Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
COMMISSION FILE NO. 1-10308
------------
CENDANT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0918165
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9 WEST 57TH STREET
NEW YORK, NY 10019
(Address of principal executive office) (Zip Code)
212-413-1800
(Registrant's telephone number, including area code)
------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, Par Value $.01 New York Stock Exchange
Income PRIDES(SM) New York Stock Exchange
Growth PRIDES (SM) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
6.45% Trust Originated Preferred Securities
7 3/4% Notes due 2003
3% Convertible Subordinated Notes Due 2002
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on February 24, 2000 was
$12,368,280,865. All executive officers and directors of the registrant have
been deemed, solely for the purpose of the foregoing calculation, to be
"affiliates" of the registrant.
The number of shares outstanding of each of the Registrant's classes of
common stock was 725,692,057 as of February 24, 2000.
================================================================================
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, dated February 10,
2000, which was mailed to stockholders in connection with the registrant's
special stockholders' meeting to be held March 21, 2000 (the "Special Proxy
Statement") and the registrant's definitive proxy statement to be mailed to
stockholders in connection with our annual stockholders meeting to be held on
May 25, 2000 (the "Annual Proxy Statement") are incorporated by reference into
Part III hereof.
DOCUMENT CONSTITUTING PART OF SECTION 10(A) PROSPECTUS
FOR FORM S-8 REGISTRATION STATEMENTS
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
---- ----------- ----
PART I
1 Business ................................................................................. 1
2 Properties ............................................................................... 36
3 Legal Proceedings ........................................................................ 37
4 Submission of Matters to a Vote of Security Holders ...................................... 43
PART II
5 Market for the Registrant's Common Equity and Related Stockholder Matters ................ 45
6 Selected Financial Data .................................................................. 46
7 Management's Discussion and Analysis of Financial Condition and Results of Operations 47
7a Quantitative and Qualitative Disclosures about Market Risk ............................... 66
8 Financial Statements and Supplementary Data .............................................. 67
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................................... 67
PART III
10 Directors and Executive Officers of the Registrant ....................................... 68
11 Executive Compensation ................................................................... 68
12 Security Ownership of Certain Beneficial Owners and Management ........................... 68
13 Certain Relationships and Related Transactions ........................................... 68
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 68
Signatures ............................................................................... 69
Index to Exhibits ........................................................................ 71
i
PART I
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires, the
"Company", "Cendant", "we", "our", or "us" means Cendant Corporation, a Delaware
Corporation, and its subsidiaries.
GENERAL
We are one of the foremost providers of travel related, real estate related
and direct marketing consumer and business services in the world. We were
created through the merger (the "Merger") of HFS Incorporated ("HFS") into CUC
International, Inc. ("CUC") in December 1997 with the resultant corporation
being renamed Cendant Corporation.
We operate in four principal divisions -- travel related services, real
estate related services, direct marketing services and diversified services. Our
businesses provide a wide range of complementary consumer and business services,
which together represent eight business segments. The travel related services
businesses facilitate vacation timeshare exchanges and franchise car rental and
hotel businesses; the real estate related services businesses franchise real
estate brokerage businesses, provide home buyers with mortgages, assist in
employee relocations and provide consumers with relocation, real estate and
home-related products and services through our Move.com network of websites; and
the direct marketing services businesses provide an array of value driven
products and services. Our diversified services businesses include our tax
preparation services franchise, information technology services, car parks in
the United Kingdom and other consumer-related services.
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, we license the owners and
operators of independent businesses to use our brand names. We do not own or
operate hotels, real estate brokerage offices, car rental operations or tax
preparation offices. Instead, we provide our franchisee customers with services
designed to increase their revenue and profitability.
Travel Related Services
In our travel segment, we franchise hotels primarily in the mid-priced and
economy markets. We are the world's largest hotel franchisor, operating the Days
Inn (Registered Trademark) , Ramada (Registered Trademark) (in the United
States), Howard Johnson (Registered Trademark) , Super 8 (Registered Trademark)
, Travelodge (Registered Trademark) (in North America), Villager Lodge
(Registered Trademark) , Knights Inn (Registered Trademark) and Wingate Inn
(Registered Trademark) lodging franchise systems. We own the Avis (Registered
Trademark) worldwide vehicle rental franchise system which, operated by its
franchisees, is the second largest car rental system in the world (based on
total revenues and volume of rental transactions). We currently own
approximately 18% of the capital stock of the largest Avis franchisee, Avis Rent
A Car, Inc. ("ARAC"). We also own Resort Condominiums International, LLC
("RCI"), the world's leading timeshare exchange organization.
Real Estate Related Services
Our real estate division consists of the real estate franchise, Move.com
Group, relocation and mortgage segments. In the real estate franchise segment,
we franchise real estate brokerage offices under the CENTURY 21 (Registered
Trademark) , COLDWELL BANKER (Registered Trademark) and ERA (Registered
Trademark) real estate brokerage franchise systems and are the world's largest
real estate brokerage franchisor. In the Move.com Group Segment, we operate a
popular network of Web sites which offer a wide selection of quality relocation,
real estate and home-related products and services. In the relocation segment,
our Cendant Mobility Services Corporation subsidiary is the largest provider of
corporate relocation services in the world, offering relocation clients a
variety of services in connection with the transfer of a client's employees. In
the mortgage segment, our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary originates, sells and services residential mortgage loans in the
United States, marketing such services to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and mortgage banks.
1
Direct Marketing Services
Our direct marketing division is divided into two segments: individual
membership and insurance/ wholesale. The individual membership segment, with
approximately 25 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto, dining, and home improvement. The insurance/wholesale segment,
with over 50 million customers, markets and administers insurance products,
primarily accidental death and dismemberment insurance and term life insurance,
and also provides products and services such as checking account enhancement
packages, financial products and discount programs to customers of various
financial institutions. Our direct marketing activities are conducted
principally through our Cendant Membership Services, Inc. subsidiary and certain
of the Company's other wholly-owned subsidiaries, including FISI*Madison
Financial Corporation ("FISI"), Benefit Consultants, Inc. ("BCI") and Cendant
International Membership Services, Ltd. ("CIMS").
Diversified Services
We also provide a variety of other consumer and business services. Our
Jackson Hewitt Inc. ("Jackson Hewitt") subsidiary operates the second largest
tax preparation service system in the United States with locations in 43 states
and franchises a system of approximately 3,000 offices that specialize in
computerized preparation of federal and state individual income tax returns. Our
National Car Parks Limited ("NCP") subsidiary operates car parks throughout the
United Kingdom. We also provide information technology services and other
consumer services.
RECENT DEVELOPMENTS
Strategic Developments
In connection with our previously announced plan to focus on maximizing the
opportunities and growth potential of our existing businesses, we have divested
certain non-strategic businesses and assets and have completed or commenced
certain other strategic initiatives related to the Internet as stated below. The
divestiture program has resulted in the disposition of 18 business units, the
proceeds of which have been partially utilized to repurchase our common stock
and reduce our indebtedness.
Disposition of Businesses
In connection with the aforementioned program, we have completed the
following dispositions during 1999:
Entertainment Publications, Inc. On November 30, 1999, we completed the
disposition of approximately 85% of our Entertainment Publications, Inc.
("EPub") business unit for approximately $281 million in cash. We retained
approximately 15% of EPub's common equity in connection with the transaction.
In addition, we will have a designee on the EPub Board of
Directors.
We account for our investment in EPub using the equity method of accounting
because, in accordance with Accounting Principles Board Opinions No. 18, we
believe that our ownership interest combined with our representation on the
Board of Directors of EPub gives us the ability to exercise significant
influence on EPub. Under the equity method of accounting, our investments will
be increased or reduced to reflect our share of EPub's income or losses.
Green Flag. On November 26, 1999, we completed the disposition of our Green
Flag business unit for approximately $401 million. Green Flag is a roadside
assistance organization based in the United Kingdom, which provides a wide range
of emergency support and rescue services.
North American Outdoor Group. On October 8, 1999, we completed the
disposition of 94% of our North American Outdoor Group ("NAOG") business unit
for approximately $141 million in cash and will retain approximately 6% of
NAOG's equity in connection with the transaction. We account for this investment
in NAOG using the cost method of accounting.
Global Refund Group. On August 24, 1999, we completed the sale of our
Global Refund Group subsidiary ("Global Refund") for approximately $158 million
in cash. Global Refund, formerly known as Europe Tax Free Shopping, was a
value-added tax refund services company.
2
Fleet. On June 30, 1999, we completed the disposition of the fleet business
segment ("fleet segment" or "fleet businesses"), which included PHH Vehicle
Management Services Corporation, Wright Express Corporation, The Harpur Group,
Ltd., and other subsidiaries pursuant to an agreement between our PHH
Corporation ("PHH") subsidiary and ARAC. Pursuant to the agreement, ARAC
acquired net assets of the fleet businesses through the assumption and
subsequent repayment of $1.44 billion of intercompany debt and the issuance of
$360 million of convertible preferred stock of Avis Fleet Leasing and Management
Corporation, a wholly-owned subsidiary of ARAC. We account for the convertible
preferred stock using the cost method of accounting.
Cendant Software Corporation. On January 12, 1999, we completed the sale of
our consumer software division, Cendant Software Corporation and its
subsidiaries, to Paris-based Havas SA, a subsidiary of Vivendi SA, for
approximately $770 million in cash.
Other Businesses. During 1999, we completed the dispositions of certain
other businesses, including Central Credit, Inc., Spark Services, Inc.,
Match.com, National Leisure Group, National Library of Poetry and Essex
Corporation. Aggregate consideration received on the dispositions of such
businesses was comprised of $116 million in cash and 1.9 million shares of
common stock of Ticketmaster On-line-City Search, Inc., which we received in the
sale of Match.com.
Internet Developments
As part of our focus on maximizing the opportunities and growth potential
of our existing businesses, we have completed or have pending the following
Internet initiatives:
New Real Estate Portal -- Move.com Group. In January 2000, we launched the
Move.com Internet portal, our flagship relocation, real estate and home-related
products and services Web site. In connection therewith we mailed a proxy
statement on February 10, 2000 to stockholders proposing the creation of a new
class of common stock ("Move.com Stock") to track the performance of the
Move.com Group, a group of businesses, assets and liabilities of Cendant that
are dedicated to providing online relocation, real estate and home-related
products and services. We also filed a registration statement on Form S-3 on
February 14, 2000 in connection with a proposed initial public offering of
Move.com stock in the second quarter of 2000. Move.com Group operates a popular
network of Web sites, including move.com, rent.net, century21.com,
coldwellbanker.com, era.com, seniorhousing.net, corporatehousing.net,
selfstorage.net and welcomewagon.net, which offer a wide selection of quality
relocation, real estate and home-related products and services. Move.com Group
also offers a broad-based distribution platform for its business partners, who
are trying to reach a highly targeted and valued group of consumers at the most
opportune times.
Strategic Alliance. On December 15, 1999, we entered into a strategic
alliance with Liberty Media Corporation ("Liberty Media"). Specifically, we have
agreed to work together with Liberty Media to develop Internet and related
opportunities associated with our travel, mortgage, real estate and direct
marketing businesses. Such efforts may include the creation of joint ventures
between Liberty Media and Cendant as well as additional equity investments in
each others' businesses. However, we can make no assurances that any alliances
or additional equity investments will be made or the timing thereof.
We will also assist Liberty Media in creating, and will receive an equity
participation in, a new venture that will seek to provide broadband video, voice
and data content to our hotels and their guests on a worldwide basis. We will
also pursue opportunities within the cable industry with Liberty Media to
leverage our direct marketing resources and capabilities.
On February 7, 2000, Liberty Media invested $400 million in cash to
purchase 18 million shares of our common stock and a two-year warrant to
purchase approximately 29 million shares of our common stock at an exercise
price of $23.00 per share. The common stock, together with the common stock
underlying the warrant, represents approximately 6.3% of our outstanding shares
after giving effect to the aforementioned transaction. We also announced that
Liberty Media Chairman, John C. Malone, Ph.D., will join our board of directors
and has also committed to purchase one million shares of our common stock for
approximately $17 million in cash.
3
Netmarket Group, Inc. Transaction. On September 15, 1999, Netmarket Group,
Inc. ("NGI") began operations as an independent company that pursues the
development of certain interactive businesses formerly within our direct
marketing division. NGI owns, operates and develops the online membership
businesses, which collectively have approximately 1.4 million online members.
Prior to September 15, 1999, our ownership of NGI was restructured into common
stock and preferred stock interests. On September 15, 1999, we donated NGI's
outstanding common stock to a charitable trust, and NGI issued additional shares
of its common stock to certain of its marketing partners. Accordingly, as a
result of the change in ownership of NGI's common stock from us to independent
third parties, NGI's operating results are no longer included in our
Consolidated Financial Statements. We retained the opportunity to participate in
NGI's value through the ownership of convertible preferred stock of NGI, which
is ultimately convertible, at our option, after September 14, 2001, into 78% of
NGI's diluted common shares which has a $5 million annual preferred dividend.
The convertible preferred stock is accounted for using the cost method of
accounting. The preferred stock dividend will be recorded in income if and when
it becomes realizable.
Formation of Cendant Internet Group. On January 31, 2000 we announced the
formation of the Cendant Internet Group ("CIG") to spearhead the convergence of
our offline and online assets. Over the next several months, we expect to
develop a comprehensive Internet plan which delivers several new business
applications and e-enable the Cendant organization. During this time frame, the
Company also expects to enter into related alliances and investments to further
enhance its digital strategy. CIG intends to work closely with Liberty Media and
our operating divisions to achieve this convergence vision.
Class Action Litigation and Government Investigation
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, approximately 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought derivatively
on our behalf and several individual lawsuits and arbitration proceedings have
been filed against us and, among others, our predecessor, HFS, and several
current and former officers and directors of Cendant and HFS. These lawsuits
assert, among other things, various claims under the federal securities laws
including claims under sections 11, 12 and 15 of the Securities Act of 1933 and
sections 10(b), 14(a) and 20(a) of and Rules 10b-5 and 14a-9 under the
Securities Exchange Act of 1934 and state, statutory and common laws, including
claims that financial statements previously issued by us allegedly were false
and misleading that these statements allegedly caused the price of our
securities to be artificially inflated. SEE "ITEM 3. LEGAL PROCEEDINGS".
In addition, the staff of the Securities and Exchange Commission (the
"SEC") and the United States Attorney for the District of New Jersey are
conducting investigations relating to the accounting irregularities. The SEC
staff has advised us that its inquiry should not be construed as an indication
by the SEC or its staff that any violations of law have occurred. As a result of
the findings from our internal investigations, we made all adjustments
considered necessary which are reflected in our previously filed restated
financial statements. Although we can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations, we do not expect that additional adjustments will be necessary.
On December 7, 1999, we announced that we reached a preliminary agreement
to settle the principal securities class action pending against us in the U.S.
District Court in Newark, New Jersey relating to the aforementioned class action
lawsuits. Under the agreement, we would pay the class members approximately
$2.85 billion in cash, an increase from approximately $2.83 billion previously
reported. The increase is a result of continued negotiation toward definitive
documents relating to additional costs to be paid to the plaintiff class. The
settlement remains subject to execution of a definitive settlement agreement and
approval by the U.S. District Court. If the preliminary settlement is not
approved by the U.S. District Court, we can make no assurances that the final
outcome or settlement of such proceedings will not be for an amount greater than
that set forth in the preliminary agreement. We currently plan to fund the
settlement through the use of available cash, the issuance of debt securities
and/or the issuance of equity securities. We intend to finance the cost of the
settlement so as to maintain our investment grade ratings.
4
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we entered into a stipulation of settlement in the
PRIDES action and the court subsequently granted the settlement its approval.
Under the settlement stipulation, in return for the release of all claims
arising from any purchase of current FELINE PRIDES on or before April 15, 1998,
we are obligated to issue up to 29,161,474 Rights with a stated theoretical
value of $11.71 each. Each class member who does not opt out and who submits a
timely and valid proof of claim will be entitled to one Right for each current
FELINE PRIDES held at the close of business on April 15, 1998. For example, if a
person owned 100 FELINE PRIDES on April 15, 1998, such person would be entitled
to 100 rights. Under the settlement stipulation, until February 14, 2001 we will
issue two new FELINE PRIDES to every person who delivers to us three Rights and
two current FELINE PRIDES. For example, if a holder of rights exchanges three
rights together with two current Income PRIDES, they will receive two new Income
PRIDES. If a holder of rights exchanges three rights together with two Growth
PRIDES, they will receive two New Growth PRIDES. The terms of the new FELINE
PRIDES will be the same as the currently outstanding PRIDES, except that the
conversion rate will be revised so that, at the time the Rights are distributed,
each of the new PRIDES will have a value equal to $17.57 more than each original
PRIDES, based upon a generally accepted valuation model. The settlement does not
resolve claims based upon purchases of current FELINE PRIDES after April 16,
1998.
Based on the settlement, we recorded an after tax charge of approximately
$228 million, or $0.26 per diluted share, which is $351 million pre-tax, in the
fourth quarter of 1998. We recorded an increase in additional paid-in capital of
$350 million offset by a decrease in retained earnings of $228 million,
resulting in a net increase in shareholders' equity of $122 million as a result
of the prospective issuance of the common stock. As a result, the settlement
should not reduce net book value. In addition, the settlement is not expected to
reduce 2000 earnings per share unless our common stock price materially
appreciates. SEE "ITEM 3. LEGAL PROCEEDINGS" for a more detailed description of
the settlement.
* * *
We continually explore and conduct discussions with regard to acquisitions
and other strategic corporate transactions in our industries and in other
franchise, franchisable or service businesses. As part of this regular on-going
evaluation of acquisition opportunities, we currently are engaged in a number of
separate, unrelated preliminary discussions concerning possible acquisitions.
The purchase price for the possible acquisitions may be paid in cash, through
the issuance of our common stock (which would increase the number of our common
stock outstanding) or other securities of the Company, borrowings, or a
combination thereof. Prior to consummating any such possible acquisition, we
will need, among other things, to initiate and complete satisfactorily our due
diligence investigations; negotiate the financial and other terms (including
price) and conditions of such acquisitions; obtain appropriate Board of
Directors, regulatory and other necessary consents and approvals; and secure
financing. No assurance can be given with respect to the timing, likelihood or
business effect of any possible transaction. In the past, we have been involved
in both relatively small acquisitions and acquisitions which have been
significant.
FINANCIAL INFORMATION
Financial information about our business segments may be found in Note 24
to our Consolidated Financial Statements presented in Item 8 of this Annual
Report on Form 10-K and incorporated herein by reference.
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report on Form
10-K that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
5
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to integrate
and operate successfully acquired businesses and the risks associated
with such businesses;
o our ability to successfully implement our plan to create a tracking
stock for our new real estate portal (described in "Businesses and
Recent Developments");
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and for us to operate within the limitations imposed by
financing arrangements; and
o the effect of changes in current interest rates.
We derived the forward-looking statements in this Annual Report on Form
10-K (including the documents incorporated by reference in this Annual Report on
Form 10-K) from the foregoing factors and from other factors and assumptions,
and the failure of such assumptions to be realized as well as other factors may
also cause actual results to differ materially from those projected. We assume
no obligation to publicly correct or update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements or if we later become aware that they
are not likely to be achieved.
PRINCIPAL EXECUTIVE OFFICE
Our principal executive offices are located at 9 West 57th Street, New
York, New York 10019 (telephone number: (212) 413-1800).
TRAVEL DIVISION
TRAVEL SEGMENT
The Travel Segment consists of our lodging franchise services, timeshare
exchange, and Avis car rental franchise businesses and represented approximately
21%, 20% and 23% of our revenue for the years ended December 31, 1999, 1998 and
1997, respectively.
LODGING FRANCHISE BUSINESS
GENERAL. The lodging industry can be divided into three broad segments
based on price and services: luxury or upscale, which typically charge room
rates above $82 per night; middle market, with room rates generally between $55
and $81 per night; and economy, where room rates generally are less than $54 per
night. Of our franchised brand names, Ramada, Howard Johnson and Wingate Inn
compete principally in the middle market segment and Days Inn, Knights Inn,
Super 8, Travelodge and Villager Lodge ("Villager") compete primarily in the
economy segment.
As franchisor of lodging facilities, we provide a number of services
designed to directly or indirectly increase hotel occupancy rates, revenue and
profitability, the most important of which is a centralized brand-specific
reservation system. Similarly, brand awareness derived from nationally
recognized brand names, supported by national advertising and marketing
campaigns, can increase the desirability of a hotel property to prospective
guests. We believe that, in general, national franchise brands with a greater
number of hotels enjoy greater brand awareness among potential hotel guests, and
thus are perceived as more valuable by existing and prospective franchisees than
brands with a lesser number of properties. Franchise brands can also increase
franchisee property occupancy through national direct sales programs to
businesses, associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital expenditures
and operating costs required to meet a brand's quality,
6
technology and operating standards, plus the ongoing payment of franchise
royalties and assessments for the reservations system and marketing programs)
with the increase in gross room revenue and decrease in certain expenses
anticipated to be derived from brand membership. Other benefits to brand
affiliation include group purchasing services, training programs, design and
construction advice, and other franchisee support services, all of which provide
the benefits of a national lodging services organization to operators of
independently-owned hotels. We believe that, in general, franchise affiliations
are viewed as enhancing the value of a hotel property by providing economic
benefits to the property.
The fee and cost structure of our lodging business provides significant
opportunities for us to increase earnings by increasing the number of franchised
properties. Hotel franchisors, such as our Company, derive substantially all of
their revenue from continuing franchise fees. Continuing franchise fees are
comprised of two components, a royalty portion and a marketing and reservations
portion, both of which are normally charged by the franchisor as a percentage of
the franchisee's gross room revenue. The royalty portion of the franchise fee is
intended to cover the operating expenses of the franchisor, such as expenses
incurred in quality assurance, administrative support and other franchise
services and to provide the franchisor with operating profits. The
marketing/reservations portion of the franchise fee is intended to reimburse the
franchisor for the expenses associated with providing such franchise services as
a central reservations system, national media advertising and certain training
programs.
Our franchisees are dispersed geographically which minimizes the exposure
to any one hotel owner or geographic region. Of the more than 6,300 properties
and 4,576 franchisees in our systems, no individual hotel owner accounts for
more than 2% of our lodging revenue.
We entered the lodging franchise business in July 1990 with the acquisition
of the Howard Johnson franchise system and the rights to operate the U.S. Ramada
franchise system. We acquired the Days Inn franchise system in January 1992, the
Super 8 franchise system in April 1993, the Villager Lodge franchise system in
November 1994, the Knights Inn franchise system in August 1995 and the
Travelodge franchise system in January 1996. Each of these acquisitions has
increased our earnings per share. We continue to seek opportunities to acquire
or license additional hotel franchise systems, including established brands in
the upscale segment of the market, where we are not currently represented. See
"Lodging Franchise Growth" below.
LODGING FRANCHISE GROWTH. Growth of the franchise systems through the sale
of long-term franchise agreements to operators of existing and newly constructed
hotels is the leading source of revenue and earnings growth in our lodging
franchise business. Franchises are terminated primarily for not paying the
required franchise fees and/or not maintaining compliance with brand quality
assurance standards required pursuant to the applicable franchise agreement.
LODGING FRANCHISE SALES. We market franchises principally to independent
hotel and motel owners, as well as to owners whose property affiliation with
other hotel brands can be terminated. We believe that our existing franchisees
also represent a significant potential market because many own, or may own in
the future, other hotels, which can be converted to our brand names.
Accordingly, a significant factor in our sales strategy is maintaining the
satisfaction of our existing franchisees by providing quality services.
We employ a national franchise sales force consisting of approximately 88
salespeople and sales management personnel, which is divided into several brand
specific sales groups, with regional offices around the country. The sales force
is compensated primarily through commissions. In order to provide broad
marketing of our brands, sales referrals are made among the sales groups and a
referring salesperson is entitled to a commission for a referral which results
in a franchise sale.
We seek to expand our franchise systems and provide marketing and other
franchise services to franchisees on an international basis through a series of
master license agreements with internationally based developers and franchisors.
As of December 31, 1999, our franchising subsidiaries (other than Ramada) have
entered into international master licensing agreements for part or all of
approximately 80 countries on six continents. The agreements typically include
minimum development requirements and require payment of an initial development
fee in connection with the execution of the license agreement as well as
recurring franchise fees.
7
LODGING FRANCHISE SYSTEMS. The following is a summary description of our
lodging franchise systems. Information reflects properties that are open and
operating and is presented as of December 31, 1999.
PRIMARY AVG. ROOMS # OF # OF DOMESTIC
BRAND MARKET SERVED PER PROPERTY PROPERTIES ROOMS INTERNATIONAL*
----- ------------- ------------ ---------- ----- --------------
Days Inn Lower Economy 86 1,888 162,472 International(1)
Howard Johnson Mid-market 102 497 50,489 International(2)
Knights Inn Lower Economy 80 233 18,609 International(3)
Ramada Mid-market 126 1,047 131,603 Domestic
Super 8 Economy 61 1,893 115,318 International(4)
Travelodge Upper Economy 84 575 48,111 International(5)
Villager Lodge Lower Economy 83 105 8,748 International(6)
Wingate Upper Mid-market 95 77 7,280 International(6)
----- -------
Total 6,315 542,630
- ----------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, China, South Africa, India,
Uruguay, Philippines, Colombia, Czech Republic and UK.
(2) Includes properties in Mexico, Canada, Colombia, Israel, Venezuela, Malta,
U.A.E., Dominican Republic, Egypt, Equator, Argentina, Jordan and UK.
(3) Includes properties in Canada.
(4) Includes properties in Canada and Singapore.
(5) Includes properties in Canada and Mexico.
(6) No international properties currently open and operating.
OPERATIONS -- LODGING. Our organization is designed to provide a high level
of service to our franchisees while maintaining a controlled level of overhead
expense. In the lodging segment, expenses related to marketing and reservations
services are budgeted to match anticipated marketing and reservation fees each
year.
CENTRAL RESERVATIONS SYSTEMS. Unlike many other franchise businesses (such
as restaurants), the lodging business is characterized by remote purchasing
through travel agencies and through use by consumers of toll-free telephone
numbers and the Internet. Each of our reservation systems is independently
operated, focusing on its specific brand and franchise system, and is comprised
of one or more nationally advertised toll-free telephone numbers, reservation
agents who accept inbound calls, a computer operation that processes
reservations, and automated links which accept reservations from travel agents
and other travel providers, such as airlines, and which report reservations made
through the system to each franchisee property. Each reservation agent handles
reservation requests and inquiries for only one of our franchise systems and
there is no "cross selling" of franchise systems to consumers. We maintain seven
reservations centers that are located in Knoxville and Elizabethton, Tennessee;
Phoenix, Arizona; Winner and Aberdeen, South Dakota; Orangeburg, South Carolina
and Saint John, New Brunswick, Canada.
Each brand maintains an Internet Web site to acquaint viewers with the
brand and its properties. Each property has its own series of information pages.
Each brand also accepts reservations over the Internet from the brand's own Web
site and other Internet Web sites equipped with compatible booking devices. In
1999, the brand Web sites had 64.7 million page views and booked an aggregate of
649,253 roomnights from Internet booking sources, compared with 33.7 million
page views and 226,782 roomnights booked in 1998, increases of 91.9% and 186.3%,
respectively.
LODGING FRANCHISE AGREEMENTS. Our lodging franchise agreements grant the
right to utilize one of the brand names associated with our lodging franchise
systems to lodging facility owners or operators under long-term franchise
agreements. An annual average of 2.0% of our existing franchise agreements are
scheduled to expire from January 1, 2000 through December 31, 2006, with no more
than 2.6% (in 2002) scheduled to expire in any one of those years.
8
The current standard agreements generally are for 15-year terms for
converted properties and 20-year terms for newly constructed properties and
generally require, among other obligations, franchisees to pay a minimum initial
fee based on property size and type, as well as continuing franchise fees
comprised of royalty fees and marketing/reservation fees based on gross room
revenues.
Under the terms of the standard franchise agreements in effect at December
31, 1999, franchisees are typically required to pay recurring fees comprised of
a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. We
discount fees from the standard rates from time to time and under certain
circumstances.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain quality standards, to pay franchise fees or other
charges or to meet other specified obligations. In the event of such
termination, we are typically entitled to be compensated for lost revenue in an
amount equal to the franchise fees accrued during periods specified in the
respective franchise agreements which are generally between one and five years.
The lodging franchise agreements are terminable by the franchisee under certain
limited circumstances. The franchisee may terminate under certain procedures if
the hotel suffers a substantial casualty or condemnation. Some franchisees and
the franchisors have negotiated certain mutual termination rights, which usually
may be exercised only on specific anniversary dates of the hotel's opening, and
only if certain conditions precedent are met. The Lodging Division also has a
policy that allows a franchisee to terminate the franchise if its hotel fails to
achieve 50% annual occupancy after certain conditions and waiting periods are
satisfied.
LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY. The service marks
"Days Inn," "Ramada," "Howard Johnson," "Super 8," "Travelodge" and related
logos are material to our business. We, through our franchisees, actively use
these marks. All of the material marks in each franchise system are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office. We own the marks relating to the Days Inn system, the
Howard Johnson system, the Knights Inn system, the Super 8 system, the
Travelodge system (in North America), the Villager Lodge system and the Wingate
Inn system through our subsidiaries.
We franchise the service mark "Ramada" and related marks and Ramada brands
and logos (the "Ramada Marks") to lodging facility owners in the United States
pursuant to two license agreements (the "Ramada License Agreements") between an
indirect subsidiary of Marriott Corporation ("Licensor") and Ramada Franchise
Systems, Inc. ("RFS"), our wholly-owned subsidiary.
The Ramada License Agreements limit RFS's use of the Ramada Marks to the
U.S. market. The Ramada License Agreements have initial terms terminating on
March 31, 2024. At the end of the initial terms, RFS has the right either (i)
to extend the Ramada License Agreements, (ii) to purchase the Ramada Marks for
their fair market value at the date of purchase, subject to certain minimums
after the initial terms, or (iii) to terminate the Ramada License Agreements.
The Ramada License Agreements require that RFS pay license fees to the Licensor
calculated on the basis of percentages of annual gross room sales, subject to
certain minimums and maximums as specified in each Ramada License Agreement.
RFS received approximately $48 million in royalties from its Ramada franchisees
in 1999 and paid the Licensor approximately $23 million in license fees.
The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements, (ii)
the maintenance by us of a minimum net worth of $50 million (however, this
minimum net worth requirement may be satisfied by a guaranty of an affiliate of
ours with a net worth of at least $50 million or by an irrevocable letter of
credit (or similar form of third-party credit support)), (iii) non-payment of
royalties, (iv) failure to maintain registrations on the Ramada Marks and to
take reasonable actions to stop infringements, (v) failure to pay certain
liabilities specified by the Restructuring Agreement, dated July 15, 1991, by
and among New World Development Co., Ltd. (a predecessor to Licensor), Ramada
International Hotels and Resorts, Inc., Ramada Inc., Franchise System Holdings,
Inc., the Company and RFS and (vi) failure to maintain appropriate hotel
standards of service and quality. A termination of the Ramada License
Agreements would result in the loss of the income
9
stream from franchising the Ramada brand names and could result in the payment
by us of liquidated damages equal to three years of license fees. We do not
believe that we will have difficulty complying with all of the material terms
of the Ramada License Agreements.
LODGING COMPETITION. Competition among the national lodging brand
franchisors to grow their franchise systems is intense. Our primary national
lodging brand competitors are the Holiday Inn (Registered Trademark) and Best
Western (Registered Trademark) brands and Choice Hotels, which franchises seven
brands, including the Comfort Inn (Registered Trademark) , Quality Inn
(Registered Trademark) and Econo Lodge (Registered Trademark) brands. Days Inn,
Travelodge and Super 8 properties principally compete with Comfort Inn, Red Roof
Inn (Registered Trademark) , and Econo Lodge in the limited service economy
sector of the market. The chief competitor of Ramada, Howard Johnson and Wingate
Inn properties, which compete in the middle market segment of the hotel
industry, is Holiday Inn (Registered Trademark) and Hampton Inn (Registered
Trademark) . Our Knights Inn and Travelodge brands compete with Motel 6
(Registered Trademark) properties. In addition, a lodging facility owner may
choose not to affiliate with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the lodging
industry is based principally upon the perceived value and quality of the brand
and services offered to franchisees, as well as the nature of those services. We
believe that prospective franchisees value a franchise based upon their view of
the relationship of conversion costs and future charges to the potential for
increased revenue and profitability. The reputation of the franchisor among
existing franchisees is also a factor, which may lead a property owner to select
a particular affiliation. We also believe that the perceived value of its brand
names to prospective franchisees is, to some extent, a function of the success
of its existing franchisees.
The ability of our lodging franchisees to compete in the lodging industry
is important to our prospects for growth, although, because franchise fees are
based on franchisee gross room revenue, our revenue is not directly dependent on
franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchises.
LODGING SEASONALITY. The principal source of lodging revenue for us is
based upon the annual gross room revenue of franchised properties. As a result,
our revenue from the lodging franchise business experiences seasonal lodging
revenue patterns similar to those of the hotel industry wherein the summer
months, because of increases in leisure travel, produce higher revenues than
other periods during the year. Therefore, any occurrence that disrupts travel
patterns during the summer period could have a material adverse effect on the
franchisee's annual performance and effect our annual performance.
TIMESHARE EXCHANGE BUSINESS
GENERAL. Our RCI subsidiary, which we acquired on November 12, 1996, is the
world's largest provider of timeshare vacation exchange opportunities and
timeshare services for more than 2.6 million timeshare households from more than
200 nations and more than 3,500 resorts in more than 90 countries around the
world. RCI's business consists primarily of the operation of an exchange program
for owners of condominium timeshares or whole units at affiliated resorts, the
publication of magazines and other periodicals related to the vacation and
timeshare industry, travel related services, resort management, integrated
software systems and service and consulting services. RCI has significant
operations in North America, Europe, the Middle East, Latin America, Africa,
Australia, and the Pacific Rim. RCI has more than 3,700 employees worldwide.
The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments and
timeshare resorts. Commercial lodging consists principally of: a) hotels and
motels in which a room is rented on a nightly, weekly or monthly basis for the
duration of the visit and b) rentals of privately-owned condominium units or
homes. Oftentimes, this segment is designed to serve both the leisure and
business traveler. Timeshare resorts present an economical and reliable
alternative to commercial lodging for many vacationers who want to experience
the added benefits associated with ownership. Timeshare resorts are purposely
designed and operated for the needs and enjoyment of the leisure traveler.
10
Resort timesharing -- also referred to as vacation ownership -- is the
shared ownership and/or periodic use of property by a number of users or owners
for a defined period of years or in perpetuity. An example of a simple form of
timeshare is a condominium unit that is owned by fifty-one persons, with each
person having the right to use the unit for one week of every year and with one
week set aside for maintenance. In the United States, industry sources estimate
that the average price of such a timeshare is about $11,000, plus a yearly
maintenance fee of approximately $350 per interval owned. Based upon information
published about the industry, we believe that 1999 sales of timeshares exceeded
$6 billion worldwide. Two principal segments make up the timeshare exchange
industry: owners of timeshare interest (consumers) and resort properties
(developers/operators). Industry sources have estimated that the total number of
owner households of timeshare interests is nearly 4.0 million worldwide, while
the total number of timeshare resorts worldwide has been estimated to be nearly
5,000. The timeshare exchange industry derives revenue from annual subscribing
membership fees paid by owners of timeshare interests, fees paid by such owners
for each exchange and fees paid by members and resort affiliates for various
other products and services.
The "RCI Network" provides RCI members who own timeshares at RCI-affiliated
resorts the capability to exchange their timeshare vacation accommodations in
any given year for comparable value accommodations at other RCI-affiliated
resorts. Approximately 1.3 million members of the RCI Network, representing
approximately 50% of the total members of the RCI Network reside outside of the
United States.
RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted purchasing
programs. In 1999, members in the United States paid an average annual
subscribing membership fee of $64 as well as an average exchange fee of
approximately $130 for every exchange arranged by RCI. In 1999, membership and
exchange fees totaled approximately $350 million and RCI arranged more than 2.0
million exchanges.
Developers of resorts affiliated with the RCI Network typically pay the
first year subscribing membership fee for new owner/members upon the sale of the
timeshare interest.
TIMESHARE EXCHANGE BUSINESS GROWTH. The timeshare exchange industry has
experienced significant growth over the past decade. We believe that the factors
driving this growth include the demographic trend toward older, more affluent
Americans who travel more frequently; the entrance of major hospitality and
entertainment companies into timeshare development; a worldwide acceptance of
the timeshare concept; and an increasing focus on leisure activities, family
travel and a desire for value, variety and flexibility in a vacation experience.
We believe that future growth of the timeshare exchange industry will be
determined by general economic conditions both in the U.S. and worldwide, the
public image of the industry, improved approaches to marketing and sales, a
greater variety of products and price points, the broadening of the timeshare
market and a variety of other factors. Accordingly, we cannot predict if future
growth trends will continue at rates comparable to those of the recent past.
One of the key innovations that RCI introduced to the vacation timeshare
industry in 1999 was the Global Points Network ("GPN"). GPN allows members to
use points (rather than a timeshare interval) as the tool for exchange. These
points can then be used for stays at RCI resorts, airfare, car rentals, hotel
stays, cruises and more, providing enormous flexibility for RCI members. GPN is
a creative way to enhance the attractiveness of RCI membership by adapting to
changes in consumer vacation habits which have trended toward shorter, but more
frequent vacations. Initial reaction to GPN has been positive, and the program
will continue to expand in 2000.
OPERATIONS. Our timeshare exchange business is designed to provide high
quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most members
are acquired from timeshare developers who purchase an initial RCI subscribing
membership for each buyer at the time the timeshare interval is sold. A small
percentage of members are acquired through direct solicitation activities of
RCI.
MEMBER SERVICES
INTERNATIONAL EXCHANGE SYSTEM. Members are served through a network of call
centers located in more than 16 countries throughout the world. These call
centers are staffed by approximately 2,100
11
people. Major regional call and information support centers are located in
Indianapolis, Saint John (Canada), Kettering (England), Cork (Ireland), Mexico
City and Singapore. All members receive a directory that lists resorts
available through the exchange system, a periodic magazine and other
information related to the exchange system and available travel services. These
materials are published in various languages.
TRAVEL SERVICES. In addition to exchange services, RCI's call centers also
engage in telemarketing and cross selling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of the
RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global basis,
RCI provides travel services through entities operating in local jurisdictions
(hereinafter, RCIT and its local entities are referred to as "Travel Agencies").
Travel Agencies provide airline reservations and airline ticket sales to members
in conjunction with the arrangement of their timeshare exchanges, as well as
providing other types of travel services, including hotel accommodations, car
rentals, cruises and tours. Travel Agencies also from time to time offer travel
packages utilizing resort developers' unsold inventory to generate both revenue
and prospective timeshare purchasers to affiliated resorts.
RESORT SERVICES. Growth of the timeshare business is dependent on the sale
of timeshare units by affiliated resorts. RCI affiliates consist of
international brand names and independent developers, owners' associations and
vacation clubs. We believe that national lodging and hospitality companies are
attracted to the timeshare concept because of the industry's relatively low
product cost and high profit margins, and the recognition that timeshare resorts
provide an attractive alternative to the traditional hotel-based vacation and
allow the hotel companies to leverage their brands into additional resort
markets where demand exists for accommodations beyond traditional rental-based
lodging operations. Today, 7 of every 10 timeshare resorts worldwide are
affiliated with RCI. We also believe that RCI's existing affiliates represent a
significant potential market because many developers and resort managers may
become involved in additional resorts in the future which can be affiliated with
RCI. Accordingly, a significant factor in RCI's growth strategy is maintaining
the satisfaction of its existing affiliates by providing quality support
services.
TIMESHARE CONSULTING. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. These services include comprehensive
market research, site selection, strategic planning, community economic impact
studies, resort concept evaluation, financial feasibility assessments, on-site
studies of existing resort developments, and tailored sales and marketing plans.
RESORT MANAGEMENT SOFTWARE. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions such
as sales, accounting, inventory, maintenance, dues and reservations. Management
believes that our RCC Premier information software is the only commercially
available technology that can fully support timeshare club operations and points
based reservation systems.
PROPERTY MANAGEMENT. RCI provides resort property management services
through its affiliate, RCI Management, Inc. ("RCIM"). RCIM is a single source
for any and all resort management services, and offers a menu including
hospitality services, a centralized reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.
TIMESHARE PROPERTY AFFILIATION AGREEMENTS. More than 3,500 timeshare
resorts are affiliated with the RCI Network, of which approximately 1,400
resorts are located in the United States and Canada, more than 1,300 in Europe
and Africa, more than 500 in Mexico and Latin America, and more than 320 in the
Asia-Pacific region. The terms of RCI's affiliation agreement with its
affiliates generally require that the developer enroll each new timeshare
purchaser at the resort as a subscribing member of RCI, license the affiliated
resort to use the RCI name and trademarks for certain purposes, set forth the
materials and services RCI will provide to the affiliate, and generally describe
RCI's expectations of the resort's management. The affiliation agreement also
includes stipulations for representation of the exchange program, minimum
enrollment requirements and treatment of exchange guests. Affiliation agreements
are typically for a term of five years, and automatically renew thereafter for
terms of one to five years
12
unless either party takes affirmative action to terminate the relationship. RCI
makes available a wide variety of goods and services to its affiliated
developers, including publications, advertising, sales and marketing materials,
timeshare consulting services, resort management software, travel packaging and
property management services.
RCI LICENSED MARKS AND INTELLECTUAL PROPERTY. The service marks "RCI",
"Resort Condominiums International" and related trademarks and logos are
material to RCI's business. RCI and its subsidiaries actively use the marks. All
of the material marks used in RCI's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. We own the marks used in RCI's
business.
COMPETITION. The global timeshare exchange industry is comprised of a
number of entities, including resort developers and owners. RCI's largest
competitor is Interval International Inc. ("Interval"), formerly our wholly
owned subsidiary, and a few other smaller firms. Based upon industry sources, we
believe that 98% of the nearly 5,000 timeshare resorts in the world are
affiliated with either RCI or Interval. Based upon 1997 published statistics
(which are the most recent published statistics) and our information, RCI
had over 2.5 million timeshare households that are members, while Interval had
approximately 850,000 timeshare households that are members. Also, in 1997, RCI
confirmed more than 1.8 million exchange transactions while Interval confirmed
approximately 480,000 transactions. As a result, based on 1997 business volume,
RCI services approximately 73% of members and approximately 79% of exchange
transactions. RCI is bound by the terms of a Consent Order issued by the Federal
Trade Commission which restricts the right of RCI to solicit, induce, or attempt
to induce clients of Interval to either terminate or not to renew their existing
Interval contracts. The proposed Consent Order contains certain other
restrictions. The restrictions generally expired on or before December 17, 1999.
SEASONALITY. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year, revenues are generally
slightly higher in the first quarter in comparison to other quarters of the
year. The Company cannot predict whether this trend will continue in the future
as the timeshare business expands outside of the United States and Europe, and
as global travel patterns shift with the aging of the world population.
AVIS CAR RENTAL FRANCHISE BUSINESS
GENERAL. On October 17, 1996, we completed the acquisition of all of the
outstanding capital stock of Avis, Inc. which together with its subsidiaries,
licensees and affiliates, operated the Avis Worldwide Vehicle System (the "Avis
System"). As part of our previously announced plan, on September 24, 1997, we
completed the initial public offering of our former subsidiary, ARAC, which
owned and operated the company-owned Avis car rental operations. We currently
own approximately 18% of the outstanding Common Stock of ARAC. We no longer own
or operate any car rental locations but own the Avis brand name and the Avis
System, which we license to our franchisees, including ARAC, the largest Avis
System franchisee.
The Avis System is comprised of approximately 4,200 rental locations,
including locations at the largest airports and cities in the United States and
approximately 160 other countries and territories and a fleet of approximately
431,000 vehicles during the peak season, all of which are operated by
franchisees. Approximately 92.5% of the Avis System rental revenues in the
United States are received from locations operated by ARAC directly or under
agency arrangements, with the remainder being received from locations operated
by independent licensees. The Avis System in Europe, Africa, part of Asia and
the Middle East is operated under franchise by Avis Europe Ltd. ("Avis Europe").
INDUSTRY. The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two principal
segments: general use (mainly at airport and downtown locations) and local
(mainly at downtown and suburban locations). The car rental industry rents
primarily from on-airport, near-airport, downtown and suburban locations to
business and leisure travelers and to individuals who have lost the use of their
vehicles through accident, theft or breakdown.
13
In addition to revenue from vehicle rentals, the industry derives significant
revenue from the sale of rental related products such as insurance, refueling
services and loss damage waivers (a waiver of the franchisee's right to make a
renter pay for damage to the rented car).
Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the travelers'
employers, (ii) business travelers who do not rent under negotiated contractual
arrangements (but who may receive discounts through travel, professional or
other organizations), (iii) leisure travelers and (iv) renters who have lost the
use of their own vehicles through accident, theft or breakdown. Contractual
arrangements normally are the result of negotiations between rental companies
and large corporations, based upon rates, billing and service arrangements, and
influenced by reliability and renter convenience. Business travelers who are not
parties to negotiated contractual arrangements and leisure travelers generally
are influenced by advertising, renter convenience and access to special rates
because of membership in travel, professional and other organizations.
AVIS SYSTEM AND WIZARD SYSTEM SERVICES. The Avis System provides Avis
System franchisees access to the benefits of a variety of services, including
(i) comprehensive safety initiatives, including the "Avis Cares" Safe Driving
Program, which offers vehicle safety information, directional assistance such as
satellite guidance, regional maps, weather reports and specialized equipment for
travelers with disabilities; (ii) standardized system identity for rental
location presentation and uniforms; (iii) training program and business
policies, quality of service standards and data designed to monitor service
commitment levels; (iv) marketing/advertising/public relations support for
national consumer promotions including Frequent Flyer/Frequent Stay programs and
the Avis System internet web site; and (v) brand awareness of the Avis System
through the familiar "We try harder" service announcements.
Avis System franchisees are also provided with access to the Wizard System,
a reservations, data processing and information management system for the
vehicle rental business. The Wizard System is linked to all major travel
networks on six continents through telephone lines and satellite communications.
Direct access with other computerized reservations systems allows real-time
processing for travel agents and corporate travel departments. Among the
principal features of the Wizard System are:
o an advanced graphical interface reservation system;
o "Roving Rapid Return," which permits customers who are returning
vehicles to obtain completed charge records from radio-connected "Roving
Rapid Return" agents who complete and deliver the charge record at the
vehicle as it is being returned;
o "Preferred Service," an expedited rental service that provides
customers with a preferred service rental record printed prior to
arrival, a pre-assigned vehicle and fast convenient check out;
o "Wizard on Wheels," which enables the Avis System locations to assign
vehicles and complete rental agreements while customers are being
transported to the vehicle;
o "Flight Arrival Notification," a flight arrival notification system
that alerts the rental location when flights have arrived so that
vehicles can be assigned and paperwork prepared automatically;
o "Avis Link," which automatically identifies the fact that a user of a
major credit card is entitled to special rental rates and conditions,
and therefore sharply reduces the number of instances in which the
Company inadvertently fails to give renters the benefits of negotiated
rate arrangements to which they are entitled;
o interactive interfaces through third-party computerized reservation
systems; and
o sophisticated automated ready-line programs that, among other things,
enable rental agents to ensure that a customer who rents a particular
type of vehicle will receive the available vehicle of that type which
has the lowest mileage.
The Wizard System processes incoming customer calls, during which customers
inquire about locations, rates and availability and place or modify
reservations. In addition, millions of inquiries and
14
reservations come to franchisees through travel agents and travel industry
partners, such as airlines. Regardless of where in the world a customer may be
located, the Wizard System is designed to ensure that availability of vehicles,
rates and personal profile information is accurately delivered at the proper
time to the customer's rental destination.
AVIS LICENSED MARKS AND INTELLECTUAL PROPERTY. The service mark "Avis",
related marks incorporating the word "Avis", and related logos are material to
our business. Our subsidiaries, joint ventures and licensees, actively use these
marks. All of the material marks used in Avis's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. We own the marks used in Avis's business. The purposes for
which we are authorized to use the marks include use in connection with
businesses in addition to car rental and related businesses, including, but not
limited to, equipment rental and leasing, hotels, insurance and information
services.
LICENSEES AND LICENSE AGREEMENTS. We have 65 independent licensees that
operate locations in the United States. The largest licensee, ARAC, accounts for
approximately 91% of all United States licensees' rentals. Other than ARAC,
certain licensees in the United States pay us a fee equal to 5% of their total
time and mileage charges, less all customer discounts, of which we are required
to pay 40% for corporate licensee-related programs, while seven licensees pay 8%
of their gross revenue. Licensees outside the United States normally pay higher
fees. Other than ARAC, our United States licensees currently pay 55 cents per
rental agreement for use of certain portions of the Wizard System, and they are
charged for use of other aspects of the Wizard System.
ARAC has entered into a Master License Agreement with the Company, which
grants ARAC the right to operate the Avis vehicle rental business in certain
specified territories. Pursuant to the Master License Agreement, ARAC has
agreed to pay us a monthly base royalty of 3.0% of ARAC's gross revenue. In
addition, ARAC has agreed to pay a supplemental royalty of 1.0 % of gross
revenue payable quarterly in arrears which will increase 0.2% effective January
1, 2001 and will increase 0.1% per year effective August 1, 2001 and in each of
the following two years thereafter to a maximum of 1.5% (the "Supplemental
Fee"). These fees have been paid by ARAC since January 1, 1997. Until the fifth
anniversary of the effective date of the Master License Agreement, the
Supplemental Fee or a portion thereof may be deferred by ARAC if ARAC does not
attain certain financial targets.
In 1997, Avis Europe's previously paidup license for Europe, the Middle
East and Africa was modified to provide for a paid-up license only as to Europe
and the Middle East. Avis Europe will pay us annual royalties for Africa and a
defined portion of Asia which covers the area between 60E longitude and 150E
longitude, excluding Australia, New Zealand and Papua New Guinea. The Avis
Europe license expires on November 30, 2036, unless earlier termination is
effected in accordance with the license terms. Avis Europe also entered into a
Preferred Alliance Agreement with us under which Avis Europe became a preferred
alliance provider for car rentals to RCI customers in Europe, Asia and Africa.
COMPETITION. The vehicle rental industry is characterized by intense price
and service competition. In any given location, franchisees may encounter
competition from national, regional and local companies, many of which,
particularly those owned by the major automobile manufacturers, have greater
financial resources than Avis and us. However, because the Company's royalty
fees are based upon the gross revenue of Avis and the other Avis System
franchisees, our revenue is not directly dependent on franchisee profitability.
The franchisees' principal competitors for commercial accounts in the
United States are the Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Principal competitors for unaffiliated business and
leisure travelers in the United States are Budget Rent A Car Corporation, Hertz
and National, and, particularly with regard to leisure travelers, Alamo
Rent-A-Car Inc. In addition, the franchisees compete with a variety of smaller
vehicle rental companies throughout the country.
SEASONALITY. The car rental franchise business is subject to seasonal
variations in customer demand, with the third quarter of the year, which covers
the summer vacation period, representing the peak season for vehicle rentals.
Therefore, any occurrence that disrupts travel patterns during the summer period
15
could have a material adverse effect on the franchisee's annual performance and
affect our annual financial performance. The fourth quarter is generally the
weakest financial quarter for the Avis System because there is limited leisure
travel and a greater potential for adverse weather conditions at such time.
FLEET SEGMENT
Pursuant to our program to divest non-strategic businesses and assets, on
June 30, 1999, we completed the disposition of our Fleet Segment for aggregate
consideration of $1.8 billion (see "Recent Developments -- Strategic
Developments"). The following is a description of the Fleet Segment businesses
through June 30, 1999.
GENERAL. Through our former PHH Vehicle Management Services Corporation and
PHH Management Services PLC subsidiaries, we offered a full range of fully
integrated fleet management services to corporate clients and government
agencies. These services included vehicle leasing, advisory services and fleet
management services for a broad range of vehicle fleets. Advisory services
included fleet policy analysis and recommendations, benchmarking, and vehicle
recommendations and specifications. In addition, we provided managerial services
which included ordering and purchasing vehicles, arranging for their delivery
through dealerships located throughout the United States, Canada, the United
Kingdom, Germany and the Republic of Ireland, as well as capabilities throughout
Europe, administration of the title and registration process, as well as tax and
insurance requirements, pursuing warranty claims with vehicle manufacturers and
re-marketing used vehicles. We also offered various leasing plans for our
vehicle leasing programs, financed primarily through the issuance of commercial
paper and medium-term notes and through unsecured borrowings under revolving
credit agreements, securitization financing arrangements and bank lines of
credit.
Through our former PHH Vehicle Management Services and Wright Express
subsidiaries in the United States and our former Harpur Group Limited subsidiary
in the U.K., we also offered fuel and expense management programs to
corporations and government agencies for the effective management and control of
automotive business travel expenses. By utilizing our service cards issued under
the fuel and expense management programs, a client's representatives were able
to purchase various products and services such as gasoline, tires, batteries,
glass and maintenance services at numerous outlets.
We also provided fuel and expense management programs and a centralized
billing service for companies operating truck fleets in each of the United
Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks were
furnished with courtesy cards together with a directory listing the names of
strategically located truck stops and service stations, which participated in
this program. Service fees were earned for billing, collection and record
keeping services and for assuming credit risk. These fees were paid by the
truck stop or service stations and/or the fleet operator and were based upon
the total dollar amount of fuel purchased or the number of transactions
processed.
PRODUCTS. Our fleet management services were divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represented the services our clients require to lease
a vehicle that included vehicle acquisition, vehicle re-marketing, financing,
and fleet management consulting. Open-end leases were the prevalent structure in
North America representing 96% of the total vehicles financed in North America
and 86% of the total vehicles financed worldwide. The open-end leases were
structured on either a fixed rate or floating rate basis (where the interest
component of the lease payment changes month to month based upon an index)
depending upon client preference. The open-end leases were typically structured
with a 12-month minimum lease term, with month to month renewals thereafter. The
typical unit remained under lease for approximately 34 months. A client received
a full range of services in exchange for a monthly rental payment that included
a management fee. The residual risk on the value of the vehicle at the end of
the lease term remained with the lessee under an open-end lease, except for a
small amount that was retained by the lessor.
Closed-end leases were structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms were 24
months, 36 months, and 48 months. The closed end structure was
16
preferred in Europe due to certain accounting regulations. The closed-end lease
structure was utilized by approximately 71% of the vehicles leased in Europe,
but only 14% of the vehicles leased on a worldwide basis. We utilized
independent third party valuations and internal projections to set the
residuals utilized for these leases.
The Fee Based Products were designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products were Fuel
Services, Maintenance Services and Accident Management. Fuel Services
represented the utilization of our proprietary cards to access fuel through a
network of franchised and independent fuel stations. The cards operated as a
universal card with centralized billing designed to measure and manage costs. In
the United States, Wright Express was the leading fleet fuel cards supplier with
over 125,000 fuel facilities in its network and in excess of 1.6 million cards
issued. Wright Express distributed its fuel cards and related offerings through
three primary channels: (1) the WEX-branded Universal Card, which was issued
directly to fleets by Wright Express, (2) the Private Label Card, under which
Wright Express provided private label fuel cards and related services to
commercial fleet customers of major petroleum companies, and (3) Co-Branded
Marketing, under which Wright Express fuel cards were co-branded and issued in
conjunction with products and services of partners such as commercial vehicle
leasing companies. In the UK, our Harpur Group Limited and Cendant Business
Answers PLC subsidiaries, utilizing the All Star and Dial brands, maintained the
largest independent fueling network with more than 12,000 fueling sites and more
than 1.2 million cards in circulation.
We offered customer vehicle maintenance charge cards that were used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provided customers with benefits such as (1) negotiated discounts off full
retail prices through our convenient supplier network, (2) access to our
in-house team of certified maintenance experts that monitor each card
transaction for policy compliance, reasonability, and cost effectiveness, and
(3) inclusion of vehicle maintenance card transactions in a consolidated
information and billing database that helps evaluate overall fleet performance
and costs. We maintained an extensive network of service providers in the United
States, Canada, and the United Kingdom to ensure ease of use by the client's
drivers.
We also provided our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the initial
accident report from the driver (i.e. facilitating emergency towing services and
car rental assistance, etc.) (2) organizing the entire vehicle appraisal and
repair process through a network of preferred repair and body shops, and (3)
coordinating and negotiating potential accident claims. Customers received
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provided customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensured that vehicle appraisals and repairs were appropriate,
cost-efficient, and in accordance with each customer's specific repair policy.
COMPETITIVE CONDITIONS. The principal factors for competition in vehicle
management services were service, quality and price. We were competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We ranked second in the United States in the
number of vehicles under management and first in the number of proprietary fuel
and maintenance cards for fleet use in circulation. There were four other major
providers of fleet management service in the United States, hundreds of local
and regional competitors, and numerous niche competitors who focused on only one
or two products and did not offer the fully integrated range of products
provided by us. In the United States, it is estimated that only 45% of fleets
are leased by third party providers.
REAL ESTATE DIVISION
REAL ESTATE FRANCHISE SEGMENT
GENERAL. Our Real Estate Franchise Segment represented approximately 10.6%,
8.6% and 7.9% of our revenue for the years ended December 31, 1999, 1998 and
1997, respectively. In August 1995, we acquired Century 21 Real Estate
Corporation ("CENTURY 21"). CENTURY 21 is the world's largest
17
franchisor of residential real estate brokerage offices with approximately
6,300 independently owned and operated franchised offices with approximately
97,000 active sales agents worldwide. In February 1996, we acquired the ERA
franchise system. The ERA system is a leading residential real estate brokerage
franchise system with over 2,500 independently owned and operated franchised
offices and more than 25,000 sales agents worldwide. In May 1996, we acquired
Coldwell Banker Corporation ("COLDWELL BANKER"), the owner of the world's
premier brand for the sale of million-dollar-plus homes and now the third
largest residential real estate brokerage franchise system with approximately
3,000 independently owned and operated franchised offices and approximately
73,000 sales agents worldwide.
We believe that application of our franchisee focused management strategies
and techniques can significantly increase the revenues produced by our real
estate brokerage franchise systems while also increasing the quality and
quantity of services provided to franchisees. We believe that independent real
estate brokerage offices currently affiliate with national real estate
franchisors principally to gain the consumer recognition and credibility of a
nationally known and promoted brand name. Brand recognition is especially
important to real estate brokers since homebuyers are generally infrequent users
of brokerage services and have often recently arrived in an area, resulting in
little ability to benefit from word-of-mouth recommendations.
During 1996, we implemented a preferred alliance program in the real estate
division which seeks to capitalize on the valuable access point the CENTURY 21,
COLDWELL BANKER and ERA brokerage offices provide for service providers who wish
to reach these home buyers and sellers as well as agents and brokers. Preferred
alliances include providers of property and casualty insurance, moving and
storage services, mortgage and title insurance, Internet services, sellers of
furniture, telecommunications and other household goods.
Our real estate brokerage franchisees are dispersed geographically, which
minimizes the exposure to any one broker or geographic region. During 1997, we
acquired a preferred equity interest in NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms. NRT
acquired the assets of National Realty Trust, the largest franchisee of the
COLDWELL BANKER system, in August 1997. NRT has also acquired other independent
regional real estate brokerage businesses which NRT has converted to COLDWELL
BANKER, CENTURY 21 and ERA franchises. As a result, NRT is the largest
franchisee of our franchise systems, based on gross commissions, and represents
6% of the franchised offices. Of the nearly 12,000 franchised offices in our
real estate brokerage franchise systems, no individual broker, other than NRT,
accounts for more than 1% of our real estate brokerage revenues.
REAL ESTATE FRANCHISE SYSTEMS
CENTURY 21. CENTURY 21 is the world's largest residential real estate
brokerage franchisor, with approximately 6,300 independently owned and operated
franchise offices with more than 97,000 active sales agents located in 24
countries and territories.
The primary component of CENTURY 21's revenue is service fees on
commissions from real estate transactions. Service fees are 6% of gross
commission income. CENTURY 21 franchisees who meet certain levels of annual
gross revenue (as defined in the franchise agreements) are eligible for the
CENTURY 21 Incentive Bonus ("CIB") Program, which results in a rebate payment to
qualifying franchisees determined in accordance with the applicable franchise
agreement (up to 2% of gross commission income in current agreements) of such
annual gross revenue. For 1999, approximately 16% of CENTURY 21 franchisees
qualified for CIB payments and such payments aggregated less than 1% of gross
commissions.
CENTURY 21 franchisees generally contribute 2% (subject to specified
minimums and maximums) of their brokerage commissions each year to the CENTURY
21 National Advertising Fund (the "NAF") which in turn disburses them for local,
regional and national advertising, marketing and public relations campaigns. In
1999, the NAF spent approximately $49 million on advertising and marketing
campaigns.
COLDWELL BANKER. COLDWELL BANKER is the world's premier brand for the sale
of million-dollar-plus homes and the third largest residential real estate
brokerage franchisor, with
18
approximately 3,000 independently owned and operated franchise offices in the
United States, Canada and 11 other countries, with approximately 73,000 sales
agents. The primary revenue from the COLDWELL BANKER system is derived from
service and other fees paid by franchisees, including initial franchise fees
and ongoing services. COLDWELL BANKER franchisees pay us annual fees consisting
of ongoing service and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenue (subject to annual rebates
to franchisees who achieve certain threshold levels of gross commission income
annually, and to minimums and maximums on advertising fees).
COLDWELL BANKER franchisees who meet certain levels of annual gross revenue
(as defined in the franchise agreements) are eligible for the Performance
Premium Award ("PPA") Program, which results in a rebate payment to qualifying
franchisees determined in accordance with the applicable franchise agreement (up
to 3% in current agreements) of such annual gross revenue. For 1999,
approximately 30% of COLDWELL BANKER franchisees qualified for PPA payments and
such payments aggregated less than 1% of gross commissions.
In 1999, Coldwell Banker Real Estate Corporation began offering a
commercial only franchise, licensing the Coldwell Banker Commercial trademarks
and systems. Coldwell Banker Commercial franchisees pay annual fees consisting
of ongoing service fees and marketing fees, generally 6% and 1%, respectively,
of their annual gross revenue (subject to annual rebates to franchisees who
achieve certain revenue thresholds annually, and to minimums and maximums on the
marketing fees).
Advertising fees collected from COLDWELL BANKER franchisees are generally
expended on local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. In 1999, the COLDWELL BANKER Advertising Funds expended
approximately $21 million for such purposes.
ERA. The ERA franchise system is a leading residential real estate
brokerage franchise system, with more than 2,500 independently owned and
operated franchise offices, and more than 25,000 sales agents located in 20
countries. The primary revenue from the ERA franchise system results from (i)
franchisees' payments of monthly membership fees ranging from $222 to $875 per
month, based on volume, plus $201 per branch and a per transaction fee of
approximately $124, and (ii) for franchise agreements entered into after July
1997, royalty fees equal to 6% of the franchisees' gross revenue. For franchise
agreements dated after July 1997, the Volume Incentive Program may result in a
rebate payment to qualifying franchisees determined in accordance with the
applicable franchise agreement.
In addition to membership fees and transaction fees, franchisees of the ERA
system pay (i) a fixed amount per month, which ranges from $239 to $958, based
on volume, plus an additional $239 per month for each branch office, into the
ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise agreements
entered into after July 1997, a contribution to the ERA NMF equal to 2% of the
franchisees' gross revenues, subject to minimums and maximums. The funds in the
ERA NMF are utilized for local, regional and national marketing activities,
including media purchases and production, direct mail and promotional activities
and other marketing efforts. In 1999, the ERA NMF spent approximately $11
million on marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES. We market real estate brokerage
franchises primarily to independent, unaffiliated owners of real estate
brokerage companies as well as individuals who are interested in establishing
real estate brokerage businesses. We believe that our existing franchisee base
represents another source of potential growth, as franchisees seek to expand
their existing business to additional markets. Therefore, our sales strategy
focuses on maintaining satisfaction and enhancing the value of the relationship
between the franchisor and the franchisee.
Our real estate brokerage franchise systems employ a national franchise
sales force consisting of approximately 125 salespersons and sales management
personnel, which is divided into separate sales organizations for the CENTURY
21, COLDWELL BANKER and ERA systems. These sales organizations are compensated
primarily through commissions on sales concluded. Members of the sales forces
are also encouraged to provide referrals to the other sales forces when
appropriate.
19
OPERATIONS -- REAL ESTATE BROKERAGE. Our brand name marketing programs for
the real estate brokerage business generally focus on increasing brand
awareness, in order to increase the likelihood of potential homebuyers and home
sellers engaging franchise brokers' services. Each brand has a dedicated
marketing staff in order to develop the brand's marketing strategy while
maintaining brand integrity. The corporate marketing services department
provides services related to production and implementation of the marketing
strategy developed by the brand marketing staffs.
Each brand provides its franchisees and their sales associates with
training programs that have been developed by such brand. The training programs
include mandatory programs instructing the franchisee and/or the sales associate
on how to best utilize the methods of the particular system and additional
optional training programs that expand upon such instruction. Each brand's
training department is staffed with instructors experienced in both real estate
practice and instruction. In addition, we have established regional support
personnel who provide consulting services to the franchisees in their respective
regions.
Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify the
highest levels of achievement within each system and provide a significant
incentive for franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential customers,
which referrals are developed from sources both within and outside of the
system.
Through our Cendant Supplier Services operations, we provide our
franchisees with volume purchasing discounts for products, services, furnishings
and equipment used in real estate brokerage operations. In addition to the
preferred alliance programs described hereinafter, Cendant Supplier Services
establishes relationships with vendors and negotiates discounts for purchases by
its customers. We do not maintain inventory, directly supply any of the products
or, generally, extend credit to franchisees for purchases. See "COMBINED
OPERATIONS -- Preferred Alliance and Co-Marketing Arrangements" below.
REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS. Our real estate brokerage
franchise agreements grant the franchises the right to utilize one of the brand
names associated with our real estate brokerage franchise systems to real estate
brokers under franchise agreements.
Our current form of franchise agreement for all real estate brokerage
brands is terminable by us for the franchisee's failure to pay fees thereunder
or other charges or for other material defaults under the franchise agreement.
In the event of such termination, the Century 21 and ERA agreements generally
provide that we are entitled to be compensated for lost revenues in an amount
equal to the average monthly franchise fees calculated for the remaining term of
the agreement. Pre-1996 agreements do not provide for liquidated damages of this
sort. See "CENTURY 21," "COLDWELL BANKER" and "ERA" above for more information
regarding the commissions and fees payable under our franchise agreements.
NRT is the largest franchisee, based on gross commission income, for our
real estate franchise systems. NRT's status as a franchisee is governed by
franchise agreements (the "Franchise Agreements") with our wholly owned
subsidiaries (the "Real Estate Franchisors") pursuant to which NRT has the
non-exclusive right to operate as part of the COLDWELL BANKER, ERA and CENTURY
21 real estate franchise systems at locations specified in the Franchise
Agreements. In February 1999, NRT entered into new fifty year franchise
agreements with the Real Estate Franchisors. These agreements require NRT to pay
royalty fees and advertising fees of 6.0% and 2.0% (2.5% for its COLDWELL BANKER
offices), respectively, on its annual gross revenues. Lower royalty fees apply
in certain circumstances. The Franchise Agreements generally provide
restrictions on NRT's ability to close offices beyond certain limits.
REAL ESTATE BROKERAGE SERVICE MARKS. The service marks "CENTURY 21,"
"COLDWELL BANKER," and "ERA" and related logos are material to our business.
Through our franchisees, we actively use these marks. All of the material marks
in each franchise system are registered (or have applications pending for
registration) with the United States Patent and Trademark Office. The marks used
in the real estate brokerage systems are owned by us through our subsidiaries.
20
COMPETITION. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors to
our real estate brokerage franchise systems are the Prudential, GMAC Real Estate
(also known as Better Homes & Gardens) and RE/MAX real estate brokerage brands.
In addition, a real estate broker may choose to affiliate with a regional chain
or not to affiliate with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the real estate
brokerage industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. We also believe that the perceived value of its brand names to
prospective franchisees is, to some extent, a function of the success of its
existing franchisees.
The ability of our real estate brokerage franchisees to compete in the
industry is important to our prospects for growth, although, because franchise
fees are based on franchisee gross commissions or volume, our revenue is not
directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation and
other factors. A franchisee's success may also be affected by general, regional
and local economic conditions. The effect of these conditions on our results of
operations is substantially reduced by virtue of the diverse geographical
locations of our franchises. At December 31, 1999, the combined real estate
franchise systems had approximately 8,300 franchised brokerage offices in the
United States and nearly 12,000 offices worldwide. The real estate franchise
systems have offices in 34 countries and territories in North and South America,
Europe, Asia, Africa and Australia.
SEASONALITY. The principal sources of our real estate segment revenue are
based upon the timing of residential real estate sales, which are lower in the
first calendar quarter each year, and relatively level the other three quarters
of the year. As a result, our revenue from the real estate brokerage segment of
its business is less in the first calendar quarter of each year.
MOVE.COM GROUP SEGMENT
GENERAL. Move.com Group operates a popular network of Web sites, which
offer a wide selection of quality relocation, real estate and home-related
products and services. We seek to improve the often stressful and demanding
moving experience by providing a one-source, "friend-in-need" solution before,
during and after the move. Move.com Group strives to establish strong, long-term
relationships with consumers by offering quality products and services for each
phase of the moving process from finding a home to improving an existing home.
Move.com Group also provides a multi-channel distribution platform for its
business partners, who are trying to reach a highly targeted and valued group of
consumers at the most opportune times. Move.com Group currently generates the
following types of revenue from its business partners: listing subscription
fees, advertising and sponsorship fees, e-commerce transaction fees and website
management fees. During 1999, Move.com Group represented an immaterial part of
our business operations. On December 31, 1999, Move.com Group had 178 full-time
employees.
The Internet is revolutionizing the way in which businesses and consumers
interact, share information and consummate transactions. According to
International Data Corporation, or IDC, the number of Internet users worldwide
will grow to approximately 502 million by the end of 2003 from approximately 196
million in 1999. The Internet places at consumers' fingertips an unprecedented
amount of information and offers a convenient way for them to select and order
products and services. The rapid growth in users combined with the Internet's
unique ability to connect a broad range of consumers and businesses is driving
growth in electronic commerce. IDC estimates that the total value of Internet
commerce will increase to $1.3 trillion in 2003 from $111 billion in 1999.
MOVE.COM NETWORK. The move.com network is comprised of the following Web
sites that offer quality relocation, real estate and home-related content and
services.
Move.com. Move.com is Move.com Group's Internet portal and flagship site.
Move.com is dedicated to providing consumers a one-stop solution for their
relocation, real estate and home-related needs before, during and after a move.
Move.com combines home and rental housing listings, mortgage
21
services and numerous moving and home-related services to help make moves
easier, less stressful, more efficient and enjoyable. Move.com offers content
and services through planning, renting, buying, selling, moving and living site
tabs.
Rent.net. Rent Net is a leading online rental and relocation guide and
advertising source for the apartment industry, representing properties and
relocation services in more than 3,000 cities across North America. Rent Net's
paying advertising clients include managers and owners of over 13,000 apartment
communities representing over 3 million apartment units in all 50 states and
Canada. Rent Net provides rental listings containing detailed property
descriptions, photographs, floor plans, 360- virtual tours, and direct
communication links to rental property managers. According to Media Metrix, Rent
Net was the most visited Web site for real estate rental listings, based on
unique visitors, during 1999, including December 1999, the most recently
measured period.
Seniorhousing.net. Senior Housing Net provides the move.com network with a
directory of over 750 retirement communities, assisted living facilities and
nursing homes containing detailed property descriptions, photographs, floor
plans, 360- virtual tours and direct communication links to onsite managers.
Corporatehousing.net. Corporate Housing Net is the leading online directory
and advertising source for the temporary/corporate housing industry, with over
400 local and national listing providers across the United States and Canada.
Through Corporate Housing Net, users are able to access detailed property
information, including photos, floor plans and available amenities, and may
contact leasing agents via e-mail, fax or phone.
Selfstorage.net. Self Storage Net is the leading online directory and
advertising source for the self storage industry, with listings for over 3,000
storage facilities across the United States and Canada. Through Self Storage
Net, users are able to access descriptions of facilities, photos and maps, as
well as direct communication links to facility owners or managers.
Century21.com. Century21.com is the official Web site for the CENTURY21
(Registered Trademark) real estate franchise system. The CENTURY21 (Registered
Trademark) franchise system is comprised of over 6,300 independently owned and
operated offices with approximately 97,000 brokers and agents worldwide, in more
than 24 countries and territories. The CENTURY21 (Registered Trademark)
franchise system provides the move.com network with home listings and brand
exposure. Move.com Group manages the Web site's maintenance and technical
support and acts as an advertising placement agent.
Coldwellbanker.com. Coldwellbanker.com is the official Web site for the
COLDWELL BANKER (Registered Trademark) real estate franchise system. The
COLDWELL BANKER (Registered Trademark) franchise system has over 3,000
independently owned and operated real estate offices with more than 73,000 sales
associates throughout the United States, Canada and 11 other countries. The
COLDWELL BANKER (Registered Trademark) franchise system provides the move.com
network with listings of residential and vacation properties and brand exposure.
Move.com Group manages the Web site's maintenance and technical support and acts
as an advertising placement agent.
Era.com. Era.com is the official Web site for the ERA (Registered
Trademark) real estate franchise system. The ERA (Registered Trademark)
franchise system is comprised of more than 2,500 independently owned and
operated offices with approximately 25,000 sales associates worldwide. The ERA
(Registered Trademark) franchise system provides the move.com network with
residential property listings and brand exposure. Move.com Group manages the Web
site's maintenance and technical support and acts as an advertising placement
agent.
Welcomewagon.com. Welcomewagon.com is the official Web site of Welcome
Wagon/Getko. Welcomewagon.com provides the move.com network with local community
information, including a directory of more than 40,000 local merchants and
service providers nationwide.
COMPETITION. The market for online relocation and real estate-related
services is relatively new, intensely competitive and rapidly changing. Move.com
Group's success will depend on its ability to continue to provide comprehensive,
timely and useful information to attract and maintain both consumers and
business partners.
22
Move.com Group believes that the primary competitive factors in attracting
consumers to the move.com network are: (i) brand recognition; (ii) quality,
depth, breadth and presentation of content and services; (iii) functionality;
(iv) ease-of-use; and (v) quality and reliability of service.
Move.com Group believes that the principal competitive factors in
attracting advertisers and content providers to the move.com network are: (i)
amount of traffic and user demographics; (ii) quality of service; (iii) ability
to provide targeted audience and quality leads that become customers; (iv)
cost-effectiveness of advertising on the move.com network; and (v) ability to
integrate content and purchase opportunities.
Move.com Group's main existing and potential competitors for consumers and
advertisers include: (i) Web sites offering home or apartment listings together
with other related services, such as apartments.com, cyberhomes.com,
homehunter.com, homestore.com, homeseekers.com, homeadvisor.com, iown.com,
newhomenetwork.com and realestate.com; (ii) online services or websites
targeting buyers and sellers of real estate properties and financial services
companies, offering real estate-related products and services; (iii) general
purpose consumer Web sites, search engine providers, and websites maintained by
Internet service providers that offer relocation, real estate or home-related
content; (iv) traditional forms of media such as radio, television, newspapers
and magazines; and (v) offline relocation, real estate and home-related product
and service companies.
Move.com Group believes its various competitive advantages, including its
affiliation with Cendant's real estate franchise systems and its proprietary
database and content will permit it to compete favorably with its competitors.
However, many of Move.com Group's existing competitors, as well as a number of
potential new competitors, have great name recognition, larger existing consumer
bases and significantly greater financial, technical and marketing resources.
Move.com Group may not be able to compete successfully for consumers, clients
and staff and increased competition could result in price reductions, reduced
margins or loss of market share, any of which could materially adversely affect
its business, results of operations and financial condition.
RELOCATION SEGMENT
GENERAL. Our Relocation Segment represented approximately 8%, 8% and 9% of
our revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
Our Cendant Mobility Services Corporation ("Cendant Mobility") subsidiary is the
largest provider of employee relocation services in the world. Our Cendant
Mobility subsidiary assists more than 100,000 transferring employees annually,
including over 17,000 employees internationally each year in 106 countries and
2,000 destination locations. At December 31, 1999, we employed approximately
2,400 people in our relocation business.
SERVICES. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers primarily include evaluation, inspection and selling
of transferees' homes or purchasing a transferee's home, issuing equity advances
(generally guaranteed by the corporate client), certain home management
services, assistance in locating a new home at the transferee's destination,
consulting services and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on equity advances and broker referral fees. Substantially,
all costs associated with such services are reimbursed by the corporate client,
including, if necessary, repayment of equity advances and reimbursement of
losses on the sale of homes purchased in most cases (other than government
clients). As a result of the obligations of most corporate clients to reimburse
Cendant Mobility for losses on resale and guarantee repayment of equity
advances, our exposure on such items is limited to the credit risk of the
corporate clients of our relocation businesses and not on the potential changes
in value of residential real estate. We believe such risk is minimal, due to the
credit quality of the corporate clients of our relocation subsidiaries. In
transactions where we assume the risk for losses on the sale of homes, which
comprise approximately 5% of net revenue, we control all facets of the resale
process, thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program provides employees guaranteed offers for
their homes and assists clients in the management of
23
employees' productivity during their relocation. Cendant Mobility allows clients
to outsource their relocation programs by providing clients with professional
support for planning and administration of all elements of their relocation
programs. The majority of new proposals involve outsourcing due to corporate
downsizing, cost containment, and increased need for expense tracking.
Our relocation accounting services supports auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management department provides coordination for moves
involving a large number of employees over a short period of time. Services
include planning, communications, analysis, and assessment of the move. Policy
consulting provides customized consultation and policy review, as well as
industry data, comparisons and recommendations. Cendant Mobility also has
developed and/or customized numerous non-traditional services including
outsourcing of all elements of relocation programs, moving services, and spouse
counseling.
Our moving service, with over 63,000 shipments annually, provides support
for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of van
line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists in
developing a custom marketing plan and monitors its implementation through the
broker. The Cendant Mobility contact also acts as an advocate, with the local
broker, for employees in negotiating offers which helps clients' employees
benefit from the highest possible price for their homes.
Our affinity services provide value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provide home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 53,000 individuals with approximately
22,000 real estate transactions annually.
Our international assignment service provides a full spectrum of services
for international assignees. This group coordinates the services previously
discussed; however, they also assist with immigration support, candidate
assessment, intercultural training, language training, and repatriation
coaching.
VENDOR NETWORKS. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 350 principal
brokers and 700 associate brokers. Our van line, insurance, appraisal and
closing networks allow us to receive discounts while maintaining control over
the quality of service provided to clients' transferees.
COMPETITIVE CONDITIONS. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and second in the United Kingdom.
SEASONALITY. Our principal sources of relocation service revenue are based
upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second and third quarters.
MORTGAGE SEGMENT
GENERAL. Our Mortgage Segment represented approximately 7%, 7% and 4% of
our revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
Through our Cendant Mortgage Corporation ("Cendant Mortgage") subsidiary, we are
the ninth largest originator of residential first mortgage loans in the United
States, and, on a retail basis, we are the sixth largest originator in 1999. We
offer services consisting of the origination, sale and servicing of residential
first mortgage loans. A full line of
24
first mortgage products are marketed to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms, including CENTURY 21, COLDWELL BANKER and ERA franchisees, and other
mortgage banks. Cendant Mortgage is a centralized mortgage lender conducting its
business in all 50 states. At December 31, 1999, Cendant Mortgage had
approximately 4,200 employees.
Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage backed securities or as participation
certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association. Cendant
Mortgage also services mortgage loans. We earn revenue from the sale of the
mortgage loans to investors, as well as from fees earned on the servicing of
the loans for investors. Mortgage servicing consists of collecting loan
payments, remitting principal and interest payments to investors, holding
escrow funds for payment of mortgage related expenses such as taxes and
insurance, and otherwise administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Internet. Mortgage information is offered to consumers through a web
interface that is owned by Cendant Mortgage. The Web Interface was
completed in 1999 and contains educational materials, rate quotes and
a full mortgage application. This content is made available to the
customers of partner organizations. Partners include Century 21,
Coldwell Banker, ERA, Cendant Mobility, Mellon Bank, US Bank, BET, GFN
and Move.com Group. In addition, we have developed and launched our own
online brand -- InstaMortgage.com in 1999. Applications from online
customers are processed via our teleservices platform.
o Teleservices. Mortgages are offered to consumers through an 800 -- number
Teleservices operation based in New Jersey under programs for real estate
organizations (Phone In-Move In(Registered Trademark)), private label
programs for financial institutions, and for relocation clients in
conjunction with the operations of Cendant Mobility. The teleservices
operation provides us with retail mortgage volume that contributes to
Cendant Mortgage ranking as the sixth largest retail originator in
1999 according to "Inside Mortgage Finance".
o Point of Sale. Mortgages are offered to consumers through field sales
professionals with all processing, underwriting and other origination
activities based in New Jersey. These field sales professionals
generally are located in real estate offices around the United States
and are equipped with software to obtain product information, quote
interest rates and prepare a mortgage application with the consumer.
o Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans. Financial
institutions include banks, thrifts and credit unions. Such institutions
are able to sell their closed loans to a large number of mortgage
lenders and generally base their decision to sell to Cendant Mortgage on
price, product menu and/or underwriting. We also have
wholesale/correspondent originations with mortgage banks affiliated with
real estate brokerage organizations.
STRATEGY. Our strategy is to increase market share by expanding all of our
sources of business with emphasis on purchase mortgage volume through our
teleservice. Phone In-Move In (Registered Trademark) and Internet (Log In-Move
In (Registered Trademark) programs Phone In-Move In (Registered Trademark) was
developed for real estate firms in 1997 and has been established in over 5,600
real estate offices at December 31, 1999. We are well positioned to expand our
financial institutions business channel by working with financial institutions
which desire to outsource their mortgage originations operations to Cendant
Mortgage. We also will expand our relocation mortgage volume through increased
linkage with Cendant Mobility. Each of these market share growth opportunities
is driven by our low cost teleservices platform, which is centralized in
Mt. Laurel, New Jersey. The competitive advantages of using a centralized,
efficient and high quality teleservices platform allows us to capture a higher
percentage of the highly fragmented mortgage market more cost effectively.
COMPETITIVE CONDITIONS. The principal methods of competition in mortgage
banking services are service, quality, products and price. There are an
estimated 20,000 national, regional or local providers of
25
mortgage banking services across the United States. Cendant Mortgage has
increased its mortgage origination market share in the United States to 1.8% in
1999 from 0.9% in 1998. The market share leader reported a 7.3% market share in
the United States according to "Inside Mortgage Finance" for 1999. Competitive
Conditions can also be impacted by shifts in consumer preference for variable
rate mortgages from fixed rate mortgages. Consumer demand for variable rate
mortgages has increased in the second half of 1999.
SEASONALITY. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity, which is
based upon the timing of residential real estate sales. Real estate sales are
lower in the first calendar quarter each year and relatively level the other
three quarters of the year. As a result, our revenue from the mortgage services
business is less in the first calendar quarter of each year.
DIRECT MARKETING DIVISION
Our direct marketing division is divided into two segments: individual
membership and insurance/ wholesale. The individual membership segment, with
approximately 25 million memberships, provides customers with access to a
variety of discounted products and services in such areas as retail shopping,
travel, auto and home improvement. The individual membership products and
services are designed to enhance customer loyalty by delivering value to the
customer. The insurance/wholesale segment, with nearly 31 million customers,
markets and administers insurance products, primarily accidental death and
dismemberment insurance, and also provides products and services such as
checking account enhancement packages, financial products and discount programs
to customers of various financial institutions. The direct marketing activities
are conducted principally through our Cendant Membership Services, Inc.
subsidiary and certain of our other wholly owned subsidiaries, including FISI,
BCI and CIMS.
We derive our direct marketing revenue principally from membership service
fees, insurance premiums and product sales. We solicit members and customers
for many of our programs by direct marketing and by using a direct sales force
to call on financial institutions, companies, associations and other groups.
Some of our individual memberships and those of Netmarket are available online
to interactive computer users via major online services and the Internet's World
Wide Web. See "Direct Marketing Distribution Channels".
INDIVIDUAL MEMBERSHIP SEGMENT
Our Individual Membership segment represented approximately 18%, 17% and
18% of our revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. We affiliate with business partners such as leading financial
institutions, retailers, and oil companies to offer membership as an enhancement
to their credit card, charge card or other customers. Participating institutions
generally receive commissions on initial and renewal memberships, based on a
percentage of the net membership fees. Individual memberships are marketed,
primarily using direct marketing techniques, through participating institutions
with us generally paying for the marketing costs to solicit the prospective
members. The member pays us and our business partners directly for the service
and, in most instances, the member is billed via a credit card. Membership fees
vary depending upon the particular membership program, and annual fees generally
range from $49 to $79 per year. Most of our memberships are for one-year
renewable terms, and members are generally entitled to unlimited use during the
membership period of the service for which the members have subscribed. Members
generally may cancel their memberships and obtain a full refund (or, in some
cases, on a pro rata basis) at any point during the membership term. Most of the
services may be accessed either through the Internet (online) or through the
mail or by telephone (offline).
OFFLINE PRODUCTS
Individual membership programs offer consumers discounts on over 500,000
Products and services by providing shop at home convenience in areas such as
retail shopping, travel, automotive, dining and home improvement. Membership
programs include among others Shoppers Advantage (Registered Trademark) ,
Travelers Advantage (Registered Trademark) , AutoVantage (Registered Trademark),
Credit Card Guardian (Registered Trademark) , and PrivacyGuard (Registered
Trademark) , along with other membership programs. A brief description of the
different types of membership programs is as follows:
26
Shopping. Shoppers Advantage (Registered Trademark) is a discount shopping
program whereby we provide product price information and home shopping services
to our members. Our merchandise database contains information on over 100,000
brand name products, including a written description of the product, the
manufacturer's suggested retail price, the vendor's price, features and
availability. All of these products may be purchased through our independent
vendor network. Vendors include manufacturers, distributors and retailers
nationwide. Individual members are entitled to an unlimited number of toll free
calls seven days a week to our shopping consultants, who access the merchandise
database to obtain the lowest available fully delivered cost from participating
vendors for the product requested and accept any orders that the member may
place. We inform the vendor providing the lowest price of the member's order and
that vendor then delivers the requested product directly to the member. We act
as a conduit between our members and the vendors; accordingly, we do not
maintain an inventory of products.
As part of our individual member Shoppers Advantage (Registered
Trademark) program, we distribute catalogs four to ten times per year to
certain members. In addition, we automatically extend the manufacturer's
warranty on all products purchased through the Shoppers Advantage (Registered
Trademark) program and offer a low price guarantee. Generally, with the
Shoppers Advantage (Registered Trademark) membership program, there is a
product feature whereby a member receives an automatic 2-year extended warranty
protection on any product purchased through the Shoppers Advantage (Registered
Trademark) service (which means that this membership service will
automatically extend the manufacturer's U.S. warranty to 2 years from the date
of purchase of the particular product in question). There is a similar feature
for the CompleteHome (Registered Trademark) membership service (now being
renamed as the Homeowner Savings Network) and for members of the Family
Funsaver Club (Registered Trademark) .
Travel. Travelers Advantage (Registered Trademark) is a discount travel
service program whereby our Cendant Travel, Inc. ("Cendant Travel") subsidiary
(one of the ten largest full service travel agencies in the U.S.), obtains
information on schedules and rates for major scheduled airlines, hotel chains
and car rental agencies from the American Airlines Sabre (Registered
Trademark) Reservation System. In addition, we maintain our own database
containing information on tours, travel packages and short notice travel
arrangements. Members book their reservations through Cendant Travel, which
earns commissions (ranging from 5%-25%) on all travel sales from the providers
of the travel services. Certain Travelers Advantage (Registered Trademark)
members can earn cash awards from Cendant Travel equal to a specified
percentage (generally 5%) of the price of travel arrangements purchased by the
member through Cendant Travel. Travel members may book their reservations by
making toll-free telephone calls seven days a week, generally twenty-four hours
a day to agents at Cendant Travel. Cendant Travel provides its members with
special negotiated rates on many air, car and hotel bookings. Cendant Travel's
agents reserve the lowest air, hotel and car rental fares available for the
members' travel requests and offer a low price guarantee on such fares.
Auto. Our auto service, AutoVantage (Registered Trademark) , offers
members comprehensive new car summaries and preferred prices on new domestic
and foreign cars purchased through our independent dealer network (which
includes over 1,800 dealer franchises); discounts on maintenance, tires and
parts at more than 25,000 locations, including over 35 chains, including
nationally known names, such as Goodyear (Registered Trademark) and Firestone
(Registered Trademark) , plus regional chains and independent locations; and
used car valuations. AutoVantage Gold (Registered Trademark) offers members
additional services including road and tow emergency assistance 24 hours a day
in the United States and trip routing.
Credit Card Registration. Our Credit Card Guardian (Registered Trademark)
and "Hot-Line" services enable consumers to register their credit and debit
cards with us so that the account numbers of these cards may be kept securely
in one place. If the member notifies us that any of these credit or debit cards
are lost or stolen, we will notify the issuers of these cards, arrange for them
to be replaced and reimburse the member for certain amounts for which the card
issuer may hold the member liable.
PrivacyGuard Service. The PrivacyGuard (Registered Trademark) and
Credentials (Registered Trademark) services provide members with a comprehensive
and understandable means of monitoring key personal information. The service
offers a member access to information in certain key areas including: credit
history and monitoring, driving records maintained by state motor vehicle
authorities, and medical files maintained by third parties. This service is
designed to assist members in obtaining and monitoring information concerning
themselves that is used by third parties in making decisions such as granting or
denying credit or setting insurance rates.
27
Buyers Advantage. The Buyers Advantage (Registered Trademark) service
extends the manufacturer's warranty on products purchased by the member. This
service also rebates 20% of repair costs and offers members price protection by
refunding any difference between the price the member paid for an item and its
reduced price, should the item be sold at a lower price within sixty days after
purchase. In addition, the service offers return guarantee protection by
refunding the purchase price of an item that the member wishes to return.
Home-Related Services. The Homeowner Savings Network service is designed
to save members time and money in maintaining and improving their homes.
Members can order do-it-yourself "How-To Guides" or call the service for a
tradesperson referral. Tradespersons are available in all 50 states through a
toll-free phone line. Members also receive discounts ranging from 10% to 50%
off on a full range of home-related products and services.
Family FunSaver Club. The Family FunSaver Club (Registered Trademark)
provides its members with a variety of benefits, including the opportunity to
inquire about and purchase family travel services and family related products,
the opportunity to buy new cars at a discount, a discounted family dining
program and a Family Values Guide offering coupon savings on family related
products such as movie tickets, casual restaurants, and theme parks.
Health Services. The HealthSaver (Service Mark) membership provides
discounts ranging from 10% to 60% off retail prices on prescription drugs,
eyewear, eye care, dental care, selected health-related services and fitness
equipment, including sporting goods. Members may also purchase prescription and
over-the-counter drugs through the mail.
Other Clubs. Our former North American Outdoor Group, Inc. subsidiary
("NAOG") owned and operated the North American Hunting Club (Registered
Trademark) , the North American Fishing Club (Registered Trademark) , the
Handyman Club of America (Registered Trademark) , the National Home Gardening
Club (Registered Trademark) and the PGA Tour Partners Club (Registered
Trademark) , among others. Members of these clubs received fulfillment kits,
discounts on related goods and services, magazines and other benefits. In
October 8, 1999, we completed the disposition of 94% of NAOG for approximately
$141 million and we retained an equity interest in NAOG of approximately 6%
(see "Recent Developments").
ONLINE PRODUCTS
Until September 15, 1999, we operated Netmarket (www.netmarket.com), our
flagship online, membership-based, value-oriented consumer site which offers
discounts on over 500,000 products and services. Netmarket offers discounted
shopping and other benefits to both members and non-members, with members
receiving preferred pricing, access to special items, cash back benefits, low
price guarantees and extended warranties on certain items. In addition,
Netmarket and/or the Individual Membership business also offer the following
online products and services: AutoVantage (Registered Trademark) , Travelers
Advantage (Registered Trademark) and PrivacyGuard (Registered Trademark)
membership programs and Haggle Zone (Registered Trademark) and Fair Agent
(Registered Trademark) consumer services. As part of our internet strategy, on
September 15, 1999, we donated Netmarket Group, Inc.'s (the owner of our
online membership businesses) outstanding common stock to a charitable trust,
and Netmarket issued additional shares of its common stock to certain of its
marketing partners. Accordingly, as a result of the change in ownership in
Netmarket common stock from us to an independent third party, Netmarket's
operating results are no longer included in our Consolidated Financial
Statements. We retained the opportunity to participate in Netmarket's value
through the ownership of the convertible preferred stock of Netmarket, which is
ultimately exchangeable, at our option, into at least 78% of Netmarket's diluted
common shares. (See "Recent Developments -- Internet Developments").
Prior to its sale in 1999, we operated Match.com, Inc. ("Match"), a
leading matchmaking service on the Internet, servicing over 100,000 consumers.
Subscriptions to the Match service range from approximately $10 per month to
just under $60 for one year.
INSURANCE/WHOLESALE SEGMENT
Our Insurance/Wholesale segment represented approximately 11%, 10% and 11%
of our revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. We affiliate with financial institutions,
28
including credit unions and banks, to offer their respective customer base
competitively priced insurance products, primarily accidental death and
dismemberment insurance and term life insurance, as well as an array of services
associated with the Individual Membership segment.
ENHANCEMENT PACKAGE SERVICE. Primarily through our FISI subsidiary, we
sell enhancement packages for financial institution consumer and business
checking and deposit account holders. FISI's financial institution clients
select a customized package of our products and services and then usually adds
its own services (such as unlimited check writing privileges, personalized
checks, cashiers' or travelers' checks without issue charge, or discounts on
safe deposit box charges or installment loan interest rates). With our
marketing and promotional assistance, the financial institution then offers the
complete package of account enhancements to its checking account holders as a
special program for a monthly fee. Most of these financial institutions choose
a standard enhancement package, which generally includes $10,000 of accidental
death and dismemberment insurance, travel discounts and a nationwide check
cashing service. Others may include our shopping and credit card registration
services, a financial newsletter or pharmacy, eyewear or entertainment
discounts as enhancements. The accidental death and dismemberment coverage is
underwritten under group insurance policies with independent insurers. We
continuously seek to develop new enhancement features, which may be added to
any package at an additional cost to the financial institution. We generally
charge a financial institution client an initial fee to implement this program
and monthly fees thereafter based on the number of customer accounts
participating in that financial institution's program. Our enhancement packages
are designed to enable a financial institution to generate additional fee
income, because the institution should be able to charge participating accounts
more than the combined costs of the services it provides and the payments it
makes to us.
Primarily through our National Card Control Inc. ("NCCI") subsidiary, we
also sell enhancement services to credit card issuers who make these services
available to their credit card holders to foster increased product usage and
loyalty. NCCI's clients create a customized package of our products and
services. These enhancements include loyalty products, such as frequent
flyer/buyer programs, as well as shopping, travel, concierge, insurance and
credit card registration services. Like FISI, NCCI generally charges its credit
card issuer clients an initial fee to implement the program and monthly fees
thereafter, based on the number of accounts participating in that institution's
program.
INSURANCE PRODUCTS. Through our BCI subsidiary, we serve as a third party
administrator for marketing accidental death insurance throughout the country
to the customers of BCI's financial institution clients. This accidental death
and dismemberment insurance is often combined with our other services to
enhance their value. These products are generally marketed through direct mail
solicitations, which generally offer $1,000 of accidental death insurance at no
cost to the customers and the opportunity to choose additional coverage of up
to $300,000. The annual premium generally ranges from $10 to $250. BCI also
acts as an administrator for term life, graded term life and hospital accident
insurance. BCI's insurance products and other services are offered through
banks and credit unions to their account holders.
DIRECT MARKETING DISTRIBUTION CHANNELS
We market our Individual Membership and Insurance/Wholesale products
through a variety of distribution channels. The consumer is ultimately reached
in the following ways: 1) at financial institutions or other associations
through direct marketing; 2) at financial institutions or other associations
through a direct sales force, participating merchants or general advertising;
and 3) through companies and various other entities.
Some of our and Netmarket's individual memberships, such as shopping,
travel, privacy guard and auto services, are available to computer users via
online services and the Internet's World Wide Web. These users are solicited
primarily through major online services such as America Online, traditional
offline direct marketing channels, major destination sites on the World Wide
Web, such as portals, and through our affinity partners. We believe that our and
Netmarket's interactive members account for approximately 4% of our total
members. Strategic alliances have been formed with online services and various
other companies, including many of the major Internet portals.
29
DIRECT MARKETING INTERNATIONAL OPERATIONS
Individual Membership and Insurance/Wholesale. Our Cendant International
Membership Services subsidiary has developed the international distribution of
enhancement package services and insurance products together with certain
individual memberships including shopping, auto and payment card protection.
As of December 31, 1999, Cendant International Membership Services had
expanded its international membership and customer base to approximately
thirteen million individuals. This base is driven by retail and wholesale
membership through over 35 major banks in Europe and Asia, as well as through
other distribution channels. We also have exclusive licensing agreements
covering the use of our merchandising systems in Australia, Japan and certain
other Asian countries under which licensees paid initial license fees and agree
to pay royalties to us on membership fees, access fees and merchandise service
fees paid to them. Royalties to us from these licenses were less than 1% of our
direct marketing revenues and profits in the years ended December 31, 1999,
1998 and 1997, respectively.
The economic impact of currency exchange rate movements on our business is
complex because it is linked to variability in real growth, inflation, interest
rates and other factors. Because we operate in a mix of services and numerous
countries, management believes currency exposures are fairly well diversified.
See Item 7A: "Quantitative and Qualitative Disclosures About Market Risk".
DIRECT MARKETING SEASONALITY
Our direct marketing businesses are generally not seasonal.
DIRECT MARKETING COMPETITION
Individual Membership. We believe that there are competitors, which offer
membership programs similar to ours, and some of these entities, which include
large retailers, travel agencies, insurance companies and financial service
institutions, have financial resources, product availability, technological
capabilities or customer bases that may be greater than ours. To date, we have
been able to compete effectively with such competitors. However, there can be
no assurances that we will continue to be able to do so. In addition, we
compete with traditional methods of merchandising that enjoy widespread
consumer acceptance, such as catalog and in-store retail shopping and shopping
clubs (with respect to our discount shopping service), and travel agents (with
respect to our discount travel service). Our systems are, for the most part,
not protected by patent.
Insurance/Wholesale. Each of our account enhancement services competes
with similar services offered by other companies, including insurance
companies. Many of the competitors are large and more established, with greater
resources and financial capabilities than ours. Finally, in attempting to
attract any relatively large financial institution as a client, we also may
from time to time compete with that institution's in-house marketing staff and
the institution's perception that it could establish programs with comparable
features and customer appeal without paying for the services of an outside
provider.
DIVERSIFIED SERVICES DIVISION
Our Diversified Services Division represented approximately 20%, 21% and
18% of our revenue for the years ended December 31, 1999, 1998 and 1997,
respectively.
CONTINUING OPERATIONS
TAX PREPARATION BUSINESS. In January 1998, we acquired Jackson Hewitt,
Inc. ("Jackson Hewitt") the second largest tax preparation service in the United
States. The Jackson Hewitt franchise system is comprised of a 43-state network
(plus the District of Columbia) with approximately 3,000 offices operating under
the trade name "Jackson Hewitt Tax Service". Office locations range from
stand-alone store front offices to offices within Wal-Mart Stores, Inc. and
Montgomery Ward & Co., Inc. locations. Through the use of proprietary
interactive tax preparation software, we are engaged in the preparation and
electronic filing of federal and state individual income tax returns. During
1999, Jackson Hewitt prepared approximately 1.38 million tax returns, which
represented an increase of 17% from the approximately 1.18 million tax returns
it prepared during 1998. To complement our tax preparation
30
services, we also offer accelerated check refunds and refund anticipation loans
to our tax preparation customers. We believe that the application of our focused
management strategies and techniques for franchise systems to the Jackson Hewitt
network can increase revenue produced by the Jackson Hewitt franchise system
while also increasing the quality and quantity of services provided to
franchisees.
Tax Services of America. During 1999, Jackson Hewitt, in conjunction with
two of its largest franchisees, created an independent joint venture, Tax
Services of America ("TSA") to maximize Jackson Hewitt's ability to add
independent tax preparation firms to its franchise system. Cendant initially
invested $5 million and approximately 80 company owned stores, and currently
has a 48% interest in the form of convertible preferred stock. TSA currently
has over 200 offices and is expected to prepare over 140,000 tax returns during
the 2000 filing season. TSA's primary objective is to grow by acquiring
independent tax preparation firms in areas where TSA is licensed to operate and
convert them to the Jackson Hewitt system.
NATIONAL CAR PARKS. Our National Car Parks ("NCP") subsidiary operates
commercial car parks in the UK and Europe, with over 60 years experience of
owning and/or managing a portfolio of nearly 500 car parks, mostly located in
city and town centers and at airports.
NCP owns or operates nearly 500 car parks across the UK and has
approximately 2,500 full and part-time employees. NCP provides a high-quality,
professional service, developing a total solution for its customers and for
organizations such as town and city administrations that wish to develop modern
and professionally managed parking and traffic management facilities, tailored
towards local business.
NCP owns and operates car parks in over 100 city and town centers
throughout the UK, most of which are regularly patrolled and many of which have
closed-circuit television surveillance. NCP is the only car park manager that
can provide the motorist with such a comprehensive geographical coverage and
such levels of investment in secured facilities. In addition, NCP is a leader
in on-airport car parking at UK airports, with over 31,000 car parking spaces
in facilities close to passenger terminals at ten airports across the UK.
Booking facilities are available through NCP's telesales service for convenient
car parking reservation at these airports, with free courtesy coach transfers
to and from airport terminals at most locations.
The brand name NCP is registered in the UK as a trademark. Furthermore,
the NCP trademark is in the process of being registered in the rest of the
European Community.
NCP's business has a distinct seasonal trend with revenue from parking in
city and town centers being closely associated with levels of retail business.
Therefore, peaks in revenue are experienced particularly around the Christmas
period. In respect of the airport parking side of the business, seasonal peaks
are experienced in line with summer vacations.
NCP's main competition is from non-commercial, local government
authorities who usually choose to operate car parking facilities themselves in
their respective cities and towns.
There is increasing government regulation over all aspects of transport
within the UK. Therefore, an objective of NCP is to work together with its
customers, local and national government and other service organizations in
order to maintain the mutually beneficial partnership between motorists and
city center environment.
INFORMATION TECHNOLOGY SERVICES. Our WizCom International, Ltd. ("WizCom")
subsidiary owns and operates the Wizard System more fully described under
"TRAVEL SERVICES -- Avis Car Rental Franchise Business -- Avis System and
Wizard System" above. In 1995, Budget Rent A Car Corporation ("Budget") entered
into a computer services agreement with WizCom that provides Budget with
certain reservation system computer services that are substantially similar to
computer services provided to the Avis System. WizCom has also entered into
agreements with hotel and other rental car companies to provide travel related
reservation and distribution system services.
OTHER SERVICES. Operating under the trade name "Welcome Wagon", we
distribute complimentary welcoming packages which provide new homeowners and
other consumers throughout the United States
31
and Canada with discounts for local merchants. These activities are conducted
through our Welcome Wagon International Inc. and Getko Group, Inc. subsidiaries.
We are exploring opportunities to leverage the assets and the distribution
channels of such subsidiaries.
DIVESTED BUSINESSES
ENTERTAINMENT PUBLICATIONS BUSINESS. In November 1999, we completed the
disposition of approximately 85% of EPub for approximately $281 million in
cash. In connection with the transaction, we will retain an equity interest in
EPub of approximately 15% (see "Recent Developments"). In addition, we will
have a designee on the EPub Board of Directors.
Through our EPub subsidiary, we offered discount programs in specific
markets throughout North America and certain international markets and enhanced
our Individual Membership and Insurance/ Wholesale segment products. We
believe that EPub is the largest marketer of discount program books of this
type in the United States. EPub has a sales force of approximately 1,100 people
with approximately 800 people soliciting schools and approximately 300 people
soliciting merchants.
EPub solicits restaurants, hotels, theaters, sporting events, retailers
and other businesses which agree to offer services and/or merchandise at
discount prices (primarily on a two-for-the-price-of-one or 50% discount
basis). EPub sells discount programs under its Entertainment (Registered
Trademark) , Entertainment (Registered Trademark) Values, Gold C (Registered
Trademark) and other trademarks, which typically provide discount offers to
individuals in the form of local discount coupon books. These books typically
contain coupons and/or a card entitling individuals to hundreds of discount
offers from participating establishments. Targeting middle to upper income
consumers, many of EPub's products also contain selected discount travel
offers, including offers for hotels, car rentals, airfare, cruises and tourist
attractions. More than 70,000 merchants with over 275,000 locations participate
in these programs. EPub also uses this national base of merchants to develop
other products, most notably, customized discount programs for major
corporations. These programs also may contain additional discount offers,
specifically designed for customized discount programs.
EPub's discount coupon books are sold annually by geographic area.
Customers are solicited primarily through schools and community groups that
distribute the discount coupon books and retain a portion of the proceeds for
their nonprofit causes. To a lesser extent, distribution occurs through
corporations as an employee benefit or customer incentive, as well as through
retailers and directly to the public. The discount coupon books are generally
provided to schools and community groups on a consignment basis. Customized
discount programs are distributed primarily by major corporations as loyalty
incentives for their current customers and/or as premiums to attract new
customers.
While prices of local discount coupon books vary, the customary price for
Entertainment (Registered Trademark) , Entertainment (Registered Trademark)
Values and Gold C (Registered Trademark) coupon books range between $10 and
$45. Customized discount programs are generally sold at significantly lower
prices. In 1998, over nine million for Entertainment (Registered Trademark) ,
Entertainment (Registered Trademark) Values and Gold C (Registered Trademark)
and other trademarked local coupon books were published in North America.
Sally Foster, Inc., a subsidiary of EPub, provides elementary and middle
schools and selected youth community groups with gift-wrap and other seasonal
products for sale in their fund-raising efforts. EPub uses the same sales force
that sells the discount coupon books to schools, attempting to combine the sale
of gift-wrap and the sale of discount coupon books. In addition, EPub has a
specialized Sally Foster sales force.
GREEN FLAG. In November 1999, we completed the disposition of our Green
Flag business unit for approximately $401 million in cash.
Green Flag is an assistance group in the UK providing a wide range of
emergency, support and rescue services to millions of drivers and home owners
in the UK through its Green Flag Motor, Green Flag Truck and Green Flag Home
services. Green Flag has approximately 900 full and part-time employees.
Using a well established network of 6,000 mechanics and 1,500 fully
equipped garages, Green Flag Motor provides roadside recovery and assistance
services to over 3.5 million members who can choose from five levels of cover.
A distinctive feature of the Green Flag Motor service is its partnership with
independent operators who provide emergency assistance to motorists throughout
the UK and Europe.
32
Using a network of specialists allows Green Flag to offer its customers a fast
service in emergency situations. Through regular inspections and strictly
enforced performance measures, Green Flag's teams of operators are able to
deliver reassurance to the customer, as well as a highly reliable service.
In the truck assistance sector, the Green Flag Truck service has developed
to include pay-on-use services in the UK and Europe and a service in the UK
suited to operators who run local delivery businesses. Service is provided
using the same network of independent operators that provide fast and efficient
expertise for businesses who cannot afford to be off the road.
A network of specialists is also available to provide Green Flag's
Emergency Home Assistance and Property Repair Services. Reassurance is key for
homeowners who take an insured assistance service or choose a pay-on-use
option. Two levels of coverage are available to insure against a wide range of
problems, including central heating, roofing, gas and electrical appliances.
Through its specially selected network of operators, 75% of Green Flag's calls
for assistance are completed within one hour, 90% within two hours.
Green Flag operates in a number of principal markets. Direct services to
the consumer is one route to market, but also through insurance companies, car
manufacturers and dealers and a large number of businesses that sell on Green
Flag assistance services as an optional or a mandatory product linked to their
own service, i.e. with car insurance or via a bank or building society account.
The brand name of 'Green Flag' (together with the LOGO) is registered in
the United Kingdom. There is also a pending registration for a European Union
Community Mark. In addition, we have registered or pending marks for other key
brands used within the business. These include names such as:
Fleetcall/Truckcall/Dialassist/React/ Locator/Home-call and Home Assistance
Services. Also registered is the CHEQUERED SIDE STRIPE used in connection with
the MOTOR Roadside Assistance and Recovery service. (This is a safety device
for use on vehicles, which attend at the roadside.)
Green Flag's operations are seasonally influenced in that the purchase of
motoring assistance follows holiday patterns and used car purchase, as well as
by weather conditions. This has a great impact on call volumes especially in
the winter.
CREDIT INFORMATION BUSINESS. Our former Central Credit Inc. ("CCI")
subsidiary (sold in August 1999) was a gambling patron credit information
business. CCI maintained a database of information provided by casinos
regarding the credit records of casino gaming patrons, and provided, for a fee,
such information and related services to its customers, which primarily
consisted of casinos. See "Recent Developments".
FINANCIAL PRODUCTS. Our former Essex Corporation ("Essex") subsidiary
(sold in January 1999) was a third-party marketer of financial products for
banks, primarily marketing annuities, mutual funds and insurance products
through financial institutions. Essex generally marketed annuities issued by
insurance companies or their affiliates, mutual funds issued by mutual fund
companies or their affiliates, and proprietary mutual funds of banks. Essex's
contracts with the insurance companies whose financial products it distributed
generally entitled Essex to a commission of slightly less than 1% on the
premiums generated through Essex's sale of annuities for these insurance
companies. See "Recent Developments".
TAX REFUND BUSINESS. Through our former Global Refund subsidiary (sold in
August 1999), we assisted travelers to receive valued added tax ("VAT") refunds
in 22 European countries, Canada and Singapore. Global Refund was the world's
leading VAT refund service, with over 125,000 affiliated retailers and seven
million transactions per year. Global Refund operated over 400 cash refund
offices at international airports and other major points of departure and
arrival worldwide. See "Recent Developments".
OTHER DIVESTED SERVICES. Our former Spark Services, Inc. ("Spark")
subsidiary (sold in August 1999) provided database-driven dating services to
over 300 radio stations throughout the United States and Canada. Spark was the
leading provider of dating and personals services to the radio industry. Spark
had also begun to test television distribution of its services through
infomercials, as well as through short form advertising and affiliation deals
with various programs. Consumers paid for Spark's services on a per minute of
usage transaction basis. See "Recent Developments".
33
COMBINED OPERATIONS
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS. We believe that there
are significant opportunities to capitalize on the significant and increasing
amount of aggregate purchasing power and marketing outlets represented by the
businesses in our business units. We initially tapped the potential of these
synergies within the lodging franchise systems in 1993 when we launched our
Preferred Alliance Program, under which hotel industry vendors provide
significant discounts, commissions and co-marketing revenue to hotel
franchisees plus preferred alliance fees to us in exchange for being designated
as the preferred provider of goods or services to the owners of our franchised
hotels or the preferred marketer of goods and services to the millions of hotel
guests who stay in the hotels and customers of our real estate brokerage
franchisees each year.
We currently participate in preferred alliance relationships with more
than 100 companies, including some of the largest corporations in the United
States. The operating profit generated by most new preferred alliance
arrangements closely approximates the incremental revenue produced by such
arrangements since the costs of the existing infrastructure required to
negotiate and operate these programs are largely fixed.
DISCONTINUED OPERATIONS
On August 12, 1998, we announced that our Executive Committee of the Board
of Directors committed to discontinue our consumer software and classified
advertising businesses by disposing of our wholly owned subsidiaries Cendant
Software Corporation ("Software") and Hebdo Mag International, Inc. ("Hebdo
Mag"). On December 15, 1998, we completed the sale of Hebdo Mag
to a company organized by Hebdo Mag management for approximately $450 million,
including approximately $315 million in cash and 7.1 million shares of our
common stock. On January 12, 1999, we completed the sale of Software to Paris
based Havas SA, a subsidiary of Vivendi SA, for $770 million in cash.
SOFTWARE. Our former Software subsidiary offered consumer software in
various multimedia forms, predominately on CD-ROM for personal computers. The
Software unit was one of the largest personal computer consumer software groups
in the world, and a leader in entertainment, educational and personal
productivity software. It included Sierra On-Line, Inc., Blizzard Entertainment
and Knowledge Adventure, Inc., and offered such titles as Diablo, Starcraft,
You Don't Know Jack, King's Quest, JumpStart, Math Blaster, Reading Blaster and
many others. These products were offered through a variety of distribution
channels, including specialty retailers, mass merchandisers, discounters and
schools.
CLASSIFIED ADVERTISING. Our former Hebdo Mag subsidiary was a publisher
of over 180 titles and distributor of classified advertising information with
operations in fifteen countries including Canada, France, Sweden, Hungary,
Taiwan, the United States, Italy, Russia, the Netherlands, Australia, Argentina
and Spain. Hebdo Mag was involved in the publication, printing and
distribution, via print and electronic media, of branded classified advertising
information products. Hebdo Mag had also expanded into other related business
activities, including the distribution of third-party services and classified
advertising web sites.
REGULATION
DIRECT MARKETING REGULATION. We market our products and services through a
number of distribution channels including telemarketing, direct mail and
online. These channels are regulated on the state and federal level and we
believe that these activities will increasingly be subject to such regulation.
Such regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members.
A number of our products and services (such as Travelers Advantage
(Registered Trademark) and certain insurance products) are also subject to
state and local regulations. We believe that such regulations do not have a
material impact on our business or revenues.
In November 1999, the Federal Gramm-Leach-Bliley Act became law. This
statute, among other things, modernized the regulatory structure affecting the
delivery of financial services to consumers.
34
Pursuant to this statute, additional requirements and limitations were adopted
relating to the sharing by financial institutions of certain customer
information with third parties such as our Direct Marketing division. Such
additional requirements and limitations will take effect in November 2000, at
the earliest, following the adoption of implementing regulation by the various
federal agencies which are charged with enforcing these matters. We do not
believe that this legislation will have a material impact on our business and
we were generally supportive of this legislation because we believe that it
adequately protects the legitimate privacy rights of the customers of those
financial institutions who partner with us in our marketing efforts, but does
so without unduly harming our own marketing efforts. We are also aware of, and
we are actively monitoring the status of, certain proposed privacy-related
state legislation that might be passed in the future; it is unclear at this
point what effect, if any, such state legislation might have on our business.
FRANCHISE REGULATION. The sale of franchises is regulated by various state
laws, as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but does
not require registration. Although no assurance can be given, proposed changes
in the FTC's franchise rule should have no adverse impact on our franchised
businesses. A number of states require registration or disclosure in connection
with franchise offers and sales. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of the
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While our franchising operations have
not been materially adversely affected by such existing regulation, we cannot
predict the effect of any future federal or state legislation or regulation.
REAL ESTATE REGULATION. The federal Real Estate Settlement Procedures Act
(RESPA) and state real estate brokerage laws restrict payments which real
estate brokers and mortgage brokers and other parties may receive or pay in
connection with the sales of residences and referral of settlement services
(e.g., mortgages, homeowners insurance, title insurance). Such laws may to some
extent restrict preferred alliance arrangements involving our real estate
brokerage franchisees, mortgage business and relocation business. Our mortgage
banking services business is also subject to numerous federal, state and local
laws and regulations, including those relating to real estate settlement
procedures, fair lending, fair credit reporting, truth in lending, federal and
state disclosure, and licensing. Currently, there are local efforts in certain
states which could limit referral fees to our relocation business.
It is a common practice for online mortgage and real estate-related
companies to enter into advertising, marketing and distribution arrangements
with other Internet companies and websites whereby the mortgage and real
estate-related companies pay fees for advertising, marketing and distribution
services and other goods and facilities. The applicability of RESPA's referral
fee prohibitions to the compensation provisions of these arrangements is
unclear and the Department of Housing and Urban Development has provided no
guidance to date on the subject. Although Move.com Group believes that it has
structured its relationships with Internet advertisers to ensure compliance
with RESPA, some level of risk is inherent absent amendments to the law or
regulations, or clarification from regulators.
TIMESHARE EXCHANGE REGULATION. Our timeshare exchange business is subject
to foreign, federal, state and local laws and regulations including those
relating to taxes, consumer credit, environmental protection and labor matters.
In addition, we are subject to state statutes in those states regulating
timeshare exchange services, and must prepare and file annually, with
regulators in states that require it, the "RCI Disclosure Guide to Vacation
Exchange". We are not subject to those state statutes governing the development
of timeshare condominium units and the sale of timeshare interests, but such
statutes directly affect the members and resorts that participate in the RCI
Network. Therefore, the statutes indirectly impact our timeshare exchange
business.
INTERNET REGULATION. Although Move.com Group's and other business units'
operations on the Internet are not currently regulated by any government agency
in the United States beyond regulations discussed above and applicable to
businesses generally, it is likely that a number of laws and regulations may be
adopted governing the Internet. In addition, existing laws may be interpreted
to apply to the
35
Internet in ways not currently applied. Regulatory and legal requirements are
subject to change and may become more restrictive, making Move.com Group's
compliance more difficult or expensive or otherwise restricting its ability to
conduct its business as it is now conducted.
EMPLOYEES
As of December 31, 1999, we employed approximately 28,000 persons
fulltime. Management considers our employee relations to be satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space and located at
9 West 57th Street, New York, NY 10019 with a lease term expiring in 2013. Many
of our general corporate functions are conducted at a building owned by us and
located at 6 Sylvan Way, Parsippany, New Jersey 07054 and at a building leased
by us and located at 1 Sylvan Way, Parsippany, New Jersey 07054 with a lease
term expiring in 2008.
Our travel segment has three properties which we own, a 166,000 square
foot facility in Virginia Beach, Virginia which serves as a satellite
administrative and reservations facility for Wizcom and ARAC, a 200,000 square
foot facility in Carmel, Indiana which serves as an administrative office for
RCI and a property located in Kettering, UK which is the European office for
RCI. The travel segment also leases space for its reservations centers and data
warehouse in Winner and Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and
Elizabethtown, Tennessee; Tulsa and Drumright, Oklahoma; Indianapolis, Indiana;
Orangeburg, South Carolina and St. John and Fredericton, New Brunswick, Canada
pursuant to leases that expire in 2000, 2004, 2007, 2004, 2002, 2001, 2000,
2001, 2008, 2009 and 2009, respectively. The Tulsa and Drumright, Oklahoma and
St. John and Fredericton, New Brunswick, Canada locations serves as an Avis car
rental reservations centers. In addition, the travel segment has 14 leased
offices spaces located within the United States and an additional 37 leased
spaces in various countries outside the United States.
The real estate franchise segment leases approximately seven properties in
various locations that function as sales offices, three of which are shared
with the travel segment.
The individual membership segment has its principal offices located in
Stamford and Trumbull, Connecticut. The individual membership segment leases
space for several of its call centers in Aurora, Colorado; Richmond, Virginia;
Westerville, Ohio; Nashville, Tennessee; Moore, Oklahoma; Houston and
Arlington, Texas; and Great Falls, Montana pursuant to leases that expire in
2000, 2007, 2005, 2006, 2003, 2005, 2000 and 2004, respectively. We also own
one building located in Cheyenne, Wyoming which serves as a call center. In
addition, the individual membership segment has leased smaller space in various
locations for business unit and ancillary needs.
The relocation segment has their main corporate operations located in
three leased buildings in Danbury, Connecticut with lease terms expiring in
2008, 2005 and 2004. There are also six regional offices located in Walnut
Creek, California; Oak Brook, Chicago, and Schaumburg, Illinois; Las Colinas,
Texas and Mission Viejo, California which provide operation support services
for the region pursuant to leases that expire in 2004, 2003, 2004, 2001 and
2003, respectively. We own the office in Mission Viejo. International offices
are located in Swindon, UK and Hong Kong, China, pursuant to leases that expire
in 2013 and 2001, respectively.
The mortgage segment has centralized its operations to one main area
occupying various leased offices in Mt. Laurel, New Jersey for a total of
approximately 885,000 square feet. The lease terms expire over the next five
years. Regional sales offices are located in Englewood, Colorado and Santa
Monica, California, pursuant to leases that expire in 2002 and 2005,
respectively.
The insurance/wholesale segment leases domestic space in Brentwood,
Tennessee; San Carlos, California; and Richmond, Virginia with lease terms
ending in 2002, 2003 and 2007, respectively. In addition, there are ten leased
locations internationally that function as sales and administrative offices for
CIMS with the main office located in Portsmouth, UK.
36
The Move.com Group segment occupies two leased offices in San Francisco,
with lease terms ending in 2003 and 2006.
We also own property in Westbury, New York and lease space in Garden City,
New York and Parsippany, New Jersey that supports the Diversified Services
Segment. The Garden City and Parsippany locations are the main operation and
administrative centers for Wizcom and Jackson Hewitt, respectively. In
addition, there are approximately nineteen leased office locations in the
United States. Internationally, we lease office space in the United Kingdom and
own one building in Birmingham, UK to support the National Car Parks business
unit.
We believe that such properties are sufficient to meet our present needs
and we do not anticipate any difficulty in securing additional space, as
needed, on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
A. CLASS ACTION AND OTHER LITIGATION AND GOVERNMENT INVESTIGATIONS
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K, approximately 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on our behalf and
several other lawsuits and arbitration proceedings have been filed in various
courts against us and other defendants.
In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW)
(D.N.J.) (the "Securities Action"), is a consolidated action consisting of over
sixty constituent class action lawsuits, that were originally filed in the
United States District Court for the District of New Jersey, the District of
Connecticut, and the Eastern District of Pennsylvania. The Securities Action is
brought on behalf of all persons who acquired securities of the Company and
CUC, except our PRIDES securities, between May 31, 1995 and August 28, 1998.
The Court granted the lead plaintiffs' unopposed motion for class certification
on January 27, 1999. Named as defendants are the Company; twenty-eight current
and former officers and directors of the Company, CUC and HFS; and Ernst &
Young LLP ("Ernst & Young"), CUC's former independent accounting firm.
The Amended and Consolidated Class Action Complaint in the Securities
Action alleges that, among other things, the lead plaintiffs and members of the
class were damaged when they acquired securities of the Company and CUC
because, as a result of accounting irregularities, the Company's and CUC's
previously issued financial statements were materially false and misleading,
and the allegedly false and misleading financial statements caused the prices
of the Company's and CUC's securities to be inflated artificially. The Amended
and Consolidated Complaint alleges violations of Sections 11, 12(a)(2), and 15
of the Securities Act of 1933 (the "Securities Act") and Sections 10(b), 14(a),
20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act").
Lead plaintiffs in the Securities Action seek damages for themselves in
unspecified amounts.
On December 14, 1998, the lead plaintiffs in the Securities Action moved
for partial summary judgment, on liability only, against the Company on the
claims under Section 11 of the Securities Act. The lead plaintiffs adjourned
this motion, however, without prejudice to their right to re-notice the motion
at a subsequent time.
On January 25, 1999, the Company answered the Amended Consolidated
Complaint and asserted Cross-Claims against Ernst & Young. The Company's
Cross-Claims allege that Ernst & Young failed to follow professional standards
to discover, and recklessly disregarded, the accounting irregularities, and is
therefore liable to the Company for damages in unspecified amounts. The
Cross-Claims assert claims for breaches of Ernst & Young's audit agreements
with the Company, negligence, breaches of fiduciary duty, fraud, and
contribution.
On March 26, 1999, Ernst & Young filed Cross-Claims against the Company
and certain of the Company's present and former officers and directors,
alleging that any failure to discover the accounting irregularities was caused
by misrepresentations and omissions made to Ernst & Young in the course of its
audits and other reviews of the Company's financial statements. Ernst & Young's
Cross-Claims assert
37
claims for breach of contract, fraud, fraudulent inducement, negligent
misrepresentation and contribu- tion. Damages in unspecified amounts are sought
for the costs to Ernst & Young associated with defending the various shareholder
lawsuits and for harm to Ernst & Young's reputation.
On December 7, 1999, we announced that we reached a preliminary agreement
to settle the Securities Action. (See "Litigation Settlements" below and Note 17
to the Consolidated Financial Statements).
Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the
"PRIDES Action") is a class action filed on June 15, 1998 and brought on behalf
of purchasers of the Company's PRIDES securities between February 24 and July
15, 1998. The PRIDES Action is a consolidation of Welch & Forbes, Inc. v.
Cendant Corp., et. al. with seven other class action lawsuits filed on behalf
of purchasers of PRIDES. Named as defendants are the Company; Cendant Capital
I, a statutory business trust formed by the Company to participate in the
offering of PRIDES securities; seventeen current and former officers and
directors of the Company, CUC and HFS; Ernst & Young; and the underwriters for
the PRIDES offering, Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith
Incorporated; and Chase Securities Inc.
The allegations in the Amended Consolidated Complaint in the PRIDES Action
are substantially similar to those in the Securities Action, and violations of
Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a)
of the Exchange Act are asserted. Damages in unspecified amounts are sought.
On November 11, 1998, the plaintiffs in the PRIDES Action brought motions
for (i) certification of a proposed class of PRIDES purchasers; (ii) summary
judgment against the Company on liability under Section 11 of the Securities
Act; and (iii) an injunction requiring the Company to place $300 million in a
trust account for the benefit of the PRIDES investors pending final resolution
of their claims. These motions were withdrawn in connection with a partial
settlement of the PRIDES Action (see Litigation Settlements below and Note 5 to
the Consolidated Financial Statements).
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D.N.J.) and
P. Schoenfield Asset ManagementLLC v. Cendant Corp., et al., (Civ. Action No.
98-4734) (D.N.J.) (the "ABI Actions") were initially commenced in October and
November of 1998, respectively, on behalf of a putative class of persons who
purchased securities of American Bankers Insurance Group, Inc. ("ABI") between
January 1998 and October 13, 1998. Named as defendants are the Company, four
former CUC officers and directors, and Ernst & Young. The complaints in the ABI
actions, as amended on February 8, 1999, assert violations of Sections 10(b),
14(e) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
Plaintiffs allege that they purchased shares of ABI common stock at artificially
inflated prices due to the accounting irregularities after we announced a cash
tender offer for 51% of ABI's outstanding shares of common stock in January
1998. Plaintiffs also allege that after the disclosure of the accounting
irregularities, we misstated our intention to complete the tender offer and a
second step merger pursuant to which the remaining shares of ABI stock were to
be acquired by us. Plaintiffs seek, among other things, unspecified compensatory
damages. The Company and the other defendants filed motions to dismiss the ABI
Actions on March 10, 1999. The United States District Court for the District of
New Jersey found that the complaints failed to state a claim upon which relief
could be granted and, accordingly, dismissed the complaints by order dated April
30, 1999. Plaintiff's appeal of the dismissal is scheduled to be argued before
the United States Court of Appeals for the Third Circuit on March 21, 2000.
B. OTHER LITIGATION
Prior to April 15, 1999, actions making substantially similar allegations
to the allegations in the Securities Action were filed by various plaintiffs on
their own behalf in the United States District Courts for the District of New
Jersey, the Eastern and Central Districts of California, the Southern District
of Florida, the Eastern District of Louisiana, the District of Connecticut and
the Eastern District of Wisconsin. The Company filed motions before the
Judicial Panel on Multidistrict Litigation (the "JPML") to transfer to the
District of New Jersey, for consolidation with the Securities Action, the
actions filed in judicial districts other than the District of New Jersey. The
motions to transfer were granted in August and
38
September, 1999. The District of New Jersey has granted the Company's motion to
dismiss two of these transferred actions: Stewart v. Cendant Corp., originally
filed in the District of Connecticut, and Wyatt v. Cendant Corp., originally
filed in the Southern District of Florida.
The Company has filed Cross-Claims against Ernst & Young in three of the
remaining transferred actions: McLaughlin v. Cendant Corp., originally filed in
the District of New Jersey; Yeager v. Cendant Corp. and Alexander v. Cendant
Corp. both originally filed in the Central District of California. Ernst & Young
has filed counterclaims and Cross-Claims against the Company in each of these
actions.
Among the actions transferred is Reliant Trading and Shepherd Trading Ltd.
v. Cendant Corp., originally filed in the Eastern District of Wisconsin. The
plaintiffs in Reliant allegedly purchased certain 4-3/4% Senior Notes
originally issued by HFS and claim to have converted these notes to shares of
Cendant common stock in April 1998, before our April 15, 1998 announcement
concerning the accounting irregularities. Plaintiffs seek, among other things,
rescission of the conversion of the notes, unspecified compensatory damages
resulting form the conversion, and additional unspecified damages resulting
from the original purchase of the notes at allegedly artificially inflated
prices.
On November 2, 1999, the Company moved for judgment on the pleadings
dismissing the Securities Act claims asserted against it. On December 10, 1999,
the parties filed a stipulation dismissing with prejudice claims of violations
of Sections 11, 12 and 15 of the Securities Act against all defendants and
claims of violations of Sections 10(b) and 20 of the Exchange Act against
certain present and former Cendant directors. On December 14, 1999, plaintiffs
filed a first Amended Complaint alleging violations of Section 10(b) of the
Exchange Act and breach of contract against the Company and violations of
Sections 10(b) and 20 of the Exchange Act against certain former and present
officers and directors of The Company. On January 14, 2000, the Company filed
an answer denying all material allegations in the First Amended Complaint.
Additionally, various counterclaims, cross-claims and third-party claims exist
between Ernst & Young and the Company and certain of its present and former
officers and directors.
Another action transferred to the District of New Jersey is Daystar
Special Situations Fund, L.P. and Daystar LLC v. Cendant Corp., originally filed
in the Southern District of New York in July 1999 to the District of New Jersey.
Plaintiffs in Daystar, allege that after disclosure of the accounting
irregularities by us in April 1998 certain material misstatements were made
regarding the full extent of the accounting irregularities. Plaintiffs allege
that they relied on such statements in purchasing over 3 million shares of
Cendant stock in April, May and June 1998. Plaintiffs seek, among other things,
damages in excess of $35 million. On October 26, 1999, all of the defendants,
including the Company, filed a motion to dismiss the Complaint. On November 29,
1999, the motion to dismiss was denied. On December 23, 1999, the Company filed
an answer denying all material allegations in the Complaint.
Kennilworth Partners, L.P. et al., v. Cendant Corp., et al., 98 Civ. 8939
(DC) (the "Kennilworth Action") was filed on December 18, 1998 on behalf of
three investment companies. Named as defendants are the Company; thirty of its
present and former officers and directors; HFS; and Ernst & Young. The
complaint in the Kennilworth Action, as amended on January 26, 1999, alleges
that the plaintiffs purchased convertible notes issued by HFS pursuant to an
indenture dated February 28, 1996 and were damaged when they converted their
notes into shares of common stock in the Company shortly prior to the Company's
April 15, 1998 announcement. The amended complaint asserts violations of
Sections 11, 12 and 15 of the Securities Act and Sections 10(b) and 20 of the
Exchange Act; a common-law breach of contract claim is also asserted. Damages
are sought in an amount estimated to be in excess of $13.6 million. On April
29, 1999, the Company moved to dismiss the Securities Act claims brought
against it. On August 10, 1999, the District Court dismissed plaintiffs' claims
under Sections 11 and 12(2) of the Securities Act against us and all of the
other defendants and dismissed the claims under Section 10(b) of the Exchange
Act against the individual officers and directors and Ernst & Young. On August
23, 1999, the Company filed an Answer and Affirmative Defenses, in which it
denied all material allegations in the amended complaint. In January 2000,
plaintiffs filed a Second Amended Complaint, asserting claims against Cendant
under Section 10(b) of the Exchange Act and for breach of contract.
Kevlin, et al v. Cendant Corp., No. C-98-12602-B (the "Kevlin Action"),
was commenced in December 1998 in the County Court of Dallas County, Texas.
According to the complaint, plaintiffs are
39
former shareholders of an entity known as Kevlin Services, Inc. In 1996, a
subsidiary of Cendant acquired all of the assets of Kevlin Services, Inc. in
exchange for approximately 1,155,733 shares of common stock of CUC International
Inc. According to the complaint, plaintiffs were to receive CUC shares worth
$26,370,000 and instead received shares worth substantially less than that
amount due to the impact of the accounting irregularities on the market price
for CUC common stock. Plaintiffs have asserted claims against Cendant, its
subsidiary and Ernst & Young for fraud, negligent misrepresentation, breach of
duty of good faith and fair dealing, breach of contract, conspiracy, negligence
and gross negligence. Plaintiffs seek compensatory and exemplary damages in
unspecified amounts. Cendant and its subsidiary have filed a general denial to
the allegations in the complaint. The parties have commenced discovery in this
case.
Raymond H. Stanton II and Raymond H. Stanton III v. Cendant Corp. is an
arbitration proceeding filed by Raymond H. Stanton II and Raymond H. Stanton
III, former owners of Dine-A-Mate, Inc. The Demand for Arbitration alleges that
the Stantons sold Dine-A-Mate stock to CUC in September 1996 in exchange for
929,930 shares of CUC common stock. The Demand alleges that due to the
accounting irregularities the price of CUC stock was artificially inflated at
the time and asserts claims for fraud, fraudulent inducement, breach of
warranty, and violation of Sections 18(a) and 10(b) of the Exchange Act. The
Stantons seek, among other things, damages equal to the differences between
$33,314,736 (the alleged value of the transaction) and the actual value of the
CUC stock they received in the sale, and punitive damages on their claims for
fraud and fraudulent inducement. The arbitration hearing is scheduled to take
place on May 2-5, 2000.
Janice G. Davidson and Robert M. Davidson v. Cendant Corp. (JAMS/Endispute -Los
Angeles No. 122002145) is an arbitration proceeding filed on December 17, 1998,
by Janice G. and Robert M. Davidson, former majority shareholders of a
California-based computer software firm acquired by the Company in a July 1996
stock merger (the "Davidson Merger"). The Davidsons' Demand for Arbitration
purported to assert claims against Cendant in connection with the Davidson
Merger and a May 1997 settlement agreement settling all disputes arising out of
the Davidson Merger (the "Davidson Settlement"). The Demand asserts claims for:
(i) securities fraud under federal, state and common law theories relating to
the Davidson Merger, through which the Davidsons received approximately
21,670,000 common shares of CUC stock and options on CUC stock in exchange for
all of their Davidson & Associates, Inc. common shares, based upon CUC's
accounting irregularities and alleged misrepresentations concerning the
Davidsons' employment as CUC executives; (ii) wrongful taking of trust property
based on fraud in connection with the Davidson Merger; (iii) unjust enrichment,
in connection with the Davidson Merger; (iv) rescission of the Davidson
Settlement for fraud under the federal securities laws, California Corporations
Code, and common law, and on grounds of unilateral mistake, failure of
consideration, and prejudice to the public interest; and (v) damages under the
Settlement Agreement for fraud in connection with the grant of CUC stock
options to the Davisdons under that Agreement. The Demand seeks unspecified
compensatory and punitive damages and a declaratory judgment that the Davidsons
are entitled to rescind the Davidson Settlement and that the claims in the
Demand are arbitrable.
Cendant answered the Demand on January 12, 1999, denying all of the
material allegations in the Demand, and also filed a Complaint for Injunctive
and Declaratory Relief against the Davidsons in the United States District
Court for the Central District of California (the "Cendant Complaint"), seeking
to enjoin the arbitration on the grounds that the parties to the Davidson
Settlement agreed therein not to arbitrate ten of the eleven claims contained
in the Demand, and that the arbitration clauses under which the Davidsons bring
their claims are inapplicable to the dispute. In February 1999, Cendant filed a
Motion for Preliminary Injunction seeking to enjoin the arbitration proceedings
pending the court's final resolution of the dispute on the merits. The
Davidsons filed a motion to dismiss the Cendant Complaint or for summary
judgment. On April 14, 1999, the court entered an order granting summary
judgment in favor of the Davidsons, denying Cendant's Motion for Preliminary
Injunction and dismissing the Cendant Complaint. The Company's appeal from this
order is pending before the United States Court of Appeals for the Ninth
Circuit. The arbitration has been stayed by agreement of the parties until the
Ninth Circuit issues a mandate on the appeal, except discovery is proceeding on
whether the Davidson Settlement should be rescinded.
40
On April 14, 1999, the Davidsons filed a complaint in the United States
District Court for the Central District of California against Cendant alleging
essentially the same claims asserted in the Demand. The complaint seeks
unspecified compensatory and punitive damages, and was filed purportedly to
toll the statue of limitations pending arbitration of the claims in the Demand.
Cendant's motion to transfer this case to the District Court of New Jersey was
granted by JPML on August 12, 1999.
Deutch v. Silverman, et al., No. 98-1998 (WHW) (the "Deutch Action"), is a
purported shareholder derivative action, purportedly filed on behalf of, and
for the benefit of the Company. The Deutch Action was commenced on April 27,
1998 in the District of New Jersey against certain of the Company's current and
former directors and officers; The Bear Stearns Companies, Inc.; Bear Stearns &
Co., Inc.; and, as a nominal party, the Company. The complaint in the Deutch
Action, as amended on December 7, 1998, alleges that certain individual
officers and directors of the Company breached their fiduciary duties by
selling shares of the Company's stock while in possession of non-public
material information concerning the accounting irregularities. The complaint
also alleges that the individual officers and directors breached their
fiduciary duties and committed acts of gross negligence by, among other things,
causing and/or allowing the Company to make a series of false and misleading
statements regarding the Company's financial condition, earnings and growth;
entering into an agreement to acquire ABI and later paying $400 million to ABI
in connection with termination of that agreement; re-pricing certain stock
options previously granted to certain Company executives; and entering into
certain severance and other agreements with Walter Forbes, the Company's former
Chairman, last summer under which Mr. Forbes received approximately $51 million
from the Company pursuant to an employment agreement we had entered into with
him in connection with the Cendant Merger. Damages are sought on behalf of
Cendant in unspecified amounts. The Company and the other defendants each moved
to dismiss the Deutch Action. On August 8, 1999, the Court dismissed certain
claims against some of the individual officers and directors and all claims
against the Bear Stearns defendants. The Court denied the Company's motion to
dismiss. On August 23, 1999, the Company filed its Answer and Affirmative
Defenses to the Complaint, in which it denied all of the material allegations
in the Complaint. On February 4, 2000, plaintiff moved for partial summary
judgment against the individual defendants, seeking damages in the amount of
$2.83 billion. The motion is scheduled to be heard on March 27, 2000.
Corwin v. Silverman et al., No. 16347-NC (the "Corwin Action"), was filed
on April 28, 1998 in the Court of Chancery for the State of Delaware. The
Corwin Action is purportedly brought derivatively, on behalf of the Company,
and as a class action, on behalf of all shareholders of HFS who exchanged their
HFS shares for CUC shares in connection with the Merger. The Corwin Action
names as defendants HFS and twenty-eight individuals who are or were directors
of the Company and HFS. The complaint in the Corwin Action, as amended on July
28, 1998, alleges that HFS and its directors breached their fiduciary duties of
loyalty, good faith, care and candor in connection with the Cendant Merger, in
that they failed to properly investigate the operations and financial
statements of CUC before approving the Merger at an allegedly inadequate price.
The amended complaint also alleges that the Company's directors breached their
fiduciary duties by entering into an employment agreement with our former
Chairman, Walter A. Forbes, in connection with the Merger that purportedly
amounted to corporate waste. The Corwin Action seeks, among other things,
rescission of the Merger and compensation for all losses and damages allegedly
suffered in connection therewith. On October 7, 1998, Cendant filed a motion to
dismiss the Corwin Action or, in the alternative, for a stay of the Corwin
Action pending determination of the Deutch Action. On June 30, 1999, the Court
of Chancery for the State of Delaware stayed the Corwin Action pending a
determination of the Deutch Action.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to accounting irregularities. The SEC staff
has advised us that its inquiry should not be construed as an indication by the
SEC or its staff that any violations of law have occurred. As a result of the
findings from our internal investigations, we made all adjustments considered
necessary which are reflected in previously filed financial statements.
Although we can provide no assurances that additional adjustments will not be
necessary as a result of these government investigations, we do not expect that
additional adjustments will be necessary.
41
C. LITIGATION SETTLEMENTS.
Settlement of Common Stock Class Action Litigation
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the principal securities class action pending against the
Company in the U.S. District Court in Newark, New Jersey relating to the
aforementioned class action lawsuits. Under the agreement, the Company would pay
the class members approximately $2.85 billion in cash, an increase from
approximately $2.83 billion previously reported. The increase is a result of
continued negotiation toward definitive documents relating to additional costs
to be paid to the plaintiff class. The settlement remains subject to execution
of a definitive settlement agreement and approval by the U.S. District Court. If
the preliminary settlement is not approved by the U.S. District Court, the
Company can make no assurances that the final outcome or settlement of such
proceedings will not be for an amount greater than that set forth in the
preliminary agreement. We currently plan to fund the settlement through the use
of available cash, the issuance of debt securities and/or the issuance of equity
securities. We intend to finance the cost of the settlement so as to maintain
our investment grade ratings. Please see the Company's Form 8-K, dated December
7, 1999, for a description of the preliminary agreement to settle the common
stock class action litigation.
The proposed settlements do not encompass all litigation asserting claims
associated with the accounting irregularities. We do not believe that it is
feasible to predict or determine the final outcome or resolution of these
unresolved proceedings. An adverse outcome from such unresolved proceedings
could be material with respect to earnings in any given reporting period.
However, the Company does not believe that the impact of such unresolved
proceedings should result in a material liability to the Company in relation to
its consolidated financial position or liquidity.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we entered into a stipulation of settlement with the
plaintiff's counsel representing the class of holders of our PRIDES securities
who purchased their securities on or prior to April 15, 1998 ("eligible
persons") to settle their class action lawsuit against us. Under the
stipulation of settlement, eligible persons will receive a new security -- a
Right -- for each PRIDES security held on April 15, 1998. For example, if a
person held 100 PRIDES on April 15, 1998, they would receive 100 Rights.
Current holders of PRIDES will not receive any Rights (unless they also held
PRIDES on April 15, 1998). We had originally announced a preliminary agreement
in principle to settle such lawsuit on January 7, 1999. The final agreement
maintained the basic structure and accounting treatment as the preliminary
agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per share ($351 million pre-tax), in the
fourth quarter of 1998 associated with the settlement agreement in principle to
settle the PRIDES securities class action. We recorded an increase in
additional paid-in capital of $350 million offset by a decrease in retained
earnings of $228 million resulting in a net increase in shareholders' equity of
$122 million as a result of the prospective issuance of the Rights. As a
result, the settlement should not reduce net book value. In addition the
settlement is not expected to reduce 1999 earnings per share unless our common
stock price materially appreciates.
At any time during the life of the Rights, holders of Rights may (a) sell
them or (b) exercise them by delivering to us three Rights together with two
PRIDES in exchange for two new PRIDES (the "New PRIDES"). For example, if a
holder of Rights exchanges three rights together with two current Income
PRIDES, they will receive two New Income PRIDES. If a holder of Rights
exchanges three Rights together with two Growth PRDIDES, they will receive two
New Growth PRIDES. The terms of the New PRIDES will be the same as the
currently outstanding PRIDES, except that the conversion rate will be revised
so that, at the time the Rights are distributed, each of the New PRIDES will
have a value equal to $17.57 more than each original PRIDES, based upon a
generally accepted valuation model. Based upon the closing price per share of
$17.78 of our Common Stock (calculated based on the average closing price per
share of our common stock for the five day period ended February 18, 2000), the
effect of the issuance of the New PRIDES will be to distribute approximately 18
million more shares of our common stock when the mandatory purchase of our
common stock associated with the PRIDES occurs in February of 2001.
42
The settlement agreement also requires us to offer to sell 4 million
additional PRIDES (having identical terms to currently outstanding PRIDES) (the
"Additional PRIDES") at "theoretical value" to holders of Rights for cash.
Theoretical value will be based on the same valuation model utilized to set the
conversion rate of the New PRIDES. The offering of Additional PRIDES will be
made only pursuant to a prospectus filed with the SEC. We currently expect to
use the proceeds of such an offering to repurchase our common stock and for
other general corporate purposes. The arrangement to offer Additional PRIDES is
designed to enhance the trading value of the Rights by removing up to 6 million
Rights from circulation via exchanges associated with the offering. If holders
of Rights do not acquire all such PRIDES, they will be offered to the public.
Under the settlement agreement, we have also agreed to file a shelf
registration statement for an additional 15 million PRIDES, which could be
issued by us at any time for cash. However, during the last 30 days prior to
the expiration of the Rights in February 2001, we will be required to make
these additional PRIDES available to holders of Rights at a price in cash equal
to 105% of the theoretical value of the additional PRIDES as of a specified
date. The PRIDES, if issued, would have the same terms as the currently
outstanding PRIDES and could be used to exercise Rights.
On June 15, 1999, the United States District Court for the District of New
Jersey entered an order and judgment approving the settlement and awarding fees
to counsel to the class.
One objector, who objected to a portion of the settlement notice
concerning fees to be sought by counsel to the class, and the amount of fees
sought by counsel to the class, has filed an appeal to the U.S. Court of
Appeals for the Third Circuit from the order and judgement approving the
settlement. Cendant believes this appeal is without merit. Counsel for the
plaintiff class has moved to dismiss this appeal. This motion is pending before
the Third Circuit.
On September 7, 1999, Cendant moved the District Court for an order
disallowing claims by purported class members seeking a total of approximately
4 million Rights pursuant to the settlement, on the grounds that such claims
were filed untimely and/or not supported by appropriate documentation. On
October 6, 1999, the District Court of New Jersey heard oral argument on the
Company's motion. On October 20, 1999, the Court issued an opinion and order
directing Lead Counsel to submit additional documentation regarding the
disputed claims. On January 14, 2000, the Court issued an order identifying
those claims allowed to participate in the settlement and those claims that
were disallowed. By stipulation and order dated February 23, 2000, the parties
agreed to distribute, and the court approved distribution of, Rights in respect
of the undisputed claims, which the Company expects to commence on or about
March 10, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual meeting of our shareholders on May 27, 1999, pursuant to
a Notice of Annual Meeting and Proxy Statement dated March 31, 1999, a copy of
which has been filed previously with the Securities and Exchange Commission, at
which our shareholders considered and approved the election of five directors
for a term of three years, certain amendments to the Company's Amended and
Restated By-Laws, a stockholder's proposal relating to the classification of
the Board of Directors and ratification of Deloitte & Touche LLP as auditors.
The results of such matters are as follows:
Proposal 1: To elect five directors for a three-year term and until their
successors are duly elected and qualified.
Results: For Withheld
Leonard S. Coleman 686,861,976 27,440,360
Robert E. Nederlander 670,402,315 43,909,021
Leonard Schutzman 687,009,774 27,292,562
Robert F. Smith 686,256,727 27,292,562
Craig R. Stapleton 687,791,909 26,510,429
43
Proposal 2: To ratify and approve the appointment of Deloitte & Touche LLP as
the Company's Independent Auditors for the year ending December 31, 1999.
Results: For Against Abstain
711,006,803 1,612,783 1,682,750
Proposal 3: To approve and adopt certain amendments to the Company's Amended
and Restated By-Laws.
Results: For Against Abstain
702,522,495 8,532,611 3,247,230
Proposal 4: A stockholder's proposal relating to the classification of the
Board of Directors.
Results: For Against Abstain
289,422,825 265,624,48 56,308,894
44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
MARKET PRICE ON COMMON STOCK
Our Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "CD". At January 24, 2000 the number of stockholders of record was
approximately 9,598. The following table sets forth the quarterly high and low
sales prices per share as reported by the NYSE for 1999 and 1998 based on a
year ended December 31.
1999 HIGH LOW
---- ---- ---
First Quarter .................. $22 7/16 $15 5/16
Second Quarter ................. 20 3/4 15 1/2
Third Quarter .................. 22 5/8 17
Fourth Quarter ................. 26 9/16 14 9/16
1998 HIGH LOW
---- ---- ---
First Quarter .................. $41 $32 7/16
Second Quarter ................. 41 3/8 18 9/16
Third Quarter .................. 22 7/16 10 7/16
Fourth Quarter ................. 20 5/8 7 1/2
On February 24, 2000, the last sale price of our Common Stock on the NYSE
was $17 1/8 per share.
DIVIDEND POLICY
We expect to retain our earnings for the development and expansion of its
business and the repayment of indebtedness and do not anticipate paying
dividends on Common Stock in the foreseeable future.
45
ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In millions, except per share data)
OPERATIONS
NET REVENUES $ 5,402 $ 5,284 $ 4,240 $ 3,238 $ 2,616
-------- -------- -------- -------- -------
Operating expense 1,795 1,870 1,322 1,183 1,025
Marketing and reservation expense 1,017 1,158 1,032 911 744
General and administrative expense 671 666 636 341 283
Depreciation and amortization expense 371 323 238 146 100
Other charges 3,032(1) 838(2) 704(3) 109(4) 97(5)
Interest expense, net 199 114 51 14 17
Net gain on dispositions of businesses (1,109) -- -- -- --
Provision (benefit) for income taxes (406) 104 191 220 143
Minority interest, net of tax 61 51 -- -- --
---------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (229) $ 160 $ 66 $ 314 $ 207
========== ========= ========= ========= =========
INCOME (LOSS) FROM CONTINUING OPERATIONS PER SHARE:
Basic $ (0.30) $ 0.19 $ 0.08 $ 0.41 $ 0.30
Diluted (0.30) 0.18 0.08 0.39 0.28
FINANCIAL POSITION
Total assets $ 15,149 $20,217 $14,073 $ 12,763 $ 8,520
Long-term debt 2,445 3,363 1,246 781 336
Assets under management and mortgage
programs 2,726 7,512 6,444 5,729 4,956
Debt under management and mortgage
programs 2,314 6,897 5,603 5,090 4,428
Mandatorily redeemable preferred
securities issued by subsidiary holding
solely senior debentures issued by the
Company 1,478 1,472 -- -- --
Shareholders' equity 2,206 4,836 3,921 3,956 1,898
OTHER INFORMATION (6)
Cash flows provided by (used in):
Operating activities $ 3,032 $ 808 $ 1,213 $ 1,493 $ 1,144
Investing activities 1,860 (4,352) (2,329) (3,091) (1,789)
Financing activities (4,788) 4,690 901 1,781 661
- ----------
(1) Represents charges of (i) $2,894 million ($1,839 million, after tax or
$2.45 per diluted share) associated with the preliminary agreement to
settle the principal shareholder securities class action suit, (ii) $7
million ($4 million, after tax or $0.01 per diluted share) in connection
with the termination of the proposed acquisition of RAC Motoring
Services, (iii) $21 million ($13 million, after tax or $0.02 per diluted
share) of investigation-related costs, (iv) $87 million ($49 million,
after tax or $0.07 per diluted share) comprised principally of an $85
million ($48 million, after tax or $0.06 per diluted share) charge
incurred in conjunction with the Netmarket Group, Inc. transaction and
(v) $23 million ($15 million, after tax or $0.02 per diluted share) of
additional charges to fund an irrevocable contribution to an independent
technology trust responsible for completing the transition of the
Company's lodging franchisees to a Company sponsored property management
system.
(2) Represents charges of (i) $351 million ($228 million, after tax or $0.26
per diluted share) associated with the agreement to settle the PRIDES
securities class action suit, (ii) $433 million ($282 million, after tax
or $0.32 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers Insurance Group, Inc. and Providan Auto
and Home Insurance Company, and (iii) $121 million ($79 million, after
tax or $0.09 per diluted share) for investigation-related costs,
including incremental financing costs, and executive terminations. Such
charges are partially offset by a net credit of $67 million ($44 million,
after tax or $0.05 per diluted share) associated with changes to the
estimate of previously recorded merger-related costs and other unusual
charges.
46
(3) Represents merger-related costs and other unusual charges of $704 million
($505 million, after tax or $0.58 per diluted share) primarily associated
with the merger of HFS Incorporated and CUC International Inc. and the
merger with PHH Corporation ("PHH") in April 1997.
(4) Represents merger-related costs and other unusual charges of $109 million
($70 million, after tax or $0.09 per diluted share) substantially related
to the Company's August 1996 merger with Ideon Group, Inc. ("Ideon").
(5) Represents a provision of $97 million ($62 million after tax or $0.08 per
diluted share) for costs related to the abandonment of certain Ideon
development efforts and the restructuring of certain Ideon operations.
(6) There were no dividends declared during the periods presented above
except for PHH and Ideon, which declared and paid dividends to their
shareholders prior to their respective mergers with the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are one of the foremost providers of real estate related, travel related and
direct marketing consumer and business services in the world. We were created
through the December 1997 merger (the "Cendant Merger") of HFS Incorporated
("HFS") and CUC International Inc. ("CUC"). We provide business services to our
customers, many of which are consumer services companies, and also provide
fee-based services directly to consumers, generally without owning the assets
or sharing the risks associated with the underlying businesses of our customers
or collaborative partners.
We operate in four principal divisions -- travel related services, real estate
related services, direct marketing services and diversified services. Our
businesses provide a wide range of complementary consumer and business
services, which together represent eight business segments. The travel related
services businesses facilitate vacation timeshare exchanges and franchise car
rental and hotel businesses; the real estate related services businesses
franchise real estate brokerage businesses, provide home buyers with mortgages,
assist in employee relocation and provide consumers with relocation, real
estate and home-related products and services through the move.com network of
Web sites; and the direct marketing services businesses, provide an array of
value driven products and services. Our diversified services include our tax
preparation services franchise, information technology services, car parking
facility services and other consumer-related services.
As a franchisor of hotels, real estate brokerage offices, car rental operations
and tax preparation services, we license the owners and operators of independent
businesses to use our brand names. We do not own or operate hotels, real estate
brokerage offices, car rental operations or tax preparation offices (except for
certain company-owned Jackson Hewitt Inc. offices, which we intend to
franchise). Instead, we provide our franchisee customers with services designed
to increase their revenue and profitability.
In connection with our previously announced program to focus on maximizing the
opportunities and growth potential of our existing businesses, we divested
several non-strategic businesses and assets and have completed or commenced
certain other strategic initiatives related to our Internet businesses. Pursuant
to such program, we completed the dispositions of North American Outdoor Group,
Global Refund Group, the fleet business segment, Central Credit, Inc., Spark
Services, Inc., Match.com, National Leisure Group, National Library of Poetry,
Essex Corporation, Cendant Software Corporation, Hebdo Mag International, Inc.,
the Green Flag Group and Entertainment Publications, Inc. As a result of the
divestitures program, we divested former CUC businesses representing
approximately 45% of CUC's revenues in 1997, the year in which CUC merged with
HFS (see "Liquidity and Capital Resources -- Divestitures").
In addition to the above mentioned divestitures, we have recently initiated
certain Internet strategies outlined below.
On September 30, 1999, we announced that our Board of Directors approved a new
series of Cendant common stock to track the performance of the Move.com Group,
an operator of a popular network of Web sites, which offer a wide selection of
quality relocation, real estate and home-related products and services. The
Move.com Group will integrate and enhance the online efforts of our
residential real estate brands and those of our other real estate business
units drawing on the success of our RentNet, Inc.
47
("RentNet") online apartment guide model. The Move.com Group commenced
operations in the third quarter of 1999 with the move.com Internet site, our
flagship site, becoming functional during January 2000. Prior to the formation
of the Move.com Group, RentNet's historical financial information was included
in our individual membership segment. We have filed a definitive proxy with the
Securities and Exchange Commission, which contains financial details as well as
more specific plans concerning the transaction. If we obtain shareholder
approval for the tracking stock, we currently intend to issue such tracking
stock in a public offering in the second quarter of 2000.
The Move.com Group currently generates the following types of revenue from its
business partners: listing subscription fees, advertising fees, e-commerce
transaction fees and Web site management fees. In addition to the move.com site
itself, the Move.com Group assets include RentNet, our online apartment rental
business acquired in January 1996 and previously included in our individual
membership segment, National Home Connections, LLC, a facilitator of connecting
and disconnecting utilities, processor of address changes and facilitator of
moving related services and products, which was acquired in May 1999, and the
assets of MetroRent, an online provider of apartment rental listings for
buildings with 25 or fewer units, which was acquired in December 1999.
On September 15, 1999, we donated Netmarket Group, Inc., ("NGI") outstanding
common stock to a charitable trust and NGI began operations as an independent
company that will pursue the development of certain interactive businesses
formerly within our direct marketing division. For a detailed discussion
regarding the NGI transaction, see "Merger -- Related Costs and Other Unusual
Charges (Credits) -- 1999."
The following discussion should be read in conjunction with the information
contained in our Consolidated Financial Statements and accompanying Notes
thereto included elsewhere herein.
CONSOLIDATED OPERATIONS -- 1999 VS. 1998
REVENUES
Revenues increased $118 million (2%) in 1999 over 1998, which reflected growth
in substantially all of our reportable operating segments despite the effects of
dispositions of non-strategic businesses. Significant contributing factors which
gave rise to such revenue growth included an increase in the amount of royalty
fees received from our franchised brands within both our travel and real estate
franchise segments and an increase in loan servicing revenues within our
mortgage segment. In addition, we experienced growth and efficiencies within our
direct marketing businesses. Revenues in 1999 included the full year operating
results of our car park subsidiary, which was acquired in April 1998, compared
to the post acquisition period in 1998. A detailed discussion of revenue trends
from 1998 to 1999 is included in the section entitled "Results of Reportable
Operating Segments -- 1999 vs. 1998."
OTHER CHARGES
LITIGATION SETTLEMENTS. On December 7, 1999, we reached a preliminary agreement
to settle the principal securities class actions pending against us, other than
certain claims relating to FELINE PRIDES securities discussed below. As a result
of the settlement, we recorded a pre-tax charge of approximately $2.89 billion,
an increase from approximately $2.87 billion previously reported. The increase
is primarily the result of continued negotiation toward definitive documents
relating to additional costs to be paid to the plaintiff class. This settlement
is subject to final documentation and court approval (see "Liquidity and Capital
Resources -- Litigation").
During 1998, we reached a final agreement to settle a class action lawsuit that
was brought on behalf of the holders of the FELINE PRIDES. As a result of the
settlement, we recorded a pre-tax charge of $351 million.
TERMINATION OF PROPOSED ACQUISITIONS. During 1999, we announced our intention
not to proceed with the acquisition of RAC Motoring Services and recorded a $7
million charge in connection with the write-off of acquisition costs. During
1998, we recorded a $433 million charge in connection with the termination of
the proposed acquisitions of American Bankers Insurance Group, Inc. and
Providian Auto and Home Insurance Company.
48
INVESTIGATION-RELATED COSTS. During 1999 and 1998, we incurred
investigation-related costs of $21 million and $33 million, respectively, in
connection with our discovery and announcement of accounting irregularities on
April 15, 1998.
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS). During 1999 and 1998,
we recorded merger-related costs and other unusual charges (credits) of $110
million and ($67) million, respectively (see "Merger-Related Costs and Other
Unusual Charges (Credits)").
OTHER CHARGES. During 1998, we incurred other charges of $53 million and $35
million in connection with the termination of certain of our former executives
and investigation-related financing costs, respectively.
For a detailed discussion regarding Other Charges, see Note 5 to the
Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $48 million (15%) in 1999 over
1998 as a result of incremental amortization of goodwill and other intangible
assets from 1998 acquisitions and capital spending primarily to support growth
and enhance marketing opportunities in our businesses, partially offset by the
impact of the disposal of non-strategic businesses.
INTEREST EXPENSE AND MINORITY INTEREST
Interest expense, net increased $85 million (75%) in 1999 over 1998 primarily
as a result of an increase in the average debt balances outstanding and a
nominal increase in the cost of funds. In addition, the composition of average
debt balances during 1999 included longer term fixed rate debt carrying higher
interest rates as compared to 1998. The weighted average interest rate on
long-term debt increased to 6.4% in 1999 from 6.2% in 1998. Minority interest,
net of tax increased $10 million (20%). Minority interest, net of tax is
primarily related to distributions payable in cash on our FELINE PRIDES and the
trust preferred securities issued in February 1998.
NET GAIN ON DISPOSITIONS OF BUSINESSES
During 1999, we recorded a net gain of $1.1 billion in connection with the
disposition of certain non-strategic businesses. For a detailed discussion
regarding such dispositions, see "Liquidity and Capital Resources --
Divestiture Program."
PROVISION (BENEFIT) FOR INCOME TAXES
Our effective tax rate increased to a benefit of 70.7% in 1999 from an expense
of 33.2% in 1998 primarily due to the impact of the disposition of our fleet
businesses which was accounted for as a tax-free merger. Accordingly, nominal
income taxes were provided on the net gain realized upon such disposition.
DISCONTINUED OPERATIONS
Pursuant to our program to divest non-strategic businesses and assets, we
disposed of our consumer software and classified advertising businesses in
January 1999 and December 1998, respectively. During 1998, we recorded a $405
million gain, net of tax, on the disposal of discontinued operations, which
included our classified advertising and consumer software businesses. During
1999, we recorded an additional $174 million gain, net of tax, on the sale of
discontinued operations, related to the disposition of our consumer software
business, coincident with the closing of the transaction and in connection with
certain post-closing adjustments. Loss from discontinued operations, net of
tax, was $25 million in 1998. For a detailed discussion regarding discontinued
operations, see Note 4 to the Consolidated Financial Statements.
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1999 VS. 1998
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before non-operating interest,
income taxes, depreciation, amortization, and minority
49
interest, adjusted to exclude net gains on dispositions of businesses and
certain other charges which are of a non-recurring or unusual nature and are
not included in assessing segment performance or are not segment-specific. Our
management believes such discussion is the most informative representation of
how management evaluates performance. However, our presentation of Adjusted
EBITDA may not be comparable with similar measures used by other companies. For
additional information, including a description of the services provided in
each of our reportable operating segments, see Note 24 to the Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------ -------------------------------- ------------------
1999 1998 % CHANGE 1999 (1) 1998 (2) % CHANGE 1999 1998
--------- --------- ---------- ---------- ---------- ---------- -------- ---------
(Dollars in millions)
Travel $1,148 $1,063 8% $ 586 $ 542 8% 51% 51%
Individual Membership 972 920 6% 127 (59) * 13% (6%)
Insurance/Wholesale 575 544 6% 180 138 30% 31% 25%
Real Estate Franchise 571 456 25% 424 349 21% 74% 77%
Relocation 415 444 (7%) 122 125 (2%) 29% 28%
Mortgage 397 353 12% 182 188 (3%) 46% 53%
Move.com Group 18 10 80% (22) 1 * * 10%
Diversified Services 1,099 1,107 (1%) 239 132 81% 22% 12%
Fleet 207 387 * 81 174 * 39% 45%
------ ------ ------ ------
Total $5,402 $5,284 2% $1,919 $1,590 21% 36% 30%
====== ====== ====== ======
- ----------
* Not meaningful.
(1) Excludes (i) a charge of $2.9 billion associated with the preliminary
agreement to settle the principal shareholder securities class action
suit, (ii) a charge of $7 million in connection with the termination of
the proposed acquisition of RAC Motoring Services, (iii) a charge of $21
million of investigation-related costs, (iv) a charge of $87 million
primarily incurred in connection with the Netmarket Group, Inc.
transaction, (v) $23 million of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for
completing the transition of the Company's lodging franchisees to a
Company sponsored property management system and (vi) a credit of $1.1
billion for the net gain on the dispositions of businesses.
(2) Excludes (i) a charge of $351 million associated with the agreement to
settle the PRIDES securities class action suit, (ii) charges of $433
million for the costs of terminating the proposed acquisitions of
American Bankers Insurance Group, Inc. and Providian Auto and Home
Insurance Company, (iii) charges of $121 million for
investigation-related costs, including incremental financing costs, and
executive terminations and (iv) a net credit of $67 million associated
with changes to the estimate of previously recorded merger-related costs
and other unusual charges.
TRAVEL
Revenues and Adjusted EBITDA increased $85 million (8%) and $44 million (8%),
respectively, in 1999 compared to 1998. Franchise fees increased $39 million
(7%) in 1999, consisting of increases in lodging and car rental franchise fees
of $26 million (7%) and $13 million (8%), respectively. Our franchise
businesses experienced growth in 1999 compared to 1998 primarily due to
increases in the amount of weighted average available rooms (24,000 incremental
rooms domestically) and car rental days. Timeshare subscriptions and exchange
revenues increased $18 million (5%), primarily as a result of increased volume.
Also contributing to the revenue and Adjusted EBITDA increases was an $11
million bulk timeshare exchange transaction in 1999, largely offset by a $7
million decrease in gains from the sale of portions of our equity investment in
Avis Rent A Car, Inc. ("ARAC"). The Adjusted EBITDA margin remained unchanged at
51% in 1999. Total expenses increased $40 million (8%), primarily due to
increased volume; however, such increase included a $19 million increase in
marketing and reservation fund expenses associated with our lodging franchise
business unit that was offset by increased marketing and reservation revenues
received from franchisees.
INDIVIDUAL MEMBERSHIP
Revenues and Adjusted EBITDA increased $52 million (6%) and $186 million,
respectively, in 1999 compared to 1998. The Adjusted EBITDA margin improved to
positive 13% from negative 6% for the
50
same periods. The revenue growth is principally due to a greater number of
members added year over year and increases in the average price of a membership.
The increase in the Adjusted EBITDA margin is primarily due to the revenue
increases, since many of the infrastructure costs associated with providing
services to members are not dependent on revenue volume, and reduction in
solicitation spending, as we further refined the targeted audiences for our
direct marketing efforts and achieved greater efficiencies in reaching potential
new members. Beginning September 15, 1999, certain of individual membership's
online businesses were no longer consolidated into our operations as a result
of the NGI transaction. In October 1999, we completed the divestiture of our
North American Outdoor Group ("NAOG") business unit. The operating results of
our former online membership businesses and NAOG were included through their
respective disposition dates in 1999 versus being included for the full year in
1998. The divested businesses accounted for a net increase in revenues and
Adjusted EBITDA of $11 million and $21 million, respectively in 1999 versus
1998. Excluding the operating results of our former online businesses and NAOG,
revenues and Adjusted EBITDA increased $41 million and $165 million,
respectively, in 1999 over 1998 and the Adjusted EBITDA margin increased to
positive 18% from negative 3%. Additionally, revenues and Adjusted EBITDA in
1999 were incrementally benefited $13 million and $5 million, respectively, by
the April 1998 acquisition of a company that, among other services, provides
members with access to their personal credit information.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $31 million (6%) and $42 million (30%),
respectively, in 1999 compared to 1998 primarily due to customer growth, which
resulted from increases in affiliations with financial institutions. The
increase in affiliations with financial institutions was attributable
principally to international expansion, while the Adjusted EBITDA increase was
due to improved profitability in international markets as well as a $25 million
expense decrease related to longer amortization periods for certain customer
acquisition costs as a result of a change in accounting estimate. International
revenues and Adjusted EBITDA increased $28 million (23%) and $15 million
(164%), respectively, primarily due to a 37% increase in customers. The
Adjusted EBITDA margin increased to 31% in 1999 from 25% in 1998. The Adjusted
EBITDA margin for domestic operations was 37% in 1999, versus 31% in 1998. The
Adjusted EBITDA margin for international operations was 16% for 1999, versus 7%
in 1998. Domestic operations, which represented 74% of segment revenues in
1999, generated higher Adjusted EBITDA margins than international operations as
a result of continued expansion costs incurred internationally to penetrate new
markets. International operations, however, have become increasingly profitable
as they have expanded over the last two years.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $115 million (25%) and $75 million
(21%), respectively, in 1999 compared to 1998. Royalty fees for the CENTURY 21
(Registered Trademark) , COLDWELL BANKER (Registered Trademark) and ERA
(Registered Trademark) franchise brands collectively increased by $67 million
(17%) primarily as a result of a 5% increase in home sale transactions by
franchisees and an 8% increase in the average price of homes sold. Home sales
by franchisees benefited from strong existing domestic home sales for the
majority of 1999, as well as from expansion of our franchise system. Existing
domestic home sales are expected to decline compared to 1999 as a result of
increases in interest rates. Declining home sales will impact royalty income
since royalty income is based on gross commission income earned by agents and
brokers on the sale of homes. These declines are expected to be partially
offset by increases in other areas of our business, such as real estate
franchise sales and higher home resale prices. Beginning in the second quarter
of 1999, the financial results of the advertising funds for the COLDWELL BANKER
and ERA brands were consolidated into the results of the real estate franchise
segment, increasing revenues by $31 million and expenses by a like amount, with
no impact on Adjusted EBITDA. Revenues in 1999 benefited from $20 million
generated from the sale of portions of our preferred stock investment in NRT
Incorporated ("NRT"), the independent company we helped form in 1997 to serve
as a consolidator of residential real estate brokerages. Since most costs
associated with the real estate franchise business do not vary significantly
with revenues, the increases in revenues, exclusive of the aforementioned
consolidation of the advertising funds, contributed to an improvement of the
Adjusted EBITDA margin to 79% in 1999 from 77% in 1998.
51
RELOCATION
Revenues and Adjusted EBITDA decreased $29 million (7%) and $3 million (2%),
respectively, in 1999 compared with 1998 and the Adjusted EBITDA margin
increased to 29% in 1999 from 28% in 1998. Operating results in 1999 benefited
from a $13 million increase in referral fees and international relocation
service revenue, offset by a comparable decline in home sales revenue. Total
expenses decreased $26 million (8%), which included $15 million in cost savings
from regional operations, technology and telecommunications, and $11 million in
reduced expenses resulting from reduced government home sales and the sale of
an asset management company in the third quarter of 1998. The asset management
company contributed 1998 revenues and Adjusted EBITDA of $21 million and $16
million, respectively. In 1999, revenues and Adjusted EBITDA benefited from the
sale of a minority interest in an insurance subsidiary, which resulted in $7
million of additional revenue and Adjusted EBITDA. In 1998, revenues and
Adjusted EBITDA also benefited from an improvement in receivable collections,
which permitted an $8 million reduction in billing reserve requirements.
MORTGAGE
Revenues increased $44 million (12%) and Adjusted EBITDA decreased $6 million
(3%), respectively, in 1999 compared with 1998. The increase in revenues
resulted from a $32 million increase in loan servicing revenues and a $12
million increase in loan closing revenues. The average servicing portfolio
increased $10 billion (29%), with the average servicing fee increasing
approximately seven basis points because of a reduction in the rate of
amortization on servicing assets. The reduced rate of amortization was caused
by higher mortgage interest rates in 1999. Total mortgage closing volume in
1999 was $25.6 billion, a decline of $400 million from 1998. However, purchase
mortgage volume (mortgages for home buyers) increased $3.7 billion (24%) to
$19.1 billion, offset by a $4.2 billion decline in mortgage refinancing volume.
Moreover, purchase mortgage volume from the teleservices business (Phone In --
Move In) and Internet business (Log In -- Move In) increased $4.7 billion
(63%), primarily because of increased purchase volume from our real estate
franchisees. Industry origination volume is expected to be lower in 2000
compared to 1999 as a result of recent increases in interest rates and reduced
refinancing volume. We expect to offset lower refinancing volume with increased
purchase mortgage volume in 2000. The Adjusted EBITDA margin decreased from 53%
in 1998 to 46% in 1999. Adjusted EBITDA decreased in 1999 because of a $17
million increase in expenses incurred within servicing operations for the larger
of the increase in the average servicing portfolio and other expense increases
for technology, infrastructure and teleservices to support capacity for volume
anticipated in future periods. We anticipate that increased costs to support
future volume will negatively impact Adjusted EBITDA through the first six
months of 2000.
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate, and
home-related products and services through its flagship portal site, move.com,
and the move.com network. Revenues increased $8 million (80%) to $18 million,
while Adjusted EBITDA decreased $23 million to a loss of $22 million in 1999
compared to 1998. These results reflect our increased investment in marketing
and development of the portal and retention bonus paid to Move.com Group
employees.
DIVERSIFIED SERVICES
Revenues decreased $8 million (1%) and Adjusted EBITDA increased $107 million
(81%), in 1999 compared to 1998. The April 1998 acquisition of National Car Park
("NCP") subsidiary, contributed incremental revenues and Adjusted EBITDA of $103
million and $48 million, respectively, in 1999 over 1998. Also contributing to
an increase in revenues and Adjusted EBITDA in 1999 was $39 million of
incremental income from investments and $13 million of revenues recognized in
connection with a litigation settlement. The aforementioned revenue increases
were partially offset by the impact of disposed operations, including Essex
Corporation ("Essex") in January 1999, National Leisure Group and National
Library of Poetry ("NLP") in May 1999, Spark Services, Inc. and Global Refund
Group in August 1999, Central Credit, Inc. in September 1999 and Entertainment
Publications, Inc. ("EPub") and
52
Green Flag Group ("Green Flag") in November 1999. The operating results of
disposed businesses were included through their respective disposition dates in
1999 versus being included for the full year in 1998 (except for Green Flag
which was acquired in April 1998). Accordingly, revenues from divested
businesses were incrementally less in 1999 by $138 million while Adjusted EBITDA
improved $15 million. The increase in Adjusted EBITDA in 1999 over 1998 also
reflects offsetting reductions in preferred alliance revenues and corporate
expenses.
FLEET
On June 30, 1999, we completed the disposition of our fleet business segment
(see "Liquidity and Capital Resources -- Divestiture Program -- Fleet).
Revenues and Adjusted EBITDA were $207 million and $81 million, respectively,
in the first six months of 1999 and $387 million and $174 million, respectively,
for the full year in 1998.
CONSOLIDATED OPERATIONS -- 1998 VS. 1997
REVENUES
Revenues increased $1.0 billion (25%) in 1998 over 1997, which reflected growth
in substantially all of our reportable operating segments. Significant
contributing factors which gave rise to such increases included substantial
growth in the volume of mortgage services provided and an increase in the
amount of royalty fees received from our franchised brands, principally within
the real estate franchise segment.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $85 million (36%) in 1998 over
1997 as a result of incremental amortization of goodwill and other intangible
assets from 1998 acquisitions and increased capital spending primarily to
accommodate growth in our businesses.
OTHER CHARGES
We recorded a $351 million charge in connection with an agreement to settle a
class action lawsuit that was brought on behalf of the holders of our Income
and Growth FELINE PRIDES securities who purchased their securities on or prior
to April 15, 1998. In addition, we recorded a $433 million charge related to
the termination of proposed acquisitions, a $53 million charge related to the
termination of certain of our former executives, and charges of $33 million and
$35 million, respectively, of investigation-related costs and
investigation-related financing costs. In addition, we recorded merger-related
and other unusual charges (credits) of ($67) million and $704 million during
1998 and 1997, respectively. For a more detailed discussion of such charges
(credits) see "Merger-Related Costs and Other Unusual Charges (Credits)" and
Note 5 to the Consolidated Financial Statements.
INTEREST EXPENSE AND MINORITY INTEREST
Interest expense, net increased $63 million (124%) in 1998 over 1997 primarily
as a result of incremental average borrowings during 1998 and a nominal
increase in the cost of funds. We primarily used debt to finance $2.9 billion
of acquisitions and investments during 1998, which resulted in an increase in
the average debt balance outstanding as compared to 1997. The weighted average
interest rate on long-term debt increased from 6.0% in 1997 to 6.2% in 1998. In
addition to interest expense on long-term debt, we also incurred $51 million of
minority interest, net of tax, primarily related to the preferred dividends
payable in cash on our FELINE PRIDES and trust preferred securities issued in
March 1998.
PROVISION FOR INCOME TAXES
Our effective tax rate was reduced to 33.2% in 1998 from 74.3% in 1997 due to
the non-deductibility of a significant amount of unusual charges recorded
during 1997 and the favorable impact in 1998 of reduced
53
rates in international tax jurisdictions in which we commenced business
operations during 1998. The 1997 effective income tax rate included a tax
benefit on 1997 unusual charges, which were deductible at an effective rate of
only 29.1%. Excluding unusual charges, the effective income tax rate on income
from continuing operations in 1997 was 40.6%.
DISCONTINUED OPERATIONS
Pursuant to our program to divest non-strategic businesses and assets, we
committed to discontinue our consumer software and classified advertising
businesses in August 1998 and subsequently sold such businesses in January 1999
and December 1998, respectively. We recorded a $405 million gain, net of tax on
the disposition of such businesses in 1998. Loss from discontinued operations,
net of tax was $25 million in 1998 compared to $26 million in 1997.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In August 1998, we changed our accounting policy with respect to revenue and
expense recognition for our membership businesses, effective January 1, 1997,
and recorded a non-cash after-tax charge of $283 million to account for the
cumulative effect of an accounting change.
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1998 VS. 1997
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
------------------------------ ---------------------------------- --------------------
1998 1997 % CHANGE 1998 (1) 1997 (2) % CHANGE 1998 1997
--------- --------- ---------- ---------- ------------ ---------- --------- ----------
(Dollars in millions)
Travel $1,063 $ 971 9% $ 542 $ 467 16% 51% 48%
Individual Membership 920 773 19% (59) 6 * (6%) 1%
Insurance/Wholesale 544 483 13% 138 111 24% 25% 23%
Real Estate Franchise 456 335 36% 349 227 54% 77% 68%
Relocation 444 402 10% 125 93 34% 28% 23%
Mortgage 353 179 97% 188 75 151% 53% 42%
Move.com Group 10 6 67% 1 (1) 200% 10% (17%)
Diversified Services 1,107 767 44% 132 151 (13%) 12% 20%
Fleet 387 324 19% 174 121 44% 45% 37%
------ ------ ------ -------
Total $5,284 $4,240 25% $1,590 $1,250 27% 30% 29%
====== ====== ====== =======
- ----------
* Not meaningful.
(1) Excludes (i) a charge of $351 million associated with the agreement to
settle the PRIDES securities class action suit, (ii) charges of $433
million for the costs of terminating the proposed acquisitions of
American Bankers Insurance Group, Inc. and Providian Auto and Home
Insurance Company, (iii) charges of $121 million for
investigation-related costs, including incremental financing costs, and
executive terminations and (iv) a net credit of $67 million associated
with changes to the estimate of previously recorded merger-related costs
and other unusual charges.
(2) Excludes unusual charges of $704 million primarily associated with the
Cendant Merger and the PHH Merger.
TRAVEL
Revenues and Adjusted EBITDA increased $92 million (9%) and $75 million (16%),
respectively, in 1998 over 1997. Contributing to the revenue and Adjusted
EBITDA increase was a $35 million (7%) increase in franchise fees, consisting
of increases of $23 million (6%) and $12 million (8%) in lodging and car rental
franchise fees, respectively. Our franchise businesses experienced increases
during 1998 in worldwide available rooms (29,800 incremental rooms,
domestically), revenue per available room, car rental days
54
and average car rental rates per day. Timeshare subscription and exchange
revenue increased $27 million (9%) as a result of a 7% increase in average
membership volume and a 4% increase in the number of exchanges. Also
contributing to the revenue and Adjusted EBITDA increase was $16 million of
incremental fees received from preferred alliance partners seeking access to
our franchisees and their customers, $13 million of fees generated from the
execution of international master license agreements and an $18 million gain on
our sale of one million shares of ARAC common stock in 1998. The aforementioned
drivers supporting increases in revenues and Adjusted EBITDA were partially
offset by a $37 million reduction in the equity in earnings of our investment in
the car rental operations of ARAC as a result of reductions in our ownership
percentage in such investment during 1997 and 1998. A $17 million (7%) increase
in marketing and reservation costs resulted in the $17 million increase in total
expenses while other operating expenses were relatively flat due to leveraging
our corporate infrastructure among more businesses, which contributed to an
improvement in the Adjusted EBITDA margin from 48% in 1997 to 51% in 1998.
INDIVIDUAL MEMBERSHIP
Revenues increased $147 million (19%) in 1998 over 1997 while Adjusted EBITDA
and Adjusted EBITDA margin decreased $65 million and 7 percentage points,
respectively, for the same period. The revenue growth was primarily
attributable to an incremental $28 million associated with an increase in the
average price of a membership, $26 million of increased billings as a result of
incremental marketing arrangements, primarily with telephone and mortgage
companies, and $36 million from the acquisition of a company in April 1998
that, among other services, provides members access to their personal credit
information. Also contributing to the revenue growth are increased product
sales and service fees, which are offered and provided to individual members.
The reduction in Adjusted EBITDA and the Adjusted EBITDA margin is a direct
result of a $104 million (25%) increase in membership solicitation costs. We
increased our marketing efforts during 1998 to solicit new members and as a
result increased our gross average annual membership base by approximately 3
million members (11%) at December 31, 1998, compared to the prior year. The
growth in members during 1998 resulted in increased servicing costs during 1998
of approximately $33 million (13%). While the costs of soliciting and acquiring
new members were expensed in 1998, the revenue associated with these new
members will not begin to be recognized until 1999, upon expiration of the
membership period.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $61 million (13%) and $27 million (24%),
respectively, in 1998 over 1997, primarily due to customer growth. This growth
generally resulted from increases in affiliations with financial institutions.
Domestic operations, which comprised 77% of segment revenues in 1998, generated
higher Adjusted EBITDA margins than the international businesses as a result of
continued expansion costs incurred internationally to penetrate new markets.
Domestic revenues and Adjusted EBITDA increased $25 million (6%) and $24
million (22%), respectively. Revenue growth, which resulted from an increase in
customers, also contributed to an improvement in the overall Adjusted EBITDA
margin from 23% in 1997 to 25% in 1998, as a result of the absorption of such
increased volume by the existing domestic infrastructure. International
revenues and Adjusted EBITDA increased $36 million (41%) and $3 million (54%),
respectively, due primarily to a 42% increase in customers while the Adjusted
EBITDA margin remained relatively flat at 7%.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $121 million (36%) and $122 million
(54%), respectively, in 1998 over 1997. Royalty fees collectively increased for
our CENTURY 21, COLDWELL BANKER and ERA franchise brands by $102 million (35%)
as a result of a 20% increase in home sales by franchisees and a 13% increase
in the average price of homes sold. Home sales by franchisees benefited from
existing home sales in the United States reaching a record 5 million units in
1998, according to data from the National Association of Realtors, as well as
from expansion of our franchise systems. Because many costs
55
associated with the real estate franchise business, such as franchise support
and information technology, do not vary directly with home sales volumes or
royalty revenues, the increase in royalty revenues contributed to an
improvement in the Adjusted EBITDA margin from 68% to 77%.
RELOCATION
Revenues and Adjusted EBITDA increased $42 million (10%) and $32 million (34%),
respectively, in 1998 over 1997. The Adjusted EBITDA margin improved from 23%
to 28%. The primary source of revenue growth was a $29 million increase in
revenues from the relocation of government employees. We also experienced
growth in the number of relocation-related services provided to client
corporations and in the number of household goods moves handled, partially
offset by lower home sale volumes. The divestiture of certain niche-market
property management operations accounted for other revenue of $8 million.
Expenses associated with government relocations increased in conjunction with
the volume and revenue growth, but economies of scale and a reduction in
overhead and administrative expenses permitted the reported improvement in the
Adjusted EBITDA margin.
MORTGAGE
Revenues and Adjusted EBITDA increased $174 million (97%) and $113 million
(151%), respectively, in 1998 over 1997, primarily due to strong mortgage
origination growth and average fee improvement. The Adjusted EBITDA margin
improved from 42% to 53%. Mortgage origination grew across all lines of
business, including increased refinancing activity and a shift to more
profitable sale and processing channels and was responsible for substantially
all of the segment's revenue growth. Mortgage closings increased $14.3 billion
(122%) to $26.0 billion and average origination fees increased 12 basis points,
resulting in a $180 million increase in origination revenues. Although the
servicing portfolio grew $9.6 billion (36%), net servicing revenue was
negatively impacted by average servicing fees declining 7 basis points due to
the increased refinancing levels in the 1998 mortgage market, which shortened
the servicing asset life and increased amortization charges. Consequently, net
servicing revenues decreased $9 million, partially offset by a $6 million
increase in the sale of servicing rights. Operating expenses increased in all
areas, reflecting increased hiring and expansion of capacity in order to
support continued growth; however, revenue growth marginally exceeded such
infrastructure enhancements.
MOVE.COM GROUP
Revenues and Adjusted EBITDA increased $4 million (67%) and $2 million (200%),
respectively, in 1998 compared to 1997, primarily due to increases in listings,
prices and the addition of new sponsors on the RentNet site. Offsetting the
increase in revenue were increases in expenses primarily related to selling and
marketing, product development and personnel costs. The revenues and expenses
include only the operations of RentNet, which has been attributed to the
Move.com Group. RentNet was previously included in our individual membership
segment.
DIVERSIFIED SERVICES
Revenues increased $340 million (44%), while Adjusted EBITDA decreased $19
million (13%). Revenues increased primarily from acquired NCP, Green Flag and
Jackson Hewitt Inc. operations, which contributed $410 million and $54 million
to 1998 revenues and Adjusted EBITDA, respectively. The revenue increase
attributable to 1998 acquisitions was partially offset by a $140 million
reduction in revenues associated with the operations of certain of our
ancillary businesses which were sold during 1997, including Interval
International, Inc. ("Interval"), which contributed $121 million to 1997
revenues.
The revenue increase did not translate into increases in Adjusted EBITDA
primarily due to asset write-offs, dispositions of certain ancillary business
operations and approximately $8 million of incremental operating costs
associated with establishing a consolidated worldwide data center. We wrote-off
$37 million of impaired goodwill associated with NLP, and $13 million of
certain of our equity investments in interactive membership businesses.
Adjusted EBITDA in 1997 associated with aforementioned
56
disposed ancillary operations included $27 million from Interval and $18
million related to services formerly provided to the casino industry. Our NCP,
Green Flag and Jackson Hewitt Inc. subsidiaries contributed $93 million and $27
million to 1998 Adjusted EBITDA, respectively.
FLEET
On June 30, 1999, we completed the disposition of our fleet business segment for
aggregate consideration of $1.8 billion (see "Liquidity and Capital Resources --
Divestiture Program -- Fleet"). Fleet business segment revenues and Adjusted
EBITDA increased $63 million (19%) and $53 million (44%), respectively, in 1998
over 1997, contributing to an improvement in the Adjusted EBITDA margin from 37%
to 45%. We acquired The Harpur Group Ltd. ("Harpur"), a fuel card and vehicle
management company in the United Kingdom ("UK"), on January 20, 1998. Harpur
contributed incremental revenues and Adjusted EBITDA in 1998 of $32 million and
$21 million, respectively. The revenue increase is further attributable to a 12%
increase in fleet leasing fees and a 31% increase in service fee revenue. The
fleet leasing revenue increase is due to a 5% increase in pricing and a 7%
increase in the number of vehicles leased, while the service fee revenue
increase is the result of a 40% increase in number of fuel cards and vehicle
maintenance cards partially offset by a 7% decline in pricing. The Adjusted
EBITDA margin improvement reflects streamlining of costs at newly acquired
Harpur and a leveraging of our corporate infrastructure among more businesses.
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
1999. On September 15, 1999, Netmarket Group, Inc. began operations as an
independent company that pursues the development of certain interactive
businesses formerly within our direct marketing division. NGI owns, operates and
develops the online membership businesses, including Netmarket.com, Travelers
Advantage, Auto Vantage, Privacy Guard and Hagglezone.com, which collectively
have approximately 1.4 million online members. Prior to September 15, 1999, our
ownership of NGI was restructured into common stock and preferred stock
interests. On September 15, 1999 (the "donation date"), we donated NGI's
outstanding common stock to a charitable trust (the "Trust"), and NGI issued
additional shares of its common stock to certain of its marketing partners. The
structure allows NGI to use its equity to attract, retain and incent employees
and permits NGI to pursue strategic alliances and acquisitions and to make
operational and strategic decisions without the need to consider the impact of
those decisions on Cendant. In addition, the contribution establishes a
charitable foundation that may enhance our image in the marketplace. Although no
assurances can be given, we believe the donation of NGI to a separate autonomous
entity will increase the likelihood that NGI will be successful and increase in
value thereby increasing the value of our investment. Our shareholders should
benefit from the potential increased value of NGI. The beneficiaries of the
Trust include The Inner City Games Foundation, the Susan G. Komen Breast Cancer
Foundation, Inc. and Community Funds, Inc. The fair market value of NGI common
stock on the donation date was estimated to be approximately $20 million. We
retained the opportunity to participate in NGI's value through the ownership of
convertible preferred stock of NGI, which is ultimately convertible, at our
option, beginning September 14, 2001, into approximately 78% of NGI's diluted
common shares. The convertible preferred stock is accounted for using the cost
method of accounting. The convertible preferred stock has a $5 million annual
preferred dividend, which will be recorded in income if and when it becomes
realizable. Accordingly, as a result of the change in ownership of NGI's common
stock from us to independent third parties, prospective from the donation date,
NGI's operating results are no longer included in our Consolidated Financial
Statements. Subsequent to our contribution of NGI's common stock to the Trust,
we provided a development advance of $77 million to NGI, which is contingently
repayable to us if certain financial targets related to NGI are achieved. The
purpose of the development advance was to provide NGI with the funds necessary
to develop Internet related products and systems, that if successful, would
significantly increase the value of NGI. Without these funds, NGI would not have
sufficient funds for development activities contemplated in its business plans.
Repayment of the advance is therefore solely dependent on the success of the
development efforts. We recorded a charge, inclusive of transaction costs, of
$85 million in connection with the donation of NGI shares to the charitable
trust and the subsequent development advance.
57
Additionally in 1999, we incurred $23 million of additional charges to fund an
irrevocable contribution to an independent technology trust responsible for
completing the transition of our lodging franchisees to a Company sponsored
property management system and $2 million of costs (included as a component of
the table below) primarily resulting from further consolidation of European
call centers in Cork, Ireland.
1997. We incurred merger-related costs and other unusual charges ("Unusual
Charges") in 1997 related to continuing operations of $704 million primarily
associated with the Cendant Merger ("the Fourth Quarter 1997 Charge") and the
merger with PHH Corporation ("PHH") in April 1997 (the "PHH Merger" or the
"Second Quarter 1997 Charge").
ACTIVITY
UNUSUAL ------------------------------------ DECEMBER 31,
CHARGES 1997 1998 1999 1999
--------- ---------- ---------- ---------- -------------
(In millions)
Fourth Quarter 1997 Charge $ 455 $ (258) $ (130) $ (6) $61
Second Quarter 1997 Charge 283 (207) (60) (5) 11
----- ------ ------ ------- ---
Total 738 (465) (190) (11) 72
Reclassification for discontinued
operations (34) 34 -- -- --
----- ------ ------ ------ ---
Total Unusual Charges related to
continuing operations $ 704 $ (431) $ (190) $(11) $72
===== ====== ====== ====== ===
Fourth Quarter 1997 Charge. We incurred Unusual Charges in the fourth quarter
of 1997 totaling $455 million substantially associated with the Cendant Merger
and our merger in October 1997 with Hebdo Mag International, Inc., a classified
advertising business. Reorganization plans were formulated prior to and
implemented as a result of the mergers. We determined to streamline our
corporate organization functions and eliminate several office locations in
overlapping markets. Our management's plan included the consolidation of
European call centers in Cork, Ireland and terminations of franchised hotel
properties.
Unusual charges included $93 million of professional fees, primarily consisting
of investment banking, legal, and accounting fees incurred in connection with
the mergers. Personnel related costs of $171 million included $73 million of
retirement and employee benefit plan costs, $24 million of restricted stock
compensation, $61 million of severance resulting from consolidations of
European call centers and certain corporate functions and $13 million of other
personnel related costs. We provided for 474 employees to be terminated, the
majority of which were severed. Business termination costs of $78 million
consisted of a $48 million impairment write down of hotel franchise agreement
assets associated with a quality upgrade program and $30 million of costs
incurred to terminate a contract which may have restricted us from maximizing
opportunities afforded by the Cendant Merger. Facility related and other
unusual charges of $113 million included $70 million of irrevocable
contributions to independent technology trusts for the direct benefit of
lodging and real estate franchisees, $16 million of building lease termination
costs and a $22 million reduction in intangible assets associated with our
wholesale annuity business for which impairment was determined in 1997. During
1999 and 1998, we recorded a net adjustment of $2 million and ($27) million,
respectively, to Unusual Charges with a corresponding increase (decrease) in
liabilities primarily as a result of a change in the original estimate of costs
to be incurred. We made cash payments of $8 million, $103 million and $152
million during 1999, 1998 and 1997, respectively, related to the Fourth Quarter
1997 Charge. Liabilities of $61 million remained at December 31, 1999, which
were primarily attributable to future severance costs and executive termination
benefits, which we anticipate that such liabilities will be settled upon
resolution of related contingencies.
Second Quarter 1997 Charge. We incurred $295 million of Unusual Charges in the
second quarter of 1997 primarily associated with the PHH Merger. During the
fourth quarter of 1997, as a result of changes in estimate, we adjusted certain
merger-related liabilities, which resulted in a $12 million credit to Unusual
Charges. Reorganization plans were formulated in connection with the PHH Merger
and were implemented upon consummation. The PHH Merger afforded us, at such
time, an opportunity to rationalize our combined corporate, real estate and
travel-related businesses, and enabled our corre-
58
sponding support and service functions to gain organizational efficiencies and
maximize profits. We initiated a plan just prior to the PHH Merger to close
hotel reservation call centers, combine travel agency operations and continue
the downsizing of fleet operations by reducing headcount and eliminating
unprofitable products. In addition, we initiated plans to integrate our
relocation, real estate franchise and mortgage origination businesses to
capture additional revenues through the referral of one business unit's
customers to another. We also formalized a plan to centralize the management
and headquarters functions of our corporate relocation business unit
subsidiaries. Such initiatives resulted in write-offs of abandoned systems and
leasehold assets commencing in the second quarter of 1997. The aforementioned
reorganization plans included the elimination of PHH corporate functions and
facilities in Hunt Valley, Maryland.
Unusual charges included $30 million of professional fees, primarily comprised
of investment banking, accounting and legal fees incurred in connection with
the PHH Merger. Personnel related costs of $154 million were associated with
employee reductions necessitated by the planned and announced consolidation of
our corporate relocation service businesses worldwide as well as the
consolidation of corporate activities. Personnel related charges also included
termination benefits such as severance, medical and other benefits and provided
for retirement benefits pursuant to pre-existing contracts resulting from a
change in control. Business termination charges of $56 million, which were
comprised of $39 million of costs to exit certain activities primarily within
our fleet management business (including $36 million of asset write-offs
associated with exiting certain activities), a $7 million termination fee
associated with a joint venture that competed with the PHH Mortgage Services
business (presently Cendant Mortgage Corporation) and $10 million of costs to
terminate a marketing agreement with a third party in order to replace the
function with internal resources. Facility related and other charges totaling
$43 million included costs associated with contract and lease terminations,
asset disposals and other charges incurred in connection with the consolidation
and closure of excess office space. During the year ended December 31, 1998, we
recorded a net credit of $40 million to Unusual Charges with a corresponding
reduction to liabilities primarily as a result of a change in the original
estimate of costs to be incurred. We made cash payments of $5 million, $28
million and $150 million during 1999, 1998 and 1997, respectively, related to
the Second Quarter 1997 Charge. Liabilities of $11 million remained at December
31, 1999, which are attributable to future severance and lease termination
payments. We anticipate that severance will be paid in installments through
April 2003 and lease terminations will be paid in installments through August
2002.
LIQUIDITY AND CAPITAL RESOURCES
STRATEGIC ALLIANCE
On December 15, 1999, we entered into a strategic alliance with Liberty Media
Corporation ("Liberty Media") to develop Internet and related opportunities
associated with our travel, mortgage, real estate and direct marketing
businesses. Such efforts may include the creation of joint ventures with
Liberty Media and others as well as additional equity investments in each
others businesses.
We will also assist Liberty Media in creating, and will receive an equity
participation in, a new venture that will seek to provide broadband video,
voice and data content to our hotels and their guests on a worldwide basis. We
will also pursue opportunities within the cable industry with Liberty Media to
leverage our direct marketing resources and capabilities.
On February 7, 2000, Liberty Media invested $400 million in cash to purchase 18
million shares of our common stock and a two-year warrant to purchase
approximately 29 million shares of our common stock at an exercise price of
$23.00 per share. The common stock, together with the common stock underlying
the warrant, represents approximately 6.3% of our outstanding shares after
giving effect to the aforementioned transaction. Liberty Media's Chairman, John
C. Malone, Ph.D., will join our Board of Directors and has also committed to
purchase one million shares of our common stock for approximately $17 million in
cash.
PENDING ISSUANCE OF TRACKING STOCK
Our shareholders are scheduled to vote on March 21, 2000 for a proposal to
authorize the issuance of a new series of our common stock ("tracking stock").
The tracking stock is intended to track the
59
performance of the Move.com Group. There is currently no common stock
outstanding related to the Move.com Group. We filed a proxy statement with the
SEC, which contains detailed financial information as well as more specific
plans concerning the transaction. Although the Move.com Group stock is intended
to track the performance of the Move.com Group, holders, if any, will be
subject to all of the risks associated with an investment in the Company and
all of its businesses, assets and liabilities. The tracking stock offering, if
approved by the shareholders, will enable us to sell all or part of the
Move.com Group stock in one or more private or public financings and perhaps
create a public trading market for the Move.com Group stock. The use of
proceeds from future offerings are at the discretion of the Company's Board of
Directors. In the third quarter of 1999, the Company began reporting the
results of the Move.com Group as a separate business segment. See Note 24 --
Segment Information -- Move.com Group for a description of the services
provided.
OTHER
In September 1999, we entered into an agreement with Chatham Street Holdings,
LLC ("Chatham") pursuant to which Chatham was granted the right, until
September 30, 2001, to purchase up to 1.6 million shares of Move.com Group
stock for approximately $16.02 per share. In addition, for every two shares of
Move.com Group stock purchased by Chatham pursuant to the agreement, Chatham
will be entitled to receive a warrant to purchase one share of Move.com Group
stock at a price equal to $64.08 per share and a warrant to purchase one share
of Move.com Group stock at a price equal to $128.16 per share. The shareholders
of Chatham are also shareholders of NRT. See Note 21 to the Consolidated
Financial Statements for a detailed discussion of NRT.
DIVESTITURE PROGRAM
In 1999, we completed our program to divest non-strategic businesses and
assets, which began in the third quarter of 1998. Proceeds have been primarily
used to repurchase our common stock and reduce our indebtedness. As a result of
the divestiture program, we divested former CUC businesses representing 45% of
CUC's revenues in 1997, the year in which CUC merged with HFS.
ENTERTAINMENT PUBLICATIONS, INC. On November 30, 1999, we completed the sale of
approximately 85% of our EPub unit for $281 million in cash. We retained
approximately 15% of EPub's common equity in connection with the transaction. In
addition, we will have a designee on EPub's Board of Directors. We account for
our investment in EPub using the equity method. We realized a net gain of
approximately $156 million ($78 million, after tax).
GREEN FLAG. On November 26, 1999, we completed the sale of our Green Flag
business unit for approximately $401 million in cash, including dividends of
$37 million. We realized a net gain of approximately $27 million ($8 million,
after tax).
FLEET. On June 30, 1999, we completed the disposition of our fleet business
segment ("fleet segment" or "fleet businesses") to ARAC. Pursuant to the
agreement, ARAC acquired the net assets of the fleet businesses through the
assumption and subsequent repayment of $1.44 billion of intercompany debt and
the issuance to us of $360 million of convertible preferred stock of Avis Fleet
Leasing and Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of
ARAC. Coincident to the closing of the transaction, ARAC refinanced the assumed
debt under management programs which was payable to us. Accordingly, we
received additional consideration from ARAC comprised of $3.0 billion of cash
proceeds and a $30 million receivable. We realized a net gain on the
disposition of the fleet business segment of $881 million ($866 million, after
tax) of which $715 million ($702 million, after tax) was recognized at the time
of closing and $166 million ($164 million, after tax) was deferred at the date
of disposition. The fleet segment disposition was structured as a tax-free
reorganization and, accordingly, no tax provision has been recorded on a
majority of the gain. However, pursuant to a recent interpretive ruling, the
Internal Revenue Service ("IRS") has taken the position that similarly
structured transactions do not qualify as tax-free reorganizations under
Internal Revenue Code Section 368(a)(1)(A). If the transaction is not
considered a tax-free reorganization, the resultant incremental liability could
range between $10 million and $170 million depending upon certain factors
including utilization of tax attributes and contractual
60
indemnification provisions. Notwithstanding the IRS interpretive ruling, we
believe that, based upon analysis of current tax law, our position would
prevail, if challenged.
OTHER BUSINESSES. During 1999, we completed the dispositions of certain
businesses, including NAOG, Central Credit, Inc., Global Refund Group, Spark
Services, Inc., Match.com, National Leisure Group and NLP. Aggregate
consideration received on the dispositions of such businesses was comprised of
approximately $407 million in cash, including dividends of $21 million and $43
million in marketable securities. The Company realized a net gain of $202
million ($81 million, after tax) on the dispositions of these businesses.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
We have sufficient liquidity and access to liquidity through various sources,
including our ability to access public equity and debt markets and financial
institutions. We currently have a $750 million term loan facility with a
syndicate of financial institutions. In addition, we also have committed
back-up facilities totaling $1.8 billion, which are currently undrawn and
available, with the exception of $5 million of letters of credit. Furthermore,
we also had $2.55 billion of availability under existing shelf registration
statements at December 31, 1999 which was subsequently reduced by $400 million
in connection with the Liberty Media transaction. Our long-term debt, including
current portion, was $2.8 billion at December 31, 1999 and consisted of (i)
approximately $2.1 billion of publicly issued fixed rate debt comprised of $400
million of 7 1/2% senior notes, $1,148 million of 7 3/4% senior notes and $547
million of 3% convertible subordinated notes and (ii) $750 million of
borrowings under a term loan facility. On January 21, 2000, we redeemed all
outstanding 7 1/2% senior notes at a redemption price of 100.695% of par, plus
accrued interest, using available cash. Our credit facilities contain certain
restrictive covenants, including restrictions on indebtedness of material
subsidiaries, mergers, limitations on liens, liquidations and sale and
leaseback transactions, and require the maintenance of certain financial
ratios.
FINANCING RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage and relocation services businesses as
a separate public reporting entity and supports the origination of mortgages
and advances under relocation contracts primarily by issuing commercial paper
and medium term notes and maintaining secured obligations. Such financing is
not classified based on contractual maturities, but rather is included in
liabilities under management and mortgage programs rather than long-term debt
since such debt corresponds directly with high quality related assets. PHH
continues to pursue opportunities to reduce its borrowing requirements by
securitizing increasing amounts of its high quality assets. Additionally, we
entered into a revolving sales agreement, under which an unaffiliated buyer
(the "Buyer"), Bishops Gate Residential Mortgage Trust, a special purpose
entity, committed to purchase, at our option, mortgage loans originated by us
on a daily basis, up to the Buyer's asset limit of $2.1 billion. Under the
terms of this sale agreement, we retain the servicing rights on the mortgage
loans sold to the Buyer and arrange for the sale or securitization of the
mortgage loans into the secondary market. The Buyer retains the right to select
alternative sale or securitization arrangements. At December 31, 1999 and 1998,
we were servicing approximately $813 million and $2.0 billion, respectively, of
mortgage loans owned by the Buyer.
PHH debt is issued without recourse to the parent company. Our PHH subsidiary
expects to continue to maximize its access to global capital markets by
maintaining the quality of its assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. PHH minimizes its exposure to interest rate and liquidity risk by
effectively matching floating and fixed interest rate and maturity
characteristics of funding to related assets, varying short and long-term
domestic and international funding sources, and securing available credit under
committed banking facilities. Depending upon asset growth and financial market
conditions, our PHH subsidiary utilizes the United States commercial paper
markets, public and private debt markets, as well as other cost-effective
short-term instruments. Augmenting these sources, our PHH subsidiary will
continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. At December 31, 1999, aggregate borrowings were comprised of
commercial paper, medium-term notes, secured obligations and other borrowings
of $0.6 billion, $1.3 billion, $0.3 billion, and $0.1 billion, respectively.
61
PHH filed a shelf registration statement with the SEC, effective March 2, 1998,
for the aggregate issuance of up to $3.0 billion of medium-term note debt
securities. These securities may be offered from time to time, together or
separately, based on terms to be determined at the time of sale. As of December
31, 1999, PHH had approximately $375 million of availability remaining under
this shelf registration statement. Proceeds from future offerings will continue
to be used to finance assets PHH manages for its clients and for general
corporate purposes.
SECURED OBLIGATIONS
In December 1999, our PHH subsidiary renewed its 364 day financing agreement
to sell mortgage loans under an agreement to repurchase such mortgages. The
agreement is collateralized by the underlying mortgage loans held in
safekeeping by the custodian to the agreement. The total commitment under this
agreement is $500 million and is renewable on an annual basis at the discretion
of the lender in accordance with the securitization agreement. Mortgage loans
financed under this agreement at December 31, 1999 and 1998 totaled $345
million and $378 million, respectively.
We are currently in the process of creating a new securitization facility to
purchase interests in the rights to payment related to our relocation
receivables. Although no assurances can be given, we expect that such facility
will be in place by the end of the first quarter of 2000.
OTHER
To provide additional financial flexibility, PHH's current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount of
outstanding commercial paper. As of December 31, 1999, PHH maintained $2.5
billion of unsecured committed credit facilities, which were provided by
domestic and foreign banks. On February 28, 2000, PHH reduced these facilities
to $1.5 billion to reflect reduced borrowing needs of PHH after the disposition
of its fleet businesses. The facilities consist of a $750 million revolving
credit maturing in February 2001 and a $750 million revolving credit maturing in
February 2005. Our management closely evaluates not only the credit of the banks
but also the terms of the various agreements to ensure ongoing availability. The
full amount of PHH's committed facilities at December 31, 1999 was undrawn and
available. Our management believes that our current policy provides adequate
protection should volatility in the financial markets limit PHH's access to
commercial paper or medium-term notes funding. PHH continuously seeks additional
sources of liquidity to accommodate PHH asset growth and to provide further
protection from volatility in the financial markets.
In the event that the public debt market is unable to meet PHH's funding needs,
we believe that PHH has appropriate alternative sources to provide adequate
liquidity, including current and potential future securitized obligations and
its revolving credit facilities.
On July 10, 1998, PHH entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with a bank, as trustee, under the Senior Indenture
dated as of June 5, 1997, which formalizes PHH's policy of limiting the payment
of dividends and the outstanding principal balance of loans to us to 40% of
consolidated net income (as defined in the Supplemental Indenture) for each
fiscal year. The Supplemental Indenture prohibits PHH from paying dividends or
making loans to us if upon giving effect to such dividends and/or loan, PHH's
debt to equity ratio exceeds 8 to 1, at the time of the dividend or loan, as
the case may be.
LITIGATION
Since the April 15, 1998 announcement of the discovery of accounting
irregularities in the former business units of CUC, approximately 70 lawsuits
claiming to be class actions, two lawsuits claiming to be brought derivatively
on our behalf and several individual lawsuits and arbitration proceedings have
been commenced in various courts and other forums against us and other
defendants by or on behalf of persons claiming to have purchased or otherwise
acquired securities or options issued by CUC or us between May 1995 and August
1998. The Court has ordered consolidation of many of the actions.
62
In addition, in October 1998, an action claiming to be a class action was filed
against us and four of our former officers and directors by persons claiming to
have purchased American Bankers' stock between January and October 1998. The
complaint claimed that we made false and misleading public announcements and
filings with the SEC in connection with our proposed acquisition of American
Bankers allegedly in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and that the plaintiff and the alleged class
members purchased American Bankers' securities in reliance on these public
announcements and filings at inflated prices. On April 30, 1999, the United
States District Court for New Jersey found that the class action failed to
state a claim upon which relief could be granted and, accordingly, dismissed
the complaint. The plaintiff has appealed the District Court's findings to the
U.S. Court of Appeals for the Third Circuit as such appeal is pending.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised us that its inquiry should not be construed as an indication by the SEC
or its staff that any violations of law have occurred. As a result of the
findings from our internal investigations, we made all adjustments considered
necessary which are reflected in our previously filed restated financial
statements for the years ended 1997, 1996 and 1995 and for the six months ended
June 30, 1998. Although we can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations, we do not expect that additional adjustments will be necessary.
As previously disclosed, we reached a final agreement with plaintiffs' counsel
representing the class of holders of our PRIDES securities who purchased their
securities on or prior to April 15, 1998 to settle their class action lawsuit
against us through the issuance of a new "Right" for each PRIDES security held.
See Notes 5 and 13 to the Consolidated Financial Statements for a more detailed
description of the settlement.
On December 7, 1999, we announced that we reached a preliminary agreement to
settle the principal securities class action pending against us in the U.S.
District Court in Newark, New Jersey relating to the common stock class action
lawsuits. Under the agreement, we would pay the class members approximately
$2.85 billion in cash, an increase from approximately $2.83 billion previously
reported. The increase is a result of continued negotiation toward definitive
documents relating to additional costs to be paid to the plaintiff class. The
settlement remains subject to execution of a definitive settlement agreement and
approval by the U.S. District Court. If the preliminary settlement is not
approved by the U.S. District Court, we can make no assurances that the final
outcome or settlement of such proceedings will not be for an amount greater than
that set forth in the preliminary agreement.
The proposed settlements do not encompass all litigation asserting claims
associated with the accounting irregularities. We do not believe that it is
feasible to predict or determine the final outcome or resolution of these
unresolved proceedings. An adverse outcome from such unresolved proceedings
could be material with respect to earnings in any given reporting period.
However, we do not believe that the impact of such unresolved proceedings should
result in a material liability to our consolidated financial position or
liquidity.
Our plan to finance the settlement reflects the existence of a range of
financing alternatives which we have considered to be potentially available. At
a minimum, these alternatives entail using various combinations of (i)
available cash, (ii) debt securities and/or (iii) equity securities. The choice
among alternatives will depend on numerous factors, including the timing of the
actual settlement payment, the relative costs of various securities, our cash
balance, our projected post-settlement cash flows and market conditions.
CREDIT RATINGS
Our long-term debt credit ratings are BBB with Standard & Poor's Corporations
("Standard & Poor's"), Baa1 with Moody's Investors Service Inc. ("Moody's"),
and BBB+ with Duff & Phelps Credit Rating Co. ("Duff & Phelps"). Our short-term
debt ratings are P2 with Moody's, and D2 with Duff & Phelps.
Following the execution of our agreement to dispose of our fleet segment, Fitch
IBCA lowered PHH's long-term debt rating from A+ to A and affirmed PHH's
short-term debt rating at F1, and Standard & Poor's affirmed PHH's long-term
and short-term debt ratings at A-/A2. Also, in connection with the
63
closing of the transaction, Duff & Phelps lowered PHH's long-term debt rating
from A+ to A and PHH's short-term debt rating was reaffirmed at D1. Moody's
lowered PHH's long-term debt rating from A3 to Baa1 and affirmed PHH's
short-term debt rating at P2. (A security rating is not a recommendation to buy,
sell or hold securities and is subject to revision or withdrawal at any time.).
COMMON SHARE REPURCHASES
During 1999, our Board of Directors authorized an additional $1.8 billion of
our common stock to be repurchased under our common share repurchase program,
increasing the total authorized amount that can be repurchased under the
program to $2.8 billion. As of December 31, 1999, we repurchased a total of
$2.0 billion (104 million shares) of our common stock under the program.
Subsequent to December 31, 1999, we repurchased an additional $132 million (6
million shares) of our common stock under the repurchase program as of February
24, 2000.
In July 1999, pursuant to a Dutch Auction self-tender offer to our shareholders,
we purchased 50 million shares of our common stock at a price of $22.25 per
share.
CASH FLOWS (1999 VS. 1998)
We generated $3.0 billion of cash flows from operations in 1999 representing a
$2.2 billion increase from 1998. The increase in cash flows from operations was
primarily due to a $1.2 billion increase in net income as adjusted for
discontinued operations activity, net gain on dispositions of businesses and
non-cash charges. Additionally, the increase in cash flows from operations was
due to a $2.1 billion net reduction in mortgage loans held for sale, which
reflects larger loan sales to the secondary markets in proportion to loan
originations.
We generated $1.9 billion in cash flows from investing activities in 1999
representing a $6.2 billion increase from 1998. The incremental cash flows in
1999 from investing activities was primarily attributable to a $3.2 billion
increase in net proceeds from the sale of subsidiaries, primarily related to
the fleet businesses, and a $2.6 billion decrease in cash used in
acquisition-related activity (acquisitions in 1998 included NCP, Green Flag and
Jackson Hewitt). Additionally, we invested $227 million less cash in management
and mortgage programs primarily due to the disposition of the fleet businesses.
We used net cash of $4.8 billion in financing activities in 1999 compared to
providing net cash of $4.7 billion from such activities in 1998. The increase
of $9.5 billion of cash flows used in financing activities during 1999 included
$2.6 billion incremental repurchases of common stock in 1999 and a $3.1 billion
decrease in proceeds from borrowings in 1999 over 1998. Additionally, we issued
the FELINES PRIDES in 1998 for proceeds of approximately $1.5 billion. Net cash
used in the financing of management and mortgage programs increased $2.7
billion primarily due to repayments of borrowings.
CAPITAL EXPENDITURES
In 1999, $277 million was invested in property and equipment to support
operational growth and enhance marketing opportunities. In addition,
technological improvements were made to improve operating efficiencies. Capital
spending in 1999 included the development of integrated business systems and
other investments in information systems within several of our segments as well
as additions to car park properties for NCP.
OTHER INITIATIVES
We continue to explore ways to increase efficiencies and productivity and to
reduce the cost structures of our respective businesses. Such actions could
include downsizing, consolidating, restructuring or other related efforts,
which we anticipate would be funded through current operations. No assurances
may be given that any plan of action will be undertaken or completed.
YEAR 2000
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act:
64
In order to minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer systems, applications and software necessary to
achieve Year 2000 compliance. Our computer systems and equipment successfully
transitioned to the Year 2000 with no significant issues. We continue to keep
our Year 2000 project management in place to monitor latent problems that could
surface at key dates or events in the future. We do not anticipate any
significant problems related to these events. The total cost of our Year 2000
compliance plan was approximately $54 million. We expensed and capitalized the
costs to complete the compliance plan in accordance with appropriate accounting
policies.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities", issued in
June 1998, to fiscal years commencing after June 15, 2000. SFAS No. 133
requires that all derivatives be recorded in the Consolidated Balance Sheets as
assets or liabilities and measured at fair value. If the derivative does not
qualify as a hedging instrument, changes in fair value are to be recognized in
net income. If the derivative does qualify as a hedging instrument, changes in
fair value are to be recognized either in net income or other comprehensive
income consistent with the asset or liability being hedged. We have developed
an implementation plan to adopt SFAS No. 133. Completion of the implementation
plan and determination of the impact of adopting SFAS No. 133 is expected to be
completed by the fourth quarter of 2000. We will adopt SFAS No. 133 on January
1, 2001, as required.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon the existing accounting rules and explains
those rules, by analogy, to other transactions that the existing rules do not
specifically address. In accordance with SAB No. 101, we will revise certain
revenue recognition policies regarding the recognition of non-refundable
one-time fees and the recognition of pro rata refundable subscription revenues.
We will adopt SAB No. 101 on January 1, 2000, as required, and will record a
non-cash after-tax charge of approximately $56 million to account for the
cumulative effect of the accounting change.
65
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed our implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to integrate
and operate successfully acquired businesses and the risks associated
with such businesses;
o our ability to successfully implement our plan to create a tracking stock
for our new real estate portal;
o our ability to develop and implement operational and financial systems
to manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our
growth strategy and for us to operate within the limitations imposed by
financing arrangements; and
o the effect of changes in current interest rates.
We derived the forward-looking statements in this Annual Report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses various financial instruments, particularly interest rate and
currency swaps, forward delivery commitments, futures and options contracts and
currency forwards, to manage and reduce the interest rate risk related
specifically to its committed mortgage pipeline, mortgage loan inventory,
mortgage servicing rights, mortgage-backed securities, and debt. Such financial
instruments are also used to manage and reduce the foreign currency exchange
rate risk related to its foreign currency denominated translational and
transactional exposures. The Company is exclusively an end user of these
instruments, which are commonly referred to as derivatives. The Company does
not engage in trading, market-making, or other speculative activities in the
derivatives markets. The Company's derivative financial instruments are
designated as hedges of underlying exposures, as those instruments demonstrate
high correlation in relation to the asset or transaction being hedged. More
detailed information about these financial instruments is provided in Notes 15
and 16 to the Consolidated Financial Statements.
Interest and currency rate risks are the principal market exposures of the
Company.
o Interest rate movements in one country as well as relative interest rate
movements between countries can materially impact the Company's
profitability. The Company's primary interest rate exposure is to interest
rate fluctuations in the United States, specifically long-term U.S.
Treasury and mortgage interest rates due to their impact on mortgagor
prepayments, mortgage loans held for sale, and anticipated mortgage
production arising from commitments issued and LIBOR and commercial paper
interest rates due to their impact on variable rate borrowings. The Company
anticipates that such interest rates will remain a primary market exposure
of the Company for the foreseeable future.
66
o The Company's primary foreign currency rate exposure is to exchange rate
fluctuations of the British pound sterling. The Company anticipates that
such foreign currency exchange rate will remain a primary market exposure
of the Company for the foreseeable future.
The Company assesses its market risk based on changes in interest and foreign
currency exchange rates utilizing a sensitivity analysis. The sensitivity
analysis measures the potential loss in earnings, fair values, and cash flows
based on a hypothetical 10% change (increase and decrease) in interest and
currency rates.
The Company uses a discounted cash flow model in determining the fair market
value of investment in leases and leased vehicles, relocation receivables,
equity advances on homes, mortgages, commitments to fund mortgages, mortgage
servicing rights and mortgage-backed securities. The primary assumptions used
in these models are prepayment speeds and discount rates. In determining the
fair market value of mortgage servicing rights and mortgage-backed securities,
the models also utilize credit losses and mortgage servicing revenues and
expenses as primary assumptions. In addition, for commitments to fund
mortgages, the borrowers propensity to close their mortgage loan under the
commitment is used as a primary assumption. For mortgages and commitments to
fund mortgages forward delivery contracts and options, the Company uses an
option-adjusted spread ("OAS") model in determining the impact of interest rate
shifts. The Company also utilizes the OAS model to determine the impact of
interest rate shifts on mortgage servicing rights and mortgage-backed
securities. The primary assumption in an OAS model is the implied market
volatility of interest rates and prepayment speeds and the same primary
assumptions used in determining fair market value.
The Company uses a duration-based model in determining the impact of interest
rate shifts on its debt portfolio and interest rate derivatives portfolios. The
primary assumption used in these models is that a 10% increase or decrease in
the benchmark interest rate produces a parallel shift in the yield curve across
all maturities.
The Company uses a current market pricing model to assess the changes in the
value of the U.S. dollar on foreign currency denominated derivatives and
monetary assets and liabilities. The primary assumption used in these models is
a hypothetical 10% weakening or strengthening of the U.S. dollar against all
currency exposures of the Company at December 31, 1999 and 1998.
The Company's total market risk is influenced by a wide variety of factors
including the volatility present within the markets and the liquidity of the
markets. There are certain limitations inherent in the sensitivity analyses
presented. While probably the most meaningful analysis permitted, these "shock
tests" are constrained by several factors, including the necessity to conduct
the analysis based on a single point in time and the inability to include the
complex market reactions that normally would arise from the market shifts
modeled.
The Company used December 31, 1999 and 1998 market rates on its instruments to
perform the sensitivity analyses separately for each of the Company's market
risk exposures -- interest and currency rate instruments. The estimates are
based on the market risk sensitive portfolios described in the preceding
paragraphs and assume instantaneous, parallel shifts in interest rate yield
curves and exchange rates.
The Company has determined that the impact of a 10% change in interest and
foreign currency exchange rates and prices on its earnings, fair values and
cash flows would not be material.
While these results may be used as benchmarks, they should not be viewed as
forecasts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Index commencing on page
F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required herein has been previously reported on our Form 10-K/A
for the year ended December 31, 1997.
67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Special Proxy Statement under
the section "Executive Officers" and the information contained in the Annual
Proxy Statement under the Sections titled "Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Exchange Act" are
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Special Proxy Statement under
the section titled "Executive Compensation and Other Information" is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's Special Proxy Statement under
the section titled "Security Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's Annual Proxy Statement under
the section titled "Certain Relationships and Related Transactions" is
incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) FINANCIAL STATEMENTS
See Financial Statements and Financial Statements Index commencing on page
F-1 hereof.
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 5, 1999, we filed a current report on Form 8-K to report under
Item 5 a plan to create a tracking stock to track the performance of Move.com
Group.
On October 21, 1999, we filed a current report on Form 8-K to report under
Item 5 third quarter 1999 financial results.
On December 2, 1999, we filed a current report on Form 8-K to report under
Item 5 the completion of our divestiture program.
On December 7, 1999, we filed a current report on Form 8-K to report under
Item 5 a preliminary settlement of the common stock class action litigation.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENDANT CORPORATION
By: /s/ James E. Buckman
-----------------------------------
James E. Buckman
Vice Chairman and General Counsel
Date: February 29, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Henry R. Silverman Chairman of the Board, President, February 29, 2000
- ------------------------- Chief Executive Officer and
(Henry R. Silverman) Director
/s/ James E. Buckman Vice Chairman, General Counsel and February 29, 2000
- ------------------------- Director
(James E. Buckman)
/s/ Stephen P. Holmes Vice Chairman and Director February 29, 2000
- -------------------------
(Stephen P. Holmes)
/s/ Michael P. Monaco Vice Chairman and Director February 29, 2000
- -------------------------
(Michael P. Monaco)
/s/ David M. Johnson Senior Executive Vice President and February 29, 2000
- ------------------------- Chief Financial Officer (Principal
(David M. Johnson) Financial Officer)
/s/ Jon F. Danski Executive Vice President and Chief February 29, 2000
- ------------------------- Accounting Officer (Principal
(Jon F. Danski) Accounting Officer)
/s/ Robert D. Kunisch Director February 29, 2000
- -------------------------
(Robert D. Kunisch)
Director February 29, 2000
- -------------------------
(John D. Snodgrass)
/s/ Leonard S. Coleman Director February 29, 2000
- -------------------------
(Leonard S. Coleman)
Director February 29, 2000
- -------------------------
(Martin L. Edelman)
/s/ Dr. Carole G. Hankin Director February 29, 2000
- -------------------------
(Dr. Carole G. Hankin)
69
SIGNATURE TITLE DATE
- ------------------------------ ---------- ------------------
Director February 29, 2000
- -------------------------
(The Rt. Hon. Brian Mulroney,
P.C., L.L.D)
Director February 29, 2000
- -------------------------
(Robert W. Pittman)
/s/ Leonard Schutzman Director February 29, 2000
- -------------------------
(Leonard Schutzman)
/s/ Robert F. Smith Director February 29, 2000
- -------------------------
(Robert F. Smith)
/s/ Robert E. Nederlander Director February 29, 2000
- -------------------------
(Robert E. Nederlander)
70
EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated March 23, 1998 among the Company, Season
Acquisition Corp. and American Bankers Insurance Group, Inc. (incorporated by
reference to Exhibit C2 to the Schedule 14D-1 (Amendment 31), dated March 23, 1998,
filed by the Company and Season Acquisition Corp.)*
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Post Effective Amendment No. 2 on Form
S-8 to the Registration Statement on Form S-4, No. 333-34517, dated December 17,
1997)*
3.2 Amended and Restated ByLaws of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated August 4, 1998)*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 33-44453, on Form S-4 dated December 19, 1991)*
4.2 Indenture dated as of February 11, 1997, between CUC International Inc. and Marine
Midland Bank, as trustee (filed as Exhibit 4(a) to the Company's Report on Form 8-K
filed February 13, 1997)*
4.3 Indenture between HFS Incorporated and Continental Bank, National Association, as
trustee (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-71736), Exhibit No. 4.1)*
4.4 Indenture dated as of February 28, 1996 between HFS Incorporated and First Trust of
Illinois, National Association, as trustee (Incorporated by reference to HFS
Incorporated's Current Report on Form 8-K dated March 8, 1996, Exhibit 4.01)*
4.5 Supplemental Indenture No. 1 dated as of February 28, 1996 between HFS
Incorporated and First Trust of Illinois, National Association, as trustee (Incorporated
by reference to HFS Incorporated's Current Report on Form 8-K dated March 8, 1996,
Exhibit 4.02)*
4.6 Indenture, dated as of February 24, 1998, between the Company and The Bank of
Nova Scotia Trust Company of New York, as Trustee (Incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated March 6, 1998)*
4.7 First Supplemental Indenture dated February 24, 1998, between the Company and The
Bank of Nova Scotia Trust Company of New York, as Trustee (Incorporated by
reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, dated
March 6, 1998)*
4.8 Amended and Restated Declaration of Trust of Cendant Capital I. (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated March 6,
1998)*
4.9 Preferred Securities Guarantee Agreement dated March 2, 1998, between by Cendant
Corporation and Wilmington Trust Company. (Incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated March 6, 1998)*
4.10 Purchase Contract Agreement (including as Exhibit A the form of the Income PRIDES
and as Exhibit B the form of the Growth PRIDES), dated March 2, 1998, between
Cendant Corporation and The First National Bank of Chicago (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated March 6,
1998)*
71
EXHIBIT NO. DESCRIPTION
- ---------------- --------------------------------------------------------------------------------------
4.11 Purchase Agreement (including as Exhibit A the form of the Warrant for the Purchase
of Shares of Common Stock), dated December 15, 1999, between Cendant Corporation
and Liberty Media Corporation.
Material Contracts, Management Contracts, Compensatory Plans and Arrangements (filed
as an Exhibit to the Company's Form 10-K/A for the year ended December 31, 1998).*
10.1 (a) Agreement with Henry R. Silverman, dated June 30, 1996 and as amended through
December 17, 1997 (filed as Exhibit 10.6 to the Company's Registration Statement on
Form S-4, Registration No. 333-34571)*
10.1 (b) Amendment to Agreement with Henry R. Silverman, dated December 31, 1998 (filed as
an Exhibit to the Company's Form 10-K for the year ended December 31, 1998).*
10.1 (c) Amendment to Agreement with Henry R. Silverman, dated August 2, 1999.
10.2 (a) Agreement with Stephen P. Holmes, dated September 12, 1997 (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.2 (b) Amendment to Agreement with Stephen P. Holmes, dated January 11, 1999 (filed as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1998).*
10.3 (a) Agreement with Michael P. Monaco, dated September 12, 1997 (filed as Exhibit 10.8 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.3 (b) Amendment to Agreement with Michael Monaco, dated December 23, 1998 (filed as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1998).*
10.4 (a) Agreement with James E. Buckman, dated September 12, 1997 (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.4 (b) Amendment to Agreement with James E. Buckman, dated January 11, 1999 (filed as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1998).*
10.5 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the Company's Form
10-Q for the period ended October 31, 1996)*
10.6 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.17 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.7 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.18 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.8 1994 Directors Stock Option Plan, as amended (filed as Exhibit 10.19 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.9 1997 Stock Option Plan (filed as Exhibit 10.23 to the Company's Form 10-Q for the
period ended April 30, 1997)*
10.10 1997 Stock Incentive Plan (filed as Appendix E to the Joint Proxy Statement/
Prospectus included as part of the Company's Registration Statement, No. 333-34517,
on Form S-4 dated August 28, 1997)*
10.11 HFS Incorporated's Amended and Restated 1993 Stock Option Plan (Incorporated by
reference to HFS Incorporated's Registration Statement on Form S-8 (Registration
No. 33-83956), Exhibit 4.1)*
10.12(a) First Amendment to the Amended and Restated 1993 Stock Option Plan dated May 5,
1995. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-8 (Registration No. 33-094756), Exhibit 4.1)*
72
EXHIBIT NO. DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------
10.12(b) Second Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(b))*
10.12(c) Third Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(c))*
10.12(d) Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated
May 20, 1996. (Incorporated by reference to HFS Incorporated's Registration
Statement on Form S-8 (Registration No. 333-06733), Exhibit 4.5)*
10.12(e) Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated
July 24, 1996 (Incorporated by reference to the HFS Incorporated's Annual Report on
Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(f) Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated
September 24, 1996 (Incorporated by reference to the HFS Incorporated's Annual
Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(g) Seventh Amendment to the Amended and Restated 1993 Stock Option Plan dated as
of April 30, 1997 (Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, Exhibit 10.17(g))*
10.12(h) Eighth Amendment to the Amended and Restated 1993 Stock Option Plan dated as of
May 27, 1997 (Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, Exhibit 10.17(h))*
10.13 HFS Incorporated's 1992 Incentive Stock Option Plan and Form of Stock Option
Agreement. (Incorporated by reference to HFS Incorporated's Registration Statement
on Form S-1 (Registration No. 33-51422), Exhibit No. 10.6)*
10.14 Cendant Corporation 1992 Employee Stock Plan (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-8 dated January 29,
1998 (Registration No. 333-45183))*
10.15 Cendant Corporation Deferred Compensation Plan (filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 1998).*
10.16 Agreement and Plan of Merger, by and among HFS Incorporated, HJ Acquisition
Corp. and Jackson Hewitt, Inc., dated as of November 19, 1997. (Incorporated by
reference to Exhibit 10.1 to HFS Incorporated's Current Report on Form 8-K dated
August 14, 1997, File No. 111402)*
10.17 Form of Underwriting Agreement for Debt Securities (Incorporated by reference to
Exhibit 1.1 to the Company's Registration Statement on Form S-3, Registration
No. 333-45227)*
10.18 Underwriting Agreement dated February 24, 1998 among the Company, Cendant
Capital I, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Chase Securities Inc. (Incorporated by reference to the Company's Form 8-K dated
March 6, 1998, Exhibit 1.1)*
10.19 Registration Rights Agreement dated as of February 11, 1997, between CUC
International Inc. and Goldman, Sachs & Co. (for itself and on behalf of the other
purchasers party thereto)(filed as Exhibit 4(b) to the Company's Report on Form 8-K
filed February 13, 1997)*
73
EXHIBIT NO. DESCRIPTION
- ----------------- ---------------------------------------------------------------------------------------
10.20 Agreement and Plan of Merger between CUC International Inc. and HFS
Incorporated, dated as of May 27, 1997 (filed as Exhibit 2.1 to the Company's Report
on Form 8-K filed on May 29, 1997)*
10.21(a) $750,000,000 Five Year Revolving Credit and Competitive Advance Facility Agreement,
dated as of October 2, 1996, among the Company, the several banks and other financial
institutions from time to time parties thereto and The Chase Manhattan Bank, as
Administrative Agent and CAF Agent (Incorporated by reference to Exhibit (b)(1) to
the Schedule 14-D1 filed by the Company on January 27, 1998, File No. 531838)*
10.21(b) Amendment, dated as of October 30, 1998, to the Five Year Competitive Advance and
Revolving Credit Agreement, dated as of October 2, 1998, by and among the Company,
the general institutions, parties thereto and The Chase Manhattan Bank, as
Administrative Agent (Incorporated by reference to Exhibit 10.2 to the Company's
Form 8-K dated February 10, 1999)*
10.22(a) $1,250,000 364-Day Revolving Credit and Competitive Advance Facility Agreement,
dated October 2, 1996, as amended and restated through October 30, 1998, among the
Company, the several banks and other financial institutions from time to time parties
thereto, and The Chase Manhattan Bank, as Administrative Agent and as Lead
Manager (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated
November 5, 1998).*
10.22(b) Amendment, dated as of February 4, 1999, to the Five-Year Competitive Advance and
Revolving Credit Agreement and the 364-Day Competitive Advance and Revolving
Credit Agreement among the Company, the lenders therein and The Chase Manhattan
Bank, as Administrative Agent (Incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 16, 1999)*.
10.23 Distribution Agreement, dated March 5, 1998, among the Company, Bear, Stearns &
Co., Inc., Chase Securities Inc., Lehman Brothers and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference to the
Company's Current Report on Form 8-K, dated March 10, 1998)*
10.24(a) 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle Management
Services, Inc., the Lenders, the Chase Manhattan Bank, as Administrative Agent and
the Chase Manhattan Bank of Canada, as Canadian Agent, Dated February 28, 2000.
10.24(b) Five-year Credit Agreement ("PHH Five-year Credit Agreement") among PHH
Corporation, the Lenders, and Chase Manhattan Bank, as Administrative Agent, dated
February 28, 2000.
10.25 Indenture between the Company and Bank of New York, Trustee, dated as of May 1,
1992 (Incorporated by reference from Exhibit 4(a)(iii) to Registration Statement
33-48125)*
10.26 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of March 1, 1993 (Incorporated by reference from Exhibit 4(a)(i) to Registration
Statement 33-59376)*
10.27 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of June 5, 1997 (Incorporated by reference from Exhibit 4(a) to Registration Statement
333-27715)*
10.28 Indenture between the Company and Bank of New York, Trustee dated as of June 5,
1997 (Incorporated by reference from Exhibit 4(a)(11) to Registration Statement
333-27715)*
74
EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------
10.29 Distribution Agreement between the Company and CS First Boston Corporation;
Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith,
Incorporated; and J.P. Morgan Securities, Inc. dated November 9, 1995 (Incorporated
by reference from Exhibit 1 to Registration Statement 33-63627)*
10.30 Distribution Agreement between the Company and Credit Suisse; First Boston
Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated June 5, 1997 filed
as Exhibit 1 to Registration Statement 333-27715*
10.31 Distribution Agreement, dated March 2, 1998, among PHH Corporation, Credit Suisse
First Boston Corporation, Goldman Sachs & Co., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated and J.P. Morgan Securities, Inc., filed as Exhibit
1 to Form 8-K dated March 3, 1998, File No. 107797*
10.32 Registration Rights Agreement, dated as of November 12, 1996, by and between HFS
Incorporated and Ms. Christel DeHaan (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-3 (Registration No. 333-17371),
Exhibit 2.2)*
10.33 License Agreement dated as of September 18, 1989 amended and restated as of
July 15, 1991 between Franchise System Holdings, Inc. and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.2)*
10.34 Restructuring Agreement dated as of July 15, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc. Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.3)*
10.35 License Agreement dated as of November 1, 1991 between Franchise Systems
Holdings, Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 10.4)*
10.36 Amendment to License Agreement, Restructuring Agreement and Certain Other
Restructuring Documents dated as of November 1, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc., Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems,
Inc. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.5)*
10.37 Master License Agreement dated July 30, 1997, among HFS Car Rental, Inc., Avis
Rent A Car System, Inc. and Wizard Co. (Incorporated by reference to HFS
Incorporated Form 10-Q for the quarter ended June 30, 1997, Exhibit 10.1)*
10.38 Term Loan Agreement, dated as of February 9, 1999, among Cendant Corporation, as
Borrower, the Lenders referred therein, Bank of America NT & SA, as Syndication
Agent, Barclays Bank, PLC, The Bank of Nova Scotia, Credit Lyonnais New York
Branch, as CoDocumentation Agents, First Union National Bank, and The Industrial
Bank of Japan, Limited, New York Branch, as Managing Agents, Credit Suisse First
Boston, The Sumitomo Bank, Limited, New York Branch, Banque Paribas, as
CoAgents and The Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Cendant Corporation's Form 8-K dated February 16, 1999 (File
No. 110308)).*
75
EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------
10.39 Internet Cooperation Agreement, dated October 1, 1999, between CompleteHome Operations,
Inc. and Century 21 Real Estate Corporation. (incorporated by reference to Cendant
Corporation Form 10-K/A dated February 4, 2000)*
10.40 Internet Cooperation Agreement, dated October 1, 1999, between CompleteHome Operations,
Inc. and Coldwell Banker Real Estate Corporation. (incorporated by reference to Cendant
Corporation Form 10-K/A dated February 4, 2000)*
10.41 Internet Cooperation Agreement, dated October 1, 1999, between CompleteHome Operations,
Inc. and ERA Franchise Systems, Inc. (incorporated by reference to Cendant
Corporation Form 10-K/A dated February 4, 2000)*
10.42 Internet Cooperation Agreement dated September 30, 1999 between CompleteHome.com, Inc.
and Getko Group, Inc. (incorporated by reference to Cendant Corporation Form 10-K/A
dated February 4, 2000)*
10.43 Move.com, Inc. 1999 Stock Option Plan (Incorporated by reference to Company's
Definitive Proxy Statement dated February 10, 2000)*
10.44 Cendant Corporation 1999 Non-Employee Directors Deferred Compensation Plan
10.45 Agreement with Samuel L. Katz, dated April 1, 1999.
12 Statement Re: Computation of Consolidated Ratio to Earnings to Fixed Charges
16.1 Letter re: change in certifying accountant (Incorporated by reference to the Company's
Form 8-K dated January 27, 1998)*
16.2 Letter re: change in certifying accountant of a significant subsidiary (Incorporated by
reference to the Company's Form 8-K dated May 18, 1998)*
21 Subsidiaries of Registrant
23 Consent of Deloitte & Touche LLP
27 Financial data schedule
- ----------
* Incorporated by reference.
76
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999,
1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the accompanying consolidated balance sheets of Cendant
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of recognizing revenue and
membership solicitation costs for its individual membership business.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
F-2
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
REVENUES
Membership and service fees, net $ 5,183 $ 5,081 $ 4,083
Fleet leasing (net of depreciation and interest costs of $670,
$1,279 and $1,205) 30 89 60
Other 189 114 97
------- ------- -------
Net revenues 5,402 5,284 4,240
------- ------- -------
EXPENSES
Operating 1,795 1,870 1,322
Marketing and reservation 1,017 1,158 1,032
General and administrative 671 666 636
Depreciation and amortization 371 323 238
Other charges:
Litigation settlement and related costs 2,894 351 --
Termination of proposed acquisitions 7 433 --
Executive terminations -- 53 --
Investigation-related costs 21 33 --
Merger-related costs and other unusual charges (credits) 110 (67) 704
Investigation-related financing costs -- 35 --
Interest, net 199 114 51
------- ------- -------
Total expenses 7,085 4,969 3,983
------- ------- -------
Net gain on dispositions of businesses 1,109 -- --
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (574) 315 257
Provision (benefit) for income taxes (406) 104 191
Minority interest, net of tax 61 51 --
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (229) 160 66
Discontinued operations:
Loss from discontinued operations, net of tax -- (25) (26)
Gain on sale of discontinued operations, net of tax 174 405 --
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (55) 540 40
Extraordinary gain, net of tax -- -- 26
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (55) 540 66
Cumulative effect of accounting change, net of tax -- -- (283)
------- ------- -------
NET INCOME (LOSS) $ (55) $ 540 $ (217)
======= ======= =======
INCOME (LOSS) PER SHARE
BASIC
Income (loss) from continuing operations $ (0.30) $ 0.19 $ 0.08
Loss from discontinued operations -- (0.03) (0.03)
Gain on sale of discontinued operations 0.23 0.48 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
------- ------- -------
NET INCOME (LOSS) $ (0.07) $ 0.64 $ (0.27)
======= ======= =======
DILUTED
Income (loss) from continuing operations $ (0.30) $ 0.18 $ 0.08
Loss from discontinued operations -- (0.03) (0.03)
Gain on sale of discontinued operations 0.23 0.46 --
Extraordinary gain -- -- 0.03
Cumulative effect of accounting change -- -- (0.35)
------- ------- -------
NET INCOME (LOSS) $ (0.07) $ 0.61 $ (0.27)
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 1,164 $ 1,009
Receivables (net of allowance for doubtful accounts of $68 and $123) 1,026 1,535
Deferred income taxes 1,427 467
Deferred membership commission costs 193 253
Other current assets 782 909
Net assets of discontinued operations -- 374
-------- -------
Total current assets 4,592 4,547
-------- -------
Property and equipment (net of accumulated depreciation of $390
and $491) 1,347 1,433
Franchise agreements (net of accumulated amortization of $216 and $169) 1,410 1,363
Goodwill (net of accumulated amortization of $297 and $248) 3,271 3,923
Other intangibles (net of accumulated amortization of $143 and $117) 662 757
Other assets 1,141 682
-------- -------
Total assets exclusive of assets under programs 12,423 12,705
-------- -------
Assets under management and mortgage programs
Relocation receivables 530 659
Mortgage loans held for sale 1,112 2,416
Mortgage servicing rights 1,084 636
Net investment in leases and leased vehicles -- 3,801
-------- -------
2,726 7,512
-------- -------
TOTAL ASSETS $ 15,149 $20,217
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,279 $ 1,518
Current portion of debt 400 --
Shareholder litigation settlement and related costs 2,892 --
Deferred income 1,039 1,354
-------- -------
Total current liabilities 5,610 2,872
-------- -------
Deferred income 413 234
Long-term debt 2,445 3,363
Other noncurrent liabilities 373 202
-------- -------
Total liabilities exclusive of liabilities under programs 8,841 6,671
-------- -------
Liabilities under management and mortgage programs
Debt 2,314 6,897
Deferred income taxes 310 341
-------- -------
2,624 7,238
-------- -------
Mandatorily redeemable preferred securities issued by subsidiary holding
solely senior debentures issued by the Company 1,478 1,472
-------- -------
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock, $.01 par value -- authorized 10 million shares; none
issued and outstanding -- --
Common stock, $.01 par value -- authorized 2 billion shares; issued
870,399,635 and 860,551,783 shares 9 9
Additional paid-in capital 4,102 3,863
Retained earnings 1,425 1,480
Accumulated other comprehensive loss (42) (49)
Treasury stock, at cost, 163,818,148 and 27,270,708 shares (3,288) (467)
-------- -------
Total shareholders' equity 2,206 4,836
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,149 $20,217
======== =======
See Notes to Consolidated Financial Statements.
F-4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (55) $ 540 $ (217)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities from continuing operations:
Loss from discontinued operations, net of tax -- 25 26
Gain on sale of discontinued operations, net of tax (174) (405) --
Extraordinary gain on sale of subsidiary, net of tax -- -- (26)
Cumulative effect of accounting change, net of tax -- -- 283
Asset impairments and termination benefits -- 63 --
Net gain on dispositions of businesses (1,109) -- --
Litigation settlement and related costs 2,894 351 --
Merger-related costs and other unusual charges (credits) 110 (67) 704
Payments of merger-related costs and other unusual charges (135) (158) (318)
Depreciation and amortization 371 323 238
Proceeds from sales of trading securities 180 136 --
Purchases of trading securities (146) (182) --
Deferred income taxes 252 (111) (24)
Net change in assets and liabilities from continuing operations:
Receivables (193) (126) (96)
Deferred membership commission costs 60 (87) --
Income taxes receivable (133) (98) (84)
Accounts payable and other current liabilities (500) 96 (87)
Deferred income (88) 82 135
Other, net (303) (54) (55)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS 1,031 328 479
--------- --------- ---------
Management and mortgage programs:
Depreciation and amortization 698 1,260 1,122
Origination of mortgage loans (25,025) (26,572) (12,217)
Proceeds on sale and payments from mortgage loans
held for sale 26,328 25,792 11,829
--------- --------- ---------
2,001 480 734
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS 3,032 808 1,213
--------- --------- ---------
INVESTING ACTIVITIES
Property and equipment additions (277) (355) (155)
Proceeds from sales of marketable securities 741 -- 506
Purchases of marketable securities (672) -- (458)
Investments (18) (24) (273)
Net assets acquired (net of cash acquired) and
acquisition-related payments (205) (2,852) (567)
Net proceeds from dispositions of businesses 3,509 314 224
Other, net 47 107 (109)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS 3,125 (2,810) (832)
--------- --------- ---------
F-5
CENDANT CORPORATIONAND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ --------------
Management and mortgage programs:
Investment in leases and leased vehicles $ (2,378) $ (2,447) $(2,069)
Payments received on investment in leases and leased
vehicles 1,529 987 589
Proceeds from sales and transfers of leases and leased
vehicles to third parties 75 183 186
Equity advances on homes under management (7,608) (6,484) (6,845)
Repayment on advances on homes under
management 7,688 6,624 6,863
Additions to mortgage servicing rights (727) (524) (270)
Proceeds from sales of mortgage servicing rights 156 119 49
-------- -------- -------
(1,265) (1,542) (1,497)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM
CONTINUING OPERATIONS 1,860 (4,352) (2,329)
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from borrowings 1,719 4,809 67
Principal payments on borrowings (2,213) (2,596) (174)
Issuance of convertible debt -- -- 544
Issuance of common stock 127 171 132
Repurchases of common stock (2,863) (258) (171)
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary holding solely senior
debentures issued by the Company -- 1,447 --
Other, net -- -- (7)
-------- -------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS EXCLUSIVE OF MANAGEMENT AND
MORTGAGE PROGRAMS (3,230) 3,573 391
-------- -------- ---------
Management and mortgage programs:
Proceeds received for debt repayment in connection
with disposal of fleet segment 3,017 -- --
Proceeds from debt issuance or borrowings 5,263 4,300 2,816
Principal payments on borrowings (7,838) (3,090) (1,693)
Net change in short-term borrowings (2,000) (93) (613)
-------- -------- ---------
(1,558) 1,117 510
-------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM
CONTINUING OPERATIONS (4,788) 4,690 901
-------- -------- ---------
Effect of changes in exchange rates on cash and cash
equivalents 51 (16) 15
-------- -------- ---------
Net cash used in discontinued operations -- (188) (181)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 155 942 (381)
Cash and cash equivalents, beginning of period 1,009 67 448
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,164 $ 1,009 $ 67
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 451 $ 543 $ 375
======== ======== =========
Income tax payments (refunds), net $ (46) $ (23) $ 265
======== ======== =========
See Notes to Consolidated Financial Statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK EQUITY
-------- -------- ------------ ------------ --------------- ---------- --------------
BALANCE AT JANUARY 1, 1997 808 $ 8 $2,843 $1,186 $ (6) $ (75) $3,956
COMPREHENSIVE LOSS:
Net loss -- -- -- (217) -- --
Currency translation
adjustment -- -- -- -- (28) --
Unrealized loss on
marketable securities,
net of tax of $2 -- -- -- -- (4) --
TOTAL COMPREHENSIVE LOSS -- -- -- -- -- -- (249)
Issuance of common stock 6 -- 46 -- -- -- 46
Exercise of stock options 11 -- 133 -- -- (18) 115
Tax benefit from exercise of
stock options -- -- 94 -- -- -- 94
Amortization of restricted stock -- -- 28 -- -- -- 28
Cash dividends declared -- -- -- (7) -- -- (7)
Adjustment to reflect change in
fiscal year from Cendant
Merger -- -- -- (22) -- -- (22)
Conversion of convertible notes 20 -- 151 -- -- -- 151
Repurchase of common stock -- -- -- -- -- (171) (171)
Retirement of treasury stock (7) -- (190) -- -- 190 --
Other -- -- (20) -- -- -- (20)
--- --- ------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1997 838 8 3,085 940 (38) (74) 3,921
COMPREHENSIVE INCOME:
Net income -- -- -- 540 -- -- --
Currency translation
adjustment -- -- -- -- (11) -- --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 529
Exercise of stock options 17 1 168 -- -- -- 169
Tax benefit from exercise of
stock options -- -- 147 -- -- -- 147
Conversion of convertible notes 6 -- 114 -- -- -- 114
Repurchase of common stock -- -- -- -- -- (258) (258)
Mandatorily redeemable
preferred securities
issued by subsidiary
holding solely senior
debentures issued by the
Company -- -- (66) -- -- -- (66)
Common stock received as
consideration in sale of
discontinued operations -- -- -- -- -- (135) (135)
Rights issuable -- -- 350 -- ---- -- 350
Other -- -- 65 -- -- -- 65
--- --- ------ ------ ----- ------ ------
BALANCE AT DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $ (49) $ (467) $4,836
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) STOCK EQUITY
-------- -------- ------------ ---------- --------------- ------------ --------------
BALANCE AT DECEMBER 31, 1998 861 $ 9 $3,863 $1,480 $ (49) $ (467) $ 4,836
COMPREHENSIVE LOSS:
Net loss -- -- -- (55) -- --
Currency translation
adjustment -- -- -- -- (69) --
Unrealized gain on
marketable securities,
net of tax of $22 -- -- -- -- 37 --
Reclassification adjustments,
net of tax of $13 -- -- -- -- 39 --
TOTAL COMPREHENSIVE LOSS -- -- -- -- -- -- (48)
Exercise of stock options 9 -- 81 -- -- 42 123
Tax benefit from exercise of
stock options -- -- 52 -- -- -- 52
Repurchase of common stock -- -- -- -- -- (2,863) (2,863)
Modifications of stock option
plans due to dispositions of
businesses -- -- 83 -- -- -- 83
Rights issuable -- -- 22 -- -- -- 22
Other -- -- 1 -- -- -- 1
--- --- ------ ------ ----- -------- --------
BALANCE AT DECEMBER 31, 1999 870 $ 9 $4,102 $1,425 $ (42) $ (3,288) $ 2,206
=== === ====== ====== ===== ======== ========
See Notes to Consolidated Financial Statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Cendant Corporation is a global provider of a wide range of complementary
consumer and business services. The Consolidated Financial Statements include
the accounts of Cendant Corporation and its wholly-owned subsidiaries
(collectively, "the Company" or "Cendant"). In presenting the Consolidated
Financial Statements, management makes estimates and assumptions that
affect reported amounts and related disclosures. Estimates, by their
nature, are based on judgement and available information. As such, actual
results could differ from those estimates. Certain reclassifications have
been made to prior year amounts to conform to the current year
presentation. Unless otherwise noted, all dollar amounts presented are in
Millions, except per share amounts.
INVESTMENTS IN AFFILIATES
Investments in affiliates over which the Company has significant influence
but not a controlling interest are carried on the equity basis of
accounting.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Property and equipment is depreciated based upon a straight-line method over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed utilizing the straight-line method over the
estimated useful lives of the related assets or the lease term, if shorter.
Franchise agreements for hotel, real estate brokerage, car rental and tax
return preparation services are amortized on a straight-line basis over the
estimated periods to be benefited, ranging from 12 to 40 years.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired, is amortized on a straight-line basis over the estimated periods
to be benefited, substantially ranging from 25 to 40 years.
Other intangibles are amortized on a straight-line method over the
estimated periods to be benefited.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, comparing the respective carrying
values to the current and expected future cash flows, on an undiscounted
basis, to be generated from such assets. Property and equipment is evaluated
separately within each business. The recoverability of goodwill and
franchise agreements is evaluated on a separate basis for each acquisition
and franchise brand, respectively. Any enterprise goodwill and franchise
agreements are also evaluated using the undiscounted cash flow method.
Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes during 1998, the Company determined
that $37 million of goodwill associated with a Company subsidiary, National
Library of Poetry, was permanently impaired. In addition, the Company had
equity investments in various businesses, which were generating negative
cash flows and were unable to access sufficient liquidity through equity or
debt offerings. As a result, the Company wrote off $13 million of such
investments in 1998. The aforementioned impairments impacted the Company's
diversified services segment and are classified as operating expenses in the
Consolidated Statements of Operations.
F-9
REVENUE RECOGNITION AND BUSINESS OPERATIONS
Franchising. Franchise revenue principally consists of royalties, as well as
marketing and reservation fees, which are based on a percentage of
franchisee revenue. Royalty, marketing, and reservation fees are accrued as
the underlying franchisee revenue is earned. Franchise revenue also includes
initial franchise fees, which are recognized as revenue when all material
services or conditions relating to the sale have been substantially
performed, which is generally when a franchised unit is opened.
Timeshare. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscribing members. Subscription
revenue represents the fees from subscribing members. There is no separate
fee charged for the participation in the timeshare exchange network.
Subscription revenue, net of related procurement costs, is deferred upon
receipt and recognized as revenue over the subscription period during which
delivery of publications and other services are provided to the subscribing
members. Subscriptions are cancelable and refundable on a prorata basis.
Subscription procurement costs are expensed as incurred. Such costs were $31
million for each of the years ended December 31, 1999 and 1998 and $27
million for the year ended December 31, 1997.
Individual Membership. Membership revenue is generally recognized upon the
expiration of the membership period. Memberships are generally cancelable
for a full refund of the membership fee during the entire membership period,
generally one year. Certain memberships are subject to a pro rata refund.
Revenues for such memberships are recognized ratably over the membership
period.
Insurance/Wholesale. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a share of the excess of
premiums paid to insurance carriers less claims experience to date, claims
incurred but not reported and carrier management expenses. Such profit
commissions are accrued based on claims experience to date, including an
estimate of claims incurred but not reported.
During 1999, the Company changed the amortization period for customer
acquisition costs related to accidental death and dismemberment insurance
products, which resulted in a reduction in expenses of $16 million ($10
million, after tax or $0.01 per diluted share). The change was based upon
new information becoming available to determine customer retention rates.
Relocation. Relocation services provided by the Company include facilitating
the purchase and resale of the transferee's residence, providing equity
advances on the transferee's residence and home management services. The
home is purchased under a contract of sale and the Company obtains a deed to
the property; however, it does not generally record the deed or transfer
title. Transferring employees are provided equity advances on the home based
on their ownership equity of the appraised home value. The mortgage is
generally retired concurrently with the advance of the equity and the
purchase of the home. Based on its client agreements, the Company is given
parameters under which it negotiates for the ultimate sale of the home. The
gain or loss on resale is generally borne by the client corporation. In
certain transactions, the Company will assume the risk of loss on the sale
of homes; however, in such transactions, the Company will control all facets
of the resale process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate. Direct costs of managing the
home during the period the home is held for resale, including property taxes
and repairs and maintenance, are generally borne by the client corporation.
The client corporation generally advances funds to cover a portion of such
carrying costs.
Revenues and related costs associated with the purchase and resale of a
transferee's residence are recognized as services are provided. Relocation
services revenue is generally recorded net of costs reimbursed by client
corporations and interest expense incurred to fund the purchase of a
transferee's residence. Revenue for other fee-based programs, such as home
marketing assistance, household goods moves, and destination services are
recognized over the periods in which the services are provided and the
related expenses are incurred.
F-10
Mortgage. Loan origination fees, commitment fees paid in connection with the
sale of loans, and certain direct loan origination costs associated with
loans are deferred until such loans are sold. Mortgage loans are recorded at
the lower of cost or market value on an aggregate basis. Sales of mortgage
loans are generally recorded on the date a loan is delivered to an investor.
Gains or losses on sales of mortgage loans are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold. See Note 9 -- Mortgage Loans Held For Sale.
Fees received for servicing loans owned by investors are credited to income
when earned. Costs associated with loan servicing are charged to expense as
incurred.
Mortgage servicing rights ("MSRs") are amortized over the estimated life of
the related loan portfolio in proportion to projected net servicing
revenues. Such amortization is recorded as a reduction of net servicing
revenue in the Consolidated Statements of Operations. The Company estimates
future prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification, and recent prepayment experience. Gains or losses on
the sale of MSRs are recognized when title and all risks and rewards have
irrevocably passed to the buyer and there are no significant unresolved
contingencies. See Note 10 -- Mortgage Servicing Rights.
Fleet. The Company primarily leased its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). Each lease was either
classified as an operating lease or a direct financing lease, as defined.
Lease revenues were recognized based on rentals. Revenues from fleet
management services other than leasing were recognized over the period in
which services were provided and the related expenses were incurred. See Note
3 -- Dispositions and Acquisitions of Businesses.
ADVERTISING EXPENSES
Advertising costs, including direct response advertising related to
membership programs, are generally expensed in the period incurred.
Advertising expenses for the years ended December 31, 1999, 1998 and 1997
were $589 million, $685 million and $574 million, respectively.
CHANGE IN ACCOUNTING POLICY
In August 1998, the Company changed its accounting policy with respect to
revenue and expense recognition for its membership businesses, effective
January 1, 1997. Prior to such adoption, the Company recorded deferred
membership income, net of estimated cancellations, at the time members were
billed (upon expiration of the free trial period), which was recognized as
revenue ratably over the membership term and modified periodically based on
actual cancellation experience. In addition, membership acquisition and
renewal costs, which related primarily to membership solicitations, were
capitalized as direct response advertising costs due to the Company's
ability to demonstrate that the direct response advertising resulted in
future economic benefits. Such costs were amortized on a straight-line basis
as revenues were recognized (over the average membership period).
The Company concluded that when membership fees are fully refundable during
the entire membership period, membership revenue should be recognized at the
end of the membership period upon the expiration of the refund offer. The
Company further concluded that non-refundable solicitation costs should be
expensed as incurred since such costs are not recoverable if membership fees
are refunded. The Company adopted such accounting policy effective January
1, 1997 and accordingly, recorded a non-cash charge of $450 million ($283
million, after tax) on such date to account for the cumulative effect of the
accounting change.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities",
issued in June 1998, to fiscal years commencing after June 15, 2000. SFAS
No. 133 requires that all derivatives be recorded in the Consolidated
Balance Sheets as assets or liabilities and measured at fair
F-11
value. If the derivative does not qualify as a hedging instrument, changes
in fair value are to be recognized in net income. If the derivative does
qualify as a hedging instrument, changes in fair value are to be recognized
either in net income or other comprehensive income consistent with the asset
or liability being hedged. The Company has developed an implementation plan
to adopt SFAS No. 133. Completion of the implementation plan and
determination of the impact of adopting SFAS No. 133 is expected to be
completed by the fourth quarter of 2000. The Company will adopt SFAS No. 133
on January 1, 2001, as required.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 draws upon the existing accounting rules and
explains those rules, by analogy, to other transactions that the existing
rules do not specifically address. In accordance with SAB No. 101, the
Company will revise certain revenue recognition policies regarding the
recognition of non-refundable one-time fees and the recognition of pro rata
refundable subscription revenues. The Company will adopt SAB No. 101 on
January 1, 2000, as required, and will record a non-cash charge of
approximately $89 million ($56 million, after tax) to account for the
cumulative effect of the accounting change.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
further reflects all potential dilution of common stock, including the
assumed exercise of stock options and warrants using the treasury method,
and convertible debt. At December 31, 1999, 183 million stock options (with
a weighted average exercise price of $15.24 per option) and 2 million stock
warrants (with a weighted average exercise price of $16.77 per warrant) were
outstanding and antidilutive. At December 31, 1998 and 1997, 38 million
stock options (with a weighted average exercise price of $29.58 per option)
and 54 million stock options (with a weighted average exercise price of
$31.16 per option), respectively, were outstanding and antidilutive.
Therefore, such options and warrants were excluded from the computation of
diluted EPS. In addition, the Company's 3% convertible subordinated notes
convertible into 18 million shares of Company common stock were antidultive;
therefore, such notes were excluded from the computation of diluted EPS at
December 31, 1999, 1998 and 1997. Diluted weighted average shares were
calculated as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------ ------ -----
Weighted average shares for basic EPS 751 848 811
Stock options -- 32 41
--- --- ---
Weighted average shares for diluted EPS 751 880 852
=== === ===
3. DISPOSITIONS AND ACQUISITIONS OF BUSINESSES
DISPOSITIONS
Entertainment Publications, Inc. On November 30, 1999, the Company completed
the sale of approximately 85% of its Entertainment Publications, Inc.
("EPub") business unit for $281 million in cash. The Company retained
approximately 15% of EPub's common equity in connection with the transaction.
In addition, the Company has a designee on EPub's Board of Directors. The
Company accounts for its investment in EPub using the equity method. The
Company realized a net gain of approximately $156 million ($78 million,
after tax). EPub is a marketer and publisher of coupon books and discount
programs which provides customers with unique products and services that
are designed to enhance a customer's purchasing power.
Green Flag. On November 26, 1999, the Company completed the sale of its
Green Flag business unit for approximately $401 million in cash, including
dividends of $37 million. The Company realized a net gain of approximately
$27 million ($8 million, after tax). Green Flag is a roadside assistance
organization based in the UK, which provides a wide range of emergency
support and rescue services.
F-12
Fleet. On June 30, 1999, the Company completed the disposition of the fleet
business segment ("fleet segment" or "fleet businesses") pursuant to an
agreement between PHH Corporation ("PHH"), a wholly-owned subsidiary of the
Company, and Avis Rent A Car, Inc. ("ARAC"). Pursuant to the agreement, ARAC
acquired the net assets of the fleet businesses through the assumption and
subsequent repayment of $1.44 billion of intercompany debt and the issuance
of $360 million of convertible preferred stock of Avis Fleet Leasing and
Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC.
Coincident with the closing of the transaction, ARAC refinanced the assumed
debt under management programs which was payable to the Company.
Accordingly, the Company received additional consideration from ARAC
comprised of $3.0 billion of cash proceeds and a $30 million receivable.
The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at the Company's option upon the satisfaction of certain
conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining certain
EBITDA (earnings before interest, income taxes, depreciation and
amortization) thresholds, as defined. There are additional circumstances
upon which the shares of Avis Fleet convertible preferred stock are
automatically or mandatorily convertible into ARAC common stock.
The Company realized a net gain on the disposition of the fleet business
segment of $881 million ($866 million, after tax) of which $715 million
($702 million, after tax) was recognized at the time of closing and $166
million ($164 million, after tax) was deferred at the date of disposition.
The realized gain is net of approximately $90 million of transaction costs.
The Company deferred the portion of the realized net gain, which was
equivalent to its common equity ownership percentage in ARAC at the time of
closing. The deferred gain is being recognized into income over forty years,
which is consistent with the period ARAC is amortizing the goodwill
generated from the transaction and is included within other revenue in the
Consolidated Statements of Operations ($2 million in 1999). During 1999, the
Company recognized $9 million of the deferred portion of the realized net
gain due to the sale of a portion of the Company's ownership of ARAC. The
deferred net gain is included in deferred income as presented in the
Consolidated Balance Sheet at December 31, 1999. The fleet segment
disposition was structured as a tax-free reorganization and, accordingly, no
tax provision has been recorded on a majority of the gain. However, pursuant
to a recent interpretive ruling, the Internal Revenue Service ("IRS") has
taken the position that similarly structured transactions do not qualify as
tax-free reorganizations under the Internal Revenue Code Section
368(a)(1)(A). If the transaction is not considered a tax-free
reorganization, the resultant incremental liability could range between $10
million and $170 million depending upon certain factors including
utilization of tax attributes and contractual indemnification provisions.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.
Other 1999 Dispositions. The Company completed the dispositions of certain
businesses, including North American Outdoor Group, Central Credit, Inc.,
Global Refund Group, Spark Services, Inc., Match.com, National Leisure Group
and National Library of Poetry. Aggregate consideration received on such
dispositions was comprised of approximately $407 million in cash, including
dividends of $21 million, and $43 million in marketable securities. The
Company realized a net gain of $202 million ($81 million, after tax) on the
dispositions of these businesses.
Interval International Inc. On December 17, 1997, as directed by the Federal
Trade Commission in connection with a merger, the Company sold all of the
outstanding shares of its timeshare exchange businesses, Interval
International Inc. ("Interval"), for net proceeds of $240 million less
transaction related costs amortized as services were provided. The Company
recognized a gain on the sale of Interval of $77 million ($26 million, after
tax) was reflected as an extraordinary gain in the Consolidated Statements
of Operations.
ACQUISITIONS
During 1998, the Company completed the acquisitions of National Parking
Corporation Limited ("NPC"), The Harpur Group Ltd. ("Harpur"), Jackson
Hewitt Inc. ("Jackson Hewitt") and certain other entities, which were
accounted for using the purchase method of accounting. Accordingly, assets
F-13
acquired and liabilities assumed were recorded at their fair values. The
excess of purchase price over the fair value of the underlying net assets
acquired was allocated to goodwill. During 1999 and 1998, the Company
recorded additional goodwill of $50 million and $100 million, respectively,
in satisfaction of a contingent purchase liability to the seller of Resort
Condominiums International, Inc., a Company acquired in 1996. The operating
results of such acquired entities are included in the Company's
Consolidated Statements of Operations since the respective dates of
acquisition. The following table presents information about the
acquisitions.
JACKSON
NPC HARPUR HEWITT OTHER
--------- -------- -------- ----------
Cash paid $1,638 $206 $476 $564
Fair value of identifiable net assets
acquired (1) 590 51 99 218
------ ---- ---- ----
Goodwill $1,048 $155 $377 $346
====== ==== ==== ====
Goodwill benefit period (years) 40 40 40 25 to 40
====== ==== ==== ========
(1) Cash acquired in connection with these acquisitions was $58 million.
4. DISCONTINUED OPERATIONS
On January 12, 1999, the Company completed the sale of Cendant Software
Corporation ("CDS"), a developer, publisher and distributor of educational
and entertainment software, for net cash proceeds of $770 million. The
Company realized a net gain of $323 million ($372 million, after tax) on the
disposition of CDS, of which $299 million ($174 million, after tax) was
recognized during 1999 and $24 million ($198 million, after tax) was
recognized during 1998, substantially in the form of a tax benefit and
corresponding deferred tax asset.
On December 15, 1998, the Company completed the sale of Hebdo Mag
International, Inc. ("Hebdo Mag"), a publisher and distributor of classified
advertising information. The Company received $315 million in cash and 7
million shares of Company common stock valued at $135 million (approximately
$19 per share market value) on the date of sale. The Company recognized a
net gain of $155 million ($207 million, after tax) on the sale of Hebdo Mag
partially in the form of a tax benefit.
Summarized financial data of discontinued operations for the years ended
December 31, consisted of:
CDS HEBDO MAG
-------------------- -------------------
1998 1997 1998 1997
--------- -------- ------ ----------
Net revenues $ 346 $434 $202 $209
===== ==== ==== ====
Income (loss) before income
taxes $ (57) $ (6) $ 17 $ (4)
Provision (benefit) for income
taxes (23) 2 8 (1)
Extraordinary loss from early
extinguishment of debt, net of
$5 million tax benefit -- -- -- (15)
----- ---- ---- ----
Net income (loss) $ (34) $ (8) $ 9 $(18)
===== ==== ==== ====
The Company allocated $20 million of interest expense to discontinued
operations for the year ended December 31, 1998. Such interest expense
represents the cost of funds associated with businesses acquired by the
discontinued business segments at an interest rate consistent with the
Company's consolidated effective borrowing rate.
F-14
Net assets of CDS at December 31, 1998 were comprised of current assets of
$285 million, goodwill of $106 million, other assets of $88 million and
total liabilities of $105 million.
5. OTHER CHARGES
LITIGATION SETTLEMENTS
Common Stock Litigation Settlement. On December 7, 1999, the Company reached
a preliminary agreement to settle the principal securities class action
pending against the Company, other than certain claims relating to FELINE
PRIDES securities discussed below. This settlement is subject to final
documentation and court approval. See Note 17 -- Commitments and
Contingencies.
FELINE PRIDES Litigation Settlement. On March 17, 1999, the Company reached
a final agreement (the "FELINE PRIDES settlement") to settle the class
action lawsuit that was brought on behalf of the holders of Income or Growth
FELINE PRIDES ("PRIDES") securities who purchased their securities on or
prior to April 15, 1998. See Note 13 -- Mandatorily Redeemable Trust
Preferred Securities Issued by Subsidiary Holding Solely Senior Debentures
Issued by the Company.
TERMINATION OF PROPOSED ACQUISITIONS
On February 4, 1999, the Company announced its intention not to proceed with
the acquisition of RAC Motoring Services ("RACMS") due to certain conditions
imposed by the UK Secretary of State of Trade and Industry that the Company
determined not to be commercially feasible and therefore unacceptable. In
connection with such termination, the Company wrote off $7 million of
deferred acquisition costs.
On October 13, 1998, the Company and American Bankers Insurance Group, Inc.
("American Bankers") terminated an agreement which provided for the
Company's acquisition of American Bankers. In connection with this
agreement, the Company made a $400 million cash payment to American Bankers
and wrote-off $32 million of costs, primarily professional fees, resulting
in a total charge of $432 million.
On October 5, 1998, the Company announced the termination of an agreement to
acquire Providian Auto and Home Insurance Company. In connection with the
termination of this agreement, the Company wrote off $1 million of costs.
EXECUTIVE TERMINATIONS
The Company incurred $53 million of costs on July 28, 1998 related to the
termination of certain former executives, principally Walter A. Forbes, who
resigned as Chairman and as a member of the Board of Directors. Aggregate
benefits given to Mr. Forbes resulted in a charge of $51 million, comprised
of $38 million in cash payments and approximately one million Company stock
options, with a fair value of $13 million, as calculated by the
Black-Scholes model. Such options were immediately vested and expire on July
28, 2008. The main benefit to the Company from Mr. Forbes' termination was
the resolution of the division of governance issues that existed at the time
between the members of the Board of Directors formerly associated with CUC
International, Inc. ("CUC") and the members of the Board of Directors
formerly associated with HFS Incorporated ("HFS").
INVESTIGATION-RELATED COSTS
The Company incurred professional fees, public relations costs and other
miscellaneous expenses of $21 million and $33 million during 1999 and 1998,
respectively, in connection with accounting irregularities and resulting
investigations into such matters.
INVESTIGATION-RELATED FINANCING COSTS
In connection with the Company's discovery and announcement of accounting
irregularities on April 15, 1998 and the corresponding lack of audited
financial statements, the Company was temporarily prohibited from accessing
public debt markets. As a result, the Company paid $28 million in fees
associated with waivers and various financing arrangements. Additionally,
during 1998, the Company exercised its option to redeem its 4 3/4%
Convertible Senior Notes (the "4 3/4% Notes"). At such time, the Company
anticipated that all holders of the 4 3/4% Notes would elect to convert the
F-15
4 3/4% Notes to Company common stock. However, at the time of redemption,
holders of the 4 3/4% Notes elected not to convert the 4 3/4% Notes to
Company common stock resulting in the Company redeeming such notes at a
premium. Accordingly, the Company recorded a $7 million loss on such
redemption.
1999 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
On September 15, 1999, Netmarket Group, Inc. ("NGI") began operations as an
independent company that pursues the development of certain interactive
businesses formerly within the Company's direct marketing division. NGI
owns, operates and develops the online membership businesses, which
collectively have approximately 1.4 million online members. Prior to
September 15, 1999, the Company's ownership of NGI was restructured into
common stock and preferred stock interests. On September 15, 1999 (the
"donation date"), the Company donated NGI's outstanding common stock to a
charitable trust, and NGI issued additional shares of its common stock to
certain of its marketing partners. The fair market value of the NGI common
stock on the donation date was approximately $20 million. Accordingly, as a
result of the change in ownership of NGI's common stock from the Company to
independent third parties, prospective from the donation date, NGI's
operating results are no longer included in the Company's Consolidated
Financial Statements. The Company retained an ownership interest in a
convertible preferred stock of NGI, which is ultimately convertible, at the
Company's option, beginning September 14, 2001, into approximately 78% of
NGI's diluted common shares. The convertible preferred stock is accounted
for using the cost method of accounting. The convertible preferred stock
has a $5 million annual preferred dividend, which will be recorded in
income if and when it becomes realizable. Subsequent to the Company's
contribution of NGI's common stock to the charitable trust, the Company
provided a development advance of $77 million to NGI, which is contingently
repayable to the Company if certain financial targets related to NGI are
achieved. The purpose of the development advance was to provide NGI with
the funds necessary to develop Internet related products and systems, that
if successful, would significantly increase the value of NGI. Without these
funds, NGI would not have sufficient funds for development activities
contemplated in its business plans. Repayment of the advance is therefore
solely dependent on the success of the development efforts. The Company
recorded a charge, inclusive of transaction costs, of $85 million in
connection with the donation of NGI shares to the charitable trust and the
subsequent development advance.
During 1999, the Company incurred $23 million of additional charges to fund
an irrevocable contribution to the independent technology trust responsible
for completing the transition of the Company's lodging franchisees to a
Company sponsored property management system and $2 million of costs
primarily resulting from further consolidation of European call centers in
Cork, Ireland which are included below as a component of the 1999 adjustment
activity for the Fourth Quarter 1997 Charge.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
Fourth Quarter 1997 Charge. The Company incurred unusual charges ("Unusual
Charges") in the fourth quarter of 1997 totaling $455 million substantially
associated with the merger of HFS and CUC (the "Cendant Merger") and the
merger in October 1997 with Hebdo Mag. Reorganization plans were formulated
prior to and implemented as a result of the mergers. The Company determined
to streamline its corporate organization functions and eliminate several
office locations in overlapping markets. Management's plan included the
consolidation of European call centers in Cork, Ireland and terminations of
franchised hotel properties. Liabilities associated with Unusual Charges are
classified as a component of accounts payable and other current liabilities.
The reduction of such liabilities from inception is summarized by category
of expenditure as follows:
F-16
1997
UNUSUAL 1997 1998 1998
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS
--------- ------------ ------------ -------------
Professional fees $ 93 $ (43) $ (38) $(10)
Personnel related 171 (45) (61) (4)
Business terminations 78 (78) 1 (1)
Facility related and
other 113 (92) (5) (12)
----- ------ ----- ----
Total Unusual Charges 455 (258) (103) (27)
Reclassification for
discontinued
operations (18) 18 -- --
----- ------ ----- ----
Total Unusual Charges
related to continuing
operations $ 437 $ (240) $(103) $(27)
===== ====== ===== ====
1999 ACTIVITY
BALANCE AT ------------------------ BALANCE AT
DECEMBER 31, CASH DECEMBER 31,
1998 PAYMENTS ADJUSTMENTS 1999
-------------- ---------- ----------- ------------
Professional fees $ 2 $(1) $ -- $ 1
Personnel related 61 (5) 3 59
Business terminations --- --- ---- ---
Facility related and
other 4 (2) (1) 1
--- --- ---- ---
Total Unusual Charges 67 (8) 2 61
Reclassification for
discontinued
operations -- -- -- --
--- --- ---- ---
Total Unusual Charges
related to continuing
operations $67 $(8) $ 2 $61
=== === ==== ===
Professional fees primarily consisted of investment banking, legal and
accounting fees incurred in connection with the mergers. Personnel related
costs included $73 million of retirement and employee benefit plan costs,
$24 million of restricted stock compensation, $61 million of severance
resulting from consolidations of European call centers and certain corporate
functions and $13 million of other personnel related costs. The Company
provided for 474 employees to be terminated, substantially all of which have
been severed. Business termination costs consisted of a $48 million
impairment write-down of hotel franchise agreement assets associated with a
quality upgrade program and $30 million of costs incurred to terminate a
contract which may have restricted the Company from maximizing opportunities
afforded by the Cendant Merger. Facility related and other unusual charges
included $70 million of irrevocable contributions to independent technology
trusts for the direct benefit of lodging and real estate franchisees, $16
million of building lease termination costs, and a $22 million reduction in
intangible assets associated with the Company's wholesale annuity business
for which impairment was determined in 1997. During 1999 and 1998, the
Company recorded a net adjustment of $2 million and ($27) million,
respectively, to Unusual Charges with a corresponding increase (decrease) to
liabilities primarily as a result of a change in the original estimate of
costs to be incurred. Such adjustments to original estimates were recorded
in the periods in which events occurred or information became available
requiring accounting recognition. Liabilities of $61 million remained at
December 31, 1999, which were primarily attributable to future severance
costs and executive termination benefits, which the Company anticipates that
such liabilities will be settled upon resolution of related contingencies.
Second Quarter 1997 Charge. The Company incurred $295 million of Unusual
Charges in the second quarter of 1997 primarily associated with the merger
of HFS with PHH in April 1997 (the "PHH Merger"). During the fourth quarter
of 1997, as a result of changes in estimates, the Company adjusted certain
merger-related liabilities, which resulted in a $12 million credit to
Unusual Charges. Reorganization plans were formulated in connection with the
PHH Merger and were implemented upon consummation. The PHH Merger afforded
the combined company, at such time, an opportunity to rationalize its
combined corporate, real estate and travel related businesses, and enabled
the corresponding support and service functions to gain organizational
efficiencies and maximize profits. Management initiated a plan just prior to
the PHH Merger to close hotel reservation call centers, combine travel
agency operations and continue the downsizing of fleet operations by
reducing headcount and eliminating unprofitable products. In addition,
management initiated plans to integrate its relocation, real estate
franchise and mortgage origination businesses to capture additional revenue
through the referral of one business unit's customers to another. Management
also formalized a plan to centralize the management and headquarter
functions of the world's largest, second largest and other company-owned
corporate relocation business unit subsidiaries. Such initiatives resulted
in write-offs of abandoned systems and leasehold assets commencing in the
second quarter 1997. The aforementioned reorganization plans provided for
560 job reductions, which included the elimination
F-17
of PHH corporate functions and facilities in Hunt Valley, Maryland. The
reduction of liabilities from inception is summarized by category of
expenditure as follows:
1997
UNUSUAL 1997 1998 1998
CHARGES REDUCTIONS REDUCTIONS ADJUSTMENTS
--------- ------------ ------------ -------------
Professional fees $ 30 $ (29) $ -- $ (1)
Personnel related 154 (112) (13) (19)
Business terminations 56 (52) 3 (6)
Facility related and
other 43 (14) (10) (14)
----- ------ ----- -----
Total Unusual Charges 283 (207) (20) (40)
Reclassification for
discontinued
operations (16) 16 -- --
----- ------ ----- -----
Total Unusual Charges
related to continuing
operations $ 267 $ (191) $ (20) $(40)
===== ====== ===== =====
1999 ACTIVITY
BALANCE AT ------------------------ BALANCE AT
DECEMBER 31, CASH DECEMBER 31,
1998 PAYMENTS ADJUSTMENTS 1999
-------------- ---------- ------------- -------------
Professional fees $ -- $ -- $ -- $ --
Personnel related 10 (2) -- 8
Business termination 1 (1) -- --
Facility related a
other 5 (2) -- 3
---- ------ ---- ----
Total Unusual Charges 16 (5) -- 11
Reclassification for
discontinued
operations -- -- -- --
---- ----- ---- ----
Total Unusual Charges
related to continuing
operations $ 16 $(5) $ -- $ 11
==== ===== ==== ====
Professional fees were primarily comprised of investment banking,
accounting, and legal fees incurred in connection with the PHH Merger.
Personnel related costs were associated with employee reductions
necessitated by the planned and announced consolidation of the Company's
corporate relocation service businesses worldwide as well as the
consolidation of corporate activities. Personnel related charges also
included termination benefits such as severance, medical and other benefits
and provided for retirement benefits pursuant to pre-existing contracts
resulting from a change in control. Business terminations were comprised of
$39 million of costs to exit certain activities primarily within the
Company's fleet management business (including $36 million of asset
write-offs associated with exiting certain activities), a $7 million
termination fee associated with a joint venture that competed with the PHH
Mortgage Services business (now Cendant Mortgage Corporation) and $10
million of costs to terminate a marketing agreement with a third party in
order to replace the function with internal resources. Facility related and
other charges included costs associated with contract and lease
terminations, asset disposals and other charges incurred in connection with
the consolidation and closure of excess office space.
The Company had substantially completed the aforementioned second quarter
1997 restructuring activities at December 31, 1998. During the year ended
December 31, 1998, the Company recorded a net adjustment of $40 million to
Unusual Charges with a corresponding reduction to liabilities primarily as a
result of a change in the original estimate of costs to be incurred. Such
adjustments to original estimates were recorded in the periods in which
events occurred or information became available requiring accounting
recognition. Liabilities of $11 million remained at December 31, 1999, which
were attributable to future severance and lease termination payments. The
Company anticipates that severance will be paid in installments through
April 2003 and the lease terminations will be paid in installments through
August 2002.
F-18
6. PROPERTY AND EQUIPMENT -- NET
Property and equipment -- net consisted of:
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1999 1998
------------- -------- ---------
Land -- $ 145 $ 153
Building and leasehold improvements 5 - 50 703 752
Furniture, fixtures and equipment 3 - 10 889 1,019
------ ------
1,737 1,924
Less accumulated depreciation and amortization 390 491
------ ------
$1,347 $1,433
====== ======
7. OTHER INTANGIBLES -- NET
Other intangibles -- net consisted of:
ESTIMATED DECEMBER 31,
BENEFIT PERIODS ----------------
IN YEARS 1999 1998
---------------- ------ -------
Avis trademark 40 $402 $402
Other trademarks 40 161 171
Customer lists 3 - 10 154 163
Other 3 - 25 88 138
---- ----
805 874
Less accumulated amortization 143 117
---- ----
$662 $757
==== ====
8. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
DECEMBER 31,
---------------------
1999 1998
--------- ---------
Accounts payable $ 320 $ 456
Merger and acquisition obligations 127 153
Accrued payroll and related 263 208
Advances from relocation clients 80 60
Other 489 641
------ ------
$1,279 $1,518
====== ======
9. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
loans insured or guaranteed by various government sponsored entities and
private insurance agencies. The insurance or guaranty is provided primarily
on a non-recourse basis to the Company, except where limited by the Federal
Housing Administration and Veterans Administration and their respective loan
programs. At December 31, 1999 and 1998, mortgage loans sold with recourse
amounted to approximately $52 million and $58 million, respectively. The
Company believes adequate allowances are maintained to cover any potential
losses.
The Company has a revolving sales agreement, under which an unaffiliated
buyer, Bishops Gate Residential Mortgage Trust, a special purpose entity
(the "Buyer"), committed to purchase, at the Company's option, mortgage
loans originated by the Company on a daily basis, up to the Buyer's asset
F-19
limit of $2.1 billion. Under the terms of this sale agreement, the Company
retains the servicing rights on the mortgage loans sold to the Buyer and
arranges for the sale or securitization of the mortgage loans into the
secondary market. The Buyer retains the right to select alternative sale or
securitization arrangements. At December 31, 1999 and 1998, the Company was
servicing approximately $813 million and $2.0 billion, respectively, of
mortgage loans owned by the Buyer.
10. MORTGAGE SERVICING RIGHTS
Capitalized MSRs consisted of:
MSRS ALLOWANCE TOTAL
---------- ----------- ------------
BALANCE, JANUARY 1, 1997 $ 290 $(1) $ 289
Additions to MSRs 252 -- 252
Amortization (96) -- (96)
Write-down/provision -- (4) (4)
Sales (33) -- (33)
Deferred hedge, net 19 -- 19
Reclassification of mortgage-related securities (54) -- (54)
------ --- -----
BALANCE, DECEMBER 31, 1997 378 (5) 373
Additions to MSRs 475 -- 475
Additions to hedge 49 -- 49
Amortization (82) -- (82)
Write-down/recovery -- 5 5
Sales (99) -- (99)
Deferred hedge, net (85) -- (85)
------ --- -----
BALANCE, DECEMBER 31, 1998 636 -- 636
Additions to MSRs 698 (5) 693
Additions to hedge 23 -- 23
Amortization (118) -- (118)
Write-down/recovery -- 5 5
Sales (161) -- (161)
Deferred hedge, net 6 -- 6
------ --- ------
BALANCE, DECEMBER 31, 1999 $1,084 $-- $1,084
====== === ======
The value of the Company's MSRs is sensitive to changes in interest rates.
The Company uses a hedge program to manage the associated financial risks
of loan prepayments. The Company uses certain derivative financial
instruments, primarily interest rate floors, interest rate swaps, principal
only swaps, futures and options on futures to administer its hedge program.
Premiums paid/received on the acquired derivative instruments are
capitalized and amortized over the life of the contracts. Gains and losses
associated with the hedge instruments are deferred and recorded as
adjustments to the basis of the MSRs. In the event the performance of the
hedge instruments do not meet the requirements of the hedge program,
changes in the fair value of the hedge instruments will be reflected in the
Consolidated Statement of Operations in the current period. Deferrals under
the hedge programs are allocated to each applicable stratum of MSRs based
upon its original designation and included in the impairment measurement.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum by
comparing estimated fair value to the recorded book value. The Company
records amortization expense in proportion to and over the period of the
projected net servicing revenue. Temporary impairment is recorded through a
valuation allowance in the period of occurrence.
F-20
11. LONG-TERM DEBT
Long-term debt consisted of:
DECEMBER 31,
--------------------
1999 1998
-------- ---------
Term Loan Facilities $ 750 $1,250
7 1/2% Senior Notes 400 400
7 3/4% Senior Notes 1,148 1,148
3% Convertible Subordinated Notes 547 545
Other -- 20
------ ------
2,845 3,363
Less current portion 400 --
------ ------
$2,445 $3,363
====== ======
TERM LOAN FACILITIES
On May 29, 1998, the Company entered into a 364 day term loan agreement
with a syndicate of financial institutions which provided for borrowings
of $3.25 billion (the "Term Loan Facility"). The Term Loan Facility
incurred interest based on the London Interbank Offered Rate ("LIBOR")
plus a margin of approximately 87.5 basis points. At December 31, 1998,
borrowings under the Term Loan Facility of $1.25 billion were classified
as long-term based on the Company's intent and ability to refinance such
borrowings on a long-term basis.
On February 9, 1999, the Company replaced the Term Loan Facility with a
two year term loan facility (the "New Facility") which provided for
borrowings of $1.25 billion with a syndicate of financial institutions.
The Company used $1.25 billion of the proceeds from the New Facility to
refinance the outstanding borrowings under the Term Loan Facility. At
December 31, 1999, outstanding borrowings under the New Facility were $750
million. The New Facility bears interest at a rate of LIBOR plus a margin
of 100 basis points and is payable in five consecutive quarterly
installments beginning on the first anniversary of the closing date. The
New Facility contains certain restrictive covenants, which are
substantially similar to and consistent with the covenants in effect for
the Company's existing revolving credit agreements discussed below. The
weighted average interest rate on the New Facility was 6.2% at December
31, 1999.
7 1/2% AND 7 3/4% SENIOR NOTES
In November 1998, the Company issued $1.55 billion of Senior Notes (the
"Notes") in two tranches consisting of $400 million principal amount of 7
1/2% Senior Notes due December 1, 2000 (see Note 26 -- Subsequent Events
-- Debt Redemption) and $1.15 billion principal amount of 7 3/4% Senior
Notes due December 1, 2003. The Notes may be redeemed, in whole or in
part, at any time at the option of the Company at a redemption price plus
accrued interest to the date of redemption. The redemption price is equal
to the greater of (i) the face value of the Notes or (ii) the sum of the
present values of the remaining scheduled payments discounted at the
treasury rate plus a spread as defined in the indenture.
3% CONVERTIBLE SUBORDINATED NOTES
During 1997, the Company completed a public offering of $550 million
principal amount of 3% Convertible Subordinated Notes (the "3% Notes") due
2002. Each $1,000 principal amount of 3% Notes is convertible into 32.65
shares of Company common stock subject to adjustment in certain events.
The 3% Notes may be redeemed at the option of the Company at any time on
or after February 15, 2000, in whole or in part, at the appropriate
redemption prices (as defined in the indenture governing the 3% Notes)
plus accrued interest to the redemption date. The 3% Notes will be
subordinated in right of payment to all existing and future Senior Debt
(as defined in the indenture governing the 3% Notes) of the Company.
F-21
CREDIT FACILITIES
The Company's credit facilities consist of (i) a $750 million, five year
revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $1.0 billion, 364 day revolving credit facility (the "364 Day
Revolving Credit Facility") (collectively the "Revolving Credit
Facilities"). The 364 Day Revolving Credit Facility will mature on October
17, 2000, but may be renewed on an annual basis for an additional 364 days
upon receiving lender approval. The Five Year Revolving Credit Facility
will mature on October 1, 2001. Borrowings under the Revolving Credit
Facilities, at the option of the Company, bear interest based on
competitive bids of lenders participating in the facilities, at prime
rates or at LIBOR, plus a margin of approximately 75 basis points. The
Company is required to pay a per annum facility fee of .175% and .15% of
the average daily unused commitments under the Five Year Revolving Credit
Facility and 364 Day Revolving Credit Facility, respectively. The interest
rates and facility fees are subject to change based upon credit ratings on
the Company's senior unsecured long-term debt by nationally recognized
debt rating agencies. Letters of credit of $5 million were outstanding
under the Five Year Revolving Credit Facility at December 31, 1999. The
Revolving Credit Facilities contain certain restrictive covenants
including restrictions on indebtedness of material subsidiaries, mergers,
limitations on liens, liquidations and sale and leaseback transactions,
and requires the maintenance of certain financial ratios. There were no
outstanding borrowings related to the above-mentioned credit facilities at
December 31, 1999 and 1998.
DEBT MATURITIES
The aggregate maturities of debt are as follows: 2000, $400 million; 2001,
$750 million; 2002, $547 million; and 2003, $1,148 million.
12. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs, which
are not classified based on contractual maturities since such debt
corresponds directly with assets under management and mortgage programs,
consisted of:
DECEMBER 31,
--------------------
1999 1998
-------- ---------
Commercial paper $ 619 $2,484
Medium-term notes 1,248 2,338
Secured obligations 345 1,902
Other 102 173
------ ------
$2,314 $6,897
====== ======
COMMERCIAL PAPER
Commercial paper, which matures within 180 days, is supported by committed
revolving credit agreements described below and short-term lines of
credit. The weighted average interest rates on the Company's outstanding
commercial paper were 6.7% and 6.1% at December 31, 1999 and 1998,
respectively.
MEDIUM-TERM NOTES
Medium-term notes primarily represent unsecured loans, which mature
through 2002. The weighted average interest rates on such medium-term
notes were 6.4% and 5.6% at December 31, 1999 and 1998, respectively.
SECURED OBLIGATIONS
The Company maintains separate financing facilities, the outstanding
borrowings under which are secured by corresponding assets under
management and mortgage programs. The collective weighted average interest
rates on such facilities were 7.0% and 5.8% at December 31, 1999 and 1998,
respectively. Such secured obligations are described below.
Mortgage Facility. In December 1999, the Company renewed its 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
such mortgages. This agreement is collateralized by the underlying mortgage
loans held in safekeeping by the custodian to the
F-22
agreement. The total commitment under this agreement is $500 million and is
renewable on an annual basis at the discretion of the lender. Mortgage
loans financed under this agreement at December 31, 1999 and 1998 totaled
$345 million and $378 million, respectively, and are included in mortgage
loans held for sale in the Consolidated Balance Sheets.
Relocation Facilities. The Company entered into a 364 day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provided for funding up to a limit of $325 million and
was renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Under the terms of this
agreement, the Company retained the servicing rights related to the
relocation receivables. This facility matured and $248 million was repaid
on December 22, 1999. At December 31, 1998, the Company was servicing $248
million of assets, which were funded under this agreement.
The Company also maintained an asset securitization agreement with a
separate unaffiliated buyer, which had a purchase commitment up to a limit
of $350 million. The terms of this agreement were similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment. This facility matured and $85 million was repaid on
October 5, 1999. At December 31, 1998, the Company was servicing $171
million of assets eligible for purchase under this agreement.
Fleet Facilities. In December 1998, the Company entered into two secured
financing transactions each expiring five years from the effective
agreement date. Loans were funded by commercial paper conduits in the
amounts of $500 million and $604 million and were secured by leased assets
(specified beneficial interests in a trust which owned the leased vehicles
and the leases) totaling $600 million and $725 million. In connection with
the disposition of the fleet segment, all secured financing arrangements
were repaid.
OTHER
Other liabilities under management and mortgage programs are principally
comprised of unsecured borrowings under uncommitted short-term lines of
credit and other bank facilities, all of which mature in 2000. The
weighted average interest rates on such debt were 6.8% and 5.5% at
December 31, 1999 and 1998, respectively.
Interest incurred on borrowings used to finance fleet leasing activities
was $89 million for the year ended December 31, 1999 and $177 million for
each of the years ended December 31, 1998 and 1997 and is included net
within fleet leasing revenues in the Consolidated Statements of
Operations. Interest related to equity advances on homes was $24 million,
$27 million and $32 million for the years ended December 31, 1999, 1998
and 1997, respectively. Interest related to origination and mortgage
servicing activities was $109 million, $139 million and $78 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Interest
expense incurred on borrowings used to finance both equity advances on
homes and mortgage servicing activities are recorded net within membership
and service fee revenues in the Consolidated Statements of Operations.
As of December 31, 1999, the Company, through its PHH subsidiary,
maintained $2.5 billion in committed and unsecured credit facilities,
which were backed by domestic and foreign banks. The facilities were
comprised of $1.25 billion of syndicated lines of credit maturing in March
2000 and $1.25 billion of syndicated lines of credit maturing in 2002.
Under such credit facilities, the Company paid annual commitment fees of $4
million for the year ended December 31, 1999 and $2 million for each of the
years ended December 31, 1998 and 1997. The full amount of the Company's
committed facility was undrawn and available at December 31, 1999 and 1998.
13. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
HOLDING SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
On March 2, 1998, Cendant Capital I (the "Trust"), a wholly-owned
consolidated subsidiary of the Company, issued 30 million FELINE PRIDES
and 2 million trust preferred securities and received approximately $1.5
billion in gross proceeds in connection with such issuance. The Trust then
F-23
invested the proceeds in 6.45% Senior Debentures due 2003 (the
"Debentures") issued by the Company, which represents the sole asset of
the Trust. The obligations of the Trust related to the FELINE PRIDES and
trust preferred securities are unconditionally guaranteed by the Company
to the extent the Company makes payments pursuant to the Debentures. Upon
the issuance of the FELINE PRIDES and trust preferred securities, the
Company recorded a liability of $43 million with a corresponding reduction
to shareholders' equity equal to the present value of the total future
contract adjustment payments to be made under the FELINE PRIDES. The
FELINE PRIDES, upon issuance, consisted of 28 million Income PRIDES and 2
million Growth PRIDES (Income PRIDES and Growth PRIDES hereinafter
referred to as "PRIDES"), each with a face amount of $50 per PRIDES. The
Income PRIDES consist of trust preferred securities and forward purchase
contracts under which the holders are required to purchase common stock
from the Company in February 2001. The Growth PRIDES consist of zero
coupon U.S. Treasury securities and forward purchase contracts under which
the holders are required to purchase common stock from the Company in
February 2001. The stand alone trust preferred securities and the trust
preferred securities forming a part of the Income PRIDES, each with a face
amount of $50, bear interest, in the form of preferred stock dividends, at
the annual rate of 6.45% payable in cash. Such preferred stock dividends
of $96 million ($60 million, after tax) and $80 million ($49 million,
after tax) for the years ended December 31, 1999 and 1998, respectively,
are presented as minority interest, net of tax in the Consolidated
Statements of Operations. Payments under the forward purchase contract
forming a part of the Income PRIDES will be made by the Company in the
form of a contract adjustment payment at an annual rate of 1.05%. Payments
under the forward purchase contract forming a part of the Growth PRIDES
will be made by the Company in the form of a contract adjustment payment
at an annual rate of 1.30%. The forward purchase contracts require the
holder to purchase a minimum of 1.04 shares and a maximum of 1.35 shares
of Company common stock per PRIDES security depending upon the average of
the closing price per share of the Company's common stock for a 20
consecutive day period ending in mid-February of 2001. The Company has the
right to defer the contract adjustment payments and the payment of
interest on the Debentures to the Trust. Such election will subject the
Company to certain restrictions, including restrictions on making dividend
payments on its common stock until all such payments in arrears are
settled.
Under the terms of the FELINE PRIDES settlement discussed in Note 5, only
holders who owned PRIDES at the close of business on April 15, 1998 will
be eligible to receive a new additional "Right" for each PRIDES security
held. Right holders may (i) sell them or (ii) exercise them by delivering
to the Company three Rights together with two PRIDES in exchange for two
new PRIDES (the "New PRIDES"), for a period beginning upon distribution of
the Rights and concluding upon expiration of the Rights (February 2001).
The terms of the New PRIDES will be the same as the original PRIDES except
that the conversion rate will be revised so that, at the time the Rights
are distributed, each New PRIDES will have a value equal to $17.57 more
than each original PRIDES, or, in the aggregate, approximately $351
million. Accordingly, the Company recorded a non-cash charge of $351
million in the fourth quarter of 1998 with an increase in additional
paid-in capital and accrued liabilities of $350 million and $1 million,
respectively, based on the prospective issuance of the Rights.
The FELINE PRIDES settlement also requires the Company to offer to sell 4
million additional PRIDES (having identical terms to currently outstanding
PRIDES) to holders of Rights for cash, at a value which will be based on
the valuation model that was utilized to set the conversion rate of the
New PRIDES. The offering of additional PRIDES will be made only pursuant
to a prospectus filed with the SEC. The arrangement to offer additional
PRIDES is designed to enhance the trading value of the Rights by removing
up to 6 million Rights from circulation via exchanges associated with the
offering and to enhance the open market liquidity of New PRIDES by
creating 4 million New PRIDES via exchanges associated with the offering.
If holders of Rights do not acquire all such PRIDES, they will be offered
to the public. Under the settlement agreement, the Company also agreed to
file a shelf registration statement for an additional 15 million special
PRIDES, which could be issued by the Company at any time for cash.
However, during the last 30 days prior to the expiration of the Rights in
February 2001, the Company will be required to make these additional
F-24
PRIDES available to holders of Rights at a price in cash equal to 105% of
their theoretical value. The special PRIDES, if issued, would have the
same terms as the currently outstanding PRIDES and could be used to
exercise Rights. Based on an average market price of $17.78 per share of
Company common stock (calculated based on the average closing price per
share of Company common stock for the consecutive five-day period ended
February 18, 2000), the effect of the issuance of the New PRIDES will be
to distribute approximately 18 million more shares of Company common stock
when the mandatory purchase of Company common stock associated with the
PRIDES occurs in February 2001.
14. SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The after-tax components of accumulated other comprehensive income (loss)
are as follows:
UNREALIZED ACCUMULATED
CURRENCY GAINS/(LOSSES) OTHER
TRANSLATION ON MARKETABLE COMPREHENSIVE
ADJUSTMENT SECURITIES INCOME/(LOSS)
------------- ---------------- --------------
Beginning balance, January 1, 1997 $(10) $ 4 $ (6)
Current-period change (28) (4) (32)
---- --- -----
Ending balance, December 31, 1997 (38) -- (38)
Current-period change (11) -- (11)
---- --- -----
Ending balance, December 31, 1998 (49) -- (49)
Current-period change (9) 16 7
------- --- -----
Ending balance, December 31, 1999 $(58) $16 $ (42)
====== === =====
The currency translation adjustments are not currently adjusted for income
taxes since they relate to indefinite investments in foreign subsidiaries.
SHARE REPURCHASES
During 1999, the Company's Board of Directors authorized an additional
$1.8 billion of Company common stock to be repurchased under a common
share repurchase program, increasing the total authorized amount to be
repurchased under the program to $2.8 billion. The Company executed this
program through open market purchases or privately negotiated
transactions, subject to bank credit facility covenants and certain rating
agency constraints. As of December 31, 1999, the Company repurchased
approximately $2.0 billion (104 million shares) of Company common stock
under the program.
In July 1999, pursuant to a Dutch Auction self-tender offer to the Company's
shareholders, the Company purchased 50 million shares of its common stock at
a price of $22.25 per share.
1998 EMPLOYEE STOCK PURCHASE PLAN
On December 1, 1998, the Company's Board of Directors amended and restated
the 1998 Employee Stock Purchase Plan (the "Plan"), which enables eligible
employees to purchase shares of common stock from the Company at 85% of
the fair market value on the first business day of each calendar quarter.
The Company reserved 2.5 million shares of Company common stock in
connection with the Plan.
PENDING ISSUANCE OF TRACKING STOCK
The shareholders of Cendant are scheduled to vote on March 21, 2000 for a
proposal (the "Tracking Stock Proposal") to authorize the issuance of a
new series of Cendant common stock ("tracking stock"). The tracking stock
is intended to reflect the performance of the Move.com Group, a group of
businesses owned by the Company offering a wide selection of quality
relocation, real estate and home-related products and services through a
network of Web sites. Before the tracking stock is first issued, the
Company's existing common stock will be re-designated as CD Stock and that
stock will be intended to reflect the performance of the Company's other
businesses (the "Cendant Group"). The Tracking Stock Proposal will allow
the Company to amend and restate its charter to increase the number of
authorized shares of common stock from 2.0 billion to 2.5 billion
initially comprised of
F-25
2.0 billion shares of CD Stock and 500 million shares of the Move.com
Group stock. In connection with the announcement of the Tracking Stock
Proposal, the Move.com Group results are reported as a separate business
segment. See Note 24 -- Segment Information for a description of the
services provided by the Move.com Group. Although the issuance of the
Move.com Group stock is intended to track the performance of the Move.com
Group, holders, if any, will still be subject to all the risks associated
with an investment in the Company and all of its businesses, assets and
liabilities.
The Company expects to issue shares of Move.com Group stock in one or more
private or public financings. The specific terms of the financing,
including whether they are private or public, the amount of the Move.com
Group stock issued, and the timing of the financings, will depend upon the
number of shares of the Move.com stock sold and whether the Company elects
to contribute the net proceeds of such financings to the equity of the
Move.com Group or the Company.
OTHER
In September 1999, the Company entered into an agreement with Chatham
Street Holdings, LLC ("Chatham") pursuant to which Chatham was granted the
right, until September 30, 2001, to purchase up to 1.6 million shares of
Move.com Group stock for approximately $16.02 per share. In addition, for
every two shares of Move.com Group stock purchased by Chatham pursuant to
the agreement, Chatham will be entitled to receive a warrant to purchase
one share of Move.com Group stock at a price equal to $64.08 per share and
a warrant to purchase one share of Move.com Group stock at a price equal
to $128.16 per share. The shareholders of Chatham are also shareholders of
NRT Incorporated ("NRT"). See Note 21 -- Related Party Transactions for a
detailed discussion of NRT.
15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices of
mortgage loans held for sale, anticipated mortgage loan closings arising
from commitments issued and changes in value of MSRs. The Company performs
analyses on an on-going basis to determine that a high correlation exists
between the characteristics of derivative instruments and the assets or
transactions being hedged. As a matter of policy, the Company does not
engage in derivative activities for trading or speculative purposes. The
Company is exposed to credit-related losses in the event of
non-performance by counterparties to certain derivative financial
instruments. The Company manages such risk by periodically evaluating the
financial position of counterparties and spreading its positions among
multiple counterparties. The Company presently does not anticipate
non-performance by any of the counterparties and no material loss would be
expected from such non-performance.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements to modify the
contractual costs of debt financing. The swap agreements correlate the
terms of the assets to the maturity and rollover of the debt by
effectively matching a fixed or floating interest rate with the stipulated
revenue stream generated from the portfolio of assets being funded.
Amounts to be paid or received under interest rate swap agreements are
accrued as interest rates change and are recognized as an adjustment to
interest expense in the Consolidated Statements of Operations. The
Company's hedging activities had an immaterial effect on interest expense
and the Company's weighted average borrowing rate for the year ended
December 31, 1999. For the years ended December 31, 1998 and 1997, the
Company's hedging activities increased interest expense by $2 million and
$4 million, respectively, but had an immaterial effect on its weighted
average borrowing rate. The following table summarizes the maturity and
weighted average rates of the Company's interest rate swaps relating to
liabilities under management and mortgage programs at December 31:
F-26
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
AMOUNT RECEIVE RATE PAY RATE MATURITIES (1)
--------- ------------------ ------------------ ---------------
1999
Medium-term notes $ 610 5.57% 6.29% 2000
======
1998
Commercial paper $ 355 4.92% 5.84% 1999-2006
Medium-term notes 931 5.27% 5.04% 1999-2000
Canada commercial paper 90 5.52% 5.27% 1999-2002
Sterling liabilities 662 6.26% 6.62% 1999-2002
Deutsche mark liabilities 32 3.24% 4.28% 1999-2001
------
$2,070
======
----------
(1) Interest rate swaps held during 1998, with maturities ranging from
1999 through 2006, were assumed by ARAC in 1999 in connection with the
disposition of the Company's fleet segment.
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates, the Company enters into foreign exchange contracts on a
selective basis. Such contracts are primarily utilized to hedge
intercompany loans to foreign subsidiaries and certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. The
Company also hedges certain anticipated transactions denominated in
foreign currencies. The principal currency hedged by the Company is the
British pound sterling. Gains and losses on foreign currency hedges
related to intercompany loans are deferred and recognized upon maturity of
the underlying loan in the Consolidated Statements of Operations. Gains
and losses on foreign currency hedges of anticipated transactions are
recognized in the Consolidated Statements of Operations, on a
mark-to-market basis, as exchange rates change.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to
the risk of adverse price fluctuations primarily due to changes in
interest rates. The Company uses forward delivery contracts and option
contracts to reduce such risk. Market value gains and losses on such
positions used as hedges are deferred and considered in the valuation of
cost or market value of mortgage loans held for sale.
With respect to the mortgage servicing portfolio, the Company acquired
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures
to manage the associated financial impact of interest rate movements.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
MARKETABLE SECURITIES
Fair value at December 31, 1999 and 1998 was $286 million and $267
million, respectively, and is based upon quoted market prices or
investment advisor estimates and approximates carrying value. Realized
gains or losses on marketable securities are calculated on a specific
identification basis. The Company reported realized gains in other
revenues in the Consolidated Statements of Operations of $65 million, $27
million and $18 million for the years ended December 31, 1999, 1998 and
1997, respectively (which included the change in net unrealized holding
gains on trading securities of $8 million and $16 million in 1999 and
1998, respectively).
RELOCATION RECEIVABLES
Fair value approximates carrying value due to the short-term nature of the
relocation receivables.
F-27
PREFERRED STOCK INVESTMENTS
Fair value approximates carrying value of the preferred stock investments.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to
purchase loans net of mortgage-related positions. The value of embedded
MSRs has been considered in determining fair value.
MORTGAGE SERVICING RIGHTS
Fair value is estimated by discounting future net servicing cash flows
associated with the underlying securities using discount rates that
approximate current market rates and externally published prepayment
rates, adjusted, if appropriate, for individual portfolio characteristics.
DEBT
Fair value of the Company's Senior Notes, Convertible Subordinated Notes
and medium-term notes are estimated based on quoted market prices or
market comparables.
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE COMPANY
Fair value is estimated based on quoted market prices and incorporates the
settlement of the FELINE PRIDES litigation and the resulting modification
of terms (see Note 5 -- Other Charges).
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, AND OTHER FINANCIAL
INSTRUMENTS
Fair value is estimated, using dealer quotes, as the amount that the
Company would receive or pay to execute a new agreement with terms
identical to those remaining on the current agreement, considering
interest rates at the reporting date.
F-28
The carrying amounts and fair values of material financial instruments at
December 31 are as follows:
1999 1998
------------------------------------- ---------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ---------- -------------- ----------- ---------- ----------
ASSETS UNDER MANAGEMENT AND MORTGAGE
PROGRAMS
Mortgage loans held for sale -- 1,112 1,124 -- 2,416 2,463
Mortgage servicing rights -- 1,084 1,202 -- 636 788
- -------------------------------------------------------------------------------------------------------------------
DEBT
Current portion of debt -- 400 402 -- -- --
Long-term debt -- 2,445 2,443 -- 3,363 3,351
- -------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LONG-TERM DEBT
Foreign exchange forwards -- -- -- 1 -- --
OTHER OFF BALANCE SHEET DERIVATIVES
Foreign exchange forwards 173 -- (1) 48 -- --
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Debt -- 2,314 2,314 -- 6,897 6,895
- -------------------------------------------------------------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED
SECURITIES ISSUED BY SUBSIDIARY HOLDING
SOLELY SENIOR DEBENTURES ISSUED BY THE
COMPANY -- 1,478 1,113 -- 1,472 1,333
- -------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES RELATING TO
LIABILITIES UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Interest rate swaps
in a gain position 161 -- -- 696 -- 8
in a loss position 449 -- 1 1,374 -- (12)
Foreign exchange forwards 21 -- -- 349 -- --
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED POSITIONS
Forward delivery commitments (a) 2,434 6 20 5,057 3 (4)
Option contracts to sell (a) 440 2 3 701 9 4
Option contracts to buy (a) 418 1 -- 948 5 1
Commitments to fund mortgages 1,283 -- 1 3,155 -- 35
Commitments to complete
securitizations (a) 813 -- (2) 2,031 -- 14
Constant maturity treasury floors (b) 4,420 57 13 3,670 44 84
Interest rate swaps (b)
in a gain position 100 -- -- 575 -- 35
in a loss position 250 -- (26) 200 -- (1)
Treasury futures (b) 152 -- (5) 151 -- (1)
Principal only swaps (b) 324 -- (15) 66 -- 3
- ----------
(a) Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of respective carrying
amounts and fair values of mortgage loans held for sale. Forward
delivery commitments are used to manage price risk on sale of all
mortgage loans to end investors, including commitments to complete
securitizations on loans held by an unaffiliated buyer as described in
Note 9 -- Mortgage Loans Held for Sale.
(b) Carrying amounts and gains (losses) on these mortgage-related positions
are capitalized and recorded as a component of MSRs. Gains (losses) on
such positions are included in the determination of the respective
carrying amounts and fair value of MSRs.
F-29
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which primarily expire through the year 2005. Rental expense
for the years ended December 31, 1999, 1998 and 1997 was $200 million, $178
million and $91 million, respectively. The Company incurred contingent
rental expenses in 1999 and 1998 of $49 million and $44 million,
respectively, which is included in total rental expense, principally based
on rental volume or profitability at certain parking facilities. The
Company has been granted rent abatements for varying periods on certain
facilities. Deferred rent relating to those abatements is amortized on a
straight-line basis over the applicable lease terms. Commitments under
capital leases are not significant.
In 1998, the Company entered into an agreement with an independent third
party to sell and leaseback vehicles subject to operating leases. Pursuant
to the agreement, the net carrying value of the vehicles sold was $101
million. Since the net carrying value of these vehicles was equal to their
sales price, no gain or loss was recognized on the sale. The lease
agreement was for a minimum lease term of 12 months with three one-year
renewal options. For the years ended December 31, 1999 and 1998, the total
rental expense incurred by the Company under this lease was $13 million and
$18 million, respectively. In connection with the disposition of the fleet
businesses, the Company elected not to execute its renewal option thereby
terminating the lease agreement.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1999 are as follows:
YEAR AMOUNT
----------- ------
2000 $103
2001 89
2002 74
2003 62
2004 56
Thereafter 112
----
$496
====
LITIGATION
Class Action Litigation and Government Investigations. Since the April 15,
1998 announcement of the discovery of accounting irregularities in former
CUC International Inc., approximately 70 lawsuits claiming to be class
actions, two lawsuits claiming to be brought derivatively on the Company's
behalf and several individual lawsuits and arbitration proceedings have
been commenced in various courts and other forums against the Company and
other defendants by or on behalf of persons claiming to have purchased or
otherwise acquired securities or options issued by CUC or the Company
between May 1995 and August 1998. The Court has ordered consolidation of
many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
also conducting investigations relating to the matters referenced above.
The SEC advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred. As a result of the findings from the Company's internal
investigations, the Company made all adjustments considered necessary by
the Company which are reflected in its previously filed restated financial
statements for the years ended 1995, 1996 and 1997 and for the six months
ended June 30, 1998. Although the Company can provide no assurances that
additional adjustments will not be necessary as a result of these
government investigations, the Company does not expect that additional
adjustments will be necessary.
As previously disclosed, the Company reached a final agreement with
plaintiff's counsel representing the class of holders of its PRIDES
securities who purchased their securities on or prior to April 15, 1998 to
settle their class action lawsuit against the Company through the issuance
of a new "Right" for each PRIDES security held. (See Notes 5 and 13 for a
more detailed description of the settlement).
F-30
On December 7, 1999, the Company announced that it reached a preliminary
agreement to settle the principal securities class action pending against
the Company in the U.S. District Court in Newark, New Jersey relating to
the common stock class action lawsuits. Under the agreement, the Company
would pay the class members approximately $2.85 billion in cash, an
increase from approximately $2.83 billion previously reported. The increase
is a result of continued negotiation toward definitive documents relating to
additional costs to be paid to the plaintiff class. The settlement remains
subject to execution of a definitive settlement agreement and approval by
the U.S. District Court. If the preliminary settlement is not approved by
the U.S. District Court, the Company can make no assurances that the final
outcome or settlement of such proceedings will not be for an amount greater
than that set forth in the preliminary agreement.
The proposed settlements do not encompass all litigation asserting claims
associated with the accounting irregularities. The Company does not believe
that it is feasible to predict or determine the final outcome or resolution
of these unresolved proceedings. An adverse outcome from such unresolved
proceedings could be material with respect to earnings in any given reporting
period. However, the Company does not believe that the impact of such
unresolved proceedings should result in a material liability to the Company
in relation to its consolidated financial position or liquidity.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
18. INCOME TAXES
The income tax provision (benefit) consists of:
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- ---------- ----------
Current
Federal $ 306 $ (159) $155
State 9 1 24
Foreign 44 56 29
------ ------ ----
359 (102) 208
------ ------ ----
Deferred
Federal (748) 176 (17)
State (24) 29 (3)
Foreign 7 1 3
------ ------ ----
(765) 206 (17)
------ ------ ----
Provision (benefit) for income taxes $ (406) $ 104 $191
====== ====== ====
Pre-tax income (loss) for domestic and foreign operations consisted of the
following:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---------- ------ ------
Domestic $ (793) $ 78 $184
Foreign 219 237 73
------ ---- ----
Pre-tax income (loss) $ (574) $315 $257
====== ==== ====
F-31
Deferred income tax assets and liabilities are comprised of:
DECEMBER 31,
------------------
1999 1998
-------- -------
CURRENT DEFERRED INCOME TAX ASSETS
Merger and acquisition-related liabilities $ 17 $ 53
Accrued liabilities and deferred income 348 323
Excess tax basis on assets held for sale -- 190
Provision for doubtful accounts 23 14
Deferred membership acquisition costs -- 3
Shareholder litigation settlement and related costs 1,058 --
Net operating loss carryforward 75 --
------ ----
Current deferred income tax assets 1,521 583
------ ----
CURRENT DEFERRED INCOME TAX LIABILITIES
Insurance retention refund 18 21
Franchise acquisition costs 10 7
Other 66 88
------ ----
Current deferred income tax liabilities 94 116
------ ----
CURRENT NET DEFERRED INCOME TAX ASSET $1,427 $467
====== ====
DECEMBER 31,
--------------------
1999 1998
--------- --------
NONCURRENT DEFERRED INCOME TAX ASSETS
Deductible goodwill -- taxable poolings $ -- $ 49
Merger and acquisition-related liabilities 29 26
Accrued liabilities and deferred income 29 64
Net operating loss carryforward 84 84
State net operating loss carryforward 151 44
Foreign tax credit carryforward 10 --
Other 28 --
Valuation allowance (161) (44)
------ -----
Noncurrent deferred income tax assets 170 223
------ -----
NONCURRENT DEFERRED INCOME TAX LIABILITIES
Depreciation and amortization 476 297
Other -- 3
------ -----
Noncurrent deferred income tax liabilities 476 300
------ -----
NONCURRENT NET DEFERRED INCOME TAX LIABILITY $ 306 $ 77
====== =====
F-32
DECEMBER 31,
----------------
1999 1998
------ -------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX ASSETS
Depreciation $ 7 $ --
Accrued liabilities 11 26
Alternative minimum tax carryforwards -- 2
---- ----
Management and mortgage program deferred income tax assets 18 28
---- ----
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAX LIABILITIES
Depreciation -- 121
Unamortized mortgage servicing rights 328 248
---- ----
Management and mortgage program deferred income tax liabilities 328 369
---- ----
Net deferred income tax liability under management and mortgage
programs $310 $341
==== ====
Net operating loss carryforwards at December 31, 1999 expire as follows:
2001, $8 million; 2002, $90 million; 2005, $7 million; 2009, $18 million;
2010, $116 million; and 2018, $215 million. The Company also has
alternative minimum tax credit carryforwards of $28 million.
The valuation allowance at December 31, 1999 relates to deferred tax assets
for state net operating loss carryforwards of $151 million and foreign tax
credit carryforwards of $10 million. The valuation allowance will be
reduced when and if the Company determines that the deferred income tax
assets are likely to be realized.
No provision has been made for U.S. federal deferred income taxes on
approximately $225 million of accumulated and undistributed earnings of
foreign subsidiaries at December 31, 1999 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. In addition, the determination of the amount of
unrecognized U.S. federal deferred income tax liability for unremitted
earnings is not practicable.
The Company's effective income tax rate for continuing operations differs
from the U.S. federal statutory rate as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ---------- ----------
Federal statutory rate (35.0%) 35.0% 35.0%
State and local income taxes, net of federal tax
benefits ( 1.8) 6.2 5.3
Non-deductible merger-related costs -- -- 29.1
Amortization of non-deductible goodwill 2.9 5.9 4.3
Taxes on foreign operations at rates different than
statutory U.S. federal rate ( 5.3) (8.0) 0.3
Nontaxable gain on disposal (31.0) -- --
Recognition of excess tax basis on assets held for sale -- (2.7) --
Other ( 0.5) (3.2) 0.3
----- ---- ----
(70.7%) 33.2% 74.3%
===== ==== ====
19. STOCK PLANS
Cendant Plans
The 1999 Broad-Based Employee Stock Option Plan (the "Broad-Based Plan"),
as amended, authorizes the granting of up to 60 million shares of Company
common stock through awards of
F-33
nonqualified stock options (stock options which do not qualify as incentive
stock options as defined under the Internal Revenue Service Code).
Employees (other than executive officers) and independent contractors of
the Company and its affiliates are eligible to receive awards under the
Broad-Based Plan. Options granted under the plan generally have a ten year
term and have vesting periods ranging from 20% to 33% per year.
The 1997 Stock Incentive Plan (the "Incentive Plan") authorizes the
granting of up to 25 million shares of Company common stock through awards
of stock options (which may include incentive stock options and/or
nonqualified stock options), stock appreciation rights and shares of
restricted Company common stock. All directors, officers and employees of
the Company and its affiliates are eligible to receive awards under the
Incentive Plan. Options granted under the Incentive Plan generally have a
ten year term and are exercisable at 20% per year commencing one year from
the date of grant or are immediately vested. The Company also maintains two
other stock plans adopted in 1997: the 1997 Employee Stock Plan (the "1997
Employee Plan") and the 1997 Stock Option Plan (the "1997 SOP"). The 1997
Employee Plan authorizes the granting of up to 25 million shares of Company
common stock through awards of nonqualified stock options, stock
appreciation rights and shares of restricted Company common stock to
employees of the Company and its affiliates. The 1997 SOP provides for the
granting of up to 10 million shares of Company common stock to key
employees (including employees who are directors and officers) of the
Company and its subsidiaries through awards of incentive and/or
nonqualified stock options. Options granted under the 1997 Employee Plan
and the 1997 SOP generally have ten-year terms and have vesting periods
ranging from 20% to 33% per year.
The Company also grants options to employees pursuant to two additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 80 million shares of Company common stock. Annual
vesting periods under these plans are 20% commencing one year from the
respective grant dates.
At December 31, 1999 there were 56 million shares available for grant under
the Company's stock option plans discussed above.
On September 23, 1998, the Compensation Committee of the Board of Directors
approved a program to effectively reprice certain Company stock options
granted to middle management during December 1997 and the first quarter of
1998. Such options, with exercise prices ranging from $31.38 to $37.50,
were effectively repriced on October 14, 1998 at $9.81 per share (the "New
Price"), which was the fair market value (as defined in the option plans)
on the date of such repricing. The Compensation Committee also modified the
terms of certain options held by certain of our executive officers and
senior managers subject to certain conditions including a revocation of 13
million existing options. Additionally, a management equity ownership
program was adopted requiring these executive officers and senior managers
to acquire Company common stock at various levels commensurate with their
respective compensation levels. The option modifications were accomplished
by canceling existing options, with exercise prices ranging from $16.78 to
$34.31, and issuing a lesser amount of options at the New Price and, with
respect to certain options of executive officers and senior managers, at
prices above the New Price, specifically $12.27 and $20.00. Additionally,
certain options replacing options that were fully vested provide for
vesting ratably over four years beginning January 1, 1999.
Move.com Group Plan
On October 29, 1999, the Board of Directors of Move.com, Inc. (a company
included within the Move.com Group) adopted the Move.com, Inc. 1999 Stock
Option Plan (the "Move.com Plan"), as amended January 13, 2000, which
authorizes the granting of up to 6 million shares of Move.com, Inc. common
stock. All active employees of Move.com Group and its affiliates are
eligible to be granted options under the Move.com Plan. Options under the
Move.com Plan generally have a 10 year term and are exercisable at 33% per
year commencing one year from the grant date. On October 29, 1999,
approximately 2.5 million options to purchase shares of common stock of
Move.com, Inc. were granted to employees of Move.com, Inc. under the
Move.com Plan (the "Existing Grants") at a
F-34
weighted average exercise price of $11.56. Such options were all
outstanding and not vested at December 31, 1999. Subject to the approval of
the stockholders of the Company (i) the Move.com Plan and Existing Grants
will be ratified and assumed by the Company, (ii) all Existing Grants will
be equitably adjusted to become options of Move.com Group stock (see Note
14 -- Shareholders' Equity -- Pending Issuance of Tracking Stock for a
description of the Move.com Group stock proposal) and (iii) the remaining
shares available to be issued in connection with the grant of options under
the Move.com Plan will be equitably adjusted to become shares of Move.com
Group stock.
The annual activity of Cendant's stock option plans consisted of:
1999 1998 1997
------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. EXERCISE AVG. EXERCISE AVG. EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------------- --------- --------------- ----------- --------------
(Shares in millions)
Balance at beginning of year 178 $ 14.64 172 $ 18.66 118 $ 11.68
Granted
Equal to fair market value 30 18.09 84 19.16 78 27.94
Greater than fair market
value 1 16.04 21 17.13 -- --
Canceled (13) 19.91 (82) 29.36 (6) 27.29
Exercised (13) 9.30 (17) 10.01 (14) 7.20
PHH Conversion (1) -- -- -- (4) --
--- --- ---
Balance at end of year 183 15.24 178 14.64 172 18.66
=== === ===
- ----------
(1) In connection with the PHH Merger, all unexercised PHH stock options
were canceled and converted into 2 million shares of Company common
stock.
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, because the exercise
prices of the Company's employee stock options are equal to or greater than
the market prices of the underlying Company stock on the date of grant, no
compensation expense is recognized.
Had the Company elected to recognize and measure compensation expense for
its stock option plans to employees based on the calculated fair value at
the grant dates for awards under such plans, consistent with the method
prescribed by SFAS No.123, net income (loss) and per share data would have
been as follows:
1999 1998 1997
---------------------- ---------------------- ---------------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
---------- ----------- ---------- ----------- ---------------- ----------------
Net income (loss) $ (55) $ (213) $ 540 $ 393 $ (217)(1) $ (664)(1)
Basic income (loss) per share (0.07) (0.28) 0.64 0.46 (0.27) (0.82)
Diluted income (loss) per share (0.07) (0.28) 0.61 0.46 (0.27) (0.82)
- ----------
(1) Includes incremental compensation expense of $335 million ($205
million, after tax) or $.25 per basic and diluted share as a result of
the immediate vesting of HFS options upon consummation of the Cendant
Merger.
F-35
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1999, 1998 and 1997:
CENDANT MOVE.COM GROUP
----------------------------------------------- ---------------
1999 1998 1997 1999
--------------- --------------- --------------- ---------------
Dividend yield -- -- -- --
Expected volatility 60.0% 55.0% 32.5% 60.0%
Risk-free interest rate 6.4% 4.9% 5.6% 6.4%
Expected holding period 6.2 years 6.3 years 7.8 years 6.2 years
The weighted average grant date fair value of Company and Move.com stock
options granted during the year ended December 31, 1999 were $11.36 and
$7.28, respectively. The weighted average grant date fair value of Company
stock options granted during the year ended December 31, 1998, which were
repriced with exercise prices equal to and higher than the underlying stock
price at the date of repricing, were $19.69 and $18.10, respectively. The
weighted average grant date fair value of the stock options granted during
the year ended December 31, 1998 which were not repriced was $10.16. The
weighted average grant date fair value of Company stock options granted
during the year ended December 31, 1997 was $13.71.
The table below summarizes information regarding Company stock options
outstanding and exercisable as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
(Shares in millions) CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- -------------------------- -------- --------------- ---------- -------- ---------
$.01 to $10.00 79 5.9 $ 7.36 53 $ 6.20
$10.01 to $20.00 60 8.0 16.83 21 15.89
$20.01 to $30.00 23 7.2 22.93 19 23.14
$30.01 to $40.00 21 7.8 32.00 16 31.88
-- ---
183 7.0 15.24 109 14.77
=== ===
20. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution pension plans that
provide certain eligible employees of the Company an opportunity to
accumulate funds for their retirement. The Company matches the
contributions of participating employees on the basis specified in the
plans. The Company's cost for contributions to these plans was $31 million,
$24 million and $16 million for the years ended December 31, 1999, 1998
and 1997, respectively.
The Company's PHH subsidiary maintains a domestic non-contributory defined
benefit pension plan covering eligible employees of PHH and its
subsidiaries employed prior to July 1, 1997. Additionally, the Company
sponsors contributory defined benefit pension plans in certain United
Kingdom subsidiaries with participation in the plans at the employees'
option. Under both the domestic and foreign plans, benefits are based on an
employee's years of credited service and a percentage of final average
compensation.
The Company's policy for all plans is to contribute amounts sufficient to
meet the minimum requirements plus other amounts as deemed appropriate. The
projected benefit obligations of the plans were $145 million and $196
million and plan assets, at fair value, were $147 million and $162 million
at December 31, 1999 and 1998, respectively. The net pension cost and
recorded liability were not material to the accompanying Consolidated
Financial Statements.
During 1999, the Company recognized a net curtailment gain of $10 million
as a result of the disposition of its fleet business segment and the
freezing of pension benefits related to the Company's PHH subsidiary
defined benefit pension plan.
F-36
21. RELATED PARTY TRANSACTIONS
NRT INCORPORATED
The Company maintains a relationship with NRT, a corporation created to
acquire residential real estate brokerage firms. On February 9, 1999, the
Company executed new agreements with NRT, which among other things,
increased the term of each of the three franchise agreements under which
NRT operates from 40 years to 50 years. NRT is party to other agreements
and arrangements with the Company and its subsidiaries. Under these
agreements, the Company acquired $182 million of NRT preferred stock (and
may be required to acquire up to an additional $81 million of NRT preferred
stock). Certain officers of the Company serve on the Board of Directors of
NRT. The Company recognized preferred dividend income of $16 million, $15
million and $5 million during the years ended December 31, 1999, 1998 and
1997, respectively, which are included in other revenue in the Consolidated
Statements of Operations. During 1999, approximately $8 million of the
preferred dividend income increased the basis of the underlying preferred
stock investment. Additionally, the Company sold preferred shares and
recognized a gain of $20 million during 1999, which is also included in
other revenue in the Consolidated Statements of Operations. During 1999,
1998 and 1997, total franchise royalties earned by the Company from NRT and
its predecessors were $172 million, $122 million and $61 million,
respectively.
The Company, at its election, will participate in NRT's acquisitions by
acquiring up to an aggregate $946 million (plus an additional $500 million
if certain conditions are met) of intangible assets, and in some cases
mortgage operations of real estate brokerage firms acquired by NRT. As of
December 31, 1999, the Company acquired $537 million of such mortgage
operations and intangible assets, primarily franchise agreements associated
with real estate brokerage companies acquired by NRT, which brokerage
companies will become subject to the NRT 50-year franchise agreements. In
February 1999, NRT and the Company entered into an agreement whereby the
Company made an upfront payment of $30 million to NRT for services to be
provided by NRT to the Company related to the identification of potential
acquisition candidates, the negotiation of agreements and other services in
connection with future brokerage acquisitions by NRT. Such fee is
refundable in the event the services are not provided.
AVIS RENT A CAR INC.
The Company continues to maintain an equity interest in ARAC. During 1999
and 1998, the Company sold approximately two million and one million
shares, respectively, of Avis Rent A Car Inc. common stock and recognized a
pre-tax gain of approximately $11 million and $18 million, respectively,
which is included in other revenue in the Consolidated Statements of
Operations. The Company recorded its equity in the earnings of ARAC, which
amounted to $18 million, $14 million and $51 million for the years ended
December 31, 1999, 1998 and 1997, respectively, as a component of other
revenue in the Consolidated Statements of Operations. On June 30, 1999, in
connection with the Company's disposition of its fleet segment, the Company
received, as part of the total consideration, $360 million of preferred
stock in a subsidiary of ARAC and additional consideration of a $30 million
receivable (see Note 3 -- Dispositions and Acquisitions of Businesses). The
Company received dividends of $9 million, which increased the basis of the
underlying preferred stock investment. Such amount is included as a
component of other revenue in the Consolidated Statements of Operations. At
December 31, 1999, the Company's interest in ARAC was approximately 18%.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. During
1999, 1998 and 1997, total franchise royalties earned by the Company from
ARAC were $102 million, $92 million and $82 million, respectively. In
addition, the Company operates the telecommunications and computer
processing system, which services ARAC for reservations, rental agreement
processing, accounting and fleet control for which the Company charges ARAC
at cost. As of December 31, 1999 and 1998, the Company had accounts
receivable of $34 million and $26 million, respectively, due from ARAC.
Certain officers of the Company serve on the Board of Directors of ARAC.
F-37
22. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenues from franchising activities include royalty revenues and initial
franchise fees charged to lodging properties, car rental locations, tax
preparation offices and real estate brokerage offices upon execution of a
franchise contract.
Franchised outlet revenues are as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------ ------ ------
Royalty revenues $839 $703 $574
Initial franchise fees 37 45 26
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are calculated based on a
specified percentage of gross room revenues. Marketing fees received from
the Company's real estate brands' franchisees are based on a specified
percentage of gross closed commissions earned on the sale of real estate.
As provided in the franchise agreements, at the Company's discretion, all
of these fees are to be expended for marketing purposes and the operation
of a centralized brand-specific reservation system for the respective
franchisees and are controlled by the Company until disbursement.
Membership and service fees revenues included marketing and reservation
fees of $280 million, $228 million and $215 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
Franchised outlet information is as follows:
DECEMBER 31,
-------------------------------
1999 1998 (1) 1997
-------- ---------- -------
Franchised units in operation 22,719 22,471 18,876
Backlog (franchised units sold but not yet
opened) 1,478 2,063 1,547
- ----------
(1) Approximately 2,000 franchised units were acquired in connection with
the acquisition of Jackson Hewitt Inc.
23. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles were disposed of during 1999
in connection with the disposition of the Company's fleet business segment
(see Note 3 -- Dispositions and Acquisitions of Businesses). In 1998,
vehicles were leased primarily to corporate fleet users for initial periods
of twelve months or more under either operating or direct financing lease
agreements. Vehicles under operating leases were amortized using the
straight-line method over the expected lease term. The Company's experience
indicated that the full term of the leases varied considerably due to
extensions beyond the minimum lease term.
The Company had two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease was
generally for the account of the lessee except for a minimum residual value
which the Company had guaranteed. The Company's experience had been that
vehicles under this type of lease agreement were sold for amounts exceeding
the residual value guarantees. Maintenance and repairs of vehicles under
these agreements were the responsibility of the lessee. The original cost
and accumulated depreciation of vehicles under this type of operating lease
was $5.3 billion and $2.6 billion, respectively, at December 31, 1998.
Under the second type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease was for the account of
the Company. The lessee generally paid for or
F-38
provided maintenance, vehicle licenses and servicing. The original cost and
accumulated depreciation of vehicles under these agreements were $1.0
billion and $191 million, respectively, at December 31, 1998. The Company,
based on historical experience and an assessment of the used vehicle
market, established an allowance in the amount of $14 million for potential
losses on residual values on vehicles under these leases at December 31,
1998.
Under the direct financing lease agreements, the minimum lease term was 12
months with a month-to-month renewal option thereafter. In addition, resale
of the vehicles upon termination of the lease was for the account of the
lessee. Maintenance and repairs of these vehicles were the responsibility
of the lessee.
Open-end operating leases and direct financing leases generally had a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically had a longer term, usually 24 months
or more, but were cancelable under certain conditions.
Gross leasing revenues, which were included in fleet leasing revenues in
the Consolidated Statements of Operations, consisted of:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ --------- ---------
Operating leases $683 $1,330 $1,223
Direct financing leases, primarily interest 17 38 42
---- ------ ------
$700 $1,368 $1,265
==== ====== ======
Net investment in leases and leased vehicles consisted of:
DECEMBER 31,
1998
-------------
Vehicles under open-end operating leases $2,726
Vehicles under closed-end operating leases 822
Direct financing leases 252
Accrued interest on leases 1
------
$3,801
======
24. SEGMENT INFORMATION
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation, amortization, and minority interest. For this purpose,
Adjusted EBITDA is defined as earnings before non-operating interest,
income taxes, depreciation, amortization and minority interest, adjusted to
exclude net gains on dispositions of businesses and certain other charges
which are of a non-recurring or unusual nature and not measured in
assessing segment performance or are not segment specific. The Company
determined its operating segments based primarily on the types of services
it provides, the consumer base to which marketing efforts are directed and
the methods used to sell services. The Company disposed of its fleet
segment on June 30, 1999, and the Company added Move.com Group as a
reportable operating segment, thereby maintaining the eight reportable
operating segments which collectively comprise the Company's continuing
operations. Included in the Move.com Group are RentNet, Inc., ("RentNet"),
acquired during January 1996, National Home Connections, LLC, acquired in
May 1999, and the assets of MetroRent, acquired in December 1999. Prior to
the formation of the Move.com Group, RentNet's historical financial
information was included in the Company's individual membership segment.
The Company reclassified the financial results of RentNet for the years
ended December 31, 1998 and 1997. Inter-segment net revenues were not
significant to the net revenues of any one segment. A description of the
services provided within each of the Company's reportable operating
segments is as follows:
F-39
TRAVEL
Travel services include the franchising of lodging properties and car
rental locations, as well as vacation/timeshare exchange services. As a
franchiser of guest lodging facilities and car rental agency locations, the
Company licenses the independent owners and operators of hotels and car
rental agencies to use its brand names. Operation and administrative
services are provided to franchisees, which include access to a national
reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. As a provider of
vacation and timeshare exchange services, the Company enters into
affiliation agreements with resort property owners/developers (the
developers) to allow owners of weekly timeshare intervals (the subscribers)
to trade their owned weeks with other subscribers. In addition, the Company
provides publications and other travel-related services to both developers
and subscribers.
INDIVIDUAL MEMBERSHIP
Individual membership provides customers with access to a variety of
services and discounted products in such areas as retail shopping, travel,
auto, dining, home improvement, and credit information. The Company
affiliates with business partners, such as leading financial institutions
and retailers, to offer membership as an enhancement to their credit card
customers. Individual memberships are marketed primarily using direct
marketing techniques.
INSURANCE/WHOLESALE
Insurance/Wholesale markets and administers competitively priced insurance
products, primarily accidental death and dismemberment insurance and term
life insurance. The Company also provides services such as checking account
enhancement packages, various financial products and discount programs to
financial institutions, which in turn provide these services to their
customers. The Company affiliates with financial institutions, including
credit unions and banks, to offer their respective customer bases such
products and services.
REAL ESTATE FRANCHISE
The Company licenses the owners and operators of independent real estate
brokerage businesses to use its brand names. Operational and administrative
services are provided to franchisees, which are designed to increase
franchisee revenue and profitability. Such services include advertising and
promotions, referrals, training and volume purchasing discounts.
RELOCATION
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes, providing equity advances to transferees (generally
guaranteed by the corporate customer), purchase of a transferee's home
which is sold within a specified time period for a price which is at least
equivalent to the appraised value, certain home management services,
assistance in locating a new home at the transferee's destination,
consulting services and other related services.
MORTGAGE
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the servicing of loans
for investors. The Company markets a variety of mortgage products to
consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association while
generally retaining mortgage servicing rights. Mortgage servicing consists
of collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering the Company's
mortgage loan servicing portfolio.
F-40
MOVE.COM GROUP
Move.com Group provides a broad range of quality relocation, real estate,
and home-related products and services through its flagship portal site,
move.com, and the move.com network. The Move.com Group integrates and
enhances the online efforts of the Company's residential real estate brand
names and those of the Company's other real estate business units.
DIVERSIFIED SERVICES
In addition to the previously described business segments, the Company also
derives revenues from providing a variety of other consumer and business
products and services which include the Company's tax preparation services
franchise, information technology services, car park facility services,
welcoming packages to new homeowners, and other consumer-related services.
FLEET
The fleet segment provided fleet and fuel card related products and
services to corporate clients and government agencies. These services
included management and leasing of vehicles, fuel card payment and
reporting and other fee-based services for clients' vehicle fleets. The
Company leased vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999
INDIVIDUAL INSURANCE/ REAL ESTATE
TOTAL TRAVEL(1) MEMBERSHIP WHOLESALE FRANCHISE
--------- ----------- ------------ ------------ ------------
Net revenues $ 5,402 $1,148 $972 $575 $ 571
Adjusted EBITDA 1,919 586 127 180 424
Depreciation and amortization 371 97 26 19 59
Segment assets 15,149 3,186 662 393 2,102
Capital expenditures 277 53 25 19 --
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES (2) FLEET
------------ ---------- ---------- -------------- ------
Net revenues $ 415 $ 397 $ 18 $1,099 $207
Adjusted EBITDA 122 182 (22) 239 81
Depreciation and amortization 17 19 2 117 15
Segment assets 1,033 2,817 22 4,934 --
Capital expenditures 21 48 2 86 23
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL INSURANCE/ REAL ESTATE
TOTAL TRAVEL(1) MEMBERSHIP WHOLESALE FRANCHISE
--------- ----------- ------------ ------------ ------------
Net revenues $ 5,284 $1,063 $ 920 $544 $ 456
Adjusted EBITDA 1,590 542 (59) 138 349
Depreciation and amortization 323 88 22 14 53
Segment assets 19,843 2,762 830 372 2,014
Capital expenditures 355 78 27 17 6
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------ --------
Net revenues $ 444 $ 353 $10 $1,107 $ 387
Adjusted EBITDA 125 188 1 132 174
Depreciation and amortization 17 9 2 96 22
Segment assets 1,130 3,504 9 4,525 4,697
Capital expenditures 70 36 1 62 58
-------------------------------------------------------------------------------------------------------
F-41
YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL INSURANCE/ REAL ESTATE
TOTAL TRAVEL(1) MEMBERSHIP WHOLESALE FRANCHISE
--------- ----------- ------------ ------------ ------------
Net revenues $ 4,240 $ 971 $773 $483 $ 335
Adjusted EBITDA 1,250 467 6 111 227
Depreciation and amortization 238 82 17 11 44
Segment assets 13,800 2,602 833 357 1,827
Capital expenditures 155 37 11 6 13
MOVE.COM DIVERSIFIED
RELOCATION MORTGAGE GROUP SERVICES FLEET
------------ ---------- ---------- ------------ --------
Net revenues $ 402 $ 179 $ 6 $767 $ 324
Adjusted EBITDA 93 75 (1) 151 121
Depreciation and amortization 8 5 1 54 16
Segment assets 1,009 2,233 7 806 4,126
Capital expenditures 23 16 1 24 24
- ----------
(1) Net revenues and Adjusted EBITDA include the equity in earnings from
the Company's investment in ARAC of $18 million, $14 million and $51
million in 1999, 1998 and 1997, respectively. Net revenues and
Adjusted EBITDA for 1999 and 1998 include a pre-tax gain of $11
million and $18 million, respectively, as a result of the 1999 and
1998 sale of a portion of the Company's equity interest. Segment
assets include such equity method investment in the amount of $118
million, $139 million and $124 million at December 31, 1999, 1998 and
1997, respectively.
(2) Net revenues include a $23 million gain on the sales of car park
facilities. Segment assets include the Company's equity investment of
$17 million in EPub.
Provided below is a reconciliation of Adjusted EBITDA and total assets for
reportable segments to the consolidated amounts.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Adjusted EBITDA for reportable segments $ 1,919 $ 1,590 $ 1,250
Other charges:
Litigation settlement and related costs 2,894 351 --
Termination of proposed acquisitions 7 433 --
Executive terminations -- 53 --
Investigation-related costs 21 33 --
Merger-related costs and other unusual charges (credits) 110 (67) 704
Investigation-related financing costs -- 35 --
Depreciation and amortization 371 323 238
Interest, net 199 114 51
Net gain on dispositions of businesses 1,109 -- --
------- ------- -------
Consolidated income (loss) before income taxes and minority
interest $ (574) $ 315 $ 257
======= ======= =======
1999 1998 1997
---------- ---------- ----------
Total assets for reportable segments $15,149 $19,843 $13,800
Net assets of discontinued operations -- 374 273
------- ------- -------
Consolidated total assets $15,149 $20,217 $14,073
======= ======= =======
F-42
GEOGRAPHIC SEGMENT INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
--------- ---------- ------------ ---------
1999
Net revenues $ 5,402 $ 4,363 $ 748 $ 291
Assets 15,149 11,722 3,215 212
Long-lived assets 1,347 590 723 34
1998
Net revenues $ 5,284 $ 4,277 $ 696 $ 311
Assets 20,217 16,251 3,707 259
Long-lived assets 1,433 646 768 (1) 19
1997
Net revenues $ 4,240 $ 3,669 $ 232 $ 339
Assets 14,073 12,749 1,015 309
Long-lived assets 545 478 49 18
- ----------
(1) Includes $691 million of property and equipment acquired in
connection with the NPC acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property and
equipment.
25. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1999
and 1998. The underlying per share information is calculated from the
weighted average shares outstanding during each quarter, which may
fluctuate based on quarterly income levels, market prices, and share
repurchases. Therefore, the sum of the quarters per share information may
not equal the total year amounts.
1999
------------------------------------------------------
FIRST (2) SECOND (3) THIRD (4) FOURTH (5)
----------- ------------ ----------- -----------
Net revenues $ 1,318 $1,391 $1,410 $ 1,283
------- ------ ------ --------
Income (loss) from continuing operations (1) $ 169 $ 874 $ 209 $ (1,481)
Gain (loss) on sale of discontinued operations,
net of tax (6) 193 (12) (7) --
------- ------ ------- --------
Net income (loss) $ 362 $ 862 $ 202 $ (1,481)
======= ====== ====== ========
Per share information:
Basic
Income (loss) from continuing operations $ 0.21 $ 1.14 $ 0.29 $ (2.08)
Net income (loss) $ 0.45 $ 1.12 $ 0.28 $ (2.08)
Weighted average shares (in millions) 800 770 726 711
Diluted
Income (loss) from continuing operations $ 0.20 $ 1.06 $ 0.27 $ (2.08)
Net income (loss) $ 0.43 $ 1.05 $ 0.26 $ (2.08)
Weighted average shares (in millions) 854 824 780 711
Common Stock Market Prices:
High $22 7/16 $20 3/4 $22 5/8 $ 26 9/16
Low $15 5/16 $15 1/2 $17 $ 14 9/16
F-43
1998
-------------------------------------------------------
FIRST (7) SECOND (8) THIRD (9) FOURTH (10)
----------- ------------ ----------- ------------
Net revenues $ 1,129 $1,278 $ 1,458 $ 1,419
------- ------ ------- -------
Income (loss) from continuing operations $ 184 $ 155 $ 123 $ (302)
Loss from discontinued operations, net of
tax (11) (2) (12) --
Gain on sale of discontinued operations,
net of tax (6) -- -- -- 405
------- ------ ------- -------
Net income $ 173 $ 153 $ 111 $ 103
======= ====== ======= =======
Per share information:
Basic
Income (loss) from continuing
operations $ 0.22 $ 0.18 $ 0.14 $ (0.36)
Net income $ 0.21 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 839 851 851 850
Diluted
Income (loss) from continuing
operations $ 0.21 $ 0.18 $ 0.14 $ (0.36)
Net income $ 0.20 $ 0.18 $ 0.13 $ 0.12
Weighted average shares (in millions) 909 901 877 850
Common Stock Market Prices:
High $ 41 $41 3/8 $22 7/16 $ 20 5/8
Low $32 7/16 $18 9/16 $10 7/16 $ 7 1/2
- ----------
(1) Includes net gains associated with the dispositions of businesses of
$750 million, $75 million and $284 million for the second, third, and
fourth quarters, respectively (see Note 3 -- Dispositions and
Acquisitions of Businesses).
(2) Includes charges of $7 million ($4 million, after tax or $0.01 per
diluted share) in connection with the termination of the proposed
acquisition of RACMS and $2 million ($1 million, after tax) for
investigation -- related costs.
(3) Includes charges of $23 million ($15 million, after tax or $0.02 per
diluted share) of additional charges to fund an irrevocable
contribution to an independent technology trust responsible for
completing the transition of the Company's lodging franchisees to a
Company sponsored property management system and $6 million ($4
million, after tax) for investigation-related costs.
(4) Includes charges of $87 million ($49 million, after tax or $0.07 per
diluted share) incurred primarily in conjunction with the NGI
transaction and $5 million ($3 million, after tax) for
investigation-related costs.
(5) Includes charges of $2,894 million ($1,839 million, after tax or
$2.59 per diluted share) associated with the preliminary agreement to
settle the principal shareholder securities class action suit and $8
million ($5 million, after tax or $0.01 per diluted share) of
investigation-related costs. Such charges were partially offset by a
$2 million ($1 million, after tax) credit associated with changes to
the estimate of previously recorded merger-related costs and other
unusual charges.
(6) Represents gains associated with the sales of Hebdo Mag and CDS (see
Note 4 -- Discontinued Operations).
(7) Includes a charge of $3 million ($2 million, after tax) for
investigation-related costs, including incremental financing costs,
and executive terminations.
(8) Includes a charge of $32 million ($20 million, after tax or $0.02 per
diluted share) for investigation-related costs, including incremental
financing costs, and executive terminations. Such charge was partially
offset by a credit of $27 million ($19 million, after tax or $0.02 per
diluted share) associated with changes to the estimate of previously
recorded merger-related costs and other unusual charges.
(9) Includes a charge of $76 million ($49 million, after tax or $0.06 per
share) for investigation-related costs, including incremental
financing costs, and executive terminations.
(10) Includes charges of (i) $433 million ($282 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian, (ii) $351 million
($228 million, after tax or $0.27 per diluted share) associated with
the agreement to settle the PRIDES securities class action suit and
(iii) $13 million ($10 million, after tax or $0.01 per diluted share)
for investigation-related costs, including incremental financing
costs, and executive terminations. Such charges were partially offset
by a credit of $43 million ($27 million, after tax or $0.03 per
diluted share) associated with changes to the estimate of previously
recorded merger-related costs and other unusual charges.
F-44
26. SUBSEQUENT EVENTS
PHH CREDIT FACILITIES
On February 28, 2000, PHH reduced the availability of its unsecured
committed credit facilities from $2.5 billion to $1.5 billion to reflect
the reduced borrowing needs of PHH as a result of the disposition of its
fleet businesses.
DEBT REDEMPTION
On January 21, 2000, the Company redeemed all outstanding 7-1/2% Senior
Notes at a redemption price of 100.695% of par plus accrued interest.
SHARE REPURCHASES
Subsequent to December 31, 1999, the Company repurchased an additional
$132 million (6 million shares) of its common stock under its repurchase
program as of February 24, 2000.
STRATEGIC ALLIANCE
On December 15, 1999, the Company entered into a strategic alliance with
Liberty Media Corporation ("Liberty Media") to develop Internet and related
opportunities associated with the Company's travel, mortgage, real estate
and direct marketing businesses. Such efforts may include the creation of
joint ventures with Liberty Media and others as well as additional equity
investments in each others businesses.
The Company will also assist Liberty Media in creating, and will receive an
equity participation in, a new venture that will seek to provide broadband
video, voice and data content to the Company's hotels and their guests on a
worldwide basis. The Company will also pursue opportunities within the
cable industry with Liberty Media to leverage the Company's direct
marketing resources and capabilities.
On February 7, 2000, Liberty Media invested $400 million in cash to
purchase 18 million shares of Company common stock and a two-year warrant
to purchase approximately 29 million shares of Company common stock at an
exercise price of $23.00 per share. The common stock, together with the
common stock underlying the warrant, represents, approximately 6.3% of our
outstanding shares after giving effect to the aforementioned transaction.
Liberty Media's Chairman, John C. Malone, Ph.D., will join the Company's
Board of Directors and has also committed to purchase one million shares of
the Company's common stock for approximately $17 million in cash.
----------------
F-45