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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, 1998
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)
9 WEST 57TH STREET 10019
NEW YORK, NY (Zip Code)
(Address of principal executive office)
212-413-1800
(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
Income PRIDES(SM) New York Stock Exchange
Growth PRIDES(SM) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
6.45% Trust Originated Preferred Securities
7 1/2% Notes due 2000
7 3/4% Notes due 2003
3% Convertible Subordinated Notes Due 2002
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on March 22, 1999 was
$12,908,560,000. 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 794,281,319 shares of Common Stock outstanding as at March 22,
1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement which was mailed
to stockholders in connection with the registrant's annual shareholders'
meeting which is scheduled to be held on May 27, 1999 (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 .................................................................... 35
3 Legal Proceedings ............................................................. 36
4 Submission of Matters to a Vote of Security Holders ........................... 39
PART II
5 Market for the Registrant's Common Stock and Related Stockholder Matters ...... 41
6 Selected Financial Data ....................................................... 42
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 43
7A Quantitative and Qualitative Disclosures About Market Risk .................... 66
8 Financial Statements and Supplementary Data ................................... 67
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................... 67
PART III
10 Directors and Executive Officers of the Registrant ............................ 67
11 Executive Compensation ........................................................ 67
12 Security Ownership of Certain Beneficial Owners and Management ................ 67
13 Certain Relationships and Related Transactions ................................ 67
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............... 68
Signatures .................................................................... 69
Index to Exhibits ............................................................. 71
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PART I
ITEM 1. BUSINESS
Except as expressly indicated or unless the context otherwise requires,
the "Company", "Cendant", "we", "our", or "us" means Cendant Corporation, a
Delaware Corporation, and its subsidiaries.
GENERAL
We are one of the foremost consumer and business services companies in the
world. We were created through the merger (the "Merger") of HFS Incorporated
("HFS") into CUC International Inc. ("CUC") in December 1997 with the resultant
corporation being renamed Cendant Corporation. We provide the fee-based
services formerly provided by each of CUC and HFS, including travel services,
real estate services and membership-based consumer services, to our customers
throughout the world.
We operate in four principal divisions--travel related services, real
estate related services, alliance marketing related services and other consumer
and business services. Our businesses provide a wide range of complementary
consumer and business services, which together represent nine business
segments. The travel related services businesses facilitate vacation timeshare
exchanges, manage corporate and government vehicle fleets and franchise car
rental and hotel businesses; the real estate related services businesses
franchise real estate brokerage businesses, provide home buyers with mortgages
and assist in employee relocation; and the alliance marketing related services
businesses provide an array of value driven products and services. Our other
consumer and business services include our tax preparation services franchise,
information technology services, car parks and vehicle emergency support and
rescue services in the United Kingdom, credit information services, financial
products and other consumer-related services.
As a franchisor of hotels, residential real estate brokerage offices, car
rental operations and tax preparation services, we license the owners and
operators of independent businesses to use our brand names. We do not own or
operate hotels, real estate brokerage offices, car rental operations or tax
preparation offices (except for certain company-owned Jackson Hewitt offices
which we intend to franchise). Instead, we provide our franchisee customers
with services designed to increase their revenue and profitability.
Travel Related Services
The travel division is comprised of the travel and fleet segments. In the
travel segment, we franchise hotels primarily in the mid-priced and economy
markets. We are the world's largest hotel franchisor, operating the Days Inn
(Registered Trademark) , Ramada (Registered Trademark) (in the United States),
Howard Johnson (Registered Trademark) , Super 8 (Registered Trademark) ,
Travelodge (Registered Trademark) (in North America), Villager Lodge
(Registered Trademark) , Knights Inn (Registered Trademark) and Wingate Inn
(Registered Trademark) lodging franchise systems. We own the Avis (Registered
Trademark) worldwide vehicle rental franchise system which, operated by its
franchisees, is the second largest car rental system in the world (based on
total revenues and volume of rental transactions). We currently own
approximately 19% of the capital stock of the largest Avis franchisee, Avis
Rent A Car, Inc. ("ARAC"). We also own Resort Condominiums International, LLC
("RCI"), the world's leading timeshare exchange organization.
Our fleet segment is conducted primarily by our PHH Vehicle Management
Services Corporation subsidiary which operates the second largest provider in
North America of comprehensive vehicle management services and our PHH Vehicle
Management Services PLC subsidiary which is the market leader in the United
Kingdom for fuel and fleet management services.
Real Estate Related Services
Our real estate division consists of the real estate franchise, relocation
and mortgage segments. In the real estate franchise segment, we franchise real
estate brokerage offices under the CENTURY 21 (Registered Trademark) , COLDWELL
BANKER (Registered Trademark) and ERA (Registered Trademark) real estate
brokerage franchise systems and are the world's largest real estate brokerage
franchisor. In the relocation segment, our Cendant Mobility Services
Corporation
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subsidiary is the largest provider of corporate relocation services in the
world, offering relocation clients a variety of services in connection with the
transfer of a client's employees. In the mortgage segment, our Cendant Mortgage
Corporation ("Cendant Mortgage") subsidiary originates, sells and services
residential mortgage loans in the United States, marketing such services to
consumers through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms and mortgage banks.
Alliance Marketing Related Services
Our alliance marketing division is divided into three segments: individual
membership; insurance/wholesale; and entertainment publications. The individual
membership segment, with approximately 32 million memberships, provides
customers with access to a variety of discounted products and services in such
areas as retail shopping, travel, auto, dining and home improvement. The
insurance/wholesale segment, with nearly 31 million customers, markets and
administers insurance products, primarily accidental death and dismemberment
insurance and term life insurance, and also provides products and services such
as checking account enhancement packages, financial products and discount
programs to customers of various financial institutions. The entertainment
publications segment provides customers with unique products and services that
are designed to enhance a customer's purchasing power. Our alliance marketing
activities are conducted principally through our Cendant Membership Services,
Inc. subsidiary and certain of the Company's other wholly-owned subsidiaries,
including FISI*Madison Financial Corporation ("FISI"), Benefit Consultants, Inc.
("BCI"), and our Entertainment Publications, Inc. ("EPub") subsidiary.
Other Consumer and Business Services
We also provide a variety of other consumer and business services. Our
Jackson Hewitt Inc. ("Jackson Hewitt") subsidiary operates the second largest
tax preparation service system in the United States with locations in 43 states
and franchises a system of approximately 3,000 offices that specialize in
computerized preparation of federal and state individual income tax returns.
Our National Parking Corporation Limited ("NPC") subsidiary is the largest
private (non-municipally owned) car park operator in the United Kingdom and a
leader in vehicle emergency support and rescue services for approximately 3.5
million members in the United Kingdom. Our Global Refund subsidiary operates
the world's leading value-added tax refund service for travelers. We also
provide information technology services, credit information services, financial
services and other consumer services.
RECENT DEVELOPMENTS
Change in Focus; Sale of Our Cendant Software and Hebdo Mag International
Subsidiaries
General. We recently have changed our focus from making strategic
acquisitions of new businesses to maximizing the opportunities and growth
potential of our existing businesses. In connection with this change in focus,
we intend to review and evaluate our existing businesses to determine if they
continue to meet our business objectives. As part of our ongoing evaluation of
such businesses, we intend from time to time to explore and conduct discussions
with regard to divestitures and related corporate transactions. However, we can
give no assurance with respect to the magnitude, timing, likelihood or
financial or business effect of any possible transaction. We also cannot
predict whether any divestitures or other transactions will be consummated or,
if consummated, will result in a financial or other benefit to us. We intend to
use a portion of the proceeds from any such dispositions and cash from
operations, to retire indebtedness, to repurchase our common stock as our Board
of Directors approves and for other general corporate purposes.
As a result of our change in focus, on January 12, 1999, we completed the
sale of our consumer software division, Cendant Software and its subsidiaries,
to Paris-based Havas SA, a subsidiary of Vivendi SA, for $800 million in cash
plus future potential cash payments.
On December 15, 1998, we completed the sale of our Hebdo Mag International
subidiary ("Hebdo Mag") to a company organized by Hebdo Mag management for
approximately $450 million, including approximately $315 million in cash and
7.1 million shares of our common stock.
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Internet Strategy. As part of the aforementioned change in focus, on
February 10, 1999, we announced our strategy for our Internet business,
following a comprehensive company-wide review. The strategy includes: (i) the
proposed sale of three of our internet companies -- RentNet, Match.com and
Bookstacks, Inc. (Books.com, MusicSpot.com and GoodMovies.com); (ii) continued
investment in our remaining internet membership business, particularly
NetMarket, which is an integral part of our overall individual membership
business; (iii) active pursuit of strategic partnerships that will leverage our
online membership assets, accelerate growth and maximize shareholder value; and
(iv) establishment of an outsourcing services business that manages fulfillment
and distribution for non-competing third party e-commerce providers.
Termination of American Bankers Acquisition and Settlement Agreement
On March 23, 1998, we announced that we had entered into a definitive
agreement (the "ABI Merger 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. Because of uncertainties
concerning the eventual completion of this acquisition, on October 13, 1998, we
and American Bankers entered into a settlement agreement pursuant to which we
and American Bankers terminated the ABI Merger Agreement and our then pending
tender offer for American Bankers shares. Pursuant to the settlement agreement:
o we and American Bankers released each other from any claims relating to
the proposed acquisition of American Bankers;
o we paid $400 million, pre-tax, in cash to American Bankers;
o we agreed to withdraw any applications we had pending with insurance
regulatory authorities in order to obtain control of American Bankers and
to withdraw from any proceedings or hearings in connection with these
applications; and
o we agreed not to take any actions or make any statements intended to
frustrate or delay any business combination between American Bankers and
any other party.
In connection with the termination of the American Bankers transaction, we
recorded a $281 million after-tax charge in the fourth quarter of 1998 in
connection with our payment to American Bankers and transaction-related
expenses.
Termination of Providian Acquisition
On December 10, 1997, we announced that we had entered into a definitive
agreement to acquire Providian Auto and Home Insurance Company and its
subsidiaries ("Providian") from a subsidiary of Aegon N.V. for approximately
$219 million in cash. On October 5, 1998, we announced that we terminated the
agreement to acquire Providian because the acquisition agreement provided that
the closing had to occur on or before September 30, 1998, and certain
representations, covenants and conditions of closing in the acquisition
agreement had not been fulfilled by that date. We did not pursue an extension
of the termination date of the agreement because Providian no longer met our
acquisition criteria.
National Parking Corporation Acquisition
On April 27, 1998, we acquired NPC for $1.6 billion in cash, which
included our repayment of approximately $227 million of outstanding NPC debt.
NPC is the largest private (non-municipally owned) car park operator in the
United Kingdom, with a portfolio of approximately 500 owned, leased and managed
car parks in over 100 towns and city centers and major airport locations. NPC
has also developed a broad-based break-down assistance group under the brand
name of Green Flag. Green Flag offers a wide range of emergency support and
rescue services to approximately 3.5 million members in the United Kingdom.
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Termination of RAC Motoring Services Acquisition
On May 21, 1998, we announced that we reached definitive agreements with
the Board of Directors of Royal Automobile Club ("RAC") to purchase RAC
Motoring Services ("RACMS") for total consideration of pounds sterling 450
million, or approximately $735 million in cash. On February 4, 1999, the U.K.
Secretary of State for Trade and Industry cleared our proposed acquisition of
RACMS on the condition that we divest our Green Flag breakdown assistance
business. We did not regard this proposed condition as reasonably acceptable or
commercially feasible and therefore we have determined not to proceed with the
acquisition of RACMS.
MATTERS RELATING TO THE ACCOUNTING IRREGULARITIES AND ACCOUNTING POLICY CHANGE
Accounting Irregularities
On April 15, 1998, we announced that in the course of transferring
responsibility for our accounting functions from Cendant personnel associated
with CUC prior to the Merger to Cendant personnel associated with HFS before
the Merger and preparing for the reporting of first quarter 1998 financial
results, we discovered accounting irregularities in certain CUC business units.
As a result, we, together with our counsel and assisted by auditors,
immediately began an intensive investigation (the "Company Investigation"). In
addition, our Audit Committee engaged Willkie Farr & Gallagher ("Willkie Farr")
as special legal counsel and Willkie Farr engaged Arthur Andersen LLP to
perform an independent investigation into these accounting irregularities (the
"Audit Committee Investigation," and together with the Company Investigation,
the "Investigations").
On July 14, 1998, we announced that the accounting irregularities were
greater than those initially discovered in April and that the irregularities
affected the accounting records of the majority of the CUC business units. On
August 13, 1998, we announced that the Company Investigation was complete. On
August 27, 1998, we announced that our Audit Committee had submitted its report
(the "Report") to the Board of Directors on the Audit Committee Investigation
into the accounting irregularities and its conclusions regarding responsibility
for those actions. A copy of the Report has been filed as an exhibit to the
Company's Current Report on Form 8-K dated August 28, 1998.
As a result of the findings of the Investigations, we restated our
previously reported financial results for 1997, 1996 and 1995 and the six
months ended June 30, 1998 and 1997. The 1997 restated amounts also included
certain adjustments related to the former HFS businesses which are
substantially comprised of $47.8 million in reductions to merger-related costs
and other unusual charges ("Unusual Charges") and a $14.5 million decrease in
pre-tax income excluding Unusual Charges, which on a net basis increased 1997
net income from continuing operations. The 1997 annual and six months results
have also been restated for a change in accounting, effective January 1, 1997,
related to revenue and expense recognition for memberships with a full refund
offer (see Notes 2 and 18 to the Consolidated Financial Statements).
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Restated consolidated results include, but are not limited to:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
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1998 1997 1997 1996 1995
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(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Income (loss):
As restated .................... $ 325.9 $ (250.6) (217.2) $ 330.0 $ 229.8
As originally reported ......... 413.8 11.0 55.4 423.6 302.8
Income from continuing operations
excluding Unusual Charges:
As restated .................... $ 343.2 $ 252.7 $ 571.0 (1) $ 383.3 (2) $ 269.2 (3)
As originally reported ......... 421.2 237.0 817.0 499.8 333.9
Per common share (diluted):
Net income (loss):
As restated .................... $ 0.37 $ (0.30) $ (0.27) $ 0.41 $ 0.31
As originally reported ......... 0.46 0.01 0.06 0.52 0.42
Income from continuing operations
excluding Unusual Charges:
As restated .................... $ 0.38 $ 0.30 $ 0.66(1) $ 0.47(2) $ 0.36(3)
As originally reported ......... 0.46 0.30 0.94 0.62 0.46
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(1) For the year ended December 31, 1997, our restated income from continuing
operations excluding Unusual Charges, extraordinary gain and the
cumulative effect of a change in accounting totaled $571.0 million ($0.66
per diluted share). The original amount included $817.0 million ($0.94
per diluted share) of income from continuing operations. The $246.0
million ($0.28 per diluted share) decrease in income from continuing
operations represents additional after-tax expenses of $14.6 million
($0.02 per diluted share) due to a change in accounting described in "--
Matters Relating to the Accounting Irregularities and Accounting Policy
Change" and $231.4 million ($0.26 per diluted share) of accounting errors
and irregularities.
(2) The $116.5 million ($0.15 per diluted share) decrease primarily
represents accounting errors and irregularities.
(3) The $64.7 million ($0.10 per diluted share) decrease primarily represents
accounting errors and irregularities.
Class Action Litigation and Government Investigation
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K, numerous lawsuits claiming to be class actions, two
lawsuits claiming to be brought derivatively on our behalf and three individual
lawsuits have been filed in various courts against us, and among others, our
predecessor, HFS, and certain current and former officers and directors of the
Company and HFS, asserting various claims under the federal securities laws and
certain state statutory and common laws. SEE "ITEM 3. LEGAL PROCEEDINGS".
In addition, the staff of the Securities and Exchange Commission (the
"SEC") and the United States Attorney for the District of New Jersey are
conducting investigations relating to the accounting irregularities. The SEC
staff has advised us that its inquiry should not be construed as an indication
by the SEC or its staff that any violations of law have occurred. While we have
made all adjustments considered necessary as a result of the findings of the
Investigations and the restatement of our financial statements for 1997, 1996
and 1995 and the first six months of 1998, we can provide no assurances that
additional adjustments will not be required as a result of these government
investigations.
Other than the PRIDES litigation discussed below, we do not believe that
it is feasible to predict or determine the final outcome or resolution of these
proceedings and investigations or to estimate the amounts or potential range of
loss with respect to the resolution of these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgments against us or
settlements and could require substantial payments by us. Our management
believes that adverse outcomes in such proceedings and investigations or any
other resolutions (including settlements) could have a material impact on our
financial condition, results of operations and cash flows.
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Settlement of PRIDES Class Action Litigation
On March 17, 1999, we announced that we reached a final settlement
agreement with plaintiff's counsel representing the class of holders of our
PRIDES securities who purchased their securities on or prior to April 15, 1998
("eligible persons") to settle their class action lawsuit against us. Under the
final settlement agreement, eligible persons will receive a new security -- a
Right -- for each PRIDES security held on April 15, 1998. Current holders of
PRIDES will not receive any Rights (unless they also held PRIDES on April 15,
1998). We had originally announced a preliminary agreement in principle to
settle such lawsuit on January 7, 1999. The final agreement maintained the
basic structure and accounting treatment as the preliminary agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per diluted share ($351 million pre-tax),
in the fourth quarter of 1998 associated with the settlement agreement in
principle to settle the PRIDES securities class action. We recorded an increase
in additional paid-in capital of $350 million offset by a decrease in retained
earnings of $228 million resulting in a net increase in stockholders' equity of
$122 million as a result of the prospective issuance of the Rights. As a
result, the settlement should not reduce net book value. In addition, the
settlement is not expected to reduce 1999 earnings per share unless our common
stock price materially appreciates. SEE "ITEM 3. LEGAL PROCEEDINGS" for a more
detailed description of the settlement.
Management and Corporate Governance Changes
On July 28, 1998, Walter A. Forbes resigned as Chairman of the Company and
as a member of the Board of Directors. Henry R. Silverman, Chief Executive
Officer of the Company, was unanimously elected by the Board of Directors to be
Chairman and continues to serve as our Chief Executive Officer and President.
Since July 28, 1998, ten members of the Board formerly associated with CUC also
resigned.
On July 28, 1998, the Board also approved the adoption of Amended and
Restated By-Laws of the Company and voted to eliminate the governance plan
adopted as part of the Merger, resulting in the elimination of the 80%
super-majority vote requirement provisions of our By-Laws relating to the
composition of the Board and the limitations on the removal of the Chairman and
the Chief Executive Officer.
* * *
FINANCIAL INFORMATION
Financial information about our industry segments may be found in Note 26
to our consolidated financial statements presented in Item 8 of this Annual
Report on Form 10-K and incorporated herein by reference.
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report on Form
10-K that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to integrate
and operate successfully acquired businesses and the risks associated
with such businesses, including the merger that created Cendant and the
NPC acquisition;
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o Our ability to successfully divest non-core assets and implement our new
internet strategy (described in "-- Recent Developments");
o our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by
financing arrangements; and
o our ability and our vendors', franchisees' and customers' ability to
complete the necessary actions to achieve a year 2000 conversion for
computer systems and applications.
We derived the forward-looking statements in this Annual Report on Form
10-K (including the documents incorporated by reference in this Annual Report
on Form 10-K) from the foregoing factors and from other factors and
assumptions, and the failure of such assumptions to be realized as well as
other factors may also cause actual results to differ materially from those
projected. We assume no obligation to publicly correct or update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements or if we
later become aware that they are not likely to be achieved.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 9 West 57th Street, New
York, New York 10019 (telephone number:(212)413-1800).
TRAVEL DIVISION
THE TRAVEL SEGMENT
The Travel Segment consists of our lodging franchise services, timeshare
exchange, and Avis car rental franchise businesses and represented
approximately 20.1%, 22.9% and 13.2% of our revenues for the year ended
December 31, 1998, 1997 and 1996, respectively.
LODGING FRANCHISE BUSINESS
GENERAL. The lodging industry can be divided into three broad segments
based on price and services: luxury or upscale, which typically charge room
rates above $82 per night; middle market, with room rates generally between $55
and $81 per night; and economy, where room rates generally are less than $54
per night. Of our franchised brand names, Ramada, Howard Johnson and Wingate
Inn compete principally in the middle market segment and Days Inn, Knights Inn,
Super 8, Travelodge and Villager Lodge ("Villager") compete primarily in the
economy segment, which is currently the fastest growing segment of the
industry.
As franchisor of lodging facilities, we provide 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. We believe that, in general, national franchise brands with
a greater number of hotels enjoy greater brand awareness among potential hotel
guests, and thus are perceived as more valuable by existing and prospective
franchisees than brands with a lesser number of properties. Franchise brands
can also increase franchisee property occupancy through national direct sales
programs to businesses, associations and affinity groups.
In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital expenditures
and operating costs required to meet a brand's quality 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
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brand membership. Other benefits to brand affiliation include group purchasing
services, training programs, design and construction advice, and other
franchisee support services, all of which provide the benefits of a national
lodging services organization to operators of independently-owned hotels. We
believe that, in general, franchise affiliations are viewed as enhancing the
value of a hotel property by providing economic benefits to the property.
We entered the lodging franchise business in July 1990 with the
acquisition of the Howard Johnson franchise system and the rights to operate
the U.S. Ramada franchise system. We acquired the Days Inn franchise system in
January 1992, the Super 8 franchise system in April 1993, the Villager Lodge
franchise system in November 1994, the Knights Inn franchise system in August
1995 and the Travelodge franchise system in January 1996. Each of these
acquisitions has increased our earnings per share. We continue to seek
opportunities to acquire or license additional hotel franchise systems,
including established brands in the upper end of the market, where we are not
currently represented. See "Lodging Franchise Growth" below.
The fee and cost structure of our lodging business provides significant
opportunities for us to increase earnings by increasing the number of
franchised properties. Hotel franchisors, such as our Company, derive
substantially all of their revenue from continuing franchise fees. Continuing
franchise fees are comprised of two components, a royalty portion and a
marketing and reservations portion, both of which are normally charged by the
franchisor as a percentage of the franchisee's gross room revenue. The royalty
portion of the franchise fee is intended to cover the operating expenses of the
franchisor, such as expenses incurred in quality assurance, administrative
support and other franchise services and to provide the franchisor with
operating profits. The marketing/reservations portion of the franchise fee is
intended to reimburse the franchisor for the expenses associated with providing
such franchise services as a national reservations system, national media
advertising and certain training programs.
Our franchisees are dispersed geographically which minimizes the exposure
to any one hotel owner or geographic region. Of the more than 6,000 properties
and 4,000 franchisees in our systems, no individual hotel owner accounts for
more than 2% of our lodging revenue.
LODGING FRANCHISE GROWTH. Growth of the franchise systems through the sale
of long-term franchise agreements to operators of existing and newly
constructed hotels is the leading source of revenue and earnings growth in our
lodging franchise business. Franchises are terminated primarily for not paying
the required franchise fees and/or not maintaining compliance with brand
quality assurance standards required pursuant to the applicable franchise
agreement.
LODGING FRANCHISE SALES. We market franchises principally to independent
hotel and motel owners, as well as to owners whose properties affiliation with
other hotel brands can be terminated. We believe that our existing franchisees
also represent a significant potential market because many own, or may own in
the future, other hotels which can be converted to our brand names.
Accordingly, a significant factor in our sales strategy is maintaining the
satisfaction of our existing franchisees by providing quality services.
We employ a national franchise sales force consisting of approximately 80
salespeople and sales management personnel, which is divided into several
brandspecific sales groups, with regional offices around the country. The sales
force is compensated primarily through commissions. In order to provide broad
marketing of our brands, sales referrals are made among the sales groups and a
referring salesperson is entitled to a commission for a referral which results
in a franchise sale.
We seek to expand our franchise systems and provide marketing and other
franchise services to franchisees on an international basis through a series of
master license agreements with internationally based developers and
franchisors. As of December 31, 1998, our 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 requires payment of an initial development fee in
connection with the execution of the license agreement as well as recurring
franchise fees.
8
LODGING FRANCHISE SYSTEMS. The following is a summary description of our
lodging franchise systems. Information reflects properties which are open and
operating and is presented as of December 31, 1998.
PRIMARY AVG. ROOMS # OF # OF DOMESTIC
BRAND MARKET SERVED PER PROPERTY PROPERTIES ROOMS INTERNATIONAL*
- ---------------- ------------------ -------------- ------------ --------- -----------------
Days Inn Lower Economy 90 1,830 163,999 International(1)
Howard Johnson Mid-market 106 489 51,807 International(2)
Knights Inn Lower Economy 82 222 18,196 International
Ramada Mid-market 131 1004 131,591 Domestic
Super 8 Economy 61 1759 108,111 International(3)
Travelodge Upper Economy 82 521 42,857 Domestic(1)(5)
Villager Lodge Lower Economy 74 99 7,284 International(4)
Wingate Upper Mid-market 94 54 5,051 International(4)
- ----------
* Description of rights owned or licensed.
(1) Includes properties in Mexico, Canada, China, South Africa, India,
Uruguay and the Philippines.
(2) Includes Mexico, Canada, Colombia, Israel, Venezuela, Malta, U.A.E. and
the Dominican Republic.
(3) Includes properties in Canada and Singapore.
(4) No international properties currently open and operating.
(5) Rights include all of North America.
OPERATIONS -- LODGING. Our organization is designed to provide a high
level of service to our franchisees while maintaining a controlled level of
overhead expense. In the lodging segment, expenses related to marketing and
reservations services are budgeted to match 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 our reservation systems is independently operated,
focusing on its specific brand and franchise system, and is comprised of one or
more nationally advertised toll-free telephone numbers, reservation agents who
accept inbound calls, a computer operation that processes reservations, and
automated links which accept reservations from travel agents and other travel
providers, such as airlines, and which report reservations made through the
system to each franchisee property. Each reservation agent handles reservation
requests and inquiries for only one of our franchise systems and there is no
"cross selling" of franchise systems to consumers. We maintain seven
reservations centers that are located in Knoxville and Elizabethton, Tennessee;
Phoenix, Arizona; Winner and Aberdeen, South Dakota; Orangeburg, South Carolina
and Saint John, New Brunswick, Canada.
LODGING FRANCHISE AGREEMENTS. Our lodging franchise agreements grant the
right to utilize one of the brand names associated our lodging franchise
systems to lodging facility owners or operators under long-term franchise
agreements. An annual average of 2.1% of our existing franchise agreements are
scheduled to expire from January 1, 1999 through December 31, 2006, with no
more than 2.8% (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 based on property size and type, as well as continuing franchise
fees comprised of royalty fees and marketing/reservation fees based on gross
room revenues.
Under the terms of the standard franchise agreements in effect at December
31, 1998, franchisees are typically required to pay recurring fees comprised of
a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. We
discount fees from the standard rates from time to time and under certain
circumstances.
Our typical franchise agreement is terminable by us upon the franchisee's
failure to maintain certain quality standards, to pay franchise fees or other
charges or to meet other specified obligations. In the
9
event of such termination, we are 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," "Travelodge" and related
logos are material to our business. We, through our franchisees, actively use
these marks. All of the material marks in each franchise system are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office. We own the marks relating to the Days Inn system, the
Howard Johnson system, the Knights Inn system, the Super 8 system, the
Travelodge system (in North America), the Villager Lodge system and the Wingate
Inn system through our subsidiaries.
We franchise the service mark "Ramada" and related marks, Ramada brands
and logos (the "Ramada Marks") to lodging facility owners in the United States
pursuant to two license agreements (the "Ramada License Agreements") between an
indirect subsidiary of Marriott Corporation ("Licensor") and Ramada Franchise
Systems, Inc. ("RFS"), our wholly-owned subsidiary. The Ramada License
Agreements limit RFS's use of the Ramada Marks to the U.S. market.
The Ramada License Agreements have initial terms terminating on March 31,
2024. At the end of the initial terms, RFS has the right either (i) to extend
the Ramada License Agreements, (ii) to purchase the Ramada Marks for their fair
market value at the date of purchase, subject to certain minimums after the
initial terms, or (iii) to terminate the Ramada License Agreements. The Ramada
License Agreements require that RFS pay license fees to the Licensor calculated
on the basis of percentages of annual gross room sales, subject to certain
minimums and maximums as specified in each Ramada License Agreement. RFS
received approximately $46 million in royalties from its Ramada franchisees in
1998 and paid the Licensor approximately $23 million in license fees.
The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements, (ii)
the maintenance by us of a minimum net worth of $50 million (however, this
minimum net worth requirement may be satisfied by a guaranty of an affiliate of
ours with a net worth of at least $50 million or by an irrevocable letter of
credit (or similar form of third-party credit support)), (iii) non-payment of
royalties, (iv) failure to maintain registrations on the Ramada Marks and to
take reasonable actions to stop infringements, (v) failure to pay certain
liabilities specified by the Restructuring Agreement, dated July 15, 1991, by
and among New World Development Co., Ltd. (a predecessor to Licensor), Ramada
International Hotels and Resorts, Inc., Ramada Inc., Franchise System Holdings,
Inc., the Company and RFS and (vi) failure to maintain appropriate hotel
standards of service and quality. A termination of the Ramada License
Agreements would result in the loss of the income stream from franchising the
Ramada brand names and could result in the payment by us of liquidated damages
equal to three years of license fees. We do not believe that 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. Our primary national
lodging brand competitors are the Holiday Inn (Registered Trademark) and Best
Western (Registered Trademark) brands and Choice Hotels, which franchises
seven brands, including the Comfort Inn (Registered Trademark) , Quality Inn
(Registered Trademark) and Econo Lodge (Registered Trademark) brands. Days
Inn, Travelodge and Super 8 properties principally compete with Comfort Inn,
Red Roof Inn (Registered Trademark) , and Econo Lodge in the limited service
economy sector of the market. The chief competitor of Ramada, Howard Johnson
and Wingate Inn properties, which compete in the middle market segment of the
hotel industry, is Holiday Inn (Registered Trademark) and Hampton Inn
(Registered Trademark) . Our Knights Inn and Travelodge brands compete with
Motel 6 (Registered Trademark) properties. In addition, a lodging facility
owner may choose not to affiliate with a franchisor but to remain independent.
We believe that competition for the sale of franchises in the lodging
industry is based principally upon the perceived value and quality of the brand
and services offered to franchisees, as well as the nature of those services.
We believe that prospective franchisees value a franchise based upon their view
of the relationship of conversion costs and future charges to the potential for
increased revenue and profitability.
10
The reputation of the franchisor among existing franchisees is also a factor
which may lead a property owner to select a particular affiliation. We also
believe that the perceived value of its brand names to prospective franchisees
is, to some extent, a function of the success of its existing franchisees.
The ability of our lodging franchisees to compete in the lodging industry
is important to our prospects for growth, although, because franchise fees are
based on franchisee gross room revenue, our revenue is not directly dependent
on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on our
results of operations is substantially reduced by virtue of the diverse
geographical locations of our franchises.
LODGING SEASONALITY. The principal source of lodging revenue for us is
based upon the annual gross room revenue of franchised properties. As a result,
our revenue from the lodging franchise business experiences seasonal lodging
revenue patterns similar to those of the hotel industry wherein the summer
months, because of increases in leisure travel, produce higher revenues than
other periods during the year. Therefore, any occurrence that disrupts travel
patterns during the summer period could have a material adverse effort on the
franchisee's annual performance and effect our annual performance.
THE TIMESHARE EXCHANGE BUSINESS
GENERAL. We acquired Resort Condominiums International, Inc. (now Resort
Condominiums International, LLC), on November 12, 1996. Our RCI subsidiary is
the world's largest provider of timeshare vacation exchange opportunities and
timeshare services for more than 2.5 million timeshare households from more
than 200 nations and more than 3,400 resorts in more than 90 countries around
the world. RCI's business consists primarily of the operation of an exchange
program for owners of condominium timeshares or whole units at affiliated
resorts, the publication of magazines and other periodicals related to the
vacation and timeshare industry, travel related services, resort management,
integrated software systems and service and consulting services. RCI has
significant operations in North America, Europe, the Middle East, Latin
America, Africa, Australia, and the Pacific Rim. RCI has more than 3,900
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, we believe that 1998 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 4.5
million worldwide, while the total number of timeshare resorts worldwide has
been estimated to be nearly 5,000. The timeshare exchange industry derives
revenue from annual subscribing membership fees paid by owners of timeshare
interests, fees paid by such owners for each exchange and fees paid by members
and resort affiliates for various other products and services.
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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 8% 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 1998, members in the United States paid an average
annual subscribing membership fee of $66 as well as an average exchange fee of
$120 for every exchange arranged by RCI. In 1998, membership and exchange fees
totaled approximately $330 million and RCI arranged more than 1.8 million
exchanges.
Developers of resorts affiliated with the RCI Network typically pay the
first year subscribing membership fee for new owner/members upon the sale of
the timeshare interest.
TIMESHARE EXCHANGE BUSINESS GROWTH. The timeshare exchange industry has
experienced significant growth over the past decade. We believe that the
factors driving this growth include the demographic trend toward older, more
affluent Americans who travel more frequently; the entrance of major
hospitality and entertainment companies into timeshare development; a worldwide
acceptance of the timeshare concept; and an increasing focus on leisure
activities, family travel and a desire for value, variety and flexibility in a
vacation experience. We believe that future growth of the timeshare exchange
industry will be determined by general economic conditions both in the U.S. and
worldwide, the public image of the industry, improved approaches to marketing
and sales, a greater variety of products and price points, the broadening of
the timeshare market and a variety of other factors. Accordingly, we cannot
predict if future growth trends will continue at rates comparable to those of
the recent past.
OPERATIONS. Our timeshare exchange business is designed to provide
high-quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most
members are acquired from timeshare developers who purchase an initial RCI
subscribing membership for each buyer at the time the timeshare interval is
sold. A small percentage of members are acquired through direct solicitation
activities of RCI.
MEMBER SERVICES. International Exchange System. Members are served through
a network of call centers located in more than 20 countries throughout the
world. These call centers are staffed by approximately 1,900 people. Major
regional call and information support centers are located in Indianapolis,
Saint John (Canada), Kettering (England), Cork (Ireland), Mexico City and
Singapore. All members receive a directory that lists resorts available through
the exchange system, a periodic magazine and other information related to the
exchange system and available travel services. These materials are published in
various languages.
TRAVEL SERVICES. In addition to exchange services, RCI's call centers also
engage in telemarketing and crossselling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of
the RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global
basis, RCI provides travel services through entities operating in local
jurisdictions (hereinafter, RCIT and its local entities are referred to as
"Travel Agencies"). Travel Agencies provide airline reservations and airline
ticket sales to members in conjunction with the arrangement of their timeshare
exchanges, as well as providing other types of travel services, including hotel
accommodations, car rentals, cruises and tours. Travel Agencies also from time
to time offer travel packages utilizing resort developers' unsold inventory to
generate both revenue and prospective timeshare purchasers to affiliated
resorts.
RESORT SERVICES. 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. We believe that national lodging and hospitality companies
12
are attracted to the timeshare concept because of the industry's relatively low
product cost and high profit margins, and the recognition that timeshare
resorts provide an attractive alternative to the traditional hotel-based
vacation and allow the hotel companies to leverage their brands into additional
resort markets where demand exists for accommodations beyond traditional
rental-based lodging operations. Today, 7 of every 10 timeshare resorts
worldwide are affiliated with RCI. We also believe that RCI's existing
affiliates represent a significant potential market because many developers and
resort managers may become involved in additional resorts in the future which
can be affiliated with RCI. Accordingly, a significant factor in RCI's growth
strategy is maintaining the satisfaction of its existing affiliates by
providing quality support services.
TIMESHARE CONSULTING. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("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. Our
RCC Premier information management software is believed to be the only
technology available today that can fully support timeshare club operations and
pointsbased 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 3,400 timeshare
resorts are affiliated with the RCI Network, of which more than 1,400 resorts
are located in the United States and Canada, more than 1,260 in Europe and
Africa, more than 475 in Mexico and Latin America, and more than 320 in the
Asia-Pacific region. The terms of RCI's affiliation agreement with its
affiliates generally require that the developer enroll each new timeshare
purchaser at the resort as a subscribing member of RCI, license the affiliated
resort to use the RCI name and trademarks for certain purposes, set forth the
materials and services RCI will provide to the affiliate, and generally
describe RCI's expectations of the resort's management. The affiliation
agreement also includes stipulations for representation of the exchange
program, minimum enrollment requirements and treatment of exchange guests.
Affiliation agreements are typically for a term of five years, and
automatically renew thereafter for terms of one to five years unless either
party takes affirmative action to terminate the relationship. RCI makes
available a wide variety of goods and services to its affiliated developers,
including publications, advertising, sales and marketing materials, timeshare
consulting services, resort management software, travel packaging and property
management services.
RCI LICENSED MARKS AND INTELLECTUAL PROPERTY. The service marks "RCI",
"Resort Condominiums International" and related trademarks and logos are
material to RCI's business. RCI and its subsidiaries actively use the marks.
All of the material marks used in RCI's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. We own the marks used in RCI's
business.
COMPETITION. The global timeshare exchange industry is comprised of a
number of entities, including resort developers and owners. RCI's largest
competitor is Interval International Inc. ("Interval"), formerly our
wholly-owned subsidiary, and a few other smaller firms. Based upon industry
sources, we believe that 98% of the nearly 5,000 timeshare resorts in the world
are affiliated with either RCI or Interval. Based upon 1997 published
statistics and our information, RCI had over 2.5 million timeshare households
that are members, while Interval had approximately 850,000 timeshare households
that are members. Also, in 1997, RCI confirmed more than 1.8 million exchange
transactions while Interval confirmed approximately 480,000 transactions. As a
result, based on 1997 business volume, RCI services approximately 73% of
members and approximately 79% of exchange transactions. RCI is bound by the
13
terms of a Consent Order issued by the Federal Trade Commission which restricts
the right of RCI to solicit, induce, or attempt to induce clients of Interval
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.
SEASONALITY. A principal source of timeshare revenue relates to exchange
services to members. Since members have historically shown a tendency to plan
their vacations in the first quarter of the year, revenues are generally
slightly higher in the first quarter in comparison to other quarters of the
year. The Company cannot predict whether this trend will continue in the future
as the timeshare business expands outside of the United States and Europe, and
as global travel patterns shift with the aging of the world population.
AVIS CAR RENTAL FRANCHISE BUSINESS
GENERAL. On October 17, 1996, we completed the acquisition of all of the
outstanding capital stock of Avis, Inc. which together with its subsidiaries,
licensees and affiliates, operated the Avis Worldwide Vehicle System (the "Avis
System"). As part of its previously announced plan, on September 24, 1997, we
completed the initial public offering ("IPO") of our subsidiary, Avis Rent A
Car, Inc. ("ARAC"), which owned and operated the company-owned Avis car rental
operations. We currently own approximately 19% of the outstanding Common Stock
of ARAC. We no longer operate any car rental locations but own the Avis brand
name and the Avis System, which we license to our franchisees, including ARAC,
the largest Avis System franchisee.
The Avis System is comprised of approximately 4,200 rental locations,
including locations at the largest airports and cities in the United States and
approximately 160 other countries and territories and a fleet of approximately
404,000 vehicles during the peak season, all of which are granted by
franchisees. Approximately 90% of the Avis System rental revenues in the United
States are received from locations operated by ARAC directly or under agency
arrangements, with the remainder being received from locations operated by
independent licensees. The Avis System in Europe, Africa, part of Asia and the
Middle East is operated under franchise by Avis Europe Ltd. ("Avis Europe").
INDUSTRY. The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two principal
segments: general use (mainly at airport and downtown locations) and local
(mainly at downtown and suburban locations). The car rental industry rents
primarily from on-airport, near-airport, downtown and suburban locations to
business and leisure travelers and to individuals who have lost the use of
their vehicles through accident, theft or breakdown. 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 systemidentity 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
14
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
communications. Direct access with other computerized reservations systems
allows realtime processing for travel agents and corporate travel departments.
Among the principal features of the Wizard System are:
o an advanced graphical interface reservation system;
o "Roving Rapid Return," which permits customers who are returning vehicles
to obtain completed charge records from radio-connected "Roving Rapid
Return" agents who complete and deliver the charge record at the vehicle
as it is being returned;
o "Preferred Service," an expedited rental service that provides customers
with a preferred service rental record printed prior to arrival, a
pre-assigned vehicle and fast convenient check out;
o "Wizard on Wheels," which enables the Avis System locations to assign
vehicles and complete rental agreements while customers are being
transported to the vehicle;
o "Flight Arrival Notification," a flight arrival notification system that
alerts the rental location when flights have arrived so that vehicles can
be assigned and paperwork prepared automatically;
o "Avis Link," which automatically identifies the fact that a user of a
major credit card is entitled to special rental rates and conditions, and
therefore sharply reduces the number of instances in which the Company
inadvertently fails to give renters the benefits of negotiated rate
arrangements to which they are entitled;
o interactive interfaces through third-party computerized reservation
systems; and
o sophisticated automated ready-line programs that, among other things,
enable rental agents to ensure that a customer who rents a particular
type of vehicle will receive the available vehicle of that type which has
the lowest mileage.
In 1998, 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
our business. Our subsidiaries, joint ventures and licensees, actively use
these marks. All of the material marks used in Avis's business are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office. We own the marks used in Avis's business. The purposes
for which we are authorized to use the marks include use in connection with
businesses in addition to car rental and related businesses, including, but not
limited to, equipment rental and leasing, hotels, insurance and information
services.
LICENSEES AND LICENSE AGREEMENTS. We have 68 independent licensees which
operate locations in the United States. The largest licensee, ARAC, accounts
for approximately 89% of all United States licensees' rentals. Other than ARAC,
certain licensees in the United States pay us a fee equal to 5% of their total
time and mileage charges, less all customer discounts, of which we are required
to pay 40% for corporate licensee-related programs, while 6 licensees pay 8% of
their gross revenue. Licensees outside the United States normally pay higher
fees. Other than ARAC, our United States licensees currently pay .54 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
15
License Agreement, ARAC has agreed to pay us a monthly base royalty of 3.0% of
ARAC's gross revenue. In addition, ARAC has agreed to pay a supplemental
royalty of 1.1 % of gross revenue payable quarterly in arrears which will
increase 0.1% per year in each of the following three years thereafter to a
maximum of 1.5% (the "Supplemental Fee"). These fees have been paid by ARAC
since January 1, 1997. Until the fifth anniversary of the effective date of the
Master License Agreement, the Supplemental Fee or a portion thereof may be
deferred by ARAC if ARAC does not attain certain financial targets.
In 1997, Avis Europe's previously paidup license for Europe, the Middle
East and Africa was modified to provide for a paid-up license only as to Europe
and the Middle East. Avis Europe will pay us annual royalties for Africa and a
defined portion of Asia which covers the area between 60E longitude and 150E
longitude, excluding Australia, New Zealand and Papua New Guinea. The Avis
Europe license expires on November 30, 2036, unless earlier termination is
effected in accordance with the license terms. Avis Europe also entered into a
Preferred Alliance Agreement with us under which Avis Europe became a preferred
alliance provider for car rentals to RCI customers in Europe, Asia and Africa,
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 us and Avis. However, because the Company's royalty
fees are based upon the gross revenue of Avis and the other Avis System
franchisees, our revenue is not directly dependent on franchisee profitability.
The franchisees' principal competitors for commercial accounts in the
United States are the Hertz Corporation ("Hertz") and National Car Rental
System, Inc. ("National"). Principal competitors for unaffiliated business and
leisure travelers in the United States are Budget Rent A Car Corporation, Hertz
and National, and, particularly with regard to leisure travelers, Alamo
Rent-A-Car Inc. In addition, the franchisees compete with a variety of smaller
vehicle rental companies throughout the country.
SEASONALITY. The car rental franchise business is subject to seasonal
variations in customer demand, with the third quarter of the year, which covers
the summer vacation period, representing the peak season for vehicle rentals.
Therefore, any occurrence that disrupts travel patterns during the summer
period could have a material adverse effect on the franchisee's annual
performance and affect our annual financial performance. The fourth quarter is
generally the weakest financial quarter for the Avis System because there is
limited leisure travel and a greater potential for adverse weather conditions
at such time.
FLEET SEGMENT
GENERAL. The Fleet Segment represented approximately 7.3%, 7.6% and 9.0%
of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Through our PHH Vehicle Management Services Corporation and PHH
Management Services PLC subsidiaries, we offer a full range of fully integrated
fleet management services to corporate clients and government agencies
comprising over 780,000 vehicles 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, we provide 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. We also offer various leasing plans for our vehicle
leasing programs, financed primarily through the issuance of commercial paper
and medium-term notes and through unsecured borrowings under revolving credit
agreements, securitization financing arrangements and bank lines of credit.
Through our PHH Vehicle Management Services and Wright Express
subsidiaries in the United States and our Harper Group Limited subsidiary in
the U.K., we also offer fuel and expense management
16
programs to corporations and government agencies for the effective management
and control of automotive business travel expenses. By utilizing our service
cards issued under the fuel and expense management programs, a client's
representatives are able to purchase various products and services such as
gasoline, tires, batteries, glass and maintenance services at numerous outlets.
We also provide fuel and expense management programs and a centralized
billing service for companies operating truck fleets in each of the United
Kingdom, Republic of Ireland and Germany. Drivers of the clients' trucks 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.
PRODUCTS. Our fleet management services are divided into two principal
products: (1) Asset Based Products, and (2) Fee Based Products.
Asset Based Products represent the services our clients require to lease a
vehicle which includes vehicle acquisition, vehicle remarketing, financing, and
fleet management consulting. We lease in excess of 350,000 units on a worldwide
basis through both open end lease structures and closed end structures.
Open-end leases are the prevalent structure in North America representing 96%
of the total vehicles financed in North America and 86% of the total vehicles
financed worldwide. The open-end leases can be structured on either a fixed
rate or floating rate basis (where the interest component of the lease payment
changes month to month based upon an index) depending upon client preference.
The open-end leases are typically structured with a 12 month minimum lease
term, with month to month renewals thereafter. The typical unit remains under
lease for approximately 34 months. A client receives a full range of services
in exchange for a monthly rental payment which includes a management fee. The
residual risk on the value of the vehicle at the end of the lease term remains
with the lessee under an open-end lease, except for a small amount which is
retained by the lessor.
Closed-end leases are structured with a fixed term with the lessor
retaining the vehicle residual risk. The most prevalent lease terms are 24
months, 36 months, and 48 months. The closed end structure is preferred in
Europe due to certain accounting regulations. The closed-end lease structure is
utilized by approximately 71% of the vehicles leased in Europe, but only 14% of
the vehicles leased on a worldwide basis. We utilize independent third party
valuations and internal projections to set the residuals utilized for these
leases.
The Fee Based Products are designed to effectively manage costs and
enhance driver productivity. The three main Fee Based Products are Fuel
Services, Maintenance Services and Accident Management. Fuel Services
represents the utilization of our proprietary cards to access fuel through a
network of franchised and independent fuel stations. The cards operate as a
universal card with centralized billing designed to measure and manage costs.
In the United States, Wright Express is the leading fleet fuel cards supplier
with over 125,000 fuel facilities in its network and in excess of 1.6 million
cards issued. Wright Express distributes its fuel cards and related offerings
through three primary channels: (1) the WEX-branded Universal Card, which is
issued directly to fleets by Wright Express, (2) the Private Label Card, under
which Wright Express provides private label fuel cards and related services to
commercial fleet customers of major petroleum companies, and (3) Co-Branded
Marketing, under which Wright Express fuel cards are co-branded and issued in
conjunction with products and services of partners such as commercial vehicle
leasing companies. In the UK, our Harper Group Limited and Cendant Business
Answers PLC subsidiaries, utilizing the All Star and Dial brands, maintain the
largest independent fueling network with more than 12,000 fueling sites and
more than 1.2 million cards in circulation.
We offer customer vehicle maintenance charge cards that are used to
facilitate repairs and maintenance payments. The vehicle maintenance cards
provide customers with benefits such as (1) negotiated discounts off full
retail prices through our convenient supplier network, (2) access to our
in-house team of certified maintenance experts that monitor each card
transaction for policy compliance, reasonability, and cost effectiveness, and
(3) inclusion of vehicle maintenance card transactions in a
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consolidated information and billing database that helps evaluate overall fleet
performance and costs. We maintain an extensive network of service providers in
the United States, Canada, and the United Kingdom to ensure ease of use by the
client's drivers.
We also provide our clients with comprehensive accident management
services such as (1) providing immediate assistance after receiving the initial
accident report from the driver (i.e. facilitating emergency towing services
and car rental assistance, etc.) (2) organizing the entire vehicle appraisal
and repair process through a network of preferred repair and body shops, and
(3) coordinating and negotiating potential accident claims. Customers receive
significant benefits from our accident management services such as (1)
convenient coordinated 24-hour assistance from our call center, (2) access to
our leverage with the repair and body shops included in our preferred supplier
network (the largest in the industry), which typically provides customers with
extremely favorable repair terms and (3) expertise of our damage specialists,
who ensure that vehicle appraisals and repairs are appropriate, cost-efficient,
and in accordance with each customer's specific repair policy.
COMPETITIVE CONDITIONS. The principal factors for competition in vehicle
management services are service quality and price. We are competitively
positioned as a fully integrated provider of fleet management services with a
broad range of product offerings. We rank second in the United States in the
number of vehicles under management and first in the number of proprietary fuel
and maintenance cards for fleet use in circulation. There are four other major
providers of fleet management service in the United States, hundreds of local
and regional competitors, and numerous niche competitors who focus on only one
or two products and do not offer the fully integrated range of products
provided by us. In the United States, it is estimated that only 45% of fleets
are leased by third party providers. The unpenetrated market and the continued
focus by corporations on cost efficiency and outsourcing will provide the
growth platform in the future.
In the UK, we rank first in both vehicles under management and proprietary
fuel and maintenance cards. We continue to compete against numerous local and
regional competitors. The UK operation has been able to differentiate itself
through its breadth of product offerings.
REAL ESTATE DIVISION
REAL ESTATE FRANCHISE SEGMENT
GENERAL. Our Real Estate Franchise Segment represented approximately 8.6%,
7.9% and 7.3% of our revenue for the year ended December 31, 1998, 1997 and
1996, respectively. In August 1995, we acquired Century 21 Real Estate
Corporation ("CENTURY 21"). Century 21 is the world's largest franchisor of
residential real estate brokerage offices with approximately 6,300
independently owned and operated franchised offices with approximately 102,000
active sales agents worldwide. In February 1996, we acquired the ERA franchise
system. The ERA system is a leading residential real estate brokerage franchise
system with over 2,600 independently owned and operated franchised offices and
more than 29,000 sales agents worldwide. In May 1996, we acquired Coldwell
Banker Corporation ("COLDWELL BANKER"), the owner of the world's premier brand
for the sale of million-dollar-plus homes and now the third largest residential
real estate brokerage franchise system with approximately 3,000 independently
owned and operated franchised offices and approximately 72,000 sales agents
worldwide.
We believe that application of our franchisee focused management
strategies and techniques can significantly increase the revenues produced by
our real estate brokerage franchise systems while also increasing the quality
and quantity of services provided to franchisees. We believe that independent
real estate brokerage offices currently affiliate with national real estate
franchisors principally to gain the consumer recognition and credibility of a
nationally known and promoted brand name. Brand recognition is especially
important to real estate brokers since 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, we 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
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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.
Our real estate brokerage franchisees are dispersed geographically, which
minimizes the exposure to any one broker or geographic region. During 1997, we
acquired a preferred equity interest in NRT Incorporated ("NRT"), a newly
formed corporation created to acquire residential real estate brokerage firms.
NRT acquired the assets of National Realty Trust, the largest franchisee of the
COLDWELL BANKER system, in August 1997. NRT has also acquired other independent
regional real estate brokerage businesses during 1998 and 1997 which NRT has
converted to COLDWELL BANKER, CENTURY 21 and ERA franchises. As a result, NRT
is the largest franchisee of our franchise systems, based on gross commissions,
and represents 6% of the franchised offices. Of the nearly 12,000 franchised
offices in our real estate brokerage franchise systems, no individual broker,
other than NRT, accounts for more than 1% of our real estate brokerage
revenues.
REAL ESTATE FRANCHISE SYSTEMS. CENTURY 21. CENTURY 21 is the world's
largest residential real estate brokerage franchisor, with approximately 6,300
independently owned and operated franchise offices with more than 102,000
active sales agents located in 25 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 1998, approximately 15% 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 1998, the NAF spent approximately $45 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 3,000 independently owned and operated
franchise offices in the United States, Canada and the Caribbean, with
approximately 72,000 sales agents. The primary revenue from the COLDWELL BANKER
system is derived from service and other fees paid by franchisees, including
initial franchise fees and ongoing services. COLDWELL BANKER franchisees pay us
annual fees consisting of ongoing service and advertising fees, which are
generally 6.0% and 2.5%, respectively, of a franchisee's annual gross 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
1998, approximately 28% of COLDWELL BANKER franchisees qualified for PPA
payments and such payments aggregated approximately less than 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 1998, the COLDWELL BANKER National Advertising Fund
expended approximately $21 million for such purposes.
ERA. The ERA franchise system is a leading residential real estate
brokerage franchise system, with more than 2,600 independently owned and
operated franchise offices, and more than 29,000 sales
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agents located in 20 countries. The primary revenue from the ERA franchise
system results from (i) franchisees' payments of monthly membership fees
ranging from $216 to $852 per month, based on volume, plus $196 per branch and
a per transaction fee of approximately $121, and (ii) for franchise agreements
entered into after July 1997, royalty fees equal to 6% of the franchisees'
gross revenues (5.0% until December 31, 1999). 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 $233 to $933,
based on volume, plus an additional $233 per month for each branch office, into
the ERA National Marketing Fund (the "ERA NMF") and (ii) for franchise
agreements entered into after July 1997, an NMF equal to 2% of the franchisees'
gross revenues, subject to minimums and maximums. The funds in the ERA NMF are
utilized for local, regional and national marketing activities, including media
purchases and production, direct mail and promotional activities and other
marketing efforts. In 1998, the ERA NMF spent approximately $10 million on
marketing campaigns.
REAL ESTATE BROKERAGE FRANCHISE SALES. We market real estate brokerage
franchises primarily to independent, unaffiliated owners of real estate
brokerage companies as well as individuals who are interested in establishing
real estate brokerage businesses. We believe that our existing franchisee base
represents another source of potential growth, as franchisees seek to expand
their existing business to additional markets. Therefore, our sales strategy
focuses on maintaining satisfaction and enhancing the value of the relationship
between the franchisor and the franchisee.
Our real estate brokerage franchise systems employ a national franchise
sales force consisting of approximately 125 salespersons and sales management
personnel, which is divided into separate sales organizations for the CENTURY
21, COLDWELL BANKER and ERA systems. These sales organizations are compensated
primarily through commissions on sales concluded. Members of the sales forces
are also encouraged to provide referrals to the other sales forces when
appropriate.
OPERATIONS -- REAL ESTATE BROKERAGE. Our 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 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, we have established regional
support personnel who provide consulting services to the franchisees in their
respective regions.
Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify
the highest levels of achievement within each system and provide a significant
incentive for franchisees to attract and retain sales associates.
Each system provides its franchisees with referrals of potential
customers, which referrals are developed from sources both within and outside
of the system.
Through our Cendant Supplier Services operations, we provide our
franchisees with volume purchasing discounts for products, services,
furnishings and equipment used in real estate brokerage operations. In addition
to the preferred alliance programs described hereinafter, Cendant Supplier
Services establishes relationships with vendors and negotiates discounts for
purchases by its customers. We do not maintain inventory, directly supply any
of the products or, generally, extend credit to franchisees for purchases. See
"COMBINED OPERATIONS -- Preferred Alliance and CoMarketing Arrangements" below.
20
REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS. Our real estate brokerage
franchise agreements grant the franchises the right to utilize one of the brand
names associated with our real estate brokerage franchise systems to real
estate brokers under franchise agreements.
Our current form of franchise agreement for all real estate brokerage
brands is terminable by us for the franchisee's failure to pay fees thereunder
or other charges or for other material default under the franchise agreement.
In the event of such termination, the Century 21 and ERA agreements generally
provide that we are entitled to be compensated for lost revenues in an amount
equal to the average monthly franchise fees calculated for the remaining term
of the agreement. Pre-1996 agreements do not provide for liquidated damages of
this sort. See "CENTURY 21," "COLDWELL BANKER" and "ERA" above for more
information regarding the commissions and fees payable under our franchise
agreements.
NRT is the largest franchisee, based on gross commission income, for our
real estate franchise systems. NRT's status as a franchisee is governed by
franchise agreements (the "Franchise Agreements") with our wholly owned
subsidiaries (the "Real Estate Franchisors") pursuant to which NRT has the
non-exclusive right to operate as part of the COLDWELL BANKER, ERA and CENTURY
21 real estate franchise systems at locations specified in the Franchise
Agreements. In February 1999, NRT entered into new fifty year franchise
agreements with the Real Estate Franchisors. These agreements require NRT to
pay royalty fees and advertising fees of 6.0% and 2.0% (2.5% for its COLDWELL
BANKER offices), respectively, on its annual gross revenues. Lower royalty fees
apply in certain circumstances. The Franchise Agreements generally provide
restrictions on NRT's ability to close offices beyond certain limits.
REAL ESTATE BROKERAGE SERVICE MARKS. The service marks "CENTURY 21,"
"COLDWELL BANKER," and "ERA" and related logos are material to our business.
Through our franchisees, we actively 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 us through our
subsidiaries.
COMPETITION. Competition among the national real estate brokerage brand
franchisors to grow their franchise systems is intense. The chief competitors
to our real estate brokerage franchise systems are the Prudential, Better Homes
& Gardens and RE/MAX real estate brokerage brands. In addition, a real estate
broker may choose to affiliate with a regional chain or not to affiliate with a
franchisor but to remain independent.
21
We believe that competition for the sale of franchises in the real estate
brokerage industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. We also believe that the perceived value of its brand names to
prospective franchisees is, to some extent, a function of the success of its
existing franchisees.
The ability of our real estate brokerage franchisees to compete in the
industry is important to our prospects for growth, although, because franchise
fees are based on franchisee gross commissions or volume, our revenue is not
directly dependent on franchisee profitability.
The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on our
results of operations is substantially reduced by virtue of the diverse
geographical locations of our franchises. At December 31, 1998, the combined
real estate franchise systems had approximately 8,400 franchised brokerage
offices in the United States and approximately 12,000 offices worldwide. The
real estate franchise systems have offices in 31 countries and territories in
North America, Europe, Asia, Africa and Australia.
SEASONALITY. The principal sources of our real estate segment revenue are
based upon the timing of residential real estate sales, which are lower in the
first calendar quarter each year, and relatively level the other three quarters
of the year. As a result, our revenue from the real estate brokerage segment of
its business is less in the first calendar quarter of each year.
RELOCATION SEGMENT
GENERAL. Our Relocation Segment represented approximately 8.4%, 9.5% and
10.7% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Our Cendant Mobility Services Corporation ("Cendant Mobility")
subsidiary is the largest provider of employee relocation services in the
world. Our Cendant Mobility subsidiary assists more than 100,000 transferring
employees annually, including approximately 15,000 employees internationally
each year in 92 countries and 300 destination cities. At December 31, 1998, we
employed approximately 2,400 people in our relocation business.
SERVICES. The employee relocation business offers a variety of services in
connection with the transfer of our clients' employees. The relocation services
provided to our customers include primarily evaluation, inspection and selling
of transferees' homes or purchasing a transferee's home which is not sold for
at least a price determined on the estimated value within a specified time
period, equity advances (generally guaranteed by the corporate customer),
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Corporate clients pay a fee for the services performed. Another source of
revenue is interest on the equity advances. Substantially, all costs associated
with such services are reimbursed by the corporate client, including, if
necessary, repayment of equity advances and reimbursement of losses on the sale
of homes purchased in most cases (other than government clients and one
corporate client). As a result of the obligations of most corporate clients to
pay the losses and guarantee repayment of equity advances, our exposure on such
items is limited to the credit risk of the corporate clients of our relocation
businesses and not on the potential changes in value of residential real
estate. We believe such risk is minimal, due to the credit quality of the
corporate clients of our relocation subsidiaries. In transactions with
government clients and one corporate client, which comprise approximately 5% of
net revenue, we assume the risk for losses on the sale of homes but we
control all facets of the resale process, thereby limiting our exposure.
The homesale program service is the core service for many domestic and
international programs. This program gives employees guaranteed offers for
their homes and assists clients in the management of employees' productivity
during their relocation. Cendant Mobility allows clients to outsource their
relocation programs by providing clients with professional support for planning
and administration of all elements of their relocation programs. The majority
of new proposals involve outsourcing due to corporate downsizing, cost
containment, and increased need for expense tracking.
22
Our relocation accounting services supports auditing, reporting, and
disbursement of all relocation-related expense activity.
Our group move management services provides coordination for moves
involving a number of employees. Services include planning, communications,
analysis, and assessment of the move. Policy consulting provides customized
consultation and policy review, as well as industry data, comparisons and
recommendations. Cendant Mobility also has developed and/or customized numerous
non-traditional services including outsourcing of all elements of relocation
programs, moving services, and spouse counseling.
Our moving service, with nearly 70,000 shipments annually, provides
support for all aspects of moving an employee's household goods. We also handle
insurance and claim assistance, invoice auditing, and control the quality of
van line, driver, and overall service.
Our marketing assistance service provides assistance to transferees in the
marketing and sale of their own home. A Cendant Mobility professional assists
in developing a custom marketing plan and monitors its implementation through
the broker. The Cendant Mobility contact also acts as an advocate, with the
local broker, for employees in negotiating offers which helps clients'
employees benefit from the highest possible price for their homes.
Our affinity services provides value-added real estate and relocation
services to organizations with established members and/or customers.
Organizations, such as insurance and airline companies, that have established
members offer our affinity services' to their members at no cost. This service
helps the organizations attract new members and to retain current members.
Affinity services provides home buying and selling assistance, as well as
mortgage assistance and moving services to members of applicable organizations.
Personal assistance is provided to over 40,000 individuals with approximately
17,500 real estate transactions annually.
Our international assignment service provides a full spectrum of services
for international assignees. This group coordinates the services previously
discussed; however, they also assist with immigration support, candidate
assessment, intercultural training, language training, and repatriation
coaching.
VENDOR NETWORKS. Cendant Mobility provides relocation services through
various vendor networks that meet the superior service standards and quality
deemed necessary by Cendant Mobility to maintain its leading position in the
marketplace. We have a real estate broker network of approximately 340
principal brokers and 420 associate brokers. Our van line, insurance, appraisal
and closing networks allow us to receive deep discounts while maintaining
control over the quality of service provided to clients' transferees.
COMPETITIVE CONDITIONS. The principal methods of competition within
relocation services are service, quality and price. In the United States, there
are two major national providers of such services. We are the market leader in
the United States and third in the United Kingdom.
SEASONALITY. Our principal sources of relocation service revenue are based
upon the timing of transferee moves, which are lower in the first and last
quarter each year, and at the highest levels in the second quarter.
MORTGAGE SEGMENT
GENERAL. Our Mortgage Segment represented approximately 6.7%, 4.2% and
3.9% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. Through our Cendant Mortgage Corporation ("Cendant Mortgage")
subsidiary, we are the tenth largest originator of residential first mortgage
loans in the United States as reported by Inside Mortgage Finance in 1998, and,
on a retail basis, we are the sixth largest originator in 1998. We offer
services consisting of the origination, sale and servicing of residential first
mortgage loans. A full line of first mortgage products are marketed to
consumers through relationships with corporations, affinity groups, financial
institutions, real estate brokerage firms, including CENTURY 21, COLDWELL
BANKER and ERA franchisees, and other mortgage banks. Cendant Mortgage is a
centralized mortgage lender conducting its business in all 50 states. At
December 31, 1998, Cendant Mortgage had approximately 4,000 employees.
23
Cendant Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgagebacked securities or as participation certificates
issued or guaranteed by Fannie Mae Corp., the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association. Cendant Mortgage
also services mortgage loans. We earn revenue from the sale of the mortgage
loans to investors, as well as from fees earned on the servicing of the loans
for investors. Mortgage servicing consists of collecting loan payments,
remitting principal and interest payments to investors, holding escrow funds
for payment of mortgagerelated expenses such as taxes and insurance, and
otherwise administering our mortgage loan servicing portfolio.
Cendant Mortgage offers mortgages through the following platforms:
o Teleservices. Mortgages are offered to consumers through an 800 number
teleservices operation based in New Jersey under programs including Phone
In-Move In (Registered Trademark) for real estate organizations, private
label programs for financial institutions and for relocation clients in
conjunction with the operations of Cendant Mobility. The teleservices
operation provides us with retail mortgage volume which contributes to
Cendant Mortgage ranking as the sixth largest retail originator (Inside
Mortgage Finance) in 1998.
o Point of Sale. Mortgages are offered to consumers through 175 field sales
professionals with all processing, underwriting and other origination
activities based in New Jersey. These field sales professionals generally
are located in real estate offices and are equipped with software to
obtain product information, quote interest rates and prepare a mortgage
application with the consumer. Originations from these point of sale
offices are generally more costly than teleservices originations.
o Wholesale/Correspondent. We purchase closed loans from financial
institutions and mortgage banks after underwriting the loans. Financial
institutions include banks, thrifts and credit unions. Such institutions
are able to sell their closed loans to a large number of mortgage lenders
and generally base their decision to sell to Cendant Mortgage on price,
product menu and/or underwriting. We also have wholesale/correspondent
originations with mortgage banks affiliated with real estate brokerage
organizations. Originations from our wholesale/correspondent platform are
more costly than point of sale or teleservices originations.
STRATEGY. Our strategy is to increase market share by expanding all of our
sources of business with emphasis on the Phone In-Move In (Registered
Trademark) program. Phone In-Move In (Registered Trademark) was developed for
real estate firms approximately 21 months ago and is currently established in
over 4,000 real estate offices at December 31, 1998. We are well positioned to
expand our relocation and financial institutions business channels as it
increases our linkage to Cendant Mobility clients and works with financial
institutions which desire to outsource their mortgage originations operations
to Cendant Mortgage. Each of these market share growth opportunities is driven
by our low cost teleservices platform which is centralized in Mt. Laurel, New
Jersey. The competitive advantages of using a centralized, efficient and high
quality teleservices platform allows us to capture a higher percentage of the
highly fragmented mortgage market more cost effectively.
COMPETITIVE CONDITIONS. The principal methods of competition in mortgage
banking services are service, quality and price. There are an estimated 20,000
national, regional or local providers of mortgage banking services across the
United States. Cendant Mortgage has increased its mortgage origination market
share in the United States to 1.8% in 1998 from 0.9% in 1996. The market share
leader reported a 7.7% market share in the United States according to Insider
Mortgage Finance for 1998.
SEASONALITY. The principal sources of mortgage services segment revenue
are based principally on the timing of mortgage origination activity which is
based upon the timing of residential real estate sales. Real estate sales are
lower in the first calendar quarter each year and relatively level the other
three quarters of the year. As a result, our revenue from the mortgage services
business is less in the first calendar quarter of each year.
ALLIANCE MARKETING DIVISION
Our Alliance Marketing division is divided into three segments: individual
membership: insurance/wholesale; and entertainment publications. The individual
membership segment, with approximately
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32 million memberships, provides customers with access to a variety of
discounted products and services in such areas as retail shopping, travel, auto
and home improvement. The individual membership products and services are
designed to enhance customer loyalty by delivering value to the customer. The
insurance/wholesale segment, with nearly 31 million customers, markets and
administers insurance products, primarily accidental death insurance, and also
provides products and services such as checking account enhancement packages,
financial products and discount programs to customers of various financial
institutions. The entertainment publications segment provides customers with
unique products and services that are designed to enhance a customer's
purchasing power. The Alliance Marketing activities are conducted principally
through our Cendant Membership Services, Inc. subsidiary and certain of our
other whollyowned subsidiaries, including FISI, BCI, and EPub.
We derive our Alliance Marketing revenue principally from membership
service fees, insurance premiums and product sales. We solicit members and
customers for many of our programs by direct marketing and by using a direct
sales force to call on financial institutions, schools, community groups,
companies and associations. Some of the our individual memberships are
available online to interactive computer users via major online services and
the Internet's World Wide Web. See "-- Distribution Channels".
INDIVIDUAL MEMBERSHIP SEGMENT
Our Individual Membership segment represented approximately 17.6%, 18.4%
and 23% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with business partners such as leading financial
institutions, retailers, and oil companies to offer membership as an
enhancement to their credit card customers. Participating institutions
generally receive commissions on initial and renewal memberships, based on a
percentage of the net membership fees. Individual memberships are marketed,
primarily using direct marketing techniques, through participating institutions
with the Company generally paying for the marketing costs to solicit the
prospective members. The member pays our business partners directly for the
service and, in most instances, is billed via a credit card. Membership fees
vary depending upon the particular membership program, and annual fees
generally range from $49 to $79 per year. Most of our memberships are for
one-year renewable terms, and members are generally entitled to unlimited use
during the membership period of the service for which the members have
subscribed. Members generally may cancel their memberships and obtain a full
refund at any point during the membership term. As of November 1998, all new
online individual memberships are refundable on a pro-rata basis over the term
of the membership. The services may be accessed either through the internet
(online) or through the mail or by telephone (off-line).
OFFLINE PRODUCTS
Individual membership programs offer consumers discounts on over 500,000
products and services by providing shop at home convenience in areas such as
retail shopping, travel, automotive, dining and home improvement. Membership
programs include among others Shoppers Advantage (Registered Trademark) ,
Travelers Advantage (Registered Trademark) , AutoVantage (Registered
Trademark) , Credit Card Guardian (Registered Trademark) , and PrivacyGuard
(Registered Trademark) , and other membership programs. A brief description of
the different types of membership programs are as follows:
Shopping. Shoppers Advantage (Registered Trademark) is a discount
shopping program whereby we provide product price information and home shopping
services to our members. Our merchandise database contains information on over
100,000 brand name products, including a written description of the product,
the manufacturer's suggested retail price, the vendor's price, features and
availability. All of these products may be purchased through our independent
vendor network. Vendors include manufacturers, distributors and retailers
nationwide. Individual members are entitled to an unlimited number of tollfree
calls seven days a week to our shopping consultants, who access the merchandise
database to obtain the lowest available fully delivered cost from participating
vendors for the product requested and accept any orders that the member may
place. We inform the vendor providing the lowest price of the member's order
and that vendor then delivers the requested product directly to the member. We
act as a conduit between our members and the vendors; accordingly, we do not
maintain an inventory of products.
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As part of our individual member Shoppers Advantage (Registered
Trademark) program, we distribute catalogs four to ten times per year to
certain members. In addition, we automatically extend the manufacturer's
warranty on all products purchased through the Shoppers Advantage (Registered
Trademark) program and offer a low price guarantee.
Travel. Travelers Advantage (Registered Trademark) is a discount travel
service program whereby our Cendant Travel, Inc. ("Cendant Travel") subsidiary
(one of the ten largest fullservice travel agencies in the U.S.), obtains
information on schedules and rates for major scheduled airlines, hotel chains
and car rental agencies from the American Airlines Sabre (Registered
Trademark) Reservation System. In addition, we maintain our own database
containing information on tours, travel packages and shortnotice 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, generally twenty-four hours a day
to agents at Cendant Travel. Cendant Travel provides its members with special
negotiated rates on many air, car and hotel bookings. Cendant Travel's agents
reserve the lowest air, hotel and car rental fares available for the members'
travel requests and offers a low price guarantee on such fares.
Auto. Our auto service, AutoVantage (Registered Trademark) , offers
members comprehensive new car summaries and preferred prices on new domestic
and foreign cars purchased through our independent dealer network (which
includes over 1,800 dealer franchises); discounts on maintenance, tires and
parts at more than 25,000 locations, including over 35 chains, including
nationally known names, such as Goodyear (Registered Trademark) and Firestone
(Registered Trademark) , plus regional chains and independent locations; and
used car valuations. AutoVantage Gold (Registered Trademark) offers members
additional services including road and tow emergency assistance 24 hours a day
in the United States and trip routing.
Credit Card Registration. Our Credit Card Guardian (Registered Trademark)
and "Hot-Line" services enable consumers to register their credit and debit
cards with us so that the account numbers of these cards may be kept securely
in one place. If the member notifies us that any of these credit or debit cards
are lost or stolen, we will notify the issuers of these cards, arrange for them
to be replaced and reimburse the member for any amount for which the card
issuer may hold the member liable.
PrivacyGuard Service. The PrivacyGuard (Registered Trademark) and
Credentials (Registered Trademark) services provide members with a
comprehensive and understandable means of monitoring key personal information.
The service offers a member access to information in certain key areas
including: credit history and monitoring, driving records maintained by state
motor vehicle authorities, and medical files maintained by third parties. This
service is designed to assist members in obtaining and monitoring information
concerning themselves that is used by third parties in making decisions such as
granting or denying credit or setting insurance rates.
Buyers Advantage. The Buyers Advantage (Registered Trademark) service
extends the manufacturer's warranty on products purchased by the member. This
service also rebates 20% of repair costs and offers members price protection by
refunding any difference between the price the member paid for an item and its
reduced price, should the item be sold at a lower price within sixty days after
purchase. In addition, the service offers return guarantee protection by
refunding the purchase price of an item that the member wishes to return.
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.
Family FunSaver Club. The Family FunSaver Club (Registered Trademark)
provides its members with a variety of benefits, including the opportunity to
inquire about and purchase family travel services and family related products,
the opportunity to buy new cars at a discount, a discounted family dining
program and a Family Values Guide offering coupon savings on family related
products such as movie tickets, casual restaurants, and theme parks.
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The Family Software Club. The Family Software Club(SM) has no membership
fee and offers members a way to purchase educational and entertainment CD-ROM
titles, often at an introductory price with a small commitment to buy titles at
regular club prices over a specified time period. Approximately every six to
eight weeks, members receive information on CD-ROM titles and other related
products and have the opportunity to purchase their featured selection,
alternate titles or no selections at that time. The club also provides its
members with special offers and discounts on software and other related
products from time to time.
Health Services. The HealthSaver(SM) 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.
Other Clubs. Our North American Outdoor Group, Inc. subsidiary ("NAOG")
owns and operates the North American Hunting Club (Registered Trademark) , the
North American Fishing Club (Registered Trademark) , the Handyman Club of
America (Registered Trademark) , the National Home Gardening Club (Registered
Trademark) and the PGA Tour Partners Club (Registered Trademark) , among
others. Members of these clubs receive fulfillment kits, discounts on related
goods and services, magazines and other benefits.
ONLINE PRODUCTS
We operate Netmarket (www.netmarket.com), our flagship online,
membership-based, value-oriented consumer site which offers discounts on over
800,000 products and services. Netmarket offers discounted shopping 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. In addition, we also offer the following
online products and services: Autovantage (Registered Trademark) , Travelers
Advantage (Registered Trademark) and PrivacyGuard (Registered Trademark)
membership programs and Haggle Zone (Trade Mark) and Fair Agent (Trade Mark)
consumer services.
We also currently operate 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 in its database with discounts of
up to 20 to 40 percent below retail prices; Musicspot (www.musicspot.com) an
online music store with more than 145,000 titles discounted up to 20 percent
below retail prices; and GoodMovies (www.goodmovies.com) an online movie store
offering more than 30,000 movie titles up to 20 to 40 percent below retail
cost. Through our Match.com, Inc. ("Match") subsidiary, we are 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.
Through our Rent Net operation (www.rent.net) subsidiary, we are 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. The RentNet operation principally derives revenues from
advertising or listing fees of products and service providers.
As part of our new internet strategy which we developed following a
comprehensive company-wide review, we intend to: (i) sell RentNet, Match and
Bookstacks, Inc. (Books.com, MusicSpot.com and GoodMovies.com); (ii) continue
to invest in our remaining Internet membership business, particularly
NetMarket, which is an integral part of our overall individual membership
business; (iii) actively pursue strategic partnerships that will leverage our
online membership assets, accelerate growth and maximize shareholder value; and
(iv) establish an outsourcing services business that manages fulfillment and
distribution for non-competing third party e-commerce providers.
INSURANCE/WHOLESALE SEGMENT
Our Insurance/Wholesale segment represented approximately 10.3%, 11.4% and
13.8% of our revenues for the year ended December 31, 1998, 1997 and 1996,
respectively. We affiliate with financial institutions, including credit unions
and banks, to offer their respective customer base competitively
27
priced insurance products, primarily accidental death and dismemberment
insurance and term life insurance, as well as an array of services associated
with the Individual Membership division segment.
ENHANCEMENT PACKAGE SERVICE. Primarily through our FISI subsidiary, we
sell enhancement packages for financial institution consumer and business
checking and deposit account holders. FISI's financial institution clients
select a customized package of our products and services and then usually adds
its own services (such as unlimited check writing privileges, personalized
checks, cashiers' or travelers' checks without issue charge, or discounts on
safe deposit box charges or installment loan interest rates). With our
marketing and promotional assistance, the financial institution then offers the
complete package of account enhancements to its checking account holders as a
special program for a monthly fee. Most of these financial institutions choose
a standard enhancement package, which generally includes $10,000 of accidental
death insurance, travel discounts and a nationwide check cashing service.
Others may our shopping and credit card registration services, a financial
newsletter or pharmacy, eyewear or entertainment discounts as enhancements. The
accidental death coverage is underwritten under group insurance policies with
independent insurers. We continuously seek to develop new enhancement features
which may be added to any package at an additional cost to the financial
institution. We generally charge a financial institution client an initial fee
to implement this program and monthly fees thereafter based on the number of
customer accounts participating in that financial institution's program. Our
enhancement packages are designed to enable a financial institution to generate
additional fee income, because the institution should be able to charge
participating accounts more than the combined costs of the services it provides
and the payments it makes to us.
Primarily through our National Card Control Inc. ("NCCI") subsidiary, we
also sell enhancement services to credit card issuers who make these services
available to their credit card holders to foster increased product usage and
loyalty. NCCI's clients create a customized package of our products and
services. These enhancements include loyalty products, such as frequent
flyer/buyer programs, as well as shopping, travel, concierge, insurance and
credit card registration services. Like FISI, NCCI generally charges its credit
card issuer clients an initial fee to implement the program and monthly fees
thereafter, based on the number of accounts participating in that institution's
program.
INSURANCE PRODUCTS. Through our BCI subsidiary, we serve as a third party
administrator for marketing accidental death insurance throughout the country
to the customers of BCI's financial institution clients. This accidental death
insurance is often combined with our other services to enhance their value.
These products are generally marketed through direct mail solicitations, which
generally offer $1,000 of accidental death insurance at no cost to the
customers and the opportunity to choose additional coverage of up to $300,000.
The annual premium generally ranges from $10 to $250. BCI also acts as an
administrator for term life, graded term life and hospital accident insurance.
BCI's insurance products and other services are offered through banks and
credit unions to their account holders.
ENTERTAINMENT PUBLICATIONS SEGMENT
Our Entertainment Publications Segment represented approximately 3.7%,
4.4%, and 5.4% of our revenues for the year ended December 31, 1998, 1997 and
1996, respectively. The Entertainment Publications Segment includes numerous
businesses established to provide unique products and services that are
designed to enhance a customer's purchasing power.
Products. Primarily through our EPub subsidiary, we offer discount
programs in specific markets throughout North America and certain international
markets and enhances other of our Individual and Insurance/Wholesale segment
products. We believe that EPub is the largest marketer of discount program
books of this type in the United States. EPub has a sales force of
approximately 1,100 people with approximately 800 people soliciting schools and
approximately 300 people soliciting merchants.
EPub solicits restaurants, hotels, theaters, sporting events, retailers
and other businesses which agree to offer services and/or merchandise at
discount prices (primarily on a two-for-the-price-of-one or 50% discount
basis). EPub sells discount programs, under its Entertainment (Registered
Trademark) , Entertainment (Registered Trademark) Values, Gold C (Registered
Trademark) and other trademarks, which typically provides discount offers to
individuals in the form of local discount coupon books. These books typically
contain coupons and/or a card entitling individuals to
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hundreds of discount offers from participating establishments. Targeting middle
to upper income consumers, many of EPub's products also contain selected
discount travel offers, including offers for hotels, car rentals, airfare,
cruises and tourist attractions. More than 70,000 merchants with over 275,000
locations participate in these programs. EPub also uses this national base of
merchants to develop other products, most notably, customized discount programs
for major corporations. These programs also may contain additional discount
offers, specifically designed for customized discount programs.
EPub's discount coupon books are sold annually by geographic area.
Customers are solicited primarily through schools and community groups that
distribute the discount coupon books and retain a portion of the proceeds for
their nonprofit causes. To a lesser extent, distribution occurs through
corporations as an employee benefit or customer incentive, as well as through
retailers and directly to the public. The discount coupon books are generally
provided to schools and community groups on a consignment basis. Customized
discount programs are distributed primarily by major corporations as loyalty
incentives for their current customers and/or as premiums to attract new
customers.
While prices of local discount coupon books vary, the customary price for
Entertainment (Registered Trademark) , Entertainment (Registered Trademark)
Values and Gold C (Registered Trademark) coupon books range between $10 and
$45. Customized discount programs are generally sold at significantly lower
prices. In 1998, over nine million Entertainment (Registered Trademark) ,
Entertainment (Registered Trademark) Values, Gold C (Registered Trademark)
and other trademarked local discount coupon books were published in North
America.
Sally Foster, Inc., a subsidiary of EPub, provides elementary and middle
schools and selected youth community groups with gift wrap and other seasonal
products for sale in their fund-raising efforts. EPub uses the same sales force
that sells the discount coupon books to schools, attempting to combine the sale
of gift wrap with the sale of discount coupon books. In addition, EPub has a
specialized Sally Foster sales force.
ALLIANCE MARKETING DISTRIBUTION CHANNELS
We market our Individual Membership, Insurance/Wholesale and Entertainment
Publications products through a variety of distribution channels. The consumer
is ultimately reached in the following ways: 1) at financial institutions or
other associations through direct marketing; 2) at financial institutions or
other associations through a direct sales force, participating merchants or
general advertising; and 3) through schools, community groups and companies.
Some of our individual memberships, such as shopping, travel, privacy guard and
auto services, are available to computer users via online services and the
internet's World Wide Web. These users are solicited primarily through major
online services such as America Online, traditional offline direct marketing
channels, major destination sites on the World Wide Web, such as portals, and
through our affinity partners. We believe that our interactive members account
for approximately 4% of our total Individual Membership Segment members.
Strategic alliances have been formed with online services and various other
companies, including the major internet portals.
ALLIANCE MARKETING INTERNATIONAL OPERATIONS
Individual Membership and Insurance/Wholesale. Our Cendant International
Membership Services subsidiary has developed the international distribution of
Enhancement Package Service and Insurance Products together with certain
Individual Memberships including Shopping, Auto and Payment Card Protection.
As of December 31, 1998, Cendant International Membership Services had
expanded its international membership and customer base to almost four million
individuals. This base is driven by retail and wholesale membership through
over 35 major banks in Europe and Asia, as well as through other distribution
channels. We also have exclusive licensing agreements covering the use of our
merchandising systems in Canada, Australia, Japan and certain other Asian
countries under which licensees paid initial license fees and agree to pay
royalties to us on membership fees, access fees and merchandise service fees
paid to them. Royalties to us from these licenses were less than 1% of our
Alliance Marketing revenues and profits in the yearsended December 31, 1998,
1997 and 1996, respectively.
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EPub. In 1998, in addition to Canadian discount coupon books,
Entertainment (Registered Trademark) discount coupon books were distributed in
Australia. The Canadian discount coupon books are published independently by a
Canadian subsidiary of EPub and the European discount books are published by
our European subsidiaries. The Australian discount coupon books are published
by an Australian joint venture in which EPub has a controlling interest. United
States and Canadian discount coupon books are also made available to foreign
travelers. With publication of these overseas discount programs, the Company
has created additional customized discount 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 we operate in a mix of services and numerous
countries, management believes currency exposures are fairly well diversified.
See Item 7A: "Quantitative and Qualitative Disclosure About Market Risk".
ALLIANCE MARKETING SEASONALITY
Except principally for the sale of discount coupon books and gift wrap,
our Alliance Marketing businesses are not seasonal. Publication of
Entertainment (Registered Trademark) , Entertainment (Registered Trademark)
Values and Gold (Registered Trademark) discount coupon books is substantially
completed by the end of August of each year with significant solicitations
beginning immediately thereafter. Most cash receipts from these discount coupon
books are received in the fourth quarter and, to a lesser extent, in the first
and third quarters of each fiscal year.
ALLIANCE MARKETING COMPETITION
Individual Membership. We believe that there are competitors which offer
membership programs similar to ours and some of these entities, which include
large retailers, travel agencies, insurance companies and financial service
institutions, have financial resources, product availability, technological
capabilities or customer bases greater than ours. To date, we have been able to
compete effectively with such competitors. However, there can be no assurances
that we will continue to be able to do so. In addition, we compete with
traditional methods of merchandising that enjoy widespread consumer acceptance,
such as catalog and instore retail shopping and shopping clubs (with respect to
its discount shopping service), and travel agents (with respect to its discount
travel service). Our systems are, for the most part, not protected by patent.
Insurance/Wholesale. Each of our account enhancement services competes
with similar services offered by other companies, including insurance
companies. Many of the competitors are large and more established, with greater
resources and financial capabilities than ours. Finally, in attempting to
attract any relatively large financial institution as a client, we also compete
with that institution's in-house marketing staff and the institution's
perception that it could establish programs with comparable features and
customer appeal without paying for the services of an outside provider.
Entertainment Publications. We believe that there are a number of
competitors in most markets throughout North America which offer similar
discount book products. The majority of these competitors are relatively small,
with discount coupon books in only a few markets. To date, we have been able to
compete effectively in markets that include these competitors, primarily on the
basis of price and product performance. We do not anticipate that these
competitors will significantly affect our ability to expand our product
offerings.
OTHER CONSUMER AND BUSINESS SERVICES DIVISION
Our Other Consumer and Business Services Division represented
approximately 17.2%, 13.7% and 13.5% of our revenues for the year ended
December 31, 1998, 1997 and 1996, respectively.
TAX PREPARATION BUSINESS. In January 1998, we acquired Jackson Hewitt, the
second largest tax preparation service in the United States. The Jackson Hewitt
franchise system is comprised of a 43-state network (plus the District of
Columbia) with approximately 3,000 offices operating under the trade name
30
"Jackson Hewitt Tax Service". We believe that the application of our 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, we are engaged in
the preparation and electronic filing of federal and state individual income
tax returns (collectively referred to as "tax returns"). During 1998, Jackson
Hewitt prepared approximately 1.2 million tax returns, which represented an
increase of 37% from the approximately 875,000 tax returns it prepared during
1997. To complement our tax preparation services, we also offer accelerated
check refunds and refund anticipation loans to our tax preparation customers.
NATIONAL CAR PARKS. Our National Car Parks ("NCP") subsidiary is the
largest single, commercial car park operating company in the UK and Europe,
with over 60 years experience of owning and/or managing a portfolio of nearly
500 car parks, mostly located in city and town centers and at airports.
NCP owns or operates nearly 500 car parks across the UK and has
approximately 2,800 full and part-time employees. NCP provides a high-quality,
professional service, developing a total solution for its customers and for
organizations such as town and city administrations that wish to develop modern
and professionally managed parking and traffic management facilities, tailored
towards local business.
NCP owns and operates car parks in over 100 city and town centers
throughout the UK, most of which are regularly patrolled and many of which have
closed-circuit television surveillance. NCP is the only car park manager that
can provide the motorist with such a comprehensive geographical coverage and
such levels of investment in security facilities. In addition, NCP is a leader
in on-airport car parking at UK airports, with over 35,000 car parking spaces
in facilities close to passenger terminals at ten airports across the UK.
Booking facilities are available through NCP's telesales service for convenient
car parking reservation at these airports, with free courtesy coach transfers
to and from airport terminals at most locations.
The brand names of NCP and Flightpath (NCP's airport brand) are registered
in the UK as trademarks. Furthermore, the NCP trademark is in the process of
being registered in the rest of the European Community.
NCP's business has a distinct seasonal trend with revenue from parking in
city and town centers being closely associated with levels of retail business.
Therefore, peaks in revenue are experienced particularly around the Christmas
period. In respect of the airport parking side of the business, seasonal peaks
are experienced in line with summer vacations.
NCP's main competition is from non-commercial, local government
authorities who usually choose to operate car parking facilities themselves in
their respective cities and towns.
There is increasing government regulation over all aspects of transport
within the UK. Therefore, an objective of NCP is to work together with its
customers, local and national government and other service organizations in
order to maintain the mutually beneficial partnership between motorists and
city center environment.
GREEN FLAG. Green Flag is the third largest assistance group in the UK
providing a wide range of emergency, support and rescue services to millions of
drivers and home owners in the UK through its Green Flag Motor, Green Flag
Truck and Green Flag Home services. Green Flag has approximately 900 full and
part-time employees.
Using a well established network of 6,000 mechanics and 1,500 fully
equipped garages, Green Flag Motor provides roadside recovery and assistance
services to over 3.5 million members who can choose from five levels of cover.
A distinctive feature of the Green Flag Motor service is its partnership with
independent operators who provide emergency assistance to motorists throughout
the UK and Europe. Using a network of specialists allows Green Flag to offer
its customers a fast service in emergency situations. Through regular
inspections and strictly enforced performance measures, Green Flag's teams of
operators are able to delivery reassurance to the customer, as well as a highly
reliable service.
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In the truck assistance sector, the Green Flag Truck service has developed
to include pay-on-use services in the UK and Europe and a service in the UK
suited to operators who run local delivery businesses. Service is provided
using the same network of independent operators that provide fast and efficient
expertise for businesses who cannot afford to be off the road.
A network of specialists is also available to provide Green Flag's
Emergency Home Assistance and Property Repair Services. Reassurance is key for
home owners who take an insured assistance service or choose a pay-on-use
option. Two levels of coverage are available to insure against a wide range of
problems, including central heating, roofing, gas and electrical appliances.
Through its specially selected network of operators, 75% of Green Flag's calls
for assistance are completed within one hour, 90% within two hours.
Green Flag operates in a number of principal markets. Direct services to
the consumer is one route to market, but also through insurance companies, car
manufacturers and dealers and a large number of businesses that sell on Green
Flag assistance services as an optional or a mandatory product linked to their
own service, i.e. with car insurance or via a bank or building society account.
The brand name of `Green Flag' (together with the LOGO) is registered in
the United Kingdom. There is also a pending registration for a European Union
Community Mark. In addition, we have registered or pending marks for other key
brands used within the business. These include names such as:
Fleetcall/Truckcall/Dialassist/React/ Locator/Home-call and Home Assistance
Services. Also registered is the CHEQUERED SIDE STRIPE used in connection with
the MOTOR Roadside Assistance and Recovery service. (This is a safety device
for use on vehicles which attend at the roadside.)
Green Flag's operations are seasonally influenced in that the purchase of
motoring assistance follows holiday patterns and used car purchase, as well as
by weather conditions. This has a great impact on call volumes especially in
the winter.
INFORMATION TECHNOLOGY SERVICES. Our WizCom International, Ltd ("WizCom")
subsidiary owns and operates the Wizard System more fully described under
"TRAVEL SERVICES -- Avis Car Rental Franchise Business -- Avis System and
Wizard System" above. In 1995, Budget Rent A Car Corporation ("Budget") entered
into a computer services agreement with WizCom that provides Budget with
certain reservation system computer services that are substantially similar to
computer services provided to the Avis System. WizCom has also entered into
agreements with hotel and other rental car companies to provide travel related
reservation and distribution system services.
CREDIT INFORMATION BUSINESS. In 1995, we 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. Our former Essex Corporation ("Essex") subsidiary 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. In January 1999, Essex was
sold to John Hancock Subsidiaries, Inc.
MUTUAL FUNDS. In August 1997, we formed an alliance with Frederick R.
Kobrick, a longtime mutual fund manager, to form a mutual fund company known as
Kobrick-Cendant Funds, Inc. (Kobrick which was subsequently renamed the Kobrick
Funds). Kobrick currently offers three no-load funds, Kobrick Capital Fund,
Kobrick Emerging Growth Fund and Kobrick Growth Fund.
TAX REFUND BUSINESS. Through our Global Refund subsidiary, we assist
travelers to receive valuedadded tax ("VAT") refunds in 22 European countries,
Canada and Singapore. Global Refund is the world's leading VAT refund service,
with over 125,000 affiliated retailers and seven million transactions
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per year. Global Refund operates over 400 cash refund offices at international
airports and other major points of departure and arrival worldwide. We plan to
expand the services Global Refund provides to travelers to include
Entertainment (Registered Trademark) coupon book memberships and the Travelers
Advantage (Registered Trademark) service product.
OTHER SERVICES. Spark Services, Inc. ("Spark") provides database-driven
dating services 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.
Our Numa Corporation subsidiary publishes personalized heritage
publications, including publications under the Halbert's name, and markets and
sells personalized merchandise.
Operating under the trade name "Welcome Wagon", we distribute
complimentary welcoming packages which provide new homeowners and other
consumers throughout the United States and Canada with discounts for local
merchants. These activities are conducted through our Welcome Wagon
International Inc. and Getko Group, Inc. subsidiaries. We are exploring
opportunities to leverage the assets and the distribution channels of such
subsidiaries.
COMBINED OPERATIONS
PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS. We believe that there are
significant opportunities to capitalize on the significant and increasing amount
of aggregate purchasing power and marketing outlets represented by the
businesses in our business units. We initially tapped the potential of these
synergies within the lodging franchise systems in 1993 when we launched our
Preferred Alliance Program, under which hotel industry vendors provide
significant discounts, commissions and co-marketing revenue to hotel franchisees
plus preferred alliance fees to us in exchange for being designated as the
preferred provider of goods or services to the owners of our franchised hotels
or the preferred marketer of goods and services to the millions of hotel guests
who stay in the hotels and customers of our real estate brokerage franchisees
each year.
We currently participate in preferred alliance relationships with more than
95 companies, including some of the largest corporations in the United States.
The operating profit generated by most new preferred alliance arrangements
closely approximates the incremental revenue produced by such arrangements since
the costs of the existing infrastructure required to negotiate and operate these
programs are largely fixed.
DISCONTINUED OPERATIONS
On August 12, 1998, we announced that our Executive Committee of the Board
of Directors committed to discontinue our consumer software and classified
advertising businesses by disposing of our wholly-owned subsidiaries Cendant
Software Corporation ("Software") and Hebdo Mag, respectively. On December 15,
1998, we completed the sale of Hebdo Mag to a company organized by Hebdo Mag
management for approximately $450 million, including approximately $315 million
in cash and 7.1 million shares of our common stock. On January 12, 1999, we
completed the sale of Software to Paris based Havas SA, a subsidiary of Vivendi
SA, for $800 million in cash plus future potential cash payments.
SOFTWARE. Our Software subsidiary offered consumer software in various
multimedia forms, predominately on CD-ROM for personal computers. The Software
unit was one of the largest personal computer consumer software groups in the
world, and a leader in entertainment, educational and personal productivity
software. It included Sierra On-Line, Inc., Blizzard Entertainment and
Knowledge Adventure, Inc., and offered such titles as Diablo, Starcraft, You
Don't Know Jack, King's Quest, JumpStart, Math Blaster, Reading Blaster and
many others. These products were offered through a variety of distribution
channels, including specialty retailers, mass merchandisers, discounters and
schools.
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The entertainment, education and productivity software industry is
competitive. Software competed 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.
The software segment had seasonal elements. Revenues were typically
highest during the third and fourth quarters and lowest during the first and
second quarters. This seasonal pattern was due primarily to the increased
demand for software products during the holiday season.
CLASSIFIED ADVERTISING BUSINESS. Hebdo Mag is 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. Hebdo Mag is involved in the publication, printing and distribution,
via print and electronic media, of branded classified advertising information
products. Hebdo Mag has also expanded into other related business activities,
including the distribution of third-party services and classified advertising
web sites.
Hebdo Mag publishes over 11 million advertisements per year in over 180
publications. With a total annual circulation of over 85 million, management
estimates Hebdo Mag publications are read by over 200 million people. Unlike
newspapers which contain significant editorial content, Hebdo Mag 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.
Hebdo Mag 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.
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, Hebdo Mag
owns leading classified advertising franchises which have long standing,
recognized reputations with readers and advertisers. Among Hebdo Mag's leading
titles, many of which have been in existence for over 15 years, are: La
Centrale des Particuliers (France), Expressz (Hungary), The Trader
(Indianapolis), Traders Post (Nashville), Car News (Taiwan), Secondamano
(Italy), Auto Trader, Renters News, The Computer Paper (Canada), Iz Ruk v Ruki
(Russia), Gula Tidningen (Sweden), Segundamano (Argentina) and The Melbourne
Trading Post (Australia).
REGULATION
ALLIANCE MARKETING REGULATION. We market our 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 we
believe that these activities will increasingly be subject to such regulation.
Such regulation may limit our ability to solicit new members or to offer one or
more products or services to existing members.
A number of our products and services (such as Travelers Advantage
(Registered Trademark) and certain insurance products) are also subject to
state and local regulations. We believe that such regulations do not have a
material impact on our business or revenues.
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
34
franchise agreements or to withhold consent to the renewal or transfer of these
agreements. While our franchising operations have not been materially adversely
affected by such existing regulation, we cannot predict the effect of any
future 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 our real estate brokerage
franchisees, mortgage business and relocation business. Our mortgage banking
services business is also subject to numerous federal, state and local laws and
regulations, including those relating to real estate settlement procedures,
fair lending, fair credit reporting, truth in lending, federal and state
disclosure, and licensing.
TIMESHARE EXCHANGE REGULATION. Our timeshare exchange business is subject
to foreign, federal, state and local laws and regulations including those
relating to taxes, consumer credit, environmental protection and labor matters.
In addition, we are subject to state statutes in those states regulating
timeshare exchange services, and must prepare and file annually, with
regulators in states which require it, the "RCI Disclosure Guide to Vacation
Exchange". We are not subject to those state statutes governing the development
of timeshare condominium units and the sale of timeshare interests, but such
statutes directly affect the members and resorts that participate in the RCI
Network. Therefore, the statutes indirectly impact our timeshare exchange
business.
EMPLOYEES
As of December 31, 1998, we employed approximately 35,000 persons full
time. Management considers our employee relations to be satisfactory.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased space and located at
9 West 57th Street, New York, NY 10019. Many of our general corporate functions
are conducted at a building owned by us and located at 6 Sylvan Way,
Parsippany, New Jersey 07054 and at a building leased by us and located at 1
Sylvan Way, Parsippany, New Jersey 07054 with a lease term expiring in 2008.
Our Travel Division has two properties which we own, a 166,000 square
foot facility in Virginia Beach, Virginia which serves as a satellite
administrative and reservations facility for Wizcom and ARAC, and a property
located in Kettering, UK which is the European office for RCI. The Travel
Division also leases space for its reservations centers and data warehouse in
Winner and Aberdeen, South Dakota; Phoenix, Arizona; Knoxville and
Elizabethtown, Tennessee; Tulsa and Drumright, Oklahoma; Indianapolis, Indiana;
Orangeburg, South Carolina and St. John, New Brunswick, Canada pursuant to
leases that expire in 2000, 2003, 2007, 2004, 1999, 2001, 2000, 2001, 2008,
2001 and 2008, respectively. The Tulsa and Drumwright, Oklahoma location serves
as an Avis car rental reservations center. In addition, the Travel Division has
18 leased offices spaces located within the United States and an additional 30
leased spaces in various countries outside the United States.
The Real Estate Division shares approximately six leases with the Travel
Division in various locations that function as sales offices.
The Individual Membership Segment has its principal offices located in
Stamford and Trumbull, Connecticut. The Individual Membership Segment leases
space for several of its call centers in Aurora, Colorado; Westerville, Ohio;
Brentwood, Tennessee; Houston and Arlington, Texas; Woburn, Massachusetts and
Great Falls, Montana pursuant to leases that expire in 2000, 2005, 2002, 2000,
2000, 2001 and 1999, respectively. We also own one building located in
Cheyenne, Wyoming which serves as a call center. In addition, the Individual
Membership Segment has leased smaller space in various locations for business
unit and ancillary needs. Internationally, the Individual Membership Segment
has approximately seven leased offices spaces located in various countries.
35
The main offices for the Fleet Segment are located in two leased spaces;
one in Hunt Valley, Maryland (200,000 square feet) and three in South Portland,
Maine (91,000 square feet) pursuant to leases that expire in 2003, 2008, 2004
and 2007, respectively. In addition, there are nine smaller leased spaces that
function as sales/distribution locations.
The Relocation Segment has their main corporate operations located in a
leased building in Danbury, Connecticut with a lease term expiring in 2008.
There are also five regional offices located in Walnut Creek, California;
Oakbrook and Schaumburg, Illinois; Irving, Texas and Mission Viejo, California
which provide operation support services for the region pursuant to leases that
expire in 2004, 2003, 2001 and 2003, respectively. We own the office in Mission
Viejo.
The Mortgage Segment has centralized its operations to one main area
occupying various leased offices in Mt. Laurel, New Jersey for a total of
approximately 600,000 square feet. The lease terms expire over the next ten
years.
The Insurance/Wholesale Segment leases domestic space in Nashville,
Tennessee; San Carlos, California; and Crozier, Virginia with lease terms
ending in 2002, 2003 and 1999, respectively. In addition, there are 11 leased
locations internationally that function as sales and administrative offices for
international membership with the main office located in Portsmouth, UK.
The primary office for the Entertainment Publication Segment is located in
Troy, Michigan (75,000 square feet) with a lease term expiring in 2004. EPub
also leases approximately 100 small office locations throughout the United
States and 10 internationally to conduct distribution activities.
We own properties in Virginia Beach, Virginia and Westbury, New York and
lease space in Garden City, New York that supports the Other Consumer and
Business Services Segment. The Garden City location is the main operation and
administrative center for Wizcom. In addition, there are approximately six
leased office locations in the United States. Internationally, we lease office
space in London, UK (18,000 square feet) and own two buildings in Leeds, UK
(86,000 square feet) and one building in Bradford, England (25,000 square feet)
to support this segment.
We believe that such properties are sufficient to meet our present needs
and we do not anticipate any difficulty in securing additional space, as
needed, on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
Class Action Litigation
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Annual Report on Form 10-K, more than 70 lawsuits claiming to be class actions,
two lawsuits claiming to be brought derivatively on our behalf and three
individual lawsuits have been filed in various courts against us and other
defendants. With the exception of an action pending in the Delaware Chancery
Court and an action filed in the Superior Court of New Jersey that has been
dismissed, these actions were all filed in or transferred to the United States
District Court for the District of New Jersey, where they are pending before
Judge William H. Walls and Magistrate Judge Joel A. Pisano. The Court has
ordered consolidation of many of the actions.
In re: Cendant Corporation Litigation, Master File No. 98-1664 (WHW)
(D.N.J.) (the "Calpers Action"), is a consolidated action consisting of over
sixty constituent class action lawsuits, and one individual lawsuit, that were
originally filed in the District of New Jersey, the District of Connecticut,
and the Eastern District of Pennsylvania. The Calpers Action is brought on
behalf of all persons who acquired securities of the Company and CUC, except
our PRIDES securities, between May 31, 1995 and August 28, 1998. The Court
granted the plaintiffs' unopposed motion for class certification on January 27,
1999. Named as defendants are the Company; twenty-eight current and former
officers and directors of the Company, CUC and HFS Incorporated ("HFS"); and
Ernst & Young LLP, CUC's former independent accounting firm.
The Amended and Consolidated Class Action Complaint in the Calpers Action
alleges that, among other things, the plaintiffs were damaged when they
acquired securities of the Company and CUC
36
because, as a result of accounting irregularities, the Company's and CUC's
previously issued financial statements were materially false and misleading,
and the allegedly false and misleading financial statements caused the prices
of the Company's and CUC's securities to be inflated artificially. The Amended
and Consolidated Complaint alleges violations of Sections 11, 12(a)(2), and 15
of the Securities Act of 1933 (the "Securities Act") and Sections 10(b), 14(a),
20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Calpers Action seeks damages in unspecified amounts.
On December 14, 1998, the plaintiffs in the Calpers Action moved for
partial summary judgment, on liability only, against the Company on the claims
under Section 11 of the Securities Act. The plaintiffs adjourned this motion
sine die, however, without prejudice to the plaintiffs' right to re-notice the
motion. In connection with the plaintiffs' agreement to withdraw their summary
judgment motion, the Company agreed not to assert any automatic stay of
discovery that would otherwise apply to the Calpers Action if any defendant
were to file a motion to dismiss the Calpers Action.
On January 25, 1999, the Company answered the Amended Consolidated
Complaint and asserted Cross-Claims against Ernst & Young LLP ("Ernst &
Young"). The Company's Cross-Claims allege that Ernst & Young failed to follow
professional standards to discover, and recklessly disregarded, the accounting
irregularities, and is therefore liable to the Company for damages. The
Cross-Claims assert breaches of Ernst & Young's audit agreements with the
Company, negligence, breaches of fiduciary duty, fraud, and contribution.
Welch & Forbes, Inc. v. Cendant Corp., et al., No. 98-2819 (WHW) (the
"PRIDES Action") is a class action brought on behalf of purchasers of the
Company's PRIDES securities between February 24 and July 15, 1998. Named as
defendants are the Company; Cendant Capital I, a statutory business trust
formed by the Company to participate in the offering of PRIDES securities;
seventeen current and former officers and directors of the company, CUC and
HFS; Ernst & Young; and the underwriters for the PRIDES offering, Merrill Lynch
& Co.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and Chase Securities
Inc. A substantially similar action filed in the Superior Court of New Jersey,
entitled First Trust Corp. IRA of Gloria Rosenberg v. Cendant Corp., et al.,
No. L-1406-98 (Law Div.), was dismissed on August 7, 1998, without prejudice to
the plaintiff's right to re-file the case in the United States District Court
for the District of New Jersey.
The allegations in the Amended Consolidated Complaint in the PRIDES Action
are substantially similar to those in the Calpers Action, and violations of
Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a)
of the Exchange Act are asserted. Damages in unspecified amounts are sought.
On November 11, 1998, the plaintiffs in the PRIDES Action brought motions
for (i) certification of a proposed class of PRIDES purchasers; (ii) summary
judgment against the Company under Section 11 of the Securities Act; and (iii)
an injunction requiring the Company to place $300 million in a trust account
for the benefit of the PRIDES investors pending final resolution of their
claims. These motions were withdrawn in connection with a partial settlement of
the PRIDES Action (see Note 6) .
On April 27, 1998, a purported shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in the District of New Jersey
against certain of the Company's current or former directors and officers; The
Bear Stearns Companies, Inc.; Bear Stearns & Co., Inc.; and, as a nominal
party, the Company. The complaint in the Deutch action, as amended on December
7, 1998, alleges that certain individual officers and directors of the Company
breached their fiduciary duties by selling shares of the Company's stock while
in possession of non-public material information concerning the accounting
irregularities. The complaint also alleges various other breaches of fiduciary
duty and gross negligence in connection with, among other things, the
accounting irregularities discussed above. Damages are sought on behalf of
Cendant in unspecified amounts.
Semerenko v. Cendant Corp., et al., Civ. Action No. 98-5384 (D. N.J.) and
P. Schoenfeld Asset Management LLC v. Cendant Corp., et al., (Civ. Action No.
98-4734) (D. N.J) (the "ABI Actions") were initially commenced in October and
November of 1998, respectively, on behalf of a putative class of persons who
purchased securities of American Bankers Insurance Group, Inc. ("ABI") between
37
March 23, 1998 and October 13, 1998. Named as defendants are the Company, four
former CUC officers and directors, and Ernst & Young. The complaints in the ABI
Actions, as amended on February 8, 1999, assert violations of Sections 10(b),
14(e) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder,
relating to the accounting irregularities discussed above. Plaintiffs allege,
among other things, that the Company made misrepresentations and omissions
regarding its ability and intent to complete a tender offer and subsequent
merger with ABI. Plaintiffs allege that such misrepresentations and omissions
caused the price of ABI securities to be artificially inflated. Plaintiffs
seek, among other things, unspecified compensatory damages. The Company filed a
motion to dismiss the ABI Actions on March 10, 1999. The other defendants have
also moved to dismiss.
Kennilworth Partners, L.P., et al. v. Cendant Corp., et al., 98 Civ. 8939
(DC) (the "Kennilworth Action") was filed on December 18, 1998 in the Southern
District of New York on behalf of three investment companies. Named as
defendants are the Company; thirty of its present and former officers and
directors; HFS; and Ernst & Young. The complaint in the Kennilworth Action, as
amended on January 26, 1999, alleges that the plaintiffs purchased convertible
notes issued by HFS pursuant to an indenture dated February 28, 1996 and were
damaged because they converted their notes into shares of common stock in the
Company in the weeks prior to the Company's April 15, 1998 announcement. The
amended complaint also alleges that plaintiffs were damaged by purchasing in
March 1998 additional notes issued by the Company, whose market value declined
as a result of the April 15, 1998 announcement and the subsequent events
described above. The amended complaint asserts violations of Sections 11, 12
and 15 of the Securities Act and Sections 10(b) and 20 of the Exchange Act; a
common-law breach of contract claim is also asserted. Damages are sought in an
amount estimated to be in excess of $13.6 million. On February 4, 1999, the
Court ordered the Kennilworth Action transferred to the District of New Jersey,
with the consent of the plaintiff and the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC (the
"Corwin Action"), was filed on April 29, 1998 in the Court of Chancery for the
State of Delaware. The Corwin Action is purportedly brought derivatively, on
behalf of the Company, and as a class action, on behalf of all shareholders of
HFS who exchanged their HFS shares for CUC shares in connection with the
Merger. The Corwin Action names as defendants HFS and twenty-eight individuals
who are or were directors of the Company and HFS. The complaint in the Corwin
Action, as amended on July 28, 1998, alleges that HFS and its directors
breached their fiduciary duties of loyalty, good faith, care and candor in
connection with the Cendant Merger, in that they failed to properly investigate
the operations and financial statements of CUC before approving the Merger at
an allegedly inadequate price. The amended complaint also alleges that the
Company's directors breached their fiduciary duties by entering into an
employment agreement with our former Chairman, Walter A. Forbes, in connection
with the Merger that purportedly amounted to corporate waste. The Corwin Action
seeks, among other things, recission of the Merger and compensation for all
losses and damages allegedly suffered in connection therewith. On October 7,
1998, Cendant filed a motion to dismiss the Corwin Action or, in the
alternative, for a stay of the Corwin Action pending determination of the
Calpers Action and the Deutch Action. The plaintiffs in the Corwin Action have
moved for leave to file a second amended complaint.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC has
advised us that its inquiry should not be construed as an indication by the SEC
or its staff that any violations of law have occurred. While our management has
made all adjustments considered necessary as a result of the findings of the
Investigations and the restatement of our financial statements for 1997, 1996
and 1995, and the first six months of 1998, we can provide no assurances that
additional adjustments will not be necessary as a result of these government
investigations.
In connection with the Merger, certain officers and directors of HFS
exchanged their shares of HFS common stock and options exercisable for HFS
common stock for shares of the Company's Common Stock and options exercisable
for the Company's Common Stock, respectively. As a result of the aforementioned
accounting irregularities, such officers and directors have advised the Company
that they believe they have claims against the Company in connection with such
exchange. In addition, certain
38
current and former officers and directors of the Company would consider
themselves to be members of any class ultimately certified in the Federal
Securities Actions now pending in which the Company is named as a defendant by
virtue of their having been HFS stockholders at the time of the Merger.
Other than with respect to the PRIDES class action litigation described
below, we do not believe it is feasible to predict or determine the final
outcome or resolution of these proceedings or to estimate the amounts or
potential range of loss with respect to these proceedings and investigations.
In addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgements against us or
settlements and could require substantial payments by us. Our management
believes that adverse outcomes with respect to such proceedings and
investigations could have a material adverse impact on our financial condition,
results of operations and cash flows.
Settlement of PRIDES Class Action Litigation
On March 17, 1999, we announced that we reached a final settlement
agreement with plaintiff's counsel representing the class of holders of our
PRIDES securities who purchased their securities on or prior to April 15, 1998
("eligible persons") to settle their class action lawsuit against us. Under the
final settlement agreement, eligible persons will receive a new security -- a
Right -- for each PRIDES security held on April 15, 1998. Current holders of
PRIDES will not receive any Rights (unless they also held PRIDES on April 15,
1998). We had originally announced a preliminary agreement in principle to
settle such lawsuit on January 7, 1999. The final agreement maintained the
basic structure and accounting treatment as the preliminary agreement.
Based on the settlement agreement, we recorded an after tax charge of
approximately $228 million, or $0.26 per share ($351 million pre-tax), in the
fourth quarter of 1998 associated with the settlement agreement in principle to
settle the PRIDES securities class action. We recorded an increase in
additional paid-in capital of $350 million offset by a decrease in retained
earnings of $228 million resulting in a net increase in stockholders' equity of
$122 million as a result of the prospective issuance of the Rights. As a
result, the settlement should not reduce net book value. In addition the
settlement is not expected to reduce 1999 earnings per share unless our common
stock price materially appreciates.
At any time during the life of the Rights, holders may (a) sell them or
(b) exercise them by delivering to us three Rights together with two PRIDES in
exchange for two new PRIDES (the "New PRIDES"). The terms of the New PRIDES
will be the same as the currently outstanding PRIDES, except that the
conversion rate will be revised so that, at the time the Rights are
distributed, each New PRIDES will have a value equal to $17.57 more than each
original PRIDES, based upon a generally accepted valuation model. Based upon
the closing price per share of $16.6875 of our Common Stock on March 17, 1999,
the effect of the issuance of the New PRIDES will be to distribute
approximately 19 million more shares of our common stock when the mandatory
purchase of our common stock associated with the PRIDES occurs in February of
2001. This represents approximately 2% more shares of common stock than are
currently outstanding.
The settlement agreement also requires us to offer to sell 4 million
additional PRIDES (having identical terms to currently outstanding PRIDES) (the
"Additional PRIDES") at "theoretical value" to holders of Rights for cash.
Theoretical value will be based on the same valuation model utilized to set the
conversion rate of the New PRIDES. Based on that valuation model, the currently
outstanding PRIDES have a theoretical value of $28.07 based on the closing
price for our common stock on March 17, 1999, which is less than their current
trading price. The offering of Additional PRIDES will be made only pursuant to
a prospectus filed with the SEC. We currently expect to use the proceeds of
such an offering to repurchase our common stock and for other general corporate
purposes. The arrangement to offer Additional PRIDES is designed to enhance the
trading value of the Rights by removing up to 6 million Rights from circulation
via exchanges associated with the offering and to enhance the open market
liquidity of New PRIDES by creating 4 million New PRIDES via exchanges
associated with the offering. If holders of Rights do not acquire all such
PRIDES, they will be offered to the public.
39
Under the settlement agreement, we have also agreed to file a shelf
registration statement for an additional 15 million PRIDES, which could be
issued by us at any time for cash. However, during the last 30 days prior to
the expiration of the Rights in February 2001, we will be required to make
these additional PRIDES available to holders of Rights at a price in cash equal
to 105% of the theoretical value of the additional PRIDES as of a specified
date. The PRIDES, if issued, would have the same terms as the currently
outstanding PRIDES and could be used to exercise Rights.
The Rights will be distributed following final court approval of the
settlement and after the effectiveness of the registration statement filed with
the SEC covering the New PRIDES.
It is presently expected that if the court approves the settlement and such
conditions are fulfilled, the Rights will be distributed in August or September
1999. This summary of the settlement does not constitute an offer to sell any
securities, which will only be made by means of a prospectus after a
registration statement is filed with the SEC. There can be no assurance that
the court will approve the agreement or that the conditions contained in the
agreement will be fulfilled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual meeting of its shareholders on October 30, 1998,
pursuant to a Notice of Annual Meeting and Proxy Statement dated September 28,
1998, a copy of which has been filed previously with the Securities and
Exchange Commission, at which our shareholders considered and approved the
election of six directors for a term of three years, the Company's 1998
Employee Stock Purchase Plan, and ratification of Deloitte & Touche LLP as
auditors. The results of such matters are as follows:
Proposal 1: To elect six directors for a three year term and until their
successors are duly elected and qualified.
Results: For Against
729,374,048 21,047,428
Proposal 2: To approve the Company's 1998 Employee Stock Purchase Plan
Results: For Against Abstain
714,345,354 33,516,760 1,938,144
Proposal 3: To ratify and approve the appointment of Deliotte & Touche LLP as
the Company's Independent Auditors for the year ending December 31, 1998.
Results: For Against Abstain
744,191,719 5,471,312 758,445
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK
HOLDER MATTERS
MARKET PRICE ON COMMON STOCK
Our Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "CD". At March 22, 1999 the number of stockholders of record was
approximately 10,841. The following table sets forth the quarterly high and low
sales prices per share as reported by the NYSE for 1998 and 1997 based on a
year ended December 31.
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 15/16
1998 HIGH LOW
- ----------------------------------- -------- -------
First Quarter ................... 41 32 7/16
Second Quarter .................. 41 3/8 18 9/16
Third Quarter ................... 22 7/16 10 7/16
Fourth Quarter .................. 20 5/8 7 1/2
On March 22, 1999, the last sale price of our Common Stock on the NYSE was
$16 5/16 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
We expect to retain our 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.
41
ITEM 6. SELECTED FINANCIAL DATA (1) (2)
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
(In millions, except per share amounts)
OPERATIONS
NET REVENUES $ 5,283.8 $ 4,240.0 $ 3,237.7 $ 2,616.1
----------- ----------- ----------- ----------
Operating expense 1,869.1 (3) 1,322.3 1,183.2 1,024.9
Marketing and reservation expense 1,158.5 1,031.8 910.8 743.6
General and administrative expense 666.3 636.2 341.0 283.3
Depreciation and amortization expense 322.7 237.7 145.5 100.4
Other charges 838.3 (4) 704.1 (5) 109.4 (6) 97.0 (7)
Interest expense, net 113.9 50.6 14.3 16.6
Provision for income taxes 104.5 191.0 220.2 143.2
Minority interest, net 50.6 -- -- --
----------- ----------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS $ 159.9 $ 66.3 $ 313.3 $ 207.1
----------- ----------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS PER SHARE:
Basic $ 0.19 $ 0.08 $ 0.41 $ 0.30
Diluted 0.18 0.08 0.39 0.28
FINANCIAL POSITION
Total assets $ 20,216.5 $ 14,073.4 $ 12,762.5 $ 8,519.5
Long-term debt 3,362.9 1,246.0 780.8 336.0
Assets under management and mortgage programs 7,511.9 6,443.7 5,729.2 4,955.6
Debt under management and mortgage programs 6,896.8 5,602.6 5,089.9 4,427.9
Mandatorily redeemable securities issued by
subsidiary 1,472.1 -- -- --
Shareholders' equity 4,835.6 3,921.4 3,955.7 1,898.2
OTHER INFORMATION (8)
ADJUSTED EBITDA (9) $ 1,589.9 $ 1,249.7 $ 802.7 $ 564.3
Cash flows provided by (used in):
Operating activities 808.0 1,213.0 1,525.6 1,144.3
Investing activities (4,351.8) (2,328.6) (3,090.8) (1,789.0)
Financing activities 4,689.6 900.1 1,780.8 661.2
- ----------
(1) Selected financial data is presented for four years. Financial data
subsequent to December 31, 1994 had been restated as a result of findings
from investigations into accounting irregularities discovered at the
former business units of CUC International, Inc. ("CUC"). Financial data
for periods prior to December 31, 1994 was not restated and therefore
should not be relied on (see Note 18 to the consolidated financial
statements).
(2) Selected financial data includes the operating results of acquisitions
accounted for under the purchase method of accounting since the
respective dates of acquisition, including: (i) National Parking
Corporation in April 1998; (ii) Harpur Group in January 1998; (iii)
Jackson Hewitt, Inc. in January 1998; (iv) Resort Condominiums
International, Inc. in November 1996; (v) Avis, Inc. in October 1996;
(vi) Coldwell Banker Corporation in May 1996; and (vii) Century 21 Real
Estate Corporation in August 1995.
(3) Includes a non-cash charge of $50.0 million ($32.2 million, after tax or
$0.04 per diluted share) related to the write off of certain equity
investments in interactive membership businesses and impaired goodwill
associated with the National Library of Poetry, a Company subsidiary.
(4) Represents charges of: (i) $433.5 million ($281.7 million, after tax or
$0.32 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers Insurance Group, Inc. and Providian Auto
and Home Insurance Company; (ii) $351.0 million ($228.2 million, after
tax or $0.26 per diluted share) associated with the final agreement to
settle the PRIDES securities class action suit; and (iii) $121.0 million
($78.7 million, after tax or $0.09 per diluted share) comprised of the
costs of the investigations into previously discovered accounting
irregularities at the former CUC business units, including
42
incremental financing costs and separation payments, principally to the
Company's former chairman. The aforementioned charges were partially
offset by a credit of $67.2 million ($43.7 million, after tax or $0.05 per
diluted share) associated with changes in the original estimate of 1997
merger-related costs and other unusual charges.
(5) Represents merger-related costs and other unusual charges related to
continuing operations of $704.1 million ($504.7 million, after tax or
$0.58 per diluted share) primarily associated with the Cendant merger in
December 1997 and merger with PHH Corporation ("PHH") in April 1997.
(6) Represents merger-related costs and other unusual charges related to
continuing operations of $109.4 million ($70.0 million, after tax or
$0.09 per diluted share) substantially related to the Company's August
1996 merger with Ideon Group, Inc. ("Ideon").
(7) Represents a provision for costs related to the abandonment of certain
Ideon development efforts and the restructuring of certain Ideon
operations. The charges aggregated $97.0 million ($62.1 million, after
tax or $0.08 per diluted share).
(8) There were no dividends declared during the periods presented above
except for PHH and Ideon, which declared and paid dividends to their
shareholders prior to their respective mergers with the Company.
(9) Adjusted EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization, adjusted to exclude other charges which
are of a non-recurring or unusual nature. Adjusted EBITDA is a measure of
performance which is not recognized under generally accepted accounting
principles and should not replace income from continuing operations or
cash flows in measuring operating results or liquidity. However,
management believes such measure is an informative representation of how
management evaluates the operating performance of the Company and its
underlying business segments (see Note 26 to the consolidated financial
statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are one of the foremost consumer and business services companies in the
world. We were created through the December 1997 merger (the "Cendant Merger")
of HFS Incorporated ("HFS") and CUC International Inc. ("CUC"). We provide
business services to our customers, many of which are consumer services
companies, and also provide fee-based services directly to consumers, generally
without owning the assets or sharing the risks associated with the underlying
businesses of our customers or collaborative partners.
We operate in four principal divisions -- travel related services, real estate
related services, alliance marketing related services and other consumer and
business services. Our businesses provide a wide range of complementary
consumer and business services, which together represent nine business
segments. The travel related services businesses facilitate vacation timeshare
exchanges, manage corporate and government vehicle fleets and franchise car
rental and hotel businesses; the real estate related services businesses
franchise real estate brokerage businesses, provide home buyers with mortgages
and assist in employee relocation; and the alliance marketing related services
businesses, provide an array of value driven products and services. Our other
consumer and business services include our tax preparation services franchise,
information technology services, car parking facility services, vehicle
emergency support and rescue services, credit information services, financial
products and other consumer-related services.
As a franchisor of hotels, real estate brokerage offices, car rental operations
and tax preparation services, we license the owners and operators of
independent businesses to use our brand names. We do not own or operate hotels,
real estate brokerage offices, car rental operations or tax preparation offices
(except for certain company-owned Jackson Hewitt offices, which we intend to
franchise). Instead, we provide our franchisee customers with services designed
to increase their revenue and profitability.
We have recently changed our focus from making strategic acquisitions of new
businesses to maximizing the opportunities and growth potential of our existing
businesses. In connection with this change in focus, we intend to review and
evaluate our existing businesses to determine whether certain businesses
continue to meet our business objectives. As part of our ongoing evaluation of
such businesses, we intend from time to time to explore and conduct discussions
with regard to divestitures and related corporate transactions. However, we can
give no assurance with respect to the magnitude, timing, likelihood or business
effect of any possible transaction. We also cannot predict whether any
divestiture or other transactions will be consummated or, if consummated, will
result in a financial or other benefit to us. We
43
intend to use a portion of the proceeds from future dispositions, if any,
together with the proceeds of potential future debt issues and bank borrowings
and cash from operations, to retire indebtedness, to repurchase our common
stock commensurate with approvals from our Board of Directors and for other
general corporate purposes. As a result of our aforementioned change in focus,
we completed the sale of two of our business segments and divested a separate
subsidiary (see "Liquidity and Capital Resources -- Divestitures").
Prior to the Cendant Merger, both HFS and CUC had grown significantly through
mergers and acquisitions accounted for under both the pooling of interests
method, the most significant being the merger of HFS with PHH Corporation
("PHH") in April 1997 (the "PHH Merger"), and purchase method of accounting.
The underlying Results of Operations discussions are presented as if all
businesses acquired in mergers and acquisitions accounted for as poolings of
interests have operated as one entity since inception.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
Our operating results and the operating results of certain of our underlying
business segments are comprised of business combinations accounted for under
the purchase method of accounting. Accordingly, the results of operations of
such acquired companies have been included in our consolidated operating
results and our applicable business segments from the respective dates of
acquisition. See "Liquidity and Capital Resources" for a discussion of our
purchase method acquisitions.
The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before interest, income taxes,
depreciation and amortization, adjusted for Other charges which are of a
non-recurring or unusual nature, and are not included in assessing segment
performance or are not segment-specific. Our management believes such
discussion is the most informative representation of how management evaluates
performance. We have determined that we have nine reportable operating segments
based primarily on the types of services we provide, the consumer base to which
marketing efforts are directed and the methods we use to sell services. For
additional information, including a description of the services provided in
each of our reportable operating segments, see Note 26 to the Consolidated
Financial Statements.
44
CONSOLIDATED RESULTS -- 1998 VS. 1997
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 % CHANGE
(Dollars in millions) -------------- -------------- ---------
Net revenues $ 5,283.8 $ 4,240.0 25%
Operating expenses (1) 3,693.9 2,990.3 24%
----------- ----------
Adjusted EBITDA 1,589.9 1,249.7 27%
Other charges
Litigation settlement 351.0 -- *
Termination of proposed acquisitions 433.5 -- *
Executive terminations 52.5 -- *
Investigation-related costs 33.4 -- *
Merger-related costs and other unusual charges (credits) (67.2) 704.1 *
Financing costs 35.1 -- *
Depreciation and amortization expense 322.7 237.7 36%
Interest expense, net 113.9 50.6 125%
----------- ----------
Pre-tax income from continuing operations before minority
interest, extraordinary gain and cumulative effect of
accounting change 315.0 257.3 22%
Provision for income taxes 104.5 191.0 (45%)
Minority interest, net of tax 50.6 -- *
----------- ----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change 159.9 66.3 141%
Loss from discontinued operations, net of tax (25.0) (26.8) *
Gain on sale of discontinued operations, net of tax 404.7 -- *
Extraordinary gain, net of tax -- 26.4 *
Cumulative effect of accounting change, net of tax -- (283.1) *
----------- ----------
Net income (loss) $ 539.6 $ (217.2) *
=========== ===========
- ----------
(1) Exclusive of Other charges and depreciation and amortization expense.
* Not meaningful.
REVENUES AND ADJUSTED EBITDA
Revenues and Adjusted EBITDA increased $1.0 billion (25%) and $340.2 million
(27%), respectively, in 1998 over 1997, which reflected growth in substantially
all of our reportable operating segments. Significant contributing factors
which gave rise to such increases included substantial growth in the volume of
mortgage services provided and an increase in the amount of royalty fees
received from our franchised brands, principally within the real estate
franchise segment. In addition, revenues and Adjusted EBITDA in 1998 included
the operating results of 1998 acquisitions, including National Parking
Corporation ("NPC") and Jackson Hewitt Inc. ("Jackson Hewitt"). A detailed
discussion of revenues and Adjusted EBITDA trends from 1997 to 1998 is included
in the section entitled "Results of Reportable Operating Segments -- 1998 vs.
1997."
1998 OTHER CHARGES
LITIGATION SETTLEMENT. We recorded a non-cash charge of $351.0 million in the
fourth quarter of 1998 in connection with an agreement to settle a class action
lawsuit that was brought on behalf of the holders of our Income or Growth
FELINE PRIDES securities who purchased their securities on or prior to April
15, 1998, the date on which we announced the discovery of accounting
irregularities in the former business units of CUC (see "Liquidity and Capital
Resources -- FELINE PRIDES and Trust Preferred Securities").
45
TERMINATION OF PROPOSED ACQUISITIONS. We incurred $433.5 million of costs,
which included a $400.0 million cash payment to American Bankers Insurance
Group, Inc. ("American Bankers"), in connection with terminating the proposed
acquisitions of American Bankers and Providian Auto and Home Insurance Company
("Providian") (see "Liquidity and Capital Resources -- Termination of Proposed
Acquisitions").
EXECUTIVE TERMINATIONS. We incurred $52.5 million of costs in 1998 related to
the termination of certain of our former executives, principally Walter A.
Forbes, who resigned as our Chairman and as a member of our Board of Directors
in July 1998. The severance agreement reached with Mr. Forbes entitled him to
the benefits required by his employment contract relating to a termination of
Mr. Forbes' employment with us for reasons other than for cause. Aggregate
benefits given to Mr. Forbes resulted in a charge of $50.9 million comprised of
$38.4 million in cash payments and 1.3 million of immediately vested Company
stock options, with a Black-Scholes value of $12.5 million.
INVESTIGATION-RELATED COSTS. We incurred $33.4 million of professional fees,
public relations costs and other miscellaneous expenses in connection with our
discovery of accounting irregularities in the former business units of CUC and
the resulting investigations into such matters.
FINANCING COSTS. In connection with our discovery and announcement of
accounting irregularities and the corresponding lack of audited financial
statements, we were temporarily disrupted in accessing public debt markets. As
a result, we paid $27.9 million in fees associated with waivers and various
financing arrangements. Additionally, during 1998, we exercised our option to
redeem our 4 3/4% Convertible Senior Notes (the "4 3/4% Notes"). At such time,
we anticipated that all holders of the 4 3/4% Notes would elect to convert the
4 3/4% Notes to our common stock. However, at the time of redemption, holders of
the 4 3/4% Notes elected not to convert the 4 3/4% Notes to our common stock and
as a result, we redeemed such notes at a premium. Accordingly, we recorded a
$7.2 million loss on early extinguishment of debt.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
We incurred merger-related costs and other unusual charges ("Unusual Charges")
in 1997 related to continuing operations of $704.1 million primarily associated
with the Cendant Merger (the "Fourth Quarter 1997 Charge") and the PHH Merger
(the "Second Quarter 1997 Charge").
NET REDUCTIONS BALANCE AT
UNUSUAL --------------------------- DECEMBER 31,
CHARGES 1997 1998 1998
(In millions) ----------- ------------ ------------ -------------
Fourth Quarter 1997 Charge $ 454.9 $ (257.5) $ (130.2) $ 67.2
Second Quarter 1997 Charge 283.1 (207.0) ( 59.7) 16.4
-------- -------- -------- -------
Total 738.0 (464.5) (189.9) 83.6
Reclassification for discontinued operations ( 33.9) 33.9 -- --
-------- -------- -------- -------
Total Unusual Charges related to continuing
operations $ 704.1 $ (430.6) $ (189.9) $ 83.6
======== ======== ======== =======
FOURTH QUARTER 1997 CHARGE. We incurred Unusual Charges in the fourth quarter
of 1997 totaling $454.9 million substantially associated with the Cendant
Merger and our merger in October 1997 with Hebdo Mag International, Inc.
("Hebdo Mag"), a classified advertising business. Reorganization plans were
formulated prior to and implemented as a result of the mergers. We determined
to streamline our corporate organization functions and eliminate several office
locations in overlapping markets. Our management's plan included the
consolidation of European call centers in Cork, Ireland and terminations of
franchised hotel properties.
Unusual Charges included $93.0 million of professional fees primarily
consisting of investment banking, legal and accounting fees incurred in
connection with the aforementioned mergers. We also incurred $170.7 million of
personnel-related costs including $73.3 million of retirement and employee
benefit plan costs, $23.7 million of restricted stock compensation, $61.4
million of severance resulting from consolidations of European call centers and
certain corporate functions and $12.3 million of other personnel--
46
related costs. Unusual Charges included $78.3 million of business termination
costs which consisted of a $48.3 million non-cash impairment write-down of
hotel franchise agreement assets associated with a quality upgrade program and
$30.0 million of costs incurred to terminate a contract which may have
restricted us from maximizing opportunities afforded by the Cendant Merger. We
also provided for facility-related and other costs of $112.9 million including
$70.0 million of irrevocable contributions made to independent technology
trusts for the direct benefit of lodging and real estate franchisees, $16.4
million of building lease termination costs and a $22.0 million reduction in
intangible assets associated with our wholesale annuity business for which
impairment was determined in 1997. During the year ended December 31, 1998, we
recorded a net credit of $28.1 million to Unusual Charges with a corresponding
reduction to liabilities primarily as a result of a change in the original
estimate of costs to be incurred. We made cash payments of $102.6 million and
$152.2 million during 1998 and 1997, respectively, related to the Fourth
Quarter 1997 Charge. Liabilities of $67.2 million remained at December 31, 1998
which were primarily attributable to future severance costs and executive
termination benefits.
SECOND QUARTER 1997 CHARGE. We incurred $295.4 million of Unusual Charges in
the second quarter of 1997 primarily associated with the PHH Merger. During the
fourth quarter of 1997, as a result of changes in estimate, we adjusted certain
merger-related liabilities, which resulted in a $12.3 million credit to Unusual
Charges. Reorganization plans were formulated in connection with the PHH Merger
and were implemented upon consummation. The PHH Merger afforded us, at such
time, an opportunity to rationalize our combined corporate, real estate and
travel-related businesses, and enabled our corresponding support and service
functions to gain organizational efficiencies and maximize profits. We
initiated a plan just prior to the PHH Merger to close hotel reservation call
centers, combine travel agency operations and continue the downsizing of fleet
operations by reducing headcount and eliminating unprofitable products. In
addition, we initiated plans to integrate our relocation, real estate franchise
and mortgage origination businesses to capture additional revenues through the
referral of one business unit's customers to another. We also formalized a plan
to centralize the management and headquarters functions of our corporate
relocation business unit subsidiaries. Such initiatives resulted in write-offs
of abandoned systems and leasehold assets commencing in the second quarter of
1997. The aforementioned reorganization plans included the elimination of PHH
corporate functions and facilities in Hunt Valley, Maryland.
Unusual Charges included $154.1 million of personnel-related costs associated
with employee reductions necessitated by the planned and announced
consolidation of our corporate relocation service businesses worldwide as well
as the consolidation of our corporate activities. Personnel-related charges
also included termination benefits such as severance, medical and other
benefits and provided for retirement benefits pursuant to pre-existing
contracts resulting from a change in control. Unusual Charges also included
professional fees of $30.3 million, primarily comprised of investment banking,
accounting and legal fees incurred in connection with the PHH Merger. We
incurred business termination charges of $55.6 million, which were comprised of
$38.8 million of costs to exit certain activities primarily within our fleet
business (including $35.7 million of asset write-offs associated with
discontinued activities), a $7.3 million termination fee associated with a
joint venture that competed with our PHH Mortgage Services business (now known
as Cendant Mortgage Corporation) and $9.6 million of costs to terminate a
marketing agreement with a third party in order to replace the function with
internal resources. We also incurred facility-related and other charges
totaling $43.1 million including costs associated with contract and lease
terminations, asset disposals and other expenses related to the consolidation
and closure of excess office space. During the year ended December 31, 1998, we
recorded a net credit of $39.6 million to Unusual Charges with a corresponding
reduction to liabilities primarily as a result of a change in the original
estimate of costs to be incurred. We made cash payments of $27.8 million and
$150.2 million during 1998 and 1997, respectively, related to the Second
Quarter 1997 Charge. Liabilities of $16.4 million remained at December 31, 1998
which were attributable to future severance and lease termination payments.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $85.0 million (36%) in 1998
over 1997 as a result of incremental amortization of goodwill and other
intangible assets from 1998 acquisitions and increased capital spending
primarily to accommodate growth in our businesses.
47
INTEREST EXPENSE AND MINORITY INTEREST, NET
Interest expense, net, increased $63.3 million (125%) in 1998 over 1997
primarily as a result of incremental average borrowings during 1998 and a
nominal increase in the cost of funds. We primarily used debt to finance $2.9
billion of acquisitions and investments during 1998, which resulted in an
increase in the average debt balance outstanding as compared to 1997. The
weighted average interest rate on long-term debt increased from 6.0% in 1997 to
6.2% in 1998. In addition to interest expense on long-term debt, we also
incurred $50.6 million of minority interest, net of tax, primarily related to
the preferred dividends payable in cash on our FELINE PRIDES and trust
preferred securities issued in March 1998 (see "Liquidity and Capital Resources
- -- Financing Exclusive of Management and Mortgage Financing -- FELINE PRIDES
and Trust Preferred Securities").
PROVISION FOR INCOME TAXES
Our effective tax rate was reduced from 74.3% in 1997 to 33.2% in 1998 due to
the non-deductibility of a significant amount of Unusual Charges recorded
during 1997 and the favorable impact in 1998 of reduced rates in international
tax jurisdictions in which we commenced business operations during 1998. The
1997 effective income tax rate included a tax benefit on 1997 Unusual Charges,
which were deductible at an effective rate of only 29.1%. Excluding Unusual
Charges, the effective income tax rate on income from continuing operations in
1997 was 40.6%.
DISCONTINUED OPERATIONS
We recorded a $404.7 million gain, net of tax, on the sale of discontinued
operations in 1998, related to the dispositions of our classified advertising
and consumer software businesses. Pursuant to a program to divest non-core
businesses and assets, in August 1998 (the "Measurement Date"), we committed to
discontinue such businesses (see "Liquidity and Capital Resources --
Divestitures -- Discontinued Operations"). Loss from discontinued operations,
net of tax, was $25.0 million in 1998 and $26.8 million in 1997. Loss from
discontinued operations in 1998 includes operating results through the
Measurement Date. The operating results of discontinued operations in 1997
included $24.4 million of Unusual Charges and $15.2 million of extraordinary
losses, net of tax. Unusual Charges, net of tax, in 1997 primarily consisted of
$19.4 million of severance associated with terminated consumer software company
executives and $5.0 million of compensation related to a stock appreciation
rights plan which was paid in connection with our merger with Hebdo Mag in
October 1997. Such merger also resulted in a $15.2 million extraordinary loss,
net of tax, associated with the early extinguishment of debt.
EXTRAORDINARY GAIN, NET
In 1997, we recorded a $26.4 million extraordinary gain, after tax, on the sale
of Interval International, Inc. ("Interval") in December 1997. The Federal
Trade Commission requested that we sell Interval in connection with the Cendant
Merger as a result of their anti-trust concerns within the timeshare industry.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET
In 1997, we recorded a non-cash after-tax charge of $283.1 million to account
for the cumulative effect of an accounting change. In August 1998, the
Securities and Exchange Commission ("SEC") requested that we change our
accounting policies with respect to revenue and expense recognition for our
membership businesses, effective January 1, 1997. Although we believed that our
accounting for memberships had been appropriate and consistent with industry
practice, we complied with the SEC's request and adopted new accounting
policies for our individual membership businesses.
48
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1998 VS. 1997
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
-------------------------------------- ---------------------------------------- -----------------
1998 1997 % CHANGE 1998 (1) 1997 (2) % CHANGE 1998 1997
------------- ------------- ---------- ---------------- ------------ ---------- --------- -------
(Dollars in millions)
Travel $ 1,063.3 $ 971.6 9% $ 542.5 $ 467.3 16% 51% 48%
Individual Membership 929.1 778.7 19% (57.8) 5.3 * (6%) 1%
Insurance/ Wholesale 544.0 482.7 13% 137.8 111.0 24% 25% 23%
Real Estate Franchise 455.8 334.6 36% 348.6 226.9 54% 76% 68%
Relocation 444.0 401.6 11% 124.5 92.6 34% 28% 23%
Fleet 387.4 324.1 20% 173.8 120.5 44% 45% 37%
Mortgage 353.4 179.2 97% 187.6 74.8 151% 53% 42%
Entertainment
Publications 197.2 188.1 5% 32.1 36.8 (13%) 16% 20%
Other 909.6 579.4 57% 100.8 (3) 114.5 (12%) 11% 20%
---------- ---------- ----------- ---------
Total $ 5,283.8 $ 4,240.0 25% $ 1,589.9 $ 1,249.7 27% 30% 29%
========== ========== ============= =========
- ----------
(1) Excludes the following Other charges or credits: (i) $433.5 million for
the costs of terminating the proposed acquisitions of American Bankers
and Providian; (ii) $351.0 million of costs associated with an agreement
to settle the PRIDES securities class action suit; (iii) $121.0 million
comprised of the costs of the investigations into previously discovered
accounting irregularities at the former CUC business units, including
incremental financing costs and separation payments, principally to our
former chairman; and (iv) $67.2 million of net credits associated with
changes to the original estimate of costs to be incurred in connection
with 1997 Unusual Charges.
(2) Excludes Unusual Charges of $704.1 million primarily associated with the
Cendant Merger and the PHH Merger.
(3) Includes a $50.0 million non-cash write-off of certain equity investments
in interactive membership businesses and impaired goodwill associated
with our National Library of Poetry subsidiary.
* Not meaningful.
TRAVEL
Revenues and Adjusted EBITDA increased $91.7 million (9%) and $75.2 million
(16%), respectively, in 1998 over 1997. Contributing to the revenue and
Adjusted EBITDA increase was a $35.4 million (7%) increase in franchise fees,
consisting of increases of $23.5 million (6%) and $11.9 million (8%) in lodging
and car rental franchise fees, respectively. Our franchise businesses
experienced increases during 1998 in worldwide available rooms (29,800
incremental rooms, domestically), revenue per available room, car rental days
and average car rental rates per day. Timeshare subscription and exchange
revenue increased $27.1 million (9%) as a result of a 7% increase in average
membership volume and a 4% increase in the number of exchanges. Also
contributing to the revenue and Adjusted EBITDA increase was $16.4 million of
incremental fees received from preferred alliance partners seeking access to
our franchisees and their customers, $12.7 million of fees generated from the
execution of international master license agreements and a $17.7 million gain
on our sale of one million shares of Avis common stock in 1998. The
aforementioned drivers supporting increases in revenues and Adjusted EBITDA
were partially offset by a $37.8 million reduction in the equity in earnings of
our investment in the car rental operations of Avis, Inc. ("ARAC") as a result
of reductions in our ownership percentage in such investment during 1997 and
1998 (see "Liquidity and Capital Resources -- 1996 Purchase Acquisitions and
Investments -- Avis"). A $16.7 million (7%) increase in marketing and
reservation costs resulted in a $16.5 million increase in total expenses while
other operating expenses were relatively flat due to leveraging our corporate
infrastructure among more businesses, which contributed to an improvement in
the Adjusted EBITDA margin from 48% in 1997 to 51% in 1998.
INDIVIDUAL MEMBERSHIP
Revenues increased $150.4 million (19%) in 1998 over 1997 while Adjusted EBITDA
and Adjusted EBITDA margin decreased $63.1 million and 7 percentage points,
respectively, for the same period. The
49
revenue growth was primarily attributable to an incremental $27.9 million
associated with an increase in the average price of a membership, $25.8 million
of increased billings as a result of incremental marketing arrangements,
primarily with telephone and mortgage companies, and $35.9 million from the
acquisition of a company in April 1998 that, among other services, provides
members access to their personal credit information. Also contributing to the
revenue growth are increased product sales and service fees which are offered
and provided to individual members. The reduction in Adjusted EBITDA and
Adjusted EBITDA margin is a direct result of a $104.3 million (25%) increase in
membership solicitation costs. We increased our marketing efforts during 1998
to solicit new members and as a result increased our gross average annual
membership base by approximately 3.3 million members (11%) at December 31,
1998, compared to the prior year. The growth in members during 1998 resulted in
increased servicing costs during 1998 of approximately $33.2 million (13%).
While the costs of soliciting and acquiring new members were expensed in 1998,
the revenue associated with these new members will not begin to be recognized
until 1999, upon expiration of the membership period.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $61.3 million (13%) and $26.8 million
(24%), respectively, in 1998 over 1997, primarily due to customer growth. This
growth generally resulted from increases in affiliations with financial
institutions. Domestic operations, which comprised 77% of segment revenues in
1998, generated higher Adjusted EBITDA margins than the international
businesses as a result of continued expansion costs incurred internationally to
penetrate new markets.
Domestic revenues and Adjusted EBITDA increased $25.4 million (6%) and $23.6
million (22%), respectively. Revenue growth, which resulted from an increase in
customers, also contributed to an improvement in the overall Adjusted EBITDA
margin from 23% in 1997 to 25% in 1998, as a result of the absorption of such
increased volume by the existing domestic infrastructure. International
revenues and Adjusted EBITDA increased $35.9 million (41%) and $3.2 million
(54%), respectively, due primarily to a 42% increase in customers while the
Adjusted EBITDA margin remained relatively flat at 7%.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $121.2 million (36%) and $121.7 million
(54%), respectively, in 1998 over 1997. Royalty fees collectively increased for
our CENTURY 21, COLDWELL BANKER and ERA franchise brands by $102.0 million
(35%) as a result of a 20% increase in home sales by franchisees and a 13%
increase in the average price of homes sold. Home sales by franchisees
benefited from existing home sales in the United States reaching a record 4.8
million units in 1998, according to data from the National Association of
Realtors, as well as from expansion of our franchise systems. Because many
costs associated with the real estate franchise business, such as franchise
support and information technology, do not vary directly with home sales
volumes or royalty revenues, the increase in royalty revenues contributed to an
improvement in the Adjusted EBITDA margin from 68% to 76%.
RELOCATION
Revenues and Adjusted EBITDA increased $42.4 million (11%) and $31.9 million
(34%), respectively, in 1998 over 1997. The Adjusted EBITDA margin improved
from 23% to 28%. The primary source of revenue growth was a $29.3 million
increase in revenues from the relocation of government employees. We also
experienced growth in the number of relocation-related services provided to
client corporations and in the number of household goods moves handled,
partially offset by lower home sale volumes. The divestiture of certain
niche-market property management operations accounted for other revenue of $8.2
million. Expenses associated with government relocations increased in
conjunction with the volume and revenue growth, but economies of scale and a
reduction in overhead and administrative expenses permitted the reported
improvement in Adjusted EBITDA margin.
FLEET
Revenues and Adjusted EBITDA increased $63.3 million (20%) and $53.3 million
(44%), respectively, in 1998 over 1997, contributing to an improvement in the
Adjusted EBITDA margin from 37% to 45%. We
50
acquired The Harpur Group Ltd. ("Harpur"), a leading fuel card and vehicle
management company in the United Kingdom ("UK"), on January 20, 1998. Harpur
contributed incremental revenues and Adjusted EBITDA in 1998 of $31.8 million
and $20.8 million, respectively. The revenue increase is further attributable
to a 12% increase in fleet leasing fees and a 31% increase in service fee
revenue. The fleet leasing revenue increase is due to a 5% increase in pricing
and a 7% increase in the number of vehicles leased, while the service fee
revenue increase is the result of a 40% increase in number of fuel cards and
vehicle maintenance cards partially offset by a 7% decline in pricing. The
Adjusted EBITDA margin improvement reflects streamlining of costs at newly
acquired Harpur and a leveraging of our corporate infrastructure among more
businesses.
MORTGAGE
Revenues and Adjusted EBITDA increased $174.2 million (97%) and $112.8 million
(151%), respectively, in 1998 over 1997, primarily due to strong mortgage
origination growth and average fee improvement. The Adjusted EBITDA margin
improved from 42% to 53%. Mortgage origination grew across all lines of
business, including increased refinancing activity and a shift to more
profitable sale and processing channels and was responsible for substantially
all of the segment's revenue growth. Mortgage closings increased $14.3 billion
(122%) to $26.0 billion and average origination fees increased 12 basis points,
resulting in a $180.3 million increase in origination revenues. Although the
servicing portfolio grew $9.6 billion (36%), net servicing revenue was
negatively impacted by average servicing fees declining 7 basis points due to
the increased refinancing levels in the 1998 mortgage market, which shortened
the servicing asset life and increased amortization charges. Consequently, net
servicing revenues decreased $9.1 million, partially offset by a $5.7 million
increase in the sale of servicing rights. Operating expenses increased in all
areas, reflecting increased hiring and expansion of capacity in order to
support continued growth; however, revenue growth marginally exceeded such
infrastructure enhancements.
ENTERTAINMENT PUBLICATIONS
Revenues increased $9.1 million (5%) and Adjusted EBITDA decreased $4.7
million, in 1998 when compared to 1997. Revenue growth was primarily driven by
a $4.0 million (2%) increase in coupon book sales, a $3.4 million (29%)
increase in related advertising revenues and a $3.4 million (11%) increase in
gift wrap sales. The decline in Adjusted EBITDA is directly attributable to an
increased absorption of corporate infrastructure costs in 1998 as compared to
1997.
OTHER SERVICES
Revenues increased $330.2 million (57%), while Adjusted EBITDA decreased $13.7
million (12%). Revenues increased primarily from acquired NPC and Jackson
Hewitt operations, which contributed $409.8 million and $53.7 million to 1998
revenues, respectively. The revenue increase attributable to 1998 acquisitions
was partially offset by a $140.0 million reduction in revenues associated with
the operations of certain of our ancillary businesses which were sold during
1997, including Interval, which contributed $121.0 million to 1997 revenues. We
sold Interval in December 1997 coincident to the proposed Cendant Merger, in
consideration of Federal Trade Commission anti-trust concerns within the
timeshare industry.
The revenue increase did not translate into increases in Adjusted EBITDA
primarily due to asset write-offs, dispositions of certain ancillary business
operations and approximately $8.0 million of incremental operating costs
associated with establishing a consolidated worldwide data center. We wrote-off
$37.0 million of impaired goodwill associated with our National Library of
Poetry subsidiary, and $13.0 million of certain of our equity investments in
interactive membership businesses. Adjusted EBITDA in 1997 associated with
aforementioned disposed ancillary operations included $27.2 million from
Interval and $18.0 million related to services formerly provided to the casino
industry. Our NPC and Jackson Hewitt subsidiaries contributed $92.7 million and
$27.0 million to 1998 Adjusted EBITDA, respectively.
51
CONSOLIDATED RESULTS -- 1997 VS. 1996
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 % CHANGE
(Dollars in millions) ------------- ------------- ---------
Net revenues $ 4,240.0 $ 3,237.7 31%
Operating expenses(1) 2,990.3 2,435.0 23%
--------- ----------
Adjusted EBITDA 1,249.7 802.7 56%
Merger-related costs and other unusual charges 704.1 109.4 544%
Depreciation and amortization expense 237.7 145.5 63%
Interest expense, net 50.6 14.3 254%
--------- ----------
Pre-tax income from continuing operations before
extraordinary gain and cumulative effect of accounting
change 257.3 533.5 (52%)
Provision for income taxes 191.0 220.2 (13%)
--------- ----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change 66.3 313.3 (79%)
Income (loss) from discontinued operations, net of tax (26.8) 16.7 *
Extraordinary gain, net of tax 26.4 -- *
Cumulative effect of accounting change, net of tax (283.1) -- *
--------- ----------
Net income (loss) $ (217.2) $ 330.0 *
========== ==========
- ----------
(1) Exclusive of merger-related costs, unusual charges and depreciation and
amortization expense
* Not meaningful.
REVENUES AND ADJUSTED EBITDA
Revenues and Adjusted EBITDA increased $1.0 billion (31%) and $447.0 million
(56%), respectively, in 1997 over 1996, and were supported by growth in
substantially all of our reportable operating segments. Revenues and Adjusted
EBITDA in 1997 included a full year of operations from companies acquired
during 1996, including Coldwell Banker Corporation ("Coldwell Banker") in May
1996, Avis, Inc. ("Avis") in October 1996 and Resort Condominiums
International, Inc. ("RCI") in November 1996 (see "Liquidity and Capital
Resources -- 1996 Purchase Acquisitions and Investments"). A detailed
discussion of fluctuations in revenues and Adjusted EBITDA from 1996 to 1997 is
included in the section entitled "Results of Reportable Operating Segments --
1997 vs. 1996."
MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
1997. We incurred merger-related costs and other unusual charges ("Unusual
Charges ") in 1997 related to continuing operations of $704.1 million primarily
associated with the Cendant Merger and the PHH Merger. See "Results of
Operations -- Consolidated Results 1998 vs. 1997 -- Merger-Related Costs and
Other Unusual Charges" for a detailed discussion of such charges.
1996. We incurred Unusual Charges in 1996 related to continuing operations of
$109.4 million substantially related to our merger with Ideon Group, Inc.
("Ideon"). Unusual Charges primarily included $80.4 million of
litigation-related liabilities associated with our determination to settle
acquired Ideon litigation which existed at the August 1996 merger date. We have
since settled all outstanding litigation matters pursuant to which the primary
resulting obligation consisted of a settlement made in June 1997 with the
cofounder of SafeCard Services, Inc. which was acquired by Ideon in 1995. The
settlement required us to make $70.5 million of payments in annual installments
through 2003. We made cash payments of $27.8 million and $56.3 million in 1998
and 1997, respectively, associated with 1996 Unusual Charges.
52
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $92.2 million (63%) in 1997
over 1996, primarily as a result of incremental amortization of goodwill and
other intangible assets from 1996 acquisitions and increased capital spending.
INTEREST EXPENSE, NET
Interest expense, net, increased $36.3 million in 1997 over 1996 primarily as a
result of the February 1997 issuance of $550 million 3% Convertible
Subordinated Notes and interest income earned in 1996 on approximately $420
million of excess proceeds generated from the $1.2 billion public offering of
46.6 million shares of our common stock in May 1996. The increase in interest,
net, was partially offset by a reduction in the weighted average interest rate
from 7.5% in 1996 to 6.0% in 1997 as a result of a greater proportion of fixed
rate debt, carrying lower interest rates, to total debt.
PROVISION FOR INCOME TAXES
Our effective tax rate increased from 41.2% in 1996 to 74.3% in 1997. The 1997
effective income tax rate included a 29.1% effective tax rate on the tax
benefit related to Unusual Charges due to the significant non-deductibility of
such costs. The effective income tax rate on 1997 income from continuing
operations excluding Unusual Charges was 40.6%.
DISCONTINUED OPERATIONS
We recorded a $26.8 million net loss from discontinued operations in 1997
compared to net income of $16.7 million in 1996. The operating results of
discontinued operations included $15.2 million of extraordinary losses, net of
tax, in 1997 and $24.4 million and $24.9 million of Unusual Charges, net of
tax, in 1997 and 1996, respectively. The extraordinary losses and Unusual
Charges incurred in 1997 have been previously discussed in the section entitled
"Results of Operations -- Consolidated Results -- 1998 vs. 1997." Unusual
Charges in 1996 consisted primarily of professional fees incurred in connection
with our mergers with certain software businesses acquired in 1996. Excluding
Unusual Charges and extraordinary items, income from discontinued operations
decreased $28.8 million (69%) from $41.6 million in 1996 to $12.8 million in
1997. Net income from the classified advertising business remained relatively
unchanged from 1996 while net income from the consumer software businesses
decreased $28.5 million (72%) to $11.1 million in 1997. In 1997 revenues
increased $49.2 million (13%) which were offset by increased operating expenses
of $93.2 million (29%). The disproportionate increase in operating expenses
resulted from accelerating development and marketing costs incurred on titles
without a corresponding revenue increase because titles were not released to
the marketplace as planned in December 1997.
RESULTS OF REPORTABLE OPERATING SEGMENTS -- 1997 VS. 1996
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
ADJUSTED EBITDA
REVENUES ADJUSTED EBITDA MARGIN
---------------------------------- ---------------------------------- --------------
1997 1996 % CHANGE 1997 (1) 1996 (2) % CHANGE 1997 1996
----------- ----------- ---------- ------------ ---------- ---------- ------ -------
(Dollars in millions)
Travel $ 971.6 $ 429.2 126% $ 467.3 $ 189.5 147% 48% 44%
Individual Membership 778.7 745.9 4% 5.3 43.2 (88%) 1% 6%
Insurance/Wholesale 482.7 448.0 8% 111.0 99.0 12% 23% 22%
Real Estate Franchise 334.6 236.3 42% 226.9 137.8 65% 68% 58%
Relocation 401.6 344.9 16% 92.6 65.5 41% 23% 19%
Fleet 324.1 293.5 10% 120.5 99.0 22% 37% 34%
Mortgage 179.2 127.7 40% 74.8 45.7 64% 42% 36%
Entertainment Publications 188.1 174.6 8% 36.8 22.0 67% 20% 13%
Other 579.4 437.6 32% 114.5 101.0 13% 20% 23%
--------- --------- --------- --------
Total $ 4,240.0 $ 3,237.7 31% $ 1,249.7 $ 802.7 56% 29% 25%
========= ========= ========= ========
- ----------
(1) Excludes Unusual Charges of $704.1 million primarily associated with the
Cendant Merger and the PHH Merger.
(2) Excludes Unusual Charges of $109.4 million incurred in connection with
the Ideon merger.
53
TRAVEL
Revenues and Adjusted EBITDA increased $542.4 million (126%) and $277.8 million
(147%), respectively, while the Adjusted EBITDA margin improved from 44% to
48%. The acquisitions of Avis and RCI in October 1996 and November 1996,
respectively, contributed incremental revenues and Adjusted EBITDA of $503.9
million and $248.2 million, respectively. Excluding the 1996 acquisitions,
revenues and Adjusted EBITDA increased $38.5 million (9%) and $29.6 million
(16%), respectively, primarily as a result of an increase in lodging franchise
fees which was driven by a 4% increase in franchised rooms and a 2% increase in
revenue per available room. Expense increases were minimized due to the
significant operating leverage associated with mature franchise operations and
a leveraging of the corporate infrastructure among more businesses.
INDIVIDUAL MEMBERSHIP
Revenues increased $32.8 million (4%) while Adjusted EBITDA and Adjusted EBITDA
margin decreased $37.9 million (88%) and 5 percentage points, respectively. The
revenue increase in 1997 was primarily due to $25.4 million of increased
product sales and service fees, which are offered and provided to individual
members. The increase in revenues also included $7.1 million of incremental
monthly billings from new marketing arrangements made during 1996 with
telephone and mortgage companies. The reduction in Adjusted EBITDA and Adjusted
EBITDA margin from 1996 to 1997 was principally due to increased membership
solicitation costs incurred during 1997, higher call center and servicing
expenses and start-up costs incurred to introduce new membership clubs. The
accounting policies for membership revenue and expense recognition were changed
effective January 1, 1997. Therefore, results of operations for 1997 and 1996
were accounted for using different accounting policies. The pro forma effect of
the accounting change, as if such a change had been applied retroactively to
1996, would have resulted in a reduction in 1996 revenues and Adjusted EBITDA
of $16.6 million and $11.3 million, respectively.
INSURANCE/WHOLESALE
Revenues and Adjusted EBITDA increased $34.7 million (8%) and $12.0 million
(12%), respectively, primarily due to an overall growth in customer base during
1997. Domestic operations, which comprised 82% and 84% of segment revenues in
1997 and 1996, respectively, generated higher Adjusted EBITDA margins than the
international businesses as a result of expansion costs incurred
internationally to penetrate new markets. Domestic revenues and Adjusted EBITDA
increased $18.7 million (5%) and $10.2 million (11%), respectively, in 1997
over 1996 while international revenues and Adjusted EBITDA increased $16.0
million (22%) and $1.8 million (45%), respectively, for the comparable periods.
REAL ESTATE FRANCHISE
Revenues and Adjusted EBITDA increased $98.3 million (42%) and $89.1 million
(65%), respectively, in 1997 over 1996 while the Adjusted EBITDA margin
improved from 58% to 68%. The acquisitions of ERA and Coldwell Banker
franchised brands in February 1996 and May 1996, respectively, contributed
incremental revenues and Adjusted EBITDA of $73.8 million and $74.6 million,
respectively, in 1997. Excluding the 1996 acquisitions, revenues and Adjusted
EBITDA increased $24.5 million (17%) and $14.5 million (17%) which was
principally driven by increased royalty fees generated from the Century 21
franchised brand. Royalty fees from Century 21 franchisees increased as a
result of a 5% increase in home sales by franchisees and an 11% increase in the
average price of homes sold. Existing home sales in the United States increased
3% from 1996 to 1997 according to data from the National Association of
Realtors. Operating expenses, which did not change proportionately with home
sale volume, increased a minimal $9.3 million (9%) to support the significant
growth of the business. In addition, the corporate infrastructure was leveraged
among more businesses.
RELOCATION
Revenues and Adjusted EBITDA increased $56.7 million (16%) and $27.1 million
(41%), respectively, primarily as a result of the acquisition of Coldwell
Banker in May 1996. Coldwell Banker was a leading
54
provider of corporate relocation services and contributed incremental revenues
and Adjusted EBITDA of $47.2 million and $18.6 million, respectively. The
Adjusted EBITDA margin improved from 19% to 23% as a result of economic
efficiencies realized from the consolidation of our relocation businesses.
FLEET
Revenues and Adjusted EBITDA increased $30.6 million (10%) and $21.5 million
(22%), respectively, in 1997 over 1996. The Adjusted EBITDA margin improved
from 34% to 37%. Revenue and Adjusted EBITDA growth in 1997 was primarily
attributable to a 24% increase in service fee revenues, supported by a 20%
increase in number of cards and an 8% increase in fleet leasing revenues,
principally resulting from a 5% increase in pricing. The Adjusted EBITDA margin
improvement reflected a leveraging of the corporate infrastructure among more
businesses.
MORTGAGE
Revenues and Adjusted EBITDA increased $51.5 million (40%) and $29.1 million
(64%), respectively, which was primarily driven by mortgage origination growth
and gain on sale of servicing rights. The Adjusted EBITDA margin improved from
36% to 42%. Mortgage originations increased 40% to $11.7 billion contributing
$35.3 million additional revenue while servicing revenue was relatively flat.
The loan servicing portfolio grew 18% to $26.7 billion while gain on sale of
servicing rights increased $12.6 million to $14.1 million. Operating expenses
increased to support volume growth and to prepare for continued expansion as
the annual loan origination run rate approached $18.0 billion. However, revenue
growth marginally exceeded increases in operating expenses.
ENTERTAINMENT PUBLICATIONS
Revenues and Adjusted EBITDA increased $13.5 million (8%) and $14.8 million
(67%), respectively, in 1997 over 1996. The Adjusted EBITDA margin improved
from 13% to 20%. Revenue growth was primarily driven by an increase in coupon
book sales. New sales channels were added in 1997, which accounted for a
majority of the revenue increase. The Adjusted EBITDA margin improvement in
1997 reflected economic benefits realized from the consolidation of two
independent sales force.
OTHER SERVICES
Revenues and Adjusted EBITDA increased $141.8 million (32%) and $13.5 million
(13%), respectively, in 1997 over 1996. Such increases were primarily supported
by the operating results of an information technology business ("WizCom") which
was acquired in October 1996 as part of the Avis acquisition. Our WizCom
subsidiary operates the telecommunications and computer system that facilitates
reservations and agreement processing for lodging and car rental operations.
The acquisition of WizCom accounted for incremental revenues and Adjusted
EBITDA in 1997 of $90.3 million and $30.6 million, respectively.
Our other ancillary businesses collectively contributed to the additional
revenue growth, although Adjusted EBITDA margins declined, primarily within
certain business units which were sold during 1997.
LIQUIDITY AND CAPITAL RESOURCES
DIVESTITURES
Discontinued Operations. During 1998, we implemented a program to divest
non-core businesses and assets in order to focus on our core businesses, repay
debt and repurchase our common stock (see "Overview"). Pursuant to such
program, on August 12, 1998, we announced that our Board of Directors committed
to discontinue our classified advertising and consumer software businesses by
disposing of Hebdo Mag and Cendant Software Corporation ("CDS"), respectively.
On December 15, 1998, we completed the sale of Hebdo Mag to its former 50%
owners for $449.7 million. We received $314.8 million in cash and 7.1 million
shares of our common stock valued at $134.9 million on the date of sale. We
recognized a $206.9 million gain on the sale of Hebdo Mag, which included a tax
benefit of $52.1 million.
On November 20, 1998, we announced the execution of a definitive agreement to
sell CDS for $800.0 million in cash plus potential future contingent payments
pursuant to the contract. The sale was
55
completed on January 12, 1999. We estimate that we will realize a gain of
approximately $380.0 million based upon the finalization of the closing balance
sheet as of the sale date. We recognized $197.8 million of such gain in 1998
substantially in the form of a tax benefit and corresponding deferred tax
asset.
Other. On January 12, 1999, we completed the sale of our Essex Corporation
("Essex) subsidiary for $8.0 million. Essex is a third-party marketer of
financial products for banks, primarily marketing annuities, mutual funds and
insurance products through financial institutions.
TERMINATION OF PROPOSED ACQUISITIONS
RAC Motoring Services. On February 4, 1999, we announced our intention to not
proceed with the acquisition of RAC Motoring Services ("RACMS") due to certain
conditions imposed by the UK Secretary of State for Trade and Industry that we
determined to be not commercially feasible and, therefore, unacceptable. We
originally announced on May 21, 1998 a definitive agreement with the Board of
Directors of Royal Automobile Club Limited to acquire RACMS for approximately
$735.0 million in cash. We wrote-off $7.0 million of deferred acquisition costs
in the first quarter of 1999 in connection with the termination of the proposed
acquisition of RACMS.
American Bankers Insurance Group, Inc. On October 13, 1998, we and American
Bankers entered into a settlement agreement (the "ABI Settlement Agreement"),
pursuant to which we and American Bankers terminated a definitive agreement
dated March 23, 1998, which provided for our acquisition of American Bankers
for $3.1 billion. Accordingly, our pending tender offer for American Bankers
shares was also terminated. Pursuant to the ABI Settlement Agreement and in
connection with the termination of our proposed acquisition of American
Bankers, we made a $400.0 million cash payment to American Bankers and wrote
off $32.3 million of costs, primarily professional fees. In addition, we
terminated a bank commitment to provide a $650.0 million, 364-day revolving
credit facility, which was made available to partially fund the acquisition.
Providian Auto and Home Insurance Company. On October 5, 1998, we announced the
termination of an agreement to acquire Providian, for $219.0 million in cash.
Certain representations and covenants in such agreement had not been fulfilled
and the conditions to closing had not been met. We did not pursue an extension
of the termination date of the agreement because Providian no longer met our
acquisition criteria. In connection with the termination of our proposed
acquisition of Providian, we wrote off $1.2 million of costs.
1998 PURCHASE ACQUISITIONS
National Parking Corporation. On April 27, 1998, we acquired NPC for $1.6
billion, substantially in cash, which included the repayment of approximately
$227.0 million of outstanding NPC debt. NPC was substantially comprised of two
operating subsidiaries: National Car Parks and Green Flag. National Car Parks
is the largest private (non-municipal) car park operator in the UK and Green
Flag operates the third largest roadside assistance group in the UK and offers
a wide-range of emergency support and rescue services. We funded the NPC
acquisition with borrowings under our revolving credit facilities.
Harpur Group. On January 20, 1998, we completed the acquisition of Harpur, a
leading fuel card and vehicle management company in the UK, for $206.1 million
in cash plus contingent payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, we completed the acquisition of Jackson
Hewitt for approximately $476.3 million in cash. Jackson Hewitt operates the
second largest tax preparation service franchise system in the United States.
The Jackson Hewitt franchise system specializes in computerized preparation of
federal and state individual income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. We acquired certain
other entities for an aggregate purchase price of approximately $463.9 million
in cash during 1998. Additionally, we made a $100.0 million cash payment to the
seller of RCI in satisfaction of a contingent purchase liability.
1997 PURCHASE ACQUISITIONS AND INVESTMENTS
Investment in NRT. In 1997, we executed agreements with NRT Incorporated
("NRT"), a corporation created to acquire residential real estate brokerage
firms. Under these agreements, we acquired
56
$182.0 million of NRT preferred stock (and may be required to acquire up to an
additional $81.3 million of NRT preferred stock). We received preferred
dividend payments of $15.4 million and $5.2 million during the years ended 1998
and 1997, respectively. On February 9, 1999, we executed new agreements with
NRT, which among other things, increased the term of each of the three
franchise agreements under which NRT operates from 40 years to 50 years.
In connection with the aforementioned agreements, at our election, we will
participate in NRT's acquisitions by acquiring up to an aggregate $946.3
million (plus an additional $500.0 million if certain conditions are met) of
intangible assets, and in some cases mortgage operations, of real estate
brokerage firms acquired by NRT. Through December 31, 1998, we acquired $445.7
million of such mortgage operations and intangible assets, (primarily franchise
agreements) associated with real estate brokerage companies acquired by NRT,
which brokerage companies will become subject to the NRT 50-year franchise
agreements. In February 1999, NRT entered into an agreement with us whereby we
made an upfront payment of $30.0 million to NRT for services to be provided by
NRT to us related to the identification of potential acquisition candidates,
the negotiation of agreements and other services in connection with future
brokerage acquisitions by NRT. Such fee is refundable in the event the services
are not provided.
Other. We acquired certain entities in 1997 for an aggregate purchase price of
$289.5 million, comprised of $267.9 million in cash and $21.6 million in our
common stock (0.9 million shares).
1996 PURCHASE ACQUISITIONS AND INVESTMENTS
RCI. In November 1996, we completed the acquisition of all the outstanding
capital stock of RCI for $487.1 million comprised of $412.1 million in cash and
$75.0 million (approximately 2.4 million shares) in our common stock plus
contingent payments of up to $200.0 million over a five year period. (We made a
contingent payment of $100.0 million during the first quarter of 1998). RCI is
the world's largest provider of timeshare exchange.
Avis. In October 1996, we completed the acquisition of all of the outstanding
capital stock of Avis, including payments under certain employee stock plans of
Avis and the redemption of a 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 our common stock. Subsequently, we 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 our common stock as of the stock purchase agreement date
in excess of the proceeds realized upon subsequent sale of our common stock.
Upon entering into a definitive merger agreement to acquire Avis, we announced
our strategy to dilute our interest in the Avis car rental operations while
retaining assets associated with the franchise, including trademarks,
reservation system assets and franchise agreements with ARAC and other
licensees. In September 1997, ARAC (the company which operated the rental car
operations of Avis) completed an initial public offering ("IPO") which resulted
in a 72.5% dilution of our equity interest in ARAC. Net proceeds from the IPO
of $359.3 million were retained by ARAC. In March 1998, we sold one million
shares of Avis common stock and recognized a pre-tax gain of approximately
$17.7 million. At December 31, 1998, our interest in ARAC was approximately
22.6%. In January 1999, our equity interest was further diluted to 19.4% as a
result of our sale of an additional 1.3 million shares of Avis common stock.
Coldwell Banker. In May 1996, we acquired by merger Coldwell Banker, the
largest gross revenue producing residential real estate company in North
America and a leading provider of corporate relocation services. We 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 our common stock generating $1.2 billion of
proceeds pursuant to a public offering.
Other. During 1996, we acquired certain other entities for an aggregate
purchase price of $281.5 million comprised of $224.0 million in cash, $52.5
million of our common stock (2.5 million shares) and $5.0 million of notes.
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FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
We believe that we have sufficient liquidity and access to liquidity through
various sources, including our ability to access public equity and debt markets
and financial institutions. We currently have a $1.25 billion term loan
facility in place as well as committed back-up facilities totaling $1.75
billion, of which $1.705 billion is currently undrawn and available. Long-term
debt increased $2.1 billion to $3.4 billion at December 31, 1998 when compared
to amounts outstanding at December 31, 1997, primarily as a result of
borrowings in 1998 to finance acquisitions and the repurchase of our common
stock under a share repurchase program. Our long-term debt, including current
portion at December 31, 1998 substantially consisted of $2.1 billion of
publicly issued fixed rate debt and $1.25 billion of borrowings under a term
facility.
TERM LOAN FACILITIES
On May 29, 1998, we entered into a 364 day term loan agreement with a syndicate
of financial institutions which provided for borrowings of $3.25 billion (the
"Term Loan Facility"). The Term Loan Facility, as amended, incurred interest
based on the London Interbank Offered Rate ("LIBOR") plus a margin of
approximately 87.5 basis points. At December 31, 1998, borrowings under the
Term Loan Facility of $1.25 billion were classified as long-term based on our
proven intent and ability to refinance such borrowings on a long-term basis.
On February 9, 1999, we replaced the Term Loan Facility with a new two year
term loan facility (the "New Facility") which provides for borrowings of $1.25
billion. The New Facility bears interest at LIBOR plus a margin of
approximately 100 basis points and is payable in five consecutive quarterly
installments beginning on the first anniversary of the closing date. The New
Facility contains certain restrictive covenants, which are substantially
similar to and consistent with the covenants in effect for our existing
revolving credit agreements. We used $1.25 billion of the proceeds from the New
Facility to refinance the majority of the outstanding borrowings under the Term
Loan Facility.
CREDIT FACILITIES
Our primary credit facility, as amended, consists of (i) a $750.0 million, five
year revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $1.0 billion, 364 day revolving credit facility (the "364 Day Revolving
Credit Facility") (collectively the "Revolving Credit Facilities"). The 364 Day
Revolving Credit Facility will mature on October 29, 1999 but may be renewed on
an annual basis for an additional 364 days upon receiving lender approval. The
Five Year Revolving Credit Facility will mature on October 1, 2001. Borrowings
under the Revolving Credit Facilities, at our option, bear interest based on
competitive bids of lenders participating in the facilities, at prime rates or
at LIBOR, plus a margin of approximately 75 basis points. We are required to
pay a per annum facility fee of .175% and .15% of the average daily unused
commitments under the Five Year Revolving Credit Facility and 364 Day Revolving
Credit Facility, respectively. The interest rates and facility fees are subject
to change based upon credit ratings on our senior unsecured long-term debt by
nationally recognized debt rating agencies. 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 maximum debt-to-capitalization ratio of 0.5:1. At December
31, 1998, we had no outstanding borrowings under the Revolving Credit
Facilities.
7 1/2% AND 7 3/4% SENIOR NOTES
On November 17, 1998, we filed an amended shelf registration statement with the
SEC for the aggregate issuance of up to $3.0 billion of debt and equity
securities. On November 24, 1998, we priced a total of $1.55 billion of Senior
Notes (the "Notes") in a two-part issue. The first issue, $400.0 million
principal amount of 7 1/2% Senior Notes due December 1, 2000, was priced to
yield 7.545%. The second issue, $1.15 billion principal amount of 7 3/4% Senior
Notes due December 1, 2003, was priced to yield 7.792%. Interest on the Notes
will be payable on June 1 and December 1 of each year, beginning on June 1,
1999. The
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Notes may be redeemed, in whole or in part, at any time, at our option at a
redemption price plus accrued interest to the date of redemption. The
redemption price is equal to the greater of (i) the face value of the Notes or
(ii) the sum of the present values of the remaining scheduled payments
discounted at the treasury rate plus a spread as defined in the indenture. The
offering was a component of a plan designed to refinance an aggregate of $3.25
billion of borrowings under our former Term Loan Facility, based on provisions
contained in the indenture. Net proceeds from the offering were used to repay
$1.3 billion of borrowings under the Term Loan Facility and for general
corporate purposes, which included the purchase of our common stock.
FELINE PRIDES AND TRUST PREFERRED SECURITIES
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business Trust
formed under the laws of the State of Delaware and our wholly-owned
consolidated subsidiary, issued 29.9 million FELINE PRIDES and 2.3 million
trust preferred securities and received approximately $1.5 billion in gross
proceeds therefrom. The Trust invested the proceeds in our 6.45% Senior
Debentures due 2003 (the "Debentures), which represents the sole asset of the
Trust. The obligations of the Trust related to the FELINE PRIDES and trust
preferred securities are unconditionally guaranteed by us to the extent we
makes payments pursuant to the Debentures. The issuance of the FELINE PRIDES
and trust preferred securities, resulted in the utilization of approximately
$3.0 billion of availability under a $4.0 billion shelf registration statement.
Upon issuance, the FELINE PRIDES consisted of 27.6 million Income PRIDES and
2.3 million Growth PRIDES (Income PRIDES and Growth PRIDES hereinafter referred
to as "PRIDES"), each with a face amount of $50 per PRIDE. The Income PRIDES
consist of trust preferred securities and forward purchase contracts under
which the holders are required to purchase our common stock in February 2001.
The Growth PRIDES consist of zero coupon U.S. Treasury securities and forward
purchase contracts under which the holders are required to purchase our common
stock in February 2001. The stand-alone trust preferred securities and the
trust preferred securities forming a part of the Income PRIDES, each with a
face amount of $50, bear interest, in the form of preferred stock dividends, at
the annual rate of 6.45%, payable in cash. Payments under the forward purchase
contract forming a part of the Income PRIDES will be made by us in the form of
a contract adjustment payment at an annual rate of 1.05%. Payments under the
forward purchase contract forming a part of the Growth PRIDES will be made by
us in the form of a contract adjustment payment at an annual rate of 1.30%. The
forward purchase contracts require the holder to purchase a minimum of 1.0395
shares and a maximum of 1.3514 shares of our common stock per PRIDES security,
depending upon the average of the closing price per share of our common stock
for a 20 consecutive day period ending in mid-February of 2001. We have the
right to defer the contract adjustment payments and the payment of interest on
its Debentures to the Trust. Such election will subject us to certain
restrictions, including restrictions on making dividend payments on our common
stock until all such payments in arrears are settled.
On March 17, 1999, we reached a final agreement to settle a class action
lawsuit that was brought on behalf of the holders of PRIDES securities who
purchased their securities on or prior to April 15, 1998. We originally
announced a preliminary agreement in principle to settle such lawsuit on
January 7, 1999. The final agreement maintained the basic structure and
accounting treatment as the preliminary agreement. Under the terms of the final
agreement, only holders who owned PRIDES at the close of business on April 15,
1998 will be eligible to receive a new additional "Right" for each PRIDES
security held. At any time during the life of the Rights (expires February
2001), holders may (i) sell them or (ii) exercise them by delivering to us
three Rights together with two PRIDES in exchange for two new PRIDES (the "New
PRIDES"). The terms of the New PRIDES will be the same as the original PRIDES
except that the conversion rate will be revised so that, at the time the Rights
are distributed, each New PRIDES will have a value equal to $17.57 more than
each original PRIDES, or, in the aggregate, approximately $351.0 million. The
settlement resulted in a net increase to shareholders' equity of $121.8
million. The final agreement also requires us to offer to sell four million
additional PRIDES (having identical terms to currently outstanding PRIDES)
("Additional PRIDES") to holders of Rights for cash, at a value which will be
based on the valuation model that was utilized to set the conversion rate of
the New PRIDES. Based on that valuation model, the currently outstanding PRIDES
have a theoretical value of $28.07, based on the closing price of our common
stock of $16.6875 per share on
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March 17, 1999. The offering of Additional PRIDES will be made only pursuant to
a prospectus filed with the SEC. We currently expect to use the proceeds of
such an offering to repurchase our common stock and for other general corporate
purposes. The arrangement to offer Additional PRIDES is designed to enhance the
trading value of the Rights by removing up to six million Rights from
circulation via exchanges associated with the offering and to enhance the open
market liquidity of New PRIDES by creating four million New PRIDES via
exchanges associated with the offering. If holders of Rights do not acquire all
such PRIDES, they will be offered to the public. Under the settlement
agreement, we also agreed to file a shelf registration statement for an
additional 15 million PRIDES, which could be issued by us at any time for cash.
However, during the last 30 days prior to the expiration of the Rights in
February 2001, we will be required to make these additional PRIDES available to
holders of Rights at a price in cash equal to 105% of the theoretical value of
the Additional PRIDES as of a specified date. The PRIDES, if issued, would have
the same terms as the currently outstanding PRIDES and could be used to
exercise Rights. Based on a market price of $16.6875 per share of our common
stock on March 17, 1999, the effect of the issuance of the New PRIDES will be
to distribute approximately 19 million more shares of our common stock when the
mandatory purchase of our common stock associated with the PRIDES occurs in
February 2001. This represents approximately 2% more shares of our common stock
than are currently outstanding.
The Rights will be distributed following final court approval of the settlement
and after the effectiveness of the registration statement filed with the SEC
covering the New PRIDES. It is presently expected that if the court approves
the settlement and such conditions are fulfilled, the Rights will be
distributed in August or September 1999. This summary of the settlement does
not constitute an offer to sell any securities, which will only be made by
means of a prospectus after a registration statement is filed with the SEC.
There can be no assurance that the court will approve the agreement or that the
conditions contained in the agreement will be fulfilled.
DEBT RETIREMENTS
On December 15, 1998, we repaid the $150.0 million principal amount of our
5 7/8% Senior Notes outstanding in accordance with the provisions of the
indenture agreement.
On May 4, 1998, we redeemed all of our outstanding ($144.5 million principal
amount) 4 3/4% Convertible Senior Notes due 2003 at a price of 103.393% of the
principal amount, together with interest accrued to the redemption date. Prior
to the redemption date, during 1998, $95.5 million of such notes were exchanged
for 3.4 million shares of our common stock.
On April 8, 1998, we exercised our option to call our 6 1/2% Convertible
Subordinated Notes (the "6 1/2% Notes") for redemption on May 11, 1998, in
accordance with the provisions of the indenture relating to the 6 1/2% Notes.
Prior to the redemption date, during 1998, all of the outstanding 6 1/2% Notes
were converted into 2.1 million shares of our common stock.
FINANCING RELATED TO MANAGEMENT AND MORTGAGE PROGRAMS
Our PHH subsidiary operates our mortgage, fleet and relocation services
businesses as a separate public reporting entity and supports purchases of
leased vehicles, originated mortgages and advances under relocation
contracts primarily by issuing commercial paper and medium term notes and
maintaining securitized obligations. Such financing is not classified based on
contractual maturities, but rather is included in liabilities under management
and mortgage programs rather than long-term debt since such debt corresponds
directly with high quality related assets. PHH continues to pursue
opportunities to reduce its borrowing requirements by securitizing increasing
amounts of its high quality assets. Additionally, we entered into a three year
agreement effective May 1998 and expanded in December 1998 under which an
unaffiliated Buyer (the "Buyer") committed to purchase, at our option, mortgage
loans originated by us on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, we retain the servicing rights
on the mortgage loans sold to the Buyer and provide the Buyer with options to
sell or securitize the mortgage loans into the secondary market. At December
31, 1998, we were servicing approximately $2.0 billion of mortgage loans owned
by the Buyer.
PHH debt is issued without recourse to the parent company. PHH subsidiary
expects to continue to maximize its access to global capital markets by
maintaining the quality of its assets under management.
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This is achieved by establishing credit standards to minimize credit risk and
the potential for losses. Depending upon asset growth and financial market
conditions, our PHH subsidiary utilizes the United States, European and
Canadian commercial paper markets, as well as other cost-effective short-term
instruments. In addition, our PHH subsidiary will continue to utilize the
public and private debt markets as sources of financing. Augmenting these
sources, our PHH subsidiary will continue to manage outstanding debt with the
potential sale or transfer of managed assets to third parties while retaining
fee-related servicing responsibility. PHH's aggregate borrowings at December
31, 1998 and 1997 were as follows:
1998 1997
(In billions) -------- --------
Commercial paper $2.5 $2.6
Medium-term notes 2.3 2.7
Securitized obligations 1.9 --
Other 0.2 0.3
----- ----
$ 6.9 $ 5.6
====== =====
PHH filed a shelf registration statement with the SEC, effective March 2, 1998,
for the aggregate issuance of up to $3.0 billion of medium-term note debt
securities. These securities may be offered from time to time, together or
separately, based on terms to be determined at the time of sale. The proceeds
will be used to finance assets PHH manages for its clients and for general
corporate purposes. As of December 31, 1998, PHH had approximately $1.6 billion
of medium-term notes outstanding under this shelf registration statement.
SECURITIZED OBLIGATIONS
Our PHH subsidiary maintains four separate financing facilities, the
outstanding borrowings of which are securitized by corresponding assets under
management and mortgage programs. The collective weighted average interest rate
on such facilities was 5.8% at December 31, 1998. Such securitized obligations
are described below.
Mortgage Facility. In December 1998, our PHH subsidiary entered into a 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
(the "Agreement") such mortgages. The Agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the
Agreement. The total commitment under this Agreement is $500.0 million.
Mortgage loans financed under this Agreement at December 31, 1998 totaled
$378.0 million.
Relocation Facilities. Our PHH subsidiary entered into a 364 day asset
securitization agreement effective December 1998 under which an unaffiliated
buyer has committed to purchase an interest in the rights to payment related to
certain relocation receivables of PHH. The revolving purchase commitment
provides for funding up to a limit of $325.0 million. Under the terms of this
agreement, our PHH subsidiary retains the servicing rights related to the
relocation receivables. At December 31, 1998, our PHH subsidiary was servicing
$248.0 million of assets which were funded under this agreement.
Our PHH subsidiary also maintains an asset securitization agreement, with a
separate unaffiliated buyer, which has a purchase commitment up to a limit of
$350.0 million. The terms of this agreement are similar to the aforementioned
facility, with PHH retaining the servicing rights on the right of payment. At
December 31, 1998, our PHH subsidiary was servicing $171.0 million of assets
eligible for purchase under this agreement.
Fleet Facilities. In December 1998, our PHH subsidiary entered into two secured
financing transactions each expiring five years from the effective agreement
date through its two wholly-owned subsidiaries, TRAC Funding and TRAC Funding
II. Secured leased assets (specified beneficial interests in a trust which owns
the leased vehicles and the leases) totaling $600.0 million and $725.3 million,
respectively, were contributed to the subsidiaries by PHH. Loans to TRAC
Funding and TRAC Funding II, were funded by commercial paper conduits in the
amounts of $500.0 million and $604.0 million, respectively, and were secured by
the specified beneficial interests. Monthly loan repayments conform to the
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amortization of the leased vehicles with the repayment of the outstanding loan
balance required at time of disposition of the vehicles. Interest on the loans
is based upon the conduit commercial paper issuance cost and committed bank
lines priced on a LIBOR basis. Repayments of loans are limited to the cash
flows generated from the leases represented by the specified beneficial
interests.
OTHER
To provide additional financial flexibility, PHH's current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average amount
of outstanding commercial paper. PHH maintains $2.65 billion of unsecured
committed credit facilities, which are backed by domestic and foreign banks.
The facilities are comprised of $1.25 billion of syndicated lines of credit
maturing in March 2000 and $1.25 billion of syndicated lines of credit maturing
in the year 2002. In addition, PHH has a $150.0 million revolving credit
facility, which matures in December 1999, and other uncommitted lines of credit
with various financial institutions, which were unused at December 31, 1998.
Management closely evaluates not only the credit of the banks but also the
terms of the various agreements to ensure ongoing availability. The full amount
of PHH's committed facilities at December 31, 1998 was undrawn and available.
Our management believes that our current policy provides adequate protection
should volatility in the financial markets limit PHH's access to commercial
paper or medium-term notes funding. PHH continuously seeks additional sources
of liquidity to accommodate PHH asset growth and to provide further protection
from volatility in the financial markets.
In the event that the public debt market is unable to meet PHH's funding needs,
we believe that PHH has appropriate alternative sources to provide adequate
liquidity, including current and potential future securitized obligations and
its $2.65 billion of revolving credit facilities.
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.
On July 10, 1998, PHH entered into a Supplemental Indenture No. 1 (the
"Supplemental Indenture") with The First National Bank of Chicago, as trustee,
under the Senior Indenture dated as of June 5, 1997, which formalizes PHH's
policy of limiting the payment of dividends and the outstanding principal
balance of loans to us to 40% of consolidated net income (as defined in the
Supplemental Indenture) for each fiscal year. The Supplemental Indenture
prohibits PHH from paying dividends or making loans to us if upon giving effect
to such dividends and/or loan, PHH's debt to equity ratio exceeds 8 to 1, at
the time of the dividend or loan, as the case may be.
LITIGATION
On April 15, 1998, we publicly announced that we discovered accounting
irregularities in the former business units of CUC. Such discovery prompted
investigations into such matters by us and the Audit Committee of our Board of
Directors. As a result of the findings from the investigations, we restated our
previously reported financial results for 1997, 1996 and 1995. Since such
announcement, more than 70 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on our behalf and three individual lawsuits
have been filed in various courts against us and other defendants. With the
exception of an action pending in the Delaware Chancery Court and an action
filed in the Superior Court of New Jersey that has been dismissed, these
actions were all filed in or transferred to the United States District Court
for the District of New Jersey, where they are pending before Judge William H.
Walls and Magistrate Judge Joel A. Pisano. The Court has ordered consolidation
of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised us that its inquiry should not be construed as an indication by the SEC
or its staff that any violations of law have occurred. While we made all
adjustments considered necessary as a result of the findings from the
Investigations in restating our financial statements, we can provide no
assurances that additional adjustments will not be necessary as a result of
these government investigations.
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On October 14, 1998, an action claiming to be a class action was filed against
us and four of our former officers and directors. The complaint claims that we
made false and misleading public announcements and filings with the SEC in
connection with our proposed acquisition of American Bankers allegedly in
violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and that the plaintiff and the alleged class members purchased
American Bankers' securities in reliance on these public announcements and
filings at inflated prices.
As previously disclosed, we reached an agreement with plaintiffs' counsel
representing the class of holders of our PRIDES securities who purchased their
securities on or prior to April 15, 1998 to settle their class action lawsuit
against us through the issuance of a new "Right" for each PRIDES security held.
See "Liquidity and Capital Resources -- FELINE PRIDES and Trust Preferred
Securities" for a more detailed description of the settlement.
Other than the PRIDES class action litigation, we do not believe that it is
feasible to predict or determine the final outcome of these proceedings or
investigations or to estimate the amounts or potential range of loss with
respect to these proceedings or investigations. The possible outcomes or
resolutions of the proceedings could include a judgment against us or
settlements and could require substantial payments by us. In addition, the
timing of the final resolution of the proceedings or investigations is
uncertain. We believe that material adverse outcomes with respect to such
proceedings or investigations could have a material impact on our financial
condition, results of operations and cash flows.
CREDIT RATINGS
In October 1998, Duff & Phelps Credit Rating Co. ("DCR"), Standard & Poor's
Corporation ("S&P"), and Moody's Investors Service Inc. ("Moody's") reduced our
long-term debt credit rating to A- from A, BBB from A, and Baa1 from A3,
respectively. In October 1998, Moody's and S&P reduced PHH's long-term and
short-term debt ratings to A3/P2 and A-/A2 from A2/P1 and A+/A1, respectively.
PHH's long-term and short-term credit ratings remain A+/F1 and A+/D1 with Fitch
IBCA and DCR, respectively. While the recent downgrading caused us to incur an
increase in cost of funds, we believe our sources of liquidity continue to be
adequate. (A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal at any time.)
REPRICING OF STOCK OPTIONS
On September 23, 1998, the Compensation Committee of our Board of Directors
approved a program to effectively reprice certain Company stock options granted
to our middle management during December 1997 and the first quarter of 1998.
Such options were effectively repriced on October 14, 1998 at $9.8125 per share
(the "New Price"), which was the fair market value (as defined in the option
plans) on the date of such repricing. On September 23, 1998, the Compensation
Committee also modified the terms of certain options held by certain of our
executive officers and senior managers subject to certain conditions including
revocation of a portion of existing options. Additionally, a management equity
ownership program was adopted that requires these executive officers and senior
managers to acquire our common stock at various levels commensurate with their
respective compensation levels. The option modifications were accomplished by
canceling existing options and issuing a lesser amount of new options at the
New Price and, with respect to certain options of executive officers and senior
managers, at prices above the New Price.
SHARE REPURCHASE PROGRAM
We have completed the repurchase of our common stock pursuant to a $1.0 billion
repurchase program, authorized by our Board of Directors in October 1998.
During the first quarter of 1999, our Board of Directors authorized an
additional $400.0 million to be repurchased under such program. We continue to
execute this program through open-market purchases or privately negotiated
transactions, subject to bank credit facility covenants and certain rating
agency constraints. As of March 11, 1999, we had repurchased a total of $1.3
billion of our common stock, reducing our outstanding shares by 64.2 million
shares. As of December 31, 1998, we had repurchased a total of 13.4 million
shares costing $257.7 million.
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CASH FLOWS (1998 VS. 1997)
We generated $808.0 million of cash flows from operations in 1998 representing
a $405.0 million decrease from 1997. The decrease in cash flows from operations
was primarily due to a $391.7 million net increase in mortgage loans held for
sale due to increased mortgage loan origination volume.
We used $4.4 billion of cash flows for investing activities in 1998,
principally consisting of a $1.5 billion net investment in assets under
management and mortgage programs and $2.9 billion of acquisitions and
acquisition related payments, which included the acquisitions of NPC and
Jackson Hewitt. In 1997, we used $2.3 billion for investing activities
including a $1.5 billion net investment in assets under management and mortgage
programs and $568.2 million of acquisitions and acquisition related payments.
In 1998, cash flows from financing activities of approximately $4.7 billion
included $1.55 billion of proceeds from public offerings of senior debt, $3.25
billion of term loan borrowings and $1.4 billion of proceeds from the issuance
of FELINE PRIDES and Trust Preferred Securities. Gross cash flows from
financing activities were partially offset by $2.0 billion of term loan
repayments, $257.7 million of our common stock purchases, and principal
repayments of $150.0 million and $144.5 million pertaining to the outstanding
5 7/8% Senior Notes and the 4 3/4% Notes, respectively. Additionally, in 1998
management and mortgage program financing consisted of $1.1 billion of net
borrowings which funded our investments in assets under management and mortgage
programs. In 1997, cash flows from financing activities of $900.1 million
primarily consisted of net borrowings totaling $435.9 million including net
proceeds of $543.2 million from the issuance of the 3% Convertible Subordinated
Notes in February 1997 and $509.9 million of net borrowings which funded
purchases of assets under management and mortgage programs.
CAPITAL EXPENDITURES
In 1998, $355.2 million was invested in property and equipment to support
operational growth and enhance marketing opportunities. In addition,
technological improvements were made to improve operating efficiencies. Capital
spending in 1998 included the development of integrated business systems within
the Relocation segment as well as investments in systems and office expansion
to support growth in the Mortgage segment. We expect to reduce our level of
capital spending by approximately 25% in 1999.
YEAR 2000 COMPLIANCE
The following disclosure also constitutes a Year 2000 readiness disclosure
statement pursuant to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after
January 1, 2000. To minimize or eliminate the effect of the Year 2000 risk on
our business systems and applications, we are continually identifying,
evaluating, implementing and testing changes to our computer systems,
applications and software necessary to achieve Year 2000 compliance. We
implemented a Year 2000 initiative in March 1996 that has now been adopted by
all of our business units. As part of such initiative, we have selected a team
of managers to identify, evaluate and implement a plan to bring all of our
critical business systems and applications into Year 2000 compliance prior to
December 31, 1999. The Year 2000 initiative consists of four phases: (i)
identification of all critical business systems subject to Year 2000 risk (the
"Identification Phase"); (ii) assessment of such business systems and
applications to determine the method of correcting any Year 2000 problems (the
"Assessment Phase"); (iii) implementing the corrective measures (the
"Implementation Phase"); and (iv) testing and maintaining system compliance
(the "Testing Phase"). We have substantially completed the Identification and
Assessment Phases and have identified and assessed five areas of risk: (i)
internally developed business applications; (ii) third party vendor software,
such as business applications, operating systems and special function software;
(iii) computer hardware components; (iv) electronic data transfer systems
between us and our customers; and (v) embedded systems, such as phone switches,
check writers and alarm systems. Although no assurances can be made, we believe
that we have identified substantially all of our systems, applications and
related software that are subject to Year 2000 compliance risk and have either
implemented or initiated the implementation of a plan to correct such systems
that are not Year 2000 compliant. In addition, as part of our assessment
process we
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are developing contingency plans as necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain vendor products and in certain situations,
exceptions have been authorized. We are closely monitoring those situations and
intend to complete testing efforts and any contingency implementation efforts
prior to December 31, 1999. Although we have begun the Testing Phase, we do not
anticipate completion of the Testing Phase until sometime prior to December
1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded
and other systems and other key services. Interruption of those services due to
Year 2000 issues could have a material adverse impact on our operations. We
have initiated an evaluation of the status of such third party service
providers' efforts to determine alternative and contingency requirements.
While approaches to reducing risks of interruption of business operations vary
by business unit, options include identification of alternative service
providers available to provide such services if a service provider fails to
become Year 2000 compliant within an acceptable timeframe prior to December 31,
1999.
The total cost of our Year 2000 compliance plan is anticipated to be $55.0
million. Approximately $30.0 million of these costs had been incurred through
December 31, 1998, and we expect to incur the balance of such costs to complete
the compliance plan. We have been expensing and capitalizing the costs to
complete the compliance plan in accordance with appropriate accounting
policies. Variations from anticipated expenditures and the effect on our future
results of operations are not anticipated to be material in any given year.
However, if Year 2000 modifications and conversions are not made including
modifications by our third party service providers, or are not completed in
time, the Year 2000 problem could have a material impact on our operations,
cash flows and financial condition. At this time we believe the most likely
"worst case" scenario involves potential disruptions in our operations as a
result of the failure of services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities". We will adopt SFAS No. 133
effective January 1, 2000. SFAS No. 133 requires us to record all derivatives
in the consolidated balance sheet as either assets or liabilities measured at
fair value. If the derivative does not qualify as a hedging instrument, the
change in the derivative fair values will be immediately recognized as gain or
loss in earnings. If the derivative does qualify as a hedging instrument, the
gain or loss on the change in the derivative fair values will either be
recognized (i) in earnings as offsets to the changes in the fair value of the
related item being hedged or (ii) be deferred and recorded as a component of
other comprehensive income and reclassified to earnings in the same period
during which the hedged transactions occur. We have not yet determined what
impact the adoption of SFAS No. 133 will have on our financial statements.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", effective for the first fiscal quarter after
December 15, 1998. We will adopt SFAS No. 134 effective January 1, 1999. SFAS
No. 134 requires that after the securitization of mortgage loans, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other interests based on its ability and intent to sell or hold
those investments. On the date SFAS No. 134 is initially applied, we will
reclassify mortgage-backed securities and other interests retained after the
securitization of mortgage loans from the trading to the available for sale
category. Subsequent accounting that results from implementing SFAS No. 134
shall be accounted for in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".
65
FORWARD LOOKING STATEMENTS
We make statements about our future results in this Annual Report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed our implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities;
o uncertainty as to our future profitability and our ability to integrate and
operate successfully acquired businesses and the risks associated with such
businesses, including the merger that created Cendant and the National
Parking Corporation acquisition;
o our ability to successfully divest non-core assets and implement our new
internet strategy;
o our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o competition in our existing and potential future lines of business;
o our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financing
arrangements; and
o our ability and our vendors; franchisees' and customers' ability to complete
the necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derived the forward-looking statements in this Annual Report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In recurring operations, we 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.
We use various financial instruments, particularly interest rate and currency
swaps and currency forwards, to manage our respective interest rate and
currency risks. We are exclusively an end user of these instruments, which are
commonly referred to as derivatives. We do 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 15 and 16 to the financial
statements.
The SEC requires that registrants include information about potential effects
of changes in interest rates and currency exchange in their financial
statements. Although the rules 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.
66
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 our 1999 net earnings based on year-end 1998
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
1998 consolidated currency exposures, including financial instruments
designated and effective as hedges, were analyzed to identify our 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 our 1999 net earnings based on
year-end 1998 positions.
The categories of primary market risk exposure to us 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
The information required herein has been previously reported on our Form
10-K/A for the year ended December 31, 1997.
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.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)(1) FINANCIAL STATEMENTS
See Financial Statements and Financial Statements Index commencing on page
F-1 hereof.
ITEM 14(A)(3) EXHIBITS
See Exhibit Index commencing on page E-1 hereof.
ITEM 14(B) REPORTS ON FORM 8K
On October 5, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of our agreement to purchase Providian Auto and Home
Insurance Company.
On October 14, 1998, we filed a current report on Form 8-K to report under
Item 5 its intention to file financial statements of NPC.
On October 14, 1998, we filed a current report on Form 8-K to report under
Item 5 the termination of its agreement to purchase American Bankers Insurance
Group, Inc. and its intention to repurchase up to $1 billion of common stock.
On October 21, 1998, we filed a current report on Form 8-K to report under
Item 5 the filing of financial schedules summarizing restated revenue and
EDITDA by business segment for all four quarters of 1997 and the first and
second quarters of 1998.
On November 4, 1998, we filed a current report on Form 8-K to report the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and for the six months
ended June 30, 1998. We also filed the consolidated financial statements of NPC
for the 52-week period ended March 27, 1998.
On November 6, 1998, we filed a current report on Form 8-K to report its
third quarter results for the quarter ending September 30, 1998. The Company
also reported the execution of certain amendments to its credit facilities.
On November 16, 1998, we filed a current report on Form 8-K to file the
unaudited pro forma financial statements of the Company giving effect to the
acquisition of NPC for the year ended December 31, 1997 and the nine months
ended September 30, 1998.
On November 24, 1998, we filed a current report on Form 8-K announcing the
execution of a definitive agreement to sell the Company's consumer software
division for $800 million in cash plus potential future cash payments of up to
approximately $200 million.
On December 4, 1998, we filed a current report on Form 8-K to file certain
required opinions and consents in connection with the sale of the Company's
7 1/2% Notes due 2000 and its 7 3/4% Notes due 2003.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENDANT CORPORATION
By: /S/ James E. Buckman
-----------------------------------
James E. Buckman
Vice Chairman and General Counsel
Date: March 29, 1999
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
- -----------
/s/ Henry R. Silverman Chairman of the Board, President, March 29, 1999
- ------------------------- Chief Executive Officer and
(Henry R. Silverman) Director
/s/ James E. Buckman Vice Chairman, General Counsel March 29, 1999
- ------------------------- and Director
(James E. Buckman)
/s/ Stephen P. Homes Vice Chairman and Director March 29, 1999
- -------------------------
(Stephen P. Holmes)
/s/ Robert D. Kunisch Vice Chairman and Director March 29, 1999
- -------------------------
(Robert D. Kunisch)
/s/ Michael P. Monaco Vice Chairman and Director March 29, 1999
- -------------------------
(Michael P. Monaco)
/s/ David M. Johnson Senior Executive Vice President March 29, 1999
- ------------------------- and Chief Financial Officer
(David M. Johnson) (Principal Financial Officer)
/s/ Tobia Ippolito Senior Vice President and Corporate March 29, 1999
- ------------------------- Controller (Principal Accounting
Officer)
Director March 29, 1999
- -------------------------
(John D. Snodgrass)
/s/ Leonard S. Coleman Director March 29, 1999
- -------------------------
(Leonard S. Coleman)
Director March 29, 1999
- -------------------------
(Martin L. Edelman)
69
SIGNATURE TITLE DATE
- ------------------------------ ---------- ---------------
/s/ Carole G. Hankin Director March 29, 1999
- -------------------------
Dr. Carole G. Hankin)
/s/ Brian Mulroney Director March 29, 1999
- -------------------------
(The Rt. Hon. Brian Mulroney,
P.C., LL.D)
/s/ Robert W. Pittman Director March 29, 1999
- -------------------------
(Robert W. Pittman)
/s/ E. John Rosenwald, Jr. Director March 29, 1999
- -------------------------
(E. John Rosenwald, Jr.)
/s/ (Robert P. Rittereiser Director March 29, 1999
- -------------------------
(Robert P. Rittereiser)
/s/ Leonard Schutzman Director March 29, 1999
- -------------------------
(Leonard Schutzman)
/s/ Robert F. Smith Director March 29, 1999
- -------------------------
(Robert F. Smith)
/s/ Craig R. Stapleton Director March 29, 1999
- -------------------------
(Craig R. Stapleton)
/s/ Robert E. Nederlander Director March 29, 1999
- -------------------------
(Robert E. Nederlander)
70
EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated March 23, 1998 among the Company, Season
Acquisition Corp. and American Bankers Insurance Group, Inc. (incorporated by
reference to Exhibit C2 to the Schedule 14D-1 (Amendment 31), dated March 23, 1998,
filed by the Company and Season Acquisition Corp.)*
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4.1 to the Company's PostEffective Amendment No. 2 on Form S-8
to the Registration Statement on Form S-4, No. 333-34517, dated December 17, 1997)*
3.2 Amended and Restated ByLaws of the Company (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K dated August 4, 1998)*
4.1 Form of Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement,
No. 33-44453, on Form S-4 dated December 19, 1991)*
4.2 Indenture dated as of February 11, 1997, between CUC International Inc. and Marine
Midland Bank, as trustee (filed as Exhibit 4(a) to the Company's Report on Form 8-K
filed February 13, 1997)*
4.3 Indenture between HFS Incorporated and Continental Bank, National Association, as
trustee (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-71736), Exhibit No. 4.1)*
4.4 Indenture dated as of February 28, 1996 between HFS Incorporated and First Trust of
Illinois, National Association, as trustee (Incorporated by reference to HFS
Incorporated's Current Report on Form 8-K dated March 8, 1996, Exhibit 4.01)*
4.5 Supplemental Indenture No. 1 dated as of February 28, 1996 between HFS Incorporated
and First Trust of Illinois, National Association, as trustee (Incorporated by reference to
HFS Incorporated's Current Report on Form 8-K dated March 8, 1996, Exhibit 4.02)*
4.6 Indenture, dated as of February 24, 1998, between the Company and The Bank of 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)*
10.1-10.38 Material Contracts, Management Contracts, Compensatory Plans and Arrangements
71
EXHIBIT NO. DESCRIPTION
- ---------------- ----------------------------------------------------------------------------------------
10.1 (a) Agreement with Henry R. Silverman, dated June 30, 1996 and as amended through
December 17, 1997 (filed as Exhibit 10.6 to the Company's Registration Statement on
Form S-4, Registration No. 333-34571)*
10.1 (b) Amendment to Agreement with Henry R. Silverman, dated December 31, 1998.
10.2 (a) Agreement with Stephen P. Holmes, dated September 12, 1997 (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.2 (b) Amendment to Agreement with Stephen P. Holmes, dated January 11, 1999.
10.3 (a) Agreement with Michael P. Monaco, dated September 12, 1997 (filed as Exhibit 10.8 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.3 (b) Amendment to Agreement with Michael Monaco, dated December 23, 1998.
10.4 (a) Agreement with James E. Buckman, dated September 12, 1997 (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-4, Registration No. 333-34571)*
10.4 (b) Amendment to Agreement with James E. Buckman, dated January 11, 1999.
10.5 1987 Stock Option Plan, as amended (filed as Exhibit 10.16 to the Company's Form 10-Q
for the period ended October 31, 1996)*
10.6 1990 Directors Stock Option Plan, as amended (filed as Exhibit 10.17 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.7 1992 Directors Stock Option Plan, as amended (filed as Exhibit 10.18 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.8 1994 Directors Stock Option Plan, as amended (filed as Exhibit 10.19 to the Company's
Form 10-Q for the period ended October 31, 1996)*
10.9 1997 Stock Option Plan (filed as Exhibit 10.23 to the Company's Form 10-Q for the
period ended April 30, 1997)*
10.10 1997 Stock Incentive Plan (filed as Appendix E to the Joint Proxy Statement/ Prospectus
included as part of the Company's Registration Statement, No. 333-34517, on Form S-4
dated August 28, 1997)*
10.11 HFS Incorporated's Amended and Restated 1993 Stock Option Plan (Incorporated by
reference to HFS Incorporated's Registration Statement on Form S-8 (Registration
No. 33-83956), Exhibit 4.1)*
10.12(a) First Amendment to the Amended and Restated 1993 Stock Option Plan dated May 5,
1995. (Incorporated by reference to HFS Incorporated's Registration Statement on Form
S-8 (Registration No. 33-094756), Exhibit 4.1)*
10.12(b) Second Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(b))*
10.12(c) Third Amendment to the Amended and Restated 1993 Stock Option Plan dated
January 22, 1996. (Incorporated by reference to the HFS Incorporated's Annual Report
on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(c))*
10.12(d) Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated
May 20, 1996. (Incorporated by reference to HFS Incorporated's Registration Statement
on Form S-8 (Registration No. 333-06733), Exhibit 4.5)*
72
EXHIBIT NO. DESCRIPTION
- ----------------- ---------------------------------------------------------------------------------------
10.12(e) Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated July 24,
1996 (Incorporated by reference to the HFS Incorporated's Annual Report on Form
10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(f) Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated
September 24, 1996 (Incorporated by reference to the HFS Incorporated's Annual
Report on Form 10-K for fiscal year ended December 31, 1995, Exhibit 10.21(e))*
10.12(g) Seventh Amendment to the Amended and Restated 1993 Stock Option Plan dated as of
April 30, 1997 (Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, Exhibit 10.17(g))*
10.12(h) Eighth Amendment to the Amended and Restated 1993 Stock Option Plan dated as of
May 27, 1997 (Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, Exhibit 10.17(h))*
10.13 HFS Incorporated's 1992 Incentive Stock Option Plan and Form of Stock Option
Agreement. (Incorporated by reference to HFS Incorporated's Registration Statement on
Form S-1 (Registration No. 33-51422), Exhibit No. 10.6)*
10.14 Cendant Corporation 1992 Employee Stock Plan (Incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8 dated January 29, 1998
(Registration No. 333-45183))*
10.15 Cendant Corporation Deferred Compensation Plan
10.16 Agreement and Plan of Merger, by and among HFS Incorporated, HJ Acquisition Corp.
and Jackson Hewitt, Inc., dated as of November 19, 1997. (Incorporated by reference to
Exhibit 10.1 to HFS Incorporated's Current Report on Form 8-K dated August 14, 1997,
File No. 111402)*
10.17 Form of Underwriting Agreement for Debt Securities (Incorporated by reference to
Exhibit 1.1 to the Company's Registration Statement on Form S-3, Registration
No. 333-45227)*
10.18 Underwriting Agreement dated February 24, 1998 among the Company, Cendant Capital
I, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Chase
Securities Inc. (Incorporated by reference to the Company's Form 8-K dated March 6,
1998, Exhibit 1.1)*
10.19 Registration Rights Agreement dated as of February 11, 1997, between CUC
International Inc. and Goldman, Sachs & Co. (for itself and on behalf of the other
purchasers party thereto)(filed as Exhibit 4(b) to the Company's Report on Form 8-K
filed February 13, 1997)*
10.20 Agreement and Plan of Merger between CUC International Inc. and HFS Incorporated,
dated as of May 27, 1997 (filed as Exhibit 2.1 to the Company's Report on Form 8-K
filed on May 29, 1997)*
10.21(a) $750,000,000 Five Year Revolving Credit and Competitive Advance Facility Agreement,
dated as of October 2, 1996, among the Company, the several banks and other financial
institutions from time to time parties thereto and The Chase Manhattan Bank, as
Administrative Agent and CAF Agent (Incorporated by reference to Exhibit (b)(1) to
the Schedule 14-D1 filed by the Company on January 27, 1998, File No. 531838)*
73
EXHIBIT NO. DESCRIPTION
- ----------------- ----------------------------------------------------------------------------------------
10.21(b) Amendment, dated as of October 30, 1998, to the Five Year Competitive Advance and
Revolving Credit Agreement, dated as of October 2, 1998, by and among the Company,
the general institutions, parties thereto and The Chase Manhattan Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company's Form
8-K dated February 10, 1999)*
10.22(a) $1,250,000 364-Day Revolving Credit and Competitive Advance Facility Agreement,
dated October 2, 1996, as amended and restated through October 30, 1998, among the
Company, the several banks and other financial institutions from time to time parties
thereto, and The Chase Manhattan Bank, as Administrative Agent and as Lead Manager
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated November
5, 1998)*.
10.22(b) Amendment, dated as of February 4, 1999, to the Five-Year Competitive Advance and
Revolving Credit Agreement and the 364-Day Competitive Advance and Revolving
Credit Agreement among the Company, the lenders therein and The Chase Manhattan
Bank, as Administrative Agent (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K dated February 16, 1999)*.
10.23 Distribution Agreement, dated March 5, 1998, among the Company, Bear, Stearns &
Co., Inc., Chase Securities Inc., Lehman Brothers and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to the
Company's Current Report on Form 8-K, dated March 10, 1998)*
10.24(a) 364-Day Credit Agreement Among PHH Corporation, PHH Vehicle Management
Services, Inc., the Lenders, the Chase Manhattan Bank, as Administrative Agent and the
Chase Manhattan Bank of Canada, as Canadian Agent, Dated March 5, 1999.
10.24(b) Five-year Credit Agreement ("PHH Five-year Credit Agreement") among PHH
Corporation, the Lenders, and Chase Manhattan Bank, as Administrative Agent, dated
March 4, 1997 (Incorporated by reference from Exhibit 10.2 to Registration Statement
333-27715)*
10.24(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)*
10.24(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)*
10.24(e) Fourth Amendment, dated as of November 2, 1998, to PHH Five-Year Credit
Agreement.
10.25 Indenture between the Company and Bank of New York, Trustee, dated as of May 1,
1992 (Incorporated by reference from Exhibit 4(a)(iii) to Registration Statement
33-48125)*
10.26 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of March 1, 1993 (Incorporated by reference from Exhibit 4(a)(i) to Registration
Statement 33-59376)*
10.27 Indenture between the Company and First National Bank of Chicago, Trustee, dated as
of June 5, 1997 (Incorporated by reference from Exhibit 4(a) to Registration Statement
333-27715)*
74
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------
10.28 Indenture between the Company and Bank of New York, Trustee dated as of June 5,
1997 (Incorporated by reference from Exhibit 4(a)(11) to Registration Statement
333-27715)*
10.29 Distribution Agreement between the Company and CS First Boston Corporation;
Goldman, Sachs & Co.; Merrill Lynch & Co.; Merrill Lynch, Pierce, Fenner & Smith,
Incorporated; and J.P. Morgan Securities, Inc. dated November 9, 1995 (Incorporated by
reference from Exhibit 1 to Registration Statement 33-63627)*
10.30 Distribution Agreement between the Company and Credit Suisse; First Boston
Corporation; Goldman Sachs & Co. and Merrill Lynch & Co., dated June 5, 1997 filed as
Exhibit 1 to Registration Statement 333-27715*
10.31 Distribution Agreement, dated March 2, 1998, among PHH Corporation, Credit Suisse
First Boston Corporation, Goldman Sachs & Co., Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith, Incorporated and J.P. Morgan Securities, Inc., filed as Exhibit 1
to Form 8-K dated March 3, 1998, File No. 107797*
10.32 Registration Rights Agreement, dated as of November 12, 1996, by and between HFS
Incorporated and Ms. Christel DeHaan (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-3 (Registration No. 333-17371),
Exhibit 2.2)*
10.33 License Agreement dated as of September 18, 1989 amended and restated as of July 15,
1991 between Franchise System Holdings, Inc. and Ramada Franchise Systems, Inc.
(Incorporated by reference to HFS Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.2)*
10.34 Restructuring Agreement dated as of July 15, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc. Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems, Inc.
(Incorporated by reference to HFS Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.3)*
10.35 License Agreement dated as of November 1, 1991 between Franchise Systems Holdings,
Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference to HFS
Incorporated's Registration Statement on Form S-1 (Registration No. 33-51422),
Exhibit No. 10.4)*
10.36 Amendment to License Agreement, Restructuring Agreement and Certain Other
Restructuring Documents dated as of November 1, 1991 by and among New World
Development Co., Ltd., Ramada International Hotels & Resorts, Inc., Ramada Inc.,
Franchise System Holdings, Inc., HFS Incorporated and Ramada Franchise Systems, Inc.
(Incorporated by reference to HFS Incorporated's Registration Statement on Form S-1
(Registration No. 33-51422), Exhibit No. 10.5)*
10.37 Master License Agreement dated July 30, 1997, among HFS Car Rental, Inc., Avis Rent
A Car System, Inc. and Wizard Co. (incorporated by reference to HFS Incorporated
Form 10-Q for the quarter ended June 30, 1997, Exhibit 10.1)*
75
EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------
10.38 Term Loan Agreement, dated as of February 9, 1999, among Cendant Corporation, as
Borrower, the Lenders referred therein, Bank of America NT & SA, as Syndication
Agent, Barclays Bank PLC, The Bank of Nova Scotia, Credit Lyonnais New York
Branch, as CoDocumentation Agents, First Union National Bank, and The Industrial
Bank of Japan, Limited, New York Branch, as Managing Agents, Credit Suisse First
Boston, The Sumitomo Bank, Limited, New York Branch, Banque Paribas, as CoAgents
and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to
Cendant Corporation's Form 8-K dated February 16, 1999 (File No. 110308))*.
12 Statement Re: Computation of Consolidated Ratio to Earnings to Combined Fixed
Charges and Preferred Stock Dividends
16.1 Letter re: change in certifying accountant (Incorporated by reference to the Company's
Form 8-K dated January 27, 1998)*
16.2 Letter re: change in certifying accountant of a significant subsidiary (Incorporated by
reference to the Company's Form 8-K dated May 18, 1998)*
21 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP related to the financial statements of Cendant
Corporation
23.2 Consent of KPMG LLP relating to the financial statements of PHH Corporation
27 Financial data schedule
- ----------
* Incorporated by reference
76
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Reports............................................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and
1996 ................................................................................... F-4
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................. F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998,
1997 and 1996 ........................................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-10
Notes to Consolidated Financial Statements ............................................... F-12
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We did not audit the statements of
income, shareholders' equity, and cash flows of PHH Corporation (a consolidated
subsidiary of Cendant Corporation) for the year ended December 31, 1996 which
statements reflect net income of $87.7 million. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for PHH Corporation, is based
solely on the report 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 report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cendant Corporation and
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 18 to the consolidated financial statements, the Company
is involved in certain litigation related to the discovery of accounting
irregularities in certain former CUC International Inc. business units.
Additionally, as discussed in Note 2, effective January 1, 1997 the Company
changed its method of recognizing revenue and membership solicitation costs for
its individual membership business.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 17, 1999
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated statement of income, shareholder's equity and
cash flows of PHH Corporation and subsidiaries (the "Company") for the year
ended December 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
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, the consolidated financial statements (before restatement and
reclassifications) referred to above present fairly, in all material respects,
the results of operations of PHH Corporation and subsidiaries and their cash
flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Baltimore, Maryland
April 30, 1997
F-3
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
REVENUES
Membership and service fees, net $ 5,080.7 $ 4,083.4 $ 3,147.0
Fleet leasing (net of depreciation and interest costs of
$1,279.4, $1,205.2 and $1,132.4) 88.7 59.5 56.7
Other 114.4 97.1 34.0
--------- --------- ---------
Net revenues 5,283.8 4,240.0 3,237.7
--------- --------- ---------
EXPENSES
Operating 1,869.1 1,322.3 1,183.2
Marketing and reservation 1,158.5 1,031.8 910.8
General and administrative 666.3 636.2 341.0
Depreciation and amortization 322.7 237.7 145.5
Other charges:
Litigation settlement 351.0 -- --
Termination of proposed acquisitions 433.5 -- --
Executive terminations 52.5 -- --
Investigation-related costs 33.4 -- --
Merger-related costs and other unusual charges (credits) (67.2) 704.1 109.4
Financing costs 35.1 -- --
Interest, net 113.9 50.6 14.3
--------- --------- ---------
Total expenses 4,968.8 3,982.7 2,704.2
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY GAIN AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 315.0 257.3 533.5
Provision for income taxes 104.5 191.0 220.2
Minority interest, net of tax 50.6 -- --
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 159.9 66.3 313.3
Income (loss) from discontinued operations, net of tax (25.0) (26.8) 16.7
Gain on sale of discontinued operations, net of tax 404.7 -- --
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 539.6 39.5 330.0
Extraordinary gain, net of tax -- 26.4 --
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 539.6 65.9 330.0
Cumulative effect of accounting change, net of tax -- (283.1) --
--------- --------- ---------
NET INCOME (LOSS) $ 539.6 $ (217.2) $ 330.0
========= ========= =========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 0.19 $ 0.08 $ 0.41
Income (loss) from discontinued operations (0.03) (0.03) 0.03
Gain on sale of discontinued operations 0.48 -- --
Extraordinary gain -- 0.03 --
Cumulative effect of accounting change -- (0.35) --
--------- --------- ---------
NET INCOME (LOSS) $ 0.64 $ (0.27) $ 0.44
========= ========= =========
DILUTED
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 0.18 $ 0.08 $ 0.39
Income (loss) from discontinued operations (0.03) (0.03) 0.02
Gain on sale of discontinued operations 0.46 -- --
Extraordinary gain -- 0.03 --
Cumulative effect of accounting change -- (0.35) --
--------- --------- ---------
NET INCOME (LOSS) $ 0.61 $ (0.27) $ 0.41
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 1,008.7 $ 67.0
Receivables (net of allowance for doubtful accounts of
$123.3 and $61.5) 1,536.4 1,170.7
Deferred membership commission costs 253.0 169.5
Deferred income taxes 466.6 311.9
Other current assets 908.6 641.2
Net assets of discontinued operations 373.6 273.3
---------- ----------
Total current assets 4,546.9 2,633.6
---------- ----------
Property and equipment, net 1,432.8 544.7
Franchise agreements, net 1,363.2 1,079.6
Goodwill, net 3,923.1 2,148.2
Other intangibles, net 757.1 624.3
Other assets 681.5 599.3
---------- ----------
Total assets exclusive of assets under programs 12,704.6 7,629.7
---------- ----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,801.1 3,659.1
Relocation receivables 659.1 775.3
Mortgage loans held for sale 2,416.0 1,636.3
Mortgage servicing rights 635.7 373.0
---------- ----------
7,511.9 6,443.7
---------- ----------
TOTAL ASSETS $ 20,216.5 $ 14,073.4
========== ==========
See accompanying notes to consolidated financial statements.
F-5
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,517.5 $ 1,492.4
Deferred income 1,354.2 1,042.0
---------- ----------
Total current liabilities 2,871.7 2,534.4
---------- ----------
Deferred income 233.9 292.1
Long-term debt 3,362.9 1,246.0
Deferred income taxes 77.2 70.9
Other non-current liabilities 125.3 110.3
---------- ----------
Total liabilities exclusive of liabilities under programs 6,671.0 4,253.7
---------- ----------
Liabilities under management and mortgage programs
Debt 6,896.8 5,602.6
---------- ----------
Deferred income taxes 341.0 295.7
---------- ----------
Mandatorily redeemable preferred securities issued by subsidiary 1,472.1 --
Commitments and contingencies (Note 18)
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 860,551,783 and 838,333,800 shares 8.6 8.4
Additional paid-in capital 3,863.4 3,085.0
Retained earnings 1,480.2 940.6
Accumulated other comprehensive loss (49.4) (38.2)
Treasury stock, at cost, 27,270,708 and 6,545,362 shares (467.2) (74.4)
---------- ----------
Total shareholders' equity 4,835.6 3,921.4
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,216.5 $ 14,073.4
========== ==========
See accompanying notes to consolidated financial statements.
F-6
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY
---------- -------- ------------ ------------- --------------- ------------ --------------
BALANCE, JANUARY 1, 1996 725.2 $ 7.3 $ 1,041.9 $ 905.1 $ (25.1) $ (31.0) $ 1,898.2
COMPREHENSIVE INCOME:
Net income -- -- -- 330.0 -- --
Currency translation
adjustment -- -- -- -- 12.2 --
Net unrealized gain on
marketable securities -- -- -- -- 6.5 --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 348.7
Issuance of common stock 63.3 .6 1,627.9 -- -- -- 1,628.5
Exercise of stock options by
payment of cash and common
stock 14.0 .1 74.6 -- -- (25.5) 49.2
Restricted stock issuance 1.4 -- -- -- -- -- --
Amortization of restricted stock -- -- 2.3 -- -- -- 2.3
Tax benefit from exercise of
stock options -- -- 78.9 -- -- -- 78.9
Cash dividends declared and
other equity distributions -- -- -- (41.3) -- -- (41.3)
Adjustment to reflect change in
fiscal years of pooled entities -- -- (.6) (7.1) -- -- (7.7)
Conversion of convertible notes 3.8 .1 18.0 -- -- -- 18.1
Purchase of common stock -- -- -- -- -- (19.2) (19.2)
----- ------ ---------- ---------- -------- --------- ----------
BALANCE, DECEMBER 31, 1996 807.7 $ 8.1 $ 2,843.0 $ 1,186.7 $ (6.4) $ (75.7) $ 3,955.7
See accompanying notes to consolidated financial statements.
F-7
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
---------- -------- ------------ ------------- --------------- ------------ --------------
BALANCE, JANUARY 1, 1997 807.7 $ 8.1 $ 2,843.0 $ 1,186.7 $ (6.4) $ (75.7) $ 3,955.7
COMPREHENSIVE LOSS:
Net loss -- -- -- (217.2) -- --
Currency translation
adjustment -- -- -- -- (27.6) --
Net unrealized loss on
marketable securities -- -- -- -- (4.2) --
TOTAL COMPREHENSIVE LOSS -- -- -- -- -- -- (249.0)
Issuance of common stock 6.2 -- 46.3 -- -- -- 46.3
Exercise of stock options by
payment of cash and common
stock 11.4 .1 132.8 -- -- (17.8) 115.1
Restricted stock issuance .2 -- -- -- -- -- --
Amortization of restricted stock -- -- 28.5 -- -- -- 28.5
Tax benefit from exercise of
stock options -- -- 93.5 -- -- -- 93.5
Cash dividends declared -- -- -- (6.6) -- -- (6.6)
Adjustment to reflect change in
fiscal year from Cendant
Merger -- -- -- (22.3) -- -- (22.3)
Conversion of convertible notes 20.2 .2 150.9 -- -- -- 151.1
Purchase of common stock -- -- -- -- -- (171.3) (171.3)
Retirement of treasury stock (7.4) -- (190.4) -- -- 190.4 --
Other -- -- (19.6) -- -- -- (19.6)
------ ------ ---------- ---------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997 838.3 $ 8.4 $ 3,085.0 $ 940.6 $ (38.2) $ (74.4) $ 3,921.4
See accompanying notes to consolidated financial statements.
F-8
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK EQUITY
---------- -------- ------------ ------------ --------------- ------------ --------------
BALANCE, JANUARY 1, 1998 838.3 $ 8.4 $ 3,085.0 $ 940.6 $ (38.2) $ (74.4) $ 3,921.4
COMPREHENSIVE INCOME:
Net income -- -- -- 539.6 -- --
Currency translation
adjustment -- -- -- -- (11.2) --
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 528.4
Exercise of stock options by
payment of cash and common
stock 16.4 .1 168.4 -- -- (.2) 168.3
Amortization of restricted stock -- -- .7 -- -- -- .7
Tax benefit from exercise of
stock options -- -- 147.3 -- -- -- 147.3
Conversion of convertible notes 5.9 .1 113.7 -- -- -- 113.8
Purchase of common stock -- -- -- -- -- (257.7) (257.7)
Mandatorily redeemable
preferred securities issued by
subsidiary -- -- (65.7) -- -- -- (65.7)
Common stock received as
consideration in sale
of discontinued
operations -- -- -- -- -- (134.9) (134.9)
Rights issuable -- -- 350.0 -- -- -- 350.0
Other -- -- 64.0 -- -- -- 64.0
----- ------ ---------- --------- ------- -------- ----------
BALANCE, DECEMBER 31, 1998 860.6 $ 8.6 $ 3,863.4 $ 1,480.2 $ (49.4) $ (467.2) $ 4,835.6
===== ====== ========== ========= ======= ======== ==========
See accompanying notes to consolidated financial statements.
F-9
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-------------- -------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 539.6 $ (217.2) $ 330.0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities from continuing
operations:
(Income) loss from discontinued operations, net of tax 25.0 26.8 (16.7)
Gain on sale of discontinued operations, net of tax (404.7) -- --
Non cash charges:
Litigation settlement 351.0 -- --
Extraordinary gain on sale of subsidiary, net of tax -- (26.4) --
Cumulative effect of accounting change, net of tax -- 283.1 --
Asset impairments and termination benefits 62.5 -- --
Merger-related costs and other unusual charges
(credits) (67.2) 704.1 109.4
Payments of merger-related costs and other unusual
charge liabilities (158.2) (317.7) (61.3)
Depreciation and amortization 322.7 237.7 145.5
Membership acquisition costs -- -- (512.1)
Amortization of membership costs -- -- 492.3
Proceeds from sales of trading securities 136.1 -- --
Purchases of trading securities (181.6) -- --
Deferred income taxes (110.8) (23.8) 68.8
Net change in assets and liabilities from continuing
operations:
Receivables (126.0) (95.6) (122.1)
Deferred membership commission costs (86.8) -- --
Income taxes receivable (97.9) (84.0) (18.3)
Accounts payable and other current liabilities 95.9 (87.0) 14.3
Deferred income 82.3 134.0 43.9
Other, net (54.1) (54.9) 103.4
--------- ---------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS 327.8 479.1 577.1
--------- ---------- ---------
Management and mortgage programs:
Depreciation and amortization 1,259.9 1,121.9 1,021.8
Origination of mortgage loans (26,571.6) (12,216.5) (8,292.6)
Proceeds on sale and payments from mortgage loans
held for sale 25,791.9 11,828.5 8,219.3
--------- ---------- ---------
480.2 733.9 948.5
--------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
OPERATIONS 808.0 1,213.0 1,525.6
--------- ---------- ---------
INVESTING ACTIVITIES
Property and equipment additions (355.2) (154.5) (101.2)
Proceeds from sales of marketable securities -- 506.1 72.4
Purchases of marketable securities -- (458.1) (125.6)
Investments (24.4) (272.5) (12.7)
Net assets acquired (net of cash acquired) and
acquisition-related payments (2,852.0) (568.2) (1,608.6)
Net proceeds from sale of subsidiary 314.8 224.0 --
Other, net 106.5 (108.7) (56.2)
--------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS $(2,810.3) $ (831.9) $(1,831.9)
--------- ---------- ---------
See accompanying notes to consolidated financial statements.
F-10
CENDANT CORPORATIONAND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Management and mortgage programs:
Investment in leases and leased vehicles $ (2,446.6) $ (2,068.8) $ (1,901.2)
Payments received on investment in leases and leased
vehicles 987.0 589.0 595.9
Proceeds from sales and transfers of leases and leased
vehicles to third parties 182.7 186.4 162.8
Equity advances on homes under management (6,484.1) (6,844.5) (4,308.0)
Repayment on advances on homes under
management 6,624.9 6,862.6 4,348.9
Additions to mortgage servicing rights (524.4) (270.4) (164.4)
Proceeds from sales of mortgage servicing rights 119.0 49.0 7.1
----------- ---------- ----------
(1,541.5) (1,496.7) (1,258.9)
----------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS (4,351.8) (2,328.6) (3,090.8)
----------- ---------- ----------
Financing Activities
Proceeds from borrowings 4,808.3 66.7 459.1
Principal payments on borrowings (2,595.9) (174.0) (3.5)
Issuance of convertible debt -- 543.2 --
Issuance of common stock 171.0 132.2 1,223.8
Purchases of common stock (257.7) (171.3) (19.2)
Proceeds from mandatorily redeemable preferred
securities issued by subsidiary, net 1,446.7 -- --
Other, net -- (6.6) (121.3)
----------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE
PROGRAMS 3,572.4 390.2 1,538.9
----------- ---------- ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 4,300.0 2,816.3 1,656.0
Principal payments on borrowings (3,089.7) (1,692.9) (1,645.9)
Net change in short-term borrowings (93.1) (613.5) 231.8
----------- ---------- ----------
1,117.2 509.9 241.9
----------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS 4,689.6 900.1 1,780.8
----------- ---------- ----------
Effect of changes in exchange rates on cash and cash
equivalents (16.4) 15.4 (46.2)
Cash provided by (used in) discontinued operations (187.7) (181.0) 53.6
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 941.7 (381.1) 223.0
Cash and cash equivalents, beginning of period 67.0 448.1 225.1
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,008.7 $ 67.0 448.1
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 623.6 $ 374.9 $ 291.7
Income tax payments, net (23.0) 264.5 89.4
See accompanying notes to consolidated financial statements.
F-11
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
Cendant Corporation, together with its subsidiaries (the "Company"), is one
of the foremost consumer and business services companies in the world. The
Company was created through the merger (the "Cendant Merger") of HFS
Incorporated ("HFS") and CUC International Inc. ("CUC") in December 1997,
which was accounted for as a pooling of interests. Prior to the Cendant
Merger, both HFS and CUC had grown significantly through mergers and
acquisitions accounted for under both the pooling of interests method (the
most significant being the merger of HFS with PHH Corporation ("PHH") in
April 1997 (the "PHH Merger")) and purchase method of accounting (See Note
4). The accompanying consolidated financial statements and notes hereto are
presented as if all mergers and acquisitions accounted for as poolings of
interests have operated as one entity since inception.
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 subsidiaries.
All 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.
MARKETABLE SECURITIES
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such determination as
of each balance sheet date. Marketable securities classified as available
for sale are carried at fair value with unrealized gains and losses
included in the determination of comprehensive income and reported as a
component of shareholders' equity. Marketable securities classified as
trading securities are reported at fair value with unrealized gains and
losses recognized in earnings. Securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities. During 1998, unrealized holding gains on trading
securities of approximately $16.0 million were included in other revenue in
the consolidated statements of operations. Marketable securities consist
principally of mutual funds, corporate bonds and other debt securities. The
cost of marketable securities sold is determined on the specific
identification method.
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. Amortization of leasehold
improvements is computed by the straight-line method over the estimated
useful lives of the related assets or the lease term, if shorter.
FRANCHISE AGREEMENTS
Franchise agreements are recorded at their acquired fair values and are
amortized on a straight-line basis over the estimated periods to be
benefited, ranging from 12 to 40 years. At December 31, 1998 and 1997,
accumulated amortization amounted to $169.1 million and $126.4 million,
respectively.
F-12
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired, is amortized on a straight-line basis over the estimated useful
lives, substantially ranging from 25 to 40 years. At December 31, 1998 and
1997, accumulated amortization amounted to $248.3 million and $177.2
million, respectively.
ASSET IMPAIRMENTS
The Company periodically evaluates the recoverability of its investments,
intangible assets and long-lived assets, comparing the respective carrying
values to the current and expected future cash flows, on an undiscounted
basis, to be generated from such assets. Property and equipment is
evaluated separately within each business. The recoverability of goodwill
and franchise agreements are evaluated on a separate basis for each
acquisition and franchise brand, respectively.
Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes, the Company determined that $37.0
million of goodwill associated with a Company subsidiary, National Library
of Poetry, was permanently impaired. In addition, the Company had equity
investments in interactive businesses, which were generating negative cash
flows and were unable to access sufficient liquidity through equity or debt
offerings. As a result, the Company wrote off $13.0 million of such
investments. The aforementioned impairments impacted the Company's Other
services segment and are classified as operating expenses in the
consolidated statements of operations.
REVENUE RECOGNITION AND BUSINESS OPERATIONS
Franchising. Franchise revenue principally consists of royalties as well as
marketing and reservation fees, which are based on a percentage of
franchisee revenue. Royalty, marketing and reservation fees are accrued as
the underlying franchisee revenue is earned. Franchise revenue also
includes initial franchise fees, which are recognized as revenue when all
material services or conditions relating to the sale have been
substantially performed which is generally when a franchised unit is
opened.
Timeshare. Timeshare revenue principally consists of exchange fees and
subscription revenue. Exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscriber. Subscription
revenue, net of related procurement costs, is deferred upon receipt and
recognized as revenue over the subscription period during which delivery of
publications and other services are provided to subscribers.
Individual Membership. Membership revenue is generally recognized upon the
expiration of the membership period. Memberships are generally cancelable
for a full refund of the membership fee during the entire membership
period, generally one year.
In August 1998, the Securities and Exchange Commission ("SEC") requested
that the Company change its accounting policies with respect to revenue and
expense recognition for its membership businesses, effective January 1,
1997. Although the Company believed that its accounting for memberships had
been appropriate and consistent with industry practice, the Company
complied with the SEC's request and adopted new accounting policies for its
membership businesses.
Prior to such adoption, the Company recorded deferred membership income,
net of estimated cancellations, at the time members were billed (upon
expiration of the free trial period), which was recognized as revenue
ratably over the membership term and modified periodically based on actual
cancellation experience. In addition, membership acquisition and renewal
costs, which related primarily to membership solicitations were capitalized
as direct response advertising costs due to the Company's ability to
demonstrate that the direct response advertising resulted in future
economic benefits. Such costs were amortized on a straight-line basis as
revenues were recognized (over the average membership period).
The SEC's conclusion was that when membership fees are fully refundable
during the entire membership period, membership revenue should be
recognized at the end of the membership period upon the expiration of the
refund offer. The SEC further concluded that non-refundable solicitation
costs should be expensed as incurred since such costs are not recoverable
if membership fees are
F-13
refunded. The Company agreed to adopt such accounting policies effective
January 1, 1997 and accordingly, recorded a non-cash after-tax charge on
such date of $283.1 million to account for the cumulative effect of the
accounting change.
Insurance/Wholesale. Commissions received from the sale of third party
accidental death and dismemberment insurance are recognized over the
underlying policy period. The Company also receives a profit commission
based on premiums less claims and certain other expenses (including the
above commissions). Such profit commissions are accrued based on claims
experience to date, including an estimate of claims incurred but not
reported.
Relocation. Relocation services provided by the Company include
facilitating the purchase and resale of the transferee's residence,
providing equity advances on the transferee's residence and home management
services. The home is purchased under a contract of sale and the Company
obtains a deed to the property; however, it does not generally record the
deed or transfer title. Transferring employees are provided equity advances
on their home based on an appraised value generally 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. In certain transactions, the Company will assume the risk of
loss on the sale of homes; however, in such transactions, the Company will
control all facets of the resale process, thereby, limiting its exposure.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate 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 corporation. The client corporation 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.
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 client
corporations, 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 and
destination services. 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.
Fleet. The Company primarily leases its vehicles under three standard
arrangements: open-end operating leases, closed-end operating leases or
open-end finance leases (direct financing leases). See Note 10 -- Net
Investment in Leases and Leased Vehicles. Each lease is either classified
as an operating lease or direct financing lease, as defined. Lease revenues
are recognized based on rentals. Revenues from fleet management services
other than leasing are recognized over the period in which 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
are deferred until such loans are sold. Mortgage loans are recorded at the
lower of cost or market value on an aggregate basis. Sales of mortgage
loans are generally recorded on the date a loan is delivered to an
investor. Gains or losses on sales of mortgage loans are recognized based
upon the difference between the selling price and the carrying value of the
related mortgage loans sold. See Note 11 -- Mortgage Loans Held For Sale.
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.
F-14
The Company recognizes as separate assets the rights to service mortgage
loans for others by allocating total costs incurred between the loan and
the servicing rights retained based on their relative fair values. The
carrying value of mortgage servicing rights ("MSRs") is amortized over the
estimated life of the related loan portfolio in proportion to projected net
servicing revenues. Such amortization is recorded as a reduction of loan
servicing fees in the consolidated statements of operations. Projected net
servicing income is in turn determined on the basis of the estimated future
balance of the underlying mortgage loan portfolio, which declines over time
from prepayments and scheduled loan amortization. The Company estimates
future prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types, interest
rate stratification and recent prepayment experience. MSRs are periodically
assessed for impairment, which is recognized in the consolidated statements
of operations during the period in which impairment occurs as an adjustment
to the corresponding valuation allowance. Gains or losses on the sale of
MSRs are recognized when title and all risks and rewards have irrevocably
passed to the buyer and there are no significant unresolved contingencies.
See Note 12 -- Mortgage Servicing Rights.
Entertainment Publications. Product revenue primarily represents the sale
of coupon books, gift wrap and other products to schools, community groups
and other organizations. Under the terms of typical sales arrangements,
coupon books are given on consignment and, if unsold, may be returned for
full credit against the purchase price. Revenue is recognized when the
consignee generates a sale to the ultimate consumer. Gift wrap and other
product revenue is recognized on the accrual basis. Customized books are
sold on a specific order basis. Revenues are recognized on such orders at
the time the Company fulfills its obligations under the terms of the
customer purchase order.
ADVERTISING EXPENSES
Advertising costs, including direct response advertising (subsequent to
January 1, 1997), are generally expensed in the period incurred.
Advertising expenses for the years ended December 31, 1998, 1997 and 1996
were $684.7 million, $574.4 million and $503.8 million, respectively.
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 $312.3 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1998 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 in effect 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
comprehensive income (loss) in the consolidated statements of shareholders'
equity.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities". The Company will adopt
SFAS No. 133 effective January 1, 2000. SFAS No. 133 requires the Company
to record all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. If the derivative does not
qualify as a hedging instrument, the change in the derivative fair values
will be immediately recognized as a gain or loss in earnings. If the
derivative does qualify as a hedging instrument, the gain or loss on the
change in the derivative fair values will
F-15
either be recognized (i) in earnings as offsets to the changes in the fair
value of the related item being hedged or (ii) be deferred and recorded as
a component of other comprehensive income and reclassified to earnings in
the same period during which the hedged transactions occur. The Company has
not yet determined what impact the adoption of SFAS No. 133 will have on
its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements to conform to the presentation used in 1998.
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed based solely on the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects all potential dilution of common stock, including the assumed
exercise of stock options using the treasury method and convertible debt.
At December 31, 1998, 38.0 million stock options outstanding with a
weighted average exercise price of $29.58 per option were excluded from the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the Company's common stock. In
addition, at December 31, 1998, the Company's 3% Convertible Subordinated
Notes, convertible into 18.0 million shares of Company common stock were
antidilutitive and, therefore, excluded from the computation of diluted
EPS. Basic and diluted EPS from continuing operations is calculated as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
(In millions, except per share amounts) ----------- ---------- -----------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 159.9 $ 66.3 $ 313.3
Convertible debt interest -- net of tax -- -- 5.8
------- ------ ------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change, as
adjusted $ 159.9 $ 66.3 $ 319.1
======= ====== =======
Weighted average shares
Basic 848.4 811.2 757.4
Potential dilution of common stock:
Stock options 32.0 40.5 40.1
Convertible debt -- -- 24.1
------- ------ -------
Diluted 880.4 851.7 821.6
======= ====== =======
EPS -- continuing operations before extraordinary gain
and cumulative effect of accounting change
Basic $ .19 $ .08 $ .41
======= ====== =======
Diluted $ .18 $ .08 $ .39
======= ====== =======
4. PURCHASE METHOD 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 excess of purchase price
over the fair value of the underlying net assets acquired is allocated to
goodwill. The operating results of such acquired companies are included in
the Company's consolidated statements of operations since the respective
dates of acquisition.
The following tables present information about the Company's acquisitions
consummated and other acquisition-related payments made during each of the
years in the three year period ended December 31, 1998.
F-16
1998
-------------------------------------------------------
JACKSON
NPC HARPUR HEWITT OTHER
(In millions) ------------- ----------- ----------- -----------
Cash paid $ 1,637.7 $ 206.1 $ 476.3 $ 563.9
Fair value of identifiable net assets acquired (1) 590.2 51.3 99.2 218.4
---------- -------- -------- -------
Goodwill $ 1,047.5 $ 154.8 $ 377.1 $ 345.5
========== ======== ======== =======
Goodwill benefit period (years) 40 40 40 25 to 40
========== ======== ======== =========
1996
-----------------------------------------------------
COLDWELL
1997 RCI AVIS BANKER OTHER
(In millions) ----------- ----------- ----------- ----------- -----------
Cash paid $ 267.9 $ 412.1 $ 367.2 $ 745.0 $ 224.0
Common stock issued 21.6 75.0 338.4 -- 52.5
Notes issued -- 100.9 -- 5.0
-------- -------- -------- -------
Total consideration 289.5 487.1 806.5 745.0 281.5
Fair value of identifiable net assets
acquired (1) 116.9 9.4 472.5 393.2 42.8
------- -------- -------- -------- -------
Goodwill $ 172.6 $ 477.7 $ 334.0 $ 351.8 $ 238.7
======= ======== ======== ======== =======
Goodwill benefit period (years) 25 to 40 40 40 40 25 to 40
========= ======== ======== ======== =========
Number of shares issued as
consideration 0.9 2.4 11.1 -- 2.5
======= ======== ======== ======== =======
- ----------
(1) Cash acquired in connection with acquisitions during 1998, 1997 and 1996
was $57.6 million, $2.6 million, and $135.0 million, respectively.
1998 ACQUISITIONS
National Parking Corporation. On April 27, 1998, the Company completed
the acquisition of National Parking Corporation Limited ("NPC") for $1.6
billion, substantially in cash, which included the repayment of
approximately $227.0 million of outstanding NPC debt. NPC was substantially
comprised of two operating subsidiaries: National Car Parks and Green Flag.
National Car Parks is the largest private (non-municipal) car park operator
in the United Kingdom ("UK") and Green Flag operates the third largest
roadside assistance group in the UK and offers a wide-range of emergency
support and rescue services.
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 UK, for approximately $206.1 million in cash plus
contingent payments of up to $20.0 million over two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $476.3 million
in cash. Jackson Hewitt operates the second largest tax preparation service
franchise system in the United States. The Jackson Hewitt franchise system
specializes in computerized preparation of federal and state individual
income tax returns.
Other 1998 Acquisitions and Acquisition-Related Payments. The Company
acquired certain other entities for an aggregate purchase price of
approximately $463.9 million in cash during the year ended December 31,
1998. Additionally, the Company made a $100.0 million cash payment to the
seller of Resort Condominiums International, Inc. ("RCI") in satisfaction
of a contingent purchase liability, which was accounted for as additional
goodwill.
PRO FORMA INFORMATION (UNAUDITED)
The following table reflects the operating results of the Company for the
years ended December 31, 1998 and 1997 on a pro forma basis, which gives
effect to the acquisition of NPC. The remaining acquisitions completed
during 1998 and 1997 are not significant on a pro forma basis and are
therefore
F-17
not included. The pro forma results are not necessarily indicative of the
operating results that would have occurred had the NPC acquisition been
consummated on January 1, 1997, nor are they intended to be indicative of
results that may occur in the future. The underlying pro forma information
includes the amortization expense associated with the assets acquired, the
Company's financing arrangements, certain purchase accounting adjustments
and related income tax effects.
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997
(In millions, except per share amounts) ------------- ------------------
Net revenues $ 5,485.3 $ 4,837.4
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change 157.3 57.7
Net income (loss) (1) 537.0 (225.8)(2)
Per share information:
Basic
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change $ 0.19 $ 0.07
Net income (loss) (1) $ 0.63 $ (0.28)
Weighted average shares 848.4 811.2
Diluted
Income from continuing operations before extraordinary gain
and cumulative effect of accounting change $ 0.18 $ 0.07
Net income (loss) (1) $ 0.61 $ (0.28)
Weighted average shares 880.4 851.7
- ----------
(1) Includes gain on sale of discontinued operations, net of tax, of $404.7
million ($0.46 per diluted share) in 1998 and loss from discontinued
operations, net of tax, of $25.0 million ($0.03 per diluted share) and
$26.8 million ($0.03 per diluted share), in 1998 and 1997, respectively.
(2) Includes an extraordinary gain, net of tax, of $26.4 million ($0.03 per
diluted share) and a cumulative effect charge for a change in
accounting, net of tax, of $283.1 million ($0.35 per diluted share).
1996 ACQUISITIONS
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of RCI for
$487.1 million. The purchase agreement provided 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.
Avis, Inc. 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 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 the subsequent sale of such Company common stock. See Note 23
-- Related Party Transactions-Avis-for a discussion of the Company's
executed business plan 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.
F-18
5. DISCONTINUED OPERATIONS
On August 12, 1998, the Company announced that the Executive Committee of
its Board of Directors committed to discontinue the Company's classified
advertising and consumer software businesses by disposing of Hebdo Mag
International, Inc. ("Hebdo Mag") and Cendant Software Corporation ("CDS"),
two wholly owned subsidiaries of the Company. Hebdo Mag is a publisher and
distributor of classified advertising information and CDS is a developer,
publisher and distributor of educational and entertainment software.
On December 15, 1998, the Company completed the sale of Hebdo Mag to its
former 50% owners for $449.7 million. The Company received $314.8 million
in cash and 7.1 million shares of Company common stock valued at $134.9
million on the date of sale. The Company recognized a gain on the sale of
Hebdo Mag of $206.9 million, including a tax benefit of $52.1 million,
which is included in the gain on sale of discontinued operations in the
consolidated statements of operations.
On January 12, 1999, the Company completed the sale of CDS for $800.0
million in cash plus potential future contingent cash payments pursuant to
the contract. The Company estimates it will realize a gain of approximately
$380.0 million based upon the finalization of the closing balance sheet at
the sale date. The Company recognized $197.8 million of such gain in 1998
substantially in the form of a tax benefit and corresponding deferred tax
asset. The Company recognized this deferred tax asset upon executing the
definitive agreement to sell CDS, which was when it became apparent to the
Company that the deferred tax asset would be realized. The recognized gain
is included in the gain on sale of discontinued operations in the
consolidated statements of operations.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
CONSUMER SOFTWARE
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
(In millions) ----------- ----------- -----------
Net revenues $ 345.8 $ 433.7 $ 384.5
------- ------- --------
Income (loss) before income taxes (57.3) (5.9) 42.0
Provision for (benefit from) income taxes (22.9) 2.4 27.3
Net income (loss) $ (34.4) $ (8.3) $ 14.7
======== ======== ========
CLASSIFIED ADVERTISING
---------------------------------------
YEAR ENDED DECEMBER 31,
(In millions) ---------------------------------------
1998 1997 1996
----------- ----------- -----------
Net revenues $ 202.4 $ 208.5 $ 126.4
-------- ------- --------
Income (loss) before income taxes and extraordinary loss 16.9 (4.5) 3.7
Provision for (benefit from) income taxes 7.5 (1.2) 1.7
Extraordinary loss from early extinguishment of debt, net
of a $4.9 million tax benefit -- (15.2) --
-------- ------- --------
Net income (loss) $ 9.4 $ (18.5) $ 2.0
======== ======== ========
The Company allocated $19.9 million and $5.0 million of interest expense to
discontinued operations for the years ended December 31, 1998 and 1997,
respectively. Such interest expense represents the cost of funds associated
with businesses acquired by the discontinued business segments at an
interest rate consistent with the Company's consolidated effective
borrowing rate.
F-19
BALANCE SHEET DATA:
CLASSIFIED
CONSUMER SOFTWARE ADVERTISING
------------------------- ------------------
DECEMBER 31, DECEMBER 31,
------------------------- ------------------
1998 1997 1997
(In millions) ----------- ----------- ----------
Current assets $ 284.9 $ 209.1 $ 58.6
Goodwill 105.7 42.2 181.5
Other assets 88.2 49.2 33.2
Total liabilities (105.2) (127.0) (173.5)
-------- -------- --------
Net assets of discontinued operations $ 373.6 $ 173.5 $ 99.8
======== ======== ========
6. OTHER CHARGES
LITIGATION SETTLEMENT
On March 17, 1999, the Company reached a final agreement to settle the
class action lawsuit that was brought on behalf of the holders of Income
or Growth FELINE PRIDES ("PRIDES") securities who purchased their
securities on or prior to April 15, 1998, the date on which the Company
announced the discovery of accounting irregularities in the former
business units of CUC (see Note 17 -- Mandatorily Redeemable Trust
Preferred Securities Issued by Subsidiary). We originally announced a
preliminary agreement in principle to settle such lawsuit on January 7,
1999. The final agreement maintained the basic structure and accounting
treatment as the preliminary agreement. Under the terms of the agreement
only holders who owned PRIDES at the close of business on April 15, 1998
will be eligible to receive a new additional "Right" for each PRIDES
security held. Right holders may (i) sell them or (ii) exercise them by
delivering to the Company, three Rights together with two PRIDES in
exchange for two New PRIDES (the "New PRIDES"), for a period beginning
upon distribution of the Rights and concluding upon expiration of the
Rights (February 2001).
The terms of the New PRIDES will be the same as the original PRIDES except
that the conversion rate will be revised so that, at the time the Rights
are distributed, each New PRIDES will have a value equal to $17.57 more
than each original PRIDES, or, in the aggregate, approximately $351.0
million. Accordingly, the Company recorded a non-cash charge of $351.0
million in the fourth quarter of 1998 with an increase in additional
paid-in capital and accrued liabilities of $350.0 million and $1.0 million,
respectively, based on the prospective issuance of the Rights. The
agreement also requires the Company to offer to sell four million
additional PRIDES (having identical terms to currently outstanding PRIDES)
to holders of Rights for cash, at a value which will be based on the
valuation model that was utilized to set the conversion rate of the New
PRIDES. Based on that valuation model, the currently outstanding PRIDES
have a theoretical value of $28.07 based on the closing price of the
Company's common stock of $16.6875 on March 17, 1999. The offering of
additional PRIDES will be made only pursuant to a prospectus filed with the
SEC. The Company currently expect to use the proceeds of such an offering
to repurchase our common stock and for other general corporate purposes.
The arrangement to offer additional PRIDES is designed to enhance the
trading value of the Rights by removing up to six million Rights from
circulation via exchanges associated with the offering and to enhance the
open market liquidity of New PRIDES by creating four million New PRIDES via
exchanges associated with the offering. If holders of Rights do not acquire
all such PRIDES, they will be offered to the public. Under the settlement
agreement, the Company also agreed to file a shelf registration statement
for an additional 15 million PRIDES, which could be issued by the Company
at any time for cash. However, during the last 30 days prior to the
expiration of the Rights in February 2001, the Company will be required to
make these additional PRIDES available to holders of Rights at a price in
cash equal to 105% of the theoretical value of the additional PRIDES as of
a specified date. The PRIDES, if issued, would have the same terms as the
currently outstanding PRIDES and could be used to exercise Rights. Based on
a market price of $16.6875, the closing price per share of the Company's
common stock on March 17, 1999, the effect of the issuance of the New
PRIDES will be to distribute approximately 19 million more shares of
Company common stock when the mandatory purchase of Company common stock
associated with the PRIDES occurs
F-20
in February 2001. This represents approximately 2% more shares of Company
common stock than are currently outstanding. The Rights will be distributed
following final court approval of the settlement and after the
effectiveness of the registration statement filed with the SEC covering the
New PRIDES. It is presently expected that if the court approves the
settlement and such conditions are fulfilled, the Rights will be
distributed in August or September 1999. This summary of the settlement
does not constitute an offer to sell any securities, which will only be
made by means of a prospectus after a registration statement is filed with
the SEC. There can be no assurance that the court will approve the
agreement or that the conditions contained in the agreement will be
fulfilled.
TERMINATION OF PROPOSED ACQUISITIONS
On October 13, 1998, the Company and American Bankers Insurance Group, Inc.
("American Bankers") entered into a settlement agreement (the "Settlement
Agreement"), pursuant to which the Company and American Bankers terminated a
definitive agreement dated March 23, 1998 which provided for the Company's
acquisition of American Bankers for $3.1 billion. Accordingly, the Company's
pending tender offer for American Bankers shares was also terminated.
Pursuant to the Settlement Agreement and in connection with termination of
the Company's proposed acquisition of American Bankers, the Company made a
$400.0 million cash payment to American Bankers and wrote off $32.3 million
of costs, primarily professional fees.
On October 5, 1998, the Company announced the termination of an agreement
to acquire, for $219.0 million in cash, Providian Auto and Home Insurance
Company ("Providian"). Certain representations and covenants in such
agreement had not been fulfilled and the conditions to closing had not been
met. The Company did not pursue an extension of the termination date of the
agreement because Providian no longer met the Company's acquisition
criteria. In connection with the termination of the Company's proposed
acquisition of Providian, the Company wrote off $1.2 million of costs.
EXECUTIVE TERMINATIONS
The Company incurred $52.5 million of costs in 1998 related to the
termination of certain former executives of the Company, principally Walter
A. Forbes, who resigned as Chairman of the Company and as a member of the
Board of Directors. The severance agreement reached with Mr. Forbes entitled
him to the benefits required by his employment contract relating to a
termination of Mr. Forbes' employment with the Company for reasons other
than for cause. Aggregate benefits given to Mr. Forbes resulted in a charge
of $50.9 million comprised of $38.4 million in cash payments and 1.3 million
Company stock options, with a Black-Scholes value of $12.5 million. Such
options were immediately vested and expire on July 28, 2008.
INVESTIGATION-RELATED COSTS
The Company incurred $33.4 million of professional fees, public relations
costs and other miscellaneous expenses in connection with accounting
irregularities and resulting investigations into such matters.
FINANCING COSTS
In connection with the Company's discovery and announcement of accounting
irregularities on April 15, 1998 and the corresponding lack of audited
financial statements, the Company was temporarily prohibited from accessing
public debt markets. As a result, the Company paid $27.9 million in fees
associated with waivers and various financing arrangements. Additionally,
during 1998, the Company exercised its option to redeem its 4% Convertible
Senior Notes (the "4 3/4% Notes") (see Note 13 -- Long-Term Debt -- 4 3/4%
Convertible Senior Notes). At such time, the Company anticipated that all
holders of the 4 3/4% Notes would elect to convert the 4 3/4% Notes to
Company common stock. However, at the time of redemption, holders of the 4
3/4% Notes elected not to convert the 4 3/4% Notes to Company common stock
and as a result, the Company redeemed such notes at a premium. Accordingly,
the Company recorded a $7.2 million loss on early extinguishment of debt.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES (CREDITS)
The Company incurred merger-related costs and other unusual charges
("Unusual Charges") in 1997 related to continuing operations of $704.1
million primarily associated with the Cendant Merger (the "Fourth Quarter
1997 Charge") and the PHH Merger (the "Second Quarter 1997 Charge").
Liabilities associated with Unusual Charges are classified as a component of
accounts payable and other current liabilities. The reduction of such
liabilities from inception is summarized by category of expenditure and by
charge as follows:
F-21
1998 ACTIVITY
NET 1997 BALANCE AT ----------------------------------- BALANCE AT
UNUSUAL 1997 DECEMBER 31, CASH NON DECEMBER 31,
CHARGES REDUCTIONS 1997 PAYMENTS CASH ADJUSTMENTS 1998
(In millions) ---------- ------------ -------------- ------------ -------- ------------- -------------
Professional fees $ 123.3 $ (72.6) $ 50.7 $ (38.2) $ -- $ (10.9) $ 1.6
Personnel related 324.8 (156.3) 168.5 (75.3) -- (23.0) 70.2
Business terminations 133.9 (130.0) 3.9 (1.2) 6.1 (7.1) 1.7
Facility related and
other 156.0 (105.6) 50.4 (15.7) 2.1 (26.7) 10.1
-------- -------- ------- ---------- ---- ------- ------
Total Unusual Charges $ 738.0 $ (464.5) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
Reclassification for
discontinued
operations (33.9) 33.9 -- -- -- -- --
-------- -------- ------- ---------- ----- ------- ------
Total Unusual Charges
related to continuing
operations $ 704.1 $ 430.6 $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
======== ======== ======= ========== ===== ======= ======
1998 ACTIVITY
NET 1997 BALANCE AT ------------------------------------- BALANCE AT
UNUSUAL 1997 DECEMBER 31, CASH NON DECEMBER 31,
CHARGES REDUCTIONS 1997 PAYMENTS CASH ADJUSTMENTS 1998
(In millions) ---------- ------------ -------------- ------------- --------- ------------- -------------
Fourth Quarter 1997
Charge $ 454.9 $ (257.5) $ 197.4 $ (102.6) $ 0.5 $ (28.1) $ 67.2
Second Quarter 1997
Charge 283.1 (207.0) 76.1 (27.8) 7.7 (39.6) 16.4
-------- ---------- -------- ---------- ------ ------- -------
Total Unusual Charges $ 738.0 $ (464.5) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
Reclassification for
discontinued
operations (33.9) 33.9 -- -- -- -- --
-------- ---------- -------- ---------- ------ ------- -------
Total Unusual Charges
related to continuing
operations $ 704.1 $ (430.6) $ 273.5 $ (130.4) $ 8.2 $ (67.7) $ 83.6
======== ========== ======== ========== ====== ======= =======
Fourth Quarter 1997 Charge. The Company incurred Unusual Charges in the
fourth quarter of 1997 totaling $454.9 million substantially associated
with the Cendant Merger and the merger in October 1997 with Hebdo Mag.
Reorganization plans were formulated prior to and implemented as a result
of the mergers. The Company determined to streamline its corporate
organization functions and eliminate several office locations in
overlapping markets. Management's plan included the consolidation of
European call centers in Cork, Ireland and terminations of franchised hotel
properties.
Unusual Charges included $93.0 million of professional fees primarily
consisting of investment banking, legal and accounting fees incurred in
connection with the mergers. The Company also incurred $170.7 million of
personnel-related costs including $73.3 million of retirement and employee
benefit plan costs, $23.7 million of restricted stock compensation, $61.4
million of severance resulting from consolidations of European call centers
and certain corporate functions and $12.3 million of other
personnel-related costs. The Company provided for 474 employees to be
terminated, the majority of which have been severed as of December 31,
1998. Unusual Charges included $78.3 million of business termination costs
which consisted of a $48.3 million impairment write down of hotel franchise
agreement assets associated with a quality upgrade program and $30.0
million of costs incurred to terminate a contract which may have restricted
the Company from maximizing opportunities afforded by the Cendant Merger.
Facility-related and other unusual charges of $112.9 million included $70.0
million of irrevocable contributions to independent technology trusts for
the direct benefit of lodging and real estate franchisees, $16.4 million of
building lease termination costs and a $22.0 million reduction in
intangible assets associated with the Company's wholesale annuity business
for which impairment was determined in 1997. During the year ended December
31,
F-22
1998, the Company recorded a net credit of $28.1 million to Unusual Charges
with a corresponding reduction to liabilities primarily as a result of a
change in the original estimate of costs to be incurred.
Second Quarter 1997 Charge. The Company incurred $295.4 million of Unusual
Charges in the second quarter of 1997 primarily associated with the PHH
Merger. During the fourth quarter of 1997, as a result of changes in
estimates, the Company adjusted certain merger-related liabilities, which
resulted in a $12.3 million credit to Unusual Charges. Reorganization plans
were formulated in connection with the PHH Merger and were implemented upon
consummation. The PHH Merger afforded the combined company, at such time, an
opportunity to rationalize its combined corporate, real estate and travel
related businesses, and enabled the corresponding support and service
functions to gain organizational efficiencies and maximize profits.
Management initiated a plan just prior to the PHH Merger to close hotel
reservation call centers, combine travel agency operations and continue the
downsizing of fleet operations by reducing headcount and eliminating
unprofitable products. In addition, management initiated plans to integrate
its relocation, real estate franchise and mortgage origination businesses to
capture additional revenue through the referral of one business unit's
customers to another. Management also formalized a plan to centralize the
management and headquarters functions of the world's largest, second largest
and other company-owned corporate relocation business unit subsidiaries. Such
initiatives resulted in write-offs of abandoned systems and leasehold assets
commencing in the second quarter 1997. The aforementioned reorganization
plans provided for 560 job reductions which included the elimination of PHH
Corporate functions and facilities in Hunt Valley, Maryland.
Unusual Charges included $154.1 million of personnel-related costs
associated with employee reductions necessitated by the planned and
announced consolidation of the Company's corporate relocation service
businesses worldwide as well as the consolidation of corporate activities.
Personnel-related charges also included termination benefits such as
severance, medical and other benefits and provided for retirement benefits
pursuant to pre-existing contracts resulting from a change in control.
Unusual Charges also included professional fees of $30.3 million, primarily
comprised of investment banking, accounting and legal fees incurred in
connection with the PHH Merger. The Company incurred business termination
charges of $55.6 million, which were comprised of $38.8 million of costs to
exit certain activities primarily within the Company's fleet management
business (including $35.7 million of asset write-offs associated with
exiting certain activities), a $7.3 million termination fee associated with
a joint venture that competed with the PHH Mortgage Services business (now
Cendant Mortgage Corporation) and $9.6 million of costs to terminate a
marketing agreement with a third party in order to replace the function
with internal resources. Facility-related and other charges totaling $43.1
million included costs associated with contract and lease terminations,
asset disposals and other charges incurred in connection with the
consolidation and closure of excess office space.
The Company had substantially completed the aforementioned restructuring
activities at December 31, 1998. During the year ended December 31, 1998,
the Company recorded a net credit of $39.6 million to Unusual Charges with
a corresponding reduction to liabilities primarily as a result of a change
in the original estimate of costs to be incurred.
1996 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
In connection with and coincident to Company mergers accounted for as
poolings of interests during 1996, the Company incurred Unusual Charges of
approximately $134.3 million in 1996, of which $109.4 million was related to
continuing operations (substantially related to the Company's merger with
Ideon Group, Inc. ("Ideon")) and $24.9 million was associated with consumer
software businesses that are discontinued. The collective Unusual Charges
recorded during 1996 related to Company mergers and the utilization of such
liabilities is summarized below:
F-23
1996 BALANCE AT BALANCE AT
UNUSUAL 1997 DECEMBER 31, 1998 DECEMBER 31,
CHARGES REDUCTIONS 1997 REDUCTIONS 1998
(In millions) --------- ------------ -------------- ------------ -------------
Professional fees $ 27.5 $ (27.5) $ -- $ -- $ --
Personnel related 7.5 (7.5) -- -- --
Facility related 12.4 (10.4) 2.0 (2.0) --
Litigation related 80.4 (14.4) 66.0 (25.0) 41.0
Other 6.5 (6.2) .3 (0.3) --
------- ------- ----- ------- -----
Total Unusual Charges 134.3 (66.0) 68.3 (27.3) 41.0
Reclassification for discontinued operations (24.9) 24.9 -- -- --
------- ------- ----- ------- -----
Total Unusual Charges related to continuing
operations $ 109.4 $ (41.1) $ 68.3 $ (27.3) $ 41.0
======= ======= ====== ======= ======
Costs associated with the discontinued operations were comprised primarily
of professional fees incurred in connection with the Company's mergers with
consumer software businesses. Costs associated with the Company's merger
with Ideon 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. The
Company has since settled all outstanding litigation matters. The remaining
$41.0 million of litigation-related liabilities at December 31, 1998
consists of the present value of settlement payments to be made in annual
installments to the co-founder of SafeCard Services, Inc., which was
acquired by Ideon in 1995. 1998 reductions include $27.8 million of cash
payments and a $0.5 million charge to Unusual Charges as a result of a
change in the original estimate of costs to be incurred.
The 1996 Unusual Charges also provided for costs to be incurred in
connection with the Company's consolidation efforts, including severance
costs to be accrued resulting from the Ideon merger and costs relating to
the expected obligations for certain third-party contracts (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. In addition, the Company incurred certain exit costs in transferring
and consolidating Ideon's credit card registration and enhancement services
into the Company's credit card registration and enhancement services
business. As a result of the Ideon merger, 120 employees were terminated.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------------
IN YEARS 1998 1997
(In millions) ------------- ------------- ---------
Land -- $ 153.4 $ 8.4
Building and leasehold improvements 5 - 50 751.9 224.4
Furniture, fixtures and equipment 3 - 10 1,018.1 632.1
---------- -------
1,923.4 864.9
Less accumulated depreciation and amortization 490.6 320.2
---------- -------
$ 1,432.8 $ 544.7
========== =======
F-24
8. OTHER INTANGIBLES, NET
Other intangibles, net consisted of:
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------------
IN YEARS 1998 1997
(In millions) ------------- ----------- -----------
Avis trademark 40 $ 402.0 $ 402.0
Other trademarks 40 170.9 72.5
Customer lists 3-10 162.7 116.8
Other 2-16 138.6 123.6
-------- --------
874.2 714.9
Less accumulated amortization 117.1 90.6
-------- --------
$ 757.1 $ 624.3
======== ========
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.
9. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consisted of:
DECEMBER 31,
-------------------------
1998 1997
(In millions) ----------- -----------
Accounts payable $ 456.0 $ 479.5
Merger and acquisition obligations 152.7 359.0
Accrued payroll and related 208.0 187.3
Advances from relocation clients 60.3 57.2
Other 640.5 409.4
--------- ---------
$ 1,517.5 $ 1,492.4
========= =========
10. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles consisted of:
DECEMBER 31,
-----------------------------
1998 1997
(In millions) ------------- -------------
Vehicles under open-end operating leases $ 2,725.6 $ 2,640.1
Vehicles under closed-end operating leases 822.1 577.2
Direct financing leases 252.4 440.8
Accrued interest on leases 1.0 1.0
---------- ----------
$ 3,801.1 $ 3,659.1
========== ==========
The Company records the cost of leased vehicles as "net 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 investment in leases and leased vehicles were $1.9
billion and $1.6 billion in 1998 and 1997, respectively, and the ratio of
such repayments to the average net investment in leases and leased vehicles
was 50.7% and 46.8% in 1998 and 1997, 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
F-25
that vehicles under this type of lease agreement have generally 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 $5.3 billion and $2.6 billion,
respectively, at December 31, 1998 and $5.0 billion and $2.4 billion,
respectively, at December 31, 1997.
Under the second 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 were $1.0 billion and $190.5 million,
respectively, at December 31, 1998 and $754.4 million and $177.2 million,
respectively, at December 31, 1997. The Company, based on historical
experience and a current assessment of the used vehicle market, established
an allowance in the amount of $14.2 million and $11.7 million for potential
losses on residual values on vehicles under these leases at December 31,
1998 and 1997, respectively.
Under the direct financing lease agreements, the minimum lease term is 12
months with a month to month renewal thereafter. In addition, resale of the
vehicles upon termination of the lease is for the account for the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Open-end operating leases and direct financing leases generally have a
minimum lease term of 12 months with monthly renewal options thereafter.
Closed-end operating leases typically have a longer term, usually 24 months
or more, but are cancelable under certain conditions.
Gross leasing revenues, which are included in fleet leasing in the
consolidated statements of operations, consist of:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
(In millions) ------------- ------------- -------------
Operating leases $ 1,330.3 $ 1,222.9 $ 1,145.8
Direct financing leases, primarily interest 37.8 41.8 43.3
---------- ---------- ----------
$ 1,368.1 $ 1,264.7 $ 1,189.1
========== ========== ==========
In June 1998, the Company entered into an agreement with an independent
third party to sell and leaseback vehicles subject to operating leases. The
net carrying value of the vehicles sold was $100.6 million. Since the net
carrying value of these vehicles was equal to their sales price, there was
no gain or loss recognized on the sale. The lease agreement entered into
between the Company and the counterparty was for a minimum lease term of 12
months with three one-year renewal options. For the year ended December 31,
1998, the total rental expense incurred by the Company under this lease was
$17.7 million.
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 $9.4 million and $7.6
million at December 31, 1998 and 1997, respectively; or guarantees to a
maximum extent. There were no guarantees to a maximum extent at December
31, 1998 or 1997. All such credit risk has been included in the Company's
consideration of related allowances. The outstanding balances under such
agreements aggregated $259.1 million and $224.6 million at December 31,
1998 and 1997, respectively.
Other managed vehicles with balances aggregating $221.8 million and $157.9
million at December 31, 1998 and 1997, respectively, are included in special
purpose entities which are not owned by the Company. These entities do not
require consolidation as they are not controlled by the Company and all risks
and rewards rest with the owners. Additionally, managed vehicles totaling
approximately $81.9 million and $69.6 million at December 31, 1998 and 1997,
respectively, are owned by special purpose entities which are owned by the
Company. However, such assets and related liabilities have been netted in the
consolidated 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.
F-26
11. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated by the
Company and held pending sale to permanent investors. The Company sells
loans insured or guaranteed by various government sponsored entities and
private insurance agencies. The insurance or guaranty is provided primarily
on a non-recourse basis to the Company, except where limited by the Federal
Housing Administration and Veterans Administration and their respective
loan programs. As of December 31, 1998 and 1997, mortgage loans sold with
recourse amounted to approximately $58.3 million and $58.5 million,
respectively. The Company believes adequate allowances are maintained to
cover any potential losses.
The Company entered into a three year agreement effective May 1998 and
expanded in December 1998 under which an unaffiliated Buyer (the "Buyer")
committed to purchase, at the Company's option, mortgage loans originated
by the Company on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, the Company retains the
servicing rights on the mortgage loans sold to the Buyer and provides the
Buyer with opportunities to sell or securitize the mortgage loans into the
secondary market. At December 31, 1998, the Company was servicing
approximately $2.0 billion of mortgage loans owned by the Buyer.
12. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights ("MSRs") activity was as follows:
IMPAIRMENT
MSRS ALLOWANCE TOTAL
(In millions) ----------- ----------- -----------
BALANCE, JANUARY 1, 1996 $ 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 to MSRs 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 to MSRs 251.8 -- 251.8
Amortization (95.6) -- (95.6)
Write-down/provision -- (4.1) (4.1)
Sales (33.1) -- (33.1)
Deferred hedge, net 18.6 -- 18.6
Reclassification of mortgage-related securities (53.5) -- (53.5)
-------- ------ --------
BALANCE, DECEMBER 31, 1997 377.7 (4.7) 373.0
Additions to MSRs 475.2 -- 475.2
Additions to hedge 49.2 -- 49.2
Amortization (82.5) -- (82.5)
Write-down/provision -- 4.7 4.7
Sales (99.1) -- (99.1)
Deferred hedge, net (84.8) -- (84.8)
-------- ------ --------
BALANCE, DECEMBER 31, 1998 $ 635.7 $ -- $ 635.7
======== ====== ========
The value of the Company's MSRs is sensitive to changes in interest rates.
The Company uses a hedge program to manage the associated financial risks
of loan prepayments. Commencing in 1997, the Company used certain
derivative financial instruments, primarily interest rate floors, interest
rate swaps, principal only swaps, futures and options on futures to
administer its hedge program. Premiums paid/received on the acquired
derivatives instruments are capitalized and amortized over the life of the
contracts. Gains and losses associated with the hedge instruments are
deferred and
F-27
recorded as adjustments to the basis of the MSRs. In the event the
performance of the hedge instruments do not meet the requirements of the
hedge program, changes in the fair value of the hedge instruments will be
reflected in the income statement in the current period. Deferrals under
the hedge programs are allocated to each applicable stratum of MSRs based
upon its original designation and included in the impairment measurement.
For purposes of performing its impairment evaluation, the Company
stratifies its portfolio on the basis of interest rates of the underlying
mortgage loans. The Company measures impairment for each stratum by
comparing estimated fair value to the recorded book value. The Company
records amortization expense in proportion to and over the period of the
projected net servicing income. Temporary impairment is recorded through a
valuation allowance in the period of occurrence.
13. LONG-TERM DEBT
Long-term debt consisted of:
DECEMBER 31,
----------------------------
1998 1997
(In millions) ------------- ------------
Term Loan Facility $ 1,250.0 $ --
Revolving Credit Facilities -- 276.0
7 1/2% Senior Notes 399.7 --
7 3/4% Senior Notes 1,148.0 --
3% Convertible Subordinated Notes 545.4 543.2
5 7/8% Senior Notes -- 149.9
4 3/4% Convertible Senior Notes -- 240.0
Other 24.9 39.2
---------- --------
3,368.0 1,248.3
Less current portion 5.1 2.3
---------- --------
$ 3,362.9 $ 1,246.0
========== =========
TERM LOAN FACILITIES
On May 29, 1998, the Company entered into a 364 day term loan agreement
with a syndicate of financial institutions which provided for borrowings of
$3.25 billion (the "Term Loan Facility"). The Term Loan Facility, as
amended, incurred interest based on the London Interbank Offered Rate
("LIBOR") plus a margin of approximately 87.5 basis points. The weighted
average interest rate on the Term Loan Facility was 6.2% at December 31,
1998.
At December 31, 1998, borrowings under the Term Loan Facility of $1.25
billion were classified as long-term based on the Company's intent and
ability to refinance such borrowings on a long-term basis. On February 9,
1999, the Company replaced the Term Loan Facility with a new two year term
loan facility (the "New Facility") which provides for borrowings of $1.25
billion. The Company used $1.25 billion of the proceeds from the New
Facility to refinance the majority of the outstanding borrowings under the
Term Loan Facility. The New Facility bears interest at a rate of LIBOR plus
a margin of approximately 100 basis points and is payable in five
consecutive quarterly installments beginning on the first anniversary of
the closing date. The New Facility contains certain restrictive covenants,
which are substantially similar to and consistent with the covenants in
effect for the Company's existing revolving credit agreements.
CREDIT FACILITIES
The Company's primary credit facility, as amended, consists of (i) a $750.0
million, five year revolving credit facility (the "Five Year Revolving
Credit Facility") and (ii) a $1.0 billion, 364 day revolving credit
facility (the "364 Day Revolving Credit Facility") (collectively the
"Revolving Credit Facilities"). The 364 Day Revolving Credit Facility will
mature on October 29, 1999 but may be renewed on an annual basis for an
additional 364 days upon receiving lender approval. The Five Year Revolving
Credit Facility will mature on October 1, 2001. Borrowings under the
Revolving Credit Facilities, at the option of the Company, bear interest
based on competitive bids of lenders
F-28
participating in the facilities, at prime rates or at LIBOR, plus a margin
of approximately 75 basis points. The Company is required to pay a per
annum facility fee of .175% and .15% of the average daily unused
commitments under the Five Year Revolving Credit Facility and 364 Day
Revolving Credit Facility, respectively. The interest rates and facility
fees are subject to change based upon credit ratings on the Company's
senior unsecured long-term debt by nationally recognized debt rating
agencies. Letters of credit of $45.0 million were outstanding under the
Five Year Revolving Credit Facility at December 31, 1998. 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 0.5:1 maximum
debt-to-capitalization ratio.
7 1/2% AND 7 3/4% SENIOR NOTES
On November 17, 1998, the Company filed an amended shelf registration
statement with the SEC for the aggregate issuance of up to $3.0 billion of
debt and equity securities. On November 24, 1998, the Company priced a
total of $1.55 billion of Senior Notes (the "Notes") in a two-part issue.
The first issue, $400.0 million principal amount of 7 1/2% Senior Notes due
December 1, 2000, was priced to yield 7.545%. The second issue, $1.15
billion principal amount of 7 3/4% Senior Notes due December 1, 2003, was
priced to yield 7.792%. Interest on the Notes will be payable on June 1 and
December 1 each year, beginning on June 1, 1999. The Notes may be redeemed,
in whole or in part, at any time at the option of the Company at a
redemption price plus accrued interest to the date of redemption. The
redemption price is equal to the greater of (i) the face value of the notes
or (ii) the sum of the present values of the remaining scheduled payments
discounted at the treasury rate plus a spread defined in the indenture. Net
proceeds from the offering were used to repay a portion of the Company's
Term Loan Facility and for general corporate purposes, which included the
repurchase of Company common stock.
3% CONVERTIBLE SUBORDINATED NOTES
In February 1997, the Company completed a public offering of $550.0 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.
5 7/8% SENIOR NOTES
On December 15, 1998, the Company repaid the $150.0 million principal
amount of 5 7/8% Senior Notes outstanding in accordance with the provisions
of the indenture agreement.
4 3/4% CONVERTIBLE SENIOR NOTES
In February 1996, the Company completed a public offering of $240.0 million
unsecured 4 3/4% Convertible Senior Notes due 2003, which were 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. On May 4, 1998,
the Company redeemed all of the outstanding ($144.5 million principal
amount) 4 3/4% Notes at a price of 103.393% of the principal amount,
together with interest accrued to the redemption date (see Note 6 -- Other
Charges -- Financing Costs). Prior to the redemption date, during 1998,
holders of such notes exchanged $95.5 million of the 4 3/4% Notes for 3.4
million shares of Company common stock.
F-29
DEBT MATURITIES
Aggregate maturities of debt for each of the next five years commencing in
1999 are as follows:
(In milloins)
YEAR AMOUNT
- --------------- -----------
1999 $ 5.1
2000 403.3
2001 1,250.3
2002 545.4
2003 1,148.0
Thereafter 15.9
---------
$ 3,368.0
=========
14. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs consisted
of:
DECEMBER 31,
-----------------------------
1998 1997
(In millions) ------------- -------------
Commercial paper $ 2,484.4 $ 2,577.5
Medium-term notes 2,337.9 2,747.8
Securitized obligations 1,901.5 --
Other 173.0 277.3
---------- ----------
$ 6,896.8 $ 5,602.6
========== ==========
COMMERCIAL PAPER
Commercial paper, which matures within 180 days, is supported by committed
revolving credit agreements described below and short-term lines of credit.
The weighted average interest rates on the Company's outstanding commercial
paper were 6.1% and 5.9% at December 31, 1998 and 1997, respectively.
MEDIUM-TERM NOTES
Medium-term notes of $2.3 billion primarily represent unsecured loans which
mature through 2002. The weighted average interest rates on such
medium-term notes were 5.6% and 5.9% at December 31, 1998 and 1997,
respectively.
SECURITIZED OBLIGATIONS
The Company maintains four separate financing facilities, the outstanding
borrowings under which are securitized by corresponding assets under
management and mortgage programs. The collective weighted average interest
rate on such facilities was 5.8% at December 31, 1998. Such securitized
obligations are described below.
Mortgage Facility. In December 1998, the Company entered into a 364 day
financing agreement to sell mortgage loans under an agreement to repurchase
such mortgages (the "Agreement"). The Agreement is collateralized by the
underlying mortgage loans held in safekeeping by the custodian to the
Agreement. The total commitment under this Agreement is $500.0 million and
is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed under
this Agreement at December 31, 1998 totaled $378.0 million and are included
in mortgage loans held for sale on the consolidated balance sheet.
Relocation Facilities. The Company entered into a 364-day asset
securitization agreement effective December 1998 under which an
unaffiliated buyer has committed to purchase an interest in the right to
payments related to certain Company relocation receivables. The revolving
purchase commitment provides for funding up to a limit of $325.0 million
and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Under the terms of this
F-30
agreement, the Company retains the servicing rights related to the
relocation receivables. At December 31, 1998, the Company was servicing
$248.0 million of assets, which were funded under this agreement.
The Company also maintains an asset securitization agreement with a
separate unaffiliated buyer, which has a purchase commitment up to a limit
of $350.0 million. The terms of this agreement are similar to the
aforementioned facility with the Company retaining the servicing rights on
the right of payment. At December 31, 1998, the Company was servicing
$171.0 million of assets eligible for purchase under this agreement.
Fleet Facilities. In December 1998, the Company entered into two secured
financing transactions each expiring five years from the effective
agreement date through its two wholly-owned subsidiaries, TRAC Funding and
TRAC Funding II. Secured leased assets (specified beneficial interests in a
trust which owns the leased vehicles and the leases) totaling $600.0
million and $725.3 million, respectively, were contributed to the
subsidiaries by the Company. Loans to TRAC Funding and TRAC Funding II were
funded by commercial paper conduits in the amounts of $500.0 million and
$604.0 million, respectively, and were secured by the specified beneficial
interests. Monthly loan repayments conform to the amortization of the
leased vehicles with the repayment of the outstanding loan balance required
at time of disposition of the vehicles. Interest on the loans is based upon
the conduit commercial paper issuance cost and committed bank lines priced
on a LIBOR basis. Repayments of loans are limited to the cash flows
generated from the leases represented by the specified beneficial
interests.
Other. Other liabilities under management and mortgage programs are
principally comprised of unsecured borrowings under uncommitted short-term
lines of credit and other bank facilities, all of which matures in 1999.
The weighted average interest rate on such debt was 5.5% and 6.7% at
December 31, 1998 and 1997, 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 $177.3
million, $177.0 million and $161.8 million for the years ended December 31,
1998, 1997, and 1996, respectively, and is included net within fleet
leasing revenues in the consolidated statements of operations. Interest
related to equity advances on homes was $26.9 million, $32.0 million and
$35.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Interest related to origination and mortgage servicing
activities was $138.9 million, $77.6 million and $63.4 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest
expense incurred on borrowings used to finance both equity advances on
homes and mortgage servicing activities are recorded net within membership
and service fee revenues in the consolidated statements of operations.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 100 percent of the
average amount of outstanding commercial paper. As of December 31, 1998,
the Company maintained $2.75 billion in committed and unsecured credit
facilities, which were backed by a consortium of domestic and foreign
banks. The facilities were comprised of $1.25 billion in 364 day credit
lines maturing in March 1999, a $250.0 million (changed to $150.0 million
in March 1999) revolving credit facility maturing December 1999 and a five
year $1.25 billion credit line maturing in the year 2002. Under such credit
facilities, the Company paid annual commitment fees of $1.9 million, $1.7
million and $2.4 million for the years ended December 31, 1998, 1997 and
1996, respectively. In March 1999, the Company extended the $1.25 billion
in 364 day credit lines to March 2000. In addition, the Company has other
uncommitted lines of credit with various banks of which $5.1 million was
unused at December 31, 1998. The full amount of the Company's committed
facility was undrawn and available at December 31, 1998 and 1997.
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
repayments of liabilities under management and mortgage programs as of
December 31, 1998, are set forth as follows:
F-31
(In millions)
ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS (1)
- -------------- ------------------------- -----------------------------
1999 $ 4,882.0 $ 4,451.7
2000 1,355.9 1,342.2
2001 668.6 659.0
2002 289.0 263.1
2003 168.3 142.0
2004-2008 148.1 38.8
---------- ----------
$ 7,511.9 $ 6,896.8
========== ==========
- ----------
(1) The projected repayments of liabilities under management and mortgage
programs are different than required by contractual maturities.
15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments as part of its overall
strategy to manage its exposure to market risks associated with
fluctuations in interest rates, foreign currency exchange rates, prices of
mortgage loans held for sale and anticipated mortgage loan closings arising
from commitments issued. The Company performs analyses on an ongoing basis
to determine that a high correlation exists between the characteristics of
derivative instruments and the assets or transactions being hedged. As a
matter of policy, the Company does not engage in derivative activities for
trading or speculative purposes. The Company is exposed to credit-related
losses in the event of non-performance by counterparties to certain
derivative financial instruments. The Company manages such risk by
periodically evaluating the financial position of counterparties and
spreading its positions among multiple counterparties. The Company
presently does not expect non-performance by any of the counterparties.
INTEREST RATE SWAPS
The Company enters into interest rate swap agreements to match the interest
characteristics of the assets being funded and to modify the contractual
costs of debt financing. The swap agreements correlate the terms of the
assets to the maturity and rollover of the debt by effectively matching a
fixed or floating interest rate with the stipulated revenue stream
generated from the portfolio of assets being funded. Amounts to be paid or
received under interest rate swap agreements are accrued as interest rates
change and are recognized over the life of the swap agreements as an
adjustment to interest expense. For the years ended December 31, 1998, 1997
and 1996, the Company's hedging activities increased interest expense $2.1
million, $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 matched swaps.
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps at December 31, 1998 and 1997.
1998
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
AMOUNT RECEIVE RATE PAY RATE MATURITIES
(Dollars in millions) ------------ ------------------ ------------------ -----------
Commercial paper $ 355.2 4.92% 5.84% 1999-2006
Medium-term notes 931.0 5.27% 5.04% 1999-2000
Canada Commercial Paper 89.8 5.52% 5.27% 1999-2002
Sterling liabilities 662.3 6.26% 6.62% 1999-2002
Deutsche mark liabilities 31.9 3.24% 4.28% 1999-2001
---------
$ 2,070.2
=========
F-32
1997
NOTIONAL WEIGHTED AVERAGE WEIGHTED AVERAGE SWAP
AMOUNT RECEIVE RATE PAY RATE MATURITIES
(Dollars in millions) ------------ ------------------ ------------------ -----------
Commercial paper $ 355.7 5.68% 6.26% 1999-2004
Medium-term notes 1,551.0 5.93% 5.73% 1999-2000
Canada Commercial Paper 142.8 4.93% 4.95% 1999-2002
Sterling liabilities 491.5 7.21% 7.69% 1999-2002
Deutsche mark liabilities 9.1 3.76% 5.34% 1999-2001
---------
$ 2,550.1
=========
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 primarily utilized to hedge
intercompany loans to foreign subsidiaries and certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. The
Company may also hedge currency exposures that are directly related to
anticipated, but not yet committed transactions expected to be denominated
in foreign currencies. The principal currencies hedged are the British
pound and the German mark. Market value gains and losses on foreign
currency hedges related to intercompany loans are deferred and recognized
upon maturity of the underlying loan. Market value gains and losses on
foreign currency hedges of anticipated transactions are recognized in the
statement of operations as exchange rates change. However, fluctuations in
exchange rates are generally offset by the anticipated exposures being
hedged. Historically, foreign exchange contracts have been short-term in
nature.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to
the risk of adverse price fluctuations primarily due to changes in interest
rates. The Company uses forward delivery contracts, 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.
With respect to the mortgage servicing portfolio, the Company acquired
certain derivative financial instruments, primarily interest rate floors,
interest rate swaps, principal only swaps, futures and options on futures
to manage the associated financial impact of interest rate movements.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND SERVICING RIGHTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments.
The fair values of the financial instruments presented may not be
indicative of their future values.
MARKETABLE SECURITIES
Fair value is based upon quoted market prices or investment advisor
estimates.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to purchase
loans net of mortgage-related positions. The value of embedded MSRs has
been considered in determining fair value.
MORTGAGE SERVICING RIGHTS
Fair value is estimated by discounting future net servicing cash flows
associated with the underlying securities using discount rates that
approximate current market rates and externally published prepayment rates,
adjusted, if appropriate, for individual portfolio characteristics.
DEBT
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-33
MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY SUBSIDIARY
Fair value is estimated based on quoted market prices and incorporates the
settlement of litigation and the resulting modification of terms (see Note
6 -- Other Charges -- Litigation Settlement).
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, OTHER MORTGAGE-RELATED
POSITIONS
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, 1998 and 1997 are as follows:
1998 1997
-------------------------------------- ---------------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
(In millions) ----------- ---------- ----------- ----------- ---------- ------------
ASSETS
Marketable securities $ -- $ 220.8 $ 220.8 $ -- $ 65.2 $ 65.2
Investment in mortgage
securities -- 46.2 46.2 -- 48.0 48.0
- ---------------------------------- -------- -------- --------- -------- -------- ---------
ASSETS UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Relocation receivables -- 659.1 659.1 -- 775.3 775.3
Mortgage loans held for
sale -- 2,416.0 2,462.7 -- 1,636.3 1,668.1
Mortgage servicing rights -- 635.7 787.7 -- 373.0 394.6
- ---------------------------------- -------- -------- --------- -------- -------- ---------
LONG-TERM DEBT -- 3,362.9 3,351.1 -- 1,246.0 1,468.3
- ---------------------------------- -------- -------- --------- -------- -------- ---------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LONG-TERM DEBT
Foreign exchange forwards 1.1 -- -- 5.5 -- --
OTHER OFF BALANCE SHEET
DERIVATIVES
Foreign exchange forwards 47.6 -- -- 102.7 -- --
- ---------------------------------- -------- -------- --------- -------- -------- ---------
LIABILITIES UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Debt -- 6,896.8 6,895.0 -- 5,602.6 5,604.2
- ---------------------------------- -------- -------- --------- -------- -------- ---------
MANDATORILY REDEEMABLE
PREFERRED SECURITIES ISSUED BY
SUBSIDIARY -- 1,472.1 1,333.2 -- -- --
- ---------------------------------- -------- -------- --------- -------- -------- ---------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LIABILITIES UNDER
MANAGEMENT AND MORTGAGE
PROGRAMS
Interest rate swaps 2,070.2 -- -- 2,550.1 -- --
in a gain position -- -- 7.8 -- -- 5.6
in a loss position -- -- (11.5) -- -- (3.9)
Foreign exchange forwards 349.3 -- 0.1 409.8 -- 2.5
- ---------------------------------- -------- -------- --------- -------- -------- ---------
MORTGAGE-RELATED POSITIONS
Forward delivery
commitments (a) 5,057.0 2.9 (3.5) 2,582.5 19.4 (16.2)
Option contracts to sell (a) 700.8 8.5 3.7 290.0 .5 --
Option contracts to buy (a) 948.0 5.0 1.0 705.0 1.1 4.4
Commitments to fund
mortgages 3,154.6 -- 35.0 1,861.7 -- 19.7
Constant maturity treasury
floors (b) 3,670.0 43.8 84.0 825.0 12.5 17.1
Interest rate swaps (b) 775.0 175.0
in a gain position -- -- 34.6 -- -- 1.3
in a loss position -- -- (1.2) -- -- --
Treasury futures (b) 151.0 -- (0.7) 331.5 -- 4.8
Principal only swaps (b) 66.3 -- 3.1 -- -- --
- ----------
(a) Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of respective carrying amounts
and fair values of mortgage loans held for sale. Forward delivery
commitments are used to manage price risk on sale of all mortgage loans
to end investors including loans held by an unaffiliated buyer as
described in Note 11.
(b) Carrying amounts on these mortgage-related positions are capitalized and
recorded as a component of MSRs. Gains (losses) on such positions are
included in the determination of the respective carrying amounts and
fair value of MSRs.
F-34
17. MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES ISSUED BY SUBSIDIARY
On March 2, 1998, Cendant Capital I (the "Trust"), a statutory business
Trust formed under the laws of the State of Delaware and a wholly-owned
consolidated subsidiary of the Company, issued 29.9 million FELINE PRIDES
and 2.3 million trust preferred securities and received approximately $1.5
billion in gross proceeds therefrom. The Trust invested the proceeds in
6.45% Senior Debentures due 2003 (the "Debentures") issued by the Company,
which represents the sole asset of the Trust. The obligations of the Trust
related to the FELINE PRIDES and trust preferred securities are
unconditionally guaranteed by the Company to the extent the Company makes
payments pursuant to the Debentures. Upon the issuance of the FELINE PRIDES
and trust preferred securities, the Company recorded a liability of $43.3
million with a corresponding reduction to shareholders' equity equal to the
present value of the total future contract adjustment payments to be made
under the FELINE PRIDES. The FELINE PRIDES, upon issuance, consisted of
27.6 million Income PRIDES and 2.3 million Growth PRIDES (Income PRIDES and
Growth PRIDES hereinafter referred to as "PRIDES"), each with a face amount
of $50 per PRIDE. The Income PRIDES consist of trust preferred securities
and forward purchase contracts under which the holders are required to
purchase common stock from the Company in February 2001. The Growth PRIDES
consist of zero coupon U.S. Treasury securities and forward purchase
contracts under which the holders are required to purchase common stock
from the Company in February 2001. The stand alone trust preferred
securities and the trust preferred securities forming a part of the Income
PRIDES, each with a face amount of $50, bear interest, in the form of
preferred stock dividends, at the annual rate of 6.45% payable in cash.
Such preferred stock dividends are presented as minority interest, net of
tax in the consolidated statements of operations. Payments under the
forward purchase contract forming a part of the Income PRIDES will be made
by the Company in the form of a contract adjustment payment at an annual
rate of 1.05%. Payments under the forward purchase contract forming a part
of the Growth PRIDES will be made by the Company in the form of a contract
adjustment payment at an annual rate of 1.30%. The forward purchase
contracts require the holder to purchase a minimum of 1.0395 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 the Company's
common stock for a 20 consecutive day period ending in mid-February of
2001. The Company has the right to defer the contract adjustment payments
and the payment of interest on the Debentures to the Trust. Such election
will subject the Company to certain restrictions, including restrictions on
making dividend payments on its common stock until all such payments in
arrears are settled.
The Company has reached an agreement to settle a class action lawsuit that
was brought on behalf of holders of PRIDES securities who purchased their
securities on or prior to April 15, 1998 (see Note 6 -- Other Charges --
Litigation Settlement).
18. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which primarily expire through the year 2004. Rental expense
for the years ended December 31, 1998, 1997 and 1996 was $177.9 million,
$91.3 million and $75.3 million, respectively. The Company incurred
contingent rental expenses in 1998 of $44.1 million, which is included in
total rental expense, principally based on rental volume or profitability
at certain NPC parking facilities. 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.
F-35
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1998 are as follows:
(In millions)
Year Amount
- ------------------- -----------
1999 $ 122.9
2000 109.3
2001 93.6
2002 69.5
2003 55.5
Thereafter 139.4
--------
$ 590.2
========
LITIGATION
Accounting Irregularities. On April 15, 1998, the Company publicly
announced that it discovered accounting irregularities in the former
business units of CUC. Such discovery prompted investigations into such
matters by the Company and the Audit Committee of the Company's Board of
Directors. As a result of the findings from the investigations, the Company
restated its previously reported financial results for 1997, 1996 and 1995.
Since the April 15, 1998 announcement more than 70 lawsuits claiming to be
class actions, two lawsuits claiming to be brought derivatively on the
Company's behalf and three individual lawsuits have been filed in various
courts against the Company and other defendants. With the exception of an
action pending in the Delaware Chancery Court and an action filed in the
Superior Court of New Jersey that has been dismissed, these actions were
all filed in or transferred to the United States District Court for the
District of New Jersey, where they are pending before Judge William H.
Walls and Magistrate Judge Joel A. Pisano. The Court has ordered
consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred. While the Company made all adjustments considered necessary as a
result of the findings from the Investigations, in restating its financial
statements, the Company can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations.
On October 14, 1998, an action claiming to be a class action was filed
against the Company and four of the Company's former officers and
directors. The complaint claims that the Company made false and misleading
public announcements and filings with the SEC in connection with the
Company's proposed acquisition of American Bankers allegedly in violation
of Sections 10(b) and 20(a) on the Securities Exchange Act of 1934, as
amended and that the plaintiff and the alleged class members purchased
American Bankers' securities in reliance on these public announcements and
filings at inflated prices.
As previously disclosed, the Company reached a final agreement with
plaintiff's counsel representing the class of holders of its PRIDES
securities who purchased their securities on or prior to April 15, 1998 to
settle their class action lawsuit against the Company through the issuance
of a new "Right" for each PRIDES security held. (see Note 6 -- Other
Charges for a more detailed description of the settlement).
Other than with respect to the PRIDES class action litigation, the Company
does not believe it is feasible to predict or determine the final outcome
or resolution of these proceedings or to estimate the amounts or potential
range of loss with respect to these proceedings and investigations. In
addition, the timing of the final resolution of these proceedings and
investigations is uncertain. The possible outcomes or resolutions of these
proceedings and investigations could include judgements against the Company
or settlements and could require substantial payments by the Company.
Management believes that material adverse outcomes with respect to such
proceedings and
F-36
investigations could have a material adverse impact on the Company's
financial condition, results of operations and cash flows.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
19. INCOME TAXES
The income tax provision consists of:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
(In millions) ------------ ----------- -----------
Current
Federal $ (159.4) $ 155.1 $ 101.1
State 0.7 24.4 13.3
Foreign 56.5 28.5 18.1
-------- -------- --------
(102.2) 208.0 132.5
-------- -------- --------
Deferred
Federal 176.1 (16.8) 70.4
State 29.5 (3.4) 16.5
Foreign 1.1 3.2 .8
-------- -------- --------
206.7 (17.0) 87.7
Provision for income taxes $ 104.5 $ 191.0 $ 220.2
======== ======== ========
Net deferred income tax assets and liabilities are comprised of the
following:
DECEMBER 31,
------------------------
1998 1997
(In millions) ---------- -----------
CURRENT NET DEFERRED INCOME TAXES
Merger and acquisition-related liabilities $ 52.8 $ 102.9
Accrued liabilities and deferred income 323.1 225.8
Excess tax basis on assets held for sale 190.0 --
Insurance retention refund (21.2) (19.3)
Provision for doubtful accounts 13.8 4.0
Franchise acquisition costs (6.9) (2.6)
Deferred membership acquisition costs 2.6 8.6
Other (87.6) (7.5)
------- --------
Current net deferred tax asset $ 466.6 $ 311.9
======= ========
DECEMBER 31,
----------------------------
1998 1997
(In millions) ------------- ------------
NON-CURRENT NET DEFERRED INCOME TAXES
Depreciation and amortization $ (296.7) $ (277.1)
Deductible goodwill -- taxable poolings 49.3 44.2
Merger and acquisition-related liabilities 25.8 35.0
Accrued liabilities and deferred income 63.9 66.9
Acquired net operating loss carryforward 83.5 59.9
Other (3.0) 0.2
---------- --------
Non-current net deferred tax liability $ (77.2) $ (70.9)
========== ========
F-37
DECEMBER 31,
---------------------------
1998 1997
(In millions) ------------ ------------
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME TAXES
Depreciation $ (121.3) $ (233.1)
Unamortized mortgage servicing rights (248.0) (74.6)
Accrued liabilities 25.8 9.5
Alternative minimum tax carryforwards 2.5 2.5
-------- --------
Net deferred tax liabilities under management and mortgage
programs $ (341.0) $ (295.7)
======== ========
Net operating loss carryforwards at December 31, 1998 acquired in connection
with the acquisition of Avis expire as follows: 2001, $8.2 million; 2002,
$89.6 million; 2005, $7.2 million; 2009, $17.7 million; and 2010, $116.0
million. Certain state net operating loss carryforwards of $43.9 million
are not expected to be realized; therefore, a valuation allowance of $43.9
million was established in 1998.
The Company's effective income tax rate for continuing operations differs
from the federal statutory rate as follows:
YEAR ENDING DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 6.2% 5.3% 3.6%
Non-deductible merger-related costs -- 29.1% --
Amortization of non-deductible goodwill 5.9% 4.3% 1.5%
Foreign taxes differential (8.0%) .3% .5%
Recognition of excess tax basis on assets held for sale (2.7%) -- --
Other (3.2%) .3% .6%
---- ---- ----
33.2% 74.3% 41.2%
==== ==== ====
20. STOCK OPTION PLANS
On December 12, 1998, the Company adopted the 1999 Broad-Based Employee
Stock Option Plan (the "Broad-Based Plan"). The Broad-Based Plan
authorizes the granting of up to 16 million shares of Company common stock
through awards of nonqualified stock options (stock options which do not
qualify as incentive stock options as defined under the Internal Revenue
Service Code). Certain officers and all employees and independent
contractors of the Company are eligible to receive awards under the
Broad-Based Plan. Options granted under the plan generally have a ten year
term and are exercisable at 20% per year commencing one year from the date
of grant.
In connection with the Cendant Merger, the Company adopted the 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 nonqualified stock options. Options granted
under the 1997 Employee Plan and the 1997 SOP
F-38
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, 1998 and 1997, there
were 38.6 million and 49.3 million shares available for grant under the
Company's stock option plans.
On September 23, 1998, the Compensation Committee of the Board of Directors
approved a program to effectively reprice certain Company stock options
granted to middle management employees during December 1997 and the first
quarter of 1998. Such options were effectively repriced on October 14, 1998
at $9.8125 per share (the "New Price"), which was the fair market value (as
defined in the option plans) on the date of such repricing. On September
23, 1998, the Compensation Committee also modified the terms of certain
options held by certain executive officers and senior managers of the
Company subject to certain conditions including revocation of a portion of
existing options. Additionally, a management equity ownership program was
adopted that requires these executive officers and senior managers to
acquire Company common stock at various levels commensurate with their
respective compensation levels. The option modifications were accomplished
by canceling existing options and issuing a lesser amount of new options at
the New Price and, with respect to certain options of executive officers
and senior managers, at prices above the New Price.
The table below summarizes the annual activity of the Company's stock
option plans:
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
(Shares in millions) ------------- --------------
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
Granted
Equal to fair market value 83.8 19.16
Greater than fair market value 20.8 17.13
Canceled (81.8) 29.36
Exercised (17.0) 10.01
------
BALANCE AT DECEMBER 31, 1998 177.8 14.64
======
- ----------
(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.
F-39
The Company utilizes the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its stock option plans. Under APB No. 25, because the
exercise prices of the Company's employee stock options are equal to or
greater than the market prices of the underlying Company stock on the date
of grant, no compensation expense is recognized.
Had the Company elected to recognize 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 (loss) per share would have reflected the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
(In millions, except per share data) ----------- ------------------- -----------
Net income (loss)
as reported $ 539.6 $ (217.2) $ 330.0
pro forma 392.9 (663.9) (2) 245.1
Net income (loss) per share:
Basic
as reported $ .64 $ (.27) $ .44
pro forma (1) .46 (.82) (2) .32
Diluted
as reported .61 (.27) .41
pro forma (1) .46 (.82) (2) .31
- ----------
(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 1998, 1997 and 1996:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
CUC HFS PHH
PLANS PLANS PLANS
----------- ----------- ----------
1998 1997 1996
----------- ----------- --------------------------------------
Dividend yield -- -- -- -- 2.8%
Expected volatility 55.0% 32.5% 28.0% 37.5% 21.5%
Risk-free interest rate 4.9% 5.6% 6.3% 6.4% 6.5%
Expected holding period 6.3 years 7.8 years 5.0 years 9.1 years 7.5 years
The weighted average fair values of Company stock options granted during the
year ended December 31, 1998, which were repriced with exercise prices
equal to and greater than the underlying stock price at the date of grant,
were 19.69 and 18.10, respectively. The weighted average fair value of the
stock options granted during the year ended December 31, 1998, which were
not repriced was $10.16. The weighted average fair value of stock options
granted during the year ended December 31, 1997 was $13.71. The weighted
average fair value of stock options granted under the former CUC plans
(inclusive of plans acquired) during the year ended December 31, 1996 was
$7.51. The weighted average fair value of stock options granted under the
former HFS plans (inclusive of the PHH plans) during the year ended
December 31, 1996 was $10.96.
The table below summarizes information regarding Company stock options
outstanding and exercisable as of December 31, 1998:
F-40
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 89.6 6.8 $ 7.40 50.5 $ 5.56
$10.01 to $20.00 38.6 7.5 15.44 17.3 14.52
$20.01 to $30.00 27.3 7.9 23.02 20.8 23.09
$30.01 to $40.00 22.3 8.8 32.03 14.8 31.83
----- -----
177.8 7.4 14.64 103.4 14.34
===== =====
21. SHAREHOLDERS' EQUITY
On December 1, 1998, the Company's Board of Directors amended and restated
the 1998 Employee Stock Purchase Plan (the "Plan"). The Company reserved
2.5 million shares of Company common stock in connection with the Plan,
which enables eligible employees to purchase shares of common stock from
the Company at 85% of the fair market value on the first business day of
each calendar quarter (the "Offering Date"). Eligible employees may
authorize the Company to withhold up to 10% of their compensation from
each paycheck during any calendar quarter, in an amount not to exceed a
total of $25,000 of Company common stock (at fair market value as of the
Offering Date) during any calendar year.
In November 1998, the Board of Directors authorized a $1.0 billion common
share repurchase program. As of December 31, 1998, the Company had
repurchased 13.4 million shares costing $257.7 million. During the first
quarter of 1999, the Company's Board of Directors authorized an additional
$400.0 million to be repurchased under such program pursuant to which the
Company continues to execute this program through open market purchases or
privately negotiated transactions, subject to bank credit facility
covenants and certain rating agency constraints. As of March 11, 1999, the
Company repurchased $1.3 billion of its common stock, reducing its
outstanding shares by 64.2 million shares under this share repurchase
program.
22. EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans that provide certain
eligible employees of the Company an opportunity to accumulate funds for
their retirement. The Company matches the contributions of participating
employees on the basis of the percentages specified in the plans. The
Company's cost for contributions to these plans was $23.6 million, $15.9
million and $10.3 million for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company's PHH subsidiary has a domestic non-contributory defined
benefit pension plan covering substantially all domestic employees of PHH
and its subsidiaries employed prior to July 1, 1997. Additionally, the
Company has contributory defined benefit pension plans in certain United
Kingdom subsidiaries with participation in the plans at the employees'
option. Under both the domestic and foreign plans, benefits are based on an
employee's years of credited service and a percentage of final average
compensation.
The Company's policy for all plans is to contribute amounts sufficient to
meet the minimum requirements plus other amounts as deemed appropriate. The
projected benefit obligations of the funded plans were $196.3 million and
$108.1 million and funded assets, at fair value, were $162.2 million and
$102.7 million at December 31, 1998 and 1997, respectively. The net pension
cost and the recorded liability were not material to the accompanying
consolidated financial statements.
F-41
23. RELATED PARTY TRANSACTIONS
NRT
During 1997, the Company executed agreements with NRT Incorporated ("NRT"),
a corporation created to acquire residential real estate brokerage firms.
In 1997, NRT acquired the real estate brokerage business and operations of
National Realty Trust ("the Trust"). The Trust was an independent trust to
which the Company contributed the brokerage offices, which were owned by
Coldwell Banker at the time of the Company's acquisition of Coldwell Banker
in 1996. Since inception, NRT acquired other local and regional real estate
brokerage businesses. NRT is the largest residential brokerage firm in the
United States. Certain officers of the Company serve on the Board of
Directors of NRT. NRT is party to various agreements and arrangements with
the Company and its subsidiaries. Under these agreements, the Company
acquired $182.0 million of NRT preferred stock (and may be required to
acquire up to an additional $81.3 million of NRT preferred stock). The
Company received preferred dividend payments of $15.4 million and $5.2
million during the years ended 1998 and 1997, respectively which are
included in other revenue in the consolidated statements of operations. NRT
is the largest franchisee, based on gross commission income, of the
Company's three real estate franchise systems. During 1998, 1997 and 1996,
NRT and its predecessors paid an aggregate $121.5 million, $60.5 million
and $24.0 million, respectively, in franchise royalties to the Company. On
February 9, 1999, the Company executed new agreements with NRT, which among
other things, increased the term of each of the three franchise agreements
under which NRT operates from 40 years to 50 years.
In connection with the aforementioned agreements, the Company at its
election, will participate in NRT's acquisitions by acquiring up to an
aggregate $946.3 million (plus an additional $500.0 million if certain
conditions are met) of intangible assets, and in some cases mortgage
operations, of real estate brokerage firms acquired by NRT. Through
December 31, 1998, the Company acquired $445.7 million of such mortgage
operations and intangible assets, primarily franchise agreements associated
with real estate brokerage companies acquired by NRT, which brokerage
companies will become subject to the NRT 50-year franchise agreements. In
February 1999, NRT and the Company entered into an agreement whereby the
Company made an upfront payment of $30.0 million to NRT for services to be
provided by NRT to the Company related to the identification of potential
acquisition candidates, the negotiation of agreements and other services in
connection with future brokerage acquisitions by NRT. Such fee is
refundable in the event the services are not provided.
AVIS, INC.
Upon entering into the definitive merger agreement to acquire Avis, the
Company announced its strategy to dilute its interest in the subsidiary of
Avis which controlled the car rental operations of Avis ("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 Initial Public Offering ("IPO") by ARAC in September 1997. Net
proceeds from the IPO of $359.3 million were retained by ARAC. In March
1998, the Company sold one million shares of Avis common stock and
recognized a pre-tax gain of approximately $17.7 million, which is included
in other revenue in the consolidated statements of operations. At December
31, 1998, the Company's interest in ARAC was approximately 22.6%. The
Company recorded its equity in the earnings of ARAC, which amounted to
$13.5 million, $51.3 million and $1.2 million for the years ended December
31, 1998, 1997 and 1996, respectively, as a component of other revenue in
the consolidated statements of operations. In January 1999, the Company's
equity interest was further diluted to 19.4% as a result of the Company's
sale of 1.3 million shares of Avis common stock.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. During
1998 and 1997, total franchise royalties paid to the Company from ARAC were
$91.9 million and $81.7 million, respectively. In addition, the Company
operates the telecommunications and computer processing system, which
services ARAC for reservations, rental
F-42
agreement processing, accounting and fleet control for which the Company
charges ARAC at cost. Certain officers of the Company serve on the Board of
Directors of ARAC.
24. DIVESTITURE
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Cendant Merger, CUC sold immediately preceding the
Cendant Merger all of the outstanding shares of its timeshare exchange
businesses, Interval International Inc. ("Interval"), for net proceeds of
$240.0 million less transaction related costs amortized as services are
provided. The Company recognized a gain on the sale of Interval of $76.6
million ($26.4 million, after tax), which has been reflected as an
extraordinary gain in the consolidated statements of operations.
25. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenue from franchising activities includes initial franchise fees charged
to lodging properties, car rental locations, tax preparation offices and
real estate brokerage offices upon execution of a franchise contract.
Initial franchise fees amounted to $44.7 million, $26.0 million and $24.2
million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Franchising information at December 31 is as follows:
1998 (1) 1997 1996
---------- -------- -------
Franchised Units in Operation 22,471 18,876 18,535
Backlog (Franchised units sold but not yet opened) 2,063 1,547 1,061
----------
(1) 1,998 franchised units were acquired in connection with the acquisition of
Jackson Hewitt.
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are calculated based on a
specified percentage of gross room revenues. Marketing fees received from
the Company's real estate brands' franchisees are based on a specified
percentage of gross closed commissions earned on the sale of real estate.
As provided in the franchise agreements, at the Company's discretion, all
of these fees are to be expended for marketing purposes and the operation
of a centralized brand-specific reservation system for the respective
franchisees and are controlled by the Company until disbursement.
Membership and service fee revenues included marketing and reservation fees
of $222.4 million, $215.4 million and $157.6 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
26. SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The provisions
of SFAS No. 131 established revised standards for public companies
relating to reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports. It also established standards for
related disclosures about products and services, and geographic areas. The
adoption of SFAS No. 131 did not affect the Company's primary financial
statements, but did affect the disclosure of segment information. The
segment information for 1997 and 1996 has been restated from the prior
years' presentation in order to conform to the requirements of SFAS No.
131.
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before interest, income taxes, depreciation and amortization,
adjusted for other charges which are of a non-recurring or unusual nature,
which are not measured in assessing segment performance or are not segment
specific. The Company determined that it has nine reportable operating
segments based primarily on the types of services it provides, the consumer
base to which marketing efforts are directed and the methods used to sell
services. Inter-segment net
F-43
revenues were not significant to the net revenues of any one segment or the
consolidated net revenues of the Company. A description of the services
provided within each of the Company's reportable operating segments is as
follows:
TRAVEL
Travel services include the franchising of lodging properties and car
rental locations, as well as vacation/timeshare exchange services. As a
franchiser of guest lodging facilities and car rental agency locations, the
Company licenses the independent owners and operators of hotels and car
rental agencies to use its brand names. Operation and administrative
services are provided to franchisees, which include access to a national
reservation system, national advertising and promotional campaigns,
co-marketing programs and volume purchasing discounts. As a provider of
vacation and timeshare exchange services, the Company enters into
affiliation agreements with resort property owners/developers (the
developers) to allow owners of weekly timeshare intervals (the subscribers)
to trade their owned weeks with other subscribers. In addition, the Company
provides publications and other travel-related services to both developers
and subscribers.
INDIVIDUAL MEMBERSHIP
Individual membership provides customers with access to a variety of
services and discounted products in such areas as retail shopping, travel,
auto, dining, home improvement, credit information and special interest
outdoor and gaming clubs. The Company affiliates with business partners
such as leading financial institutions and retailers to offer membership as
an enhancement to their credit card customers. Individual memberships are
marketed primarily using direct marketing techniques. Through the Company's
membership based online consumer sites, similar products and services are
offered over the internet.
INSURANCE/WHOLESALE
Insurance/Wholesale membership markets and administers competitively priced
insurance products, primarily accidental death and dismemberment insurance
and term life insurance. The Company also provides services such as
checking account enhancement packages, various financial products and
discount programs to financial institutions, which in turn provide these
services to their customers. The Company affiliates with financial
institutions, including credit unions and banks, to offer their respective
customer bases such products and services.
RELOCATION
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes, providing equity advances to transferees (generally
guaranteed by the corporate customer), purchase of a transferee's home
which is sold within a specified time period for a price which is at least
equivalent to the appraised value, certain home management services,
assistance in locating a new home at the transferee's destination,
consulting services and other related services.
REAL ESTATE FRANCHISE
The Company licenses the owners and operators of independent real estate
brokerage businesses to use its brand names. Operational and administrative
services are provided to franchisees, which are designed to increase
franchisee revenue and profitability. Such services include advertising and
promotions, referrals, training and volume purchasing discounts.
FLEET
Fleet 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. The
Company leases vehicles primarily to corporate fleet users under operating
and direct financing lease arrangements.
MORTGAGE
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the
F-44
servicing of loans for investors. The Company markets a variety of mortgage
products to consumers through relationships with corporations, affinity
groups, financial institutions, real estate brokerage firms and other
mortgage banks.
The Company customarily sells all mortgages it originates to investors
(which include a variety of institutional investors) either as individual
loans, as mortgage-backed securities or as participation certificates
issued or guaranteed by Fannie Mae, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association while generally
retaining mortgage servicing rights. Mortgage servicing consists of
collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering the Company's
mortgage loan servicing portfolio.
ENTERTAINMENT PUBLICATIONS
Entertainment Publications ("EPub") offers discount programs in specific
markets throughout North America and certain international markets and
enhances other products of the Company's Individual and Insurance/Wholesale
membership segment products. The Company solicits restaurants, hotels,
theaters, sporting events, retailers and other businesses which agree to
offer books and/or merchandise at discount prices. The Company sells to
schools, community groups and other organizations discount programs, which
typically provide discount offers to individuals in the form of local
discount coupon books, gift wrap and other seasonal products.
OTHER SERVICES
In addition to the previously described business segments, the Company also
derives revenues from providing a variety of other consumer and business
products and services which include the Company's tax preparation services
franchise, information technology services, car park facility services,
vehicle emergency support and rescue services, credit information services,
financial products, published products, welcoming packages to new
homeowners, value added-tax refund services to travelers and other
consumer-related services.
SEGMENT INFORMATION (1)
(In millions)
YEAR ENDED DECEMBER 31, 1998
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ------------ ------------ ------------- -----------
Net revenues $ 5,283.8 $ 1,063.3 $ 929.1 $ 544.0 $ 444.0
Adjusted EBITDA 1,589.9 542.5 (57.8) 137.8 124.5
Depreciation and amortization 322.7 88.3 23.7 14.0 16.7
Segment assets 19,842.9 2,761.6 839.0 371.5 1,130.3
Capital expenditures 355.2 79.0 28.4 16.6 69.6
REAL ESTATE
FRANCHISE FLEET MORTGAGE EPUB OTHER
------------ ----------- ---------- ----------- -----------
Net revenues $ 455.8 $ 387.4 $ 353.4 $ 197.2 $ 909.6
Adjusted EBITDA 348.6 173.8 187.6 32.1 100.8
Depreciation and amortization 53.2 22.2 8.8 8.7 87.1
Segment assets 2,014.3 4,697.2 3,504.0 97.3 4,427.7
Capital expenditures 5.8 57.7 36.4 3.9 57.8
- --------------------------------------------------------------------------------------------------------
F-45
YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ------------ ------------ ------------- -----------
Net revenues $ 4,240.0 $ 971.6 $ 778.7 $ 482.7 $ 401.6
Adjusted EBITDA 1,249.7 467.3 5.3 111.0 92.6
Depreciation and amortization 237.7 81.9 17.8 11.0 8.1
Segment assets 13,800.1 2,601.5 840.6 357.0 1,008.7
Capital expenditures 154.5 36.5 12.1 5.6 23.0
REAL ESTATE
FRANCHISE FLEET MORTGAGE EPUB OTHER
------------ ----------- ---------- ------------- -------------
Net revenues $ 334.6 $ 324.1 $ 179.2 $ 188.1 $ 579.4
Adjusted EBITDA 226.9 120.5 74.8 36.8 114.5
Depreciation and amortization 43.6 16.3 5.1 8.7 45.2
Segment assets 1,827.1 4,125.8 2,233.3 114.4 691.7
Capital expenditures 12.6 24.3 16.2 2.8 21.4
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL INSURANCE/
TOTAL TRAVEL (2) MEMBERSHIP WHOLESALE RELOCATION
------------- ------------ ------------ ------------- -----------
Net revenues $ 3,237.7 $ 429.2 $ 745.9 $ 448.0 $ 344.9
Adjusted EBITDA 802.7 189.5 43.2 99.0 65.5
Depreciation and amortization 145.5 36.9 12.8 12.8 11.2
Segment assets 12,642.4 2,686.2 882.7 297.1 1,086.4
Capital expenditures 101.2 20.8 8.9 5.2 9.1
REAL ESTATE
FRANCHISE FLEET MORTGAGE EPUB OTHER
------------ ----------- ---------- ------------- -------------
Net revenues $ 236.3 $ 293.5 $ 127.7 $ 174.6 $ 437.6
Adjusted EBITDA 137.8 99.0 45.7 22.0 101.0
Depreciation and amortization 27.3 17.6 4.4 7.0 15.5
Segment assets 1,295.5 3,991.1 1,742.4 80.9 580.1
Capital expenditures 9.9 15.3 9.9 3.6 18.5
- ----------
(1) Segment data includes the financial results associated with acquisitions
accounted for under the purchase method of accounting since the
respective dates of acquisition as follows:
ACQUISITION
SEGMENT ACQUISITION DATE
- ------------------------------ ----------------- --------------
Travel Avis October 1996
RCI November 1996
Real Estate franchise Coldwell Banker May 1996
Other NPC April 1998
Jackson Hewitt January 1998
(2) Net revenues and Adjusted EBITDA include the equity in earnings from the
Company's investment in ARAC of $13.5 million, $51.3 million and $1.2
million in 1998, 1997 and 1996, respectively. 1998 net revenues and
Adjusted EBITDA include a pre-tax gain of $17.7 million as a result of a
1998 sale of a portion of the Company's equity interest. Total assets
include such equity method investment in the amount of $139.1 million,
$123.8 million and $76.5 million at December 31, 1998, 1997 and 1996,
respectively.
F-46
Provided below is a reconciliation of total Adjusted EBITDA and total assets
for reportable segments to the consolidated amounts.
ADJUSTED EBITDA
(In millions)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -----------
Adjusted EBITDA for reportable segments $ 1,589.9 $ 1,249.7 $ 802.7
Other charges
Litigation settlement 351.0 -- --
Termination of proposed acquisitions 433.5 -- --
Executive terminations 52.5 -- --
Merger-related costs and other unusual charges (credits) (67.2) 704.1 109.4
Investigation-related costs 33.4 -- --
Financing costs 35.1 -- --
Depreciation and amortization 322.7 237.7 145.5
Interest, net 113.9 50.6 14.3
---------- ---------- --------
Consolidated income from continuing operations before income
taxes, minority interest, extraordinary gain and cumulative
effect of accounting change $ 315.0 $ 257.3 $ 533.5
========== ========== ========
TOTAL ASSETS
(in millions)
DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
Total assets for reportable segments $ 19,842.9 $ 13,800.1 $ 12,642.4
Net assets of discontinued operations 373.6 273.3 120.1
----------- ----------- -----------
Consolidated total assets $ 20,216.5 $ 14,073.4 $ 12,762.5
=========== =========== ===========
GEOGRAPHIC INFORMATION
UNITED UNITED ALL OTHER
TOTAL STATES KINGDOM COUNTRIES
(In millions) ------------- ------------- ---------------- -----------
1998
Net revenues $ 5,283.8 $ 4,277.5 $ 695.5 $ 310.8
Assets 20,216.5 16,251.0 3,706.5 259.0
Long-lived assets 1,432.8 645.9 767.8 (1) 19.1
1997
Net revenues $ 4,240.0 $ 3,669.1 $ 231.8 $ 339.1
Assets 14,073.4 12,749.2 1,014.7 309.5
Long-lived assets 544.7 477.6 49.1 18.0
1996
Net revenues $ 3,237.7 $ 2,947.3 $ 133.7 $ 156.7
Assets 12,762.5 11,566.6 830.7 365.2
Long-lived assets 523.9 444.4 65.9 13.6
------------
(1) Includes $691.0 million of property and equipment acquired in
connection with the NPC acquisition.
Geographic segment information is classified based on the geographic
location of the subsidiary. Long-lived assets are comprised of property
and equipment.
27. SUBSEQUENT EVENT
On February 4, 1999, the Company announced its intention to not proceed with
the acquisition of RAC Motoring Services ("RACMS") due to certain
conditions imposed by the UK Secretary of State of Trade and Industry that
the Company determined to be not commercially feasible and therefore
unacceptable. The Company originally announced on May 21, 1998 its
definitive agreement with the Board of Directors of Royal Automobile Club
Limited to acquire RACMS for approximately
F-47
$735.0 million in cash. The Company wrote-off $7.0 million of deferred
acquisition costs in the first quarter of 1999 in connection with the
termination of the proposed acquisition of RACMS.
28. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1998
and 1997. The underlying per share information is calculated from the
weighted average shares outstanding during each quarter, which may
fluctuate based on quarterly income levels. Therefore, the sum of the
quarters may not equal the total year amounts.
1998
--------------------------------------------------------------------------
FIRST SECOND (1) THIRD (2) FOURTH(3) TOTAL YEAR
(In millions, except per share data) ------------- ------------- ------------- ------------------ -------------
Net revenues $ 1,129.4 $ 1,277.9 $ 1,457.8 $ 1,418.7 $ 5,283.8
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 183.9 154.9 123.1 (302.0) 159.9
Loss from discontinued operations,
net of tax (11.0) (1.9) (12.1) -- (25.0)
Gain on sale of discontinued operations,
net of tax -- -- -- 404.7 (4) 404.7
--------- --------- --------- --------- ---------
Net income $ 172.9 $ 153.0 $ 111.0 $ 102.7 $ 539.6
========= ========= ========= ========= =========
Per share information:
Basic
Income (loss) from continuing
operations $ 0.22 $ 0.18 $ 0.14 $ (0.36) $ 0.19
Net income $ 0.21 $ 0.18 $ 0.13 $ 0.12 $ 0.64
Weighted average shares 838.7 850.8 850.8 850.0 848.4
Diluted
Income (loss) from continuing
operations $ 0.21 $ 0.18 $ 0.14 $ (0.36) $ 0.18
Net income $ 0.20 $ 0.18 $ 0.13 $ 0.12 $ 0.61
Weighted average shares 908.5 900.9 877.4 850.0 880.4
Common Stock Market Prices:
High 41 41 3/8 22 7/16 20 5/8
Low 32 7/16 18 9/16 10 7/16 7 1/2
F-48
1997
------------------------------------------------------------------------------
FIRST SECOND (5) THIRD (6) FOURTH TOTAL YEAR
----------------- ------------ ------------- ------------------- -------------
Net revenues $ 953.7 $ 999.6 $ 1,186.5 $ 1,100.2 $ 4,240.0
--------- -------- --------- ---------- ---------
Income (loss) from continuing operations
before extraordinary gain and
cumulative effect of accounting change 113.8 (69.4) 203.0 (181.1) 66.3
Income (loss) from discontinued
operations, net of tax 2.8 (14.6) (0.4) (14.6) (26.8)
Extraordinary gain, net of tax -- -- -- 26.4 (8) 26.4
Cumulative effect of accounting change,
net of tax (283.1)(7) -- -- -- (283.1)
--------- -------- --------- ---------- ---------
Net income (loss) $ (166.5) $ (84.0) $ 202.6 $ (169.3) $ (217.2)
========= ======== ========= ========== =========
Per share information:
Basic
Income (loss) from continuing
operations before extraordinary
gain and cumulative effect of
accounting change $ 0.14 $ (0.09) $ 0.25 $ (0.22) $ 0.08
Net income (loss) $ (0.21) $ (0.11) $ 0.25 $ (0.20) $ (0.27)
Weighted average shares 799.4 804.2 805.9 828.4 811.2
Diluted
Income (loss) from continuing
operations before extraordinary
gain and cumulative effect of
accounting change $ 0.13 $ (0.09) $ 0.23 $ (0.22) $ 0.08
Net income (loss) $ (0.19) $ (0.11) $ 0.23 $ (0.20) $ (0.27)
Weighted average shares 877.1 804.2 889.0 828.4 851.7
Common Stock Market Prices:
High 26 7/8 26 3/4 31 3/4 31 3/8
Low 22 1/2 20 23 11/16 26 15/16
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(1) Includes charges of $32.2 million ($20.4 million, after tax or $0.02 per
diluted share) comprised of the costs of the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs. Such charges were
partially offset by a credit of $27.5 million ($18.6 million, after tax
of $0.02 per diluted share) associated with changes to the original
estimate of costs to be incurred in connection with the 1997 Unusual
Charges.
(2) Includes charges of: (i) $76.4 million ($49.2 million, after tax or $0.06
per share) comprised of costs associated with the investigations into
previously discovered accounting irregularities at the former CUC
business units, including incremental financing costs and separation
payments, principally to the Company's former chairman; and (ii) a $50.0
million ($32.2 million, after-tax or $0.04 per diluted share) non-cash
write off of certain equity investments in interactive membership
businesses and impaired goodwill associated with the National Library of
Poetry, a Company subsidiary.
(3) Includes charges of: (i) $433.5 million ($281.7 million, after tax or
$0.33 per diluted share) for the costs of terminating the proposed
acquisitions of American Bankers and Providian; (ii) $351.0 million
($228.2 million, after tax or $0.27 per diluted share) associated with an
agreement to settle the PRIDES securities class action suit, and (iii)
$12.4 million (9.9 million, after tax or $0.01 per diluted share)
comprised of the costs of the investigations into previously discovered
accounting irregularities at the former CUC business units, including
incremental financing costs and separation payments. Such charges were
partially offset by a credit of $42.8 million ($27.5 million, after tax
or $0.03 per diluted share) associated with changes to the original
estimate of costs to be incurred in connection with the 1997 Unusual
Charges.
(4) Represents gains associated with the sales of Hebdo Mag and CDS (see Note
5 -- Discontinued Operations).
(5) Includes Unusual Charges of $295.4 million primarily associated with the
PHH Merger. Unusual Charges of $278.9 million ($208.4 million, after-tax
or $.24 per diluted share) pertained to continuing operations and $16.5
million were associated with discontinued operations.
(6) Includes Unusual Charges in the net amount of $442.6 million
substantially associated with the Cendant Merger and Hebdo Mag merger.
Net Unusual Charges of $425.2 million ($296.3 million, after-tax or $.34
per diluted share) pertained to continuing operations and $17.4 million
were associated with discontinued operations.
(7) Represents a non-cash after-tax charge of $0.35 per diluted share to
account for the cumulative effect of a change in accounting, effective
January 1, 1997, related to revenue and expense recognition for
memberships.
(8) Represents the gain on the sale of Interval, which was sold coincident to
the Cendant Merger in consideration of Federal Trade Commission
anti-trust concerns within the timeshare industry.
F-49