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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
COMMISSION FILE NO. 1-10308
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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)
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive office) (Zip Code)
(973) 428-9700
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, Par Value $.01 New York Stock Exchange
5 7/8% Senior Notes due 1998 New York Stock Exchange
4 3/4% Convertible Senior Notes due 2003 New York Stock Exchange
FELINE PRIDES(SM) 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: NONE
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 March 20, 1998, was $
30,448,280,000. 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 843,661,053 shares of Common Stock outstanding as at March
20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with the registrant's annual shareholders' meeting
to be held May 19, 1998 (the "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
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PART I
1 Business ..................................................................... 1
2 Properties ................................................................... 29
3 Legal Proceedings ............................................................ 30
4 Submission of Matters to a Vote of Security Holders .......................... 30
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters .... 31
6 Selected Financial Data ...................................................... 32
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................... 33
7A Quantitative and Qualitative Disclosure About Market Risk .................... 46
8 Financial Statements and Supplementary Data .................................. 47
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. 47
PART III
10 Directors and Executive Officers of the Registrant ........................... 48
11 Executive Compensation ....................................................... 48
12 Security Ownership of Certain Beneficial Owners and Management .............. 48
13 Certain Relationships and Related Transactions ............................... 48
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 48
Signatures ................................................................... 50
Index to Exhibits ............................................................ 52
i
PART I
ITEM 1. BUSINESS
GENERAL
Cendant Corporation (the "Registrant", which, together with its
subsidiaries is herein called collectively the "Company" or "Cendant") is one
of the foremost consumer and business services companies in the world. The
Company was created through the merger (the "Merger") of CUC International
Inc. ("CUC") and HFS Incorporated ("HFS") in December 1997 with CUC surviving
and being renamed Cendant Corporation. The Company provides all the services
formerly provided by each of CUC and HFS, including technology-driven
membership-based consumer services, travel services and real estate services.
Within three principal operating segments -membership, travel and real
estate services -- Cendant's businesses provide a wide range of complementary
consumer and business services. The travel segment facilitates vacation
timeshare exchanges, manages corporate and government vehicle fleets and
franchises car rental and hotel businesses; the real estate segment assists
in employee relocation, provides home buyers with mortgages and franchises
real estate brokerage businesses; and the membership segment provides an
array of value driven services through more than 20 membership clubs. The
Company also offers tax preparation services, consumer software in various
multimedia forms, information technology services, credit information
services and financial products.
The Company's membership-based consumer services provide more than 66.5
million members with access to a variety of goods and services worldwide.
These memberships include such components as shopping, travel, auto, dining,
home improvement, lifestyle, vacation exchange, credit card and checking
account enhancement packages, financial products and discount programs. The
Company also administers insurance package programs which are generally
combined with discount shopping and travel for credit union members. The
Company believes that it is the leading provider of membership-based consumer
services of these types in the United States. The Company's membership
activities are conducted principally through Cendant Membership Services,
Inc. and certain of the Company's other wholly-owned subsidiaries, including
FISI*Madison Financial Corporation ("FISI"), Benefit Consultants, Inc.
("BCI"), Entertainment Publications, Inc. ("Entertainment") and SafeCard
Services, Incorporated ("SafeCard") .
In the travel industry, the Company, through certain of its subsidiaries,
franchises hotels primarily in the mid-priced and economy markets. The
Company is 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. Additionally, the
Company owns 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). The Company currently owns approximately 20% of the capital
stock of the world's largest Avis franchisee, Avis Rent A Car, Inc. ("ARAC").
The Company also owns Resort Condominiums International, LLC ("RCI"), the
world's leading timeshare exchange organization, and PHH Vehicle Management
Services Corporation which operates the second largest provider in North
America of comprehensive vehicle management services, and is the market
leader in the United Kingdom for fuel and fleet management services. The
Company also operates the world's leading value-added tax refund service for
travelers.
In the residential real estate industry, the Company, through certain of
its subsidiaries, franchises real estate brokerage offices under the CENTURY
21(Registered Trademark), Coldwell Banker(Registered Trademark) and
Electronic Realty Associates(Registered Trademark) (ERA(Registered
Trademark)) real estate brokerage franchise systems and is the world's
largest real estate brokerage franchisor. Additionally, the Company, through
Cendant Mobility Services Corporation, is the largest provider of corporate
relocation services in the United States, offering relocation clients a
variety of services in connection with the transfer or a client's employees.
Through Cendant Mortgage Corporation ("Cendant Mortgage"), the Company
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
Through the acquisition of Jackson Hewitt, Inc. ("Jackson Hewitt") on
January 7, 1998, the Company operates the second largest tax preparation
service system in the United States with locations in 43 states. The Company
franchises a system of approximately 2,000 offices that specialize in
computerized preparation of federal and state individual income tax returns.
The Company also offers consumer software in various multimedia forms,
predominately on CD-ROM for personal computers. The Company's Cendant
Software unit is one of the largest personal computer consumer software
groups in the world, and a leader in entertainment and educational software.
It includes Sierra On-Line, Inc., Davidson & Associates, Inc., Blizzard
Entertainment and Knowledge Adventure, Inc., and offers such titles as
Diablo, Warcraft, You Don't Know Jack, King's Quest, JumpStart, Math Blaster,
Reading Blaster and many others.
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, the Company licenses the
owners and operators of independent businesses to use the Company's brand
names. The Company does not own or operate hotels, real estate brokerage
offices, car rental operations or tax preparation offices (except for certain
company-owned Jackson Hewitt offices which the Company intends to resell).
Instead, the Company provides its franchisee customers with services designed
to increase their revenue and profitability.
PROPOSED ACQUISITIONS AND RECENT DIVESTITURE
Proposed Acquisition of American Bankers. On March 23, 1998, the Company
announced that it had entered into a definitive agreement to acquire American
Bankers Insurance Group Inc. ("American Bankers") for $67 per share in cash
and stock, for an aggregate consideration of approximately $3.1 billion. The
Company intends to purchase 23.5 million shares of American Bankers at $67
per share through its pending cash tender offer, to be followed by a merger
in which the Company will deliver Cendant shares with a value of $67 for each
remaining share of American Bankers common stock outstanding. The Company has
already received anti-trust clearance to acquire American Bankers. The tender
offer is subject to the receipt of tenders representing at least 51 percent
of the common shares of American Bankers as well as customary closing
conditions, including regulatory approvals. The transaction is expected to be
completed in the latter part of the second quarter of 1998. American Bankers
concentrates on marketing affordable, specialty insurance products and
services through financial institutions, retailers and other entities
offering consumer financing as a regular part of their business. American
Bankers, through its subsidiaries, operates in the United States, Canada,
Latin America, the Caribbean and the United Kingdom.
In connection with the Company's proposal to acquire American Bankers, the
Company entered into a commitment letter, dated January 23, 1998, with The
Chase Manhattan Bank and Chase Securities Inc. to provide a $1.5 billion
364-day revolving credit facility (the "New Facility") which will mature 364
days after the execution of the definitive documentation relating thereto.
The New Facility will bear interest, at the option of the Company, at rates
based on competitive bids of lenders participating in such facilities at a
prime rate or at LIBOR plus an applicable variable margin based on the
Company's senior unsecured long-term debt rating.
National Parking Corporation Acquisition. On March 23, 1998, the Company
announced that it had agreed with the board of directors of U.K.-based
National Parking Corporation Limited ("NPC") to the terms of a recommended
cash offer to acquire the entire issued share capital of NPC for 673 pence
per share, a total of approximately pounds sterling801 million (approximately
$1.3 billion). Payment for the shares will be made in cash. The Company has
received irrevocable undertakings to accept the offer with respect to
holdings amounting to approximately 73 percent of NPC's issued share capital
and the directors of NPC intend unanimously to recommend that NPC
shareholders accept the offer. The offer is subject to customary regulatory
approvals and it is anticipated that the transaction will close during the
second quarter of 1998. NPC operates in two principal segments: National Car
Parks Limited, the largest private (non-municipality owned) car park operator
in the U.K. with approximately 500 locations; and Green Flag Group Limited,
the largest for-profit roadside assistance organization with more than 3.5
million members in the U.K.
2
Providian Acquisition. On December 10, 1997, the Company announced that it
had entered into a definitive agreement to acquire Providian Auto and Home
Insurance Company ("Providian") and its subsidiaries from an Aegon N.V.
subsidiary for approximately $219 million in cash. Providian sells automobile
insurance to consumers through direct response marketing in 45 states and the
District of Columbia. The closing of this transaction is subject to customary
conditions, including regulatory approval, and is anticipated to occur in the
spring of 1998. Upon acquisition, the Company intends to change the name of
Providian to Cendant Auto Insurance Company ("Cendant Auto") and expand
Cendant Auto's marketing channels to the Company's existing distribution
channels, while also providing the Company's existing customer base with a
new product offering.
Interval Divestiture. On December 17, 1997, in connection with the merger
with HFS, the Company completed the divestiture of its timeshare exchange
subsidiary, Interval International Inc., as contemplated by a consent decree
with the Federal Trade Commission.
* * *
The Company continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its industries and
in other franchise, franchisable or service businesses. As part of this
regular on-going evaluation of acquisition opportunities, the Company
currently is 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 Common
Stock (which would increase the number of shares of Common Stock outstanding)
or other securities of the Company, borrowings, or a combination thereof.
Prior to consummating any such possible acquisitions, the Company, among
other things, will need to initiate and complete satisfactorily its 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, the Company has
been involved in both relatively small acquisitions and acquisitions which
have been significant.
Financial information about the Company's industry segments may be found
in Note 22 to the Company's consolidated financial statements presented in
Item 8 of this Annual Report on Form 10-K and incorporated herein by
reference. Except where expressly noted, information herein does not include
information on or with respect to American Bankers, NPC, Providian or their
respective businesses.
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. Important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements, include, but
are not limited to: uncertainty as to the Company's future profitability; the
Company's ability to develop and implement operational and financial systems
to manage rapidly growing operations; competition in the Company's existing
and potential future lines of business; the Company's ability to integrate
and operate successfully acquired businesses and the risks associated with
such businesses, including the Merger and the proposed American Bankers, NPC
and Providian acquisitions; the Company's ability to obtain financing on
acceptable terms to finance the Company's growth strategy and for the Company
to operate within the limitations imposed by financing arrangements;
uncertainty as to the future profitability of acquired businesses; and other
factors. Other factors and assumptions not identified above were also
involved in the derivation of these forward-looking statements, and the
failure of such other assumptions to be realized as well as other factors may
also cause actual results to differ materially from those projected. The
Company assumes no obligation to update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
3
The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (973) 428-9700).
MEMBERSHIP SERVICES
GENERAL. The Company's Membership Services segment has grown to more than
66.5 million memberships worldwide. The Company derives its Membership
Services revenue principally from membership fees. Membership fees vary
depending upon the particular membership program, and annual fees to
consumers generally range from $6 to $250 per year. Most of the Company's
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 at any point during the membership term.
The Company arranges with clients, such as financial institutions, utility
companies, retailers, oil companies, credit unions, on-line networks,
fundraisers and others to market certain membership services to such clients'
individual account holders and customers. Participating institutions
generally receive commissions on initial and renewal memberships, averaging
fifteen to twenty percent of the net membership fees. The Company's contracts
with these clients generally grant the Company the right to continue
providing membership services directly to such clients' individual account
holders even if the client terminates the contract, provided that the client
continues to receive its commission.
The Company solicits members for many of its programs by direct marketing
and by using a direct sales force calling on financial institutions, fund
raising charitable institutions and associations. Some of the Company's
individual memberships are available on-line to interactive computer users
via major on-line services and the Internet's World Wide Web. See
"--Distribution Channels".
Individual memberships represented 76%, 72% and 67% of membership revenues
for the year ended December 31, 1997, 1996 and 1995, respectively. Wholesale
memberships represented 14%, 16% and 19% of membership revenues for the year
ended December 31, 1997, 1996 and 1995, respectively. Discount program
memberships represented 10%, 12% and 14% of membership revenues for the year
ended December 31, 1997, 1996 and 1995, respectively. Membership revenue is
recorded net of anticipated cancellations. See Item 7: "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Membership Services Segment".
TYPES OF MEMBERSHIPS. The Company offers Shoppers Advantage(Registered
Trademark), Travelers Advantage(Registered Trademark), AutoVantage(Registered
Trademark), Dinner on Us Club(Registered Trademark), PrivacyGuard(Registered
Trademark), Buyers Advantage(Registered Trademark), Credit Card
Guardian(Registered Trademark), CompleteHome(Registered Trademark) and other
membership services. These benefits are offered as individual memberships, as
components of wholesale membership enhancement packages and insurance
products, and as components of discount program memberships. A brief
description of the different types of memberships are as follows:
Individual Memberships. The Company classifies memberships as individual
memberships if: 1) the member pays directly for the services; 2) the Company
pays for the marketing costs to solicit the member and primarily markets
these services using direct marketing techniques; 3) the membership is sold
at full price; and 4) the initial fulfillment kit consists of a variety of
membership materials such as a membership card, information describing the
service and discount coupons applicable to the service. Examples of these
memberships include Shoppers Advantage(Registered Trademark), Travelers
Advantage(Registered Trademark) and AutoVantage(Registered Trademark) and
insurance products, which are sold at prices generally between $15 and $250
per year.
Wholesale Memberships. The Company classifies memberships as wholesale
memberships if: 1) the Company does not pay for the marketing costs to
solicit the member; 2) the initial fulfillment kit consists of a variety of
membership materials such as a membership card and information describing the
service; 3) the memberships may be sold at full or discounted group prices;
and 4) the member or the sponsor pays for the membership. Examples of these
memberships include enhancement packages sold through banks and credit unions
and insurance products sold to credit unions, for which the Company acts as a
third party administrator. Fees for these memberships are generally between
$6 and $50 per year.
4
Discount Program Memberships. The Company classifies memberships as
discount program memberships if: 1) the initial fulfillment materials consist
of various offers of local or national discounts; 2) the primary marketing
method is through either a direct sales force contacting primarily
fundraising institutions, a participating merchant or general advertising;
and 3) the member or a local merchant generally pays for the membership.
Examples of these memberships include the Entertainment(Registered Trademark)
and Gold C(Registered Trademark) coupon book programs and Sally
Foster(Registered Trademark) Gift Wrap. Fees to consumers for these
memberships generally range from $10 to $50 per year.
MEMBERSHIP SERVICES. The various memberships may contain all or some of
the features of the following services:
Shopping. Shoppers Advantage(Registered Trademark) is a discount shopping
program whereby the Company, through Comp-U-Card Services, Inc., provides
product price information and home shopping services to its members. The
Company's merchandise database contains information on approximately 250,000
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 the Company's
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 the Company's 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. The Company informs the vendor
providing the lowest price of the member's order and that vendor then
delivers the requested product directly to the member. The Company acts as a
conduit between its members and the vendors; accordingly, it does not
maintain an inventory of products.
As part of its individual member Shoppers Advantage(Registered Trademark)
program, the Company distributes catalogs four to ten times per year to
certain members. In addition, the Company automatically extends the
manufacturer's warranty on all products purchased through the Shoppers
Advantage(Registered Trademark) program and offers a low price guarantee.
Travel. Travelers Advantage(Registered Trademark) is a discount travel
service program whereby the Company, through Cendant Travel Services, Inc.
("Cendant Travel") (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, the Company
maintains its own database containing information on tours, cruises, 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 the Company 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, 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
offers a low price guarantee on such fares.
Auto. The Company's auto service, AutoVantage(Registered Trademark),
offers members comprehensive new car summaries and preferred prices on new
domestic and foreign cars purchased through the Company's independent dealer
network (which includes over 2,000 dealer franchises); discounts on
maintenance, tires and parts at more than 35 chains and more than 23,000
locations, including well known chains such as Goodyear(Registered Trademark)
and Firestone(Registered Trademark); discounts on parts and labor at
participating AutoVantage(Registered Trademark) new car dealers across the
country; 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.
Dining. Dinner on Us Club(Registered Trademark) features two-for-one
dining offers at more than 19,000 restaurants in major metropolitan areas
across the United States. The Company also manages other dining programs
which allow members to earn additional benefits for each dollar spent for
dining at participating restaurants in the United States.
5
Credit Card Registration. The Company's Credit Card Guardian(Registered
Trademark) service enables consumers to register their credit and debit cards
with the Company so that the account numbers of these cards may be kept
securely in one place. If the member notifies the Company that any of these
credit or debit cards are lost or stolen, the Company will notify the issuers
of these cards, arrange for them to be replaced and reimburse the member for
any amount for which the card issuer may hold the member liable. During 1996,
the Company acquired Ideon Group, Inc. ("Ideon"), which through its principal
subsidiary, SafeCard, offers a credit card registration service, "Hot-Line".
If a member notifies SafeCard of a loss or theft of his/her credit cards,
SafeCard retrieves (or, if cards have not been previously registered,
obtains) the necessary card registration information, and then promptly
notifies the credit card issuers of the loss, simultaneously requesting
replacement.
PrivacyGuard Service. The PrivacyGuard(Registered Trademark) service
provides members with a comprehensive and understandable means of monitoring
key personal information. The service offers a member access to information
in four key areas: credit history and monitoring, driving records maintained
by state motor vehicle authorities, Social Security records 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.
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.
CompleteHome. The CompleteHome(Registered Trademark) 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.
Health Services. The HealthSaver(Service Mark) membership provides discounts
ranging from 10% to 60% off retail prices on prescription drugs, eyewear,
eyecare, 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.
Lifestyle Clubs. The Company's North American Outdoor Group, Inc.
subsidiary ("NAOG") owns and operates the North American Hunting
Club(Registered Trademark), the North American Fishing Club(Registered
Trademark) and the Handyman Club of America(Registered Trademark), among
others. Members of these clubs receive fulfillment kits, discounts on related
goods and services, magazines and other benefits.
Spark Services, Inc. ("Spark") provides database-driven classified
advertising services focusing on dating to over 300 radio stations throughout
the United States and Canada. Spark is the leading provider of dating and
personals services to the radio industry. Spark has 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 pay for Spark's services on a per minute of usage transaction
basis.
Enhancement Package Service. The Company, primarily through FISI, sells
enhancement package memberships for checking account holders. FISI's
financial institution clients, with whom FISI has entered into written
contracts, select a customized package of the Company's products and
services. Each client 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 the Company's 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 the Company's financial institution clients choose a standard
enhancement package, which generally includes $10,000 of accidental death
insurance, travel discounts and a nationwide check cashing service. Others
may choose the Company's shopping and credit card registration services, a
financial
6
newsletter or pharmacy, eyewear or entertainment discounts as enhancements.
The accidental death coverage is underwritten under group insurance policies
with independent insurers. The Company continuously seeks to develop new
enhancement features which may be added to any package at an additional cost
to the financial institution.
The Company generally charges a financial institution client an initial
fee to implement this program and monthly fees thereafter based on the number
of member accounts participating in that financial institution's program. The
Company's 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 the Company.
The Company, primarily through National Card Control Inc. ("NCCI"), a
wholly-owned subsidiary, also sells 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 the Company's 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 member accounts participating in that institution's program.
Discount Program Memberships. The Company, primarily through its
wholly-owned subsidiary, Entertainment, offers discount program memberships
in specific markets throughout North America and certain international
markets and enhances other of the Company's individual and wholesale
memberships. The Company believes it is the largest marketer of discount
program memberships of this type in the United States.
The Company solicits restaurants, hotels, motels, theaters, retailers and
other businesses which agree to offer services and/or merchandise at discount
prices (primarily on a two-entrees-for-the-price-of-one or 50% discount
basis). The Company sells discount coupon memberships, under its
Entertainment(Registered Trademark), Gold C(Registered Trademark) and other
trademarks, typically containing coupons for hundreds of discount offers from
participating establishments. Targeting middle to upper income consumers,
Entertainment(Registered Trademark) coupon books also contain selected
discount travel offers, including offers for hotels, restaurants and tourist
attractions. More than 100,000 merchants participate in these programs.
Entertainment has used this national base of merchants to develop other
products, most notably, customized memberships. Membership books customized
for major corporations typically contain portions of Entertainment(Registered
Trademark) books, along with other discount offers.
Entertainment(Registered Trademark) coupon book memberships are
distributed annually by geographic area. Members are solicited through
nonprofit organizations, corporations and, to a lesser extent, through
retailers and directly from the public. Customized books are distributed
primarily by major corporations as premiums and incentives for their
employees. The coupon books are generally provided to nonprofit organizations
and corporations on a consignment basis.
While prices of local coupon memberships vary, the customary price for
Entertainment(Registered Trademark) and Gold C(Registered Trademark) coupon
book memberships ranges between $10 and $45. Customized book memberships are
generally sold at significantly lower prices. In 1997, over five million
Entertainment(Registered Trademark) coupon books were published in North
America.
Sally Foster, Inc., a subsidiary of the Company, provides fundraising
institutions, primarily public and private elementary schools, with seasonal
products for sale in their fundraising efforts. The Company uses its Gold
C(Registered Trademark) sales force to sell these products, often combining
the sale of gift wrap with other membership services.
Insurance Products. The Company, through BCI, serves 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 insurance is often combined with other Company membership
7
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 member and the opportunity to choose
additional coverage of up to $250,000. The annual membership fee generally
ranges from $10 to $250. BCI also acts as an administrator for some term,
graded term and hospital accident insurance.
BCI's insurance products and other services are offered through credit
unions to their account holders and to the account holders of FISI's and the
Company's financial institution clients. BCI also markets the Company's
shopping, travel, automobile and discount coupon program membership services
to its clients. See also "--General -- Proposed Acquisitions and Recent
Divestiture -- Providian Acquisition" and "--Proposed Acquisition of American
Bankers."
ONLINE PRODUCTS. The Company operates netMarket (www.netmarket.com), its
flagship online, membership-based, value-oriented consumer site which offers
discounts on over a million products and services. It offers discounted
shopping, travel, auto and other benefits to both members and non-members,
with members receiving preferred pricing, access to specials, cash back
benefits, low price guarantees and extended warranties on certain items.
The Company also operates other online consumer offerings such as
Books.com (www.books.com), one of the largest online booksellers in the world
with more than four million titles available and discounts of 20 to 40
percent below retail prices; Musicspot (www.musicspot.com) an online music
store with more than 150,000 titles discounted 20 percent below retail
prices; and GoodMovies (www.goodmovies.com) an online movie store offering
more than 50,000 movie titles at 20 to 40 percent below retail cost. The
Company, through Match.com, Inc. ("Match"), is the 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.
The Company, through its Rent Net operation (www.rent.net) is the leading
apartment information and rental service on the Internet, with listings in
more than 2,000 North American cities. Rent Net's clients include many of the
top 50 property management companies across North America, and its apartment
and relocation information has been seen by more than one million users
monthly.
OTHER. The Company's Numa Corporation subsidiary publishes personalized
heritage publications, including under the Halbert's name, and markets and
sells personalized merchandise.
DISTRIBUTION CHANNELS. The Company markets its individual, wholesale, and
discount program memberships 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 merchant or general advertising; and 3) through fundraisers
such as schools and charitable institutions. Some of the Company's individual
memberships, such as shopping, travel and auto services, are available to
computer users via on-line services and the Internet's World Wide Web. These
users are solicited primarily through direct mail, inserts in newly-purchased
computer equipment containers and interactive communications networks, such
as America Online. The Company believes that its interactive users account
for less than 2% of its total members. The Company is currently working with
a range of industry leaders developing interactive technologies. Strategic
alliances have been formed with major phone companies and on-line services.
INTERNATIONAL MEMBERSHIP. As of December 31, 1997, Cendant International
Membership Services had expanded its international membership base to almost
four million members, an increase of approximately 100%. This membership base
is driven by retail and wholesale membership through 40 major banks in
Europe, Asia, as well as through other distribution channels.
The Company has exclusive licensing agreements covering the use of its
merchandising systems in Japan, Canada and Australia, under which licensees
paid initial license fees and agree to pay royalties to the Company on
membership fees, access fees and merchandise service fees paid to them.
Royalties to the Company from these licenses were less than 1% of the
Company's revenues and profits in the years-ended December 31, 1997, 1996 and
1995, respectively.
8
In 1997, in addition to Canadian coupon book memberships,
Entertainment(Registered Trademark) coupon book memberships were distributed
in six European markets and Australia. The Canadian coupon book memberships
are published independently by a Canadian subsidiary of Entertainment and the
European memberships are published by the Company's European subsidiaries.
The Australian coupon book memberships are published by an Australian joint
venture in which Entertainment has a controlling interest. United States and
Canadian memberships are also made available to foreign travelers. With
publication of these overseas memberships, the Company has created additional
custom-designed programs for international use.
The economic impact of currency exchange rate movements on the Company is
complex because it is linked to variability in real growth, inflation,
interest rates and other factors. Because the Company operates in a mix of
membership services and numerous countries, management believes currency
exposures are fairly well diversified. See Item 7A: "Quantitative and
Qualitative Disclosure About Market Risk".
SEASONALITY. Except principally for the sale of discount coupon program
memberships, the Company's membership business is not seasonal. Publication
of Entertainment(Registered Trademark) and Gold C Savings Spree(Registered
Trademark) books is generally completed in October of each year with
significant member solicitations beginning soon thereafter. Most cash
receipts from these coupon book memberships are received in the fourth
quarter and, to a lesser extent, in the first and third quarters of each
fiscal year. For financial statement purposes, the Company recognizes these
membership fees over the service period.
COMPETITION. Individual Memberships. The Company believes that there are
competitors which offer membership programs similar to the Company's 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 greater
than those of the Company. To date, the Company has been able to compete
effectively with such competitors. However, there can be no assurances that
it will continue to be able to do so. In addition, the Company competes with
traditional methods of merchandising that enjoy widespread consumer
acceptance, such as catalog and in-store retail shopping and shopping clubs
(with respect to its discount shopping service), and travel agents (with
respect to its discount travel service). The Company's systems are not
protected by patent.
Wholesale Memberships. Each of the Company's account enhancement
membership 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
those of the Company. Finally, in attempting to attract any relatively large
financial institution as a client, the Company also competes 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.
Discount Program Memberships. The Company believes that there are a number
of competitors in most markets throughout North America which offer similar
discount program memberships. The majority of these competitors are
relatively small, with coupon books in only a few markets. To date, the
Company has been able to compete effectively in markets that include these
competitors, primarily on the basis of price and product performance. The
Company does not anticipate that these competitors will significantly affect
the Company's ability to expand.
TRAVEL SERVICES
THE 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 rates generally are less than $54
per night. Of the brand names franchised by the Company, 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, which is currently the fastest
growing segment of the industry.
9
As franchisor of lodging facilities, the Company provides a number of
services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability, the most important of which is a centralized
brand-specific national reservations 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. The Company believes 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 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 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. The
Company believes that, in general, franchise affiliations are viewed as
enhancing the value of a hotel property by providing economic benefits to the
property.
The Company 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. The Company acquired the Days Inn franchise
system in 1992, the Super 8 franchise system and substantially all of the
assets of the Park Inn International(Registered Trademark) franchise system
in the U.S. and Canada in 1993 (which the Company sold in 1996), the Villager
Lodge franchise system in 1994, the Knights Inn franchise system in August
1995 and the Travelodge franchise system in January 1996. Each of these
acquisitions has increased the Company's earnings per share. The Company
continues to seek actively opportunities to acquire or license additional
hotel franchise systems, including established brands in the upper end of the
market, where the Company is not currently represented. See "Lodging
Franchise Growth" below.
The fee and cost structure of the Company's business provides significant
opportunities for the Company to increase earnings by increasing the number
of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from annual franchise fees. Annual
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 sales. 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 national reservations
system, national media advertising and certain training programs.
The Company's franchisees are dispersed geographically which minimizes the
exposure to any one hotel owner or geographic region. Of the more than 5,500
properties and 3,700 franchisees in the Company's systems, no individual
hotel owner accounts for more than 2% of the Company's lodging revenue.
LODGING FRANCHISE GROWTH. Growth of the franchise systems through the sale
of long-term franchise contracts to operators of existing and newly
constructed hotels is the leading source of revenue and earnings growth in
the Company's 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. The Company markets franchises principally to
independent hotel and motel owners, as well as to owners whose properties are
affiliated with other hotel brands. The Company believes that its existing
franchisees also represent a significant potential market because many own,
or may own in the future, other hotels which can be converted to the
Company's brand names. Accordingly, a significant factor in the Company's
sales strategy is maintaining the satisfaction of its existing franchisees by
providing quality services.
10
The Company employs a national franchise sales force consisting of
approximately 80 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 the Company's brands, sales referrals are
made among the sales groups and a referring salesperson is entitled to a
commission for referrals which result in a franchise sale.
The Company seeks to expand its 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, 1997, the Company's franchising
subsidiaries (other than Ramada) have entered into international master
licensing agreements for part or all of 46 countries on six continents. The
agreements typically include minimum development requirements and require an
initial development fee upon execution of the license agreement as well as
recurring franchise fees.
PRINCIPAL LODGING FRANCHISE SYSTEMS. The following is a summary
description of the Company's principal lodging franchise systems. Information
reflects properties which are open and operating and is presented as of
December 31, 1997.
PRIMARY MARKET AVG. ROOMS DOMESTIC
BRAND SERVED PER PROPERTY # OF PROPERTIES # OF ROOMS INTERNATIONAL *
- -------------- -------------- -------------- --------------- ------------ ----------------
Days Inn Lower Economy 91 1,761 159,400 International(1)
Howard Johnson Mid-market 108 483 51,944 International(2)
Knights Inn Lower Economy 83 190 15,771 International(3)
Ramada Mid-market 135 885 119,132 Domestic
Super 8 Economy 61 1,630 100,166 International(3)
Travelodge Upper Economy 81 479 39,030 Domestic(1)(5)
Villager Lodge Lower Economy 77 82 6,339 International(4)
Wingate Mid-market 94 19 1,790 International(4)
- ------------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, Israel, China, South Africa and
India.
(2) Includes Mexico, Canada, Columbia, Israel, Japan, Venezeula and Malta.
(3) Includes properties in Canada.
(4) No international properties currently open and operating.
(5) Rights include all of North America.
OPERATIONS -- LODGING. The Company's organization is designed to provide a
high level of service to its franchisees while maintaining a controlled level
of overhead expense. In the lodging segment, expenses related to marketing
and reservations services are budgeted to match marketing and reservation
fees each year.
National 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. Each of the Company's reservations 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
the Company's franchise systems and there is no "cross selling" of franchise
systems. The Company maintains 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. Generally, reservation agents for each of the franchise systems are
located in at least
11
two of the Company's seven facilities, thereby ensuring continuous service in
the event of a power failure or telephone line interruption occurring at any
one of the locations. The Company currently intends to establish a call
center in Cork, Ireland to serve franchisee's hotels in Europe.
Brand Name Marketing Programs. The Company's brand name marketing programs
seek to increase the traveling public's awareness of the Company's franchise
systems and thereby to increase franchisee property occupancy rates and
revenues. To achieve this objective, each of the franchise systems' programs
is managed by its own staff, who develop the marketing strategy for the
system and report to the brand president. A central corporate marketing
services department implements the strategy.
The marketing services department publishes hotel directories for each
franchise system, conducts market research and produces artwork for national
and regional advertising programs. In addition, the marketing services
department works with the independent advertising agencies that have been
retained for each franchise system. These advertising agencies produce
television, radio and print advertising and assist in placing advertisements
in the media.
Quality Assurance. The Company believes that franchisees have a high level
of interest in the degree to which the quality of fellow franchise operators
is monitored, both upon admission to the system and on an ongoing basis.
Franchise quality control occurs through inspections at the time of
application, upon entry into the system and on an ongoing basis through
quality assurance programs. Quality assurance programs promote uniformity
within the franchise system, an important marketing factor with respect to
increasing consumer demand for lodging facilities. These programs consist of
generally unannounced inspections of properties (two to four times a year) by
inspectors who are rotated through franchise system properties to promote
consistent grading standards. Properties proposed to be converted to one of
the Company's franchise systems are inspected by the Company's most
experienced inspectors, who are dedicated specifically to this function and
who prepare specific renovation schedules to which the potential franchisees
are required to adhere. These specialists report to the Senior Vice President
of Operations -- Hotel Division rather than to the sales personnel proposing
the property. As of December 31, 1997, the Company employed 82 persons in the
quality assurance department.
Various brand-specific quality assurance initiatives are designed to
encourage compliance. The Company has instituted certain financial incentive
programs to encourage franchisees to improve their properties. Approximately
13% of the franchisee properties are in quality assurance default at any
time, with many defaults due to operating standards issues (e.g., failure to
attend training programs, outdated signage, logo violations, etc.). In
general, franchisees are given 30 days to correct the conditions that led to
default or implement a plan to correct the default. If the default is not
cured in a timely fashion, the Company has the right to terminate the
defaulting franchisee's franchise agreement and realize a termination fee.
Training. Each of the Company's franchise systems has a training
department which conducts both mandatory and optional training programs.
These departments are staffed by experienced Company employees who conduct
regularly scheduled regional educational seminars for both non-management and
property level management personnel. Training programs are designed to teach
franchisees how to utilize best the Company's reservations system and
marketing programs, as well as the fundamentals of hotel operations such as
recruiting, housekeeping and yield management. The Company also provides
special on-site training upon request. The Company has developed and
maintains a library of training videos, cassettes and tapes, as well as
printed training material, which are available to franchisees. The Company
also employs Property Opening Specialists who help the property staff become
acclimated when their property enters a franchise system.
Purchasing. Through its Cendant Supplier Services operation, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in lodging operations. In addition
to the preferred alliance programs described hereinafter, Cendant Supplier
Services establishes relationships with lodging industry vendors and
negotiates discounts for purchases by its customers. The Company does 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.
12
Franchise Services. In all of its operations, the Company emphasizes
service to its franchisees. This emphasis is exemplified by the franchise
services department which is comprised of 48 persons with extensive
experience in the lodging industry, who are available to respond to inquiries
by franchisees. Each franchisee is assigned a franchise service manager who
is available via a toll-free telephone number. After each communication with
a franchisee, the franchise service manager prepares a contact report which
is circulated within the Company to the departments responsible for
responding to the inquiry.
LODGING FRANCHISE AGREEMENTS. The Company's lodging franchise agreements
grant the right to utilize one of the brand names associated with the
Company's lodging franchise systems to lodging facility owners or operators
under long-term franchise agreements. An annual average of 2.7% of the
Company's existing franchise agreements are scheduled to expire from January
1, 1998 through December 31, 2006, with no more than 3.6% (in 2002) scheduled
to expire in any one of those years.
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 of between $15,000 and $35,000 based on property size and type,
as well as annual 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, 1997, 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%. The
Company discounts fees from the standard rates from time to time and under
certain circumstances.
The Company's typical franchise agreement is terminable by the Company
upon the franchisee's failure to maintain certain quality standards or to pay
franchise fees or other charges. In the event of such termination, the
Company is typically entitled to be compensated for lost revenues 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.
LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY. The service marks
"Days Inn," "Ramada," "Howard Johnson", "Super 8" and "Travelodge" and
related logos are material to the Company's business. The Company, through
its franchisees, actively uses 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
relating to the Days Inn system, the Howard Johnson system, the Knights Inn
system, the Super 8 system, the Travelodge system (in North America) and the
Villager Lodge system are owned by the Company through its subsidiaries. The
marks relating to the Wingate Inn system are owned by a limited partnership,
of which a subsidiary of the Company is the general partner.
The Company franchises the service mark "Ramada" and related marks, 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"), a wholly-owned
subsidiary of the Company. 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 royalties calculated on the
basis of percentages of annual gross room sales, subject to certain minimums
and maximums as specified in each Ramada License Agreement. Such royalties
approximate $44 million for 1997.
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 the Company of a minimum net worth of $50 million
(however, this minimum net worth requirement may be satisfied by a guaranty
of an affiliate of the Company with a net worth of at least $50 million or by
an irrevocable letter of credit (or similar
13
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 stream from franchising the
Ramada brand names and could result in the payment by the Company of
liquidated damages equal to three years of license fees. The Company does not
believe that it 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. The Company's 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, Hampton 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. The Company's Knights Inn and
Thriftlodge 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.
The Company believes 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. The Company believes 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. The
Company also believes 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 the Company's lodging franchisees to compete in the lodging
industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross room revenue, the
Company's 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 the Company's results of operations is substantially reduced by
virtue of the diverse geographical locations of the Company's franchises. At
December 31, 1997, the Company had franchised lodging properties in North
America (including all 50 states of the United States), Europe, Asia, Africa
and South America.
LODGING SEASONALITY. The principal source of lodging revenue for the
Company is based upon the annual gross room revenue of franchised properties.
As a result, the Company's 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 effort on the franchisee's annual performance and effect
the Company's annual performance.
THE TIMESHARE EXCHANGE BUSINESS
GENERAL. The Company acquired Resort Condominiums International, Inc. (now
Resort Condominiums International, LLC), on November 12, 1996. RCI is the
world's largest provider of timeshare vacation exchange opportunities and
timeshare services for nearly 2.4 million timeshare households from more than
200 nations and more than 3,200 resorts in 90 countries around the world.
RCI's business consists primarily of the operation of an exchange program for
owners of condominium timeshares or
14
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 3,500 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.
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 $10,000,
plus a yearly maintenance fee of approximately $350 per interval owned. Based
upon information published about the industry, the Company believes that 1997
sales of timeshares exceeded $6 billion worldwide. Two principal segments
make up the timeshare exchange industry: owners of timeshare interests
(consumers) and resort properties (developers/operators). Industry sources
have estimated that the total number of owner households of timeshare
interests is nearly 4 million worldwide, while the total number of timeshare
resorts worldwide has been estimated to be more than 4,500. The timeshare
exchange industry derives revenue from annual 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 1.2 million members of the RCI Network,
representing approximately 50% of the total members of the RCI Network reside
outside of the United States. RCI's membership volume has grown at a compound
annual rate for the last five years of approximately 8%, while exchange
volumes have grown at a compound annual rate of approximately 10% for the
same time period.
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 1997, members in the United States paid an average
annual membership fee of $65 as well as an average exchange fee of $107 for
every exchange arranged by RCI. In 1997, membership and exchange fees totaled
approximately $300 million and RCI arranged more than 1.8 million exchanges.
Developers of resorts affiliated with the RCI Network typically pay the
first year membership fee for new members upon the sale of the timeshare
interest. In the United States, nearly 60% of such owners renew their
memberships in their second year and nearly 80% of these owners renew each
year thereafter.
TIMESHARE EXCHANGE BUSINESS GROWTH. The timeshare exchange industry has
experienced significant growth over the past decade. The Company believes
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. The Company believes that future growth
of the timeshare exchange industry will be determined by general economic
conditions both in the U.S. and worldwide, the
15
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, the Company cannot
predict if future growth trends will continue at rates comparable to those of
the recent past.
OPERATIONS. The Company's 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 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 20 countries throughout the
world. These call centers are staffed by approximately 2,000 people. Major
regional call and information support centers are located in Indianapolis,
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.
Quality Assurance. Members have a high level of interest in the quality of
their home resorts and other resorts within the exchange system. Quality
control of affiliated resorts occurs through inspections at the time of
application, unannounced inspections and visits by Company personnel, and
comment card feedback from members exchanging into each resort. Resorts
meeting certain quality measures are given special recognition through RCI's
Gold Crown Resort and Resorts of International Distinction award programs.
RESORT SERVICES. Resort Affiliations. Growth of the timeshare business is
dependent on the sale of timeshare units by affiliated resorts. RCI
affiliates international brand names and independent developers, owners'
associations and vacation clubs. The Company believes 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. The Company
also believes 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.
Sales Support Services. Exchange services are considered to be an
essential component of timeshare ownership. In fact, exchange is one of the
primary reasons given for purchasing timeshare. RCI provides a wide variety
of sales and marketing materials to assist its affiliated resorts in selling
more efficiently and effectively. These include videos explaining the concept
of timesharing and exchange, interactive multi-media sales tools, wall
displays customized for the resort, a wide variety of promotional brochures,
travel services, purchasing discounts and the Endless Vacation Special Resort
Edition Directory which includes photos and/or summary information for all
RCI-affiliated resorts. In addition, RCI uses state-of-the-art database
marketing techniques to identify highly qualified sales prospects for its
resort affiliates.
16
Advertising. RCI provides many advertising opportunities in its member and
developer focused publications, as well as through its site on the Internet
World Wide Web at http://www.rci.com.
Timeshare Consulting. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). 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. The
Company's RCC Premier information management software is believed to be the
only technology available today 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 3,200 timeshare
resorts are affiliated with the RCI Network, of which nearly 1,300 resorts
are located in the United States and Canada, more than 1,200 in Europe and
Africa, more than 450 in Mexico and Latin America, and nearly 300 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 member of RCI, license the affiliated resort to
use the RCI name and marks 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 or six years, and automatically
renew thereafter for terms of one to six years 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 marks 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. The marks used in RCI's business
are owned by the Company.
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.
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 a wholly-owned
subsidiary of the Company, and a few other smaller firms. Based upon industry
sources, the Company believes that 98% of the more than 4,500 timeshare
resorts in the world are affiliated with either RCI or Interval. Based upon
1997 published statistics and Company information, RCI has nearly 2.4 million
timeshare households that are members, while Interval has 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
17
transactions. RCI is bound by the terms of a proposed Consent Order issued by
the Federal Trade Commission which restricts the right of RCI to solicit,
induce, or attempt to induce clients of Interval International Inc. to either
terminate or not to renew their existing Interval contracts. The proposed
Consent Order contains certain other restrictions. The restrictions generally
expire on or before December 17, 1999.
AVIS CAR RENTAL FRANCHISE BUSINESS
GENERAL. On October 17, 1996, the Company 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 its previously announced plan, on
September 24, 1997, the Company completed the initial public offering ("IPO")
of the subsidiary, Avis Rent A Car, Inc. ("ARAC"), which owned and operated
the company-owned Avis car rental operations. The Company currently owns
approximately 20% of the outstanding Common Stock of ARAC. The Company no
longer operates any car rental locations but owns the Avis brand name and the
Avis System, which it licenses to its 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 378,000 vehicles during the peak season, all of which are
granted by franchisees. Approximately 87% 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
Asian 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. 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 website; 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 communica-
18
tions. 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 "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; a flight arrival notification system that
alerts the Company's rental location when flights have arrived so
that vehicles can be assigned and paperwork prepared automatically;
o "Flight Check," a system that provides flight arrival and departure
times and the next three available flights to the Roving Rapid Return
terminals and Wizard System terminals;
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.
In 1997, the Wizard System processed approximately 30.8 million incoming
customer calls, during which customers inquired about locations, rates and
availability and placed or modified reservations. In addition, millions of
inquiries and 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 the Company's business. The Company, through its subsidiaries, joint
ventures and licensees, actively uses 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. The marks
used in Avis's business are owned by the Company through its subsidiaries.
The purposes for which the Company is 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. The Company has 73 independent licensees
which operate locations in the United States. The largest licensee, ARAC,
accounts for approximately 87% of all United States licensees' rentals. Other
than ARAC, certain licensees in the United States pay the Company a fee equal
to 5% of their total time and mileage charges, less all customer discounts,
of which the Company is required to pay 40% for corporate licensee-related
programs, while 17 licensees pay 8% of their gross revenue. Licensees
outside the United States normally pay higher fees. Most of the Company's
United States licensees currently pay 50 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 the Company 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 0.1% per
year commencing in 1999 and in each of the
19
following four 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 paid-up 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 annual royalties to the
Company for Africa and a defined portion of Asia which covers the area
between 60|SD longitude and 150|SD 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 the Company
under which Avis Europe became a preferred alliance provider for car rentals
to RCI customers in Europe, Asia and Africa, and for car rentals to PHH
customers needing replacement vehicles for fleets managed by PHH 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 the Company. 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 could have a material adverse effect on the franchisee's annual
performance and affect the Company's 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 MANAGEMENT SERVICES BUSINESS
Fleet Management Services. The Company, through PHH Vehicle Management
Services Corporation ("VMS"), is a provider of fully integrated fleet
management services principally to corporate clients and government agencies
comprising over 600,000 units under management on a worldwide basis. These
services include vehicle leasing, advisory services and fleet management
services for a broad range of vehicle fleets. Advisory services include fleet
policy analysis and recommendations, benchmarking, and vehicle
recommendations and specifications. In addition, VMS provides managerial
services which include 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 remarketing used vehicles. VMS offers various
leasing plans for its vehicle leasing programs, financed primarily through
the issuance of commercial paper and medium-term notes and through unsecured
borrowings under revolving credit agreements and bank lines of credit.
Fuel and Expense Management Programs. VMS also offers fuel and expense
management programs to corporations and government agencies for the effective
management and control of automotive business travel expenses. By utilizing
the VMS service card issued under the fuel and expense management programs, a
client's representatives are able to purchase various products and services
such as gasoline, tires, batteries, glass and maintenance services at
numerous outlets.
The Company also provides a fuel and expense management program and a
centralized billing service for companies operating truck fleets in each of
the United Kingdom, Republic of Ireland and
20
Germany. Drivers of the clients' trucks are furnished with courtesy cards
together with a directory listing the names of strategically located truck
stops and service stations which participate in this program. Service fees
are earned for billing, collection and record keeping services and for
assuming credit risk. These fees are paid by the truck stop or service
stations and/or the fleet operator and are based upon the total dollar amount
of fuel purchased or the number of transactions processed.
Other. Wright Express Corporation, a wholly-owned subsidiary of the
Company acquired as part of the Ideon acquisition, is a provider of
information processing, management and financial services to petroleum
companies and transportation fleets in North America. The Wright Express
Universal Fleet Card is the nation's most widely accepted electronic fleet
fueling credit card and is accepted at over 120,000 fueling locations.
Competitive Conditions. The principal factors for competition in vehicle
management services are service quality and price. In the United States and
Canada, an estimated 30% of the market for vehicle management services is
served by third-party providers. There are 5 major providers of such services
in North America, as well as an estimated several hundred local and regional
competitors. The Company is the second largest provider of comprehensive
vehicle management services in North America. In the United Kingdom, the
Company is the market leader for fuel and fleet management services. Numerous
local and regional competitors serve each such market element.
CLASSIFIED ADVERTISING BUSINESS
GENERAL. On October 2, 1997, the Company completed the acquisition of
Hebdo Mag International Inc. ("Hebdo Mag"), an international 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. Through Hebdo Mag, the Company is involved in the
publication, printing and distribution, via print and electronic media, of
branded classified advertising information products. The Company has also
expanded into other related business activities, including the distribution
of third-party services and classified advertising web sites.
The Company publishes over 11 million advertisements per year in over 180
publications. With a total annual circulation of over 85 million, management
estimates the Company's publications are read by over 200 million people.
Unlike newspapers which contain significant editorial content, the Company's
publications contain primarily classified and display advertisements. These
advertisements target buyers and sellers of goods and services in the markets
for used and new cars, trucks, boats, real estate, computers, second-hand
general merchandise and employment as well as personals.
The Company owns leading local classified advertising publishing
franchises in most of the regional markets where it has a presence. In
addition to its print titles, Hebdo Mag generates revenues by distributing
third-party services related to its classified business such as vehicle
financing, vehicle and life insurance and warranty protection.
INDUSTRY. The classified advertising information industry is highly
fragmented, with a large number of small, independent companies publishing
local or regional titles. Hebdo Mag is the only major company focused
exclusively on this industry on an international basis. In most of its major
markets, the Company owns leading classified advertising franchises which
have long standing, recognized reputations with readers and advertisers.
Among the Company's leading titles, many of which have been in existence for
over 15 years, are: La Centrale des Particuliers (France) - 1969, Expressz
(Hungary) - 1986, The Trader (Indianapolis) - 1969, Traders Post (Nashville)
- - 1972, Car News (Taiwan) - 1991, Secondamano (Italy) - 1977, Auto Trader
- - 1978, Renters News - 1998, The Computer Paper (Canada) - 1989, Iz Ruk v Ruki
(Russia) - 1992, Gula Tidningen (Sweden) - 1981, Segundamano (Argentina) and
The Melbourne Trading Post (Australia) - 1966.
PRINCIPAL PRODUCTS. Print Publications. Depending on the size and maturity
of the markets served by Hebdo Mag's publications, the range of products
covered can vary greatly. In some markets the Company has a single title that
carries information on a broad range of consumer goods and services while in
other markets the Company has a number of titles, each of which covers a very
specific product area. As regional demands and market opportunities dictate,
the Company seeks to strengthen its position in
21
a market by developing a broad offering of targeted classified publications.
As an example, the Company has already segmented some of its vehicle
publications in North America into new and used, car, truck, recreational
vehicle, motorcycle and agricultural equipment titles.
Depending on the local market and the products targeted by each title, the
Company's publications fall into three general revenue generating models:
1. Paid ad papers in which both the individual and commercial "display"
ads are paid for as well as having paid circulation. Examples include
Auto Trader (Canada), La Centrale des Particuliers (France), Truck
Trader (Canada), and Expressz (Hungary).
2. Free ad papers in which the individual classified ads are free and
commercial "display" ads, are paid for, with paid circulation. Examples
include Secondamano (Italy), Buy & Sell (Canada), Gula Tidningen
(Sweden) and Iz Ruk v Ruki (Russia).
3. Free distribution papers in which the ads, typically commercial
classified and "display" ads, are paid for and the paper is distributed
without charge to free-standing racks at targeted locations. Examples
include Renters News, Immobilier Hebdo and Condo Guide (Canada) and
Zart New Homes Guide (Indianapolis).
In addition to these three principal types of publications, Hebdo Mag has
more recently introduced free distribution papers with limited editorial
content such as its local computer and sports papers. These papers enable the
Company to broaden its audience reach and thereby further strengthen its
local market position without significant incremental cost. Hebdo Mag has
plans to expand these publications by launching local editions of both its
Computer Papers and Metro Sports papers in many of its existing markets.
Because of the broad mix of the types of classified publications published
by Hebdo Mag, it has a diversified revenue mix. In 1997, Hebdo Mag's
classified advertisements represented 29% of its revenues, commercial display
advertisements 37%, circulation 31%, and printing, royalties and other
services 3%. Hebdo Mag is not dependent on any one publication, with the
Company's largest publication, La Centrale des Particuliers ("La Centrale"),
representing only 11% of revenues in 1997. Hebdo Mag is diversified
geographically with 63% of 1997 revenues coming from Europe, 23% coming from
Canada, 10% coming from the United States and 4% coming from Asia. Hebdo Mag
is also diversified across the products sold in its publications such as
automobiles, real estate and general merchandise.
COMPETITION. Specialized classified publications compete locally with
daily newspapers, and in some segments, with free shoppers and other
classified publications. The competition is both for the content -the
advertisement, and for the consumer of that content -the reader.
TAX-FREE SHOPPING BUSINESS
Through a subsidiary, Europe Tax-Free Shopping ("ETS") (to be renamed
"Global Refund"), the Company assists travelers to receive valued-added tax
("VAT") refunds in over 30 countries, including the United Kingdom, Germany,
Italy and France. ETS is the world's leading VAT refund service, with over
125,000 affiliated retailers and seven million transactions per year. ETS
operates over 400 cash refund offices at international airports and other
major points of departure and arrival worldwide. The Company plans to expand
the services ETS provides to travelers to include Entertainment(Registered
Trademark) coupon book memberships and the Travelers Advantage(Registered
Trademark) memberships.
REAL ESTATE SERVICES
REAL ESTATE BROKERAGE FRANCHISE BUSINESS
GENERAL. In August 1995, the Company acquired Century 21 Real Estate
Corporation ("Century 21"), the world's largest franchisor of residential
real estate brokerage offices with approximately 6,300 independently owned
and operated franchised offices with approximately 110,000 sales agents
worldwide. In February 1996, the Company acquired the ERA franchise system.
The ERA system is the fourth
22
largest residential real estate brokerage franchise system with over 2,500
independently owned and operated franchised offices and more than 30,000
sales agents worldwide. In May 1996, the Company acquired Coldwell Banker
Corporation ("Coldwell Banker"), the owner of the world's premier brand for
the sale of million-dollar-plus homes and the third largest residential real
estate brokerage franchise system with approximately 2,800 independently
owned and operated franchised offices and approximately 61,000 sales agents
worldwide.
The Company believes that application of its franchisee focused management
strategies and techniques can significantly increase the revenues produced by
its real estate brokerage franchise systems while also increasing the quality
and quantity of services provided to franchisees. The Company believes 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 home buyers 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, the Company implemented a preferred alliance program which
seeks to capitalize on the dollar volume of home sales brokered by CENTURY
21, Coldwell Banker and ERA agents and the valuable access point these
brokerage offices provide for service providers who wish to reach these home
buyers and sellers. Preferred alliance marketers include providers of
property and casualty insurance, moving and storage services, mortgage and
title insurance, environmental testing services, and sellers of furniture,
fixtures and other household goods.
The Company's real estate brokerage franchisees are dispersed
geographically, which minimizes the exposure to any one broker or geographic
region. During 1997, the Company acquired an 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
September 1997. NRT has also acquired other independent regional real estate
brokerage businesses during 1997 which NRT has converted to Coldwell Banker,
CENTURY 21 and ERA franchises. As a result, NRT is the largest franchisee of
the Company's franchise systems representing 4% of the franchised offices. Of
the more than 11,700 franchised offices in the Company's real estate
brokerage franchise systems, no individual broker, other than NRT, accounts
for more than 1% of the Company's real estate brokerage services.
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
110,000 sales agents located in 20 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 1997, approximately 12% 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 1997, the NAF spent approximately $37 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 approximately 2,800 independently owned and
operated franchise offices in the United States, Canada and Puerto Rico, with
approximately 61,000 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
23
Banker franchisees pay annual fees to the Company consisting of ongoing
service and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenues (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 1997, approximately 24% of Coldwell Banker franchisees qualified
for PPA payments and such payments aggregated approximately 1% of gross
commissions.
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 1997, Coldwell Banker expended approximately $19
million for such purposes.
ERA. The ERA franchise system is the fourth largest residential real
estate brokerage franchise system in the world, with more than 2,500
independently owned and operated franchise offices, with more than 30,000
sales agents located in 15 countries. The primary revenue from the ERA
franchise system results from (i) franchisees' payments of monthly membership
fees ranging from $213 to $839 per month, based on volume, plus per
transaction fees of approximately $119, and (ii) for franchise agreements
entered into after January 1, 1998, royalty fees equal to 6% of the
franchisees' gross revenues. For franchise agreements dated after January 1,
1998, 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 $229 to $918,
based on volume, plus an additional $229 per month for each branch office,
into the ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise
agreements entered into after January 1, 1998, an NMF equal to 2% of the
franchisees' gross revenues, subject to minimums and maximums. The Company
utilizes the funds in the ERA NMF for local, regional and national marketing
activities, including media purchases and production, direct mail and
promotional activities and other marketing efforts. In 1997, the ERA NMF
spent approximately $9 million on marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES. The Company markets 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. The Company believes that its
existing franchisee base represents another source of potential growth, as
franchisees seek to expand their existing business to additional markets.
Therefore, the Company's sales strategy focuses on maintaining satisfaction
and enhancing the value of the relationship between the franchisor and the
franchisee.
The Company's real estate brokerage franchise systems employ a national
franchise sales force consisting of approximately 123 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.
OPERATIONS -- REAL ESTATE BROKERAGE. The Company's brand name marketing
programs for the real estate brokerage business focus on increasing brand
awareness generally, in order to increase the likelihood of potential home
buyers 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 which 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
24
optional training programs which expand upon such instruction. Each brand's
training department is staffed with instructors experienced in both real
estate practice and instruction. In addition, the Company has 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 its Cendant Supplier Services operations, the Company provides its
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. The Company does 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. The Company's real estate
brokerage franchise agreements grant the franchises the right to utilize one
of the brand names associated with the Company's real estate brokerage
franchise systems to real estate brokers under franchise agreements.
The current standard franchise agreement for the CENTURY 21 system
provides for a 10-year term (prior to October 1995, agreements provided for
five-year terms). Franchise agreements generally require, among other
obligations, that franchisees pay annual fees comprised of royalty fees and
National Advertising Fund fees which are generally 6% and 2%, respectively,
of gross commissions on closed transactions (subject to minimums and maximums
or advertising fees). See "CENTURY 21" above. The marketing fee is
brand-specific national and local media advertising and promotion. In
addition, the CENTURY 21 agreements provide for the payment of the CIB to
qualified franchisees who meet certain levels of annual gross revenue (as
defined in the franchise agreements).
Coldwell Banker franchise agreements generally have a term of seven to ten
years for which franchisees pay annual fees consisting of ongoing service and
advertising fees, which are generally 6.0% and 2.5%, respectively, of a
franchisee's annual gross revenues (subject to minimums and maximums on
advertising fees and subject to annual rebates to franchisees who achieve
certain threshold levels of gross commission revenue annually). See "Coldwell
Banker" above. In return for payment of the franchise fees, the Company
provides Coldwell Banker franchisees access to the Coldwell Banker name and
systems and the combined market presence of all its franchised offices.
The current form of the franchise agreement for the ERA system provides
for a term of 10 years. New ERA franchisees pay royalty fees and advertising
fees of 6.0% and 2.0% respectively on annual gross revenue. Prior to 1997,
ERA agreements provided for franchisees to pay monthly membership fees and
marketing fees at fixed rates determined by gross annual volume of real
estate sales, and a per transaction charge of approximately $119. See "ERA"
above.
The Company's current form of franchise agreement for all real estate
brokerage brands is terminable by the Company for the franchisee's failure to
pay fees thereunder or other charges or for other material default under the
franchise agreement. In the event of such termination, the agreement
generally provides that the Company is 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.
REAL ESTATE BROKERAGE SERVICE MARKS. The service marks "CENTURY 21,"
"Coldwell Banker," and "ERA" and related logos are material to the Company's
business. The Company, through its franchisees, actively uses 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 the Company through its subsidiaries.
25
COMPETITION. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors
of the Company's real estate brokerage franchise systems are the RE/MAX,
Better Homes & Gardens and Prudential 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.
The Company believes 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. The Company also believes 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 the Company's real estate brokerage franchisees to compete
in the industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross commissions or volume,
the Company's 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 the
Company's results of operations is substantially reduced by virtue of the
diverse geographical locations of the Company's franchises. At December 31,
1997, the combined real estate franchise systems had more than 8,600
franchised brokerage offices in the United States and more than 11,700
offices worldwide. The real estate franchise systems have offices in 23
countries and territories in North America, Europe, Asia, Africa and
Australia.
SEASONALITY. The principal sources of real estate segment revenue for the
Company 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, the Company's revenue from the real
estate brokerage segment of its business is less in the first calendar
quarter of each year.
RELOCATION SERVICES BUSINESS
Cendant Mobility Services Corporation ("Cendant Mobility"), a wholly owned
subsidiary of the Company, is the largest provider of employee relocation
services in the world. The employee relocation business offers relocation
clients a variety of services in connection with the transfer of its clients'
employees. At December 31, 1997, Cendant Mobility employed approximately
2,720 people in its relocation business at its corporate office and five
regional offices.
The relocation services provided to customers of Cendant Mobility include
primarily appraisal, inspection and selling of transferees' homes, equity
advances (guaranteed by the corporate customer), purchase of a home which is
not sold for at least a price determined on the appraised value within a
specified time period, certain home management services, assistance in
locating a new home at the transferee's destination, consulting services and
other related services.
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 by one of the
Company's relocation subsidiaries. Corporate clients also pay a fee for the
services performed. Another source of revenue for the Company is interest on
the equity advances. As a result of the obligations of corporate clients to
pay the losses and guarantee repayment of equity advances, the exposure of
the Company on such items is limited to the credit risk of the corporate
clients of its relocation businesses and not on the potential changes in
value of residential real estate. The Company believes such risk is minimal,
due to the credit quality of the corporate, government and affinity clients
of its relocation subsidiaries.
Competitive Conditions. The principal methods of competition within
relocation services are service quality and price. In each of the United
States and Canada, there are two major national providers of such services.
The Company is the market leader in the United States and Canada, and third
in the United Kingdom.
26
MORTGAGE BANKING SERVICES BUSINESS
The Company, through Cendant Mortgage Corporation, is the eleventh largest
originator of residential first mortgage loans in the United States as
reported by Inside Mortgage Finance in 1997. Cendant Mortgage offers services
consisting of the origination, sale and servicing of residential first
mortgage loans. A variety of first mortgage products are marketed to
consumers through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms and other mortgage banks. Cendant
Mortgage is a centralized mortgage lender conducting its business in all 50
states. 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 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.
Competitive Conditions. The principal methods of competition in mortgage
banking services are service, quality and price. There are an estimated
20,000 national, regional or local providers of mortgage banking services
across the United States.
OTHER REAL ESTATE SERVICES
Welcome Wagon International, Inc. ("Welcome Wagon"), a wholly-owned
subsidiary of the Company, has over 2,500 field representatives who visit
households and campuses each year to provide consumers with discounts for
local merchants. Getko Group Inc. ("Getko"), a wholly-owned subsidiary of the
Company, distributes complimentary welcoming packages which provide new
homeowners throughout the United States and Canada with discounts for local
merchants. The Company plans to expand Welcome Wagon's and Getko's market
penetration and the number of their membership offerings to include some of
the Company's programs.
COMBINED OPERATIONS
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS
The Company believes a significant portion of its revenue growth
opportunities will arise from its ability to capitalize on the significant
and increasing amount of aggregate purchasing power and marketing outlets
represented by the businesses in the Company's business units. The Company
initially tapped the potential of these synergies within the lodging
franchise systems in 1993 when it launched its Preferred Alliance Program,
under which hotel industry vendors provide significant discounts, commissions
and co-marketing revenue to hotel franchisees plus preferred alliance fees to
the Company in exchange for being designated as the preferred provider of
goods or services to the owners of the Company's franchised hotels or the
preferred marketer of goods and services to the millions of hotel guests who
stay in the hotels and customers of the real estate brokerage offices each
year.
The Company currently participates in preferred alliance relationships
with more than 90 companies, including AT&T, ADT Security Systems, Aon,
Kodak, VISA U.S.A., Office Depot and Coca-Cola. Fees to the Company from
these contracts have increased from $6.5 million in 1993 to $77.5 million in
1997. 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. Revenue received by
the Company pursuant to the preferred alliance arrangements has been a
significant source of increases in "Other income" in the Company's statement
of operations for 1997 compared to 1996.
OTHER BUSINESSES
TAX PREPARATION BUSINESS. In January 1998, the Company acquired Jackson
Hewitt, the second largest tax preparation service in the United States, with
a 43-state network comprised of approximately
27
2,000 offices operating under the trade name "Jackson Hewitt Tax Service"
during the 1997 tax season. The Company believes that the application of its
focused management strategies and techniques for franchise systems to the
Jackson Hewitt network can significantly increase revenues produced by the
Jackson Hewitt franchise system while also increasing the quality and
quantity of services provided to franchisees.
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, the
Company is engaged in the preparation and electronic filing of federal and
state individual income tax returns (collectively referred to as "tax
returns"). During 1997, Jackson Hewitt prepared approximately 875,000 tax
returns, which represented an increase of 21% from the approximately 722,000
tax returns it prepared during 1996. To complement its tax preparation
services, the Company also offers accelerated check requests and refund
anticipation loans to its tax preparation customers.
SOFTWARE. The Company also offers consumer software in various multimedia
forms, predominately on CD-ROM for personal computers. The Company's Cendant
Software unit is one of the largest personal computer consumer software
groups in the world, and a leader in entertainment and educational software.
It includes Sierra On-Line, Inc., Davidson & Associates, Inc., Blizzard
Entertainment and Knowledge Adventure, Inc., and offers such titles as
Diablo, Warcraft, You Don't Know Jack, King's Quest, JumpStart, Math Blaster,
Reading Blaster and many others. These products are offered through a variety
of distribution channels, including specialty retailers, mass merchandisers,
discounters and schools.
The entertainment, education and productivity software industry is
competitive. The Company competes primarily with other developers of
multimedia PC based software. Products in the market compete primarily on the
basis of subjective factors such as entertainment value and objective factors
such as price, graphics and sound quality. Large diversified entertainment,
cable and telecommunications companies, in addition to large software
companies, are increasing their focus on the interactive entertainment and
education software market, which will result in greater competition for the
Company.
The Company's software segment has seasonal elements. Revenues are
typically highest during the third and fourth quarters and lowest during the
first and second quarters. This seasonal pattern is due primarily to the
increased demand for the Company's products during the holiday season.
INFORMATION TECHNOLOGY SERVICES. WizCom International, Ltd ("WizCom"), a
wholly owned indirect subsidiary of the Company, 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.
CREDIT INFORMATION BUSINESS. In 1995, the Company acquired Central Credit
Inc. ("CCI"), a gambling patron credit information business. CCI maintains a
database of information provided by casinos regarding the credit records of
casino gaming patrons, and provides, for a fee, such information and related
services to its customers, which primarily consist of casinos.
FINANCIAL PRODUCTS. Essex Corporation ("Essex"), a subsidiary of the
Company, is a third-party marketer of financial products for banks, primarily
marketing annuities, mutual funds and insurance products through financial
institutions. Essex generally markets 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 distributes generally entitle
Essex to a commission of slightly less than 1% on the premiums generated
through Essex's sale of annuities for these insurance companies.
MUTUAL FUNDS. In August 1997, the Company formed a joint venture with
Frederick R. Kobrick, a longtime mutual fund manager, to form a mutual fund
company known as Kobrick-Cendant Funds, Inc. ("Kobrick-Cendant").
Kobrick-Cendant currently offers two no-load funds, Kobrick-Cendant Capital
Fund and Kobrick-Cendant Emerging Growth Fund.
28
REGULATION
Membership Service Regulation. The Company markets its products and
services through a number of distribution channels including telemarketing,
direct mail and on-line. These channels are regulated on the state and
federal level and the Company believes that these activities will
increasingly be subject to such regulation. Such regulation may limit the
Company's ability to solicit new members or to offer one or more products or
services to existing members and may materially affect the Company's business
and revenues.
Certain of the Company's products and services (such as Buyers
Advantage(Registered Trademark) and, certain insurance products related to
the Internet) are also subject to state and local regulations. The Company
believes that such regulations do not have a material impact on its business
or revenues.
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. 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 the Company's franchising operations have not been
materially adversely affected by such existing regulation, the Company cannot
predict the effect of any future legislation or regulation.
Real Estate Regulation. The federal Real Estate Settlement Procedures Act
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 the Company's
real estate brokerage franchisees, mortgage business and relocation business.
The Company's 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.
Timeshare Exchange Regulation. The Company's 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, the Company is subject to state statutes in
those states regulating timeshare exchange services, and must prepare and
file annually, with regulators in states which require it, the "RCI
Disclosure Guide to Vacation Exchange". The Company is 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 the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 34,000 persons
full time. Management considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located in a building
owned by the Company and situated at 6 Sylvan Way, Parsippany, New Jersey
07054. The CUC division's principal offices are located in Stamford,
Connecticut.
The Membership Services Division has three owned buildings that are
located in Miami, Florida; Cheyenne, Wyoming and Westbury, New York. The
Membership Services Division leases space for several of its call centers in
Aurora, Colorado; Westerville, Ohio; Brentwood, Tennessee; Nashville,
Tennessee; Houston and Arlington, Texas; San Carlos, California and Hunt
Valley, Maryland pursuant to leases that expire in 2000, 2005, 2002, 2004,
2000, 2004, and 2003, respectively. Also, the Membership Services Division
has approximately 145 leased office spaces located in various countries
outside the United States.
29
The Real Estate Services Division has two owned buildings in Mission
Viejo, California and one owned internationally in Swindon, UK. The Real
Estate Services Division has leased properties located in Norwalk, Connecticut;
Danbury, Connecticut; Oak Brook, Illinois; Troy, Michigan; Mount Laurel, New
Jersey and Itasca, Illinois, pursuant to leases that expire in 1999, 2000,
2003, 2004, 2001, and 2008, respectively.
The Travel Services Division owns two properties, a 166,000 facility in
Virginia Beach, Virginia which serves as a satellite administrative and
reservations facility for Wizcom and ARAC, and a property located in
Kettering, Europe. The Travel Services Division also leases space for its
reservations centers and data warehouse in Winner and Aberdeen, South Dakota;
Phoenix, Arizona; Garden City, New York; Knoxville, Tennessee; Tulsa,
Oklahoma; Indianapolis, Indiana and St. John, New Brunswick, Canada pursuant
to leases that expire in 2000, 1998, 2007, 2015, 2004, 2001, 2000/2001, and
2001, respectively. The Tulsa, Oklahoma location serves as an Avis car rental
reservations center. In addition, the Travel Services Division has 38 leased
offices spaces located in various countries outside the United States.
The Company also owns properties located in Torrance and Oakhurst,
California and leases 17 office spaces internationally, which represent space
for businesses classified as "Other". In addition, there are sales offices
and other ancillary office space leased in locations around the country.
Management believes that such properties are sufficient to meet its present
needs and does not anticipate any difficulty in securing additional space, as
needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than non-material
litigation, incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of its shareholders on October 1, 1997,
pursuant to a Notice of Special Meeting and Proxy Statement dated August 28,
1997, a copy of which has been filed previously with the Securities and
Exchange Commission, at which shareholders of the Company considered and
approved the Merger of the Company and HFS (and related transactions
contemplated thereby) and the Company's 1997 Stock Incentive Plan. The
results of such matters are as follows:
Proposal 1: To approve the proposed Merger of the Company and HFS (and
related transactions contemplated below).
RESULTS: FOR AGAINST ABSTAIN
280,653,487 630,695 911,958
Proposal 2: To approve the Company's 1997 Stock Incentive Plan.
RESULTS: FOR AGAINST ABSTAIN
214,725,702 65,934,965 1,535,472
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK
HOLDER MATTERS
MARKET PRICE ON COMMON STOCK
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "CD". At March 20, 1998 the number of stockholders
of record was approximately 11,727. The following table sets forth the
quarterly high and low sales prices per share as reported by the NYSE for
1997 and 1996 based on a year ended December 31.
1996 HIGH LOW
- -------------- ------ -----
First Quarter .................... 26 11/64 19 5/64
Second Quarter ................... 26 1/2 18 43/64
Third Quarter .................... 26 37/64 21 1/4
Fourth Quarter ................... 27 21/64 22 1/2
1997 HIGH LOW
- -------------- ------ -----
First Quarter .................... 26 7/8 22 1/2
Second Quarter ................... 26 3/4 20
Third Quarter .................... 31 3/4 23 11/16
Fourth Quarter ................... 31 3/8 26 15/18
On March 20, 1998, the last sale price of the Company's Common Stock on
the NYSE was $40 per share.
All stock price information has been restated to reflect a three-for-two
stock split effected in the form of a dividend to stockholders of record on
October 7, 1996, payable on October 21, 1996.
DIVIDEND POLICY
The Company expects to retain its earnings for the development and
expansion of its business and the repayment of indebtedness and does not
anticipate paying dividends on Common Stock in the foreseeable future.
31
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Company's financial statements and notes thereto
appearing on pages F-1 through F-51.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data: (1)(2)
Net Revenues $5,314.7 $3,908.8 $2,992.1 $2,446.7 $2,136.4
------------ ------------ ------------ ------------ ----------
Expenses:
Total expenses exclusive of depreciation,
amortization and interest, net 4,696.9(3) 3,001.8(4) 2,362.6(5) 1,874.6(6) 1,675.8
Depreciation and amortization 256.8 167.9 112.9 97.2 80.8
Interest, net 66.3 25.4 13.3 10.6 13.9
------------ ------------ ------------ ------------ ----------
Total Expenses 5,020.0 3,195.1 2,488.8 1,982.4 1,770.5
------------ ------------ ------------ ------------ ----------
Income before income taxes and
extraordinary loss 294.7 713.7 503.3 464.3 365.9
Net income 55.4(3) 423.6(4) 302.8(5) 286.6(6) 209.2(7)
Net income per share (diluted) .06(3) .52(4) .42(5) .41(6) .31(7)
Weighted average shares outstanding
(diluted) 851.7 818.6 741.8 702.2 607.7
Dividends per common share (8) -- -- -- -- --
AT DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
Balance sheet data: (1)(2)
Total assets $14,851.2 $13,588.3 $8,994.4 $7,437.0 $6,698.8
Long-term debt 1,348.3 1,004.6 354.0 420.0 394.1
Assets under management and mortgage
programs 6,443.7 5,729.2 4,955.6 4,115.4 4,058.8
Debt under management and mortgage
programs 5,602.6 5,089.9 4,427.9 3,791.6 3,629.7
Shareholders' equity 4,477.5 4,307.2 2,133.0 1,614.2 1,303.8
- ------------
(1) Financial data has been restated to include the following mergers and
acquisitions accounted for under the pooling of interest method of
accounting: (i) the Merger; (ii) the October 1997 merger with Hebdo
Mag International Inc.; (iii) the April 30, 1997 merger with PHH
Corporation; (iv) the July 1996 mergers with Davidson and Associates,
Inc. ("Davidson") and Sierra On-Line, Inc. ("Sierra"); (v) the August
1996 merger with Ideon Group, Inc. ("Ideon"); (vi) the 1995 acquisitions
of Getko Group Inc., North American Outdoor Group, Inc. and Advance
Ross Corporation; and (vii) other mergers and acquisitions.
(2) Financial data included the following acquisitions accounted for under the
purchase method of accounting, and accordingly the financial results of
such acquired companies are included since the respective dates of
acquisition: (i) Resort Condominiums International, Inc. ("RCI") in
November 1996; (ii) Avis, Inc. ("Avis") in October 1996; (iii)
Coldwell Banker Corporation ("Coldwell Banker") in May 1996; (iv) Century
21 Real Estate Corporation in August 1995; (v) the Super 8 Motel franchise
system in April 1993; and (vi) other acquisitions.
(3) Includes fourth quarter 1997 and second quarter 1997 charges associated
with and coincident with business combinations accounted for as pooling
of interests in the aggregate amount of $1.1 billion ($816.8 million
after-tax, or $0.94 per diluted share). The fourth quarter 1997 merger
related costs and other unusual charges of $844.9 million ($589.8 million
after-tax, or $0.70 per diluted share) is associated with the Merger and
the fourth quarter acquisition by merger of Hebdo Mag International, Inc.
and is comprised of merger related costs, costs associated with benefit
plans which were accelerated due to change in control provisions,
severance, exit costs associated with call center consolidations, costs
associated with exiting certain activities, professional fees,
contributions to trusts for technology initiatives and other items. The
second quarter 1997 charge includes a one-time merger related charge of
$303.0 million ($227 million, after-tax or $.28 per diluted share)
in connection with the merger with PHH Corporation ("PHH"). Such charge
is comprised of merger-related costs, including severance, facility and
system consolidations and terminations, costs associated with exiting
certain activities and professional fees.
(4) Includes provisions for costs incurred principally in connection with
the 1996 mergers with Davidson, Sierra and Ideon. The charges
aggregated $179.9 million ($118.7 million after-tax or $.14 per
diluted share). Such costs in connection with the Company's mergers
with Davidson and Sierra are non-recurring and are comprised
primarily of transaction costs and other professional fees. Such
costs associated with the Company's merger with Ideon are
non-recurring and include transaction costs as well as a provision
relating to certain litigation matters. In June 1997, the Company
entered into an agreement which provided for the settlement of
certain Ideon litigation matters. Such agreement called for the
payment of $70.5 million over a six-year period which was provided
for during the year ended December 31, 1996.
32
(5) Includes provision for costs related to the abandonment of certain
Ideon development efforts and the restructuring of the SafeCard
division of Ideon and corporate infrastructure. The charges
aggregated $97.0 million ($62.1 million, after-tax).
(6) Includes a net gain of $9.8 million ($6.2 million, after-tax or $.01
per diluted share) comprised of the net gain on the sale of The
ImagiNation Network, Inc. offset by costs related to Ideon products
abandoned and restructuring.
(7) Includes extraordinary loss, net of tax of $12.8 million or $.02 per
diluted share, related to the early extinguishment of debt.
(8) Prior to the Merger, CUC and HFS had not declared or paid cash
dividends on their common stock. However, cash dividends were
declared and paid by Ideon and PHH to their shareholders prior to
their respective mergers with the Company. The Company expects to
retain its earnings for the development and expansion of its business
and the repayment of indebtedness and does not anticipate paying
dividends on its common stock in the foreseeable future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
On December 17, 1997, Cendant Corporation (the "Company") was created through
the merger (the "Cendant Merger") of CUC International Inc. ("CUC") and HFS
Incorporated ("HFS") with CUC surviving and being renamed Cendant
Corporation. The Company is one of the foremost consumer and business
services companies in the world. The combination of CUC and HFS provides the
Company's membership businesses access to HFS's more than 100 million
consumer contacts, while providing HFS businesses with the technology-driven,
direct marketing expertise necessary to successfully cross-market within its
existing business units.
The Company provides fee-based services to consumers within the Membership
Services, Travel Services and Real Estate Services business segments. The
Company generally does not own the assets or share the risks associated with
the underlying businesses of its customers. In the Membership Services
segment, the Company is a technology-driven leading provider of
membership-based consumer services. In the Travel Services segment, the
Company is the world's largest franchisor of lodging facilities and rental
car facilities, the leading provider of vacation timeshare exchange services
and a leading provider of international fleet management services. In the
Real Estate Services segment, the Company is the world's largest franchisor
of residential real estate brokerage offices, the world's largest provider of
corporate relocation services and a leading mortgage lender in the United
States.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information contained
in the Consolidated Financial Statements and accompanying Notes thereto of
the Company appearing elsewhere in this Form 10-K.
The operating results of the Company and its underlying business segments are
comprised of business combinations, which were accounted for as poolings of
interests (See "Liquidity and Capital Resources -- 1997 Poolings and 1996
Poolings"). Accordingly, all financial information has been restated as if
all of the pooled companies operated as one entity since inception. The
Company and certain of its business segments also include businesses which
were acquired in 1996 and accounted for by the purchase method of accounting.
(See "Liquidity and Capital Resources --1996 Purchase Acquisitions").
Accordingly, the results of operations of such acquired companies were
included in the consolidated operating results of the Company from the
respective dates of acquisition. In the underlying Results of Operations
discussion, operating expenses exclude interest expense-net and income taxes.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
The Company consummated mergers in the second and fourth quarters of 1997 and
third quarter of 1996 which were accounted for as poolings of interests.
Pre-tax merger-related costs and other unusual charges aggregated $1.1
billion ($816.8 million after tax) in 1997 and $179.9 million ($118.7 million
after tax) in 1996. As a result of the $698.1 million after-tax incremental
charge, net income decreased $368.2 million (87%) to $55.4 million.
33
Net revenues increased $1.4 billion (36%) to $5.3 billion while aggregate
operating, marketing and reservation and general and administrative expenses
increased only $727.1 million (26%), indicative of the Company's strong
operating leverage. The $88.9 million (53%) and $40.9 million (161%)
increases in depreciation/amortization and interest, respectively, were
primarily attributable to 1996 purchase business combinations. These
purchases included the $0.9 billion purchase of Avis, Inc. and $0.8
billion purchase of Resort Condominiums International, Inc. ("RCI"). The
weighted average interest rate on long-term debt decreased to 6% from 7.5%
due to increased fixed rate debt outstanding at December 31, 1997. Borrowings
under the Company's primary revolving credit facilities were reduced to $276
million at December 31, 1997. The effective income tax rate rose to 81.2% in
1997 compared to 40.6% in 1996 as a result of non-deductible merger-related
charges. Excluding merger-related permanent book/tax differences, the
effective income tax rate decreased from 40.6% to 40.0%.
CENDANT MERGER CHARGE (1997)
The Company incurred merger-related costs and other unusual charges of $844.9
($589.8 million, after tax) million associated with the Cendant Merger and
Hebdo Mag merger. The charge includes $340.3 million of costs associated with
the mergers such as professional fees, costs associated with retirement and
benefit plans which were accelerated as a result of change of control events,
and exit costs associated with the consolidation of approximately 61 worldwide
call centers and office locations. Such costs include severance costs associated
with approximately 448 employees, lease buy-outs and assets abandoned.
The charge also includes costs associated with the streamlining of operations
to narrow management's focus on its core operations. As a result, the Company
provided for costs associated with the termination of franchise contracts and
other exit costs necessary to complete a quality upgrade of its hotel
franchise system approximating $47.2 million as well as $70.0 million of
primarily cash contributions to independent trusts that have undertaken
technology initiatives for the direct benefit of lodging and real estate
franchisees. The Company determined coincident with the Cendant Merger to
abandon or sell certain businesses and wrote-off approximately $184.1 million
of assets that primarily represented assets impaired as a result of such
determinations. The Company also provided for costs associated with the
termination of contracts with certain vendors and former business partners
approximating $103.0 million in the fourth quarter of 1997 which were completed
with the intention of enhancing the profitability of future core operations.
The charge also includes a pre-tax net gain of $34.7 million on the sale of
Interval International Inc. (See Note 20) and a pre-tax loss of $17.0 million
on the early repayment of Hebdo Mag debt coincident with the Hebdo Mag
merger. In addition, the Company established $75 million of litigation
reserves coincident with the Cendant Merger. In prior reporting periods,
no reserves were established, based on management's belief that such claims
lacked merit, would be vigorously defended and, as a result, losses were not
probable. In connection with management's focus on its core operations and
after further evaluation of the corporate resources and related expenses
required to continue such litigation management intends to pursue settlements
in such matters. Management believes it is appropriate to follow such
strategy and accordingly, has established such reserve.
The Company paid $190.6 million and recorded non-cash write-offs of $208.3
million against the provision in the fourth quarter of 1997. The remaining
merger and related costs and other unusual charges will be substantially
completed during 1998.
PHH MERGER CHARGE (1997)
The Company recorded a merger charge of $303.0 million ($227.0 million,
after tax) in connection with the merger of PHH Corporation with and into
the Company. The charge in principal comprised of personnel related costs
of $142.4 million. Such costs are comprised of costs incurred in connection
with employee reductions associated with the combination of the Company's
relocation services business and the consolidation of corporate activities.
Personnel related charges include termination benefits such as severance,
medical and other benefits. Also included in personnel related charges are
retirement benefits resulting from a change in control. Several grantor
trusts were established and funded by the Company to pay such benefits in
accordance with the terms of the PHH merger agreement. Full implementation of
the restructuring plan will result in the termination of approximately 500
employees (principally located in North America), majority of which
were terminated as of December 31, 1997. The charge also includes (i)
professional fees of $36.8 million which are primarily comprised of
investment banking, accounting and legal fees incurred in connection
with the PHH Merger; (ii) business termination charges of $44.7 million
which are comprised of costs to exit certain activities within the Company's
fleet management and mortgage service businesses and costs to discontinue other
ancillary operations in accordance with the Company's revised strategic plan;
and (iii) facility related expenses which include costs associated with
contract and lease terminations, asset disposal and other charges incurred in
connection with the consolidation and closure of excess space.
34
The Company anticipates that approximately $236.0 million will be paid in
cash in connection with the PHH Merger Charge of which $158.8 million was
paid through December 31, 1997. The remaining cash portion of the PHH Merger
Charge will be financed through cash generated from operations and borrowings
under the Company's revolving credit facilities. Revenue and operating
results from activities that will not be continued are not material to the
results of operations of the Company.
DAVIDSON, SIERRA AND IDEON MERGER CHARGES (1996)
The Company incurred pre-tax merger-related costs and other unusual charges
of $179.9 million in 1996 in connection with business combinations with
software companies Davidson and Associates, Inc. ("Davidson") and Sierra
On-Line, Inc. ("Sierra") and the membership operations of Ideon Group, Inc.
("Ideon").
The underlying financial summary of the Company includes merger-related costs
and other unusual charges of $1,147.9 million ($816.8 million, after tax) and
$179.9 million ($118.7 million, after tax), for the years ended December 31,
1997 and 1996, respectively.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 VARIANCE
----------- ----------- ----------
(In millions)
Net revenues $5,314.7 $3,908.8 36%
Operating expenses 4,953.7 3,169.7 56%
----------- -----------
Operating income $ 361.0 $ 739.1 (51%)
=========== ===========
Net income $ 55.4 $ 423.6 (87%)
=========== ===========
SEGMENT DISCUSSION
The underlying discussion of each segment's financial results exclude merger
related costs and other unusual charges. Management believes such discussion
is the most informative representation of recurring, non-transactional related
results of the Company's business segments.
MEMBERSHIP SERVICES SEGMENT
The Membership Services Segment provides consumers with access to a variety
of goods and services through more than 20 membership programs. The Company
generates revenue streams from the sale of 1 to 3 year membership programs
with renewal rates exceeding 70% and is less dependent on sales of product
and services. Total memberships at December 31, 1997 approximated 66 million,
making the Company the largest consumer membership business worldwide.
Membership growth is generated primarily from direct marketing to consumers
or reaching consumers through businesses such as banks, credit card and
travel companies that provide access to new members as a service enhancement
to their customers. Commencing with the Cendant Merger, membership businesses
have unfettered access to Travel Segment businesses that account for 1 of 6
U.S. hotel rooms sold, 1 of 4 cars rented in the U.S. and more than 70% of
timeshare resort vacation exchanges worldwide. Membership businesses also
have access to real estate businesses that participate in more than 25% of
U.S. home sales, more than 50% of corporate employee relocations and home
buyers underlying nearly $20 billion of annual mortgage originations.
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-------------------------
OPERATING INCOME 1997 1996 VARIANCE
- ------------------ ------------ ------------ ----------
Net revenues $1,981.7 $1,662.1 19%
Operating expenses 1,522.3 1,347.4 13%
------------ ------------
Operating income $ 459.4 $ 314.7 46%
============ ============
A 7.5 million (13%) increase in memberships was the largest contributing
factor to the revenue increase and a 6% increase in membership pricing
accounted for the balance. Individual memberships, which include shopping,
travel, Accidental Death and Dismemberment ("AD&D") insurance and credit
monitoring products, increased by more than 4.5 million (13%). Wholesale
memberships, which include members that are solicited by sponsor companies
such as banks and credit unions, increased 2.3 million (19%) including 1.6
million new memberships in Europe.
35
The Company was able to contain the increase in expenses at only 13% due to a
continually maturing membership base with a greater percentage of the total
individual memberships in renewal years. This resulted in increased profit
margins due to the significantly lower marketing costs associated with
membership renewal compared with new membership acquisitions. Improved
response rates for new members also favorably impacted expenses and profit
margins.
Individual membership usage continues to increase, which contributes to
additional service fees and indirectly contributes to the Company's strong
renewal rates. Historically, an increase in overall membership usage has had
a favorable impact on renewal rates. The Company records its deferred revenue
net of estimated cancellations which are anticipated in the Company's
marketing programs. The number of cancellations has increased due to the
increased level of marketing efforts, but has decreased as a percentage of
the total number of members.
TRAVEL SERVICES SEGMENT
The Company operates business units that provide a spectrum of services
necessary to domestic and international travelers. The Company is the world's
largest franchisor of nationally recognized hotel brands and car rental
operations (Avis), which are responsible for 16% and 25% of all hotel rooms
sold and cars rented in the United States, respectively. Royalty revenue is
received from franchisees under contracts that generally range from 10 to 50
years in duration. The Company is the world's largest provider of timeshare
exchange services (RCI) to timeshare owners under one to three year
membership programs which require both exchange fees for swapping vacation
weeks and recurring and renewal membership fees. Travelers that may or may
not participate in the above cross-marketed services frequently receive
value-added tax ("VAT") refunds from international countries through European
Tax Free Shopping ("ETS"), the largest VAT refund facilitator worldwide.
Travel Services operating units also provide vehicle fleet leasing and assist
vehicle sales through the largest consolidated classified advertiser worldwide.
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------
OPERATING INCOME 1997 1996 VARIANCE
- ------------------ ------------ ---------- ----------
Net revenues $1,480.8 $887.0 67%
Operating expenses 991.9 620.3 60%
------------ ----------
Operating income $ 488.9 $266.7 83%
============ ==========
Operating income increased as a result of growth from businesses owned in
both 1997 and 1996 and profits from car rental franchise and timeshare
operations acquired in the fourth quarter of 1996.
Operating income increased $123.7 million (26%) assuming 1996 was restated on
a pro forma basis as if car rental franchise and timeshare operations were
acquired on January 1, 1996. The increase results from a $169.3 million (13%)
increase in revenue while corresponding operating expenses increased only
$45.6 million (5%). Most travel business units contributed double digit
growth in pro forma operating income; however, timeshare and hotel
franchising contributed the most significant increases at $51.6 million (84%)
and $32.1 million (18%), respectively. Timeshare profits reflected a 22%
increase in membership fees driven by increases in membership and pricing.
Simultaneously, approximately $21.1 million of operating expense reductions
were achieved during a post-acquisition reorganization of timeshare
operations. Lodging franchise revenue increased $37.3 million (10%) while
expenses increased only $5.8 million (3%). The lodging revenue increase was
attributable to 4% system growth, 2% revenue per available room ("REVPAR")
increases at franchised properties and increased revenue received from
preferred alliance partners seeking access to franchisees and franchisee
customers. Expense increases were minimized due to the significant operating
leverage associated with mature franchise operations and a reduction of
corporate overhead allocated to the Travel Services Segment as the Company
leveraged its corporate infrastructure among more businesses.
REAL ESTATE SERVICES SEGMENT
The Company operates business units that provide a range of services related
to home sales, principally in the United States. The Company is the world's
largest franchisor of real estate brokerage offices
36
through its CENTURY 21 (Registration Mark), Coldwell Banker (Registration Mark)
and ERA (Registration Mark) franchise brands, which were involved in more than
25% of homes sold in the United States in 1997. Similar to Travel Services
Segment franchise businesses, the Company receives royalty revenue from
approximately 11,000 franchisees under contracts with terms ranging from 5 to 30
years. The Company operates the world's largest provider of corporate employee
relocation services and receives fees for providing services such as selling
relocating employees' homes (without recourse to the Company), assisting the
relocating employee in finding a home or providing an array of services such as
moving household goods, expense reporting and others. The Company also operates
the largest in-bound mortgage telemarketing operation in the United States.
Cendant Mortgage Corporation generates origination profits from the sale of
mortgage notes, generally within 45 days of origination but retains recurring
servicing revenue streams over the life of the mortgage. Each Real Estate
Services business provides customer referrals from other Real Estate Services
businesses as well as a fertile data base for prospective Membership Services
Segment cross-selling.
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------
OPERATING INCOME 1997 1996 VARIANCE
- ------------------ ----------- ----------- ----------
Net revenues $990.5 $774.2 28%
Operating expenses 623.1 557.9 12%
---------- -----------
Operating income $367.4 $216.3 70%
========== ===========
Operating income increased as a result of growth from businesses owned in
both 1997 and 1996 and profits from the Coldwell Banker and ERA franchise
brands and Coldwell Banker Relocation Services, Inc. ("CBRS") acquired in the
first and second quarters of 1996.
Operating income increased $123.7 million (41%) assuming 1996 was restated on
a pro forma basis as if the Coldwell Banker, ERA and CBRS operations were
acquired on January 1, 1996. The increase results from a $129.6 million (15%)
increase in revenue while corresponding operating expenses increased only
$6.0 million (1%). Real estate franchise, corporate relocation and mortgage
businesses increased more than 37% each over 1996 pro forma results. Real
estate franchise operating income increased $61.0 million (37%) based on
revenue growth of $54.8 million (20%) to $334.6 million primarily due to a
15% combined increase in home sales and average price of homes sold in 1997.
Operating expenses decreased $6.2 million primarily as a result of
consolidation of certain franchise administration functions of the three
recently acquired franchise brands. Corporate relocation operating income
increased $31.4 million (43%) due to a $22.8 million increase in home sale
assistance related revenue. Operating expenses decreased $8.6 million (3%)
due to the consolidation of the PHH Relocation Services Inc. and CBRS into
one operating company, Cendant Mobility Services, Inc. Mortgage Services
operating income increased $28.3 million (69%) due to a $51.5 million (40%)
increase in revenue while expenses increased only $23.2 million (27%). The
revenue increase resulted form a 40% increase in loan origination volume to
$11.7 billion, which accelerated to nearly a $20 billion annual run rate by
year-end 1997. Although the Company generally sells originated notes
within 45 days of origination, it generally retains servicing rights and as a
result, servicing revenue increased $13.4 million (18%). The increase in
expenses was related to not only processing current year volume, but costs in
preparation of hiring, training and providing office facilities for increased
staff needed to handle the processing of future increased origination volume
as monthly applications more than doubled.
OTHER SERVICES SEGMENT
Other business operations primarily consist of operations responsible for the
development and sale of high-quality education, entertainment and personal
productivity interactive multimedia products for home and school use
("Software"); providing information technology and reservation system support
services to the car rental and hotel industry ("Wizcom"), casino credit
information and marketing services ("Casino Marketing") and the equity in
earnings from the Company's investment in ARAC.
37
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------
OPERATING INCOME 1997 1996 VARIANCE
- ------------------ ----------- ----------- ----------
Net revenues $861.7 $585.5 47%
Operating expenses 668.4 464.0 44%
----------- -----------
Operating income $193.3 $121.5 59%
=========== ===========
Operating income increased as a result of $41.7 million of incremental
revenue from the Company's equity investment in ARAC and lesser but favorable
contributions from Software, Wizcom and Casino Marketing. Revenues increased
$276.2 million (47%) to $861.7 million, primarily due to a $90.6 million
increase in software revenue, $41.7 million of equity in earnings from the
Company's ARAC investment and a $90.3 million increase in revenue from Wizcom
which was acquired as part of the October 1996 Avis acquisition. In contrast,
operating expenses increased only $204.2 million (44%), primarily due to
$77.8 million of expenses associated with Wizcom, which was acquired in
October 1996 and $94.2 million of incremental software marketing, research
and development costs.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net income increased $120.8 million (40%) despite non-recurring merger and
related charges approximating $179.9 million ($118.7 million, after tax) in
1996 in connection with the mergers with Davidson, Sierra and Ideon. The
increase in net income primarily resulted from a $222.5 million (43%)
increase in operating income.
Net revenues increased $916.7 million (31%) to $3.9 billion while aggregate
operating, marketing and general and administrative expenses increased only
$556.3 million (25%), again indicating the Company's substantial operating
leverage. The $55.0 million (49%) and $12.1 million (91%) increases in
depreciation/ amortization and interest expense, respectively, were primarily
attributable to 1995 and 1996 purchase business combinations. During this
period, the Company expanded its membership and hotel franchise service
business to include a real estate segment and other travel segment businesses
including timeshare, car rental franchising, fleet management and tax-free
shopping. The Company's effective tax rate increased from 39.8% to 40.6%
which resulted in $5.7 million of incremental income tax expense based on
1996 pre-tax income, assuming 1995 effective tax rates. The increase is
primarily attributable to non-deductible merger-related costs.
The underlying financial summary of the Company include merger-related costs and
other unusual charges of $179.9 million ($118.7 million, after tax) and $97.0
million ($62.1 million, after tax), for the years ended December 31, 1996 and
1995, respectively, as follows:
YEAR ENDED DECEMBER 31,
-----------------------
(IN MILLIONS) 1996 1995 VARIANCE
---------- ---------- ----------
Net revenues $ 3,908.8 $ 2,992.1 31%
Operating expenses 3,169.7 2,475.5 28%
---------- ----------
Operating income $ 739.1 $ 516.6 43%
========== ==========
Net income $ 423.6 $ 302.8 40%
========== ==========
SEGMENT DISCUSSION
The underlying discussion of each segment's financial results exclude merger
related costs and other unusual charges. Management believes such discussion is
the most informative representation of recurring, non-transactional related
operating results of the Company's business segments.
MEMBERSHIP SERVICES SEGMENT
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-------------------------
OPERATING INCOME 1996 1995 VARIANCE
- ------------------- ------------ ------------ ----------
Net revenues $1,662.1 $1,373.7 21%
Operating expenses 1,347.4 1,154.0 17%
---------- ------------
Operating income $ 314.7 $ 219.7 43%
========== ============
A 5.6 million (10%) increase in memberships was the largest contributing
factor to the revenue increase. Individual memberships, which include
shopping, travel, AD&D insurance and credit monitoring products, increased by
more than 2.3 million (7%). Wholesale memberships, which include members that
are solicited by sponsor companies such as banks and credit unions, increased
2.2 million (23%) including 1.2 million new memberships in Europe.
38
The Company was able to maintain the increase in expenses at only 17% due to a
continually maturing membership base with a greater percentage of the total
individual memberships as renewals. This results in increased profit margins due
to the significant decrease in marketing costs associated with membership
renewal compared with new membership acquisitions. Improved response rates for
new members also favorably impact expenses and profit margins.
TRAVEL SERVICES SEGMENT
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------
OPERATING INCOME 1996 1995 VARIANCE
- ------------------ ----------- ----------- ----------
Net revenues $ 887.0 $ 666.4 33%
Operating expenses 620.3 471.6 32%
--------- ---------
Operating income $ 266.7 $ 194.8 37%
========= =========
Operating income increased as a result of growth from businesses owned in
both 1996 and 1995 and profits from car rental franchise and timeshare
operations acquired in the fourth quarter of 1996. Net revenues increased
$220.6 million (33%) to $887.0 million while expenses increased only $148.7
million (32%). The increase in operating income was generated primarily from
$25.2 million and $19.3 million increases in Lodging Franchise and Fleet
Management Services, respectively, as well as $20.9 million of increases from
acquired company operations. Operating income from Lodging Franchise
increased 21% to $145.8 million as a result of a $50.0 million (15%) increase
in revenue and only a $24.9 million (12%) increase in expenses. System growth
fueled the 13% increase in royalty fees and a 41% increase in fees from
preferred alliance partners contributed to the revenue increase. As a result
of high operating leverage, more than 50% of the revenue increase resulted in
incremental operating income. Fleet Management Services operating income
increased $19.3 million (34%) to $76.2 million as a result of an increase in
fee-based services and an $11.7 million gain on the sale of the Company's
truck fuel management business in January 1996.
REAL ESTATE SERVICES SEGMENT
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-------------------------
OPERATING INCOME 1996 1995 VARIANCE
- ------------------ ------------ ------------ ----------
Net revenues $ 774.2 $ 505.2 53%
Operating expenses 557.9 395.2 41%
---------- ----------
Operating income $ 216.3 $ 110.0 97%
========== ==========
Operating income increased as a result of growth from businesses owned in
both 1996 and 1995 and profits from acquired real estate franchise systems
during a period when the Company entered this industry. Real estate franchise
operating income increased $91.1 million to $110.5 million including $162.8
million of incremental royalty, $13.2 million of increased preferred alliance
revenue and only $97.2 million of incremental operating expenses. Corporate
relocation operating income increased $12.6 million as a result of $19.2
million of operating income from acquired operations offset by a $6.6 million
net decrease in relocation business operating profits associated with the
development of an expanded full service infrastructure that supports a
greater range of client services offered.
OTHER SERVICES SEGMENT
(IN MILLIONS) YEAR ENDED DECEMBER 31,
-----------------------
OPERATING INCOME 1996 1995 VARIANCE
- ------------------ ----------- ----------- ----------
Net revenues $ 585.5 $ 446.8 31%
Operating expenses 464.2 357.7 30%
---------- ----------
Operating income $ 121.3 $ 89.1 36%
========== ==========
Operating income increased primarily as a result of a $27.1 million increase
from software operations and $9.5 million in consideration received for the
termination of a corporate services agreement.
39
LIQUIDITY AND CAPITAL RESOURCES
ACQUISITION OVERVIEW
The Company continues to seek to expand and strengthen its leadership
position in its membership services, travel services and real estate services
industry segments and other businesses with strategic acquisitions. The
Company's acquired businesses share similar characteristics, foremost of
which is that each was immediately accretive to Company cash flow and
earnings. Revenue is generated substantially from service fees and is not
dependent on tangible assets or the need for capital expenditures other than
certain technology investments. These service businesses each generate
significant cash flow which is enhanced by the Company's operating leverage
that supports acquired revenue streams without corresponding increases in
operating infrastructure expenses.
1997 POOLINGS
Cendant. The Cendant Merger was completed on December 17, 1997 pursuant to
which CUC issued approximately 440.0 million shares of its common stock for
all of the outstanding common stock of HFS. Pursuant to the agreement and
plan of merger, HFS stockholders received 2.4031 shares of CUC common stock
for each share of HFS common stock.
On December 17, 1997, as directed by the Federal Trade Commission in connection
with the Cendant Merger, the Company sold all of the outstanding shares of one
of its timeshare exchange businesses, Interval International Inc. ("Interval"),
for net proceeds of $232.0 million which includes $40.0 million of
consideration for a non-solicitation agreement pursuant to which the Company is
precluded from soliciting any of Interval's employees, customers or clients for
a period of two years from the closing date of the transaction. Also in
conjunction with the sale, the Company agreed to continue to provide services
to certain of Interval's customers for a specified period, guarantee
performance of certain responsibilities to third parties (i.e., lease payments
and certain other contracts) and absorb certain additional transitional costs
related to the transaction. The Company recognized a gain on the sale of
Interval of $34.7 million ($13.5 million, after tax), which, when combined with
an extraordinary loss for early extinguishment of acquired Hebdo Mag debt,
resulted in less than $4.0 million of net extraordinary items. Accordingly, the
net extraordinary item has been reflected as a component of the Cendant Merger
Charge.
Hebdo Mag. On October 3, 1997, the Company acquired all of the outstanding
capital stock of Hebdo Mag for approximately $440 million, which was
satisfied by the issuance of approximately 14.2 million shares of Company
common stock. Hebdo Mag is a leading publisher and distributor of
international classified advertising information.
PHH. On April 30, 1997, the Company issued 72.8 million shares of Company
common stock in exchange for all of the outstanding common stock of PHH. PHH
operates the world's largest provider of corporate relocation services and
also provides mortgage and fleet management services. The Company recorded a
one-time merger and related charge of approximately $303.0 million ($227.0
million, after tax) in the second quarter of 1997 upon consummation of the
PHH Merger.
1996 POOLINGS
Davidson and Sierra. During July 1996, the Company issued 45.1 million shares
of Company common stock for all of the outstanding capital stock of Davidson.
Also during July 1996, the Company issued 38.4 million shares of Company
common stock for all of the outstanding capital stock of Sierra. Davidson and
Sierra develop, publish and distribute educational and entertainment software
for home and school use.
Ideon. During August 1996, the Company acquired all of the outstanding
capital stock of Ideon, principally a provider of credit card enhancement
services, for a purchase price approximating $393 million, which was
satisfied by the issuance of 16.6 million shares of Company common stock.
In connection with the Davidson, Sierra and Ideon mergers, the Company
recorded a restructuring charge approximating $179.9 million ($118.7 million,
after tax) in the year ended December 31, 1996 for which $3.0 million of
corresponding liabilities remain at December 31, 1997.
40
COMPLETED AND PROPOSED 1998 PURCHASE ACQUISITIONS
National Parking Corporation. On March 23, 1998, the Company agreed with the
board of directors of U.K.-based National Parking Corporation Limited ("NPC")
to acquire NPC's outstanding equity for approximately $1.3 billion in cash.
The offer is subject to customary regulatory approvals and it is anticipated
that the transaction will close during the second quarter of 1998. NPC
operates in two principal segments: National Car Parks Limited, the largest
private (non-municipality owned) car park operator in the U.K. with
approximately 500 locations, and Green Flag Group Limited, the largest
for-profit roadside assistance organization with more than 3.5 million
members in the U.K.
American Bankers. On March 23, 1998, the Company entered into a definitive
agreement to acquire American Bankers Insurance Group, Inc. ("American
Bankers") for $67 per share in cash and stock, for an aggregate consideration
of approximately $3.1 billion. The Company intends to purchase 23.5 million
shares of American Bankers at $67 per share through its pending cash tender
offer, to be followed by a merger in which the Company will deliver Cendant
shares with a value of $67 for each remaining share of American Bankers common
stock outstanding. The Company has received antitrust clearance to acquire
American Bankers. The tender offer is subject to the receipt of tenders
representing at least 51 percent of the common shares of American Bankers as
well as customary closing conditions, including regulatory approvals. The
transaction is expected to be completed in the summer of 1998. American Bankers
provides affordable, specialty insurance products and services through
financial institutions, retailers and other entities offering consumer
financing.
In connection with the Company's proposal to acquire American Bankers, on
January 23, 1998, the Company received a bank commitment to provide a $1.5
billion, 364-day revolving credit facility which will bear interest, at the
option of the Company, at rates based on Prime or LIBOR plus an applicable
variable margin.
Harpur Group. On January 20, 1998, the Company acquired The Harpur Group Ltd.,
a leading fuel card and vehicle management company in the United Kingdom, for
approximately $186 million in cash plus future contingent payments of up to $20
million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company acquired Jackson Hewitt Inc.
("Jackson Hewitt"), for approximately $480 million in cash or $68 per share of
common stock of Jackson Hewitt. Jackson Hewitt is the second largest tax
preparation service franchise system in the United States with locations in 43
states. Jackson Hewitt franchises a system of approximately 2,000 offices that
specialize in computerized preparation of federal and state individual income
tax returns.
Providian. On December 9, 1997, the Company entered into a definitive agreement
to acquire Providian Auto and Home Insurance Company for approximately $219.0
million in cash. Closing is subject to receipt of required regulatory approval
and other customary conditions and is anticipated in the spring of 1998.
Providian sells automobile insurance to consumers through direct response
marketing in 45 states and the District of Columbia.
Other. Subsequent to December 31, 1997, the Company acquired certain entities
for an aggregate purchase price of approximately $197.5 million, satisfied by
the payment of cash.
1997 PURCHASE ACQUISITIONS AND INVESTMENTS
Investment in NRT. During the third quarter of 1997, the Company acquired
$182.0 million of preferred stock of NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms. The
Company acquired $216.1 million of certain intangible assets including
trademarks associated with real estate brokerage firms acquired by NRT in
1997. The Company, at its discretion, may acquire up to $81.3 million of
additional NRT preferred stock and may also purchase up to $229.9 million of
certain intangible assets of real estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of National Realty Trust (the "Trust"), and two other regional real
estate brokerage businesses. The Trust is an independent trust to which the
Company
41
contributed the brokerage offices formerly owned by Coldwell Banker in
connection with the Company's acquisition of Coldwell Banker in 1996. NRT is
the largest residential brokerage firm in the United States.
Other. The Company acquired certain entities in 1997 for an aggregate purchase
price of $347.1 million, comprised of $306.4 million in cash and $40.7 million
in Company common stock.
1996 PURCHASE ACQUISITIONS AND INVESTMENTS
RCI. In November 1996, the Company completed the acquisition of all the
outstanding common stock of RCI for $487.1 million comprised of
$412.1 million in cash and $75 million of the Company common stock plus future
contingent payments of up to $200.0 million over the next five years.
Approximately $100.0 million of the contingent payments will be made in March
1998. RCI is the world's largest provider of timeshare exchange.
Avis. In October 1996, the Company completed the acquisition of all of the
outstanding capital stock of Avis Inc. ("Avis"), including payments under
certain employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for $806.5 million. The purchase price was comprised of
approximately $367.2 million in cash, $100.9 million in indebtedness and $338.4
million (approximately 11.1 million shares) in Company common stock.
Subsequently, the Company made contingent cash payments of $26.0 million in
1996 and $60.8 million in 1997. The contingent payments made in 1997
represented the incremental amount of value attributable to Company common
stock as of the stock purchase agreement date in excess of the proceeds
realized upon subsequent sale of such Company common stock.
Prior to the consummation of the acquisition, the Company announced its
strategy to dilute its interest in the Avis car rental operations while
retaining assets that are consistent with its service provider business
profile, including the trademark, franchise agreements, reservation system and
information technology system assets. In September 1997, ARAC (the company
which operated the rental car operations of Avis completed an Initial Public
Offering ("IPO") resulting in a 72.5% dilution of the Company's equity interest
in ARAC. Net proceeds of $359.3 million were retained by ARAC. The Company's
interest in ARAC was further diluted to 20.4% primarily due to a secondary
offering of common stock in March 1998.
Coldwell Banker. In May 1996, the Company acquired by merger Coldwell Banker
Corporation, the largest gross revenue producing residential real estate
company in North America and a leading provider of corporate relocation
services. The Company paid $640.0 million in cash for all of the outstanding
capital stock of Coldwell Banker and repaid $105.0 million of Coldwell Banker
indebtedness. The aggregate purchase price for the transaction was financed
through the May 1996 sale of an aggregate 46.6 million shares of Company common
stock generating $1.2 billion of proceeds pursuant to a public offering.
Other. During 1996, the Company acquired certain other entities for an
aggregate purchase price of $358.4 million comprised of $300.9 million in cash,
$52.5 million of Company common stock (2.5 million shares) and $5.0 million of
notes.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
The Company believes that it has excellent liquidity and access to liquidity
through various sources. The Company has also demonstrated its ability to
access equity and public debt markets and financial institutions to generate
capital for strategic acquisitions.
Company long-term debt which approximated $1.3 billion at December 31, 1997,
primarily consisted of $276.0 million of borrowings under the Company's primary
revolving credit facilities and $933.1 million of primarily publicly issued
fixed rate debt. All year-end borrowings under the Company's primary revolving
credit facilities and $1.1 billion of first quarter 1998 borrowings under the
same facility which financed the Jackson Hewitt, Harpur and other transactions,
were completely repaid in March 1998 with the proceeds of the Company's FELINE
PRIDES (Service Mark) Offering (see below). Current Company committed revolving
credit facilities include $4.0 billion of parent company arrangements and $175
million of subsidiary credit facilities.
42
As of the Cendant Merger consummation date, the Company terminated its existing
credit facility and assumed and amended the HFS revolving credit facilities to
provide aggregate commitments of $2.0 billion consisting of (i) a $1.25
billion, 364-day revolving credit facility (the "364 Day Revolving Credit
Facility") and (ii) a $750.0 million, five year revolving credit facility,
which matures on October 1, 2001 (the "Five Year Revolving Credit Facility" and
collectively with the 364 Day Revolving Credit Facility, (the "Revolving Credit
Facilities"). The 364 Day Revolving Credit Facility will mature on September
30, 1998 but may be renewed on an annual basis for an additional 364 days up to
a maximum aggregate term of five years upon receiving lender approval. The
Revolving Credit Facilities, at the option of the Company, bear interest based
on competitive bids of lenders participating in the facilities, at prime rates
or at LIBOR plus a margin of approximately 22 basis points, which is based on
credit ratings assigned to the Company's senior unsecured long-term debt by
nationally recognized statistical rating companies. On January 23, 1998, the
Company received a bank commitment to provide a $1.5 billion, 364-day revolving
credit facility which bears interest at rates approximating the Revolving
Credit Facilities, for the purpose of financing the American Bankers
acquisition. On March 25, 1998, the Company entered into a $500 million Credit
Agreement with the Chase Manhattan Bank, which matures on June 15, 1998.
Of the $933.1 million of fixed rate debt, $783.2 million represents publicly
issued convertible securities which mature beginning in 2001 but may be
redeemed in part and under certain conditions commencing in 1998.
Approximately $149.9 million of senior notes mature in December 1998.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the Securities and Exchange
Commission for the issuance of up to an aggregate $4 billion of debt and equity
securities. Pursuant to the Shelf Registration Statement, the Company issued
29.9 million FELINE PRIDES (Service Mark) and 2.3 million trust preferred
securities on March 2, 1998 and received approximately $1.4 billion in gross
proceeds therefrom. The issuance of the FELINE PRIDES resulted in the
utilization of approximately $3 billion of availability under the Shelf
Registration Statement. The FELINE PRIDES consist of 27.6 million Income PRIDES
and 2.3 million Growth PRIDES, each with a face amount of $50 per PRIDE. The
Income PRIDES consist of trust preferred securities and stock purchase
contracts under which the holders will purchase common stock from the Company
in February of 2001. The Growth PRIDES consist of stock purchase contracts
under which the holders will purchase common stock from the Company in February
of 2001 and zero coupon U.S. Treasury securities. The trust preferred
securities will bear interest at the annual rate of 6.45 percent, and the
forward purchase contract forming a part of the Income PRIDE will pay 1.05
percent annually in the form of a contract adjustment payment. The forward
purchase contract forming a part of the Growth PRIDES will pay 1.3 percent
annually in the form of a contract adjustment payment. The forward purchase
contracts call for the holder to purchase a minimum of 1.0395 shares and a
maximum of 1.3514 shares of Company common stock per PRIDES security, depending
upon the average of the closing price per share of Company common stock for a
20 consecutive trading day period ending in mid-February of 2001. This
represents a maximum common stock purchase price of $48.10 per share or a 30%
premium to the $37.00 closing price of Company common stock on February 24,
1998. The Company has received a rating on the trust preferred securities of
"a3" from Moody's Investors Services ("Moody's"), "A-" from Duff & Phelps
Credit Rating Co. ("Duff") and "A-" from Standard & Poor's ("S&P"). The Company
also may issue an aggregate amount of up to $1.01 billion of Medium-Term Notes
(the "Notes"), equity or other securities under the Shelf Registration
Statement. The Notes will bear interest at either (a) a fixed rate or (b) a
floating rate determined by reference to an interest rate formula. The proceeds
would be used for general corporate purposes, which may include future
acquisitions, repayment of debt outstanding under Revolving Credit Facilities,
working capital, and capital expenditures. The Company is considering issuing
equity securities under the Shelf Registration Statement in the second quarter.
The Company expects to file a new shelf registration statement in the second
quarter of 1998 for the issuance of debt and equity securities for an
aggregate amount to be determined. The proceeds would be used for general
corporate purposes, which may include future acquisitions, repayment of debt
outstanding under Revolving Credit Facilities, working capital, and capital
expenditures.
Long-term debt increased $343.7 million to $1.3 billion at December 31, 1997
when compared to amounts outstanding at December 31, 1996, primarily as a
result of the $550 million issuance of 3% Notes, the proceeds of which were
used to repay outstanding revolving credit facility borrowings at the Cendant
Merger date.
43
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH operates their mortgage services, fleet management services and relocation
services businesses as a separate public reporting entity and supports
purchases of leased vehicles and originated mortgages primarily by issuing
commercial paper and medium term notes. Such borrowings are not classified
based on contractual maturities, but rather are included in liabilities under
management and mortgage programs rather than long-term debt since such debt
corresponds directly with high quality related assets.
PHH debt is issued without recourse to the Company. The Company expects to
continue to have broad access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing
credit standards to minimize credit risk and the potential for losses.
Depending upon asset growth and financial market conditions, PHH utilizes the
United States, European and Canadian commercial paper markets, as well as
other cost-effective short-term instruments. In addition, PHH will continue
to utilize the public and private debt markets as sources of financing.
Augmenting these sources, PHH will continue to manage outstanding debt with
the potential sale or transfer of managed assets to third parties while
retaining fee-related servicing responsibility. PHH's aggregate outstanding
borrowings at the underlying balance sheet dates were as follows ($
billions):
DECEMBER 31,
-----------------
1997 1996
------- -------
Commercial paper $2.6 $3.1
Medium-term notes 2.7 1.7
Other 0.3 0.3
------- -------
$5.6 $5.1
======= =======
To provide additional financial flexibility, the Company's current policy is to
ensure that minimum committed facilities aggregate 80 percent of the average
amount of outstanding commercial paper. PHH maintains a $2.5 billion syndicated
unsecured credit facility which is backed by domestic and foreign banks and is
comprised of $1.25 billion of lines of credit maturing in 364 days and $1.25
billion maturing in the year 2002. In addition, PHH has approximately $181
million of uncommitted lines of credit with various financial institutions
which were unused at December 31, 1997. Management closely evaluates not only
the credit of the banks but the terms of the various agreements to ensure
ongoing availability. The full amount of PHH's committed facilities in 1997 to
date are undrawn and available. Management believes that its current policy
provides adequate protection should volatility in the financial markets limit
PHH's access to commercial paper or medium-term notes funding.
PHH minimizes its exposure to interest rate and liquidity risk by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities.
The Company and PHH currently operate under policies limiting (a) the payment
of dividends on PHH's capital stock to 40% of net income of PHH on an annual
basis excluding one-time charges, less the outstanding principal balance of
loans from PHH to the Company as of the date of the proposed dividend
payment, and (b) the outstanding principal balance of loans from PHH to the
Company to 40% of net income of PHH on an annual basis excluding one-time
charges, less payment of dividends on PHH's capital stock during such year.
PHH filed a shelf registration statement with the Securities and Exchange
Commission effective January 30, 1998, for the aggregate issuance of up to $3
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. The proceeds will be used to finance assets PHH manages for
its clients and for general corporate purposes.
44
CREDIT RATINGS
Following the Cendant Merger in December 1997, S&P and Duff affirmed A
ratings to the Company's long-term debt and Moody's upgraded the Company's
senior unsecured debt ratings to A3. S&P, Moody's and Fitch Investors
Service, LP ("Fitch") also affirmed investment grade ratings of A+, A2 and
A+, respectively, to PHH debt and A1, P1 and F1, respectively to PHH
commercial paper. Following the American Bankers bid in December 1997, Fitch
placed the ratings of PHH's short-term debt on Credit Watch with negative
implications. Following the Company's March 23, 1998 announcements relating
to the Company's agreements to acquire American Bankers and NPC, Moody's and
Duff affirmed the Company's and PHH's credit ratings while S&P placed the
ratings for the Company and PHH on Credit Watch with negative implications. A
security rating is not a recommendation to buy, sell or hold securities and
is subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independent of any other
rating.
CASH FLOWS (1997 VS. 1996)
The Company generated $1.2 billion of cash flows from operations in 1997
representing a $433.7 million decrease from 1996. The decrease in cash flows
from operations was primarily due to a $599.8 million increase in net income
adjusted for non-cash merger-related costs and other unusual charges, which
was offset by $361.0 million of incremental merger-related payments, $242.6
million reduction in accounts payable and other current liabilities and a
$314.7 million incremental increase in mortgage loans held for sale due to
acceleration of mortgage loan origination volume. The $2.5 billion decrease
in cash flows from investing activities consisted of approximately $1.5
billion of net investment in assets under management mortgage programs and
$897.6 million of payments of purchase liabilities associated with 1996
business combinations, including ARAC and RCI. In 1997, cash flows from
financing activities of approximately $795.7 million, primarily consisting of
net borrowings totaling $844.3 million offset by a net purchase of common
stock. The net borrowings included a $543.2 million convertible debt offering
in February 1997.
CAPITAL EXPENDITURES
The Company anticipates investing approximately $200 million during calendar
year 1998 in capital expenditures, representing less than 4% of 1997
consolidated revenue. Such capital expenditures are primarily associated with
the consolidation of internationally-based call centers and with information
technology systems to support expected volume increases in the Company's
mortgage services business and improve operational efficiencies in the delivery
of relocation services.
YEAR 2000 COMPLIANCE
The Company currently is in the process of identifying, evaluating and
implementing changes to computer systems and applications necessary to achieve
a year 2000 date conversion with no effect on customers or disruption to
business operations. These actions are necessary to ensure that the systems and
applications will recognize and process data from and after January 1, 2000.
Major areas of potential business impact have been identified and are being
reviewed, and initial conversion efforts are underway. However, if such
modifications and conversions are not made, or are not completed timely, the
year 2000 issue could have a material impact on the operations of the Company.
The total future cost of compliance associated with identified actions is
anticipated to be approximately $30 million. Variations from anticipated
expenditures and the effect on the Company's future results of operations are
not anticipated to be material in any given year.
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a material impact on Company operations. The
third quarter represented 27% of annual revenue as a result of peak leisure
travel and real estate sales in summer months. The fourth quarter represented
27% of annual revenue due to holiday season demand for software products.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes
45
standards for reporting and display of an alternative income measurement and
its components in the financial statements. This statement is effective for
fiscal years beginning after December 15, 1997. The Company will adopt SFAS
No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" effective for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about their operating segments in
their annual and interim financial statements. It also requires public
enterprises to disclose company-wide information regarding products and
services and the geographic areas in which they operate. The Company will
adopt SFAS No. 131 in 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" effective for periods beginning
after December 15, 1997. The Company will adopt SFAS No. 132 in 1998.
The aforementioned recently issued accounting pronouncements establish
standards for disclosures only and therefore will have no impact on the
Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from
any future results, performance, or achievements expressed or implied by such
forward looking statements. These forward looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward looking statements. Important assumptions and other
factors that could cause actual results to differ materially from those in
the forward looking statements, include, but are not limited to: uncertainty
as to the Company's future profitability, the Company's ability to develop
and implement operational and financial systems to manage rapidly growing
operations; competition in the Company's existing and potential future lines
of business; the Company's ability to integrate and operate successfully
acquired and merged businesses and the risks associated with such businesses,
including the Company's ability to obtain financing on acceptable terms to
finance the Company's growth strategy and for the Company to operate within
the limitations imposed by financing arrangements; uncertainty as to the
future profitability of acquired businesses, and other factors. Other factors
and assumptions not identified above were also involved in the derivation of
these forward looking statements, and the failure of such other assumptions
to be realized as well as other factors may also cause actual results to
differ materially from those projected. The Company assumes no obligation to
update these forward looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, the Company must deal with effects of changes in
interest rates and currency exchange rates. The following discussion presents
an overview of how such changes are managed and a view of their potential
effects.
The Company uses various financial instruments, particularly interest rate
and currency swaps and currency forwards, to manage its respective interest
rate and currency risks. 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. Established practices require that derivative financial
instruments relate to specific asset, liability or equity transactions or to
currency exposures. More detailed information about these financial
instruments, as well as the strategies and policies for their use, is
provided in Notes 13 and 14 to the financial statements.
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Although the rules
46
offer alternatives for presenting this information, none of the alternatives
is without limitations. The following discussion is based on so-called "shock
tests," which model effects of interest rate and currency shifts on the
reporting company. Shock tests, while probably the most meaningful analysis
permitted, are constrained by several factors, including the necessity to
conduct the analysis based on a single point in time and by their inability
to include the extraordinarily complex market reactions that normally would
arise from the market shifts modeled. While the following results of shock
tests for interest rate and currencies may have some limited use as
benchmarks, they should not be viewed as forecasts.
o One means of assessing exposure to interest rate changes is a
duration-based analysis that measures the potential loss in net
earnings resulting from a hypothetical 10% change (decrease) in
interest rates across all maturities (sometimes referred to as a
"parallel shift in the yield curve"). Under this model, it is
estimated that, all else constant, such a decrease would not
adversely impact the 1998 net earnings of the Company based on
year-end 1997 positions.
o One means of assessing exposure to changes in currency exchange rates
is to model effects on future earnings using a sensitivity analysis.
Year-end 1997 consolidated currency exposures, including financial
instruments designated and effective as hedges, were analyzed to
identify the Company's assets and liabilities denominated in other
than their relevant functional currency. Net unhedged exposures in
each currency were then remeasured assuming a 10% change (decrease)
in currency exchange rates compared with the U.S. dollar. Under this
model, it is estimated that, all else constant, such a decrease would
not adversely impact the 1998 net earnings of the Company based on
year-end 1997 positions.
The categories of primary market risk exposure of the Company are: (i)
long-term U.S. interest rates due to mortgage loan origination commitments
and an investment in mortgage loans held for resale; (ii) short-term interest
rates as they impact vehicle and relocation receivables; and (iii) LIBOR and
commercial paper interest rates due to their impact on variable rate
borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Schedule Index commencing
on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
(a) Previous independent accountants
(i) On January 20, 1998, in connection with the Company's previously
announced plan to name a successor accountant following the Merger, the
Company replaced Ernst & Young LLP, which served as the Company's independent
accountants, and engaged Deloitte & Touche LLP, the auditor of HFS
Incorporated prior to the Merger, as its new independent accountants. Ernst &
Young LLP will continue to audit and report on the Company's former CUC
businesses as of and for the year ended December 31, 1997.
(ii) The reports of Ernst & Young LLP on the financial statements for the
past two fiscal years of the Company contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope of accounting principles.
(iii) The Audit Committee of the Company's Board of Directors participated
in and approved the decision to change independent accountants.
(iv) In connection with its audit for the two most recent fiscal years and
through January 20, 1998, there were no disagreements with Ernst & Young LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Ernst & Young LLP would have caused Ernst &
Young LLP to make reference thereto in their report on the financial
statements for such years.
(v) During the two most recent fiscal years and through January 20, 1998,
there were no reportable events as that term is defined in Item 304 (a) (1)
(v) of Regulation S-K.
47
(vi) The Company has requested that Ernst & Young LLP furnish it with a
letter addressed to the Commission stating whether or not it agrees with the
above statements. A copy of such letter, dated January 22, 1998, is filed as
Exhibit 16 to the Current Report on Form 8-K of the Company dated January 27,
1998.
(b) New independent accountants
As stated above, the Company engaged Deloitte & Touche LLP as its new
independent accountants as of January 20, 1998. Such engagement was approved
by the Audit Committee of the Company's Board of Directors on January 20,
1998. During the two most recent fiscal years and through January 20, 1998,
the Company has not consulted with Deloitte & Touche LLP regarding either:
(i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements, and neither a written report
was provided to the registrant nor oral advice was provided that Deloitte &
Touche concluded was an important factor considered by the registrant in
reaching a decision as to the accounting, auditing or financial reporting
issue; or
(ii) any matter that was either the subject of a disagreement, as that
term is defined in Item 304 (a) (1) (iv) of Regulation S-K, and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that
term is defined in Item 304 (a) (1) (v) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's Proxy Statement under the
sections titled "Proposal 1: Election of Directors" and "Executive Officers"
is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's Proxy Statement under the
section titled "Executive Compensation and Other Information" is incorporated
herein by reference in response to this item, except that the information
contained in the Proxy Statement under the sub-headings "Pre-Merger
Compensation Committee Report on Executive Compensation" and "Performance
Graph" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained in the Company's 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 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.
48
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 hereof.
ITEM 14(B) REPORTS ON FORM 8-K
On October 31, 1997, the Company filed a Current Report on Form 8-K to
report the execution of a Stock Purchase Agreement to sell all of the
outstanding stock of Interval Holdings, Inc. and CUC Vacation Exchange, Inc.
On November 4, 1997, the Company filed a Current Report on Form 8-K to
report the post-merger financial results relating to the acquisition of Hebdo
Mag International Inc.
On December 18, 1997, the Company filed a Current Report on Form 8-K to
report the completion of the Merger.
49
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
Senior Executive Vice President
and General Counsel
Date: March 31, 1998
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/ Walter A. Forbes
- --------------------------------- Chairman of the Board March 31, 1998
(Walter A. Forbes)
/s/ Henry R. Silverman
- --------------------------------- President, Chief Executive Officer and March 31, 1998
(Henry R. Silverman) Director
/s/ Michael P. Monaco Vice Chairman, Chief Financial Officer March 31, 1998
- -------------------------------- and Director (Principal Financial
(Michael P. Monaco) Officer)
/s/ Scott E. Forbes
- --------------------------------- Senior Vice President--Finance March 31, 1998
(Scott E. Forbes) (Principal Accounting Officer)
/s/ Stephen P. Holmes
- --------------------------------- Vice Chairman and Director March 31, 1998
(Stephen P. Holmes)
/s/ Robert D. Kunisch
- --------------------------------- Vice Chairman and Director March 31, 1998
(Robert D. Kunisch)
/s/ Christopher K. McLeod
- --------------------------------- Vice Chairman and Director March 31, 1998
(Christopher K. McLeod)
/s/ E. Kirk Shelton
- --------------------------------- Vice Chairman and Director March 31, 1998
(E. Kirk Shelton)
/s/ Robert T. Tucker
- --------------------------------- Vice Chairman, Director, and Secretary March 31, 1998
(Robert T. Tucker)
/s/ James E. Buckman
- --------------------------------- Senior Executive Vice President, March 31, 1998
(James E. Buckman) General Counsel and Director
/s/ John D. Snodgrass
- --------------------------------- Director March 31, 1998
(John D. Snodgrass)
/s/ Bartlett Burnap
- --------------------------------- Director March 31, 1998
(Bartlett Burnap)
50
SIGNATURE TITLE DATE
- --------------------------------- -------------------------------------- ------------------
/s/ Leonard S. Coleman
- ---------------------------------
(Leonard S. Coleman) Director March 31, 1998
/s/ T. Barnes Donnelley
- ---------------------------------
(T. Barnes Donnelley) Director March 31, 1998
/s/ Martin L. Edelman
- ---------------------------------
(Martin L. Edelman) Director March 31, 1998
/s/ Frederick D. Green
- ---------------------------------
(Frederick D. Green) Director March 31, 1998
/s/ Stephen A. Greyser
- ---------------------------------
(Stephen A. Greyser) Director March 31, 1998
/s/ Dr. Carole G. Hankin
- ---------------------------------
(Dr. Carole G. Hankin) Director March 31, 1998
/s/ Brian Mulroney
- ---------------------------------
(The Rt. Hon. Brian Mulroney,
P.C., LL.D) Director March 31, 1998
/s/ Robert E. Nederlander
- ---------------------------------
(Robert E. Nederlander) Director March 31, 1998
/s/ Burton C. Perfit
- ---------------------------------
(Burton C. Perfit) Director March 31, 1998
/s/ Anthony G. Petrello
- ---------------------------------
(Anthony G. Petrello) Director March 31, 1998
/s/ Robert W. Pittman
- ---------------------------------
(Robert W. Pittman) Director March 31, 1998
/s/ E. John Rosenwald, Jr.
- ---------------------------------
(E. John Rosenwald, Jr.) Director March 31, 1998
/s/ Robert P. Rittereiser
- ---------------------------------
(Robert P. Rittereiser) Director March 31, 1998
/s/ Stanley M. Rumbough, Jr.
- ---------------------------------
(Stanley M. Rumbough, Jr.) Director March 31, 1998
/s/ Leonard Schutzman
- ---------------------------------
(Leonard Schutzman) Director March 31, 1998
/s/ Robert F. Smith
- ---------------------------------
(Robert F. Smith) Director March 31, 1998
Craig R. Stapleton
- ---------------------------------
(Craig R. Stapleton) Director March 31, 1998
51
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 C-2 to
the Schedule 14-D-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 By-Laws of the Company (incorporated by reference to Exhibit 4.2 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)*
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 Novia 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
Novia 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)*
10.1-10.47 Material Contracts, Management Contracts, Compensatory Plans and Arrangements
52
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------------
10.1 Agreement with E. Kirk Shelton, dated as of May 27, 1997 (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571, July 31, 1996)*
10.2 Agreement with Christopher K. McLeod, dated as of May 27, 1997 (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.3 Restated Employment Contract with Walter A. Forbes, dated as of May 27, 1997 (filed as
Exhibit 10.3 to the Company's Registration Statement on Form S-4, Registration No.
333-34571)*
10.4 Agreement with Henry R. Silverman, dated May 27, 1997 (filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-4, Registration No. 333-34571)*
10.5 Agreement with Stephen P. Holmes, dated May 27, 1997 (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-4, Registration No. 333-34571)*
10.6 Agreement with Michael P. Monaco, dated May 27, 1997 (filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-4, Registration No. 333-34571)*
10.7 Agreement with James E. Buckman, dated May 27, 1997 (filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-4, Registration No. 333-34571)*
10.8 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)*
10.9 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)*
10.10 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)*
10.11 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)*
10.12 Restricted Stock Plan and Form of Restricted Stock Plan Agreement (filed as Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991, as
amended December 12, 1991, and December 19, 1991.)*
10.13 1997 Stock Option Plan (filed as Exhibit 10.23 to the Company's Form 10-Q for the period
ended April 30, 1997)*
10.14 1996 Executive Retirement Plan (filed as Exhibit 10.22 to the Company's Form 10-Q for the
period ended April 30, 1997)*
10.15 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)*
10.16 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)*
10.17(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. 33094756), Exhibit 4.1)*
10.17(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))*
53
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------------
10.17(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))*
10.17(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)*
10.17(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))*
10.17(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))*
10.17(g) Seventh Amendment to the Amended and Restated 1993 Stock Option Plan dated as of April 30,
1997
10.17(h) Eighth Amendment to the Amended and Restated 1993 Stock Option Plan dated as of May 27, 1997
10.18 Chicago 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.
1-11402)*
10.19 Agreement and Plan of Merger, dated as of July 19, 1996, by and among Ideon Group, Inc., CUC
International Inc. and IG Acquisition Corp. (filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1996)*
10.20 Form of U.S. Underwriting Agreement dated October 1996, among CUC International Inc., certain
selling stockholders and the U.S. Underwriters (filed as Exhibit 1.1(a) to the Company's
Registration Statement on Form S-3, Registration No. 333-13537, filed on October 9, 1996)*
10.21 Form of International Underwriting Agreement dated October 1996, among CUC International
Inc., certain selling stockholders and the International Underwriters (filed as Exhibit 1.1
(b) to the Company's Registration Statement on Form S-3, Registration No. 333-13537, filed on
October 9, 1996)*
10.22 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)*
10.23 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)*
10.24 Plan for Corporate Governance of CUC International Inc. following the Effective Time (filed
as Exhibit 99.2 to the Company's Report on Form 8-K filed on May 29, 1997)*
10.25 $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 14D-1 filed by the
Company on January 27, 1998, File No. 5-31838)*
54
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------------
10.26 $1,250,000 364-Day Revolving Credit and Competitive Advance Facility Agreement, dated 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 Advance
Agent. (Incorporated by reference to Exhibit (b)(2) to the Schedule 14D-1 filed by the
Company on January 27, 1998, File No. 5-31838).*
10.27 Cendant Corporation Acquisition Revolving Credit Facility Commitment Letter, dated January
23, 1998, among Chase Securities Inc., The Chase Manhattan Bank and Cendant Corporation
(Incorporated by reference to exhibit (b)(3) to the Schedule 14D-1 filed by the Company on
January 27, 1998, File No. 5-31838)*
10.28 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)*
10.29(a) 364-Day Credit Agreement Among the Company, 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 March 4, 1997, filed as Exhibit 10.1 to Registration
Statement 333-27715*
10.29(b) Five-year Credit Agreement among the Company, the Lenders, and Chase Manhattan Bank, as
Administrative Agent, dated March 4, 1997 filed as Exhibit 10.2 to Registration Statement
333-27715*
10.29(c) Second Amendment to PHH Credit Agreements (incorporated by reference to PHH Incorporated's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, Exhibit
10.1)*
10.29(d) Third Amendment to PHH Credit Agreements (incorporated by reference to PHH Incorporated's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, Exhibit
10.1)*
10.30 Indenture between the Company and Bank of New York, Trustee, dated as of May 1, 1992, filed
as Exhibit 4(a)(iii) to Registration Statement 33-48125*
10.31 Indenture between the Company and First National Bank of Chicago, Trustee, dated as of March
1, 1993, filed as Exhibit 4(a)(i) to Registration Statement 33-59376*
10.32 Indenture between the Company and First National Bank of Chicago, Trustee, dated as of June
5, 1997, filed as Exhibit 4(a) to Registration Statement 333-27715*
10.33 Indenture between the Company and Bank of New York, Trustee dated as of June 5, 1997, filed
as Exhibit 4(a)(11) to Registration Statement 333-27715*
10.34 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, filed as Exhibit 1 to Registration Statement
33-63627*
10.35 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*
10.36 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. 1-07797)*
55
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------------
10.37 Agreement and Plan of Merger dated as of May 1, 1996 among HFS Incorporated, CBC Acquisition
Corp., Fremont Investors, Inc. and Coldwell Banker Corporation. (Incorporated by reference to
HFS Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996, Exhibit 2.4)*
10.38 Agreement and Plan of Merger dated as of August 23, 1996 among HFS Incorporated, Avis
Acquisition Corp., U.S. Trust Company of California, N.A. as Trustee of the Trust forming a
part of the Avis, Inc. Employee Stock Ownership Plan and Avis, Inc. (Incorporated by
reference to HFS Incorporated's Registration Statement on Form S-3 Registration No.
333-11029, Exhibit 2.1)*
10.39 Stock Purchase Agreement dated as of October 6, 1996 by and among HFS Incorporated, Ms.
Christel DeHaan and Resort Condominiums International, Inc. (Incorporated by reference to HFS
Incorporated's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1996, Exhibit 2.1)*
10.40 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)*
10.41 Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS Incorporated,
PHH Corporation and Mercury Acquisition Corp. (Incorporated by reference to HFS
Incorporated's Current Report on Form 8-K dated November 14, 1996, Exhibit 2.1)*
10.42 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)*
10.43 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)*
10.44 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)*
10.45 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)*
10.46 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)*
10.47 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)*
56
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------------
12 Statement Re: Computation of Consolidated Ratio to Earnings to Combined Fixed Charges and
Preferred Stock Dividends
16 Letter re: change in certifying accountant (Incorporated by reference to the Company's Form
8-K dated January 27, 1998)*
21 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP related to the financial statements of Cendant Corporation
23.2 Consent of Ernst & Young LLP relating to the financial statements of Cendant Membership
Services, Inc. and CUC International Inc.
23.3 Consent of KPMG Peat Marwick LLP relating to the financial statements of PHH Corporation
23.4 Consent of Deloitte & Touche LLP relating to the financial statements of Sierra On-Line, Inc.
23.5 Consent of KPMG Peat Marwick LLP relating to the financial statements of Davidson &
Associates, Inc.
23.6 Consent of Price Waterhouse LLP relating to the financial statements of Ideon Group, Inc.
27 Financial data schedule
- ------------
* Incorporated by reference
57
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-8
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-10
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995 F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-14
Notes to Consolidated Financial Statements F-16
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Cendant Corporation
We have audited the consolidated balance sheets of Cendant Corporation and
subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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. The consolidated financial statements
give retroactive effect to the merger of CUC International Inc. with HFS
Incorporated to form Cendant Corporation, which has been accounted for as a
pooling of interests as described in Note 4 to the consolidated financial
statements. We did not audit the balance sheets of Cendant Membership Services,
Inc. and CUC International Inc. as of December 31, 1997 and January 31, 1997,
respectively, which statements reflect total assets of approximately $3.2
billion and $2.7 billion respectively, or the related statements of income,
shareholders' equity, and cash flows for the years ended December 31, 1997,
January 31, 1997 and 1996 which statements reflect net income of approximately
$17.2 million, $166.4 million, $145.0 million, respectively. Nor did we audit
the balance sheet of PHH Corporation [a consolidated subsidiary of Cendant
Corporation] as of December 31, 1996 or the related statements of income,
shareholders' equity, and cash flows of PHH Corporation for the years ended
December 31, 1996 and January 31, 1996, which statements reflect total assets
of approximately $6.6 billion as of December 31, 1996 and net income of
approximately $87.7 million and $78.1 million for the years ended December 31,
1996 and January 31, 1996, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for Cendant Membership Services, Inc., CUC
International Inc. and PHH Corporation for such periods, is based solely on the
reports of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly in all
material respects the financial condition of Cendant Corporation and
subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche, LLP
Parsippany, New Jersey
March 30, 1998
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
Cendant Membership Services, Inc.
We have audited the consolidated balance sheet of Cendant Membership Services,
Inc. ("CMS"), a wholly-owned subsidiary of Cendant Corporation, as of December
31, 1997, and the related consolidated statements of income, shareholder's
equity, and cash flows for the year ended December 31, 1997, not separately
included herein. We have also audited the consolidated balance sheet of CUC
International Inc. ("CUC") as of January 31, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended January 31, 1997, not separately included herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of the following
wholly-owned subsidiaries: Davidson & Associates, Inc. ("Davidson") for the
year ended December 31, 1995, Sierra On-Line, Inc. ("Sierra") for the year
ended March 31, 1996 and Ideon Group, Inc. ("Ideon") for the year ended
December 31, 1995. Effective January 1, 1995, Ideon changed its fiscal year end
from October 31 to December 31 (the "Ideon Transition Period"). We also did not
audit the statement of operations for the Ideon Transition Period which
includes a loss of $49.9 million included as a charge to retained earnings in
the consolidated financial statements for the year ended January 31, 1996.
These financial statements reflect total revenues constituting 27.6% of the
consolidated financial statements total for the year ended January 31, 1996 and
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data for Davidson, Sierra and Ideon for the
periods indicated above, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CMS at December
31, 1997, and the consolidated results of its operations and its cash flows
for the year ended December 31, 1997, and the consolidated financial position
of CUC at January 31, 1997, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended January 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 3, 1998
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated balance sheet of PHH Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for the years ended December
31, 1996 and January 31, 1996, before the restatement related to the merger
of Cendant Corporation's relocation business with the Company and
reclassifications to conform to the presentation used by Cendant Corporation,
not presented separately herein. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements (before restatement and
reclassifications) referred to above present fairly, in all material
respects, the financial position of PHH Corporation and subsidiaries as of
December 31, 1996, and the results of their operations and their cash flows
for the years ended December 31, 1996 and January 31, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
F-4
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Sierra On-Line, Inc. and subsidiaries (the "Company")
for the year ended March 31, 1996, not presented separately herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the results of the Company's
operations and their cash flows for the year ended March 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Seattle, Washington
June 24, 1996
F-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Davidson & Associates, Inc.
We have audited the consolidated statements of earnings, shareholders' equity
and cash flows of Davidson & Associates, Inc. and subsidiaries for the year
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principle used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of Davidson & Associates, Inc. and subsidiaries for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
F-6
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated statements of operations, of cash flows and
of changes in stockholders' equity of Ideon Group, Inc. (formerly known as
SafeCard Services, Incorporated), and its subsidiaries (not presented
separately herein), present fairly, in all material respects, the results of
operations and cash flows of Ideon Group, Inc. and its subsidiaries for the
year ended December 31, 1995, and the two months ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Ideon Group, Inc. for any period
subsequent to December 31, 1995.
As discussed in Note 1 to the consolidated financial statements of Ideon
Group, Inc., the Company changed the amortization periods for deferred
subscriber acquisition costs effective December 31, 1994.
/s/ Price Waterhouse LLP
Tampa, Florida
February 2, 1996
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 149.5 $ 633.9
Receivables, (net of allowance for doubtful
accounts
of $108.0 and $106.9) 1,648.8 1,290.6
Deferred income taxes 226.5 141.3
Other current assets 550.5 463.8
------------ -----------
TOTAL CURRENT ASSETS 2,575.3 2,529.6
------------ -----------
Deferred membership acquisition costs 424.5 401.6
Franchise agreements--net 890.3 995.9
Goodwill--net 2,467.0 2,302.2
Other intangibles--net 897.8 636.2
Other assets 1,152.6 993.6
------------ -----------
TOTAL ASSETS EXCLUSIVE OF ASSETS UNDER PROGRAMS 8,407.5 7,859.1
------------ -----------
ASSETS UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Net investment in leases and leased vehicles 3,659.1 3,418.7
Relocation receivables 775.3 773.3
Mortgage loans held for sale 1,636.3 1,248.3
Mortgage servicing rights 373.0 288.9
------------ -----------
6,443.7 5,729.2
------------ -----------
TOTAL ASSETS $14,851.2 $13,588.3
============ ===========
See accompanying notes to consolidated financial statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES $ 1,742.8 $ 1,680.4
------------ -----------
Deferred income 1,197.2 1,099.4
Long-term debt 1,348.3 1,004.6
Deferred income taxes 66.6 46.8
Other noncurrent liabilities 120.5 78.1
------------ -----------
TOTAL LIABILITIES EXCLUSIVE OF LIABILITIES UNDER PROGRAMS 4,475.4 3,909.3
------------ -----------
LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Debt 5,602.6 5,089.9
------------ -----------
Deferred income taxes 295.7 281.9
------------ -----------
Commitments and contingencies (Note 15)
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
838,333,800 and 804,655,850 shares 8.4 8.0
Additional paid-in capital 3,059.9 2,870.5
Retained earnings 1,530.0 1,540.8
Net unrealized gain (loss) on marketable securities (1.5) 4.3
Currency translation adjustment (41.5) (12.5)
Restricted stock, deferred compensation (3.4) (28.2)
Treasury stock, at cost, 6,545,362 and 6,911,757 shares (74.4) (75.7)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 4,477.5 4,307.2
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,851.2 $13,588.3
============ ===========
See accompanying notes to consolidated financial statements.
F-9
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
REVENUES
Membership and service fees--net $4,589.0 $3,433.9 $2,606.2
Fleet leasing (net of depreciation and interest costs
of $1,205.2, $1,132.4 and $1,089.0) 59.5 56.7 52.1
Other 666.2 418.2 333.8
---------- ---------- ----------
NET REVENUES 5,314.7 3,908.8 2,992.1
---------- ---------- ----------
EXPENSES
Operating 1,555.5 1,392.8 1,110.9
Marketing and reservation 1,266.3 1,089.5 875.2
General and administrative 727.2 339.6 279.5
Depreciation and amortization 256.8 167.9 112.9
Interest--net 66.3 25.4 13.3
Merger-related costs and other unusual charges 1,147.9 179.9 97.0
---------- ---------- ----------
Total expenses 5,020.0 3,195.1 2,488.8
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 294.7 713.7 503.3
Provision for income taxes 239.3 290.1 200.5
---------- ---------- ----------
NET INCOME $ 55.4 $ 423.6 $ 302.8
========== ========== ==========
PER SHARE INFORMATION
Net income per share
Basic $ 0.07 $ 0.56 $ 0.45
Diluted $ 0.06 $ 0.52 $ 0.42
Weighted average shares
Basic 811.2 754.4 670.5
Diluted 851.7 818.6 741.8
See accompanying notes to consolidated financial statements.
F-10
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON CURRENCY RESTRICTED
----------------- PAID-IN RETAINED MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION STOCK
-------- -------- ------------ ----------- -------------- ------------- --------------- --------
BALANCE, JANUARY 1, 1995 663.2 $6.6 $670.5 $ 970.3 $(.7) $(22.0) $-- $(10.5)
Issuance of common stock 20.8 .2 183.4 -- -- -- -- --
Exercise of stock options by
payment of cash and common
stock 12.4 .1 64.4 -- -- -- -- (20.5)
Tax benefit from exercise of
stock options -- -- 54.8 -- -- -- -- --
Amortization of ESOP obligation -- -- 3.0 -- -- -- -- --
Exercise of stock warrants 2.4 -- 14.9 -- -- -- -- --
Cash dividends declared and
other equity distributions -- -- .2 (36.0) -- -- -- --
Adjustment to reflect change in
Ideon and Advance Ross fiscal
years -- -- -- (50.0) -- -- -- --
Conversion of convertible notes 2.1 -- 13.7 -- -- -- -- --
Net unrealized gain on
marketable securities -- -- -- -- 1.3 -- -- --
Purchase of common stock -- -- -- -- -- -- -- (10.1)
Retirement of treasury stock (.6) -- (10.1) -- -- -- -- 10.1
Currency translation adjustment -- -- -- -- -- (3.4) -- --
Net income -- -- -- 302.8 -- -- -- --
------- -------- ------------ ----------- -------------- ------------- -------------- ---------
BALANCE, DECEMBER 31, 1995 700.3 $6.9 $994.8 $1,187.1 $ .6 $(25.4) $-- $(31.0)
See accompanying notes to consolidated financial statements.
F-11
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(In millions)
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON CURRENCY RESTRICTED
----------------- PAID-IN RETAINED MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION STOCK
-------- -------- ------------ ----------- -------------- ------------- --------------- --------
BALANCE, JANUARY 1, 1996 700.3 $6.9 $ 994.8 $1,187.1 $ .6 $(25.4) $ -- $(31.0)
Hebdo Mag adjustment 14.2 .2 16.7 .7 -- 1.6 -- --
Issuance of common stock 71.0 .7 1,654.0 (34.1) -- -- -- --
Exercise of stock options
by payment of cash and
common stock 14.0 .1 78.2 -- -- -- -- (25.5)
Restricted stock issuance 1.4 -- 30.5 -- -- -- (30.5) --
Amortization of
restricted stock -- -- -- -- -- -- 2.3 --
Tax benefit from exercise
of stock options -- -- 78.9 -- -- -- -- --
Cash dividends declared
and other equity
distributions -- -- -- (29.4) -- -- -- --
Adjustment to reflect
change in Davidson, Sierra
and Ideon fiscal years -- -- -- (4.7) -- -- -- --
Adjustment to reflect change
in PHH Fiscal year -- -- (.6) (2.4) -- 2.4 -- --
Conversion of convertible
notes 3.8 .1 18.0 -- -- -- -- --
Net unrealized gain on
marketable securities -- -- -- -- 3.7 -- -- --
Purchase of common stock -- -- -- -- -- -- -- (19.2)
Currency translation
adjustment -- -- -- -- -- 8.9 -- --
Net income -- -- -- 423.6 -- -- -- --
--------- --------- ---------- ---------- ------------- --------------- ------------- ----------
BALANCE, DECEMBER 31, 1996 804.7 $8.0 $2,870.5 $1,540.8 $4.3 $(12.5) $(28.2) $(75.7)
See accompanying notes to consolidated financial statements.
F-12
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(In millions)
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) ON CURRENCY RESTRICTED
----------------- PAID-IN RETAINED MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES ADJUSTMENT COMPENSATION STOCK
-------- -------- ------------ ----------- -------------- ------------- --------------- --------
BALANCE, JANUARY 1, 1997 804.7 $8.0 $2,870.5 $1,540.8 $ 4.3 $(12.5) $(28.2) $ (75.7)
Issuance of common stock 9.2 .1 48.7 7.3 -- -- -- --
Exercise of stock options by
payment of cash and common
stock 11.4 .1 102.6 -- -- -- -- (17.8)
Restricted stock issuance .2 -- 3.7 -- -- -- (3.7) --
Amortization of restricted stock -- -- -- -- -- -- 28.5 --
Tax benefit from exercise of
stock options -- -- 93.5 -- -- -- -- --
Cash dividends declared -- -- -- (6.6) -- -- -- --
Adjust to reflect change in CUC
fiscal year -- -- -- (66.9) -- -- -- --
Adjustment to reflect taxable
poolings -- -- 41.2 -- -- -- -- --
Post-closing payment made in
connection with shares issued
to acquire Avis Inc. -- -- (60.8) -- -- -- -- --
Conversion of convertible notes 20.2 .2 150.9 -- -- -- -- --
Net unrealized loss on
marketable securities -- -- -- -- (5.8) -- -- --
Purchase of common stock -- -- -- -- -- -- -- (171.3)
Retirement of treasury stock (7.4) -- (190.4) -- -- -- -- 190.4
Currency translation adjustment -- -- -- -- -- (29.0) -- --
Net income -- -- -- 55.4 -- -- -- --
-------- -------- ------------ ----------- -------------- ------------- ----------- --------
BALANCE, DECEMBER 31, 1997 838.3 $8.4 $3,059.9 $1,530.0 $(1.5) $(41.5) $ (3.4) $ (74.4)
======== ======== ============ =========== ============== ============= =========== ========
See accompanying notes to consolidated financial statements.
F-13
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
YEAR ENDED DECEMBER 31,
-------------------------------------
OPERATING ACTIVITIES 1997 1996 1995
----------- ----------- -----------
Net income $ 55.4 $ 423.6 $ 302.8
Merger-related costs and other unusual charges 1,147.9 179.9 97.0
Merger-related payments (441.5) (80.5) (36.2)
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 256.8 167.9 112.9
Membership acquisition costs (663.4) (638.2) (605.1)
Amortization of membership costs 617.6 641.3 556.6
Effect of changes in fiscal years of pooled entities (66.9) (7.1) (50.0)
Deferred income taxes (42.5) 56.5 22.6
Increase (decrease) from changes in:
Receivables (287.3) (162.6) (184.8)
Accounts payable and other current liabilities (192.6) 50.0 75.8
Deferred income 162.4 23.4 83.5
Other (71.0) 39.8 (18.3)
----------- ----------- -----------
474.9 694.0 356.8
----------- ----------- -----------
Management and mortgage programs:
Depreciation and amortization 1,121.9 1,021.8 960.9
Mortgage loans held for sale (388.0) (73.3) (139.5)
----------- ----------- -----------
733.9 948.5 821.4
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,208.8 1,642.5 1,178.2
----------- ----------- -----------
INVESTING ACTIVITIES
Property and equipment additions (182.7) (140.6) (108.7)
Proceeds from sales of marketable securities 522.5 137.3 255.9
Purchases of marketable securities (458.1) (125.6) (138.2)
Loans and investments (272.5) (12.7) (33.8)
Net assets acquired, exclusive of cash acquired and
acquisition-related payments (625.1) (1,688.3) (145.8)
Proceeds from sale of subsidiary 117.5 -- --
Funding of grantor trusts -- (89.9) --
Other (109.2) 33.6 (23.7)
----------- ----------- -----------
(1,007.6) (1,886.2) (194.3)
----------- ----------- -----------
Management and mortgage programs:
Investment in leases and leased vehicles (2,068.8) (1,901.2) (2,008.5)
Payments received on investment in leases and leased
vehicles 589.0 595.9 576.6
Proceeds from sales and transfers of leases and leased
vehicles to third parties 186.4 162.8 109.8
Equity advances on homes under management (6,844.5) (4,308.0) (6,238.5)
Repayment of advances on homes under management 6,862.6 4,348.9 6,070.5
Additions to originated mortgage servicing rights (270.4) (164.4) (130.1)
Proceeds from sales of mortgage servicing rights 49.0 7.1 21.7
----------- ----------- -----------
(1,496.7) (1,258.9) (1,598.5)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,504.3) (3,145.1) (1,792.8)
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-14
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from borrowings $ 66.6 $ 494.4 $ --
Principal payments on borrowings (275.4) (3.1) (45.9)
Issuance of convertible debt 543.2 -- --
Issuance of common stock 129.3 1,222.2 100.8
Purchases of common stock (171.3) (19.2) (10.1)
Redemption of warrants -- -- 14.9
Payment of dividends by pooled entities (6.6) (27.8) (30.9)
Other -- (81.6) --
----------- ----------- -----------
285.8 1,584.9 28.8
----------- ----------- -----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 2,816.3 1,656.0 1,858.8
Principal payments on borrowings (1,692.9) (1,645.9) (1,237.0)
Net change in short-term borrowings (613.5) 231.8 17.4
----------- ----------- -----------
509.9 241.9 639.2
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 795.7 1,826.8 668.0
----------- ----------- -----------
Effect of changes in exchange rates on cash and
cash equivalents 15.4 (46.2) 6.5
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (484.4) 278.0 59.9
Cash and cash equivalents, beginning of period 633.9 355.9 296.0
----------- ----------- -----------
Cash and cash equivalents, end of period $ 149.5 $ 633.9 $ 355.9
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 390.8 $ 307.6 $ 285.4
=========== =========== ===========
Taxes $ 264.5 $ 89.4 $ 90.7
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-15
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Cendant Corporation, together with its subsidiaries and its joint
ventures ("Cendant" or the "Company") is a leading global provider of
consumer and business services. The Company was created through the
merger (the "Cendant Merger") of CUC International Inc. ("CUC") and HFS
Incorporated ("HFS") on December 17, 1997 with CUC surviving and being
renamed Cendant Corporation. The Company provides all the services
formerly provided by each of CUC and HFS including technology-driven
membership-based consumer services, travel services and real estate
services. See Note 22 for a description of the Company's industry
segments and the services provided within its underlying businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
and transactions of the Company together with its wholly owned and
majority owned subsidiaries. The accompanying consolidated financial
statements have been restated for the business combinations accounted
for as poolings of interests (see Note 4) as if such combined companies
had operated as one entity since inception. All material intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation is computed by the straight-line method
over the estimated useful lives of the related assets.
FRANCHISE AGREEMENTS
Franchise agreements are recorded at their estimated fair values upon
acquisition and are amortized on a straight-line basis over the
estimated periods to be benefited, ranging from 12 to 40 years. At
December 31, 1997 and 1996, accumulated amortization amounted to $125.3
million and $87.9 million, respectively.
GOODWILL
Goodwill, which represents the excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over the
estimated useful lives, ranging from 5 to 40 years. At December 31,
1997 and 1996, accumulated amortization amounted to $200.0 million and
$168.6 million, respectively.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its long-lived
assets, comparing the respective carrying values to the current and
expected future cash flows to be generated from such assets. Property
and equipment is evaluated separately within each business. The
recoverability of franchise agreements and goodwill are evaluated on a
separate basis for each acquisition and each respective franchise
brand.
MEMBERSHIP ACQUISITION AND ADVERTISING COSTS
Membership acquisition costs are deferred and charged to operations as
membership fees are recognized. These costs, which relate directly to
membership solicitations (direct response advertising
F-16
costs), principally include: postage, printing, kits, mailings,
publications (including coupon books) and telemarketing costs.
Substantially all of these costs are incurred for services performed by
outside sources. Such costs are amortized on a straight-line basis as
revenues are realized over the average membership period (generally one
to three years). The membership acquisition costs incurred, applicable
to obtaining a new member, for memberships other than coupon book
memberships, generally approximate the initial membership fee. Initial
membership fees for coupon book memberships generally exceed the
membership acquisition costs incurred applicable to obtaining a new
member. However, if membership acquisitions costs were to exceed the
membership fee, an appropriate adjustment would be made for any
significant impairment.
Amortization of membership acquisition costs, including deferred
renewal costs, which consist principally of charges from sponsoring
institutions and publications, amounted to $617.6 million, $641.3
million and $556.6 million for the years ended December 31, 1997, 1996
and 1995, respectively.
All advertising costs, other than direct response advertising costs,
are expensed in the period incurred. Total advertising expenses were
$1,132.0 million, $970.4 million and $776.8 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
CORE BUSINESS OPERATIONS AND REVENUE RECOGNITION
Membership. Membership fees are generally billed through financial
institutions and other cardholder based institutions and are recorded
as deferred membership income upon acceptance of the membership, net of
estimated cancellations. Membership fees are recognized over the
average membership period, generally one to three years. Deferred
membership income is classified as non-current in the Consolidated
Balance Sheets since working capital will not be required as the
deferred income is recognized over future periods.
Franchising. Franchise revenue principally consists of royalty,
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 recorded as revenue when the
lodging property, car rental location or real estate brokerage office
opens as a franchised unit.
Timeshare. Timeshare exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscriber. Timeshare
subscription revenue is deferred upon receipt and recorded as revenue
as the contractual services (delivery of publications) are provided to
subscribers.
Fleet management. Revenues from fleet management services other than
leasing are recognized over the period in which services are provided
and the related expenses are incurred. The Company records the cost of
leased vehicles as an "investment in leases and leased vehicles".
Amounts charged to lessees for interest on the unrecovered investment
are credited to income on a level yield method which approximates the
contractual terms.
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 of title. Transferring employees
are provided equity on their home based on an appraised value
determined by independent appraisers, after deducting any outstanding
mortgages. 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.
While homes are held for resale, the amount funded for such homes carry
an interest charge computed at a floating rate based on various
indices. 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. All such costs are
generally guaranteed by the client corporation. The client normally
advances funds to cover a portion of such carrying costs. When the home
is sold, a settlement is made with the client corporation netting
actual costs with any advanced funding.
F-17
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are
provided. Relocation services revenue is recorded net of costs
reimbursed by client corporations and interest expenses incurred to
fund the purchase of a transferee's residence. Under the terms of
contracts with clients, the Company is generally protected against
losses from changes in real estate market conditions. The Company also
offers fee-based programs such as home marketing assistance, household
goods moves, destination services, and property dispositions for
financial institutions and government agencies. Revenues from these
fee-based services are taken into income over the periods in which the
services are provided and the related expenses are incurred.
Mortgage. Loan origination fees, commitment fees paid in connection
with the sale of loans, and direct loan origination costs associated
with loans held for resale, are deferred until the loan is sold. Fees
received for servicing loans owned by investors are based on the
difference between the weighted average yield received on the mortgages
and the amount paid to the investor, or on a stipulated percentage of
the outstanding monthly principal balance on such loans. Servicing fees
are credited to income when received. Costs associated with loan
servicing are charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Sales of mortgage securities are recorded on
the settlement date. The Company acquires mortgage-servicing rights by
originating or purchasing mortgage loans and selling those loans with
servicing retained, or it may purchase mortgage-servicing rights
separately. The carrying value of mortgage-servicing rights is
amortized over the estimated life of the related loan portfolio. Such
amortization is recorded as a reduction of loan servicing fees in the
Consolidated Statements of Income. Gains or losses on the sale of
mortgage servicing rights are recognized when title and all risks and
rewards have irrevocably passed to the buyer and there are no
significant unresolved contingencies. 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. Such gains and losses are also increased or decreased by the
amount of deferred mortgage-servicing fees recorded.
SOFTWARE RESEARCH AND DEVELOPMENT AND SOFTWARE OPERATIONS
Capitalization of software development costs begins upon the
establishment of technological feasibility of the product. Costs
meeting this criteria are insignificant and, therefore, most costs
related to designing, development and testing new software products are
charged to operating expenses as incurred. Software research and
development costs aggregated $112.5 million, $66.2 million and $52.9
million for the years ended December 31, 1997, 1996 and 1995,
respectively. Software net revenue was $464.7 million, $375.2 million
and $292.0 million for the years ended December 31, 1997, 1996 and
1995, respectively, and is included in other revenue in the
Consolidated Statements of Income. Costs of software revenue include
material costs, manufacturing labor and overhead and royalties paid to
developers and affiliated label publishers. Costs of software revenue,
included in operating expenses, were $132.8 million, $109.6 million and
$115.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has a history of working closely with all of its
distributors and retailers with respect to selling consumer software.
As a result, the Company monitors the sales of its consumer software at
all of its significant points of sale on a regular basis. Therefore,
the Company has extensive data on returns by product on an on-going
basis and does not have any significant obligations for future
performance.
INCOME TAXES
The provision for income taxes includes deferred income taxes resulting
from items reported in different periods for income tax and financial
statement purposes. Deferred tax assets and liabilities represent the
expected future tax consequences of the differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. The effects of changes in tax rates on
deferred tax assets and liabilities are recognized in the period that
includes the enactment date. No provision has been made for U.S. income
taxes on approximately $ 248.1 million
F-18
of cumulative undistributed earnings of foreign subsidiaries at
December 31, 1997 since it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
The determination of unrecognized deferred U.S. tax liability for
unremitted earnings is not practicable.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates, equity accounts are
translated at historical exchange rates and revenues, expenses and cash
flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
shareholders' equity.
RECLASSIFICATIONS
Reclassifications have been made to the historical financial statements
of the respective pooled companies to conform to the Cendant
presentation.
3. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share" which required a change in the
computation and presentation of earnings per share ("EPS") to include
basic and diluted EPS in place of primary and fully diluted EPS,
respectively. Basic EPS is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted
EPS reflects all potential dilution of common stock. Prior periods have
been restated to reflect the new standard. Diluted EPS is calculated as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 (1) 1996 1995
-------- -------- --------
Net income, adjusted for addback of convertible debt
interest $ 55.4 $429.4 $309.5
======== ======== ========
Weighted average shares--basic 811.2 754.4 670.5
Potential dilution of common stock:
Stock options 40.5 40.1 44.3
Convertible debt -- 24.1 27.0
-------- -------- --------
Weighted average shares--diluted 851.7 818.6 741.8
======== ======== ========
Diluted EPS $ .06 $ .52 $ .42
======== ======== ========
(1) Diluted EPS was calculated using unrounded amounts. The net income
amount in whole dollars for 1997 was $55,351,000.
4. BUSINESS COMBINATIONS
In connection with the underlying pooling of interest business
combinations, the accompanying consolidated financial statements have
been prepared as if the Company and all such pooled companies had
operated as one entity since inception.
1997 POOLINGS
Cendant. On December 17, 1997, HFS merged with CUC to form Cendant. The
Cendant Merger was consummated with CUC issuing 440.0 million shares of
its common stock in exchange for all of the outstanding common stock of
HFS. Pursuant to the terms of the agreement and plan of merger, HFS
stockholders received 2.4031 shares of CUC common stock for each share
of HFS common stock. Upon consummation of the Cendant Merger, CUC
changed its name to Cendant Corporation. Effective with the Cendant
Merger, the Company's shareholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number
of authorized shares of common stock and preferred stock to 2 billion
shares and 10 million shares, respectively.
In connection with the Cendant Merger, the Company determined that it
will use a calendar year end and, accordingly, CUC changed its fiscal
year end from January 31 to December 31. Prior to the Cendant Merger,
HFS reported on a calendar year basis. The HFS statements of income for
the years
F-19
ended December 31, 1996 and 1995 have been combined with the CUC
statements of income for the years ended January 31, 1997, and 1996
respectively. As a result of CUC's change in fiscal year, the operating
results of CUC for January 1997, were duplicated in the Company's
consolidated statement of income for the year ended December 31, 1997.
Accordingly, an adjustment has been made to 1997 retained earnings for
the duplication of net income of $66.9 million for such one-month
period.
Hebdo Mag. On October 3, 1997, the Company issued 14.2 million shares
of its common stock for all of the outstanding capital stock of Hebdo
Mag International Inc. ("Hebdo Mag"). Hebdo Mag is a publisher and
distributor of classified advertising information.
PHH. On April 30, 1997, the Company and PHH Corporation ("PHH") merged
(the "PHH Merger") which was satisfied by the issuance of 72.8 million
shares of Company common stock in exchange for all of the outstanding
common stock and stock options of PHH. PHH operates the world's largest
corporate relocation services business and also provides mortgage
services and fleet management services. Prior to the PHH Merger, PHH
reported on an April 30 fiscal year basis. To conform to a calendar
year end, PHH prepared financial statements for the twelve month
periods ended December 31, 1996 and January 31, 1996 which were
combined with the Company's statements of income for the years ended
December 31, 1996 and 1995, respectively. In combining PHH's twelve
month periods, the consolidated statement of income for the year ended
December 31, 1996 included one month (January 1996) of PHH's operating
results which was also included in the consolidated statement of income
for the year ended December 31, 1995. Accordingly, an adjustment has
been made to 1996 retained earnings for the duplication of net income
of $8.3 million and cash dividends declared of $5.9 million for such
one-month period.
Numa. During February 1997, the Company issued 3.0 million shares of
its common stock for substantially all of the assets and specific
liabilities of Numa Corporation ("Numa"). Numa publishes personalized
heritage publications and markets and sells personalized merchandise.
1996 POOLINGS
Davidson, Sierra and Ideon. During July 1996, the Company issued 45.1
million shares of its common stock for all of the outstanding capital
stock of Davidson & Associates, Inc. ("Davidson"). Also during July
1996, the Company issued 38.4 million shares of its common stock for
all of the outstanding capital stock of Sierra On-Line, Inc.
("Sierra"). Davidson and Sierra develop, publish and distribute
educational and entertainment software for home and school use. During
August 1996, the Company issued 16.6 million shares of its common stock
for all of the outstanding capital stock of Ideon Group, Inc.
("Ideon"). Ideon is principally a provider of credit card enhancement
services.
During 1995, prior to being merged into the Company, Davidson and
Sierra acquired all of the outstanding capital stock of various
companies by issuing an aggregate of 0.8 million and 3.9 million
equivalent shares of Company common stock, respectively.
Davidson, Sierra and Ideon previously reported on fiscal years ended
December 31, March 31 and December 31, respectively, for their
financial reporting. To conform to CUC's former fiscal year end of
January 31, Davidson's and Ideon's operating results for January 1996
have been excluded from, and Sierra's operating results for February
and March 1996 have been duplicated in the Company's year ended
December 31, 1996 operating results. Accordingly, a $4.7 million charge
was recorded to 1996 retained earnings for such excluded and duplicated
periods. Effective January 1, 1995, Ideon changed its fiscal year end
from October 31 to December 31. Ideon's operating results from October
31, 1995 through December 31, 1995 (the "Ideon Transition Period") have
been excluded from the accompanying consolidated statement of income.
Ideon's revenues and net loss for the Ideon Transition Period were
$34.7 million and $49.9 million, respectively. This excluded period has
been reflected in a $49.9 million charge to 1995 retained earnings. The
net loss for the Ideon Transition Period was principally the result of
a $65.5 million one-time, non-cash, pre-tax charge recorded in
connection with a change in amortization periods for deferred
membership acquisition costs. Prior to the change, membership
acquisition costs were generally amortized up to ten years for single
year membership periods and up to twelve years for multi-year
membership periods. These amortization
F-20
periods represented the estimated life of the member. The amortization
periods were shortened to one year and three years for single and
multi-year membership periods, respectively, which represented the
initial membership period without regard for anticipated renewals.
In 1996, the Company acquired the outstanding stock of certain other
entities by issuing 8.3 million shares of its common stock.
1995 POOLINGS
Getko, NAOG and Advance Ross. During June 1995, the Company issued 5.6
million shares of its common stock for all of the outstanding capital
stock of Getko Group Inc. ("Getko"). Getko distributes complimentary
welcoming packages to new homeowners throughout the United States and
Canada. During September 1995, the Company issued 2.3 million shares of
its common stock for all of the outstanding capital stock of North
American Outdoor Group, Inc. ("NAOG"). NAOG owns one of the largest
for-profit hunting and general interest fishing membership
organizations in the United States, and also owns various other
membership organizations. During January 1996, the Company issued 8.9
million shares of its common stock for all of the outstanding capital
stock of Advance Ross Corporation ("Advance Ross"). Advance Ross
processes value-added tax refunds for travelers in over 20 European
countries.
The following table presents the historical results of the pooled
Cendant entities for the last complete interim periods prior to their
respective mergers:
YEAR ENDED DECEMBER 31,
------------------------------------
(IN MILLIONS) 1997 1996 1995
----------- ----------- ----------
Net revenues
Cendant (1) $1,424.7 $ -- $ --
CUC 2,002.6 2,156.8 1,314.4
HFS 1,570.9 786.0 411.3
Hebdo Mag 137.9 124.7 --
PHH 178.6 650.5 645.6
1996 Pooled
Entities -- 190.8 533.7
1995 Pooled
Entities -- -- 87.1
----------- ----------- ----------
$5,314.7 $3,908.8 $2,992.1
=========== =========== ==========
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN MILLIONS) 1997 1996 1995
-------------- ----------- -----------
Net income (loss)
Cendant (1) $ (345.3)(2) $ -- $ --
CUC 252.0 155.1 (4) 157.5
HFS 109.9 (3) 169.5 79.8
Hebdo Mag 6.6 2.3 --
PHH 32.2 87.7 78.1
1996 Pooled
Entities -- 9.0 (19.7)(5)
1995 Pooled
Entities -- -- 7.1
-------------- ----------- -----------
$ 55.4 $423.6 $302.8
============== =========== ===========
(1) Operating results of Cendant for the fourth quarter of 1997
(2) Includes after-tax Cendant Merger charge of $589.8 million
(3) Includes after-tax PHH Merger charge of $227.0 million
(4) Includes after-tax charge of $118.7 million related to the
Company's 1996 pooling transactions
(5) Includes after-tax costs related to Ideon products abandoned and
restructuring of $62.1 million
F-21
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities
assumed were recorded at their estimated fair values. The operating
results of such acquired companies are reflected in the Company's
consolidated statements of income since the respective dates of
acquisition.
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions which
were consummated during the three years ended December 31, 1997.
(IN MILLIONS)
ACQUIRED IN 1996
------------------------------------------
ACQUIRED COLDWELL
IN 1997 RCI AVIS BANKER OTHER
---------- --------- --------- ---------- ---------
Cash paid $306.4 $412.1 $367.2 $747.8 $300.9
Common stock issued (1) 40.7 75.0 338.4 -- 52.5
Notes issued -- -- 100.9 -- 5.0
---------- --------- --------- ---------- ---------
Total consideration 347.1 487.1 806.5 747.8 358.4
---------- --------- --------- ---------- ---------
Assets acquired 242.4 439.1 783.9 541.7 132.9
Liabilities assumed 185.0 429.7 311.4 148.5 70.1
---------- --------- --------- ---------- ---------
Fair value of identifiable net assets acquired 57.4 9.4 472.5 393.2 62.8
---------- --------- --------- ---------- ---------
Goodwill $289.7 $477.7 $334.0 $354.6 $295.6
========== ========= ========= ========== =========
(1) Number of shares issued 1.6 2.4 11.1 -- 2.5
========== ========= ========= ========== =========
(IN MILLIONS ACQUIRED IN 1995
-----------------------
CENTURY 21 OTHER
------------ ---------
Cash paid $100.2 $122.5
Common stock issued (2) 64.8 40.8
Preferred stock issued 80.0 --
------------ ---------
Total consideration 245.0 163.3
------------ ---------
Assets acquired 120.6 67.2
Liabilities assumed 75.3 56.2
------------ ---------
Fair value of identifiable net assets acquired 45.3 11.0
------------ ---------
Goodwill $199.7 $152.3
============ =========
(2) Number of shares issued 9.6 6.0
============ =========
1997 ACQUISITIONS
The Company acquired certain entities for an aggregate purchase price
of $347.1 million.
1996 ACQUISITIONS
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of
Resort Condominiums International, Inc. and its affiliates ("RCI") for
$487.1 million. The purchase agreement provides for contingent payments
of up to $200.0 million over a five year period which are based on
components which measure RCI's future performance, including EBITDA,
net revenues and number of members, as defined. Any contingent payments
made will be accounted for as additional goodwill. The Company
determined that $100.0 million is payable in March 1998 under the terms
of the contingent purchase arrangement.
F-22
Avis. In October 1996, the Company completed the acquisition of all of
the outstanding capital stock of Avis, Inc. ("Avis"), initially
including payments under certain employee stock plans of Avis and the
redemption of certain series of preferred stock of Avis for an
aggregate $806.5 million. Subsequently, the Company made contingent
cash payments of $26.0 million in 1996 and $60.8 million in 1997. The
contingent payments made in 1997 represented the incremental amount of
value attributable to Company common stock as of the stock purchase
agreement date in excess of the proceeds realized upon subsequent sale
of such Company common stock.
In September 1997, the subsidiary of Avis which controlled the car
rental operations of Avis ("ARAC") completed an Initial Public Offering
("IPO") resulting in a 72.5% dilution of the Company's investment in
ARAC. Net proceeds of $359.3 million were retained by ARAC. The
Company's interest was further diluted to 20.4% primarily due to a
secondary offering of common stock in March 1998. See Note 19 for a
discussion of the Company's executed business plan and related
accounting treatment regarding Avis.
Coldwell Banker Corporation. In May 1996, the Company acquired by
merger Coldwell Banker Corporation ("Coldwell Banker"), the largest
gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. The
Company paid $640.0 million in cash for all of the outstanding capital
stock of Coldwell Banker and repaid $105.0 million of Coldwell Banker
indebtedness. The aggregate purchase price for the transaction was
financed through the May 1996 sale of an aggregate 46.6 million shares
of Company common stock pursuant to a public offering. Subsequent to
the acquisition of Coldwell Banker, the Company acquired for $2.8
million a relocation consulting firm which was merged into the Coldwell
Banker relocation business.
Other 1996 Acquisitions. The Company acquired certain other entities
for an aggregate purchase price of $358.4 million.
1995 ACQUISITIONS
Century 21. In August 1995, a majority owned (87.5%) subsidiary of the
Company, C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate
Corporation ("Century 21"), the world's largest residential real estate
brokerage franchisor. Aggregate consideration for the acquisition
consisted of $245.0 million. Pursuant to an agreement, as amended,
between the Company and a management group of Holding, the Company
acquired the remaining 12.5% interest in Holding for $52.8 million in
1997.
Other 1995 Acquisitions. The Company acquired certain other entities
for an aggregate purchase price of $163.3 million.
F-23
PRO FORMA INFORMATION (UNAUDITED)
The following information reflects pro forma statements of income data
for the year ended December 31, 1996 assuming the aforementioned
acquisitions completed during 1996 were consummated on January 1, 1996.
The 1996 acquisitions have been accounted for using the purchase method
of accounting. The acquisitions completed during 1997 were immaterial
to the operating results of the Company. The pro forma results are not
necessarily indicative of the operating results that would have
occurred had the transactions been consummated as indicated nor are
they intended to indicate results that may occur in the future. The
underlying pro forma information includes the amortization expense
associated with the assets acquired, the reflection of the Company's
financing arrangements, and the related income tax effects.
YEAR ENDED
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1996
--------------
Net revenues $4,475.3
Income before income taxes 797.0
Net income 473.4
Net income per share:
Basic $ 0.60
Diluted 0.56
Weighted average shares outstanding:
Basic 784.9
Diluted 849.1
5. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLINGS
The Company incurred merger-related costs and other unusual charges
("Cendant Merger Charge") of $844.9 million ($589.8 million, after tax)
associated with and coincident to the Cendant Merger and the fourth
quarter 1997 merger with Hebdo Mag. The Company recorded a one-time
merger and related charge (the "PHH Merger Charge") of $303.0 million
($227.0 million, after tax) during the second quarter of 1997 in
connection with the PHH Merger. The Cendant Merger Charge and the PHH
Merger Charge are summarized by type as follows:
CENDANT PHH TOTAL
--------- --------- ---------
(In millions)
Personnel related $151.1 $142.4 $ 293.5
Professional fees 115.1 36.8 151.9
Facility related 74.1 57.1 131.2
Business terminations 103.0 44.7 147.7
Asset write-offs 184.1 -- 184.1
Technology
initiatives 70.0 -- 70.0
Litigation related 80.0 -- 79.9
Other costs 67.5 22.0 89.6
--------- --------- ---------
$844.9 $303.0 $1,147.9
========= ========= =========
F-24
Cendant Merger Charge. The Company incurred merger-related costs and
other unusual charges of $844.9 million associated with the Cendant
Merger and Hebdo Mag merger. The charge includes $340.3 million of costs
associated with the mergers such as professional fees, costs associated
with retirement and benefit plans which were accelerated as a result of
change of control events, and exit costs associated with the
consolidation of approximately 61 worldwide call centers and office
locations. Such costs include severance associated with approximately
448 employees, lease buy-outs and assets abandoned.
The charge also includes costs associated with the rationalization of
operations to narrow the management's focus on its core operations. As a
result, the Company provided for costs associated with the termination
of franchise contracts and other exit costs necessary to complete a
quality upgrade of its hotel franchise system approximating $47.2
million as well as $70.0 million of primarily cash contributions to
independent trusts that have undertaken technology initiatives for the
direct benefit of lodging and real estate franchisees. In connection
with the Cendant Merger the Company determined to abandon or sell
certain businesses and wrote-off approximately $184.1 million of assets
that primarily represent assets impaired as a result of such
determinations. The Company also provided for costs associated with the
termination of contracts with certain vendors and former business
partners approximating $103.0 million in the fourth quarter of 1997.
The charge includes a pre-tax net gain of $34.7 million on the sale of
Interval International Inc. (See Note 20) and a pre-tax loss of $17.0
million on the early repayment of Hebdo Mag debt coincident with the
Hebdo Mag merger. In addition, the Company established $80 million of
litigation reserves coincident with the Cendant Merger. In prior
reporting periods, no reserves were established, based on management's
belief that such claims lacked merit, would be vigorously defended and,
as a result, losses were not probable. In connection with management's
focus on its core operations and after further evaluation of the
corporate resources and related expenses required to continue such
litigation management intends to pursue settlements in such matters.
Management believes it is appropriate to follow such strategy and
accordingly, has established such reserve.
The Company paid $190.6 million and recorded non-cash write-offs of
$208.3 million against the provision in the fourth quarter of 1997. The
remaining merger-related costs and other unusual charges will be
substantially completed during 1998. Operating results from activities
that will not be continued are not material to the results of operations
of the Company.
PHH Merger Charge . Personnel related charges are comprised of costs
incurred in connection with employee reductions associated with the
combination of the Company's relocation services business and the
consolidation of corporate activities. Personnel related charges include
termination benefits such as severance, medical and other benefits. Also
included in personnel related charges are retirement benefits resulting
from a change in control. Several grantor trusts were established and
funded by the Company to pay such benefits in accordance with the terms
of the PHH merger agreement. Full implementation of the restructuring
plan will result in the termination of approximately 500 employees
(principally located in North America), a majority of which were
terminated as of December 31, 1997. The Company continues to implement
its restructuring plan relating to its relocation services business and
expects to be substantially complete with the plan in the second quarter
of 1998. Professional fees are primarily comprised of investment
banking, accounting and legal fees incurred in connection with the PHH
Merger. Business termination charges are comprised of costs to exit
certain activities within the Company's fleet management and mortgage
service businesses and to discontinue other ancillary operations in
accordance with the Company's revised strategic plan. Facility related
expenses include costs associated with contract and lease terminations,
asset disposal and other charges incurred in connection with the
consolidation and closure of excess space.
F-25
The Company anticipates that approximately $236.0 million will be paid
in cash in connection with the PHH Merger Charge of which $158.5
million was paid through December 31, 1997. The remaining cash portion
of the PHH Merger Charge will be financed through cash generated from
operations and borrowings under the Company's revolving credit
facilities. Operating results from activities that will not be
continued are not material to the results of operations of the Company.
1996 POOLINGS
Davidson, Sierra and Ideon Merger Charge. Principally in connection with
the Davidson, Sierra, and Ideon mergers, the Company recorded a charge
to operations of approximately $179.9 million ($118.7 million,
after-tax) for the year ended December 31, 1996.
Such costs in connection with the Davidson & Sierra mergers with the
Company (approximately $48.6 million) were non-recurring and were
comprised primarily of transaction costs, litigation matters and exit
costs. Such costs associated with the Company's merger with Ideon (the
"Ideon Merger") (approximately $127.2 million) were non-recurring and
included transaction and exit costs as well as a provision relating to
certain litigation matters giving consideration to the Company's
intended approach to these matters. In determining the amount of the
provision related to these outstanding litigation matters, the Company
estimated the cost of settling these litigation matters. In estimating
such cost, the Company considered potential liabilities related to
these matters and the estimated cost of prosecuting and defending them
(including out-of-pocket costs, such as attorneys' fees, and the cost
to the Company of having its management involved in numerous complex
litigation matters). The Company has since settled certain of these
litigation matters while certain of these matters remain outstanding.
Although the Company has attempted to estimate the amounts that will be
required to settle remaining litigation matters, there can be no
assurance that the actual aggregate amount of such settlements will not
exceed the amount accrued (See Note 15). The Company considered
litigation-related costs and liabilities, as well as exit costs and
transaction costs, in determining the agreed upon exchange ratio in
respect to the Ideon Merger. As of December 31, 1997, payments
related to the above matters amounted to $176.9 million.
In determining the amount of the provision related to the Company's
proposed consolidation efforts, the Company estimated the significant
severance costs to be accrued upon the consummation of the Ideon Merger
and costs relating to the expected obligations for certain third-party
contracts (e.g., existing leases and vendor agreements) to which Ideon
is a party and which are neither terminable at will nor automatically
terminate upon a change-in-control of Ideon. As a result of the Ideon
Merger, 120 employees were terminated. The Company incurred significant
exit costs because Ideon's credit card registration and enhancement
services are substantially similar to the Company's credit card
registration and enhancement services. All of the business activities
related to the operations performed by Ideon's Jacksonville, Florida
office were transferred to the Company's Comp-U-Card Division in
Stamford, Connecticut upon the consummation of the Ideon Merger.
COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment
of certain new product developmental efforts and the related impairment
of certain assets and the restructuring of the SafeCard division of
Ideon and the Ideon corporate infrastructure as discussed below. The
original charge of $45.0 million was composed of accrued liabilities of
$36.2 million and asset impairments of $8.8 million. In December 1995,
Ideon recovered $1.2 million of costs in the above charges. Also
included in costs related to products abandoned are marketing and
operational costs incurred of $53.2 million. During the year ended
December 31, 1996, all remaining amounts that had been previously
accrued were paid.
F-26
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded
PGA TOUR Partners program that provided various benefits to members and
consumer response rates after the launch were significantly less than
Ideon management's expectations. The product as configured was deemed
not economically viable and a charge of $18 million was incurred. Costs
associated with the abandonment of the product marketing included
employee severance payments (approximately 130 employees), costs to
terminate equipment and facilities leases, costs for contract
impairments and write-downs taken for asset impairments. In September
1995, after a period of product redesign and test marketing, Ideon
discontinued its PGA TOUR Partners credit card servicing role and
recorded a charge of $3.6 million for costs associated with the
abandonment of this role, including employee severance payments
(approximately 60 employees), costs to terminate equipment and
facilities leases and the recognition of certain commitments. In April
1995, Ideon launched a nationwide child registration and missing child
search program. Consumer response rates after the launch were
significantly less than Ideon management's expectations and a charge of
$9.0 million was incurred to cover severance payments (approximately
100 employees), costs to terminate equipment and facilities leases and
write-down taken for asset impairments. As a result of the
discontinuance of these products, Ideon undertook an overall
restructuring of its operations and incurred charges of $7.2 million to
terminate operating leases and write-down assets to realizable value,
$3.0 million for restructuring its SafeCard division and $4.2 million
for restructuring its corporate infrastructure.
PURCHASE BUSINESS COMBINATION LIABILITIES
In connection with the acquisitions of Century 21, Coldwell Banker, RCI
and certain other acquisitions, related business plans were developed
to restructure each of the respective companies. The restructuring
plans have all been finalized within one year of each respective
acquisition based upon management's assessments of actions to be taken
to complete the plans. Acquisition liabilities recorded in connection
with such business plans and any subsequent adjustments thereto have
been included in the respective purchase price allocations of each
acquired company. Acquisition liabilities include costs associated with
restructuring activities such as planned involuntary termination and
relocation of employees, the consolidation and closing of certain
facilities and the elimination of duplicative operating and overhead
activities.
Acquisition liabilities recorded in connection with the Company's
acquisitions accounted for under the purchase method of accounting and
the employees to be terminated in connection with the respective
restructuring plans are summarized as follows:
COLDWELL
(DOLLARS IN MILLIONS) CENTURY 21 BANKER RCI OTHER
------------ ---------- -------- --------
Personnel related $12.6 $5.8 $14.6 $ 6.5
Facility related 16.5 0.1 12.4 3.1
Other costs 1.0 3.8 1.7 1.4
------------ ---------- -------- --------
Total $30.1 $9.7 $28.7 $11.0
============ ========== ======== ========
Terminated employees 319 87 252 275
============ ========== ======== ========
Personnel related charges include termination benefits such as
severance, wage continuation, medical and other benefits. Facility
related costs include contract and lease terminations, temporary
storage and relocation costs associated with assets to be disposed of,
and other charges incurred in the consolidation and closure of excess
space.
F-27
Payments charged against the acquisition liabilities are as follows:
COLDWELL
(IN MILLIONS) CENTURY 21 BANKER RCI OTHER
------------ ---------- -------- -------
1997 $ 1.5 $1.8 $18.8 $ 2.5
1996 11.3 3.9 0.5 7.7
1995 14.3 -- -- --
------------ ---------- -------- -------
$27.1 $5.7 $19.3 $10.2
============ ========== ======== =======
The Company's business plans to restructure the aforementioned
acquisitions have been fully executed. Acquisition liabilities of $17.2
million remaining at December 31, 1997 pertain primarily to contractual
obligations that existed at the respective acquisition dates, contract
terminations and future lease commitments.
6. OTHER INTANGIBLES -- NET
Other intangibles -net consisted of:
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS -----------------------------
(IN MILLIONS IN YEARS 1997 1996
---------------- ------------ ---------------
Avis trademarks 40 $ 402.0 $400.0
Other trademarks 40 262.9 --
Customer lists 6.5 -10 116.8 114.0
Reservation systems 10 95.0 95.0
Other 2 -16 123.9 90.7
---------- --------
1,000.6 699.7
Less accumulated amortization 102.8 63.5
---------- --------
Other intangibles--net $ 897.8 $636.2
========== ========
Other intangibles are recorded at their estimated fair values at the
dates acquired and are amortized on a straight-line basis over the
periods to be benefited.
7. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
YEAR ENDED
DECEMBER 31,
-----------------------
(IN MILLIONS) 1997 1996
----------- ----------
Accounts payable $ 395.1 $ 536.0
Short-term debt -- 251.0
Merger and acquisition obligations 636.8 167.2
Accrued payroll and related 191.8 157.0
Advances from relocation clients 57.2 78.8
Litigation related 109.0 --
Other 352.9 490.4
----------- ----------
Accounts payable and other current liabilities $1,742.8 $1,680.4
=========== ==========
F-28
Short-term debt at December 31, 1996 consisted of $150.0 million of
acquired Avis fleet financing, borrowed on behalf of ARAC, which was
repaid upon settlement of the corresponding intercompany loan due from
ARAC prior to the IPO and a $100.9 million note payable issued to ARAC
as partial consideration for ARAC in connection with the Company's
acquisition of ARAC. The outstanding short-term debt as of December 31,
1996 had a weighted average interest rate of 6.85%.
8. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles consisted of:
YEAR ENDED
DECEMBER 31,
-----------------------
(IN MILLIONS) 1997 1996
----------- ----------
Vehicles under open-end operating leases $2,640.1 $2,617.3
Vehicles under closed-end operating leases 577.2 443.9
Direct financing leases 440.8 356.7
Accrued interest on leases 1.0 .8
-------- --------
Net investment in leases and leased vehicles $3,659.1 $3,418.7
======== ========
The Company records the cost of leased vehicles as an "investment in
leases and leased vehicles". The vehicles are 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 are amortized using the straight-line method
over the expected lease term. The Company's experience indicates that
the full term of the leases may vary considerably due to extensions
beyond the minimum lease term. Lessee repayments of investments in
leases and leased vehicles were $1.6 billion in both 1997 and 1996, and
the ratio of such repayments to the average net investment in leases
and leased vehicles was 46.80% and 47.19%, in 1997 and 1996,
respectively.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease
is generally for the account of the lessee except for a minimum
residual value which the Company has guaranteed. The Company's
experience has been that vehicles under this type of lease agreement
have consistently been sold for amounts exceeding the residual value
guarantees. Maintenance and repairs of vehicles under these agreements
are the responsibility of the lessee. The original cost and accumulated
depreciation of vehicles under this type of operating lease was $5.0
billion and $2.4 billion, respectively, at December 31, 1997 and $4.6
billion and $2.0 billion, respectively, at December 31, 1996.
Under the other type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account
of the Company. The lessee generally pays for or provides maintenance,
vehicle licenses and servicing. The original cost and accumulated
depreciation of vehicles under these agreements was $754.4 million and
$177.2 million, respectively, at December 31, 1997 and $600.6 million
and $156.7 million, respectively, at December 31, 1996. The Company
believes adequate reserves are maintained in the event of loss on
vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles
upon termination of the lease is generally for the account of the
lessee. Maintenance and repairs of these vehicles are the
responsibility of the lessee.
F-29
Gross leasing revenues, which are reflected in fleet leasing on the
consolidated statements of income consist of:
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN MILLIONS) 1997 1996 1995
------------ ----------- ----------
Operating leases $1,222.9 $1,145.8 $1,098.7
Direct financing leases, primarily interest 41.8 43.3 42.4
------------ ----------- ----------
$1,264.7 $1,189.1 $1,141.1
============ =========== ==========
Other managed vehicles are subject to leases serviced by the Company
for others, and neither the vehicles nor the leases are included as
assets of the Company. The Company receives a fee under such agreements
which covers or exceeds its cost of servicing.
The Company has transferred existing managed vehicles and related
leases to unrelated investors and has retained servicing
responsibility. Credit risk for such agreements is retained by the
Company to a maximum extent in one of two forms: excess assets
transferred, which were $7.6 million and $7.1 million at December 31,
1997 and 1996, respectively; or guarantees to a maximum extent. There
were no guarantees to a maximum extent at December 31, 1997 or 1996.
All such credit risk has been included in the Company's consideration
of related reserves. The outstanding balances under such agreements
aggregated $224.6 million and $158.5 million at December 31, 1997 and
1996, respectively.
Other managed vehicles with balances aggregating $75.6 million and
$93.9 million at December 31, 1997 and 1996, respectively, are included
in a special purpose entity which is not owned by the Company. This
entity does not require consolidation as it is not controlled by the
Company and all risks and rewards rest with the owners. Additionally,
managed vehicles totaling approximately $69.6 million and $47.4 million
at December 31, 1997 and 1996, respectively, are owned by special
purpose entities which are owned by the Company. However, such assets
and related liabilities have been netted in the balance sheet since
there is a two-party agreement with determinable accounts, a legal
right of offset exists and the Company exercises its right of offset in
settlement with client corporations.
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. Such mortgage
loans are recorded at the lower of cost or market value on an aggregate
loan basis. The Company issues mortgage-backed certificates 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. As of December 31, 1997, mortgage loans sold
with recourse amounted to approximately $58.5 million. The Company
believes adequate reserves are maintained to cover any potential
losses.
F-30
10. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights activity was as follows:
MORTGAGE
SERVICING IMPAIRMENT
(IN MILLIONS) RIGHTS ALLOWANCE TOTAL
----------- ------------ --------
BALANCE, JANUARY 1, 1995 $ 97.2 $ -- $ 97.2
Additions 130.1 -- 130.1
Amortization (28.6) -- (28.6)
Write-down/provision (1.6) (1.4) (3.0)
Sales (4.3) -- (4.3)
----------- ------------ --------
BALANCE, DECEMBER 31, 1995 192.8 (1.4) 191.4
Less: PHH activity for January
1996 to reflect change in
PHH fiscal year (14.0) .2 (13.8)
Additions 164.4 -- 164.4
Amortization (51.8) -- (51.8)
Write-down/provision -- .6 .6
Sales (1.9) -- (1.9)
----------- ------------ --------
BALANCE, DECEMBER 31, 1996 289.5 (.6) 288.9
Additions 270.4 -- 270.4
Amortization (95.6) -- (95.6)
Write-down/provision -- (4.1) (4.1)
Sales (33.1) -- (33.1)
Other (53.5) -- (53.5)
----------- ------------ --------
BALANCE, DECEMBER 31, 1997 $377.7 $(4.7) $373.0
=========== ============ ========
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".
The statement provides criteria for: (i) recognizing the transfer of
assets as sales or secured borrowings; (ii) recognizing servicing
assets and other retained interests in the transferred assets and;
(iii) overall guidance for amortizing servicing rights and measuring
such assets for potential impairment. The servicing right and any other
retained interests are recorded by allocating the previous carrying
amount between assets sold and the retained interests, based on their
relative fair values at the date of the transfer. SFAS No. 125 also
eliminated the distinction between the various classes of servicing
rights (purchased, originated, excess). Upon adoption of the statement,
assets previously recognized as excess servicing rights were classified
as mortgage servicing rights to the extent that the recorded value
related to the contractually specified servicing fee. The remaining
recorded asset represents an interest-only strip in the amount of $48.0
million which is recorded within other assets in the consolidated
balance sheet at December 31, 1997. The impact of adopting SFAS No. 125
was not material to the Company's financial statements.
The Company stratifies its servicing rights according to the interest
rate bands of the underlying mortgage loans for purposes of impairment
evaluation. 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 income. Temporary impairment is recorded
through a valuation allowance and amortization expense in the period of
occurrence.
F-31
11. LONG-TERM DEBT
Long-term debt consisted of:
(IN MILLIONS) DECEMBER 31,
------------------------
1997 1996
-------------- ----------
Credit Facilities $ 385.1 $ 330.2
5 7/8% Senior Notes 149.9 149.8
4 1/2% Convertible Senior Notes -- 146.7
4 3/4% Convertible Senior Notes 240.0 240.0
3% Convertible Subordinated Notes 543.2 --
Other 45.1 148.9
-------------- ----------
1,363.3 1,015.6
Less current portion 15.0 11.0
-------------- ----------
Long-term debt $1,348.3 $1,004.6
============== ==========
CREDIT FACILITIES
At December 31, 1997, the Company's primary credit facility, as
amended, consisted of (i) a $750.0 million, five year revolving credit
facility (the "Five Year Revolving Credit Facility") and (ii) a $1.25
billion, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility" and collectively with the Five Year Revolving Credit
Facility, (the "Revolving Credit Facilities"). Outstanding borrowings
under the Revolving Credit Facilities were $276.0 million and $205.0
million at December 31, 1997 and 1996, respectively. The 364-Day
Revolving Credit Facility will mature on September 30, 1998 but may be
renewed on an annual basis for an additional 364 days upon receiving
lender approval. The Five Year Revolving Credit Facility will mature on
October 1, 2001. The Revolving Credit Facilities, at the option of the
Company, bear interest based on competitive bids of lenders
participating in the facilities, at prime rates or at LIBOR plus a
margin of approximately 22 basis points. The Company is required to pay
a per annum facility fee of .08% and .06% of the average daily
availability of the Five Year Revolving Credit Facility and 364
Revolving Credit Facility, respectively. The interest rates and
facility fees are subject to change based upon credit ratings on the
Company's senior unsecured long-term debt by nationally recognized
statistical rating companies. The Revolving Credit Facilities contain
certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires
the maintenance of certain financial ratios, including a 3:1 minimum
interest coverage ratio and a 3.5:1 maximum coverage ratio, as defined.
Additionally, at December 31, 1997, the Company had various other
credit facilities aggregating $175.2 million under which $109.1 million
and $125.2 million was outstanding at December 31, 1997 and 1996,
respectively. Average interest rates on these facilities approximated
6.41% and 6.04% in 1997 and 1996, respectively, with $60.0 million
expiring in February 1999 and $115.2 million expiring in March 1998.
Amounts outstanding under all revolving credit facilities as of
December 31, 1997 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
5 7/8% SENIOR NOTES
In December 1993, the Company completed a public offering of $150.0
million, unsecured 5 7/8% Senior Notes due December 15, 1998. The
Senior Notes have been classified as long-term based upon the Company's
intent and ability to refinance such indebtedness on a long-term basis.
(See Note 24 -- "Subsequent Events--Financing".
F-32
4 1/2% CONVERTIBLE SENIOR NOTES
On September 22, 1997, the Company exercised its option to redeem the
outstanding 4 1/2% Convertible Senior Notes (the "4 1/2% Notes"),
effective on October 15, 1997, in accordance with the provisions of the
indenture under which the 4 1/2% Notes were issued. Prior to the
redemption date, all of the outstanding 4 1/2% Notes were converted
into 19.7 million shares of Company common stock.
4 3/4% CONVERTIBLE SENIOR NOTES
In February 1996, the Company completed a public offering of $240
million unsecured 4 3/4% Convertible Senior Notes (the "4 3/4% Notes")
due 2003, which are convertible at the option of the holder at any time
prior to maturity into 36.030 shares of Company common stock per $1,000
principal amount of the 4 3/4% Notes, representing a conversion price
of $27.76 per share. The 4 3/4% Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after March 3, 1998
at redemption prices decreasing from 103.393% of principal at March 3,
1998 to 100% of principal at March 3, 2003. However, on or after March
3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not be
redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $38.86 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days
within a period of 30 consecutive trading days ending within five days
prior to notice of redemption.
3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company completed a public offering of $550
million 3% Convertible Subordinated Notes (the "3% Notes") due 2002.
Each $1,000 principal amount of 3% Notes is convertible into 32.6531
shares of Company common stock subject to adjustment in certain events.
The 3% Notes may be redeemed at the option of the Company at any time
on or after February 15, 2000, in whole or in part, at the appropriate
redemption prices (as defined in the indenture governing the 3% Notes)
plus accrued interest to the redemption date. The 3% Notes will be
subordinated in right of payment to all existing and future Senior Debt
(as defined in the indenture governing the 3% Notes) of the Company.
DEBT MATURITIES
Aggregate maturities of debt for each of the next five years commencing
in 1998 are as follows:
(In millions)
YEAR AMOUNT
---- ----------
1998 $ 15.0
1999 20.5
2000 26.1
2001 43.1
2002 560.7
Thereafter 697.9
----------
Total $1,363.3
==========
12. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs
consisted of:
DECEMBER 31,
-----------------------
(IN MILLIONS) 1997 1996
----------- ----------
Commercial paper $2,577.5 $3,090.8
Medium-term notes 2,747.8 1,662.2
Other 277.3 336.9
----------- ----------
Liabilities under management and mortgage programs $5,602.6 $5,089.9
=========== ==========
F-33
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term
lines of credit. The weighted average interest rates on the Company's
outstanding commercial paper was 5.9% and 5.4% at December 31, 1997 and
1996, respectively.
Medium-term notes of $2.7 billion primarily represent unsecured loans
which mature in 1998. The weighted average interest rates on such
medium-term notes was 5.9% and 5.7% at December 31, 1997 and 1996,
respectively.
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
matures in 1998. The weighted average interest rate on such debt was
6.7% and 5.8% at December 31, 1997 and 1996, respectively.
Interest expense is incurred on indebtedness which is used to finance
fleet leasing, relocation and mortgage servicing activities. Interest
incurred on borrowings used to finance fleet leasing activities was
$177.0 million, $161.8 million and $159.7 million for the years ended
December 31, 1997, 1996, and 1995, respectively, is included net within
fleet leasing revenues in the Consolidated Statements of Income.
Interest related to equity advances on homes was $32.0 million, $35.0
million and $26.0 million for the years ended December 31, 1997, 1996
and 1995, respectively. Interest related to mortgage servicing
activities were $77.6 million, $63.4 million and $49.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest
expenses incurred on borrowings used to finance both equity advances on
homes and mortgage servicing activities are recorded net within
membership and service fee revenue in the Consolidated Statements of
Income.
The Company maintains a $2.5 billion committed and unsecured credit
facility which is backed by a consortium of domestic and foreign banks.
The facility is comprised of a $1.25 billion credit line maturing in
364 days and a five year $1.25 billion credit line maturing in the year
2002. Under such credit facility, the Company paid annual commitment
fees of $1.7 million, $2.4 million and $2.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively. In addition, the
Company has other uncommitted lines of credit with various banks of
which $180.7 million was unused at December 31, 1997. The full amount
of the Company's committed facility was undrawn and available at
December 31, 1997 and 1996.
Although the period of service for a vehicle is at the lessee's option,
and the period a home is held for resale varies, management estimates,
by using historical information, the rate at which vehicles will be
disposed and the rate at which homes will be resold. Projections of
estimated liquidations of assets under management and mortgage programs
and the related estimated repayment of liabilities under management and
mortgage programs as of December 31, 1997, are set forth as follows:
(IN MILLIONS)
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS (1)
------------- ----------------------- ----------------------------
1998 $3,321.3 $2,746.6
1999 1,855.2 1,702.6
2000 838.6 766.3
2001 272.8 245.8
2002 92.9 84.4
2003-2007 62.9 56.9
---------- ----------
$6,443.7 $5,602.6
========== ==========
(1) The projected repayments of liabilities under management and
mortgage programs are different than required by contractual
maturities.
F-34
13. 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 and anticipated mortgage loan closing
arising from commitments issued. 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 derivatives 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 expect
non-performance by any of the counterparties.
INTEREST RATE SWAPS
If the interest characteristics of the funding mechanism that the
Company uses does not match the interest characteristics of the assets
being funded, the Company enters into interest rate swap agreements to
offset the interest rate risk associated with such funding. 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 over the life of the swap agreements as an adjustment to
interest expense. For the years ended December 31, 1997 and 1996, the
Company's hedging activities increased interest expense $4.0 million
and $4.1 million, respectively, and had no effect on its weighted
average borrowing rate. The fair value of the swap agreements is not
recognized in the consolidated financial statements since they are
accounted for as hedges.
F-35
The following table summarizes the maturity and weighted average rates
of the Company's interest rate swaps related to liabilities under
management programs at December 31, 1997:
(DOLLARS IN MILLIONS) MATURITIES
--------------------------------------------------------------------------
TOTAL 1998 1999 2000 2001 2002 2003
----------- ----------- --------- --------- -------- ------- ---------
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 355.7 $ 184.3 $110.1 $ 40.6 $11.8 $ 3.4 $ 5.5
Weighted average receive rate 5.68% 5.68% 5.68% 5.68% 5.68% 5.68%
Weighted average pay rate 6.25% 6.29% 6.19% 6.28% 6.40% 6.61%
------------------------------------------------------------------------------------------------------
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 586.0 500.0 86.0
Weighted average receive rate 6.12% 6.71%
Weighted average pay rate 5.89% 5.89%
Pay floating/receive floating:
Notional value 965.0 965.0
Weighted average receive rate 5.76%
Weighted average pay rate 5.70%
------------------------------------------------------------------------------------------------------
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 54.8 29.6 18.4 5.9 .9
Weighted average receive rate 4.53% 4.53% 4.53% 4.53%
Weighted average pay rate 5.36% 5.12% 4.89% 4.93%
Pay floating/receive floating:
Notional value 59.8 31.2 16.7 6.5 5.1 .3
Weighted average receive rate 5.88% 5.88% 5.88% 5.88% 5.88%
Weighted average pay rate 4.91% 4.91% 4.91% 4.91% 4.91%
Pay floating/receive fixed:
Notional value 28.3 28.3
Weighted average receive rate 3.68%
Weighted average pay rate 4.53%
------------------------------------------------------------------------------------------------------
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 491.4 174.6 167.5 113.9 35.4
Weighted average receive rate 7.22% 7.15% 7.24% 7.28%
Weighted average pay rate 7.69% 7.69% 7.69% 7.69%
------------------------------------------------------------------------------------------------------
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 9.1 2.5 (5.6) 3.1 9.1
Weighted average receive rate 3.76% 3.76% 3.76% 3.76%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34%
----------- ----------- --------- --------- -------- ------- ---------
Total $2,550.1 $1,915.5 $307.1 $256.0 $62.3 $ 3.7 $ 5.5
=========== =========== ========= ========= ======== ======= =========
F-36
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates on a selective basis, the Company enters into foreign
exchange contracts. Such contracts are utilized as hedges of
intercompany loans to foreign subsidiaries. Market value gains and
losses on the Company's foreign currency transaction hedges related to
intercompany loans are deferred and recognized upon maturity of the
loan. Such contracts effectively offset the currency risk applicable to
approximately $409.8 million and $329.1 million of obligations at
December 31, 1997 and 1996, respectively.
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. The Company uses
forward delivery contracts, financial futures 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.
The value of the Company's mortgage servicing rights is sensitive to
changes in interest rates. The Company has developed and implemented a
hedge program to manage the associated financial risks of loan
prepayments. The Company has acquired certain derivative financial
instruments, primarily interest rate floors, futures and options to
administer its hedge program. Premiums paid or received on the acquired
derivative instruments are capitalized and amortized over the life of
the contract. Gains and losses associated with the hedge instruments
are deferred and recorded as adjustments to the basis of the mortgage
servicing rights. Deferrals under the hedge programs are allocated to
each applicable stratum of mortgage servicing rights based upon its
original designation and included in the impairment measurement.
14. 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
The Company determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. All securities at December 31, 1997 and 1996
were classified as available-for-sale and were reported at fair value
with the net unrealized holding gains and losses, net of tax, reported
as a component of shareholders' equity until realized. Fair value was
based upon quoted market prices or investment adviser estimates.
Declines in the market value of available-for-sale securities deemed to
be other than temporary result in charges to current earnings and the
establishment of a new cost basis. Gross unrealized gains and losses on
marketable securities were not material.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to
purchase loans. These loans are priced to be sold with servicing rights
retained. Gains (losses) on mortgage-related positions, used to reduce
the risk of adverse price fluctuations, for both mortgage loans held for
sale and anticipated mortgage loan closings arising from commitments
issued, are included in the carrying amount of mortgage loans held for
sale.
MORTGAGE SERVICING RIGHTS
Fair value is estimated based on market quotes and discounted cash flow
analyses based on current market information including market prepayment
rate consensus. Such market information is subject to change as a result
of changing economic conditions.
LONG-TERM DEBT
The fair values of the Company's Senior Notes, Convertible Notes and
Medium-term Notes are estimated based on quoted market prices or market
comparables.
F-37
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, FUTURES CONTRACTS AND
OPTIONS
The fair values of these instruments are 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.
The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows:
1997 1996
------------------------------------ -----------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
(IN MILLIONS) AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Marketable securities:
Debt securities $ -- $ 11.5(a) $ 11.5 $ -- $ 75.7(a) $ 75.7
Equity securities -- -- -- -- 22.5 22.5
Investment in mortgage
related securities -- 48.0 48.0 -- -- --
- ----------------------------- ----------- ----------- ----------- ----------- --------- -----------
ASSETS UNDER MANAGEMENT AND
MORTGAGE PROGRAMS
Relocation receivables -- 775.3 775.3 -- 773.3 773.3
Mortgage loans held for
sale -- 1,636.3 1,668.1 -- 1,248.3 1,248.3
Mortgage servicing rights -- 373.0 394.6 -- 288.9 324.1
- ----------------------------- ----------- ----------- ----------- ----------- --------- -----------
LIABILITIES
Long-term debt -- 1,348.3 1,637.5 -- 1,004.6 1,484.3
- ----------------------------- ----------- ----------- ----------- ----------- --------- -----------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LONG-TERM DEBT
Interest rate swaps 132.6 -- -- 162.2 -- --
In a gain position -- -- 3.9 -- -- .4
In a loss position -- -- (3.8) -- -- (7.7)
Interest rate collars 27.1 -- -- 29.2 -- --
In a gain position -- -- -- -- -- .1
In a loss position -- -- -- -- -- --
Foreign exchange forwards 5.5 -- -- -- -- --
- -- -------------------------- ----------- ----------- ----------- ----------- --------- -----------
LIABILITIES UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Debt -- 5,602.6 5,604.2 -- 5,089.9 5,089.9
- ----------------------------- ----------- ----------- ----------- ----------- --------- -----------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LIABILITIES UNDER
MANAGEMENT AND MORTGAGE
PROGRAMS
Interest rate swaps 2,550.1 -- -- 1,670.2 -- --
In a gain position -- -- 5.6 -- -- 2.5
In a loss position -- -- (3.9) -- -- (10.7)
Foreign exchange forwards 415.5 -- 2.5 329.1 -- 10.0
- ----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
MORTGAGE-RELATED POSITIONS
Forward delivery commitments
(b) 2,582.5 19.4 (16.2) 1,703.5 11.4 7.4
Option contracts to sell (b) 290.0 .5 -- 265.0 1.0 .7
Option contracts to buy (b) 705.0 1.1 4.4 350.0 1.3 (.5)
Treasury options used to
hedge
servicing rights (c) 331.5 4.8 4.8 313.9 1.3 .3
Constant maturity treasury
floors (c) 825.0 12.5 17.1 -- -- --
Interest rate swaps (c) 175.0 1.3 1.3 -- -- --
- ---------------
(a) Securities maturing within one year amounted to $11.3 million and
$71.7 million at December 31, 1997 and 1996, respectively, and are
classified as Other Current Assets in the Consolidated Balance
Sheet.
(b) Carrying amounts and gains (losses) on these mortgage-related
positions are already included in the determination of the
respective carrying amounts and fair values of mortgage loans held
for sale.
(c) Carrying amounts on these mortgage-related positions are
capitalized and recorded as mortgage servicing rights. Gains
(losses) on such positions are included in the determination of
fair value of mortgage servicing rights.
F-38
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various
facilities and equipment, which expire through the year 2004. Rental
expense for the years ended December 31, 1997, 1996 and 1995 was $100.3
million, $84.4 million and $66.9 million respectively. The Company has
been granted rent abatements for varying periods on certain of its
facilities. Deferred rent relating to those abatements is being
amortized on a straight-line basis over the applicable lease terms.
Commitments under capital leases are not significant.
Future minimum lease payments required under noncancelable operating
leases as of December 31, 1997 are as follows:
(In millions)
YEAR AMOUNT
---------------------------- --------
1998 $ 76.8
1999 69.2
2000 58.8
2001 43.0
2002 30.6
Thereafter 83.8
--------
Total minimum lease payments $362.2
========
LITIGATION
Ideon settlement. On June 13, 1997, the Company entered into a
settlement agreement (the "Agreement") with Peter Halmos, the
co-founder of SafeCard Services, Incorporated ("SafeCard"), which was
reorganized in 1995 as Ideon and then acquired by the Company in August
1996. The Agreement, which became effective in July 1997, provided for
the settlement of outstanding litigation matters involving Peter
Halmos, SafeCard and Ideon. The Agreement called for the dismissal with
prejudice of such litigation matters and the payment of $70.5 million
to Peter Halmos, over a six-year period comprised of one up-front
payment of $13.5 million and six subsequent annual payments of $9.5
million. As a result the Company recorded a liability representing the
present value of such payments.
The agreement also called for the transfer of all remaining rights,
title and interest of Peter Halmos in, to, under and in respect of all
gains, profits, payments, benefits, income or interest earned relating
to the assets of SafeCard's CreditLine business to the Company, which
were valued at approximately $45.8 million and included in goodwill as
of December 31, 1997. The difference between the present value of the
payments to Halmos and the value of CreditLine assets received has been
included as a reduction to the liability recorded in connection with
the Ideon merger (see Note 5).
Acquired Company Litigation. One of the Company's subsidiaries
currently faces liability to third parties for damages due to property
damage allegedly caused by environmental contamination at four former
manufactured gas plants and one related waterway site located in the
States of Washington and Oregon. Various third parties, including
governmental entities and other potentially responsible parties, have
alleged that such subsidiary is legally obligated to pay damages and/or
take actions to investigate or clean up property damage to surface
water, ground water, land or other property resulting from the
purported presence of hazardous substances allegedly generated or
released during the historical operation of the manufactured gas plants
for which such subsidiary allegedly is responsible. Such subsidiary is
currently defending itself vigorously in these matters but concurrently
is seeking to effect an out-of-court settlement that, if successful,
would result in another party providing an indemnification to such
subsidiary for future liabilities relating to these claims.
Messrs. Paul A. Kruger, Warren F. Kruger and Lyle Miller (collectively,
the "Plaintiffs") have sued the Company and its wholly-owned
subsidiary, SafeCard. The complaint alleges that the Company wrongfully
controlled, influenced and dominated SafeCard's affairs and that
SafeCard, under the
F-39
direction and control of the Company, wrongfully impeded the Plaintiffs
ability to achieve their contingent payments due under a stock
purchase agreement. The complaint contains, in addition to other counts
against the Company and SafeCard, one count of tortious interference
with contract (against the Company) and one count of intentional
interference with economic opportunity (also against the Company). The
complaint seeks actual damages in an amount of $22 million. The
Plaintiffs are also currently seeking court approval to amend the
complaint to claim unspecified punitive damages. The Company and
SafeCard have objected to such amendment and are awaiting a court
decision with respect thereto.
Pending litigation. The Company is subject to certain other legal
proceedings and claims arising in the ordinary course of its business.
Management does not believe that the outcome of such matters will have
a material adverse effect on the Company's financial position,
liquidity or operating results.
16. INCOME TAXES
The income tax provision (benefit) consists of:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1997 1996 1995
--------- --------- ---------
Current
Federal $236.3 $149.3 $108.8
State 46.7 19.6 22.1
Foreign 39.3 21.2 14.7
--------- --------- --------
322.3 190.1 145.6
--------- --------- --------
Deferred
Federal (81.3) 83.3 52.4
State (5.1) 15.5 1.3
Foreign 3.4 1.2 1.2
--------- --------- --------
(83.0) 100.0 54.9
--------- --------- --------
Provision for income taxes $239.3 $290.1 $200.5
========= ========= ========
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
------------------------
(IN MILLIONS) 1997 1996
----------- -----------
CURRENT NET DEFERRED INCOME TAXES
Merger and acquisition-related reserves $ 165.2 $ 62.7
Accrued liabilities and deferred income 90.1 84.0
Insurance retention refund (34.8) (11.3)
Provision for doubtful accounts 4.0 8.1
Franchise acquisition costs (2.6) (2.6)
Other 4.6 .4
----------- -----------
Current net deferred tax asset $ 226.5 $ 141.3
=========== ===========
NON-CURRENT NET DEFERRED INCOME TAXES
Depreciation and amortization $(308.1) $(173.6)
Deductible goodwill--taxable poolings 182.7 --
Merger and acquisition-related reserves 35.0 --
Accrued liabilities and deferred income 100.3 65.2
Acquired net operating loss carryforward 59.9 85.9
Other 5.1 (24.3)
----------- -----------
Non-current net deferred tax asset (liability) 74.4 (46.8)
Valuation allowance (141.4) --
----------- -----------
F-40
DECEMBER 31,
------------------------
(IN MILLIONS) 1997 1996
----------- -----------
Non-current net deferred tax liability $ (66.6) $ (46.8)
=========== ===========
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME
TAXES
Depreciation $(233.1) $(245.1)
Unamortized mortgage servicing rights (74.6) (51.2)
Accrued liabilities 9.5 1.3
Alternative minimum tax carryforwards 2.5 13.1
----------- -----------
Net deferred tax liabilities under management and
mortgage programs $(295.7) $(281.9)
=========== ===========
The Company has recorded deferred tax assets of $182.7 million
primarily attributed to the difference in book and tax basis of assets
acquired and accounted for using the pooling-of-interests method of
accounting. Such deferred tax assets are expected to be realized
through certain future foreign tax credit benefits. A partial valuation
allowance of $141.4 million has been established relating to one
specific acquisition, since management believes that it is "more likely
than not" that such asset will not be realized. The deferred tax asset,
net of the valuation allowance, recorded in connection with the above
acquisitions, resulted in a corresponding $41.2 million increase to
shareholders' equity.
Net operating loss carryforwards at December 31, 1997 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2002,
$30.2 million; 2005, $7.2 million; 2009, $17.7 million; and 2010,
$116.0 million.
The Company's effective income tax rate differs from the statutory
federal rate as follows:
FOR THE YEAR ENDING DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 9.2% 3.0% 3.6%
Non-deductible merger-related costs 30.8% 1.4% --
Amortization of non-deductible goodwill 4.2% 1.2% 1.4%
Foreign taxes differential 1.1% 0.3% 0.1%
Other 0.9% (0.3%) (0.3%)
---------- ---------- ----------
Effective tax rate 81.2% 40.6% 39.8%
========== ========== ==========
17. STOCK OPTION PLANS
In connection with the Cendant Merger, the Company adopted its 1997
Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan
authorizes the granting of up to 25 million shares of Company common
stock through awards of stock options (which may include incentive
stock options and/or nonqualified stock options), stock appreciation
rights and shares of restricted Company common stock. All directors,
officers and employees of the Company and its affiliates are eligible
to receive awards under the Incentive Plan. Options granted under the
Incentive Plan generally have a ten year term and are exercisable at
20% per year commencing one year from the date of grant. During 1997,
the Company also adopted two other stock plans: the 1997 Employee Stock
Plan (the "1997 Employee Plan") and the 1997 Stock Option Plan (the
"1997 SOP"). The 1997 Employee Plan authorizes the granting of up to 25
million shares of Company common stock through awards of nonqualified
stock options, stock appreciation rights and shares of restricted
Company common stock to employees of the Company and its affiliates.
The 1997 SOP provides for the granting of up to 10 million shares of
Company common stock to key employees (including employees who are
directors and officers) of the Company and its subsidiaries through
awards of incentive and/or
F-41
nonqualified stock options. Options granted under the 1997 Employee
Plan and the 1997 SOP generally have ten year terms and are exercisable
at 20% per year commencing one year from the date of grant.
The Company also grants options to employees pursuant to three
additional stock option plans under which the Company may grant options
to purchase in the aggregate up to 70.8 million shares of Company
common stock. Annual vesting periods under these plans range from 20%
to 33%, all commencing one year from the respective grant dates. At
December 31, 1997, there were 35.5 million shares outstanding
collectively under these plans.
Prior to the Cendant Merger, CUC and HFS had various incentive and
non-qualified stock option plans under which Cendant no longer intends
to make any new option grants, but pursuant to which there continues to
exist outstanding options to purchase shares of Company common stock.
Options originally granted under these plans generally expire ten years
after their respective grant dates. In connection with the Cendant
Merger, all obligations under existing stock option plans were assumed
by Cendant, including the immediate vesting of options outstanding
under the HFS Plans which resulted from a change of control provision.
The table below summarizes the annual activity of Cendant's pooled
stock option plans:
WEIGHTED
OPTIONS AVG. EXERCISE
(SHARES IN MILLIONS) OUTSTANDING PRICE
------------- ---------------
BALANCE AT DECEMBER 31, 1994 92.7 $ 6.20
Granted 21.1 10.74
Canceled (2.7) 8.48
Exercised (12.4) 5.39
------------- ---------------
BALANCE AT DECEMBER 31, 1995 98.7 $ 7.21
Granted 36.1 22.14
Canceled (2.8) 18.48
Exercised (14.0) 5.77
------------- ---------------
BALANCE AT DECEMBER 31, 1996 118.0 $11.68
Granted 78.8 27.94
Canceled (6.4) 27.29
Exercised (14.0) 7.20
PHH conversion (1) (4.4) --
------------- ---------------
BALANCE AT DECEMBER 31, 1997 172.0 $18.66
============= ===============
(1) In connection with the PHH Merger, all unexercised PHH stock
options were canceled and converted into 1.8 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
Principle Board Opinion ("APB") No. 25 and related interpretations in
accounting for its stock option plans. Under APB No. 25, because the
exercise prices of the Company's employee stock options are equal to
the market prices of the underlying Company stock on the date of grant,
no compensation expense is recognized.
F-42
Had the Company elected to recognize compensation cost for its stock
option plans based on the calculated fair value at the grant dates for
awards under such plans, consistent with the method prescribed by SFAS
No. 123, net income per share would have reflected the pro forma
amounts indicated below:
YEAR ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) --------------------------------------------
1997 1996 1995
------------- --------- ---------
Net income (loss):
as reported $ 55.4 $423.6 $302.8
pro forma (396.3)(2) 338.8 297.5
Net income (loss) per share:
Basic as reported $ 0.07 $ 0.56 $ 0.45
pro forma (1) (0.49)(2) 0.45 0.44
Diluted as reported $ 0.06 $ 0.52 $ 0.42
pro forma (1) (0.49)(2) 0.43 0.41
(1) The effect of applying SFAS No. 123 on the pro forma net income per
share disclosures is not indicative of future amounts because it
does not take into consideration option grants made prior to 1995
or in future years.
(2) Includes incremental compensation expense of $335.4 million ($204.9
million, after tax) or $.25 per basic and diluted share as a result
of the immediate vesting of HFS options upon consummation of the
Cendant Merger.
The fair values of the stock options are estimated on the dates of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for options granted in 1997, 1996 and
1995:
CENDANT
PLANS CUC PLANS HFS PLANS PHH PLANS
------------- ---------------------------- ---------------------------- ---------------------------
1997 1996 1995 1996 1995 1996 1995
------------- ------------- ------------- ------------- ------------- ------------- ------------
Dividend Yield -- -- -- -- -- 2.8% 3.5%
Expected volatility 32.5% 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 5.6% 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 7.8 years 5.0 years 5.0 years 9.1 years 9.1 years 7.5 years 7.5 years
The weighted average fair value of Cendant stock options granted during
the year ended December 31, 1997 was $13.71. The weighted average fair
values of stock options granted under the former CUC plans (inclusive
of plans acquired) during the years ended December 31, 1996 and 1995
were $7.51 and $6.69, respectively. The weighted average fair values of
stock options granted under the former HFS plans (inclusive of the PHH
plans) during the years ended December 31, 1996 and 1995 were $10.96
and $4.79, respectively.
The tables below summarize information regarding Cendant stock options
outstanding and exercisable as of December 31, 1997:
(Shares in millions)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ -------- --------------- ---------- -------- ----------
$.01 to $10.00 48.9 5.4 $ 4.16 47.5 $ 4.09
$10.01 to $20.00 29.2 7.1 14.60 21.1 14.99
$20.01 to $30.00 46.5 8.9 23.55 35.1 23.75
$30.01 to $40.00 47.4 9.8 31.35 18.1 31.40
-------- --------
Total 172.0 7.8 18.66 121.8 15.69
======== ========
F-43
Shares exercisable and available for grant at December 31, 1997 and
1996 were as follows:
(IN MILLIONS) 1997 1996
--------- ---------------------------
HFS OPTIONS
(INCLUSIVE OF
CENDANT CUC PHH
OPTIONS OPTIONS OPTIONS)
--------- --------- ----------------
Shares exercisable 121.8 11.8 46.2
Shares available for grant 49.3 8.4 5.1
The Company reserved 11.4 million shares of Company common stock for
issuance in connection with its Restricted Stock Plan. As of December
31, 1997, 10.6 million shares of restricted common stock have been
granted of which 10.4 million shares have vested under this plan.
The Company has reserved 1.1 million shares of Company common stock in
connection with its 1994 Employee Stock Purchase Plan, which enables
employees to purchase shares of common stock from the Company at 90% of
the fair market value on the fifteenth day following the last day of
each calendar quarter, in an amount up to 25% of the employees'
year-to-date earnings.
18. EMPLOYEE BENEFIT PLANS
PENSION AND RETIREMENT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in
the plans. During 1996, a Deferred Compensation Plan (the "Plan") was
implemented providing senior executives with the opportunity to
participate in a funded, deferred compensation program. The assets of
the Plan are held in an irrevocable rabbi trust. Under the Plan,
participants may defer up to 80% of their base compensation and up to
98% of bonuses earned. The Company contributes $0.50 for each $1.00
contributed by a participant, regardless of length of service, up to a
maximum of six percent of the employee's compensation. The Plan is not
qualified under Section 401 of the Internal Revenue Code. The Company's
matching contributions relating to the above plans were not material to
the consolidated financial statements.
The Company's PHH subsidiary has a non-contributory defined benefit
pension plan covering substantially all domestic employees of PHH and
its subsidiaries. PHH's subsidiary located in the United Kingdom has a
contributory defined benefit pension plan, with participation at the
employee's 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 policy for both plans is to
contribute amounts sufficient to meet the minimum requirements plus
other amounts as the Company deems appropriate from time to time. The
projected benefit obligations of the funded plans were $108.1 million
and $97.1 million and funded assets, at fair value (primarily common
stock and bond mutual funds) were $102.7 million and $88.4 million at
December 31, 1997 and 1996, respectively. The net pension cost and the
recorded liability were not material to the accompanying consolidated
financial statements.
The Company also sponsors two unfunded retirement plans to provide
certain key executives with benefits in excess of limits under the
federal tax law and to include annual incentive payments in benefit
calculations. The projected benefit obligation, net pension cost and
recorded liability related to the unfunded plans were not material to
the accompanying consolidated financial statements.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. The net
periodic postretirement benefit costs and the recorded liability were
not material to the accompanying consolidated financial statements.
F-44
19. INVESTMENTS
ARAC
Upon entering into a definitive merger agreement to acquire Avis in
1996, the Company announced its strategy to dilute its interest in ARAC
while retaining assets associated with the franchise business,
including trademarks, reservation system assets and franchise
agreements with ARAC and other licensees. Since the Company's control
was planned to be temporary, the Company accounted for its 100%
investment in ARAC under the equity method. The Company's equity
interest was diluted to 27.5% pursuant to an IPO by ARAC in September
1997 and was further diluted to 20.4% as a result of a secondary
offering in March 1998.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of
ARAC revenue, escalating to 4.5% of ARAC revenue over a 5-year period.
In addition, the Company operates the telecommunications and computer
processing system which services ARAC for reservations, rental
agreement processing, accounting and fleet control for which the
Company charges ARAC at cost.
NRT
During the third quarter of 1997, the Company acquired $182.0 million
of preferred stock of NRT Incorporated ("NRT"), a newly formed
corporation created to acquire residential real estate brokerage firms.
The Company acquired $216.1 million of certain intangible assets
including trademarks associated with real estate brokerage firms
acquired by NRT in 1997. The Company, at its discretion, may acquire up
to $81.3 million of additional NRT preferred stock and may also
purchase up to $229.9 million of certain intangible assets of real
estate brokerage firms acquired by NRT.
In September 1997, NRT acquired the real estate brokerage business and
operations of National Realty Trust ("the Trust"), and two other
regional real estate brokerage businesses. The Trust is an independent
trust to which the Company contributed the brokerage offices formerly
owned by Coldwell Banker in connection with the Company's acquisition
of Coldwell Banker. NRT is the largest residential brokerage firm in
the United States.
20. DIVESTITURE
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Cendant Merger, the Company sold all of the
outstanding shares of one of its timeshare exchange businesses,
Interval International Inc. ("Interval"), for net proceeds of $232.0
million which includes $40.0 million of consideration for a
non-solicitation agreement pursuant to which the Company is precluded
from soliciting any of Interval's employees, customers or clients for a
period of two years from the closing date of the transaction. Proceeds
from the non-solicitation agreement were deferred and will be amortized
over the life of the agreement. Also in conjunction with the sale, the
Company agreed to continue to provide services to certain of Interval's
customers for a specified period, guarantee performance of certain
responsibilities to third parties (i.e., lease payments and certain
other contracts), and absorb certain additional transitional costs
related to the transaction. The estimated fair value of the services to
be provided to Interval's customers of $67.0 million was recorded as a
non-current liability. The value assigned will be amortized over the
average life of the servicing period. After considering all these
factors, the Company recognized a gain on the sale of Interval of $34.7
million ($13.5 million, after tax), which has been reflected as a
component of the Cendant Merger Charge (See Note 5).
21. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenue from franchising activities includes initial franchise fees
charged to lodging properties and real estate brokerage offices upon
execution of a franchise contract. Initial franchise fees amounted to
$26.0 million, $24.2 million and $15.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-45
Franchising activity for the years ended December 31, 1997, 1996 and
1995 is as follows:
LODGING REAL ESTATE
------------------------ --------------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- -------- -------- -------
FRANCHISE IN OPERATION
Units at end of year 5,566 5,397 4,603 11,715 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired -- 24 31 -- 110 104
New agreements 1,205 1,142 983 1,107 829 248
Backlog, end of year 1,271 786 682 276 275 176
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 and
reservation fees received from the Company's real estate brands'
franchisees are based on a specified percentage of gross closed
commissions earned on the sale of real estate. As provided in the
franchise agreements, at the Company's discretion, all of these fees
are to be expended for marketing purposes and the operation of a
centralized brand-specific reservation system for the respective
franchisees and are controlled by the Company until disbursement.
Membership and service fee revenues included marketing and reservation
fees of $170.0 million, $157.6 million and $140.1 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
22. INDUSTRY SEGMENT INFORMATION
The Company operates within three principal industry segments --
membership, travel and real estate. A description of the Company's
segments, and the services provided within its underlying businesses,
are as follows:
MEMBERSHIP SERVICES SEGMENT
Membership. Individual, wholesale and discount program membership
services are provided to consumers and are distributed through various
channels, including financial institutions, credit unions, charities,
other cardholder-based organizations and retail establishments. These
memberships include such components as shopping, travel, auto, dining,
home improvement, lifestyle, credit card and checking account
enhancement packages, financial products and discount programs. The
Company also administers insurance package programs, which are
generally combined with discount shopping and travel for credit union
members.
TRAVEL SERVICES SEGMENT
Franchising (Lodging and car rental). As a franchisor of guest lodging
facilities and car rental agency locations, Cendant licenses the
independent owners and operators of hotels and car rental agencies to
use its brand names. Operational and administrative services are
provided to frachisees, which include access to a national reservation
system, national advertising and promotional campaigns, co-marketing
programs and volume purchasing discounts.
Fleet management. Fleet management services primarily consist of the
management, purchasing, leasing, and resale of vehicles for corporate
clients and government agencies. These services also include fuel,
maintenance, safety and accident management programs and other
fee-based services for clients' vehicle fleets.
Timeshare. Timeshare exchange programs, publications and other
travel-related services are provided to the timeshare industry.
Value-added tax services. Cendant processes value-added tax refunds for
travelers abroad.
F-46
REAL ESTATE SERVICES SEGMENT
Franchising (Real Estate). As a franchisor of real estate brokerage
offices, Cendant licenses the owners and operators of independent real
estate brokerage offices 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 and
include the selling of transferee residences, providing equity advances
on transferee residences for the purchase of new homes and home
management services. Cendant also offers fee-based programs such as
home marketing assistance, household goods moves, destination services
and property dispositions for financial institutions and government
agencies.
Mortgage. Mortgage services primarily include the origination, sale and
servicing of residential first mortgage loans. Cendant markets a
variety of first mortgage products to consumers through relationships
with corporations, affinity groups, financial institutions, real estate
brokerage firms and other mortgage banks.
New mover services. Welcoming packages are distributed to new
homeowners which provides them with discounts from local merchants.
OTHER SERVICES SEGMENT
Software, financial services and marketing. Cendant (i) develops,
publishes and distributes educational and entertainment software for
home and school use; (ii) markets financial product memberships,
generally annuities, mutual funds, and life insurance for financial
institutions; (iii) provides marketing and other services to casino
gaming facilities; and (iv) operates the telecommunications and
computer system which facilitates hotel and car rental agency
reservations and rental agreement processing.
The following table presents industry segment and geographic data of
the Company for the years ended December 31, 1997, 1996 and 1995.
Operating income consists of net revenues less operating expenses
(total expenses excluding interest--net).
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INDUSTRY SEGMENT DATA
(IN MILLIONS)
EXPENSES
REAL NOT
MEMBERSHIP ESTATE TRAVEL OTHER ALLOCATED
1997 SERVICES SERVICES SERVICES SERVICES TO SEGMENTS CONSOLIDATED
------------ ---------- ----------- ---------- ------------- --------------
Net revenues $1,981.7 $ 990.5 $1,480.8 $861.7 -- $ 5,314.7
Operating income(1) 258.5 274.0 212.1 193.3 $(576.9) 361.0
Identifiable assets 1,939.6 5,119.3 6,830.8 961.5 -- 14,851.2
Depreciation and amortization 36.3 55.8 111.2 53.5 -- 256.8
Capital expenditures 23.3 65.4 51.6 42.4 -- 182.7
1996
Net revenues $1,662.1 $ 774.2 $ 887.0 $585.5 -- $ 3,908.8
Operating income(2) 183.4 216.3 266.7 72.7 -- 739.1
Identifiable assets 1,834.7 4,172.0 6,823.7 757.9 -- 13,588.3
Depreciation and amortization 36.2 44.5 65.2 22.0 -- 167.9
Capital expenditures 19.0 30.5 47.6 43.5 -- 140.6
1995
Net revenues $1,373.7 $ 505.2 $ 666.4 $446.8 -- $ 2,992.1
Operating income 122.7(3) 110.0 194.8 89.1 -- 516.6
Identifiable assets 1,462.6 2,403.2 4,446.4 682.2 -- 8,994.4
Depreciation and amortization 35.3 18.0 46.9 12.7 -- 112.9
Capital expenditures 44.2 14.4 17.3 32.8 -- 108.7
(1) Includes merger-related costs and other unusual charges which were
allocated to the business segments as follows: Membership--$200.9
million, Real estate--$93.4 million, Travel--$276.7 million, not
allocated (Corporate-related)--$576.9 million.
(2) Includes merger-related costs and other unusual charges allocated
$127.2 million and $48.6 million to the Membership and Other
segments, respectively.
(3) Includes costs related to Ideon products abandoned and
restructuring of $97.0 million.
F-48
GEOGRAPHIC DATA
NORTH EUROPE AND
(IN MILLIONS) AMERICA OTHER CONSOLIDATED
---------- ------------ --------------
1997
Net revenues $ 4,605.3 $ 709.4 $ 5,314.7
Operating income 231.1 129.9 361.0
Identifiable assets 13,316.3 1,534.9 14,851.2
1996
Net revenues $ 3,529.6 $ 379.2 $ 3,908.8
Operating income 675.4 63.7 739.1
Identifiable assets 12,519.5 1,068.8 13,588.3
1995
Net revenues $ 2,774.2 $ 217.9 $ 2,992.1
Operating income 477.7 38.9 516.6
Identifiable assets 8,230.8 763.6 8,994.4
23. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Selected unaudited quarterly financial data is summarized as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA) FIRST SECOND (1) THIRD FOURTH (2) TOTAL YEAR
----------- ----------- ----------- ----------- ------------
1997
----
Net revenues $1,158.2 $1,300.5 $1,431.3 $1,424.7 $5,314.7
Income (loss) before income taxes 278.0 54.9 414.3 (452.5) 294.7
Net income (loss) 166.0 (13.4) 248.3 (345.5) 55.4
Net income (loss) per share(5)
Basic $ .21 $ (.02) $ .31 $ (.42) $ .07
Diluted .19 (.02) .29 (.42) .06
- --------------------------------------------------------------------------------------------------------
FIRST SECOND (3) THIRD (4) FOURTH TOTAL YEAR
---------- ---------- ----------- ----------- ------------
1996
----
Net revenues $821.4 $935.7 $1,042.9 $1,108.8 $3,908.8
Income before income taxes 158.3 179.4 112.6 263.4 713.7
Net income 96.0 101.0 68.5 158.1 423.6
Net income per share(5)
Basic $ .14 $ .14 $ .09 $ .20 $ .56
Diluted .12 .13 .08 .19 .52
- --------------------------------------------------------------------------------------------------------
(1) Includes merger costs of $303.0 million ($227.0 million, after tax
or $.28 per share) recorded in connection with the PHH Merger.
(2) Includes merger costs and other unusual charges of $844.9 million
($589.8 million, after tax or $.70 per share) recorded in
connection with the Cendant Merger.
(3) Includes merger costs of $28.6 million ($25.1 million, after tax
or $0.03 per share) recorded in connection with the mergers of
Davidson & Associates, Inc. and Sierra On-Line, Inc.
(4) Includes merger costs of $147.2 million ($89.6 million, after tax
or $0.11 per share) principally related to the completion of the
Ideon Group, Inc. acquisition.
(5) Calculation of the net income (loss) per share is based on the
weighted average shares during each quarter. Accordingly, the sum
of the quarters may not equal the total year.
F-49
24. SUBSEQUENT EVENTS
PROPOSED ACQUISITIONS
National Parking Corporation. On March 23, 1998, the Company agreed
with the board of directors of U.K.-based National Parking Corporation
Limited ("NPC") to acquire the outstanding equity for approximately
$1.3 billion in cash. The offer is subject to customary regulatory
approvals and it is anticipated that the transaction will close during
the second quarter of 1998. NPC operates in two principal segments:
National Car Parks Limited, the largest private (non-municipality
owned) car park operator in the U.K. with approximately 500 locations,
and Green Flag Group Limited, the largest for-profit roadside
assistance organization with more than 3.5 million members in the U.K.
American Bankers. On March 23, 1998, the Company entered into a
definitive agreement to acquire American Bankers Insurance Group, Inc.
("American Bankers") for $67 per share in cash and stock, for aggregate
consideration of approximately $3.1 billion. The Company intends to
purchase 23.5 million shares of American Bankers at $67 per share
through its pending cash tender offer, to be followed by a merger in
which the Company will deliver Cendant shares with a value of $67 for
each remaining share of American Bankers common stock outstanding. The
Company has received anti-trust clearance to acquire American Bankers.
The tender offer is subject to the receipt of tenders representing at
least 51 percent of the common shares of American Bankers as well as
customary closing conditions, including regulatory approvals. The
transaction is expected to be completed in the summer of 1998. American
Bankers provides affordable, specialty insurance products and services
through financial institutions, retailers and other entities offering
consumer financing.
In connection with the Company's proposal to acquire American Bankers,
on January 23, 1998, the Company received a bank commitment to provide
a $1.5 billion, 364-day revolving credit facility which will bear
interest, at the option of the Company, at rates based on Prime or LIBOR
plus an applicable variable margin.
Providian. On December 9, 1997, the Company executed a definitive
agreement to acquire Providian Auto and Home Insurance Company for
approximately $219.0 million in cash. Closing is subject to receipt of
required regulatory approval and other customary conditions and is
anticipated in the spring of 1998. Providian sells automobile
insurance to consumers through direct response marketing in 45 states
and the District of Columbia.
COMPLETED ACQUISITIONS
Harpur Group. On January 20, 1998, the Company completed the
acquisition of The Harpur Group Ltd. ("Harpur"), a leading fuel card
and vehicle management company in the United Kingdom, from privately
held H-G Holdings, Inc. for approximately $186.0 million in cash plus
future contingent payments of up to $20.0 million over the next two
years.
Jackson Hewitt. On January 7, 1998, the Company completed the
acquisition of Jackson Hewitt Inc. ("Jackson Hewitt"), for
approximately $480.0 million in cash or $68 per share of common stock
of Jackson Hewitt. Jackson Hewitt operates the second largest tax
preparation service franchisor system in the United States with
locations in 41 states. Jackson Hewitt franchises a system of
approximately 2,050 offices that specialize in computerized preparation
of federal and state individual income tax returns.
Other. Subsequent to December 31, 1997, the Company acquired certain
entities for an aggregate purchase price of approximately $197.5
million, satisfied by the payment of cash. Such acquisitions will be
accounted for under the purchase method of accounting.
FINANCING TRANSACTIONS
Issuance of FELINE PRIDES(Service Mark). The Company filed an amended
shelf registration statement (the "Shelf Registration Statement") on
February 6, 1998 with the Securities and Exchange Commission for the
issuance of up to an aggregate $4 billion of debt and equity securities.
Pursuant to the aforementioned Shelf Registration Statement, the
Company issued 29.9 million FELINE PRIDES(Service Mark)
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and 2.3 million trust preferred securities on March 2, 1998 and
received approximately $1.4 billion in gross proceeds therefrom. The
issuance of the FELINE PRIDES (Service Mark) resulted in the utilization
of approximately $3 billion of availability under the Shelf
Registration Statement. The FELINE PRIDES (Service Mark) consist of
27.6 million Income PRIDES and 2.3 million Growth PRIDES, each with a
face amount of $50 per PRIDE. The Income PRIDES consist of trust
preferred securities and stock purchase contracts under which the
holders will purchase common stock from the Company in February of
2001. The Growth PRIDES consist of stock purchase contracts under which
the holders will purchase common stock from the Company in February of
2001 and zero coupon U.S. Treasury securities. The trust preferred
securities will bear interest at the annual rate of 6.45 percent, and
the forward purchase contract forming a part of the Income PRIDES will
pay 1.05 percent annually in the form of a contract adjustment payment.
The forward purchase contract forming a part of the Growth PRIDES will
pay 1.3 percent annually in the form of a contract adjustment payment.
The forward purchase contracts call for the holder to purchase the
minimum of 1.0395 shares and a maximum of 1.3514 shares of Company
common stock per PRIDES security, depending upon the average of the
closing price per share of Company common stock for a 20 consecutive
trading day period ending in mid-February of 2001. This represents a
maximum common stock purchase price of $48.10 per share or a 30%
premium to the $37.00 closing of Company common stock on February 24,
1998.
Credit Agreement. On March 25, 1998, the Company entered into a $500
million credit agreement with the Chase Manhattan Bank, which matures
on June 15, 1998.
F-51