<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
REGISTRATION NOS.
333-49405,
333-49405-01,
333-49405-02
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
<S> <C> <C>
CENDANT CORPORATION DELAWARE 06-0918165
CENDANT CAPITAL II DELAWARE 22-356523
CENDANT CAPITAL III DELAWARE 22-3565321
(EXACT NAME OF THE REGISTRANTS (State or other Jurisdiction of (I.R.S. Employer
AS SPECIFIED IN THEIR RESPECTIVE CHARTERS) Incorporation or Organization) Identification No.)
</TABLE>
6 SYLVAN WAY
PARISPPANY, NEW JERSEY 07054
(973) 428-9700
FAX: (973) 496-5331
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JAMES E. BUCKMAN, ESQ.
VICE CHAIRMAN
AND GENERAL COUNSEL
CENDANT CORPORATION
6 SYLVAN WAY
PARSIPPANY, NEW JERSEY 07054
(973) 428-9700
FAX: (973) 496-5331
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
VINCENT J. PISANO, ESQ. ERIC J. BOCK, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP VICE PRESIDENT-LEGAL
919 THIRD AVENUE CENDANT CORPORATION
NEW YORK, NY 10022 6 SYLVAN WAY
(212) 735-3000 PARSIPPANY, NEW JERSEY 07054
FAX: (212) 735-2000 (973) 428-9700
FAX: (973) 496-5331
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as determined
by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement Number of the earlier
Effective Registration Statement for the same offering. [ ]
If this Form is a Post-Effective Amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement Number of the earlier Effective Registration Statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
OFFERING PRICE MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE PER AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities(2) ..........................
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value ................
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock, par value $.01 .............
- ---------------------------------------------------------------------------------------------------------------------
Stock Purchase Units of Cendant Corporation
- ---------------------------------------------------------------------------------------------------------------------
Stock Purchase Contracts of Cendant
Corporation ................................
- ---------------------------------------------------------------------------------------------------------------------
Warrants of Cendant Corporation .............
- ---------------------------------------------------------------------------------------------------------------------
Preferred Securities of Cendant Capital II .
- ---------------------------------------------------------------------------------------------------------------------
Preferred Securities of Cendant Capital III
- ---------------------------------------------------------------------------------------------------------------------
Guarantees and backup Undertakings of
Cendant Corporation in connection with
Preferred Securities of Cendant Capital II
and Cendant Capital III ....................
- ---------------------------------------------------------------------------------------------------------------------
Total....................................... $3,000,000,000(3) 100% $3,000,000,000(3)(4) $885,000(5)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(i).
(2) Also includes such indeterminate number of Debt Securities, shares of
Common Stock, shares of Preferred Stock, Stock Purchase Units, Stock
Purchase Contracts, Guarantees and Warrants of Cendant Corporation, or
Preferred Securities of Cendant Capital II and Cendant Capital III as
may be issued upon conversion or exchange of any of the Debt Securities
or Preferred Stock that provide for conversion or exchange into other
securities.
(3) Such amount represents the principal amount of any Debt Securities
issued at their principal amount, the issue price rather than the
principal amount of any Debt Securities issued at original issue
discount, the liquidation preference of any Preferred Stock and the
amount computed pursuant to Rule 457(i) for any Common Stock.
(4) No separate consideration will be received for Debt Securities,
Preferred Stock, Common Stock, Stock Purchase Units, Stock Purchase
Contracts, Guarantees and Warrants of Cendant Corporation, or Preferred
Securities of Cendant Capital II and Cendant Capital III issuable upon
conversion or exchange of the Debt Securities or Preferred Stock.
(5) Pursuant to Rule 429 under the Securities Act of 1933, as amended, this
Registration Statement contains a combined Prospectus that also relates
to $1.1 billion aggregate offering price of debt securities, common
stock and preferred stock previously registered pursuant to the
Company's Registration Statement on Form S-3 (File No. 333-45227) and
not issued. The filing fee associated with such securities was
previously paid with such Registration Statement. This Registration
Statement constitutes Amendment No. 4 to the Registration Statement on
Form S-3 (No. 333-45227) pursuant to which the total amount of unsold
debt securities, common stock and preferred stock may be offered and
sold as Debt Securities, Common Stock, Preferred Stock, Stock Purchase
Units or Stock Purchase Contracts of Cendant Corporation, Preferred
Securities of Cendant Capital II, Preferred Securities of Cendant
Capital III or Guarantees and back-up Undertakings of Cendant
II and Cendant Capital III, without limitation as to class of
securities, together with the Securities registered hereunder, through
the use of the combined Prospectus included herein. In the event any
such previously registered debt securities, common stock or preferred
stock are offered prior to the effective date of this Registration
Statement, they will not be included in any Prospectus hereunder.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE
SECURITIES AND THEY ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED NOVEMBER 17, 1998
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED , 1998)
$
[GRAPHIC OMITTED]
CENDANT CORPORATION LOGO
% NOTES DUE 200
----------------
The notes will bear interest at the rate of % per year. The interest
rate will be subject to adjustment under certain circumstances described in
this prospectus supplement. Interest on the notes will be payable on and
of each year, beginning , 1999. Interest on the notes will accrue
from , 1998. The notes will mature on , 200 .
The notes will be redeemable prior to maturity, in whole or in part, as
described in this prospectus supplement. The notes do not have the benefit of
any sinking fund.
The notes are unsecured and rank equally with all of our other unsecured
senior indebtedness. The notes will rank effectively junior to all liabilities
of our subsidiaries. In addition, our subsidiaries' ability to pay dividends or
make loans to us may be prohibited or otherwise restricted by their respective
credit arrangements.
The notes will be issued only in registered form in denominations of
$1,000. We do not intend to list the notes on any securities exchange.
INVESTING IN THE NOTES INVOLVES RISKS, INCLUDING THOSE DESCRIBED IN THE
"RISK FACTOR" SECTION APPEARING ON PAGE S-16 OF THIS PROSPECTUS SUPPLEMENT.
----------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
---------- ------
<S> <C> <C>
Public Offering Price (1) ...................... % $
Underwriting Discount .......................... % $
Proceeds, before expenses, to Cendant .......... % $
</TABLE>
(1) Purchasers will also be required to pay accrued interest from
, 1998 if settlement occurs after that date.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement and the accompanying prospectus are truthful or
complete. Any representation to the contrary is a criminal offense.
We expect that the notes will be ready for delivery in global form only
through the book-entry delivery system of The Depository Trust Company on or
about , 1998.
----------------
THE JOINT BOOK-RUNNING MANAGERS ARE:
CHASE SECURITIES INC. MERRILL LYNCH & CO.
----------------
The date of this prospectus supplement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT:
Forward-Looking Statements ............................................................... S-3
Summary .................................................................................. S-4
Risk Factor .............................................................................. S-16
Consolidated Ratio of Earnings to Fixed Charges .......................................... S-17
Use of Proceeds .......................................................................... S-17
Capitalization ........................................................................... S-18
Management's Discussion and Analysis of Financial Condition and Results of Operations .... S-19
Description of the Notes ................................................................. S-47
Underwriting ............................................................................. S-51
Legal Matters ............................................................................ S-52
Where You Can Find More Information ...................................................... S-52
Incorporation of Information We File With the SEC ........................................ S-52
Index to Financial Statements (appears after the Prospectus) ............................. F-1
PROSPECTUS:
Available Information .................................................................... 2
Incorporation of Certain Documents by Reference .......................................... 3
The Company .............................................................................. 5
Use of Proceeds .......................................................................... 6
Consolidated Ratio of Earnings to Fixed Charges .......................................... 6
Description of the Debt Securities ....................................................... 6
General Description of Capital Stock ..................................................... 16
Description of Warrants .................................................................. 21
Description of Preferred Securities of the Cendant Trusts ................................ 21
Description of Trust Guarantees .......................................................... 23
Description of Stock Purchase Contracts and Stock Purchase Units ......................... 25
Plan of Distribution ..................................................................... 26
Legal Opinions ........................................................................... 26
Experts .................................................................................. 27
</TABLE>
----------------
You should read this Prospectus Supplement along with the Prospectus that
follows. Both documents contain information you should consider when making
your investment decision. You should rely only on the information contained or
incorporated by reference in this Prospectus Supplement and the Prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this Prospectus Supplement and the Prospectus is
accurate as of the date on the front cover of this Prospectus Supplement only.
Our business, financial condition, results of operations and prospects may have
changed since that date.
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
We make statements about our future results in this Prospectus Supplement
and the accompanying Prospectus 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, the NPC
acquisition and the proposed RACMS acquisition (described in "Summary --
The Company -- 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 the completion and impact of the sale of our discontinued operations,
such as Hebdo Mag International, Inc. and our software 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 Prospectus Supplement
and the accompanying Prospectus (including the documents incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus) from
the foregoing 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.
S-3
<PAGE>
SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire Prospectus Supplement and accompanying
Prospectus and the audited and unaudited financial statements, including the
related notes, included or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus before making an investment
decision. Except as expressly indicated or unless the context otherwise
requires, "Cendant," the "Company," "we," "our" and "us" means Cendant
Corporation, a Delaware corporation, and its subsidiaries.
THE COMPANY
GENERAL
We are one of the foremost consumer and business services companies in the
world. We were created through the merger (the "Merger") of CUC International
Inc. ("CUC") and HFS Incorporated ("HFS") in December 1997. We provide
fee-based services to consumers within the Travel, Real Estate and Alliance
Marketing business segments. We generally do not own the assets or share the
risks associated with the underlying businesses of our customers.
Our businesses provide a wide range of complementary consumer and business
services within three principal operating segments:
o Travel Services: our travel segment franchises hotel and car rental
businesses, facilitates vacation timeshare exchanges and manages
corporate and government vehicle fleets;
o Real Estate Services: our real estate segment franchises real estate
brokerage businesses, assists in employee relocation, provides home
buyers with mortgages and provides servicing on home buyer mortgages;
and
o Alliance Marketing: our alliance marketing segment provides an array of
value driven products and services through more than 20 membership clubs
and client relationships.
We also offer a tax preparation services franchise, information technology
services, credit information services and financial products.
Travel Services
In the travel industry, 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 general use
car rental system in the world (based on total revenues and volume of rental
transactions). We currently own approximately 20% of the capital stock of the
world's largest Avis franchisee, Avis Rent A Car, Inc. ("ARAC").
We also own Resort Condominiums International, LLC ("RCI"), the world's
leading timeshare exchange organization, and PHH Vehicle Management Services
Corporation ("PHH Vehicle Management"), which operates the second largest
provider in North America of comprehensive vehicle management services. PHH
Vehicle Management is the market leader in the United Kingdom for fuel and
fleet management services. With our purchase of National Parking Corporation
Limited ("NPC") in April 1998, we became the largest private (non-municipality
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. We also operate the world's leading value-added tax refund
service for travelers.
S-4
<PAGE>
Real Estate Services
In the residential real estate industry, 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.
Our Cendant Mobility Services Corporation subsidiary is the largest provider of
corporate relocation services in the United States, offering relocation clients
a variety of services in connection with the transfer of a client's employees.
Through Cendant Mortgage Corporation ("Cendant Mortgage"), we originate, sell
and service 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
Our Alliance Marketing segment is divided into three divisions:
o Individual Membership: with more than 33 million memberships, we provide
customers with access to a variety of products and services in such
areas as retail shopping, travel, auto, dining and home improvement;
o Insurance/Wholesale: with nearly 31 million customers, we market and
administer insurance products, primarily accidental death insurance, and
provide products and services such as checking account enhancement
packages, financial products and discount programs to customers of
various financial institutions; and
o Lifestyle: with over 11 million customers, we provide customers with
unique products and services that are designed to enhance a customer's
purchasing power.
Our alliance marketing activities are conducted principally through
Cendant Membership Services, Inc. and certain of our other wholly-owned
subsidiaries, including FISI*Madison Financial Corporation ("FISI"), Benefit
Consultants, Inc. ("BCI"), and Entertainment Publications, Inc. ("EPub").
Other Services
By acquiring Jackson Hewitt Inc. ("Jackson Hewitt") on January 7, 1998, we
operate the second largest tax preparation service system in the United States
with locations in 43 states. Through Jackson Hewitt, we franchise a system of
approximately 2,000 offices that specialize in computerized preparation of
federal and state individual income tax returns. We also offer information
technology services to hotels, car rental and other travel related businesses,
credit information services to consumers and financial products to banks.
Franchise Businesses
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
that we intend to sell). Instead, we provide our franchisee customers with
services designed to increase their revenue and profitability.
RECENT DEVELOPMENTS
Change in Focus; Sale of Hebdo Mag and Plan to Sell Software Business
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
S-5
<PAGE>
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 such dispositions, if any, together with the
proceeds of this and future debt issues and bank borrowings and cash from
operations, to retire our outstanding $3.25 billion bank term loan, to execute
a program to repurchase initially up to $1.0 billion of our common stock and
for other general corporate purposes.
As a result of our change in focus, on August 12, 1998, we announced that
we agreed to sell 100% of our international classified advertising subsidiary,
Hebdo Mag International, Inc. ("Hebdo Mag"), to a company organized by Hebdo
Mag management. The acquisition agreement, as amended, provides that we will
receive approximately seven million shares of our common stock owned by Hebdo
Mag management and $360 million in cash on the closing of the transaction. The
sale of Hebdo Mag is conditioned upon, among other things, the receipt of
certain governmental approvals and financing. Although we cannot provide any
assurances, we currently anticipate that this transaction, if completed, will
close in the fourth quarter of 1998.
We have also announced that we have engaged Credit Suisse First Boston to
analyze strategic alternatives in regard to our consumer software business and
we are currently in various stages of discussions with certain parties
regarding a potential sale of such business unit. We offer consumer software in
various multimedia forms, predominately on CD-ROM for personal computers. Our
consumer software business unit is one of the largest personal computer
consumer software groups in the world, and a leader in entertainment,
educational and personal productivity software. This unit includes Sierra
On-Line, Inc., Blizzard Entertainment and Knowledge Adventure, Inc., and offers
such titles as Diablo, Starcraft, You Don't Know Jack, King's Quest, JumpStart,
Math Blaster, Reading Blaster and many others.
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" or "ABI") 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 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
will record a $280 million after-tax charge in the fourth quarter of 1998 in
connection with our payment to American Bankers and transaction expenses.
On October 14, 1998, an action claiming to be a class action (the "ABI
Action") was filed against us and four of our former officers and directors.
The complaint claims that we made false and
S-6
<PAGE>
misleading public announcements and filings with the Securities and Exchange
Commission (the "SEC") in connection with our proposed acquisition of American
Bankers allegedly in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and that the plaintiff
and the alleged class members purchased American Bankers' securities in
reliance on these public announcements and filings at inflated prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Litigation."
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-municipality owned) car park operator in the
United Kingdom, with a portfolio of approximately 500 owned and managed car
parks in over 100 towns and city centers and major airport locations. NPC has
also developed a broad-based 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.
RAC Motoring Services Acquisition
On May 21, 1998, we announced that we reached an agreement with the Board
of Directors of Royal Automobile Club Limited ("RAC") to purchase RAC Motoring
Services ("RACMS") for a total price of \P450 million, or approximately $735
million in cash. As part of the purchase price, we agreed to make a charitable
contribution of \P13 million (approximately $21 million) to the RAC Foundation
to promote awareness and understanding of the environmental issues related to
mobility and the use of motor vehicles, and to help promote, research and
investigate solutions to such issues.
On June 19, 1998, members of the RAC approved the first stage of the
two-step process to implement the sale of RACMS to us. On July 8, 1998, the
High Court of Justice in England and Wales (the "U.K. Court") approved the
reorganization within the RAC group companies. The final stage of the process
involves the sale of RACMS to us. On August 12, 1998, the shareholders of RACMS
approved the sale of RACMS to us. On September 24, 1998, the U.K. Secretary of
State for Trade and Industry referred the RACMS acquisition to the U.K.
Monopolies and Mergers Commission (the "MMC") for its review. The closing of
this transaction is subject to certain conditions, including MMC approval.
Although we cannot provide any assurances, we currently anticipate that this
transaction, if completed, will close in the spring of 1999.
RACMS operates the U.K.'s second largest roadside assistance company with
over 6 million associate members, including 2.7 million under fleet programs
and car manufacturers' warranty programs and 2.9 million direct individual
members. RACMS also operates London Wall Insurance, a provider of auto warranty
products, and the British School of Motoring ("BSM"), the U.K.'s largest
driving school company.
S-7
<PAGE>
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 before 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,
the Audit Committee of our Board of Directors (the "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," 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 the Audit Committee of the Board of
Directors had submitted its report (the "Report") to the Board of Directors. A
copy of the Report has been filed as an exhibit to our Current Report on Form
8-K dated August 28, 1998.
As a result of the findings of the Investigations, we have restated our
previously reported financial statements for the years ended December 31, 1997,
1996 and 1995 and the six months ended June 30, 1998. The 1997 restated amounts
also include 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 income from continuing operations. The 1997 annual 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" and Note 3 to the consolidated financial
statements contained elsewhere in this Prospectus Supplement).
Restated consolidated results include, but are not limited to:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ---------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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
S-8
<PAGE>
$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 "-- The Company -- 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 Investigations
Since our April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, and prior to the date of this
Prospectus Supplement, 71 lawsuits claiming to be class actions, two lawsuits
claiming to be brought derivatively on our behalf and one individual lawsuit
have been filed against us and certain current and former officers and
directors of Cendant and HFS, asserting various claims under the federal
securities laws (the "Federal Securities Actions"). Some of the Federal
Securities Actions also name as defendants Merrill Lynch, Pierce, Fenner &
Smith Incorporated and, in one case, Chase Securities Inc., underwriters for
our February 1998 FELINE PRIDES securities offering. Two others also name Ernst
& Young LLP, CUC's former independent accountants. Sixty-four of the Federal
Securities Actions were filed in the United States District Court for the
District of New Jersey, six were filed in the United States District Court for
the District of Connecticut (including the individual action), one was filed in
the United States District Court for the Eastern District of Pennsylvania, and
one was filed in New Jersey Superior Court. The Federal Securities Actions
filed in the District of Connecticut and the Eastern District of Pennsylvania
have been transferred to the District of New Jersey. On June 10, 1998, we moved
to dismiss or stay the Federal Securities Action filed in New Jersey Superior
Court on the ground that, among other things, it was duplicative of the actions
filed in federal courts. The court granted that motion on August 7, 1998
without prejudice to the plaintiff's right to refile the case in the District
of New Jersey.
Certain of these Federal Securities Actions claim to be brought on behalf
of purchasers of our common stock and/or options on common stock during various
periods, most frequently beginning May 28, 1997 and ending April 15, 1998
(although the alleged class periods begin as early as March 21, 1995 and end as
late as July 15, 1998). Other of these Federal Securities Actions claim to be
brought on behalf of persons who exchanged common stock of HFS for our common
stock in connection with the Merger. Some plaintiffs purport to represent both
of these types of investors. In addition, eight Federal Securities Actions
pending in the District of New Jersey claim to be brought, either in their
entirety or in part, on behalf of purchasers of our PRIDES securities. The
complaints in the Federal Securities Actions allege, among other things, that
as a result of accounting irregularities, our previously issued financial
statements were materially false and misleading and that the defendants knew or
should have known that these financial statements caused the prices of our
securities to be inflated artificially. The Federal Securities Actions
variously allege violations of Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, Section 14(a) of the Exchange Act and Rule 14a-9
promulgated thereunder, Section 20(a) of the Exchange Act and Sections 11, 12
and 15 of the Securities Act of 1933, as amended (the "Securities Act").
Certain actions also allege violations of common law. The individual action
also alleges violations of Section 18(a) of the Exchange Act and the Florida
securities law. The class action complaints seek damages in unspecified
amounts. The individual action seeks damages in the amount of approximately $9
million plus interest and expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
order consolidating the 50 Federal Securities Actions that had at that time
been filed in the United States District Court for the District of New Jersey,
under the caption In re: Cendant Corporation Litigation, Master File
S-9
<PAGE>
No. 98-1664 (WHW). Pursuant to the Order, all related actions subsequently
filed in the District of New Jersey are to be consolidated under that caption.
United States District Court Judge William H. Walls has selected lead
plaintiffs and lead counsel to represent all potential class members in the
consolidated actions and ordered that a consolidated amended complaint be filed
by December 14, 1998.
On November 11, 1998, the lead plaintiff representing purchasers of the
Company's PRIDES securities filed an amended and consolidated complaint
containing substantially the allegations discussed above and asserting claims
under Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and
20(a) of the Exchange Act. Simultaneously, the lead plaintiff filed motions
seeking (1) certification of a class of persons who purchased the Company's
PRIDES securities between February 24 and April 15, 1998 pursuant to a
registration statement and prospectus prepared in connection with the public
offering of the Company's PRIDES securities; (2) summary judgment against us on
the claims brought pursuant to Section 11 of the Securities Act; and (3) a
preliminary injunction requiring us to place $300 million in a trust account
for the benefit of the proposed class of PRIDES purchases. The Company intends
to vigorously oppose the motions; however, the Company makes no assurances as
to the timing, outcome or resolution of the motions.
In addition, on April 27, 1998 a shareholder derivative action, Deutch v.
Silverman, et al., No. 98-1998 (WHW), was filed in the District of New Jersey
against certain of our current and former directors and officers, The Bear
Stearns Companies, Inc., Bear Stearns & Co. Inc. and, as a nominal party,
Cendant. The complaint in the Deutch action alleges that certain of our
officers and directors breached their fiduciary duties by selling their shares
of our stock while in possession of non-public material information concerning
accounting irregularities. The complaint also alleges various other breaches of
fiduciary duty, mismanagement, negligence and corporate waste and seeks damages
on our behalf.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware. The
Corwin action is claimed to have been brought both derivatively, on our behalf,
and as a class action, on behalf of all shareholders of HFS who exchanged their
HFS shares for our shares in connection with the Merger. The Corwin action
names as defendants HFS and 28 individuals who are and were directors of
Cendant and HFS. The complaint in the Corwin action, as amended on July 28,
1998, alleges that the defendants breached their fiduciary duties of loyalty,
good faith, care and candor in connection with the Merger, in that they failed
to properly investigate CUC's operations and financial statements before
approving the Merger at an allegedly inadequate price. The amended complaint
also alleges that our directors breached their fiduciary duties by entering
into an employment agreement with our former Chairman, Walter Forbes, in
connection with the Merger that allegedly amounted to corporate waste. The
Corwin action seeks, among other things, rescission of the Merger and
compensation for all losses and damages allegedly suffered as a result of the
alleged actions of the defendants. 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 Federal Securities Actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters described 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.
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
S-10
<PAGE>
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.
Management and Corporate Governance Changes
On July 28, 1998, Walter A. Forbes, who had been Chairman of CUC before
the Merger, resigned as our Chairman and as a member of our Board of Directors.
Henry R. Silverman, who had been Chairman and Chief Executive Officer of HFS
before the Merger and who was our Chief Executive Officer, was unanimously
elected by the Board of Directors to be Chairman and will continue to serve as
our Chief Executive Officer and President. Since July 28, 1998, a total of 11
members of the Board formerly associated with CUC also resigned, leaving us
with 17 directors.
On July 28, 1998, we also approved the adoption of Amended and Restated
By-Laws and voted to eliminate the governance plan adopted as part of the
Merger. This resulted in the elimination of the 80% super-majority vote
requirement provisions of our By-Laws relating to the composition of the Board
of Directors and the limitations on the removal of the Chairman and the Chief
Executive Officer.
S-11
<PAGE>
THE OFFERING
TERMS OF THE NOTES:
Aggregate principal
amount................ $ .
Interest rate.......... % per year. The interest rate will be
subject to adjustment based upon the rating on
the notes. See "Description of the Notes --
Interest Rate Adjustment."
Maturity date.......... , 200 .
Interest payment dates. and of each year, beginning
, 1999.
Interest calculations.... Based on a 360-day year of twelve 30-day
months.
Ranking.................. The notes will be senior unsecured obligations
and will rank equally in right of payment with
all of our other unsecured senior indebtedness.
The notes will rank effectively junior to all
liabilities of our subsidiaries. In addition, our
subsidiaries' ability to pay dividends or make
loans to us may be prohibited or otherwise
restricted by their respective credit
arrangements with third parties. See "Description
of the Notes -- Ranking."
Redemption or
sinking fund............ The notes will be redeemable prior to maturity,
in whole at any time or in part from time to
time, at a redemption price equal to the greater
of (i) 100% of the principal amount of the notes
to be redeemed or (ii) the sum of the present
values of the remaining scheduled payments of
principal and interest (calculated at the
interest rate on the notes on the date of their
issuance, regardless of any interest rate
adjustment at any time) discounted to the
redemption date, at the Treasury Rate (as defined
herein) plus 50 basis points, plus, in each case,
accrued interest to the date of redemption. The
notes do not have the benefit of any sinking
fund. See "Description of the Notes -- Optional
Redemption."
Form of note............. One or more global securities, held in the name
of The Depository Trust Company.
Settlement and payment... Same-day -- immediately available funds.
Rating................... The notes will be rated by Moody's Investors
Service, Inc., by Standard & Poor's Ratings
Services, by Duff & Phelps Credit Rating
Co., and by Fitch IBCA.
Use of proceeds.......... We estimate that the net proceeds from the
offering will be approximately $ . We intend
to use these proceeds to repay outstanding debt
and for general corporate purposes. See "Use of
Proceeds."
Risk factors............. We urge you to carefully read the "Risk Factor"
section beginning on page S-16, where we describe
specific risks associated with the notes, before
you make your investment decision.
For additional information with respect to the notes, see "Description of
the Notes."
S-12
<PAGE>
SUMMARY FINANCIAL INFORMATION
The table on the following page sets forth our summary historical
financial data for each of the last three fiscal years in the period ended
December 31, 1997 and for each of the nine-month periods ended September 30,
1998 and 1997. This financial data is derived from, and should be read in
conjunction with, the audited consolidated financial statements and the related
notes as filed on our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997 (the "Form 10-K/A") and the unaudited consolidated interim
financial statements as filed on our Quarterly Report on Form 10-Q for the
nine-month period ended September 30, 1998, and the related notes. The audited
consolidated financial statements and the related notes and the unaudited
interim consolidated financial statements and the related notes are also
included elsewhere in this Prospectus Supplement. The financial data for 1997,
1996 and 1995 is restated as described in Note 3 to the audited consolidated
financial statements included in our Form 10-K/A and in this Prospectus
Supplement. Financial data for the nine-month periods ended September 30, 1998
and 1997 and at September 30, 1998 is unaudited and, in the opinion of our
management, includes all adjustments necessary for a fair presentation of such
data. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the entire year. The table on the
following page also presents our unaudited pro forma financial information for
the year ended December 31, 1997 and the nine-month period ended September 30,
1998, which gives effect to our April 27, 1998 acquisition of NPC, as if such
acquisition occurred on January 1, 1997. The summary financial information in
the table on the following page should be read together with our (i) unaudited
pro forma consolidated statements and the related notes for the year ended
December 31, 1997 and the nine-month period ended September 30, 1998 included
in our Current Report on Form 8-K dated November 16, 1998; and (ii) the section
titled "Where You Can Find More Information" and "Incorporation of Information
We File With the SEC" appearing elsewhere in this Prospectus Supplement.
S-13
<PAGE>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1998 1997
------------- ----------------------- --------------------
(PRO FORMA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1)(2):
Net revenues ........................ $ 4,066.6 $3,865.1 $ 3,139.8
---------- ----------- ------------
Expenses:
Operating ........................... 1,433.5 1,306.9 958.1
Marketing and reservation ........... 853.2 853.2 750.3
General and administrative .......... 523.1 487.4 455.0
Depreciation and amortization ....... 256.2 241.3 175.4
Merger-related costs and other
unusual charges .................... (24.4) (24.4)(3) 278.9(4)
Other charges ....................... 158.6 158.6 (8) --
Interest, net ....................... 103.3 72.9 36.3
---------- ----------- ------------
Total expenses ..................... 3,303.5 3,095.9 2,654.0
---------- ----------- ------------
Income from continuing
operations before income
taxes, minority interest,
extraordinary gain and
cumulative effect of accounting
change ............................. 763.1 769.2 485.8
Provision for income taxes .......... 266.9 273.0 238.4
Minority interest, net .............. 34.4 34.3 --
---------- ----------- ------------
Income from continuing
operations before
extraordinary gain and
cumulative effect of accounting
change ............................. $ 461.8 461.9 247.4
==========
Income (loss) from discontinued
operations, net of taxes ........... (25.0) (12.2)
----------- ------------
Income before extraordinary gain
and cumulative effect of
accounting change .................. 436.9 235.2
Extraordinary gain, net of tax ...... -- --
----------- ------------
Income before cumulative effect
of accounting change ............... 436.9 235.2
Cumulative effect of accounting
change, net of tax ................. -- (283.1)(10)
----------- ------------
Net income (loss) ................... $ 436.9 $ (47.9)
=========== ============
OTHER INFORMATION:
Ratio of earnings to fixed
charges (11) ....................... 2.86x 2.63x
PER SHARE INFORMATION (DILUTED):
Income from continuing
operations before
extraordinary gain and
cumulative effect of accounting
change ............................. $ 0.53 $ 0.53 $ 0.29
Income (loss) from discontinued
operations, net .................... (0.03) (0.01)
Extraordinary gain, net ............. -- --
Cumulative effect of accounting
change, net ........................ -- (0.32)
Net income (loss) ................... $ 0.50 $ (0.04)
=========== ============
Weighted average shares
outstanding ........................ 895.0 895.0 877.1
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1997 1996 1995
------------- -------------------- -------------------- ------------------
(PRO FORMA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1)(2):
Net revenues ........................ $ 4,837.4 $ 4,240.0 $ 3,237.7 $ 2,616.1
---------- ------------ --------- -----------
Expenses:
Operating ........................... 1,694.1 1,322.3 1,183.2 1,024.9
Marketing and reservation ........... 1,031.8 1,031.8 910.8 743.6
General and administrative .......... 746.7 636.2 341.0 283.3
Depreciation and amortization ....... 283.4 237.7 145.5 100.4
Merger-related costs and other
unusual charges .................... 704.1 704.1 (5) 109.4(6) 97.0(7)
Other charges ....................... -- -- -- --
Interest, net ....................... 141.1 50.6 14.3 16.6
---------- ------------ ---------- -------------
Total expenses ..................... 4,601.2 3,982.7 2,704.2 2,265.8
---------- ------------ ---------- -------------
Income from continuing
operations before income
taxes, minority interest,
extraordinary gain and
cumulative effect of accounting
change ............................. 236.2 257.3 533.5 350.3
Provision for income taxes .......... 182.9 191.0 220.2 143.2
Minority interest, net .............. 0.4 -- -- --
---------- ------------ ---------- -------------
Income from continuing
operations before
extraordinary gain and
cumulative effect of accounting
change ............................. $ 52.9 66.3 313.3 207.1
==========
Income (loss) from discontinued
operations, net of taxes ........... (26.8) 16.7 22.7
------------ ---------- -------------
Income before extraordinary gain
and cumulative effect of
accounting change .................. 39.5 330.0 229.8
Extraordinary gain, net of tax ...... 26.4 (9) -- --
------------ ---------- -------------
Income before cumulative effect
of accounting change ............... 65.9 330.0 229.8
Cumulative effect of accounting
change, net of tax ................. (283.1)(10) -- --
------------ ---------- -------------
Net income (loss) ................... $ (217.2) $ 330.0 $ 229.8
============ ========== =============
OTHER INFORMATION:
Ratio of earnings to fixed
charges (11) ....................... 1.63x 2.64x 2.20x
PER SHARE INFORMATION (DILUTED):
Income from continuing
operations before
extraordinary gain and
cumulative effect of accounting
change ............................. $ 0.06 $ 0.08 $ 0.39 $ 0.28
Income (loss) from discontinued
operations, net .................... (0.03) 0.02 0.03
Extraordinary gain, net ............. 0.03
Cumulative effect of accounting
change, net ........................ (0.35)
------------
Net income (loss) ................... $ (0.27) $ 0.41 $ 0.31
============ ========== =============
Weighted average shares
outstanding ........................ 851.7 851.7 821.6 763.7
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------------------------
1998 1997 1996 1995
------------ ------------ ------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(1)(2)(12):
Total assets ........................ $ 20,074.4 (13) $ 14,073.4 $ 12,762.5 $ 8,519.5
Total debt (excluding debt under
management and mortgage
programs) .......................... 4,011.2 (14) 1,246.0 780.8 336.0
Assets under management and
mortgage programs .................. 7,303.2 6,443.7 5,729.2 4,955.6
Debt under management and
mortgage programs .................. 6,195.8 5,602.6 5,089.9 4,427.9
Shareholders' equity ................ 4,707.5 3,921.4 3,955.7 1,898.2
</TABLE>
S-14
<PAGE>
- ----------
(1) Financial data include the following mergers and acquisitions accounted
for under the pooling of interests method of accounting: (i) the Merger;
(ii) the April 30, 1997 merger (the "PHH Merger") with PHH Corporation
("PHH"); (iii) the August 1996 merger with Ideon Group, Inc. ("Ideon");
and (iv) the 1995 acquisitions of Getko Group Inc. ("Getko"), North
American Outdoor Group, Inc. and Advance Ross Corporation ("Advance
Ross").
(2) Financial data include the operating results of the following significant
acquisitions accounted for under the purchase method of accounting since
the respective dates of acquisition: (i) NPC in April 1998; (ii) RCI in
November 1996; (iii) Avis, Inc. ("Avis") equity investment in October
1996; (iv) Coldwell Banker Corporation ("Coldwell Banker") in May 1996;
and (v) Century 21 Real Estate Corporation in August 1995.
(3) Represents a net credit to Unusual Charges which primarily represents
changes in previously recorded estimates. Such credit was net of $24.1
million of costs incurred related to lease terminations.
(4) Represents charges recorded during the second quarter of 1997 principally
in connection with and coincident to the PHH Merger.
(5) Represents a non-cash charge ($504.7 million, after tax or $0.58 per
diluted share) recorded during the second and fourth quarters of 1997
primarily associated with and coincident to the Merger and the PHH
Merger.
(6) Represents a non-cash charge ($70.0 million, after tax or $0.09 per
diluted share) recorded in connection with the 1996 merger with Ideon.
(7) Represents a non-cash charge ($62.1 million, after tax or $0.08 per
diluted share) related to the abandonment of certain Ideon development
efforts and the restructuring of the SafeCard division and corporate
infrastructure of Ideon.
(8) Includes (i) $81.4 million of costs incurred related to the
Investigations and a non-recurring termination benefit provided to Walter
Forbes, the former CUC and Company Chairman; (ii) $50.0 million of
non-cash write-offs of impaired intangible assets and interactive
marketing business investments; and (iii) $27.2 million of incremental
financing costs primarily incurred in connection with the execution of a
term loan facility.
(9) Represents extraordinary gain ($0.03 per diluted share) related to our
sale of our Interval International, Inc. ("Interval") subsidiary, which
was sold in consideration of Federal Trade Commission anti-trust concerns
within the timeshare industry.
(10) Represents a non-cash after-tax charge of $283.1 million ($0.35 per
diluted share and $0.32 per diluted share for the year ended December 31,
1997 and nine months ended September 30, 1997 respectively) to account
for the cumulative effect of a change in accounting, effective January 1,
1997, related to revenue and expense recognition for memberships with
full refund offers. The effect of adopting such accounting change on the
Company's 1997 operating results, before the cumulative effect
adjustment, was additional after-tax expense of $14.6 million ($0.02 per
diluted share) comprised of a reduction in revenues of $4.9 million with
an increase in operating expenses of $18.8 million and a tax benefit of
$9.1 million. The pro forma effect of the accounting change on income
from continuing operations before extraordinary gain for 1996 and 1995,
as if the accounting change had been applied retroactively to those
years, would have been additional after-tax expense of $7.4 million
($0.01 per diluted share) and $29.1 million ($0.04 per diluted share),
respectively.
(11) See "Consolidated Ratio of Earnings to Fixed Charges" included elsewhere
in this Prospectus Supplement.
(12) Prior to the Merger, CUC and HFS had not declared or paid cash dividends
on their common stock. However, cash dividends were declared and paid by
Ideon and PHH to their shareholders prior to their respective mergers
with the Company. The Company expects to retain its earnings for the
development and expansion of its business, the repayment of indebtedness
and the repurchase of its common stock and does not anticipate paying
dividends on its common stock in the foreseeable future.
(13) Includes cash and cash equivalents of $1,611.2 million. The pro forma
effect of a pre-tax $400 million termination fee paid on October 13, 1998
in connection with the American Bankers settlement agreement reduced cash
and cash equivalents to $1,211.2 million.
(14) Includes the current portion of the Term Loan Facility (as defined
herein) of $2,545.0 million.
S-15
<PAGE>
RISK FACTOR
You should carefully read the following risk factor before purchasing any
notes.
DISCOVERY OF ACCOUNTING IRREGULARITIES AND RELATED LITIGATION AND GOVERMENT
INVESTIGATIONS
On April 15, 1998, Cendant announced that, in the course of transferring
responsibility for the Company's accounting functions from Cendant personnel
associated with CUC before the Merger to Cendant personnel associated with HFS
before the Merger and preparing for the reporting of first quarter 1998
financial results, Cendant discovered accounting irregularities in certain CUC
business units. As a result, the Audit Committee of Cendant's Board of
Directors and its counsel, assisted by auditors, immediately began an intensive
investigation that resulted, in part, in Cendant restating its previously
reported financial results for 1997, 1996, 1995 and the first six months of
1998. See "Summary -- The Company -- Matters Relating to the Accounting
Irregularities and Accounting Policy Change -- Accounting Irregularities."
As a result of these accounting irregularities, numerous lawsuits claiming
to be class actions, two lawsuits claiming to be brought derivatively on
Cendant's behalf and an individual lawsuit have been filed against Cendant and,
among others, certain current and former officers and directors of the Company
and HFS, asserting, among other claims, various claims under the federal
securities laws, including claims under Sections 11, 12 and 15 of the
Securities Act and Sections 10(b), 14(a) and 20(a) of and Rules 10b-5 and 14a-9
under the Exchange Act and certain state statutory and common laws, including
claims that financial statements previously issued by Cendant allegedly were
false and misleading and that Cendant allegedly knew or should have known that
these statements allegedly caused the price of Cendant's securities to be
artificially inflated. Although the Company expects that it will oppose any
such contention, the plaintiffs in these actions may contend that any damages
should reflect, in whole or in part, the decline in market price of Cendant
securities following: (i) the announcement of the accounting irregularities on
April 15, 1998 after the New York Stock Exchange closed; and (ii) the press
release concerning the accounting irregularities that the Company issued on
July 14, 1998. On April 15, 1998, the last sale price of Cendant common stock
on the New York Stock Exchange was $35.625. On April 16, 1998, the day
following to the announcement of the accounting irregularities, the last sale
price of Cendant common stock on the New York Stock Exchange was $19.0625. On
July 13, 1998, the last sale price of Cendant common stock on the New York
Stock Exchange was $18.875. On July 14, 1998, the last sale price of Cendant
common stock on the New York Stock Exchange was $15.6875. On November 16, 1998,
the last sale price of Cendant common stock on the New York Stock Exchange was
$13.25.
In addition, the SEC and the United States Attorney for the District of
New Jersey are conducting investigations relating to the accounting issues.
While management has made all adjustments considered necessary as a result of
the findings of the Company's investigations and the restatement of the
Company's financial statements for 1997, 1996 and 1995, and the first six
months of 1998, the Company can provide no assurances that additional
adjustments will not be necessary as a result of these government
investigations. See "Summary -- The Company -- Matters Relating to the
Accounting Irregularities and Accounting Policy Change -- Class Action
Litigation and Government Investigations."
Cendant does 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 the Company or settlements and could require substantial
payments by the Company. Cendant's management believes that adverse outcomes in
such proceedings and investigations or any other resolutions (including
settlements) could have a material impact on the Company's financial condition,
results of operations and cash flows.
S-16
<PAGE>
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed charges of us
and our consolidated subsidiaries for each of the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
- ------------------------------ ------------------------------------
1998(1) 1997 1997 1996 1995
- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2.86x 2.63x 1.63x 2.64x 2.20x
</TABLE>
- ----------
(1) Includes 100% of PHH Corporation consolidated net income of which only
40% of consolidated net income is available to the Company pursuant to
PHH's credit arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The ratio of earnings to fixed charges is computed by dividing the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of accounting change plus fixed charges, less capitalized
interest by fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred financing costs) and the
portion of operating lease rental expense that is representative of the
interest factor (deemed to be one-third of operating lease rentals).
USE OF PROCEEDS
We intend to use the net proceeds we receive from the sale of the notes to
repay a portion of our 364-day term loan facility (the "Term Loan Facility")
and, to the extent additional proceeds are available, for general corporate
purposes. The Term Loan Facility provides for borrowings of up to $3.25
billion, the full amount of which has been drawn as of the date hereof. The
Term Loan Facility bears interest at a rate of LIBOR plus the applicable LIBOR
spread, as defined (the rate equaled 6.16% at September 30, 1998), and matures
on May 28, 1999. We used approximately $2.0 billion of the Term Loan Facility
to refinance the outstanding borrowings under our revolving credit facilities
and the remainder to prefund a portion of the American Bankers acquisition and
for general corporate purposes (including working capital). At September 30,
1998, after giving effect to the $400 million termination fee payment to
American Bankers on October 13, 1998, we had cash and cash equivalents of
approximately $1.2 billion. See "Summary -- The Company -- Recent
Developments," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Financing (Exclusive of Management and Mortgage Program
Financing)."
S-17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1998.
The Actual amounts are those reported and the As Adjusted amounts give effect
to the offering of the notes and our application of the estimated net proceeds
of the offering. See "Use of Proceeds." This table should be read in
conjunction with, and is qualified in its entirety by reference to, our
financial statements and related notes contained herein or in documents
incorporated by reference in this Prospectus Supplement and in the accompanying
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------
ACTUAL AS ADJUSTED
-------------- ------------
(IN MILLIONS)
<S> <C> <C>
LONG-TERM DEBT:(1)
% Notes Due 200 .............................................. $ -- $
Term Loan Facility ................................................ 705.0 (2)
3% Convertible Subordinated Notes ................................. 545.1
Other long-term debt .............................................. 58.4
----------- ----------
TOTAL LONG-TERM DEBT ............................................. 1,308.5
----------- ----------
Mandatorily redeemable preferred
securities issued by subsidiaries (3) ............................ 1,472.1 1,472.1
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 10 million shares; none
issued ........................................................... -- --
Common stock, $.01 par value; authorized two billion shares; issued
858,281,922 shares ............................................... 8.6 8.6
Additional paid-in capital ........................................ 3,405.2 3,405.2
Retained earnings ................................................. 1,377.5 1,377.5
Accumulated other comprehensive loss (4) .......................... (6.7) (6.7)
Restricted stock, deferred compensation ........................... (2.7) (2.7)
Treasury stock, at cost; 6,750,546 shares ......................... (74.4) (74.4)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....................................... 4,707.5 4,707.5
----------- -----------
TOTAL CAPITALIZATION ........................................... $ 7,488.1 $
============= ===========
</TABLE>
- ----------
(1) Long-term debt excludes an aggregate of $6.2 billion of indebtedness of
PHH, one of our subsidiaries, which is self-sufficient in managing its
funding sources to ensure adequate liquidity to finance assets under
management programs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Management and Mortgage Program Financing."
(2) Does not include $2,545.0 million of indebtedness which is not designated
as long-term debt.
(3) These securities were issued in connection with our February 1998 FELINE
PRIDES offering.
(4) The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
NET UNREALIZED ACCUMULATED
GAIN (LOSS) ON CURRENCY OTHER
MARKETABLE TRANSLATION COMPREHENSIVE
SECURITIES ADJUSTMENT INCOME (LOSS)
---------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, 1998 ............................. $ 0.2 $ (38.4) $ (38.2)
Currency translation adjustment ...................... -- 35.5 35.5
Net unrealized loss on marketable securities ......... (4.0) -- ( 4.0)
------ ------- -------
Balance, September 30, 1998 .......................... $ (3.8) $ (2.9) $ (6.7)
====== ======= =======
</TABLE>
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In December 1997, Cendant Corporation (the "Company") was created through
the merger (the "Cendant Merger") of HFS Incorporated ("HFS") and CUC
International Inc. ("CUC"). The Company is one of the foremost consumer and
business services companies in the world. The Company provides fee-based
services to consumers within the Travel, Real Estate and Alliance Marketing
business segments. The Company generally does not own the assets or share the
risks associated with the underlying businesses of its customers.
In the Travel Services segment, the Company is the world's largest
franchisor of lodging facilities and rental car facilities, the leading
provider of vacation timeshare exchange services, a leading provider of
international fleet management services, a leading roadside assistance company
in the U.K. and the largest operator of brand name parking garages in the U.K.
In the Real Estate Services segment, the Company is both the world's largest
franchisor of residential real estate brokerage offices and provider of
corporate relocation services and is a leading mortgage lender in the United
States. In the Alliance Marketing segment, the Company is a leading provider of
membership consumer services and products, a significant marketer and
administrator of insurance products through financial institutions and a
provider of products and services designed to enhance customers' lifestyles.
As publicly announced on April 15, 1998, the Company discovered accounting
irregularities in certain business units of CUC. As a result, the Company
together with its counsel and assisted by auditors, immediately began an
intensive investigation (the "Company Investigation"). In addition, the Audit
Committee of the Company's Board of Directors initiated an investigation into
such matters (the "Audit Committee Investigation," together with the Company
Investigation, the "Investigations"). As a result of the findings from the
Investigations, the Company restated its financial statements for the years
ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998.
The 1997 annual results, presented herein, have also been restated for a change
in accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships with full refund offers.
The Company recently has changed its focus from making strategic
acquisitions of new businesses to maximizing the opportunities and growth
potential of its existing businesses. In connection with this change in focus,
the Company intends to review and evaluate its existing businesses to determine
if they continue to meet its business objectives. As part of its ongoing
evaluation of such businesses, the Company intends from time to time to explore
and conduct discussions with regard to divestitures and related corporate
transactions. However, the Company can give no assurance with respect to the
magnitude, timing, likelihood or financial or business effect of any possible
transaction. The Company also cannot predict whether any divestitures or other
transactions will be consummated or, if consummated, will result in a financial
or other benefit to the Company. The Company intends to use a portion of the
proceeds from such dispositions, if any, together with the proceeds of this and
future debt issues and bank borrowings and cash from operations, to retire the
Company's outstanding $3.25 billion bank term loan, to execute a program to
initially repurchase up to $1.0 billion of the Company's common stock and for
other general corporate purposes.
As a result of the Company's change in focus, on August 12, 1998, the
Company announced that it agreed to sell 100% of its classified advertising
business unit, Hebdo Mag International Inc. ("Hebdo Mag") to a company
organized by Hebdo Mag management and has engaged Credit Suisse First Boston to
analyze strategic alternatives in regard to a potential third party sale of the
Company's entire consumer software business unit ("Cendant Software"). The
Company is currently in various stages of discussions with certain parties
regarding a potential sale of Cendant Software. See
"-- Liquidity and Capital Resources -- Discontinued Operations".
RESULTS OF OPERATIONS
The operating results of the Company and its underlying business segments
are comprised of business combinations which have been accounted for as
poolings of interests. Accordingly, all
S-19
<PAGE>
financial information has been restated as if all of the pooled companies
operated as one entity since inception. In addition, the Company and certain of
its business segments also include businesses which were acquired and accounted
for by the purchase method of accounting. Accordingly, the results of
operations of such acquired companies were included in the consolidated
operating results of the Company from the respective dates of acquisition. See
"-- Liquidity and Capital Resources -- Business Combinations" for a discussion
of the Company's mergers and acquisitions. In the underlying "Results of
Operations" discussions of the Company and its business segments, operating
expenses exclude net interest expense, income taxes and minority interest.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER
30, 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997 INCREASE
------------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Net revenues .................................. $ 3,865.1 $ 3,139.8 23%
---------- ---------
Operating expenses:
Excluding Unusual Charges .................... 3,020.2 2,338.8 29%
Unusual Charges (Credits) (1) ................ (24.4) 278.9 *
---------- ---------
Total operating expenses ...................... 2,995.8 2,617.7 14%
---------- ---------
Operating income .............................. 869.3 522.1 67%
Interest, net (2) ............................ 100.1 36.3 176%
---------- ---------
Pre-tax income before minority interest and
cumulative effect of accounting change ...... 769.2 485.8 58%
Provision for income taxes .................... 273.0 238.4 15%
Minority interest, net ........................ 34.3 -- *
---------- ---------
Income from continuing operations before
cumulative effect of accounting change ...... 461.9 247.4 87%
Loss from discontinued operations
net of taxes ................................ (25.0) (12.2) 105%
Cumulative effect of accounting change,
net of tax .................................. -- (283.1) *
---------- ---------
Net income (loss) ............................. $ 436.9 $ (47.9) *
========== ==========
</TABLE>
- ----------
(1) Merger-related costs and other unusual charges.
(2) Includes $27.2 million of financing costs incurred as a result of the
Company's discovery of accounting irregularities in the CUC business
units.
* Not meaningful.
Operating income from continuing operations increased $347.2 million,
which was comprised of a $725.3 million (23%) increase in net revenues and a
$378.1 million (14%) increase in operating expenses. Contributing to the
increase in operating income was a reduction of Unusual Charges of $303.3
million primarily attributable to $278.9 million of Unusual Charges incurred
during the second quarter of 1997 principally in connection with and coincident
to the April 1997 merger (the "PHH Merger") of PHH Corporation ("PHH") with and
into HFS. A net credit to Unusual Charges of $24.4 million was recorded in 1998
which primarily represented changes in previously recorded estimates. Excluding
Unusual Charges operating income increased $43.9 million in 1998 from 1997
despite $81.4 million of costs incurred related to the Investigations and a
non-recurring termination benefit provided to Walter Forbes, the former CUC and
Company Chairman, as well as $50.0 million of non-cash write-offs of impaired
Alliance Marketing segment intangible assets and Other segment interactive
marketing business investments. In addition, in 1998, the Company incurred
$62.1 million
S-20
<PAGE>
of incremental individual membership solicitation costs which were planned
before management was aware of the accounting change associated with
memberships sold with a full refund offer, requiring the Company to expense
such costs as incurred. The Company experienced increases in operating income
in 1998 primarily as a result of the continued growth in the Travel (38%) and
Real Estate (75%) segments. In addition, businesses acquired during 1998
accounted for $46.8 million of the incremental increase in operating income in
1998. A discussion of operating income excluding merger-related costs and other
unusual charges is included in the segment discussion to follow.
Interest expense, net, increased $63.8 million in 1998 primarily due to
(i) $27.2 million of incremental financing costs which were primarily incurred
in connection with the execution of a term loan facility; (ii) incremental
average borrowings which the Company used to finance more than $2.6 billion of
acquisitions during the nine months ended September 30, 1998 including the
acquisitions of NPC, Jackson Hewitt and Harpur (See "-- Liquidity and Capital
Resources -- Completed Acquisitions"); and (iii) interest income earned in 1997
on the proceeds from the February 1997 issuance of $550 million 3% Convertible
Subordinated Notes and other available cash, which were invested in short-term
marketable securities.
The Company's effective tax rate was reduced from 49.1% in 1997 to 35.5%
in 1998 due to the non-deductibility of a significant amount of Unusual Charges
recorded during 1997 and the Company's continued focus on executing strategies
to optimize its effective tax rate. The 1997 effective income tax rate includes
a tax benefit from only a 25.3% effective tax rate on Unusual Charges due to
the significant non-deductibility of such costs. Excluding Unusual Charges, the
effective income tax rate on income from continuing operations decreased from
40.4% in 1997 to 35.6% in 1998. Such decrease is due to the Company's execution
of certain tax minimization strategies, the favorable impact of lower tax rates
in international jurisdictions and lower non-deductible amortization expense as
a percentage of pre-tax income.
Minority interest of $34.3 million in 1998 primarily related to the
preferred dividend payable in cash on the FELINE PRIDES and the trust preferred
securities issued on March 2, 1998. See "-- Liquidity and Capital Resources --
Financing Exclusive of Management and Mortgage Program Financing".
Discontinued operations, consisting of the Company's consumer software and
classified advertising businesses generated net losses in 1998 and 1997 of
$25.0 million and $12.2 million, respectively. The operating results of
discontinued operations in 1997 included Unusual Charges, after tax, of $10.0
million for severance associated with the termination of certain consumer
software executives. Excluding Unusual Charges, the consumer software business
unit incurred incremental net losses in 1998 compared to 1997 of $24.9 million
comprised of increased net revenues of $84.4 million, which were more than
offset by a $121.2 million increase in operating expenses. Additional operating
expenses were incurred during 1998 for development and marketing costs. Net
income of the classified advertising business increased $2.1 million on a net
revenue increase of $56.6 million. Operating income within the classified
advertising business unit increased $13.1 million primarily as a result of
profits from businesses acquired by Hebdo Mag prior to its merger with the
Company during the fourth quarter of 1997. The operating income increase within
the classified advertising unit was partially offset by a higher effective tax
rate in 1998.
The Company recorded a non-cash after-tax charge in 1997 of $283.1 million
to account for the cumulative effect of an accounting change, effective January
1, 1997, related to revenue and expense recognition for memberships with full
refund offers.
SEGMENT DISCUSSION
The underlying discussion of each segment's operating results for the nine
months ended September 30, 1998 and 1997 focuses on results from continuing
operations, excluding interest, taxes, Unusual Charges and the cumulative
effect of a change in accounting ("Operating Income"). Management believes such
discussion is the most informative representation of recurring,
non-transactional related operating results of the Company's business segments.
S-21
<PAGE>
Travel Services Segment
The Company provides a spectrum of services necessary to domestic and
international travelers. The Company is the world's largest franchisor of
nationally recognized hotel brands and car rental operations (Avis). Royalty
revenue is received from franchisees under contracts that generally range from
10 to 50 years in duration. The Company is the world's largest provider of
timeshare exchange services (RCI) to timeshare owners under one to three year
membership programs which require both exchange fees for exchanging vacation
weeks and recurring membership fees. In addition, the Company is a leading
provider of corporate fleet management and leasing services and also operates
the largest value-added tax refund service worldwide.
The Company acquired NPC on April 27, 1998. NPC owns National Car Parks,
the largest private (non-municipal) car park operator in the United Kingdom
(the "UK"). NPC also owns Green Flag, the third largest roadside assistance
group in the UK, which offers a wide range of emergency support and rescue
services to approximately 3.5 million members in the UK.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997 INCREASE
------------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 1,415.4 $ 1,015.0 39%
Operating expenses ......... 931.0 663.1 40%
---------- ----------
Operating income ........... $ 484.4 $ 351.9 38%
========== ==========
</TABLE>
Operating income increased $132.5 million (38%) due to a revenue increase
of $400.4 million (39%) while expenses increased $267.9 million (40%).
Excluding the 1998 acquisitions of Harpur and NPC, operating income increased
$94.5 million (27%), revenue increased $112.3 million (11%), operating expenses
increased $17.8 million (3%) and operating margins increased from 35% to 40%.
In addition to acquisitions, revenue increases were achieved by all
business units comprising the Travel Services segment. Corporate fleet
management revenue, exclusive of Harpur, increased $17.9 million (7%) due
primarily to a $17.1 million (17%) increase in vehicle leasing due to a 10%
price improvement and an $18.2 million (14%) increase in service fees due to a
24% increase in the number of fuel and other service based cards. Lodging
franchise fees increased $17.3 million (6%) driven by a 2% increase in revenue
per available room and a 2% increase in royalty rate. Timeshare exchange
revenue increased $14.5 million (11%) driven by a 7% increase in the exchange
fee and subscription revenue increased $5.3 million (6%) driven by 6% growth in
the member base. The operating expense increase was due principally to $250.2
million in acquisitions while the remaining $17.7 million in increase in
operating expenses represents only a 3% increase reflecting the Travel Services
segment's operating leverage.
Real Estate Services Segment
The Company provides a range of services related to home sales,
principally in the United States. The Company is the world's largest franchisor
of real estate brokerage offices through its CENTURY 21 (Registered
Trademark), COLDWELL BANKER (Registered Trademark) and ERA (Registered
Trademark) franchise brands. Similar to the Travel Services segment franchise
business, the Company receives royalty revenue from approximately 12,000
franchisees under contracts with terms ranging from five to 50 years. The
Company is the world's largest provider of corporate employee relocation
services and receives fees for providing an array of services such as reselling
relocating employees' homes with the employee or client corporation generally
bearing the economic risk of such transaction, assisting relocating employees
in finding homes, moving household goods, expense reporting and other services.
The Company also operates the largest in-bound mortgage telemarketing operation
in the United States generating origination profits from the sale of mortgage
notes, but retains recurring servicing revenue streams over the life of the
mortgage. In addition, the Company is a distributor of welcome packages, which
provide discounts from local merchants to new homeowners. Customer referrals
are made within the various real estate related services as well as generating
a database for prospective Alliance Marketing segment cross selling.
S-22
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997 INCREASE
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 994.0 $ 718.4 38%
Operating expenses ......... 555.9 468.1 19%
-------- --------
Operating income ........... $ 438.1 $ 250.3 75%
======== ========
</TABLE>
Operating income increased $187.8 million (75%) primarily as a result of
significant increases in mortgage origination revenue, real estate franchise
royalty fees and relocation revenue while operating expenses increased a
moderate 19% generating a 9.2 percentage point operating margin improvement for
the Real Estate Services segment. Revenue increased $275.6 million (38%),
principally comprised of an $87.8 million (42%) increase in real estate
franchise royalty fees, a $126 million (147%) increase in mortgage origination
revenue and a $40.7 million (14%) increase in relocation related revenue. A 23%
increase in home sale volume and a 14% increase in the underlying average price
of homes sold drove the royalty fee increase while a $10.3 billion (132%)
increase in mortgage originations generated the mortgage origination revenue
growth with government home sales and referrals driving $27.6 and $11.7
million, respectively, of growth in relocation revenue. Operating expenses
increased $87.8 million (19%) consisting of a $24.7 million (111%) increase in
information technology expenses required to support growth and the
consolidation of duplicate systems of acquired companies, $28.7 million (46%)
incremental mortgage production and support department costs, $14.0 million
(30%) additional government home sale expense and $16.5 million additional
depreciation and amortization due to expansion with the balance being other
growth related expenses.
Alliance Marketing Segment
The Company derives its Alliance Marketing revenue principally from
membership fees, insur- ance premiums and product sales. The Alliance Marketing
segment is divided into three divisions: individual membership ("Individual
Membership"); insurance/wholesale ("Insurance/Wholesale"); and lifestyle
("Lifestyle"). Individual Membership, with more than 33 million members,
provides customers with access to a variety of products and services in such
areas as retail shopping, travel, auto, dining and home improvement.
Insurance/Wholesale, with nearly 31 million customers, markets and administers
insurance products, primarily accidental death insurance. Insurance/Wholesale
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. Lifestyle, with over 11 million
customers, provides customers with unique products and services that are
designed to enhance a customer's lifestyle.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
INCREASE
1998 1997 (DECREASE)
------------- ------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 1,248.3 $ 1,123.9 11%
Operating expenses ......... 1,273.9 1,019.8 25%
--------- ----------
Operating income ........... $ (25.6) $ 104.1 (125)%
========== ==========
</TABLE>
Operating income decreased $129.7 million (125%) to a loss of $25.6
million despite a $124.4 million (11%) increase in revenue. A $254.1 million
increase in operating expenses primarily resulted from a $37.0 million non-cash
write-off related to impaired goodwill associated with a Company subsidiary,
the National Library of Poetry, $77.0 million of incremental marketing
expenditures in the individual membership businesses, $27.3 million of costs
associated with expanding international operations, $28.8 million associated
with revenue growth and increased marketing expenditures at the North American
Outdoor Group ("NAOG") and $31.7 million of expenses associated with
Credentials, Inc. ("Credentials"), an individual membership business acquired
in March 1998. The Company's decision to increase marketing solicitation costs
preceded the Company's awareness of the
S-23
<PAGE>
requirement to change its accounting for memberships sold with a full refund
offer, which requires the deferral of revenue generated by such solicitation
offers until the refund offer expires and expensing such costs as incurred.
Individual revenues increased $54.8 million (11%) due primarily to the
Credentials acquisition and an increase in average membership prices.
Insurance/wholesale revenues increased $57.1 million (16%) primarily from a
$25.3 million (41%) increase in revenues from international sources and a $31.8
million (11%) domestic revenue increase. NAOG revenues increased $25.1 million
(36%) due primarily to increases in book video and advertising revenues.
Other Services Segment
The Company operates a variety of other businesses in addition to those
which comprise each of the Company's core business segments. Such business
operations and transactions are primarily comprised of: (i) franchising the
second largest tax preparation service system in the United States as a result
of the Company's first quarter 1998 acquisition of Jackson Hewitt; (ii)
information technology and reservation system support services provided to the
car rental, hotel and other travel related industries; (iii) casino credit
information and marketing services; (iv) financial products provided to banks;
and (v) equity in earnings from the Company's investment in the Avis Rent A
Car, Inc. ("ARAC") car rental company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
INCREASE
1998 1997 (DECREASE)
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 207.4 $ 282.5 (27)%
Operating expenses ......... 259.4 187.8 38%
------- --------
Operating income ........... $ (52.0) $ 94.7 (155)%
======== ========
</TABLE>
Operating income decreased $146.7 million (155%) from both a $75.1 million
decrease in revenue and a $71.6 million in expenses.
The increase in expenses included $81.3 million of costs incurred during
1998 associated with the Investigations including a $50.4 million termination
benefit provided to the former Company Chairman Walter Forbes upon his July
1998 separation from the Company in accordance with his employment contract.
Incremental expenses incurred during 1998 also included a $13.0 million
write-off of certain Company investments in interactive businesses and other
net increases in operating expenses resulting from acquisitions and the
integration of acquired businesses and assets including $30.2 million from
Jackson Hewitt expenses and other travel agency operations. The increase in
operating expenses during 1998 were partially offset by $64.4 million of 1997
expenses incurred by Interval International Inc. ("Interval"), a former Company
subsidiary which was sold in December 1997.
The $75.1 million decrease in revenue resulted primarily from a $39.1
million decrease in equity of earnings from the Company's investment in ARAC
due to a decrease in common equity ownership interest from 100% to
approximately 20% and a $90.7 million decrease from the absence of revenue from
Interval operations net of $52.4 million associated with the acquired Jackson
Hewitt operations.
S-24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 INCREASE (DECREASE)
------------- ------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C>
CONTINUING OPERATIONS
Net revenues .......................................... $ 4,240.0 $ 3,237.7 31%
--------- ----------
Operating expenses:
Excluding Unusual Charges ............................ 3,228.0 2,580.5 25%
Unusual Charges (1) .................................. 704.1 109.4 544%
--------- ----------
Total operating expenses .............................. 2,523.9 2,689.9 (6)%
--------- ----------
Operating income ...................................... 307.9 547.8 (44)%
Interest, net ......................................... 50.6 14.3 254 %
--------- ----------
Pre-tax income 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 ..................... 66.3 313.3 (79)%
Income (loss) from discontinued operations, net of
taxes ............................................... (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 (166)%
========== ==========
</TABLE>
- ----------
* Not meaningful.
(1) Merger-related costs and other unusual charges ("Unusual Charges").
Operating income from continuing operations decreased $239.9 million (44%)
despite a $1.0 billion (31%) revenue increase and only a $647.5 million (25%)
increase in operating expenses, excluding Unusual Charges. A discussion of
operating income excluding Unusual Charges is included in the segment
discussion to follow. Unusual Charges increased $594.7 million (544%)
representing merger-related costs and other unusual charges incurred primarily
in connection with and coincident to the PHH Merger in April 1997 (the "Second
Quarter 1997 Charge") and the Merger in December 1997 (the "Fourth Quarter 1997
Merger Charge"). Unusual Charges primarily represent costs such as irrevocable
contributions to independent trusts, asset impairments as well as exit costs
for terminated personnel, consolidation of office locations and terminated
contracts coincident with the mergers. The Unusual Charges are discussed
separately below.
As a result of the discussion above, pre-tax income from continuing
operations before extraordinary gain and cumulative effect of accounting change
decreased $276.2 million (52%) to $257.3 million. In addition to the decrease
in operating income discussed above, interest, net, increased $36.3 million
(254%) to $50.6 million. The increase in interest, net, resulted primarily from
the February 1997 issuance of $550 million 3% Convertible Subordinated Notes
and interest income earned in 1996 on approximately $414 million of excess
proceeds generated from the $1.2 billion public offering of 46.6 million shares
of Company common stock in May 1996. The increase in interest, net, was
partially offset by a decrease 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.
S-25
<PAGE>
Income from continuing operations decreased $247.0 million (79%) to $66.3
million. This resulted from the unfavorable variance in pre-tax income and an
increase in the effective income tax rate from 41.2% in 1996 to 74.3% in 1997.
The 1997 effective income tax rate includes an additional 29.1% effective tax
rate on 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 showed a $26.8 million net loss in 1997 compared
to $16.7 million of net income 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. Unusual Charges in 1997 primarily consisted of $19.4
million of after tax severance associated with four terminated consumer
software company executives and $5.0 million of after tax compensation expense
incurred in connection with a stock appreciation rights plan paid upon a change
in control associated with the October 1997 merger with Hebdo Mag. The Hebdo
Mag merger also resulted in a $15.2 million extraordinary loss, net of tax,
associated with the early extinguishment of debt. Unusual Charges in 1996
consisted primarily of professional fees incurred in connection with mergers
with Sierra On-Line, Inc. ("Sierra") and Davidson and Associates, Inc.
("Davidson") in July 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. While classified advertising net
income remained relatively unchanged from 1996, net income from the consumer
software business decreased $28.5 million (72%) to $11.1 million in 1997.
Increased sales in 1997 of $49.2 million (13%) 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 partially
attributable to titles which were not released to the marketplace as planned in
December 1997.
The $26.4 million extraordinary gain represents the after tax gain on the
sale of Interval in December 1997. The Federal Trade Commission directed the
Company to sell Interval in connection with the Merger as a result of
anti-trust concerns regarding the combined market share in the timeshare
exchange industry of Interval and HFS subsidiary, RCI.
The Company recorded a non-cash after-tax charge in 1997 of $283.1 million
to account for the cumulative effect of an accounting change, effective January
1, 1997, related to revenue and expense recognition for memberships with full
refund offers.
1997 MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
In 1997, the Company incurred merger-related costs and other Unusual
Charges of $738.0 million of which $704.1 million ($504.7 million after tax or
$0.58 per diluted share) was related to continuing operations and $33.9 million
was associated with businesses which are discontinued. Charges incurred during
the fourth quarter of 1997 of $454.9 million were substantially associated with
and/or coincident to the Merger and the merger with Hebdo Mag (collectively,
the "Fourth Quarter 1997 Charge"). Unusual Charges of $283.1 million, comprised
of $295.4 million of charges incurred in the second quarter of 1997 reduced by
$12.3 million of changes in estimates recorded in the fourth quarter of 1997,
were substantially associated with the PHH Merger (the "Second Quarter 1997
Charge"). The Unusual Charges recorded during 1997 related to the
aforementioned mergers and the utilization of such liabilities is summarized by
charge below.
Fourth Quarter 1997 Charge
The Company incurred Unusual Charges in the fourth quarter of 1997
totaling $454.9 million substantially associated with the Merger and the Hebdo
Mag merger. In addition to $170.0 million of professional fees and executive
compensation expense incurred directly as a result of the mergers, the Company
incurred $284.9 million of costs resulting from reorganization plans 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
initiated a plan in 1997 to consolidate European
S-26
<PAGE>
call centers in Cork, Ireland in 1998 and upgrade the quality standards of its
hotel franchise businesses, which resulted in planned terminations of franchise
properties commencing in January 1998. In December 1997, the Company
irrevocably contributed $70.0 million to independent technology trusts which
made technology investments for the direct benefit of hotel and real estate
franchisees. Management also approved a plan to terminate a contract, which may
restrict the Company from maximizing opportunities afforded by the Merger.
Following is a description of costs by type of expenditure and reduction
of corresponding liabilities through December 31, 1997.
Unusual Charges include $93.0 million of estimated professional fees
primarily consisting of investment banking, legal and accounting fees incurred
in connection with the mergers. Approximately $43.4 million of invoices were
paid in the fourth quarter of 1997 leaving a $49.6 million balance to be paid
in 1998. 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 corporate functions and nine European call centers and
$12.3 million of other personnel related costs. Total employees to be
terminated, including seven corporate employees, approximated 474 with limited
terminations in 1997. The $170.7 million of personnel related liabilities were
reduced in 1997 by $35.2 million of non-cash reductions primarily including
$23.7 million and $9.5 million of costs associated with restricted stock and
stock option compensation, respectively, and $8.9 million of personnel related
payments. Approximately $45.3 million of retirement plan costs were paid in
January 1998. Unusual Charges include $78.3 million of business termination
costs which consists of a $48.3 million impairment of hotel franchise agreement
assets associated with a quality upgrade program and $30.0 million of contract
termination costs. Of the $78.3 million of business termination liabilities,
$30.0 million was paid in December 1997 and $48.3 million of non-cash
reductions of intangible assets were recorded. Facility related and other
Unusual Charges of $112.9 million include $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 accordance with SFAS 121 in the fourth quarter of 1997.
Approximately $70.0 million was paid for these obligations in December 1997 and
the remaining $21.2 million is anticipated to be paid over the earlier of lease
buy-out or lease term.
At September 30, 1998, $85.9 million of liabilities remained which are
primarily comprised of $63.3 million of severance and other personnel related
costs and $18.7 million of outstanding facility-related liabilities.
Approximately $4.1 million of such remaining costs will be paid upon the
closure of nine European call centers which will be substantially completed in
1998. Approximately $37.8 million of executive termination benefits will be
paid or otherwise extinguished upon the settlement of employment obligations.
Outstanding facility-related liabilities will be paid or otherwise extinguished
upon the aforementioned closures of European call centers and other office
consolidations. During the nine months ended September 30, 1998, the Company
recorded a net credit of $13.2 million to the Merger related costs and other
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 $295.4 million of Unusual Charges in the second quarter of 1997 was
primarily associated with the PHH Merger. During the fourth quarter, 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. In
addition to $125.8 million of professional fees and executive compensation
expenses incurred directly as a result of the PHH Merger, the Company incurred
$157.3 million of expenses resulting from reorganization plans formulated prior
to and implemented as of the PHH Merger date. The PHH Merger afforded the
combined Company an opportunity to rationalize its combined corporate, real
estate and travel segment businesses, and corresponding support and service
functions to gain organizational efficiencies and maximize profits. Such
initiatives included 500 job reductions including
S-27
<PAGE>
the virtual elimination of all PHH corporate functions and facilities in Hunt
Valley, Maryland. Management initiated a plan prior to the 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. With respect to the real estate segment, management
initiated plans to integrate its relocation, 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 corporate relocation business
unit subsidiaries. The real estate segment initiatives resulted in
approximately 380 planned job reductions, write-offs of abandoned systems and
leasehold assets commencing in the second quarter 1997.
Following is a description of costs by type of expenditure and reduction
of corresponding liabilities through December 31, 1997:
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 several corporate relocation service businesses,
including the previous two largest relocation businesses worldwide as well as
the consolidation of corporate activities. Personnel related charges also
include termination benefits such as severance, medical and other benefits.
Personnel related charges also include retirement benefits pursuant to
pre-existing contracts resulting from a change in control. Several grantor
trusts were established and funded by the Company in November 1996 to pay such
benefits in accordance with the terms of the PHH merger agreement. The
Company's restructuring plan resulted in the termination of approximately 560
employees (principally corporate employees located in North America), of which
364 were terminated by December 31, 1997. Approximately $102.4 million of
personnel related costs were paid in 1997 and $9.8 million of non-cash stock
compensation was recognized. Unusual Charges also include professional fees of
$30.3 million of which $29.2 million was paid in 1997 and is primarily
comprised of investment banking, accounting and legal fees incurred in
connection with the PHH Merger. Unusual Charges also include business
termination charges of $55.6 million, which are comprised of $38.8 million of
costs to exit certain activities primarily within the Company's fleet
management business, a $7.3 million termination fee associated with a joint
venture that competed with 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. In connection with the business termination charges, approximately
$16.0 million was paid in 1997 and $35.7 million of assets associated with
discontinued activities were written off. Facility related and other net
charges totaling $43.1 million include costs associated with contract and lease
terminations, asset disposals and other charges incurred in connection with the
consolidation and closure of excess office space. Approximately $2.6 million
was paid and $11.3 million of assets were written off in 1997. The remaining
facility related obligations will be paid or are otherwise anticipated to be
extinguished in 1998.
The Company had substantially completed the aforementioned restructuring
activities by the end of the second quarter of 1998. The $76.1 million of
liabilities remaining at December 31, 1997 primarily consisted of $41.9 million
of severance and benefit plan payments and $29.2 million related to contract,
leasehold and lease termination obligations.
At September 30, 1998, $39.9 million of liabilities remained which
primarily consisted of $14.8 million of future severance and benefit payments
and $23.9 million of future lease termination payments. During the nine months
ended September 30, 1998, the Company recorded a net credit of $11.2 million to
the Merger related costs and other unusual charges with a corresponding
reduction to liabilities as a result of a change in the original estimate of
costs to be incurred. Such credit was net of $24.1 million of costs incurred
related to lease terminations.
1996 UNUSUAL CHARGES
The Company incurred Unusual Charges of approximately $134.3 million in
1996 in connection with its August 1996 merger with Ideon and its July 1996
mergers with Davidson and Sierra. Unusual Charges of $109.4 million were
related to continuing operations (substantially Ideon) and $24.9 million
S-28
<PAGE>
were associated with businesses that are discontinued (Davidson and Sierra).
Unusual Charges include $80.4 million of litigation related liabilities
associated with the Company's determination to settle acquired Ideon litigation
upon the August 1996 merger date. The primary obligation consists of litigation
with the co-founder of SafeCard Services, Incorporated ("SafeCard") which was
acquired by Ideon in 1995. The Company entered into a settlement agreement in
June 1997 requiring $70.5 million of payments through 2003. The Company paid
$14.4 million for litigation related charges in 1997.
The balance of the Unusual Charges consists of $27.5 million of
professional fees incurred and paid in connection with the mergers, $7.5
million of severance incurred and paid in connection with employee terminations
and $18.9 million of facility related and other obligations for which $6.9
million of payments and $9.7 million of leaseheld improvement write-offs were
made through December 31, 1997.
SEGMENT DISCUSSION -- 1997 VERSUS 1996
The underlying discussion of each segment's continuing operating results
focuses on profits from continuing operations, excluding interest, taxes,
Unusual Charges, extraordinary gain and cumulative effect of a change in
accounting ("Operating Income"). Management believes such discussion is the
most informative representation of recurring, non-transactional related
operating results of the Company's business segments.
Travel Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
1997 1996 1996 INCREASE INCREASE
------------- ------------ ------------- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenue ................ $ 1,337.2 $ 802.4 $ 1,226.9 67% 9%
Operating expenses ......... 878.6 548.1 874.1 60% 1%
---------- -------- ----------
Operating income ........... $ 458.6 $ 254.3 $ 352.8 80% 30%
========== ======== ==========
</TABLE>
HISTORICAL DISCUSSION. Operating income increased $204.3 million (80%) as
a result of growth from businesses owned and/or consolidated in both 1997 and
1996 and from car rental franchise (ARAC) and timeshare (RCI) operations each
acquired during the fourth quarter of 1996. Timeshare business operations
contributed incremental revenue and operating income in 1997 of $315.5 million
and $77.2 million, respectively, and the car rental franchise business
accounted for incremental revenues and operating income of $140.2 million and
$75.7 million, respectively. Lodging franchise revenue increased $38.4 million
(10%) while expenses increased only $6.9 million (3%). The lodging revenue
increase was attributable to 4% system growth, 2% revenue per available room
("REVPAR") increases at franchised properties and increased revenue received
from preferred alliance partners seeking access to franchisees and franchisee
customers. Expense increases were minimized due to the significant operating
leverage associated with mature franchise operations and a reduction of
corporate overhead allocated to the Travel Services segment as the Company
leveraged its corporate infrastructure among more businesses. Fleet management
revenue increased $30.6 million (10%) while expenses only increased $8.2
million (4%). The increase in revenue is primarily the result of a 24% increase
in service fee revenue due to a 20% increase in number of cards and an 8%
increase in asset based revenues due primarily to a 5% increase in pricing.
PRO FORMA DISCUSSION. On a pro forma basis, as if car rental franchise and
timeshare operations were acquired on January 1, 1996, operating income
increased $105.8 million (30%). The pro forma increase results from a $110.3
million (9%) increase in revenue while corresponding operating expenses
increased $4.5 million (1%). Most travel business units contributed double
digit percentage point growth in pro forma operating income with timeshare and
hotel franchising contributing the most significant increases at $51.6 million
(179%) and $32.1 million (23%), respectively. Timeshare profits reflected a 22%
increase in membership fees driven by increases in both memberships and
S-29
<PAGE>
pricing. Simultaneously, approximately $21.1 million of operating expense
reductions were achieved during a post-acquisition reorganization of timeshare
operations.
Real Estate Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
1997 1996 1996 INCREASE INCREASE
----------- ------------ ----------- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenues ............... $ 987.0 $ 782.4 $ 860.9 26% 15%
Operating expenses ......... 641.0 566.4 620.8 13% 3%
-------- -------- --------
Operating income ........... $ 346.0 $ 216.0 $ 240.1 60% 44%
======== ======== ========
</TABLE>
HISTORICAL DISCUSSION. Operating income increased $130.0 million (60%) as
a result of growth from businesses owned and/or consolidated in both 1997 and
1996 and from the acquisitions of the COLDWELL BANKER (REGISTERED TRADEMARK)
franchise system and Coldwell Banker Relocation Services Inc. ("CBRS") in May
1996 and the ERA (Registered Trademark) franchise system in February 1996.
Real estate franchise revenue and operating income increased $98.4 million
(42%) and $72.8 million (66%), respectively, from 1996 to 1997 primarily due to
the aforementioned acquisitions of the Coldwell Banker and ERA (Registered
Trademark) franchise brands which collectively contributed incremental
revenues and operating income of $73.8 million and $69.0 million, respectively.
In addition, the real estate franchise business realized growth in the
operating results of businesses owned in both 1997 and 1996 principally as a
result of increases in both the volume and average price of homes sold.
Corporate relocation revenue and operating income increased $56.7 million (16%)
and $30.2 million (56%), respectively, principally due to the operating results
of acquired CBRS operations which contributed incremental revenues and
operating income in 1997 of $47.2 million and $18.4 million, respectively.
Mortgage services operating income increased $28.3 million (69%) due to a $51.5
million (40%) increase in revenue while expenses increased only $23.2 million
(27%). The revenue increase resulted from a 40% increase in loan origination
volume to $11.7 billion, which accelerated to nearly an $18 billion annual run
rate by year-end 1997. Although the Company generally sells originated notes
within 45 days of origination, it routinely retains servicing rights. Servicing
revenue increased $13.4 million (28%) primarily due to gains on sales of
servicing. The increase in expenses was not only related to processing current
year volume, but to preparation for hiring, training and providing office
facilities for increased staff needed to handle the processing of future
origination volume as monthly applications more than doubled.
PRO FORMA DISCUSSION. On a pro forma basis, as if Coldwell Banker, CBRS
and ERA (Registered Trademark) were acquired on January 1, 1996, operating
income in 1997 increased $105.9 million (44%) from 1996. This increase results
from a $126.1 million (15%) increase in revenue while corresponding operating
expenses increased only $20.2 million (3%). Operating income of the real estate
franchise, corporate relocation and mortgage services businesses each increased
by more than 30% over 1996 pro forma results. Real estate franchise operating
income increased $59.2 million (48%) based on revenue growth of $54.8 million
(20%) primarily due to a 17% combined increase in 1997 in home sales and the
average price of homes sold. Real estate franchise operating expenses decreased
$4.4 million primarily as a result of consolidation of certain franchise
administration functions of the recently acquired franchise brands. Corporate
relocation operating income increased $19.7 million (30%) due to a $21.8
million increase in revenue, primarily relocation referrals, while operating
expenses increased only $2.1 million (1%) due to the consolidation of the PHH
Relocation Services Inc. and CBRS into one operating company, Cendant Mobility
Services Corporation. The pro forma operating results for Mortgage Services are
the same as the historical results.
S-30
<PAGE>
Alliance Marketing Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 INCREASE (DECREASE)
------------- ------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 1,570.3 $ 1,474.3 7 %
Operating expenses ......... 1,432.6 1,316.0 9 %
---------- ----------
Operating income ........... $ 137.7 $ 158.3 (13)%
========== ==========
</TABLE>
Operating income for the Alliance Marketing segment decreased $20.6
million (13%) to $137.7 million primarily due to a $23.7 million reduction in
1997 operating income due to a change in accounting policy.
Prior to 1997, the Company recorded deferred membership income, net of
estimated cancellations, at the time members were billed (upon expiration of
the free trial period). Such net billings were 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 corresponding revenues were
recognized (over the average membership period). The Company believed that
these accounting policies were appropriate and consistent with industry
practice.
In August 1998, in connection with the Company's cooperation with the SEC
investigation into accounting irregularities discovered in the former CUC
business units, the SEC concluded that when membership fees are fully
refundable during the entire membership period, membership revenue should be
recognized at the end of the membership period upon the expiration of the
refund offer. The SEC further concluded that non-refundable solicitation costs
should be expensed as incurred since such costs are not recoverable if
membership fees are refunded. The Company adopted the new accounting policy
effective as of January 1, 1997.
The Company anticipates a significant increase in costs to solicit new
members in 1998. Since revenue from members solicited in 1998 will not be
recognized under the new accounting policy until 1999, the Company anticipates
a negative impact in 1998 in its individual membership business.
Individual Membership operating income decreased $25.4 million (183%) from
a pro forma 1996 operating income of $13.9 million which was adjusted for the
accounting change applied retroactively. Revenues increased $24.5 million (4%)
due primarily to increased monthly membership billings of $7.1 million (55%)
and a $14.7 million (22%) increase in travel agent commissions. Individual
Membership operating expenses increased $49.9 million (8%) due primarily to
increased call center and other servicing expenses as well as increased general
and administrative expenses.
Insurance/Wholesale operating income increased $12.7 million (13%) to
$108.1 million. Revenue increased $34.7 million (8%) to $482.7 million and was
partially offset by an increase in expenses of $22.0 million (6%). Domestic
revenues increased $18.7 million to $394.9 million. This revenue increase
reflected the addition of 1.6 million new customers and was partially offset
primarily by an increase in insurance claims (which are accounted for as a
reduction in profit sharing revenue) from 27.6% to 29.0% of revenue. Domestic
expenses increased by $8.9 million (3%) due to increased marketing and
servicing expenses. International revenue increased $16.0 million (22%) to
$87.8 million while expenses increased $13.1 million (18%) to $85.2 million.
The international business continued its expansion into new countries and
markets, accounting for growth in both revenue and expenses.
Lifestyle operating income decreased to $41.1 million from $42.1 million
in 1996. This reduction was due to revenue increases of $52.5 million (14%)
being more than offset by expense increases of $53.5 million (17%). Revenues
and operating income at EPub increased by $14.9 million (9%) and $3.7 million
(23%), respectively, reflecting stable coupon book prices and increased sales
through new
S-31
<PAGE>
sales channels. Revenues and operating income in the Company's dating
membership business increased by $13.8 million (65%) and $5.2 million (95%),
respectively, due primarily to an additional 210 participating radio stations
and the September 1997 acquisition of Match.Com. NAOG posted revenue gains of
$15.4 million (19%), but operating income decreased $13.9 million (92%). NAOG
also adopted the change in accounting policies for membership revenues and
marketing expenses discussed above resulting in a decrease in revenue of $2.0
million and an increase in operating expenses of $5.1 million. These changes
were due primarily to increases in book, video and advertising revenues being
offset by higher membership acquisition costs and start-up expenses associated
with the introduction of new Garden and Golf clubs.
Other Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 INCREASE
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 345.5 $ 178.6 93%
Operating expenses ......... 275.8 150.0 84%
-------- --------
Operating income ........... $ 69.7 $ 28.6 144%
======== ========
</TABLE>
Operating income increased $41.1 million (144%) primarily from a $41.7
million incremental increase in the equity in earnings of ARAC, which was
initially acquired by the Company in October 1996.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 INCREASE (DECREASE)
------------- ------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Net revenues ............................................ $ 3,237.7 $ 2,616.1 24 %
Operating expenses:
Excluding Unusual Charges .............................. 2,580.5 2,152.2 20 %
Unusual Charges (1) .................................... 109.4 97.0 13 %
---------- ----------
Total operating expenses ................................ 2,689.9 2,249.2 20 %
---------- ---------- --
Operating income ........................................ 547.8 366.9 49 %
Interest, net ........................................... 14.3 16.6 (14)%
---------- ----------
Pre-tax income .......................................... 533.5 350.3 52 %
Provision for income taxes .............................. 220.2 143.2 54 %
---------- ----------
Income from continuing operations, net of taxes ......... 313.3 207.1 51 %
Income from discontinued operations ..................... 16.7 22.7 (26)%
---------- ----------
Net income .............................................. $ 330.0 $ 229.8 44 %
========== ==========
</TABLE>
- ----------
(1) Merger-related costs and other Unusual Charges.
Operating income from continuing operations increased $180.9 million (49%)
due to a $621.6 million (24%) revenue increase and only a $440.7 million (20%)
increase in operating expenses, which includes a $12.4 million increase in
Unusual Charges (see Unusual Charge discussion below). This aggregate net
increase is primarily the result of increases in the Travel Services and Real
Estate Services segments included in separate segment discussions to follow.
S-32
<PAGE>
Pre-tax income from continuing operations increased $183.2 million (52%).
Exclusive of the increase in operating income discussed above, interest, net
decreased $2.3 million (14%) to $14.3 million. The decrease in interest, net
resulted from incremental interest income in 1996 generated from excess of
proceeds of the May 1996 offering of common stock which raised $1.2 billion of
proceeds and funded the $745 million acquisition of Coldwell Banker in May
1996, and subsequently the cash portions of the ARAC and RCI acquisitions which
were completed in October and November of 1996, respectively.
Income from continuing operations increased $106.2 million (51%). This
resulted from the favorable variance in pre-tax income discussed above offset
by an increase in the effective income tax rate from 40.9% in 1995 to 41.2% in
1996.
Income from discontinued operations decreased $6.0 million (26%) to $16.7
million. Net income for 1996 included $24.9 million, after tax, of Unusual
Charges incurred coincident to the July 1996 Davidson and Sierra mergers.
Excluding the Unusual Charges, income from discontinued operations increased
$18.9 million (83%) to $41.6 million. The increase was primarily attributable
to a $19.3 million (95%) increase in software business net income, which was
primarily generated from a $76.1 million (25%) increase in sales of software
titles while operating expenses increased only $41.5 million (16%).
UNUSUAL CHARGE DISCUSSION
1996 Unusual Charge
The Company incurred Unusual Charges of approximately $134.3 million in
1996 in connection with its August 1996 merger with Ideon and its July 1996
mergers with Davidson and Sierra. Unusual Charges of $109.4 million were
related to continuing operations (substantially Ideon). Unusual Charges include
$80.4 million of litigation related liabilities associated with the Company's
determination to settle acquired Ideon litigation upon the August 1996 merger
date. The primary obligation consists of litigation with the co-founder of
SafeCard which was acquired by Ideon in 1995. The Company entered into a
settlement agreement in June 1997 requiring $70.5 million of payments through
2003. The Company paid $14.4 million for litigation related charges in 1997.
The balance of the Unusual Charges consists of $27.5 million of
professional fees incurred and paid in connection with the mergers, $7.5
million of severance incurred and paid in connection with employee terminations
and $18.9 million of facility related and other obligations for which $6.9
million of payments and $9.7 million of leasehold improvement write-offs were
made through December 31, 1997.
1995 Costs Related to Ideon Products Abandoned and Restructuring
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of certain
assets and the restructuring of the SafeCard division of Ideon and the Ideon
corporate infrastructure as discussed below. The original charge of $45.0
million was composed of accrued liabilities of $36.2 million and asset
impairments of $8.8 million. In December 1995, Ideon recovered $1.2 million of
costs in the above charges. Also included in costs related to products
abandoned are marketing and operational costs incurred of $53.2 million. During
the year ended December 31, 1996, all remaining amounts that had been
previously accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA Tour
Partners program that provided various benefits to members and consumer
response rates after the launch were significantly less than Ideon management's
expectations. The product as configured was deemed not economically viable and
a charge of $18 million was incurred. Costs associated with the abandonment of
the product marketing included employee severance payments (approximately 130
employees), costs to terminate equipment and facilities leases, costs for
contract impairments and write-downs taken for asset impairments. In
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<PAGE>
September 1995, after a period of product redesign and test marketing, Ideon
discontinued its PGA Tour Partners credit card servicing role and recorded a
charge of $3.6 million for costs associated with the abandonment of this role,
including employee severance payments (approximately 60 employees), costs to
terminate equipment and facilities leases and the recognition of certain
commitments. In April 1995, Ideon launched a nationwide child registration and
missing child search program. Consumer response rates after the launch were
significantly less than Ideon management's expectations and a charge of $9.0
million was incurred to cover severance payments (approximately 100 employees),
costs to terminate equipment and facilities leases and write-down taken for
asset impairments. As a result of the discontinuance of these products, Ideon
undertook an overall restructuring of its operations and incurred charges of
$7.2 million to terminate operating leases and write-down assets to realizable
value, $3.0 million for restructuring its SafeCard division and $4.2 million
for restructuring its corporate infrastructure.
SEGMENT DISCUSSION -- 1996 VERSUS 1995
The underlying discussion of each segment's financial results focuses on
profits from continuing operations, excluding interest, taxes and Unusual
Charges ("Operating Income"). Management believes such discussion is the most
informative representation of recurring, non-transactional related operating
results of the Company's business segments.
Travel Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 INCREASE
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 802.4 $ 684.4 17%
Operating expenses ......... 548.1 488.2 12%
-------- --------
Operating income ........... $ 254.3 $ 196.2 30%
======== ========
</TABLE>
Operating income increased as a result of growth from businesses owned in
both 1996 and 1995 and profits from car rental franchise and timeshare
operations acquired in the fourth quarter of 1996. Net revenues increased
$118.0 million (17%) to $802.4 million while expenses increased only $59.9
million (12%). The increase in operating income was generated primarily from
$25.2 million and $22.0 million increases in the lodging franchise and fleet
management services businesses, respectively, as well as $3.8 million of
increases from acquired company operations. Lodging franchise operating income
increased 21% to $145.8 million as a result of a $50.0 million (15%) increase
in revenue and only a $24.9 million (12%) increase in expenses. The revenue
increase resulted from a 13% increase in royalty fees and a 41% increase in
fees from preferred alliance partners. As a result of high operating leverage,
more than 50% of the revenue increase resulted in incremental operating income.
PHH fleet management services operating income increased $19.3 million (34%) to
$76.2 million as a result of an increase in fee-based services and an $11.7
million gain on the sale of a truck fuel management business in January 1996.
Real Estate Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 INCREASE
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 782.4 $ 504.3 55%
Operating expenses ......... 566.4 390.2 45%
-------- --------
Operating income ........... $ 216.0 $ 114.1 89%
======== ========
</TABLE>
Operating income increased as a result of acquired real estate franchise
system operations and growth from businesses owned in both 1996 and 1995. Real
estate franchise operating income
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increased $91.2 million (472%) in 1996 to $110.5 million which was primarily
driven from the incremental operating results of Century 21 Real Estate
Corporation ("Century 21"), ERA and Coldwell Banker which were acquired in
August 1995, February 1996 and May 1996, respectively. The increase in
operating income was comprised of incremental revenue, including $162.8 million
of royalty and $12.2 million of preferred alliance revenue offset by $97.2
million of incremental operating expenses. Corporate relocation operating
income increased $12.6 million as a result of $23.5 million of operating income
from acquired operations offset by a $10.9 million net decrease in relocation
business operating profits associated with the development of an expanded full
service infrastructure that supports a greater range of client services.
Alliance Marketing Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 INCREASE
------------- ------------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 1,474.3 $ 1,302.3 13%
Operating expenses ......... 1,316.0 1,166.5 13%
---------- ----------
Operating income ........... $ 158.3 $ 135.8 17%
========== ==========
</TABLE>
Operating income increased $22.5 million (17%) to $158.3 million due to a
$172.0 million (13%) revenue increase being partially offset by an increase of
$149.5 million (13%) in operating expenses.
Individual Membership operating income increased $2.7 million (15%) to
$20.7 million. Revenue increased $48.8 million (8%) due primarily to a $21.9
million (4%) increase in annual billings while monthly billings increased by
$10.7 million (516%). The annual billing increase was primarily due to
increases of $21.1 million for the Travelers Advantage product and $14.8
million for the Privacy Guard product but was partially offset by decreases of
$9.2 million and $6.5 million for the Shopping and Auto Advantage products,
respectively. Cancellation rates remained relatively constant in both years.
Individual membership operating expenses increased $45.9 million (8%) to $642.5
million, primarily as a result of increases in annual membership acquisition
costs of $44.9 million (14%). As a percentage of annual revenues, membership
acquisition costs increased from 57% in 1995 to 63% in 1996.
Insurance/Wholesale operating income increased $36.5 million (62%) to
$95.4 million. Revenues increased $93.9 million (27%) to $448.0 million and
were partially offset by an increase in expenses of $57.4 million (19%).
Domestic revenue increased $57.1 million (18%) to $376.2 million reflecting the
addition of 1.7 million new customers, 1996 acquisitions and a reduction in
insurance claims and premiums (which are accounted for as a reduction in
revenues) from 30.3% to 27.6% of revenue. Domestic expenses increased $23.9
million (9%) due to 1996 acquisitions and increased marketing and servicing
expenses associated with additional revenue. International revenue increased
$36.8 million (105%) to $71.8 million while expenses increased $33.5 million
(87%) to $72.1 million. The small prior year base of international revenue
coupled with continued expansion into new countries and markets accounted for
accelerated growth in both revenue and expenses.
Lifestyle operating income decreased to $42.1 million from $59.0 million
in 1995. This reduction was due to revenue increases of $29.4 million (9%)
being offset by expense increases of $46.2 million (17%). Revenue and operating
income at EPub decreased by $23.9 million (12%) and $20.4 million (56%)
respectively due primarily to revenue declines resulting from a decrease in
coupon book prices. Revenue and operating income at the Company's dating
membership business increased by $17.5 million (477%) and $4.9 million
respectively due primarily to the addition of 70 new participating radio
stations. The NAOG generated revenue and operating income increases of $18.2
million (28%) and $9.2 million (154%) respectively due primarily to increased
book/video sales and increased membership in the Handyman Club. Revenues at
Numa Corporation ("Numa") increased by $16.9 million (33%) but were more than
offset by operating expense increases of $24.6 million (66%) due primarily to
an increase in advertising costs from 27% to 34% of sales.
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Other Services Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 INCREASE
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues ............... $ 178.6 $ 125.1 43%
Operating expenses ......... 150.0 107.3 40%
-------- --------
Operating income ........... $ 28.6 $ 17.8 61%
======== ========
</TABLE>
The increase in operating income primarily includes $9.5 million in
consideration received during 1996 for the termination of a corporate services
agreement and $9.5 million from the equity in earnings of ARAC representing the
Company's proportionate share of ARAC's car rental operating results since the
October 1996 acquisition date, partially offset by incremental corporate
related expenses due to infrastructure growth in 1996.
LIQUIDITY AND CAPITAL RESOURCES
BUSINESS COMBINATIONS
Pending Acquisition
RAC MOTORING SERVICES. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal Automotive
Club Limited ("RACL") to acquire their RAC Motoring Services Subisidary
("RACMS") for approximately $735 million in cash. The sale of RACMS has
subsequently been approved by its shareholders. On September 24, 1998, the U.K.
Secretary of State for Trade and Industry referred the RACMS acquisition to the
UK Monopolier and Merger Commission (the "MMC") for its approval. Closing is
subject to certain conditions, including MMC approval. Although no assurances
can be made, the Company currently anticipates that the transaction, if
completed, will close in the spring of 1999. The Company plans to fund this
acquisition with proceeds from borrowings under its committed facilities,
operating cash flows or a combination of the above.
1998 Purchase Acquisitions
NATIONAL PARKING CORPORATION LIMITED. On April 27, 1998, the Company
acquired NPC for $1.6 billion in cash, which included the repayment of
approximately $227 million of outstanding NPC debt. NPC is substantially
comprised of two operating subsidiaries: National Car Parks and Green Flag.
National Car Parks is the largest private (non-municipal) single 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. The Company funded the NPC acquisition with borrowings under
its revolving credit facilities.
HARPUR GROUP. On January 20, 1998, the Company completed the acquisition
of Harpur, a leading fuel card and vehicle management company in the UK, from
privately held H-G Holdings, Inc. for approximately $186 million in cash plus
future contingent payments of up to $20 million over two years.
JACKSON HEWITT. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt for approximately $480 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 COMPLETED ACQUISITIONS AND RELATED PAYMENTS. The Company acquired
certain other entities for an aggregate purchase price of approximately $336.9
million in cash during the nine month period ended September 30, 1998.
Additionally, the Company made a $100 million cash payment to the seller of
Resort Condominiums International, Inc. in satisfaction of a contingent
purchase liability.
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<PAGE>
Termination of Acquisition Agreements
PROVIDIAN AUTO AND HOME INSURANCE COMPANY. On October 5, 1998, the Company
announced it terminated its agreement to acquire for $219 million in cash
Providian Auto and Home Insurance Company ("Providian"). The termination date
in the Company's agreement to acquire Providian was September 30, 1998. Certain
representations and covenants in the acquisition agreement had not been
fulfilled and the conditions to closing had not been met by that date. The
Company did not pursue an extension of the termination date of the agreement
because Providian no longer met the Company's acquisition criteria.
AMERICAN BANKERS INSURANCE GROUP, INC. Due to uncertainties concerning the
eventual completion of the Company's pending acquisition of American Bankers
Group, Inc. ("American Bankers") on October 13, 1998, the Company and American
Bankers entered into a settlement agreement (the "Settlement Agreement"),
pursuant to which the Company and American Bankers terminated the definitive
agreement, dated March 23, 1998 (the "Merger Agreement") which provided for the
Company's acquisition of American Bankers for $3.1 billion. Accordingly, the
Company's pending tender offer for American Banker 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
million cash payment to American Bankers and wrote-off approximately $30
million of costs, primarily professional fees which were deferred in connection
with the proposed transaction. Such charges were recorded by the Company during
the fourth quarter of 1998. The Company also terminated a bank commitment to
provide a $650 million, 364-day revolving credit facility, which was made
available to partially fund the acquisition.
1997 Poolings
CENDANT. The Merger was completed on December 17, 1997 pursuant to which
CUC issued approximately 440.0 million shares of its common stock for all of
the outstanding common stock of HFS. Pursuant to the agreement and plan of
merger, HFS stockholders received 2.4031 shares of CUC common stock for each
share of HFS common stock.
On December 17, 1997, as directed by the Federal Trade Commission in
connection with the Merger, the Company sold all of the outstanding shares of
one of its timeshare exchange businesses, Interval, for net proceeds of $240.0
million in cash less transaction related costs. The Company is precluded from
soliciting any of Interval's employees, customers or clients for a period of
two years from the closing date of the transaction. Also in conjunction with
the sale, the Company agreed to continue to provide services to certain of
Interval's customers for a specified period, guarantee performance of certain
responsibilities to third parties (i.e., lease payments and certain other
contracts) and absorb certain additional transitional costs related to the
transaction.
PHH. On April 30, 1997, the Company issued 72.8 million shares of Company
common stock in exchange for all of the outstanding common stock of PHH. PHH
operates the world's largest provider of corporate relocation services and also
is a leading provider of mortgage and fleet management services.
NUMA. In February 1997, the Company issued 3.0 million shares of its
common stock for all the outstanding capital stock of Numa. Numa publishes and
markets personalized heritage publications.
1996 Poolings
IDEON. In August 1996, the Company acquired all of the outstanding capital
stock of Ideon, principally a provider of credit card enhancement services, for
a purchase price approximating $393 million, which was satisfied by the
issuance of 16.6 million shares of Company common stock.
OTHER. In 1996, the Company acquired the outstanding stock of certain
other entities by issuing 4.8 million shares of its common stock.
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<PAGE>
1995 Poolings
GETKO, NAOG AND ADVANCE ROSS. In June 1995, the Company issued 5.6 million
shares of its common stock for all of the outstanding capital stock of Getko
Group Inc. ("Getko"). Getko distributes complimentary welcoming packages to new
homeowners throughout the United States and Canada. In September 1995, the
Company issued 2.3 million shares of its common stock for all of the
outstanding capital stock of NAOG. NAOG owns one of the largest for-profit
hunting and general interest fishing membership organizations in the United
States, and also owns various other membership organizations. In January 1996,
the Company issued 8.9 million shares of its common stock for all of the
outstanding capital stock of Advance Ross Corporation ("Advance Ross"). Advance
Ross is the parent company to Global Refund, a subsidiary which processes
value-added tax refunds for travelers in over 20 European countries.
1997 Purchase Acquisitions and Investments
INVESTMENT IN NRT. During the third quarter of 1997, the Company executed
an agreement with NRT Incorporated ("NRT") (a corporation created to acquire
residential real estate brokerage firms) and the principal stockholders of NRT,
under which the Company may acquire up to $263.3 million of NRT preferred stock
and may, at its discretion, acquire $446.0 million of intangible assets of real
estate brokerage firms acquired by NRT. During the third quarter of 1997, the
Company acquired $182.0 million of NRT preferred stock and through September
30, 1998 the Company has also acquired $359.8 million of certain intangible
assets including trademarks associated with real estate brokerage firms
acquired by NRT which are subject to a 40 year franchise agreement.
In September 1997, NRT acquired the real estate brokerage business and
operations of the National Realty Trust (the "Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to which
the Company contributed the brokerage offices formerly owned by Coldwell Banker
in connection with the Company's acquisition of Coldwell Banker in 1996. NRT is
the largest residential brokerage firm in the United States.
OTHER. The Company acquired certain entities in 1997 for an aggregate
purchase price of $289.5 million, comprised of $267.9 million in cash and $21.6
million in Company common stock (0.9 million shares).
1996 Purchase Acquisitions and Investments
RCI. In November 1996, the Company completed the acquisition of all the
outstanding common stock of RCI for $487.1 million comprised of $412.1 million
in cash and $75.0 million (approximately 2.4 million shares) in Company common
stock plus future contingent payments of up to $200.0 million over the next
five years. The Company 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, the Company 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 certain series of preferred stock of
Avis for $806.5 million. The purchase price was comprised of approximately
$367.2 million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 11.1 million shares) in Company common stock. Subsequently, the
Company made contingent cash payments of $26.0 million in 1996 and $60.8
million in 1997. The contingent payments made in 1997 represented the
incremental amount of value attributable to Company common stock as of the
stock purchase agreement date in excess of the proceeds realized upon
subsequent sale of such Company common stock.
Prior to the consummation of the acquisition, the Company announced its
strategy to dilute its interest in the Avis car rental operations while
retaining assets that are consistent with its service provider business
profile, including the trademark, franchise agreements, reservation system and
information technology system assets. In September 1997, ARAC (the company
which operated the rental car operations of Avis) completed an initial public
offering resulting in a 72.5% dilution of the
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<PAGE>
Company's equity interest in ARAC. Net proceeds of $359.3 million were retained
by ARAC. The Company's interest in ARAC was further diluted to 20.4% due to a
primary offering by ARAC and a secondary offering of common stock in March
1998.
COLDWELL BANKER. In May 1996, the Company acquired by merger Coldwell
Banker Corporation ("Coldwell Banker"), one of the largest residential real
estate brokerage companies in North America and a leading provider of corporate
relocation services. The Company paid $640.0 million in cash for all of the
outstanding capital stock of Coldwell Banker and repaid $105.0 million of
Coldwell Banker indebtedness. The aggregate purchase price for the transaction
was financed through the May 1996 sale of an aggregate 46.6 million shares of
Company common stock generating $1.2 billion of proceeds pursuant to a public
offering.
OTHER. During 1996, the Company acquired certain other entities for an
aggregate purchase price of $281.5 million comprised of $224.0 million in cash,
$52.5 million of Company common stock (2.5 million shares) and $5.0 million of
notes.
1995 Purchase Acquisitions
CENTURY 21. In August 1995, a majority owned (87.5%) subsidiary of the
Company, C21 Holding Corp. ("Holding"), acquired Century 21, the world's
largest residential real estate brokerage franchisor. The aggregate purchase
price of $245.0 million for the acquisition consisted of $100.2 million in
cash, $64.8 million in Company common stock (9.6 million shares), and $80.0
million of preferred stock. Pursuant to an agreement, as amended, between the
Company and a management group of Holding, the Company acquired the remaining
12.5% interest in Holding for $52.8 million in 1997.
OTHER. The Company acquired certain other entities for an aggregate
purchase price of $163.3 million comprised of $122.5 million in cash and $40.8
million in Company common stock (6.0 million shares).
DISCONTINUED OPERATIONS
On August 12, 1998 (the "Measurement Date"), the Company announced that
its Executive Committee of the Board of Directors committed to discontinue the
Company's classified advertising and consumer software businesses by disposing
of Hebdo Mag and Cendant Software, respectively. The Company has since entered
into a definitive agreement, as amended, to sell Hebdo Mag to its former 50%
owners for 7.1 million shares of Company common stock and approximately $360
million in cash. The transaction is expected to be consummated in the fourth
quarter of 1998 and is subject to certain conditions, including regulatory
approval and financing by the purchaser. The Company expects to recognize a
gain of approximately $230 million upon the disposal of Hebdo Mag, assuming a
Company stock price of $13.25 per share, the closing price of the Company's
common stock on November 3, 1998. In addition, the Company has engaged
investment bankers to analyze various strategic alternatives in regard to the
disposition of Cendant Software. The Company is currently in various stages of
discussions with certain parties regarding the potential sale of the consumer
software business unit. The Company anticipates that the disposition of Cendant
Software will also result in a significant gain. The Company believes that the
divestiture of its Hebdo Mag and Cendant Software subsidiaries will generate
significant proceeds.
FINANCING (EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM FINANCING)
The Company believes that it has adequate liquidity and access to
liquidity through various sources. The Company was unable to access equity and
public debt markets until October 13, 1998, the date on which the Company
completed the filing of its restated financial statements with the SEC.
Accordingly, the Company has secured additional liquidity through other sources
including the $3.25 billion Term Loan Facility (as defined) and committed
revolving credit facilities of $1.75 billion.
On May 29, 1998, the Company entered into the 364-day term loan facility
with a syndicate of financial institutions which provided for borrowings of
$3.25 billion (the "Term Loan Facility"). The
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<PAGE>
Term Loan Facility bears interest at LIBOR plus the applicable LIBOR spread.
The Company intends to repay all outstanding Borrowings under the Term Loan
Facility as soon as practicable. Upon the execution of the Term Loan Facility,
temporary credit agreements, which provided for $1.0 billion of borrowings,
were terminated. The Term Loan Facility contains certain restrictive covenants,
which are substantially similar to and consistent with the covenants in effect
for the Company's then existing revolving credit agreements. At September 30,
1998, the full amount of the commitment under the Term Loan Facility was drawn.
The Company used $2.0 billion of the proceeds from the Term Loan Facility to
repay the outstanding borrowings under its revolving credit facilities and
intends to use the remainder for the acquisition of RACMS and for general
corporate purposes.
The Company's primary credit facilities, as amended, consist 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
participating in the facilities, at prime rates or at LIBOR, plus a margin of
approximately 60 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. The Revolving Credit Facilities
contain certain restrictive covenants including restrictions on indebtedness,
mergers, liquidations and sale and leaseback transactions and requires the
maintenance of certain financial ratios, including a 3:1 minimum interest
coverage ratio and a 3.5:1 maximum debt coverage ratio, as defined.
The Company filed an amended shelf registration statement (the "Shelf
Registration Statement") on February 6, 1998 with the SEC for the issuance of
up to an aggregate $4.0 billion of debt and equity securities. Pursuant to the
Shelf Registration Statement, 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 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 represent 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. The issuance of the FELINE PRIDES and
trust preferred securities resulted in the utilization of approximately $3.0
billion of availability under the Shelf Registration Statement. Upon issuance,
the FELINE PRIDES consisted of 27.6 million Income PRIDES and 2.3 million
Growth PRIDES, each with a face amount of $50 per PRIDES. The Income PRIDES
consist of trust preferred securities and forward purchase contracts under
which the holders are required to purchase common stock from the Company in
February of 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 trust preferred
securities and the trust preferred securities under the Income PRIDES, each
with a face amount of $50 per security, bear interest, in the form of preferred
stock dividends, at the annual rate of 6.45 percent, payable in cash. 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 percent. The forward purchase contract forming 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 percent. The forward purchase contracts require the
holder to purchase a minimum of 1.0395 shares and a maximum of 1.3514 shares of
the Company common stock per PRIDES security, depending upon the average of the
closing price per share of the Company common stock for a 20 consecutive
trading day period ending in mid-February of 2001. The Company
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<PAGE>
has the right to defer the contract adjustment payments and the payment of
interest on its 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.
On May 4, 1998, the Company redeemed all of the 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 the Company's common stock.
On April 8, 1998, the Company exercised its option to call its 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 Company common stock.
The Company's long-term debt, including current portion, was $4.0 billion
at September 30, 1998, which primarily consisted of $3.25 billion of borrowings
under the Company's Term Loan Facility and $700 million of publicly issued
fixed rate debt.
MANAGEMENT AND MORTGAGE PROGRAM FINANCING
PHH, a wholly owned subsidiary of the Company, operates its mortgage
services, fleet management services and relocation services businesses as a
separate public reporting entity and supports purchases of leased vehicles and
originated mortgages primarily by issuing commercial paper and medium term
notes. Financial covenants related to such debt are designed to ensure the
self-sufficient liquidity status of PHH. Accordingly, PHH's publicly filed
financial statements were not impacted by the accounting irregularities
previously disclosed and PHH continues to issue debt securities in public
markets. Such borrowings are not classified based on contractual maturities,
but rather are included in liabilities under management and mortgage programs
rather than long-term debt since such debt corresponds directly with high
quality related assets. Additionally, PHH continues to pursue opportunities to
reduce its borrowing requirements by securitizing increasing amounts of its
high quality assets. In May 1998, PHH commenced a program to sell originated
mortgage loans to an unaffiliated buyer, at the option of the Company, up to
the buyer's asset limit of $1.5 billion. The buyer may sell or securitize such
mortgage loans into the secondary market, however, servicing rights are
retained by the Company. The Company has entered into negotiations and, in the
future, expects to increase the amount of mortgage loans it may sell to this
buyer to $2.25 billion.
PHH debt is issued without recourse to the Company. PHH expects to
continue to maximize its access to global capital markets by maintaining the
quality of its assets under management. This is achieved by establishing credit
standards to minimize credit risk and the potential for losses. Depending upon
asset growth and financial market conditions, PHH utilizes the United States,
European and Canadian commercial paper markets, as well as other cost-effective
short-term instruments. In addition, PHH will continue to utilize the public
and private debt markets as sources of financing. Augmenting these sources, PHH
will continue to manage outstanding debt with the potential sale or transfer of
managed assets to third parties while retaining fee-related servicing
responsibility. At September 30, 1998, PHH had outstanding debt of $6.2 billion
comprised of $3.0 billion in commercial paper, $3.0 billion of medium-term
notes and other borrowings of $0.2 billion.
Consistent with general market trends for issuers of commercial paper with
comparable credit ratings, maturities of recent PHH commercial paper issuances
have become shorter than PHH's historical experience and shorter than desired
by PHH. In the event that the public debt market is unable to meet PHH's
funding needs, the Company believes that it has appropriate alternative
financing sources to provide adequate liquidity, including PHH's $2.7 billion
of revolving credit facilities.
PHH filed a shelf registration statement with the SEC which became
effective on March 2, 1998, for the aggregate issuance of up to $3.0 billion of
the medium-term note debt securities. These securities may be offered from time
to time, together or separately, based on terms to be determined
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at the time of sale. The proceeds will be used to finance assets PHH manages
for its clients and for PHH general corporate purposes. As of September 30,
1998, PHH had approximately $1.5 billion of medium-term notes outstanding under
this shelf registration statement.
To provide additional financial flexibility, PHH's current policy is to
ensure that minimum committed facilities aggregate 80 percent of the average
amount of outstanding commercial paper. It is PHH's intention to increase the
minimum percentage of committed bank facilities to outstanding commercial paper
to 100 percent by December 31, 1998. PHH maintains a $2.5 billion syndicated
unsecured credit facility which is backed by domestic and foreign banks and is
comprised of $1.25 billion of lines of credit maturing in March 1999 and $1.25
billion maturing in the year 2000. In addition, PHH has a $200 million
revolving credit facility, which matures on June 24, 1999, and other
uncommitted lines of credit with various financial institutions which were
unused at September 30, 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 September 30,
1998 was undrawn and available. Management believes that its current policy
provides adequate protection should volatility in the financial markets limit
PHH's access to commercial paper or medium-term notes funding. PHH continuously
seeks additional sources of liquidity to accommodate PHH asset growth and to
provide further protection from volatility in the financial markets.
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 the
policy for PHH of limiting the payment of dividends and the outstanding
principal balance of loans to the Company 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 the Company 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.
CREDIT RATINGS
In October 1998, Duff & Phelps Credit Rating Co. ("DCR"), Standard &
Poor's ("S&P"), and Moody's reduced the Company's long-term debt credit rating
to A- from A, to BBB from A, and to 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 PHH to incur an increase in
cost of funds, management believes its 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).
CASH FLOWS
Nine Months Ended September 30, 1998
Cash flows provided from operations in 1998 were $758.5 million,
representing a $378.5 million decrease from the same period in 1997. The
decrease in operating cash flows reflects growth in mortgage loan origination
volume and a corresponding $810.5 million decrease in related cash flow. Rapid
growth contributed to the 138% increase in Mortgage Services operating income.
The Company used $4.0 billion of cash flows for investing activities in 1998,
which consisted of $2.7 billion of acquisitions and acquisition-related
payments and $1.1 billion of net investment in assets under management and
mortgage-programs. Cash provided by financing activities of $1.4 billion
primarily reflects the issuance of the FELINE PRIDES and proceeds of $3.3
billion from borrowings under the Term Loan Facility and $586.4 million of
proceeds from debt issued under management and mortgage programs.
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Year Ended December 31, 1997
The Company generated $1.2 billion of cash flows from operations in 1997,
representing a $312.6 million decrease from 1996. The decrease in cash flows
from operations was primarily due to a $314.7 million increase in mortgage
loans held for sale due to increased mortgage loan origination volume.
The Company used $2.3 billion of cash flows for investing activities in
1997, consisting of approximately $1.5 billion of a net investment in assets
under management and mortgage programs and $568.2 million for acquisition
costs, including ARAC and RCI. In 1996, the Company used $3.1 billion for
investing activities, including a $1.3 billion net investment in assets under
management and mortgage programs and $1.6 billion of acquisition costs. In
1997, cash flows from financing activities of approximately $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 management and mortgage program financing consisting
of $509.9 million of net borrowings which funded the Company's purchases of
assets under management and mortgage programs. In 1996, cash flows from
financing activities of approximately $1.8 billion consisted of public
offerings of common stock that resulted in $1.2 billion of net proceeds and
$241.9 million of net borrowings which funded the Company's purchase of assets
under management and mortgage programs.
Deferred membership income at December 31, 1997 of $1.3 billion primarily
represents fees collected for the sale of one year memberships to individual
consumers. In accordance with the Company's membership agreement, members have
the right to a full refund at any time during the active membership period.
Based on the Company's experience, approximately 45% of fees billed will be
refunded to new members prior to expiration of the membership term. Deferred
membership income at December 31, 1996 of $900.9 million primarily represents
the estimated unamortized portion of the aggregate membership fees billed
primarily in 1996 net of estimated cancellation refunds. Such deferral was
calculated prior to the change in accounting for memberships. Deferred
membership acquisition costs of $269.9 million at December 31, 1996 represents
direct member solicitation costs which were amortized to expense over the
membership period prior to the Company adopting the new policy for accounting
for memberships effective January 1, 1997. Solicitation costs were expensed as
incurred in 1997.
CAPITAL EXPENDITURES
The Company incurred $240.8 million of costs for capital expenditures and
anticipates investing up to approximately $300 million in capital expenditures
in 1998. Such capital expenditures are primarily associated with the
development of integrated corporate relocation business systems in accordance
with the merger plan developed upon the PHH merger date, mortgage services
office and system additions to support the rapid growth in origination volume
and the consolidation of internationally-based call centers.
LITIGATION
Accounting Irregularities Litigation. As a result of the accounting
irregularities described in "Summary -- The Company -- Matters Relating to the
Accounting Irregularities and Accounting Policy Change," numerous lawsuits
claiming to be class actions, two lawsuits claiming to be brought derivatively
on our behalf and an individual lawsuit have been filed against the Company
and, among others, certain current and former officers and directors of the
Company and HFS, asserting various claims under the federal securities laws,
including claims under Sections 11, 12 and 15 of the Securities Act and
Sections 10(b), 14(a) and 20(a) of and Rules 10b-5 and 14a-9 under the Exchange
Act, and certain state statutory and common laws, including claims that
financial statements previously issued by Cendant allegedly were false and
misleading and that Cendant allegedly knew or should have known that these
statements allegedly caused the price of our securities to be artificially
inflated. In addition, the SEC and the United States Attorney for the District
of New Jersey are conducting
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investigations relating to the accounting issues. The SEC has 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 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 six months ended June 30, 1998, we can provide no assurances
that additional adjustments will not be necessary as a result of these
government investigations.
The Company does 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 the proceedings and investigations could include
judgements against the Company or settlements and could require substantial
payments by the Company. Management believes that adverse outcomes in such
proceedings and investigations or any other resolutions (including settlements)
could have a material impact on the Company's financial condition, results of
operations and cash flows.
Other Litigation. Subsequent to the September 1998 issuance of the Company's
Form 10-K/A, on October 14, 1998, an action titled P. Schoenfeld Asset
Management LLC v. Cendant Corp., et al., No. 98-4734 (WHW) (the "ABI Action"),
was filed in the United States District Court for the District of New Jersey
against the Company and four of its former officers and directors. The
plaintiff in the ABI Action claims to be bringing the action on behalf of a
class of all persons who purchased securities of American Bankers between March
23, 1998 and October 13, 1998. The complaint in the ABI Action alleges that the
plaintiff and the putative class members purchased American Bankers securities
in reliance on false and misleading public announcements and filings with the
SEC made by the Company in connection with its proposed acquisition of American
Bankers. The complaint alleges that those public announcements and filings
contained materially misstated financial statements, because of accounting
irregularities discussed above, and that the Company falsely announced its
intention to consummate the acquisition of American Bankers. It is asserted
that these misstatements were made in violation of Sections 10(b) and 20(a) of
the Exchange Act and caused the plaintiff and the other putative class members
to purchase American Bankers securities at inflated prices.
CAPITAL EXPENDITURES
The Company incurred $240.8 million of costs for capital expenditures
during the nine months ended September 30, 1998 and anticipates investing up to
approximately $300 million in capital expenditures in 1998. Such capital
expenditures are primarily associated with the development of integrated
corporate relocation business systems in accordance with the merger plan
developed upon the PHH merger date, mortgage services office and system
additions to support the rapid growth in origination volume and the
consolidation of internationally-based call centers.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes entitles 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 resulted in a $50.4 million third quarter 1998 expense comprised of
$37.9 million in cash payments and 1.3 million of Company stock options with a
Black-Scholes value of $12.5 million. Such options were immediately vested and
expire on July 28, 2008.
REPRICING OF STOCK OPTIONS
On September 23, 1998, the Compensation Committee of the Board of
Directors approved a repricing and option exchange program for mid-management
employees relating to Company stock options granted to such employees during
December 1997 and first quarter of 1998. Such options were
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repriced on October 15, 1998 at $9.8125 per share (the "New Price"), which was
the fair market value as defined in the option plans. On September 23, 1998,
the Compensation Committee also approved a repricing and option exchange
program for 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 repricing was accomplished by canceling existing options and issuing 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
In October 1998, the Company announced that its Board of Directors had
authorized a $1 billion common share repurchase program. Subject to compliance
with bank credit facility covenants and rating agency constraints, the Company
expects to execute the program through open-market purchases.
YEAR 2000 COMPLIANCE
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 the Company's
business systems and applications, the Company is continually identifying,
evaluating, implementing and testing changes to its computer systems,
applications and software necessary to achieve Year 2000 compliance. The
Company's predecessor, HFS, implemented a Year 2000 initiative in March 1996
that has now been adopted by all business units of the Company. As part of such
initiative, the Company has selected a team of managers to identify, evaluate
and implement a plan to bring all of the Company's 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"). The Company has
substantially completed the Identification and Assessment Phases and has
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 the Company and its
customers; and (v) embedded systems, such as phone switches, check writers and
alarm systems. Although no assurances can be made, the Company believes that it
has identified substantially all of its systems, applications and related
software that are subject to Year 2000 compliance risk and has either
implemented or initiated the implementation of a plan to correct such systems
that are not Year 2000 compliant. The Company has targeted December 31, 1998
for completion of the Implementation Phase. Although the Company has begun the
Testing Phase, it does not anticipate completion of the Testing Phase until
sometime prior to December 1999.
The Company relies on third party service providers for services such as
telecommunications, internet service, utilities, components for its embedded
and other systems and other key services. Interruption of those services due to
Year 2000 issues could affect the Company's operations. The Company has
initiated an evaluation of the status of such third party service providers'
efforts and 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 Company is revising its existing business interruption contingency
plans to address internal and external issue specific to Year 2000 compliance.
In addition, where necessary, the Company is
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establishing contingency plans for specific issues that may arise. We
anticipate completing and testing these contingency plans by July 1999. These
plans, which are intended to enable the Company to function operationally,
include performing certain processes manually; repairing or obtaining
replacement systems; changing suppliers; and reducing or suspending operations.
The Company believes, however, that due to the widespread nature of potential
Year 2000 issues, the contingency planning process is an ongoing one which will
require further modifications as the Company obtains additional information
regarding the Company's internal systems and equipment during the remediation
and testing phases of its Year 2000 Program and the status of third party Year
2000 readiness.
The total cost of the Company's Year 2000 compliance plan is anticipated
to be $53 million. Approximately $19 million of these costs had been incurred
through September 30, 1998, and the Company expects to incur the balance of
such costs to complete the compliance plan. The remainder of the costs is
expected to be funded through operating cash flows or from borrowings under the
Company's credit facilities. The Company has 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
the Company's future results of operations are not anticipated to be material
in any given year. However, if Year 2000 modifications and conversions are not
made, or are not completed in time, the Year 2000 problem could have a material
impact on the operations and financial condition of the Company.
The estimates and conclusions herein are forward-looking statements and
are based on management's 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 that could have a serious
impact on certain operations and the ability of the Company's service providers
to bring their systems into Year 2000 compliance.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information" effective for periods beginning after
December 15, 1997 and interim periods subsequent to the initial year of
application. SFAS No. 131 establishes standards for the way that public
business enterprises report information about their operating segments in their
annual and interim financial statements. It also requires public enterprises to
disclose company-wide information regarding products and services and the
geographic areas in which they operate. The Company will adopt SFAS No. 131
effective for the 1998 calendar year end.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" effective for periods
beginning after December 15, 1997. The Company will adopt SFAS No. 132
effective for the 1998 calendar year end.
SFAS No. 131 and No. 132 establish standards for disclosures only and
therefore will have no impact on the Company's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective January 1, 2000. The
Company has not yet determined the impact SFAS No. 133 will have on its
financial statements.
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DESCRIPTION OF THE NOTES
The following description of the notes (referred to in the accompanying
Prospectus as the "Senior Debt Securities") supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Debt Securities set forth in the accompanying Prospectus, to
which description reference is hereby made. Capitalized terms used and not
defined herein have the meaning set forth in the accompanying Prospectus.
GENERAL
The notes will be limited to $ in aggregate principal amount
and will mature on , 200 . The notes will bear interest from , 1998,
or from the most recent date to which interest has been paid or provided for,
at the annual rate set forth on the cover page of this Prospectus Supplement
(the "Original Interest Rate"), subject to adjustment, as described below.
Interest will be payable semiannually on and of each year,
commencing , 1999, to the persons in whose names the notes are registered
at the close of business on the preceding or , whether or not such
day is a business day. All payments of interest and principal will be payable
in United States dollars.
INTEREST RATE ADJUSTMENT
The interest rate on the notes shall be subject to adjustment if, on any
date (the "Step-up Date") prior to maturity of the notes, the rating on the
notes is decreased to below Investment Grade (as defined below) by both of the
Rating Agencies (as defined below). Upon a decrease in the rating below
Investment Grade, the interest rate on the notes shall be automatically
increased, effective from and including the Step-up Date, to an annual rate
(the "Step-up Rate") equal to the sum of the Original Interest Rate plus 150
basis points; provided that if, on any date (a "Step-down Date") prior to
maturity when the interest rate on the notes is the Step-up Rate, the rating on
the notes shall be increased so that the notes are rated Investment Grade by
both Rating Agencies, then the interest rate on the notes shall be
automatically decreased, effective from and including the Step-down Date, to
the Original Interest Rate, it being understood that the interest rate on the
notes may from time to time be increased to the Step-up Rate and, if so
increased, thereafter decreased to the Original Interest Rate as set forth in
the proviso to this sentence. A change in the rating on the notes by any Rating
Agency shall be deemed to have occurred on the date that such Rating Agency
shall have publicly announced the change.
When any change in the interest rate on the notes occurs during any
interest payment period, the amount of interest to be paid with respect to such
period shall be calculated at an annual rate equal to the weighted average of
the interest rate in effect immediately prior to such change and the Step-up
Rate or Original Interest Rate, as applicable, in effect during such interest
payment period, calculated by multiplying each such rate by the number of days
such rate is in effect during each month of such interest payment period,
determining the sum of such products and dividing such sum by the number of
days in such interest payment period. All calculations pursuant to the
preceding sentence and of interest on the notes will be computed on the basis
of a year of twelve 30-day months. The Company will covenant that, as promptly
as practicable after any increase or decrease in the interest rate on the notes
as described above, it will (a) send written notice to the Trustee and the
holders of the notes in the manner provided in the Indenture and (b) issue a
press release, each of which shall state (i) that a change in the interest rate
on the notes has occurred and the reasons for such change in the interest rate,
(ii) the annual interest rate before giving effect to such change, (iii) the
annual interest rate after giving effect to such change, (iv) the days during
which each interest rate has been (and assuming no further change in interest
rate prior to the next applicable record date, will be) in effect during the
relevant interest payment period and the amount of the interest payment due on
the next interest payment date (assuming no further change in interest rate
prior to the next applicable record date), and (v) the effective date of such
change.
If, at any time prior to the maturity of the notes, the notes are rated A3
(or the equivalent) or higher by Moody's and A- (or the equivalent) or higher
by S&P, or the equivalent of such ratings used by any other Rating Agency
selected as provided in the definition of the term "Rating Agencies"
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below, then the interest rate on the notes shall no longer be subject to
adjustment as provided above, notwithstanding any subsequent decrease in the
rating of the notes to below Investment Grade by either of the Rating Agencies.
For purposes of this "Interest Rate Adjustment" provision, the following
definitions shall apply:
"Investment Grade" means Baa3 (or the equivalent) or higher by Moody's or
BBB- (or the equivalent) or higher by S&P or the equivalent of such ratings
used by any other Rating Agency selected as provided in the definition of
the term "Rating Agencies."
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Rating Agencies" means (i) Moody's and S&P or (ii) if Moody's or S&P or
both shall not make a rating of the notes publicly available, a nationally
recognized securities rating agency or agencies, as the case may be,
selected by the Company by notice to the Trustee, which shall be
substituted for Moody's or S&P or both, as the case may be; and "Rating
Agency" shall mean either of the Rating Agencies. The Company will covenant
that it will use its best efforts to cause two Rating Agencies to make
publicly available a rating on the notes at all times prior to maturity of
the notes.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
RANKING
The notes will be senior unsecured obligations and will rank pari passu in
right of payment to all other unsecured senior indebtedness of the Company.
The Company is a holding company whose principal asset is the stock of its
subsidiaries. Although the notes will not be subordinated in right of payment
to any other indebtedness of the Company, the right of the Company and its
creditors, including the holders of notes, under general equitable principles,
to participate in any distributions of assets of any subsidiary of the Company
upon the Company's liquidation or reorganization or otherwise is, unless there
is a substantive consolidation of the Company with its subsidiaries, likely to
be subject to the prior claims of creditors of such subsidiary, except to the
extent that the claims of the Company itself as a creditor of such subsidiary
may be recognized. In addition, the ability of any subsidiary to pay dividends
or make loans to the Company may be prohibited or otherwise restricted by such
subsidiary's credit arrangements with third parties. In particular, PHH's
credit arrangements limit the payment of dividends and the outstanding
principal balance of loans to the Company to 40% of consolidated net income (as
defined) for each fiscal year. In addition, such credit arrangements prohibit
PHH from paying dividends or making loans to the Company in certain
circumstances. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
As of , 1998, after giving pro forma effect to the offering of the
notes and the application of the net proceeds therefrom, the Company would have
had approximately $ billion of indebtedness outstanding, including the
6.45% Senior Debentures due 2003 issued in connection with the Company's FELINE
PRIDES offering, which would have ranked pari passu with the notes, and the
total liabilities of the Company's subsidiaries (excluding amounts owed to the
Company) would have been $ billion.
OPTIONAL REDEMPTION
The notes will be redeemable, at the option of the Company, in whole at
any time or in part from time to time, on at least 30 days but not more than 60
days prior notice mailed to the registered address of each holder of notes, at
a redemption price equal to the greater of (i) 100% of the principal amount of
the notes to be redeemed or (ii) the sum of the present values of the Remaining
Scheduled Payments discounted, on a semiannual basis (assuming a 360-day year
consisting of twelve 30 day months), at the Treasury Rate plus 50 basis points,
plus, in the case of each of clause (i) and (ii) above, accrued interest to the
date of redemption.
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For purposes of this "Optional Redemption" provision, the following
definitions shall apply:
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity (computed as of
the second business day immediately preceding such redemption date) of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means the fixed rate United States Treasury
security selected by an Independent Investment Banker as having a maturity
most comparable to the remaining term of the notes (and which are not
callable prior to maturity) to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial practices, in
pricing new issues of corporate debt securities of comparable maturity to
the remaining term of the notes. "Independent Investment Banker" means one
of the Reference Treasury Dealers appointed by the Company.
"Comparable Treasury Price" means, with respect to any redemption date,
(i) the average of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) on
the third business day preceding such redemption date, as set forth in the
daily statistical release (or any successor release) published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities" or (ii) if such release (or any
successor release) is not published or does not contain such prices on such
business day, (A) the average of the Reference Treasury Dealer Quotations
for such redemption date, after excluding the highest or lowest of such
Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer
than four such Reference Treasury Dealer Quotations, the average of all
such quotations. "Reference Treasury Dealer Quotations" means, with respect
to each Reference Treasury Dealer and any redemption date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) quoted in writing to the Trustee by such Reference Treasury Dealer
at 3:30 p.m., New York City time on the third business day preceding such
redemption date.
"Reference Treasury Dealer" means each of Chase Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective
successors; provided, however, that if any of the foregoing shall cease
(either directly or through an affiliate) to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the
Company may substitute therefor another nationally recognized investment
banking firm that is a Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to each note to be
redeemed, the remaining scheduled payments of the principal thereof and
interest thereon, calculated at the Original Interest Rate (regardless of
any interest rate adjustment on the notes described under "--Interest Rate
Adjustment" at any time), that would be due after the related redemption
date but for such redemption; provided, however, that, if such redemption
date is not an interest payment date with respect to such note, the amount
of the next succeeding scheduled interest payment thereon will be reduced
by the amount of interest accrued thereon to such redemption date.
On and after the redemption date, interest will cease to accrue on the
notes or any portion thereof called for redemption unless the Company shall
fail to make any redemption payment. On or before the redemption date, the
Company shall deposit with a paying agent (or the Trustee) money sufficient to
pay the redemption price of an accrued interest on the notes to be redeemed on
such date. If less than all of the notes are to be redeemed, the notes to be
redeemed shall be selected by the Trustee by such method as the Trustee shall
deem fair and appropriate.
SINKING FUND
The notes are not subject to a sinking fund.
DEFEASANCE
The Indenture permits the defeasance of the notes upon the satisfaction of
the conditions described under "Description of the Debt Securities --
Defeasance or Covenant Defeasance of the Indentures" in the Prospectus.
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In the event the Company elects to defease the notes, the interest rate in
effect for the notes (the "Effective Rate") on the date of the irrevocable
deposit of the money and/or Government Obligations as trust funds in trust for
the benefit of the holders of the notes shall be the rate used by the Company
in calculating the requisite interest and principal payments necessary to
defease the notes (the "Defeasance Rate"). Neither the Effective Rate nor the
Defeasance Rate shall thereafter be affected by any change in rating.
BOOK-ENTRY SYSTEM
The notes may be issued in whole or in part in the form of one or more
fully registered notes (each, a "Global Note") which will be deposited with, or
on behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of the Depositary's nominee in either temporary or permanent form.
Except as set forth below, a Global Note may not be transferred except as a
whole by the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary or by the
Depositary or any nominee to a successor of the Depositary or a nominee of such
successor.
Ownership of beneficial interests in a Global Note will be limited to
persons that have accounts with the Depositary for such Global Note or its
nominee ("participants") or persons who may hold interests through
participants. Ownership of beneficial interests in such Global Note will be
shown on, and the transfer of ownership will be effected only through, records
maintained by the Depositary (with respect to participants' interest) for such
Global Note or by participants or persons that hold through participants (with
respect to beneficial owners' interests).
The Depositary has advised the Company that it is a limited-purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities for its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Persons who are not participants may beneficially own securities held by the
Depositary only through participants.
Upon the issuance by the Company of notes represented by a Global Note,
the Depositary will credit, on its book-entry registration and transfer system,
the respective principal amounts of the notes represented by such Global Note
to the accounts of participants. The accounts to be credited shall be
designated by the Company, if such notes are offered and sold directly by the
Company.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Company within 90
days, the Company will issue notes in certificated form in exchange for each
Global Note. In addition, the Company may at any time determine not to have
notes represented by one or more Global Notes, and, in such event,will issue
notes in certificated form in exchange for the Global Note or notes
representing such notes. In any such instance, an owner of a beneficial
interest in a Global Note will be entitled to physical delivery in certificated
form of notes equal in principal amount to such beneficial interest and to have
such notes registered in its name. Notes so issued in certificated form will be
issued in denominations of $1,000 or any amount in excess thereof which is an
integral multiple of $1,000 and will be issued in fully registered form only.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds. Except as set forth above, the notes
will trade in the Depositary's Same-Day Funds Settlement System until maturity,
and therefore the Depositary will require secondary trading activity in the
notes to be settled in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on
trading activity in the notes.
S-50
<PAGE>
UNDERWRITING
The Company has entered into an underwriting agreement dated the date of
this Prospectus Supplement relating to the offer and sale of the notes (the
"Underwriting Agreement") with Chase Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and (collectively, the
"Underwriters"), relating to the offer and sale of the notes (the "Underwriting
Agreement"). In the Underwriting Agreement, we have agreed to sell to each
Underwriter, and each Underwriter has agreed to purchase from us, the principal
amount of notes that appears opposite the name of such Underwriter in the table
below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ---------------------------------------- -------------
<S> <C>
Chase Securities Inc. ............... $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .......................
-------------
Total ................................ $
=============
</TABLE>
The obligations of the Underwriters under the Underwriting Agreement,
including their agreement to purchase notes from us, are several and not joint.
The Underwriters have agreed to purchase all of the notes if any of them are
purchased. The Underwriters are not obligated to purchase any of the notes
unless certain conditions contained in the Underwriting Agreement are
satisfied.
The Underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price set forth on the cover page of
this Prospectus Supplement and to certain dealers at such price less a
concession not in excess of % of the principal amount. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of % of the
principal amount to certain other dealers. After the initial public offering,
the Underwriters may change the public offering price, concession and discount.
We have agreed to indemnify the Underwriters against, or to contribute to
payments that the Underwriters may be required to make in respect of, certain
liabilities, including liabilities under the Securities Act.
The notes are a new issue of securities, and there is currently no
established trading market for the notes. In addition, we do not intend to
apply for the notes to be listed on any securities exchange or to arrange for
the notes to be quoted on any quotation system. The Underwriters have advised
us that they intend to make a market in the notes, but they are not obligated
to do so. The Underwriters may discontinue any market-making in the notes at
any time in their sole discretion. Accordingly, we cannot assure you that a
liquid market will develop for the notes, that you will be able to sell your
notes at a particular time or that the prices that you receive when you sell
will be favorable. Future trading prices of the notes will depend on many
factors, including our operating performance and financial condition,
prevailing interest rates and the market for similar securities.
In connection with the offering of the notes, Chase Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the
Underwriters, may engage in overallotment, stabilizing transactions and
syndicate covering transactions in accordance with Regulation M under the
Exchange Act. Overallotment involves sales in excess of the offering size,
which creates a short position for the Underwriters. Stabilizing transactions
involve bids to purchase the notes in the open market for the purpose of
pegging, fixing or maintaining the price of the notes. Syndicate covering
transactions involve purchases of the notes in the open market after the
distribution has been completed in order
S-51
<PAGE>
to cover short positions. Stabilizing transactions and syndicate covering
transactions may cause the price of the notes to be higher than it would
otherwise be in the absence of those transactions. If Chase Securities Inc. or
Merrill Lynch, Pierce, Fenner & Smith Incorporated engage in stabilizing or
syndicate covering transactions, they may discontinue them at any time.
In the ordinary course of their respective businesses, the Underwriters
and their affiliates have performed, and may in the future perform, financial
advisory, investment banking and/or general financing and banking services for
Cendant and its affiliates. In particular, The Chase Manhattan Bank, an
affiliate of Chase Securities Inc., is the administrative agent and a lender
under the Term Loan Facility and will receive a portion of the amount repaid
under the Term Loan Facility with the net proceeds of the offering. See "Use of
Proceeds." Because more than 10 percent of the net proceeds of the offering may
be paid to members or affiliates of members of the National Association of
Securities Dealers, Inc. ("NASD") participating in the offering, the offering
will be conducted pursuant to NASD Conduct Rule 2710(c)(8).
Certain of the Federal Securities Actions described in "Summary--The
Company--Matters Relating to the Accounting Irregularities and Accounting
Policy Change--Class Action Litigation and Government Investigations" also name
as defendants Merrill Lynch, Pierce, Fenner & Smith Incorporated and, in one
case, Chase Securities Inc., underwriters for our February 1998 FELINE PRIDES
securities offering.
We estimate that we will spend approximately $ for printing, rating
agencies, trustee and legal fees and other expenses related to the offering.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for Cendant
by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and for the
Underwriters by Shearman & Sterling, New York, New York.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the notes. For further information on Cendant and the notes, you should refer
to our registration statement and its exhibits. This Prospectus Supplement and
the accompanying Prospectus summarize material provisions of contracts and
other documents that we refer you to. Since the Prospectus Supplement and the
Prospectus may not contain all the information that you may find important, you
should review the full text of these documents. We have included copies of
these documents as exhibits to our registration statement.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
o incorporated documents are considered part of the Prospectus
Supplement,
o we can disclose important information to you by referring you to those
documents,
o information that we file with the SEC will automatically update and
supersede this Prospectus Supplement and the accompanying Prospectus,
and
o Any statement contained in a document incorporated or deemed to be
incorporated by reference in the Prospectus Supplement or accompanying
Prospectus shall be deemed to be
S-52
<PAGE>
modified or superseded for the purposes of the Prospectus Supplement
and accompanying Prospectus to the extent that a statement contained
in the Prospectus Supplement or accompanying Prospectus or in any
subsequently filed document that also is or is deemed to be
incorporated by reference in the Prospectus Supplement or accompanying
Prospectus modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of the Prospectus Supplement or
accompanying Prospectus.
We incorporate by reference the documents listed below that we filed with
the SEC under the Exchange Act:
o our Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997,
o our Quarterly Reports on Form 10-Q for the quarter ended September 30,
1998 and on Form 10-Q/A for the quarters ended March 31, 1998 and June
30, 1998,
o our Current Reports on Form 8-K dated November 16, 1998, November 5,
1998, November 4, 1998, October 14, 1998, October 14, 1998,
October 13, 1998, October 5, 1998, August 28, 1998, August 13, 1998,
August 4, 1998, July 29, 1998, July 15, 1998 and July 14, 1998, June
4, 1998, May 18, 1998, May 5, 1998, April 9, 1998, March 25, 1998,
March 6, 1998, March 5, 1998, February 16, 1998, February 6, 1998,
February 2, 1998, January 29, 1998, January 27, 1997, January 20, 1998
and January 14, 1998, and on Form 8-K/A, dated September 17, 1998, and
o the description of our common stock contained in the Registration
Statements on Form 8-A dated July 27, 1984 and August 15, 1989.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this Prospectus Supplement but before
the end of the notes offering:
o Reports filed under Sections 13(a) and (c) of the Exchange Act,
o Proxy or information statements filed under Section 14 of the Exchange
Act in connection with any subsequent stockholders' meeting, and
o Any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Investor Relations
Cendant Corporation
6 Sylvan Way
Parsippany, New Jersey 07054
Telephone: (973) 428-9700.
S-53
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SUBJECT TO COMPLETION DATED NOVEMBER 17, 1998
PROSPECTUS
$4,100,000,000
CENDANT CORPORATION
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK,
STOCK PURCHASE CONTRACTS, STOCK PURCHASE UNITS AND WARRANTS
CENDANT CAPITAL II
CENDANT CAPITAL III
PREFERRED SECURITIES FULLY AND UNCONDITIONALLY GUARANTEED
BY CENDANT CORPORATION
--------------
Cendant Corporation (the "Company"), directly or through such agents,
dealers or underwriters as may be designated from time to time, may offer,
issue and sell, together or separately, its (i) debt securities (the "Debt
Securities"), which may be senior debt securities (the "Senior Debt
Securities") or subordinated debt securities (the "Subordinated Debt
Securities"), (ii) shares of its preferred stock, par value $0.01 per share
(the "Preferred Stock"), (iii) shares of its common stock, par value $0.01 per
share (the "Common Stock"), (iv) Stock Purchase Contracts ("Stock Purchase
Contracts") to purchase shares of Common Stock, (v) Stock Purchase Units, each
representing ownership of a Stock Purchase Contract and Preferred Securities
(as defined herein) or debt obligations of third parties, including U.S.
Treasury securities, securing the holder's obligation to purchase Common Stock
under the Stock Purchase Contracts ("Stock Purchase Units") and (vi) warrants
to purchase Debt Securities, Preferred Stock, Common Stock or other securities
or rights ("Warrants").
Cendant Capital II and Cendant Capital III (each, a "Cendant Trust"),
statutory business trusts formed under the laws of the State of Delaware, may
offer, from time to time, preferred securities, representing preferred
undivided beneficial interests in the assets of the respective Cendant Trusts
("Preferred Securities"). The payment of periodic cash distributions
("Distributions") with respect to Preferred Securities out of moneys held by
each of the Cendant Trusts, and payments on liquidation, redemption or
otherwise with respect to such Preferred Securities, will be guaranteed by the
Company to the extent described herein (each, a "Trust Guarantee"). See
"Description of Preferred Securities" and "Description of Trust Guarantees."
The Company's obligations under the Trust Guarantees will rank junior and
subordinate in right of payment to all other liabilities of the Company and on
a parity with its obligations under the senior most preferred or preference
stock of the Company. See "Description of Trust Guarantees--Status of the Trust
Guarantees." Debt Securities may be issued and sold by the Company in one or
more series to a Cendant Trust or a trustee of such Cendant Trust in connection
with the investment of the proceeds from the offering of Preferred Securities
and Common Securities (as defined herein) of such Cendant Trust. The Debt
Securities purchased by a Cendant Trust may be subsequently distributed pro
rata to holders of Preferred Securities and Common Securities in connection
with the dissolution of such Cendant Trust.
The Debt Securities, Preferred Stock, Common Stock, Stock Purchase
Contracts, Stock Purchase Units, Warrants and Preferred Securities are herein
collectively referred to as the "Securities," with an aggregate public offering
price of up to $4,100,000,000 (or its equivalent in foreign currencies or
foreign currency units based on the applicable exchange rate at the time of
offering) in amounts, at prices and on terms to be determined at the time of
sale.
The form in which the Securities are to be issued, their specific
designation, aggregate principal amount or aggregate initial offering price,
maturity, if any, rate and times of payment of interest or dividends, if any,
redemption, conversion, and sinking fund terms, if any, voting or other rights,
if any, exercise price and detachability, if any, and other specific terms will
be set forth in a Prospectus Supplement (the "Prospectus Supplement"), together
with the terms of offering of such Securities. Any such Prospectus Supplement
will also contain information, as applicable, about certain material United
States Federal income tax considerations relating to the particular Securities
offered thereby.
<PAGE>
The Declaration of Trust for each of such Trusts also provides that to the
full extent permitted by law, the Company shall indemnify any Company
Indemnified Person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of any such Trust) by reason of the fact that he is or was a Company
Indemnified Person against expenses (including attorneys' fees), judgments,
fines and amounts paid insettlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of any such Trust, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. Each of the Declaration of Trusts also provides that to
the full extent permitted by law, the Company shall indemnify any Company
Indemnified Person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of any
such trust to procure a judgment in its favor by reason of the fact that such
person is or was a Company Indemnified Person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of any such trust and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such Company Indemnified Person shall have been adjudged to be liable to
any such trust unless and only to the extent that the Court of Chancery of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court of Chancery or such other court
shall deem proper. The Declaration of Trust for each such Trust further
provides that expenses (including attorneys' fees) incurred by a Company
Indemnified Person in defending a civil, criminal, administrative or
investigative action, suit or proceeding referred to in the immediately
preceding two sentences shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such Company Indemnified Person to repay such amount if it
shall ultimately be determined that such person is not entitled to be
indemnified by the Company as authorized in any such Declaration.
The Declaration of Trust for each Trust also provides that the Company
shall indemnify each Fiduciary Indemnified Person against any loss, liability
or expense incurred without negligence or bad faith on its part, arising out of
or in connection with the acceptance or administration of the trust or trusts
under any such Trust, including the costs and expenses (including reasonable
legal fees and expenses) of defending itself against or investigating any claim
or liability in connection with the exercise or performance of any of its
powers or duties thereunder.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "CD". Any Prospectus Supplement will also contain information, where
applicable, as to any other listing on a securities exchange of the Securities
covered by such Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Securities may be sold directly by the Company, through agents
designated from time to time or to or through underwriters or dealers. The
Company reserves the sole right to accept, and together with its agents, from
time to time, to reject in whole or in part any proposed purchase of Securities
to be made directly or through agents. If any agents or underwriters are
involved in the sale of any Securities, the names of such agents or
underwriters and any applicable fees, commissions or discounts will be set
forth in the applicable Prospectus Supplement. See "Plan of Distribution."
This Prospectus may not be used to consummate any sale of Securities
unless accompanied by a Prospectus Supplement.
The date of this Prospectus is , 1998
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER, DEALER OR AGENT INVOLVED IN THE OFFERING DESCRIBED HEREIN. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITAITON IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
FORWARD-LOOKING STATEMENTS
The Company makes statements about its future results in this Prospectus
that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
the Company's current expectations and the current economic environment. The
Company cautions you that these statements are not guarantees of future
performance. They involve a number of risks and uncertainties that are
difficult to predict. Actual results could differ materially from those
expressed or implied in the forward-looking statements. Important assumptions
and other important factors that could cause actual results to differ
materially from those in the forward-looking statements, include, but are not
limited to:
o the resolution or outcome of the pending litigation and government
investigations relating to the Company's previously announced accounting
irregularities;
o uncertainty as to the Company's future profitability and ability to
integrate and operate successfully acquired businesses and the risks
associated with such businesses;
o the Company's ability to develop and implement operational and financial
systems to manage rapidly growing operations;
o competition in the Company's existing and potential future lines of
business;
o the completion and impact of the sale of the Company's discontinued
operations, such as Hebdo Mag International, Inc. and the Company's
software business;
o the Company's ability to obtain financing on acceptable terms to finance
our growth strategy and for the Company to operate within the
limitations imposed by financing arrangements; and
o the Company's ability and the Company's vendors', franchisees' and
customers' ability to complete the necessary actions to achieve a year
2000 conversion for computer systems and applications.
The Company derived the forward-looking statements in this Prospectus
(including the documents incorporated by reference in this Prospectus) from
other factors and assumptions not identified above, and the failure of such
other assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to 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 the Company later become aware
that they are not likely to be achieved.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a combined Registration Statement on
Form S-3 (together with all the amendments and exhibits thereto, the
"Registration Statement") filed by the Company and the Cendant Trusts with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Securities.
This Prospectus does not contain all of the information set forth in such
Registration Statement, certain
2
<PAGE>
parts of which are omitted in accordance with the rules and regulations of the
Commission, although it does include a summary of the material terms of the
Indenture and the Declaration of Trust (each as defined herein). Reference is
made to such Registration Statement and to the exhibits relating thereto for
further information with respect to the Company, the Cendant Trusts and the
Securities. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission or incorporated by reference herein are not necessarily
complete, and, in each instance, reference is made to the copy of such document
so filed for a more complete description of the matter involved. Each such
statement is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy statements and other information can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. The Commission also maintains a website that contains reports, proxy and
information statements and other information. The website address is
http.//www.sec.gov. In addition, such material can be inspected at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
No separate financial statements of the Cendant Trusts have been included
or incorporated by reference herein. The Company does not consider that such
financial statements would be material to holders of the Preferred Securities
because (i) all of the voting securities of the Cendant Trusts will be owned,
directly or indirectly, by the Company, a reporting company under the Exchange
Act, (ii) the Cendant Trusts have and will have no independent operations but
exist for the sole purpose of issuing securities representing undivided
beneficial interests in their assets and investing the proceeds thereof in
Subordinated Debt Securities issued by the Company, and (iii) the Company's
obligations described herein and in any accompanying Prospectus Supplement,
under the Declaration (as defined herein)(including the obligation to pay
expenses of the Cendant Trusts), the Subordinated Indenture and any
supplemental indentures thereto, the Subordinated Debt Securities issued to the
Cendant Trust and the Trust Guarantees taken together, constitute a full and
unconditional guarantee by the Company of payments due on the Preferred
Securities. See "Description of Preferred Securities of the Cendant Trusts" and
"Description of Trust Guarantees."
The Cendant Trusts are not currently subject to the information reporting
requirements of the Exchange Act. The Cendant Trusts will become subject to
such requirements upon the effectiveness of the Registration Statement,
although they intend to seek and expect to receive exemptions therefrom.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the
Commission pursuant to the Exchange Act are incorporated herein by reference:
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997;
Quarterly Reports on Form 10-Q for the quarter ended September 30, 1998 and on
Form 10-Q/A for the quarters ended March 31, 1998 and June 30, 1998; Current
Reports on Form 8-K dated November 16, 1998, November 5, 1998, November 4,
1998, October 14, 1998, October 14, 1998, October 13, 1998, October 5, 1998,
August 28, 1998, August 13, 1998, August 4, 1998, July 29, 1998, July 15, 1998
and July 14, 1998, June 4, 1998, May 18, 1998, May 5, 1998, April 9, 1998,
March 25, 1998, March 6, 1998, March 5, 1998, February 16, 1998, February 6,
1998, February 2, 1998, January 29, 1998, January 27, 1998, January 20, 1998
and January 14, 1998, and on Form 8-K/A, dated September 17, 1998; and the
description of the Company's common stock contained in the Registration
Statements on Form 8-A dated July 27, 1984 and August 15, 1989.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to
be incorporated herein by reference and to be a part hereof from
3
<PAGE>
the date of filing of such documents. Any statement contained in this
Prospectus or in a document incorporated or deemed to be incorporated herein by
reference shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated
herein by reference or in any Prospectus Supplement modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have been
or may be incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to Investor
Relations, Cendant Corporation, 6 Sylvan Way, Parsippany, New Jersey 07054,
(Telephone: (973) 428-9700).
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE SECURITIES OFFERED
HEREBY, INCLUDING STABILIZING TRANSACTIONS, THE PURCHASE OF SECURITIES TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS.
4
<PAGE>
THE COMPANY
The Company is one of the foremost consumer and business services
companies in the world. The Company was created through the merger of CUC
International Inc. ("CUC") and HFS Incorporated ("HFS") in December 1997, and
provides a wide range of complementary consumer and business services within
three principal operating segments:
o Travel Services: the travel segment franchises hotel and car rental
businesses, facilitates vacation timeshare exchanges and manages
corporate and government vehicle fleets;
o Real Estate Services: the real estate segment franchises real estate
brokerage businesses, assists in employee relocation, provides home
buyers with mortgages and provides servicing on home buyer mortgages;
and
o Alliance Marketing: the alliance marketing segment provides an array of
value driven products and services through more than 20 membership clubs
and client relationships.
The Company also offers a tax preparation services franchise, information
technology services, credit information services and financial products.
THE CENDANT TRUSTS
Each of the Cendant Trusts is a statutory business trust formed under
Delaware law pursuant to (i) a declaration of trust (each a "Declaration")
executed by the Company as sponsor for such trust (the "Sponsor"), and the
Cendant Trustees (as defined herein) of such trust and (ii) the filing of a
certificate of trust with the Secretary of State of the State of Delaware on
February 5, 1998. Each Cendant Trust exists for the exclusive purposes of (i)
issuing and selling the Preferred Securities and common securities representing
common undivided beneficial interests in the assets of such Cendant Trust (the
"Common Securities" and, together with the Preferred Securities, the "Trust
Securities"), (ii) using the gross proceeds from the sale of the Trust
Securities to acquire the Debt Securities and (iii) engaging in only those
other activities necessary, appropriate, convenient or incidental thereto. All
of the Common Securities will be directly or indirectly owned by the Company.
The Common Securities will rank on a parity, and payments will be made thereon
pro rata, with the Preferred Securities, except that, if an event of default
under the Declaration has occurred and is continuing, the rights of the holders
of the Common Securities to payment in respect of distributions and payments
upon liquidation, redemption and otherwise will be subordinated to the rights
of the holders of the Preferred Securities. The Company will directly or
indirectly acquire Common Securities in an aggregate liquidation amount equal
to at least 3% of the total capital of each Cendant Trust.
Unless otherwise specified in the applicable Prospectus Supplement, each
Cendant Trust has a term of up to 55 years but may terminate earlier, as
provided in the Declaration. Each Cendant Trust's business and affairs will be
conducted by the trustees (the "Cendant Trustees") appointed by the Company as
the direct or indirect holder of all of the Common Securities. The holder of
the Common Securities will be entitled to appoint, remove or replace any of, or
increase or reduce the number of, the Cendant Trustees of each Cendant Trust.
The duties and obligations of the Cendant Trustees shall be governed by the
Declaration of such Cendant Trust. A majority of the Cendant Trustees (the
"Regular Trustees") of each Cendant Trust will be persons who are employees or
officers of or who are affiliated with the Company. One Cendant Trustee of each
Cendant Trust will be a financial institution (the "Institutional Trustee")
that is not affiliated with the Company and has a minimum amount of combined
capital and surplus of not less than $50,000,000, which shall act as property
trustee and as indenture trustee for the purposes of compliance with the
provisions of Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), pursuant to the terms set forth in the applicable Prospectus Supplement.
In addition, unless the Institutional Trustee maintains a principal place of
business in the State of Delaware and otherwise meets the requirements of
applicable law, one Cendant Trustee of each Cendant Trust will be an entity
having a principal place of business in, or a natural person resident of, the
State of Delaware (the "Delaware Trustee"). The Company will pay all fees and
expenses related to the Cendant Trust and the offering of the Trust Securities.
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Unless otherwise specified in the applicable Prospectus Supplement, the
Institutional Trustee and Delaware Trustee for each Cendant Trust shall be
Wilmington Trust Company, and its address in the State of Delaware is Rodney
Square North, 1100 North Mamet Street, Wilmington, Delaware 19890. The
principal place of business of each Cendant Trust shall be c/o Cendant
Corporation, 6 Sylvan Way, Parsippany, New Jersey 07054, telephone (973)
428-9700.
USE OF PROCEEDS
Unless otherwise set forth in a Prospectus Supplement, the net proceeds
from the offering of the Securities will be used for general corporate
purposes, which may include acquisitions, repayment of other debt, working
capital and capital expenditures. When a particular series of Securities is
offered, the Prospectus Supplement relating thereto will set forth the
Company's intended use for the net proceeds received from the sale of such
Securities. Pending application for specific purposes, the net proceeds may be
invested in short-term marketable securities.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed charges of the
Company and its consolidated subsidiaries for each of the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, FISCAL YEAR ENDED DECEMBER 31,
- ---------------------------- --------------------------------
1998 1997 1997 1996 1995
- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2.86x(1) 2.63x 1.63x 2.64x 2.20x
</TABLE>
- ----------
(1) Includes 100% of PHH Corporation consolidated net income of which only
40% of consolidated net income is available to the Company pursuant to
PHH's credit arrangements.
The ratio of earnings to fixed charges is computed by dividing the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of accounting charge plus fixed charges, less capitalized
interest by fixed charges. Fixed charges consist of interest expense on all
indebtedness (including amortization of deferred financing costs) and the
portion of operating lease rental expense that is representative of the
interest factor (deemed to be one-third of operating lease rentals).
DESCRIPTION OF THE DEBT SECURITIES
The Debt Securities may be offered from time to time by the Company as
Senior Debt Securities and/or as Subordinated Debt Securities. The Senior Debt
Securities will be issued under an Indenture, as it may be supplemented from
time to time (the "Senior Indenture"), between the Company and The Bank of Nova
Scotia Trust Company of New York, as trustee (the "Senior Trustee"). The
Subordinated Debt Securities will be issued under an Indenture, as it may be
supplemented from time to time (the "Subordinated Indenture"), between the
Company and The Bank of Nova Scotia Trust Company of New York, as trustee (the
"Subordinated Trustee"). The term "Trustee", as used herein, refers to either
the Senior Trustee or the Subordinated Trustee, as appropriate. The forms of
the Senior Indenture and the Subordinated Indenture (being sometimes referred
to herein collectively as the "Indentures" and individually as an "Indenture")
have been filed as exhibits to the Registration Statement. The terms of the
Indentures are also governed by certain provisions of the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The following summary of
certain material provisions of the Debt Securities does not purport to be
complete and is qualified in its entirety by reference to the Indentures. All
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Indentures. For a summary of certain definitions
used in this section, see "Certain Definitions" below.
GENERAL
The Indentures will provide for the issuance of Debt Securities in series
up to the aggregate amount from time to time authorized by the Company for each
series. A Prospectus Supplement will
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set forth the following terms (to the extent such terms are applicable to such
Debt Securities) of and information relating to the Debt Securities in respect
of which this Prospectus is delivered: (1) the designation of such Debt
Securities; (2) classification as Senior or Subordinated Debt Securities; (3)
the aggregate principal amount of such Debt Securities; (4) the percentage of
their principal amount at which such Debt Securities will be issued; (5) the
date or dates on which such Debt Securities will mature; (6) the rate or rates,
if any, per annum, at which such Debt Securities will bear interest, or the
method of determination of such rate or rates; (7) the times and places at
which such interest, if any, will be payable; (8) provisions for sinking,
purchase or other analogous fund, if any; (9) the date or dates, if any, after
which such Debt Securities may be redeemed at the option of the Company or of
the holder and the redemption price or prices; (10) the date or the dates, if
any, after which such Debt Securities may be converted or exchanged at the
option of the holder into or for shares of Common Stock or Preferred Stock of
the Company and the terms for any such conversion or exchange; and (11) any
other specific terms of the Debt Securities. Principal, premium, if any, and
interest, if any, will be payable and the Debt Securities offered hereby will
be transferable, at the corporate trust office of the Trustee's agent in the
borough of Manhattan, City of New York, provided that payment of interest, if
any, may be made at the option of the Company by check mailed to the address of
the person entitled thereto as it appears in the Security Register. (Section
301 of each Indenture)
If a Prospectus Supplement specifies that a series of Debt Securities is
denominated in a currency or currency unit other than United States dollars,
such Prospectus Supplement shall also specify the denomination in which such
Debt Securities will be issued and the coin or currency in which the principal,
premium, if any, and interest, if any, on such Debt Securities will be payable,
which may be United States dollars based upon the exchange rate for such other
currency or currency unit existing on or about the time a payment is due.
Special United States federal income tax considerations applicable to any Debt
Securities so denominated are also described in the applicable Prospectus
Supplement.
The Debt Securities may be issued in registered or bearer form and, unless
otherwise specified in a Prospectus Supplement, in denominations of $1,000 and
integral multiples thereof. Debt Securities may be issued in book-entry form,
without certificates. Any such issue will be described in the Prospectus
Supplement relating to such Debt Securities. No service charge will be made for
any transfer or exchange of the Debt Securities, but the Company or the Trustee
may require payment of a sum sufficient to cover any tax or other government
charge payable in connection therewith.
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount from their stated
principal amount. United States Federal income tax consequences and other
considerations applicable thereto will be described in the Prospectus
Supplement relating to such Debt Securities.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indentures will provide that the Company shall not consolidate with or
merge into any other corporation or convey, transfer or lease its properties
and assets substantially as an entirety to any Person, unless: (1) the
corporation formed by such consolidation or into which the Company is merged or
the Person which acquires by conveyance or transfer, or which leases, the
properties and assets of the Company substantially as an entirety (A) shall be
a corporation, partnership, limited liability company or trust organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and (B) shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the Company's obligation for the due and punctual
payment of the principal of (and premium, if any, on) and interest on all the
Debt Securities and the performance and observance of every covenant of the
Indentures on the part of the Company to be performed or observed; (2)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (3) the Company or such
Person shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and such supplemental indenture comply with this "Merger,
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<PAGE>
Consolidation and Sale of Assets" section and that all conditions precedent
herein provided for relating to such transaction have been complied with. This
paragraph shall apply only to a merger or consolidation in which the Company is
not the surviving corporation and to conveyances, leases and transfers by the
Company as transferor or lessor. (Section 801 of each Indenture)
The Indentures will further provide that upon any consolidation by the
Company with or merger by the Company into any other corporation or any
conveyance, transfer or lease of the properties and assets of the Company
substantially as an entirety to any Person in accordance with the preceding
paragraph, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indentures with the same effect as if such successor
Person had been named as the Company therein, and in the event of any such
conveyance or transfer, the Company (which term shall for this purpose mean
Cendant Corporation or any successor Person which shall theretofore become such
in the manner described in the preceding paragraph), except in the case of a
lease, shall be discharged of all obligations and covenants under the
Indentures and the Debt Securities and the coupons and may be dissolved and
liquidated. (Section 802 of each Indenture)
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indentures with
respect to Debt Securities of any series:
(1) default in the payment of any interest on any Debt Securities of that
series or any related coupon, when such interest or coupon becomes due and
payable, and continuance of such default for a period of 30 days; or
(2) default in the payment of the principal of (or premium, if any, on)
any Debt Securities of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment when and as due
pursuant to the terms of the Debt Securities of that series and Article
Twelve of the Indentures; or
(4) default in the performance, or breach, of any covenant or warranty of
the Company in the Indentures (other than a default in the performance, or
breach, of a covenant or warranty which is specifically dealt with
elsewhere under this "Events of Default" section), and continuance of such
default or breach for a period of 90 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal amount
of all Outstanding Debt Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" thereunder; or
(5) the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company under the Federal Bankruptcy
Code or any other applicable federal or state law, or appointing a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance
of any such decree or order unstayed and in effect for a period of 90
consecutive days; or
(6) the institution by the Company of proceedings to be adjudicated
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable federal or state law, or
the consent by it to the filing of any such petition or to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its
property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due; or
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<PAGE>
(7) (A) there shall have occurred one or more defaults by the Company in
the payment of the principal of (or premium, if any, on) Debt aggregating
$50 million or more, when the same becomes due and payable at the stated
maturity thereof, and such default or defaults shall have continued after
any applicable grace period and shall not have been cured or waived, or (B)
Debt of the Company aggregating $50 million or more shall have been
accelerated or otherwise declared due and payable, or required to be
prepaid or repurchased (other than by regularly scheduled required
prepayment), prior to the stated maturity thereof; or
(8) any other Event of Default provided with respect to Debt Securities
of that series.
If an Event of Default described in clause (1), (2), (3), (4), (7) or (8)
above with respect to Debt Securities of any series at the time Outstanding
occurs and is continuing, then in every such case the Trustee or the Holders of
not less than 25% in principal amount of the Outstanding Debt Securities of
that series may declare the principal amount (or, if the Debt Securities of
that series are Original Issue Discount Securities or Indexed Securities, such
portion of the principal amount as may be specified in the terms of that
series) of all of the Debt Securities of that series to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders), and upon any such declaration such principal amount (or specified
portion thereof) shall become immediately due and payable. If an Event of
Default described in clause (5) or (6) above occurs and is continuing, then the
principal amount of all the Debt Securities shall become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder, subject, however, to all rights, powers and limitations provided
for by the Federal Bankruptcy Code or any other applicable Federal or State
Law.
At any time after a declaration of acceleration with respect to Debt
Securities of any series (or of all series, as the case may be) has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as provided in Article Five of the Indentures, the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series
(or of all series, as the case may be), by written notice to the Company and
the Trustee, may rescind and annul such declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient
to pay in the Currency in which the Debt Securities of such series are
payable (except as otherwise specified pursuant to Section 301 of the
Indentures for the Debt Securities of such series and except, if
applicable, as provided in certain provisions of Section 312 of the
Indentures):
(A) all overdue interest on all Outstanding Debt Securities of that
series (or of all series, as the case may be) and any related coupons;
(B) all unpaid principal of (and premium, if any, on) any Outstanding
Debt Securities of that series (or of all series, as the case may be)
which has become due otherwise than by such declaration of acceleration,
and interest on such unpaid principal at the rate or rates prescribed
therefor in such Debt Securities;
(C) to the extent that payment of such interest is lawful, interest on
overdue interest at the rate or rates prescribed therefor in such Debt
Securities; and
(D) all sums paid or advanced by the Trustee thereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default with respect to Debt Securities of that series
(or of all series, as the case may be), other than the non-payment of
amounts of principal of (or premium, if any, on) or interest on Debt
Securities of that series (or of all series, as the case may be) which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in Section 513 of the Indentures.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
9
<PAGE>
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Debt Securities because of an Event of Default
specified in clause (7) of the first paragraph of this section shall have
occurred and be continuing, such declaration of acceleration shall be
automatically annulled if the Debt that is the subject of such Event of Default
has been discharged or the holders thereof have rescinded their declaration of
acceleration in respect of such Debt, and written notice of such discharge or
rescission, as the case may be, shall have been given to the Trustee by the
Company and countersigned by the holders of such Debt or a trustee, fiduciary
or agent for such holders, within 30 days after such declaration of
acceleration in respect of the Debt Securities, and no other Event of Default
has occurred during such 30-day period which has not been cured or waived
during such period. (Section 502 of each Indenture)
Subject to Section 502 of each Indenture, the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
may on behalf of the Holders of all the Debt Securities of such series waive
any past default described in clause (1), (2), (3), (4), (7), or (8) of the
first paragraph of this section (or, in the case of a default described in
clause (5) or (6) of the first paragraph of this section, the Holders of not
less than a majority in principal amount of all Outstanding Debt Securities may
waive any such past default), and its consequences, except a default (i) in
respect of the payment of the principal of (or premium, if any, on) or interest
on any Debt Security or any related coupon, or (ii) in respect of a covenant or
provision which under the Indentures cannot be modified or amended without the
consent of the Holder of each Outstanding Debt Security of such series
affected. (Section 513 of each Indenture)
Upon any such waiver, any such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of the Indentures; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
(Section 513 of each Indenture)
No Holder of any Debt Security of any series or any related coupons shall
have any right to institute any proceeding, judicial or otherwise, with respect
to the Indentures, or for the appointment of a receiver or trustee, or for any
other remedy thereunder, unless (i) such Holder has previously given written
notice to the Trustee of a continuing Event of Default with respect to the Debt
Securities of that series; (ii) the Holders of not less than 25% in principal
amount of the Outstanding Debt Securities of that series in the case of any
Event of Default under clause (1), (2), (3), (4), (7) or (8) of the first
paragraph of this section, or, in the case of any Event of Default described in
clause (5) or (6) of the first paragraph of this section, the Holders of not
less than 25% in principal amount of all Outstanding Debt Securities, shall
have made written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee under each of the Indentures;
(iii) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request; (iv) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
(v) no direction inconsistent with such written request has been given to the
Trustee during such 60-day period by the Holders of a majority or more in
principal amount of the Outstanding Debt Securities of that series in the case
of any Event of Default described in clause (1), (2), (3), (4), (7) or (8) of
the first paragraph of this section, or, in the case of any Event of Default
described in clause (5) or (6) of the first paragraph of this section, by the
Holders of a majority or more in principal amount of all Outstanding Debt
Securities. (Section 507 of each Indenture)
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under either Indenture in good
faith. Subject to the provisions of the Indentures relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee under the Indentures is not under any obligation to exercise any of its
rights or powers under the Indentures at the request or direction of any of the
Holders unless such Holders shall have offered to the Trustee reasonable
security or indemnity. Subject to certain provisions concerning the rights of
the Trustee, with respect to the Debt Securities of any series, the Holders of
not less than a majority in principal amount of the Outstanding Debt Securities
of such series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee under the Indentures.
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Within 90 days after the occurrence of any Default with respect to Debt
Securities of any series, the Trustee shall transmit in the manner and to the
extent provided in TIA Section 313(c), notice of such Default known to the
Trustee, unless such Default shall have been cured or waived; provided,
however, that, except in the case of a Default in the payment of the principal
of (or premium, if any, on) or interest on any Debt Securities of such series,
or in the payment of any sinking fund installment with respect to Debt
Securities of such series, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Holders of Debt Securities of such series and any related coupons; and provided
further that, in the case of any Default of the character specified in clause
(7) of the first paragraph of this section with respect to Debt Securities of
such series, no such notice to Holders shall be given until at least 30 days
after the occurrence thereof.
The Company is required to deliver to the Trustee, within 120 days after
the end of each fiscal year, a brief certificate of the Company's compliance
with all of the conditions and covenants under the Indentures.
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURES
The Indentures will provide that the Company may, at its option and at any
time, terminate the obligations of the Company with respect to the Outstanding
Debt Securities of any series ("defeasance"). Such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Outstanding Debt Securities and any related coupons, except
for the following which shall survive until otherwise terminated or discharged
under the Indentures: (A) the rights of Holders of such Outstanding Debt
Securities and any related coupons (i) to receive, solely from the trust fund
described in the Indentures, payments in respect of the principal of (and
premium, if any, on) and interest on such Debt Securities and any related
coupons when such payments are due, and (ii) to receive shares of common stock
or other Securities from the Company upon conversion of any convertible Debt
Securities issued thereunder, (B) the Company's obligations to issue temporary
Debt Securities, register the transfer or exchange of any Debt Securities,
replace mutilated, destroyed, lost or stolen Debt Securities, maintain an
office or agency for payments in respect of the Debt Securities and, if the
Company acts as its own Paying Agent, hold in trust, money to be paid to such
Persons entitled to payment, and with respect to Additional Amounts, if any, on
such Debt Securities as contemplated in the Indentures, (C) the rights, powers,
trusts, duties and immunities of the Trustee under the Indentures and (D) the
defeasance provisions of the Indentures. With respect to Subordinated Debt
Securities, money and securities held in trust pursuant to the Defeasance and
Covenant Defeasance provisions described herein, shall not be subject to the
subordination provisions of the Subordinated Indenture. In addition, the
Company may, at its option and at any time, elect to terminate the obligations
of the Company with respect to certain covenants that are set forth in the
Indentures, some of which are described in the "Certain Covenants" section
above, and any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Debt Securities ("covenant
defeasance"). (Section 1403 of each Indenture)
In order to exercise either defeasance or covenant defeasance:
(1) the Company shall irrevocably have deposited or caused to be deposited
with the Trustee, in trust, for the purpose of making the following payments,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders of such Debt Securities and any related coupons, (A) money in an
amount (in such Currency in which such Debt Securities and any related coupons
are then specified as payable at Stated Maturity), or (B) Government
Obligations applicable to such Debt Securities (determined on the basis of the
Currency in which such Debt Securities are then specified as payable at Stated
Maturity) which through the scheduled payment of principal and interest in
respect thereof in accordance with their terms will provide, not later than one
day before the due date of any payment of principal (including any premium) and
interest, if any, under such Debt Securities and any related coupons, money in
an amount or (C) a combination thereof, sufficient, in the opinion
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<PAGE>
of a nationally recognized firm of independent public accountants to pay and
discharge (i) the principal of (and premium, if any, on) and interest on the
Outstanding Debt Securities and any related coupons on the Stated Maturity (or
Redemption Date, if applicable) of such principal (and premium, if any) or
installment or interest and (ii) any mandatory sinking fund payments or
analogous payments applicable to the Outstanding Debt Securities and any
related coupons on the day on which such payments are due and payable in
accordance with the terms of the Indentures and of such Debt Securities and any
related coupons; provided that the Trustee shall have been irrevocably
instructed to apply such money or the proceeds of such Government Obligations
to said payments with respect to such Debt Securities and any related coupons.
Before such a deposit, the Company may give to the Trustee, in accordance with
certain redemption provisions in the Indentures, a notice of its election to
redeem all or any portion of such Outstanding Debt Securities at a future date
in accordance with the terms of the Debt Securities of such series and the
redemption provisions of the Indentures, which notice shall be irrevocable.
Such irrevocable redemption notice, if given, shall be given effect in applying
the foregoing; and
(2) no Default or Event of Default with respect to the Debt Securities and
any related coupons shall have occurred and be continuing on the date of such
deposit or, insofar as the Event of Default described in clauses (5) and (6) of
the Events of Default section above are concerned, at any time during the
period ending on the 91st day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period); (3) such defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a default under, the
Indentures or any other material agreement or instrument to which the Company
is a party or by which it is bound; (4) in the case of a defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel stating that
(x) the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (y) since the Issue Date, there has been a change
in the applicable federal income tax law, in either case to the effect that,
and based thereon such opinion shall confirm that, the Holders of the
Outstanding Debt Securities and any related coupons will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance had not
occurred; (5) in the case of a covenant defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the Holders
of the Outstanding Debt Securities and any related coupons will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred; (6) notwithstanding any other
provisions of the defeasance and covenant defeasance provisions of the
Indentures, such defeasance or covenant defeasance shall be effected in
compliance with any additional or substitute terms, conditions or limitations
in connection therewith pursuant to Section 301 of the Indentures; and (7) the
Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent under the
Indentures to either defeasance or covenant defeasance, as the case may be,
have been complied with. (Section 1404 of each Indenture)
SATISFACTION AND DISCHARGE
The Indentures shall upon Company Request cease to be of further effect
with respect to any series of Debt Securities (except as to any surviving
rights of registration of transfer or exchange of Debt Securities of such
series herein expressly provided for and the obligation of the Company to pay
any Additional Amounts as contemplated by Section 1005 of each Indenture) and
the Trustee, at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of such Indenture as to such series
when (1) either (A) all Debt Securities of such series theretofore
authenticated and delivered and all coupons, if any, appertaining thereto
(other than (i) coupons appertaining to Bearer Securities surrendered for
exchange for Registered Securities and maturing after such exchange, whose
surrender is not required or has been waived as provided in Section 305 of the
Indentures, (ii) Debt Securities and coupons of such series which have been
destroyed, lost or stolen and which have been replaced or paid as provided in
Section 306 of the Indentures, (iii)
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coupons appertaining to Debt Securities called for redemption and maturing
after the relevant Redemption Date, whose surrender has been waived as provided
in Section 1106 of the Indentures, and (iv) Debt Securities and coupons of such
series for whose payment money has theretofore been deposited in trust with the
Trustee or any Paying Agent or segregated and held in trust by the Company and
thereafter repaid to the Company, as provided in Section 1003 of the
Indentures) have been delivered to the Trustee for cancellation; or (B) all
Debt Securities of such series and, in the case of (i) or (ii) below, any
coupons appertaining thereto not theretofore delivered to the Trustee for
cancellation (i) have become due and payable, or (ii) will become due and
payable at their Stated Maturity within one year, or (iii) if redeemable at the
option of the Company, are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name, and at the expense, of the Company, and the
Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
an amount, in the Currency in which the Debt Securities of such series are
payable, sufficient to pay and discharge the entire indebtedness on such Debt
Securities not theretofore delivered to the Trustee for cancellation, for
principal (and premium, if any) and interest to the date of such deposit (in
the case of Debt Securities which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be; (2) the Company has paid or
caused to be paid all other sums payable hereunder by the Company; and (3) the
Company has delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent herein provided for
relating to the satisfaction and discharge of the Indentures as to such series
have been complied with. (Section 401 of each Indenture)
AMENDMENTS AND WAIVERS
The Indentures will provide that at any time and from time to time, the
Company and the Trustee may, without the consent of any holder of Debt
Securities, enter into one or more indentures supplemental thereto for certain
specified purposes, including, among other things, (i) to cure ambiguities,
defects or inconsistencies, or to make any other provisions with respect to
questions or matters arising under the Indentures (provided that such action
shall not adversely affect the interests of the Holders in any material
respect), (ii) to effect or maintain the qualification of the Indentures under
the Trust Indenture Act, or (iii) to evidence the succession of another person
to the Company and the assumption by any such successor of the obligations of
the Company in accordance with the Indentures and the Debt Securities. (Section
901 of each Indenture). Other amendments and modifications of the Indentures or
the Debt Securities may be made by the Company and the Trustee with the consent
of the holders of not less than a majority of the aggregate principal amount of
all of the then Outstanding Debt Securities of any Series; provided, however,
that no such modification or amendment may, without the consent of the holder
of each Outstanding Debt Security affected thereby, (1) change the Stated
Maturity of the principal of, or any installment of interest on, any Debt
Security or reduce the principal amount thereof or the rate of interest thereon
or any premium payable upon the redemption thereof, or change any obligation of
the Company to pay Additional Amounts contemplated by Section 1005 of each
Indenture (except as contemplated and permitted by certain provisions of the
Indentures), or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502 of the Indentures
of the amount thereof provable in bankruptcy pursuant to Section 504 of the
Indentures, or adversely affect any right of repayment at the option of any
Holder of any Debt Security, or change any Place of Payment where, or the
Currency in which, any Debt Security or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of redemption
or repayment at the option of the Holder, on or after the Redemption Date or
Repayment Date, as the case may be), or adversely affect any right to convert
or manage any Debt Securities as may be provided pursuant to Section 301 of the
Indentures, or (2) reduce the percent in principal amount of the Outstanding
Debt Securities of any series, the consent of whose Holders is required for any
such supplemental indenture, for any waiver of compliance with certain
provisions of the Indentures or certain defaults thereunder and their
consequences provided for in the Indentures, or reduce the requirements for
quorum or voting.
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GOVERNING LAW
The Indentures and the Debt Securities will be governed by and construed
in accordance with the laws of the State of New York. The Indentures are
subject to the provisions of the Trust Indenture Act that are required to be a
part thereof and shall, to the extent applicable, be governed by such
provisions.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Capital Stock" means any and all shares, interests, participations,
rights or equivalents (however designated) of corporate stock of the Company or
any Principal Subsidiary.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Debt" means notes, bonds, debentures or other similar evidences of
indebtedness for money borrowed.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Fair Market Value" means the fair market value of the item in question as
determined by the Board of Directors acting in good faith and in exercise of
its fiduciary duties.
"Holder" means a Person in whose name a Debt Security is registered in the
Security Register.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Debt Securities.
"Issue Date" means the date of first issuance of the Debt Securities under
either Indenture.
"Maturity", when used with respect to any Debt Securities, means the date
on which the principal of such Debt Security or an installment of principal
becomes due and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption, notice of
option to elect repayment or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman, the
President or a Vice President, and by the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, including an employee of the Company, and who shall be
acceptable to the Trustee.
"Original Issue Discount Security" means any Debt Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the Maturity thereof pursuant to Section 502
of the Indentures.
"Outstanding", when used with respect to Debt Securities, means, as of the
date of determination, all Debt Securities theretofore authenticated and
delivered under the Indentures, except:
(i) Debt Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
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(ii) Debt Securities, or portions thereof, for whose payment, money in
the necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company) in trust or set aside and segregated
in trust by the Company (if the Company shall act as its own Paying Agent)
for the Holders of such Debt Securities;
(iii) Debt Securities, except to the extent provided in the "Defeasance
or Covenant Defeasance of the Indentures" section, with respect to which
the Company has effected defeasance and/or covenant defeasance as provided
in the Indenture; and
(iv) Mutilated, destroyed, lost or stolen Debt Securities which have
become or are about to become due and payable which have been paid pursuant
to Section 306 of the Indentures or in exchange for or in lieu of which
other Debt Securities have been authenticated and delivered pursuant to the
Indenture, other than any such Debt Securities in respect of which there
shall have been presented to the Trustee proof satisfactory to it that such
Debt Securities are held by a bona fide purchaser in whose hands the Debt
Securities are valid obligations of the Company; provided, however, that in
determining whether the Holders of the requisite principal amount of
Outstanding Debt Securities have given any request, demand, authorization,
direction, notice, consent or waiver under the Indentures, and for the
purpose of making the calculations required by TIA Section 313, Debt
Securities owned by the Company or any other obligor upon the Debt
Securities or any Affiliate of the Company or such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in making such calculation or in
relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Debt Securities which the Trustee knows to be so
owned shall be so disregarded. Debt Securities so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to
act with respect to such Debt Securities and that the pledgee is not the
Company or any other obligor upon the Debt Securities or any Affiliate of
the Company or such other obligor.
"Paying Agent" means any Person (including the Company acting as Paying
Agent) authorized by the Company to pay the principal of (and premium, if any,
on) or interest on any Debt Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer, the
cashier, any assistant cashier, any trust officer or assistant trust officer,
the controller or any assistant controller or any other officer of the Trustee
customarily performing functions similar to those performed by any of the
above-designated officers, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Rolling Period" shall mean with respect to any fiscal quarter, such
fiscal quarter and the three immediately preceding fiscal quarters considered
as a single accounting period.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305 of the Indenture.
"Stated Maturity", when used with respect to any Debt Security or any
installment of principal thereof or interest thereon, means the date specified
in such Debt Security as the fixed date on which the principal of such Debt
Security or such installment of principal or interest is due and payable.
"Subsidiary" means any corporation of which at the time of determination
the Company, directly and/or indirectly through one or more Subsidiaries, owns
more than 50% of the Voting Stock.
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"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force at the date as of which the Indentures were executed, except that any
supplemental indenture executed pursuant to the Indentures shall conform to the
requirements of the Trust Indenture Act as in effect on the date of execution
thereof.
"Trustee" means The Bank of Nova Scotia Trust Company of New York until a
successor Trustee shall have become such pursuant to the applicable provisions
of the Indentures, and thereafter "Trustee" shall mean such successor Trustee.
"Vice President", when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
"Voting Stock" means stock of the class or classes having general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of a corporation (irrespective of whether or
not at the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
GENERAL DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject to, and qualified in its entirety by reference
to, the more complete descriptions thereof set forth in the Company's Amended
and Restated Certificate of Incorporation (the "Certificate"), and Amended and
Restated By-laws (the "By-laws") which documents are exhibits to this
Registration Statement.
The Company is authorized to issue up to 2,000,000,000 shares of Common
Stock, par value $.01 per share, and up to 10,000,000 shares of Preferred
Stock, par value $1.00 per share. As of November 12, 1998, there were
853,078,387 shares of Common Stock and no shares of Preferred Stock
outstanding.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following summary contains a description of certain general terms of
the Company's Preferred Stock. The particular terms of any series of Preferred
Stock that may be offered will be described in the applicable Prospectus
Supplement. If so indicated in a Prospectus Supplement, the terms of any such
series may differ from the terms set forth below. The summary of terms of the
Preferred Stock does not purport to be complete and is subject to and qualified
in its entirety by reference to the provisions of the Certificate and the
Certificate of Designation (the "Certificate of Designation") relating to a
particular series of offered Preferred Stock which is or will be in the form
filed or incorporated by reference as an exhibit to the Registration Statement
of which this Prospectus is a part at or prior to the time of the issuance of
such series of Preferred Stock.
The Board of Directors of the Company has the power, without further
action by the shareholders, to issue Preferred Stock in one or more series,
with such designations of series, dividend rates, redemption provisions,
special or relative rights in the event of liquidation, dissolution,
distribution or winding up of the Company, sinking fund provisions, conversion
or exchange provisions, voting rights thereof and other preferences,
privileges, powers, rights, qualifications, limitations and restrictions, as
shall be set forth as and when established by the Board of Directors of the
Company. The shares of any series of Preferred Stock will be, when issued,
fully paid and non-assessable and holders thereof will have no preemptive
rights in connection therewith.
RANK
Unless otherwise specified in the Prospectus Supplement relating to a
particular series of Preferred Stock, each series of Preferred Stock will rank
on parity as to dividends and liquidation rights in all respects with each
other series of Preferred Stock.
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DIVIDEND RIGHTS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefor, cash dividends at such rates and on such dates as
are set forth in the Prospectus Supplement relating to such series of Preferred
Stock. Different series of the Preferred Stock may be entitled to dividends at
different rates or based upon different methods of determination. Such rates
may be fixed or variable or both. Each such dividend will be payable to the
holders of record as they appear on the stock books of the Company on such
record dates as will be fixed by the Board of Directors of the Company or a
duly authorized committee thereof. Dividends on any series of the Preferred
Stock may be cumulative or noncumulative, as provided in the Prospectus
Supplement relating thereto.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock will
be entitled to receive out of assets of the Company available for distribution
to stockholders, before any distribution of assets is made to holders of Common
Stock or any other class of stock ranking junior to such series of the
Preferred Stock upon liquidation, liquidating distributions in the amount set
forth in the Prospectus Supplement relating to such series of Preferred Stock
plus an amount equal to accrued and unpaid dividends for the then current
dividend period and, if such series of the Preferred Stock is cumulative, for
all dividend periods prior thereto, all as set forth in the Prospectus
Supplement with respect to such series of Preferred Stock.
REDEMPTION
The terms, if any, on which shares of a series of Preferred Stock may be
subject to optional or mandatory redemption, in whole or in part, will be set
forth in the Prospectus Supplement relating to such series.
CONVERSION AND EXCHANGE
The terms, if any, on which shares of a series of Preferred Stock are
convertible into another series of Preferred Stock or Common Stock or
exchangeable for another series of Preferred Stock or Common Stock will be set
forth in the Prospectus Supplement relating thereto. Such terms may include
provisions for conversion, either mandatory, at the option of the holder, or at
the option of the Company, in which case the number of shares of another series
of Preferred Stock or Common Stock to be received by the holders of such series
of Preferred Stock would be calculated as of a time and in the manner stated in
such Prospectus Supplement.
TRANSFER AGENT AND REGISTRAR
The transfer agent, registrar and dividend disbursement agent for each
series of Preferred Stock will be designated in the applicable Prospectus
Supplement. The registrar for shares of each series of Preferred Stock will
send notices to shareholders of any meetings at which holders of the Preferred
Stock have the right to elect directors of the Company or to vote on any other
matter.
VOTING RIGHTS
The holders of Preferred Stock of a series offered hereby will not be
entitled to vote except as indicated in the Prospectus Supplement relating to
such series of Preferred Stock or as required by applicable law.
DESCRIPTION OF COMMON STOCK
GENERAL
Subject to the rights of the holders of any shares of the Company's
Preferred Stock which may at the time be outstanding, holders of Common Stock
are entitled to such dividends as the Board of
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Directors may declare out of funds legally available therefor. The holders of
Common Stock will possess exclusive voting rights in the Company, except to the
extent the Board of Directors specifies voting power with respect to any
Preferred Stock issued. Except as hereinafter described, holders of Common
Stock are entitled to one vote for each share of Common Stock, but will not
have any right to cumulate votes in the election of directors. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive, after payment of all of the Company's debts and
liabilities and of all sums to which holders of any Preferred Stock may be
entitled, the distribution of any remaining assets of the Company. Holders of
the Common Stock will not be entitled to preemptive rights with respect to any
shares which may be issued. Any shares of Common Stock sold hereunder will be
fully paid and non-assessable upon issuance against full payment of the
purchase price therefor. The Common Stock is listed on the New York Stock
Exchange under the symbol "CD."
CERTAIN PROVISIONS
The provisions of the Company's Certificate and By-Laws which are
summarized below may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in such stockholder's best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
CLASSIFIED BOARD
The Board of Directors is divided into three classes that are elected for
staggered three-year terms. A director may be removed by the stockholders
without cause only by the affirmative vote of the holders, voting as a single
class, of 80% or more of the total number of votes entitled to be cast by all
holders of the voting stock, which shall include all capital stock of the
Company which by its terms may vote on all matters submitted to stockholders of
the Company generally.
COMMITTEES OF THE BOARD OF DIRECTORS
Pursuant to the Certificate, the Board of Directors' authority to
designate committees shall be subject to the provisions of the By-Laws. The
Board of Directors may designate one or more directors as alternate members of
any committee other than the Litigation Committee (as defined below) to fill
any vacancy on the committee and to fill a vacant chairmanship of a committee
occurring as a result of a member of chairman leaving the committee, whether
through death, resignation, removal or otherwise. Pursuant to the By-Laws, the
Board of Directors shall have the following committees:
Executive Committee. An Executive Committee that shall consist of not less
than three directors elected by a majority vote of the Board of Directors. The
Executive Committee shall nominate for election as Directors Craig R.
Stapleton, Robert P. Rittereiser and Carole Hankin or their designees (the "CUC
Directors").
Compensation Committee. A Compensation Committee consisting of not less
than three directors elected by a majority vote of the Board of Directors.
Audit Committee. An Audit Committee consisting of not less than four
directors elected by a majority vote of the Board of Directors; provided that
there shall be no changes to the composition of the Audit Committee until its
final report concerning accounting issues at the CUC businesses as disclosed by
the Company in a press release dated July 14, 1998 or as are being investigated
by the Audit Committee as of July 28, 1998 (the "Accounting Issues").
Litigation Committee. A Litigation Committee consisting of no more than
four Directors and comprised of an equal number of CUC Directors and non-CUC
Directors. The Litigation Committee shall have full and exclusive power and
authority to (i) determine whether the prosecution of any pending or threatened
stockholder derivative actions arising from or relating to the Accounting
Issues are or would be in the best interests of the Company; and (ii) initiate,
settle or maintain on behalf of the Company any direct action by the Company
against any present or former Director (whether sued
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as a director or officer) arising from or relating to the Accounting Issues.
Subject to certain limitations in the By-Laws, each resolution of the
Litigation Committee requires the approval of a majority of the Litigation
Committee. No CUC Director who is a member of the Litigation Committee may be
removed from the Litigation Committee.
In the event that a CUC Director serving on the Litigation Committee no
longer serves as a member of the committee, then a non-CUC Director serving on
the committee shall immediately resign as a member of the committee and no
action shall be taken by the Litigation Committee prior to the resignation of
the non-CUC Director. In the event that there is only one CUC Director serving
on the Litigation Committee and such person ceases serving as a member of the
committee (whether because of resignation, removal or failure to be reelected
as a Director by the stockholders of the Company), to the extent consistent
with Delaware law and the Certificate, then such CUC Director shall be replaced
on the Litigation Committee by a person who at the time of such replacement is
a Director designated by Carole G. Hankin and Christopher K. McLeod or their
successors appointed or elected pursuant to the By-Laws to the extent they are
serving as Directors (and such person will thereafter be deemed to be a CUC
Director).
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Newly created directorships resulting from any increase in the number of
Directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled solely by
the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board of Directors. Any Directors elected
in accordance with the preceding sentence shall hold office for the remainder
of the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been elected and qualified. No decrease in the number of Directors constituting
the Board of Directors shall shorten the term of any incumbent Director.
SPECIAL MEETINGS OF STOCKHOLDERS
A special meeting of stockholders may be called only by the Chairman of
the Board of Directors, the President or the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.
QUORUM AT STOCKHOLDER MEETINGS
The holders of one-third of the shares entitled to vote at any meeting of
the stockholders, present in person or by proxy, shall constitute a quorum at
all stockholder meetings.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Stockholder action by written consent in lieu of a meeting is prohibited
under the Certificate. As a result, stockholder action can be taken only at an
annual or special meeting of stockholders. This prevents the holders of a
majority of the outstanding voting stock of the Company from using the written
consent procedure to take stockholder action without giving all the
stockholders of the Company entitled to vote on a proposed action the
opportunity to participate in determining the proposed action.
ADVANCE NOTICE OF STOCKHOLDER--PROPOSED BUSINESS AT ANNUAL MEETINGS
The By-Laws provide that for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 60 days nor more than
90 days prior to the meeting; provided, however, that in the event that less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the tenth day following the
date on which
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such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary must set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting, (ii) the name and address, as they appear on the Company's books, of
the stockholder proposing such business, (iii) the class and number of shares
of the Company which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business.
In addition, the By-Laws provide that for a stockholder to properly
nominate a director at a meeting of stockholders, the stockholder must have
given timely notice thereof in writing to the Secretary of the Company. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Company (i) in the case of an annual
meeting, at least 90 days prior to the date of the last annual meeting of the
Company stockholders and (ii) with respect to a special meeting of
stockholders, the close of business on the 10th day following the date on which
notice of such meeting is first given to stockholders. Such stockholder's
notice to the Secretary must set forth: (i) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated, (ii) a representation that the stockholder is holder of record of
Common Stock and intends to appear in person or by proxy at the meeting to
nominate each such nominee, (iii) a description of all arrangements between
such stockholder and each nominee, (iv) such other information with respect to
each nominee as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Commission, and (v) the consent of each
nominee to serve as director of the Company if so elected.
AMENDMENT OF GOVERNING DOCUMENTS
In addition to the provisions of the Certificate that require a
super-majority of stockholders to approve certain amendments to the Certificate
and By-Laws, until the earlier of July 28, 2004 or such time as all litigation
relating to the Accounting Issues has been finally disposed of, the affirmative
vote of a majority of the Litigation Committee and a super-majority of the
stockholders shall be required to adopt certain amendments to certain
provisions of the By-Laws described under "-- Committees of the Board of
Directors."
FAIR PRICE PROVISIONS
Under the Delaware General Corporation Law and the Certificate, an
agreement of merger, sale, lease or exchange of all or substantially all of the
Company's assets must be approved by the Board of Directors and adopted by the
holders of a majority of the outstanding shares of stock entitled to vote
thereon. However, the Certificate includes what generally is referred to as a
"fair price provision," which requires the affirmative vote of the holders of
at least 80% of the outstanding shares of capital stock entitled to vote
generally in the election of the Company's directors, voting together as a
single class, to approve certain business combination transactions (including
certain mergers, recapitalization and the issuance or transfer of securities of
the Company or a subsidiary having an aggregate fair market value of $10
million or more) involving the Company or a subsidiary and an owner or any
affiliate of an owner of 5% or more of the outstanding shares of capital stock
entitled to vote, unless either (i) such business combination is approved by a
majority of disinterested directors, or (ii) the shareholders receive a "fair
price" for their securities and certain other procedural requirements are met.
The Certificate provides that this provision may not be repealed or amended in
any respect except by the affirmative vote of the holders of not less than 80%
of the outstanding shares of capital stock entitled to vote generally in the
election of directors.
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DESCRIPTION OF WARRANTS
GENERAL
The Company may issue Warrants to purchase Debt Securities, Preferred
Stock, Common Stock or any combination thereof, and such Warrants may be issued
independently or together with any such Securities and may be attached to or
separate from such Securities. Each series of Warrants will be issued under a
separate warrant agreement (each a "Warrant Agreement") to be entered into
between the Company and a warrant agent ("Warrant Agent"). The Warrant Agent
will act solely as an agent of the Company in connection with the Warrants of
each such series and will not assume any obligation or relationship of agency
for or with holders or beneficial owners of Warrants. The following sets forth
certain general terms and provisions of the Warrants offered hereby. Further
terms of the Warrants and the applicable Warrant Agreement will be set forth in
the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of any
Warrants in respect of which this Prospectus is being delivered, including the
following: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued;
(iv) the currency or currencies, including composite currencies, in which the
price of such Warrants may be payable; (v) the designation and terms of the
Securities (other than Preferred Securities and Common Securities) purchasable
upon exercise of such Warrants; (vi) the price at which and the currency or
currencies, including composite currencies, in which the Securities (other than
Preferred Securities and Common Securities) purchasable upon exercise of such
Warrants may be purchased; (vii) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (viii)
whether such Warrants will be issued in registered form or bearer form; (ix) if
applicable, the minimum or maximum amount of such Warrants which may be
exercised at any one time; (x) if applicable, the designation and terms of the
Securities (other than Preferred Securities and Common Securities) with which
such Warrants are issued and the number of such Warrants issued with each such
Security; (xi) if applicable, the date on and after which such Warrants and the
related Securities (other than Preferred Securities and Common Securities) will
be separately transferable; (xii) information with respect to book-entry
procedures, if any; (xiii) if applicable, a discussion of certain United States
Federal income tax considerations; and (xiv) any other terms of such Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Warrants.
DESCRIPTION OF PREFERRED SECURITIES OF THE CENDANT TRUSTS
GENERAL
Each Cendant Trust may issue, from time to time, only one series of
Preferred Securities having terms described in the Prospectus Supplement
relating thereto. The Declaration of each Cendant Trust authorizes the Regular
Trustees of such Cendant Trust to issue on behalf of such Cendant Trust one
series of Preferred Securities. Each Declaration will be qualified as an
indenture under the Trust Indenture Act. The Institutional Trustee, an
independent trustee, will act as indenture trustee for the Preferred Securities
for purposes of compliance with the provisions of the Trust Indenture Act. The
Preferred Securities will have such terms, including distributions, redemption,
voting, liquidation rights and such other preferred, deferred or other special
rights or such restrictions as shall be established by the Regular Trustees in
accordance with the applicable Declaration or as shall be set forth in the
Declaration or made part of the Declaration by the Trust Indenture Act.
Reference is made to any Prospectus Supplement relating to the Preferred
Securities of a Cendant Trust for specific terms of the Preferred Securities,
including, to the extent applicable, (i) the distinctive designation of such
Preferred Securities, (ii) the number of Preferred Securities issued by such
Cendant Trust, (iii) the annual distribution rate (or method of determining
such rate) for Preferred Securities issued by such Cendant Trust and the date
or dates upon which such distributions shall be payable (provided, however,
that distributions on such Preferred Securities shall, subject to any deferral
provisions, and any provisions for payment of defaulted distributions, be
payable on a quarterly basis to holders of
21
<PAGE>
such Preferred Securities as of a record date in each quarter during which such
Preferred Securities are outstanding), (iv) any right of such Cendant Trust to
defer quarterly distributions on the Preferred Securities as a result of an
interest deferral right exercised by the Company on the Subordinated Debt
Securities held by such Cendant Trust; (v) whether distributions on Preferred
Securities shall be cumulative, and, in the case of Preferred Securities having
such cumulative distribution rights, the date or dates or method of determining
the date or dates from which distributions on Preferred Securities shall be
cumulative, (vi) the amount or amounts which shall be paid out of the assets of
such Cendant Trust to the holders of Preferred Securities upon voluntary or
involuntary dissolution, winding-up or termination of such Cendant Trust, (vii)
the obligation or option, if any, of such Cendant Trust to purchase or redeem
Preferred Securities and the price or prices at which, the period or periods
within which and the terms and conditions upon which Preferred Securities shall
be purchased or redeemed, in whole or in part, pursuant to such obligation or
option with such redemption price to be specified in the applicable Prospectus
Supplement, (viii) the voting rights, if any, of Preferred Securities in
addition to those required by law, including the number of votes per Preferred
Security and any requirement for the approval by the holders of Preferred
Securities as a condition to specified action or amendments to the Declaration,
(ix) the terms and conditions, if any, upon which Subordinated Debt Securities
held by such Cendant Trust may be distributed to holders of Preferred
Securities, and (x) any other relevant rights, preferences, privileges,
limitations or restrictions of Preferred Securities consistent with the
Declaration or with applicable law. All Preferred Securities offered hereby
will be guaranteed by the Company to the extent set forth below under
"Description of Trust Guarantees." The Trust Guarantee issued to each Cendant
Trust, when taken together with the Company's back-up undertakings, consisting
of its obligations under each Declaration (including the obligation to pay
expenses of each Cendant Trust), the applicable Indenture and any applicable
supplemental indentures thereto and the Subordinated Debt Securities issued to
any Cendant Trust will provide a full and unconditional guarantee by the
Company of amounts due on the Preferred Securities issued by each Cendant
Trust. The payment terms of the Preferred Securities will be the same as the
Subordinated Debt Securities issued to the applicable Cendant Trust by the
Company.
Each Declaration authorizes the Regular Trustees to issue on behalf of the
applicable Trust one series of Common Securities having such terms including
distributions, redemption, voting, liquidation rights or such restrictions as
shall be established by the Regular Trustees in accordance with the Declaration
or as shall otherwise be set forth therein. The terms of the Common Securities
issued by each Cendant Trust will be substantially identical to the terms of
the Preferred Securities issued by such Cendant Trust, and the Common
Securities will rank on a parity, and payments will be made thereon pro rata,
with the Preferred Securities except that, if an event of default under such
Declaration has occurred and is continuing, the rights of the holders of the
Common Securities to payment in respect of distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of the Preferred Securities. The Common Securities will also carry the
right to vote and to appoint, remove or replace any of the Cendant Trustees of
such Cendant Trust. All of the Common Securities of each Cendant Trust will be
directly or indirectly owned by the Company.
The financial statements of any Cendant Trust that issues Preferred
Securities will be reflected in the Company's consolidated financial statements
with the Preferred Securities shown as Company-obligated mandatorily-redeemable
preferred securities of a subsidiary trust under minority interest in
consolidated subsidiaries. In a footnote to the Company's audited financial
statements there will be included statements that the applicable Cendant Trust
is wholly-owned by the Company and that the sole asset of such Cendant Trust is
the Subordinated Debt Securities (indicating the principal amount, interest
rate and maturity date thereof).
22
<PAGE>
DESCRIPTION OF TRUST GUARANTEES
Set forth below is a summary of information concerning the Trust
Guarantees that will be executed and delivered by the Company for the benefit
of the holders, from time to time, of Preferred Securities. Each Trust
Guarantee will be qualified as an indenture under the Trust Indenture Act.
Unless otherwise specified in the applicable Prospectus Supplement, Wilmington
Trust Company will act as independent indenture trustee for Trust Indenture Act
purposes under each Trust Guarantee (the "Preferred Securities Guarantee
Trustee"). The terms of each Trust Guarantee will be those set forth in such
Trust Guarantee and those made part of such Trust Guarantee by the Trust
Indenture Act. The following summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the provisions of the
form of Trust Guarantee, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and the Trust
Indenture Act. Each Trust Guarantee will be held by the Preferred Securities
Guarantee Trustee for the benefit of the holders of the Preferred Securities of
the applicable Cendant Trust.
GENERAL
Unless otherwise specified in the applicable Prospectus Supplement,
pursuant to each Trust Guarantee, the Company will agree, to the extent set
forth therein, to pay in full to the holders of the Preferred Securities, the
Guarantee Payments (as defined below) (except to the extent paid by such
Cendant Trust), as and when due, regardless of any defense, right of set-off or
counterclaim which such Cendant Trust may have or assert. The following
payments or distributions with respect to the Preferred Securities (the
"Guarantee Payments"), to the extent not paid by such Cendant Trust, will be
subject to the Trust Guarantee (without duplication): (i) any accrued and
unpaid distributions that are required to be paid on such Preferred Securities,
to the extent such Cendant Trust shall have funds available therefor, (ii) the
redemption price, including all accrued and unpaid distributions to the date of
redemption (the "Redemption Price"), to the extent such Cendant Trust has funds
available therefor, with respect to any Preferred Securities called for
redemption by such Cendant Trust and (iii) upon a voluntary or involuntary
dissolution, winding-up or termination of such Cendant Trust (other than in
connection with such distribution of Debt Securities to the holders of
Preferred Securities or the redemption of all of the Preferred Securities upon
maturity or redemption of the Subordinated Debt Securities) the lesser of (a)
the aggregate of the liquidation amount and all accrued and unpaid
distributions on such Preferred Securities to the date of payment, to the
extent such Cendant Trust has funds available therefor or (b) the amount of
assets of such Cendant Trust remaining for distribution to holders of such
Preferred Securities in liquidation of such Cendant Trust. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of
the required amounts by the Company to the holders of Preferred Securities or
by causing the applicable Cendant Trust to pay such amounts to such holders.
Each Trust Guarantee will not apply to any payment of distributions except
to the extent the applicable Cendant Trust shall have funds available therefor.
If the Company does not make interest or principal payments on the Subordinated
Debt Securities purchased by such Cendant Trust, such Cendant Trust will not
pay distributions on the Preferred Securities issued by such Cendant Trust and
will not have funds available therefore.
The Company has also agreed to guarantee the obligations of each Cendant
Trust with respect to the Common Securities (the "Common Guarantee") issued by
such Cendant Trust to the same extent as the Trust Guarantee, except that, if
an Event of Default under the Subordinated Indenture has occurred and is
continuing, holders of Preferred Securities under the Trust Guarantee shall
have priority over holders of the Common Securities under the Common Guarantee
with respect to distributions and payments on liquidation, redemption or
otherwise.
CERTAIN COVENANTS OF THE COMPANY
Unless otherwise specified in the applicable Prospectus Supplement, in
each Trust Guarantee, the Company will covenant that, so long as any Preferred
Securities issued by the applicable Cendant
23
<PAGE>
Trust remain outstanding, if there shall have occurred any event of default
under such Trust Guarantee or under the Declaration of such Cendant Trust, then
(a) the Company will not declare or pay any dividend on, make any distributions
with respect to, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of its capital stock (other than (i) purchases or
acquisitions of capital stock of the Company in connection with the
satisfaction by the Company of its obligations under any employee or agent
benefit plans or the satisfaction by the Company of its obligations pursuant to
any contract or security outstanding on the date of such event requiring the
Company to purchase capital stock of the Company, (ii) as a result of a
reclassification of the Company's capital stock (other than into cash or other
property) or the exchange or conversion of one class or series of the Company's
capital stock for another class or series of the Company's capital stock, (iii)
the purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, (iv) dividends or distributions in
capital stock of the Company (or rights to acquire capital stock) or
repurchases or redemptions of capital stock solely from the issuance or
exchange of capital stock or (v) redemptions or repurchases of any rights
outstanding under a shareholder rights plan); (b) the Company shall not make
any payment of interest, principal or premium, if any, on or repay, repurchase
or redeem any debt securities issued by the Company which rank junior to the
Subordinated Debt Securities issued to the applicable Cendant Trust and (c) the
Company shall not make any guarantee payments with respect to the foregoing
(other than pursuant to a Trust Guarantee).
MODIFICATION OF THE TRUST GUARANTEES; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights
of holders of Preferred Securities (in which case no consent of such holders
will be required), each Trust Guarantee may be amended only with the prior
approval of the holders of not less than a majority in liquidation amount of
the outstanding Preferred Securities of such Cendant Trust. The manner of
obtaining any such approval of holders of such Preferred Securities will be set
forth in accompanying Prospectus Supplement. All guarantees and agreements
contained in a Trust Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities of the applicable Cendant Trust then
outstanding.
EVENTS OF DEFAULT
An event of default under a Trust Guarantee will occur upon the failure of
the Company to perform any of its payment or other obligations thereunder. The
holders of a majority in liquidation amount of the Preferred Securities to
which such Trust Guarantee relates have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Preferred Securities Guarantee Trustee in respect of such Trust Guarantee or to
direct the exercise of any trust or power conferred upon the Preferred
Securities Guarantee Trustee under such Trust Guarantee.
If the Preferred Securities Guarantee Trustee fails to enforce such Trust
Guarantee, any record holder of Preferred Securities to which such Trust
Guarantee relates may institute a legal proceeding directly against the Company
to enforce the Preferred Securities Guarantee Trustee's rights under such Trust
Guarantee without first instituting a legal proceeding against the applicable
Cendant Trust, the Preferred Securities Guarantee Trustee or any other person
or entity. Notwithstanding the foregoing, if the Company has failed to make a
Guarantee Payment under a Trust Guarantee, a record holder of Preferred
Securities to which such Trust Guarantee relates may directly institute a
proceeding against the Company for enforcement of such Trust Guarantee for such
payment to the record holder of the Preferred Securities to which such Trust
Guarantee relates of the principal of or interest on the applicable Debt
Securities on or after the respective due dates specified in the Debt
Securities, and the amount of the payment will be based on the holder's pro
rata share of the amount due and owing on all of the Preferred Securities to
which such Trust Guarantee relates. The Company has waived any right or remedy
to require that any action be brought first against the applicable
24
<PAGE>
Cendant Trust or any other person or entity before proceeding directly against
the Company. The record holder in the case of the issuance of one or more
global Preferred Securities certificates will be The Depository Trust Company
acting at the direction of the beneficial owners of the Preferred Securities.
The Company will be required to provide annually to the Preferred
Securities Guarantee Trustee a statement as to the performance by the Company
of certain of its obligations under each outstanding Trust Guarantee and as to
any default in such performance.
INFORMATION CONCERNING THE PREFERRED SECURITIES GUARANTEE TRUSTEE
The Preferred Securities Guarantee Trustee, prior to the occurrence of a
default to a Trust Guarantee, undertakes to perform only such duties as are
specifically set forth in such Trust Guarantee and, after default with respect
to such Trust Guarantee, shall exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
such provision, the Preferred Securities Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by a Trust Guarantee at
the request of any holder of Preferred Securities to which such Trust Guarantee
relates unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby.
TERMINATION
Each Trust Guarantee will terminate as to the Preferred Securities issued
by the applicable Cendant Trust upon full payment of the Redemption Price of
all Preferred Securities of such Cendant Trust, upon distribution of the Debt
Securities held by such Cendant Trust to the holders of all of the Preferred
Securities of such Cendant Trust or upon full payment of the amounts payable in
accordance with the Declaration of such Cendant Trust upon liquidation of such
Cendant Trust. Each Trust Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of Preferred
Securities issued by the applicable Cendant Trust must restore payment of any
sums paid under such Preferred Securities or such Trust Guarantee.
STATUS OF THE TRUST GUARANTEES
The Trust Guarantees will constitute senior unsecured obligations of the
Company and will rank on a parity with all of the Company's other senior
unsecured obligations.
Each Trust Guarantee will constitute a guarantee of payment and not of
collection (that is, the guaranteed party may institute a legal proceeding
directly against the Company to enforce its rights under such Trust Guarantee
without instituting a legal proceeding against any other person or entity).
GOVERNING LAW
The Trust Guarantees will be governed by and construed in accordance with
the law of the State of New York.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
The Company may issue Stock Purchase Contracts, including contracts
obligating holders to purchase from the Company, and the Company to sell to the
holders, a specified number of shares of Common Stock or Preferred Stock at a
future date or dates. The consideration per share of Common Stock or Preferred
Stock may be fixed at the time the Stock Purchase Contracts are issued or may
be determined by reference to a specific formula set forth in the Stock
Purchase Contracts. The Stock Purchase Contracts may be issued separately or as
a part of units ("Stock Purchase Units") consisting of a Stock Purchase
Contract and Debt Securities, Preferred Securities or debt obligations of third
parties, including U.S. Treasury securities, securing the holders' obligations
to purchase the Common Stock or Preferred Stock under the Stock Purchase
Contracts. The Stock Purchase Contracts may
25
<PAGE>
require the Company to make periodic payments to the holders of the Stock
Purchase Units or vice versa, and such payments may be unsecured or prefunded
on some basis. The Stock Purchase Contracts may require holders to secure their
obligations thereunder in a specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the Prospectus
Supplement will not necessarily be complete, and reference will be made to the
Stock Purchase Contracts, and, if applicable, collateral arrangements and
depositary arrangements, relating to such Stock Purchase Contracts or Stock
Purchase Units.
PLAN OF DISTRIBUTION
The Company may sell the Securities and the Cendant Trusts may sell
Preferred Securities being offered hereby in any of, or any combination of, the
following ways: (i) directly to purchasers; (ii) through agents; (iii) through
underwriters; and/or (iv) through dealers.
Offers to purchase Securities may be solicited directly by the Company
and/or a Cendant Trust or by agents designated by the Company and/or a Cendant
Trust from time to time. Any such agent, who may be deemed to be an underwriter
as that term is defined in the Securities Act, involved in the offer or sale of
Securities, will be named, and any commissions payable by the Company and/or a
Cendant Trust to such agent will be set forth, in the Prospectus Supplement.
Unless otherwise indicated in a Prospectus Supplement, any such agent will be
acting on a best efforts basis for the period of its appointment (ordinarily
five business days or less).
If an underwriter or underwriters are utilized in the offer or sale of
Securities, the Company and/or the applicable Cendant Trust will execute an
underwriting agreement with such underwriters at the time of sale of such
Securities to such underwriters and the names of such underwriters and the
principal terms of the Company's and/or the applicable Cendant Trust's
agreement with such underwriters will be set forth in the appropriate
Prospectus Supplement.
If a dealer is utilized in the offer or sale of Securities, the Company
and/or the applicable Cendant Trust will sell such Securities to such dealer,
as principal. Such dealer may then resell such Securities to the public at
varying prices to be determined by such dealer at the time of resale. The name
of such dealer and the principal terms of the Company's and/or the applicable
Cendant Trust's agreement with such dealer will be set forth in the appropriate
Prospectus Supplement.
Agents, underwriters, and dealers may be entitled under agreements with
the Company and/or a Cendant Trust to indemnification by the Company and/or a
Cendant Trust against certain liabilities, including liabilities under the
Securities Act. Agents, dealers and underwriters may also be customers of,
engage in transactions with, or perform services for the Company in the
ordinary course of their business.
Underwriters, agents or their controlling persons may engage in
transactions with and perform services for the Company in the ordinary course
of business.
The place and time of delivery for Securities will be set forth in the
accompanying Prospectus Supplement for such Securities.
LEGAL OPINIONS
Certain matters of Delaware law relating to the validity of the Preferred
Securities will be passed upon on behalf of the Cendant Trusts by Skadden,
Arps, Slate, Meagher & Flom LLP. The validity of the Securities offered hereby
by the Company will be passed on for the Company by Eric J. Bock, Esq., Vice
President--Legal, of the Company. Mr. Bock holds shares of Common Stock and
options to acquire shares of Common Stock.
26
<PAGE>
EXPERTS
The consolidated financial statements of the Company and its consolidated
subsidiaries, except PHH Corporation ("PHH"), as of December 31, 1996 and for
the years ended December 31, 1996 and January 31, 1996, Davidson and
Associates, Inc. ("Davidson") for the year ended December 31, 1995 and Ideon
Group, Inc. ("Ideon") for the year ended December 31, 1995 incorporated by
reference from the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1997 and included in this Prospectus have been audited by Deloitte
& Touche LLP, as stated in their report appearing herein and incorporated
herein by reference, which report expresses an unqualified opinion and includes
explanatory paragraphs related to the restatement as described in Note 3,
certain litigation as described in Note 17, and the change in method of
recognizing revenue and membership solicitation costs as described in Notes 2
and 3. The consolidated financial statements of PHH and Davidson (consolidated
with the Company's financial statements) have been audited by KPMG Peat Marwick
LLP, as stated in their reports appearing herein and incorporated herein by
reference. The consolidated financial statements of Ideon (consolidated with
the Company's financial statements) have been audited by PricewaterhouseCoopers
LLP, as stated in their report appearing herein and incorporated herein by
reference. Such consolidated financial statements of the Company and its
subsidiaries are included and incorporated by reference herein in reliance upon
the respective reports of such firms given upon their authority as experts in
accounting and auditing. All of the foregoing firms are independent auditors.
The consolidated financial statements of National Parking Corporation
incorporated in this Prospectus by reference from the Company's Current Report
on Form 8-K, dated November 4, 1998 have been audited by Deloitte & Touche,
chartered accountants and registered auditors, as stated in their report which
is incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Avis Rent A Car, Inc.
incorporated in this Prospectus by reference from the Company's Current Report
on Form 8-K, dated February 6, 1998 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CENDANT CORPORATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Reports ......................................................... F-2
Financial Statements:
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 ............................................ F-7
Consolidated Balance Sheets as of December 31, 1997 and 1996 ....................... F-8
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 ............................................ F-10
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 ............................................ F-12
Notes to Consolidated Financial Statements ......................................... F-14
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 (Unaudited) ......................... F-63
Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and December 31,
1997 .............................................................................. F-65
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (Unaudited) ......................... F-67
Notes to Consolidated Financial Statements ......................................... F-69
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cendant Corporation
We have audited the consolidated balance sheets of Cendant Corporation and
subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. We did not audit the balance sheet of
PHH Corporation (a consolidated subsidiary of Cendant Corporation) as of
December 31, 1996, or the related statements of income, shareholders' equity,
and cash flows of PHH Corporation for the years ended December 31, 1996 and
January 31, 1996, which statements reflect total assets of $6.6 billion as of
December 31, 1996, and net income of $87.7 million and $78.1 million for the
years ended December 31, 1996 and January 31, 1996, respectively. Nor did we
audit the statements of operations, stockholder's equity or cash flows of Ideon
Group, Inc. (a consolidated subsidiary of Cendant Corporation) for the year
ended December 31, 1995, which statements reflect a net loss of $49.4 million
for the year ended December 31, 1995. Nor did we audit the statements of
earnings, shareholders' equity or cash flows of Davidson & Associates, Inc. (a
consolidated subsidiary of Cendant Corporation) for the year ended December 31,
1995, which statements reflect net income of $13.6 million for the year ended
December 31, 1995. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for PHH Corporation, Ideon Group, Inc. and Davidson &
Associates, Inc. for such periods, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 3, the accompanying consolidated balance sheets as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997 have been restated. Additionally, as
discussed in Note 17 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.
As discussed in Notes 2 and 3, in 1997 the Company changed its method of
recognizing revenue and membership solicitation costs for its membership
businesses.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
September 28, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHH Corporation
We have audited the consolidated balance sheet of PHH Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for the years ended December
31, 1996 and January 31, 1996, before the restatement related to the merger of
Cendant Corporation's relocation business with the Company and
reclassifications to conform to the presentation used by Cendant Corporation,
not presented separately herein. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements (before restatement and
reclassifications) referred to above present fairly, in all material respects,
the financial position of PHH Corporation and subsidiaries as of December 31,
1996, and the results of their operations and their cash flows for the years
ended December 31, 1996 and January 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
April 30, 1997
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Davidson & Associates, Inc.
We have audited the consolidated statements of earnings, shareholders' equity
and cash flows of Davidson & Associates, Inc. and subsidiaries for the year
ended December 31, 1995 not presented seperately herein. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Davidson & Associates, Inc. and subsidiaries for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Long Beach, California
February 21, 1996
F-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Ideon Group, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity of Ideon Group, Inc. (formerly known as
SafeCard Services, Incorporated), and its subsidiaries (not presented
separately herein), present fairly, in all material respects, the results of
operations and cash flows of Ideon Group, Inc. and its subsidiaries for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Ideon Group, Inc. for any period subsequent to December 31, 1995.
/s/ Price Waterhouse LLP
Tampa, Florida
February 2, 1996
F-5
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-6
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Membership and service fees -- net $ 3,988.7 $ 3,138.0 $ 2,522.1
Fleet leasing (net of depreciation and interest costs of $1,205.2,
$1,132.4 and $1,089.0) 59.5 56.7 52.1
Other 191.8 43.0 41.9
--------- --------- ---------
Net revenues 4,240.0 3,237.7 2,616.1
--------- --------- ---------
EXPENSES
Operating 1,322.3 1,183.2 1,024.9
Marketing and reservation 1,031.8 910.8 743.6
General and administrative 636.2 341.0 283.3
Depreciation and amortization 237.7 145.5 100.4
Interest -- net 50.6 14.3 16.6
Merger-related costs and other unusual charges 704.1 109.4 97.0
--------- --------- ---------
Total expenses 3,982.7 2,704.2 2,265.8
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EXTRAORDINARY
GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 257.3 533.5 350.3
Provision for income taxes 191.0 220.2 143.2
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 66.3 313.3 207.1
Income (loss) from discontinued operations,
net of taxes (Note 6) (26.8) 16.7 22.7
---------- --------- ---------
INCOME BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 39.5 330.0 229.8
Extraordinary gain, net of tax (Note 22) 26.4 -- --
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 65.9 330.0 229.8
Cumulative effect of accounting change, net of tax (Note 3) (283.1) -- --
---------- ---------- ----------
NET INCOME (LOSS) $ (217.2) $ 330.0 $ 229.8
========== ========== ==========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before extaordinary gain and
cumulative effect of accounting change $ 0.08 $ 0.41 $ 0.30
Income (loss) from discontinued operations, net (0.03) 0.03 0.03
Extraordinary gain, net 0.03 -- --
Cumulative effect of accounting change, net (0.35) -- --
---------- ---------- ----------
NET INCOME (LOSS) $ (0.27) $ 0.44 $ 0.33
=========== ========== ==========
DILUTED
Income from continuing operations before extraordinary gain and
cumulative effect of accounting change $ 0.08 $ 0.39 $ 0.28
Income (loss) from discontinued operations, net (0.03) 0.02 0.03
Extraordinary gain, net 0.03 -- --
Cumulative effect of accounting change, net (0.35) -- --
----------- ---------- ----------
NET INCOME (LOSS) $ (0.27) $ 0.41 $ 0.31
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
-------------------------------
DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 67.0 $ 448.1
Receivables, (net of allowance for doubtful accounts
of $61.5 and $61.0) 1,170.7 994.1
Deferred membership acquisition costs -- 269.9
Deferred income taxes 311.9 136.9
Other current assets 767.2 525.0
Net assets of discontinued operations 273.3 120.1
----------- -----------
Total current assets 2,590.1 2,494.1
----------- -----------
Franchise agreements -- net 890.3 995.9
Goodwill -- net 2,148.2 2,080.3
Other intangibles -- net 897.5 634.5
Other assets 1,103.6 828.5
----------- -----------
Total assets exclusive of assets under programs 7,629.7 7,033.3
----------- -----------
Assets under management and mortgage programs
Net investment in leases and leased vehicles 3,659.1 3,418.7
Relocation receivables 775.3 773.3
Mortgage loans held for sale 1,636.3 1,248.3
Mortgage servicing rights 373.0 288.9
----------- -----------
6,443.7 5,729.2
----------- -----------
TOTAL ASSETS $ 14,073.4 $ 12,762.5
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
-----------------------------
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other current liabilities $ 1,492.4 $ 1,602.9
Deferred income 1,042.0 573.0
----------- -----------
Total current liabilities 2,534.4 2,175.9
----------- -----------
Deferred income 292.1 327.9
Long-term debt 1,246.0 780.8
Deferred income taxes 70.9 62.4
Other noncurrent liabilities 110.3 88.0
----------- -----------
Total liabilities exclusive of liabilities under programs 4,253.7 3,435.0
----------- -----------
Liabilities under management and mortgage programs
Debt 5,602.6 5,089.9
----------- -----------
Deferred income taxes 295.7 281.9
----------- -----------
Commitments and contingencies (Note 17)
Shareholders' equity
Preferred stock, $.01 par value -- authorized 10 million shares; none
issued and outstanding -- --
Common stock, $.01 par value -- authorized 2 billion shares; issued
838,333,800 and 807,654,321 shares 8.4 8.1
Additional paid-in capital 3,088.4 2,871.2
Retained earnings 940.6 1,186.7
Net unrealized gain on marketable securities 0.2 4.4
Currency translation adjustment (38.4) (10.8)
Restricted stock, deferred compensation (3.4) (28.2)
Treasury stock, at cost, 6,545,362 and 6,911,757 shares (74.4) (75.7)
----------- -----------
Total shareholders' equity 3,921.4 3,955.7
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,073.4 $ 12,762.5
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
----------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 687.7 $ 6.9 $ 711.5 $ 718.7
Issuance of common stock 21.1 .3 186.8 --
Exercise of stock options by
payment of cash and common
stock 12.5 .1 67.1 --
Tax benefit from exercise of
stock options -- -- 54.8 --
Amortization of ESOP
obligation -- -- 3.0 --
Exercise of stock warrants 2.4 -- 14.9 --
Cash dividends declared and
other equity distributions -- -- .2 (43.4)
Conversion of convertible notes 2.1 -- 13.7 --
Net unrealized loss on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Retirement of treasury stock (.6) -- (10.1) --
Currency translation adjustment -- -- -- --
Net income -- -- -- 229.8
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1995 725.2 $ 7.3 $ 1,041.9 $ 905.1
Issuance of common stock 63.3 .6 1,627.9 --
Exercise of stock options by
payment of cash and common
stock 14.0 .1 74.6 --
Restricted stock issuance 1.4 -- 30.5 --
Amortization of restricted stock -- -- -- --
Tax benefit from exercise of
stock options -- -- 78.9 --
Cash dividends declared and
other equity distributions -- -- -- (41.3)
Adjustment to reflect change in
fiscal years pooled entities -- -- (.6) (7.1)
Conversion of convertible notes 3.8 .1 18.0 --
Net unrealized gain on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Currency translation adjustment -- -- -- --
Net income -- -- -- 330.0
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1996 807.7 $ 8.1 $ 2,871.2 $ 1,186.7
<CAPTION>
AS RESTATED (NOTE 3)
-----------------------------------------------------------
NET UNREALIZED
LOSS ON CURRENCY RESTRICTED
MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SECURITIES ADJUSTMENT COMPENSATION STOCK
--------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ (.7) $ (20.8) $ -- $ (10.5)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (20.5)
Tax benefit from exercise of
stock options -- -- -- --
Amortization of ESOP
obligation -- -- -- --
Exercise of stock warrants -- -- -- --
Cash dividends declared and
other equity distributions -- -- -- --
Conversion of convertible notes -- -- -- --
Net unrealized loss on
marketable securities (1.4) -- -- --
Purchase of common stock -- -- -- (10.1)
Retirement of treasury stock -- -- -- 10.1
Currency translation adjustment -- (2.2) -- --
Net income -- -- -- --
------- --------- -------- ---------
BALANCE, DECEMBER 31, 1995 $ (2.1) $ (23.0) $ -- $ (31.0)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (25.5)
Restricted stock issuance -- -- (30.5) --
Amortization of restricted stock -- -- 2.3 --
Tax benefit from exercise of
stock options -- -- -- --
Cash dividends declared and
other equity distributions -- -- -- --
Adjustment to reflect change in
fiscal years pooled entities -- 2.4 -- --
Conversion of convertible notes -- -- -- --
Net unrealized gain on
marketable securities 6.5 -- -- --
Purchase of common stock -- -- -- (19.2)
Currency translation adjustment -- 9.8 -- --
Net income -- -- -- --
------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 4.4 $ (10.8) $ (28.2) $ (75.7)
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
----------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 807.7 $ 8.1 $ 2,871.2 $ 1,186.7
Issuance of common stock 6.2 -- 46.3 --
Exercise of stock options by
payment of cash and common
stock 11.4 .1 132.8 --
Restricted stock issuance .2 -- 3.7 --
Amortization of restricted stock -- -- -- --
Tax benefit from exercise of
stock options -- -- 93.5 --
Cash dividends declared -- -- -- (6.6)
Adjustment to reflect taxable
poolings -- -- 41.2 --
Adjustment to reflect change in
CUC fiscal year -- -- -- (22.3)
Post-closing payment made in
connection with shares issued
to acquire Avis Inc. -- -- (60.8) --
Conversion of convertible notes 20.2 .2 150.9 --
Net unrealized loss on
marketable securities -- -- -- --
Purchase of common stock -- -- -- --
Retirement of treasury stock (7.4) -- (190.4) --
Currency translation adjustment -- -- -- --
Net loss -- -- -- (217.2)
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1997 838.3 $ 8.4 $ 3,088.4 $ 940.6
====== ====== ========== ==========
<CAPTION>
AS RESTATED (NOTE 3)
-------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS) ON CURRENCY RESTRICTED
MARKETABLE TRANSLATION STOCK, DEFERRED TREASURY
SECURITIES ADJUSTMENT COMPENSATION STOCK
---------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 4.4 $ (10.8) $ (28.2) $ (75.7)
Issuance of common stock -- -- -- --
Exercise of stock options by
payment of cash and common
stock -- -- -- (17.8)
Restricted stock issuance -- -- (3.7) --
Amortization of restricted stock -- -- 28.5 --
Tax benefit from exercise of
stock options -- -- -- --
Cash dividends declared -- -- -- --
Adjustment to reflect taxable
poolings -- -- -- --
Adjustment to reflect change in
CUC fiscal year -- -- -- --
Post-closing payment made in
connection with shares issued
to acquire Avis Inc. -- -- -- --
Conversion of convertible notes -- -- -- --
Net unrealized loss on
marketable securities (4.2) -- -- --
Purchase of common stock -- -- -- (171.3)
Retirement of treasury stock -- -- -- 190.4
Currency translation adjustment -- (27.6) -- --
Net loss -- -- -- --
------ --------- --------- ----------
BALANCE, DECEMBER 31, 1997 $ 0.2 $ (38.4) $ (3.4) $ (74.4)
====== ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
--------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES ------------ ------------- -------------
<S> <C> <C> <C>
Net income (loss) $ (217.2) $ 330.0 $ 229.8
(Income) loss from discontinued operations, net of taxes 26.8 (16.7) (22.7)
Extraordinary gain on sale of subsidiary, net of tax (26.4) -- --
Cumulative effect of accounting change, net of tax 283.1 -- --
Merger-related costs and other unusual charges 704.1 109.4 97.0
Merger-related payments (317.7) (61.3) (36.2)
Adjustments to reconcile net income to net cash provided by
continuing operations
Depreciation and amortization 237.7 145.5 100.4
Membership acquisition costs (26.0) (512.1) (442.9)
Amortization of membership costs -- 492.3 390.2
Effect of changes in fiscal years of pooled entities (22.3) (7.1) --
Deferred income taxes (23.8) 68.8 54.2
Change in operating assets and liabilities from continuing operations:
Receivables (95.6) (122.1) (82.6)
Accounts payable and other current liabilities (87.0) 47.7 122.4
Deferred income 134.0 43.9 12.0
Other (90.6) 58.8 (98.7)
---------- ---------- ----------
NET CASH PROVIDED BY CONTINUING OPERATIONS EXCLUSIVE OF
MANAGEMENT AND MORTGAGE PROGRAMS 479.1 577.1 322.9
---------- ---------- ----------
Management and mortgage programs:
Depreciation and amortization 1,121.9 1,021.8 960.9
Mortgage loans held for sale (388.0) (73.3) (139.5)
---------- ---------- ----------
733.9 948.5 821.4
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 1,213.0 1,525.6 1,144.3
---------- ---------- ----------
INVESTING ACTIVITIES
Property and equipment additions (154.5) (101.2) (100.4)
Proceeds from sales of marketable securities 506.1 72.4 164.2
Purchases of marketable securities (458.1) (125.6) (51.3)
Loans and investments (272.5) (12.7) (33.8)
Net assets acquired, exclusive of cash acquired and
acquisition-related payments (568.2) (1,608.6) (145.8)
Net proceeds from sale of subsidiary 224.0 -- --
Funding of grantor trusts -- (89.9) --
Other (108.7) 33.7 (23.4)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS
EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAMS (831.9) (1,831.9) (190.5)
---------- ---------- ----------
Management and mortgage programs:
Investment in leases and leased vehicles (2,068.8) (1,901.2) (2,008.5)
Payments received on investment in leases and leased vehicles 589.0 595.9 576.6
Proceeds from sales and transfers of leases and leased vehicles to
third parties 186.4 162.8 109.8
Equity advances on homes under management (6,844.5) (4,308.0) (6,238.5)
Repayment of advances on homes under management 6,862.6 4,348.9 6,070.5
Additions to originated mortgage servicing rights (270.4) (164.4) (130.1)
Proceeds from sales of mortgage servicing rights 49.0 7.1 21.7
---------- ---------- ----------
(1,496.7) (1,258.9) (1,598.5)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (2,328.6) (3,090.8) (1,789.0)
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AS RESTATED (NOTE 3)
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from borrowings $ 66.7 $ 459.1 $ 6.0
Principal payments on borrowings (174.0) (3.5) (50.0)
Issuance of convertible debt 543.2 -- --
Issuance of common stock 132.2 1,223.8 100.2
Purchases of common stock (171.3) (19.2) (10.1)
Payments of dividends and other equity distributions by
pooled entities (6.6) (41.3) (39.1)
Other -- (80.0) 15.0
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS EXCLUSIVE OF MANAGEMENT AND MORTGAGE PROGRAM 390.2 1,538.9 22.0
---------- ---------- ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings 2,816.3 1,656.0 1,858.8
Principal payments on borrowings (1,692.9) (1,645.9) (1,237.0)
Net change in short-term borrowings (613.5) 231.8 17.4
---------- ---------- ----------
509.9 241.9 639.2
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS 900.1 1,780.8 661.2
---------- ---------- ----------
Effect of changes in exchange rates on cash and cash
equivalents 15.4 (46.2) 6.5
Cash provided by (used in) discontinued operations (181.0) 53.6 (1.8)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (381.1) 223.0 21.2
Cash and cash equivalents, beginning of period 448.1 225.1 203.9
---------- ---------- ----------
Cash and cash equivalents, end of period $ 67.0 $ 448.1 $ 225.1
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 374.9 $ 291.7 $ 284.9
========== ========== ==========
Taxes $ 264.5 $ 89.4 $ 90.7
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Cendant Corporation, together with its subsidiaries and its joint ventures
("Cendant" or the "Company") is a leading global provider of consumer and
business services. The Company was created through the merger (the "Cendant
Merger") of HFS Incorporated ("HFS") and CUC International Inc. ("CUC") on
December 17, 1997 with the merged company being renamed Cendant Corporation.
The Company provides all the services formerly provided by each of HFS and
CUC including travel services, real estate services and membership-based
consumer services. See Note 24 for a description of the Company's industry
segments and the services provided within its underlying businesses.
On April 15, 1998, as a result of the discovery of accounting irregularities
in the former CUC business units, the Audit Committee of the Company's
Board of Directors initiated an investigation into such matters. The Audit
Committee's investigation has since been completed and, as a result of its
findings, the Company has restated its previously reported financial
results for 1995 through 1997. The accompanying consolidated financial
statements and footnotes thereto for the years ended December 31, 1997,
1996 and 1995 set forth herein incorporates all relevant information
obtained from the investigation, and reflects the correction of accounting
policies which were changed as a result of the findings. Accordingly, the
restated consolidated financial statements presented herein are the
Company's primary historical financial statements for the periods
presented. See Note 3 for a reconciliation of the Company's financial
position and results of operations from financial statements previously
filed prior to restatement, to the restated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
transactions of the Company together with its wholly owned and majority
owned subsidiaries. The accompanying consolidated financial statements have
been restated for the business combinations accounted for as poolings of
interests (see Note 5) as if such combined companies had operated as one
entity since inception. 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is computed by the straight-line method over the
estimated useful lives of the related assets.
FRANCHISE AGREEMENTS
Franchise agreements are recorded at their estimated fair values upon
acquisition and are amortized on a straight-line basis over the estimated
periods to be benefited, ranging from 12 to 40 years. At December 31, 1997
and 1996, accumulated amortization amounted to $125.3 million and $87.9
million, respectively.
F-14
<PAGE>
GOODWILL
Goodwill, which represents the excess of cost over fair value of net assets
acquired is being amortized on a straight-line basis over the estimated
useful lives, ranging from 5 to 40 years. At December 31, 1997 and 1996,
accumulated amortization amounted to $177.2 million and $141.4 million,
respectively.
ASSET IMPAIRMENT
The Company periodically evaluates the recoverability of its long-lived
assets, comparing the respective carrying values to the current and
expected future cash flows, 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 each respective
franchise brand. Management believes that as of December 31, 1997, the
carrying values and remaining lives of goodwill and franchise agreements
are appropriate.
CORE BUSINESS OPERATIONS AND REVENUE RECOGNITION
Franchising. Franchise revenue principally consists of royalty, marketing
and reservation fees, which are based on a percentage of franchisee
revenue. Royalty, marketing and reservation fees are accrued as the
underlying franchisee revenue is earned. Franchise revenue also includes
initial franchise fees which are recorded as revenue when the lodging
property, car rental location or real estate brokerage office opens as a
franchised unit.
Timeshare. Timeshare exchange fees are recognized as revenue when the
exchange request has been confirmed to the subscriber. Timeshare
subscription revenue is deferred upon receipt and recorded as revenue as the
contractual services (delivery of publications) are provided to subscribers.
Fleet management. Revenues from fleet management services other than leasing
are recognized over the period in which services are provided and the
related expenses are incurred. The Company records the cost of leased
vehicles as an "investment in leases and leased vehicles". Amounts charged
to lessees for interest on the unrecovered investment are credited to income
on a level yield method which approximates the contractual terms.
Relocation. Relocation services provided by the Company include facilitating
the purchase and resale of the transferee's residence, providing equity
advances on the transferee's residence and home management services. The
home is purchased under a contract of sale and the Company obtains a deed to
the property, however, it does not generally record the deed or transfer of
title. Transferring employees are provided equity on their home based on an
appraised value determined by independent appraisers, after deducting any
outstanding mortgages. The mortgage is generally retired concurrently with
the advance of the equity and the purchase of the home. Based on its client
agreements, the Company is given parameters under which it negotiates for
the ultimate sale of the home. The gain or loss on resale is generally borne
by the client corporation.
While homes are held for resale, the amount funded for such homes carry an
interest charge computed at a floating rate based on various indices. Direct
costs of managing the home during the period the home is held for resale,
including property taxes and repairs and maintenance are generally borne by
the client. All such costs are generally guaranteed by the client
corporation. The client normally advances funds to cover a portion of such
carrying costs. When the home is sold, a settlement is made with the client
corporation netting actual costs with any advanced funding.
Revenues and related costs associated with the purchase and resale of a
residence are recognized over the period in which services are provided.
Relocation services revenue is recorded net of costs reimbursed by client
corporations and interest expenses incurred to fund the purchase of a
transferee's residence. Under the terms of contracts with clients, the
Company is generally protected against losses from changes in real estate
market conditions. The Company also offers fee-based programs such as home
marketing assistance, household goods moves, destination services, and
property dispositions for financial institutions and government agencies.
Revenues from these fee-based services are taken into income over the
periods in which the services are provided and the related expenses are
incurred.
F-15
<PAGE>
Mortgage. Loan origination fees, commitment fees paid in connection with the
sale of loans, and direct loan origination costs associated with loans held
for resale, are deferred until the loan is sold. Fees received for servicing
loans owned by investors are based on the difference between the weighted
average yield received on the mortgages and the amount paid to the investor,
or on a stipulated percentage of the outstanding monthly principal balance
on such loans. Servicing fees are credited to income when received. Costs
associated with loan servicing are charged to expense as incurred.
Sales of mortgage loans are generally recorded on the date a loan is
delivered to an investor. Sales of mortgage securities are recorded on the
settlement date. The Company acquires mortgage-servicing rights by
originating or purchasing mortgage loans and selling those loans with
servicing retained, or it may purchase mortgage-servicing rights separately.
The carrying value of mortgage-servicing rights is amortized over the
estimated life of the related loan portfolio. Such amortization is recorded
as a reduction of loan servicing fees in the consolidated statements of
operations. Gains or losses on the sale of mortgage servicing rights are
recognized when title and all risks and rewards have irrevocably passed to
the buyer and there are no significant unresolved contingencies. Gains or
losses on sales of mortgage loans are recognized based upon the difference
between the selling price and the carrying value of the related mortgage
loans sold. Such gains and losses are also increased or decreased by the
amount of deferred mortgage-servicing fees recorded.
Lifestyle product sales. Product sale revenue primarily represents the sale
of entertainment books, gift wrapping and other products to schools,
churches and other charitable organizations on a consignment basis. Revenue
is recognized when the consignee generates a sale to the ultimate consumer.
Insurance. Insurance premiums received for the sale of accidental death and
dismemberment insurance ("AD&D") are recognized upon execution of
underlying agreements with consumers. The Company transfers the risk of
insurance, administration of claims and balance of premiums to third party
insurance companies. Also, the Company recognizes its percentage share of
the excess of premiums transferred over claims costs and insurance company
administrative retention, based on actual and actuarially determined future
claims costs.
Membership. Prospective club members receive a free three month trial
membership for which they are under no obligation to commit to purchase nor
pay for such membership. Memberships are generally billed to credit cards
upon expiration of the trial period. Memberships are cancellable for a full
refund of the membership fee during the entire membership period, generally
1 year. Membership revenue is recognized upon the expiration of the
membership period (See ACCOUNTING CHANGE FOR MEMBERSHIPS).
ACCOUNTING CHANGE FOR MEMBERSHIPS
Prior to 1997, the Company recorded deferred membership income, net of
estimated cancellations, at the time members were billed (upon expiration
of the free trial period), which was recognized as revenue ratably over the
membership term and modified periodically based on actual cancellation
experience. In addition, membership acquisition and renewal costs, which
related primarily to membership solicitations were capitalized as direct
response advertising costs due to the Company's ability to demonstrate that
the direct response advertising resulted in future economic benefits. Such
costs were amortized on a straight-line basis as revenues were recognized
(over the average membership period). The Company believed that such
accounting policies were appropriate and consistent with industry practice.
In August 1998, in connection with the Company's cooperation with the
Securities and Exchange Commission ("SEC") investigation of accounting
irregularities discovered in the former CUC business units, the SEC
concluded that when membership fees are fully refundable during the entire
membership period, membership revenue should be recognized at the end of
the membership period upon the expiration of the refund offer. The SEC
Staff further concluded that non-refundable solicitation costs should be
expensed as incurred since such costs are not recoverable if membership
fees are refunded.
F-16
<PAGE>
The Company agreed to adopt such accounting policies effective January 1,
1997 and recorded a cumulative adjustment on such date for the cumulative
impact of the accounting change (see Note 3--Restatement--Accounting
Change).
ADVERTISING EXPENSES
The Company formerly expensed all advertising costs, other than direct
response advertising costs, in the period incurred. As a result of the
change in accounting for memberships (see Accounting change for
memberships), the Company's policy is to expense all advertising costs in
the period incurred. Advertising expenses for the years ended December 31,
1997, 1996 and 1995 were $898.2 million, $805.6 million and $653.9 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 $199.6 million of cumulative undistributed earnings of
foreign subsidiaries at December 31, 1997 since it is the present intention
of management to reinvest the undistributed earnings indefinitely in
foreign operations. The determination of unrecognized deferred U.S. tax
liability for unremitted earnings is not practicable.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at the
exchange rates as of the balance sheet dates, equity accounts are
translated at historical exchange rates and revenues, expenses and cash
flows are translated at the average exchange rates for the periods
presented. Translation gains and losses are included as a component of
shareholders' equity.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" for fiscal years beginning after June
15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company will adopt SFAS No. 133 effective for the 2000 calendar
year end. The Company has not yet determined the impact SFAS No. 133 will
have on its financial position or results of operations when such statement
is adopted.
3. RESTATEMENT
As publicly announced on April 15, 1998, the Company discovered accounting
irregularities in certain business units of CUC. The Audit Committee of the
Company's Board of Directors initiated an investigation into such matters
(See Note 17). As a result of the findings of the Audit Committee
investigation and Company investigation, the Company has restated
previously reported annual results including the 1997, 1996 and 1995
financial information set forth herein. The 1997 annual results have also
been restated for a change in accounting, effective January 1, 1997,
related to revenue and expense recognition for memberships (see "Accounting
Change").
While management has made all adjustments considered necessary as a result
of the investigation into accounting irregularities and the preparation and
audit of the restated financial statements for 1997, 1996 and 1995, there
can be no assurances that additional adjustments will not be required as a
result of the SEC investigation.
The following statements of operations and balance sheets reconcile
previously reported and restated financial information.
F-17
<PAGE>
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES,
AS PREVIOUSLY AND ACCOUNTING
REPORTED CHANGE
--------------- -----------------
<S> <C> <C>
Net revenues $5,314.7 $ (432.5)
-------- --------
Expenses
Operating 1,555.5 115.9
Marketing and reservation 1,266.3 (114.2)
General and administrative 727.2 7.4
Depreciation and amortization 256.8 16.3
Interest-net 66.3 (0.2)
Merger-related costs and other unusual
charges 1,147.9 (409.9)
-------- --------
Total expenses 5,020.0 (384.7)
-------- --------
Income from continuing operations before
income taxes, extraordinary gain and
cumulative effect of accounting change 294.7 (47.8)
Provision for income taxes 239.3 (47.1)
-------- --------
Income from continuing operations before
extraordinary gain and cumulative effect of
accounting change 55.4 (0.7)
Loss from discontinued operations, net of
taxes -- --
-------- --------
Income before extraordinary gain and
cumulative effect of accounting change 55.4 (0.7)
Extraordinary gain, net of tax -- 11.2
-------- --------
Income before cumulative effect of accounting
change 55.4 10.5
Cumulative effect of accounting change, net of
tax -- (283.1)
-------- --------
Net income (loss) $ 55.4 $ (272.6)
======== ========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.07
Loss from discontinued operations, net --
Extraordinary gain, net --
Cumulative effect of accounting change, net --
--------
Net income (loss) $ 0.07
========
DILUTED
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.06
Loss from discontinued operations, net --
Extraordinary gain, net --
Cumulative effect of accounting change, net --
--------
Net income (loss) $ 0.06
========
WEIGHTED AVERAGE SHARES
Basic 811.2
Diluted 851.7
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
RESTATED BEFORE RECLASSIFICATION
DISCONTINUED FOR DISCONTINUED AS
OPERATIONS OPERATIONS RESTATED
----------------- ------------------ -----------
<S> <C> <C> <C>
Net revenues $4,882.2 $ (642.2) $4,240.0
-------- -------- --------
Expenses
Operating 1,671.4 (349.1) 1,322.3
Marketing and reservation 1,152.1 (120.3) 1,031.8
General and administrative 734.6 (98.4) 636.2
Depreciation and amortization 273.1 (35.4) 237.7
Interest-net 66.1 (15.5) 50.6
Merger-related costs and other unusual
charges 738.0 (33.9) 704.1
-------- -------- --------
Total expenses 4,635.3 (652.6) 3,982.7
-------- -------- --------
Income from continuing operations before
income taxes, extraordinary gain and
cumulative effect of accounting change 246.9 10.4 257.3
Provision for income taxes 192.2 (1.2) 191.0
-------- -------- --------
Income from continuing operations before
extraordinary gain and cumulative effect of
accounting change 54.7 11.6 66.3
Loss from discontinued operations, net of
taxes -- (26.8) (26.8)
-------- -------- --------
Income before extraordinary gain and
cumulative effect of accounting change 54.7 (15.2) 39.5
Extraordinary gain, net of tax 11.2 15.2 26.4
-------- -------- --------
Income before cumulative effect of accounting
change 65.9 -- 65.9
Cumulative effect of accounting change, net of
tax (283.1) -- (283.1)
-------- -------- --------
Net income (loss) $ (217.2) $ -- $ (217.2)
======== ======== ========
INCOME (LOSS) PER SHARE
BASIC
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.08
Loss from discontinued operations, net (0.03)
Extraordinary gain, net 0.03
Cumulative effect of accounting change, net (0.35)
--------
Net income (loss) $ (0.27)
========
DILUTED
Income from continuing operations before
extraordinary gain and cumulative effect
of accounting change $ 0.08
Loss from discontinued operations, net (0.03)
Extraordinary gain, net 0.03
Cumulative effect of accounting change, net (0.35)
--------
Net income (loss) $ (0.27)
========
WEIGHTED AVERAGE SHARES
Basic 811.2
Diluted 851.7
</TABLE>
F-18
<PAGE>
BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
IRREGULARITIES RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY AND ACCOUNTING DISCONTINUED FOR DISCONTINUED AS
REPORTED CHANGE OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 149.5 $ (64.0) $ 85.5 $ (18.5) $ 67.0
Receivables, net 1,648.8 (309.8) 1,339.0 (168.3) 1,170.7
Deferred membership
acquisition costs 424.5 (424.5) -- -- --
Net assets of discontinued
operations -- -- -- 273.3 273.3
Other assets 777.0 383.0 1,160.0 (80.9) 1,079.1
---------- -------- --------- -------- ---------
Total current assets 2,999.8 (415.3) 2,584.5 5.6 2,590.1
---------- -------- --------- -------- ---------
Goodwill -- net 2,467.0 (95.0) 2,372.0 (223.8) 2,148.2
Other assets 2,940.7 33.1 2,973.8 (82.4) 2,891.4
---------- -------- --------- -------- ---------
Total assets exclusive of assets
under programs 8,407.5 (477.2) 7,930.3 (300.6) 7,629.7
---------- -------- --------- -------- ---------
Assets under management and
mortgage programs 6,443.7 -- 6,443.7 -- 6,443.7
---------- -------- --------- -------- ---------
TOTAL ASSETS $ 14,851.2 $ (477.2) $14,374.0 $ (300.6) $14,073.4
========== ======== ========= ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $ 1,742.8 $ (80.1) $ 1,662.7 $ (170.3) $ 1,492.4
Deferred income 1,197.2 136.9 1,334.1 -- 1,334.1
Long-term debt 1,348.3 3.0 1,351.3 (105.3) 1,246.0
Other liabilities 187.1 19.1 206.2 (25.0) 181.2
---------- -------- --------- -------- ---------
Total liabilities exclusive of
liabilities under programs 4,475.4 78.9 4,554.3 (300.6) 4,253.7
---------- -------- --------- -------- ---------
Liabilities under management
and mortgage programs 5,898.3 -- 5,898.3 -- 5,898.3
---------- -------- --------- -------- ---------
Total shareholders' equity 4,477.5 (556.1) 3,921.4 -- 3,921.4
---------- -------- --------- -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 14,851.2 $ (477.2) $14,374.0 $ (300.6) $14,073.4
========== ======== ========= ======== =========
</TABLE>
F-19
<PAGE>
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Net revenues $3,908.8 $ (160.2) $3,748.6 $ (510.9) $3,237.7
-------- -------- -------- -------- --------
Expenses
Operating 1,392.8 35.8 1,428.6 (245.4) 1,183.2
Marketing and reservation 1,089.5 (92.5) 997.0 (86.2) 910.8
General and administrative 339.6 62.4 402.0 (61.0) 341.0
Depreciation and
amortization 167.9 12.0 179.9 (34.4) 145.5
Interest-net 25.4 2.2 27.6 (13.3) 14.3
Merger-related costs and
other unusual charges 179.9 (45.6) 134.3 (24.9) 109.4
-------- -------- -------- -------- --------
Total expenses 3,195.1 (25.7) 3,169.4 (465.2) 2,704.2
-------- -------- -------- -------- --------
Income from continuing
operations before income
taxes 713.7 (134.5) 579.2 (45.7) 533.5
Provision for income taxes 290.1 (40.9) 249.2 (29.0) 220.2
-------- -------- -------- -------- --------
Income from continuing
operations 423.6 (93.6) 330.0 (16.7) 313.3
Income from discontinued
operations, net of taxes -- -- -- 16.7 16.7
-------- -------- -------- -------- --------
Net income $ 423.6 $ (93.6) $ 330.0 $ -- $ 330.0
======== ======== ======== ======== ========
INCOME PER SHARE
BASIC
Income from continuing
operations $ 0.56 $ 0.41
Income from discontinued
operations, net -- 0.03
-------- --------
Net income $ 0.56 $ 0.44
======== ========
DILUTED
Income from continuing
operations $ 0.52 $ 0.39
Income from discontinued
operations, net -- 0.02
-------- --------
Net income $ 0.52 $ 0.41
======== ========
WEIGHTED AVERAGE SHARES
Basic 754.4 757.4
Diluted 818.6 821.6
</TABLE>
F-20
<PAGE>
BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 633.9 $ (156.1) $ 477.8 $ (29.7) $ 448.1
Receivables, net 1,290.6 (172.0) 1,118.6 (124.5) 994.1
Deferred membership
acquisition costs 401.6 (131.7) 269.9 -- 269.9
Net assets of discontinued
operations -- -- -- 120.1 120.1
Other assets 605.1 114.6 719.7 (57.8) 661.9
---------- -------- --------- -------- ---------
Total current assets 2,931.2 (345.2) 2,586.0 (91.9) 2,494.1
---------- -------- --------- -------- ---------
Goodwill -- net 2,302.2 (29.9) 2,272.3 (192.0) 2,080.3
Other assets 2,625.7 (82.4) 2,543.3 (84.4) 2,458.9
---------- -------- --------- -------- ---------
Total assets exclusive of assets
under programs 7,859.1 (457.5) 7,401.6 (368.3) 7,033.3
---------- -------- --------- -------- ---------
Assets under management and
mortgage programs 5,729.2 -- 5,729.2 -- 5,729.2
---------- -------- --------- -------- ---------
TOTAL ASSETS $ 13,588.3 $ (457.5) $13,130.8 $ (368.3) $12,762.5
========== ======== ========= ======== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and other $ 1,680.4 $ 59.5 $ 1,739.9 $ (137.0) $ 1,602.9
Deferred income 1,099.4 (198.5) 900.9 -- 900.9
Long-term debt 1,004.6 (9.2) 995.4 (214.6) 780.8
Other liabilities 124.9 42.2 167.1 (16.7) 150.4
---------- -------- --------- -------- ---------
Total liabilities exclusive of
liabilities under programs 3,909.3 (106.0) 3,803.3 (368.3) 3,435.0
---------- -------- --------- -------- ---------
Liabilities under management
and mortgage programs 5,371.8 -- 5,371.8 -- 5,371.8
---------- -------- --------- -------- ---------
Total shareholders' equity 4,307.2 (351.5) 3,955.7 -- 3,955.7
---------- -------- --------- -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 13,588.3 $ (457.5) $13,130.8 $ (368.3) $12,762.5
========== ======== ========= ======== =========
</TABLE>
F-21
<PAGE>
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------------
ACCOUNTING RESTATED BEFORE RECLASSIFICATION
AS PREVIOUSLY ERRORS AND DISCONTINUED FOR DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS OPERATIONS RESTATED
--------------- ---------------- ----------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Net revenues $2,992.1 $ 34.6 $3,026.7 $ (410.6) $2,616.1
-------- -------- -------- -------- --------
Expenses
Operating 1,110.9 137.0 1,247.9 (223.0) 1,024.9
Marketing and reservation 875.2 (75.3) 799.9 (56.3) 743.6
General and administrative 279.5 73.0 352.5 (69.2) 283.3
Depreciation and
amortization 112.9 5.4 118.3 (17.9) 100.4
Interest-net 13.3 9.4 22.7 (6.1) 16.6
Merger-related costs and
other unusual charges 97.0 -- 97.0 -- 97.0
-------- -------- -------- -------- --------
Total expenses 2,488.8 149.5 2,638.3 (372.5) 2,265.8
-------- -------- -------- -------- --------
Income from continuing
operations before income
taxes 503.3 (114.9) 388.4 (38.1) 350.3
Provision for income taxes 200.5 (41.9) 158.6 (15.4) 143.2
-------- -------- -------- -------- --------
Income from continuing
operations 302.8 (73.0) 229.8 (22.7) 207.1
Income from discontinued
operations, net of taxes -- -- -- 22.7 22.7
-------- -------- -------- -------- --------
Net income $ 302.8 $ (73.0) $ 229.8 $ -- $ 229.8
======== ======== ======== ======== ========
INCOME PER SHARE
BASIC
Income from continuing
operations $ 0.45 $ 0.30
Income from discontinued
operations, net -- 0.03
-------- --------
Net income $ 0.45 $ 0.33
======== ========
DILUTED
Income from continuing
operations $ 0.42 $ 0.28
Income from discontinued
operations, net -- 0.03
-------- --------
Net income $ 0.42 $ 0.31
======== ========
WEIGHTED AVERAGE SHARES
Basic 670.5 692.4
Diluted 741.8 763.7
</TABLE>
F-22
<PAGE>
Following are the primary categories of adjustments to revenue which appear on
the reconciliation of previously reported and restated statements of
operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
ADJUSTMENTS TO NET REVENUES: ----------------------------------------
1997 1996 1995
(IN MILLIONS) ----------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
Improper revenue recognition .......................... $ (91.7) $ (110.2) $ (31.2)
Improper reversal of merger liabilities ............... (167.7) -- --
Revenue associated with pooled entities--not previously
reported ............................................. 14.2 108.4 197.3
Elimination of intercompany transactions and contra-
revenue .............................................. (180.0) (158.3) (124.3)
Other errors .......................................... (2.4) (0.1) (7.2)
Accounting change ..................................... (4.9) -- --
-------- -------- --------
Adjustment to net revenues ............................ $ (432.5) $ (160.2) $ 34.6
-------- -------- --------
</TABLE>
DESCRIPTION OF NET REVENUE ADJUSTMENTS
IMPROPER REVENUE RECOGNITION
The Company made adjustments to correct the misapplication of generally
accepted accounting principles resulting in improper revenue recognition.
These errors include: the understatement of estimated membership fees to be
refunded to members; the immediate recognition of revenue which should have
been deferred and recognized over the membership term; the recording of
fictitious revenue; other accounting errors.
IMPROPER REVERSAL OF MERGER LIABILITIES
The Company recorded adjustments to correct the reduction of liabilities
previously established primarily for merger transactions and a corresponding
inappropriate entry to record revenue.
REVENUE ASSOCIATED WITH POOLED ENTITIES--NOT PREVIOUSLY RECORDED
The Company recorded adjustments to consolidate the financial statements of
acquired entities which were accounted for as poolings of interest as
required by generally accepted accounting principles. Previous consolidated
financial statements did not reflect certain acquired company financial
statements for periods required.
ELIMINATION OF INTERCOMPANY TRANSACTIONS AND CONTRA-REVENUE
The Company made adjustments to eliminate intercompany revenue not
previously eliminated and properly classify certain expenses as
contra-revenue resulting in reductions to revenue.
ACCOUNTING CHANGE
The Company adopted a change in accounting for memberships revenue and
expenses effective January 1, 1997 (See Note 2--Accounting change for
memberships.) Accordingly, the Company recorded a non-cash after-tax charge
on such date of $283.1 million or $.35 per diluted share, to account for
the cumulative effect of the accounting change. The cumulative effect
adjustment also impacted the Company's financial position which included
reductions in deferred membership acquisition costs and accrued expenses of
$278.4 and $47.8 million, respectively and increases in deferred income and
prepaid expenses (commissions) of $363.9 million and $148.1 million,
respectively. The effect of adopting the change in accounting for
memberships on the Company's 1997 operating results, before the cumulative
effect adjustment, was additional after-tax expense of $15.3 million or
$.02 per diluted share comprised of a reduction in revenues of $4.7 million
with an increase in operating expenses of $19.0 million and a tax benefit
of $8.4 million.
The underlying pro forma information assumes the aforementioned accounting
change has been applied retroactively. For comparative purposes, such pro
forma information is presented with actual results.
F-23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -------- --------- ---------
<S> <C> <C> <C>
Income before extraordinary gain:
As restated $39.5 $330.0 $229.8
Pro forma 39.5 322.6 200.7
Net income:
As restated 65.9 330.0 229.8
Pro forma 65.9 322.6 200.7
PER SHARE INFORMATION
BASIC
Income before extraordinary gain:
As restated $ .05 $ .44 $ .33
Pro forma .05 .43 .29
Net income
As restated .08 .44 .33
Pro forma .08 .43 .29
DILUTED
Income before extraordinary gain:
As restated .05 .41 .31
Pro forma .05 .40 .27
Net income:
As restated .08 .41 .31
Pro forma .08 .40 .27
</TABLE>
4. EARNINGS PER SHARE ("EPS")
Basic EPS is computed based solely on the weighted average number of common
shares outstanding during the period. Diluted EPS reflects all potential
dilution of common stock. Basic and Diluted EPS from continuing operations
is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change $ 66.3 $313.3 $207.1
Convertible debt interest -- 5.8 6.7
------ ------ ------
Income from continuing operations before extraordinary
gain and cumulative effect of accounting change, as
adjusted $ 66.3 $319.1 $213.8
====== ====== ======
Weighted average shares -- basic 811.2 757.4 692.4
Potential dilution of common stock:
Stock options 40.5 40.1 44.3
Convertible debt -- 24.1 27.0
------ ------ ------
Weighted average shares -- diluted 851.7 821.6 763.7
====== ====== ======
EPS -- CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
BASIC $ .08 $ .41 $ .30
====== ====== ======
DILUTED $ .08 $ .39 $ .28
====== ====== ======
</TABLE>
F-24
<PAGE>
5. BUSINESS COMBINATIONS
In connection with the underlying pooling of interests business
combinations, the accompanying consolidated financial statements have been
prepared as if the Company and all such pooled companies had operated as one
entity since inception.
1997 POOLINGS
Cendant. On December 17, 1997, HFS merged with CUC to form Cendant. The
Cendant Merger was consummated with CUC issuing 440.0 million shares of its
common stock in exchange for all of the outstanding common stock of HFS.
Pursuant to the terms of the agreement and plan of merger, HFS stockholders
received 2.4031 shares of CUC common stock for each share of HFS common
stock. Upon consummation of the Cendant Merger, CUC changed its name to
Cendant Corporation. Effective with the Cendant Merger, the Company's
shareholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock
and preferred stock to 2 billion shares and 10 million shares,
respectively.
In connection with the Cendant Merger, the Company determined that it will
use a calendar year end and, accordingly, CUC changed its fiscal year end
from January 31 to December 31. Prior to the Cendant Merger, HFS reported on
a calendar year basis. The HFS statements of income for the years ended
December 31, 1996 and 1995 have been combined with the CUC statements of
income for the years ended January 31, 1997, and 1996 respectively. As a
result of CUC's change in fiscal year, the operating results of CUC for
January 1997, were duplicated in the Company's consolidated statement of
operations for the year ended December 31, 1997. Accordingly, an adjustment
has been made to 1997 retained earnings for the duplication of net income of
$22.3 million for such one-month period.
PHH. On April 30, 1997, the Company and PHH Corporation ("PHH") merged (the
"PHH Merger") which was satisfied by the issuance of 72.8 million shares of
Company common stock in exchange for all of the outstanding common stock and
stock options of PHH. PHH operates the world's largest corporate relocation
services business and also provides mortgage services and fleet management
services. Prior to the PHH Merger, PHH reported on an April 30 fiscal year
basis. To conform to a calendar year end, PHH prepared financial statements
for the twelve month periods ended December 31, 1996 and January 31, 1996
which were combined with the Company's statements of income for the years
ended December 31, 1996 and 1995, respectively. In combining PHH's twelve
month periods, the consolidated statement of income for the year ended
December 31, 1996 included one month (January 1996) of PHH's operating
results which was also included in the consolidated statement of operations
for the year ended December 31, 1995. Accordingly, an adjustment has been
made to 1996 retained earnings for the duplication of net income of $8.3
million and cash dividends declared of $5.9 million for such one-month
period.
Numa. During February 1997, the Company issued 3.0 million shares of its
common stock for all the outstanding common stock of Numa Corporation
("Numa"). Numa publishes personalized heritage publications and markets and
sells personalized merchandise.
1996 POOLINGS
Ideon. In August 1996, the Company issued 16.6 million shares of its
common stock for all of the outstanding capital stock of Ideon Group, Inc.
("Ideon"). Ideon is principally a provider of credit card enhancement
services. Ideon previously reported on a fiscal year ended December 31, for
its financial reporting. To conform to CUC's former fiscal year end of
January 31, Ideon's operating results for January 1996 have been excluded
from the Company's year ended December 31, 1996 operating results.
Accordingly, a $1.1 million credit was recorded to 1996 retained earnings
for such excluded period.
Other. In 1996, the Company acquired the outstanding stock of certain
other entities by issuing 4.8 million shares of its common stock.
F-25
<PAGE>
1995 POOLINGS
Getko, NAOG and Advance Ross. In June 1995, the Company issued 5.6 million
shares of its common stock for all of the outstanding capital stock of
Getko Group Inc. ("Getko"). Getko distributes complimentary welcoming
packages to new homeowners throughout the United States and Canada. In
September 1995, the Company issued 2.3 million shares of its common stock
for all of the outstanding capital stock of North American Outdoor Group,
Inc. ("NAOG"). NAOG owns one of the largest for-profit hunting and general
interest fishing membership organizations in the United States, and also
owns various other membership organizations. In January 1996, the Company
issued 8.9 million shares of its common stock for all of the outstanding
capital stock of Advance Ross Corporation ("Advance Ross"). Advance Ross is
the parent company to Global Refund, a subsidiary which processes
value-added tax refunds for travelers in over 20 European countries.
The following table presents the historical results of the pooled Cendant
entities for the last complete interim periods prior to their respective
mergers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
(IN MILLIONS) ------------ ------------ ------------
<S> <C> <C> <C>
Net revenues
Cendant (1) $ 1,100.2 $ -- $ --
CUC 1,390.3 1,571.7 1,165.0
HFS 1,570.9 786.0 446.1
PHH 178.6 650.5 610.8
NUMA -- 68.0 51.1
1996 Pooled Entities -- 161.5 256.0
1995 Pooled Entities -- -- 87.1
--------- --------- ---------
$ 4,240.0 $ 3,237.7 $ 2,616.1
========= ========= =========
Income (loss) from continuing operations
before extraordinary gain and cumulative effect
of accounting change
Cendant (1) $ (181.1) $ -- $ --
CUC 105.3 35.6 75.5
HFS 109.9 169.5 79.8
PHH 32.2 87.7 78.1
NUMA -- 6.7 14.0
1996 Pooled Entities -- 13.8 (47.4)
1995 Pooled Entities -- -- 7.1
--------- --------- ---------
$ 66.3 $ 313.3 $ 207.1
========= ========= =========
</TABLE>
- ----------
(1) Operating results of Cendant for the fourth quarter of 1997.
PURCHASE BUSINESS COMBINATIONS
The acquisitions discussed below were accounted for using the purchase
method of accounting. Accordingly, assets acquired and liabilities assumed
were recorded at their estimated fair values. The operating results of such
acquired companies are reflected in the Company's consolidated statements
of income since the respective dates of acquisition.
F-26
<PAGE>
The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions which were
consummated during the three years ended December 31, 1997.
<TABLE>
<CAPTION>
ACQUIRED IN 1996
(IN MILLIONS) ---------------------------------------
ACQUIRED COLDWELL
IN 1997 RCI AVIS BANKER OTHER
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash paid $ 267.9 $ 412.1 $ 367.2 $ 745.0 $ 224.0
Common stock issued (1) 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
------- ------- ------- ------- -------
Assets acquired 230.6 439.1 783.9 541.7 91.5
Liabilities assumed 113.7 429.7 311.4 148.5 48.7
------- ------- ------- ------- -------
Fair value of identifiable net assets acquired 116.9 9.4 472.5 393.2 42.8
------- ------- ------- ------- -------
Goodwill $ 172.6 $ 477.7 $ 334.0 $ 351.8 $ 238.7
======= ======= ======= ======= =======
(1) Number of shares issued 0.9 2.4 11.1 -- 2.5
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
ACQUIRED IN 1995
(IN MILLIONS) -------------------------
CENTURY 21 OTHER
------------ ----------
<S> <C> <C>
Cash paid $ 100.2 $ 122.5
Common stock issued (2) 64.8 40.8
Preferred stock issued 80.0 --
------- -------
Total consideration 245.0 163.3
------- -------
Assets acquired 120.6 67.2
Liabilities assumed 75.3 56.2
------- -------
Fair value of identifiable net assets acquired 45.3 11.0
------- -------
Goodwill $ 199.7 $ 152.3
======= =======
(2) Number of shares issued 9.6 6.0
======= =======
</TABLE>
1997 ACQUISITIONS
The Company acquired certain entities for an aggregate purchase price of
$289.5 million.
1996 ACQUISITIONS
Resort Condominiums International, Inc. In November 1996, the Company
completed the acquisition of all the outstanding capital stock of Resort
Condominiums International, Inc. and its affiliates ("RCI") for $487.1
million. The purchase agreement provides for contingent payments of up to
$200.0 million over a five year period which are based on components which
measure RCI's future performance, including EBITDA, net revenues and number
of members, as defined. The Company made a contingent payment of $100.0
million during the first quarter of 1998, which was accounted for as
additional goodwill.
Avis. In October 1996, the Company completed the acquisition of all of the
outstanding capital stock of Avis, Inc. ("Avis"), including payments under
certain employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for 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.
F-27
<PAGE>
In September 1997, the subsidiary of Avis, which controlled the car rental
operations of Avis ("ARAC"), completed an Initial Public Offering ("IPO")
resulting in a 72.5% dilution of the Company's investment in ARAC. Net
proceeds of $359.3 million were retained by ARAC. The Company's interest was
further diluted to 20.4% primarily due to a secondary offering of common
stock in March 1998. See Note 21 for a discussion of the Company's executed
business plan and related accounting treatment regarding Avis.
Coldwell Banker Corporation. In May 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640.0 million
in cash for all of the outstanding capital stock of Coldwell Banker and
repaid $105.0 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 1996 sale of
an aggregate 46.6 million shares of Company common stock pursuant to a
public offering.
Other 1996 Acquisitions. The Company acquired certain other entities for an
aggregate purchase price of $281.5 million.
1995 ACQUISITIONS
Century 21. In August 1995, a majority owned (87.5%) subsidiary of the
Company, C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate
Corporation ("Century 21"), the world's largest residential real estate
brokerage franchisor. Aggregate consideration for the acquisition consisted
of $245.0 million. Pursuant to an agreement, as amended, between the
Company and a management group of Holding, the Company acquired the
remaining 12.5% interest in Holding for $52.8 million in 1997.
Other 1995 Acquisitions. The Company acquired certain other entities for an
aggregate purchase price of $163.3 million.
PRO FORMA INFORMATION (UNAUDITED)
The following information reflects pro forma statements of income data for
the year ended December 31, 1996 assuming the aforementioned acquisitions
accounted for using the purchase method of accounting completed during 1996
were consummated on January 1, 1996. The acquisitions completed during 1997
were immaterial to the operating results of the Company. The pro forma
results are not necessarily indicative of the operating results that would
have occurred had the transactions been consummated as indicated nor are
they intended to indicate results that may occur in the future. The
underlying pro forma information includes the amortization expense
associated with the assets acquired, and reflects the Company's financing
arrangements, and the related income tax effects.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) -------------
<S> <C>
Net revenues $3,804.2
Net income(1) 379.8
Net income per share:(1)
Basic $ .48
Diluted .45
Weighted average shares outstanding:
Basic 784.9
Diluted 849.1
</TABLE>
------------
(1) Includes operating results of discontinued operations for the year ended
December 31, 1996 (See Note 6--Discontinued Operations)
F-28
<PAGE>
6. DISCONTINUED OPERATIONS
Classified Advertising Acquisition. In October 1997, the Company issued
14.2 million shares of its common stock for all of the outstanding capital
stock of Hebdo Mag International, Inc. ("Hebdo Mag"). The transaction was
accounted for as a pooling of interests and therefore, all prior periods
have been restated to include the operations of Hebdo Mag for all periods
prior to the merger. Hebdo Mag is a publisher and distributor of classified
advertising information.
Software Acquisitions. In July 1996, the Company issued 45.1 million shares
and 38.4 million shares of Company common stock for all of the outstanding
capital stock of Davidson and Associates, Inc. ("Davidson") and Sierra
On-Line Inc. ("Sierra"), respectively. Davidson and Sierra develop, publish
and distribute educational and entertainment software for home and school
use. During 1995, prior to being merged into the Company, Davidson and
Sierra acquired all of the outstanding capital stock of various companies
by issuing an aggregate of 0.8 million and 3.9 million equivalent shares of
Company common stock, respectively. Davidson and Sierra previously reported
on fiscal years ended December 31 and March 31, respectively, for their
financial reporting. To conform to CUC's former fiscal year end of January
31, Davidson and Sierra's operating results for January 1996 have been
excluded from the Company's year ended December 31, 1996 operating results.
Accordingly, a $5.8 million charge was recorded to 1996 retained earnings
for such excluded period. In addition Sierra's operating results for the
three months ended March 1995 have been duplicated in the Company's year
ended December 31, 1995 operating results. Such operating results were
immaterial.
In January 1997, the Company issued 3.1 million shares of its common stock
for all of the outstanding capital stock of Knowledge Adventure, Inc.
("KA"). KA develops and markets children's education computer software.
Davidson, Sierra and KA (collectively, the "Software Acquisitions")
substantially comprise the Company's wholly-owned subsidiary, Cendant
Software Corporation ("Cendant Software"). The Software Acquisitions were
accounted for as poolings of interest and therefore, all prior periods have
been restated to include the operations of Davidson, Sierra and KA for all
periods prior to their respective mergers.
Divestitures. On August 12, 1998, the Company announced that its Executive
Committee of the Board of Directors committed to discontinue the Company's
classified advertising and consumer software businesses by disposing of
Hebdo Mag and Cendant Software, respectively. The Company has since entered
into a definitive agreement to sell Hebdo Mag to its former 50% owners for
7.1 million shares of Company common stock and approximately $410 million
in cash. The transaction is subject to certain conditions, including
regulatory approval and financing by the purchaser. In addition, the
Company has engaged investment bankers to analyze various strategic
alternatives in regard to the disposition of Cendant Software within one
year of the measurement date.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SOFTWARE
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
(IN MILLIONS) ---------- ---------- ----------
<S> <C> <C> <C>
Net revenues $ 433.7 $ 384.5 $ 308.4
------- ------- -------
Income (loss) from operations before income taxes (5.9) 42.0 33.9
Provision for income taxes 2.4 27.3 13.6
------- ------- -------
Net income (loss) $ (8.3) $ 14.7 $ 20.3
======= ======= =======
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
CLASSIFIED ADVERTISING
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
(IN MILLIONS) ----------- --------- ---------
<S> <C> <C> <C>
Net revenues $ 208.5 $126.4 $102.2
------- ------ ------
Income (loss) from operations before income taxes
and extraordinary loss (4.5) 3.7 4.2
Provision for (benefit from) income taxes (1.2) 1.7 1.8
Extraordinary loss from early extinguishment of
debt, net of a $4.9 million tax benefit (15.2) -- --
------- ------ ------
Net income (loss) $ (18.5) $ 2.0 $ 2.4
======= ====== ======
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SOFTWARE CLASSIFIED ADVERTISING
----------------------- ----------------------
AT DECEMBER 31, AT DECEMBER 31,
----------------------- ----------------------
1997 1996 1997 1996
(IN MILLIONS) ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Current assets $ 209.1 $ 162.0 $ 58.6 $ 50.0
Goodwill 42.2 10.7 181.5 181.3
Other assets 49.2 42.4 33.2 42.0
Total liabilities 127.0 114.2 173.5 254.1
------- ------- ------ -------
Net assets of discontinued operations $ 173.5 $ 100.9 $ 99.8 $ 19.2
======= ======= ====== =======
</TABLE>
7. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
1997 POOLING
In 1997, the Company incurred merger-related costs and other unusual
charges ("Unusual Charges") of $738.0 million of which $704.1 million
($504.7 million after tax or $.58 per diluted share) was related to
continuing operations and $33.9 million was associated with businesses
which are discontinued. Charges incurred during the fourth quarter of 1997
of $454.9 million were substantially associated with and/or coincident to
the Cendant Merger and the merger with Hebdo Mag (collectively, the "Fourth
Quarter 1997 Charge"). Unusual Charges of $283.1 million, comprised of
$295.4 million of charges incurred in the second quarter of 1997, reduced
by $12.3 million for changes in estimates recorded in the fourth quarter of
1997, were substantially associated with the PHH Merger (the "Second
Quarter 1997 Charge"). The collective Unusual Charges recorded during 1997
related to the aforementioned mergers and the reduction of related
liabilities is summarized below by category of expenditure and by charge as
follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
ORIGINAL DUE TO LIABILITIES AT
UNUSUAL CHANGE IN UNUSUAL CASH DECEMBER 31,
CHARGES ESTIMATES CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ------------ --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Professional fees $ 121.3 $ 2.0 $ 123.3 $ 72.6 $ -- $ 50.7
Personnel related 324.9 (0.1) 324.8 111.3 45.0 168.5
Business terminations 133.9 -- 133.9 46.0 84.0 3.9
Facility related and other 170.2 (14.2) 156.0 72.5 33.1 50.4
------- ------ ------- ------ ------- ------
Total Unusual Charges $ 750.3 ($ 12.3) $ 738.0 $302.4 $ 162.1 $273.5
Reclassification for discontinued
operations (33.9) -- (33.9) (8.0) (25.9) --
------- ------ ------- ------ ------- ------
Total Unusual Charges related
to continuing operations $ 716.4 ($ 12.3) $ 704.1 $294.4 $ 136.2 $273.5
======= ====== ======= ====== ======= ======
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
ADJUSTMENTS
ORIGINAL DUE TO LIABILITIES AT
UNUSUAL CHANGE IN UNUSUAL CASH DECEMBER 31,
CHARGES ESTIMATES CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ------------ --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter 1997 Charge $ 454.9 $ -- $ 454.9 $152.2 $ 105.3 $197.4
Second Quarter 1997 Charge 295.4 (12.3) 283.1 150.2 56.8 76.1
------- ------ ------- ------ ------- ------
Total Unusual Charges $ 750.3 ($ 12.3) 738.0 $302.4 $ 162.1 $273.5
Reclassification for discontinued
operations (33.9) -- (33.9) (8.0) (25.9) --
------- ------ ------- ------ ------- ------
Total Unusual Charges related
to continuing operations $ 716.4 ($ 12.3) $ 704.1 $294.4 $ 136.2 $273.5
======= ====== ======= ====== ======= ======
</TABLE>
FOURTH QUARTER 1997 CHARGE
The Company incurred Unusual Charges in the fourth quarter 1997 totaling
$454.9 million substantially associated with the Cendant and Hebdo Mag
mergers. In addition to $170.0 million of professional fees and executive
compensation expense incurred directly as a result of the mergers, the
Company incurred $284.9 million of costs resulting from reorganization
plans formulated prior to and implemented as a result of the merger.
The Company determined to streamline its corporate organization functions
and eliminate several office locations in overlapping markets. Management
initiated a plan in 1997 to consolidate European call centers in Cork,
Ireland in 1998 and upgrade the quality standards of its hotel franchise
businesses, which resulted in planned terminations of franchise properties
commencing in January 1998. In December 1997, the Company irrevocably
contributed $70.0 million to independent technology trusts which made
technology investments for the direct benefit of hotel and real estate
franchisees. Management also approved a plan to terminate a contract, which
may restrict the Company from maximizing opportunities afforded by the
merger of HFS and CUC.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997.
Unusual Charges include $93.0 million of estimated professional fees
primarily consisting of investment banking, legal and accounting fees
incurred in connection with the mergers. Approximately $43.4 million of
invoices were paid in the fourth quarter of 1997 leaving a $49.6 million
balance to be paid in 1998. 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 corporate functions
and nine European call centers and $12.3 million other personnel related
costs. Total employees to be terminated, including seven corporate
employees, approximated 474 with limited terminations in 1997. The $170.7
million of personnel related liabilities were reduced in 1997 by $35.2
million of non-cash reductions primarily including $23.7 and $9.5 million
of costs associated with restricted stock and stock option compensation,
respectively and $8.9 million of personnel related payments. Approximately
$45.3 million of retirement plan costs were paid in January 1998. Unusual
Charges include $78.3 million of business termination costs which consists
of a $48.3 million impairment of hotel franchise agreement assets
associated with a quality upgrade program and $30.0 million of contract
termination costs. Of the $78.3 million of business termination
liabilities, $30.0 million was paid in December 1997 and $48.3 million of
non-cash reductions of intangible assets were recorded. Facility related
and other unusual charges of $112.9 million include $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 accordance with SFAS No-121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" in the fourth quarter of 1997. Approximately $70.0 million was
paid for these obligations in December 1997 and the remaining obligations
are anticipated to be paid over the earlier of lease buy-out or lease term.
F-31
<PAGE>
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, 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. In addition to $125.8 million of professional fees and
executive compensation expenses incurred directly as a result of the
merger, the Company incurred $157.3 million of expenses resulting from
reorganization plans formulated prior to and implemented as of the merger
date. The merger afforded the combined Company an opportunity to
rationalize its combined corporate, real estate and travel segment
businesses, and corresponding support and service functions to gain
organizational efficiencies and maximize profits. Such initiatives included
500 job reductions including the virtual elimination of all PHH Corporate
functions and facilities in Hunt Valley, Maryland. Management initiated a
plan just prior to the 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.
With respect to the real estate segment, management initiated plans to
integrate its relocation, 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. The real estate segment initiatives resulted in approximately
380 planned job reductions, write-offs of abandoned systems and leasehold
assets commencing in the second quarter 1997.
Following is a description of costs by type of expenditure and reduction of
corresponding liabilities through December 31, 1997:
Unusual Charges include $154.1 million of personnel related costs
associated with employee reductions necessitated by the planned and
announced consolidation of the Company's several corporate relocation
service businesses worldwide as well as the consolidation of corporate
activities. Personnel related charges also include termination benefits
such as severance, medical and other benefits. Personnel related charges
also include retirement benefits pursuant to pre-existing contracts
resulting from a change in control. Several grantor trusts were established
and funded by the Company in November 1996 to pay such benefits in
accordance with the terms of the PHH merger agreement. The Company's
restructuring plan resulted in the termination of approximately 560
employees (principally corporate employees located in North America), of
which 364 were terminated by December 31, 1997. Approximately $102.4
million of personnel related costs were paid in 1997 and $9.8 million of
non-cash stock compensation was recognized. Unusual Charges also include
professional fees of $30.3 million of which $29.2 million was paid in 1997
and is primarily comprised of investment banking, accounting and legal fees
incurred in connection with the PHH Merger. Unusual Charges also include
business termination charges of $55.6 million, which are comprised of $38.8
million of costs to exit certain activities primarily within the Company's
fleet management business, a $7.3 million termination fee associated with a
joint venture that competed with PHH Mortgage Services business and $9.6
million of costs to terminate a marketing agreement with a third party in
order to replace the function with internal resources. In connection with
the business termination charges, approximately $16.0 million was paid in
1997 and $35.7 million of assets associated with discontinued activities
were written off. Facility related and other charges totaling $43.1 million
include costs associated with contract and lease terminations, asset
disposals and other charges incurred in connection with the consolidation
and closure of excess office space. Approximately $2.6 million was paid and
$11.3 million of assets were written off in 1997. The remaining facility
related obligations will be paid or are otherwise anticipated to be
extinguished in 1998.
The Company had substantially completed the aforementioned restructuring
activities by the second quarter of 1998. The $76.1 million of liabilities
remaining at December 31, 1997 primarily consist of $41.9 million of
severance and benefit plan payments and $29.2 million related to contract,
leasehold and lease termination obligations.
F-32
<PAGE>
1996 POOLINGS
1996 UNUSUAL CHARGE
In connection with and coincident to the Ideon merger in August 1996 and
the Davidson and Sierra mergers in July 1996, the Company incurred Unusual
Charges of approximately $134.3 million in 1996, of which $109.4 million
($70.0 million, after tax or $.09 per diluted share) was related to
continuing operations (substantially Ideon) and $24.9 million was
associated with businesses that are discontinued (Davidson and Sierra). The
collective Unusual Charges recorded during 1996 related to the
aforementioned mergers and the utilization of such liabilities is
summarized below by category of expenditure as follows:
<TABLE>
<CAPTION>
ORIGINAL LIABILITIES AT
UNUSUAL CASH DECEMBER 31,
CHARGES PAYMENTS NON-CASH 1997
(IN MILLIONS) ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Professional fees ............... $ 27.5 $ (27.5) $ -- $ --
Personnel related ............... 7.5 (7.5) -- --
Facility related ................ 12.4 (.7) (9.7) 2.0
Litigation related .............. 80.4 (14.4) -- 66.0
Other ........................... 6.5 (6.2) -- .3
------- ------- ------ -----
Total Unusual Charges ........... 134.3 (56.3) (9.7) 68.3
Reclassification for discontinued
operations ..................... (24.9) 24.9 -- --
------- ------- ------ -----
Total Unusual Charges related to
continuing operations .......... $ 109.4 $ (31.4) $ (9.7) $68.3
======= ======= ====== =====
</TABLE>
Costs associated with the Davidson and Sierra mergers were comprised
primarily of professional fees incurred in connection with the
transactions. Costs associated with the Company's merger with Ideon (the
"Ideon Merger") were non-recurring and included transaction and exit costs
as well as a provision relating to certain litigation matters giving
consideration to the Company's intended approach to these matters. In
determining the amount of the provision related to these outstanding
litigation matters, the Company estimated the cost of settling these
litigation matters. In estimating such cost, the Company considered
potential liabilities related to these matters and the estimated cost of
prosecuting and defending them (including out-of-pocket costs, such as
attorneys' fees, and the cost to the Company of having its management
involved in such litigation matters). The Company has since settled all
outstanding litigation matters. The remaining $66.0 million of litigation
related liabilities at December 31, 1997 consists of a present value of
$47.9 million representing settlement payments to be made in annual
installments to Peter Halmos, the co-founder of SafeCard Services
Incorporated ("SafeCard") (see Note 17 -- Commitments and Contingencies --
Ideon Settlement) and $18.1 million of settlements related to certain other
class action lawsuits which were paid in the first quarter of 1998. The
$2.0 million of facility-related liabilities remaining at December 31, 1997
are for lease termination payments. The Company considered
litigation-related costs and liabilities, as well as exit costs and
transaction costs, in determining the agreed upon exchange ratio in respect
to the Ideon Merger.
In determining the amount of the provision related to the Company's
consolidation efforts, the Company estimated the significant severance costs
to be accrued upon the consummation of the Ideon Merger and costs relating
to the expected obligations for certain third-party contracts (e.g.,
existing leases and vendor agreements) to which Ideon is a party and which
are neither terminable at will nor automatically terminate upon a
change-in-control of Ideon. As a result of the Ideon Merger, 120 employees
were terminated. The Company incurred significant exit costs because Ideon's
credit card registration and enhancement services are substantially similar
to the Company's credit card registration and enhancement services. All of
the business activities related to the operations performed by Ideon's
Jacksonville, Florida office were transferred to the Company's Comp-U-Card
Division in Stamford, Connecticut upon the consummation of the Ideon Merger.
F-33
<PAGE>
COSTS RELATED TO IDEON PRODUCTS ABANDONED AND RESTRUCTURING
During the year ended December 31, 1995, Ideon incurred special charges
totaling $43.8 million, net of recoveries, related to the abandonment of
certain new product developmental efforts and the related impairment of
certain assets and the restructuring of the SafeCard division of Ideon and
the Ideon corporate infrastructure as discussed below. The original charge
of $45.0 million was composed of accrued liabilities of $36.2 million and
asset impairments of $8.8 million. In December 1995, Ideon recovered $1.2
million of costs in the above charges. Also included in costs related to
products abandoned are marketing and operational costs incurred of $53.2
million. During the year ended December 31, 1996, all remaining amounts
that had been previously accrued were paid.
During 1995, the following costs related to products abandoned and
restructuring were incurred. In early 1995, Ideon launched an expanded PGA
TOUR Partners program that provided various benefits to members and consumer
response rates after the launch were significantly less than Ideon
management's expectations. The product as configured was deemed not
economically viable and a charge of $18 million was incurred. Costs
associated with the abandonment of the product marketing included employee
severance payments (approximately 130 employees), costs to terminate
equipment and facilities leases, costs for contract impairments and
write-downs taken for asset impairments. In September 1995, after a period
of product redesign and test marketing, Ideon discontinued its PGA TOUR
Partners credit card servicing role and recorded a charge of $3.6 million
for costs associated with the abandonment of this role, including employee
severance payments (approximately 60 employees), costs to terminate
equipment and facilities leases and the recognition of certain commitments.
In April 1995, Ideon launched a nationwide child registration and missing
child search program. Consumer response rates after the launch were
significantly less than Ideon management's expectations and a charge of $9.0
million was incurred to cover severance payments (approximately 100
employees), costs to terminate equipment and facilities leases and
write-down taken for asset impairments. As a result of the discontinuance of
these products, Ideon undertook an overall restructuring of its operations
and incurred charges of $7.2 million to terminate operating leases and
write-down assets to realizable value, $3.0 million for restructuring its
SafeCard division and $4.2 million for restructuring its corporate
infrastructure.
PURCHASE BUSINESS COMBINATION LIABILITIES
In connection with the acquisitions of Century 21, Coldwell Banker, RCI and
certain other acquisitions, related business plans were developed to
restructure each of the respective companies. The restructuring plans were
finalized within one year of each respective acquisition based upon
management's assessments of actions to be taken to complete the plans.
Acquisition liabilities recorded in connection with such business plans and
any subsequent adjustments thereto have been included in the respective
purchase price allocations of each acquired company. Acquisition
liabilities include costs associated with restructuring activities such as
planned involuntary termination and relocation of employees, the
consolidation and closing of certain facilities and the elimination of
duplicative operating and overhead activities.
Acquisition liabilities recorded in connection with the Company's
acquisitions accounted for under the purchase method of accounting and the
employees to be terminated in connection with the respective restructuring
plans are summarized as follows:
<TABLE>
<CAPTION>
COLDWELL
CENTURY 21 BANKER RCI OTHER
(Dollars in millions) ------------ --------- -------- ---------
<S> <C> <C> <C> <C>
Personnel related $ 12.6 $ 5.8 $ 14.6 $ 6.5
Facility related 16.5 0.1 12.4 3.1
Other costs 1.0 3.8 1.7 1.4
------ ----- ------ ------
Total $ 30.1 $ 9.7 $ 28.7 $ 11.0
====== ===== ====== ======
Terminated employees 319 87 252 275
====== ===== ====== ======
</TABLE>
F-34
<PAGE>
Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs
include contract and lease terminations, temporary storage and relocation
costs associated with assets to be disposed of, and other charges incurred
in the consolidation and closure of excess space.
Payments charged against the acquisition liabilities are as follows:
<TABLE>
<CAPTION>
COLDWELL
CENTURY 21 BANKER RCI OTHER
(In millions) ------------ --------- -------- ---------
<S> <C> <C> <C> <C>
1997 $ 1.5 $ 1.8 $ 18.8 $ 2.5
1996 11.3 3.9 0.5 7.7
1995 14.3 -- -- --
------ ----- ------ ------
$ 27.1 $ 5.7 $ 19.3 $ 10.2
====== ===== ====== ======
</TABLE>
The Company's business plans to restructure the aforementioned acquisitions
have been fully executed. Acquisition liabilities of $17.2 million
remaining at December 31, 1997 pertain primarily to contractual obligations
that existed at the respective acquisition dates, contract terminations and
future lease commitments.
8. OTHER INTANGIBLES -- NET
Other intangibles -- net consisted of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
BENEFIT PERIODS ----------------------
IN YEARS 1997 1996
(In millions) ---------------- ---------- ---------
<S> <C> <C> <C>
Avis trademarks 40 $ 402.0 $ 400.0
Other trademarks 40 262.9 --
Customer lists 6.5 - 10 116.8 114.0
Reservation systems 10 95.0 95.0
Other 2 - 16 123.6 89.0
-------- -------
1,000.3 698.0
Less accumulated amortization 102.8 63.5
-------- -------
Other intangibles -- net $ 897.5 $ 634.5
======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996
(In millions) ------------ ------------
<S> <C> <C>
Accounts payable $ 479.5 $ 473.0
Short-term debt -- 250.9
Merger and acquisition obligations 359.0 147.4
Accrued payroll and related 187.3 159.4
Advances from relocation clients 57.2 78.8
Other 409.4 493.4
--------- ---------
Accounts payable and other current liabilities $ 1,492.4 $ 1,602.9
========= =========
</TABLE>
Short-term debt at December 31, 1996 consisted of $150.0 million of
acquired Avis fleet financing, borrowed on behalf of ARAC, which was repaid
upon settlement of the corresponding intercompany loan due from ARAC prior
to the IPO and a $100.9 million note payable issued to
F-35
<PAGE>
ARAC as partial consideration for ARAC in connection with the Company's
acquisition of ARAC. The outstanding short-term debt as of December 31,
1996 had a weighted average interest rate of 6.85%.
10. NET INVESTMENT IN LEASES AND LEASED VEHICLES
Net investment in leases and leased vehicles consisted of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1997 1996
(In millions) ----------- -----------
<S> <C> <C>
Vehicles under open-end operating leases $ 2,640.1 $ 2,617.3
Vehicles under closed-end operating leases 577.2 443.9
Direct financing leases 440.8 356.7
Accrued interest on leases 1.0 .8
--------- ---------
Net investment in leases and leased vehicles $ 3,659.1 $ 3,418.7
========= =========
</TABLE>
The Company records the cost of leased vehicles as a "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 investments in leases and leased vehicles were $1.6
billion in both 1997 and 1996, and the ratio of such repayments to the
average net investment in leases and leased vehicles was 46.80% and 47.19%,
in 1997 and 1996, respectively.
The Company has two types of operating leases. Under one type, open-end
operating leases, resale of the vehicles upon termination of the lease is
generally for the account of the lessee except for a minimum residual value
which the Company has guaranteed. The Company's experience has been that
vehicles under this type of lease agreement have consistently been sold for
amounts exceeding the residual value guarantees. Maintenance and repairs of
vehicles under these agreements are the responsibility of the lessee. The
original cost and accumulated depreciation of vehicles under this type of
operating lease was $5.0 billion and $2.4 billion, respectively, at
December 31, 1997 and $4.6 billion and $2.0 billion, respectively, at
December 31, 1996.
Under the other type of operating lease, closed-end operating leases,
resale of the vehicles on termination of the lease is for the account of
the Company. The lessee generally pays for or provides maintenance, vehicle
licenses and servicing. The original cost and accumulated depreciation of
vehicles under these agreements was $754.4 million and $177.2 million,
respectively, at December 31, 1997 and $600.6 million and $156.7 million,
respectively, at December 31, 1996. The Company believes adequate reserves
are maintained in the event of loss on vehicle disposition.
Under the direct financing lease agreements, resale of the vehicles upon
termination of the lease is generally for the account of the lessee.
Maintenance and repairs of these vehicles are the responsibility of the
lessee.
Gross leasing revenues, which are reflected in fleet leasing on the
consolidated statements of income consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
(In millions) ----------- ----------- -----------
<S> <C> <C> <C>
Operating leases $ 1,222.9 $ 1,145.8 $ 1,098.7
Direct financing leases, primarily interest 41.8 43.3 42.4
--------- --------- ---------
$ 1,264.7 $ 1,189.1 $ 1,141.1
========= ========= =========
</TABLE>
F-36
<PAGE>
Other managed vehicles are subject to leases serviced by the Company for
others, and neither the vehicles nor the leases are included as assets of
the Company. The Company receives a fee under such agreements which covers
or exceeds its cost of servicing.
The Company has transferred existing managed vehicles and related leases to
unrelated investors and has retained servicing responsibility. Credit risk
for such agreements is retained by the Company to a maximum extent in one
of two forms: excess assets transferred, which were $7.6 million and $7.1
million at December 31, 1997 and 1996, respectively; or guarantees to a
maximum extent. There were no guarantees to a maximum extent at December
31, 1997 or 1996. All such credit risk has been included in the Company's
consideration of related reserves. The outstanding balances under such
agreements aggregated $224.6 million and $158.5 million at December 31,
1997 and 1996, respectively.
Other managed vehicles with balances aggregating $75.6 million and $93.9
million at December 31, 1997 and 1996, respectively, are included in a
special purpose entity which is not owned by the Company. This entity does
not require consolidation as it is not controlled by the Company and all
risks and rewards rest with the owners. Additionally, managed vehicles
totaling approximately $69.6 million and $47.4 million at December 31, 1997
and 1996, respectively, are owned by special purpose entities which are
owned by the Company. However, such assets and related liabilities have
been netted in the balance sheet since there is a two-party agreement with
determinable accounts, a legal right of offset exists and the Company
exercises its right of offset in settlement with client corporations.
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. Such mortgage loans
are recorded at the lower of cost or market value on an aggregate loan
basis. The Company issues mortgage-backed certificates insured or
guaranteed by various government sponsored entities and private insurance
agencies. The insurance or guaranty is provided primarily on a non-recourse
basis to the Company, except where limited by the Federal Housing
Administration and Veterans Administration and their respective loan
programs. As of December 31, 1997, mortgage loans sold with recourse
amounted to approximately $58.5 million. The Company believes adequate
reserves are maintained to cover any potential losses.
F-37
<PAGE>
12. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights activity was as follows:
<TABLE>
<CAPTION>
MORTGAGE
SERVICING IMPAIRMENT
RIGHTS ALLOWANCE TOTAL
(In millions) ----------- ----------- ----------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 97.2 $ -- $ 97.2
Additions 130.1 -- 130.1
Amortization (28.6) -- (28.6)
Write-down/provision (1.6) (1.4) (3.0)
Sales (4.3) -- (4.3)
------- ------- -------
BALANCE, DECEMBER 31, 1995 192.8 (1.4) 191.4
Less: PHH activity for January
1996 to reflect change in PHH fiscal year (14.0) .2 (13.8)
Additions 164.4 -- 164.4
Amortization (51.8) -- (51.8)
Write-down/provision -- .6 .6
Sales (1.9) -- (1.9)
------- ------- -------
BALANCE, DECEMBER 31, 1996 289.5 (.6) 288.9
Additions 270.4 -- 270.4
Amortization (95.6) -- (95.6)
Write-down/provision -- (4.1) (4.1)
Sales (33.1) -- (33.1)
Other (53.5) -- (53.5)
------- ------- -------
BALANCE, DECEMBER 31, 1997 $ 377.7 $ (4.7) $ 373.0
======= ======= =======
</TABLE>
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The
statement provides criteria for: (i) recognizing the transfer of assets as
sales or secured borrowings; (ii) recognizing servicing assets and other
retained interests in the transferred assets and; (iii) overall guidance
for amortizing servicing rights and measuring such assets for potential
impairment. The servicing right and any other retained interests are
recorded by allocating the previous carrying amount between assets sold and
the retained interests, based on their relative fair values at the date of
the transfer. SFAS No. 125 also eliminated the distinction between the
various classes of servicing rights (purchased, originated, excess). Upon
adoption of the statement, assets previously recognized as excess servicing
rights were classified as mortgage servicing rights to the extent that the
recorded value related to the contractually specified servicing fee. The
remaining recorded asset represents an interest-only strip in the amount of
$48.0 million which is recorded within other assets in the consolidated
balance sheet at December 31, 1997. The impact of adopting SFAS No. 125 was
not material to the Company's financial statements.
The Company stratifies its servicing rights according to the interest rate
bands of the underlying mortgage loans for purposes of impairment
evaluation. The Company measures impairment for each stratum by comparing
estimated fair value to the recorded book value. The Company records
amortization expense in proportion to, and over the period of the projected
net servicing income. Temporary impairment is recorded through a valuation
allowance and amortization expense in the period of occurrence.
F-38
<PAGE>
13. LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
(In millions) ------------ ---------
<S> <C> <C>
Revolving Credit Facilities $ 276.0 $ 205.0
5 7/8% Senior Notes 149.9 149.8
4 1/2% Convertible Senior Notes -- 146.7
4 3/4% Convertible Senior Notes 240.0 240.0
3% Convertible Subordinated Notes 543.2 --
Other 39.2 42.3
--------- -------
1,248.3 783.8
Less current portion 2.3 3.0
--------- -------
Long-term debt $ 1,246.0 $ 780.8
========= =======
</TABLE>
CREDIT FACILITIES
At December 31, 1997, the Company's primary credit facility, as amended,
consisted of (i) a $750.0 million, five year unsecured revolving credit
facility (the "Five Year Revolving Credit Facility") and (ii) a $1.25
billion, 364 day unsecured revolving credit facility (the "364 Day
Revolving Credit Facility" and collectively with the Five Year Revolving
Credit Facility, (the "Revolving Credit Facilities"). The 364-Day Revolving
Credit Facility will mature on October 31, 1998 but may be renewed on an
annual basis for an additional 364 days upon receiving lender approval. The
Five Year Revolving Credit Facility will mature on October 1, 2001.
Borrowings under the Revolving Credit Facilities, at the option of the
Company, bear interest based on competitive bids of lenders participating
in the facilities, at prime rates or at LIBOR, plus a margin of
approximately 22 basis points. The Company is required to pay a per annum
facility fee of .08% and .06% of the average daily availability of the Five
Year Revolving Credit Facility and 364 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. The Revolving Credit
Facilities contain certain restrictive covenants including restrictions on
indebtedness, mergers, liquidations and sale and leaseback transactions and
requires the maintenance of certain financial ratios, including a 3:1
minimum interest coverage ratio and a 3.5:1 maximum coverage ratio, as
defined. Amounts outstanding under all revolving credit facilities as of
December 31, 1997 are classified as long-term, based on the Company's
intent and ability to maintain these loans on a long-term basis.
5 7/8% SENIOR NOTES
The 5 7/8% Senior Notes due December 15, 1998 have been classified as
long-term based upon the Company's intent and ability to refinance such
indebtedness on a long-term basis. (See Note 26 -- "Subsequent
Events--Financing Transactions").
4 1/2% CONVERTIBLE SENIOR NOTES
On September 22, 1997, the Company exercised its option to redeem the
outstanding 4 1/2% Convertible Senior Notes (the "4 1/2% Notes"), effective
on October 15, 1997, in accordance with the provisions of the indenture
under which the 4 1/2% Notes were issued. Prior to the redemption date, all
of the outstanding 4 1/2% Notes were converted into 19.7 million shares of
Company common stock.
4 3/4% CONVERTIBLE SENIOR NOTES
In February 1996, the Company completed a public offering of $240 million
unsecured 4 3/4% Convertible Senior Notes (the "4 3/4% Notes") due 2003,
which are convertible at the option of the holder at any time prior to
maturity into 36.030 shares of Company common stock per $1,000 principal
amount of the 4 3/4% Notes, representing a conversion price of $27.76 per
share. The
F-39
<PAGE>
4 3/4% Notes were redeemable at the option of the Company, in whole or in
part, at any time on or after March 3, 1998 at redemption prices decreasing
from 103.393% of principal at March 3, 1998 to 100% of principal at March
3, 2003. However, on or after March 3, 1998 and prior to March 3, 2000, the
4 3/4% Notes were not redeemable at the option of the Company unless the
closing price of the Company's common stock had exceeded $38.86 per share
(subject to adjustment upon the occurrence of certain events) for 20
trading days within a period of 30 consecutive trading days ending within
five days prior to notice of redemption. The 4 3/4% Notes were redeemed on
May 4, 1998 and have been classified as long-term based on the Company's
intent and ability to refinance the 4 3/4% Notes on a long-term basis. (See
Note 26 -- "Subsequent Events--Financing Transactions").
3% CONVERTIBLE SUBORDINATED NOTES
On February 11, 1997, the Company completed a public offering of $550
million 3% Convertible Subordinated Notes (the "3% Notes") due 2002. Each
$1,000 principal amount of 3% Notes is convertible into 32.6531 shares of
Company common stock subject to adjustment in certain events. The 3% Notes
may be redeemed at the option of the Company at any time on or after
February 15, 2000, in whole or in part, at the appropriate redemption
prices (as defined in the indenture governing the 3% Notes) plus accrued
interest to the redemption date. The 3% Notes will be subordinated in right
of payment to all existing and future Senior Debt (as defined in the
indenture governing the 3% Notes) of the Company.
DEBT MATURITIES
Aggregate maturities of debt for each of the next five years commencing in
1998 are as follows:
(In millions)
<TABLE>
<CAPTION>
AMOUNT
YEAR ------------
<S> <C>
1998 $ 2.3
1999 4.1
2000 1.0
2001 --
2002 543.2
Thereafter 697.7
---------
Total $ 1,248.3
=========
</TABLE>
14. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS
Borrowings to fund assets under management and mortgage programs consisted
of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
(In millions) ----------- -----------
<S> <C> <C>
Commercial paper $ 2,577.5 $ 3,090.8
Medium-term notes 2,747.8 1,662.2
Other 277.3 336.9
--------- ---------
Liabilities under management and mortgage programs $ 5,602.6 $ 5,089.9
========= =========
</TABLE>
Commercial paper, all of which matures within 90 days, is supported by
committed revolving credit agreements described below and short-term lines
of credit. The weighted average interest rates on the Company's outstanding
commercial paper was 5.9% and 5.4% at December 31, 1997 and 1996,
respectively.
Medium-term notes of $2.7 billion primarily represent unsecured loans which
mature in 1998. The weighted average interest rates on such medium-term
notes was 5.9% and 5.7% at December 31, 1997 and 1996, respectively.
F-40
<PAGE>
Other liabilities under management and mortgage programs are principally
comprised of unsecured borrowings under uncommitted short-term lines of
credit and other bank facilities, all of which matures in 1998. The
weighted average interest rate on such debt was 6.7% and 5.8% at December
31, 1997 and 1996, respectively.
Interest expense is incurred on indebtedness which is used to finance fleet
leasing, relocation and mortgage servicing activities. Interest incurred on
borrowings used to finance fleet leasing activities was $177.0 million,
$161.8 million and $159.7 million for the years ended December 31, 1997,
1996, and 1995, respectively, is included net within fleet leasing revenues
in the Consolidated Statements of Income. Interest related to equity
advances on homes was $32.0 million, $35.0 million and $26.0 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
related to mortgage servicing activities were $77.6 million, $63.4 million
and $49.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Interest expenses incurred on borrowings used to finance both
equity advances on homes and mortgage servicing activities are recorded net
within membership and service fee revenue in the Consolidated Statements of
Income.
To provide additional financial flexibility, the Company's current policy
is to ensure that minimum committed facilities aggregate 80 percent of the
average amount of outstanding commercial paper. As of December 31, 1997,
the Company maintained a $2.5 billion committed and unsecured credit
facility which was backed by a consortium of domestic and foreign banks.
The facility was comprised of a $1.25 billion credit line maturing in 364
days and a five year $1.25 billion credit line maturing in the year 2002.
Under such credit facility, the Company paid annual commitment fees of $1.7
million, $2.4 million and $2.3 million for the years ended December 31,
1997, 1996 and 1995, respectively. In addition, the Company has other
uncommitted lines of credit with various banks of which $180.7 million was
unused at December 31, 1997. The full amount of the Company's committed
facility was undrawn and available at December 31, 1997 and 1996.
Although the period of service for a vehicle is at the lessee's option, and
the period a home is held for resale varies, management estimates, by using
historical information, the rate at which vehicles will be disposed and the
rate at which homes will be resold. Projections of estimated liquidations
of assets under management and mortgage programs and the related estimated
repayment of liabilities under management and mortgage programs as of
December 31, 1997, are set forth as follows:
<TABLE>
<CAPTION>
(In millions) ASSETS UNDER MANAGEMENT LIABILITIES UNDER MANAGEMENT
YEARS AND MORTGAGE PROGRAMS AND MORTGAGE PROGRAMS (1)
- ---------------- ------------------------- -----------------------------
<S> <C> <C>
1998 $ 3,321.3 $ 2,746.6
1999 1,855.2 1,702.6
2000 838.6 766.3
2001 272.8 245.8
2002 92.9 84.4
2003-2007 62.9 56.9
--------- ---------
$ 6,443.7 $ 5,602.6
========= =========
</TABLE>
------------
(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 closing arising
from commitments issued. The Company performs analyses on an on-going basis
to determine that a high correlation exists between the characteristics of
derivative instruments and the assets or
F-41
<PAGE>
transactions being hedged. As a matter of policy, the Company does not
engage in derivatives activities for trading or speculative purposes. The
Company is exposed to credit-related losses in the event of non-performance
by counterparties to certain derivative financial instruments. The Company
manages such risk by periodically evaluating the financial position of
counterparties and spreading its positions among multiple counterparties.
The Company presently does not expect non-performance by any of the
counterparties.
INTEREST RATE SWAPS
If the interest characteristics of the funding mechanism that the Company
uses does not match the interest characteristics of the assets being
funded, the Company enters into interest rate swap agreements to offset the
interest rate risk associated with such funding. The swap agreements
correlate the terms of the assets to the maturity and rollover of the debt
by effectively matching a fixed or floating interest rate with the
stipulated revenue stream generated from the portfolio of assets being
funded. Amounts to be paid or received under interest rate swap agreements
are accrued as interest rates change and are recognized over the life of
the swap agreements as an adjustment to interest expense. For the years
ended December 31, 1997 and 1996, the Company's hedging activities
increased interest expense $4.0 million and $4.1 million, respectively, and
had no effect on its weighted average borrowing rate. The fair value of the
swap agreements is not recognized in the consolidated financial statements
since they are accounted for as hedges.
F-42
<PAGE>
The following table summarizes the maturity and weighted average rates of
the Company's interest rate swaps related to liabilities under management
and mortgage programs at December 31, 1997:
<TABLE>
<CAPTION>
MATURITIES
(Dollars in millions) ----------------------------------------------------------------------------------
TOTAL 1998 1999 2000 2001 2002 2003
------------ ------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Commercial Paper:
Pay fixed/receive floating:
Notional value $ 355.7 $ 184.3 $ 110.1 $ 40.6 $ 11.8 $ 3.4 $ 5.5
Weighted average receive rate 5.68% 5.68% 5.68% 5.68% 5.68% 5.68%
Weighted average pay rate 6.25% 6.29% 6.19% 6.28% 6.40% 6.61%
- ------------------------------------------------------------------------------------------------------------------------
Medium-Term Notes:
Pay floating/receive fixed:
Notional value 586.0 500.0 86.0
Weighted average receive rate 6.12% 6.71%
Weighted average pay rate 5.89% 5.89%
Pay floating/receive floating :
Notional value 965.0 965.0
Weighted average receive rate 5.76%
Weighted average pay rate 5.70%
- ------------------------------------------------------------------------------------------------------------------------
CANADA
Commercial Paper:
Pay fixed/receive floating:
Notional value 54.8 29.6 18.4 5.9 .9
Weighted average receive rate 4.53% 4.53% 4.53% 4.53%
Weighted average pay rate 5.36% 5.12% 4.89% 4.93%
- ------------------------------------------------------------------------------------------------------------------------
Pay floating/receive floating :
Notional value 59.8 31.2 16.7 6.5 5.1 .3
Weighted average receive rate 5.88% 5.88% 5.88% 5.88% 5.88%
Weighted average pay rate 4.91% 4.91% 4.91% 4.91% 4.91%
- ------------------------------------------------------------------------------------------------------------------------
Pay floating/receive fixed:
Notional value 28.3 28.3
Weighted average receive rate 3.68%
Weighted average pay rate 4.53%
UK
Commercial Paper:
Pay floating/receive fixed:
Notional value 491.4 174.6 167.5 113.9 35.4
Weighted average receive rate 7.22% 7.15% 7.24% 7.28%
Weighted average pay rate 7.69% 7.69% 7.69% 7.69%
- ------------------------------------------------------------------------------------------------------------------------
GERMANY
Commercial Paper:
Pay fixed/receive fixed:
Notional value 9.1 2.5 (5.6) 3.1 9.1
Weighted average receive rate 3.76% 3.76% 3.76% 3.76%
Weighted average pay rate 5.34% 5.34% 5.34% 5.34%
--------- ------- ------- ------
Total $ 2,550.1 $ 1,915.5 $ 307.1 $ 256.0 $ 62.3 $ 3.7 $ 5.5
========= ========= ======= ======= ====== ======= ======
</TABLE>
F-43
<PAGE>
FOREIGN EXCHANGE CONTRACTS
In order to manage its exposure to fluctuations in foreign currency
exchange rates on a selective basis, the Company enters into foreign
exchange contracts. Such contracts are utilized as hedges of intercompany
loans to foreign subsidiaries. Market value gains and losses on the
Company's foreign currency transaction hedges related to intercompany loans
are deferred and recognized upon maturity of the loan. Such contracts
effectively offset the currency risk applicable to approximately $409.8
million and $329.1 million of obligations at December 31, 1997 and 1996,
respectively.
OTHER FINANCIAL INSTRUMENTS
With respect to both mortgage loans held for sale and anticipated mortgage
loan closings arising from commitments issued, the Company is exposed to
the risk of adverse price fluctuations. The Company uses forward delivery
contracts, financial futures and option contracts to reduce such risk.
Market value gains and losses on such positions used as hedges are deferred
and considered in the valuation of cost or market value of mortgage loans
held for sale.
The value of the Company's mortgage servicing rights is sensitive to
changes in interest rates. The Company has developed and implemented a
hedge program to manage the associated financial risks of loan prepayments.
The Company has acquired certain derivative financial instruments,
primarily interest rate floors, futures and options to administer its hedge
program. Premiums paid or received on the acquired derivative instruments
are capitalized and amortized over the life of the contract. Gains and
losses associated with the hedge instruments are deferred and recorded as
adjustments to the basis of the mortgage servicing rights. Deferrals under
the hedge programs are allocated to each applicable stratum of mortgage
servicing rights based upon its original designation and included in the
impairment measurement.
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
The Company determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. All securities at December 31, 1997 and 1996 were
classified as available-for-sale and were reported at fair value with the
net unrealized holding gains and losses, net of tax, reported as a
component of shareholders' equity until realized. Fair value was based upon
quoted market prices or investment adviser estimates. Declines in the
market value of available-for-sale securities deemed to be other than
temporary result in charges to current earnings and the establishment of a
new cost basis. Gross unrealized gains and losses on marketable securities
were not material.
MORTGAGE LOANS HELD FOR SALE
Fair value is estimated using the quoted market prices for securities
backed by similar types of loans and current dealer commitments to purchase
loans. These loans are priced to be sold with servicing rights retained.
Gains (losses) on mortgage-related positions, used to reduce the risk of
adverse price fluctuations, for both mortgage loans held for sale and
anticipated mortgage loan closings arising from commitments issued, are
included in the carrying amount of mortgage loans held for sale.
MORTGAGE SERVICING RIGHTS
Fair value is estimated based on market quotes and discounted cash flow
analyses based on current market information including market prepayment
rate consensus. Such market information is subject to change as a result of
changing economic conditions.
LONG-TERM DEBT
The fair values of the Company's Senior Notes, Convertible Notes and
Medium-term Notes are estimated based on quoted market prices or market
comparables.
F-44
<PAGE>
INTEREST RATE SWAPS, FOREIGN EXCHANGE CONTRACTS, FUTURES CONTRACTS AND
OPTIONS
The fair values of these instruments are estimated, using dealer quotes, as
the amount that the Company would receive or pay to execute a new agreement
with terms identical to those remaining on the current agreement,
considering interest rates at the reporting date.
The carrying amounts and fair values of the Company's financial instruments
at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- -------------------------------------------
NOTIONAL/ ESTIMATED NOTIONAL/ ESTIMATED
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE
(In millions) ----------- ---------------- ----------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Marketable securities:
Debt securities $ -- $ 21.7 (a) $ 21.7 $ -- $ 69.4 (a) $ 69.4
Equity securities -- -- -- -- 22.5 22.5
Investment in mortgage
related securities -- 48.0 48.0 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Relocation receivables -- 775.3 775.3 -- 773.3 773.3
Mortgage loans held for
sale -- 1,636.3 1,668.1 -- 1,248.3 1,248.3
Mortgage servicing rights -- 373.0 394.6 -- 288.9 324.1
- ------------------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LONG-TERM DEBT
Foreign exchange
forwards 5.5 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES UNDER MANAGEMENT
AND MORTGAGE PROGRAMS
Debt -- 5,602.6 5,604.2 -- 5,089.9 5,089.9
- ------------------------------------------------------------------------------------------------------------------------------
OFF BALANCE SHEET DERIVATIVES
RELATING TO LIABILITIES UNDER
MANAGEMENT AND MORTGAGE
PROGRAMS
Interest rate swaps 2,550.1 -- -- 1,670.2 -- --
In a gain position -- -- 5.6 -- -- 2.5
In a loss position -- -- (3.9) -- -- (10.7)
Foreign exchange
forwards 415.5 -- 2.5 329.1 -- 10.0
- ------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED POSITIONS
Forward delivery
commitments (b) 2,582.5 19.4 (16.2) 1,703.5 11.4 7.4
Option contracts to sell (b) 290.0 .5 -- 265.0 1.0 .7
Option contracts to buy (b) 705.0 1.1 4.4 350.0 1.3 (.5)
Treasury options used to
hedge
servicing rights (c) 331.5 4.8 4.8 313.9 1.3 .3
Constant maturity treasury
floors (c) 825.0 12.5 17.1 -- -- --
Interest rate swaps (c) 175.0 1.3 1.3 -- -- --
</TABLE>
------------
(a) All debt securities mature within one year and are classified as other
current assets in the consolidated balance sheets.
(b) Carrying amounts and gains (losses) on these mortgage-related positions
are already included in the determination of the respective carrying
amounts and fair values of mortgage loans held for sale.
(c) Carrying amounts on these mortgage-related positions are capitalized and
recorded as mortgage servicing rights. Gains (losses) on such positions
are included in the determination of fair value of mortgage servicing
rights.
F-45
<PAGE>
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has noncancelable operating leases covering various facilities
and equipment, which expire through the year 2004. Rental expense for the
years ended December 31, 1997, 1996 and 1995 was $91.3 million, $75.3
million and $62.5 million respectively. The Company has been granted rent
abatements for varying periods on certain of its facilities. Deferred rent
relating to those abatements is being amortized on a straight-line basis
over the applicable lease terms. Commitments under capital leases are not
significant.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1997 are as follows:
(In millions)
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------- ---------
<S> <C>
1998 $ 70.3
1999 64.4
2000 55.3
2001 41.2
2002 29.5
Thereafter 78.2
------
Total minimum lease payments $338.9
======
</TABLE>
LITIGATION
Company Investigation and Litigation
On April 15, 1998, as a result of the discovery of accounting
irregularities in former CUC business units and the investigation of the
Audit Committee of the Company's Board of Directors into such matters, the
Company has restated its previously reported financial results for 1997,
1996 and 1995.
Since the Company's announcement of the discovery of such accounting
irregularities on April 15, 1998, and prior to the date hereof, seventy-one
purported class action lawsuits and one individual lawsuit have been filed
against the Company, and certain current and former officers and directors
of the Company and HFS, asserting various claims under the federal
securities laws (the "Federal Securities Actions"). Some of the actions
also name as defendants Merrill Lynch & Co. and, in one case, Chase
Securities, Inc., underwriters for the Company's PRIDES securities
offering; two others also name Ernst & Young LLP, the Company's former
independent accountants. Sixty-four of the Federal Securities Actions were
filed in the United States District Court for the District of New Jersey,
six were filed in the United States District Court for the District of
Connecticut (including the individual action), one was filed in the United
States District Court for the Eastern District of Pennsylvania, and one was
filed in New Jersey Superior Court. The Federal Securities Actions filed in
the District of Connecticut and Eastern District of Pennsylvania have been
transferred to the District of New Jersey. On June 10, 1998, the Company
moved to dismiss or stay the Federal Securities Actions filed in New Jersey
Superior Court on the ground that, among other things, it is duplicative of
the actions filed in federal courts. The court granted that motion on
August 7, 1998, without prejudice to the plaintiff's right to re-file the
case in the District of New Jersey.
Certain of these Federal Securities Actions purport to be brought on behalf
of purchasers of the Company's common stock and/or options on common stock
during various periods, most frequently beginning May 28, 1997 and ending
April 15, 1998 (although the alleged class periods begin as early as March
21, 1995 and end as late as July 15, 1998). Others claim to be brought on
behalf of persons who exchanged HFS common stock for the Company's common
stock in connection with the Merger. Some plaintiffs purport to represent
both of these types of investors. In addition, eight actions pending in the
District of New Jersey purport to be brought, either in
F-46
<PAGE>
their entirety or in part, on behalf of purchasers of the Company's PRIDES
securities. The complaints in the Federal Securities Actions allege, among
other things, that as a result of accounting irregularities, the Company's
previously issued financial statements were materially false and misleading
and that the defendants knew or should have known that these financial
statements caused the prices of the Company's securities to be inflated
artificially. The Federal Securities Actions variously allege violations of
Section 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 10b-5 promulgated thereunder, Section 14(a) of
the Exchange Act and SEC 14a-9 promulgated thereunder, Section 20(a) of the
Exchange Act, and Sections 11, 12 and 15 of the Securities Act of 1933, as
amended (the "Securities Act"). Certain actions also allege violations of
common law. The individual action also alleges violations of Section 18(a)
of the Exchange Act and the Florida securities law. The class action
complaints seek damages in unspecified amounts. The individual action seeks
damages in the amount of approximately $9 million plus interest and
expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
Order consolidating the 50 Federal Securities Actions that had at that time
been filed in the United States District Court for the District of New
Jersey, under the caption In re: Cendant Corporation Litigation, Master
File No. 98-1664 (WHW). Pursuant to the Order, all related actions
subsequently filed in the District of New Jersey are to be consolidated
under that caption. United States District Court Judge William H. Walls has
selected lead plaintiffs to represent all potential class members in the
consolidated action. He has also ordered that applications seeking
appointment as lead counsel to represent the lead plaintiffs are to be
filed with the Court by September 17, 1998. The selection of lead counsel
is pending.
In addition, 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 and former directors
and officers; The Bear Stearns Companies, Inc.; Bear Stearns & Co.; Inc.
and, as a nominal party, the Company. The complaint in the Deutch action
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, mismanagement, negligence and corporate waste,
and seeks damages on behalf of the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware.
The Corwin action is purportedly brought both derivatively, on behalf of
the Company, and as a class action, on behalf of all shareholders of HFS
who exchanged their HFS shares for the Company's shares in connection with
the Merger. The Corwin action names as defendants HFS and twenty-eight
individuals who are and were directors of Cendant 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 Merger, in that they failed to properly
investigate the operations and financial statements of the Company 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 Cendant's
former Chairman, Walter 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.
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 matters referenced above. The SEC staff has
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.
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
F-47
<PAGE>
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
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 defendent
by virtue of their having been HFS stockholders at the time of the Merger.
While it is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
Ideon settlement. On June 13, 1997, the Company entered into a settlement
agreement (the "Agreement") with Peter Halmos, the co-founder of SafeCard
Services, Incorporated ("SafeCard"), which was reorganized in 1995 as Ideon
and then acquired by the Company in August 1996. The Agreement, which
became effective in July 1997, provided for the settlement of outstanding
litigation matters involving Peter Halmos, SafeCard and Ideon. The
Agreement called for the dismissal with prejudice of such litigation
matters and the payment of $70.5 million to Peter Halmos, over a six-year
period comprised of one up-front payment of $13.5 million and six
subsequent annual payments of $9.5 million. The Company had previously
provided a reserve for this litigation in the charge recorded coincident
with the Ideon Merger. (See Note 7 -- Merger-Related Costs and Other
Unusual Charges -- 1996 Poolings -- Ideon Merger Charge.)
Acquired Company Litigation. One of the Company's subsidiaries currently
faces liability to third parties for damages due to property damage
allegedly caused by environmental contamination at four former manufactured
gas plants and one related waterway site located in the States of
Washington and Oregon. Various third parties, including governmental
entities and other potentially responsible parties, have alleged that such
subsidiary is legally obligated to pay damages and/or take actions to
investigate or clean up property damage to surface water, ground water,
land or other property resulting from the purported presence of hazardous
substances allegedly generated or released during the historical operation
of the manufactured gas plants for which such subsidiary allegedly is
responsible. Such subsidiary is currently defending itself vigorously in
these matters but concurrently is seeking to effect an out-of-court
settlement that, if successful, would result in another party providing an
indemnification to such subsidiary for future liabilities relating to these
claims.
Messrs. Paul A. Kruger, Warren F. Kruger and Lyle Miller (collectively, the
"Plaintiffs") have sued the Company and its wholly-owned subsidiary,
SafeCard. The complaint alleges that the Company wrongfully controlled,
influenced and dominated SafeCard's affairs and that SafeCard, under the
direction and control of the Company, wrongfully impeded the Plaintiffs'
ability to achieve their contingent payments due under a stock purchase
agreement. The complaint contains, in addition to other counts against the
Company and SafeCard, one count of tortious interference with contract
(against the Company) and one count of intentional interference with
economic opportunity (also against the Company). The complaint seeks actual
damages in an amount of $22 million. The Plaintiffs are also currently
seeking court approval to amend the complaint to claim unspecified punitive
damages. The Company and SafeCard have objected to such amendment and are
awaiting a court decision with respect thereto.
Other pending litigation. The Company is subject to certain other legal
proceedings and claims arising in the ordinary course of its business.
Management does not believe that the outcome of such matters will have a
material adverse effect on the Company's financial position, liquidity or
operating results.
F-48
<PAGE>
18. INCOME TAXES
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
(In millions) ----------- --------- ---------
<S> <C> <C> <C>
Current
Federal $ 155.1 $ 101.1 $ 38.4
State 24.4 13.3 14.4
Foreign 28.5 18.1 10.1
------- ------- -------
208.0 132.5 62.9
------- ------- -------
Deferred
Federal (16.8) 70.4 73.7
State (3.4) 16.5 2.7
Foreign 3.2 .8 3.9
------- ------- -------
(17.0) 87.7 80.3
------- ------- -------
Provision for income taxes $ 191.0 $ 220.2 $ 143.2
======= ======= =======
</TABLE>
Net deferred income tax assets and liabilities are comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
(In millions) ------------- -------------
<S> <C> <C>
CURRENT NET DEFERRED INCOME TAXES
Merger and acquisition-related liabilities $ 102.9 $ 54.6
Accrued liabilities and deferred income 225.8 132.6
Insurance retention refund (19.3) (13.7)
Provision for doubtful accounts 4.0 8.1
Franchise acquisition costs (2.6) (2.6)
Deferred membership acquisition costs 8.6 (40.0)
Other (7.5) (2.1)
--------- ---------
Current net deferred tax asset $ 311.9 $ 136.9
========= =========
NON-CURRENT NET DEFERRED INCOME TAXES
Depreciation and amortization $ (277.1) $ (169.6)
Deductible goodwill -- taxable poolings 44.2 --
Merger and acquisition-related liabilities 35.0 --
Accrued liabilities and deferred income 66.9 46.3
Acquired net operating loss carryforward 59.9 85.9
Other .2 (25.0)
--------- ---------
Non-current net deferred tax asset (liability) $ (70.9) $ (62.4)
========= =========
MANAGEMENT AND MORTGAGE PROGRAM DEFERRED INCOME
TAXES
Depreciation $ (233.1) $ (245.1)
Unamortized mortgage servicing rights (74.6) (51.2)
Accrued liabilities 9.5 1.3
Alternative minimum tax carryforwards 2.5 13.1
--------- ---------
Net deferred tax liabilities under management and
mortgage programs $ (295.7) $ (281.9)
========= =========
</TABLE>
The Company has recorded deferred tax assets of $ 44.2 million primarily
attributed to the difference in book and tax basis of assets acquired and
accounted for using the pooling-of-interests method of accounting. The
deferred tax asset recorded in connection with the above acquisitions,
resulted in a corresponding $44.2 million increase to shareholders' equity.
F-49
<PAGE>
Net operating loss carryforwards at December 31, 1997 acquired in
connection with the acquisition of Avis, Inc. expire as follows: 2002,
$30.2 million; 2005, $7.2 million; 2009, $17.7 million; and 2010, $116.0
million.
The Company's effective income tax rate differs from the statutory federal
rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.3% 3.6% 3.2%
Non-deductible merger-related costs 29.1% -- --
Amortization of non-deductible goodwill 4.3% 1.5% 1.2%
Foreign taxes differential .3% .5% .6%
Other .3% .6% .9%
----- ----- -----
Effective tax rate 74.3% 41.2% 40.9%
===== ===== =====
</TABLE>
19. STOCK OPTION PLANS
In connection with the Cendant Merger, the Company adopted its 1997 Stock
Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of stock options (which may include incentive stock options and/or
nonqualified stock options), stock appreciation rights and shares of
restricted Company common stock. All directors, officers and employees of
the Company and its affiliates are eligible to receive awards under the
Incentive Plan. Options granted under the Incentive Plan generally have a
ten year term and are exercisable at 20% per year commencing one year from
the date of grant. During 1997, the Company also adopted two other stock
plans: the 1997 Employee Stock Plan (the "1997 Employee Plan") and the 1997
Stock Option Plan (the "1997 SOP"). The 1997 Employee Plan authorizes the
granting of up to 25 million shares of Company common stock through awards
of nonqualified stock options, stock appreciation rights and shares of
restricted Company common stock to employees of the Company and its
affiliates. The 1997 SOP provides for the granting of up to 10 million
shares of Company common stock to key employees (including employees who
are directors and officers) of the Company and its subsidiaries through
awards of incentive and/or nonqualified stock options. Options granted
under the 1997 Employee Plan and the 1997 SOP generally have ten year terms
and are exercisable at 20% per year commencing one year from the date of
grant.
The Company also grants options to employees pursuant to three additional
stock option plans under which the Company may grant options to purchase in
the aggregate up to 70.8 million shares of Company common stock. Annual
vesting periods under these plans range from 20% to 33%, all commencing one
year from the respective grant dates. At December 31, 1997, there were 35.5
million shares outstanding collectively under these plans.
F-50
<PAGE>
The table below summarizes the annual activity of Cendant's pooled stock
option plans:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVG. EXERCISE
OUTSTANDING PRICE
(Shares in millions) ------------- --------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 92.7 $ 6.20
Granted 21.1 10.74
Canceled (2.7) 8.48
Exercised (12.4) 5.39
-----
BALANCE AT DECEMBER 31, 1995 98.7 7.21
Granted 36.1 22.14
Canceled (2.8) 18.48
Exercised (14.0) 5.77
-----
BALANCE AT DECEMBER 31, 1996 118.0 11.68
Granted 78.8 27.94
Canceled (6.4) 27.29
Exercised (14.0) 7.20
PHH conversion (1) (4.4) --
-----
BALANCE AT DECEMBER 31, 1997 172.0 18.66
=====
</TABLE>
----------
(1) In connection with the PHH Merger, all unexercised PHH stock options
were canceled and converted into 1.8 million shares of Company common
stock.
The Company utilizes the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" and applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its stock option plans. Under APB No. 25, because the exercise prices of
the Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997(1) 1996 1995
(In millions, except per share data) ----------------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
as reported $ (217.2) $330.0 $229.8
pro forma (663.9)(3) 245.1 201.8
Net income (loss) per share:
Basic as reported $ (.27) $ .44 $ .33
pro forma (2) (.82)(3) .32 .29
Diluted as reported (.27) .41 .31
pro forma (2) (.82)(3) .31 .27
</TABLE>
----------
(1) Includes an after-tax charge of $283.1 million or $.35 per share, to
account for the cumulative effect of a change in accounting related to
revenue and expense recognition for memberships (see Notes 2 and 3).
(2) 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.
(3) 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.
F-51
<PAGE>
The fair values of the stock options are estimated on the dates of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for options granted in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
CENDANT
PLANS CUC PLANS HFS PLANS PHH PLANS
----------- ----------------------- ----------------------- ----------------------
1997 1996 1995 1996 1995 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend Yield -- -- -- -- -- 2.8% 3.5%
Expected volatility 32.5% 28.0% 26.0% 37.5% 37.5% 21.5% 19.8%
Risk-free interest rate 5.6% 6.3% 5.3% 6.4% 6.4% 6.5% 6.9%
Expected holding period 7.8 years 5.0 years 5.0 years 9.1 years 9.1 years 7.5 years 7.5 years
</TABLE>
The weighted average fair value of Cendant stock options granted during the
year ended December 31, 1997 was $13.71. The weighted average fair values
of stock options granted under the former CUC plans (inclusive of plans
acquired) during the years ended December 31, 1996 and 1995 were $7.51 and
$6.69, respectively. The weighted average fair values of stock options
granted under the former HFS plans (inclusive of the PHH plans) during the
years ended December 31, 1996 and 1995 were $10.96 and $4.79, respectively.
The tables below summarize information regarding Cendant stock options
outstanding and exercisable as of December 31, 1997:
(Shares in millions)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- -------------------------- -------- --------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
$.01 to $ 10.00 48.9 5.4 $ 4.16 47.5 $ 4.09
$10.01 to $ 20.00 29.2 7.1 14.60 21.1 14.99
$20.01 to $ 30.00 46.5 8.9 23.55 35.1 23.75
$30.01 to $ 40.00 47.4 9.8 31.35 18.1 31.40
---- ----
Total 172.0 7.8 18.66 121.8 15.69
===== =====
</TABLE>
Shares exercisable and available for grant at December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ------------------------------
HFS OPTIONS
CENDANT CUC (INCLUSIVE OF PHH
OPTIONS OPTIONS OPTIONS)
(In millions) --------- --------- ------------------
<S> <C> <C> <C>
Shares exercisable 121.8 11.8 46.2
Shares available for grant 49.3 8.4 5.1
</TABLE>
The Company reserved 11.4 million shares of Company common stock for
issuance in connection with its Restricted Stock Plan. As of December 31,
1997, 10.6 million shares of restricted common stock have been granted of
which 10.4 million shares have vested under this plan.
The Company has reserved 1.1 million shares of Company common stock in
connection with its 1994 Employee Stock Purchase Plan, which enables
employees to purchase shares of common stock from the Company at 90% of the
fair market value on the fifteenth day following the last day of each
calendar quarter, in an amount up to 25% of the employees' year-to-date
earnings.
20. EMPLOYEE BENEFIT PLANS
PENSION AND RETIREMENT PLANS
The Company sponsors several defined contribution plans that provide
certain eligible employees of the Company an opportunity to accumulate
funds for their retirement. The Company matches the contributions of
participating employees on the basis of the percentages specified in the
plans.
F-52
<PAGE>
During 1996, a Deferred Compensation Plan (the "Plan") was implemented
providing senior executives with the opportunity to participate in a
funded, deferred compensation program. The assets of the Plan are held in
an irrevocable rabbi trust. Under the Plan, participants may defer up to
80% of their base compensation and up to 98% of bonuses earned. The Company
contributes $0.50 for each $1.00 contributed by a participant, regardless
of length of service, up to a maximum of six percent of the employee's
compensation. The Plan is not qualified under Section 401 of the Internal
Revenue Code. The Company's matching contributions relating to the above
plans were not material to the consolidated financial statements.
The Company's PHH subsidiary has a non-contributory defined benefit pension
plan covering substantially all domestic employees of PHH and its
subsidiaries. PHH's subsidiary located in the United Kingdom has a
contributory defined benefit pension plan, with participation at the
employee's option. Under both the domestic and foreign plans, benefits are
based on an employee's years of credited service and a percentage of final
average compensation. The policy for both plans is to contribute amounts
sufficient to meet the minimum requirements plus other amounts as the
Company deems appropriate from time to time. The projected benefit
obligations of the funded plans were $108.1 million and $97.1 million and
funded assets, at fair value (primarily common stock and bond mutual funds)
were $102.7 million and $88.4 million at December 31, 1997 and 1996,
respectively. The net pension cost and the recorded liability were not
material to the accompanying consolidated financial statements.
The Company also sponsors two unfunded retirement plans to provide certain
key executives with benefits in excess of limits under the federal tax law
and to include annual incentive payments in benefit calculations. The
projected benefit obligation, net pension cost and recorded liability
related to the unfunded plans were not material to the accompanying
consolidated financial statements.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's PHH subsidiary provides health care and life insurance
benefits for certain retired employees up to the age of 65. The net
periodic postretirement benefit costs and the recorded liability were not
material to the accompanying consolidated financial statements.
21. INVESTMENTS
ARAC
Upon entering into a definitive merger agreement to acquire Avis in 1996,
the Company announced its strategy to dilute its interest in ARAC while
retaining assets associated with the franchise business, including
trademarks, reservation system assets and franchise agreements with ARAC
and other licensees. Since the Company's control was planned to be
temporary, the Company accounted for its 100% investment in ARAC under the
equity method. The Company's equity interest was diluted to 27.5% pursuant
to an IPO by ARAC in September 1997 and was further diluted to 20.4% as a
result of a secondary offering in March 1998.
The Company licenses the Avis trademark to ARAC pursuant to a 50-year
master license agreement and receives royalty fees based upon 4% of ARAC
revenue, escalating to 4.5% of ARAC revenue over a 5-year period. In
addition, the Company operates the telecommunications and computer
processing system which services ARAC for reservations, rental agreement
processing, accounting and fleet control for which the Company charges ARAC
at cost.
NRT
During the third quarter of 1997, the Company executed an agreement with
NRT Incorporated ("NRT") (a corporation created to acquire residential real
estate brokerage firms) and the principal stockholders of NRT, under which
the Company may acquire up to $263.3 million of NRT preferred stock and
may, at its discretion, acquire $446.0 million of intangible assets of real
estate brokerage firms acquired by NRT. During the third quarter of 1997,
the Company acquired
F-53
<PAGE>
$182.0 million of NRT preferred stock and through December 31, 1997 the
Company had also acquired 216.1 million of certain intangible assets
including trademarks associated with real estate brokerage firms acquired
by NRT which are subject to a 40 year franchise agreement.
In September 1997, NRT acquired the real estate brokerage business and
operations of National Realty Trust ("the Trust"), and two other regional
real estate brokerage businesses. The Trust is an independent trust to
which the Company contributed the brokerage offices formerly owned by
Coldwell Banker in connection with the Company's acquisition of Coldwell
Banker. NRT is the largest residential brokerage firm in the United States.
22. 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 pursuant to a Stock Purchase
Agreement ("Interval Agreement"). The Company is restricted in its
solicitation of Interval's employees, customers or clients for a period of
two years from the closing date of the transaction pursuant to the Interval
Agreement. In conjunction with the sale, the Company agreed to continue to
provide services to certain of Interval's customers for a specified period,
guarantee performance of certain responsibilities to third parties (i.e.,
lease payments and certain other contracts), and absorb certain additional
transitional costs related to the transaction. The estimated fair value of
the services to be provided to Interval's customers of $57.6 million was
recorded as a non-current liability. The value assigned will be amortized
over the average life of the servicing period. After considering all these
factors, the Company recognized a gain on the sale of Interval of $76.6
million ($26.4 million, after tax), which has been reflected as an
extraordinary gain in the consolidated statements of operations.
23. FRANCHISING AND MARKETING/RESERVATION ACTIVITIES
Revenue from franchising activities includes initial franchise fees charged
to lodging properties and real estate brokerage offices upon execution of a
franchise contract. Initial franchise fees amounted to $26.0 million, $24.2
million and $15.7 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Franchising activity for the years ended December 31, 1997, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
LODGING REAL ESTATE
--------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
FRANCHISE IN OPERATION
Units at end of year 5,566 5,397 4,603 11,715 11,349 5,990
EXECUTED BUT NOT OPENED
Acquired -- 24 31 -- 110 104
New agreements 1,205 1,142 983 1,107 829 248
</TABLE>
The Company receives marketing and reservation fees from several of its
lodging and real estate franchisees. Marketing and reservation fees related
to the Company's lodging brands' franchisees are calculated based on a
specified percentage of gross room revenues. Marketing and reservation fees
received from the Company's real estate brands' franchisees are based on a
specified percentage of gross closed commissions earned on the sale of real
estate. As provided in the franchise agreements, at the Company's
discretion, all of these fees are to be expended for marketing purposes and
the operation of a centralized brand-specific reservation system for the
respective franchisees and are controlled by the Company until
disbursement. Membership and service fee revenues included marketing and
reservation fees of $170.0 million, $157.6 million and $140.1 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
F-54
<PAGE>
24. INDUSTRY SEGMENT INFORMATION
The Company operates within three principal industry segments -- alliance
marketing, travel and real estate. A description of the Company's segments,
and the services provided within its underlying businesses, are as follows:
ALLIANCE MARKETING SEGMENT
Individual, wholesale and discount program membership services are provided
to consumers and are distributed through various channels, including
financial institutions, credit unions, charities, other cardholder-based
organizations and retail establishments. These memberships include such
components as shopping, travel, auto, dining, home improvement, lifestyle,
credit card and checking account enhancement packages, financial products
and discount programs. The Company also administers insurance package
programs, which are generally combined with discount shopping and travel
for credit union members and publishes a coupon book which is sold through
schools and other not-for- profit organizations.
TRAVEL SERVICES SEGMENT
Franchising (Lodging and car rental). As a franchisor of guest lodging
facilities and car rental agency locations, Cendant licenses the
independent owners and operators of hotels and car rental agencies to use
its brand names. Operational and administrative services are provided to
franchisees, which include access to a national reservation system,
national advertising and promotional campaigns, co-marketing programs and
volume purchasing discounts.
Fleet management. Fleet management services primarily consist of the
management, purchasing, leasing, and resale of vehicles for corporate
clients and government agencies. These services also include fuel,
maintenance, safety and accident management programs and other fee-based
services for clients' vehicle fleets.
Timeshare. Timeshare exchange programs, publications and other
travel-related services are provided to the timeshare industry.
Value-added tax services. Cendant processes value-added tax refunds for
travelers abroad.
REAL ESTATE SERVICES SEGMENT
Franchising (Real estate brokerage). As a franchisor of real estate
brokerage offices, Cendant licenses the owners and operators of independent
real estate brokerage offices to use its brand names. Operational and
administrative services are provided to franchisees, which are designed to
increase franchisee revenue and profitability. Such services include
advertising and promotions, referrals, training and volume purchasing
discounts.
Relocation. Relocation services are provided to client corporations and
include the selling of transferee residences, providing equity advances on
transferee residences for the purchase of new homes and home management
services. Cendant also offers fee-based programs such as home marketing
assistance, household goods moves, destination services and property
dispositions for financial institutions and government agencies.
Mortgage. Mortgage services primarily include the origination, sale and
servicing of residential first mortgage loans. Cendant markets a variety of
first mortgage products to consumers through relationships with
corporations, affinity groups, financial institutions, real estate
brokerage firms and other mortgage banks.
New mover services. Welcoming packages are distributed to new homeowners
which provides them with discounts from local merchants.
OTHER SERVICES SEGMENT
Financial services and marketing. Cendant (i) markets financial product
memberships, generally annuities, mutual funds, and life insurance for
financial institutions; (ii) provides marketing and other services to
casino gaming facilities; and (iii) operates the telecommunications and
computer system which facilitates hotel and car rental agency reservations
and rental agreement processing.
F-55
<PAGE>
The following table presents industry segment and geographic data of the
Company for the years ended December 31, 1997, 1996 and 1995. Operating
income consists of net revenues less operating expenses (total expenses
excluding interest--net).
<TABLE>
<CAPTION>
INDUSTRY SEGMENT DATA
Real
Travel Estate Alliance Other
Services Services Marketing(5) Services Consolidated
(In millions) ---------- ---------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1997
Net revenues $1,337.2 $ 987.0 $1,570.3 $ 345.5 $ 4,240.0
Operating income(1) 272.6 280.7 125.0 (370.4) 307.9
Identifiable assets 6,700.4 5,113.1 1,395.8 864.1(4) 14,073.4
Depreciation and amortization 102.7 58.4 42.0 34.6 237.7
Capital expenditures 51.6 65.4 23.3 42.4 182.7
1996
Net revenues $ 802.4 $ 782.4 $1,474.3 $ 178.6 $ 3,237.7
Operating income 254.3 216.0 48.9(2) 28.6 547.8
Identifiable assets 6,685.3 4,170.0 1,395.9 511.3(4) 12,762.5
Depreciation and amortization 55.5 44.5 34.8 10.7 145.5
Capital expenditures 47.6 30.5 19.0 43.5 140.6
1995
Net revenues $ 684.4 $ 504.3 $1,302.3 $ 125.1 $ 2,616.1
Operating income 196.2 114.1 38.8(3) 17.8 366.9
Identifiable assets 4,449.4 2,406.0 1,072.1 592.0(4) 8,519.5
Depreciation and amortization 46.9 18.0 30.5 5.0 100.4
Capital expenditures 17.3 14.4 44.2 32.8 108.7
</TABLE>
------------
(1) Includes merger-related costs and other unusual charges which were
allocated to the business segments as follows: Travel--$186.0 million,
Real estate--$65.3 million, Alliance Marketing--$12.7 million,
Other--(substantially Corporate-related)--$440.1 million.
(2) Includes merger-related costs and other unusual charges of $109.4
million.
(3) Includes costs related to Ideon products abandoned and restructuring of
$97.0 million.
(4) Includes net assets of discontinued operations of $273.3, $120.1 and
$188.9 in 1997, 1996 and 1995, respectively.
(5) 1997 Alliance Marketing segment data has been restated for a change in
accounting, effective January 1, 1997, related to revenue and expense
recognition for memberships (see Notes 2 and 3).
GEOGRAPHIC DATA
<TABLE>
<CAPTION>
NORTH EUROPE AND
AMERICA OTHER CONSOLIDATED
(In millions) ----------- ----------- -------------
<S> <C> <C> <C>
1997
Net revenues $ 3,731.2 $ 508.8 $ 4,240.0
Operating income 210.3 97.6 307.9
Identifiable assets 12,640.0 1,433.4 14,073.4
1996
Net revenues $ 3,042.2 $ 195.5 $ 3,237.7
Operating income 508.1 39.7 547.8
Identifiable assets 11,981.2 781.3 12,762.5
1995
Net revenues $ 2,435.3 $ 180.8 $ 2,616.1
Operating income 332.7 34.2 366.9
Identifiable assets 7,775.4 744.1 8,519.5
</TABLE>
F-56
<PAGE>
25. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
Provided below is the selected unaudited quarterly financial data for 1997
and 1996, as restated for (i) the findings from the independent
investigation confirming accounting irregularities in certain CUC business
units and the preparation and audit of the Company's restated financial
statements (collectively classified as "Accounting errors and
irregularities"); (ii) the change in accounting for memberships; and (iii)
discontinued operations. See Notes 2, 3 and 6 for a description of such
accounting adjustments. The underlying per share information is calculated
based on weighted average shares outstanding during each quarter, and
therefore, the sum of the quarters may not equal the total year amounts.
FIRST QUARTER 1997
<TABLE>
<CAPTION>
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED
------------ ---------------- ----------------- -----------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $1,158.2 $ (67.2) $ (137.3) $ 953.7
-------- -------- -------- --------
Operating income 297.2 (84.7) (11.5) 201.0
-------- -------- -------- --------
Income from continuing operations before
cumulative effect of accounting change 166.0 (49.4) (2.8) 113.8
Income from discontinued operations, net
of taxes -- -- 2.8 2.8
Cumulative effect of accounting change,
net of tax -- (283.1) -- (283.1)
-------- -------- -------- --------
Net income (loss) $ 166.0 $ (332.5) $ -- $ (166.5)
======== ======== ======== ========
Per Share Information:
Income from continuing operations before
cumulative effect of accounting change
Basic $ 0.21 $ 0.14
Diluted 0.19 0.13
</TABLE>
SECOND QUARTER 1997
<TABLE>
<CAPTION>
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED(1)
------------ ---------------- ----------------- ------------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $1,300.5 $ (173.0) $ (127.9) $ 999.6
-------- -------- -------- -------
Operating income (loss) 70.9 (122.0) 18.2 (32.9)
-------- -------- -------- -------
Loss from continuing operations (13.4) (70.6) 14.6 (69.4)
Loss from discontinued operations, net
of taxes -- -- (14.6) (14.6)
-------- -------- -------- -------
Net loss $ (13.4) $ (70.6) $ -- $ (84.0)
======== ======== ======== =======
Per Share Information:
Loss from continuing operations
Basic $ (0.02) $ (0.09)
Diluted (0.02) (0.09)
</TABLE>
- ----------
(1) Includes Unusual Charges, related to continuing operations, of $295.4
million primarily associated with the PHH Merger in April 1997. Unusual
Charges of $278.9 million ($208.4 million, after-tax or $.24 per share)
pertained to continuing operations and $16.5 million were associated with
discontinued operations.
(2) Includes adjustments for accounting errors and irregularities and a
change in accounting.
F-57
<PAGE>
THIRD QUARTER 1997
<TABLE>
<CAPTION>
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED
------------ ---------------- ----------------- -----------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $1,431.3 $ (102.8) $ (142.0) $1,186.5
-------- -------- -------- --------
Operating income 429.8 (74.2) (1.5) 354.1
-------- -------- -------- --------
Income from continuing operations 248.3 (45.7) 0.4 203.0
Loss from discontinued operations, net
of taxes -- -- (0.4) (0.4)
-------- -------- -------- --------
Net income $ 248.3 $ (45.7) $ -- $ 202.6
======== ======== ======== ========
Per Share Information:
Income from continuing operations
Basic $ 0.31 $ 0.25
Diluted 0.29 0.24
</TABLE>
FOURTH QUARTER 1997
<TABLE>
<CAPTION>
RECLASSIFICATION
AS FOR
PREVIOUSLY DISCONTINUED AS
REPORTED ADJUSTMENTS(2) OPERATIONS RESTATED(3)
------------ ---------------- ----------------- ---------------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $1,424.7 $ (89.5) $ (235.0) $1,100.2
-------- ------- -------- --------
Operating income (436.9) 232.9 (10.3) (214.3)
-------- ------- -------- --------
Loss from continuing operations before
extraordinary gain (345.5) 165.0 (0.6) (181.1)
Loss from discontinued operations before
extraordinary gain, net of taxes -- -- (14.6) (14.6)
Extraordinary gain, net of tax -- 11.2 15.2 26.4 (4)
-------- ------- -------- --------
Net loss $ (345.5) $ 176.2 $ -- $(169.3)
======== ======= ======== ========
Per Share Information:
Loss from continuing operations before
extraordinary gain
Basic $ (0.42) $ (0.22)
Diluted (0.42) (0.22)
</TABLE>
- ----------
(2) Includes adjustments for accounting errors and irregularities and a
change in accounting.
(3) Includes Unusual Charges in the net amount of $442.6 million
substantially associated with the Cendant and Hebdo Mag mergers during
the fourth quarter of 1997. Net Unusual Charges of $425.2 million ($296.3
million, after-tax or $.34 per share) pertained to continuing operations
and $17.4 million were associated with discontinued operations.
(4) Represents the gain on the sale of Interval International, Inc. in
December 1997, a Company subsidiary which was sold in consideration of
Federal Trade Commission anti-trust concerns within the timeshare
industry.
F-58
<PAGE>
FIRST QUARTER 1996
<TABLE>
<CAPTION>
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $821.4 $ (65.8) $ (94.7) $660.9
------ ------- ------- ------
Operating income 165.8 (60.1) (0.5) 105.2
------ ------- ------- ------
Income from continuing operations 96.0 (40.8) 1.3 56.5
Loss from discontinued operations, net
of taxes -- -- (1.3) (1.3)
------ ------- ------- ------
Net income $ 96.0 $ (40.8) $ -- $ 55.2
====== ======= ======= ======
Per Share Information:
Income from continuing operations
Basic $ 0.14 $ 0.08
Diluted 0.12 0.07
</TABLE>
SECOND QUARTER 1996
<TABLE>
<CAPTION>
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- ----------------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $935.7 $ (53.7) $ (106.7) $ 775.3
------ ------- -------- --------
Operating income 186.7 (54.7) 13.8 145.8
------ ------- -------- --------
Income from continuing operations 101.0 (34.1) 20.3 87.2
Loss from discontinued operations, net
of taxes -- -- (20.3) (20.3)(5)
------ ------- -------- --------
Net income $101.0 $ (34.1) $ -- $ 66.9(5)
====== ======= ======== ==========
Per Share Information:
Income from continuing operations
Basic $ 0.14 $ 0.12
Diluted 0.13 0.11
</TABLE>
- ----------
(5) Includes Unusual Charges of $24.9 million associated with the Davidson
and Sierra mergers in July 1996.
F-59
<PAGE>
THIRD QUARTER 1996
<TABLE>
<CAPTION>
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- --------------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net revenues $1,042.9 $43.1 $ (132.4) $ 95306
-------- ----- -------- --------
Operating income 115.0 33.7 (29.0) 119.7(6)
-------- ----- -------- ----------
Income from continuing operations 68.5 13.6 (15.5) 66.6(6)
Income from discontinued operations, net
of taxes -- -- 15.5 15.5
-------- ----- -------- ----------
Net income $ 68.5 $13.6 $ -- $ 82.1(6)
======== ===== ======== ==========
Per Share Information:
Income from continuing operations
Basic $ 0.09 $ 0.09
Diluted 0.08 0.08
</TABLE>
- ----------
(6) Includes Unusual Charges of $109.4 million ($70.0 million, after tax or
$.09 per share) associated with the Ideon Merger in August 1996.
FOURTH QUARTER 1996
<TABLE>
<CAPTION>
RECLASSIFICATION
AS ACCOUNTING FOR
PREVIOUSLY ERRORS AND DISCONTINUED AS
REPORTED IRREGULARITIES OPERATIONS RESTATED
------------ ---------------- ----------------- ---------
<S> <C> <C> <C> <C>
(in millions, except per share data)
Net revenues $1,108.8 $ (83.8) $ (177.1) $847.9
-------- ------- -------- ------
Operating income 271.6 (51.2) (43.3) 177.1
-------- ------- -------- ------
Income from continuing operations 158.1 (32.3) (22.8) 103.0
Income from discontinued operations, net
of taxes -- -- 22.8 22.8
-------- ------- -------- ------
Net income $ 158.1 $ (32.3) $ -- $125.8
======== ======= ======== ======
Per Share Information:
Income from continuing operations
Basic $ 0.20 $ 0.13
Diluted 0.19 0.13
</TABLE>
26. SUBSEQUENT EVENTS
PENDING ACQUISITIONS
American Bankers. On March 23, 1998, the Company 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 aggregate consideration of approximately $3.1 billion. The
Company has agreed to purchase 23.5 million shares of American Bankers at
$67 per share through its pending cash tender offer, to be followed by a
merger in which the Company has agreed to deliver Cendant shares with a
value of $67 for each remaining share of American Bankers common stock
outstanding. The Company has already received anti-trust clearance to
acquire American Bankers. The tender offer is subject to the receipt of
tenders representing at least 51 percent of the common shares of American
Bankers as well as customary closing conditions, including regulatory
approvals. From time to time representatives of the Company and
representatives of American Bankers have discussed possible modifications
to the terms of the ABI Merger Agreement, including a change in the mix of
consideration to increase the cash component and decrease the stock
component and changing the transaction to a taxable
F-60
<PAGE>
transaction. No agreement regarding any such modification has been reached
and there can be no assurance that such discussion will result in any
agreement being reached. The transaction is expected to be completed in the
fourth quarter of 1998 or the first quarter of 1999. If no agreement
regarding the terms of any modification to the terms of the ABI Merger
Agreement is reached, the current ABI Merger Agreement will remain in
effect in accordance with its terms. American Bankers provides affordable,
specialty insurance products and services through financial institutions,
retailers and other entities offering consumer financing.
In connection with the Company's proposal to acquire American Bankers, the
Company has a bank commitment to provide a $650 million, 364-day revolving
credit facility which will bear interest, at the option of the Company, at
rates based on prime rates, as defined, or LIBOR plus an applicable
variable margin.
RAC Motoring Services. On May 21, 1998, the Company announced that it has
reached a definitive agreement with the Board of Directors of Royal
Automobile Club Limited ("RACL") to acquire their RAC Motoring Services
subsidiary for approximately $735 million in cash. The sale of RAC Motoring
Services has subsequently been approved by its shareholders. Closing is
subject to certain conditions, including regulatory approval. Although no
assurances can be made, the Company currently anticipates that the
transaction will be completed in the spring of 1999. RAC Motoring Services
is the second-largest roadside assistance company in the UK and also owns
the UK's largest driving school company.
Providian. On December 9, 1997, the Company executed a definitive agreement
to acquire Providian Auto and Home Insurance Company for approximately
$219.0 million in cash. Closing is subject to receipt of required
regulatory approval and accordingly, no assurance can be made that the
acquisition will be completed. Providian sells automobile insurance to
consumers through direct response marketing.
COMPLETED ACQUISITIONS
National Parking Corporation. On April 27, 1998, the Company completed the
acquisition of National Parking Corporation ("NPC") for $1.6 billion in
cash, which included the repayment of approximately $227 million of
outstanding NPC debt. NPC is substantially comprised of two operating
subsidiaries. National Car Parks is the largest private (non-municipal)
single car park operator in the United Kingdom ("UK") with approximately
500 locations. Green Flag operates the third largest roadside assistance
group in the UK and offers a wide-range of emergency support and rescue
services to approximately 3.5 million members.
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, from privately held H-G Holdings, Inc. for
approximately $186.0 million in cash plus future contingent payments of up
to $20.0 million over the next two years.
Jackson Hewitt. On January 7, 1998, the Company completed the acquisition
of Jackson Hewitt Inc. ("Jackson Hewitt"), for approximately $480.0 million
in cash. 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. Subsequent to December 31, 1997, the Company acquired certain other
entities for an aggregate purchase price of approximately $348.5 million in
cash. Such acquisitions will be accounted for under the purchase method of
accounting.
FINANCING TRANSACTIONS
Term Loan Facility. 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, bears interest at LIBOR plus an applicable
LIBOR spread, as defined. Upon the execution of the Term Loan Facility,
temporary credit
F-61
<PAGE>
agreements, which provided for $1.0 billion of borrowings, were terminated.
The Term Loan Facility, as amended, contains certain restrictive covenants,
which are substantially similar to and consistent with the covenants in
effect for the Company's existing revolving credit agreements.
Issuance Of Mandatorily Redeemable Preferred Securities. On March 2, 1998,
the Company issued 29.9 million FELINE PRIDES and 2.3 million trust
preferred securities and received approximately $1.4 billion in gross
proceeds therefrom. The FELINE PRIDES consist of 27.6 million Income PRIDES
and 2.3 million Growth PRIDES, each with a face amount of $50 per PRIDE.
The Income PRIDES consist of trust preferred securities and stock purchase
contracts under which the holders will purchase common stock from the
Company in February 2001. The Growth PRIDES consist of stock purchase
contracts under which the holders will purchase common stock from the
Company in February 2001 and zero coupon U.S. Treasury securities. The
trust preferred securities will bear interest, in the form of preferred
stock dividends, at the annual rate of 6.45 percent. Such preferred stock
dividends are presented as minority interest, net of tax in the
consolidated statements of income. The forward purchase contract forming a
part of the Income PRIDES will pay 1.05 percent annually in the form of a
contract adjustment payment. The forward purchase contract forming a part
of the Growth PRIDES will pay 1.3 percent annually in the form of a
contract adjustment payment. The forward purchase contracts call for the
holder to purchase the minimum of 1.0395 shares and a maximum of 1.3514
shares of Company common stock per PRIDES security, depending upon the
average of the closing price per share of Company common stock for a 20
consecutive day period ending in mid-February of 2001.
Redemption of 4 3/4% Notes. On May 4, 1998, the Company redeemed all of its
outstanding ($144.5 million principal amount) 4 3/4% Convertible Senior
Notes at a price of 103.393% of the principal amount together with interest
accrued to the redemption date. Prior to May 4, 1998, holders of such notes
exchanged $90.5 million of the 4 3/4% Notes for 2.5 million shares of
Company common stock.
Redemption of 6 1/2% Notes. On April 8, 1998, the Company exercised its
option to call its 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, all of the outstanding 6 1/2% Notes were converted into 2.1 million
shares of Company common stock.
SEVERANCE AGREEMENT
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes gives him the benefits required
by his employment contract relating to a termination of Mr. Forbes'
employment with the Company for reasons other than for cause. Those
benefits total $35 million in cash and include the granting of
approximately 1.3 million stock options.
REPRICING OF STOCK OPTIONS
On July 28, 1998, the Compensation Committee of the Board of Directors
approved, in principle, a program to reprice certain Company stock options
granted to employees of the Company, other than executive officers, during
December 1997 and the first quarter of 1998. The new option price for such
stock options is to be the market price of the Company's common stock as
reported on the New York Stock Exchange shortly after the filing of the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1997. On September 23, 1998, the Compensation Committee extended such
repricing program to certain executive officers and senior managers of the
Company subject to certain conditions including revocation of a portion of
existing options plus repricing of other portions at prices at and above
fair market value at the time of repricing. Additionally, a management
equity ownership program was adopted that requires executive officers and
these senior managers to acquire Company common stock at various levels
commensurate with such manager's compensation.
F-62
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1997
AS RESTATED AS RESTATED
1998 (NOTE 2) 1998 (NOTE 2)
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Membership and service fees -- net ........................ $1,416.4 $1,099.3 $3,678.8 $2,932.5
Fleet leasing (net of depreciation and interest costs
of $324.9, $307.9, $954.6 and $892.2).................... 18.5 12.8 57.5 42.9
Other ..................................................... 22.9 74.4 128.8 164.4
-------- -------- -------- --------
Net revenues ............................................... 1,457.8 1,186.5 3,865.1 3,139.8
Expenses
Operating ................................................. 515.9 344.3 1,306.9 958.1
Marketing and reservation ................................. 297.2 278.5 853.2 750.3
General and administrative ................................ 187.6 150.6 487.4 455.0
Depreciation and amortization ............................. 88.9 59.0 241.3 175.4
Other charges:
Merger-related costs and other unusual charges
(credits) .............................................. -- -- (24.4) 278.9
Investigation related costs and termination
benefits ............................................... 61.9 -- 81.4 --
Financing costs ......................................... 14.5 -- 27.2 --
Asset impairments ....................................... 50.0 -- 50.0 --
Interest -- net ........................................... 31.0 13.5 72.9 36.3
-------- -------- -------- --------
Total expenses ............................................. 1,247.0 845.9 3,095.9 2,654.0
-------- -------- -------- --------
Income from continuing operations before income
taxes, minority interest and cumulative effect of
accounting change ......................................... 210.8 340.6 769.2 485.8
Provision for income taxes ................................. 73.2 137.6 273.0 238.4
Minority interest, net ..................................... 14.5 -- 34.3 --
-------- -------- -------- --------
Income from continuing operations before cumulative
effect of accounting change ............................... 123.1 203.0 461.9 247.4
Loss from discontinued operations, net of taxes
(Note 7) .................................................. (12.1) (0.4) (25.0) (12.2)
-------- -------- -------- --------
Income before cumulative effect of accounting
change .................................................... 111.0 202.6 436.9 235.2
Cumulative effect of accounting change, net of tax ......... -- -- -- (283.1)
-------- -------- -------- --------
Net income (loss) .......................................... $ 111.0 $ 202.6 $ 436.9 $ (47.9)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------------
1997 1997
AS RESTATED AS RESTATED
1998 (NOTE 2) 1998 (NOTE 2)
---------- ------------- ---------- ------------------
<S> <C> <C> <C> <C>
Income (Loss) Per Share:
Basic
Income from continuing operations before
cumulative effect of accounting change ............. $ 0.14 $0.25 $ 0.55 $ 0.31
Loss from discontinued operations, net .............. (0.01) -- (0.03) (0.02)
Cumulative effect of accounting change, net ......... -- -- -- (0.35)
------- ----- ------- ---------
Net income (loss) ................................... $ 0.13 $0.25 $ 0.52 $ (0.06)
======= ===== ======= =========
Diluted
Income from continuing operations before
cumulative effect of accounting change .............. $ 0.14 $0.23 $ 0.53 $ 0.29
Loss from discontinued operations, net ................ (0.01) -- (0.03) (0.01)(1)
Cumulative effect of accounting change, net ........... -- -- -- (0.32)(1)
------- ----- ------- ---------
Net income (loss) ..................................... $ 0.13 $0.23 $ 0.50 $ (0.04)
======= ===== ======= =========
</TABLE>
- ----------
(1) The number of weighted average shares used to compute income from
continuing operations per share was also used to calculate the per share
amounts for the net loss from discontinued operations, the cumulative
effect of accounting change, net of tax and net loss. As a result of
losses recorded for such amounts, the per share amounts for the net loss
from discontinued operations, the cumulative effect of accounting change,
net of tax and net loss are anti-dilutive to their respective basic per
share amounts.
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents .............................. $ 1,611.2 $ 67.0
Receivables, net ....................................... 1,327.8 1,170.7
Deferred income taxes .................................. 330.9 311.9
Other current assets ................................... 973.7 767.2
Net assets of discontinued operations .................. 520.2 273.3
--------- ---------
Total current assets .................................... 4,763.8 2,590.1
--------- ---------
Property and equipment ................................. 1,298.2 460.8
Franchise agreements, net .............................. 961.3 890.3
Goodwill, net .......................................... 4,015.8 2,148.2
Other intangibles, net ................................. 1,043.6 897.5
Other assets ........................................... 688.5 642.8
--------- ---------
Total assets exclusive of assets under programs ......... 12,771.2 7,629.7
--------- ---------
Assets under management and mortgage programs
Net investment in leases and leased vehicles ........... 3,738.0 3,659.1
Relocation receivables ................................. 631.0 775.3
Mortgage loans held for sale ........................... 2,360.8 1,636.3
Mortgage servicing rights .............................. 573.4 373.0
--------- ---------
7,303.2 6,443.7
--------- ---------
Total assets ............................................ $20,074.4 $14,073.4
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Accounts payable and other current liabilities ..................................... $ 1,489.3 $ 1,492.4
Current portion of long-term debt .................................................. 2,702.7 --
Deferred income .................................................................... 1,392.2 1,042.0
--------- ---------
Total current liabilities .......................................................... 5,584.2 2,534.4
--------- ---------
Deferred income .................................................................... 227.8 292.1
Long-term debt ..................................................................... 1,308.5 1,246.0
Other noncurrent liabilities ....................................................... 320.6 181.2
--------- ---------
Total liabilities exclusive of liabilities under programs .......................... 7,441.1 4,253.7
--------- ---------
Liabilities under management and mortgage programs
Debt .............................................................................. 6,195.8 5,602.6
Deferred income taxes ............................................................. 257.9 295.7
Mandatorily redeemable preferred securities issued by subsidiaries ................. 1,472.1 --
Commitments and contingencies (Note 15)
Shareholders' Equity
Preferred stock, $.01 par value -- authorized 10 million shares; none issued and
outstanding ....................................................................... -- --
Common stock, $.01 par value -- authorized 2 billion shares; issued 858,281,922
and 838,333,800 shares, respectively .............................................. 8.6 8.4
Additional paid-in capital ......................................................... 3,405.2 3,088.4
Retained earnings .................................................................. 1,377.5 940.6
Accumulated other comprehensive loss ............................................... (6.7) (38.2)
Restricted stock, deferred compensation ............................................ (2.7) (3.4)
Treasury stock, at cost 6,750,546 shares ........................................... (74.4) (74.4)
--------- ---------
Total shareholders' equity ......................................................... 4,707.5 3,921.4
--------- ---------
Total liabilities and shareholders' equity ......................................... $20,074.4 $14,073.4
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------- ------------
AS RESTATED
(NOTE 2)
<S> <C> <C>
Operating Activities
Net income (loss) .................................................................... $ 436.9 $ (47.9)
Loss from discontinued operations, net of taxes ...................................... 25.0 12.2
Cumulative effect of accounting change, net of tax ................................... -- 283.1
Depreciation and amortization ........................................................ 241.3 175.4
Other charges -- asset impairments and termination benefits .......................... 62.5 --
Merger-related costs and other unusual charges (credits) ............................. (24.4) 278.9
Payments of merger-related costs and other unusual charge liabilities ................ (127.2) (157.6)
Other ................................................................................ (76.1) (305.5)
---------- ----------
Net cash provided by operations exclusive of management and mortgage
programs ............................................................................ 538.0 238.6
---------- ----------
Management and mortgage programs:
Depreciation and amortization ....................................................... 944.9 812.3
Mortgage loans held for sale ........................................................ (724.4) 86.1
---------- ----------
220.5 898.4
---------- ----------
Net cash provided by operating activities of continuing operations ................... 758.5 1,137.0
---------- ----------
Investing Activities
Property and equipment additions ..................................................... (240.8) (97.4)
Investments .......................................................................... (94.2) (181.2)
Net change in marketable securities .................................................. 4.7 (646.5)
Net assets acquired (net of cash acquired) and acquisition-related payments .......... (2,658.2) (539.9)
Other, net ........................................................................... 77.0 (131.3)
---------- ----------
Net cash used in investing activities of continuing operations exclusive of
management and mortgage programs .................................................... (2,911.5) (1,596.3)
---------- ----------
Management and mortgage programs:
Investment in leases and leased vehicles ............................................ (1,876.4) (1,629.4)
Payments received on investment in leases and leased vehicles ....................... 765.5 615.2
Proceeds from sales and transfers of leases and leased vehicles to third parties..... 136.8 63.5
Equity advances on homes under management ........................................... (5,186.5) (4,185.5)
Repayment of advances on homes under management ..................................... 5,333.8 4,341.3
Additions to originated mortgage servicing rights ................................... (338.7) (147.6)
Proceeds from sales of mortgage servicing rights .................................... 75.2 49.0
---------- ----------
(1,090.3) (893.5)
---------- ----------
Net cash used in investing activities of continuing operations ....................... (4,001.8) (2,489.8)
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------- ------------
AS RESTATED
(NOTE 2)
<S> <C> <C>
Financing Activities
Proceeds from borrowings .......................................................... $ 3,279.6 $ 917.5
Principal payments on borrowings .................................................. (420.5) (174.2)
Issuance of convertible debt ...................................................... -- 542.8
Issuance of common stock .......................................................... 160.4 119.9
Purchases of common stock ......................................................... -- (171.3)
Proceeds from mandatorily redeemable preferred securities issued by
subsidiaries, net ................................................................ 1,446.7 --
Other, net ........................................................................ -- (6.6)
---------- ----------
Net cash provided by financing activities of continuing operations exclusive of
management and mortgage programs ................................................. 4,466.2 1,228.1
---------- ----------
Management and mortgage programs:
Proceeds from debt issuance or borrowings ........................................ 2,455.1 2,129.2
Principal payments on borrowings ................................................. (2,215.7) (1,575.8)
Net change in short-term borrowings .............................................. 347.0 (693.9)
---------- ----------
586.4 (140.5)
---------- ----------
Net cash provided by financing activities of continuing operations ................ 5,052.6 1,087.6
---------- ----------
Effect of changes in exchange rates on cash and cash equivalents .................. (9.7) (0.4)
Net cash used in discontinued operations .......................................... (255.4) (45.0)
---------- ----------
Net increase (decrease) in cash and cash equivalents .............................. 1,544.2 (310.6)
Cash and cash equivalents, beginning of period .................................... 67.0 448.1
---------- ----------
Cash and cash equivalents, end of period .......................................... $ 1,611.2 $ 137.5
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE>
CENDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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
with the merged company being renamed Cendant Corporation. The Company
provides fee-based services to consumers within the Travel, Real Estate and
Alliance Marketing business segments.
The consolidated balance sheet of the Company as of September 30, 1998, the
consolidated statements of operations for the three and nine months ended
September 30, 1998 and 1997 and the consolidated statements of cash flows
for the nine months ended September 30, 1998 and 1997 are unaudited. The
accompanying consolidated financial statements include the accounts and
transactions of the Company and all wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions of
Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities
Exchange Act of 1934. The December 31, 1997 consolidated balance sheet was
derived from the Company's audited financial statements included in the
Company's Annual Report on Form10-K/A for the year ended December 31, 1997
and should be read in conjunction with such consolidated financial
statements and notes thereto.
In the opinion of the Company's management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998.
2. RESTATEMENT
As publicly announced on April 15, 1998, the Company discovered accounting
irregularities in certain business units of CUC. As a result, the Company
together with its counsel and assisted by auditors, immediately began an
intensive investigation (the "Company Investigation"). In addition, the
Audit Committee of the Company's Board of Directors initiated an
investigation into such matters (the "Audit Committee Investigation,"
together with the Company Investigation, the "Investigations"). On July 14,
1998, the Company 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, the Company announced that the Company Investigation
was completed and, on August 27, 1998, the Company announced that the Audit
Committee had submitted its report to the Board of Directors on the Audit
Committee Investigation into the accounting irregularities and its
conclusions regarding responsibility for those actions. As a result of the
findings from the Investigations, the Company restated its financial
statements for the years ended December 31, 1997, 1996 and 1995. Such
restated financial statements were audited and filed on Form 10-K/A with
the Securities and Exchange Commission ("SEC") on September 29, 1998. In
addition, as a result of the Investigations and a concurrent internal
financial review process by the Company which revealed both accounting
errors and accounting irregularities, the Company restated its financial
statements for the quarterly periods ended March 31 and June 30, 1998,
respectively. The Company's restated financial statement for the quarterly
periods ended March 31, 1998 and 1997 and June 30, 1998 and 1997 were filed
on Quarterly Reports Form 10-Q/A with the SEC on October 13, 1998. The
financial statements for the three and nine months ended September 30, 1997
are restated herein in this Form 10-Q.
F-69
<PAGE>
In connection with the Company Investigation and coincident with the audit
and restatement process, certain adjustments were made in 1997 for
accounting errors (that were not a result of irregularities) which relate
to the former HFS businesses. Such adjustments were substantially comprised
of $47.8 million in reductions to merger-related costs and other unusual
charges, which increased 1997 income from continuing operations.
In connection with the aforementioned accounting irregularities, the SEC
and the United States Attorney for the District of New Jersey are also
conducting investigations relating to the accounting irregularities (See
Note 15). In connection with the SEC's investigation, in August 1998, the
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. (See Note 3-Accounting Change). Accordingly,
the financial results for the three and nine months ended September 30,
1997 as set forth herein have been restated for the accounting change.
The Company has recorded all corrections arising from the findings of the
Investigations. Such corrections were the result of accounting
irregularities, the misapplication of generally accepted accounting
principles and the aforementioned change in accounting for memberships.
Provided below is a summary of the impact of such corrections and a
reconciliation of the financial results from amounts previously reported to
the restated financial statement amounts, as presented in this Quarterly
Report on Form 10-Q. The reconciliation includes the reclassification of
discontinued operations (see Note 7 Discontinued Operations). While
management has made all adjustments considered necessary as a result of the
findings of the Investigations, there can be no assurance that additional
adjustments will not be required as a result of the ongoing SEC
investigation.
F-70
<PAGE>
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
AS IRREGULARITIES
PREVIOUSLY DISCONTINUED AND ACCOUNTING AS
REPORTED OPERATIONS CHANGE RESTATED
------------ -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net revenues ....................................... $1,431.3 $ (142.0) $ (102.8) $1,186.5
-------- -------- -------- --------
Expenses
Operating ......................................... 464.5 (78.6) (41.6) 344.3
Marketing and reservation ......................... 360.9 (26.4) (56.0) 278.5
General and administrative ........................ 105.8 (25.5) 70.3 150.6
Depreciation and amortization ..................... 70.2 (9.9) (1.3) 59.0
Interest, net ..................................... 15.6 (4.2) 2.1 13.5
-------- -------- -------- --------
Total expenses ..................................... 1,017.0 (144.6) (26.5) 845.9
-------- -------- -------- --------
Income from continuing operations before
income taxes ...................................... 414.3 2.6 (76.3) 340.6
Provision (benefit) for income taxes ............... 166.0 2.2 (30.6) 137.6
-------- -------- -------- --------
Income from continuing operations .................. 248.3 0.4 (45.7) 203.0
Loss from discontinued operations, net of taxes..... -- (0.4) -- (0.4)
Net income ......................................... $ 248.3 $ -- $ (45.7) $ 202.6
======== ======== ======== ========
Income per share
Basic
Income from continuing operations ................. $ 0.31 $ 0.25
Loss from discontinued operations, net ............ -- --
-------- --------
Net income ......................................... $ 0.31 $ 0.25
======== ========
Income per share
Diluted
Income from continuing operations ................. $ 0.29 $ 0.23
Loss from discontinued operations, net ............ -- --
-------- --------
Net income ......................................... $ 0.29 $ 0.23
======== ========
Weighted Average Shares
Basic .............................................. 805.9 805.9
Diluted ............................................ 889.0 889.0
</TABLE>
F-71
<PAGE>
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------
ACCOUNTING
ADJUSTMENTS
FOR ERRORS,
AS IRREGULARITIES
PREVIOUSLY DISCONTINUED AND ACCOUNTING AS
REPORTED OPERATIONS CHANGE RESTATED
------------ -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net revenues ....................................... $3,890.0 $ (407.2) $ (343.0) $3,139.8
-------- -------- -------- --------
Expenses
Operating ......................................... 1,317.8 (209.4) (150.3) 958.1
Marketing and reservation ......................... 963.4 (97.2) (115.9) 750.3
General and administrative ........................ 324.1 (65.4) 196.3 455.0
Depreciation and amortization ..................... 190.6 (23.9) 8.7 175.4
Merger-related costs and other unusual
charges ......................................... 303.0 (16.5) (7.6) 278.9
Interest, net ..................................... 43.9 (14.2) 6.6 36.3
-------- -------- -------- --------
Total expenses ..................................... 3,142.8 (426.6) (62.2) 2,654.0
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of
accounting change ................................. 747.2 19.4 (280.8) 485.8
Provision (benefit) for income taxes ............... 346.5 7.2 (115.3) 238.4
-------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of accounting change ............ 400.7 12.2 (165.5) 247.4
Loss from discontinued operations, net of taxes..... -- (12.2) -- (12.2)
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ................................. 400.7 -- (165.5) 235.2
Cumulative effect of accounting change, net
of tax ............................................ -- -- (283.1) (283.1)
-------- -------- -------- --------
Net income (loss) .................................. $ 400.7 $ -- $ (448.6) $ (47.9)
======== ======== ======== ========
Income (loss) per share
Basic
Income from continuing operations before
cumulative effect of accounting change .......... $ 0.50 $ 0.31
Loss from discontinued operations, net ............ -- (0.02)
Cumulative effect of accounting change, net ....... -- (0.35)
-------- --------
Net income (loss) .................................. $ 0.50 $ (0.06)
======== ========
Income (loss) per share
Diluted
Income from continuing operations before
cumulative effect of accounting change .......... $ 0.47 $ 0.29
Loss from discontinued operations, net ............ -- (0.01)
Cumulative effect of accounting change, net ....... -- (0.32)
-------- --------
Net income (loss) .................................. $ 0.47 $ (0.04)
======== --------
Weighted Average Shares
Basic .............................................. 804.3 804.3
Diluted ............................................ 877.1 877.1
</TABLE>
F-72
<PAGE>
3. ACCOUNTING CHANGE
Effective January 1, 1997, the Company adopted a change in accounting for
the recognition of membership revenues and expenses. Prior to such
adoption, the Company recorded deferred membership income, net of estimated
cancellations, at the time members were billed (upon expiration of the free
trial period), which was recognized as revenue ratably over the membership
term and modified periodically based on actual cancellation experience. In
addition, membership acquisition and renewal costs, which related primarily
to membership solicitations were capitalized as direct response advertising
costs due to the Company's ability to demonstrate that the direct response
advertising resulted in future economic benefits. Such costs were amortized
on a straight-line basis as revenues were recognized (over the average
membership period). The Company believed that such accounting policies were
appropriate and consistent with industry practice.
In August 1998, in connection with the Company's cooperation with the SEC
investigation into accounting irregularities discovered in the former CUC
business units, the SEC concluded that when membership fees are fully
refundable during the entire membership period, membership revenue should
be recognized at the end of the membership period upon the expiration of
the refund offer. The SEC further concluded that non-refundable
solicitation costs should be expensed as incurred since such costs are not
recoverable if membership fees are refunded. Accordingly, effective January
1, 1997, the Company recorded a non-cash after-tax charge of $283.1 million
or $.32 per diluted share for the nine months ended September 30, 1997, to
account for the cumulative effect of the accounting change.
4. EARNINGS PER SHARE ("EPS")
Basic EPS is computed based solely on the weighted average number of common
shares outstanding during the period. Diluted EPS reflects all potential
dilution of common stock. Basic and diluted EPS from continuing operations
is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) --------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income from continuing operations
before cumulative effect of accounting
change ................................... $123.1 $203.0 $461.9 $247.4
Convertible debt interest ................. 2.8 5.8 8.6 11.3
------ ------ ------ ------
Income from continuing
operations,before cumulative effect of
accounting change, as adjusted ........... $125.9 $208.8 $470.5 $258.7
====== ====== ====== ======
Weighted average shares - basic ........... 850.8 805.9 844.8 804.3
Potential dilution of common stock:
Stock options ............................. 8.5 34.6 31.2 33.7
Convertible debt .......................... 18.0 48.5 19.0 39.1
------ ------ ------ ------
Weighted average shares - diluted ......... 877.4 889.0 895.0 877.1
====== ====== ====== ======
EPS - continuing operations before
cumulative effect of accounting
change
Basic ..................................... $ 0.14 $ 0.25 $ 0.55 $ 0.31
====== ====== ====== ======
Diluted ................................... $ 0.14 $ 0.23 $ 0.53 $ 0.29
====== ====== ====== ======
</TABLE>
F-73
<PAGE>
5. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130 "Reporting Comprehensive Income" effective January 1, 1998. This
statement establishes standards for the reporting and display of an
alternative income measurement and its components in the financial
statements.
Components of comprehensive income (loss) are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
--------- -----------
(IN MILLIONS)
<S> <C> <C>
Net income (loss) .................................................... $436.9 $ (47.9)
------ -------
Other comprehensive income (loss), net of tax:
Currency translation adjustment ...................................... 35.5 (16.4)
Unrealized gains (losses) on marketable securities:
Unrealized holding gains (losses) arising during the period ......... (4.0) --
Reclassification adjustment for gains included in earnings .......... -- (4.3)
------ -------
Comprehensive income (loss) .......................................... $468.4 $ (68.6)
====== =======
</TABLE>
The components of accumulated other comprehensive income (loss) for the
nine months ended September 30, 1998 are as follows: securities
<TABLE>
<CAPTION>
NET UNREALIZED ACCUMULATED
GAIN (LOSS) ON CURRENCY OTHER
MARKETABLE TRANSLATION COMPREHENSIVE
SECURITIES ADJUSTMENT INCOME (LOSS)
(IN MILLIONS) ---------------- ------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1998 ................ $ 0.2 $ (38.4) $ (38.2)
Currency translation adjustment ......... -- 35.5 35.5
Net unrealized gain (loss) on
marketable securities .................. (4.0) -- (4.0)
------ ------- -------
Balance, September 30, 1998 ............. $ (3.8) $ (2.9) $ (6.7)
====== ======= =======
</TABLE>
6. 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. Excess purchase price over
fair value of the underlying net assets acquired is allocated to goodwill.
Goodwill is amortized on a straight-line basis over the estimated benefit
periods, ranging from 25 to 40 years. The operating results of such
acquired companies are reflected in the Company's consolidated statements
of operations since the respective dates of acquisition.
The following table reflects the fair values of assets acquired and
liabilities assumed in connection with the Company's acquisitions
consummated and other acquisition-related payments made during the nine
months ended September 30, 1998.
<TABLE>
<S> <C>
(IN MILLIONS)
Total consideration:
Cash paid (net of $52.4 million of cash acquired)......... $2,658.2
Assets acquired .......................................... 1,187.3
Liabilities assumed ...................................... 495.8
Fair value of identifiable net assets acquired ........... 691.5
--------
Goodwill ................................................. $1,996.7
========
</TABLE>
National Parking Corporation -- On April 27, 1998, the Company completed
the acquisition of National Parking Corporation Limited ("NPC") for $1.6
billion in cash, which included the repayment of approximately $227 million
of outstanding NPC debt. NPC is substantially
F-74
<PAGE>
comprised of two operating subsidiaries: National Car Parks and Green Flag.
National Car Parks is the largest private (non-municipal) single 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 $186.0 million in cash plus
future 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 $480.0 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 $336.9 million in cash during the nine month period ended
September 30, 1998. Additionally, the Company made a $100.0 million cash
payment to the seller of Resort Condominiums International, Inc. in
satisfaction of a contingent purchase liability.
Pro forma Information -- The following table reflects the unaudited
operating results of the Company for the nine months ended September 30,
1998 and 1997 on a pro forma basis, which gives effect to the acquisition
of NPC, accounted for under the purchase method of accounting. The
remaining acquisitions completed during 1998 are not significant on a pro
forma basis and are therefore not included. The pro forma results are not
necessarily indicative of the operating results that would have occurred
had the NPC transaction 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 the related income tax effects.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ------------------------------
1998 1997
----------- ----------------
<S> <C> <C>
Net revenues ..................................................... $4,066.6 $3,565.8
Income before cumulative effect of accounting change (1) ......... 436.8 228.9
Net income (loss) ................................................ 436.8 (54.2)(2)
Per share information:
Income per share before cumulative effect of accounting
change (1)
Basic ........................................................... $ 0.52 $ 0.28
Diluted ......................................................... 0.50 0.27
Net income (loss) per share
Basic ........................................................... $ 0.52 $ (0.07)
Diluted ......................................................... 0.50 (0.05)(2)
Weighted average shares outstanding:
Basic ........................................................... 844.8 804.3
Diluted ......................................................... 895.0 877.1
</TABLE>
----------
(1) Includes loss from discontinued operations, net of taxes for the nine
months ended September 30, 1998 and 1997 of $25.0 million ($.03 per
diluted share) and $12.2 million ($.01per diluted share),
respectively.
(2) Includes the cumulative effect of a change in accounting of $283.1
million ($0.32 per diluted share) related to revenue and expense
recognition for memberships with full refund offers.
F-75
<PAGE>
7. DISCONTINUED OPERATIONS
On August 12, 1998 (the "Measurement Date"), the Company announced that its
Executive Committee of the 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 ("Cendant Software"), respectively. The Company has
since entered into a definitive agreement, as amended, to sell Hebdo Mag to
its former 50% owners for 7.1 million shares of Company common stock and
approximately $360 million in cash. The transaction is expected to be
consummated in the fourth quarter of 1998 and is subject to certain
conditions, including regulatory approval and financing by the purchaser.
The Company expects to recognize a gain of approximately $230 million upon
the disposal of Hebdo Mag, assuming a Company stock price of $13.25 per
share, the closing price of the Company's common stock on November 3, 1998.
In addition, the Company has engaged investment bankers to analyze various
strategic alternatives in regard to the disposition of Cendant Software and
the Company is currently in various stages of discussions with certain
parties regarding the potential sale of such business unit. The Company
anticipates that the disposition of Cendant Software will also result in a
significant gain.
Summarized financial data of discontinued operations are as follows:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
CONSUMER SOFTWARE
----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) ------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues ...................... $ 119.5 $ 90.7 $ 345.8 $ 261.4
Loss before income taxes .......... (20.2) (4.6) (57.3) (31.6)
Benefit from income taxes ......... (9.7) (3.2) (22.9) (12.1)
------- ------ ------- -------
Net loss .......................... $ (10.5) $ (1.4) $ (34.4) $ (19.5)
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
CLASSIFIED ADVERTISING
---------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) --------------------- ---------------------
1998 1997 1998 1997
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ....................... $ 65.2 $51.3 $202.4 $145.8
------ ----- ------ ------
Income (loss) before income
taxes ............................. (0.2) 2.0 20.4 12.2
Provision for income taxes ......... 1.4 1.0 11.0 4.9
------ ----- ------ ------
Net income (loss) .................. $ (1.6) $ 1.0 $ 9.4 $ 7.3
====== ===== ====== ======
</TABLE>
The Company has allocated $13.8 million and $3.8 million of interest
expense to discontinued operations for the nine months ended September 30,
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-76
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
CONSUMER SOFTWARE CLASSIFIED ADVERTISING
-------------------------------- -------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
(IN MILLIONS) --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Current assets ............ $ 163.0 $ 209.1 $ 69.0 $ 58.6
Goodwill .................. 111.3 42.2 273.3 181.5
Other assets .............. 94.5 49.2 34.5 33.2
Total liabilities ......... (102.6) (127.0) (122.8) (173.5)
-------- -------- -------- --------
Net assets of discontinued
operations ............... $ 266.2 $ 173.5 $ 254.0 $ 99.8
======== ======== ======== ========
</TABLE>
8. FINANCING TRANSACTIONS
Term Loan Facility -- 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, bears interest at LIBOR plus an applicable
LIBOR spread, as defined. Upon the execution of the Term Loan Facility,
temporary credit agreements, which provided for $1.0 billion of borrowings,
were terminated. The Term Loan Facility, as amended, contains certain
restrictive covenants, which are substantially similar to and consistent
with the covenants in effect for the Company's existing revolving credit
agreements. At September 30, 1998, the Term Loan Facility was fully
utilized with approximately $700 million of borrowings classified as
long-term based on the Company's ability and intent to refinance such
borrowings on a long-term basis. The Company used $2 billion of the
proceeds from the Term Loan Facility to repay the outstanding borrowings
under its revolving credit facilities.
Issuance of 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 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, each with a face
amount of $50 per PRIDES. The Income PRIDES consist of trust preferred
securities and forward purchase contracts under which the holders are
required to purchase common stock from the Company in February 2001. The
Growth PRIDES consist of zero coupon U.S. Treasury securities and forward
purchase contracts under which the holders are required to purchase common
stock from the Company in February 2001. The 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 percent 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 percent. 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 percent. 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 Company common stock for a 20
consecutive day period
F-77
<PAGE>
ending in mid-February of 2001. The Company has the right to defer the
contract adjustment payments and the payment of interest on its 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.
Redemption of 4 3/4% Notes -- On May 4, 1998, the Company redeemed all of
the outstanding ($144.5 million principal amount) 4 3/4% Convertible Senior
Notes (the "4 3/4% Notes") 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, holders of such notes exchanged $95.5 million
of the 4 3/4% Notes for 3.4 million shares of Company common stock (See
Note 11).
Redemption of 6 1/2% Notes -- On April 8, 1998, the Company exercised its
option to call its 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 Company common stock.
9. MERGER-RELATED COSTS AND OTHER UNUSUAL CHARGES
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 and/or coincident to the Cendant Merger
(the "Fourth Quarter 1997 Charge") and the merger with PHH Corporation (the
"Second Quarter 1997 Charge"). The remaining liabilities at December 31,
1997, which are classified as accounts payable and other current
liabilities and the reduction of such liabilities for the nine months ended
September 30, 1998 are summarized by category of expenditure and by charge
as follows:
<TABLE>
<CAPTION>
LIABILITIES LIABILITIES AT
AT DECEMBER 31, CASH SEPTEMBER 30,
1997 PAYMENT NON-CASH ADJUSTMENTS 1998
(IN MILLIONS) ----------------- --------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Professional fees .................. $ 50.7 $ 37.6 $ -- $ (9.3) $ 3.8
Personnel related .................. 168.5 72.2 -- (18.2) 78.1
Business terminations .............. 3.9 1.8 1.4 (2.4) 1.1
Facility related and other ......... 50.4 15.7 2.5 5.5 42.7
------ ------ ---- ------- ------
Total .............................. $273.5 $127.3 $3.9 $ (24.4) $125.7
====== ====== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES LIABILITIES AT
AT DECEMBER 31, CASH SEPTEMBER 30,
1997 PAYMENT NON-CASH ADJUSTMENTS 1998
(IN MILLIONS) ----------------- --------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Fourth Quarter 1997
Charge ............ $197.4 $ 99.3 $0.9 $ (13.2) $ 85.8
Second Quarter 1997
Charge ............ 76.1 28.0 3.0 (11.2) 39.9
------ ------ ---- ------- ------
Total ............. $273.5 $127.3 $3.9 $ (24.4) $125.7
====== ====== ==== ======= ======
</TABLE>
Fourth Quarter 1997 Charge. The $85.8 million of liabilities remaining at
September 30, 1998 are primarily comprised of $63.3 million of severance
and other personnel related costs and $18.8 million of outstanding
facility-related liabilities. Approximately $4.1 million of remaining
severance costs will be paid upon the closure of nine European call centers
which will be substantially completed in 1998. Approximately $37.8 million
of executive termination benefits will be paid or otherwise extinguished
upon the settlement of employment obligations. Outstanding facility-related
liabilities will be paid or otherwise extinguished upon the aforementioned
closures of European call centers and other office consolidations. During
the nine months ended September 30, 1998, the Company recorded a net credit
of $13.2 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.
F-78
<PAGE>
Second Quarter 1997 Charge. The $39.9 million of liabilities remaining at
September 30, 1998 primarily consists of $14.8 million of future severance
and benefit payments and $23.9 million of future lease termination
payments. During the nine months ended September 30, 1998, the Company
recorded a net credit of $11.2 million to Unusual Charges with a
corresponding reduction to liabilities as a result of a change in the
original estimate of costs to be incurred. Such credit was net of $24.1
million of costs incurred related to lease terminations.
10. INVESTIGATION RELATED COSTS AND TERMINATION BENEFITS
The Company records all costs incurred in connection with and as a result
of the investigations into accounting irregularities as "investigation
related costs and termination benefits" in the consolidated statement of
operations.
On July 28, 1998, the Company announced that Walter A. Forbes resigned as
Chairman of the Company and as a member of the Board of Directors. The
severance agreement reached with Mr. Forbes entitles him 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 resulted in a $50.4 million third quarter 1998 charge
comprised of $37.9 million in cash payments and 1.3 million of Company
stock options with a Black-Scholes value of $12.5 million. Such options
were immediately vested and expire on July 28, 2008. Other costs for the
three and nine months ended September 30, 1998 of $11.5 million and $31.0
million, respectively, are primarily comprised of professional fees and
public relations costs incurred in connection with the investigations.
11. OTHER CHARGES - FINANCING COSTS
The Company paid $25 million of banking fees on May 29, 1998 in connection
with executing the Term Loan Facility (see Note 8 Financing Transactions).
Such financing was arranged to ensure Company liquidity in the absence of
access to public financing markets as a result of the Company's discovery
and announcement of accounting irregularities and the corresponding lack of
audited financial statements. The financing costs have been deferred and
are being amortized over six months, the anticipated borrowing period.
In connection with the Company exercising its option to redeem the 4 3/4%
Notes, 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 based upon the
fair value of the common stock at such time. However, during the redemption
period, the Company's common stock price experienced a significant
decrease. As a result, holders of the 4 3/4% Notes elected not to convert
the 4 3/4% notes to common stock and redeemed such notes at a premium (see
Note 8 - Financing Transactions). Accordingly, the Company recorded a $7.2
million ($4.5 million after-tax) loss on early extinguishment of debt which
is classified in the statement of operations as Other Charges - Financing
Costs.
12. OTHER CHARGES - ASSET IMPAIRMENTS
The Company periodically evaluates the recoverability of its investments
and long-lived assets. As a result of such practices, the Company recorded
a $50.0 million non-cash charge during the third quarter of 1998. Based on
a recent evaluation of its long-lived assets and in connection with the
Company's regular budget and forecasting processes, the Company determined
that $37 million of goodwill associated with a Company subsidiary within
its Alliance Marketing segment, National Library of Poetry, was impaired.
In addition, the Company had equity investments in interactive businesses
within its Other segment, which were generating negative cash flows and
were unable to access sufficient liquidity through equity or debt
offerings. As a result, the Company wrote-off $13 million of such
investments.
F-79
<PAGE>
13. INVESTMENT IN AVIS RENT A CAR, INC.
The Company's equity interest in Avis Rent A Car, Inc. ("Avis ") was
reduced from 27.5% to 20.4% as a result of a secondary offering by Avis of
its common stock in March 1998 in which the Company sold one million shares
of Avis common stock. The Company recognized a pre-tax gain of
approximately $17.7 million as a result of the sale, which is included in
other revenue in the consolidated statement of operations.
14. PENDING ACQUISITION
RAC Motoring Services -- On May 21, 1998, the Company announced that it
reached a definitive agreement with the Board of Directors of Royal
Automobile Club Limited ("RACL") to acquire their RAC Motoring Services
subsidiary ("RACMS") for approximately $735 million in cash. The sale of
RACMS has subsequently been approved by its shareholders. On September 24,
1998, the UK Secretary of State for Trade and Industry referred the RACMS
acquisition to the UK Monopolies and Mergers Commission (the "MMC") for its
approval. Closing is subject to certain conditions, including MMC approval.
Although no assurances can be made, the Company currently anticipates that
the transaction, if completed, will close in the spring of 1999. RACMS is
the second-largest roadside assistance company in the UK and also owns the
UK's largest driving school company.
15. COMPANY INVESTIGATION AND LITIGATION
Accounting Irregularities Litigation and Investigation
On April 15, 1998, the Company announced that it discovered accounting
irregularities in the former CUC business units. Since the Company's
announcement and prior to the date hereof, seventy-one purported class
action lawsuits, two purported derivative lawsuits and one individual
lawsuit have been filed against the Company and certain current and former
officers and directors of the Company and HFS, asserting various claims
under the federal securities law (the "Federal Securities Actions"). Some
of the actions also name as defendants Merrill Lynch & Co. and, in one
case, Chase Securities, Inc., underwriters for the Company's PRIDES
securities offering; and two others also name Ernst & Young LLP, the
Company's former independent accountants. Sixty-four of the Federal
Securities Actions were filed in the United States District Court for the
District of New Jersey, six were filed in the United States District Court
for the District of Connecticut (including the individual action), one was
filed in the United States District Court for the Eastern District of
Pennsylvania, and one was filed in New Jersey Superior Court. The Federal
Securities Actions filed in the District of Connecticut and the Eastern
District of Pennsylvania have been transferred to the District of New
Jersey. On June 10, 1998, the Company moved to dismiss or stay the Federal
Securities Actions filed in New Jersey Superior Court on the ground that,
among other things, it is duplicative of the actions filed in federal
courts. The court granted that motion on August 7, 1998 without prejudice
to the plaintiff's right to refile the case in the District of New Jersey.
Certain of these Federal Securities Actions purport to be brought on behalf
of purchasers of the Company's common stock and/or options on common stock
during various periods, most frequently beginning May 28, 1997 and ending
April 15, 1998 (although the alleged class periods begin as early as March
21, 1995 and ends as late as July 15, 1998). Others claim to be brought on
behalf of persons who exchanged common stock of HFS for the Company's
common stock in connection with the Cendant Merger. Some plaintiffs purport
to represent both of these types of investors. In addition, eight actions
pending in the District of New Jersey purport to be brought, either in
their entirety or in part, on behalf of purchasers of the Company's PRIDES
securities. The complaints in the Federal Securities Actions allege, among
other things, that as a result of accounting irregularities, the Company's
previously issued financial statements were materially false and misleading
and that the defendants knew or should have known that these financial
statements caused the prices of the Company's securities to be inflated
artificially. The Federal
F-80
<PAGE>
Securities Actions variously allege violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") and Rule
10b-5 promulgated thereunder, Section 14(a) of the Exchange Act and Rule
14a-9 promulgated thereunder, Section 20(a) of the Exchange Act and
Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the
"Securities Act"). Certain actions also allege violations of common law.
The individual action also alleges violations of Section 18(a) of the
Exchange Act and the Florida securities law. The class action complaints
seek damages in unspecified amounts. The individual action seeks damages in
the amount of approximately $9 million plus interest and expenses.
On May 29, 1998, United States Magistrate Judge Joel A. Pisano entered an
order consolidating the 50 Federal Securities Actions that had at that time
been filed in the United States District Court for the District of New
Jersey, under the caption In re: Cendant Corporation Litigation, Master
File No. 98-1664 (WHW). Pursuant to the Order, all related actions
subsequently filed in the District of New Jersey are to be consolidated
under that caption. United States District Court Judge William H. Walls has
selected lead plaintiffs and lead counsel to represent all potential class
members in the consolidated actions and ordered that a consolidated amended
complaint be filed by December 14, 1998. On November 11, 1998, the lead
plaintiff representing purchasers of the Company's PRIDES securities filed
an amended and consolidated complaint. Simultaneously, that lead plaintiff
filed motions seeking: (1) certification of a class of persons who
purchased the Company's PRIDES securities between February 24, and April
15, 1998 pursuant to a registration statement and prospectus prepared in
connection with the public offering of the Company's PRIDES securities; (2)
summary judgment against the Company on the claims brought pursuant to
Section 11 of the Securities Act; and (3) a preliminary injunction
requiring the Company to place $300 million in trust for the benefit of the
proposed class of PRIDES purchasers. The Company intends to vigorously
oppose the motions; however, the Company can make no assurances as to the
timing, outcome or resolutions thereof.
In addition, on April 27, 1998, a 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 and former directors and
officers; The Bear Stearns Companies, Inc., Bear Stearns & Co., Inc. and,
as a nominal party, the Company. The complaint in the Deutch action 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 accounting
irregularities. The complaint also alleges various other breaches of
fiduciary duty, mismanagement, negligence and corporate waste and seeks
damages on behalf of the Company.
Another action, entitled Corwin v. Silverman, et al., No. 16347-NC, was
filed on April 29, 1998 in the Court of Chancery for the State of Delaware.
The Corwin action is purportedly brought both derivatively, on behalf of
the Company, and as a class action, on behalf of all shareholders of HFS
who exchanged their HFS shares for the Company's shares in connection with
the Cendant Merger. The Corwin action names as defendants HFS and
twenty-eight individuals who are and were directors of Cendant and HFS. The
complaint in the Corwin action alleges that the defendants 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 the Company before approving the
Cendant 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 Cendant's former Chairman,
Walter Forbes, in connection with the Cendant Merger that purportedly
amounted to corporate waste. The Corwin action seeks, among other things,
recision of the Cendant Merger and compensation for all losses and damages
allegedly suffered in connection therewith. On October 7, 1998, the Company
filed a motion to dismiss the Corwin action or, in the alternative, for a
stay of the Corwin action pending determination of the Federal Securities
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
has 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.
F-81
<PAGE>
In connection with the Cendant 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 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 have been HFS stockholders at the time of the Cendant Merger.
The Company does not believe 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 the resolution of these
proceedings or investigations. In addition, the timing of the final
resolution of the proceedings or investigations is uncertain. The possible
outcomes or resolutions of the proceedings could include a judgment against
the Company or a settlement and could require substantial payments by the
Company. The Company's management believes that adverse outcomes with
respect to such proceedings could have a material adverse impact on the
financial condition, results of operations and cash flows of the Company.
ABI Litigation
On October 14, 1998, an action entitled P Schoenfeld Asset Management LLC
v. Cendant Corp., et al., No. 98-4734 (WHW) (the "ABI Action"), was filed
in the United States District Court for the District of New Jersey against
the Company and four of its former officers and directors. The plaintiff in
the ABI Action claims to be bringing the action on behalf of a class of all
persons who purchased securities of American Bankers between March 23, 1998
and October 13, 1998. The complaint in the ABI Action alleges that the
plaintiff and the putative class members purchased American Bankers
securities in reliance on false and misleading public announcements and
filings with the SEC made by the Company in connection with its proposed
acquisition of American Bankers. The complaint alleges that those public
announcements and filings contained materially misstated financial
statements, because of accounting irregularities discussed above, and that
the Company falsely announced its intention to consummate the acquisition
of American Bankers. It is asserted that these misstatements were made in
violation of Sections 10(b) and 20(a) of the Exchange Act and caused the
plaintiff and other putative class members to purchase American Bankers
securities at inflated prices.
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 litigation
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
16. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective for all quarterly and annual
periods beginning after June 15, 1999. SFAS No. 133 requires the
recognition of all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. The Company will adopt SFAS
No. 133 effective January 1, 2000. The Company has not yet determined the
impact SFAS No. 133 will have on its financial position or results of
operations when such statement is adopted.
17. SUBSEQUENT EVENTS
Repricing of Stock Options
On September 23, 1998, the Compensation Committee of the Board of Directors
approved a repricing and option exchange program for mid-management
employees relating to Company
F-82
<PAGE>
stock options granted to such employees during December 1997 and the first
quarter of 1998. Such options were repriced on October 15, 1998 at $9.8125
per share (the "New Price"), which was the market price at the time of
repricing. On September 23, 1998, the Compensation Committee also approved
a repricing and option exchange program for 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 repricing was
accomplished by canceling existing options and issuing new options at the
New Price and, with respect to certain options of executive officers and
senior managers, at prices above the New Price.
Termination of Acquisition Agreements
AMERICAN BANKERS INSURANCE GROUP, INC. Due to uncertainties concerning the
eventual completion of the Company's pending acquisition of American
Bankers Insurance Group, Inc. ("American Bankers") on October 13, 1998, the
Company and 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 (the "Merger
Agreement") 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 million cash payment to American Bankers and wrote-off approximately
$30 million of costs, primarily professional fees, which were deferred in
connection with the proposed transaction. Such charges were recorded by the
Company during the fourth quarter of 1998. The Company also terminated a
bank commitment to provide a $650 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, the Company
announced the termination of an agreement to acquire Providian Auto and
Home Insurance Company ("Providian") for $219 million in cash. The
termination date in the such agreement to acquire Providian was
September 30, 1998. Certain representations and covenants in acquisition
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.
Share Repurchase Program
In October 1998, the Company announced that its Board of Directors had
authorized a $1 billion common share repurchase program. Subject to
compliance with bank credit facility covenants and rating agency
constraints, the Company expects to execute the program through open-market
purchases.
F-83
<PAGE>
==============================================================================
$
[GRAPHIC OMITTED]
CENDANT CORPORATION LOGO
% NOTES DUE 200
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
JOINT BOOK-RUNNING MANAGERS
CHASE SECURITIES INC. MERRILL LYNCH & CO.
, 1998
==============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $885,000
Trustee's Expenses .................................. 5,000
*Accounting Fees and Expenses ....................... 35,000
*Legal Fees and Expenses ............................ 10,000
*Miscellaneous ...................................... 10,000
----------
Total Expenses ...................................... $945,000
==========
</TABLE>
- ------------
* Estimated for purposes of completing the information required pursuant to
this Item 14.
The Company will pay all fees and expenses associated with filing the
Registration Statement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of such
corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided that such person acted in good faith and
in a manner such person reasonably believed to be in or not opposed to the
best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. A Delaware corporation may indemnify directors, officers, employees
and other agents of such corporation in an action by or in the right of a
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the person to be indemnified has been
adjudged to be liable to the corporation. Where a director, officer, employee
or agent of the corporation is successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to above or in defense of
any claim, issue or matter therein, the corporation must indemnify such
person against the expenses (including attorneys' fees) which he or she
actually and reasonably incurred in connection therewith.
The Registrant's By-Laws contain provisions that provide for
indemnification of officers and directors and their heirs and distributees to
full extent permitted by, and in the manner permissible under, the General
Corporation Law of the State of Delaware.
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware, registrant's Amended and Restated Certificate of
Incorporation contains a provision eliminating the personal liability of a
director to the Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director, subject to certain exceptions.
The Company maintains, at its expense, a policy of insurance which insures
its directors and officers, subject to certain exclusions and deductions as
are usual in such insurance policies, against certain liabilities which may
be incurred in those capacities.
Article IV of the Declaration of Trust for each Trust limits the liability
to the Trust and certain other persons and provides for the indeminification
by the Trust or the Company of Trustees, the Officers, other employees and
certain other persons.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (Standard Provisions) for Debt Securities. (Incorporated by
reference to Exhibit 1.1 to the Company's Form S-3 Registration Statement No. 333-45227)
1.2 Form of Underwriting Agreement (Standard Provisions) for Common Stock. (Incorporated by reference
to Exhibit 1.2 to the Company's Form S-3 Registration Statement No. 333-45227)
1.3 Form of Underwriting Agreement (Standard Provisions) for Preferred Stock. (Incorporated by
reference to Exhibit 1.3 to the Company's Form S-3 Registration Statement No. 333-45227)
1.4 Forms of Underwriting Agreement for Offering of Preferred Securities, Stock Purchase Units, Stock
Purchase Contracts, Guarantees and Warrants. (To be filed under subsequent Form 8-K, which is
incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to
Appendix B to the Joint Proxy Statement/Prospectus included as part of the Registration Statement
on Form S-4 of the Registrant, Registration No. 333-34517).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 of the
Company's Current Report on Form 8-K dated August 4, 1998).
4.1 Form of Certificate for the Company's Common Stock, par value $.01 per share. (Incorporated by
reference to Exhibit 4.1 to the Company's Form S-3 Registration Statement No. 333-45227)
4.2 Form of Senior Indenture to be entered into by the Company and The Bank of Nova Scotia Trust
Company of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 to the Company's Form
S-3 Registration Statement No. 333-45227)
4.3 Form of Subordinated Indenture to be entered into by the Company and The Bank of Nova Scotia
Trust Company of New York, as Trustee. (Incorporated by reference to Exhibit 4.3 to the Company's
Form S-3 Registration Statement No. 333-45227)
4.4 Certificate of Trust of Cendant Capital II. (Incorporated by reference to Exhibit 4.5 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.5 Certificate of Trust of Cendant Capital III. (Incorporated by reference to Exhibit 4.6 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.6 Declaration of Trust of Cendant Capital II. (Incorporated by reference to Exhibit 4.8 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.7 Declaration of Trust of Cendant Capital III. (Incorporated by reference to Exhibit 4.9 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.8 Form of Amended and Restated Declaration of Trust of Cendant Capital II. (Including as Exhibit
A-1 the form of Preferred Security)(Incorporated by reference to Exhibit 4.11 to the Company's
Form S-3 Registration Statement No. 333-45227)
4.9 Form of Amended and Restated Declaration of Trust of Cendant Capital III. (Including as Exhibit
A-1 the form of Preferred Security)(Incorporated by reference to Exhibit 4.12 to the Company's
Form S-3 Registration Statement No. 333-45227)
4.10 Form of Preferred Securities Guarantee Agreement by Cendant Corporation with respect to Cendant
Capital II. (Incorporated by reference to Exhibit 4.14 to the Company's Form S-3 Registration
Statement No. 333-45227)
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
4.11 Form of Preferred Securities Guarantee Agreement by Cendant Corporation with respect to Cendant
Capital III. (Incorporated by reference to Exhibit 4.15 to the Company's Form S-3 Registration
Statement No. 333-45227)
4.12 Form of Warrant Agreement.**
4.13 Form of Warrant.**
5.1 Opinion of Eric J. Bock, Esq. regarding the legality of the Securities being registered by the
Company hereby.
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the legality of the Securities
being registered by the Cendant Trusts hereby.
12.1 Statement re: Computation of Consolidated Ratio of Earnings to Fixed Charges. (Incorporated by
reference to Exhibit 12 to the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1997)
23.1 Consent of Deloitte & Touche LLP related to the financial statements of Cendant Corporation.
(* and incorporated by reference to Exhibit 23.1 to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1997.)
23.2 Consent of KPMG Peat Marwick LLP related to the financial statements of PHH Corporation.
(* and incorporated by reference to Exhibit 23.2 to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1997)
23.3 Consent of Deloitte & Touche LLP relating to the financial statements of National Parking
Corporation. (Incorporated by reference to Exhibit 23.1 to the Company's Current Report on
Form 8-K dated November 4, 1998)
23.4 Consent of KPMG Peat Marwick LLP relating to the financial statements of Davidson &
Associates, Inc. (* and incorporated by reference to Exhibit 23.3 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1997)
23.5 Consent of PricewaterhouseCoopers LLP relating to the financial statements of Ideon Group, Inc.
(* and incorporated by reference to Exhibit 23.4 to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1997)
23.6 Consent of Deloitte & Touche LLP relating to the financial statements of Avis Rent A Car, Inc.*
23.7 Consent of Eric J. Bock (included in Exhibit 5.1).
23.8 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.2).
24.1 Power of attorney.*
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of Nova
Scotia Trust Company of New York, as Trustee for the Senior Debt Securities.*
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of Nova
Scotia Trust Company of New York, as Trustee for the Subordinated Debt Securities.*
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Declaration of Trust of Cendant Capital II.*
25.4 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Preferred Securities Guarantee of Cendant Capital II.*
25.5 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Declaration of Trust of Cendant Capital III.*
25.6 From T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Preferred Securities Guarantee of Cendant Capital IV.*
</TABLE>
- ------------
* Previously filed.
** To be filed by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The Undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement, to include any
material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change
to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
each such Registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrants pursuant to the foregoing provisions,
or otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrants of expenses incurred or paid by a director, officer or
controlling person of such Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, such
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such idemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
(i) The undersigned Registrants hereby undertake that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Cendant
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Amendment to the Registration Statement, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Parsippany, State of New
Jersey, on November 17, 1998.
CENDANT CORPORATION
By: /s/ James E. Buckman
----------------------
James E. Buckman
Vice Chairman,
General Counsel and
Director
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signatures
appear below, constitutes and appoints each of James E. Buckman, Stephen P.
Holmes and Eric J. Bock, or any of them, each acting alone, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in his name, place and stead, in any and
all capacities, in connection with the Registrant's Registration Statement in
the name and on behalf of the Registrant or on behalf of the undersigned as a
director or officer of the Registrant, on Form S-3 under the Securities Act
of 1933, as amended, including, without limiting the generality of the
foregoing, to sign the Registration Statement and any and all amendments
(including post-effective amendments) to the Registration Statement, and any
subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as they might or could do in person,
thereby ratifying and confirming all that said attorneys-in-fact and agents,
or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board,
---------------------- President, Chief Executive Officer November 17, 1998
(Henry R. Silverman) and Director
*
---------------------- Vice Chairman and Director November 17, 1998
(Michael P. Monaco)
/s/ David Johnson
---------------------- Senior Executive Vice President November 17, 1998
David Johnson and Chief Financial Officer
/s/ Scott E. Forbes
---------------------- Executive Vice President and November 17, 1998
Scott E. Forbes Chief Accounting Officer
*
---------------------- Vice Chairman and Director November 17, 1998
(Stephen P. Holmes)
---------------------- Vice Chairman and Director
(Robert D. Kunisch)
II-6
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
* Vice Chairman, General Counsel November 17, 1998
---------------------- and Director
(James E. Buckman)
* Director November 17, 1998
----------------------
(John D. Snodgrass)
Director
----------------------
(Leonard S. Coleman)
Director
----------------------
(Martin L. Edelman)
* Director November 17, 1998
----------------------
(Dr. Carole G. Hankin)
Director
------------------------------------------
(The Rt. Hon. Brian Mulroney, P.C., LL.D.)
II-7
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
* Director November 17, 1998
-------------------------
(Robert W. Pittman)
* Director November 17, 1998
-------------------------
(E. John Rosenwald, Jr.)
* Director November 17, 1998
-------------------------
(Robert P. Rittereiser)
* Director November 17, 1998
-------------------------
(Leonard Schutzman)
Director
-------------------------
(Robert F. Smith)
Director
-------------------------
(Craig R. Stapleton)
Director
-------------------------
(Robert E. Nederlander)
* /s/ Eric J. Bock
-------------------------
By: Eric J. Bock
as attorney-in-fact
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Cendant
Capital II and Cendant Capital III certify that they have reasonable grounds
to believe that they meet all of the requirements for filing on Form S-3 and
that they have duly caused this Amendment to the Registration Statement to be
signed on their behalf by the undersigned, thereunto duly authorized, in the
City of Parsippany, State of New Jersey on November 17, 1998.
CENDANT CAPITAL II
By: /s/ Michael P. Monaco
---------------------
Michael P. Monaco,
Trustee
By: /s/ James E. Buckman
--------------------
James E. Buckman,
Trustee
CENDANT CAPITAL III
By: /s/ Michael P. Monaco
---------------------
Michael P. Monaco,
Trustee
By: /s/ James E. Buckman
--------------------
James E. Buckman,
Trustee
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------------- --------
<S> <C>
1.1 Form of Underwriting Agreement (Standard Provisions) for Debt Securities. (Incorporated by
reference to Exhibit 1.1 to the Company's Form S-3 Registration Statement No. 333-45227)
1.2 Form of Underwriting Agreement (Standard Provisions) for Common Stock. (Incorporated by reference
to Exhibit 1.2 to the Company's Form S-3 Registration Statement No. 333-45227)
1.3 Form of Underwriting Agreement (Standard Provisions) for Preferred Stock. (Incorporated by
reference to Exhibit 1.3 to the Company's Form S-3 Registration Statement No. 333-45227)
1.4 Forms of Underwriting Agreement for Offering of Preferred Securities, Stock Purchase Units, Stock
Purchase Contracts, Guarantees and Warrants. (To be filed under subsequent Form 8-K, which is
incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to
Appendix B to the Joint Proxy Statement/Prospectus included as part of the Registration Statement
on Form S-4 of the Registrant, Registration No. 333-34517).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 of the
Company's Current Report on Form 8-K dated August 4, 1998).
4.1 Form of Certificate for the Company's Common Stock, par value $.01 per share. (Incorporated by
reference to Exhibit 4.1 to the Company's Form S-3 Registration Statement No. 333-45227)
4.2 Form of Senior Indenture to be entered into by the Company and The Bank of Nova Scotia Trust
Company of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 to the Company's Form
S-3 Registration Statement No. 333-45227)
4.3 Form of Subordinated Indenture to be entered into by the Company and The Bank of Nova Scotia
Trust Company of New York, as Trustee. (Incorporated by reference to Exhibit 4.3 to the Company's
Form S-3 Registration Statement No. 333-45227)
4.4 Certificate of Trust of Cendant Capital II. (Incorporated by reference to Exhibit 4.5 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.5 Certificate of Trust of Cendant Capital III. (Incorporated by reference to Exhibit 4.6 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.6 Declaration of Trust of Cendant Capital II. (Incorporated by reference to Exhibit 4.8 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.7 Declaration of Trust of Cendant Capital III. (Incorporated by reference to Exhibit 4.9 to the
Company's Form S-3 Registration Statement No. 333-45227)
4.8 Form of Amended and Restated Declaration of Trust of Cendant Capital II. (Including as Exhibit
A-1 the form of Preferred Security)(Incorporated by reference to Exhibit 4.11 to the Company's
Form S-3 Registration Statement No. 333-45227)
4.9 Form of Amended and Restated Declaration of Trust of Cendant Capital III. (Including as Exhibit
A-1 the form of Preferred Security)(Incorporated by reference to Exhibit 4.12 to the Company's
Form S-3 Registration Statement No. 333-45227)
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------------- --------
4.10 Form of Preferred Securities Guarantee Agreement by Cendant Corporation with respect to Cendant
Capital II. (Incorporated by reference to Exhibit 4.14 to the Company's Form S-3 Registration
Statement No. 333-45227)
4.11 Form of Preferred Securities Guarantee Agreement by Cendant Corporation with respect to Cendant
Capital III. (Incorporated by reference to Exhibit 4.15 to the Company's Form S-3 Registration
Statement No. 333-45227)
4.12 Form of Warrant Agreement.**
4.13 Form of Warrant.**
5.1 Opinion of Eric J. Bock, Esq. regarding the legality of the Securities being registered by the
Company hereby.
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the legality of the Securities
being registered by the Cendant Trusts hereby.
12.1 Statement re: Computation of Consolidated Ratio of Earnings to Fixed Charges. (Incorporated by
reference to Exhibit 12 to the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1997)
23.1 Consent of Deloitte & Touche LLP related to the financial statements of Cendant Corporation.
(* and incorporated by reference to Exhibit 23.1 to the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1997)
23.2 Consent of KPMG Peat Marwick LLP related to the financial statements of PHH Corporation.
(* and incorporated by reference to Exhibit 23.2 to the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1997)
23.3 Consent of Deloitte & Touche LLP relating to the financial statements of National Parking
Corporation. (Incorporated by reference to Exhibit 23.1 to the Company's Current Report on
Form 8-K dated November 4, 1998)
23.4 Consent of KPMG Peat Marwick LLP relating to the financial statements of Davidson & Associates,
Inc. (* and incorporated by reference to Exhibit 23.3 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1997)
23.5 Consent of PricewaterhouseCoopers LLP relating to the financial statements of Ideon Group, Inc.
(* and incorporated by reference to Exhibit 23.4 to the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1997)
23.6 Consent of Deloitte & Touche LLP relating to the financial statements of Avis Rent A Car, Inc.*
23.7 Consent of Eric J. Bock (included in Exhibit 5.1).
23.8 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.2).
24.1 Power of attorney.*
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of Nova
Scotia Trust Company of New York, as Trustee for the Senior Debt Securities.*
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of Nova
Scotia Trust Company of New York, as Trustee for the Subordinated Debt Securities.*
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Declaration of Trust of Cendant Capital II.*
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------------- --------
25.4 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Preferred Securities Guarantee of Cendant Capital II.*
25.5 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Declaration of Trust of Cendant Capital III.*
25.6 From T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of Wilmington Trust
Company, as Trustee under the Preferred Securities Guarantee of Cendant Capital IV.*
</TABLE>
- ------------
* Previously filed.
** To be filed by amendment.
<PAGE>
CENDANT CORPORATION
6 Sylvan Way
Parsippany, New Jersey 07054
November 17, 1998
Cendant Corporation
6 Sylvan Way
Parsippany, NJ 07054
Cendant Capital Trust II
Cendant Capital Trust III
c/o Cendant Corporation
6 Sylvan Way
Parsippany, NJ 07054
Re: Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
I am acting as counsel for (i) Cendant Corporation, a
Delaware corporation (the "Company"), (ii) Cendant Capital Trust II, a
statutory business trust formed under the Business Trust Act of the State of
Delaware ("Cendant Capital Trust II"), and (iii) Cendant Capital Trust III, a
statutory business trust formed under the Business Trust Act of the State of
Delaware ("Cendant Capital Trust III" and, together with Cendant Capital Trust
II, the "Cendant Capital Trusts"), in connection with the preparation of the
Registration Statement on Form S-3 (File No. 333-49405) that was filed on April
3, 1998 by the Company with the Securities and Exchange Commission (the
"Commission") and as amended on November 6, 1998 and November 17, 1998 (such
Registration Statement, as so amended being hereinafter referred to as the
"Registration Statement").
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 2
The Registration Statement relates to the issuance and sale
from time to time, pursuant to the General Rules and Regulations promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), of
$4,100,000,000 aggregate gross proceeds of the Company's Debt Securities,
Common Stock, Preferred Stock, Stock Purchase Units, Stock Purchase Contracts
or Warrants (the "Cendant Securities"), Preferred Securities of Cendant Capital
Trust II, Preferred Securities of Cendant Capital Trust III or Guarantees and
back-up Undertakings of Cendant Corporation in connection with Preferred
Securities of Cendant Capital Trust II and Cendant Capital Trust III (the
Guarantees and back-up Undertakings of Cendant Corporation, hereinafter the
"Cendant Securities") (each as defined in the Registration Statement and
collectively, the "Securities"). Capitalized terms used but not defined herein
are use as defined in the Registration Statement.
This opinion is delivered in accordance with the requirements
of Items 601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, I have examined originals or
copies, certified or otherwise identified to my satisfaction, (i) the
Registration Statement, including exhibits thereto; (ii) the Amended and
Restated Certificate of Incorporation of the Company; and (iii) the Amended and
Restated By-Laws of the Company. I have also examined originals or copies,
certified or otherwise identified to my satisfaction, of such documents,
corporate records and other instruments as I have deemed necessary or
appropriate as a basis for the opinions set forth herein.
In my examination, I have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such latter documents. In making my
examination of executed documents and documents to be executed by parties other
than the Cendant Capital Trusts, I have assumed that the parties thereto had or
will have the power, corporate or other, to enter into and perform all
obligations thereunder and have also assumed the due authorization is by all
requisite action, corporate or other, and execution and
2
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 3
delivery by such parties of such documents and, the validity and binding effect
thereof on such parties. As to any facts material to the opinions expressed
herein which were not independently established or verified, I have relied upon
oral or written statements and representations of officers, trustees and other
representatives of the Company, the Cendant Capital Trusts and others.
I am admitted to the bar in the State of New York and I
express no opinion as to the laws of any jurisdiction other than (i) the
General Corporation Law of the State of Delaware, (ii) the laws of the State of
New York and (iii) the laws of the United States of America, to the extent
referred to specifically herein. The Securities may be issued from time to time
on a delayed or continuous basis, and this opinion is limited to the laws,
including the rules and regulations, as in effect on the date hereof.
Based upon and subject to the foregoing, I am of the opinion
that:
1. The Company is a corporation duly incorporated and validly existing
pursuant to the laws of the State of Delaware.
2. When (i) the Registration Statement, as finally amended (including all
necessary post-effective amendments), has become effective; (ii) an
appropriate prospectus supplement or term sheet with respect to the
Cendant Securities has been prepared, delivered and filed in
compliance with the Securities Act and the applicable rules and
regulations thereunder; (iii) if the Cendant Securities are to be sold
pursuant to a firm commitment underwritten offering, the underwriting
agreement with respect to the Cendant Securities has been duly
authorized, executed and delivered by the Company and the other
parties thereto; (iv) the Board of Directors of the Company, including
any appropriate committee appointed thereby, and appropriate officers
of the Company have taken all necessary corporate action to approve
the issuance and terms of the Cendant Securities and related matters;
(v) the terms of the Cendant Securities and of their issuance and sale
have been duly established in conformity with the applicable
Certificate of Designation or Indenture, as
3
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 4
the case may be, so as not to violate any applicable law, the Amended
and Restated Certificate of Incorporation or By-Laws of the Company or
result in a default under or breach of any agreement or instrument
binding upon the Company and so as to comply with any requirement or
restriction imposed by any court or governmental body having
jurisdiction over the Company; and (vi) the Securities have been duly
executed and authenticated in accordance with the provisions of the
Amended and Restated Certificate of Incorporation, Bylaws, applicable
Certificate of Designation or Indenture, as applicable, and duly
delivered to the purchasers thereof upon payment of the agreed-upon
consideration therefor, the Securities, when issued and sold in
accordance with the applicable indenture of declaration of trust, the
applicable underwriting agreement, if any, or any other duly
authorized, executed and delivered valid and binding purchase or
agency agreement, the Securities will be legally issued by the
Company, duly authorized, fully paid and non-assessable and, in the
case of the Debt Securities, will constitute valid and binding
obligations of the Company, enforceable against the Company in
accordance with their terms, except to the extent that enforcement
thereof may be limited by (a) bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally, and (b)
general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity).
3. Upon issuance, the Guarantees and back-up Undertakings of the Company
will constitute the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with their
terms except to the extent that enforcement thereof may be limited by
(a) bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally, and (b) general principles of equity
(regardless of whether enforceability is considered in a proceeding at
law or in equity).
I hereby consent to the filing of this opinion with the
Commission as Exhibit 5 to the Registration Statement. I also consent to the
reference to me under
4
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 5
the heading "Legal Opinions" in the Registration Statement. In giving this
consent, I do not thereby admit that I am in the category of persons whose
consent is required under Section 7 of the Securities Act or the Rules and
Regulations of the Commission promulgated thereunder. This opinion is
expressed as of the date hereof unless otherwise expressly stated, and I
disclaim any undertaking to advise you of any subsequent changes of the facts
stated or assumed herein or any subsequent changes in applicable law.
Very truly yours,
/s/ Eric J. Bock
<PAGE>
Exhibit 5.2
[LETTERHEAD OF SKADDEN, ARPS,
SLATE, MEAGHER & FLOM LLP]
November 17, 1998
Cendant Corporation
6 Sylvan Way
Parsippany, NJ 07054
Cendant Capital Trust II
Cendant Capital Trust III
c/o Cendant Corporation
6 Sylvan Way
Parsippany, NJ 07054
Re: Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to (i) Cendant Corporation, a Delaware
corporation (the "Company"), (ii) Cendant Capital Trust II, a statutory
business trust formed under the Business Trust Act of the State of Delaware
("Cendant Capital Trust II"), and (iii) Cendant Capital Trust III, a statutory
business trust formed under the Business Trust Act of the State of Delaware
("Cendant Capital Trust III" and, together with Cendant Capital Trust II, the
"Cendant Capital Trusts"), in connection with the preparation of the
Registration Statement on Form S-3 (File No. 333-49405) as filed with the
Securities and Exchange Commission (the "Commission") on April 3, 1998 under
the Securities Act of 1933, as amended (the "Securities Act"), Amendment No. 1
to the Registration Statement as filed with the Commission on November 6, 1998
under the Securities Act, and Amendment No. 2 to the Registration Statement as
filed with the Commission on November 17, 1998 under the Securities Act, (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"). The Registration Statement relates to the issuance
and sale from time to time, pursuant to the General Rules and Regulations
promulgated under the Securities Act of $4,100,000,000 aggregate gross
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 2
proceeds of Debt Securities, Common Stock, Preferred Stock, Stock Purchase
Units, Stock Purchase Contracts or Warrants of the Company, Preferred
Securities of Cendant Capital Trust II, Preferred Securities of Cendant Capital
Trust III or Guarantees and back-up Undertakings of the Company in connection
with Preferred Securities of Cendant Capital Trust II and Cendant Capital Trust
III (each as defined in the Registration Statement).
The Preferred Securities of Cendant Capital Trust II are to be issued
pursuant to the Declaration of Trust of Cendant Capital Trust II (the "Cendant
Capital Trust II Declaration"), dated February 5, 1998, by and among the
Company, as sponsor, and Wilmington Trust Company, as the institutional trustee
(in such capacity, the "Cendant Capital Trust II Institutional Trustee"), and
Michael P. Monaco and James E. Buckman as regular trustees, as amended and
restated at the time such Preferred Securities are offered by an Amended and
Restated Declaration of Trust of Cendant Capital Trust II (the Cendant Capital
Trust II Declaration, as so amended and restated, being hereinafter referred to
as the "Cendant Capital Trust II Declaration"). The Preferred Securities of the
Cendant Capital Trust III are to be issued pursuant to the Declaration of Trust
of Cendant Capital Trust III (the "Cendant Capital Trust III Declaration"),
dated February 5, 1998, by and among the Company, as sponsor, and Wilmington
Trust Company, as the institutional trustee (in such capacity, the "Cendant
Capital Trust III Institutional Trustee"), and Michael P. Monaco and James E.
Buckman as regular trustees, as amended and restated at the time such Preferred
Securities are offered by an Amended and Restated Declaration of Trust of
Cendant Capital Trust III (the Cendant Capital Trust III Declaration, as so
amended and restated, being hereinafter referred to as the "Cendant Capital
Trust III Declaration"). The Cendant Capital Trust II Declaration and the
Cendant Capital Trust III Declaration being collectively referred to as the
"Cendant Capital Trust Declarations."
This opinion is delivered in accordance with the requirements of Items
601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement; (ii) the Certificate of Trust of Cendant Capital Trust II, dated
February 5, 1998, as filed with the Secretary of State of the State of
Delaware; (iii) the Certificate of Trust of Cendant Capital Trust III, dated
February 5, 1998, as filed with the Secretary of State of the State of
Delaware; (iv) the Declaration of Trust of Cendant
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 3
Capital Trust II, dated February 5, 1998; (v) the Declaration of Trust of
Cendant Capital Trust III, dated February 5, 1998; (vi) the Form of Amended and
Restated Declaration of Trust of Cendant Capital Trust II; and (vii) the Form
of Amended and Restated Declaration of Trust of Cendant Capital Trust III. We
have also examined originals or copies, certified or otherwise identified to
our satisfaction, of such agreements, certificates of public officials,
certificates of trustees or other representatives of the Cendant Capital
Trusts, certificates of officers or other representatives of the Company and
others, and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of executed documents and documents to be executed, we have assumed
that the parties thereto, other than the Cendant Capital Trusts, had or will
have the power, corporate, trust or other, to enter into and perform all
obligations thereunder and have also assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof on such
parties. As to any facts material to the opinions expressed herein which were
not independently established or verified, we have relied upon oral or written
statements and representations of officers and other representatives of the
Company, trustees and other representatives of the Cendant Capital Trusts and
others.
Members of our firm are admitted to the bar in the State of New York and
we express no opinion as to the laws of any jurisdiction other than the laws of
the State of New York and the General Corporation Law and the Business Trust
Act of the State of Delaware.
Based upon and subject to the foregoing and to the other qualifications
and limitations set forth herein, we are of the opinion that when (i) the
Registration Statement, as finally amended (including all necessary
post-effective amendments), has become effective under the Securities Act; (ii)
an appropriate prospectus supplement or term sheet with respect to the
Preferred Securities has been prepared, delivered and filed in compliance with
the Securities Act and the applicable rules and regulations thereunder; (iii)
if the Preferred Securities are to be sold pursuant to a
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 4
firm commitment underwritten offering, the underwriting agreement with respect
to the Preferred Securities has been duly authorized, executed and delivered by
the applicable Cendant Capital Trust other parties thereto; (iv) the trustees
of the applicable Cendant Capital Trust and the Board of Directors of the
Company, including any appropriate committees appointed thereby, and
appropriate officers of the Company have taken all necessary corporate action
to approve the issuance and terms of the Preferred Securities and related
matters; (v) the terms of the Preferred Securities and of their issuance and
sale have been duly established in conformity with the applicable Cendant
Capital Trust Declaration, so as not to violate any applicable law, the Amended
and Restated Certificate of Incorporation or By-Laws of the Company or result
in a default under or breach of any agreement or instrument binding upon the
applicable Cendant Capital Trust or the Company and so as to comply with any
requirement or restriction imposed by any court or governmental body having
jurisdiction over the applicable Cendant Capital Trust or the Company; (vi) an
Amended and Restated Declaration of Trust of Cendant Capital Trust II or an
Amended and Restated Declaration of Trust of Cendant Capital Trust III, as
applicable, reflecting the terms of the Preferred Securities, has been duly
executed and filed with the Secretary of State of the State of Delaware; and
(vii) the Preferred Securities have been duly executed and authenticated in
accordance with the provisions of the applicable Cendant Capital Trust
Declaration, and duly delivered to the purchasers thereof upon payment of the
agreed-upon consideration therefor, the Preferred Securities, when issued and
sold in accordance with the applicable Cendant Capital Trust Declaration, and
the applicable underwriting agreement, if any, or any other duly authorized,
executed and delivered valid and binding purchase or agency agreement, (1) will
be duly authorized for issuance, and will be validly issued, fully paid and
non-assessable, representing undivided beneficial interests in the assets of
the applicable Cendant Capital Trust; and (2) the holders of the Preferred
Securities will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware. We bring to your attention,
however, that the holders of Preferred Securities may be obligated, pursuant to
the applicable Cendant Capital Trust Declaration, to (i) provide indemnity
and/or security in connection with, and pay taxes or governmental charges
arising from, transfers of Preferred Securities and (ii) provide security and
indemnity in connection with the requests of or directions of the Cendant
Capital Trust II Institutional Trustee to exercise its rights under the Cendant
Capital Trust II Declaration or the Cendant Capital Trust III Institutional
Trustee to exercise its rights under the Cendant Capital Trust III Declaration,
as applicable.
<PAGE>
Cendant Corporation
Cendant Capital Trust II
Cendant Capital Trust III
November 17, 1998
Page 5
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5 to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Opinions" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
Rules and Regulations of the Commission promulgated thereunder. This opinion is
expressed as of the date hereof unless otherwise expressly stated, and we
disclaim any undertaking to advise you of any subsequent changes of the facts
stated or assumed herein or any subsequent changes in applicable law.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
