain
Cendant employee stock options. Discovery has concluded. The magistrate has
recommended that the defendants receive partial summary judgment on the
counterclaims regarding the frozen options and wage claims, with the
damages on these claims to be set at trial. We are claiming more than $10
million in damages. The counterclaim is in excess of $10 million.
We initiated AAA arbitration proceedings in Delaware against Cross
Country Bank on January 25, 2000. We demanded that Cross Country Bank remit
certain withheld membership revenues to us, in accordance with the terms of
our agreement. Cross Country asserts that it has authority to retain
certain amounts and that we owe it additional monies. We are seeking
amounts of up to $5 million. Cross Country Bank has counterclaimed and is
seeking at least $1.4 million from us. Discovery has been completed in this
proceeding. The arbitration hearing has commenced and is currently expected
to be completed by this summer.
RELATIONSHIP BETWEEN CENDANT AND OUR COMPANY AFTER THE DISTRIBUTION
In connection with the distribution, we will enter into a
distribution agreement, a corporate services agreement, a travel services
agreement, intellectual property license agreements, a tax sharing and
indemnification agreement and a number of marketing and ancillary
agreements with Cendant for the purpose of accomplishing the contribution
to us of the businesses described in this information statement and the
distribution. These agreements will govern the relationship between Cendant
and us after the distribution and will provide, among other things, for the
allocation of employee benefits, tax and other liabilities and obligations
attributable to periods prior to the distribution. The agreements will also
govern various services, resources and functions, including technology
hardware, database software, travel agency reservation and general customer
service centers, to be provided and received by each of Cendant and our
company. These agreements will contain terms comparable to terms that would
have been obtained in an arms-length negotiation and, accordingly, will
equitably reflect the benefits and costs of our ongoing relationship with
Cendant.
Distribution Agreement
The distribution agreement will set forth the agreements between
Cendant and us with respect to the principal corporate transactions
required to effect the contribution by Cendant of its individual membership
and loyalty businesses into Cendant Membership Services, Inc., the
distribution of our shares to Cendant's stockholders, arrangements
governing the continuing relationship between us and Cendant and the mutual
provision and receipt of services after the distribution.
The Contribution; Allocation of Assets and Liabilities; No Representations
and Warranties
In connection with the distribution, Cendant will cause to be
contributed to us the individual membership and loyalty businesses and the
stock of companies engaged in such business described in this information
statement, other than intellectual property. It will effect this
contribution by causing the transfer of its individual membership and
loyalty businesses and all of the issued and outstanding capital stock of
its subsidiaries engaged in that business. In connection with the
distribution, we also assumed a $100 million promissory note payable to
Cendant with an annual interest rate of 10% due September 30, 2003. In
addition, Cendant also expects to undertake certain other transactions in
preparation for the distribution.
The distribution agreement will also provide generally that all
assets and liabilities, other than with respect to any liabilities relating
directly to the accounting irregularities involving CUC International,
Inc., of the contributed businesses conducted by Cendant prior to the
distribution will be vested solely in us and our subsidiaries after the
distribution. Cendant will have no interest in our assets and business and
generally will have no obligation with respect to our liabilities after the
distribution. Similarly, we will have no interest in the assets of
Cendant's other businesses and generally will have no obligation with
respect to the liabilities of Cendant's retained businesses after the
distribution.
Except as expressly set forth in the distribution agreement or in
any other ancillary agreement, neither we nor Cendant will make any
representation or warranty as to the assets, businesses, or liabilities
transferred or assumed as part of the contribution, as to any consents or
approvals required in connection with the transfers, as to the value or
freedom from any security interests of any of the assets transferred, as to
the absence of any defenses or freedom from counterclaim with respect to
any claim of either us or Cendant, or as to the legal sufficiency of any
assignment, document, or instrument delivered to convey title to any asset
transferred. Except as expressly set forth in any other ancillary
agreement, all assets will be transferred on an "as is," "where is" basis,
and the respective transferees will agree to bear the economic and legal
risks that any conveyance is insufficient to vest in the transferee good
and marketable title, free and clear of any security interest, that any
necessary consents or approvals are not obtained or that requirements of
laws or judgments are not complied with.
The Distribution
The distribution agreement will provide that, subject to the terms
and conditions contained in the agreement, we and Cendant will take all
reasonable steps necessary and appropriate to cause all conditions to the
distribution to be satisfied, and to effect the distribution as of 11:59
p.m. on , 2001. Cendant's agreement to consummate the distribution will be
subject to the satisfaction, or waiver by the Cendant board in its sole
discretion, of the following conditions:
o Cendant's board, or its duly appointed committee, will
have established the record date and the distribution
date and any appropriate procedures in connection with
the distribution;
o all necessary regulatory approvals will have been
received;
o this information statement will have been mailed to
Cendant's stockholders;
o the registration statement on Form 10, of which this
information statement is a part, will have been declared
effective under the Securities Exchange Act of 1934;
o our Board of Directors named in this information
statement will have been elected and our amended and
restated certificate of incorporation and bylaws will
have been adopted and be in effect;
o our common stock will have been approved for listing on a
national securities exchange or quotation system, subject
to official notice of issuance;
o we will have entered into an agreement establishing our
new revolving credit facility;
o we will have performed our obligations under the
distribution agreement;
o we and Cendant will have taken all actions necessary or
appropriate under the securities or blue sky laws of
states or other political subdivisions of the United
States in connection with the distribution; and
o no order, injunction, or decree by any court of competent
jurisdiction, or other legal restraint or prohibition,
preventing consummation of the distribution will have
been issued or be in effect.
Following the satisfaction or waiver of the conditions enumerated
above, the distribution agreement will provide that on or prior to the
effectiveness of the distribution, Cendant will deliver to the distribution
agent a certificate or certificates representing all of the outstanding
shares of our common stock. Cendant will instruct the distribution agent to
distribute those shares on , 2001 or as soon thereafter as practicable in a
proportion equal to one of our shares of common stock for every shares of
Cendant common stock outstanding as of , 2001.
Indemnification
We will agree to indemnify, hold harmless and defend Cendant, each
of its affiliates and each of their respective directors, officers and
employees, from and against any and all damage, loss, liability and expense
they may incur or suffer, arising out of or due to:
o the failure of us or any of our affiliates or any other
person to pay, perform or otherwise discharge any
liabilities of the contributed businesses, including,
without limitation:
o our liabilities under the distribution agreement, the tax
sharing and indemnification agreement or any other
ancillary agreement;
o liabilities incurred in connection with the conduct or
operation of the contributed businesses, including any
acquired businesses, or our ownership or use of our
assets, whether arising before, at or after the
distribution date;
o liabilities set forth on the balance sheet of the
individual membership services and loyalty businesses of
Cendant as of the effective time of the distribution;
o certain liabilities of Cendant or our company relating to
any business formerly owned or operated by us or the
contributed businesses or arising out of the sale of any
of those businesses, other than any liabilities relating
directly to the accounting irregularities involving CUC
International, Inc.; or
o liabilities relating to the acquisition by any of the
contributed businesses of any business prior to the
effective time of the distribution, except to the extent
such liabilities arise out of the issuance of securities
of Cendant in any such acquisition; and
o any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a
material fact required to be stated in the registration
statement, the preliminary or final information
statement, or any amendment or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements in the registration statement or this
information statement not misleading, except to the
extent such liabilities arise out of or are based upon
information included in any section of the registration
statement or this information statement about Cendant.
Cendant will agree to indemnify, hold harmless and defend us, each
of our affiliates and each of our and their respective directors, officers,
and employees, from and against any and all damage, loss, liability, and
expense we or they may incur or suffer, arising out of or due to:
o the failure of Cendant or any affiliate of Cendant or any
other person to pay, perform or otherwise discharge any
liabilities of Cendant or its affiliates other than those
liabilities associated with the contributed businesses
that we have assumed and liabilities under the
distribution agreement, the tax sharing and
indemnification agreement or any ancillary agreement; and
o any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a
material fact required to be stated in the registration
statement, the preliminary or final information
statement, or any amendment or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements in the registration statement or this
information statement not misleading, except to the
extent such liabilities arise out of or are based upon
information included in any section of the registration
statement or this information statement about us.
In circumstances in which the indemnity is unavailable or
insufficient, for any reason, to hold harmless a party entitled to
indemnification in respect of any indemnifiable losses under the
distribution agreement, each indemnifying party, in order to provide for
just and equitable contribution, will contribute to the amount paid or
payable by such indemnified party as a result of these indemnifiable
losses, in a proportion appropriate to reflect the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged
statements or omissions that resulted in these indemnifiable losses, as
well as any other relevant equitable considerations.
The distribution agreement also will specify procedures with
respect to claims subject to indemnification and related matters.
Insurance
The distribution agreement will obligate us to use our best
efforts to procure and maintain for at least five years directors' and
officers' liability insurance coverage at least equal to the amount of
Cendant's current directors' and officers' insurance coverage with respect
to directors and officers of Cendant who will become our directors and
officers as of the effective date of the distribution for acts as our
directors and officers for periods from and after the date of the
distribution. The distribution agreement will obligate Cendant to use its
best efforts to maintain directors' and officers' liability insurance
coverage at least equal to the amount of Cendant's current directors' and
officers' liability insurance coverage for at least five years with respect
to the directors and officers of Cendant who will become directors and
officers of us as of the date of the distribution for acts as directors and
officers of Cendant or one of its affiliates during periods prior to the
date of the distribution.
Dispute Resolution
The distribution agreement will contain provisions that govern,
except as otherwise provided in any ancillary agreement, the resolution of
disputes, controversies, or claims that may arise between us and Cendant.
These provisions contemplate that efforts will be made to resolve disputes,
controversies, and claims by escalation of the matter to senior management
and other representatives of us and Cendant. If those efforts are not
successful, either we or Cendant may submit the dispute, controversy, or
claim to binding arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, subject to the provisions of
the agreement.
Expenses
The distribution agreement will provide that we will pay all costs
and expenses incurred in connection with the consummation of the
distribution and the transactions contemplated by the agreement and all
costs and expenses incurred in connection with the preparation, execution,
delivery, and implementation of the distribution agreement and the
ancillary agreements. None of the expenses that we will pay are direct or
indirect expenses of Cendant's stockholders relating to the transactions.
We will also pay all other expenses of the transaction, including the
legal, filing, accounting, printing, and other expenses incurred in
connection with the preparation, printing, and filing of the registration
statement on Form 10 of which this information statement is a part.
Amendments and Waivers; Further Assurances
The distribution agreement will provide that it may only be
amended or rights under it waived by an instrument signed by the party to
be charged with the amendment or waiver. We and Cendant will agree to use
our respective reasonable efforts to:
o execute and deliver any additional instruments and
documents and take any other actions the other party may
reasonably request to effectuate the purposes of the
distribution agreement and the ancillary agreements and
their terms; and
o to take all actions and do all things reasonably
necessary under applicable laws and agreements or
otherwise to consummate and make effective the
transactions contemplated by the distribution agreement
and the ancillary agreements.
Corporate Services Agreement
In connection with the distribution, we will enter into a
corporate services agreement with Cendant pursuant to which we will each
provide the other with certain transition and other services similar to
those provided currently. Such services will include:
o servicing, administration and fulfillment by us of
Cendant's hotel brand points and loyalty programs;
o cost sharing arrangements with Cendant relating to
certain customer contact centers;
o provision of database modeling services by us to Cendant;
o provision of customer list processing services by us to
Cendant;
o receipt, scanning and transmission of enrollment data by
us to Cendant;
o marketing assistance from FISI Madison, LLC, a
wholly-owned subsidiary of Cendant, in offering our
individual membership programs to its customers,
including regional banks and financial institutions
focusing directly on the checking and savings accounts
business;
o shared benefits and volume commitments with Cendant
relating to certain telecommunications arrangements; and
o provision of general corporate services by Cendant to us,
including payroll, accounts payable and employee
benefits.
Compensation to be paid for services delivered pursuant to the
agreement will differ based upon the type of service provided. For certain
services, fees will be based upon volume and for other services upon actual
costs incurred by the party providing the service. The agreement will
continue for a period of one year. However, the provision of certain
services may be required for periods extending beyond the base term of the
agreement but in no event is it anticipated that any such agreement will
extend beyond ten years. The agreement may be terminated by the mutual
agreement of the parties or in connection with the failure of one party to
perform its obligations under the agreement.
Tax Sharing and Indemnification Agreement
In connection with the distribution, we will enter into a tax
sharing and indemnification agreement with Cendant that will govern the
allocation between the companies of federal, state, local, and foreign tax
liabilities and related tax matters, such as the preparation and filing of
tax returns and tax contests, for the taxable periods before and after the
distribution.
In addition, the tax sharing and indemnification agreement will
contain provisions that concern events which might occur after the
distribution that could have an adverse affect on the tax treatment of the
distribution. Under the agreement, each company will be responsible for,
and will indemnify the other company from and against, any tax liability
resulting from any action by such company that may cause the tax treatment
of the distribution, the preceding contributions of capital and related
transactions to be different than as intended. In addition, in order to
maintain the qualification of the distribution as a tax-free distribution
under Section 355 of the Code, there are material limitations on
transactions in which we can be involved during the two-year period
following the distribution date. Specifically, during this two-year period,
we will agree to refrain from engaging in certain transactions unless we
obtain (i) a private letter ruling from the IRS or an opinion from a
nationally recognized tax advisor, which opinion is satisfactory to Cendant
in its sole discretion, providing that the transaction will not affect the
tax-free treatment of the distribution and the preceding contributions of
capital, or (ii) the consent of Cendant. These transactions include
liquidation or merger with another company, certain redemptions,
repurchases or reacquisitions of capital stock, certain dispositions or
sales of assets, the discontinuance of the active conduct of trades or
businesses, and any other transaction resulting in the direct or indirect
acquisition of a 50% or greater interest in CMS's stock within the meaning
of Section 355(e) of the Code.
The tax sharing and indemnification agreement also will contain
the following technical provisions:
o we will be responsible for the respective federal, state
and foreign income tax liabilities imposed on or
attributable to us and any of our subsidiaries relating
to all taxable periods. Accordingly, we will indemnify
Cendant and its subsidiaries against any income tax
liabilities attributable to us and any of our
subsidiaries;
o Cendant will be responsible for the respective federal,
state and foreign income tax liabilities attributable to
Cendant and its subsidiaries, other than us and our
subsidiaries, relating to all taxable periods.
Accordingly, Cendant will indemnify us and our
subsidiaries against any such tax liabilities
attributable to any of Cendant's remaining subsidiaries;
o any tax refund or tax benefit received by either company
that is on account of or otherwise attributable to the
other company will be paid by the receiving company to
the other company;
o after the distribution, the company to which a tax return
relates generally will be responsible for preparing and
filing such return, with the other company providing the
requisite information, assistance, and cooperation; and
o each company generally will be responsible for handling,
settling, and contesting any tax liability for which it
is liable under the terms of the tax sharing and
indemnification agreement.
Employee Matters Agreement
The employee matters agreement will allocate assets, liabilities
and responsibilities relating to our and Cendant's active and former
employees and their participation in our respective stock and employee
benefits plans.
We expect that the employee matters agreement will generally
require us to establish and maintain new employee benefit and compensation
plans for our employees. However, certain benefits will continue to be
provided by Cendant during a transition period and we will reimburse
Cendant for the costs they incur in providing such benefits to our
employees. Under the employee matters agreement, we expect that we will be
responsible for providing specified welfare and retirement benefits to our
employees after the date of the distribution, which will generally be
similar to the benefits Cendant provided to such employees. These benefits
include medical, dental, and vision benefits, flexible spending accounts
covering health care and dependent care expenses, life and accident
insurance plans, short and long term disability plans, a severance plan, a
401(k) plan, policies covering vacations, holidays, and sick leave, an
annual incentive plan and director compensation plans.
Qualified Savings Plans
Pursuant to the employee matters agreement, following the
distribution, we expect that Cendant will retain sponsorship of the Cendant
savings plans and the trusts related thereto. Cendant will cause each
employee who will be employed by us or one of our subsidiaries on the
distribution date to become fully vested, to the extent not already vested,
in such employee's account balances, if any, under the Cendant savings
plans. The account balances of each such employee will be maintained under
the Cendant savings plans. However, such employees will not be entitled to
make additional contributions under the Cendant savings plans and matching
contributions will no longer be made by either Cendant or us on behalf of
such employees. We intend to establish new savings plans for our active
employees which will allow our active employees to transfer their account
balances from the Cendant savings plans to our new savings plans.
Non-Qualified Deferred Compensation Plans
Pursuant to the employee matters agreement, we expect that Cendant
will retain sponsorship of the Cendant non-qualified deferred compensation
plan and related rabbi trust and will generally retain liability for
benefits payable thereunder to our active and former employees who are
participants. Such employees will be treated in accordance with the terms
of such plan and their existing distribution elections and, for such
purposes, our employees will be deemed to be separating from employment
with Cendant upon the distribution. Following the distribution, we intend
to establish a separate non-qualified deferred compensation plan and rabbi
trust for our eligible employees.
Health and Welfare Plans
Except as otherwise provided in the employee matters agreement, we
will assume all liabilities and responsibilities for providing health and
welfare benefits to our employees. As of the date of the distribution, we
intend to establish health and welfare plans that are substantially similar
to the Cendant plans. During a transition period after the distribution, we
may administer some of our plans in conjunction with the respective Cendant
plans and provide reimbursement to Cendant for any costs or expenses it
incurs in connection with such administration. For those benefits that are
provided through insurance, we will create similar benefit arrangements for
our employees immediately following the distribution. We expect that the
transition period for all plans will conclude on or before December 31,
2001.
Stock Options and Restricted Stock
The employee matters agreement will provide for the treatment of
outstanding options to purchase Cendant common stock and shares of
restricted Cendant common stock granted under Cendant's equity incentive
plans.
Vested Options. It is currently contemplated that vested Cendant
options outstanding at the time of the distribution which are held by
persons who are our active employees generally will remain options to
purchase Cendant common stock and obligations of Cendant. Accordingly, such
options generally will be treated as though the optionee has terminated
employment with Cendant and therefore will have the period of time set
forth in the applicable option plan or option agreement, generally four
months to one year, to exercise such options prior to their expiration.
Such options will also be adjusted in the manner described below in "--
Other Options."
Unvested Options. It is currently contemplated that unvested
Cendant options outstanding at the time of the distribution which are held
by persons who are our employees immediately after the distribution
generally will be replaced with options to purchase shares of our common
stock. Such replacement options will be unvested and will continue to vest
in accordance with their original vesting schedule, subject to continued
employment with us. The number of shares these options cover and their
exercise price per share will be determined using a formula designed to
cause (1) the economic value of such options (i.e., the difference between
the fair market value of the shares of our common stock subject to such
options and the aggregate per share exercise price thereof) immediately
after the distribution to be the same as the economic value immediately
prior to the distribution of the Cendant options being replaced, and (2)
the ratio of the exercise price to the fair market value of the underlying
stock to remain the same immediately before and immediately after the
distribution.
Other Options. All other Cendant options outstanding at the time
of the distribution will generally remain Cendant options. The number of
shares subject to, and the exercise prices of, such Cendant options will be
adjusted to take into account the distribution using a formula designed to
cause (1) the aggregate economic value (i.e., the difference between the
fair market value of the shares subject to such options and the aggregate
per share exercise prices thereof) of the resulting Cendant options
immediately after the distribution to be equal to the aggregate economic
value of the Cendant options immediately prior the distribution, and (2)
for each resulting option, the ratio of the exercise price to the fair
market value of the underlying stock to remain the same immediately before
and immediately after the distribution.
Restricted Stock. A number of our key employees and officers hold
shares of restricted Cendant common stock. It is currently contemplated
that shares of restricted Cendant common stock outstanding at the time of
the distribution which are held by persons who are our active employees
immediately after the distribution generally will be replaced with
restricted shares of our common stock. The number of shares of our common
stock will be determined using a formula designed to cause the economic
value of such replacement shares immediately after the distribution to be
the same as the economic value immediately prior to the distribution.
Travel Services Agreement
At the time of the distribution, we will enter into an agreement
with Cendant, pursuant to which Cendant, through its wholly-owned
subsidiary, Cendant Travel, Inc., will provide us with certain processing
and support services relating to the booking and fulfillment of travel
transactions. Pursuant to the agreement, we will pay fees to Cendant based
on the number of travel transactions Cendant provides to members of our
programs as well as on the base commission rates paid by vendors, such as
airlines and cruise lines. The agreement will continue for a period of ten
years, subject to renewal under certain circumstances. The agreement may be
terminated prior to end of the initial term upon 180 days written notice
for certain services and upon longer notice periods for certain other
services.
Master License Agreement
The existing license agreement with Cendant will be replaced by a
new license agreement granting us the exclusive right on a worldwide basis,
subject to limited exceptions outside the United States and Canada, to use
the trademarks, service marks and domain names currently used in the
conduct of our individual membership business. Cendant will retain title to
all of the licensed trademarks, service marks and domain names. Pursuant to
the agreement, we will pay Cendant a monthly royalty equal to 3% of the
gross revenues we generate through the use of the licensed trademarks,
service marks and domain names. This agreement will be in effect for a
period of 50 years, subject to earlier termination as described below.
The master license agreement provides Cendant with certain rights
related to our business and operations. We are required to use the
trademarks, service marks and domain names in accordance with certain
standards. The Master License Agreement shall terminate without offering us
an opportunity to cure its default, if (i) certain bankruptcy and
insolvency events occur, (ii) we purport to transfer any rights and
obligations under the Master License Agreement without compliance with the
terms of the Master License Agreement, (iii) we compete with Cendant in
violation of the Distribution Agreement, (iv) we disclose the confidential
information of Cendant in violation of the Master License Agreement, (v)
upon a Change of Control Event (as defined), or (vi) we receive three or
more notices of termination for Curable Defaults (as defined) which are
cured or not cured (collectively, the "Non-Curable Defaults"); provided
that, except for (i) above, Cendant shall give us 30 days notice of such
Non-Curable Default. Cendant may also terminate the Master License
Agreement if we (i) fail, refuse, or neglect to promptly pay monies owing
to Cendant under certain specified agreements, (ii) misuse or make any
unauthorized use of the licensed proprietary marks or otherwise materially
impair the goodwill associated with such marks, (iii) engage in any
business or markets any service or product under a name or mark which, in
Cendant's opinion, is similar to the licensed proprietary marks, or (iv)
fail to maintain material compliance with the standards prescribed by
Cendant in the Master License Agreement or otherwise in writing
(collectively, the "Curable Defaults"), provided, however, that we shall
have 30 days (10 days in the case of (i) above) after our receipt from
Cendant of written notice of such default to remedy such default and,
provided further, that other than with respect to (i) above, in the event
such default is not cured within 30 days but we have commenced to cure such
default within 30 days and are diligently prosecuting such cure to
completion, we shall have up to an additional 60 days to cure such default.
Change of Control Event means a transaction or series of related
transactions by which (a) any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) other than Cendant or an
affiliate or successor to Cendant, is or becomes after the date hereof the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act as in effect on the date hereof), of more than 20% of the total voting
power of all of our voting stock then outstanding (the "Relevant
Percentage"); (b)(1) another corporation merges into us or our subsidiary
or we consolidate with or merge into any other corporation or (2) we convey
transfer or lease all or substantially all our assets to any person or
group, in one transaction or a series of related transactions other than
any conveyance, transfer or lease between us and our wholly owned
subsidiary, with the effect that a person or group, other than a person or
group which is the beneficial owner of more than the Relevant Percentage of
the total voting power of our voting stock immediately prior to such
transaction becomes the beneficial owner of more than the Relevant
Percentage of the total voting power of all voting stock of the surviving
or transferee corporation of such transaction or series; or (c) during any
period of two consecutive years, individuals who at the beginning of such
period constituted our Board of Directors (together with any new directors
whose election by our Stockholders, was approved by a vote of a majority of
the Directors then still in office who were either Directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the Directors then in office.
Marketing Agreements with Cendant
We are party to agreements with Cendant to market most of our
individual membership programs to Cendant's hotel chain and car rental
customers. Pursuant to such agreements, Cendant will permit us to market
our individual membership services to its hotel chain and Avis customers.
We will pay Cendant a commission based upon the number of members enrolled
in our programs during the term of the agreement. The agreement will
continue for a period of a five years, subject to automatic renewal under
certain circumstances.
Cendant has also agreed to refer certain interested callers to us
to permit us to offer our individual membership services to such callers.
We will pay Cendant a fee based upon the number of calls routed to us and
the length of such calls. The agreement will continue for a period of two
years, subject to earlier termination under certain circumstances.
Promissory Note
In connection with the distribution, we have assumed a $100
million promissory note dated October 25, 2000 payable to Cendant, which
matures on September 30, 2003. The note bears interest at a rate per annum
equal to 10% and is payable semi-annually on the fifteenth day of January
and July of each year, commencing on July 15, 2001. On or before the
maturity date of this note, we expect to have sufficient funds to pay off
the note in full or to refinance the note by obtaining a third party loan
on acceptable terms and conditions.
MANAGEMENT
Our Directors and Executive Officers
Following the distribution, our Board of Directors will
include directors, the majority of which will be independent. One of our
directors, Mr. Scott Bernstein, will be our President and Chief Executive
Officer. Mr. John W. Chidsey, who is an officer of Cendant, will serve as
the Chairman of our Board of Directors. Prior to the distribution, we
intend to appoint at least two independent directors to our Board of
Directors. Our Board of Directors will be divided into three classes.
Commencing with the annual meeting of stockholders to be held in fiscal
2002, directors for each class will be elected at the annual meeting of
stockholders held in the year in which the term for such class expires and
thereafter will serve for a term of three years.
The following table sets forth information as to persons who serve
or who we expect to serve as our directors and executive officers
immediately following the distribution. Our Board of Directors may appoint
additional executive officers from time to time.
Name Age Position(s)
- ---- --- -----------
John W. Chidsey...................... 38 Non-executive Chairman of the Board of Directors
Scott W. Bernstein................... 41 President, Chief Executive Officer and Director
Charles M. Fallon, Jr................ 38 Executive Vice President and Chief Operations Officer
Nathaniel J. Lipman.................. 36 Executive Vice President of Business Development
Peter G. McGonagle................... 38 Executive Vice President and General Counsel
Michael P. Rauscher.................. 40 Executive Vice President of Marketing Services
Ric Leutwyler ....................... 42 General Manager of Travel and Leisure Services Group
Peter Wragg ......................... 38 General Manager of Protection Services Group
Robert J. Stevenish ................. 58 General Manager of Retail Services Group
John W. Chidsey. Mr. Chidsey has been Non-Executive Chairman of
our Board of Directors since May 2001. Mr. Chidsey has served as Chief
Executive Officer of Cendant's Financial Services Division, including the
Individual Membership Segment, since January 2000. Mr. Chidsey was Chairman
and Chief Executive Officer of the Insurance/Wholesale Division of Cendant
from November 1998 until January 2000. From May 1998 to November 1998, Mr.
Chidsey was President and Chief Operating Officer of the Alliance Marketing
Division of Cendant. From December 1997 to May 1998, Mr. Chidsey was
Executive Vice President, Business Development of Cendant.
Scott W. Bernstein. Mr. Bernstein has been our President and Chief
Executive Officer since May 2001 and held those same positions for
Cendant's individual membership and loyalty businesses since October 2000.
Mr. Bernstein became President of the individual membership business and
Chief Executive Officer of the loyalty business in March 2000. He joined
Cendant Corporation in April 1999 as a Senior Vice President in the Direct
Marketing Division, where he was General Manager of all individual
membership programs, except shopping and travel, as well as being
responsible for new product development for that division. Prior to that,
from September 1996 to October 1998, Mr. Bernstein served as President,
Chief Executive Officer and Director of Discovery Zone, Inc., which he lead
through development and confirmation of a plan for reorganization following
its March 1996 bankruptcy filing and prior to its April 1999 bankruptcy
filing. Prior to that, from April 1992 through May 1996, Mr. Bernstein
served in various senior executive positions with Time Warner Inc. and Six
Flags Entertainment Corp, including Senior Vice President (Chief
Administrative Officer) of Six Flags, and President of Six Flags' Northeast
Operations.
Charles M. Fallon, Jr. Mr. Fallon has been our Executive Vice
President and Chief Operations Officer since May 2001 and held those same
positions for Cendant's individual membership business from March 2000 to
May 2001. Prior to joining Cendant, Mr. Fallon was a Director in Investment
Banking at Salomon Smith Barney.
Nathaniel J. Lipman. Mr. Lipman has been our Executive Vice
President of Business Development since May 2001 and joined the individual
membership division of Cendant in June 1999 as Senior Vice President,
Business Development and Strategic Planning. Mr. Lipman previously was with
Planet Hollywood International, Inc. where he was Senior Executive Vice
President, Corporate Development and Strategic Planning from 1995 until
June 1999. Prior to his tenure at Planet Hollywood, Inc., Mr. Lipman was
Senior Vice President and General Counsel of House of Blues Entertainment,
Inc.
Peter G. McGonagle. Mr. McGonagle has been our Executive Vice
President and General Counsel since May 2001 and held the same positions
with the individual membership division of Cendant since April 2000. Mr.
McGonagle joined the individual membership division of Cendant in 1996 as
Vice President, Legal, where he worked on various corporate transactional
matters in addition to general commercial matters. In 1998 he was promoted
to Senior Vice President of Cendant Corporation and General Counsel of
Cendant's Direct Marketing Division.
Michael P. Rauscher. Mr. Rauscher has been our Executive Vice
President of Marketing Services since May 2001, prior to which time he held
the title of Senior Vice President of Marketing Services for the individual
membership division of Cendant. Prior to that, Mr. Rauscher served as
President of Cendant's subsidiary, Benefits Consultants, Inc., as Cendant's
Senior Vice President of Inbound Marketing, Vice President of Partnership
Marketing and Business Development, and as Director of Marketing & Member
Communications. Mr. Rauscher joined the individual membership division of
Cendant in September 1988 as Product Manager, Travelers Advantage(R).
Ric Leutwyler. Mr. Leutwyler has been our General Manager of
Travel and Leisure Services Group since May 2001 and held the same position
with the individual membership division of Cendant since April 1999.
Previously, Mr. Leutwyler served as Senior Vice President for Cendant's
Reservation Services Division, Chief Executive Officer of Central Credit,
Inc., and President of RCI Travel, which serves the timeshare community.
Peter Wragg. Mr. Wragg has been our General Manager of Protection
Services Group since May 2001 and held the same position with the
individual membership division of Cendant since August 2000. Prior to that,
Mr. Wragg served as a Vice President in charge of our PrivacyGuard(R)
product. He joined the individual membership business in 1988 in New
Product Development and helped launch the Buyers Advantage program.
Robert J. Stevenish. Mr. Stevenish has been our General Manager of
Retail Services Group since May 2001 and joined Netmarket Group Inc. in
June 2000 as President and Chief Executive Officer. From January 2000 to
June 2000, Mr. Stevenish served as President and Chief Executive Officer of
RU4.com, an internet company. From June 1997 to January 2000, Mr. Stevenish
served as President and Chief Executive Officer of Fedco. From October 1995
to April 1997, Mr. Stevenish served as Senior Executive Vice President of
Montgomery Ward. Prior to that, he served as Executive Vice President,
Chief Operating Officer and Director of Hills Stores. Prior to Hills, he
spent 24 years in various senior executive positions with J.C. Penney,
including six as Director of Specialty Retailing in the Office of the
Chairman. Mr. Stevenish currently is a member of the board of directors of
One Price Clothing, Inc.
Annual Meeting
Our first annual meeting of stockholders after the distribution
is expected to be held in May 2002. The annual meeting will be held at our
principal office or at such other place and on such date as may be fixed
from time to time by resolution of our Board of Directors.
Committees of the Board of Directors
Our Board of Directors will establish committees, described
below, to assist in the discharge of its responsibilities.
Audit Committee
The audit committee will conduct its duties consistent with its
written charter, which will include a review of:
o our financial reports and other financial information;
o systems of internal controls regarding finance,
accounting, legal, compliance, and ethics; and
o auditing, accounting, and financial reporting processes.
The audit committee will annually recommend to the Board of
Directors the firm of independent public accountants to be selected as our
auditors. The audit committee will also consult with our independent
accountants, approve the scope of their audit and other work, and meet with
members of our management including our director of internal audit.
Compensation and Human Resources Committee
The compensation and human resources committee will conduct its
duties consistent with its written charter, which will include
responsibility for approving and monitoring executive compensation plans,
policies, and programs. The committee will review and establish the
compensation of and grants made to our officers, except for the chief
executive officer. The committee will recommend the salary and incentive
compensation for our chief executive officer, subject to the approval of
our board. The committee will review and advise our management, as
necessary, on succession planning and other significant human resource
matters. In addition, the committee will monitor the effectiveness and
funded status of any retirement plans we establish and our 401(k) plan, and
approve or review significant employee benefit plan actions.
Executive Committee
The executive committee will have the authority to act on behalf
of our full Board of Directors in the management and direction of our
business and affairs during the intervals between meetings of our Board of
Directors, subject to restrictions under Delaware law and the discretion of
our Board of Directors. The executive committee will also perform the
function of a nominating committee.
Special Committees
Our Board of Directors may from time to time establish special
committees to act on behalf of the Board of Directors on matters delegated
to it by the full board. This may include matters such as approval of final
terms of acquisitions and divestitures, alliances, and capital
expenditures.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation and human resources
committee will have served as an officer or an employee of our businesses
during the previous fiscal year, nor is any member expected to serve as one
of our officers or employees following the distribution.
Director Compensation
Our non-employee directors (as defined in Rule 16b-3(b)(3) of the
Exchange Act) will receive an annual retainer of $25,000, plus $3,000 for
chairing a committee and $2,000 for serving as a member of a committee
other than as Chairman. Non-employee directors will also be paid $1,000 for
each Board of Directors meeting attended and $500 ($1,000 for committee
chair) for each board committee meeting if held on the same day as a board
of directors meeting and $1,000 ($2,000 for committee chair) for each board
committee meeting attended on a day on which there is no board meeting.
Non-employee directors will be reimbursed for expenses incurred in
attending meetings of the Board of Directors and committees. Non-employee
directors may also receive grants of stock options in the future.
Executive Compensation
The compensation of our executive officers will be approved by the
compensation and human resources committee of our Board of Directors. Our
compensation and human resources committee will consist entirely of non-
employee directors. We expect that the compensation of executives and other
officers will consist principally of base salary, annual cash incentive,
and long-term equity incentive compensation.
Salaries of the executive officers will be based, among other
factors, on our compensation and human resources committee's assessment of
the executive's responsibilities, experience and performance, compensation
data of other companies, and the competitive environment for attracting and
retaining executives. However, current compensation for executive officers
will be subject to the terms of existing employment agreements with each
such executive officer. See "Employment Agreements."
Our equity-based awards will consist of stock options, which will
be granted from time to time under our 2001 Stock Option Plan. We
anticipate that our compensation and human resources committee will base
grants of stock-based awards on various factors, including the number of
shares of common stock outstanding, the number of shares of common stock
authorized under our 2001 Stock Option Plan, the executive officer's
ability to contribute to our future services, and the other elements of the
executive's compensation.
Summary Compensation Table
The following table sets forth the year 2000 cash and non-cash
compensation awarded to or earned by our chief executive officer and our
four other executive officers who, based on the salary and bonus
compensation received from Cendant and Cendant Membership Services, Inc.,
were the most highly compensated for the year ended December 31, 2000:
Long Term
Compensation Awards
--------------------------------------------------
Securities
Underlying Options
CD Common Stock/
Restricted Move.Com
Stock Awards Common Stock
Annual Compensation ($)(3) (#)(4)
- ----------------------------------------------------------------------------------------------------------------------
Name And Other Annual All Other
Principal Position Year Salary ($) Bonus ($)(1) Compensation ($)(2) Compensation ($)(5)
- ----------------------------------------------------------------------------------------------------------------------
Scott W. Bernstein
President and Chief Exec. Officer
Charles M. Fallon, Jr.
Exec. Vice Pres. and
Chief Operating Officer
Nathaniel J. Lipman
Exec. Vice Pres. of Business
Devel. & Strategic Marketing
Peter McGonagle
Exec. Vice Pres. and General
Counsel
Robert J. Stevenish (6)
Exec. Vice Pres. and General
Manager, Shopping Div.
- ----------------------------------------------------------------------------------------------------------------------
(1) For 2000, bonus amounts include fiscal year 2000 profit-sharing
bonuses paid in February 2001.
(2) The officers indicated received special one-time retention or
sign-on bonuses.
(3) In June 2000, the officers indicated were granted restricted
shares of Cendant common stock. The value per share as of the date
of grant was $12.25. Each of the restricted shares will become
vested, and the restrictions relating to transferability on such
shares will lapse, on March 31, 2002.
(4) Shows separately options for Cendant common stock and Move.com
common stock.
(5) Payments included in these amounts for the fiscal year ended
December 31, 2000 consist of (i) matching contributions to the
401(k) plan ("Defined Contribution Match"), (ii) insurance
premiums for life insurance coverage, (iii) executive medical
benefits and (iv) relocation assistance.
(6) Mr. Stevenish commenced employment on June 12, 2000.
The foregoing amounts were as follows:
Year Defined Contribution Life Insurance Executive Medical Relocation Total($)
Match($) Premium($) Benefits($) Assistance ($)
----------------------------------------------------------------------------------------------
Mr. Bernstein...... 2000
Mr. Fallon......... 2000
Mr. Lipman......... 2000
Mr. McGonagle...... 2000
Mr. Stevenish...... 2000
Option Grants In 2000
The following table summarizes option grants during the year 2000
made to the named executive officers. The table shows separately option
grants relating to Cendant common stock and Move.com common stock.
Individual Grants
% Of Total Common
Number Of Stock Options
Securities Granted To
Underlying Employees In Exercise
Options/SARs Fiscal Year Price Per Expiration Grant Date
Granted (1) (By Series) Share($) Date Present Value($)
--------------------------------------------------------------------------------------
CD Common Stock
- ---------------
Mr. Bernstein.................. (2)
Mr. Fallon.................... (2)
Mr. Lipman..................... (2)
Mr. McGonagle.................. (2)
Mr. Stevenish................. (2)
Move.Com Common Stock
- ---------------------
Mr. Bernstein.................. (3)
Mr. Fallon.................... (3)
Mr. Lipman..................... (3)
Mr. McGonagle.................. (3)
Mr. Stevenish.................
(1) The vesting of these options accelerates under certain
circumstances (including a change of control of Cendant).
(2) The values assigned to each reported option on this table are
computed using the Black-Scholes option pricing model. The
calculations assume a risk-free rate of return of 5.0%, which
represents the yield of United States Treasury Notes with a
duration on the option grant date approximating the expected life
of the option. The calculations for all option grant dates assume
a 55% volatility; however, there can be no assurance as to the
actual volatility of Cendant common stock in the future. The
calculations for all grant dates also assume no dividend payout
and a 4.7 year expected life. In assessing these option values, it
should be kept in mind that no matter what theoretical value is
placed on a stock option on the date of grant to a named executive
officer, its ultimate value will depend on the market value of
Cendant common stock at a future date.
(3) The values assigned to each reported option on this table are
computed using the Black-Scholes option pricing model. The
calculations assume a risk-free rate of return of 5.2%, which
represents the yield of United States Treasury Notes with a
duration on the option grant date approximating the expected life
of the option. The calculations for all option grant dates assume
no volatility because Move.com Common Stock is not publicly
traded. The calculations for all grant dates also assume no
dividend payout and a 8.5 year expected life. In assessing these
option values, it should be kept in mind that no matter what
theoretical value is placed on a stock option on the date of grant
to a named executive officer, its ultimate value will depend on
the market value of Move.com Common Stock at a future date.
Aggregated Option Exercises in 2000 and Year-End Option Values Table
The following table summarizes the exercise of options by the
named executive officers during the last fiscal year and the value of
unexercised options held by such executives as of the end of such fiscal
year. All shares acquired on exercise (and value realized) are pursuant to
exercises of Cendant common stock options. No named executive officer
exercised Move.com common stock options. The number of securities
underlying unexercised options in-the-money options (and the value of
unexercised in-the-money options) reflect the aggregate of Cendant common
stock options and Move.com common stock options.
Value Of
Number Of Securities Unexercised In The
Underlying Exercised Money Options/SARs
Shares Acquired Options/SARs At Fy-End ($)(1)
On Value At Fy-End (#) Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
- ------------------------------ ----------------- ------------- --------------------------- --------------------
Mr. Bernstein................
Mr. Fallon...................
Mr. Lipman...................
Mr. McGonagle................
Mr. Stevenish................
(1) Amounts shown reflect aggregate of Cendant common stock options and
Move.com common stock options. For options to purchase Cendant common
stock, amounts are based upon the closing price on the New York Stock
Exchange on December 29, 2000. For options to purchase Move.com common
stock, amounts are estimated based upon the closing price of
Homestore.com, Inc. common stock on December 29, 2000 ($20.125) and
the exchange rate which was applied upon the conversion of shares of
Move.com common stock into shares of Homestore.com, Inc. stock
(.7284). Based upon this valuation methodology, none of the named
executive officers have value shown in this column attributable to
options to purchase Move.com common stock.
Long-Term Incentive Plans-Awards in 2000
The following table summarizes the grants of long-term incentive
awards to certain of the named executive officers in the last fiscal year.
The awards are denominated in cash and payable at target amount subject to
the named executive officer's continued employment through the payout date.
Performance
or Other Estimated Future Payouts Under
Name Period Until Non-Stock Price-Based Plans
Maturation or -------------------------------------
Payout Target ($)
- ------------------------------------------------------------------------------
Mr. Bernstein......
Mr. Fallon.........
Mr. Lipman.........
Mr. McGonagle......
Mr. Stevenish......
2001 Stock Option Plan
We intend to adopt, subject to the approval of Cendant in its
capacity as our sole stockholder, a 2001 Stock Option Plan. The purpose of
the 2001 Stock Option Plan will be to secure for us and our stockholders
the benefits of the incentive inherent in common stock ownership by our
officers, key employees and non-employee directors, who will be largely
responsible for our future growth and continued financial success, and to
provide long-term incentives in addition to current compensation to certain
of our key executives who will contribute significantly to our long-term
performance and growth. Under the plan, our compensation committee may
grant options to acquire shares of our common stock to such employees and
non-employee directors and on such terms and conditions as it shall
determine.
We will reserve shares of the authorized but unissued shares of
our common stock for issuance under the option plan. As of the distribution
date, there will be approximately employees eligible to participate in the
option plan.
Employment Contracts and Similar Arrangements
Each of the named executive officers is employed by Cendant or its
individual membership division pursuant to a written agreement of
employment which will, in each case, be assumed by us, and become our
obligation, upon the distribution. In addition, each of the named executive
officers will become eligible for a transaction bonus upon the successful
consummation of the distribution, either pursuant to their respective
employment agreements or otherwise. Such transaction bonuses will otherwise
become payable upon the completion of certain other similar transactions.
The maximum transaction bonus for each named executive officer equal as
follows:
Mr. Bernstein $
Mr. Fallon $
Mr. Lipman $
Mr. McGonagle $
Mr. Stevenish $
Mr. Bernstein. Cendant entered into an employment
agreement with Mr. Bernstein effective as of April 1, 2000 and ending on
March 31, 2003, subject to earlier termination as provided therein. Mr.
Bernstein's agreement provides for a base salary of $ and an annual bonus
targeted at 50% of base salary. The agreement also provides for a long term
incentive and retention bonus equal to $ , which is subject to Mr.
Bernstein meeting certain requirements.
In the event that Mr. Bernstein's employment is terminated as a
Without Cause Termination or a Consecutive Discharge (each as defined in
the agreement), Mr. Bernstein will become eligible for a severance payment
ranging from $ to $ , depending on the effective date of termination,
and will receive accelerated vesting of 50% of any outstanding and unvested
Cendant options granted after the effective date of the agreement.
Messrs. Fallon, Lipman, McGonagle and Stevenish. Cendant's
individual membership division entered into employment agreements with each
of Messrs. Fallon, Lipman, McGonagle and Stevenish.
The executive agreements with Mr. Fallon and Mr. Lipman were
entered into effective October 25, 2000 and ending October 31, 2003, and
the executive agreements with Messrs. Stevenish and McGonagle were entered
into effective October 24, 2000 and ending October 31, 2002. Each executive
agreement is subject to earlier termination as provided therein.
The executive agreements with Mr. Fallon and Mr. Lipman provide
for a base salary of $ and annual incentive bonus targeted at 50% of base
salary. The executive agreements with Mr. Stevenish provides for a base
salary of $ and an annual incentive bonus targeted at 50% of base salary.
The executive agreement with Mr. McGonagle provides for a base salary of
$ and annual incentive bonus targeted at 50% of base salary.
Each of the executive agreements provides for a cash severance
payment and certain other protections in the event that any executive's
employment terminates as a Without Cause Termination or a Constructive
Discharge (each as defined in the executive agreements).
OWNERSHIP OF OUR COMMON STOCK
All of the outstanding shares of our common stock are, and will
be, prior to the distribution, held beneficially and of record by Cendant.
The following table sets forth information concerning shares of our common
stock projected to be beneficially owned immediately after the distribution
date by:
o each person or entity known by us to own more than 5% of
the outstanding shares of Cendant's common stock;
o each person who we currently know will be one of our
directors at the time of the distribution;
o each person who we currently know will be one of our
named executive officers at the time of the distribution;
and
o all persons who we currently know will be our directors
and executive officers at the time of the distribution as
a group.
The projected share amounts in the table below are based on the
number of shares of Cendant common stock owned by each person or entity at
March 15, 2001. Once a distribution ratio has been determined, the figures
will change to reflect the distribution ratio of one share of our common
stock for every shares of Cendant common stock. The percentage ownership of
our common stock of each person or entity named below immediately following
the distribution will be approximately the same as the percentage ownership
of that person or entity immediately prior to the distribution. To our
knowledge, except under applicable community property laws or as otherwise
indicated in the footnotes below, each person or entity has sole voting and
investment power with respect to the shares of common stock set forth
opposite such person's or entity's name.
Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with respect to
securities. Shares of common stock and options, warrants, and convertible
securities that are currently exercisable or convertible within 60 days
into shares of our common stock are deemed to be outstanding and to be
beneficially owned by the person holding the options or warrants for the
purpose of computing the percentage ownership of the person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
Directors and Executive Officers and Five Percent Holders
Of the Total
Number of Shares
Total Amount Beneficially Owned,
of Shares Percent of Shares Which May Be
Beneficially Common Stock Acquired Within 60
Name Owned(1) Owned(2) Days(3)
- --------------------------------------------- --------------- ----------------- ------------------------
Capital Research and
Management Company
333 South Hope Street
Los Angeles, CA 90071(4)................ ** 6.59% N/A
Liberty Media Corporation
9197 South Peoria Street
Englewood, CO 80112(5).................. ** 5.46% N/A
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116(6)....................
** 4.81% N/A
John W. Chidsey............................ ** *
Scott W. Bernstein......................... ** *
Charles M. Fallon, Jr...................... ** *
Nathaniel J. Lipman........................ ** *
Peter G. McGonagle......................... ** *
Michael P. Rauscher........................ ** *
All directors and executive officers as a
group, including those named above
(9 persons)................................ ** %
- -------------------------
* Indicates less than 1%
** The number of shares will be finalized upon the determination of the
distribution ratio.
(1) Shares beneficially owned includes direct and indirect ownership
of shares and stock options that are currently exercisable or
exercisable within 60 days. The amounts included in this column
represent the shares of our common stock that will be beneficially
owned by the listed person or entity based on a distribution ratio
of shares of our common stock to be received for every one share
of Cendant common stock held by such person or entity on March 15,
2001.
(2) Based on 844,658,429 shares of Cendant common stock outstanding on
March 15, 2001.
(3) Includes stock options that are currently exercisable plus stock
options that are exercisable within 60 days.
(4) Based upon the information contained in a Form 13G/A, dated
February 9, 2001, by Capital Research and Management Company, a
registered investment advisor, Capital Research and Management
Company beneficially owned 55,674,020 shares of Cendant's common
stock with sole power to vote none of such shares and sole power
to dispose all of such shares.
(5) Based upon the information contained in a Schedule 13D filed on
November 22, 2000 by Liberty Media Corporation. Liberty Media has
sole voting power and sole dispositive power for all of the
shares.
(6) Based upon the information contained in a Form 13G/A, dated
February 12, 2001, by Massachusetts Financial Services Company, a
registered investment adviser on behalf of itself and its other
mutual funds and institutional clients, such persons beneficially
owned 40,685,814 shares of Cendant's common stock with sole power
to vote 2,943,629 of such shares and sole power to dispose all of
such shares.
DESCRIPTION OF OUR CAPITAL STOCK
The following information reflects our certificate of
incorporation and bylaws as these document will be in effect at the time of
the distribution.
Our Authorized Capital Stock
Immediately after the distribution, our authorized capital stock
will consist of shares of common stock par value $.01 per share, and shares
of preferred stock, par value $.01 per share. Immediately after the
distribution, approximately shares of our common stock will be outstanding
based on the shares of Cendant common stock outstanding on , 2001 and
assuming no exercise of outstanding options. All of the shares to be
distributed to Cendant stockholders in the distribution will be fully paid
and non-assessable. We have reserved shares for issuance under our 2001
Stock Option Plan. No shares of preferred stock will be issued or
outstanding immediately after the distribution. However, shares of
preferred stock designated as Series A Junior Participating Preferred Stock
have been authorized and reserved for issuance in connection with the
rights agreement described below.
The following summary describes material provisions of our
certificate of incorporation and bylaws that will become effective
immediately prior to the distribution. You should read copies of these
documents, which will be filed as exhibits to the registration statement on
Form 10 that we have filed with the SEC. See "Where You Can Obtain
Additional Information."
Our Common Stock
The holders of our common stock will be entitled to one vote for
each share on all matters voted on by stockholders, including elections of
directors, and will possess all voting power, except as otherwise required
by law or provided in any resolution adopted by our Board of Directors with
respect to any series of our preferred stock. Our certificate of
incorporation will not provide for cumulative voting in the election of
directors. Accordingly, the holders of a majority of our shares voting for
the election of directors will be able to elect all of the directors, if
they choose to do so, subject to any rights of the holders of any preferred
stock to elect directors. Subject to any preferential or other rights of
any outstanding series of our preferred stock that may be established by
our Board of Directors, the holders of our common stock will be entitled to
such dividends as our Board of Directors may declare from time to time from
legally available funds and, upon our dissolution, will be entitled to
receive pro rata all of our assets available for distribution to
stockholders.
The holders of our common stock will have no preemptive rights.
The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in
the future.
Our Preferred Stock
Our certificate of incorporation will authorize our Board of
Directors to provide for the issuance of shares of our preferred stock in
one or more series, and to fix and determine, with respect to any series of
our preferred stock, the number of shares of such series and the voting
powers, designations, preferences, limitations, and restrictions of those
shares. The authority of our board with respect to any series of our
preferred stock will include the establishment of all voting powers,
preferences, designations, rights, qualifications, limitations, and
restrictions described in Delaware General Corporation Law.
We believe that the ability of our Board of Directors to issue
one or more series of our preferred stock will provide us with flexibility
in structuring possible future financings and acquisitions, and in meeting
other corporate needs that might arise. The authorized shares of our
preferred stock, as well as shares of our common stock, will be available
for issuance without further action by our stockholders, unless action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded. The New
York Stock Exchange currently requires stockholder approval as a
prerequisite to listing shares in several instances, including where the
present or potential issuance of shares could result in an increase in the
number of outstanding shares of common stock, or in the amount of
outstanding voting securities, of at least 20%. If the approval of our
stockholders is not required for the issuance of shares of our preferred
stock or our common stock, our board may determine not to seek stockholder
approval.
Although our Board of Directors has no intention at the present
time of doing so, it could issue a series of our preferred stock that
could, depending on the terms of such series, impede the completion of a
merger, tender offer, or other takeover attempt. Our Board of Directors
will make any determination to issue such shares based on its judgment as
to the best interests of us and our stockholders. Our Board of Directors,
in so acting, could issue our preferred stock with terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of our Board of Directors, including a tender offer
or other transaction that some, or a majority, of our stockholders might
believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then current market price of
such stock.
Anti-Takeover Effects of Provisions of Our Certificate
of Incorporation and Bylaws
Board of Directors
Before the distribution, our certificate of incorporation and
bylaws will divide our Board of Directors into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of
our Board of Directors will be elected each year. One class of our
directors will initially serve a one-year term, a second class of our
directors will initially serve a two-year term, and the third class will
initially serve a three-year term. Beginning in 2002, one class of
directors will be elected each year for a three-year term.
Our staggered Board of Directors could prevent a party who
acquires control of a majority of our outstanding voting stock from
obtaining control of our Board of Directors until the second annual
stockholders meeting following the date on which the acquirer obtains the
controlling stock interest. This result could have the effect of
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
Number of Directors; Removal; Filling Vacancies
Our certificate of incorporation and bylaws will provide that the
number of directors will be fixed by resolution of our Board of Directors,
from time to time. If the number of directors is increased or decreased,
the increase or decrease will be apportioned among the classes so as to
maintain, as nearly as possible, an equal number of directors in each
class, provided, however, that no decrease in the number of directors in a
class will shorten the term of an incumbent director. Any additional
director elected to fill a vacancy resulting from an increase in the size
of our board will hold office for a term that coincides with the remaining
term of the class to which such director is elected, unless otherwise
required by law. Our certificate of incorporation will provide that members
of our Board of Directors may be removed only for cause upon the
affirmative vote of holders of at least two-thirds of the shares of our
capital stock entitled to vote.
Our certificate of incorporation and bylaws will provide that any
vacancy on our board that results from an increase in the number of
directors, or from the death, resignation, retirement, disqualification, or
removal from office of any director, will be filled by a majority of the
remaining members of our board, though less than a quorum, or by the sole
remaining director. Any director elected to fill a vacancy resulting from
the death, resignation, retirement, disqualification, or removal from
office of a director will have the same remaining term as his or her
predecessor. Accordingly, our board could temporarily prevent any
stockholder from enlarging our board and filling the new directorships with
that stockholder's own nominees.
No Stockholder Action By Written Consent; Special Meetings
Our certificate of incorporation and by-laws provide that any
action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of such stockholders
and may not be effected by any consent in writing by such stockholders.
Except as otherwise required by law and subject to the rights of the
holders of any of our preferred stock, special meetings of our stockholders
for any purpose or purposes may be called only by our Chairman of the
Board, our Chief Executive Officer, or, if none, our President or by our
Board of Directors. Any power of stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice shall
be transacted at any special meeting. These provisions may have the effect
of delaying consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by our board or the chairman of
the board.
Advance Notice Procedures
Our by-laws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors or to bring
other business before an annual meeting of our stockholders. Our
stockholder notice procedure provides that only persons who are nominated
by, or at the direction of, our chairman of the board, or by a stockholder
who has given timely written notice to our secretary prior to the meeting
at which directors are to be elected, will be eligible for election as our
directors. Our stockholder notice procedure also provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, our chairman of the board or our board,
or by a stockholder who has given timely written notice to our secretary of
such stockholder's intention to bring such business before such meeting.
Under our stockholder notice procedure, for notice of stockholder
nominations to be made at an annual meeting to be timely, such notice must
be received by our secretary not later than the close of business on the
60th calendar day nor earlier than the close of business on the 90th
calendar day prior to the first anniversary of the preceding year's annual
meeting, except that, in the event that the date of the annual meeting is
more than 30 calendar days before or after such anniversary date, notice by
the stockholder to be timely must be so delivered not later than the close
of business on the 10th calendar day following the earlier of the day on
which such notice of the date of the annual meeting was mailed and the day
on which public announcement of a meeting date is first made by us.
Under our stockholder notice procedure, for notice of a
stockholder nomination to be made at a special meeting at which directors
are to be elected to be timely, such notice must be received by us not
later than the close of business on the 10th calendar day following the
earlier of the day on which notice of the special meeting was mailed and
the day on which public announcement of the date of the special meeting is
first made by us.
In addition, under our stockholder notice procedure, a
stockholder's notice to us proposing to nominate a person for election as a
director or relating to the conduct of business other than the nomination
of directors must contain the information required by our certificate of
incorporation. If the chairman of a meeting determines that an individual
was not nominated, or other business was not brought before the meeting, in
accordance with our stockholder notice procedure, such individual will not
be eligible for election as a director, or such business will not be
conducted at such meeting, as the case may be.
Other Constituencies
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of our company,
our board, committees of our board and individual directors, in addition to
considering the effects of any action on our company or its stockholders,
will be authorized under a provision of our certificate of incorporation to
consider the interests of our employees, customers, suppliers, and
creditors and the employees, customers, suppliers, and creditors of our
subsidiaries, the communities in which our offices or other establishments
are located, and all other factors the directors consider pertinent. This
provision will permit our board to consider numerous judgmental or
subjective factors affecting a proposal for a business combination,
including some non-financial matters, and on the basis of these
considerations, our board will be permitted to oppose a business
combination or other transaction which, viewed exclusively from a financial
perspective, might be attractive to some, or even a majority, of our
stockholders.
Amendment of Our Certificate of Incorporation and Bylaws
Our certificate of incorporation will require the affirmative
vote of the holders of not less than 80% of the votes entitled to be cast
by the holders of all then outstanding shares of voting stock, voting
together as a single class, to make, alter, amend, change, add to, or
repeal any provision of, our certificate of incorporation or bylaws where
such creation, alteration, amendment, change, addition, or repeal would be
inconsistent with the provisions of our certificate relating to:
o the number of members of our board;
o the classification of our board into classes of directors
with staggered terms;
o the filling of vacancies on our board;
o the right to call a special stockholders' meeting; or
o the right of stockholders' to act by written consent.
Our certificate further provides that the related by-laws
described above, including the stockholder notice procedure, may be amended
only by our board or by the affirmative vote of the holders of at least 80%
of the voting power of the outstanding shares of voting stock, voting
together as a single class.
Rights Agreement
On , 2001, our Board of Directors authorized an issuance of one
right for each share of our common stock. The distribution to stockholders
of record shall be effective as of the close of business on , 2001. The
following summary description of the rights plan does not purport to be
complete and is qualified in its entirety by reference to the rights
agreement between us and , a copy of which is filed as an exhibit to the
registration statement of which this information statement is a part and is
incorporated herein by reference.
Each right entitles the holder to purchase 1/1000th of a share of
a new series of our preferred stock designated as Series A Junior
Participating Preferred Stock at an exercise price of $ . Rights will only
be exercisable (under certain circumstances specified in the rights
agreement) when there has been a distribution of the rights (and such
rights are no longer redeemable by us). A distribution of the rights would
occur upon the earlier of: (i) 10 business days (or such later date as our
board of directors may determine) following a public announcement that any
person or group has acquired beneficial ownership of 10% or more of the
outstanding shares of our common stock, other than as a result of
repurchases of stock by us or through inadvertence by certain institutional
stockholders or (ii) 10 business days (or such later date as our board of
directors may determine) following the commencement of a tender offer or
exchange offer that would result in any person or group acquiring
beneficial ownership of 10% or more of the outstanding shares of our common
stock.
The rights will expire at 5:00 P.M. (New York City time) on ,
2011, unless such date is extended or the rights are earlier redeemed or
exchanged by us.
If any person or group acquires 10% or more of our outstanding
common stock, the "flip-in" provision of the rights agreement will be
triggered and the rights will entitle a holder (other than such person or
any member of such group, as such rights will be null and void) to acquire
a number of additional shares of our common stock having a market value of
twice the exercise price of each right. In the event we are involved in a
merger or other business combination transaction, each right will entitle
its holder to purchase, at the right's then-current exercise price, a
number of shares of the acquiring company's common stock having a market
value at that time of twice the rights' exercise price.
Up to and including the tenth business day following a public
announcement that a person or group of affiliated or associated persons has
acquired beneficial ownership of 10% or more of our outstanding shares of
common stock, other than as a result of repurchases of stock by us, we may
redeem the rights in whole, but not in part, at a price of $.001 per right
(payable in cash, common stock or other consideration that we deemed
appropriate). Promptly upon our election to redeem the rights, the rights
will terminate and the only right of the holders of rights will be to
receive the $.001 redemption price.
At any time after any person or group acquires 10% or more of our
outstanding common stock, and prior to the acquisition by such person or
group of fifty percent (50%) or more of our outstanding common stock, our
board of directors may exchange the rights (other than rights owned by such
person or group which have become void), in whole or in part, for our
common stock at an exchange ratio of one share of our common stock, for
1/1000th of a share of our Series A junior participating preferred stock
(or of a share of a class or series of our preferred stock having
equivalent rights, preferences and privileges), per right (subject to
adjustment).
Until a right is exercised, the holder thereof, as such, will have
no rights as a stockholder of our company, including, without limitation,
no right to vote or to receive dividends. While the distribution of the
rights will not be taxable to stockholders or to us, stockholders may,
depending upon the circumstances, recognize taxable income in the event
that the rights become exercisable for our common stock (or other
consideration) or for common stock of the acquiring company or in the event
of the redemption of the rights as set forth above.
Any of the provisions of the rights agreement may be amended by
our board of directors prior to the distribution of the rights. After such
distribution, the provisions of the rights agreement may be amended by our
board of directors in order to cure any ambiguity, to make changes which do
not adversely affect the interests of holders of rights or to shorten or
lengthen any time period under the rights agreement. The foregoing
notwithstanding, no amendment may be made at such time as the rights are
not redeemable.
The existence of the rights agreement and the rights is intended
to deter coercive or partial offers which will not provide fair value to
all stockholders and to enhance our ability to represent all of our
stockholders and thereby maximize stockholder value.
Anti-Takeover Legislation--Delaware Law
We are subject to Section 203 of the Delaware General Corporation
Law. Section 203 provides that, subject to certain exceptions, a
corporation shall not engage in any business combination with any
"interested stockholder" for a three-year period following the time that
such stockholder becomes an interested stockholder unless:
o prior to such time, the Board of Directors of the
corporation approved either the business combination or
the transaction which resulted in the stockholder
becoming an interested stockholder;
o upon consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares); or
o at or subsequent to such time, the business combination
is approved by the Board of Directors of the corporation
and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the
interested stockholder.
Except as specified in Section 203, an interested stockholder is
generally defined as:
o any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of
the corporation, at any time within the three-year period
immediately prior to the relevant date; and
o the affiliates and associates of any such person.
Section 203 may make it more difficult for a person who would be
an "interested stockholder" to effect various business combinations with a
corporation for a three-year period. We have not elected to be exempt from
the restrictions imposed under Section 203. The provisions of Section 203
may encourage persons interested in acquiring us to negotiate in advance
with our board, since the stockholder approval requirement would be avoided
if a majority of the directors then in office approves either the business
combination or the transaction which results in any such person becoming an
interested stockholder. Such provisions also may have the effect of
preventing changes in our management. It is possible that such provisions
could make it more difficult to accomplish transactions which our
stockholders may otherwise deem to be in their best interests.
Transfer Agent and Registrar
Mellon Investor Services, LLP will be the transfer agent and
registrar for our common stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws will require us to indemnify and hold harmless any
director or officer who was or is a party or is threatened to be made a
party, to any threatened, pending, or completed action, suit or proceeding
whether civil, criminal, administrative or investigative, including any
action or suit by or in the right of our company, because the person is or
was our director or officer against liability incurred in such proceeding.
Our bylaws will generally prohibit us from indemnifying any officer or
director who is adjudged liable to us or is subjected to injunctive relief
in favor of us for:
o any appropriation, in violation of the director's or
officer's duties, of any business opportunity;
o acts or omissions that involve intentional misconduct or
a knowing violation of law;
o unlawful corporate distributions; or
o any transactions from which the director derived an
improper personal benefit.
We intend to purchase and maintain insurance on behalf of our
officers and directors against liability asserted against or incurred by
these persons in their capacity as an officer or director, or arising out
of their status as an officer or director, regardless of whether we would
have the power to indemnify or advance expenses to these persons against
these liabilities under our bylaws or the Delaware General Corporation Law.
Our certificate of incorporation will eliminate the liability of
our directors to us or our stockholders for monetary damages for any action
taken, or any failure to take action, as a director to the extent permitted
under the Delaware General Corporation Law.
If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, the liability of our directors will be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as
amended, without further action by the stockholders. These provisions in
our certificate of incorporation may limit the remedies available to a
stockholder in the event of breaches of any director's duties.
The distribution agreement will provide for indemnification by us
of Cendant and its directors, officers, and employees for some liabilities,
including liabilities under the Securities Act.
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the
Exchange Act with respect to the shares of our common stock and the
associated rights being issued in the distribution. This information
statement does not contain all of the information set forth in the
registration statement and the exhibits thereto, to which reference is
hereby made. With respect to each contract, agreement, or other document
filed as an exhibit to the registration statement, reference is made to
such exhibit for a more complete description of the matter involved. The
registration statement and the exhibits thereto filed by us with the SEC
may be inspected at the public reference facilities of the SEC listed
below.
After the distribution, we will be subject to the informational
requirements of the Exchange Act, and in accordance therewith will file
reports, proxy statements, and other information with the SEC. Such
reports, proxy statements, and other information can be inspected and
copied at the public reference facilities at its principal offices at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
Regional Offices of the SEC maintained by the SEC at Seven World Trade
Center, Thirteenth Floor, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
information may be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a World Wide Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants that file electronically with the SEC.
After the distribution, our shares will be listed on the New York
Stock Exchange. When our shares commence trading on the New York Stock
Exchange, such reports, proxy statements, and other information will be
available for inspection at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
We intend to furnish holders of our common stock with annual
reports containing combined financial statements audited by independent
accountants, beginning with the fiscal year ending December 31, 2001.
No person is authorized to give any information or to make any
representations other than those contained in this information statement,
and, if given or made, such information or representations must not be
relied upon as having been authorized. Neither the delivery of this
information statement nor any distribution of securities made hereunder
will imply that there has been no change in the information set forth
herein or in our affairs since the date hereof.
INDEX TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Page
Independent Auditors' Report F-2
Combined Balance Sheets as of March 31, 2001 (Unaudited)
and as of December 31, 2000 and 1999 F-3
Statements of Combined Operations for the Three Months
Ended March 31, 2001 and 2000 (Unaudited) and for the
Years Ended December 31, 2000, 1999 and 1998 F-4
Statements of Combined Cash Flows for the Three Months
Ended March 31, 2001 and 2000 (Unaudited) and for the
Years Ended December 31, 2000, 1999 and 1998 F-5
Statements of Changes in Combined Deficit for the Three
Months Ended March 31, 2001 (Unaudited) and for the
Years Ended December 31, 2000, 1999 and 1998 F-7
Notes to Combined Financial Statements F-8
Financial Statement Schedule - Valuation and Qualifying Accounts
For the Years Ended December 31, 2000, 1999 and 1998 S-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cendant Membership Services:
We have audited the accompanying combined balance sheets of Cendant
Membership Services (the "Company") as of December 31, 2000 and 1999, and
the related statements of combined operations, combined cash flows and
changes in combined deficit for each of the three years in the period ended
December 31, 2000. Our audits also included the financial statement
schedule listed in the index to combined financial statements. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic combined financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The Company is an integrated business unit of Cendant Corporation;
consequently, as indicated in Note 1 to the combined financial statements,
these financial statements reflect portions of certain income and expense
allocations made from or to Cendant. Furthermore, the accompanying combined
financial statements have been prepared from the separate records
maintained by the Company and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the
Company had been operated as an unaffiliated entity.
/s/ DELOITTE & TOUCHE LLP
Stamford, Connecticut
May 24, 2001
F-2
CENDANT MEMBERSHIP SERVICES
COMBINED BALANCE SHEETS
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,263 $ 8,638 $ 13,907
Accounts receivable - net of allowances of $940, $841
and $490, respectively 32,323 29,031 51,843
Prepaid commissions 231,315 220,315 217,240
Other current assets 26,597 26,617 17,714
Deferred income taxes 96,785 96,785 141,381
--------- ---------- ----------
Total current assets 396,283 381,386 442,085
PROPERTY AND EQUIPMENT - Net 79,736 76,706 69,899
DEFERRED INCOME TAXES 59,067 59,067 49,998
GOODWILL AND INTANGIBLES - Net 168,195 170,412 174,469
INVESTMENTS 25,907 25,508 24,621
--------- ---------- ----------
TOTAL ASSETS $ 729,188 $ 713,079 $ 761,072
========= ========== ==========
LIABILITIES AND COMBINED DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 52,274 $ 65,121 $ 47,679
Accrued expenses 63,781 85,299 63,236
Deferred revenue 689,073 700,909 793,809
Current portion of long-term debt 9,701 9,724 9,256
--------- ---------- ----------
Total current liabilities 814,829 861,053 913,980
DEFERRED REVENUE 13,390 21,113 31,010
LONG-TERM DEBT 117,877 118,361 26,945
COMMITMENTS AND CONTINGENCIES (Note 10)
COMBINED DEFICIT (216,908) (287,448) (210,863)
--------- ---------- ----------
TOTAL LIABILITIES AND COMBINED DEFICIT $ 729,188 $ 713,079 $ 761,072
========= ========== ==========
See notes to combined financial statements.
F-3
CENDANT MEMBERSHIP SERVICES
STATEMENTS OF COMBINED OPERATIONS
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Years Ended December 31,
2001 2000 2000 1999 1998
(Unaudited)
REVENUES:
Membership $190,375 $185,459 $747,649 $759,492 $ 688,873
Merchandise and other 4,537 8,953 27,814 32,282 30,727
---------- --------- --------- -------- ---------
Total revenues 194,912 194,412 775,463 791,774 719,600
---------- --------- --------- -------- ---------
EXPENSES:
Operating 51,110 48,613 198,704 249,769 267,546
Marketing 42,605 31,500 153,705 186,929 352,095
Commissions 48,552 44,416 180,109 162,764 135,220
General and administrative 12,170 13,740 65,837 51,834 40,225
Intercompany
royalty expense 14,080 14,242 56,716 55,852 52,334
Depreciation and amortization 6,746 5,531 23,946 22,723 19,713
Special charges 1,909 18,052 25,975 89,750 -
---------- --------- --------- -------- ---------
Total expenses 177,172 176,094 704,992 819,621 867,133
---------- --------- --------- -------- ---------
OPERATING INCOME
(LOSS) 17,740 18,318 70,471 (27,847) (147,533)
INTEREST EXPENSE - Net 2,517 2,929 10,747 11,907 12,082
---------- --------- --------- -------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 15,223 15,389 59,724 (39,754) (159,615)
PROVISION FOR (BENEFIT
FROM) INCOME TAXES 6,013 6,101 23,679 (12,660) (60,497)
---------- --------- --------- -------- ---------
NET INCOME (LOSS) $ 9,210 $ 9,288 $ 36,045 $(27,094) $ (99,118)
========== ========= ========= ======== ==========
See notes to combined financial statements.
F-4
CENDANT MEMBERSHIP SERVICES
STATEMENTS OF COMBINED CASH FLOWS
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Years Ended December 31,
2001 2000 2000 1999 1998
(Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 9,210 $ 9,288 $ 36,045 $(27,094) $(99,118)
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Amortization of goodwill and
intangibles 2,216 2,143 8,764 9,248 8,312
Depreciation and amortization of
property and equipment 4,530 3,388 15,182 13,475 11,401
Deferred income taxes - - 31,778 (12,600) 60,296
Non-cash portion of special charges 1,040 7,200 17,945 - -
Other (281) 371 (636) 3,015 (1,972)
Net change in assets and liabilities
from operations (excluding effects
of acquisitions and disposition):
Accounts receivable (3,391) 15,010 13,016 (36,129) 2,671
Prepaid commissions (11,001) 4,332 6,563 11,489 (33,252)
Other current assets 21 (2,779) (7,539) 11,995 (12,256)
Accounts payable and accrued
expenses (34,556) (10,377) 15,427 (7,356) (22,674)
Deferred revenue (19,559) (42,383) (131,610) (64,352) 68,964
--------- --------- --------- --------- --------
Net cash (used in) provided by
operating activities (51,771) (13,807) 4,935 (98,309) (17,628)
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (8,408) (8,899) (30,891) (21,049) (29,877)
Proceeds from sale of property and
equipment - - 5,542 - -
Acquisition of businesses, net of cash
acquired - - 37,400 (4,937) (115,951)
--------- --------- --------- --------- --------
Net cash (used in) provided by
investing activities (8,408) (8,899) 12,051 (25,986) (145,828)
--------- --------- --------- --------- --------
(Continued)
F-5
CENDANT MEMBERSHIP SERVICES
STATEMENTS OF COMBINED CASH FLOWS
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Years Ended December 31,
2001 2000 2000 1999 1998
(Unaudited)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on long-term
borrowing $ (23) $ (20) $ (82) $ (81) $ (81)
Payments on capital leases (503) (162) (2,052) (2,030) (1,319)
Principal payments on acquisition note
payable - - (7,491) (7,124) (6,392)
Funding from (to) Cendant Corporation 61,330 21,260 (12,630) 117,548 183,421
--------- --------- --------- --------- --------
Net cash provided by (used in)
financing activities 60,804 21,078 (22,255) 108,313 175,629
--------- --------- --------- --------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 625 (1,628) (5,269) (15,982) 12,173
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,638 13,907 13,907 29,889 17,716
--------- --------- --------- --------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 9,263 $ 12,279 $ 8,638 $ 13,907 $ 29,889
========== ========= ========= ========= ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 2,548 $ 2,568 $ 12,288 $ 12,669 $ 13,371
========== ========= ========= ========= ========
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of funding from
Cendant to note payable $ - $ - $100,000 $ - $ -
========== ========= ========= ========= ========
Computer equipment acquired under
capital leases $ - $ 310 $ 1,509 $ 2,975 $ 3,854
========== ========= ========= ========= ========
(Concluded)
See notes to combined financial statements.
F-6
CENDANT MEMBERSHIP SERVICES
STATEMENTS OF CHANGES IN COMBINED DEFICIT
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
Funding
(To) From Total
Accumulated Cendant Combined
Net Losses Corporation Deficit
BALANCE, JANUARY 1, 1998 $(299,928) $(112,200) $(412,128)
Net loss (99,118) - (99,118)
Funding from Cendant Corporation - 183,421 183,421
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 (399,046) 71,221 (327,825)
Net loss (27,094) - (27,094)
Funding from Cendant Corporation - 144,056 144,056
----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 (426,140) 215,277 (210,863)
Net income 36,045 - 36,045
Funding to Cendant Corporation - (112,630) (112,630)
----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 (390,095) 102,647 (287,448)
Net income (Unaudited) 9,210 - 9,210
Funding from Cendant Corporation (Unaudited) - 61,330 61,330
----------- ----------- -----------
BALANCE, MARCH 31, 2001 (Unaudited) $(380,885) $ 163,977 $(216,908)
=========== =========== ===========
See notes to combined financial statements.
F-7
CENDANT MEMBERSHIP SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Unless Otherwise Noted)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Cendant Membership Services (the "Company") is a combined reporting
entity comprised of all assets, liabilities and transactions used in
managing and operating the individual membership and loyalty
businesses of Cendant Corporation ("Cendant"). On October 25, 2000,
Cendant committed to a plan to spin-off the Company to Cendant
stockholders.
All entities included in the combined financial statements are
indirect wholly owned subsidiaries of Cendant. The Company is a
membership-based, consumer services company, providing its members
with access to a variety of discounted products and services in such
areas as shopping, travel, privacy protection, credit card
registration, auto, home improvement and loyalty programs. The
Company markets its products and services through marketing partners
such as leading financial institutions, retailers, oil companies, and
online networks. The Company has two operating segments that have
been aggregated into one reportable operating segment as the
products, services, customer base and economics have similar
characteristics.
The accompanying combined financial statements have been prepared
from the separate records maintained by the Company and may not
necessarily be indicative of the conditions that would have existed
or the results of operations if the Company had been operated as an
unaffiliated entity. All intra-company balances have been eliminated.
Portions of certain income and expenses represent allocations made
from or to Cendant (Note 13). Management believes the basis of these
allocations is reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - In presenting the combined financial statements,
management makes estimates and assumptions that affect reported
amounts and related disclosures. Estimates, by their nature, are
based on judgment and available information. As such, actual results
could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with original maturities of three months or
less to be cash equivalents.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist of
accounts receivable and commission advances. Accounts receivable are
from various marketing and business partners and are generally not at
risk for collection. The Company maintains an allowance for losses,
based upon the expected collectibility of accounts receivable.
Commission advances are periodically evaluated as to recovery.
Fair Value of Financial Instruments - The Company determines the fair
value of its financial instruments as follows:
Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable - Carrying amounts approximate fair value due to the
short-term maturities of these instruments.
Investments - Carrying amounts approximate fair value, which
was based on quoted market prices or other available market
information.
F-8
Long-term Debt - Based upon available information for debt
having similar terms and risks, the aggregate fair value of
debt outstanding was $126,127 and $35,040 at December 31, 2000
and 1999, respectively.
Investments - Investments in debt securities are classified as
held-to-maturity and are recorded at cost. Investments are classified
as long-term assets due to their restrictive nature for business and
acquisition requirements.
Property and Equipment - Property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful
lives of the related assets. Amortization of leasehold improvements
and computer equipment under capital leases is computed using the
straight-line method over the estimated benefit period of the related
assets or the lease term, if shorter.
Goodwill and Intangibles - Goodwill, which represents the excess of
cost over fair value of net assets acquired, is amortized on a
straight-line basis over the estimated periods to be benefited,
ranging from 5 to 40 years. Other intangibles represent the fair
value of acquired client lists and are amortized on a straight-line
basis over the estimated periods to be benefited, ranging from 3 to
10 years.
Impairment of Assets - The Company periodically evaluates the
recoverability of its long-lived assets, identifiable intangibles and
goodwill, comparing the respective carrying values to the current and
expected future cash flows, on an undiscounted basis, to be generated
from such assets.
Revenue Recognition - The Company's primary revenue source is the
sale of memberships for a number of Company operated programs. The
Company recognizes revenue based upon the term of the membership and
the refund type or method.
Membership terms are generally one year, although some memberships
provide two or three year terms. Other memberships are provided on a
monthly basis. New members are generally given a free trial period of
one to three months. Members are generally entitled to unlimited use
of the membership service during the membership period. In most
instances, the member is billed through a credit or debit card.
The majority of memberships are cancelable for a full refund of the
membership fee during the membership period. However, some
memberships are offered under a pro rata refund policy in which the
amount of the refund declines over the membership term. The Company's
policy is to recognize membership revenue when it is earned and is no
longer subject to refund. Accordingly, revenue for full money back
memberships is not recognized until the end of the membership term.
Membership fees subject to a prorated refund are recognized ratably
over the membership term.
The Company also provides membership services on a wholesale basis to
certain financial institutions that market such services directly to
their customers or provide such services as an enhancement to their
other products. Wholesale revenue is generally earned monthly based
upon the number of wholesale members active during the month.
Wholesale membership revenue is recognized when earned.
In connection with the Company's shopping product, the Company
operates a retail merchandising service that offers a variety of
consumer products at a discount to members. The Company processes
customer orders and billings, while merchandise shipments are made
directly to the customer by third party vendors. Because the Company
acts as an agent between members and third party vendors in these
transactions, the Company records only the net margin on the
merchandising product sales. Revenue is recorded when the vendor
ships the underlying product.
F-9
Other revenue sources include fees received for advertising and other
services. All revenue is deferred until it is both earned and
realizable in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements".
All deferred membership revenue is classified as current. Long-term
deferred revenue includes other service income to be earned beyond
one year.
Major Customers - Membership service programs sponsored by the
Company's two largest marketing partners accounted for 15% and 14%,
respectively, of revenues for the year ended December 31, 2000.
Membership service programs sponsored by the Company's largest
marketing partner accounted for 22% and 17% of revenues for the years
ended December 31, 1999 and 1998, respectively. No other marketing
partner accounted for more than 10% of revenues for the years ended
December 31, 2000, 1999 and 1998.
Prepaid Commissions and Other Current Assets - Marketing partners
generally receive commissions on initial and renewal memberships,
based on a percentage of the net membership fees. The Company also
incurs service fees for billings processed through credit card
interchange services. Commissions and service fees are refundable to
the Company if a member cancels their membership and receives a
refund. These deferred costs are expensed when the membership revenue
associated with the commission and service fee is recognized and are
no longer refundable to the Company.
Other assets include membership fulfillment information packages and
promotional premiums, which are expensed when distributed. The
Company amortizes computer software license agreements over the
license periods.
Marketing Expenses - The Company markets memberships, primarily using
direct marketing techniques, to the customers of its marketing
partners. The Company generally pays all of the marketing costs to
solicit prospective members. All marketing costs, including
membership solicitation expenses, are expensed as incurred.
Internally Developed Software - The Company accounts for its
internally developed software in accordance with Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires all costs related to the development of internal use
software other than those incurred during the application development
stage to be expensed as incurred. Costs incurred during the
application development stage have been capitalized and are being
amortized over the estimated useful life of the software.
Income Taxes - The Company's operations are included in the
consolidated federal income tax return of Cendant. In addition, the
Company files consolidated and combined state income tax returns with
Cendant in jurisdictions where required. The provision for income
taxes is computed as if the Company filed its federal and state
income tax returns on a stand-alone basis. Pre-tax income is
generated from domestic sources.
Earnings per Share - Earnings per share for the Company is not
presented because it is not currently an independent public company,
and as a result, the presentation of earnings per share is not
applicable. After the distribution of the Company stock to Cendant
stockholders, earnings per share will be presented. Basic earnings
per share will be computed by dividing net earnings by the weighted
average number of shares outstanding during the reporting period. As
the Company expects to issue options to its employees who currently
have Cendant CD common stock options, the Company will compute
diluted earnings per share similar to basic earnings per share except
that the weighted average number of shares outstanding will be
increased to include additional shares from the assumed exercise of
stock
F-10
options, if dilutive. The number of additional shares will be
calculated by assuming that outstanding stock options were exercised
and that the proceeds from such exercises were used to acquire shares
of common stock at the average market price during the reporting
period.
Interim Financial Statements - The financial information as of March
31, 2001 and for the three months ended March 31, 2001 and 2000 is
unaudited but includes all adjustments that management considers
necessary for a fair presentation of combined financial position,
combined results of operations, combined cash flows and changes in
combined deficit. Results for the three months ended March 31, 2001
are not necessarily indicative of results to be expected for the full
fiscal year 2001 or for any future period.
Recently Issued Accounting Pronouncements - In June 2000, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All
derivatives, whether designated as hedging relationships or not, will
be required to be recorded on the balance sheet at fair value. The
Company adopted SFAS No. 133 on January 1, 2001, as required. As the
Company has no derivative instruments, the adoption of this standard
had no impact on the Company's financial position, results of
operations or cash flows.
3. COMBINED DEFICIT
Combined deficit represents the net amount of all funding received
from or provided to Cendant and the accumulated net losses of the
Company.
4. BUSINESS ACQUISITIONS AND DISPOSITION
On April 10, 1998, the Company acquired Credentials Services, Inc.
("Credentials") for $122,745. The acquisition was accounted for using
the purchase method of accounting. Accordingly, assets acquired of
$56,559 and liabilities assumed of $91,496 were recorded at their
fair values. Assets acquired included cash of $1,857. The excess of
purchase price over the fair value of the underlying net assets
acquired and liabilities assumed was allocated to goodwill in the
amount of $157,682. The operations of Credentials are included in the
accompanying combined financial statements since the acquisition
date.
On September 15, 1999 (the "donation date"), the Company donated the
outstanding common stock of its wholly owned subsidiary, Netmarket
Group Inc. ("NGI"), to an independent charitable trust (the "Trust").
The fair market value of the NGI common stock on the donation date
was approximately $20,000. Accordingly, NGI's operating results were
no longer included in the Company's combined financial statements
from the donation date forward. The Company retained an ownership
interest in the convertible preferred stock of NGI, such conversion
was subject to certain conditions. On October 1, 2000 ("acquisition
date"), the Company exercised its option to convert the NGI preferred
interest into common shares and purchased the remaining common shares
from the Trust for $1,500. The acquisition was accounted for using
the purchase method of accounting. Accordingly, assets acquired of
$63,529 and liabilities assumed of $66,736 were recorded at their
fair values. Assets acquired included cash of $38,900. The excess of
purchase price over the fair value of the underlying net assets
acquired and liabilities assumed was $4,707. The operations of NGI
are included in the accompanying combined financial statements since
the acquisition date.
F-11
Unaudited pro forma information is presented as if NGI had been
combined as of the beginning of the years as follows:
2000 1999
Revenues $834,060 $815,474
========= ========
Net (loss) income $ (1,779) $ 20,616
========= ========
5. SPECIAL CHARGES
Included in the Company's statements of combined operations for the
years ended December 31, 2000, 1999 and 1998 are special charges of
$25,975, $89,750 and $0, respectively. The 2000 non-cash charges
include asset write-offs of $14,195 due to management's decision to
abandon certain computer system applications, asset write-offs of
$994 due to management's decision to close two facilities, and $2,756
for stock option contract modifications related to a change in the
status of employees who became employees of NGI. The remaining cash
portion of the charges were paid prior to December 31, 2000 and
included $7,775 for nine executive terminations and $255 for
severance costs incurred in closing the two facilities.
The 1999 charges include a development advance of $77,000 to NGI made
subsequent to the Company's contribution of NGI's common stock to the
Trust and $12,750 of NGI transaction and other disposition related
costs. Repayment of the advance was predicated on the achievement of
certain financial targets and, therefore, was solely dependent on the
success of the developmental efforts. Given the uncertainty of its
overall recovery, the advance was expensed.
6. PROPERTY AND EQUIPMENT - NET
Property and equipment - net consisted of:
Estimated
Useful
Lives December 31,
In Years 2000 1999
Computer equipment and software 3-7 $ 61,953 $ 46,781
Furniture, fixtures, and equipment 3-7 38,191 37,405
Building and leasehold improvements 5-20 31,462 29,793
Computer equipment under capital leases 2-4 5,561 5,055
Construction in progress 17,643 19,980
--------- ---------
154,810 139,014
Less accumulated depreciation and amortization 78,104 69,115
--------- ---------
$ 76,706 $ 69,899
========= =========
F-12
7. GOODWILL AND INTANGIBLES - NET
Goodwill and intangibles - net consisted of:
Estimated
Benefit
Period December 31,
In Years 2000 1999
Goodwill 5-40 $193,772 $189,065
Other intangibles 3-10 14,473 14,473
--------- ---------
208,245 203,538
Less accumulated amortization 37,833 29,069
--------- ---------
$170,412 $174,469
========= =========
8. INVESTMENTS
Investments consisted of:
December 31,
2000 1999
Held-to-maturity investments:
U.S. Treasury notes and municipal bonds $ 2,484 $ 2,440
Money market funds 1,299 1,232
Corporate and municipal bonds and notes in escrow (1) 21,725 20,949
--------- ---------
$ 25,508 $ 24,621
========= =========
(1) Investments held in escrow relate to a long-term acquisition note payable.
9. LONG-TERM DEBT
Long-term debt consisted of:
December 31,
2000 1999
Note payable to Cendant $ 100,000 $ -
Acquisition note payable 25,303 32,794
Capital lease obligation 2,684 3,227
Other long-term debt 98 180
--------- ---------
128,085 36,201
Less current portion of long-term debt 9,724 9,256
--------- ---------
Long-term debt $118,361 $ 26,945
========= =========
F-13
On October 25, 2000, concurrent with Cendant's plan to spin-off the
Company, Cendant and the Company agreed to convert $100,000 of
funding from Cendant to an unsecured note. The principal on this note
is repayable to Cendant on September 30, 2003. The Company is
required to make semi-annual interest payments on the unpaid
principal at 10% per annum on January 15th and July 15th of each
year, commencing on July 15, 2001. As interest expense has been
recorded during 2000 and will be recorded in future periods, the
Company has allocated interest expense to all historical periods
presented.
In connection with the 1996 acquisition of Ideon Group, Inc.
("Ideon"), the Company recorded a non-interest bearing note payable
to a former shareholder of Ideon. The Company established the
liability at its net present value using a 6% discount rate. The
Company is required to make six annual payments of approximately
$9,500, which began in July 1998 and will continue through July 2003.
The note also requires that the final two payments, totaling $19,011,
be placed in escrow. Such funds are held in escrow and included in
investments on the combined balance sheets.
The aggregate amounts of maturities on long-term debt, including
capital leases, for the next three years until maturity are as
follows: 2001, $9,724; 2002, $9,265; and 2003; $109,096. Interest
expense, including allocated amounts related to funding from Cendant,
for the years ended December 31, 2000, 1999 and 1998 was $12,836,
$13,203 and $13,201, respectively.
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company has noncancelable operating and capital leases
covering various facilities and equipment. Rent expense for the years
ended December 31, 2000, 1999 and 1998 was $21,304, $20,670 and
$19,847, respectively. Capital lease obligations have been included
in long-term debt and current portion of long-term debt.
Future minimum lease payments required under noncancelable operating
and capital leases as of December 31, 2000 are as follows:
Year Operating Capital
2001 $ 8,957 $ 1,830
2002 6,820 879
2003 6,106 161
2004 6,050 -
2005 4,921 -
Thereafter 13,932 -
------- -------
Future minimum lease payments $46,786 2,870
Less imputed interest 186
-------
Total capital lease obligations $ 2,684
=======
F-14
Cendant Class Action Litigation and Government Investigations - On
August 14, 2000, the U.S. District Court approved Cendant's agreement
(the "settlement agreement") to settle the principal securities class
action pending against Cendant, which was brought on behalf of
purchasers of all Cendant and CUC International, Inc. ("CUC")
publicly traded securities, other than PRIDES, between May 1995 and
August 1998. Under the settlement agreement, Cendant will pay the
class members approximately $2.85 billion in cash. Certain parties in
the class action have appealed the District Court's orders approving
the plan of allocation of the settlement fund and awarding of
attorneys' fees and expenses to counsel for the lead plaintiffs. None
of the appeals challenged the fairness of the $2.85 billion
settlement amount. The U.S. Court of Appeals for the Third Circuit
has issued a briefing schedule for the appeals, which is nearly
complete. Oral arguments for all appeals were heard on May 22, 2001;
the court reserved its decision until further notice.
The settlement agreement required Cendant to post collateral in the
form of credit facilities and/or surety bonds by November 13, 2000.
Cendant also had the option of forming a trust established for the
benefit of the plaintiffs in lieu of posting collateral. On November
13, 2000, Cendant posted collateral in the form of letters of credit
and surety bonds in the amounts of $1.71 billion and $790 million,
respectively. Cendant also made a cash deposit of approximately $350
million to the trust at December 31, 2000. The credit facilities
under which Cendant posted collateral also require Cendant to make
minimum deposits of $600 million, $800 million and $800 million to
this trust during 2001, 2002 and 2003, respectively. Such deposits
will serve to reduce the amount of collateral required to be posted
under the settlement agreement.
Cendant is involved in litigation asserting claims associated with
the accounting irregularities discovered in former CUC business units
outside of the principal common stockholder class action litigation.
After the spin-off, the Company will bear no liability for any of the
aforementioned litigation. A significant adverse financial judgment
against Cendant in connection with the litigation, however, could
have a negative impact on the Company's operations as a result of the
agreements entered into with Cendant relating to the provision by
Cendant of on-going corporate services, intellectual property,
marketing, tax sharing and indemnification.
Other Litigation - The Company is involved in other claims and
pending litigation that arise in the usual course of its business. In
the opinion of management, after consulting with its outside legal
counsel with respect to such matters, such other claims and pending
litigation will not result in any material liabilities being imposed
upon the Company, after taking into account any reserves established
for such matters.
Change of Control Contingent Liabilities - In connection with the
planned spin-off of the Company, the Company implemented a
transaction bonus program under which payments will be made to the
Company's management team upon the completion of the spin-off or a
change in control. Due to the contingent nature of these payments, no
liability was recorded as of December 31, 2000. However, if a
transaction is completed, management estimates that the ultimate cost
of this program to be approximately $9,000.
F-15
11. INCOME TAXES
The provision for (benefit from) income taxes consisted of:
Years Ended December 31,
2000 1999 1998
Current
Federal $(6,608) $ (147) $(105,492)
State (1,491) 87 (15,301)
-------- -------- ----------
(8,099) (60) (120,793)
-------- -------- ----------
Deferred
Federal 28,600 (11,340) 54,266
State 3,178 (1,260) 6,030
-------- -------- ----------
31,778 (12,600) 60,296
-------- -------- ----------
Provision for (benefit from) income taxes $23,679 $(12,660) $(60,497)
======== ========= ==========
Deferred income tax assets are comprised of:
December 31,
2000 1999
Current deferred income tax assets:
Accrued liabilities and deferred revenue $172,531 $203,673
Acquisition related liabilities 9,957 13,113
-------- --------
Current deferred income tax assets 182,488 216,786
Current deferred income tax liability:
Prepaid commissions (85,703) (75,405)
-------- --------
Current net deferred income tax assets $ 96,785 $141,381
======== ========
F-16
December 31,
2000 1999
Noncurrent deferred income tax assets:
Depreciation and amortization $ 24,254 $ 17,772
Development advance 29,953 29,953
Net operating loss carryforwards 25,105 -
Valuation allowance (22,018) -
Other 2,322 2,273
------- -------
Noncurrent deferred income tax assets 59,616 49,998
Noncurrent deferred income tax liability:
Accrued liabilities and deferred revenue (549) -
-------- --------
Noncurrent net deferred income tax assets $ 59,067 $ 49,998
======== ========
The valuation allowance at December 31, 2000 reduces the deferred
income tax asset of $25,105 related to the acquired net operating
loss carryforwards. The valuation allowance reduces the deferred
income tax asset to an amount which represents management's best
estimate of the amount that, more likely than not, will be realized.
The Company's effective income tax rate differs from the U.S. federal
statutory rate as follows:
2000 1999 1998
Federal statutory rate 35.0 % 35.0 % 35.0 %
State and local income taxes, net of federal tax benefits 1.8 1.9 3.8
Amortization of non-deductible goodwill 2.7 (4.7) (0.8)
Other 0.1 (0.4) (0.1)
------ ------ ------
Effective tax rate 39.6 % 31.8 % 37.9 %
====== ====== ======
12. EMPLOYEE BENEFIT AND STOCK INCENTIVE PLANS
The Company maintained a defined contribution plan (the "Plan")
covering all full-time employees who have met certain service and
other requirements. The Plan provided a matching contribution. The
contribution expense under the Plan for the years ended December 31,
1999 and 1998 was $1,187 and $1,323, respectively. Effective January
1, 2000, the Plan was merged with and into the Cendant Corporation
Employee Savings Plan (the "Savings Plan"). In anticipation of the
merger and subject to the provisions of ERISA, the Company
discontinued all employee and employer contributions to the Plan as
of December 31, 1999. Under the Savings Plan, the Company matches
employees' contributions with a maximum contribution of 6% of the
employees' eligible compensation. The contribution expense under the
Savings Plan for the year ended December 31, 2000 was $1,800.
The Company also participates in Cendant's stock incentive plans (the
"Incentive Plans") and Employee Stock Purchase Plan (the "ESP Plan").
Under the Incentive Plans, eligible employees are offered options to
purchase Cendant's common stock at 100% of the current market price
at the date of grant. Under the ESP Plan, Cendant enables employees
to purchase shares of common stock at 85% of the fair market value on
the more favorable of the first or last day of business of each
calendar quarter.
F-17
Under the Incentive Plans, 1,973,006, 1,235,625, and 751,795 options
to purchase shares of Cendant's CD common stock with weighted average
exercise prices of $18.39, $18.60 and $10.98 were granted to Company
employees during 2000, 1999 and 1998, respectively. At December 31,
2000, there were 4,605,562 options outstanding (with a weighted
average exercise price of $17.12), of which 1,069,319 (with a
weighted average exercise price of $15.59) were vested.
The Company utilizes the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations
in accounting for its stock option plans to employees. Under APB No.
25, compensation expense is recognized when the exercise prices of
the Company's employee stock options are less than the market prices
of the underlying Company stock on the date of grant. Had the Company
elected to recognize and measure compensation expense for its stock
option plans to employees based on the calculated fair value at the
dates for awards under such plans, consistent with the method
prescribed by SFAS No. 123, pro forma net income (loss) would have
been $29,380, ($29,339) and ($99,639) for the years ended December
31, 2000, 1999 and 1998, respectively. The fair values of the
Company's stock options are estimated on the dates of grant using the
Black-Scholes options-pricing model with the following weighted
average assumptions for stock options granted in 2000, 1999 and 1998:
2000 1999 1998
Dividend yield - - -
Expected volatility 55.0 % 60.0 % 55.0 %
Risk-free interest rate 5.0 % 6.4 % 4.9 %
Expected holding period (years) 4.7 6.2 6.3
13. RELATED PARTY TRANSACTIONS
Related party charges include allocations from Cendant for services
provided to the Company, as well as for services provided by the
Company to Cendant. There are no significant intercompany sales or
purchases between Cendant and the Company. These charges (to) and
from Cendant, exclusive of intercompany royalty fees and allocated
interest expense, consisted of:
2000 1999 1998
Corporate allocations $13,022 $17,077 $13,046 (a)
Travel agency support 12,317 12,354 14,384 (b)
Information technology support 10,324 1,376 - (c)
Solicitation 3,464 2,077 - (d)
Shared facility charges, net 1,267 682 (95) (e)
Marketing services (4,905) (4,048) (3,489) (f)
Other 55 89 29 (g)
------- ------- -------
Net intercompany charges $35,544 $29,607 $23,875
======= ======= =======
(a) Cendant provides the Company with executive management,
telecommunication support, human resources, tax,
treasury, payroll, and accounts payable services. Costs
for such services have been allocated to the Company by
Cendant based upon an estimate of the benefits received.
F-18
(b) Cendant Travel Inc., an indirect wholly owned subsidiary
of Cendant, provides all travel agency support services for
the Company's travel product. Costs are allocated to the
Company based upon total transactions processed.
(c) Cendant provides information technology support services
to the Company. Beginning in the fourth quarter of 1999,
these services included certain data processing functions
performed at a Cendant data center. Cost allocations to
the Company are based upon the volume of computer
processing activity and support provided.
(d) The Company partners with certain Cendant business units
to market membership products to their customers. Cendant
is generally paid based upon the number of solicitations
made.
(e) The Company shares certain call center facilities with
other Cendant business units. Facility charges to and
from these Cendant units are based upon relative space
occupied.
(f) The Company provides marketing services to certain
Cendant business units. Such services include data
modeling, telemarketing and customer enrollment and
fulfillment. Costs are allocated to Cendant business
units based upon the volume of activity and support
provided.
(g) There are certain other miscellaneous services provided by
the Company and Cendant that are not material in nature.
Intercompany Royalty Expense - The Company licenses certain
copyrights, trademarks and other intellectual property from a Cendant
affiliate. Such charges approximate 7.5% of revenues generated from
the use of such intellectual property. In April 2001, the royalty was
reduced to 3%.
Treasury Activities - The Company's capital investments and working
capital needs have been financed by cash flows from operations and
funding from Cendant. Under Cendant's centralized cash management
system, Cendant deposits sufficient cash to meet daily obligations in
certain of the Company's bank accounts and withdraws excess funds
from those accounts. These transactions are included in Funding from
(to) Cendant Corporation on the Statements of Combined Cash Flows and
Changes in Combined Deficit.
14. SELECTED QUARTERLY DATA (UNAUDITED)
Fiscal Year Quarters
--------------------------------------------------------------------
First Second Third Fourth Total
YEAR ENDED
DECEMBER 31, 2000
Revenues $ 194,412 $ 177,286 $ 192,619 $ 211,146 $ 775,463
Net income 9,288 (1) 9,843 10,735 6,179 (2) $ 36,045
YEAR ENDED
DECEMBER 31, 1999
Revenues 187,107 186,977 221,693 195,997 $ 791,774
Net income (loss) 124 (2,128) (38,654) (3) 13,564 (4) $ (27,094)
(1) Net income for the first quarter of 2000 includes a
special charge of $10,954 (net of income tax of $7,098)
for abandonment of certain computer system applications,
cost reductions and executive terminations.
F-19
(2) Net income for the fourth quarter of 2000 includes a
special charge of $4,808 (net of income tax of $3,115)
for abandonment of certain computer system applications.
(3) Net loss for the third quarter of 1999 includes a special
charge of $61,241 (net of income tax of $26,509) related
to a development advance to NGI and disposition related
costs.
(4) Net income for the fourth quarter of 1999 includes a
special charge of $1,396 (net of income tax of $604)
related to additional NGI transaction costs incurred.
15. AGREEMENTS GOVERNING ONGOING RELATIONSHIP WITH CENDANT
In connection with Cendant's spin-off of the Company to Cendant
stockholders, the Company will become an independent public company.
In this regard, the Company is negotiating a distribution agreement,
employee matters agreement, master license agreement and various
other agreements with Cendant for the purpose of accomplishing the
announced spin-off. These agreements will govern the relationship
between Cendant and the Company after the spin-off and provide, among
other things, for the allocation of employee benefits, tax and other
liabilities and obligations attributable to periods prior to the
spin-off, and the provision and receipt of various transition and
other services, resources, and functions (including technology
hardware, database software, travel agency reservation and general
customer service centers) to be provided and received by Cendant and
the Company.
The distribution agreement will also provide that the Company
generally will indemnify Cendant against liabilities arising out of
the individual membership businesses being transferred to the Company
and that Cendant generally will indemnify the Company against
liabilities arising out of the businesses Cendant is retaining. In
addition, the distribution agreement will contain a non-competition
clause preventing competition between certain aspects of the
Company's respective businesses.
The employee matters agreement will generally require the Company to
establish and maintain new employee benefit and compensation plans
for its employees; however certain benefits will continue to be
provided by Cendant during a transition period and the Company will
reimburse Cendant for the costs it incurs in providing such benefits
to the Company's employees. This agreement will also provide for the
adjustment of outstanding options to purchase Cendant common stock
("Cendant Options") granted under each of Cendant's options plans.
Cendant Options outstanding at the time of the spin-off generally
will be replaced with options to purchase shares of the Company's
common stock or the Company's options.
Prior to April 2001, the Company paid a royalty to Cendant equal to
approximately 7.5% of revenues generated by the use of certain
copyrights, trademarks, software and intellectual property essential
to the operations of the Company's membership program business. In
April 2001, it was determined that the intellectual property used in
the membership business would be retained by Cendant and a license
agreement was entered into providing for the payment of a 3% royalty
to Cendant. In connection with the spin-off, the Company will enter
into a new master license agreement with Cendant that will grant the
Company the exclusive right to use this intellectual property in the
conduct of the membership business worldwide, subject to limited
exceptions outside the United States and Canada. The agreement will
be in effect for a period of 50 years, subject to earlier termination
upon certain events. Cendant will retain title to all of the licensed
intellectual property. Pursuant to the agreement, the Company will
pay Cendant a monthly royalty equal to 3% of the gross revenues the
Company generates through the use of the licensed intellectual
property.
F-20
Each of these agreements will contain terms comparable to terms that
would have been obtained in an arms-length negotiation and,
accordingly, will equitably reflect the benefits and costs of the
Company's on-going relationship with Cendant.
* * * * * *
F-21
Schedule II
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
---------- ----------- ---------- -------
Year ended December 31, 2000
Allowance for doubtful accounts $ 490 $ 550 $ (199) $ 841
Allowance for deferred tax assets - 22,018 - 22,018
Year ended December 31, 1999
Allowance for doubtful accounts $ 689 $ 514 $ (713) $ 490
Allowance for deferred tax assets - - - -
Year ended December 31, 1998
Allowance for doubtful accounts $ 202 $ 557 $ (70) $ 689
Allowance for deferred tax assets - - - -
S-1